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 GROWTH AND TAX STRATEGY FUND - ANNUAL REPORT FOR PERIOD ENDING MAY 31, 2006
[LOGO OF USAA]
USAA(R)
USAA GROWTH and
TAX STRATEGY Fund
[GRAPHIC OF USAA GROWTH AND TAX STRATEGY FUND]
A n n u a l R e p o r t
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MAY 31, 2006
Table of CONTENTS
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MESSAGE FROM THE PRESIDENT 2
MANAGERS' COMMENTARY 4
INVESTMENT OVERVIEW 7
FINANCIAL INFORMATION
Distributions to Shareholders 12
Report of Independent Registered Public Accounting Firm 13
Portfolio of Investments 14
Notes to Portfolio of Investments 37
Financial Statements 40
Notes to Financial Statements 43
EXPENSE EXAMPLE 58
ADVISORY AGREEMENTS 60
DIRECTORS' AND OFFICERS' INFORMATION 71
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
[PHOTO OF CLIFFORD A. GLADSON] [PHOTO OF LAURA L. MELDRUM]
CLIFFORD A. GLADSON, CFA LAURA L. MELDRUM
USAA Investment Management Company Northern Trust Investments, N.A.
(Bonds and Money Market Instruments) (Blue Chip Stocks)
[PHOTO OF CHRISTOPHER A. FRONK]
CHRISTOPHER A. FRONK CPA, CFA
Northern Trust Investments, N.A.
(Blue Chip Stocks)
- --------------------------------------------------------------------------------
HOW DID THE FUND PERFORM?
For the year ended May 31, 2006, the USAA Growth and Tax
Strategy Fund had a total return of 7.38%. This compares to a
7.87% return for the Lipper Balanced Funds Index, 8.63% for
the S&P 500 Index, 6.14% for the Russell 1000 Growth Index,
and 1.89% for the Lehman Brothers Municipal Bond Index.
During the period, your Fund's Board of Trustees approved
proposals by USAA Investment Management Company to terminate
the subadvisory agreement with Loomis, Sayles & Company, L.P.
(Loomis Sayles) and enter into a new subadvisory agreement
with Northern Trust Investments, N.A. (Northern Trust). This
change took effect on December 1, 2005.
HOW WERE THE FUND'S ASSETS ALLOCATED BETWEEN STOCKS AND TAX-EXEMPT SECURITIES?
Your Fund was the first mutual fund to combine stocks and
municipal bonds in a balanced fund format. Under the Internal
Revenue Code, the Fund must have at least 50% of its assets
invested in tax-exempt securities at the end of each fiscal
quarter to pass tax-exempt income to you. As of May 31, 2006,
the Fund had 48% of its net assets in stocks and 52% in
tax-exempt securities.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
REFER TO PAGE 9 FOR BENCHMARK DEFINITIONS.
5
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HOW DID THE FUND'S TAX-EXEMPT SECURITIES PERFORM?
In the rising-rate environment, municipal bonds outperformed
the overall bond market as their yields increased only
slightly. To illustrate, the yield on the Bond Buyer 40-Bond
Index, an industry standard for long-term investment-grade
municipal bonds, went from 4.70% on May 31, 2005, to 4.82% on
May 31, 2006. In contrast, the yield on the taxable 30-year
U.S. Treasury bond went from 4.32% to 5.23%. The municipal
bond portion of the Fund provided a strong income stream
throughout the year, and as the yield differential between
lower and higher quality municipal bonds narrowed, we took the
opportunity to improve the Fund's credit quality. Our view
during the year was that bonds in the 25- to 30-year maturity
range offered the best yields for the level of risk, and our
emphasis on these bonds helped relative performance.
WHAT'S YOUR OUTLOOK FOR THE TAX-EXEMPT SECURITIES PORTION OF THE FUND?
Even though the Federal Reserve Board may raise the short-term
federal funds rate one or two more times, we believe that
we'll be in a relatively stable long-term interest-rate
environment. This is based on our view that the economy is
slowing and that inflation will stay under control. Therefore,
we continue to find value in 25- to 30-year maturities and
expect to buy when the market offers us opportunities.
HOW DID THE EQUITY PORTION OF THE FUND PERFORM?
In the first half of the year, the equity portion managed by
Loomis Sayles outperformed the Russell 1000 Growth Index. The
switch
AS INTEREST RATES RISE, EXISTING BOND PRICES FALL.
SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES OR THE
FEDERAL ALTERNATIVE MINIMUM TAX.
THE BOND BUYER 40-BOND INDEX IS REPRESENTATIVE OF YIELDS OF 40
LARGE ONE-YEAR, TAX-EXEMPT NOTES.
6
. . . C O N T I N U E D
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COMMENTARY on the Fund
to Northern Trust as subadviser was made not only for
additional tax efficiency, but also to diversify the equity
portion of the Fund beyond the growth style. Instead of using
the Russell 1000 Growth Index as a benchmark, Northern Trust
is using the S&P 500 Index, which includes both growth and
value large-cap stocks.
The Fund took taxable capital gains of roughly $15 million as
we converted from Loomis Sayles' 49 holdings in the equity
portion of the Fund on December 1, 2005, to the roughly 500
necessary to implement the index style of Northern Trust.
However, Northern Trust quickly began to chip away at this
gain by harvesting tax losses, which totaled $2.1 million
through May 31, 2006. Finding these losses proved difficult in
the January through April 2006 period as stock prices rose,
but it was much easier in May, when stocks sold off rather
dramatically. Some specific companies that helped the Fund
achieve tax losses were Du Pont (E.I.) De Nemours & Co.,
Intel Corp., and Texas Instruments, Inc. The Fund added
after-tax value by selling shares of these companies on
January 25, 2006, taking tax losses before buying them back on
February 27, 2006.
From January 1, 2006, to May 1, 2006, the harvested losses in
the equity portion of the Fund helped Northern Trust
outperform the S&P 500 Index on an after-tax basis (assuming a
15% rate on long-term capital gains and 35% on short-term
capital gains). Northern Trust's goal is to continue to
perform in line with the S&P 500 Index and use its innovative
tax management overlay to provide an after-tax return in
excess of the index. Additionally, we will continue to look to
chip away at the capital gains assumed in the transition
between now and the October 31, 2006, tax period-end.
Thank you for your investment in the USAA Growth and Tax
Strategy Fund, which continues to provide a choice for
tax-sensitive investors using a balanced fund format.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 14-36.
7
I N V E S T M E N T
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OVERVIEW
USAA GROWTH AND TAX STRATEGY FUND
(Ticker Symbol: USBLX)
OBJECTIVE
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Conservative balance for the investor between income, the
majority of which is exempt from federal income tax, and the
potential for long-term growth of capital to preserve
purchasing power.
TYPES OF INVESTMENTS
- --------------------------------------------------------------------------------
Invests principally in tax-exempt bonds and money market
instruments and the remainder in blue chip stocks.
- --------------------------------------------------------------------------------
5/31/06 5/31/05
- --------------------------------------------------------------------------------
Net Assets $191.8 Million $188.5 Million
Net Asset Value Per Share $14.40 $14.65
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AVERAGE ANNUAL TOTAL RETURNS AND 30-DAY SEC YIELD* AS OF 5/31/06
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 30-DAY SEC YIELD
7.38% 3.52% 5.58% 2.27%
*CALCULATED AS PRESCRIBED BY THE SECURITIES AND EXCHANGE COMMISSION.
The performance data quoted represents past performance and is
no guarantee of future results. Current performance may be
higher or lower than the performance data quoted. The return
and principal value of an investment will fluctuate, so that
an investor's shares, when redeemed, may be worth more or less
than their original cost. For performance data current to the
most recent month-end, visit usaa.com.
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE
REINVESTMENT OF ALL NET INVESTMENT INCOME DIVIDEND AND
REALIZED CAPITAL GAIN DISTRIBUTIONS. THE TOTAL RETURNS QUOTED
DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD
PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
8
. . . C O N T I N U E D
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OVERVIEW
CUMULATIVE PERFORMANCE COMPARISON
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
LIPPER BALANCED LEHMAN BROTHERS USAA GROWTH AND RUSSELL 1000
S&P 500 INDEX FUNDS INDEX MUNICIPAL BOND INDEX TAX STRATEGY FUND GROWTH INDEX
------------- --------------- -------------------- ----------------- -------------
05/31/96 $10,000.00 $10,000.00 $10,000.00 $10,000.00 $10,000.00
06/30/96 10,038.13 10,032.97 10,108.99 10,071.40 10,013.58
07/31/96 9,594.89 9,774.78 10,200.45 9,936.11 9,426.89
08/31/96 9,797.58 9,929.13 10,198.16 10,031.51 9,670.20
09/30/96 10,348.52 10,297.42 10,340.68 10,303.03 10,374.37
10/31/96 10,633.83 10,515.29 10,457.55 10,451.16 10,436.88
11/30/96 11,436.91 11,005.35 10,649.10 10,799.29 11,220.50
12/31/96 11,210.35 10,873.54 10,604.14 10,697.58 11,000.82
01/31/97 11,910.34 11,209.79 10,624.21 10,914.38 11,772.39
02/28/97 12,003.85 11,251.39 10,721.76 10,996.61 11,692.68
03/31/97 11,511.55 10,924.38 10,578.73 10,749.17 11,059.92
04/30/97 12,198.17 11,252.79 10,667.40 10,967.92 11,794.34
05/31/97 12,943.93 11,713.59 10,827.96 11,420.52 12,645.48
06/30/97 13,519.37 12,101.88 10,943.30 11,654.36 13,151.57
07/31/97 14,594.82 12,791.20 11,246.38 12,099.10 14,314.72
08/31/97 13,777.80 12,385.73 11,140.95 11,825.89 13,476.88
09/30/97 14,531.94 12,879.42 11,273.06 12,169.78 14,140.06
10/31/97 14,047.16 12,644.91 11,345.72 12,130.44 13,617.43
11/30/97 14,696.89 12,877.18 11,412.53 12,287.78 14,195.83
12/31/97 14,949.11 13,080.62 11,578.94 12,426.37 14,354.86
01/31/98 15,114.30 13,173.57 11,698.34 12,514.51 14,784.10
02/28/98 16,203.77 13,696.59 11,701.90 12,899.07 15,896.19
03/31/98 17,032.88 14,115.40 11,712.31 13,251.48 16,529.88
04/30/98 17,207.30 14,214.27 11,659.47 13,227.27 16,758.63
05/31/98 16,911.94 14,070.56 11,843.91 13,162.70 16,283.08
06/30/98 17,598.39 14,330.03 11,890.66 13,283.88 17,280.36
07/31/98 17,412.40 14,162.15 11,920.38 13,099.43 17,165.97
08/31/98 14,896.72 12,942.07 12,104.57 12,286.36 14,589.77
09/30/98 15,851.84 13,500.67 12,255.47 12,769.69 15,710.52
10/31/98 17,139.25 14,005.75 12,255.22 13,034.69 16,973.20
11/30/98 18,177.60 14,518.40 12,298.16 13,506.72 18,264.27
12/31/98 19,224.40 15,054.02 12,329.15 13,864.48 19,911.15
01/31/99 20,028.00 15,294.75 12,475.74 14,301.49 21,080.30
02/28/99 19,405.64 14,927.11 12,421.37 14,001.58 20,117.28
03/31/99 20,181.83 15,295.57 12,438.39 14,412.18 21,176.78
04/30/99 20,963.36 15,796.58 12,469.39 14,627.67 21,203.86
05/31/99 20,468.88 15,553.00 12,397.24 14,360.46 20,552.21
06/30/99 21,601.75 15,983.01 12,218.89 14,767.58 21,991.78
07/31/99 20,930.18 15,684.09 12,263.35 14,579.73 21,292.85
08/31/99 20,826.57 15,519.52 12,165.03 14,466.91 21,640.77
09/30/99 20,256.33 15,320.68 12,170.11 14,258.38 21,186.16
10/31/99 21,537.62 15,764.28 12,038.26 14,765.42 22,786.09
11/30/99 21,975.41 15,933.90 12,166.30 14,887.81 24,015.49
12/31/99 23,267.91 16,405.37 12,075.60 15,149.83 26,513.29
01/31/00 22,099.01 15,993.24 12,023.02 14,850.53 25,270.12
02/29/00 21,681.13 15,954.71 12,162.74 15,061.80 26,505.46
03/31/00 23,800.79 16,894.11 12,428.48 16,065.04 28,402.61
04/30/00 23,084.98 16,584.51 12,355.06 15,684.02 27,051.09
05/31/00 22,611.74 16,428.46 12,290.79 15,311.86 25,688.89
06/30/00 23,168.63 16,690.68 12,616.48 15,657.62 27,635.80
07/31/00 22,806.73 16,645.19 12,792.03 15,541.64 26,483.73
08/31/00 24,222.56 17,388.17 12,989.17 16,076.94 28,881.66
09/30/00 22,944.10 17,022.24 12,921.60 15,265.51 26,149.61
10/31/00 22,846.62 17,007.18 13,062.60 15,418.25 24,912.27
11/30/00 21,046.86 16,389.83 13,161.42 14,942.05 21,240.03
12/31/00 21,150.12 16,797.19 13,486.61 15,049.41 20,567.96
01/31/01 21,900.05 17,153.68 13,620.24 15,185.16 21,988.91
02/28/01 19,904.45 16,487.83 13,663.43 14,452.14 18,255.81
03/31/01 18,644.20 15,955.38 13,785.88 13,909.24 16,269.26
04/30/01 20,091.89 16,624.98 13,636.50 14,401.76 18,326.88
05/31/01 20,226.68 16,773.05 13,783.34 14,474.73 18,057.17
06/30/01 19,734.57 16,516.05 13,875.56 14,301.79 17,638.98
07/31/01 19,540.22 16,504.10 14,081.09 14,393.70 17,198.14
08/31/01 18,318.20 16,034.41 14,313.04 13,833.03 15,791.77
09/30/01 16,839.08 15,263.86 14,265.02 13,127.11 14,215.10
10/31/01 17,160.37 15,519.32 14,434.98 13,405.23 14,960.89
11/30/01 18,476.35 16,137.20 14,313.29 13,933.65 16,398.11
12/31/01 18,638.31 16,253.58 14,177.88 13,798.80 16,367.30
01/31/02 18,366.47 16,111.02 14,423.81 13,845.51 16,078.15
02/28/02 18,012.19 16,001.55 14,597.58 13,668.00 15,410.91
03/31/02 18,689.69 16,351.42 14,311.51 13,883.34 15,943.95
04/30/02 17,557.08 15,959.03 14,591.23 13,403.95 14,642.68
05/31/02 17,428.19 15,951.58 14,679.89 13,375.75 14,288.43
06/30/02 16,187.21 15,271.07 14,835.12 12,802.86 12,966.69
07/31/02 14,925.72 14,488.38 15,025.91 12,604.00 12,253.84
08/31/02 15,023.43 14,637.02 15,206.54 12,717.64 12,290.47
09/30/02 13,392.31 13,763.14 15,539.60 12,322.74 11,015.59
10/31/02 14,569.76 14,336.84 15,281.99 12,694.71 12,026.07
11/30/02 15,426.48 14,918.46 15,218.48 12,847.32 12,679.27
12/31/02 14,520.68 14,516.33 15,539.60 12,650.54 11,803.43
01/31/03 14,141.02 14,298.88 15,500.22 12,467.48 11,517.02
02/28/03 13,928.53 14,191.65 15,716.93 12,525.29 11,464.13
03/31/03 14,063.38 14,249.56 15,726.33 12,727.03 11,677.49
04/30/03 15,221.24 15,020.69 15,830.24 13,182.95 12,540.89
05/31/03 16,022.45 15,685.04 16,200.90 13,570.97 13,166.87
06/30/03 16,227.12 15,803.97 16,132.05 13,638.49 13,348.17
07/31/03 16,513.36 15,840.60 15,567.55 13,472.64 13,680.32
08/31/03 16,834.77 16,108.02 15,683.65 13,609.22 14,020.56
09/30/03 16,656.52 16,128.46 16,144.75 13,775.07 13,870.47
10/31/03 17,598.29 16,660.57 16,063.46 14,059.80 14,649.54
11/30/03 17,752.96 16,808.08 16,230.88 14,177.62 14,802.91
12/31/03 18,683.35 17,410.32 16,365.27 14,567.69 15,314.84
01/31/04 19,026.21 17,670.30 16,459.02 14,696.08 15,627.61
02/29/04 19,290.58 17,911.13 16,706.72 14,844.23 15,726.89
03/31/04 18,999.59 17,825.69 16,648.54 14,694.34 15,435.16
04/30/04 18,701.72 17,451.07 16,254.25 14,406.22 15,255.72
05/31/04 18,957.85 17,528.12 16,195.31 14,515.51 15,540.07
06/30/04 19,326.38 17,802.17 16,254.25 14,654.21 15,734.25
07/31/04 18,686.80 17,467.03 16,468.16 14,274.36 14,844.76
08/31/04 18,761.69 17,573.28 16,798.18 14,354.33 14,771.45
09/30/04 18,964.93 17,834.35 16,887.35 14,725.57 14,911.94
10/31/04 19,254.67 18,027.21 17,032.67 15,067.33 15,144.51
11/30/04 20,033.49 18,512.80 16,892.18 15,469.39 15,665.46
12/31/04 20,714.99 18,974.93 17,098.47 15,927.67 16,279.68
01/31/05 20,210.07 18,730.49 17,258.27 15,677.44 15,736.78
02/28/05 20,635.14 18,995.48 17,200.85 15,797.11 15,904.26
03/31/05 20,270.12 18,733.95 17,092.37 15,533.39 15,614.49
04/30/05 19,885.87 18,508.83 17,361.92 15,478.70 15,317.14
05/31/05 20,518.05 18,933.25 17,484.63 16,025.65 16,058.22
06/30/05 20,547.45 19,069.31 17,593.11 16,279.13 15,999.02
07/31/05 21,311.25 19,493.06 17,513.59 16,620.11 16,780.98
08/31/05 21,116.91 19,549.44 17,690.41 16,565.11 16,564.86
09/30/05 21,287.86 19,626.95 17,571.26 16,703.38 16,641.14
10/31/05 20,932.78 19,318.78 17,464.56 16,515.45 16,479.39
11/30/05 21,723.71 19,787.79 17,548.40 16,913.41 17,190.39
12/31/05 21,731.37 19,961.11 17,699.30 17,046.82 17,136.50
01/31/06 22,306.75 20,437.60 17,747.06 17,224.88 17,437.35
02/28/06 22,367.10 20,412.03 17,866.21 17,331.72 17,409.64
03/31/06 22,645.46 20,610.79 17,743.00 17,327.69 17,666.71
04/30/06 22,949.33 20,835.52 17,736.90 17,423.29 17,642.68
05/31/06 22,289.64 20,422.40 17,815.91 17,208.19 17,044.67
[END CHART]
DATA FROM 5/31/96 THROUGH 5/31/06.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, AND THE
CUMULATIVE PERFORMANCE QUOTED DOES NOT REFLECT THE DEDUCTION
OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR
THE REDEMPTION OF FUND SHARES.
9
. . . C O N T I N U E D
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The graph illustrates the comparison of a $10,000 hypothetical
investment in the USAA Growth and Tax Strategy Fund to the following
benchmarks:
o The S&P 500 Index is an unmanaged index representing the weighted
average performance of a group of 500 widely held, publicly traded
stocks. It is not possible to invest directly in the S&P 500 Index.
The S&P 500 Index is replacing the Russell 1000 Growth Index as the
Fund's comparable broad-based securities index, because the S&P 500
Index is representative of the stocks in which Northern Trust
intends to invest, and thus, provides a more appropriate comparison
for the Fund.
o The Lipper Balanced Funds Index tracks the total return performance
of the 30 largest funds within the Lipper Balanced Funds category.
o The Russell 1000 Growth Index measures the performance of those
Russell 1000 companies with higher price-to-book ratios and higher
forecasted growth values.
o The Lehman Brothers Municipal Bond Index is an unmanaged benchmark
of total return performance for the long-term, investment-grade,
tax-exempt bond market.
10
. . . C O N T I N U E D
========================--------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
TAX-EXEMPT SECURITIES
TOP 5 HOLDINGS
(% OF NET ASSETS)
- --------------------------------------------------------------------------------
Wisconsin - Univ. of Wisconsin Hospitals and Clinics Auth. RB, Series 2000 3.4%
Texas - Lewisville RB, Series 1998B 3.3%
Connecticut - Mashantucket (Western) Pequot Tribe RB, Series 1997B 3.2%
Texas - Northwest ISD GO 3.0%
Georgia - Atlanta Airport RB, Series 2000A 2.5%
- ------------------------------------------------------
TOP 10 EQUITY INDUSTRIES
(% of Net Assets)
- ------------------------------------------------------
Escrowed Bonds 15.1%
Hospital 9.3%
Water/Sewer Utility 4.6%
General Obligation Bonds 3.9%
Education 3.7%
Casinos & Gaming 3.3%
Real Estate Tax/Fee Bonds 3.3%
Integrated Oil & Gas 3.1%
Pharmaceuticals 3.0%
Other Diversified Financial Services 2.7%
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON
PAGES 14-36.
11
. . . C O N T I N U E D
========================--------------------------------------------------------
- ------------------------------------------------------
TOP 5 EQUITY HOLDINGS
(% of Net Assets)
- ------------------------------------------------------
Exxon Mobil Corp. 1.6%
General Electric Co. 1.6%
Citigroup, Inc. 1.1%
Bank of America Corp. 0.9%
Pfizer, Inc. 0.8%
ASSET ALLOCATION
5/31/06
[PIE CHART OF ASSET ALLOCATION]
Tax-Exempt Bonds 50.3%
Blue Chip Stocks 48.0%
Tax-Exempt Money Market Instruments 1.3%
[END CHART]
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT EQUAL 100%.
12
D I S T R I B U T I O N S
==========================------------------------------------------------------
to SHAREHOLDERS
USAA GROWTH AND TAX STRATEGY FUND
The following federal tax information related to the Fund's fiscal
year ended May 31, 2006, is provided for information purposes only and
should not be used for reporting to federal or state revenue agencies.
Federal tax information for the calendar year will be reported to you
on Form 1099-DIV in January 2007.
For the year ended May 31, 2006, the Fund distributed long-term
realized capital gains of $0.689847 per share.
Certain dividends paid by the Fund may be subject to a maximum tax
rate of 15%, as provided for by the Jobs and Growth Tax Relief
Reconciliation Act of 2003. Of the distributions paid during the
fiscal year, the maximum amount that may be considered qualified
dividend income is $722,000.
100% of taxable ordinary income distributions qualify for dividends-
received deductions eligible to corporations.
The Fund has designated a portion of the amount paid to redeeming
shareholders, in the amount of $823,000, as a long-term capital gain
distribution for tax purposes.
13
R E P O R T O F I N D E P E N D E N T R E G I S T E R E D
========================--------------------------------------------------------
Public ACCOUNTING Firm
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
USAA GROWTH AND TAX STRATEGY FUND:
We have audited the accompanying statement of assets and liabilities of the USAA
Growth and Tax Strategy Fund (a portfolio of USAA Investment Trust) (the
"Fund"), including the portfolio of investments, as of May 31, 2006, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the four years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit. The financial
highlights for the period presented through May 31, 2002, were audited by other
auditors whose report, dated July 5, 2002, expressed an unqualified opinion on
those financial highlights.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
We were not engaged to perform an audit of the Fund's internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Fund's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of May 31, 2006, by correspondence with the custodian and
brokers or by other appropriate auditing procedures where replies from brokers
were not received. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
USAA Growth and Tax Strategy Fund at May 31, 2006, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the four
years in the period then ended, in conformity with U.S. generally accepted
accounting principles.
/S/ ERNST & YOUNG LLP
San Antonio, Texas
July 14, 2006
14
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
TAX-EXEMPT SECURITIES (51.6%)
TAX-EXEMPT BONDS (50.3%)
ARIZONA (1.2%)
$2,250 Univ. Medical Center Corp. Hospital RB,
Series 2005 5.00% 7/01/2035 $ 2,233
ARKANSAS (1.4%)
2,500 Conway Health Facilities Board Hospital RB,
Series 1999A 6.40 8/01/2029 2,653
CALIFORNIA (1.1%)
1,000 Public Works Board RB (MLO), Series 2004F 5.00 11/01/2029 1,021
4,435 West Contra Costa USD GO, Series D (INS) 5.05(a) 8/01/2034 1,093
COLORADO (0.3%)
500 Univ. of Colorado Hospital Auth. RB, Series 2006A 5.00 11/15/2037 499
CONNECTICUT (3.2%)
6,000 Mashantucket (Western) Pequot Tribe RB,
Series 1997B(b) 5.75 9/01/2027 6,132
GEORGIA (2.5%)
4,500 Atlanta Airport RB, Series 2000A (INS)(PRE)(f) 5.60 1/01/2030 4,831
HAWAII (0.6%)
1,000 State GO, Series 2003DA (INS) 5.25 9/01/2019 1,070
INDIANA (0.8%)
1,000 Health and Educational Facility Auth. RB,
Series 2006A 5.00 2/15/2039 1,004
550 Health and Educational Facility Auth. RB,
Series 2006A(e) 5.25 2/15/2036 565
LOUISIANA (0.7%)
1,225 Local Government Environmental Facilities
and Community Development Auth. RB,
Series 2000 (INS) 6.55 9/01/2025 1,363
15
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
MAINE (1.7%)
$3,000 Health and Higher Educational Facilities Auth. RB,
Series 2000C (INS) 5.75% 7/01/2030 $ 3,232
MASSACHUSETTS (1.2%)
2,455 Water Pollution Abatement Trust RB,
Series 11 4.50 8/01/2035 2,379
MICHIGAN (6.0%)
4,000 Detroit Sewage Disposal RB,
Series 1999A (INS)(PRE)(f) 5.75 7/01/2026 4,307
4,000 Hospital Finance Auth. RB, Series 1996 6.25 10/01/2027 4,054
3,000 Hospital Finance Auth. RB, Series 2005 (INS) 5.00 11/15/2026 3,096
MISSOURI (0.8%)
1,500 Health and Educational Facility Auth. RB,
Series 2005A 5.38 2/01/2035 1,531
MONTANA (0.5%)
1,000 Facility Finance Auth. RB,
Series 2002 (Providence Services) (INS) 4.75 12/01/2021 1,014
NEW JERSEY (0.5%)
1,000 Middlesex County Improvement Auth. RB,
Series 2004A 5.00 8/15/2023 1,017
NEW MEXICO (0.5%)
1,000 Farmington PCRB, Series 2003B 4.88 4/01/2033 988
NEW YORK (7.8%)
1,000 Dormitory Auth. RB, Mortgage Hospital
Special Surgery (INS) 4.50 8/15/2025 990
4,000 Metropolitan Transportation Auth. RB,
Series 2000A (PRE) 6.00 4/01/2030 4,329
3,000 Metropolitan Transportation Auth. RB, Series F 5.00 11/15/2030 3,063
2,395 New York City GO, Series 2000A (PRE) 6.00 5/15/2020 2,619
295 New York City GO, Series 2000A 6.00 5/15/2020 319
1,500 New York City Housing Development Corp. RB,
Series 2005A (Capital Funding Project) (INS) 5.00 7/01/2025 1,554
16
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
$ 1,000 New York City IDA Civic Facility RB,
Series 2005B-2 (Ethical Culture School) (INS) 4.50% 6/01/2035 $ 975
1,000 State Environmental Facilities Corp. RB,
Series 2004E 5.00 6/15/2025 1,043
NORTH CAROLINA (0.8%)
1,500 Charlotte-Mecklenberg Hospital Auth. RB,
Series A 4.88 1/15/2032 1,501
OHIO (1.9%)
1,000 Municipal Electric Generation Agency RB,
Joint Venture 5 (INS) 5.00 2/15/2023 1,036
2,470 State Univ. General Receipt Bonds,
Series 2003B 5.25 6/01/2017 2,639
RHODE ISLAND (0.1%)
205 Housing and Mortgage Finance Corp. SFH RB,
Series 15-A 6.85 10/01/2024 205
TEXAS (11.7%)
4,000 Houston Utility Systems RB, Series 2004A (INS) 5.13 5/15/2028 4,149
5,675 Lewisville RB, Series 1998B (INS) 5.80 9/01/2025 6,288
27,940 Northwest ISD GO (NBGA)(PRE) 6.38(a) 8/15/2032 5,708
2,330 Northwest ISD GO (NBGA) 6.38(a) 8/15/2032 468
2,000 Pflugerville GO, Series 2003A (INS) 5.00 8/01/2028 2,050
3,420 San Antonio Water System RB,
Series 2002A (INS) 5.50 5/15/2018 3,687
WASHINGTON (1.3%)
1,500 Economic Development Finance Auth.
RB (MLO) (INS) 5.00 6/01/2038 1,531
1,000 Vancouver Downtown Redevelopment Auth. RB,
Series 2003A (INS) 5.00 1/01/2023 1,003
WISCONSIN (3.7%)
500 Muskego Norway School District GO (INS)(PRE) 5.00 4/01/2022 530
6,030 Univ. of Wisconsin Hospitals and Clinics Auth. RB,
Series 2000 (INS)(PRE) 6.13 4/01/2021 6,588
--------
Total tax-exempt bonds (cost: $91,182) 96,357
--------
17
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
TAX-EXEMPT MONEY MARKET INSTRUMENTS (1.3%)
VARIABLE-RATE DEMAND NOTES (1.2%)(c)
------------------------------------
COLORADO (0.2%)
$ 400 Educational and Cultural Facilities Auth. RB,
Series 2005 (Concordia Univ. Irvine Project)
(LOC - U.S. Bank, N.A.) 3.58% 12/01/2035 $ 400
FLORIDA (0.2%)
300 Jacksonville Health Facilities Hospital RB,
Series 2003A (LOC - Bank of America, N.A.) 3.59 8/15/2033 300
NEW YORK (0.6%)
1,200 Dormitory Auth. RB, Series 1993 (Oxford Univ.
Press) (LOC - Landesbank Hessen-Thuringen) 3.55 7/01/2023 1,200
TEXAS (0.2%)
400 Austin Higher Education Auth., Inc. RB,
Series 2000 (Concordia Univ. at Austin
Project) (LOC - Wachovia Bank, N.A.) 3.55 4/01/2025 400
VIRGINIA (0.0%)(g)
100 Richmond IDA RB,
Series 2001 (LOC - SunTrust Bank) 3.58 12/01/2031 100
--------
2,400
--------
NUMBER
OF SHARES
- ---------
MONEY MARKET FUNDS (0.1%)
-------------------------
128,417 SSGA TAX FREE MONEY MARKET FUND, 2.93%(d) 128
--------
Total tax-exempt money market instruments (cost: $2,528) 2,528
--------
Total tax-exempt securities (cost: $93,710) 98,885
--------
BLUE CHIP STOCKS (48.0%)
ADVERTISING (0.1%)
4,335 Interpublic Group of Companies, Inc.* 42
1,790 Omnicom Group, Inc. 170
--------
212
--------
18
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
AEROSPACE & DEFENSE (1.3%)
6,590 Boeing Co. $ 549
3,860 General Dynamics Corp. 246
1,100 Goodrich Corp. 47
7,480 Honeywell International, Inc. 308
700 L-3 Communications Holdings, Inc. 51
3,100 Lockheed Martin Corp. 225
3,100 Northrop Grumman Corp. 200
4,075 Raytheon Co. 187
1,500 Rockwell Collins, Inc. 82
8,900 United Technologies Corp. 556
--------
2,451
--------
AGRICULTURAL PRODUCTS (0.1%)
5,800 Archer-Daniels-Midland Co. 241
--------
AIR FREIGHT & LOGISTICS (0.5%)
2,625 FedEx Corp. 287
8,830 United Parcel Service, Inc. "B" 711
--------
998
--------
AIRLINES (0.0%)(g)
4,500 Southwest Airlines Co. 72
--------
ALUMINUM (0.1%)
7,850 Alcoa, Inc. 249
--------
APPAREL & ACCESSORIES & LUXURY GOODS (0.1%)
3,360 Coach, Inc.* 98
1,100 Liz Claiborne, Inc. 43
880 VF Corp. 55
--------
196
--------
APPAREL RETAIL (0.2%)
5,730 Gap, Inc. 104
3,480 Limited Brands, Inc. 95
4,600 TJX Companies, Inc. 109
--------
308
--------
APPLICATION SOFTWARE (0.2%)
5,990 Adobe Systems, Inc.* 171
2,060 Autodesk, Inc.* 75
1,625 Citrix Systems, Inc.* 61
19
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
3,820 Compuware Corp.* $ 28
1,770 Intuit, Inc.* 98
1,110 Parametric Technology Corp.* 15
--------
448
--------
ASSET MANAGEMENT & CUSTODY BANKS (0.5%)
1,525 Ameriprise Financial, Inc. 70
6,700 Bank of New York Co., Inc. 223
3,100 Franklin Resources, Inc. 279
100 Janus Capital Group, Inc. 2
380 Legg Mason, Inc. 36
3,725 Mellon Financial Corp. 135
100 Northern Trust Corp.(h) 5
2,125 State Street Corp. 132
150 T. Rowe Price Group, Inc. 12
--------
894
--------
AUTO PARTS & EQUIPMENT (0.1%)
1,380 Johnson Controls, Inc. 118
--------
AUTOMOBILE MANUFACTURERS (0.1%)
5,650 General Motors Corp. 152
--------
AUTOMOTIVE RETAIL (0.1%)
1,660 AutoNation, Inc.* 36
660 AutoZone, Inc.* 60
--------
96
--------
BIOTECHNOLOGY (0.7%)
10,750 Amgen, Inc.* 727
3,435 Biogen Idec, Inc.* 160
2,590 Genzyme Corp.* 154
3,700 Gilead Sciences, Inc.* 212
--------
1,253
--------
BREWERS (0.2%)
7,750 Anheuser-Busch Companies, Inc. 354
570 Molson Coors Brewing Co. "B" 37
--------
391
--------
BROADCASTING & CABLE TV (0.5%)
5,510 CBS Corp. "B" 143
4,700 Clear Channel Communications, Inc. 145
20
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
19,985 Comcast Corp. "A"* $ 642
850 EW Scripps Co. "A" 39
2,230 Univision Communications, Inc. "A"* 80
--------
1,049
--------
BUILDING PRODUCTS (0.1%)
1,780 American Standard Companies, Inc. 76
4,275 Masco Corp. 132
--------
208
--------
CASINOS & GAMING (0.1%)
1,300 Harrah's Entertainment, Inc. 99
3,000 International Game Technology, Inc. 112
--------
211
--------
COMMERCIAL PRINTING (0.0%)(g)
1,600 R.R. Donnelley & Sons Co. 52
--------
COMMUNICATIONS EQUIPMENT (1.4%)
905 ADC Telecommunications, Inc.* 16
3,100 Avaya, Inc.* 37
1,100 CIENA Corp.* 5
53,865 Cisco Systems, Inc.* 1,060
2,020 Comverse Technology, Inc.* 45
13,300 Corning, Inc.* 322
13,600 JDS Uniphase Corp.* 41
19,890 Lucent Technologies, Inc.* 51
23,500 Motorola, Inc. 496
13,000 QUALCOMM, Inc. 588
4,000 Tellabs, Inc.* 57
--------
2,718
--------
COMPUTER & ELECTRONICS RETAIL (0.1%)
3,640 Best Buy Co., Inc. 193
1,400 Circuit City Stores, Inc. 42
--------
235
--------
COMPUTER HARDWARE (1.2%)
7,040 Apple Computer, Inc.* 421
4,330 Dell, Inc.* 110
2,300 Gateway 2000, Inc.* 4
23,990 Hewlett-Packard Co. 777
8,900 International Business Machines Corp. 711
21
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
1,815 NCR Corp.* $ 71
30,710 Sun Microsystems, Inc.* 143
--------
2,237
--------
COMPUTER STORAGE & PERIPHERALS (0.3%)
23,730 EMC Corp.* 304
1,080 Lexmark International, Inc. "A"* 62
3,440 Network Appliance, Inc.* 110
1,610 QLogic Corp.* 29
1,470 SanDisk Corp.* 82
--------
587
--------
CONSTRUCTION & ENGINEERING (0.0%)(g)
625 Fluor Corp. 55
--------
CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (0.4%)
5,175 Caterpillar, Inc. 378
425 Cummins, Inc. 47
2,150 Deere & Co. 184
620 Navistar International Corp., Inc.* 16
1,690 PACCAR, Inc. 130
--------
755
--------
CONSTRUCTION MATERIALS (0.0%)(g)
900 Vulcan Materials Co. 70
--------
CONSUMER FINANCE (0.5%)
10,660 American Express Co. 579
3,010 Capital One Financial Corp. 249
2,800 SLM Corp. 151
--------
979
--------
DATA PROCESSING & OUTSOURCED SERVICES (0.5%)
1,170 Affiliated Computer Services, Inc. "A"* 58
1,860 Computer Sciences Corp.* 105
1,400 Convergys Corp.* 26
4,575 Electronic Data Systems Corp. 112
7,655 First Data Corp. 353
1,840 Fiserv, Inc.* 79
4,400 Paychex, Inc. 162
1,320 SABRE Holdings Corp. "A" 28
--------
923
--------
22
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
DEPARTMENT STORES (0.4%)
700 Dillard's, Inc. "A" $ 19
2,715 Federated Department Stores, Inc. 198
2,315 J.C. Penney Co., Inc. 140
3,440 Kohls Corp.* 185
2,020 Nordstrom, Inc. 74
500 Sears Holdings Corp.* 76
--------
692
--------
DISTILLERS & VINTNERS (0.0%)(g)
200 Brown-Forman Corp. "B" 15
1,200 Constellation Brands, Inc. "A"* 30
--------
45
--------
DISTRIBUTORS (0.0%)(g)
250 Genuine Parts Co. 11
--------
DIVERSIFIED BANKS (1.1%)
14,390 U.S. Bancorp 444
12,425 Wachovia Corp. 665
14,600 Wells Fargo & Co. 969
--------
2,078
--------
DIVERSIFIED CHEMICALS (0.5%)
800 Ashland, Inc. 50
8,465 Dow Chemical Co. 337
9,185 Du Pont (E.I.) De Nemours & Co. 391
820 Eastman Chemical Co. 46
1,200 Engelhard Corp. 47
1,300 Hercules, Inc.* 20
1,500 PPG Industries, Inc. 97
--------
988
--------
DIVERSIFIED COMMERCIAL & PROFESSIONAL SERVICES (0.1%)
10,070 Cendant Corp. 163
325 Cintas Corp. 14
1,040 Equifax, Inc. 37
--------
214
--------
DIVERSIFIED METALS & MINING (0.1%)
1,250 Phelps Dodge Corp. 107
--------
23
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED REITS (0.1%)
1,050 Vornado Realty Trust $ 94
--------
DRUG RETAIL (0.3%)
8,160 CVS Corp. 228
10,110 Walgreen Co. 410
--------
638
--------
EDUCATIONAL SERVICES (0.0%)(g)
1,440 Apollo Group, Inc. "A"* 75
--------
ELECTRIC UTILITIES (0.6%)
900 Allegheny Energy, Inc.* 33
3,930 American Electric Power Co., Inc. 135
2,600 Edison International 102
2,080 Entergy Corp. 146
6,665 Exelon Corp. 377
3,295 FirstEnergy Corp. 173
100 FPL Group, Inc. 4
1,040 PPL Corp. 31
5,930 Southern Co. 189
--------
1,190
--------
ELECTRICAL COMPONENTS & EQUIPMENT (0.3%)
825 Cooper Industries Ltd. "A" 73
3,750 Emerson Electric Co. 309
1,575 Rockwell Automation, Inc. 108
--------
490
--------
ELECTRONIC EQUIPMENT MANUFACTURERS (0.1%)
2,900 Agilent Technologies, Inc.* 101
2,530 Symbol Technologies, Inc. 30
750 Tektronix, Inc. 24
--------
155
--------
ELECTRONIC MANUFACTURING SERVICES (0.1%)
1,600 Jabil Circuit, Inc. 56
1,300 Molex, Inc. 46
5,310 Sanmina-SCI Corp.* 25
8,025 Solectron Corp.* 28
--------
155
--------
24
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL & FACILITIES SERVICES (0.1%)
1,950 Allied Waste Industries, Inc.* $ 23
4,875 Waste Management, Inc. 179
--------
202
--------
FERTILIZERS & AGRICULTURAL CHEMICALS (0.1%)
2,100 Monsanto Co. 177
--------
FOOD DISTRIBUTORS (0.0%)(g)
2,980 Sysco Corp. 91
--------
FOOD RETAIL (0.2%)
3,275 Albertson's, Inc. 84
7,240 Kroger Co. 145
4,490 Safeway, Inc. 106
1,360 SUPERVALU, Inc. 40
--------
375
--------
FOREST PRODUCTS (0.1%)
100 Louisiana-Pacific Corp. 2
2,150 Weyerhaeuser Co. 138
--------
140
--------
GAS UTILITIES (0.0%)(g)
140 NICOR, Inc. 6
400 Peoples Energy Corp. 15
--------
21
--------
GENERAL MERCHANDISE STORES (0.3%)
1,000 Big Lots, Inc.* 16
3,160 Dollar General Corp. 51
1,880 Family Dollar Stores, Inc. 47
8,780 Target Corp. 430
--------
544
--------
GOLD (0.1%)
1,190 Freeport-McMoRan Copper & Gold, Inc. "B" 67
3,630 Newmont Mining Corp. 189
--------
256
--------
HEALTH CARE DISTRIBUTORS (0.1%)
1,500 AmerisourceBergen Corp. 65
2,900 Cardinal Health, Inc. 194
--------
259
--------
25
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT (0.8%)
2,750 Baxter International, Inc. $ 104
2,470 Becton, Dickinson & Co. 149
2,475 Biomet, Inc. 87
10,625 Boston Scientific Corp.* 220
1,040 C.R. Bard, Inc. 77
1,610 Hospira, Inc.* 72
12,055 Medtronic, Inc. 609
3,470 St. Jude Medical, Inc.* 118
2,000 Stryker Corp. 88
1,570 Zimmer Holdings, Inc.* 95
--------
1,619
--------
HEALTH CARE FACILITIES (0.2%)
4,070 HCA, Inc. 181
2,430 Health Management Associates, Inc. "A" 51
790 Manor Care, Inc. 37
4,700 Tenet Healthcare Corp.* 37
--------
306
--------
HEALTH CARE SERVICES (0.3%)
4,970 Caremark Rx, Inc.* 238
1,295 Laboratory Corp. of America Holdings* 77
3,040 Medco Health Solutions, Inc.* 164
1,660 Quest Diagnostics, Inc. 93
--------
572
--------
HEALTH CARE SUPPLIES (0.0%)(g)
540 Bausch & Lomb, Inc. 27
--------
HEALTH CARE TECHNOLOGY (0.0%)(g)
2,260 IMS Health, Inc. 61
--------
HOME ENTERTAINMENT SOFTWARE (0.1%)
3,030 Electronic Arts, Inc.* 127
--------
HOME FURNISHINGS (0.0%)(g)
2,210 Leggett & Platt, Inc. 56
--------
HOME IMPROVEMENT RETAIL (0.4%)
7,470 Home Depot, Inc. 284
7,480 Lowe's Companies, Inc. 466
26
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
390 Sherwin-Williams Co. $ 19
--------
769
--------
HOMEBUILDING (0.1%)
1,230 Centex Corp. 59
2,710 D.R. Horton, Inc. 71
--------
130
--------
HOMEFURNISHING RETAIL (0.1%)
2,800 Bed Bath & Beyond, Inc.* 98
--------
HOTELS, RESORTS, & CRUISE LINES (0.3%)
4,340 Carnival Corp. 173
3,155 Hilton Hotels Corp. 87
1,625 Marriott International, Inc. "A" 117
1,720 Starwood Hotels and Resorts, Inc. 105
--------
482
--------
HOUSEHOLD APPLIANCES (0.1%)
770 Black & Decker Corp. 67
525 Snap-On, Inc. 22
720 Stanley Works 35
340 Whirlpool Corp. 30
--------
154
--------
HOUSEHOLD PRODUCTS (1.0%)
1,550 Clorox Co. 98
4,870 Colgate-Palmolive Corp. 294
2,260 Kimberly-Clark Corp. 137
27,050 Procter & Gamble Co. 1,467
--------
1,996
--------
HOUSEWARES & SPECIALTIES (0.1%)
1,250 Fortune Brands, Inc. 92
2,450 Newell Rubbermaid, Inc. 65
--------
157
--------
HUMAN RESOURCE & EMPLOYMENT SERVICES (0.1%)
1,100 Monster Worldwide, Inc.* 54
1,560 Robert Half International, Inc. 64
--------
118
--------
27
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
HYPERMARKETS & SUPER CENTERS (0.4%)
4,750 Costco Wholesale Corp. $ 251
11,530 Wal-Mart Stores, Inc. 559
--------
810
--------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (0.2%)
5,200 AES Corp.* 95
1,200 Constellation Energy Group, Inc. 62
1,500 Dynegy, Inc. "A"* 8
4,620 TXU Corp. 265
--------
430
--------
INDUSTRIAL CONGLOMERATES (2.1%)
7,535 3M Co. 631
86,925 General Electric Co. 2,978
795 Textron, Inc. 72
9,700 Tyco International Ltd. 263
--------
3,944
--------
INDUSTRIAL GASES (0.1%)
1,975 Air Products & Chemicals, Inc. 128
2,800 Praxair, Inc. 148
--------
276
--------
INDUSTRIAL MACHINERY (0.4%)
2,365 Danaher Corp. 152
1,800 Dover Corp. 88
1,485 Eaton Corp. 109
4,100 Illinois Tool Works, Inc. 203
3,270 Ingersoll-Rand Co. Ltd. "A" 143
880 ITT Industries, Inc. 46
1,100 Pall Corp. 33
1,000 Parker-Hannifin Corp. 78
--------
852
--------
INDUSTRIAL REITS (0.1%)
2,175 ProLogis 108
--------
INSURANCE BROKERS (0.1%)
2,100 Aon Corp. 75
5,460 Marsh & McLennan Companies, Inc. 153
--------
228
--------
28
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
INTEGRATED OIL & GAS (3.1%)
20,190 Chevron Corp. $ 1,207
13,745 ConocoPhillips 870
50,040 Exxon Mobil Corp. 3,048
700 Hess Corp. 105
3,250 Marathon Oil Corp. 244
1,650 Murphy Oil Corp. 87
3,575 Occidental Petroleum Corp. 354
--------
5,915
--------
INTEGRATED TELECOMMUNICATION SERVICES (1.2%)
30,995 AT&T, Inc. 808
13,775 BellSouth Corp. 465
1,400 Centurytel, Inc. 50
2,900 Citizens Communications Co. 37
1,242 Embarq Corp.* 52
11,400 Qwest Communications International, Inc.* 80
25,705 Verizon Communications, Inc. 802
--------
2,294
--------
INTERNET RETAIL (0.1%)
3,080 Amazon.com, Inc.* 107
--------
INTERNET SOFTWARE & SERVICES (0.6%)
1,620 Google, Inc. "A"* 602
2,440 VeriSign, Inc.* 55
12,600 Yahoo!, Inc.* 398
--------
1,055
--------
INVESTMENT BANKING & BROKERAGE (1.1%)
1,100 Bear Stearns Companies, Inc. 147
6,880 Charles Schwab Corp. 115
1,700 E*TRADE Financial Corp.* 41
4,000 Goldman Sachs Group, Inc. 604
3,600 Lehman Brothers Holdings, Inc. 240
6,300 Merrill Lynch & Co., Inc. 456
9,680 Morgan Stanley 577
--------
2,180
--------
IT CONSULTING & OTHER SERVICES (0.1%)
1,300 Cognizant Technology Solutions Corp. "A"* 77
3,415 Unisys Corp.* 22
--------
99
--------
29
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
LEISURE PRODUCTS (0.0%)(g)
990 Brunswick Corp. $ 36
1,780 Hasbro, Inc. 33
--------
69
--------
LIFE & HEALTH INSURANCE (0.8%)
3,100 AFLAC, Inc. 145
1,968 Lincoln National Corp. 111
5,400 MetLife, Inc. 278
700 Principal Financial Group, Inc. 38
11,000 Prudential Financial, Inc. 838
925 Torchmark Corp. 54
--------
1,464
--------
LIFE SCIENCES TOOLS & SERVICES (0.1%)
1,780 Applera Corp. - Applied Biosystems Group 53
1,140 Fisher Scientific International, Inc.* 85
100 Millipore Corp.* 7
1,450 Thermo Electron Corp.* 53
1,040 Waters Corp.* 43
--------
241
--------
MANAGED HEALTH CARE (0.5%)
8,000 Aetna, Inc. 308
1,600 Coventry Health Care, Inc.* 83
3,210 UnitedHealth Group, Inc. 141
6,590 WellPoint, Inc.* 472
--------
1,004
--------
METAL & GLASS CONTAINERS (0.0%)(g)
1,580 Pactiv Corp.* 39
--------
MOTORCYCLE MANUFACTURERS (0.0%)(g)
110 Harley-Davidson, Inc. 6
--------
MOVIES & ENTERTAINMENT (1.0%)
550 Live Nation, Inc.* 12
21,950 News Corp. "A" 419
44,985 Time Warner, Inc. 774
3,705 Viacom, Inc. "B"* 140
16,875 Walt Disney Co. 515
--------
1,860
--------
30
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
MULTI-LINE INSURANCE (0.6%)
14,925 American International Group, Inc. $ 907
820 Genworth Financial, Inc. "A" 28
2,620 Hartford Financial Services Group, Inc. 230
--------
1,165
--------
MULTI-UTILITIES (0.6%)
3,100 CenterPoint Energy, Inc. 37
2,200 CMS Energy Corp.* 28
3,470 Dominion Resources, Inc. of Virginia 252
1,780 DTE Energy Co. 72
12,384 Duke Energy Corp. 350
1,990 Keyspan Corp. 80
2,720 NiSource, Inc. 59
2,200 PG&E Corp. 87
2,340 Public Service Enterprise Group, Inc. 149
1,400 Sempra Energy 63
840 Teco Energy, Inc. 13
2,610 Xcel Energy, Inc. 49
--------
1,239
--------
OFFICE ELECTRONICS (0.1%)
9,300 Xerox Corp.* 128
--------
OFFICE REITS (0.0%)(g)
2,590 Equity Office Properties Trust 87
--------
OFFICE SERVICES & SUPPLIES (0.1%)
1,100 Avery Dennison Corp. 65
2,265 Pitney Bowes, Inc. 93
--------
158
--------
OIL & GAS DRILLING (0.3%)
3,160 Nabors Industries, Inc.* 114
1,200 Noble Corp. 83
1,100 Rowan Companies, Inc. 44
2,900 Transocean, Inc.* 236
--------
477
--------
OIL & GAS EQUIPMENT & SERVICES (0.7%)
3,000 Baker Hughes, Inc. 259
2,730 BJ Services Co. 100
3,530 Halliburton Co. 263
31
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
1,400 National-Oilwell Varco, Inc.* $ 93
8,400 Schlumberger Ltd. 551
3,000 Weatherford International Ltd.* 156
--------
1,422
--------
OIL & GAS EXPLORATION & PRODUCTION (0.4%)
4,200 Anadarko Petroleum Corp. 209
2,600 Apache Corp. 169
2,290 Chesapeake Energy Corp. 70
1,050 Devon Energy Corp. 60
1,230 EOG Resources, Inc. 81
190 Hugoton Royalty Trust 5
1,025 Kerr-McGee Corp. 109
3,200 XTO Energy, Inc. 132
--------
835
--------
OIL & GAS REFINING & MARKETING (0.2%)
780 Sunoco, Inc. 53
4,965 Valero Energy Corp. 305
--------
358
--------
OIL & GAS STORAGE & TRANSPORTATION (0.1%)
5,875 El Paso Corp. 91
4,370 Williams Companies, Inc. 99
--------
190
--------
OTHER DIVERSIFIED FINANCIAL SERVICES (2.7%)
37,490 Bank of America Corp. 1,815
41,470 Citigroup, Inc. 2,044
30,600 J.P. Morgan Chase & Co. 1,305
--------
5,164
--------
PACKAGED FOODS & MEAT (0.5%)
1,700 Campbell Soup Co. 60
4,615 ConAgra Foods, Inc. 104
3,060 General Mills, Inc. 159
2,925 H.J. Heinz Co. 124
1,790 Hershey Co. 102
1,580 Kellogg Co. 74
1,200 McCormick & Co., Inc. 41
4,140 Sara Lee Corp. 70
2,520 Tyson Foods, Inc. "A" 40
2,000 Wm. Wrigley Jr. Co. 92
--------
866
--------
32
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
PAPER PACKAGING (0.0%)(g)
500 Sealed Air Corp. $ 26
700 Temple-Inland, Inc. 30
--------
56
--------
PAPER PRODUCTS (0.1%)
3,660 International Paper Co. 124
295 MeadWestVaco Corp. 8
--------
132
--------
PERSONAL PRODUCTS (0.1%)
880 Alberto-Culver Co. "B" 41
4,605 Avon Products, Inc. 146
1,210 Estee Lauder Companies, Inc. "A" 49
--------
236
--------
PHARMACEUTICALS (3.0%)
14,090 Abbott Laboratories 602
920 Allergan, Inc. 87
700 Barr Pharmaceuticals, Inc.* 37
18,690 Bristol-Myers Squibb Co. 459
10,080 Eli Lilly & Co. 521
2,600 Forest Laboratories, Inc.* 97
17,305 Johnson & Johnson, Inc. 1,042
2,150 King Pharmaceuticals, Inc.* 38
19,375 Merck & Co., Inc. 645
63,150 Pfizer, Inc. 1,494
13,230 Schering-Plough Corp. 252
1,010 Watson Pharmaceuticals, Inc.* 26
11,760 Wyeth 538
--------
5,838
--------
PHOTOGRAPHIC PRODUCTS (0.0%)(G)
2,870 Eastman Kodak Co. 69
--------
PROPERTY & CASUALTY INSURANCE (0.8%)
2,365 ACE Ltd. 123
6,440 Allstate Corp. 354
1,050 Ambac Financial Group, Inc. 84
3,580 Chubb Corp. 181
1,740 Cincinnati Financial Corp. 80
1,230 MBIA, Inc. 70
7,560 Progressive Corp. 207
33
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
800 Safeco Corp. $ 44
6,950 St. Paul Travelers Companies, Inc. 306
860 XL Capital Ltd. "A" 54
--------
1,503
--------
PUBLISHING (0.2%)
585 Dow Jones & Co., Inc. 20
880 Knight-Ridder, Inc. 54
3,250 McGraw-Hill Companies, Inc. 168
1,450 New York Times Co. "A" 35
2,610 Tribune Co. 78
--------
355
--------
RAILROADS (0.4%)
2,300 Burlington Northern Santa Fe Corp. 178
1,925 CSX Corp. 129
3,225 Norfolk Southern Corp. 170
2,325 Union Pacific Corp. 216
--------
693
--------
REAL ESTATE MANAGEMENT & DEVELOPMENT (0.0%)(g)
700 CB Richard Ellis Group, Inc. "A"* 54
--------
REGIONAL BANKS (0.9%)
3,100 AmSouth Bancorp 83
4,580 BB&T Corp. 190
1,100 Compass Bancshares, Inc. 61
5,550 Fifth Third Bancorp 211
1,400 First Horizon National Corp. 56
3,725 KeyCorp 133
700 M&T Bank Corp. 81
5,325 National City Corp. 196
4,750 North Fork Bancorp., Inc. 140
2,600 PNC Financial Services Group, Inc. 179
3,000 Regions Financial Corp. 102
2,700 SunTrust Banks, Inc. 205
3,125 Synovus Financial Corp. 82
925 Zions Bancorp 75
--------
1,794
--------
RESIDENTIAL REITs (0.1%)
1,100 Apartment Investment and Management Co. "A" 47
1,875 Archstone-Smith Trust 91
34
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
2,475 Equity Residential Properties Trust $ 109
--------
247
--------
RESTAURANTS (0.5%)
625 Darden Restaurants, Inc. 22
10,040 McDonald's Corp. 333
10,100 Starbucks Corp.* 360
300 Wendy's International, Inc. 18
2,550 Yum! Brands, Inc. 129
--------
862
--------
RETAIL REITs (0.1%)
1,650 Simon Property Group, Inc. 131
--------
SEMICONDUCTOR EQUIPMENT (0.3%)
15,575 Applied Materials, Inc. 263
3,600 Freescale Semiconductor, Inc. "B"* 112
1,990 KLA-Tencor Corp. 82
1,550 Novellus Systems, Inc.* 36
1,980 Teradyne, Inc.* 31
--------
524
--------
SEMICONDUCTORS (1.1%)
3,600 Advanced Micro Devices, Inc.* 111
4,005 Altera Corp.* 78
370 Analog Devices, Inc. 13
2,650 Applied Micro Circuits Corp.* 8
3,862 Broadcom Corp. "A"* 131
50,845 Intel Corp. 916
2,600 Linear Technology Corp. 88
2,200 LSI Logic Corp.* 21
5,400 Micron Technology, Inc.* 89
3,050 National Semiconductor Corp. 78
2,500 NVIDIA Corp.* 58
1,700 PMC-Sierra, Inc.* 16
12,780 Texas Instruments, Inc. 399
3,440 Xilinx, Inc. 90
--------
2,096
--------
SOFT DRINKS (0.9%)
18,360 Coca-Cola Co. 808
1,685 Coca-Cola Enterprises, Inc. 33
35
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
620 Pepsi Bottling Group, Inc. $ 20
14,400 PepsiCo, Inc. 871
--------
1,732
--------
SPECIALIZED CONSUMER SERVICES (0.0%)(g)
3,270 H&R Block, Inc. 74
--------
SPECIALIZED FINANCE (0.1%)
200 Chicago Mercantile Exchange Holdings, Inc. 88
1,200 CIT Group, Inc. 62
1,600 Moody's Corp. 84
--------
234
--------
SPECIALIZED REITs (0.1%)
857 Host Marriott Corp. 17
1,840 Plum Creek Timber Co., Inc. 66
725 Public Storage, Inc. 52
--------
135
--------
SPECIALTY CHEMICALS (0.1%)
1,650 Ecolab, Inc. 64
990 International Flavors & Fragrances, Inc. 35
1,275 Rohm & Haas Co. 64
600 Sigma-Aldrich Corp. 42
206 Tronox, Inc. "B" 3
--------
208
--------
SPECIALTY STORES (0.1%)
1,900 Office Depot, Inc.* 79
710 OfficeMax, Inc. 29
7,060 Staples, Inc. 166
--------
274
--------
STEEL (0.1%)
750 Allegheny Technologies, Inc. 48
1,125 Nucor Corp. 118
600 United States Steel Corp. 40
--------
206
--------
SYSTEMS SOFTWARE (1.1%)
2,125 BMC Software, Inc.* 43
4,560 CA, Inc. 99
55,290 Microsoft Corp. 1,252
36
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------------------------
3,810 Novell, Inc.* $ 29
37,627 Oracle Corp.* 535
10,415 Symantec Corp.* 163
--------
2,121
--------
THRIFTS & MORTGAGE FINANCE (0.8%)
4,800 Countrywide Financial Corp. 184
9,030 Fannie Mae 449
2,000 Freddie Mac 120
2,200 Golden West Financial Corp. 161
990 MGIC Investment Corp. 65
3,190 Sovereign Bancorp, Inc. 71
8,600 Washington Mutual, Inc. 395
--------
1,445
--------
TIRES & RUBBER (0.0%)(g)
650 Goodyear Tire & Rubber Co.* 8
--------
TOBACCO (0.7%)
16,500 Altria Group, Inc. 1,194
700 Reynolds American, Inc. 77
1,990 UST, Inc. 87
--------
1,358
--------
TRADING COMPANIES & DISTRIBUTORS (0.0%)(g)
675 W.W. Grainger, Inc. 49
--------
TRUCKING (0.0%)(g)
575 Ryder System, Inc. 31
--------
WIRELESS TELECOMMUNICATION SERVICES (0.4%)
2,820 Alltel Corp. 174
24,840 Sprint Nextel Corp. 527
--------
701
--------
Total blue chip stocks (cost: $87,464) 92,063
--------
TOTAL INVESTMENTS (COST: $181,174) $190,948
========
37
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
GENERAL NOTES
- --------------------------------------------------------------------------------
Market values of securities are determined by procedures and
practices discussed in Note 1 to the financial statements.
The portfolio of investments category percentages shown
represent the percentages of the investments to net assets and,
in total, may not equal 100%.
PORTFOLIO DESCRIPTION ABBREVIATIONS
GO General Obligation
IDA Industrial Development Authority/Agency
ISD Independent School District
MLO Municipal Lease Obligation
PCRB Pollution Control Revenue Bond
PRE Prerefunded to a date prior to maturity
RB Revenue Bond
REIT Real Estate Investment Trust
SFH Single-Family Housing
USD Unified School District
CREDIT ENHANCEMENTS - add the financial strength of the
provider of the enhancement to support the issuer's ability to
repay the principal and interest payments when due. A
high-quality bank, insurance company or other corporation, or
a collateral trust may provide the enhancement.
(LOC) Principal and interest payments are guaranteed by a
bank letter of credit.
(NBGA) Principal and interest payments are guaranteed by a
non-bank guarantee agreement from Texas Permanent
School Fund.
38
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
(INS) Principal and interest payments are insured by one
of the following: ACA Financial Guaranty Corp.,
AMBAC Assurance Corp., Financial Guaranty Insurance
Co., Financial Security Assurance Holdings Ltd.,
MBIA Insurance Corp., or XL Capital Assurance. The
insurance does not guarantee the market value of the
security.
SPECIFIC NOTES
- --------------------------------------------------------------------------------
(a) Zero-coupon security. Rate represents the effective yield
at date of purchase.
(b) Restricted security that is not registered under the
Securities Act of 1933. A resale of this security in the
United States may occur in an exempt transaction to a
qualified institutional buyer as defined by Rule 144A, and
as such, has been deemed liquid by USAA Investment
Management Company (the Manager) under liquidity
guidelines approved by the Board of Trustees, unless
otherwise noted as illiquid.
(c) Variable-rate demand notes (VRDNs) - provide the right to
sell the security at face value on either that day or
within the rate-reset period. The interest rate is
adjusted at a stipulated daily, weekly, monthly,
quarterly, or other specified time interval to a rate that
reflects current market conditions. VRDNs will normally
trade as if the maturity is the earlier put date, even
though stated maturity is longer.
(d) Rate represents the money market fund annualized seven-day
yield at May 31, 2006.
(e) At May 31, 2006, the aggregate market value of securities
purchased on a when-issued basis was $565,000.
39
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
(f) At May 31, 2006, portions of these securities were
segregated to cover when-issued purchases.
(g) Represents less than 0.1% of net assets.
(h) Northern Trust Corp. is the parent to Northern Trust
Investments, N.A. (NTI), which is the subadviser of the
Fund.
* Non-income-producing security for the year ended May 31,
2006.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
40
S T A T E M E N T
==================--------------------------------------------------------------
of ASSETS and LIABILITIES
(in thousands)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
ASSETS
Investments in securities, at market value (identified cost of $181,174) $190,948
Cash 76
Receivables:
Capital shares sold 28
Dividends and interest 1,428
--------
Total assets 192,480
--------
LIABILITIES
Payables:
Securities purchased 560
Capital shares redeemed 39
Accrued management fees 74
Other accrued expenses and payables 52
--------
Total liabilities 725
--------
Net assets applicable to capital shares outstanding $191,755
========
NET ASSETS CONSIST OF:
Paid-in capital $167,910
Accumulated undistributed net investment income 973
Accumulated net realized gain on investments 13,098
Net unrealized appreciation of investments 9,774
--------
Net assets applicable to capital shares outstanding $191,755
========
Capital shares outstanding, unlimited number of shares
authorized, no par value 13,316
========
Net asset value, redemption price, and offering price per share $ 14.40
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
41
S T A T E M E N T
==================--------------------------------------------------------------
of OPERATIONS
(in thousands)
USAA GROWTH AND TAX STRATEGY FUND
YEAR ENDED MAY 31, 2006
INVESTMENT INCOME
Dividends $ 1,043
Interest 5,248
-------
Total income 6,291
-------
EXPENSES
Management fees 879
Administration and servicing fees 289
Transfer agent's fees 186
Custody and accounting fees 108
Postage 28
Shareholder reporting fees 24
Trustees' fees 9
Registration fees 31
Professional fees 40
Other 13
-------
Total expenses 1,607
Expenses paid indirectly (19)
-------
Net expenses 1,588
-------
NET INVESTMENT INCOME 4,703
-------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain:
Unaffiliated transactions 17,966
Affiliated transactions 71
Change in net unrealized appreciation/depreciation (9,039)
-------
Net realized and unrealized gain 8,998
-------
Increase in net assets resulting from operations $13,701
=======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
42
S T A T E M E N T S
====================------------------------------------------------------------
of Changes in NET ASSETS
(in thousands)
USAA GROWTH AND TAX STRATEGY FUND
YEARS ENDED MAY 31,
2006 2005
---------------------------
FROM OPERATIONS
Net investment income $ 4,703 $ 4,427
Net realized gain on investments 18,037 17,876
Change in net unrealized appreciation/depreciation
of investments (9,039) (3,838)
---------------------------
Increase in net assets resulting from operations 13,701 18,465
---------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (4,455) (4,465)
Net realized gains (12,308) (13,663)
---------------------------
Distributions to shareholders (16,763) (18,128)
---------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 12,589 6,987
Shares issued for dividends reinvested 15,342 16,551
Cost of shares redeemed (21,583) (22,165)
---------------------------
Increase in net assets from capital
share transactions 6,348 1,373
---------------------------
Net increase in net assets 3,286 1,710
NET ASSETS
Beginning of period 188,469 186,759
---------------------------
End of period $191,755 $188,469
===========================
Accumulated undistributed net investment income:
End of period $ 973 $ 725
===========================
CHANGE IN SHARES OUTSTANDING
Shares sold 858 478
Shares issued for dividends reinvested 1,055 1,129
Shares redeemed (1,462) (1,522)
---------------------------
Increase in shares outstanding 451 85
===========================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
43
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
USAA INVESTMENT TRUST (the Trust), registered under the Investment
Company Act of 1940 (the 1940 Act), as amended, is an open-end
management investment company organized as a Massachusetts business
trust consisting of 10 separate funds. The information presented in
this annual report pertains only to the USAA Growth and Tax Strategy
Fund (the Fund), which is classified as diversified under the 1940
Act. The Fund's investment objective is to seek a conservative balance
between income, the majority of which is exempt from federal income
tax, and the potential for long-term growth of capital to preserve
purchasing power.
A. SECURITY VALUATION - The value of each security is determined (as
of the close of trading on the New York Stock Exchange (NYSE) on
each business day the exchange is open) as set forth below:
1. Equity securities, including exchange-traded funds (ETFs),
except as otherwise noted, traded primarily on a domestic
securities exchange or the Nasdaq over-the-counter markets are
valued at the last sales price or official closing price on
the exchange or primary market on which they trade. Equity
securities traded primarily on foreign securities exchanges or
markets are valued at the last quoted sales price, or the most
recently determined official closing price calculated
according to local market convention, available at the time
the Fund is valued. If no last sale or official closing price
is reported or available, the average of the bid and asked
prices is generally used.
2. Equity securities trading in various foreign markets may take
place on days when the NYSE is closed. Further, when the NYSE
is open, the foreign markets may be closed. Therefore, the
calculation of the Fund's net asset value (NAV) may not take
place at the same time the prices of certain foreign
44
N O T E S
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to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
securities held by the Fund are determined. In most cases,
events affecting the values of foreign securities that occur
between the time of their last quoted sales or official
closing prices and the close of normal trading on the NYSE on
a day the Fund's NAV is calculated will not be reflected in
the value of the Fund's foreign securities. However, USAA
Investment Management Company (the Manager), an affiliate of
the Fund, and the Fund's subadviser, if applicable, will
monitor for events that would materially affect the value of
the Fund's foreign securities and, if necessary, the Manager
will value the foreign securities in good faith, considering
such available information that the Manager deems relevant,
under valuation procedures approved by the Trust's Board of
Trustees. In addition, the Fund may use information from an
external vendor or other sources to adjust the foreign market
closing prices of foreign equity securities to reflect what
the Fund believes to be the fair value of the securities as of
the close of the NYSE. Fair valuation of affected foreign
equity securities may occur frequently based on an assessment
that events that occur on a fairly regular basis (such as U.S.
market movements) are significant.
3. Investments in open-end investment companies, other than ETFs,
are valued at their NAV at the end of each business day.
4. Debt securities purchased with original maturities of 60 days
or less are valued at amortized cost, which approximates market
value.
5. Repurchase agreements are valued at cost, which approximates
market value.
6. Other debt securities are valued each business day by a pricing
service (the Service) approved by the Trust's Board of
Trustees. The Service uses the mean between quoted bid and
asked
45
N O T E S
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to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
prices or the last sales price to price securities when, in
the Service's judgment, these prices are readily available and
are representative of the securities' market values. For many
securities, such prices are not readily available. The Service
generally prices these securities based on methods that
include consideration of yields or prices of securities of
comparable quality, coupon, maturity, and type; indications as
to values from dealers in securities; and general market
conditions.
7. Securities for which market quotations are not readily
available or are considered unreliable, or whose values have
been materially affected by events occurring after the close
of their primary markets but before the pricing of the Fund,
are valued in good faith at fair value, using methods
determined by the Manager in consultation with the Fund's
subadviser, if applicable, under valuation procedures approved
by the Trust's Board of Trustees. The effect of fair value
pricing is that securities may not be priced on the basis of
quotations from the primary market in which they are traded
and the actual price realized from the sale of a security may
differ materially from the fair value price. Valuing these
securities at fair value is intended to cause the Fund's NAV
to be more reliable than it otherwise would be.
Fair value methods used by the Manager include, but are not
limited to, obtaining market quotations from secondary pricing
services, broker-dealers, or widely used quotation systems.
General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and
duration of any restrictions on disposition of the securities,
and an evaluation of the forces that influenced the market in
which the securities are purchased and sold.
B. FEDERAL TAXES - The Fund's policy is to comply with the
requirements of the Internal Revenue Code applicable to
46
N O T E S
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to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
regulated investment companies and to distribute substantially
all of its income to its shareholders. Therefore, no federal
income tax provision is required.
C. INVESTMENTS IN SECURITIES - Security transactions are accounted
for on the date the securities are purchased or sold (trade
date). Gains or losses from sales of investment securities are
computed on the identified cost basis. Dividend income, less
foreign taxes, if any, is recorded on the ex-dividend date. If
the ex-dividend date has passed, certain dividends from foreign
securities are recorded upon notification. Interest income is
recorded on the accrual basis. Discounts and premiums are
amortized over the life of the respective securities, using the
effective yield method for long-term securities and the
straight-line method for short-term securities.
D. REPURCHASE AGREEMENTS - The Fund may enter into repurchase
agreements with commercial banks or recognized security dealers.
These agreements are collateralized by obligations issued or
guaranteed as to both principal and interest by the U.S.
government, its agencies, or its instrumentalities. Government-
sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac,
are supported only by the credit of the issuing U.S. government
agency, and are neither issued nor guaranteed by the U.S.
government. Obligations pledged as collateral are required to
maintain a value equal to or in excess of the repurchase
agreement price plus accrued interest and are held by the Fund,
either through its regular custodian or through a special
"tri-party" custodian that maintains separate accounts for both
the Fund and its counterparty, until maturity of the repurchase
agreement. The Fund's Manager monitors the creditworthiness of
sellers with which the Fund may enter into repurchase agreements.
The Fund did not invest in any repurchase agreements as of May
31, 2006.
47
N O T E S
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to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
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.
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 statement 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.
48
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
F. SECURITIES PURCHASED ON A DELAYED-DELIVERY OR WHEN-ISSUED BASIS -
Delivery and payment for securities that have been purchased by
the Fund on a delayed-delivery or when-issued basis can take
place a month or more after the trade date. During the period
prior to settlement, these securities do not earn interest, are
subject to market fluctuation, and may increase or decrease in
value prior to their delivery. The Fund maintains segregated
assets with a market value equal to or greater than the amount of
its purchase commitments. The purchase of securities on a
delayed-delivery or when-issued basis may increase the volatility
of the Fund's NAV to the extent that the Fund makes such
purchases while remaining substantially fully invested. As of May
31, 2006, net outstanding when-issued commitments, including
interest purchased where applicable, for the Fund were $560,000.
G. EXPENSES PAID INDIRECTLY - A portion of the brokerage commissions
that the Fund pays may be recaptured as a credit that is tracked
and used by the custodian to directly reduce expenses paid by the
Fund. In addition, through arrangements with the Fund's
custodian and other banks utilized by the Fund for cash
management purposes, realized credits, if any, generated from
cash balances in the Fund's bank accounts are used to reduce the
Fund's expenses. For the year ended May 31, 2006, brokerage
commission recapture credits and custodian and other bank credits
reduced the Fund's expenses by $14,000 and $5,000, respectively,
resulting in a total reduction in Fund expenses of $19,000.
H. INDEMNIFICATIONS - Under the Trust's organizational documents,
its officers and trustees are indemnified against certain
liabilities arising out of the performance of their duties to the
Trust. In addition, in the normal course of business the Trust
enters into contracts that contain a variety of representations
and warranties that provide general indemnifications. The Trust's
maximum exposure under these arrangements is unknown, as this
would
49
N O T E S
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to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
involve future claims that may be made against the Trust that
have not yet occurred. However, the Trust expects the risk of
loss to be remote.
I. USE OF ESTIMATES - The preparation of financial statements in
conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that may
affect the reported amounts in the financial statements.
(2) LINE OF CREDIT
- --------------------------------------------------------------------------------
The Fund participates in a joint, short-term, revolving, committed
loan agreement of $300 million with USAA Capital Corporation (CAPCO),
an affiliate of the Manager. The purpose of the agreement is to meet
temporary or emergency cash needs, including redemption requests that
might otherwise require the untimely disposition of securities.
Subject to availability, the Fund may borrow from CAPCO an amount up
to 5% of the Fund's total assets at a rate per annum equal to the rate
at which CAPCO obtains funding in the capital markets, with no markup.
The USAA funds that are party to the loan agreement are assessed
facility fees by CAPCO based on the funds' assessed proportionate
share of CAPCO's operating expenses related to obtaining and
maintaining CAPCO's funding programs in total (in no event to exceed
0.07% annually of the $300 million loan agreement). The facility fees
are allocated among the funds based on their respective average net
assets for the period. Prior to January 6, 2006, the facility fees
assessed by CAPCO were limited to an amount not to exceed 0.09%
annually of the $300 million loan agreement.
For the year ended May 31, 2006, the Fund paid CAPCO facility fees of
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.
50
N O T E S
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to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
(3) DISTRIBUTIONS
- --------------------------------------------------------------------------------
The character of any distributions made during the year from net
investment income or net realized gains is determined in accordance
with federal tax regulations and may differ from those determined in
accordance with U.S. generally accepted accounting principles. Also,
due to the timing of distributions, the fiscal year in which amounts
are distributed may differ from the year that the income or realized
gains were recorded by the Fund.
During the current fiscal year, permanent differences between
book-basis and tax-basis accounting resulted in reclassifications to
the statement of assets and liabilities to increase paid-in capital
and decrease accumulated net realized gain on investments by $823,000.
This includes the utilization of earnings and profits distributed to
shareholders on redemption of shares as part of the dividends-paid
deduction for federal income tax purposes. This reclassification has
no effect on net assets.
The tax character of distributions paid during the years ended May 31,
2006, and 2005, was as follows:
2006 2005
------------------------------------
Ordinary income* $4,348,000 $ 645,000
Tax-exempt income 3,733,000 3,849,000
Long-term realized capital gains 8,682,000 13,634,000
* Includes distribution of short-term realized capital gains, if any, which are
taxable as ordinary income.
As of May 31, 2006, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed tax-exempt income $ 812,000
Undistributed ordinary income 4,457,000
Undistributed long-term capital gains 8,827,000
Unrealized appreciation of investments 9,749,000
51
N O T E S
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to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
The difference between book-basis and tax-basis unrealized
appreciation of investments is attributable to the tax deferral of
losses on wash sales.
Distributions of net investment income are made quarterly.
Distributions of realized gains from security transactions not offset
by capital losses are made annually in the succeeding fiscal year or
as otherwise required to avoid the payment of federal taxes.
(4) INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
Cost of purchases and proceeds from sales/maturities of securities,
excluding short-term securities, for the year ended May 31, 2006,
were $210,438,000 and $217,044,000, respectively.
As of May 31, 2006, the cost of securities, including short-term
securities, for federal income tax purposes, was $181,199,000.
Gross unrealized appreciation and depreciation of investments as of
May 31, 2006, for federal income tax purposes, were $11,497,000 and
$1,748,000, respectively, resulting in net unrealized appreciation of
$9,749,000.
(5) LENDING OF PORTFOLIO SECURITIES
- --------------------------------------------------------------------------------
The Fund, through its third-party securities-lending agent,
Metropolitan West Securities LLC (MetWest), may lend its securities to
qualified financial institutions, such as certain broker-dealers, to
earn additional income. The borrowers are required to secure their
loans continuously with cash collateral in an amount at least equal to
the fair value of the securities loaned, initially in an amount at
least equal to 102% of the fair value of domestic securities loaned
and 105% of the fair value of international securities loaned. Cash
collateral is invested in high-quality short-term investments. The
Fund and MetWest retain 80% and 20%, respectively, of the income
earned from the investment of cash
52
N O T E S
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to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
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. The Fund had no securities-lending
transactions during the year ended May 31, 2006.
(6) TRANSACTIONS WITH MANAGER
- --------------------------------------------------------------------------------
A. MANAGEMENT FEES - The Manager provides investment management
services to the Fund pursuant to an Investment Advisory
Agreement. Under this agreement, the Manager is responsible
for managing the business and affairs of the Fund and for
directly managing the day-to-day investment of a portion of
the Fund's assets, subject to the authority of and
supervision by the Trust's Board of Trustees. The Manager is
also authorized to select (with approval of the Trust's
Board of Trustees) one or more subadvisers to manage the
day-to-day investment of a portion of the Fund's assets. The
Manager monitors each subadviser's performance through
quantitative and qualitative analysis, and periodically
recommends to the Trust's Board of Trustees as to whether
each subadviser's agreement should be renewed, terminated,
or modified. The Manager also is responsible for allocating
assets to the subadvisers. The allocation for each
subadviser can range from 0% to 100% of the Fund's assets,
and the Manager can change the allocations without
shareholder approval.
53
N O T E S
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to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
The investment management fee for the Fund is composed of a base
fee and a performance adjustment that increases or decreases the
base fee depending upon the performance of the Fund relative to
the performance of the Lipper Balanced Funds Index, which tracks
the total return performance of the 30 largest funds in the
Lipper Balanced Funds category. The Fund's base fee is accrued
daily and paid monthly at an annualized rate of 0.50% of the
Fund's average net assets for the fiscal year.
The performance adjustment is calculated monthly by comparing
the Fund's performance to that of the Lipper index over the
performance period. The performance period for the Fund consists
of the current month plus the previous 35 months.
The annual performance adjustment rate is multiplied by the
average net assets of the Fund over the entire performance
period, which is then multiplied by a fraction, the numerator of
which is the number of days in the month and the denominator of
which is 365 (366 in leap years). The resulting amount is then
added to (in the case of overperformance) or subtracted from (in
the case of underperformance) the base fee, as referenced in the
following chart:
OVER/UNDER PERFORMANCE ANNUAL ADJUSTMENT RATE
RELATIVE TO INDEX(1) AS A % OF THE FUND'S AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------
+/- 0.20% to 0.50% +/- 0.04%
+/- 0.51% to 1.00% +/- 0.05%
+/- 1.01% and greater +/- 0.06%
(1) Based on the difference between average annual performance of the Fund and
its relevant index, rounded to the nearest 0.01%.
Under the performance fee arrangement, the Fund will pay a
positive performance fee adjustment for a performance period
54
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
whenever the Fund outperforms the Lipper Balanced Funds Index over
that period, even if the Fund had overall negative returns during
the performance period.
For the year ended May 31, 2006, the Fund incurred total
management fees, paid or payable to the Manager, of $879,000,
which is net of a performance adjustment of $(86,000) that
decreased the base management fee of 0.50% by 0.04%.
B. SUBADVISORY ARRANGEMENTS - The Manager has entered into an
investment subadvisory agreement with Northern Trust Investments,
N.A. (NTI), under which NTI directs the investment and
reinvestment of the portion of the Fund's assets invested in blue
chip stocks (as allocated from time to time by the Manager). The
Manager (not the Fund) pays NTI a subadvisory fee equal to the
greater of a minimum annual fee of $100,000 or a fee at an annual
amount of 0.25% on the first $40 million of assets and 0.10% on
assets over $40 million of the portion of the Fund's average
daily net assets that NTI manages. Prior to December 1, 2005,
Loomis, Sayles & Company, L.P. (Loomis Sayles) was the
subadviser of the Fund and was paid a subadvisory fee by the
Manager (not the Fund) in the annual amount of 0.20% of the
portion of the Fund's average net assets that Loomis Sayles
managed. For the year ended May 31, 2006, the Manager incurred
subadvisory fees, paid or payable to NTI and Loomis Sayles of
$71,000 and $91,000, respectively.
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 $289,000.
55
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
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 $12,000 for these legal and
tax services. These expenses are included in the professional
fees expenses on the Fund's statement of operations.
D. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services (SAS), an affiliate of the Manager,
provides transfer agent services to the Fund based on an annual
charge of $25.50 per shareholder account plus out-of-pocket
expenses. The Fund also pays SAS fees that are related to the
administration and servicing of accounts that are traded on an
omnibus basis. For the year ended May 31, 2006, the Fund incurred
transfer agent's fees, paid or payable to SAS, of $186,000.
E. UNDERWRITING SERVICES - The Manager provides exclusive
underwriting and distribution of the Fund's shares on a
continuing best-efforts basis. The Manager receives no
commissions or fees for this service.
(7) TRANSACTIONS WITH AFFILIATES
- --------------------------------------------------------------------------------
Certain trustees and officers of the Fund are also directors,
officers, and/or employees of the Manager. None of the affiliated
trustees or Fund officers received any compensation from the Fund.
56
N O T E S
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to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
(8) SECURITY TRANSACTIONS WITH AFFILIATED FUNDS
- --------------------------------------------------------------------------------
During the year ended May 31, 2006, in accordance with affiliated
transaction procedures approved by the Trust's Board of Trustees,
purchases and sales of security transactions were executed between the
Fund and the following affiliated USAA funds at the then-current
market price with no brokerage commissions incurred:
NET REALIZED
COST TO GAIN (LOSS)
SELLER PURCHASER PURCHASER TO SELLER
- --------------------------------------------------------------------------------------------------
USAA Growth and Tax Strategy Fund USAA California Bond Fund $1,039,000 $31,000
USAA Growth and Tax Strategy Fund USAA Intermediate-Term Fund 1,078,000 42,000
USAA Growth and Tax Strategy Fund USAA New York Bond Fund 2,998,000 (2,000)
57
N O T E S
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to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
(9) FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
-------------------------------------------------------------------------
2006 2005 2004 2003 2002
-------------------------------------------------------------------------
Net asset value at
beginning of period $ 14.65 $ 14.61 $ 13.99 $ 14.23 $ 15.87
-------------------------------------------------------------------------
Income (loss) from investment
operations:
Net investment income .36 .34 .35 .35 .41
Net realized and unrealized
gain (loss) .71 1.15 .62 (.17) (1.60)
-------------------------------------------------------------------------
Total from investment operations 1.07 1.49 .97 .18 (1.19)
-------------------------------------------------------------------------
Less distributions:
From net investment income (.34) (.35) (.34) (.37) (.45)
From realized capital gains (.98) (1.10) (.01) (.05) -
-------------------------------------------------------------------------
Total distributions (1.32) (1.45) (.35) (.42) (.45)
-------------------------------------------------------------------------
Net asset value at end of period $ 14.40 $ 14.65 $ 14.61 $ 13.99 $ 14.23
=========================================================================
Total return (%)* 7.38 10.40 6.96 1.46 (7.59)
Net assets at end of period (000) $191,755 $188,469 $186,759 $186,929 $205,108
Ratio of expenses to average
net assets (%)**(a) .83 .81 .80 .91 .83
Ratio of net investment income
to average net assets (%)** 2.44 2.37 2.41 2.67 2.75
Portfolio turnover (%) 111.04 119.99 43.22 52.38 31.81
* Assumes reinvestment of all net investment income and realized capital gain
distributions during the period.
** For the year ended May 31, 2006, average net assets were $193,054,000.
(a) Reflects total operating expenses of the Fund before reductions of any
expenses paid indirectly. The Fund's expenses paid indirectly decreased the
expense ratios as follows:
(.01%) (.03%) (.01%) (.00%)(+) (.02%)
+ Represents less than 0.01% of average net assets.
58
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
EXAMPLE
- --------------------------------------------------------------------------------
As a shareholder of the Fund, you incur two types of costs: direct
costs, such as wire fees, redemption fees, and low balance fees; and
indirect costs, including management fees, transfer agency fees, and
other Fund operating expenses. This example is intended to help you
understand your indirect costs, also referred to as "ongoing costs"
(in dollars), of investing in the Fund and to compare these costs with
the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the
beginning of the period and held for the entire six-month period of
December 1, 2005, through May 31, 2006.
ACTUAL EXPENSES
- --------------------------------------------------------------------------------
The first line of the table on the next page provides information
about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested at the
beginning of the period, to estimate the expenses that you paid over
the period. Simply divide your account value by $1,000 (for example,
an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the first line under the heading "Expenses
Paid During Period" to estimate the expenses you paid on your account
during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
- --------------------------------------------------------------------------------
The second line of the table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return. The hypothetical
account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may
59
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
use this information to compare the ongoing costs of investing in the
Fund and other funds. To do so, compare this 5% hypothetical example
with the 5% hypothetical examples that appear in the shareholder
reports of other funds.
Please note that the expenses shown in the table are meant to
highlight your ongoing costs only and do not reflect any direct costs,
such as wire fees, redemption fees, or low balance fees. Therefore,
the second line of the table is useful in comparing ongoing costs
only, and will not help you determine the relative total costs of
owning different funds. In addition, if these direct costs were
included, your costs would have been higher.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE DECEMBER 1, 2005 -
DECEMBER 1, 2005 MAY 31, 2006 MAY 31, 2006
-------------------------------------------------------------
Actual $1,000.00 $1,017.40 $4.22
Hypothetical
(5% return before expenses) 1,000.00 1,020.74 4.23
*Expenses are equal to the Fund's annualized expense ratio of .84%,
which is net of any expenses paid indirectly, multiplied by the
average account value over the period, multiplied by 182 days/365
days (to reflect the one-half year period). The Fund's ending account
value on the first line in the table is based on its actual total
return of 1.74% for the six-month period of December 1, 2005, through
May 31, 2006.
60
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
SEPTEMBER BOARD MEETING
- --------------------------------------------------------------------------------
As disclosed in the Information Statement to shareholders dated
December 1, 2005, the Board of Trustees, including the Trustees who
are not "interested persons" of the Trust (the "Independent Trustees")
at a meeting held on September 14, 2005, approved the adoption of an
Investment Subadvisory Agreement with Northern Trust Investments, N.A.
(NTI). In advance of the meeting, the Board received and considered a
variety of information relating to the Investment Subadvisory
Agreement and NTI, 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) materials
about NTI's experience and success in managing similar accounts; (ii)
the qualifications of the individuals at NTI responsible for these
investment activities; (iii) NTI's investment performance in similar
accounts as correlated against the S&P 500 Index; and (iv) the fees to
be paid to NTI. Prior to voting, the Independent Trustees reviewed the
proposed Investment 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 Investment Subadvisory Agreement. The Independent Trustees
also reviewed the proposed Investment Subadvisory Agreement in private
sessions with their counsel at which no representatives of management
were present.
In approving the Fund's Investment Subadvisory Agreement with NTI, the
Board considered various factors, among them: (i) the nature, extent,
and quality of services to be provided to the Fund by NTI, including
the personnel that will be providing services; (ii) NTI's compensation
and any other benefits that will be derived from the subadvisory
relationship by NTI; (iii) comparisons of performance to comparable
investment companies, to the extent provided; and (iv) the terms of
the Investment Subadvisory Agreement. The Board's analysis of these
factors is set forth below.
61
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AGREEMENTS (unaudited)
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
After full consideration of a variety of factors, the Board, including
the Independent Trustees, voted to approve the Investment Subadvisory
Agreement with NTI. In approving the Investment Subadvisory Agreement,
the Board did not identify any single factor as controlling, and each
Board member 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 Board considered information provided to them regarding the
services to be provided by NTI. The Board considered NTI's level of
knowledge and investment style. The Board reviewed the experience and
credentials of the investment personnel who will be responsible for
managing the investment of portfolio securities with respect to the
Fund and NTI's level of staffing. The Board noted that the materials
provided to them indicated that the method of compensating portfolio
managers is reasonable. The Board also noted NTI's brokerage
practices. The Board also considered NTI's regulatory and compliance
history. The Board noted that the Manager's monitoring processes of
NTI will 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 NTI. The Board also took into account their
knowledge of NTI's experience and performance in advising the USAA S&P
500 Index Fund.
SUBADVISER COMPENSATION. The Board also took into consideration the
financial condition of NTI. In considering the cost of services to be
provided by NTI and the profitability to NTI of its relationship with
the Fund, the Board noted that the fees under the Investment
Subadvisory Agreement will be paid by the Manager. The Board also
noted that the advisory fees paid by the Fund would not change as a
result of the new subadvisory agreement. The Board also relied on the
ability of the Manager to negotiate the Investment Subadvisory
62
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AGREEMENTS (unaudited)
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
Agreement and the fees thereunder at arm's length. The Board also
considered information relating to the cost of services to be provided
by NTI and the potential economies of scale in NTI's management of the
Fund, to the extent available. However, this information was less
significant to the Board's consideration of the Investment Subadvisory
Agreement than the other factors considered.
SUBADVISORY FEES AND FUND PERFORMANCE. The Board considered that the
Fund pays a management fee to the Manager and that, in turn, the
Manager will pay a subadvisory fee to NTI. The Board noted the
Manager's expertise and resources in monitoring the performance,
investment style, and risk-adjusted performance of NTI. The Board also
noted NTI's long-term performance record for similar accounts and that
NTI had previously met its objective of providing similar pre-tax
returns relative to the S&P 500 Index. Among other performance data
provided, the Board noted that the performance of NTI's Tax Advantaged
S&P 500 Composite was similar to or outperformed the S&P 500 Index for
the one-, three-, and five-year periods ended March 31, 2005, and
since inception on May 1, 1995, through March 31, 2005.
CONCLUSION. The Board reached the following conclusions regarding the
Investment Subadvisory Agreement, among others: (i) NTI is qualified
to manage a portion of the Fund's assets in accordance with its
investment objective and policies; (ii) NTI maintains an appropriate
compliance program; (iii) NTI's performance in managing accounts
similar to the Fund is reasonable in relation 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
NTI. Based on its conclusions, the Board determined that approval of
the Investment Subadvisory Agreement with NTI would be in the
interests of the Fund and its shareholders.
63
A D V I S O R Y
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AGREEMENTS (unaudited)
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
APRIL BOARD MEETING
- --------------------------------------------------------------------------------
At a meeting of the Board of Trustees held on April 19, 2006, the
Board, including the Independent Trustees, approved the continuance of
the Investment Advisory Agreement between the Trust and the Manager
with respect to the Fund and the Subadvisory 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
64
A D V I S O R Y
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AGREEMENTS (unaudited)
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
the renewal of the Investment Advisory Agreement and Subadvisory
Agreement is considered, particular focus is given to information
concerning Fund performance, comparability of fees and total expenses,
and profitability. However, the Board noted that the evaluation
process with respect to the Manager and the Subadviser is an ongoing
one. In this regard, the Board's and its committees' consideration of
the Investment Advisory Agreement and Subadvisory Agreement included
certain information previously received at such meetings.
INVESTMENT ADVISORY AGREEMENT
- --------------------------------------------------------------------------------
After full consideration of a variety of factors, the Board of
Trustees, including the Independent Trustees, voted to approve the
Investment Advisory Agreement. In approving the Investment Advisory
Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by independent counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES. In considering the nature,
extent, and quality of the services provided by the Manager under the
Investment Advisory Agreement, the Board of Trustees reviewed
information provided by the Manager relating to its operations and
personnel. The Board also took into account its familiarity with the
Manager's management through Board meetings, discussions, and 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.
65
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
The Board considered the Manager's management style and the
performance of its duties under the Investment Advisory Agreement.
The Board considered the level and depth of knowledge of the Manager,
including the professional experience and qualifications of its senior
and investment personnel, as well as current staffing levels. The
Board discussed the Manager's effectiveness in monitoring the
performance of the 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
66
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
load type (in this case, investment companies with no sales loads),
asset size, and expense components (the "expense group") and (ii) a
larger group of investment companies that includes all no-load retail
open-end investment companies in the same investment
classification/objective as the Fund regardless of asset size,
excluding outliers (the "expense universe"). Among other data, the
Board noted that the Fund's management fee rate - which includes
advisory and administrative services and the effects of any
performance fee adjustment - was below the median of both its expense
group and its expense universe. The data indicated that the Fund's
total expenses were lower than the median of both its expense group
and its expense universe. The Board took into account the various
services provided to the Fund by the Manager and its affiliates. The
Board also noted the level and method of computing the management fee,
including any performance adjustment to such fee. The Trustees also
took into account that the subadvisory fees under the Subadvisory
Agreement are paid by the Manager.
In considering the Fund's performance, the Board of Trustees noted
that the Board reviews at its regularly scheduled meetings information
about the Fund's performance results. The Trustees also reviewed
various comparative data provided to them in connection with their
consideration of the renewal of the Investment Advisory Agreement,
including, among other information, a comparison of the Fund's average
annual total return with its Lipper index and with that of other
mutual funds deemed to be in its peer group by the independent third
party in its report (the "performance universe"). The Fund's
performance universe consisted of the Fund and all retail and
institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or
primary channel of distribution. This comparison indicated that the
Fund's performance exceeded the average of its performance universe
for the one- and three-year periods ended December 31, 2005, exceeded
its Lipper index for the one-year period ended December 31, 2005, was
below its Lipper index for the three-year period ended December 31,
2005, and was below the average of both its
67
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
performance universe and its Lipper index for the five-year period
ended December 31, 2005. The Board also noted that the Fund's
percentile performance ranking was in the top 30% and top 50% of its
performance universe for the one- and three-year periods,
respectively, ended December 31, 2005.
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 took into
account management's discussions 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
68
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
proportionally more than some expenses. The Board determined that the
current investment management fee structure was reasonable.
CONCLUSIONS. The Board reached the following conclusions regarding the
Fund's Investment Advisory Agreement with the Manager, among others:
(i) the Manager has demonstrated that it possesses the capability and
resources to perform the duties required of it under the Investment
Advisory Agreement; (ii) the Manager maintains an appropriate
compliance program; (iii) the performance of the Fund is reasonable in
relation to the performance of funds with similar investment
objectives and to relevant indices; (iv) the Fund's advisory expenses
are reasonable in relation to those of similar funds and to the
services to be provided by the Manager; and (v) the Manager's level of
profitability from its relationship with the Fund is reasonable. Based
on its conclusions, the Board determined that continuation of the
Investment Advisory Agreement would be in the interests of the Fund
and its shareholders.
SUBADVISORY AGREEMENT
- --------------------------------------------------------------------------------
In approving the Subadvisory Agreement with respect to the Fund, the
Board considered various factors, among them: (i) the nature, extent,
and quality of services provided to the Fund by the Subadviser,
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.
69
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
NATURE, EXTENT, AND QUALITY OF SERVICES PROVIDED; INVESTMENT
PERSONNEL. The Trustees considered information provided to them
regarding the services provided by the Subadviser, including
information presented periodically throughout the previous year. The
Board considered the Subadviser's level of knowledge and investment
style. The Board reviewed the experience and credentials of the
investment personnel who are responsible for managing the investment
of portfolio securities with respect to the Fund and the Subadviser's
level of staffing. The Trustees noted that the materials provided to
them by the Subadviser indicated that the method of compensating
portfolio managers is reasonable and includes appropriate mechanisms
to prevent a manager with underperformance from taking undue risks.
The Trustees also noted the Subadviser's brokerage practices. The
Board also considered the Subadviser's regulatory and compliance
history. The Board noted that the Manager's monitoring processes of
the Subadviser include: (i) regular telephonic meetings to discuss,
among other matters, investment strategies, and to review portfolio
performance; (ii) monthly portfolio compliance checklists and
quarterly compliance certifications to the Board; and (iii) due
diligence visits to the Subadviser.
SUBADVISER COMPENSATION. The Board also took into consideration the
financial condition of the Subadviser. In considering the cost of
services to be provided by the Subadviser and the profitability to the
Subadviser of its relationship with the Fund, the Trustees noted that
the fees under the Subadvisory Agreement were paid by the Manager. The
Trustees also relied on the ability of the Manager to negotiate the
Subadvisory Agreement and the fees thereunder at arm's length. The
Board also considered information relating to the cost of services to
be provided by the Subadviser, the Subadviser's profitability with
respect to the Fund, and the potential economies of scale in the
Subadviser's 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.
70
A D V I S O R Y
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AGREEMENTS (unaudited)
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2006
SUBADVISORY FEES AND FUND PERFORMANCE. The Board noted that the
subadvisory fees that the Subadviser charges the Fund are unique and
could not be compared to the fees that the Subadviser charges to other
clients. The Board considered that the Fund pays a management fee to
the Manager and that, in turn, the Manager pays a subadvisory fee to
the Subadviser.
As noted above, the Board considered the Fund's performance during the
one-, three-, and five-year periods ended December 31, 2005, as
compared to the Fund's respective peer group and noted that the Board
reviews at its regularly scheduled meetings information about the
Fund's performance results. The Board also considered the performance
of the Subadviser. 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 recent performance of the Fund. The Board also noted the
Subadviser's long-term performance record for similar accounts.
CONCLUSIONS. 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.
71
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.
72
. . . 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.
73
. . . 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.
74
. . . 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.
75
. . . 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.
76
. . . 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.
77
. . . 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.
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TRUSTEES Christopher W. Claus
Barbara B. Dreeben
Robert L. Mason, Ph.D.
Michael F. Reimherr
Richard A. Zucker
ADMINISTRATOR, USAA Investment Management Company
INVESTMENT ADVISER, P.O. Box 659453
UNDERWRITER, San Antonio, Texas 78265-9825
AND DISTRIBUTOR
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN AND State Street Bank and Trust Company
ACCOUNTING AGENT P.O. Box 1713
Boston, Massachusetts 02105
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1800
ACCOUNTING FIRM San Antonio, Texas 78205
TELEPHONE Call toll free - Central time
ASSISTANCE HOURS Monday - Friday, 7 a.m. to 10 p.m.
Saturday, 8:30 a.m. to 5 p.m.
FOR ADDITIONAL (800) 531-8181
INFORMATION ABOUT For account servicing, exchanges,
MUTUAL FUNDS or redemptions (800) 531-8448
RECORDED MUTUAL 24-hour service (from any phone)
FUND PRICE QUOTES (800) 531-8066
MUTUAL FUND (from touch-tone phones only)
USAA TOUCHLINE For account balance, last transaction, fund
prices, or to exchange or redeem fund shares
(800) 531-8777
INTERNET ACCESS USAA.COM
COPIES OF THE MANAGER'S PROXY VOTING POLICIES AND PROCEDURES, APPROVED BY THE
TRUST'S BOARD OF TRUSTEES FOR USE IN VOTING PROXIES ON BEHALF OF THE FUND, ARE
AVAILABLE WITHOUT CHARGE (I) BY CALLING (800) 531-8448; (II) AT USAA.COM; AND
(III) ON THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. INFORMATION REGARDING HOW
THE FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT
12-MONTH PERIOD ENDED JUNE 30, IS AVAILABLE (I) AT USAA.COM; AND (II) ON THE
SEC'S WEB SITE AT HTTP://WWW.SEC.GOV.
THE FUND FILES ITS COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE
FIRST AND THIRD QUARTERS OF EACH FISCAL YEAR ON FORM N-Q. THESE FORMS N-Q ARE
AVAILABLE (I) BY CALLING (800) 531-8448; (II) AT USAA.COM; AND (III) ON THE
SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. THESE FORMS N-Q ALSO MAY BE REVIEWED AND
COPIED AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE
OPERATION OF THE PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING (800)
SEC-0330.
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and others electronically.
Sign up at USAA.COM.
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[LOGO OF USAA] WE KNOW WHAT IT MEANS TO SERVE.(R)
USAA ----------------------------------
INSURANCE o MEMBER SERVICES
23403-0706 (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.