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 GNMA TRUST- ANNUAL REPORT FOR PERIOD ENDING MAY 31, 2006
[LOGO OF USAA]
USAA(R)
USAA GNMA Trust(R)
[GRAPHIC OF USAA GNMA TRUST]
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
MANAGER'S COMMENTARY 4
FUND RECOGNITION 9
INVESTMENT OVERVIEW 10
FINANCIAL INFORMATION
Distributions to Shareholders 15
Report of Independent Registered Public Accounting Firm 16
Portfolio of Investments 17
Notes to Portfolio of Investments 20
Financial Statements 21
Notes to Financial Statements 24
EXPENSE EXAMPLE 35
ADVISORY AGREEMENTS 37
DIRECTORS' AND OFFICERS' INFORMATION 43
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 MARGARET "DIDI" WEINBLATT] MARGARET "DIDI" WEINBLATT, Ph.D., CFA
USAA Investment Management Company
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HOW DID THE FUND PERFORM?
For the year ended May 31, 2006, the USAA GNMA Trust had a total
return of 0.40%. This compares to a 0.10% return for the Lipper GNMA
Funds Index and 0.72% for the Lehman Brothers GNMA 30-Year Index.
WHAT WAS THE MARKET ENVIRONMENT DURING THE PERIOD?
The Federal Reserve Board (the Fed) continued to raise short-term
interest rates; by the end of May 2006, the federal funds rate stood
at 5%, up from a low of 1% in June 2004. Unlike the previous reporting
year, when long-term rates remained stubbornly low in the face of Fed
hikes, long-term rates moved up substantially, although not as much as
short-term rates. The yield on the benchmark 10-year U.S. Treasury
bond rose from 3.98% on May 31, 2005, to 5.12% a year later (see chart
on next page).
Partially driving the Fed's decision-making were the strong U.S.
economy and occasional signs of inflation. Some indications of an
economic slowdown began to appear during the latter part of the
period. We've noted before that there's a lag between Fed rate hikes
and their impact on the economy. It's our view that the cumulative
effects of two years of sustained tightening are beginning to be felt.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
REFER TO PAGE 13 FOR BENCHMARK DEFINITIONS.
5
. . . C O N T I N U E D
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HISTORICAL YIELD CURVE
[CHART OF HISTORICAL YIELD CURVE]
5/31/05 5/31/06 CHANGE
------- ------- ------
3 MONTH 2.940% 4.833% 1.8932%
6 MONTH 3.108 5.062 1.9544
2 YEAR 3.574 5.033 1.4594
3 YEAR 3.626 5.030 1.4040
5 YEAR 3.735 5.032 1.2971
10 YEAR 3.981 5.119 1.1376
30 YEAR 4.320 5.228 0.9072
SOURCE: BLOOMBERG L.P.
[END CHART]
HOW DID MORTGAGE-BACKED SECURITIES PERFORM?
Mortgage-backed securities outperformed the overall bond market. One
reason is that mortgage-backed securities have interest-rate
sensitivity similar to that of short- to intermediate-term bonds.
Even though mortgage-backed securities have 15- or 30-year final
maturities, they are paid off when a mortgage is refinanced or a house
is sold, giving mortgages a weighted average life that is
substantially less than the final maturity. Another performance driver
was the fact that there is no risk of leveraged buyouts (LBOs) in GNMA
securities (GNMAs) as there is in corporate bonds. In an LBO, a
private equity fund can take a corporation private at the expense of
current bondholders. Finally, we saw substantial foreign buying of
GNMAs. Foreigners are
6
. . . C O N T I N U E D
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COMMENTARY on the Fund
attracted to GNMAs because of their U.S. government guarantee. In the
first part of the reporting year, foreign buying pushed valuations to
very high levels relative to other mortgage-backed securities. But in
2006, foreign buying has cooled, leaving GNMAs at more reasonable
levels, although still high by historical standards.
TREASURY YIELDS AND FED FUNDS RATE
[CHART OF TREASURY YIELDS AND FED FUNDS RATE]
30-YEAR YIELD 10-YEAR YIELD 2-YEAR YIELD FEDERAL FUNDS RATE
5/31/2005 4.32% 3.98% 3.58% 3.00%
6/1/2005 4.24 3.89 3.48 3.00
6/2/2005 4.24 3.91 3.53 3.00
6/3/2005 4.28 3.98 3.56 3.00
6/6/2005 4.24 3.95 3.58 3.00
6/7/2005 4.19 3.90 3.56 3.00
6/8/2005 4.22 3.94 3.60 3.00
6/9/2005 4.23 3.95 3.62 3.00
6/10/2005 4.33 4.05 3.70 3.00
6/13/2005 4.37 4.09 3.70 3.00
6/14/2005 4.42 4.11 3.69 3.00
6/15/2005 4.40 4.10 3.71 3.00
6/16/2005 4.37 4.07 3.67 3.00
6/17/2005 4.36 4.07 3.71 3.00
6/20/2005 4.39 4.11 3.71 3.00
6/21/2005 4.33 4.04 3.69 3.00
6/22/2005 4.24 3.94 3.60 3.00
6/23/2005 4.25 3.95 3.61 3.00
6/24/2005 4.22 3.92 3.58 3.00
6/27/2005 4.19 3.90 3.58 3.00
6/28/2005 4.25 3.97 3.65 3.00
6/29/2005 4.26 3.98 3.66 3.00
6/30/2005 4.19 3.92 3.64 3.25
7/1/2005 4.30 4.05 3.74 3.25
7/4/2005 4.30 4.04 3.74 3.25
7/5/2005 4.36 4.11 3.79 3.25
7/6/2005 4.33 4.07 3.77 3.25
7/7/2005 4.32 4.06 3.72 3.25
7/8/2005 4.34 4.09 3.77 3.25
7/11/2005 4.34 4.10 3.79 3.25
7/12/2005 4.39 4.14 3.84 3.25
7/13/2005 4.40 4.16 3.83 3.25
7/14/2005 4.42 4.18 3.84 3.25
7/15/2005 4.40 4.17 3.86 3.25
7/18/2005 4.47 4.22 3.89 3.25
7/19/2005 4.42 4.18 3.86 3.25
7/20/2005 4.39 4.16 3.87 3.25
7/21/2005 4.50 4.28 3.94 3.25
7/22/2005 4.44 4.22 3.91 3.25
7/25/2005 4.47 4.25 3.94 3.25
7/26/2005 4.45 4.23 3.93 3.25
7/27/2005 4.47 4.26 3.99 3.25
7/28/2005 4.40 4.19 3.95 3.25
7/29/2005 4.47 4.28 4.02 3.25
8/1/2005 4.51 4.31 4.04 3.25
8/2/2005 4.55 4.34 4.04 3.25
8/3/2005 4.50 4.29 4.01 3.25
8/4/2005 4.52 4.31 4.04 3.25
8/5/2005 4.58 4.39 4.10 3.25
8/8/2005 4.60 4.42 4.15 3.25
8/9/2005 4.57 4.39 4.11 3.50
8/10/2005 4.58 4.39 4.12 3.50
8/11/2005 4.52 4.32 4.07 3.50
8/12/2005 4.45 4.24 4.04 3.50
8/15/2005 4.48 4.28 4.06 3.50
8/16/2005 4.42 4.21 4.00 3.50
8/17/2005 4.48 4.27 4.05 3.50
8/18/2005 4.42 4.20 3.99 3.50
8/19/2005 4.42 4.21 4.02 3.50
8/22/2005 4.43 4.21 4.01 3.50
8/23/2005 4.40 4.18 3.98 3.50
8/24/2005 4.39 4.17 3.97 3.50
8/25/2005 4.37 4.16 4.00 3.50
8/26/2005 4.37 4.19 4.07 3.50
8/29/2005 4.36 4.17 4.05 3.50
8/30/2005 4.31 4.09 3.94 3.50
8/31/2005 4.26 4.02 3.82 3.50
9/1/2005 4.31 4.03 3.73 3.50
9/2/2005 4.30 4.04 3.76 3.50
9/5/2005 4.30 4.03 3.74 3.50
9/6/2005 4.36 4.10 3.81 3.50
9/7/2005 4.42 4.14 3.85 3.50
9/8/2005 4.43 4.15 3.87 3.50
9/9/2005 4.40 4.12 3.87 3.50
9/12/2005 4.45 4.17 3.91 3.50
9/13/2005 4.42 4.13 3.86 3.50
9/14/2005 4.45 4.17 3.88 3.50
9/15/2005 4.52 4.21 3.89 3.50
9/16/2005 4.57 4.27 3.98 3.50
9/19/2005 4.55 4.25 3.92 3.50
9/20/2005 4.53 4.24 3.98 3.75
9/21/2005 4.46 4.17 3.92 3.75
9/22/2005 4.46 4.18 3.94 3.75
9/23/2005 4.52 4.25 4.02 3.75
9/26/2005 4.56 4.29 4.05 3.75
9/27/2005 4.54 4.28 4.07 3.75
9/28/2005 4.50 4.26 4.08 3.75
9/29/2005 4.55 4.30 4.13 3.75
9/30/2005 4.57 4.33 4.17 3.75
10/3/2005 4.62 4.39 4.21 3.75
10/4/2005 4.60 4.37 4.21 3.75
10/5/2005 4.57 4.34 4.18 3.75
10/6/2005 4.61 4.39 4.20 3.75
10/7/2005 4.57 4.37 4.19 3.75
10/10/2005 4.57 4.36 4.19 3.75
10/11/2005 4.60 4.39 4.22 3.75
10/12/2005 4.66 4.44 4.23 3.75
10/13/2005 4.69 4.46 4.23 3.75
10/14/2005 4.70 4.48 4.26 3.75
10/17/2005 4.72 4.50 4.28 3.75
10/18/2005 4.69 4.47 4.25 3.75
10/19/2005 4.69 4.46 4.24 3.75
10/20/2005 4.66 4.43 4.22 3.75
10/21/2005 4.60 4.39 4.21 3.75
10/24/2005 4.66 4.45 4.25 3.75
10/25/2005 4.74 4.54 4.34 3.75
10/26/2005 4.79 4.59 4.37 3.75
10/27/2005 4.77 4.55 4.35 3.75
10/28/2005 4.77 4.57 4.39 3.75
10/31/2005 4.76 4.55 4.38 3.75
11/1/2005 4.76 4.57 4.40 4.00
11/2/2005 4.80 4.61 4.43 4.00
11/3/2005 4.85 4.65 4.46 4.00
11/4/2005 4.86 4.66 4.47 4.00
11/7/2005 4.82 4.62 4.45 4.00
11/8/2005 4.76 4.55 4.41 4.00
11/9/2005 4.84 4.64 4.49 4.00
11/10/2005 4.74 4.56 4.43 4.00
11/11/2005 4.74 4.57 4.43 4.00
11/14/2005 4.80 4.61 4.49 4.00
11/15/2005 4.75 4.56 4.46 4.00
11/16/2005 4.66 4.47 4.40 4.00
11/17/2005 4.65 4.46 4.37 4.00
11/18/2005 4.68 4.49 4.39 4.00
11/21/2005 4.66 4.46 4.37 4.00
11/22/2005 4.66 4.43 4.30 4.00
11/23/2005 4.70 4.49 4.35 4.00
11/24/2005 4.70 4.47 4.35 4.00
11/25/2005 4.66 4.43 4.35 4.00
11/28/2005 4.62 4.41 4.32 4.00
11/29/2005 4.69 4.48 4.39 4.00
11/30/2005 4.69 4.49 4.41 4.00
12/1/2005 4.72 4.52 4.44 4.00
12/2/2005 4.72 4.51 4.42 4.00
12/5/2005 4.76 4.57 4.47 4.00
12/6/2005 4.68 4.48 4.40 4.00
12/7/2005 4.71 4.51 4.40 4.00
12/8/2005 4.67 4.46 4.36 4.00
12/9/2005 4.73 4.53 4.40 4.00
12/12/2005 4.75 4.55 4.43 4.00
12/13/2005 4.73 4.52 4.41 4.25
12/14/2005 4.66 4.46 4.36 4.25
12/15/2005 4.67 4.46 4.35 4.25
12/16/2005 4.64 4.44 4.36 4.25
12/19/2005 4.64 4.44 4.37 4.25
12/20/2005 4.65 4.46 4.41 4.25
12/21/2005 4.68 4.49 4.44 4.25
12/22/2005 4.61 4.43 4.38 4.25
12/23/2005 4.55 4.38 4.37 4.25
12/26/2005 4.55 4.38 4.37 4.25
12/27/2005 4.51 4.34 4.35 4.25
12/28/2005 4.53 4.38 4.36 4.25
12/29/2005 4.51 4.36 4.36 4.25
12/30/2005 4.54 4.39 4.40 4.25
1/2/2006 4.54 4.39 4.40 4.25
1/3/2006 4.55 4.37 4.33 4.25
1/4/2006 4.54 4.34 4.30 4.25
1/5/2006 4.55 4.35 4.32 4.25
1/6/2006 4.56 4.38 4.35 4.25
1/9/2006 4.55 4.37 4.35 4.25
1/10/2006 4.61 4.43 4.40 4.25
1/11/2006 4.63 4.45 4.42 4.25
1/12/2006 4.59 4.41 4.38 4.25
1/13/2006 4.53 4.36 4.34 4.25
1/16/2006 4.53 4.36 4.33 4.25
1/17/2006 4.50 4.33 4.33 4.25
1/18/2006 4.51 4.33 4.33 4.25
1/19/2006 4.55 4.38 4.37 4.25
1/20/2006 4.52 4.35 4.35 4.25
1/23/2006 4.53 4.36 4.35 4.25
1/24/2006 4.57 4.39 4.39 4.25
1/25/2006 4.66 4.48 4.46 4.25
1/26/2006 4.70 4.52 4.49 4.25
1/27/2006 4.69 4.51 4.50 4.25
1/30/2006 4.70 4.53 4.51 4.25
1/31/2006 4.68 4.52 4.52 4.50
2/1/2006 4.71 4.56 4.58 4.50
2/2/2006 4.70 4.56 4.60 4.50
2/3/2006 4.63 4.53 4.57 4.50
2/6/2006 4.62 4.55 4.61 4.50
2/7/2006 4.66 4.57 4.60 4.50
2/8/2006 4.68 4.59 4.63 4.50
2/9/2006 4.65 4.55 4.66 4.50
2/10/2006 4.55 4.59 4.68 4.50
2/13/2006 4.56 4.58 4.67 4.50
2/14/2006 4.59 4.61 4.68 4.50
2/15/2006 4.57 4.60 4.69 4.50
2/16/2006 4.57 4.59 4.69 4.50
2/17/2006 4.51 4.54 4.68 4.50
2/20/2006 4.51 4.54 4.68 4.50
2/21/2006 4.53 4.57 4.70 4.50
2/22/2006 4.48 4.52 4.67 4.50
2/23/2006 4.50 4.56 4.72 4.50
2/24/2006 4.53 4.58 4.72 4.50
2/27/2006 4.55 4.59 4.73 4.50
2/28/2006 4.51 4.55 4.68 4.50
3/1/2006 4.56 4.59 4.70 4.50
3/2/2006 4.61 4.63 4.71 4.50
3/3/2006 4.66 4.68 4.75 4.50
3/6/2006 4.74 4.75 4.77 4.50
3/7/2006 4.71 4.72 4.75 4.50
3/8/2006 4.72 4.73 4.72 4.50
3/9/2006 4.72 4.73 4.71 4.50
3/10/2006 4.75 4.76 4.74 4.50
3/13/2006 4.76 4.77 4.72 4.50
3/14/2006 4.70 4.69 4.64 4.50
3/15/2006 4.75 4.73 4.68 4.50
3/16/2006 4.69 4.64 4.62 4.50
3/17/2006 4.72 4.67 4.64 4.50
3/20/2006 4.70 4.66 4.65 4.50
3/21/2006 4.75 4.72 4.74 4.50
3/22/2006 4.72 4.70 4.74 4.50
3/23/2006 4.76 4.74 4.77 4.50
3/24/2006 4.69 4.67 4.71 4.50
3/27/2006 4.73 4.71 4.74 4.50
3/28/2006 4.80 4.78 4.80 4.75
3/29/2006 4.84 4.81 4.80 4.75
3/30/2006 4.90 4.86 4.84 4.75
3/31/2006 4.89 4.85 4.82 4.75
4/3/2006 4.90 4.86 4.85 4.75
4/4/2006 4.91 4.87 4.82 4.75
4/5/2006 4.90 4.85 4.80 4.75
4/6/2006 4.97 4.90 4.84 4.75
4/7/2006 5.06 4.98 4.90 4.75
4/10/2006 5.03 4.96 4.88 4.75
4/11/2006 5.00 4.92 4.86 4.75
4/12/2006 5.06 4.98 4.91 4.75
4/13/2006 5.11 5.05 4.95 4.75
4/14/2006 5.11 5.05 4.95 4.75
4/17/2006 5.08 5.01 4.90 4.75
4/18/2006 5.08 4.98 4.83 4.75
4/19/2006 5.12 5.02 4.85 4.75
4/20/2006 5.14 5.04 4.88 4.75
4/21/2006 5.09 5.01 4.90 4.75
4/24/2006 5.06 4.98 4.88 4.75
4/25/2006 5.16 5.07 4.94 4.75
4/26/2006 5.18 5.11 4.99 4.75
4/27/2006 5.17 5.07 4.90 4.75
4/28/2006 5.16 5.05 4.86 4.75
5/1/2006 5.23 5.14 4.95 4.75
5/2/2006 5.21 5.11 4.91 4.75
5/3/2006 5.24 5.14 4.94 4.75
5/4/2006 5.24 5.15 4.97 4.75
5/5/2006 5.19 5.10 4.93 4.75
5/8/2006 5.18 5.11 4.95 4.75
5/9/2006 5.20 5.12 4.96 4.75
5/10/2006 5.19 5.13 4.99 5.00
5/11/2006 5.23 5.15 4.99 5.00
5/12/2006 5.31 5.20 5.01 5.00
5/15/2006 5.27 5.16 4.98 5.00
5/16/2006 5.21 5.10 4.95 5.00
5/17/2006 5.27 5.15 4.95 5.00
5/18/2006 5.17 5.06 4.91 5.00
5/19/2006 5.14 5.06 4.96 5.00
5/22/2006 5.13 5.04 4.95 5.00
5/23/2006 5.12 5.01 4.92 5.00
5/24/2006 5.13 5.04 4.94 5.00
5/25/2006 5.17 5.07 4.95 5.00
5/26/2006 5.16 5.05 4.95 5.00
5/29/2006 5.16 5.05 4.95 5.00
5/30/2006 5.19 5.08 4.97 5.00
5/31/2006 5.23 5.12 5.04 5.00
SOURCE: BLOOMBERG L.P.
[END CHART]
HOW DID YOU MANAGE THE FUND IN THIS ENVIRONMENT?
Concerned about rising interest rates, we began the year with a
strategy of maintaining a relatively short duration (a measure of
interest-rate sensitivity). We achieved this by buying higher-coupon
bonds and keeping some assets in cash equivalents. About halfway
through the reporting year, we began to extend duration through
purchases of lower-coupon mortgages, and by the end of the period the
Fund's interest-rate sensitivity was fairly
7
. . . C O N T I N U E D
========================--------------------------------------------------------
close to neutral. When foreign buying pushed GNMA prices to levels
that, in our view, were too high, we restricted new purchases to
Fannie Mae and Freddie Mac mortgage-backed securities. By the end of
the period, we were taking advantage of the four-year highs in
long-term rates to purchase additional securities.
COUPON RATE COMPOSITION OF MORTGAGE POOLS
[CHART OF COUPON RATE COMPOSITION OF MORTGAGE POOLS]
AVERAGE COUPON RATE
COUPON RATE % 5.75% (MAY 2006)
5.00 16.2%
5.50 39.1
5.88 1.7
6.00 27.1
6.15 1.4
6.50 10.2
6.75 0.1
7.00 2.8
7.50 0.7
8.00 0.7
[END CHART]
WHAT'S YOUR OUTLOOK?
Although data on jobs, retail sales, home prices, and manufacturing
are finally giving signs that economic growth is slowing, it's still
difficult to say when the Fed will stop raising short-term rates. Our
view is that the economy will continue to cool, with housing being a
key factor. In the last three years, rising residential real estate
prices have allowed consumers to maintain their spending by cashing
out equity in their homes. Flat to lower home prices, therefore, could
dampen consumer spending and slow employment growth, because so many
of the new jobs that have been created are in housing-related
industries.
8
. . . C O N T I N U E D
========================--------------------------------------------------------
COMMENTARY on the Fund
As we move into the new reporting year, risk reduction seems to be the
new investment theme. GNMAs should benefit from this emphasis because
they are among the safest securities. Of course, for investors in this
Fund, it's all about earning income. Although the net asset value will
fluctuate, we believe long-term investors should focus on total return
and steady income.
COULD THE HOUSING SLOWDOWN HAVE AN IMPACT ON THE FUND?
GNMAs are backed by the full faith and credit of the U.S. government.
If a mortgage-holder defaults on a mortgage in a GNMA pool, the
investor will receive all of the principal back. Regardless of
housing prices, GNMAs are as safe from a credit-risk perspective as
U.S. Treasuries. Indirectly, a housing slowdown could potentially be a
catalyst for lower interest rates and a less-aggressive Fed, which,
we believe, would be positive for the bond market overall.
On behalf of everyone at USAA, we thank you for your investment in the
Fund.
THE USAA GNMA TRUST IS NOT INDIVIDUALLY BACKED BY THE FULL FAITH AND
CREDIT OF THE U.S. GOVERNMENT.
9
F U N D
========------------------------------------------------------------------------
RECOGNITION
USAA GNMA TRUST
[LOGO OF LIPPER LEADER] [LOGO OF LIPPER LEADER]
PRESERVATION EXPENSE
The Fund is listed as a Lipper Leader for Preservation among 4,177 fixed-income
funds and for Expense among 148 funds within the Lipper U.S. Mortgage category
for the overall period ending May 31, 2006.
LIPPER RATINGS FOR PRESERVATION REFLECT FUNDS' HISTORICAL LOSS AVOIDANCE
RELATIVE TO OTHER FUNDS WITHIN THE SAME ASSET CLASS AS OF MAY 31, 2006.
PRESERVATION RATINGS ARE RELATIVE, RATHER THAN ABSOLUTE, MEASURES, AND FUNDS
NAMED LIPPER LEADERS FOR PRESERVATION MAY STILL EXPERIENCE LOSSES PERIODICALLY;
THOSE LOSSES MAY BE LARGER FOR EQUITY AND MIXED EQUITY FUNDS THAN FOR
FIXED-INCOME FUNDS. THE FUND RECEIVED A LIPPER LEADER RATING FOR PRESERVATION
AMONG 4,177 AND 3,506 FIXED-INCOME FUNDS FOR THE THREE-AND FIVE-YEAR PERIODS,
RESPECTIVELY, AND A SCORE OF 2 AMONG 2,171 FIXED-INCOME FUNDS FOR THE 10-YEAR
PERIOD. LIPPER RATINGS FOR EXPENSE REFLECT FUNDS' EXPENSE MINIMIZATION RELATIVE
TO PEERS WITH SIMILAR LOAD STRUCTURES AS OF MAY 31, 2006. THE FUND RECEIVED A
LIPPER LEADER RATING FOR EXPENSE AMONG 148, 128, AND 79 FUNDS FOR THE THREE-,
FIVE-, AND 10-YEAR PERIODS, RESPECTIVELY, WITHIN THE LIPPER U.S. MORTGAGE
CATEGORY. RATINGS ARE SUBJECT TO CHANGE EVERY MONTH AND ARE BASED ON AN
EQUAL-WEIGHTED AVERAGE OF PERCENTILE RANKS FOR THE PRESERVATION AND EXPENSE
METRICS OVER THREE-, FIVE-, AND 10-YEAR PERIODS (IF APPLICABLE). THE HIGHEST 20%
OF FUNDS IN EACH PEER GROUP ARE NAMED LIPPER LEADERS, THE NEXT 20% RECEIVE A
SCORE OF 2, THE MIDDLE 20% ARE SCORED 3, THE NEXT 20% ARE SCORED 4, AND THE
LOWEST 20% ARE SCORED 5. LIPPER RATINGS ARE NOT INTENDED TO PREDICT FUTURE
RESULTS, AND LIPPER DOES NOT GUARANTEE THE ACCURACY OF THIS INFORMATION. MORE
INFORMATION IS AVAILABLE AT WWW.LIPPERLEADERS.COM. LIPPER LEADER COPYRIGHT 2006,
REUTERS, ALL RIGHTS RESERVED.
10
I N V E S T M E N T
====================------------------------------------------------------------
OVERVIEW
USAA GNMA TRUST (Ticker Symbol: USGNX)
OBJECTIVE
- --------------------------------------------------------------------------------
High level of current income consistent with preservation of principal.
TYPES OF INVESTMENTS
- --------------------------------------------------------------------------------
Normally invests at least 80% of the Fund's assets in GNMA securities
backed by the full faith and credit of the U.S. government.
- --------------------------------------------------------------------------------
5/31/06 5/31/05
- --------------------------------------------------------------------------------
Net Assets $521.2 Million $594.2 Million
Net Asset Value Per Share $9.32 $9.76
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AND 30-DAY SEC YIELD* AS OF 5/31/06
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 30-DAY SEC YIELD
0.40% 4.04% 5.57% 4.97%
*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.
11
. . . C O N T I N U E D
========================--------------------------------------------------------
AVERAGE ANNUAL COMPOUNDED RETURNS WITH REINVESTMENT OF DIVIDENDS -- PERIODS
ENDING MAY 31, 2006
- -----------------------------------------------------------------------------------------
TOTAL RETURN = DIVIDEND RETURN + PRICE CHANGE
- -----------------------------------------------------------------------------------------
10 YEARS 5.57% = 6.03% + (0.46%)
5 YEARS 4.04% = 5.22% + (1.18%)
1 YEAR 0.40% = 4.91% + (4.51%)
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.
ANNUAL TOTAL RETURNS AND COMPOUNDED DIVIDEND RETURNS FOR THE 10-YEAR PERIOD
ENDING MAY 31, 2006
[CHART OF TOTAL RETURN, DIVIDEND RETURN, CHANGE IN SHARE PRICE]
TOTAL RETURN DIVIDEND RETURN CHANGE IN SHARE PRICE
5/31/1997 9.23% 7.28% 1.95%
5/31/1998 10.65 6.93 3.72
5/31/1999 3.15 6.25 -3.10
5/31/2000 0.21 6.51 -6.30
5/31/2001 12.91 7.36 5.55
5/31/2002 7.83 5.91 1.92
5/31/2003 6.49 5.70 0.79
5/31/2004 0.39 4.72 -4.33
5/31/2005 5.33 4.92 0.41
5/31/2006 0.40 4.91 -4.51
[END CHART]
TOTAL RETURN EQUALS DIVIDEND RETURN PLUS SHARE PRICE CHANGE AND
ASSUMES REINVESTMENT OF ALL NET INVESTMENT INCOME AND REALIZED CAPITAL
GAIN DISTRIBUTIONS. DIVIDEND RETURN IS THE NET INVESTMENT INCOME FROM
DIVIDENDS RECEIVED OVER THE PERIOD, ASSUMING REINVESTMENT OF ALL
DIVIDENDS. SHARE PRICE CHANGE IS THE CHANGE IN NET ASSET VALUE OVER
THE PERIOD ADJUSTED FOR 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.
12
. . . C O N T I N U E D
========================--------------------------------------------------------
OVERVIEW
12-MONTH DIVIDEND YIELD COMPARISON
[CHART OF 12-MONTH DIVIDEND YIELD COMPARISON]
USAA GNMA TRUST LIPPER GNMA FUNDS AVERAGE
5/31/1997 6.90% 6.34%
5/31/1998 6.44 6.13
5/31/1999 6.38 5.90
5/31/2000 6.87 6.17
5/31/2001 6.64 5.92
5/31/2002 5.58 5.08
5/31/2003 5.54 4.27
5/31/2004 4.93 4.06
5/31/2005 4.80 3.96
5/31/2006 5.15 4.48
[END CHART]
THE 12-MONTH DIVIDEND YIELD IS COMPUTED BY DIVIDING NET INVESTMENT
INCOME DIVIDENDS PAID DURING THE PREVIOUS 12 MONTHS BY THE LATEST
MONTH-END NET ASSET VALUE ADJUSTED FOR REALIZED CAPITAL GAIN
DISTRIBUTIONS. THE GRAPH REPRESENTS DATA FOR PERIODS ENDING 5/31/97 TO
5/31/06.
THE LIPPER GNMA FUNDS AVERAGE IS AN AVERAGE PERFORMANCE LEVEL OF ALL
GNMA FUNDS, REPORTED BY LIPPER INC., AN INDEPENDENT ORGANIZATION THAT
MONITORS THE PERFORMANCE OF MUTUAL FUNDS.
13
. . . C O N T I N U E D
========================--------------------------------------------------------
CUMULATIVE PERFORMANCE COMPARISON
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
LEHMAN BROTHERS
GNMA 30-YEAR INDEX USAA GNMA TRUST LIPPER GNMA FUNDS INDEX
05/31/96 $10,000.00 $10,000.00 $10,000.00
06/30/96 10,132.66 10,126.73 10,112.14
07/31/96 10,171.18 10,149.32 10,148.63
08/31/96 10,174.59 10,186.85 10,148.43
09/30/96 10,346.04 10,341.78 10,309.22
10/31/96 10,556.99 10,559.00 10,512.34
11/30/96 10,712.85 10,723.87 10,670.17
12/31/96 10,654.68 10,659.85 10,601.56
01/31/97 10,737.46 10,742.02 10,669.75
02/28/97 10,777.20 10,781.66 10,697.10
03/31/97 10,669.25 10,670.50 10,595.01
04/30/97 10,845.69 10,818.59 10,757.88
05/31/97 10,958.67 10,923.31 10,854.20
06/30/97 11,089.73 11,076.01 10,982.01
07/31/97 11,290.08 11,282.17 11,188.96
08/31/97 11,266.50 11,220.87 11,153.69
09/30/97 11,416.95 11,378.46 11,300.66
10/31/97 11,534.73 11,517.32 11,412.90
11/30/97 11,571.89 11,538.88 11,437.65
12/31/97 11,676.48 11,673.47 11,550.42
01/31/98 11,790.38 11,836.73 11,663.74
02/28/98 11,816.66 11,806.33 11,679.91
03/31/98 11,866.48 11,883.87 11,721.45
04/30/98 11,935.21 11,957.55 11,788.38
05/31/98 12,017.27 12,086.84 11,872.41
06/30/98 12,067.69 12,202.29 11,923.93
07/31/98 12,136.17 12,231.50 11,979.73
08/31/98 12,230.83 12,425.98 12,092.00
09/30/98 12,376.09 12,705.15 12,241.38
10/31/98 12,364.57 12,456.91 12,177.01
11/30/98 12,434.97 12,597.23 12,246.85
12/31/98 12,485.71 12,637.69 12,294.68
01/31/99 12,574.25 12,734.87 12,369.26
02/28/99 12,533.03 12,445.04 12,287.74
03/31/99 12,608.85 12,576.50 12,365.13
04/30/99 12,669.31 12,605.62 12,419.15
05/31/99 12,604.57 12,465.64 12,329.78
06/30/99 12,552.93 12,374.20 12,261.81
07/31/99 12,470.26 12,137.74 12,181.41
08/31/99 12,465.51 12,005.76 12,169.47
09/30/99 12,667.25 12,236.51 12,368.03
10/31/99 12,743.06 12,248.67 12,424.77
11/30/99 12,748.39 12,256.30 12,426.30
12/31/99 12,722.34 12,181.15 12,372.93
01/31/00 12,607.64 12,121.01 12,265.00
02/29/00 12,770.61 12,296.25 12,416.20
03/31/00 12,975.29 12,446.87 12,610.93
04/30/00 12,962.52 12,381.64 12,582.34
05/31/00 13,011.66 12,499.11 12,633.36
06/30/00 13,250.73 12,747.31 12,848.05
07/31/00 13,319.72 12,809.09 12,901.01
08/31/00 13,521.56 13,019.76 13,090.87
09/30/00 13,647.28 13,105.59 13,203.43
10/31/00 13,749.99 13,212.21 13,285.96
11/30/00 13,943.00 13,440.43 13,488.66
12/31/00 14,140.22 13,663.46 13,682.04
01/31/01 14,371.46 13,869.53 13,890.15
02/28/01 14,434.57 13,972.18 13,960.42
03/31/01 14,520.83 14,072.32 14,029.69
04/30/01 14,544.71 14,034.88 14,030.07
05/31/01 14,666.83 14,110.43 14,125.42
06/30/01 14,710.42 14,128.61 14,159.74
07/31/01 14,962.47 14,406.34 14,422.65
08/31/01 15,071.57 14,535.09 14,530.18
09/30/01 15,274.98 14,741.77 14,723.33
10/31/01 15,477.83 14,960.80 14,911.31
11/30/01 15,347.64 14,771.25 14,769.07
12/31/01 15,301.95 14,640.13 14,697.07
01/31/02 15,456.65 14,790.79 14,846.56
02/28/02 15,614.15 14,973.50 15,006.13
03/31/02 15,466.09 14,758.04 14,849.63
04/30/02 15,738.03 15,065.90 15,109.19
05/31/02 15,840.99 15,215.45 15,208.19
06/30/02 15,968.42 15,325.48 15,327.14
07/31/02 16,153.52 15,495.25 15,501.99
08/31/02 16,266.07 15,654.82 15,623.12
09/30/02 16,400.67 15,781.77 15,748.97
10/31/02 16,451.26 15,809.21 15,783.30
11/30/02 16,466.80 15,808.22 15,786.26
12/31/02 16,630.55 15,992.20 15,956.13
01/31/03 16,672.62 16,031.15 15,994.62
02/28/03 16,756.07 16,112.19 16,082.99
03/31/03 16,767.90 16,110.41 16,076.06
04/30/03 16,806.76 16,164.46 16,114.72
05/31/03 16,807.34 16,200.49 16,133.26
06/30/03 16,858.45 16,215.08 16,160.33
07/31/03 16,580.02 15,877.80 15,836.11
08/31/03 16,689.23 15,975.62 15,931.91
09/30/03 16,930.15 16,232.57 16,194.79
10/31/03 16,886.00 16,170.74 16,128.31
11/30/03 16,944.51 16,198.55 16,179.70
12/31/03 17,102.67 16,313.94 16,292.53
01/31/04 17,188.18 16,395.79 16,378.19
02/29/04 17,300.77 16,492.25 16,479.18
03/31/04 17,371.65 16,558.90 16,532.59
04/30/04 17,098.13 16,314.04 16,257.65
05/31/04 17,063.42 16,261.82 16,216.59
06/30/04 17,217.84 16,395.86 16,330.76
07/31/04 17,357.14 16,512.81 16,467.48
08/31/04 17,598.10 16,709.55 16,690.00
09/30/04 17,635.22 16,739.69 16,676.58
10/31/04 17,774.60 16,839.69 16,785.82
11/30/04 17,734.15 16,803.29 16,739.24
12/31/04 17,849.42 16,874.49 16,829.14
01/31/05 17,952.95 16,954.95 16,926.84
02/28/05 17,897.30 16,901.90 16,865.76
03/31/05 17,863.29 16,866.15 16,831.37
04/30/05 18,043.71 17,024.82 16,991.40
05/31/05 18,173.62 17,127.78 17,101.57
06/30/05 18,291.75 17,163.02 17,138.67
07/31/05 18,397.85 17,110.17 17,069.71
08/31/05 18,340.81 17,251.87 17,211.98
09/30/05 18,305.96 17,167.60 17,122.44
10/31/05 18,490.85 17,092.50 17,038.19
11/30/05 18,623.99 17,129.29 17,085.82
12/31/05 18,864.24 17,331.71 17,275.99
01/31/06 18,794.44 17,381.44 17,317.22
02/28/06 18,950.43 17,398.92 17,348.26
03/31/06 18,876.53 17,311.81 17,231.28
04/30/06 18,797.25 17,233.57 17,163.26
05/31/06 18,836.72 17,196.59 17,117.83
[END CHART]
DATA FROM 5/31/96 THROUGH 5/31/06.
The graph illustrates the comparison of a $10,000 hypothetical
investment in the USAA GNMA Trust to the following benchmarks:
o The Lehman Brothers GNMA 30-Year Index is an unmanaged index of
pass-through securities with an original maturity of 30 years.
o The Lipper GNMA Funds Index tracks the total return performance of
the 10 largest funds within the Lipper GNMA Funds category.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, AND THE CUMULATIVE
PERFORMANCE QUOTED DOES NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND
SHARES.
14
. . . C O N T I N U E D
========================--------------------------------------------------------
OVERVIEW
ASSET ALLOCATION
5/31/06
[PIE CHART OF ASSET ALLOCATION]
30-Year Fixed-Rate Single-Family Mortgages* 89.4%
Collateralized Mortgage Obligations 5.9%
15-Year Fixed-Rate Single-Family Mortgages* 4.8%
Repurchase Agreements 2.5%
[END CHART]
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT EQUAL 100%.
*COMBINED IN THE PORTFOLIO OF INVESTMENTS UNDER MORTGAGE-BACKED
PASS-THROUGH SECURITIES, SINGLE-FAMILY.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON
PAGES 17-19.
15
D I S T R I B U T I O N S
==========================------------------------------------------------------
to SHAREHOLDERS
USAA GNMA TRUST
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 fiscal year ended May 31, 2006, certain dividends paid by the
Fund qualify as interest-related dividends. The Fund designates
$28,321,000 as qualifying interest income.
16
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 GNMA TRUST:
We have audited the accompanying statement of assets and liabilities of the USAA
GNMA Trust (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 GNMA Trust 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
17
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(in thousands)
USAA GNMA TRUST
MAY 31, 2006
PRINCIPAL COUPON MARKET
AMOUNT SECURITY RATE MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY ISSUES (100.1%)(a)
MORTGAGE-BACKED PASS-THROUGH SECURITIES, SINGLE-FAMILY (94.2%)
Government National Mortgage Assn. I,
$ 6,113 Pool 604858 5.50% 12/15/2018 $ 6,067
32,068 Pool 604713 5.50 10/15/2033 31,231
14,639 Pool 616143 5.50 12/15/2033 14,257
7,277 Pool 615486 5.50 7/15/2034 7,092
6,397 Pool 781378 6.00 12/15/2016 6,470
3,435 Pool 780770 6.00 4/15/2028 3,435
1,227 Pool 482833 6.00 11/15/2028 1,226
3,164 Pool 492703 6.00 2/15/2029 3,160
2,022 Pool 781148 6.00 7/15/2029 2,020
3,284 Pool 584367 6.00 5/15/2032 3,277
9,911 Pool 603869 6.00 1/15/2033 9,887
2,687 Pool 553069 6.00 2/15/2033 2,681
3,902 Pool 581541 6.00 7/15/2033 3,893
2,446 Pool 615955 6.00 9/15/2033 2,440
1,016 Pool 456861 6.50 5/15/2028 1,037
849 Pool 472596 6.50 5/15/2028 868
805 Pool 462642 6.50 7/15/2028 822
776 Pool 464827 6.50 9/15/2028 792
2,132 Pool 490804 6.50 11/15/2028 2,177
101 Pool 434165 6.50 1/15/2029 103
93 Pool 469900 6.50 1/15/2029 96
2,744 Pool 486065 6.50 3/15/2031 2,798
2,203 Pool 485860 6.50 10/15/2031 2,246
1,837 Pool 577423 6.50 1/15/2032 1,873
858 Pool 581120 6.50 3/15/2032 874
2,139 Pool 552707 6.50 8/15/2032 2,180
11,025 Pool 781516 6.50 9/15/2032 11,242
89 Pool 474279 6.75 5/15/2028 92
224 Pool 474256 6.75 5/15/2028 229
157 Pool 440293 7.00 4/15/2027 162
1,434 Pool 780570 7.00 5/15/2027 1,485
66 Pool 478209 7.00 6/15/2028 68
111 Pool 458908 7.00 7/15/2028 115
376 Pool 464128 7.00 8/15/2028 389
294 Pool 486467 7.00 8/15/2028 304
421 Pool 464854 7.00 9/15/2028 435
2,592 Pool 487603 7.00 5/15/2029 2,681
2,022 Pool 487613 7.00 6/15/2029 2,091
1,022 Pool 555482 7.00 8/15/2031 1,057
18
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS (continued)
(in thousands)
USAA GNMA TRUST
MAY 31, 2006
PRINCIPAL COUPON MARKET
AMOUNT SECURITY RATE MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
Government National Mortgage Assn. I,
$ 620 Pool 781328 7.00% 9/15/2031 $ 642
995 Pool 564438 7.00 10/15/2031 1,029
343 Pool 563599 7.00 6/15/2032 354
1,278 Pool 563613 7.00 7/15/2032 1,321
621 Pool 780716 7.50 2/15/2028 652
111 Pool 781001 7.50 3/15/2029 117
285 Pool 499432 7.50 4/15/2029 299
424 Pool 470683 7.50 7/15/2029 445
872 Pool 510533 7.50 10/15/2029 914
229 Pool 518539 7.50 10/15/2029 239
141 Pool 538003 7.50 8/15/2030 148
219 Pool 443263 7.50 12/15/2030 229
113 Pool 486050 7.50 1/15/2031 119
74 Pool 530250 7.50 1/15/2031 77
181 Pool 552172 7.50 11/15/2031 190
18 Pool 178674 8.00 1/15/2022 20
373 Pool 352169 8.00 6/15/2023 398
437 Pool 442548 8.00 5/15/2027 466
416 Pool 511530 8.00 7/15/2030 444
171 Pool 520978 8.00 9/15/2030 183
123 Pool 307542 8.50 6/15/2021 133
37 Pool 329602 8.50 7/15/2022 40
158 Pool 312950 9.00 7/15/2021 171
Government National Mortgage Assn. II,
14,356 Pool 003389 5.00 5/20/2033 13,585
15,674 Pool 003414 5.00 7/20/2033 14,831
10,350 Pool 003568 5.00 6/20/2034 9,800
29,147 Pool 003759 5.00 9/20/2035 27,573
3,799 Pool 003375 5.50 4/20/2033 3,684
12,754 Pool 003530 5.50 3/20/2034 12,377
41,885 Pool 003678(d) 5.50 2/20/2035 40,631
41,853 Pool 003702 5.50 4/20/2035 40,600
23,453 Pool 003736 5.50 7/20/2035 22,751
2,255 Pool 003052 6.00 3/20/2031 2,245
5,096 Pool 003273 6.00 8/20/2032 5,072
4,054 Pool 003285 6.00 9/20/2032 4,034
4,111 Pool 003460 6.00 10/20/2033 4,105
4,261 Pool 448816 6.00 12/20/2033 4,234
12,553 Pool 003517 6.00 2/20/2034 12,496
12,527 Pool 003531 6.00 3/20/2034 12,470
10,222 Pool 003611 6.00 9/20/2034 10,176
19
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS (continued)
(in thousands)
USAA GNMA TRUST
MAY 31, 2006
PRINCIPAL COUPON MARKET
AMOUNT SECURITY RATE MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
Government National Mortgage Assn. II,
$24,213 Pool 003625 6.00% 10/20/2034 $ 24,103
7,385 Pool 605742 6.00 11/20/2034 7,341
15,000 Pool 003852(c) 6.00 5/20/2036 14,929
754 Pool 003080 6.50 5/20/2031 765
648 Pool 003107 6.50 7/20/2031 658
1,975 Pool 781494 6.50 8/20/2031 2,005
2,882 Pool 781427 6.50 4/20/2032 2,923
2,726 Pool 003250 6.50 6/20/2032 2,764
10,752 Pool 003599 6.50 8/20/2034 10,899
2,334 Pool 002971 7.00 9/20/2030 2,394
312 Pool 003070 7.50 4/20/2031 325
94 Pool 000563 8.00 12/20/2022 99
2,150 Pool 002958 8.00 8/20/2030 2,285
Fannie Mae (+),
14,744 Pool 846573 5.00 12/01/2035 13,844
1,399 Pool 598427 6.00 2/01/2017 1,409
1,376 Pool 608749 6.50 10/01/2016 1,401
4,705 Pool 618473 6.50 12/01/2016 4,791
Freddie Mac (+),
4,860 Pool G18095 5.00 1/01/2021 4,694
10,760 Pool A42616 5.50 12/01/2035 10,380
--------
490,655
--------
COLLATERALIZED MORTGAGE OBLIGATIONS (5.9%)
Government National Mortgage Assn. I,
15,000 Series 2003-50, Class PC 5.50 3/16/2032 14,608
8,703 Series 2002-35, Class C 5.88 10/16/2023 8,796
7,404 Series 2001-12, Class B 6.15 6/16/2021 7,484
--------
30,888
--------
Total U.S. government agency issues (cost: $538,028) 521,543
--------
REPURCHASE AGREEMENTS (2.5%)(b)
13,113 UBS Securities LLC, 5.00%, acquired on
5/31/2006 and due on 6/01/2006 at
$13,113 (collateralized by $14,150 of
Fannie Mae Notes(a,+), 4.63%, due 5/01/2013;
market value $13,376) (cost: $13,113) 13,113
--------
TOTAL INVESTMENTS (COST: $551,141) $534,656
========
20
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
USAA GNMA TRUST
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%.
SPECIFIC NOTES
- --------------------------------------------------------------------------------
(a) U.S. government agency issues - mortgage-backed securities issued
by Government National Mortgage Association (GNMA) are supported
by the full faith and credit of the U.S. government. Securities
issued by government-sponsored enterprises (GSEs) indicated with
"+" are supported only by the credit of the issuing agency,
instrumentality, or corporation, and are neither issued nor
guaranteed by the U.S. government.
(b) Collateral on repurchase agreements is received by the Fund upon
entering into the repurchase agreement. The collateral is marked-
to-market daily to ensure its market value is equal to or in excess
of the repurchase agreement price plus accrued interest.
(c) At May 31, 2006, the aggregate market value of securities purchased
on a delayed-delivery basis was $14,929,000.
(d) At May 31, 2006, a portion of this security was segregated to
cover when-issued securities.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
21
S T A T E M E N T
==================--------------------------------------------------------------
of ASSETS and LIABILITIES
(in thousands)
USAA GNMA TRUST
MAY 31, 2006
ASSETS
Investments in securities, at market value (identified cost of $551,141) $534,656
Cash 1
Receivables:
Capital shares sold 103
USAA Transfer Agency Company (Note 6C) 3
Interest 2,515
Securities sold 14,875
--------
Total assets 552,153
--------
LIABILITIES
Payables:
Securities purchased 29,901
Capital shares redeemed 514
Dividends on capital shares 425
Accrued management fees 56
Accrued transfer agent's fees 16
Other accrued expenses and payables 65
--------
Total liabilities 30,977
--------
Net assets applicable to capital shares outstanding $521,176
========
NET ASSETS CONSIST OF:
Paid-in capital $580,404
Accumulated net realized loss on investments (42,743)
Net unrealized depreciation of investments (16,485)
--------
Net assets applicable to capital shares outstanding $521,176
========
Capital shares outstanding, unlimited number of shares authorized,
no par value 55,946
========
Net asset value, redemption price, and offering price per share $ 9.32
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
22
S T A T E M E N T
==================--------------------------------------------------------------
of OPERATIONS
(in thousands)
USAA GNMA TRUST
YEAR ENDED MAY 31, 2006
INVESTMENT INCOME
Interest income $ 28,032
--------
EXPENSES
Management fees 708
Administration and servicing fees 850
Transfer agent's fees 876
Custody and accounting fees 113
Postage 80
Shareholder reporting fees 32
Trustees' fees 9
Registration fees 43
Professional fees 52
Other 24
--------
Total expenses 2,787
Expenses paid indirectly (4)
--------
Net expenses 2,783
--------
NET INVESTMENT INCOME 25,249
--------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss (126)
Change in net unrealized appreciation/depreciation (22,656)
--------
Net realized and unrealized loss (22,782)
--------
Increase in net assets resulting from operations $ 2,467
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
23
S T A T E M E N T S
====================------------------------------------------------------------
of Changes in NET ASSETS
(in thousands)
USAA GNMA TRUST
YEARS ENDED MAY 31,
2006 2005
----------------------------
FROM OPERATIONS
Net investment income $ 25,249 $ 24,552
Net realized gain (loss) on investments (126) 686
Change in net unrealized appreciation/depreciation
of investments (22,656) 5,792
----------------------------
Increase in net assets resulting
from operations 2,467 31,030
----------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (28,404) (28,942)
----------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 69,320 79,152
Reinvested dividends 22,819 22,918
Cost of shares redeemed (139,240) (120,435)
----------------------------
Decrease in net assets from capital share
transactions (47,101) (18,365)
----------------------------
Capital contribution from USAA Transfer
Agency Company (Note 6C) 3 -
----------------------------
Net decrease in net assets (73,035) (16,277)
NET ASSETS
Beginning of period 594,211 610,488
----------------------------
End of period $ 521,176 $ 594,211
============================
CHANGE IN SHARES OUTSTANDING
Shares sold 7,237 8,082
Shares issued for dividends reinvested 2,387 2,341
Shares redeemed (14,585) (12,309)
----------------------------
Decrease in shares outstanding (4,961) (1,886)
============================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
24
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
USAA GNMA TRUST
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 GNMA Trust (the Fund),
which is classified as diversified under the 1940 Act. The Fund's
investment objective is to provide a high level of current income
consistent with preservation of principal.
A. SECURITY VALUATION - The value of each security is determined (as
of the close of trading on the New York Stock Exchange on each
business day the exchange is open) as set forth below:
1. Debt securities are valued each business day by a pricing
service (the Service) approved by the Trust's Board of
Trustees. The Service uses the mean between quoted bid and
asked prices or the last sales price to price securities when,
in the Service's judgment, these prices are readily available
and are representative of the securities' market values. For
many securities, such prices are not readily available. The
Service generally prices these securities based on methods
that include consideration of yields or prices of securities
of comparable quality, coupon, maturity, and type; indications
as to values from dealers in securities; and general market
conditions.
2. Securities purchased with original maturities of 60 days or
less are valued at amortized cost, which approximates market
value.
3. Repurchase agreements are valued at cost, which approximates
market value.
4. 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
25
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2006
valued in good faith at fair value, using methods determined
by USAA Investment Management Company (the Manager), an
affiliate of the Fund, under valuation procedures approved by
the Trust's Board of Trustees. The effect of fair value
pricing is that securities may not be priced on the basis of
quotations from the primary market in which they are traded
and the actual price realized from the sale of a security may
differ materially from the fair value price. Valuing these
securities at fair value is intended to cause the Fund's net
asset value (NAV) to be more reliable than it otherwise would
be.
Fair value methods used by the Manager include, but are not
limited to, obtaining market quotations from secondary pricing
services, broker-dealers, or widely used quotation systems.
General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and
duration of any restrictions on disposition of the securities,
and an evaluation of the forces that influenced the market in
which the securities are purchased and sold.
B. FEDERAL TAXES - The Fund's policy is to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
income to its shareholders. Therefore, no federal income tax
provision is required.
C. INVESTMENTS IN SECURITIES - Security transactions are accounted
for on the date the securities are purchased or sold (trade
date). Gains or losses from sales of investment securities are
computed on the identified cost basis. 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.
26
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2006
These agreements are collateralized by obligations issued or
guaranteed as to both principal and interest by the U.S.
government, its agencies, or its instrumentalities. Government-
sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac,
are supported only by the credit of the issuing U.S. government
agency, and are neither issued nor guaranteed by the U.S.
government. Obligations pledged as collateral are required to
maintain a value equal to or in excess of the repurchase
agreement price plus accrued interest and are held by the Fund,
either through its regular custodian or through a special
"tri-party" custodian that maintains separate accounts for both
the Fund and its counterparty, until maturity of the repurchase
agreement. The Fund's Manager monitors the creditworthiness of
sellers with which the Fund may enter into repurchase agreements.
E. 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, outstanding
delayed-delivery commitments, including interest purchased where
applicable, for the Fund were $29,901,000, which included when-
issued securities of $14,899,000. Also outstanding was a same-day
sale of a when-issued commitment of $14,875,000.
F. EXPENSES PAID INDIRECTLY - Through arrangements with the Fund's
custodian and other banks utilized by the Fund for cash
27
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2006
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, these custodian
and other bank credits reduced the Fund's expenses by $4,000.
G. INDEMNIFICATIONS - Under the Trust's organizational documents,
its officers and trustees are indemnified against certain
liabilities arising out of the performance of their duties to the
Trust. In addition, in the normal course of business the Trust
enters into contracts that contain a variety of representations
and warranties that provide general indemnifications. The Trust's
maximum exposure under these arrangements is unknown, as this
would involve future claims that may be made against the Trust
that have not yet occurred. However, the Trust expects the risk
of loss to be remote.
H. USE OF ESTIMATES - The preparation of financial statements in
conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that may
affect the reported amounts in the financial statements.
(2) LINE OF CREDIT
- --------------------------------------------------------------------------------
The Fund participates in a joint, short-term, revolving, committed
loan agreement of $300 million with USAA Capital Corporation (CAPCO),
an affiliate of the Manager. The purpose of the agreement is to meet
temporary or emergency cash needs, including redemption requests that
might otherwise require the untimely disposition of securities.
Subject to availability, the Fund may borrow from CAPCO an 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
28
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2006
maintaining CAPCO's funding programs in total (in no event to exceed
0.07% annually of the $300 million loan agreement). The facility fees
are allocated among the funds based on their respective average net
assets for the period. Prior to January 6, 2006, the facility fees
assessed by CAPCO were limited to an amount not to exceed 0.09%
annually of the $300 million loan agreement.
For the year ended May 31, 2006, the Fund paid CAPCO facility fees of
$1,000, which represents 1.8% of total fees paid to CAPCO by the USAA
funds. The Fund had no borrowings under this agreement during the year
ended May 31, 2006.
(3) DISTRIBUTIONS
- --------------------------------------------------------------------------------
The character of any distributions made during the year from net
investment income or net realized gains is determined in accordance
with federal tax regulations and may differ from those determined in
accordance with U.S. generally accepted accounting principles. Also,
due to the timing of distributions, the fiscal year in which amounts
are distributed may differ from the year that the income or realized
gains were recorded by the Fund.
During the current fiscal year, permanent differences between
book-basis and tax-basis accounting for security paydowns resulted in
reclassifications to the statement of assets and liabilities to
increase accumulated undistributed net investment income and increase
accumulated net realized loss on investments by $3,155,000. This
reclassification has no effect on net assets.
The tax character of distributions paid during the years ended May 31,
2006, and 2005, was as follows:
2006 2005
-----------------------------
Ordinary income* $28,404,000 $28,942,000
*Includes distribution of short-term realized capital gains, if any,
which are taxable as ordinary income.
29
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2006
As of May 31, 2006, the components of net assets representing
distributable earnings on a tax basis were as follows:
Undistributed ordinary income $ 425,000
Accumulated capital and other losses (42,743,000)
Unrealized depreciation of investments (16,485,000)
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. Distributions of realized gains from security
transactions not offset by capital losses are made annually in the
succeeding fiscal year or as otherwise required to avoid the payment
of federal taxes. At May 31, 2006, the Fund had a current post-October
deferred capital loss of $1,524,000 and capital loss carryovers of
$41,219,000, for federal income tax purposes. The post-October loss
will be recognized on the first day of the following fiscal year. If
not offset by subsequent capital gains, the capital loss carryovers
will expire between 2008 and 2014, as shown below. It is unlikely that
the Trust's Board of Trustees will authorize a distribution of capital
gains realized in the future until the capital loss carryovers have
been utilized or expire.
CAPITAL LOSS CARRYOVERS
--------------------------------------------
EXPIRES BALANCE
----------- -----------
2008 $ 8,011,000
2009 13,754,000
2010 1,176,000
2012 9,577,000
2013 4,814,000
2014 3,887,000
-----------
Total $41,219,000
===========
30
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2006
(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
$145,384,000 and $175,225,000, respectively.
As of May 31, 2006, the cost of securities, including short-term
securities, for federal income tax purposes, was $551,141,000.
Gross unrealized appreciation and depreciation of investments as of
May 31, 2006, for federal income tax purposes, were $1,503,000 and
$17,988,000, respectively, resulting in net unrealized depreciation of
$16,485,000.
(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.
Cash collateral is invested in high-quality short-term investments.
The Fund and MetWest retain 80% and 20%, respectively, of the income
earned from the investment of cash received as collateral, net of any
expenses associated with the lending transactions. MetWest receives no
other fees from the Fund for its services as securities-lending agent.
Risks to the Fund in securities-lending transactions are that the
borrower may not provide additional collateral when required or return
the securities when due, and that the value of the short-term
investments will be less than the amount of cash collateral required
to be returned to the borrower. Wachovia Corp., parent company of
MetWest, has agreed to indemnify the Fund against any losses due to
counterparty default in securities-lending transactions. The Fund had
no securities-lending transactions during the year ended May 31, 2006.
31
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2006
(6) TRANSACTIONS WITH MANAGER
- --------------------------------------------------------------------------------
A. MANAGEMENT FEES - The Manager carries out the Fund's investment
policies and manages the Fund's portfolio. 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 GNMA Funds Index, which tracks the total
return performance of the 10 largest funds in the Lipper GNMA
Funds category. The Fund's base fee is accrued daily and paid
monthly at an annualized rate of 0.125% of its 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%.
32
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2006
Under the performance fee arrangement, the Fund will pay a
positive performance fee adjustment for a performance period
whenever the Fund outperforms the Lipper GNMA 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 $708,000,
which included no performance adjustment.
B. ADMINISTRATION AND SERVICING FEES - The Manager provides certain
administration and shareholder servicing functions for the Fund.
For such services, the Manager receives a fee accrued daily and
paid monthly at an annualized rate of 0.15% of the Fund's average
net assets. For the year ended May 31, 2006, the Fund incurred
administration and servicing fees, paid or payable to the Manager,
of $850,000.
In addition to the services provided under its Administration and
Servicing Agreement with the Fund, the Manager also provides
certain legal and tax services for the benefit of the Fund. The
Trust's Board of Trustees has approved the reimbursement of these
expenses incurred by the Manager. For the year ended May 31, 2006,
the Fund reimbursed the Manager $21,000 for these legal and tax
services. These expenses are included in the professional fees
expenses on the Fund's statement of operations.
C. 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 $876,000.
33
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2006
In addition, the Fund recorded a receivable from SAS of $3,000 for
adjustments related to corrections to shareholder transactions.
D. UNDERWRITING SERVICES - The Manager provides exclusive
underwriting and distribution of the Fund's shares on a continuing
best-efforts basis. The Manager receives no commissions or fees
for this service.
(7) TRANSACTIONS WITH AFFILIATES
- --------------------------------------------------------------------------------
Certain trustees and officers of the Fund are also directors, officers,
and/or employees of the Manager. None of the affiliated trustees or
Fund officers received any compensation from the Fund.
(8) SECURITY TRANSACTIONS WITH AFFILIATED FUNDS
- --------------------------------------------------------------------------------
During the year ended May 31, 2006, in accordance with affiliated
transaction procedures approved by the Trust's Board of Trustees,
purchases and sales of security transactions were executed between the
Fund and the following affiliated USAA fund at the then-current market
price with no brokerage commissions incurred:
NET REALIZED
GAIN TO
SELLER PURCHASER COST TO PURCHASER SELLER
-----------------------------------------------------------------------------------------------
USAA Life Income Fund USAA GNMA Trust $630,000 $2,000
34
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
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 $ 9.76 $ 9.72 $ 10.16 $ 10.08 $ 9.89
--------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .48 .47 .48 .56 .57(b)
Net realized and unrealized gain (loss) (.44) .04 (.44) .08 .19(b)
--------------------------------------------------------------------
Total from investment operations .04 .51 .04 .64 .76
Less distributions:
From net investment income (.48) (.47) (.48) (.56) (.57)
--------------------------------------------------------------------
Net asset value at end of period $ 9.32 $ 9.76 $ 9.72 $ 10.16 $ 10.08
====================================================================
Total return (%)* .40 5.33 .39 6.49 7.83
Net assets at end of period (000) $521,176 $594,211 $610,488 $751,794 $589,157
Ratio of expenses to average
net assets (%)**(a) .49 .48 .47 .46 .41
Ratio of net investment income to
average net assets (%)** 4.46 4.06 3.62 4.43 5.62(b)
Portfolio turnover (%) 26.10 37.29 58.53 74.64 44.77
* Assumes reinvestment of all net investment income distributions during the
period.
** For the year ended May 31, 2006, average net assets were $566,383,000.
(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 by less than 0.01%.
(b) In 2001, a change in amortization method was made as required by an
accounting pronouncement. Without that change, these amounts would have
been:
Net investment income $ .57
Net realized and unrealized gain $ .19
Ratio of net investment income to average net assets 5.63%
35
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
USAA GNMA TRUST
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
36
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
(continued)
USAA GNMA TRUST
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 $1,003.90 $2.45
Hypothetical
(5% return before expenses) 1,000.00 1,022.49 2.47
*Expenses are equal to the Fund's annualized expense ratio of 0.49%,
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
0.39% for the six-month period of December 1, 2005, through May 31,
2006.
37
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
USAA GNMA TRUST
MAY 31, 2006
At a meeting of the Board of Trustees held on April 19, 2006, the
Board, including the Trustees who are not "interested persons" of the
Trust (the "Independent Trustees"), approved the continuance of the
Investment Advisory Agreement between the Trust and the Manager with
respect to the Fund.
In advance of the meeting, the Trustees received and considered a
variety of information relating to the Investment Advisory Agreement
and the Manager, 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 operations and
personnel. Prior to voting, the Independent Trustees reviewed the
proposed continuance of the Investment Advisory 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 with respect to the Fund. The Independent Trustees also
reviewed the proposed continuation of the Investment Advisory
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. At the meeting at which the renewal
of the Investment Advisory Agreement is considered, particular focus
is given to information concerning Fund performance, comparability of
38
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA GNMA TRUST
MAY 31, 2006
fees and total expenses, and profitability. However, the Board noted
that the evaluation process with respect to the Manager is an ongoing
one. In this regard, the Board's and its committees' consideration of
the Investment Advisory Agreement included certain types of
information previously received at such meetings.
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.
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
39
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA GNMA TRUST
MAY 31, 2006
its senior and investment personnel, as well as current staffing
levels. 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 objectives
and classifications, sales load type (in this case, investment
companies with no sales loads), asset size, and expense components (the
"expense group") and (ii) a larger group of investment companies that
includes all no-load retail open-end investment companies in similar
investment classifications/objectives as the Fund regardless of
40
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA GNMA TRUST
MAY 31, 2006
asset size, excluding outliers (the "expense universe"). Among other
data, the Board noted that the Fund's management fee rate - which
includes advisory and administrative services and the effects of any
performance adjustment - was below the median of both its expense
group and its expense universe. The data indicated that the Fund's
total expenses were below the median of both its expense group and its
expense universe. The Board took into account the various services
provided to the Fund by the Manager and its affiliates. The Board also
noted the level and method of computing the management fee, including
the performance adjustment to such fee.
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
and its Lipper index for the one-, three-, and five-year periods ended
December 31, 2005. The Board also noted that the Fund's percentile
performance ranking was in the 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
41
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA GNMA TRUST
MAY 31, 2006
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.
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. The Trustees also
noted the relatively low management fee and total expenses of the Fund
as compared to its peer group and peer universe.
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 noted that
the Fund's contractual management fee is below the asset-weighted
average of funds at all asset levels in its peer group as set forth in
the report prepared by the independent third party. The Board also
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 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
42
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA GNMA TRUST
MAY 31, 2006
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.
43
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.
44
. . . 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.
45
. . . 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.
46
. . . 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.
47
. . . 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.
48
. . . 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.
49
. . . 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.
50
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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
THE FUND FILES ITS COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE
FIRST AND THIRD QUARTERS OF EACH FISCAL YEAR ON FORM N-Q. THESE FORMS N-Q ARE
AVAILABLE (I) BY CALLING (800) 531-8448; (II) AT USAA.COM; AND (III) ON THE
SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. THESE FORMS N-Q ALSO MAY BE REVIEWED AND
COPIED AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE
OPERATION OF THE PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING (800)
SEC-0330.
[LOGO OF RECYCLED PAPER]
Recycled
Paper
- --------------------------------------------------------------------------------
[LOGO OF USAA] 9800 Fredericksburg Road -------------
USAA(R) San Antonio, Texas 78288 PRSRT STD
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- --------------------------------------------------------------------------------
[LOGO OF USAA] WE KNOW WHAT IT MEANS TO SERVE.(R)
USAA ----------------------------------
INSURANCE o MEMBER SERVICES
23413-0706 (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.