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 TREASURY MONEY MARKET TRUST - ANNUAL REPORT FOR PERIOD ENDING MAY 31, 2006
[LOGO OF USAA]
USAA(R)
USAA TREASURY MONEY
MARKET Trust(R)
[GRAPHIC OF USAA TREASURY MONEY MARKET TRUST]
A n n u a l R e p o r t
- --------------------------------------------------------------------------------
MAY 31, 2006
Table of CONTENTS
- --------------------------------------------------------------------------------
MESSAGE FROM THE PRESIDENT 2
MANAGER'S COMMENTARY 4
INVESTMENT OVERVIEW 6
FINANCIAL INFORMATION
Distributions to Shareholders 9
Report of Independent Registered Public Accounting Firm 10
Portfolio of Investments 11
Notes to Portfolio of Investments 13
Financial Statements 15
Notes to Financial Statements 18
EXPENSE EXAMPLE 25
ADVISORY AGREEMENTS 27
DIRECTORS' AND OFFICERS' INFORMATION 33
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
==============------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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
========================--------------------------------------------------------
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
==================--------------------------------------------------------------
COMMENTARY on the Fund
[PHOTO OF PAMELA BLEDSOE NOBLE] PAMELA BLEDSOE NOBLE, CFA
USAA Investment Management Company
- --------------------------------------------------------------------------------
HOW DID THE FUND PERFORM?
For the year ended May 31, 2006, the USAA Treasury Money
Market Trust had a total return of 3.57%. This compares to an
average return of 3.21% for similar Treasury and repurchase
agreement (repo) money market funds ranked by iMoneyNet, Inc.
HOW DID THE CONTINUING TIGHTENING CAMPAIGN BY THE FEDERAL RESERVE BOARD (THE
FED) AFFECT THE FUND?
There were eight Fed meetings during the reporting year, and
at each one the Fed increased rates by 0.25%, taking the
federal funds rate from 3% to 5%. Although protecting the
Fund's $1 per share net asset value (NAV) is our first
responsibility, our goal in a rising-rate environment is to
pass along the rate increases to shareholders as quickly as
possible. As a result of the Fed's actions and our strategies,
the Fund's seven-day yield rose from 2.57% on May 31, 2005, to
4.40% on May 31, 2006.
HOW DID YOU MANAGE THE FUND?
Our strategy is to maximize current income while maintaining
the highest degree of safety and liquidity. Our goal is to
strike a balance between overnight repurchase agreements and a
ladder of Treasury bills and notes.
As short-term interest rates continued to rise, the portfolio
contained a high percentage of repurchase agreements backed by
U.S. Treasuries to capture the rate increases and maximize
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
REFER TO PAGE 7 FOR BENCHMARK DEFINITIONS.
5
. . . C O N T I N U E D
========================--------------------------------------------------------
current income. We also regularly purchased Treasury bills in
laddered maturities. The weighted average maturity of the Fund
increased from 10 days as of June 1, 2005, to 25 days at the
end of the reporting period.
DO YOU EXPECT MORE RATE INCREASES FROM THE FED?
Yes, we think the Fed still has further to go. As the period
ended, we received news that first-quarter gross domestic
product (GDP) growth was even stronger than had been initially
reported (5.3% instead of 4.8%), but there was also data
indicating that an economic slowdown may have begun. We are in
a transition period for the economy and the interest-rate
cycle. Fed members are saying that they are going to watch the
data very closely and act accordingly. We will do the same.
HOW DO YOU EXPECT TO MANAGE THE FUND GOING FORWARD?
Over the next year, we expect the interest-rate cycle to
transition from rising rates to rate stability. In response,
we will also transition the portfolio into an appropriate
balance between repurchase agreements and Treasury bills and
notes based on market opportunity to maximize income and
protect the NAV of the Fund.
As you have experienced, money market funds can be an ideal
investment in rising-rate environments and an important part
of your diversified investment portfolio. Thank you for your
investment in the Fund.
6
I N V E S T M E N T
====================------------------------------------------------------------
OVERVIEW
USAA TREASURY MONEY MARKET TRUST
(Ticker Symbol: UATXX)
OBJECTIVE
- --------------------------------------------------------------------------------
Maximum current income while maintaining the highest degree of
safety and liquidity.
TYPES OF INVESTMENTS
- --------------------------------------------------------------------------------
Invests principally in U.S. government securities with
maturities of 397 days or less; normally at least 80% of the
Fund's assets will be in U.S. Treasury bills, notes, and
bonds, and repurchase agreements collateralized by these
instruments.
- --------------------------------------------------------------------------------
5/31/06 5/31/05
- --------------------------------------------------------------------------------
Net Assets $185.6 Million $174.0 Million
Net Asset Value Per Share $1.00 $1.00
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AND 7-DAY YIELD AS OF 5/31/06
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 7-DAY YIELD
3.57% 1.82% 3.49% 4.40%
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. FOR
PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
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 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY
INVESTING IN THE FUND.
TOTAL RETURN EQUALS INCOME RETURN AND ASSUMES 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. YIELDS AND
RETURNS FLUCTUATE. THE SEVEN-DAY YIELD QUOTATION MORE CLOSELY
REFLECTS CURRENT EARNINGS OF THE FUND THAN THE TOTAL RETURN
QUOTATION.
7
. . . C O N T I N U E D
========================--------------------------------------------------------
7-DAY YIELD COMPARISON
[CHART OF 7-DAY YIELD COMPARISON]
USAA TREASURY MONEY iMONEYNET
MARKET TRUST AVERAGE
5/31/2005 2.57% 2.20%
6/28/2005 2.59 2.27
7/26/2005 2.77 2.43
8/30/2005 3.08 2.71
9/27/2005 3.21 2.84
10/25/2005 3.27 2.90
11/29/2005 3.53 3.16
12/27/2005 3.73 3.35
1/31/2006 3.86 3.50
2/28/2006 4.03 3.65
3/28/2006 4.13 3.82
4/25/2006 4.17 3.89
5/30/2006 4.40 4.13
[END CHART]
DATA REPRESENT THE LAST TUESDAY OF EACH MONTH. ENDING DATE
5/30/06.
The graph tracks the Fund's seven-day yield against the
iMoneyNet, Inc. average for all U.S. Treasury & Repo money
market funds.
8
. . . C O N T I N U E D
========================--------------------------------------------------------
OVERVIEW
CUMULATIVE PERFORMANCE OF $10,000
[CHART OF CUMULATIVE PERFORMANCE]
USAA TREASURY MONEY
MARKET TRUST
05/31/96 $10,000.00
06/30/96 10,037.36
07/31/96 10,081.84
08/31/96 10,122.67
09/30/96 10,164.91
10/31/96 10,207.47
11/30/96 10,247.97
12/31/96 10,292.81
01/31/97 10,336.19
02/28/97 10,375.39
03/31/97 10,419.32
04/30/97 10,462.55
05/31/97 10,506.23
06/30/97 10,551.95
07/31/97 10,598.01
08/31/97 10,641.38
09/30/97 10,689.18
10/31/97 10,735.77
11/30/97 10,778.29
12/31/97 10,828.70
01/31/98 10,874.42
02/28/98 10,917.00
03/31/98 10,965.93
04/30/98 11,011.95
05/31/98 11,056.44
06/30/98 11,106.12
07/31/98 11,154.55
08/31/98 11,203.20
09/30/98 11,250.09
10/31/98 11,293.60
11/30/98 11,338.03
12/31/98 11,381.66
01/31/99 11,422.07
02/28/99 11,461.21
03/31/99 11,507.76
04/30/99 11,550.21
05/31/99 11,589.50
06/30/99 11,635.69
07/31/99 11,679.20
08/31/99 11,726.34
09/30/99 11,772.00
10/31/99 11,816.62
11/30/99 11,867.64
12/31/99 11,917.07
01/31/00 11,966.82
02/29/00 12,016.03
03/31/00 12,070.19
04/30/00 12,120.50
05/31/00 12,180.67
06/30/00 12,238.79
07/31/00 12,300.14
08/31/00 12,362.22
09/30/00 12,421.20
10/31/00 12,486.65
11/30/00 12,548.93
12/31/00 12,608.97
01/31/01 12,673.72
02/28/01 12,725.31
03/31/01 12,778.67
04/30/01 12,829.71
05/31/01 12,875.30
06/30/01 12,915.41
07/31/01 12,957.02
08/31/01 12,994.50
09/30/01 13,022.55
10/31/01 13,049.68
11/30/01 13,071.00
12/31/01 13,087.77
01/31/02 13,103.53
02/28/02 13,118.34
03/31/02 13,133.59
04/30/02 13,148.68
05/31/02 13,163.38
06/30/02 13,177.56
07/31/02 13,193.18
08/31/02 13,209.59
09/30/02 13,223.37
10/31/02 13,238.58
11/30/02 13,250.75
12/31/02 13,261.87
01/31/03 13,273.07
02/28/03 13,282.68
03/31/03 13,292.41
04/30/03 13,302.35
05/31/03 13,312.62
06/30/03 13,321.01
07/31/03 13,328.24
08/31/03 13,335.61
09/30/03 13,342.13
10/31/03 13,349.92
11/30/03 13,356.48
12/31/03 13,363.95
01/31/04 13,371.01
02/29/04 13,377.13
03/31/04 13,383.78
04/30/04 13,390.69
05/31/04 13,396.59
06/30/04 13,403.24
07/31/04 13,412.79
08/31/04 13,423.25
09/30/04 13,435.33
10/31/04 13,450.20
11/30/04 13,466.01
12/31/04 13,485.04
01/31/05 13,503.58
02/28/05 13,523.69
03/31/05 13,547.57
04/30/05 13,573.69
05/31/05 13,602.02
06/30/05 13,630.46
07/31/05 13,662.61
08/31/05 13,697.30
09/30/05 13,734.59
10/31/05 13,770.51
11/30/05 13,810.17
12/31/05 13,855.42
01/31/06 13,896.83
02/28/06 13,939.38
03/31/06 13,990.36
04/30/06 14,035.45
05/31/06 14,087.12
[END CHART]
DATA FROM 5/31/96 THROUGH 5/31/06.
The graph illustrates a hypothetical $10,000 investment in the
USAA Treasury Money Market Trust.
ASSET ALLOCATION
5/31/06
[PIE CHART OF ASSET ALLOCATION]
Repurchase Agreements 66.6%
U.S. Treasury Bills 32.0%
U.S. Government Guaranteed Securities 1.6%
[END CHART]
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT
EQUAL 100%.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. 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. INCOME MAY BE SUBJECT TO
FEDERAL, STATE, OR LOCAL TAXES, OR TO THE ALTERNATIVE MINIMUM
TAX. FOR SEVEN-DAY YIELD INFORMATION, PLEASE REFER TO PAGE 6.
9
DISTRIBUTIONS
==============------------------------------------------------------------------
to SHAREHOLDERS
USAA TREASURY MONEY MARKET 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 $6,428,000 as qualifying interest income.
10
REPORT OF INDEPENDENT REGISTERED
==================--------------------------------------------------------------
Public ACCOUNTING Firm
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
USAA TREASURY MONEY MARKET TRUST:
We have audited the accompanying statement of assets and liabilities of the USAA
Treasury Money Market 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 Treasury Money Market 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
11
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(in thousands)
USAA TREASURY MONEY MARKET TRUST
MAY 31, 2006
PRINCIPAL
AMOUNT SECURITY VALUE
- ------------------------------------------------------------------------------------------
U.S. TREASURY BILLS (32.0%)(a)
$ 3,000 4.44%, 6/01/2006 $ 3,000
3,000 4.44%, 6/08/2006 2,997
3,000 4.48%, 6/15/2006 2,995
3,000 4.52%, 6/22/2006 2,992
3,000 4.22%, 7/06/2006 2,988
3,000 4.53%, 7/06/2006 2,987
3,000 4.28%, 7/13/2006 2,985
3,000 4.54%, 7/20/2006 2,981
3,000 4.64%, 8/03/2006 2,976
3,000 4.60%, 8/10/2006 2,973
3,000 4.70%, 8/17/2006 2,970
3,000 4.69%, 8/24/2006 2,967
3,000 4.76%, 8/31/2006 2,964
3,000 4.65%, 9/07/2006 2,962
3,000 4.70%, 9/14/2006 2,959
3,000 4.70%, 9/21/2006 2,956
3,000 4.75%, 9/28/2006 2,953
3,000 4.78%, 10/05/2006 2,950
3,000 4.74%, 10/12/2006 2,947
3,000 4.81%, 11/16/2006 2,933
--------
Total U.S. Treasury bills (cost: $59,435) 59,435
--------
U.S. GOVERNMENT GUARANTEED SECURITIES (1.6%)
3,024 Overseas Private Investment Corp., Series 1995-221/308
Certificates of Participation, 3.85%, 12/14/2007(c)
(cost: $3,024) 3,024
--------
Total investment in securities (cost: $62,459) 62,459
--------
REPURCHASE AGREEMENTS (66.6%)(d)
25,000 Bear Stearns & Co., Inc., 4.98%, acquired on 5/31/2006 and
due 6/01/2006 at $25,000 (collateralized by $25,441 of
Government National Mortgage Assn.(e), 4.50% - 5.50%,
due 11/20/2032 - 1/15/2036; market value $25,502) 25,000
40,000 Credit Suisse First Boston Corp., 4.90%, acquired on 5/31/2006
and due 6/01/2006 at $40,000 (collateralized by $35,000
of U.S. Treasury Inflation Index bonds(f), 3.00%,
due 7/15/2012; market value $40,801) 40,000
12
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS (continued)
(in thousands)
USAA TREASURY MONEY MARKET TRUST
MAY 31, 2006
PRINCIPAL
AMOUNT SECURITY VALUE
- ------------------------------------------------------------------------------------------
$40,480 Deutsche Bank Securities, 4.90%, acquired on 5/31/2006 and
due 6/01/2006 at $40,480 (collateralized by $3,625 of U.S.
Treasury notes(b), 4.50%, due 2/15/2009; $1,159 of
U.S. Treasury bills, 4.75%(a), due 7/27/2006; and $93,022
of U.S. Treasury STRIPS, 5.46%(g), due 11/15/2023; combined
market value $41,290) $ 40,480
18,000 UBS Securities LLC, 4.88%, acquired on 5/31/2006 and due
6/01/2006 at $18,000 (collateralized by $18,325 of U.S.
Treasury notes(b), 4.88%, due 4/30/2008; market value
$18,364) 18,000
--------
Total repurchase agreements (cost: $123,480) 123,480
--------
TOTAL INVESTMENTS (COST: $185,939) $185,939
========
13
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
USAA TREASURY MONEY MARKET TRUST
MAY 31, 2006
GENERAL NOTES
- --------------------------------------------------------------------------------
Values of securities are determined by procedures and practices
discussed in Note 1 to the financial statements.
The cost of securities at May 31, 2006, for federal income tax
purposes, was $185,939.
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) Securities offered at a discount to face value rather than at a
stated coupon rate. Rates represent the discount rates at purchase
date.
(b) Rates for U.S. Treasury notes represent the stated coupon payment
rate at time of issuance.
(c) Put bonds - provide the right to sell the bond at face value at
specific tender dates prior to final maturity. The put feature
shortens the effective maturity of the security.
(d) Collateral on repurchase agreements is received by the Fund upon
entering into the repurchase agreement. The collateral is marked-
to-market daily to ensure its market value is equal to or in excess
of the repurchase agreement price plus accrued interest.
(e) U.S. government agency issues - mortgage-backed securities issued
by Government National Mortgage Association (GNMA) are supported by
the full faith and credit of the U.S. government.
(f) U.S. Treasury inflation-indexed notes/bonds - designed to provide a
real rate of return after being adjusted over time to reflect the
impact of inflation. Their principal value periodically adjusts to
14
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA TREASURY MONEY MARKET TRUST
MAY 31, 2006
the rate of inflation. They trade at the prevailing real, or after-
inflation, interest rates. The U.S. Treasury guarantees repayment
of these securities of at least their face value in the event of
sustained deflation or a drop in prices.
(g) Zero-coupon security. Rate represents the effective yield at date
of purchase.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
15
S T A T E M E N T
==================--------------------------------------------------------------
of ASSETS and LIABILITIES
(in thousands)
USAA TREASURY MONEY MARKET TRUST
MAY 31, 2006
ASSETS
Investments in securities (amortized cost approximates market value) $ 62,459
Repurchase agreements (valued at cost) 123,480
Receivables:
Capital shares sold 283
Interest 129
USAA Transfer Agency Company (Note 4C) 1
--------
Total assets 186,352
--------
LIABILITIES
Payables:
Capital shares redeemed 725
Dividends on capital shares 22
Accrued management fees 20
Other accrued expenses and payables 24
--------
Total liabilities 791
--------
Net assets applicable to capital shares outstanding $185,561
========
NET ASSETS CONSIST OF:
Paid-in capital $185,561
========
Capital shares outstanding, unlimited number of shares authorized,
no par value 185,561
========
Net asset value, redemption price, and offering price per share $ 1.00
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
16
S T A T E M E N T
==================--------------------------------------------------------------
of OPERATIONS
(in thousands)
USAA TREASURY MONEY MARKET TRUST
YEAR ENDED MAY 31, 2006
INVESTMENT INCOME
Interest income $7,258
------
EXPENSES
Management fees 228
Administration and servicing fees 183
Transfer agent's fees 231
Custody and accounting fees 53
Postage 24
Shareholder reporting fees 19
Trustees' fees 9
Registration fees 48
Professional fees 35
Other 6
------
Total expenses 836
Expenses paid indirectly (6)
------
Net expenses 830
------
NET INVESTMENT INCOME $6,428
======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
17
S T A T E M E N T S
====================------------------------------------------------------------
of Changes in NET ASSETS
(in thousands)
USAA TREASURY MONEY MARKET TRUST
YEARS ENDED MAY 31,
2006 2005
--------------------------
FROM OPERATIONS
Net investment income $ 6,428 $ 2,733
--------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (6,428) (2,733)
--------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 163,352 143,220
Reinvested dividends 6,177 2,617
Cost of shares redeemed (157,951) (160,616)
--------------------------
Increase (decrease) in net assets from
capital share transactions 11,578 (14,779)
--------------------------
Net increase (decrease) in net assets 11,578 (14,779)
NET ASSETS
Beginning of period 173,983 188,762
--------------------------
End of period $ 185,561 $ 173,983
==========================
CHANGE IN SHARES OUTSTANDING
Shares sold 163,352 143,220
Shares issued for dividends reinvested 6,177 2,617
Shares redeemed (157,951) (160,616)
--------------------------
Increase (decrease) in shares outstanding 11,578 (14,779)
==========================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
18
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
USAA TREASURY MONEY MARKET 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 Treasury Money Market
Trust (the Fund), which is classified as diversified under the 1940
Act. The Fund's investment objective is to provide maximum current
income while maintaining the highest degree of safety and liquidity.
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. Pursuant to Rule 2a-7 under the 1940 Act, securities in the
Fund are valued at amortized cost, which approximates market
value. This method values a security at its cost on the date
of purchase and, thereafter, assumes a constant amortization
to maturity of any premiums or discounts.
2. Repurchase agreements are valued at cost, which approximates
market value.
3. Securities for which valuations are not readily available or
are considered unreliable are 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 and procedures to stabilize net asset
value approved by the Trust's Board of Trustees.
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.
19
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TREASURY MONEY MARKET TRUST
MAY 31, 2006
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 daily on the accrual basis. Discounts and premiums on
securities are amortized over the life of the respective
securities using the straight-line method.
D. REPURCHASE AGREEMENTS - The Fund may enter into repurchase
agreements with commercial banks or recognized security dealers.
These agreements are collateralized by obligations issued or
guaranteed as to both principal and interest by the U.S.
government, its agencies, or its instrumentalities. 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. As of May 31, 2006, the Fund had no
delayed-delivery or when-issued commitments.
F. EXPENSES PAID INDIRECTLY - Through arrangements with the Fund's
custodian and other banks utilized by the Fund for cash
20
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TREASURY MONEY MARKET 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 $6,000.
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.
21
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TREASURY MONEY MARKET TRUST
MAY 31, 2006
The USAA funds that are party to the loan agreement are assessed
facility fees by CAPCO based on the funds' assessed proportionate
share of CAPCO's operating expenses related to obtaining and
maintaining CAPCO's funding programs in total (in no event to exceed
0.07% annually of the $300 million loan agreement). The facility fees
are allocated among the funds based on their respective average net
assets for the period. Prior to January 6, 2006, the facility fees
assessed by CAPCO were limited to an amount not to exceed 0.09%
annually of the $300 million loan agreement.
For the year ended May 31, 2006, the Fund paid CAPCO facility fees of
less than $500, which represents 0.6% of total fees paid to CAPCO by
the USAA funds. The Fund had no borrowings under this agreement during
the year ended May 31, 2006.
(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.
The tax character of distributions paid during the years ended May 31,
2006, and 2005, was as follows:
2006 2005
---------------------------------
Ordinary income* $6,428,000 $2,733,000
*Includes distribution of short-term realized capital gains, if any,
which are taxable as ordinary income.
As of May 31, 2006, the components of net assets representing
distributable earnings on a tax basis were as follows:
Undistributed ordinary income $22,000
22
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TREASURY MONEY MARKET TRUST
MAY 31, 2006
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.
(4) TRANSACTIONS WITH MANAGER
- --------------------------------------------------------------------------------
A. MANAGEMENT FEES - The Manager carries out the Fund's investment
policies and manages the Fund's portfolio. The Fund's management
fees are accrued daily and paid monthly at an annualized rate of
0.125% of the Fund's average net assets for the fiscal year. For
the year ended May 31, 2006, the Fund incurred management fees,
paid or payable to the Manager, of $228,000.
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 0.10% 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 $183,000.
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 $11,000 for these legal and
tax services. These expenses are included in the professional
fees expenses on the Fund's statement of operations.
23
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TREASURY MONEY MARKET TRUST
MAY 31, 2006
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 $231,000. In
addition, the Fund recorded a receivable from SAS of $1,000 at
May 31, 2006, 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.
(5) 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.
24
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TREASURY MONEY MARKET TRUST
MAY 31, 2006
(6) 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 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------------------------------------------------------------------
Income from investment operations:
Net investment income .04 .02 .01 .01 .02
Less distributions:
From net investment income (.04) (.02) (.01) (.01) (.02)
--------------------------------------------------------------------
Net asset value at end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====================================================================
Total return (%)* 3.57 1.53 .63 1.14 2.24
Net assets at end of period (000) $185,561 $173,983 $188,762 $205,558 $186,367
Ratio of expenses to average
net assets (%)**(a) .46 .45 .43 .43 .42
Ratio of net investment income to
average net assets (%)** 3.52 1.50 .63 1.13 2.17
* Assumes reinvestment of all net investment income distributions during the
period.
** For the year ended May 31, 2006, average net assets were $182,488,000.
(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%.
25
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
USAA TREASURY MONEY MARKET 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
use this information to compare the ongoing costs of investing in the
26
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
(continued)
USAA TREASURY MONEY MARKET TRUST
MAY 31, 2006
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 $1,020.10 $2.32
Hypothetical
(5% return before expenses) 1,000.00 1,022.64 2.32
*Expenses are equal to the Fund's annualized expense ratio of 0.46%,
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
2.01% for the six-month period of December 1, 2005, through May 31,
2006.
27
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
USAA TREASURY MONEY MARKET 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
28
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA TREASURY MONEY MARKET 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 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 its senior
29
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA TREASURY MONEY MARKET TRUST
MAY 31, 2006
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
objective and classification, sales load type (in this case,
investment companies with no sales loads), asset size, and expense
components (the "expense group") and (ii) a larger group of investment
companies that includes all no-load retail open-end investment
companies in the same investment classification/objective as the Fund
regardless of asset size, excluding outliers (the "expense
30
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA TREASURY MONEY MARKET TRUST
MAY 31, 2006
universe"). Among other data, the Board noted that the Fund's
management fee rate - which includes advisory and administrative
services - was below the median of both its expense group and expense
universe. The data indicated that the Fund's total expenses were below
the median of both its expense group and 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.
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 10% of its performance universe for
the one- and three-year periods ended December 31, 2005.
COMPENSATION AND PROFITABILITY. The Board took into consideration the
level and method of computing the management fee. The information
considered by the Board included operating profit margin information
for the Manager's business as a whole. The Board also received and
considered profitability information related to the management
revenues from the Fund. This consideration included a broad review of
the methodology used in the allocation of certain costs to the Fund.
31
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA TREASURY MONEY MARKET TRUST
MAY 31, 2006
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 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
32
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA TREASURY MONEY MARKET TRUST
MAY 31, 2006
relation to the performance of funds with similar investment
objectives and to relevant indices; (iv) the Fund's advisory expenses
are reasonable in relation to those of similar funds and to the
services to be provided by the Manager; and (v) the Manager's level of
profitability from its relationship with the Fund is not unreasonable.
Based on its conclusions, the Board determined that continuation of
the Investment Advisory Agreement would be in the interests of the
Fund and its shareholders.
33
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.
34
. . . 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.
35
. . . 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.
36
. . . 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.
37
. . . 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.
38
. . . 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.
39
. . . 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.
40
N O T E S
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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.
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[LOGO OF USAA] WE KNOW WHAT IT MEANS TO SERVE.(R)
USAA ----------------------------------
INSURANCE o MEMBER SERVICES
23415-0706 (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
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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
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*Print the name and title of each signing officer under his or her signature.