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 CORNERSTONE STRATEGY FUND - ANNUAL REPORT FOR PERIOD ENDING MAY 31, 2006
[LOGO OF USAA]
USAA(R)
USAA CORNERSTONE
STRATEGY Fund
[GRAPHIC OF USAA CORNERSTONE STRATEGY FUND]
A n n u a l R e p o r t
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MAY 31, 2006
Table of CONTENTS
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MESSAGE FROM THE PRESIDENT 2
MANAGERS' COMMENTARY 4
FUND RECOGNITION 11
INVESTMENT OVERVIEW 12
FINANCIAL INFORMATION
Distributions to Shareholders 17
Report of Independent Registered Public Accounting Firm 18
Portfolio of Investments 19
Notes to Portfolio of Investments 54
Financial Statements 59
Notes to Financial Statements 62
EXPENSE EXAMPLE 79
ADVISORY AGREEMENTS 81
DIRECTORS' AND OFFICERS' INFORMATION 93
THIS REPORT IS FOR THE INFORMATION OF THE SHAREHOLDERS AND OTHERS WHO HAVE
RECEIVED A COPY OF THE CURRENTLY EFFECTIVE PROSPECTUS OF THE FUND, MANAGED BY
USAA INVESTMENT MANAGEMENT COMPANY. IT MAY BE USED AS SALES LITERATURE ONLY WHEN
PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS, WHICH PROVIDES FURTHER DETAILS
ABOUT THE FUND.
(C)2006, USAA. All rights reserved.
2
M E S S A G E
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from the PRESIDENT
"
IT IS A CLASSIC SCENARIO. WHEN MARKETS
[PHOTO OF CHRISTOPHER W. CLAUS] GO UP, RISK TOLERANCE GOES UP, AND
INVESTORS START TO CHASE PERFORMANCE.
"
June 2006
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Remember risk? It is the flip side of the risk/reward equation. In
exchange for the possibility of higher returns, you take on more risk.
But during the last two to three years, many investors have forgotten
this fundamental investment truth. Hungry for returns in the
low-interest-rate environment, they flocked into the riskier asset
classes - the emerging markets, small-cap stocks, precious metals, and
commodities. Investor experience has been all about reward and very
little about risk.
In May, however, risk finally re-emerged as a consideration in
investment decision-making. Rising global interest rates and the
potential for a worldwide economic slowdown have led to increased
market volatility, reminding investors that outsized rewards are
generally paired with greater risk. As a result, the old adage that
you should be paid for the risk you assume has taken on renewed
meaning.
It is a classic scenario. When markets go up, risk tolerance goes up,
and investors start to chase performance. The opposite approach is
often the better course. You would be wise to cultivate patience
during rising markets and potentially reduce the amount of risk you
take. Experienced investors know that as market returns increase, so
do the chances of a correction.
Still, when the financial markets are awash in liquidity, it is easy
to forget the fundamentals. If you cannot find the returns you want in
conservative equity and fixed-income investments, you are tempted to
seek higher returns elsewhere. This is precisely what happened during
the last couple of years.
But in the spring, it all began to unravel as global interest rates
continued to rise. In the months ahead, we may see even higher
short-term rates as
3
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the Federal Reserve Board (the Fed) tries to combat inflation. We may
also see a slowdown in the U.S. economy, and if the U.S. economy
cools, the world economy is likely to follow suit.
In this environment, money market fund yields - currently near 5% -
are appealing, especially for risk-averse investors. Once the Fed
pauses, bonds should become more attractive. For equity investors, the
most prudent play may be a conservative stance. They might also want
to consider locking in some of their gains in the emerging markets,
small-cap stocks, precious metals, and commodities.
At USAA Investment Management Company, we have already taken a more
conservative position in our international and emerging markets
portfolios - perhaps earlier than a crystal ball would have suggested
- but as the market has fallen, our relative performance has been
solid. Going forward, we will continue to look for investment
opportunities that have the potential to add value while evaluating
the risks that could affect them.
From all of us here, thank you for your business and the opportunity
to serve your investment needs.
Sincerely,
/s/ CHRISTOPHER W. CLAUS
Christopher W. Claus
President and Vice Chairman of the Board
CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES, AND EXPENSES OF
THE USAA MUTUAL FUNDS CAREFULLY BEFORE INVESTING. CONTACT US AT (800)
531-8448 FOR A PROSPECTUS CONTAINING THIS AND OTHER INFORMATION ABOUT
THE FUNDS FROM USAA INVESTMENT MANAGEMENT COMPANY, DISTRIBUTOR (USAA).
READ IT CAREFULLY BEFORE INVESTING.
AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY
THE FDIC OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS
POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND.
Past performance is no guarantee of future results. o As interest
rates rise, existing bond prices fall. o Foreign and precious metals
and minerals investing are subject to additional risks, such as
currency fluctuations, market illiquidity, and political instability.
4
M A N A G E R S '
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COMMENTARY on the Fund
USAA Investment Management Company MFS Investment Management
MARK W. JOHNSON, CFA (International Stocks)
Precious Metals and Minerals, DAVID R. MANNHEIM
Real Estate Securities
MARCUS L. SMITH
MARGARET "DIDI" WEINBLATT, Ph.D., CFA
Bonds and Money Market Instruments Wellington Management Company, LLP
(U.S. Stocks)
ARNOLD J. ESPE, CFA MATTHEW E. MEGARGEL, CFA
Bonds and Money Market Instruments
MAYA K. BITTAR, CFA
STUART H. WESTER, CFA
U.S. Stocks FRANCIS J. BOGGAN, CFA
JEFFREY L. KRIPKE
Batterymarch Financial Management, Inc.
(U.S. and International Stocks)
THOMAS LINKAS, CFA
CHARLES F. LOVEJOY, CFA
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HOW DID THE FUND PERFORM?
For the year ended May 31, 2006, the USAA Cornerstone Strategy
Fund had a total return of 8.67%. This compares to a return of
14.81% for the Lipper Global Flexible Funds Index and 8.63%
for the S&P 500 Index.
HOW WAS THE FUND ALLOCATED AMONG THE VARIOUS ASSET CLASSES?
The Fund began the reporting year with 52% of net assets in
U.S. equities, 29% in international equities, and 19% in bonds
and money market instruments. Due to asset allocation
adjustments and investment performance, the Fund ended the
fiscal year with 42% of net assets in U.S. equities, 29% in
international equities, 27% in bonds and money market
instruments, 1% in precious metals and minerals securities,
and 1% in real estate equity securities.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
REFER TO PAGE 14 FOR BENCHMARK DEFINITIONS.
5
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WHY DID THE FUND UNDERPERFORM ITS LIPPER PEER GROUP INDEX?
First, there was underperformance within the U.S. equity
portion of the Fund relative to the Lipper Global Flexible
Funds Index. Also, the Fund was underweight in international
stocks in a period when international stocks significantly
outperformed U.S. stocks. Finally, the Fund had an underweight
position in stocks overall, both in the United States and
overseas, in a period when stocks outperformed bonds by a good
margin.
WERE ANY STEPS TAKEN TO IMPROVE PERFORMANCE?
Yes, USAA Investment Management Company (USAA IMCO) and the
Fund's Board of Trustees made several key decisions during the
reporting year that we believe will ultimately enhance
long-term performance, increase flexibility and efficiency,
and potentially reduce risk. These include:
o In December 2005, Batterymarch Financial Management,
Inc. (Batterymarch) began subadvising a portion of the
Fund's assets using a "best ideas" global investment
strategy, purchasing stocks that its stock-selection model
has ranked the most attractive in the global marketplace.
Instead of being tied to just one stock style in one
country, Batterymarch can scour the world on your behalf
for what it believes are the best investments in each global
industry sector.
o Effective March 1, 2006, the Fund's Board of Trustees
voted to increase the international stocks category limit
from 30% to 70%.
o The Fund increased its utilization of exchange-traded funds
(ETFs) for cost efficiency and investment flexibility. ETFs,
relatively low-cost vehicles that typically track a market
index, give us the ability to adjust the Fund's asset
allocation quickly when USAA IMCO believes it is warranted.
At the end of the
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COMMENTARY on the Fund
reporting year, 13.7% of the Fund's net assets were in ETFs
tied to the U.S. stock market.
HOW DID THE U.S. STOCK PORTION OF THE FUND THAT WELLINGTON MANAGEMENT COMPANY,
LLP (WELLINGTON) MANAGES PERFORM?
The Wellington-managed portion of the Fund underperformed the
Russell 3000 Index. While stock selection was positive
relative to the Russell 3000 Index, sector allocation
detracted from relative performance. Energy was the
top-performing area of the market, and the Fund benefited from
overweight exposure to this sector, with Schlumberger Ltd.,
Chesapeake Energy Corp., and GlobalSantaFe Corp. among the top
positive contributors to performance. Industrials company
Precision Castparts Corp. delivered excellent performance with
strong fundamental growth. In the financials sector, many of
our capital markets-related stocks, including E*TRADE
Financial Corp., Merrill Lynch & Co., Inc., and State Street
Corp., outperformed on a relative basis.
Stock selection in information technology, health care, and
utilities detracted from relative performance in the portion
of the Fund that Wellington managed. Adobe Systems, Inc. was
our weakest-performing stock, because the company was between
product cycles and struggled to meet its revenue and earnings
targets. However, we view this as a short-term concern because
the new version of the hugely popular Adobe Acrobat remains on
track for a fall 2006 release. Dell, Inc., Yahoo!, Inc., and
THE RUSSELL 3000 INDEX MEASURES THE PERFORMANCE OF THE 3,000
LARGEST U.S. COMPANIES BASED ON TOTAL MARKET CAPITALIZATION,
WHICH REPRESENTS APPROXIMATELY 98% OF THE INVESTABLE U.S.
EQUITY MARKET. WELLINGTON AND USAA IMCO UTILIZE THE RUSSELL
3000 AS A FINANCIAL MARKET PERFORMANCE BENCHMARK IN MANAGING
THE U.S. STOCK PORTION OF THE FUND.
GLOBALSANTAFE CORP., DELL, INC., YAHOO!, INC., TEMPUR-PEDIC
INTERNATIONAL, INC., AND KOHL'S CORP. WERE SOLD OUT OF THE
FUND PRIOR TO MAY 31, 2006.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 19-53.
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Microsoft Corp. also hurt performance, as did the mattress
company Tempur-Pedic International, Inc., the retailer Kohl's
Corp., and biotechnology giant Amgen, Inc.
As of the end of the reporting year, the portion of the
portfolio that Wellington manages was overweight in the health
care and consumer discretionary sectors, where we have been
finding stocks with attractive valuations and good relative
earnings potential. We were modestly overweight in energy as
global demand and constrained supply foster long-term growth
prospects. We also maintained an overweight position in
information technology, with an emphasis on software
companies, which should benefit from higher corporate spending
amid new product cycles. We were underweight in utilities,
which appear expensive on a price-to-earnings basis and less
attractive on a yield basis given our modestly higher
interest-rate outlook.
HOW DID THE INTERNATIONAL STOCK PORTION OF THE FUND THAT MFS INVESTMENT
MANAGEMENT (MFS) HANDLES PERFORM?
The MFS-managed portion of the Fund underperformed the Morgan
Stanley Capital International Europe, Australasia and Far East
(MSCI-EAFE) Index. As a result of a company-by-company
bottom-up research process, we remained underweight in Japan,
because although we don't dispute that an economic recovery is
taking hold, stock prices have moved up very quickly, and from
a valuation standpoint we believe we're finding better
opportunities elsewhere. We were overweight in continental
Europe, slightly overweight in the United Kingdom, and had
2.8% of net assets in emerging markets, which are not in the
MSCI-EAFE Index.
Among the best individual performers in the MFS-managed
portion of the Fund relative to the MSCI-EAFE Index was
THE MSCI-EAFE INDEX IS AN UNMANAGED INDEX THAT REFLECTS THE
MOVEMENTS OF STOCK MARKETS IN EUROPE, AUSTRALASIA, AND THE FAR
EAST BY REPRESENTING A BROAD SELECTION OF DOMESTICALLY LISTED
COMPANIES WITHIN EACH MARKET.
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COMMENTARY on the Fund
Schneider Electric S.A. (France), the global leader in
electrical equipment distribution, which is benefiting from
higher corporate expenditures on property and equipment. Other
stocks that did well in the industrial goods and services
sector were Sweden's Sandvik AB and Atlas Copco AB. In
utilities and communications, our holding in Hutchison
Telecommunications International Ltd. (Hong Kong) did well
based on its strong position in the mobile phone market in
India. Although we were underweight in the strong energy
sector, we had very positive stock selection, led by EnCana
Corp. (Canada) and CNOOC Ltd. (China).
Consistent with the MFS philosophy of looking for
above-average sustainable growth companies, we tended not to
own metals and mining stocks that benefited from the strong
rise in commodity prices. This hurt performance in the basic
materials sector. Higher commodity prices also had a negative
impact on our overweight position in Bridgestone Corp.
(Japan). In consumer staples, our substantially overweight
position in Nestle S.A. (Switzerland) detracted from
performance on a relative basis.
We at MFS continue to see a slowdown in global earnings
growth, from above-trend levels back to being more in line
with long-term trends. As earnings slow, we believe the
markets tend to reward companies that show the ability to
sustain above-average earnings growth, and we believe we're
finding these companies throughout the world and in many
sectors for the MFS portion of the Fund.
HOW DID THE PORTION OF THE FUND THAT BATTERYMARCH MANAGES PERFORM?
With the ability to purchase the stocks that its stock
selection model has ranked as most attractive, from anywhere
in the world, the portion of the Fund that Batterymarch
manages significantly
THE MSCI WORLD INDEX IS AN UNMANAGED INDEX THAT REFLECTS THE
MOVEMENTS OF WORLD STOCK MARKETS BY REPRESENTING A BROAD
SELECTION OF DOMESTICALLY LISTED COMPANIES WITHIN EACH MARKET.
SANDVIK AB AND ATLAS COPCO AB WERE SOLD OUT OF THE FUND PRIOR
TO MAY 31, 2006.
9
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outperformed the MSCI World Index from its introduction into
the Fund in early December.
Batterymarch intentionally keeps the industry sector
weightings of its portion of the Fund approximately in line
with the MSCI World Index as a risk-management tool, and
therefore individual stock selection was the key to the strong
performance. Performance during the period was helped by stock
selection in the industrials, information technology,
financials (excluding banks), energy, and consumer staples
sectors, with Vallourec S.A., a French carbon steel
manufacturer, and LUKoil Holdings ADR, a Russian oil company,
among the top contributors. Exposure within the 11 global
economic sectors was a result of bottom-up stock selection, as
opposed to any top-down macro views.
The Batterymarch stock selection model, which ranks a very
broad stock universe, led us to end the reporting year with
greater exposure to the value-oriented end of the spectrum for
the Batterymarch portion of the Fund. This positioning
reflects the fact that our model ranks stocks based on
underlying company fundamentals; as these fundamentals shift,
our goal is to shift with them. Batterymarch re-ranks all
stocks daily, an approach that allows us to make investment
decisions based on the most up-to-date information available.
HOW DID THE FUND'S BOND AND MONEY MARKET INSTRUMENTS, A USAA
IMCO-MANAGED-PORTION, PERFORM?
It's hard for most people to be excited about performance when
you barely manage to break even, as was the case with the bond
portion during the reporting year. However, this represented
outstanding performance relative to the Lehman Brothers U.S.
Aggregate Bond Index.
THE LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX COVERS THE U.S.
INVESTMENT-GRADE FIXED-RATE BOND MARKET, INCLUDING GOVERNMENT
AND CREDIT SECURITIES, AGENCY MORTGAGE PASS-THROUGH
SECURITIES, ASSET-BACKED SECURITIES, AND COMMERCIAL
MORTGAGE-BACKED SECURITIES THAT HAVE REMAINING MATURITIES OF
MORE THAN ONE YEAR.
10
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COMMENTARY on the Fund
It was a tough environment for bonds as interest rates rose
across all maturities on the yield curve, but USAA IMCO
managed to provide a positive total return as interest on the
bonds we owned offset the principal erosion caused by rising
rates. A key factor in our good performance was our strategy
regarding duration, a measure of interest-rate sensitivity.
We began the year with a shorter-than-average duration, and
gradually moved toward a neutral duration. Throughout the
reporting year, we were opportunistic, buying when rates rose
and selling as they fell, and also investing in floating-rate
bonds whose income rose as the Federal Reserve Board (the Fed)
raised rates.
The biggest driver of our outperformance, however, was
security selection. This USAA IMCO portion was overweight in
corporate bonds, with a focus on individual issues in finance,
utilities, and real estate investment trusts. We also
benefited from our decision to emphasize commercial
mortgage-backed securities over residential mortgages. Credit
for our ability to pick the right bonds in the right sectors
goes largely to USAA IMCO's team of 17 analysts here in San
Antonio.
With the economy in the sensitive transition period from high
to moderate growth, and with the Fed under new leadership,
we're avoiding making any big bets on duration as we move into
the new reporting year. Instead, we are continuing to focus on
what we do best, which is to use our research advantage to
find individual securities that we believe give us the most
value for a given level of risk.
HOW DID THE USAA IMCO-MANAGED PRECIOUS METALS AND MINERALS PORTION OF
THE FUND PERFORM?
The Fund's allocation to precious metals and minerals
securities helped performance, because the price of gold and
other commodities rose dramatically.
On behalf of everyone at USAA IMCO, Wellington, MFS, and
Batterymarch, we thank you for your investment in the Fund.
11
F U N D
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RECOGNITION
USAA CORNERSTONE STRATEGY FUND
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OVERALL MORNINGSTAR RATING(TM)
out of 1,472 large blend funds for the period
ending May 31, 2006:
OVERALL RATING
* * * *
3-YEAR 5-YEAR 10-YEAR
* * * * * * * * * * * *
out of 1,472 funds out of 1,177 funds out of 440 funds
The Overall Morningstar Rating for a fund is derived from a
weighted average of the performance figures associated with its
three-, five-, and 10-year (if applicable) Morningstar Ratings metrics.
Ratings are based on risk-adjusted returns.
- --------------------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. FOR EACH FUND WITH AT LEAST
A THREE-YEAR HISTORY, MORNINGSTAR CALCULATES A MORNINGSTAR RATING(TM) BASED ON A
MORNINGSTAR RISK-ADJUSTED RETURN MEASURE THAT ACCOUNTS FOR VARIATION IN A FUND'S
MONTHLY PERFORMANCE (INCLUDING THE EFFECTS OF SALES CHARGES, LOADS, AND
REDEMPTION FEES), PLACING MORE EMPHASIS ON DOWNWARD VARIATIONS AND REWARDING
CONSISTENT PERFORMANCE. THE TOP 10% OF THE FUNDS IN EACH BROAD ASSET CLASS
RECEIVE 5 STARS, THE NEXT 22.5% RECEIVE 4 STARS, THE NEXT 35% RECEIVE 3 STARS,
THE NEXT 22.5% RECEIVE 2 STARS, AND THE BOTTOM 10% RECEIVE 1 STAR. (EACH SHARE
CLASS IS COUNTED AS A FRACTION OF ONE FUND WITHIN THIS SCALE AND RATED
SEPARATELY, WHICH MAY CAUSE SLIGHT VARIATIONS IN THE DISTRIBUTION PERCENTAGES.)
12
I N V E S T M E N T
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OVERVIEW
USAA CORNERSTONE STRATEGY FUND (Ticker Symbol: USCRX)
OBJECTIVE
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Achieve a positive, inflation-adjusted rate of return and a
reasonably stable value of Fund shares, thereby preserving
purchasing power of shareholders' capital.
TYPES OF INVESTMENTS
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Using preset target ranges, the Fund's strategy is to invest
its assets mostly in stocks (divided into the categories of
U.S., international, real estate, and precious metals and
minerals) and, to a much lesser extent, in bonds and money
market instruments.
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5/31/06 5/31/05
- -----------------------------------------------------------------------------------------
Net Assets $1,712.1 Million $1,543.4 Million
Net Asset Value Per Share $26.50 $26.53
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AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/06
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1 YEAR 5 YEARS 10 YEARS
8.67% 5.64% 6.62%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS
NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE
HIGHER OR LOWER THAN THE PERFORMANCE DATA QUOTED. THE RETURN
AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO THAT
AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE
MOST RECENT MONTH-END, VISIT USAA.COM.
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE
REINVESTMENT OF ALL NET INVESTMENT INCOME DIVIDEND AND
REALIZED CAPITAL GAIN DISTRIBUTIONS. THE TOTAL RETURNS QUOTED
DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD
PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
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CUMULATIVE PERFORMANCE COMPARISON
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
LIPPER GLOBAL USAA CORNERSTONE
S&P 500 INDEX FLEXIBLE FUNDS INDEX STRATEGY FUND
05/31/96 $10,000.00 $10,000.00 $10,000.00
06/30/96 10,038.13 10,041.43 10,058.89
07/31/96 9,594.89 9,796.48 9,812.34
08/31/96 9,797.58 9,941.01 10,032.30
09/30/96 10,348.52 10,219.99 10,313.35
10/31/96 10,633.83 10,345.97 10,464.05
11/30/96 11,436.91 10,786.39 10,919.12
12/31/96 11,210.35 10,801.68 11,120.85
01/31/97 11,910.34 11,001.66 11,288.15
02/28/97 12,003.85 11,065.17 11,342.52
03/31/97 11,511.55 10,884.31 11,166.86
04/30/97 12,198.17 10,990.74 11,233.78
05/31/97 12,943.93 11,452.86 11,693.83
06/30/97 13,519.37 11,773.71 12,116.25
07/31/97 14,594.82 12,257.91 12,683.81
08/31/97 13,777.80 11,906.17 12,305.65
09/30/97 14,531.94 12,413.48 13,009.82
10/31/97 14,047.16 11,973.32 12,675.12
11/30/97 14,696.89 12,010.58 12,727.28
12/31/97 14,949.11 12,113.61 12,860.39
01/31/98 15,114.30 12,143.18 12,855.81
02/28/98 16,203.77 12,690.67 13,304.96
03/31/98 17,032.88 13,116.52 13,726.61
04/30/98 17,207.30 13,232.21 13,777.03
05/31/98 16,911.94 13,118.89 13,699.12
06/30/98 17,598.39 13,108.62 13,621.20
07/31/98 17,412.40 12,980.44 13,308.29
08/31/98 14,896.72 11,544.19 11,928.46
09/30/98 15,851.84 11,728.98 12,161.60
10/31/98 17,139.25 12,341.42 12,575.55
11/30/98 18,177.60 12,894.01 12,937.17
12/31/98 19,224.40 13,202.75 13,118.78
01/31/99 20,028.00 13,359.52 13,103.83
02/28/99 19,405.64 13,034.61 12,750.08
03/31/99 20,181.83 13,459.04 12,869.66
04/30/99 20,963.36 14,182.09 13,696.75
05/31/99 20,468.88 13,956.17 13,597.10
06/30/99 21,601.75 14,473.50 13,826.29
07/31/99 20,930.18 14,463.54 13,680.99
08/31/99 20,826.57 14,412.68 13,533.66
09/30/99 20,256.33 14,333.91 13,349.49
10/31/99 21,537.62 14,624.53 13,517.87
11/30/99 21,975.41 15,137.98 13,638.89
12/31/99 23,267.91 16,155.90 14,185.65
01/31/00 22,099.01 15,825.78 13,781.60
02/29/00 21,681.13 16,706.26 13,661.47
03/31/00 23,800.79 16,625.11 14,502.34
04/30/00 23,084.98 16,068.66 14,376.76
05/31/00 22,611.74 15,816.28 14,344.00
06/30/00 23,168.63 16,383.23 14,638.85
07/31/00 22,806.73 16,180.92 14,521.37
08/31/00 24,222.56 16,732.79 14,826.37
09/30/00 22,944.10 16,239.13 14,431.00
10/31/00 22,846.62 15,924.41 14,301.09
11/30/00 21,046.86 15,309.12 14,041.28
12/31/00 21,150.12 15,928.85 14,575.21
01/31/01 21,900.05 16,134.77 14,832.11
02/28/01 19,904.45 15,321.12 14,278.34
03/31/01 18,644.20 14,565.36 13,798.78
04/30/01 20,091.89 15,308.05 14,478.15
05/31/01 20,226.68 15,190.95 14,426.77
06/30/01 19,734.57 14,968.94 14,204.12
07/31/01 19,540.22 14,757.01 14,238.37
08/31/01 18,318.20 14,392.58 13,907.25
09/30/01 16,839.08 13,443.67 12,942.42
10/31/01 17,160.37 13,761.35 13,068.02
11/30/01 18,476.35 14,258.52 13,696.01
12/31/01 18,638.31 14,276.08 13,887.39
01/31/02 18,366.47 14,183.74 13,661.68
02/28/02 18,012.19 14,067.38 13,738.90
03/31/02 18,689.69 14,458.15 14,202.21
04/30/02 17,557.08 14,263.35 14,012.13
05/31/02 17,428.19 14,431.11 14,000.25
06/30/02 16,187.21 13,887.64 13,501.30
07/31/02 14,925.72 13,065.56 12,735.06
08/31/02 15,023.43 13,130.56 12,836.04
09/30/02 13,392.31 12,322.87 12,105.44
10/31/02 14,569.76 12,841.67 12,550.93
11/30/02 15,426.48 13,357.01 13,073.63
12/31/02 14,520.68 13,017.29 12,740.93
01/31/03 14,141.02 12,810.94 12,384.97
02/28/03 13,928.53 12,676.90 12,213.13
03/31/03 14,063.38 12,663.46 12,206.99
04/30/03 15,221.24 13,399.86 12,980.28
05/31/03 16,022.45 14,116.89 13,636.97
06/30/03 16,227.12 14,287.59 13,833.36
07/31/03 16,513.36 14,399.17 13,937.69
08/31/03 16,834.77 14,703.14 14,232.28
09/30/03 16,656.52 14,927.95 14,238.42
10/31/03 17,598.29 15,499.08 14,895.10
11/30/03 17,752.96 15,747.70 15,128.32
12/31/03 18,683.35 16,275.22 15,761.99
01/31/04 19,026.21 16,643.17 15,960.02
02/29/04 19,290.58 16,877.16 16,244.69
03/31/04 18,999.59 16,953.04 16,108.54
04/30/04 18,701.72 16,464.13 15,830.06
05/31/04 18,957.85 16,540.25 15,966.21
06/30/04 19,326.38 16,770.72 16,281.82
07/31/04 18,686.80 16,343.24 15,805.31
08/31/04 18,761.69 16,407.41 15,811.50
09/30/04 18,964.93 16,801.51 16,089.98
10/31/04 19,254.67 17,109.65 16,325.14
11/30/04 20,033.49 17,901.82 16,999.68
12/31/04 20,714.99 18,411.43 17,575.89
01/31/05 20,210.07 18,084.59 17,279.56
02/28/05 20,635.14 18,509.00 17,687.84
03/31/05 20,270.12 18,164.55 17,384.92
04/30/05 19,885.87 17,974.35 17,121.51
05/31/05 20,518.05 18,318.81 17,470.53
06/30/05 20,547.45 18,518.53 17,529.80
07/31/05 21,311.25 18,960.07 18,043.44
08/31/05 21,116.91 19,069.06 18,168.56
09/30/05 21,287.86 19,419.71 18,280.51
10/31/05 20,932.78 19,047.89 17,878.81
11/30/05 21,723.71 19,517.45 18,260.75
12/31/05 21,731.37 20,033.56 18,547.67
01/31/06 22,306.75 20,845.81 19,041.99
02/28/06 22,367.10 20,830.34 18,999.01
03/31/06 22,645.46 21,120.74 19,242.58
04/30/06 22,949.33 21,565.22 19,593.62
05/31/06 22,289.64 21,031.62 18,984.68
[END CHART]
DATA FROM 5/31/96 THROUGH 5/31/06.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, AND THE
CUMULATIVE PERFORMANCE QUOTED DOES NOT REFLECT THE DEDUCTION
OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR
THE REDEMPTION OF FUND SHARES.
14
. . . C O N T I N U E D
========================--------------------------------------------------------
OVERVIEW
The graph on page 13 illustrates the comparison of a $10,000
hypothetical investment in the USAA Cornerstone Strategy Fund
to the following benchmarks:
o The S&P 500 Index is an unmanaged index representing the
weighted average performance of a group of 500 widely held,
publicly traded stocks. It is not possible to invest
directly in the S&P 500 Index.
o The Lipper Global Flexible Funds Index tracks the total
return performance of the 10 largest funds within the
Lipper Global Flexible Portfolio Funds category.
15
. . . C O N T I N U E D
========================--------------------------------------------------------
- ---------------------------------------------------------------------------
TOP 3 HOLDINGS*
IN EACH CATEGORY
(% of Net Assets)
- ---------------------------------------------------------------------------
INTERNATIONAL STOCKS
Roche Holdings AG 0.8%
Reckitt Benckiser plc 0.7%
Nestle S.A. 0.6%
BONDS
Chase Commercial Mortgage Securities Corp.,
Series 2000-2, Class A2 0.3%
Chase Commercial Mortgage Securities Corp.,
Series 2000-3, Class A2 0.3%
Credit Suisse First Boston Mortgage Securities Corp.,
Series 2000-C1, Class A2 0.3%
U.S. EQUITIES
iShares Trust, S&P 500 Index Fund** 13.5%
Bank of America Corp. 0.7%
General Electric Co. 0.5%
PRECIOUS METALS AND MINERALS SECURITIES
Freeport-McMoRan Copper & Gold, Inc. "B" 0.2%
Newmont Mining Corp. 0.2%
Glamis Gold Ltd. 0.1%
REAL ESTATE EQUITY SECURITIES
Duke Realty Corp., Preferred 0.2%
Leopalace21 Corp. 0.1%
Simon Property Group, Inc. 0.1%
*EXCLUDES MONEY MARKET INSTRUMENTS AND SHORT-TERM INVESTMENTS PURCHASED WITH
CASH COLLATERAL FROM SECURITIES LOANED.
**PURSUANT TO A SECURITIES AND EXCHANGE COMMISSION (SEC) EXEMPTIVE ORDER AND A
RELATED AGREEMENT WITH ISHARES TRUST (ISHARES), THE FUND MAY INVEST IN ISHARES
IN AMOUNTS EXCEEDING LIMITS SET FORTH IN THE INVESTMENT COMPANY ACT OF 1940
THAT WOULD OTHERWISE BE APPLICABLE.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 19-53.
FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS
CURRENCY FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL
INSTABILITY.
16
. . . C O N T I N U E D
========================--------------------------------------------------------
OVERVIEW
ASSET ALLOCATION
5/31/06
[PIE CHART OF ASSET ALLOCATION]
U.S. Equities 41.5%
International Equities 28.9%
Bonds 25.2%
Precious Metals & Minerals Securities 1.4%
Real Estate Equity Securities 0.8%
Other* 12.4%
[END CHART]
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT EQUAL
100%.
*INCLUDES MONEY MARKET INSTRUMENTS AND SHORT-TERM INVESTMENTS
PURCHASED WITH CASH COLLATERAL FROM SECURITIES LOANED.
- ------------------------------------------------------
TOP 10 INDUSTRIES*
(% of Net Assets)
- ------------------------------------------------------
Diversified Banks 3.8%
Electric Utilities 3.5%
Pharmaceuticals 3.3%
Integrated Oil & Gas 3.2%
Property & Casualty Insurance 3.1%
Commercial Mortgage-Backed Securities 2.7%
Regional Banks 2.7%
Multi-Line Insurance 2.5%
Oil & Gas Exploration & Production 2.3%
Other Diversified Financial Services 2.1%
*EXCLUDES U.S. GOVERNMENT AND EXCHANGE-TRADED FUNDS.
17
D I S T R I B U T I O N S
==========================------------------------------------------------------
to SHAREHOLDERS
USAA CORNERSTONE STRATEGY FUND
The following federal tax information related to the Fund's
fiscal year ended May 31, 2006, is provided for information
purposes only and should not be used for reporting to federal
or state revenue agencies. Federal tax information for the
calendar year will be reported to you on Form 1099-DIV in
January 2007.
For the year ended May 31, 2006, the Fund distributed
long-term realized capital gains of $2.008419 per share.
Certain dividends paid by the Fund may be subject to a maximum
tax rate of 15%, as provided for by the Jobs and Growth Tax
Relief Reconciliation Act of 2003. Of the distributions paid
during the fiscal year, the maximum amount that may be
considered qualified dividend income is $8,433,000.
20.33% of ordinary income distributions qualify for dividends-
received deductions eligible to corporations.
For the fiscal year ended May 31, 2006, certain dividends paid
by the Fund qualify as interest-related dividends. The Fund
designates $18,984,000 as qualifying interest income.
The Fund has designated a portion of the amount paid to
redeeming shareholders, in the amount of $7,596,000, as a
long-term capital gain distribution for tax purposes.
18
R E P O R T O F I N D E P E N D E N T R E G I S T E R E D
=======================---------------------------------------------------------
Public ACCOUNTING Firm
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA CORNERSTONE STRATEGY FUND:
We have audited the accompanying statement of assets and liabilities of the USAA
Cornerstone Strategy Fund (a portfolio of USAA Investment Trust) (the "Fund"),
including the portfolio of investments, as of May 31, 2006, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the financial
highlights for each of the four years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The financial highlights
for the period presented through May 31, 2002, were audited by other auditors
whose report, dated July 5, 2002, expressed an unqualified opinion on those
financial highlights.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of May 31, 2006, by correspondence with the custodian and
brokers or by other appropriate auditing procedures where replies from brokers
were not received. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
USAA Cornerstone Strategy Fund at May 31, 2006, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the four
years in the period then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
San Antonio, Texas
July 14, 2006
19
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------
U.S. EQUITIES (41.5%)
U.S. COMMON STOCKS (27.4%)
AEROSPACE & DEFENSE (1.4%)
60,500 Boeing Co. $ 5,037
88,900 Lockheed Martin Corp. 6,444
32,300 Precision Castparts Corp. 1,861
69,500 Raytheon Co. 3,187
107,000 United Technologies Corp. 6,690
--------
23,219
--------
APPAREL & ACCESSORIES & LUXURY GOODS (0.0%)(q)
11,300 Polo Ralph Lauren Corp. 638
--------
APPAREL RETAIL (0.3%)
39,600 Abercrombie & Fitch Co. "A" 2,291
8,000 Christopher & Banks Corp. 215
66,650 Jos. A. Bank Clothiers, Inc.* 2,421
--------
4,927
--------
APPLICATION SOFTWARE (0.5%)
153,500 Adobe Systems, Inc.* 4,395
41,600 Autodesk, Inc.* 1,514
33,200 Intuit, Inc.* 1,835
--------
7,744
--------
ASSET MANAGEMENT & CUSTODY BANKS (0.7%)
25,400 Affiliated Managers Group, Inc.(g)* 2,291
93,800 Nuveen Investments, Inc. "A"(g) 4,213
82,000 State Street Corp. 5,092
--------
11,596
--------
AUTO PARTS & EQUIPMENT (0.1%)
26,000 Johnson Controls, Inc. 2,214
--------
AUTOMOTIVE RETAIL (0.1%)
49,800 O'Reilly Automotive, Inc.* 1,578
--------
BIOTECHNOLOGY (0.5%)
57,400 Alkermes, Inc.* 1,138
98,100 Amgen, Inc.* 6,630
--------
7,768
--------
20
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------
BROADCASTING & CABLE TV (0.6%)
256,750 CBS Corp. "B" $ 6,652
16,700 DIRECTV Group, Inc.* 293
72,200 Univision Communications, Inc. "A"* 2,596
--------
9,541
--------
CASINOS & GAMING (0.3%)
111,200 Penn National Gaming, Inc.* 4,273
14,900 Scientific Games Corp. "A"* 568
24,400 Shuffle Master, Inc.(g)* 890
--------
5,731
--------
CATALOG RETAIL (0.1%)
51,950 Coldwater Creek, Inc.* 1,335
--------
COMMUNICATIONS EQUIPMENT (1.0%)
32,400 ADTRAN, Inc. 817
245,800 Cisco Systems, Inc.* 4,838
233,800 Corning, Inc.* 5,670
54,500 Foundry Networks, Inc.* 701
76,400 Motorola, Inc. 1,611
68,000 QUALCOMM, Inc. 3,074
--------
16,711
--------
COMPUTER HARDWARE (0.1%)
44,700 Avid Technology, Inc.* 1,761
--------
COMPUTER STORAGE & PERIPHERALS (0.5%)
332,200 EMC Corp.* 4,252
87,000 QLogic Corp.* 1,556
14,600 SanDisk Corp.* 821
63,500 Seagate Technology* 1,483
52,200 Western Digital Corp.* 1,062
--------
9,174
--------
CONSTRUCTION & ENGINEERING (0.3%)
56,800 Fluor Corp. 4,979
--------
CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (0.2%)
35,700 Oshkosh Truck Corp. 1,887
18,400 Terex Corp.* 1,683
--------
3,570
--------
21
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------
CONSTRUCTION MATERIALS (0.1%)
14,800 Martin Marietta Materials, Inc. $ 1,354
--------
CONSUMER FINANCE (0.0%)(q)
30,700 Doral Financial Corp.(g) 231
--------
DATA PROCESSING & OUTSOURCED SERVICES (0.6%)
66,300 Alliance Data Systems Corp.* 3,518
26,000 DST Systems, Inc.* 1,529
97,700 First Data Corp. 4,505
--------
9,552
--------
DEPARTMENT STORES (0.4%)
49,900 Federated Department Stores, Inc. 3,634
46,000 J.C. Penney Co., Inc. 2,795
--------
6,429
--------
DIVERSIFIED METALS & MINING (0.2%)
48,300 Phelps Dodge Corp. 4,139
--------
EDUCATIONAL SERVICES (0.2%)
67,400 Career Education Corp.* 2,197
16,100 ITT Educational Services, Inc.* 1,046
--------
3,243
--------
ELECTRIC UTILITIES (0.2%)
36,200 Edison International 1,420
36,600 FirstEnergy Corp. 1,919
--------
3,339
--------
ELECTRONIC EQUIPMENT MANUFACTURERS (0.1%)
41,000 Amphenol Corp. "A" 2,278
--------
ELECTRONIC MANUFACTURING SERVICES (0.2%)
51,700 Jabil Circuit, Inc. 1,800
164,600 Sanmina-SCI Corp.* 774
231,900 Solectron Corp.* 825
--------
3,399
--------
ENVIRONMENTAL & FACILITIES SERVICES (0.3%)
146,900 Waste Management, Inc. 5,380
--------
22
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------
FOOD RETAIL (0.3%)
143,500 Kroger Co. $ 2,886
121,300 Safeway, Inc. 2,860
--------
5,746
--------
FOOTWEAR (0.1%)
20,500 Nike, Inc. "B" 1,646
--------
GAS UTILITIES (0.0%)(q)
7,200 Energen Corp. 244
2,700 Questar Corp. 199
--------
443
--------
HEALTH CARE DISTRIBUTORS (0.1%)
36,500 Patterson Companies, Inc.* 1,250
--------
HEALTH CARE EQUIPMENT (0.7%)
31,000 Biomet, Inc. 1,091
46,500 Kinetic Concepts, Inc.* 1,809
167,500 Medtronic, Inc. 8,457
9,900 Respironics, Inc.* 337
--------
11,694
--------
HEALTH CARE FACILITIES (0.0%)(q)
12,200 Community Health Systems, Inc.* 460
--------
HEALTH CARE SERVICES (0.4%)
30,400 Amedisys, Inc.(g)* 1,087
75,200 Medco Health Solutions, Inc.* 4,053
42,300 Omnicare, Inc. 1,961
--------
7,101
--------
HEALTH CARE SUPPLIES (0.0%)(q)
14,100 Cooper Companies, Inc. 668
--------
HOME IMPROVEMENT RETAIL (0.2%)
58,700 Lowe's Companies, Inc. 3,656
--------
HOMEBUILDING (0.3%)
76,633 D.R. Horton, Inc. 2,020
15,500 KB Home 794
23
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------
30,100 Lennar Corp. "A" $ 1,442
1,500 NVR, Inc.(g)* 913
--------
5,169
--------
HOTELS, RESORTS, & CRUISE LINES (0.0%)(q)
16,100 Hilton Hotels Corp. 442
--------
HOUSEHOLD APPLIANCES (0.1%)
13,400 Whirlpool Corp. 1,205
--------
HOUSEHOLD PRODUCTS (0.4%)
134,900 Procter & Gamble Co. 7,318
--------
HUMAN RESOURCE & EMPLOYMENT SERVICES (0.1%)
14,900 Manpower, Inc. 981
--------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (0.2%)
34,200 Mirant Corp.* 851
50,400 TXU Corp. 2,888
--------
3,739
--------
INDUSTRIAL CONGLOMERATES (0.8%)
261,700 General Electric Co. 8,966
60,500 Textron, Inc. 5,501
--------
14,467
--------
INSURANCE BROKERS (0.0%)(q)
3,900 National Financial Partners Corp. 175
--------
INTEGRATED OIL & GAS (1.3%)
31,500 Chevron Corp. 1,883
135,884 ConocoPhillips 8,600
138,100 Exxon Mobil Corp. 8,412
20,600 Marathon Oil Corp. 1,546
23,700 Occidental Petroleum Corp. 2,349
--------
22,790
--------
INTEGRATED TELECOMMUNICATION SERVICES (0.2%)
6,300 AT&T, Inc. 164
34,600 NeuStar, Inc. "A"* 1,113
24
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------
43,200 Verizon Communications, Inc. $ 1,349
--------
2,626
--------
INTERNET SOFTWARE & SERVICES (0.3%)
12,400 Google, Inc. "A"* 4,611
--------
INVESTMENT BANKING & BROKERAGE (0.7%)
7,300 A.G. Edwards, Inc. 391
151,700 E*TRADE Financial Corp.* 3,682
17,300 Lehman Brothers Holdings, Inc. 1,152
63,700 Merrill Lynch & Co., Inc. 4,613
35,500 Morgan Stanley 2,116
--------
11,954
--------
IT CONSULTING & OTHER SERVICES (0.1%)
72,000 Accenture Ltd. "A" 2,027
13,900 MPS Group, Inc.* 209
--------
2,236
--------
LIFE & HEALTH INSURANCE (0.2%)
48,800 MetLife, Inc. 2,512
--------
LIFE SCIENCES TOOLS & SERVICES (0.5%)
79,800 Applera Corp. - Applied Biosystems Group 2,362
9,100 Charles River Laboratories International, Inc.* 364
24,400 Fisher Scientific International, Inc.* 1,812
12,800 Invitrogen Corp.* 816
13,900 Millipore Corp.* 965
21,700 Techne Corp.* 1,187
31,800 Waters Corp.* 1,324
--------
8,830
--------
MANAGED HEALTH CARE (1.0%)
74,225 Aetna, Inc. 2,855
6,800 CIGNA Corp. 631
36,000 Coventry Health Care, Inc.* 1,881
72,200 Health Net, Inc.* 3,106
22,200 Humana, Inc.* 1,124
6,900 Sierra Health Services, Inc.* 284
35,180 UnitedHealth Group, Inc. 1,546
76,600 WellPoint, Inc.* 5,483
--------
16,910
--------
25
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------
Movies & Entertainment (0.4%)
233,700 Time Warner, Inc. $ 4,022
70,250 Viacom, Inc. "B"* 2,652
--------
6,674
--------
MULTI-LINE INSURANCE (0.5%)
59,300 American International Group, Inc. 3,606
20,300 Hartford Financial Services Group, Inc. 1,785
87,000 Loews Corp. 2,956
--------
8,347
--------
MULTI-UTILITIES (0.4%)
23,400 Alliant Energy Corp. 805
53,500 Dominion Resources, Inc. 3,883
32,900 PG&E Corp. 1,305
--------
5,993
--------
OIL & GAS DRILLING (0.2%)
105,600 Patterson-UTI Energy, Inc. 3,157
--------
OIL & GAS EQUIPMENT & SERVICES (0.3%)
7,800 Halliburton Co. 582
75,600 Schlumberger Ltd.(g) 4,957
3,900 Tidewater, Inc. 198
--------
5,737
--------
OIL & GAS EXPLORATION & PRODUCTION (0.9%)
167,200 Chesapeake Energy Corp.(g) 5,115
26,300 Devon Energy Corp. 1,508
188,100 Noble Energy, Inc. 8,175
--------
14,798
--------
OIL & GAS REFINING & MARKETING (0.1%)
37,000 Valero Energy Corp. 2,270
--------
OIL & GAS STORAGE & TRANSPORTATION (0.0%)(q)
5,400 Western Gas Resources, Inc. 265
--------
OTHER DIVERSIFIED FINANCIAL SERVICES (1.2%)
236,400 Bank of America Corp. 11,442
178,043 Citigroup, Inc. 8,777
--------
20,219
--------
26
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------
PACKAGED FOODS & MEAT (0.1%)
40,000 General Mills, Inc. $ 2,076
--------
PHARMACEUTICALS (1.1%)
85,900 Abbott Laboratories 3,668
106,900 Bristol-Myers Squibb Co. 2,624
83,900 Eli Lilly and Co. 4,333
6,800 Endo Pharmaceuticals Holdings, Inc.* 200
105,800 King Pharmaceuticals, Inc.* 1,881
28,000 Mylan Laboratories, Inc. 585
299,200 Schering-Plough Corp. 5,703
--------
18,994
--------
PROPERTY & CASUALTY INSURANCE (0.7%)
112,100 ACE Ltd. 5,803
40,200 Chubb Corp. 2,031
23,800 First American Corp. 999
7,300 Ohio Casualty Corp. 218
2,400 Philadelphia Consolidated Holding Corp.* 80
66,450 W.R. Berkley Corp. 2,284
--------
11,415
--------
RAILROADS (0.2%)
37,600 CSX Corp. 2,516
--------
REGIONAL BANKS (0.1%)
33,200 PNC Financial Services Group, Inc. 2,288
--------
RESTAURANTS (0.2%)
17,100 Brinker International, Inc. 627
17,500 Darden Restaurants, Inc. 620
47,800 RARE Hospitality International, Inc.* 1,470
--------
2,717
--------
SEMICONDUCTOR EQUIPMENT (0.4%)
68,200 Freescale Semiconductor, Inc. "B"* 2,129
26,300 Lam Research Corp.* 1,178
35,000 MEMC Electronic Materials, Inc.* 1,226
96,650 Varian Semiconductor Equipment Associates, Inc.* 2,991
--------
7,524
--------
27
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------
SEMICONDUCTORS (0.6%)
76,300 Advanced Micro Devices, Inc.* $ 2,357
111,200 Analog Devices, Inc. 3,751
129,500 Atmel Corp.* 621
52,500 Microchip Technology, Inc. 1,801
86,400 National Semiconductor Corp. 2,219
--------
10,749
--------
SOFT DRINKS (0.5%)
60,300 Pepsi Bottling Group, Inc. 1,890
117,400 PepsiCo, Inc. 7,098
--------
8,988
--------
SPECIALIZED FINANCE (0.1%)
70,600 Nasdaq Stock Market, Inc.* 2,149
--------
SPECIALTY STORES (0.3%)
128,300 Michaels Stores, Inc. 4,987
--------
STEEL (0.0%)(q)
6,600 Nucor Corp. 695
--------
SYSTEMS SOFTWARE (0.5%)
366,800 Microsoft Corp. 8,308
--------
TECHNOLOGY DISTRIBUTORS (0.1%)
34,511 Arrow Electronics, Inc.* 1,121
16,500 CDW Corp. 923
--------
2,044
--------
THRIFTS & MORTGAGE FINANCE (0.4%)
72,500 Golden West Financial Corp. 5,300
37,100 IndyMac Bancorp, Inc. 1,703
--------
7,003
--------
TOBACCO (0.6%)
108,100 Altria Group, Inc. 7,821
59,600 Loews Corp. - Carolina Group 2,768
--------
10,589
--------
TRADING COMPANIES & DISTRIBUTORS (0.1%)
22,400 Fastenal Co. 963
--------
28
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------
TRUCKING (0.0%)(q)
12,800 Con-Way, Inc. $ 756
--------
WIRELESS TELECOMMUNICATION SERVICES (0.4%)
295,170 Sprint Nextel Corp. 6,261
17,000 Syniverse Holdings, Inc.* 277
--------
6,538
--------
Total U.S. common stocks (cost: $411,875) 469,218
--------
U.S. PREFERRED SECURITIES (0.4%)
ELECTRIC UTILITIES (0.0%)(q)
10,000 Southern California Edison Co., Series A, 5.35%, perpetual(l) 985
--------
PROPERTY & CASUALTY INSURANCE (0.1%)
10,000 Axis Capital Holdings Ltd. 1,005
--------
PRINCIPAL
AMOUNT
(000)
- ---------
REGIONAL BANKS (0.2%)
$3,000 Farm Credit Bank of Texas, Series 1, 7.56%, perpetual(l) 3,144
--------
REINSURANCE (0.1%)
2,000 Swiss Re Capital I, LP, 6.85%(b,g,l) 1,978
--------
Total U.S. preferred securities (cost: $7,259) 7,112
--------
NUMBER
OF SHARES
- ---------
U.S. EXCHANGE-TRADED FUNDS (13.7%)
1,815,500 iShares Trust, S&P 500 Index Fund(g) 231,603
15,100 MidCap SPDR Trust Series 1(g) 2,117
--------
Total U.S. exchange-traded funds (cost: $236,601) 233,720
--------
Total U.S. equities (cost: $655,735) 710,050
--------
29
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of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------
INTERNATIONAL EQUITIES (28.9%)
INTERNATIONAL STOCKS (28.9%)
AUSTRALIA (0.6%)
112,000 BHP Billiton Ltd. (Diversified Metals & Mining) $ 2,379
433,645 QBE Insurance Group Ltd. (Property & Casualty Insurance) 6,988
17,100 Rio Tinto Ltd. (Diversified Metals & Mining) 1,005
--------
10,372
--------
AUSTRIA (0.3%)
47,240 Erste Bank der oesterreichischen Sparkassen AG
(Regional Banks)(g) 2,693
12,800 OMV AG (Integrated Oil & Gas) 745
74,700 Telekom Austria AG (Integrated Telecommunication Services) 1,666
1,700 VA Stahl AG (Steel) 241
--------
5,345
--------
BELGIUM (0.1%)
12,500 Delhaize Group (Food Retail) 799
--------
BERMUDA (0.2%)
100,000 Arch Capital Group Ltd., 8.00% (Perpetual Preferred)
(Reinsurance) 2,507
70,000 Endurance Specialty Holdings Ltd., 7.75%,
Series A (Perpetual Preferred) (Reinsurance) 1,664
--------
4,171
--------
BRAZIL (0.5%)
48,014 Banco Bradesco S.A. (Preferred) (Diversified Banks) 1,463
44,600 Banco Itau S.A. ADR (Preferred) (Diversified Banks)(g) 1,188
34,310 Companhia Vale Do Rio Doce ADR (Steel) 1,599
84,549 Petroleo Brasileiro S.A. (Preferred) (Integrated Oil & Gas) 1,615
53,000,000 Tim Participacoes S.A. (Preferred)
(Wireless Telecommunication Services) 126
33,500 Uniao De Bancos Brasileiros S.A. (Unibanco) GDR
(Preferred) (Diversified Banks) 2,138
56,900 Unibanco Uniao De Bancos Brasileiros S.A. (Diversified Banks) 714
--------
8,843
--------
CANADA (0.9%)
217,400 Bombardier, Inc. "B" (Aerospace & Defense)* 622
60,240 Canadian National Railway Co. (Railroads) 2,693
41,200 Canadian Natural Resources Ltd. (Oil & Gas
Exploration & Production) 2,169
34,400 EnCana Corp. (Oil & Gas Exploration & Production) 1,735
6,100 First Quantum Minerals Ltd. (Diversified Metals & Mining) 302
30
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------
9,300 Husky Energy, Inc. (Integrated Oil & Gas) $ 546
5,600 National Bank of Montreal (Diversified Banks) 311
14,900 Nexen, Inc. (Oil & Gas Exploration & Production) 829
38,600 Royal Bank Canada (Diversified Banks) 1,577
39,900 Shaw Communications, Inc. (Broadcasting & Cable TV) 1,112
17,200 Suncor Energy, Inc. (Integrated Oil & Gas) 1,388
8,700 Teck Cominco Ltd. (Diversified Metals & Mining) 554
31,420 Toronto-Dominion Bank (Other Diversified Financial Services) 1,704
--------
15,542
--------
CHINA (0.3%)
2,848,500 CNOOC Ltd. (Oil & Gas Exploration & Production)(p) 2,163
954,000 China Life Insurance Co. Ltd. "H" (Life & Health Insurance)(p) 1,404
100,000 China Mobile Ltd. (Wireless Telecommunication Services)(p) 512
480,000 Denway Motors Ltd. (Automobile Manufacturers)(p) 166
294,000 PetroChina Co. Ltd. "H" (Integrated Oil & Gas)(p) 313
--------
4,558
--------
DENMARK (0.1%)
19,700 Carlsberg A/S (Brewers) 1,379
8,700 Sydbank A/S (Regional Banks) 314
--------
1,693
--------
FINLAND (0.1%)
21,900 Metso Corp. (Industrial Machinery) 779
--------
FRANCE (5.1%)
247,400 AXA S.A. (Multi-Line Insurance)(g) 8,591
38,193 Air Liquide S.A. (Industrial Gases) 7,938
22,100 Alstom RGPT (Construction & Engineering)* 1,876
10,200 Assurances Generales de France (AGF) (Multi-Line Insurance)(g) 1,235
27,450 Atos Origin S.A. (IT Consulting & Other Services)* 1,889
36,520 BNP Paribas S.A. (Diversified Banks)(g) 3,407
33,450 Bouygues S.A. (Construction & Engineering) 1,817
32,100 Cap Gemini S.A. (IT Consulting & Other Services) 1,761
167,341 Credit Agricole S.A. (Regional Banks)(g) 6,238
13,620 Groupe DANONE (Packaged Foods & Meat) 1,643
76,280 LVMH Moet Hennessy Louis Vuitton S.A.
(Apparel & Accessories & Luxury Goods) 7,497
90,300 Legrand S.A. (Electrical Components & Equipment)(g)* 2,642
4,000 Natexis Banques Populaires (Regional Banks) 1,015
27,110 Pernod Ricard S.A. (Distillers & Vintners)(g) 5,291
283,700 SCOR (Reinsurance) 673
31
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of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------
70,740 Sanofi-Aventis S.A. (Pharmaceuticals)(g) $ 6,667
97,904 Schneider Electric S.A. (Electrical Components & Equipment) 10,155
15,000 Societe BIC S.A. (Office Services & Supplies) 1,004
21,900 Societe Generale (Diversified Banks)(g)* 3,373
11,511 Societe Television Francaise (Broadcasting & Cable TV) 380
133,440 Total S.A. (Integrated Oil & Gas)(g) 8,652
1,100 Vallourec S.A. (Steel) 1,379
41,590 Veolia Environnement S.A. (Multi-Utilities)(g) 2,305
--------
87,428
--------
GERMANY (1.6%)
2,200 Adidas-Salomon AG (Footwear) 436
72,930 Bayer AG (Diversified Chemicals) 3,275
27,550 Bayerische Motoren Werke AG (Automobile Manufacturers)(g) 1,417
5,500 Celesio AG (Pharmaceuticals) 527
63,550 Commerzbank AG (Diversified Banks)(g) 2,386
24,550 Deutsche Bank AG (Diversified Banks)(g) 2,817
55,050 Deutsche Lufthansa AG (Airlines) 962
5,900 Deutsche Postbank AG (Regional Banks) 413
44,620 E. On AG (Multi-Utilities) 5,146
6,000 Fresenius AG (Preferred) (Biotechnology) 979
12,500 Fresenius Medical Care AG (Health Care Equipment) 1,400
35,399 GEA Group AG (Diversified Commercial & Professional Services) 617
4,900 Heidelberger Druckmaschinen AG (Commercial Printing) 223
18,100 MAN AG (Industrial Machinery)(g) 1,301
6,600 Muenchener Rueckversicherungs-Gesellschaft AG (Reinsurance) 894
29,630 Schering AG (Pharmaceuticals) 3,231
18,350 Stada Arzneimittel AG (Pharmaceuticals) 734
--------
26,758
--------
GREECE (0.1%)
24,196 Alpha Bank A.E. (Regional Banks) 604
7,800 Titan Cement Co. S.A. (Construction Materials) 408
--------
1,012
--------
HONG KONG (0.5%)
405,000 Esprit Holdings Ltd. (Apparel Retail)(p) 3,250
2,189,000 Hutchison Telecommunications International Ltd.
(Wireless Telecommunication Services)(p)* 3,522
1,089,000 Li & Fung Ltd. (Trading Companies & Distributors)(p) 2,220
--------
8,992
--------
HUNGARY (0.0%)(q)
1,900 Gedeon Richter RT (Pharmaceuticals) 371
--------
32
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------
INDIA (0.1%)
18,100 State Bank of India Ltd. GDR (Diversified Banks) $ 786
66,200 Tata Motors Ltd. ADR (Construction & Farm Machinery &
Heavy Trucks)(g) 1,112
--------
1,898
--------
INDONESIA (0.2%)
3,930,500 PT Bank Central Asia (Diversified Banks) 1,741
40,800 PT Telekomunikasi ADR (Integrated Telecommunication Services) 1,259
--------
3,000
--------
IRELAND (0.0%)(q)
26,700 Irish Life & Permanent plc (Other Diversified Financial Services) 643
--------
ISRAEL (0.1%)
196,800 Bank Hapoalim Ltd. (Diversified Banks) 918
199,600 Bank Leumi Le-Israel (Regional Banks) 750
54,100 Israel Chemicals Ltd. (ICL) (Fertilizers & Agricultural Chemicals) 229
--------
1,897
--------
ITALY (0.8%)
125,930 Assicurazioni Generali S.p.A. (Multi-Line Insurance) 4,581
217,810 Capitalia S.p.A. (Diversified Banks) 1,804
39,789 FastWeb S.p.A. (Communications Equipment)(g)* 1,965
654,540 UniCredito Italiano S.p.A. (Regional Banks) 4,991
--------
13,341
--------
JAPAN (5.1%)
23,000 Aeon Credit Service Co. Ltd. (Consumer Finance) 606
8,200 Aisin Seiki Co. Ltd. (Auto Parts & Equipment) 279
129,000 Ajinomoto Co. Inc. (Packaged Foods & Meat) 1,522
73,900 Asahi Breweries Ltd. (Brewers) 1,083
453,000 Asahi Glass Co. Ltd. (Building Products) 5,985
193,000 Bridgestone Corp. (Tires & Rubber)(g) 3,927
10,000 Canon Sales Co. Inc. (Trading Companies & Distributors) 211
81,000 Canon, Inc. (Electronic Equipment Manufacturers) 5,585
100,000 Chiba Bank Ltd. (Regional Banks) 896
76,000 Daido Steel Co. Ltd. (Steel) 624
18,000 Dowa Mining Co. (Diversified Metals & Mining) 161
129,000 Fuji Electric Holdings Co. Ltd. (Electrical Components & Equipment) 682
168,500 Haseko Corp. (Homebuilding)* 579
144,000 Hitachi Ltd. (Electronic Equipment Manufacturers) 969
21,300 Hokkaido Electric Power Co. Inc. (Electric Utilities) 500
229,000 Itochu Corp. (Trading Companies & Distributors) 1,929
33
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------
23,000 JTEKT Corp. (Auto Parts & Equipment) $ 454
136,000 Kaneka Corp. (Diversified Chemicals) 1,312
122,000 Kao Corp. (Personal Products) 3,030
216,000 Kawasaki Heavy Industries Ltd.
(Construction & Farm Machinery & Heavy Trucks) 718
106,000 Kobe Steel Ltd. (Steel) 348
96,000 Komatsu Ltd. (Construction & Farm Machinery & Heavy Trucks) 1,906
291,000 Marubeni Corp. (Trading Companies & Distributors) 1,570
60,000 Matsushita Electric Industrial Co. Ltd.
(Electronic Equipment Manufacturers) 1,287
154,000 Mazda Motor Corp. (Automobile Manufacturers) 921
35,000 Minebea Co. Ltd. (Industrial Machinery) 206
131,600 Mitsubishi Corp. (Trading Companies & Distributors) 2,765
257,000 Mitsubishi Electric Corp. (Heavy Electrical Equipment) 2,076
66,000 Mitsubishi Rayon Co. Ltd. (Textiles) 568
95,000 Mitsui Mining & Smelting Co. Ltd. (Diversified Metals & Mining) 610
32,600 Nintendo Co. Ltd. (Leisure Products) 5,463
70,500 Nishi Nippon City Bank Ltd. (Regional Banks) 326
51,100 Nitto Denko Corp. (Specialty Chemicals) 3,905
18,500 ORIX Corp. (Other Diversified Financial Services) 5,268
86,800 Omron Corp. (Electrical Components & Equipment) 2,352
242,000 Ricoh Co. Ltd. (Office Electronics) 4,698
77,000 Sekisui Chemical Co. Ltd. (Homebuilding) 650
607,000 Shinsei Bank Ltd. (Diversified Banks) 4,018
4,100 Sumco Corp. (Semiconductor Equipment) 241
75 Sumitomo Mitsui Financial Group, Inc. (Diversified Banks) 760
46,000 Taiheiyo Cement Corp. (Building Products) 192
107,000 Teijin Ltd. (Textiles) 754
491,000 Tokyo Gas Co. Ltd. (Gas Utilities) 2,434
112,000 Toppan Printing Co. Ltd. (Commercial Printing) 1,398
258,000 Toyobo Co. Ltd. (Textiles) 732
161,300 Toyota Motor Corp. (Automobile Manufacturers) 8,499
28,000 Yamaha Motor Co. Ltd. (Motorcycle Manufacturers) 745
105,000 Yaskawa Electric Corp. (Electronic Equipment Manufacturers) 1,134
--------
86,878
--------
KOREA (0.7%)
79,600 Korea Electric Power Corp. ADR (Electric Utilities) 1,615
15,330 Samsung Electronics Co. Ltd. (Semiconductors)(p) 9,788
--------
11,403
--------
MALAYSIA (0.0%)(q)
102,600 Genting Berhad (Casinos & Gaming) 636
--------
34
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------
MEXICO (0.4%)
31,000 America Movil S.A. de C.V. ADR "L"
(Wireless Telecommunication Services) $ 1,013
166,100 America Telecom S.A. de C.V. (Wireless
Telecommunication Services)* 937
34,700 Cemex S.A. de C.V. ADR (Construction Materials)(g)* 1,977
162,210 Grupo Televisa S.A. de C.V. ADR (Broadcasting & Cable TV) 2,983
--------
6,910
--------
NETHERLANDS (0.9%)
7,200 Aalberts Industries N.V. (Industrial Machinery) 534
40,000 Aegon N.V., 6.38% (Preferred) (Life & Health Insurance) 946
12,400 Buhrmann N.V. (Trading Companies & Distributors) 192
38,800 CSM N.V. (Packaged Foods & Meat) 1,120
18,100 European Aeronautic Defense and Space Co. N.V.
(Aerospace & Defense) 645
52,100 Hagemeyer N.V. (Trading Companies & Distributors)* 257
77,725 Heineken N.V. (Brewers) 3,106
55,600 ING Groep N.V. (Multi-Line Insurance)(g) 2,175
33,000 Koninklijke BAM Groep N.V. (Building Products) 703
91,000 Koninklijke Philips Electronics N.V. (Electrical
Components & Equipment) 2,862
92,000 STMicroelectronics N.V. (Semiconductors) 1,499
74,600 Wolters Kluwer N.V. (Publishing)(g) 1,761
--------
15,800
--------
NORWAY (0.2%)
28,800 Statoil ASA (Integrated Oil & Gas) 833
251,400 Telenor ASA (Wireless Telecommunication Services)(g) 3,173
--------
4,006
--------
POLAND (0.0%)(q)
41,260 Powszechna Kasa Oszczednosci Bank Polski S.A. (Regional Banks) 467
--------
RUSSIA (0.3%)
60,100 Gazprom OAO (Integrated Oil & Gas) 2,566
38,800 LUKoil Holdings ADR (Integrated Oil & Gas)* 3,003
--------
5,569
--------
SINGAPORE (0.2%)
2,358,080 Singapore Telecommunications Ltd.
(Integrated Telecommunication Services) 3,779
--------
SOUTH AFRICA (0.1%)
151,100 African Bank Investments Ltd. (Consumer Finance) 642
55,100 Aveng Ltd. (Building Products) 180
35
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------
9,200 Imperial Holdings Ltd. (Trucking)* $ 197
160,600 Network Healthcare Holdings Ltd. (Health Care Facilities)* 218
20,600 Reunert Ltd. (Electrical Components & Equipment) 199
--------
1,436
--------
SPAIN (0.5%)
304,560 Banco Bilbao Vizcaya Argentaria S.A. (Diversified Banks) 6,311
77,860 Iberdrola S.A. (Electric Utilities)(g) 2,499
--------
8,810
--------
SWEDEN (0.5%)
8,300 Alfa Laval AB (Construction & Engineering) 253
16,000 Boliden AB (Diversified Metals & Mining) 310
1,176,700 LM Ericsson Telephone Co. "B" ADR (Communications Equipment) 3,760
65,600 Skandinaviska Enskilda Banken "A" (Diversified Banks) 1,565
73,800 Svenska Handelsbanken "A" (Regional Banks) 1,976
--------
7,864
--------
SWITZERLAND (2.9%)
84,500 ABB Ltd. (Construction & Engineering) 1,068
6,900 Actelion Ltd. (Pharmaceuticals)* 804
43,590 Credit Suisse Group (Diversified Banks) 2,516
7,745 Holcim Ltd. (Construction Materials) 608
45,793 Julius Baer Holding Ltd. "B" (Diversified Banks) 4,040
35,645 Nestle S.A. (Packaged Foods & Meat) 10,633
83,200 Roche Holdings AG (Pharmaceuticals) 12,952
3,050 Swiss Life Holding (Property & Casualty Insurance) 705
75,613 Swiss Re (Reinsurance) 5,315
14,570 Synthes, Inc. (Health Care Equipment) 1,784
77,573 UBS AG (Diversified Capital Markets) 8,772
3,935 Zurich Financial Services AG (Multi-Line Insurance)* 890
--------
50,087
--------
TAIWAN (0.3%)
263,200 Hon Hai Precision Industry Co., Ltd. GDR
(Electronic Equipment Manufacturers) 3,324
140,400 Siliconware Precision Industries Co. ADR (Semiconductors)(g) 854
--------
4,178
--------
THAILAND (0.1%)
609,690 Bangkok Bank Public Co. Ltd. (Diversified Banks) 1,694
34,000 PTT Public Co. Ltd. (Integrated Oil & Gas) 216
--------
1,910
--------
36
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------
UNITED KINGDOM (5.1%)
53,958 Anglo American plc (Diversified Metals & Mining) $ 2,173
80,160 AstraZeneca plc (Pharmaceuticals) 4,234
391,970 BG Group plc (Oil & Gas Exploration & Production) 5,205
46,200 Barratt Developments plc (Homebuilding) 793
9,700 Bellway plc (Homebuilding) 205
42,600 Bovis Homes Group plc (Homebuilding) 653
110,200 British Airways plc (Airlines)* 702
56,600 British Energy Group plc (Electric Utilities)* 732
49,400 Charter plc (Construction & Engineering)* 757
334,890 Diageo plc (Distillers & Vintners) 5,493
65,900 Drax Group plc (Electric Utilities)* 1,018
141,400 GKN plc (Auto Parts & Equipment) 719
275,130 GlaxoSmithKline plc (Pharmaceuticals) 7,615
43,100 HBOS plc (Diversified Banks) 737
42,300 Imperial Tobacco Group plc (Tobacco) 1,293
1,819,100 Invensys plc (Diversified Commercial & Professional Services)* 791
496,582 Ladbrokes plc (Casinos & Gaming) 3,692
189,550 Marks & Spencer Group plc (Department Stores) 1,925
90,370 Next plc (Apparel Retail) 2,746
109,620 Northern Rock plc (Diversified Banks) 2,105
40,580 Persimmon plc (Building Products) 911
308,170 Reckitt Benckiser plc (Household Products) 11,325
123,800 Rexam plc (Metal & Glass Containers) 1,109
197,100 Rolls-Royce Group plc (Aerospace & Defense)* 1,522
10,603,980 Rolls-Royce Group plc "B" (acquired 3/08/2006; cost $18)
(Aerospace & Defense)(n,p)* 21
22,350 Royal Bank of Scotland Group plc (Diversified Banks) 721
139,740 Royal Dutch Shell plc "A" (Integrated Oil & Gas) 4,589
365,560 Smith & Nephew plc (Health Care Equipment) 2,984
158,690 Smiths Group plc (Aerospace & Defense) 2,632
1,089,660 Tesco plc (Food Retail) 6,531
11,000 Vedanta Resources plc (Diversified Metals & Mining) 298
254,850 WPP Group plc (Advertising) 3,138
595,790 William Hill plc (Casinos & Gaming) 6,858
126,260 Yell Group plc (Publishing) 1,184
--------
87,411
--------
Total international stocks (cost: $410,131) 494,586
--------
37
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------
INTERNATIONAL RIGHTS (0.0%)(q)
SWITZERLAND
5 Holcim Ltd. (acquired 5/16/2006; cost $0)
(Construction Materials)*(p,n) $ -
--------
Total international equities (cost: $410,131) 494,586
--------
PRECIOUS METALS AND MINERALS SECURITIES (1.4%)
GOLD (1.2%)
AFRICAN GOLD COMPANIES (0.1%)
16,700 Gold Fields Ltd. 366
39,000 Gold Fields Ltd. ADR 854
--------
1,220
--------
AUSTRALIAN GOLD COMPANIES (0.1%)
400,000 Lihir Gold Ltd.* 878
55,000 Newcrest Mining Ltd. 834
--------
1,712
--------
EUROPEAN GOLD COMPANIES (0.1%)
47,000 Randgold Resources Ltd. ADR* 922
--------
NORTH AMERICAN GOLD COMPANIES (0.9%)
28,000 Agnico-Eagle Mines Ltd. 934
29,000 Barrick Gold Corp.(g) 888
260,000 Cambior, Inc.* 826
53,100 Freeport-McMoRan Copper & Gold, Inc. "B" 2,973
27,000 Glamis Gold Ltd.* 1,036
29,000 Goldcorp, Inc. 889
80,000 Kinross Gold Corp.* 874
31,000 Meridian Gold, Inc.* 969
81,800 Newmont Mining Corp. 4,266
28,000 Royal Gold, Inc. 792
90,000 Yamana Gold, Inc.* 930
--------
15,377
--------
SOUTH AMERICAN GOLD COMPANIES (0.0%)(q)
34,000 Compania de Minas Buenaventura S.A. ADR 876
--------
Total gold (cost: $18,993) 20,107
--------
38
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------
DIAMONDS (0.0%)(q)
21,000 Aber Diamond Corp. (cost: $818) $ 733
--------
PLATINUM GROUP METALS (0.1%)
8,600 Anglo American Platinum Corp. 762
4,200 Impala Platinum Holdings Ltd. 707
20,000 Lonmin plc 984
--------
Total platinum group metals (cost: $2,306) 2,453
--------
SILVER (0.1%)
160,000 Hecla Mining Co.(g)* (cost: $664) 874
--------
Total precious metals and minerals securities (cost: $22,781) 24,167
--------
REAL ESTATE EQUITY SECURITIES (0.8%)
OFFICE REITS (0.2%)
120,000 Duke Realty Corp., Preferred, Series M, 6.95%, perpetual 2,951
30,000 HRPT Properties Trust "C", Preferred, 7.125%, cumulative redeemable 732
--------
3,683
--------
REAL ESTATE MANAGEMENT & DEVELOPMENT (0.5%)
261,000 Capitaland Ltd. (Singapore) 678
4,800 CB Richard Ellis Group, Inc. "A"* 371
440,000 China Overseas Land and Investment Ltd. (Hong Kong)(p) 255
171,000 Hang Lung Properties Ltd. (Hong Kong)(p) 298
11,300 Jones Lang LaSalle, Inc. 898
95,000 Keppel Corp. Ltd. (Singapore) 812
58,000 Leopalace21 Corp. (Japan) 1,732
363,000 New World Development Ltd. (Hong Kong)(p) 577
5,600 Nexity (France) 342
513,000 Sino Land Co. (Hong Kong)(p) 779
145,000 Tokyu Land Corp. (Japan) 1,081
--------
7,823
--------
RETAIL REITS (0.1%)
24,000 Simon Property Group, Inc. 1,911
--------
Total real estate equity securities (cost: $12,812) 13,417
--------
39
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -----------------------------------------------------------------------------------------------------------------------------
BONDS (25.2%)
CORPORATE OBLIGATIONS (17.1%)
APPAREL & ACCESSORIES & LUXURY GOODS (0.1%)
$1,000 Kellwood Co., Debentures 7.63% 10/15/2017 $ 910
1,000 Kellwood Co., Senior Notes 7.88 7/15/2009 1,006
----------
1,916
----------
BROADCASTING & CABLE TV (0.4%)
2,000 Cox Communications, Inc., Notes 4.63 6/01/2013 1,807
1,000 Cox Enterprises,Inc., Notes(b) 7.38 6/15/2009 1,033
2,000 Cox Enterprises, Inc., Notes(b) 8.00 2/15/2007 2,023
1,000 Liberty Media Corp., Senior Notes(g) 5.70 5/15/2013 924
1,000 Liberty Media Corp., Senior Notes 7.88 7/15/2009 1,046
----------
6,833
----------
CASINOS & GAMING (0.1%)
1,000 Harrahs Operating Co., Inc., Bonds 5.63 6/01/2015 941
----------
CONSUMER FINANCE (0.7%)
1,000 Ford Motor Credit Co., Senior Notes 4.95 1/15/2008 938
2,000 Ford Motor Credit Co., Notes(g) 7.00 10/01/2013 1,727
2,000 General Motors Acceptance Corp., Notes 6.13 8/28/2007 1,958
1,000 General Motors Acceptance Corp., Notes(g) 6.75 12/01/2014 909
2,000 Household Finance Corp., Notes 6.38 10/15/2011 2,058
3,000 HSBC Finance Corp., Notes(g) 5.50 1/19/2016 2,873
2,000 SLM Corp., MTN, CPI Floating Rate Notes 5.36(c) 6/01/2009 1,952
----------
12,415
----------
DATA PROCESSING & OUTSOURCED SERVICES (0.1%)
2,000 Fiserv, Inc., Notes 4.00 4/15/2008 1,935
----------
DIVERSIFIED BANKS (0.3%)
1,000 Emigrant Bancorp, Inc., Senior Notes(b) 6.25 6/15/2014 969
1,000 JPMorgan Chase& Co., Notes 4.50 1/15/2012 944
1,500 Mizuho Capital Investment 1 Ltd.,
Subordinated Bonds(b) 6.69 6/30/2016 1,452
1,273 U.S. Central Credit Union, Senior Notes 2.70 9/30/2009 1,210
----------
4,575
----------
DIVERSIFIED CHEMICALS (0.2%)
4,000 ICI Wilmington, Inc., Notes 4.38 12/01/2008 3,867
----------
40
P O R T F O L I O
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of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -----------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED REITS (0.2%)
$2,000 Liberty Property, LP, Senior Notes 5.65% 8/15/2014 $ 1,933
2,000 Washington REIT, Senior Notes 5.25 1/15/2014 1,909
----------
3,842
----------
ELECTRIC UTILITIES (2.8%)
1,000 American Electric Power Co., Inc., Senior Notes 4.71 8/16/2007 990
4,000 Black Hills Corp., Notes 6.50 5/15/2013 3,964
3,662 Cedar Brakes II, LLC, Senior Notes, Series C(b) 9.88 9/01/2013 4,107
3,000 Entergy Louisiana, Inc., First Mortgage Bonds 5.83 11/01/2010 2,959
2,000 Entergy Mississippi, Inc., First Mortgage Bonds 5.92 2/01/2016 1,931
950 FPL Energy National Wind, LLC, Secured Notes(b) 5.61 3/10/2024 913
4,000 Monongahela Power Co., Notes, Series A 7.36 1/15/2010 4,203
3,111 Oglethorpe Power Corp., Secured Series Facility Bonds 6.97 6/30/2011 3,161
4,300 Power Contract Financing, Senior Notes(b) 6.26 2/01/2010 4,313
2,000 PPL Capital Funding, Inc., Guaranteed Notes, Series A 4.33 3/01/2009 1,919
3,000 PPL Energy Supply, LLC, Bonds, Series A 5.70 10/15/2015 2,866
2,000 Sempra Energy ESOP, Series 1999 (NBGA)(b) 4.21 11/01/2014(e) 1,969
3,000 Texas-New Mexico Power Co., Notes 6.13 6/01/2008 3,003
3,000 Tristate General & Transport Association, Bonds(b) 6.04 1/31/2018 2,953
2,000 TXU Electricity Ltd., Senior Notes, Series TCRS (INS) 7.25 12/01/2016 2,194
2,000 TXU Energy Co., LLC, Senior Notes 7.00 3/15/2013 2,069
3,000 Virginia Electric Power Co., Senior Notes 5.40 1/15/2016 2,863
1,000 West Penn Power Co., Notes 6.63 4/15/2012 1,025
----------
47,402
----------
ELECTRICAL COMPONENTS & EQUIPMENT (0.1%)
2,295 Ametek, Inc., Senior Notes 7.20 7/15/2008 2,348
----------
GAS UTILITIES (0.7%)
3,000 Boardwalk Pipelines, LLC, Notes 5.50 2/01/2017 2,839
1,000 Enbridge Energy Partners, LP, Senior Notes 5.35 12/15/2014 940
41
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -----------------------------------------------------------------------------------------------------------------------------
$2,500 Energy Transfer Partners, LP, Senior Notes 5.95% 2/01/2015 $ 2,419
2,000 Gulfstream Natural Gas Systems, LLC, Senior Notes(b) 6.19 11/01/2025 1,944
2,000 Noram Energy Corp., Debentures 6.50 2/01/2008 2,024
1,040 Northern Border Partners, LP, Senior Notes, Series A 8.88 6/15/2010 1,149
1,000 Valero Logistics Operations, LP, Senior Notes 6.05 3/15/2013 995
----------
12,310
----------
HEALTH CARE EQUIPMENT (0.1%)
1,000 Baxter International, Inc., Notes(g) 7.13 2/01/2007 1,007
----------
HEALTH CARE FACILITIES (0.1%)
2,000 HCA, Inc., Notes 5.25 11/06/2008 1,969
----------
HOUSEHOLD APPLIANCES (0.2%)
4,000 Stanley Works Capital Trust I, Bonds(b,l) 5.90 12/01/2045 3,742
----------
HOUSEWARES & SPECIALTIES (0.1%)
2,000 Newell Rubbermaid, Inc., MTN, Series A(l) 6.35 7/15/2028 2,009
----------
INTEGRATED OIL & GAS (0.2%)
3,124 Merey Sweeny, LP, Senior Notes(b) 8.85 12/18/2019 3,596
----------
LIFE & HEALTH INSURANCE (0.6%)
2,000 Great West Life & Annuity, Inc., Bonds(b,l) 7.15 5/16/2046 2,002
1,000 Lincoln National Corp., Bonds(l) 7.00 5/17/2066 998
3,000 Phoenix Companies, Inc., Senior Notes 6.68 2/16/2008 3,011
4,000 Prudential Holdings, LLC, Bonds(b) 8.70 12/18/2023 4,775
----------
10,786
----------
MANAGED HEALTH CARE (0.2%)
1,000 Coventry Health Care, Inc., Senior Notes 6.13 1/15/2015 975
2,135 Highmark, Inc., Senior Notes(b) 6.80 8/15/2013 2,195
----------
3,170
----------
MULTI-LINE INSURANCE (1.0%)
4,000 American General Finance Corp., MTN 5.40 12/01/2015 3,823
1,000 ASIF Global Financing XIX, Senior Notes(b) 4.90 1/17/2013 955
4,000 Assurant, Inc., Notes 5.63 2/15/2014 3,867
42
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -----------------------------------------------------------------------------------------------------------------------------
$4,000 ILFC E-Capital Trust I, Bonds(b,g,l) 5.90% 12/21/2065 $ 3,912
4,500 Oil Casualty Insurance Ltd.,
Subordinated Debentures(b) 8.00 9/15/2034 4,270
----------
16,827
----------
MULTI-SECTOR HOLDINGS (0.1%)
1,000 Leucadia National Corp., Senior Notes 7.00 8/15/2013 990
----------
MULTI-UTILITIES (0.4%)
4,000 Northwestern Corp., Notes(b) 7.30 12/01/2006 4,044
2,000 PSEG Funding Trust, Notes 5.38 11/16/2007 1,991
----------
6,035
----------
OFFICE REITS (0.7%)
1,000 Arden Realty, LP, Notes 5.25 3/01/2015 959
3,000 Brandywine Operating Partnership, LP, Notes 5.63 12/15/2010 2,951
3,000 Carramerica Realty Corp., Notes 5.50 12/15/2010 2,980
2,000 EOP Operating, LP, Guaranteed Notes 4.75 3/15/2014 1,829
3,000 HRPT Properties Trust, Notes 5.75 11/01/2015 2,890
----------
11,609
----------
OIL & GAS EQUIPMENT & SERVICES (0.2%)
1,500 Seacor Holdings, Inc., Senior Notes 5.88 10/01/2012 1,448
2,000 Seacor Holdings, Inc., Senior Notes 7.20 9/15/2009 2,041
----------
3,489
----------
OIL & GAS EXPLORATION & PRODUCTION (0.3%)
2,000 Southwestern Energy Co., MTN 7.35 10/02/2017 2,090
2,000 Southwestern Energy Co., MTN 7.63 5/01/2027(m) 2,087
----------
4,177
----------
OIL & GAS REFINING & MARKETING (0.0%)(q)
500 Ultramar Diamond Shamrock Corp., Senior Notes 6.75 10/15/2037 510
----------
OIL & GAS STORAGE & TRANSPORTATION (0.1%)
2,000 K N Capital Trust III, Subordinated Debentures 7.63 4/15/2028 1,798
----------
OTHER DIVERSIFIED FINANCIAL SERVICES (0.4%)
2,600 Bank of America Corp., Subordinated Notes 9.38 9/15/2009 2,883
1,000 Citigroup, Inc., Global Notes 4.25 7/29/2009 965
3,000 ZFS Finance USA Trust I, Notes(b,g,l) 6.15 12/15/2065 2,886
----------
6,734
----------
43
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -----------------------------------------------------------------------------------------------------------------------------
PACKAGED FOODS & MEAT (0.1%)
$2,000 Kraft Foods, Inc., Notes 4.63% 11/01/2006 $ 1,994
---------
PROPERTY & CASUALTY INSURANCE (1.9%)
2,000 21st Century Insurance Group, Senior Notes 5.90 12/15/2013 1,928
2,000 ACE INA Holdings, Inc., Senior Notes 5.88 6/15/2014 1,952
1,000 AXIS Capital Holdings Ltd., Senior Notes 5.75 12/01/2014 955
2,000 Berkshire Hathaway Finance Corp., Senior Notes 4.75 5/15/2012 1,900
5,000 Berkshire Hathaway Finance Corp., Senior Notes 4.85 1/15/2015 4,674
1,000 Fidelity National Title Group, Inc., Notes 5.25 3/15/2013 914
2,000 Fidelity National Title Group, Inc., Notes 7.30 8/15/2011 2,043
3,000 Fund American Companies, Inc., Notes 5.88 5/15/2013 2,916
2,000 Markel Corp., Senior Notes 6.80 2/15/2013 2,024
1,500 Markel Corp., Senior Notes 7.00 5/15/2008 1,528
1,000 Markel Corp., Notes 7.20 8/15/2007 1,015
500 Markel Corp., Senior Notes 7.35 8/15/2034 488
2,250 Ohio Casualty Corp., Notes 7.30 6/15/2014 2,307
1,000 RLI Corp., Senior Notes 5.95 1/15/2014 954
3,000 St. Paul Travelers Companies, Inc., Senior Notes 5.50 12/01/2015 2,882
1,000 W.R. Berkley Corp., Senior Notes 5.60 5/15/2015 948
3,000 XL Capital Ltd., Senior Notes 6.38 11/15/2024 2,841
---------
32,269
---------
PUBLISHING (0.4%)
2,000 Gannett Co., Notes 5.75 6/01/2011 1,984
2,000 Knight-Ridder, Inc., Notes 5.75 9/01/2017 1,818
4,000 Scholastic Corp., Notes 5.00 4/15/2013 3,457
---------
7,259
---------
RAILROADS (0.2%)
3,000 TTX Co., Notes(b) 5.40 2/15/2016 2,853
---------
REGIONAL BANKS (1.1%)
2,000 Bank of Hawaii, Notes 6.88 3/01/2009 2,049
2,000 Colonial Bank, N.A., Subordinated Notes 6.38 12/01/2015 1,989
2,000 First Republic Bank Corp., Subordinated Notes 7.75 9/15/2012 2,210
3,000 Fulton Capital Trust I, Notes 6.29 2/01/2036 2,736
1,000 Hudson United Bank, Subordinated Notes 7.00 5/15/2012 1,056
44
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -----------------------------------------------------------------------------------------------------------------------------
$2,453 PNC Financial Services, Trust Preferred
Securities, Series C 8.88% 3/15/2027 $ 2,613
3,000 Popular North America Capital Trust I, Bonds 6.56 9/15/2034 2,827
3,000 TCF National Bank, Subordinated Notes 5.50 2/01/2016 2,876
----------
18,356
----------
RESIDENTIAL REITS (0.4%)
1,000 BRE Properties, Inc., Senior Notes 4.88 5/15/2010 968
2,000 ERP Operating, LP, Notes 5.25 9/15/2014 1,905
2,000 ERP Operating, LP, Senior Notes 5.38 8/01/2016 1,891
1,000 Post Apartment Homes, LP, Senior Notes 5.45 6/01/2012 955
2,000 United Dominion Realty Trust, Senior Notes 5.25 1/15/2015 1,867
----------
7,586
----------
RETAIL REITS (0.8%)
3,000 Federal Realty Investment Trust, Notes 5.65 6/01/2016 2,890
3,000 Kimco Realty Corp., Notes 5.58 11/23/2015 2,885
3,000 Pan Pacific Retail Properties, Inc., Notes 5.25 9/01/2015 2,776
3,000 Simon Property Group, LP, Notes(b) 5.75 12/01/2015 2,929
3,000 Tanger Factory Outlets, Senior Notes 6.15 11/15/2015 2,924
----------
14,404
----------
SPECIALIZED REITS (0.2%)
1,000 Hospitality Properties Trust, Senior Notes 5.13 2/15/2015 918
3,000 Nationwide Health Properties, Inc., Notes 6.00 5/20/2015 2,878
----------
3,796
----------
THRIFTS & MORTGAGE FINANCE (0.8%)
1,000 Countrywide Financial Corp., MTN, Series A, Bonds 4.50 6/15/2010 956
1,000 Countrywide Home Loan, Guaranteed Notes, Series MTNL 4.00 3/22/2011 927
2,000 Independence Community Bank Corp., Notes(l) 3.50 6/20/2013 1,913
3,000 Independence Community Bank Corp., Subordinated Notes(l) 3.75 4/01/2014 2,840
3,000 Roslyn Bancorp, Inc., Senior Notes 7.50 12/01/2008 3,114
2,000 Washington Mutual Bank, Subordinated Notes 5.65 8/15/2014 1,947
500 Washington Mutual, Inc., Subordinated Notes 4.63 4/01/2014 451
2,000 World Savings Bank Federal Savings Bank, Notes 4.13 12/15/2009 1,911
----------
14,059
----------
45
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -----------------------------------------------------------------------------------------------------------------------------
TOBACCO (0.3%)
$1,000 Universal Corp., MTN, Series C 5.20% 10/15/2013 $ 899
2,000 Universal Corp., MTN, Series B 7.88 2/15/2008 2,053
2,000 UST, Inc., Notes 6.63 7/15/2012 2,059
----------
5,011
----------
TRUCKING (0.2%)
2,750 Roadway Corp., Senior Notes 8.25 12/01/2008 2,864
----------
WIRELESS TELECOMMUNICATION SERVICES (0.3%)
2,000 Iwo Holdings Inc., Senior Discount
Notes, 10.75%, 1/15/2010 8.43(r) 1/15/2015 1,575
3,000 US Unwired, Inc., Secured Notes 10.00 6/15/2012 3,364
----------
4,939
----------
Total corporate obligations (cost: $302,816) 292,222
----------
EURODOLLAR AND YANKEE OBLIGATIONS (3.2%)(f)
DIVERSIFIED BANKS (0.7%)
3,000 BOI Capital Funding Number 3 LP, Guaranteed
Bonds (United Kingdom)(b,g,l) 6.11 1/29/2049 2,816
1,500 Chuo Mitsui Trust & Banking Co.,
Subordinated Notes (Japan)(b,l) 5.51 12/29/2049 1,407
1,000 HBOS plc, Subordinated Notes
(United Kingdom)(b) 6.41 10/01/2035 906
1,000 Mizuho Finance, Notes (Japan)(b) 5.79 4/15/2014 986
2,000 MUFG Capital Finance 1 Ltd., Guaranteed
Preferred Bonds (Japan)(l) 6.35 7/29/2049 1,973
1,000 Nordea Bank AB, Subordinated
Notes (Sweden)(b,l) 5.42 12/29/2049 940
1,000 Skandinaviska Enskilda Banken,
Subordinated Bonds (Sweden)(b,l) 5.47 3/29/2049 938
2,000 UFJ Finance Aruba AEC, Notes (Japan) 8.75 11/13/2049 2,122
----------
12,088
----------
DIVERSIFIED METALS & MINING (0.1%)
2,000 Glencore Funding, LLC, Notes (Switzerland)(b) 6.00 4/15/2014 1,878
----------
FOOD RETAIL (0.2%)
3,000 Woolworths Ltd., Senior Notes (Australia)(b) 5.25 11/15/2011 2,930
----------
46
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -----------------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT (0.1%)
$2,000 Republic of Poland, Global
Unsubordinated Notes (Poland) 5.25% 1/15/2014 $ 1,953
----------
INTEGRATED OIL & GAS (0.2%)
2,000 BP Capital plc, Guaranty Notes (United Kingdom) 2.75 12/29/2006 1,973
1,000 Pemex Finance Ltd., Senior Notes (Mexico) 8.88 11/15/2010 1,089
950 PEMEX Finance Ltd., Notes (Mexico) 9.03 2/15/2011 1,022
----------
4,084
----------
OIL & GAS DRILLING (0.1%)
1,721 Delek & Avner-Yam Tethys Ltd., Secured
Notes (Israel)(b) 5.33 8/01/2013 1,657
----------
OIL & GAS EXPLORATION & PRODUCTION (0.5%)
2,000 Canadian Oil Sands Ltd., Notes (Canada)(b) 5.80 8/15/2013 1,978
5,000 EOG Resources Canada, Inc.,
Senior Notes (Canada)(b) 4.75 3/15/2014 4,663
2,000 RAS Laffan Liquefied Natural Gas Co. Ltd. II,
Bonds, Series A (Qatar)(b) 5.30 9/30/2020 1,883
----------
8,524
----------
OIL & GAS REFINING & MARKETING (0.2%)
3,000 GS Caltex Corp., Notes (Korea)(b,g) 5.50 10/15/2015 2,849
----------
PAPER PRODUCTS (0.0%)(q)
1,000 Domtar, Inc., Notes (Canada) 5.38 12/01/2013 815
----------
PROPERTY & CASUALTY INSURANCE (0.1%)
1,145 Mantis Reef Ltd. II, Notes (Australia)(b) 4.80 11/03/2009 1,102
----------
REGIONAL BANKS (0.1%)
1,000 Kaupthing Bank, Bonds (Iceland)(b) 7.13 5/19/2016 1,004
----------
REINSURANCE (0.8%)
2,000 Endurance Specialty Holdings, Ltd., Senior Notes (Bermuda) 6.15 10/15/2015 1,929
5,000 Montpelier Re Holdings Ltd., Senior Notes (Bermuda) 6.13 8/15/2013 4,652
47
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -----------------------------------------------------------------------------------------------------------------------------
$5,000 Platinum Underwriters Finance, Inc.,
Guaranteed Notes, Series B (Bermuda) 7.50% 6/01/2017 $ 4,921
2,000 Stingray Pass-Through Trust, Pass-Through
Certificates (Cayman Islands)(b) 5.90 1/12/2015 1,923
----------
13,425
----------
RETAIL REITS (0.1%)
2,000 Westfield Capital Corp., Senior Notes (Australia)(b) 5.13 11/15/2014 1,880
----------
Total Eurodollar and Yankee obligations (cost: $56,345) 54,189
----------
ASSET-BACKED SECURITIES (0.9%)
AIRLINES (0.2%)
America West Airlines, Inc., Pass-Through Certificates,
939 Series 1996-1, Class A, EETC 6.85 7/02/2009 940
1,825 Series 1999-1, Class G, EETC (INS) 7.93 1/02/2019 1,927
----------
2,867
----------
ASSET-BACKED FINANCING (0.7%)
2,304 Aerco Ltd., Series 2A, Class A4(b) 5.60(c) 7/15/2025 2,213
1,423 Airport Airplanes, Pass-Through Certificates, Series 1R, Class A8 5.46(c) 3/15/2019 1,363
4,000 ARG Funding Corp., Series 2005-1A, Class A3(b) 4.29 4/20/2011 3,828
2,000 Chase Credit Card Owner Trust, Series 2002-5, Class A 5.18(c) 10/15/2009 2,003
1,000 Permanent Financing plc, Notes, Series 8, Class 1B 4.98(c) 6/10/2042 1,000
2,000 Trinity Rail Leasing L.P., Series 2006 1A, Class A1(b) 5.90 5/14/2036 2,003
----------
12,410
----------
Total asset-backed securities (cost: $15,286) 15,277
----------
COMMERCIAL MORTGAGE SECURITIES (2.7%)
COMMERCIAL MORTGAGE-BACKED SECURITIES (2.7%)
3,146 Banc of America Commercial Mortgage Inc., Series 2000-2, Class A1 7.02 9/15/2032 3,231
5,000 Chase Commercial Mortgage Securities Corp., Series 2000-3, Class A2 7.32 10/15/2032 5,279
48
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -----------------------------------------------------------------------------------------------------------------------------
$5,000 Series 2000-2, Class A2 7.63% 7/15/2032 $ 5,342
1,000 Commercial Mortgage Asset Trust, Series 1999-C1, Class A4 6.98 1/17/2032 1,067
2,000 Commercial Mortgage Trust, Pass-Through Certificates,
Series 2005- LP5, Class GMB1(b) 5.15 5/10/2043 1,954
Credit Suisse First Boston Mortgage Securities Corp.,
1,900 Series 2001-CK6, Class A2 6.10 8/15/2036 1,913
5,000 Series 2000-C1, Class A2 7.55 4/15/2062 5,295
5,000 First Union National Bank Commercial Mortgage Trust,
Series 1999-C4, Class A2 7.39 12/15/2031 5,253
1,000 GE Capital Commercial Mortgage Corp.,
Series 2001-3, Class A2 6.07 6/10/2038 1,020
3,000 Government Lease Trust,
Series 1999-GSA1, Class A4(b) 6.48 5/18/2011 3,073
1,000 GS Mortgage Securities Corp. II,
Series 2001-GL3A, Class A2(b) 6.45 8/05/2018 1,036
2,000 JP Morgan Chase Commercial Mortgage
Securities Corp., Series 2006-LDP6, Class A-SB 5.49(c) 4/15/2043 1,964
Merrill Lynch Mortgage Investors, Inc.,
2,000 Series 1998-C1, Class A2 6.48 11/15/2026 2,020
949 Series 1999-C1, Class A2 7.56 11/15/2031 990
2,000 Prudential Mortgage Capital Funding, LLC,
Series 2001-ROCK, Class B 6.76 5/10/2034 2,099
4,413 TIAA Real Estate Co. Ltd.,
Series 2001 C1A, Class A-3(b) 6.56 6/19/2026 4,474
----------
46,010
----------
INTEREST-ONLY COMMERCIAL MORTGAGE-BACKED SECURITIES (0.0%)(d,q)
9,250 Bear Stearns Commercial Mortgage Securities, Inc.,
Series 2004-ESA, Class X1 (acquired 6/17/2004; cost $538)(b,n) 1.83 5/14/2016 490
----------
Total commercial mortgage securities (cost: $46,932) 46,500
----------
U.S. GOVERNMENT AGENCY ISSUES (0.7%)(j)
ASSET-BACKED FINANCING (0.1%)
2,535 U.S. Small Business Administration, Participation Certificates,
Series 2003-20 F 4.07 6/01/2023 2,298
----------
49
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -----------------------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.0%)(q)
$ 341 Government National Mortgage Assn. I,
Series 2001-49 VB 7.00% 11/16/2016 $ 342
----------
INTEREST-ONLY COMMERCIAL MORTGAGE-BACKED SECURITIES (0.1%)(d)
43,751 Government National Mortgage Assn.I,
Series 2003-59, Class XB 2.28 7/16/2010 1,343
----------
MORTGAGE-BACKED PASS-THROUGH SECURITIES (0.2%)
Fannie Mae(+),
488 Pool 610989 6.50 10/01/2016 497
412 Pool 535164 7.00 2/01/2030 424
222 Pool 547483 7.00 8/01/2030 228
Government National Mortgage Assn. I,
212 Pool 340945 6.50 5/15/2023 216
333 Pool 352106 6.50 8/15/2023 340
154 Pool 366762 6.50 4/15/2024 157
612 Pool 577423 6.50 1/15/2032 624
33 Pool 206743 7.50 3/15/2017 34
107 Pool 207904 7.50 3/15/2017 111
15 Pool 207950 7.50 3/15/2017 16
11 Pool 166093 8.00 6/15/2016 12
4 Pool 166108 8.00 6/15/2016 5
20 Pool 177786 8.00 9/15/2016 21
24 Pool 186000 8.00 11/15/2016 25
29 Pool 193968 8.00 12/15/2016 31
35 Pool 203822 8.00 3/15/2017 37
2 Pool 034140 8.50 9/15/2009 2
8 Pool 138007 8.50 6/15/2016 9
7 Pool 164021 8.50 6/15/2016 7
24 Pool 159980 8.50 7/15/2016 25
4 Pool 176311 8.50 9/15/2016 4
2 Pool 177247 8.50 9/15/2016 2
13 Pool 174005 8.50 12/15/2016 14
22 Pool 197279 8.50 12/15/2016 24
3 Pool 197400 8.50 1/15/2017 3
19 Pool 201986 8.50 1/15/2017 21
14 Pool 185270 8.50 2/15/2017 15
3 Pool 157116 9.00 6/15/2016 3
1 Pool 162801 9.00 7/15/2016 1
50
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -----------------------------------------------------------------------------------------------------------------------------
Government National Mortgage Assn. I,
$ 3 Pool 166282 9.00% 7/15/2016 $ 3
2 Pool 164502 9.00 8/15/2016 2
4 Pool 172663 9.00 9/15/2016 5
3 Pool 170810 9.00 10/15/2016 3
12 Pool 031433 9.50 6/15/2009 12
1 Pool 032271 9.50 6/15/2009 1
18 Pool 034679 9.50 6/15/2009 19
5 Pool 035052 9.50 9/15/2009 5
7 Pool 167971 9.50 7/15/2016 8
18 Pool 172771 9.50 9/15/2016 19
3 Pool 185417 9.50 11/15/2016 3
18 Pool 186335 9.50 11/15/2016 20
4 Pool 187909 9.50 11/15/2016 4
51 Pool 189802 9.50 4/15/2017 56
23 Pool 214646 9.50 5/15/2017 25
9 Pool 225137 9.50 8/15/2017 10
10 Pool 037733 10.00 11/15/2009 10
3 Pool 037889 10.00 11/15/2009 3
13 Pool 037888 10.00 11/15/2009 14
11 Pool 036897 10.00 12/15/2009 12
4 Pool 059731 11.50 3/15/2013 4
Government National Mortgage Assn. II,
464 Pool 002934 7.50 6/20/2030 482
109 Pool 003070 7.50 4/20/2031 114
404 Pool 002958 8.00 8/20/2030 429
----------
4,171
----------
OTHER U.S. GOVERNMENT GUARANTEED SECURITIES (0.3%)
1,733 Perforadora Centrale S.A. de C.V. "A", Guaranteed Bond,
Series A, Title XI 5.24 12/15/2018 1,706
3,571 Rowan Companies, Inc., Guaranteed Bond, Title XI 2.80 10/20/2013 3,237
----------
4,943
----------
Total U.S. government agency issues (cost: $13,546) 13,097
----------
U.S. TREASURY SECURITIES (0.2%)
BONDS (0.2%)
4,000 4.50%, 2/15/2036(g)(cost: $3,542) 3,575
----------
51
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -----------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS (0.4%)
CASINOS & GAMING (0.1%)
$2,000 Mashantucket (Western) Pequot Tribe, CT, RB(b) 5.91% 9/01/2021 $ 1,864
----------
COMMUNITY SERVICE (0.1%)
650 Jicarilla Apache Nation, NM, RB 2.95 12/01/2006 642
----------
HOSPITAL (0.1%)
1,965 Rhode Island State Health & Education RB,
Series C (LOC - Citizens Bank of Rhode Island) 3.60 9/15/2033(m) 1,911
----------
MULTI-UTILITIES (0.1%)
2,074 California Maritime Infrastructure Auth. RB, Series 1999 6.63 11/01/2009 2,093
----------
Total municipal bonds (cost: $6,751) 6,510
----------
Total bonds (cost: $445,218) 431,370
----------
MONEY MARKET INSTRUMENTS (1.4%)
VARIABLE-RATE DEMAND NOTES (0.3%)(o)
------------------------------------
HEALTH CARE FACILITIES (0.2%)
3,940 Louisiana Public Facilities Auth., RB,
Series 2002D (LOC - Hibernia National Bank) 5.75 7/01/2028 3,940
----------
ELECTRIC UTILITIES (0.1%)
2,000 Sempra Energy ESOP, Series 1999A (NBGA)(b) 5.71 11/01/2014 2,000
----------
5,940
----------
COMMERCIAL PAPER (0.2%)
-----------------------
ASSET-BACKED FINANCING
2,699 Lockhart Funding LLC(a,b) 5.02 6/02/2006 2,699
----------
DISCOUNT NOTE (0.2%)
--------------------
3,331 Federal Home Loan Bank(j,+,k) 4.89 6/01/2006 3,331
----------
52
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER COUPON VALUE
OF SHARES SECURITY RATE MATURITY (000)
- -----------------------------------------------------------------------------------------------------------------------------
MONEY MARKET FUNDS (0.7%)
-------------------------
12,512,340 SSgA Prime Money Market Fund 4.84%(h) - $ 12,512
----------
Total money market instruments (cost: $24,482) 24,482
----------
PRINCIPAL
AMOUNT
(000)
- ----------
SHORT-TERM INVESTMENTS PURCHASED WITH
CASH COLLATERAL FROM SECURITIES LOANED (11.0%)
CORPORATE OBLIGATIONS (3.4%)
----------------------------
OTHER DIVERSIFIED FINANCIAL SERVICES
$ 20,000 Canadian Imperial Bank of Commerce, Yankee CD (Canada) 5.23 1/30/2007 20,018
15,000 Five Finance Inc.(b) 5.12(c) 12/01/2006 15,004
22,481 Tango Finance Corp., MTN(b) 5.13(c) 10/25/2006 22,490
----------
57,512
----------
COMMERCIAL PAPER (2.7%)
-----------------------
ASSET-BACKED FINANCING
11,053 Mont Blanc Capital Corp.(a,b,k) 5.10 6/07/2006 11,044
25,000 Park Granada LLC(a,b,k) 5.15 6/01/2006 25,000
11,000 Park Sienna LLC(a,k) 5.15 6/01/2006 11,000
----------
47,044
----------
MONEY MARKET FUNDS (0.0%)(q)
----------------------------
702,905 AIM Short-Term Investment Co. Liquid Assets Portfolio 4.92(h) - 703
49,777 Merrill Lynch Premier Institutional Fund 4.81(h) - 50
----------
753
----------
REPURCHASE AGREEMENTS (4.9%)(i)
-------------------------------
13,000 Credit Suisse First Boston LLC, 5.00%, acquired on 5/31/2006 and
due 6/01/2006 at $13,000 (collateralized by $13,915 of Freddie
Mac Discount Notes(j,+), 5.25%(k), due 4/18/2007; market
value $13,264) 13,000
53
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT VALUE
(000) SECURITY (000)
- -----------------------------------------------------------------------------------------------------------------------------
$ 21,000 Deutsche Bank Securities, Inc., 5.02%, acquired on 5/31/2006 and
due 6/01/2006 at $21,000 (collateralized by $8,112 of Federal
Home Loan Discount Notes(j,+), 5.03%(k), due 7/21/2006; $13,470
of Federal Home Loan Bank Bonds(j,+), 3.10%, due 11/08/2006;
combined market value $21,425) $ 21,000
20,000 Merrill Lynch Government Securities, Inc., 5.01%, acquired on
5/31/2006 and due 6/01/2006 at $20,000 (collateralized by
$20,425 of U.S. Treasury Notes, 4.88%, due 4/30/2011;
market value $20,401) 20,000
30,000 Morgan Stanley & Co., Inc., 5.02%, acquired on 5/31/2006 and due
6/01/2006 at $30,000 (collateralized by $31,490 of Federal Home
Loan Bank Bonds(j,+), 5.70% - 6.25%, due 6/15/2021 - 7/03/2025;
combined market value $31,061) 30,000
----------
84,000
----------
Total short-term investments purchased with cash collateral from
securities loaned (cost: $189,301) 189,309
----------
TOTAL INVESTMENTS (COST: $1,760,460) $1,887,381
==========
54
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
GENERAL NOTES
- --------------------------------------------------------------------------------
Market values of securities are determined by procedures and practices
discussed in Note 1 to the financial statements.
The portfolio of investments category percentages shown represent the
percentages of the investments to net assets and, in total, may not
equal 100%.
ADR - American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S.
dollars.
GDR - Global depositary receipts are receipts issued by a U.S. or
foreign bank evidencing ownership of foreign shares. Dividends are
paid in U.S. dollars.
ISHARES - exchange-traded funds, managed by Barclays Global Fund
Advisors, that represent a portfolio of stocks designed to closely
track a specific market index. iShares funds are traded on securities
exchanges.
SPDR - Standard & Poor's depositary receipt, or "spider," is an
exchange-traded fund based on either the S&P 500 Index or the S&P
MidCap 400 Index, and is traded on the American Stock Exchange (AMEX).
PORTFOLIO DESCRIPTION ABBREVIATIONS
CPI Consumer Price Index
EETC Enhanced Equipment Trust Certificate
ESOP Employee Stock Ownership Plan
MTN Medium-Term Note
RB Revenue Bond
REIT Real Estate Investment Trust
55
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
CREDIT ENHANCEMENTS - add the financial strength of the provider of
the enhancement to support the issuer's ability to repay the principal
and interest payments when due. A high-quality bank, insurance company
or other corporation, or a collateral trust may provide the
enhancement.
(LOC) Principal and interest payments are guaranteed by a bank
letter of credit.
(NBGA) Principal and interest payments are guaranteed by a non-bank
guarantee agreement from Sempra Energy.
(INS) Scheduled principal and interest payments are insured by
AMBAC Assurance Corp. The insurance does not guarantee
the market value of the security.
SPECIFIC NOTES
- --------------------------------------------------------------------------------
(a) Commercial paper issued in reliance on the "private placement"
exemption from registration afforded by Section 4(2) of the
Securities Act of 1933. Unless this commercial paper is
subsequently registered, a resale of this commercial paper in the
United States must be effected in a transaction exempt from
registration under the Securities Act of 1933. Section 4(2)
commercial paper is normally resold to other investors through or
with the assistance of the issuer or an investment dealer who
makes a market in this security, and as such has been deemed
liquid by USAA Investment Management Company (the Manager) under
liquidity guidelines approved by the Board of Trustees, unless
otherwise noted as illiquid.
(b) Restricted security that is not registered under the Securities
Act of 1933. A resale of this security in the United States may
occur in an exempt transaction to a qualified institutional buyer
as defined by Rule 144A, and as such has been deemed liquid by the
Manager under liquidity guidelines approved by the Board of
Trustees, unless otherwise noted as illiquid.
56
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
(c) Variable-rate or floating-rate security - interest rate is
adjusted periodically. The interest rate disclosed represents the
current rate at May 31, 2006.
(d) Interest-only commercial mortgage-backed securities (IO CMBSs) -
represent the right to receive only the interest payments on an
underlying pool of commercial mortgage loans. The interest rate
disclosed is the purchase yield, which reflects an anticipated
yield based upon interest rates at the time of purchase and the
estimated timing and amount of future cash flows. The principal
amount represents the notional amount of the underlying pool on
which current interest is calculated. IO CMBSs are backed by loans
that have various forms of prepayment protection, which include
lock-out provisions, yield maintenance provisions, and prepayment
penalties. This serves to moderate their prepayment risk. IO CMBSs
are subject to recessionary default-related prepayments that may
have a negative impact on yield.
(e) Security has a mandatory call or put, which shortens its effective
maturity date.
(f) Eurodollar and Yankee obligations are dollar-denominated
instruments that are issued outside the U.S. capital markets by
foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions
(Eurodollar obligations) as well as dollar-denominated instruments
that are issued by foreign issuers in the U.S. capital markets
(Yankee obligations).
(g) The security or a portion thereof was out on loan as of May 31,
2006.
(h) Rate represents the money market fund annualized seven-day yield
at May 31, 2006.
(i) Collateral on repurchase agreements is received by the Fund upon
entering into the repurchase agreement. The collateral is
57
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
marked-to-market daily to ensure its market value is equal to or
in excess of the repurchase agreement price plus accrued interest.
(j) U.S. government agency issues - mortgage-backed securities issued
by Government National Mortgage Association (GNMA) and certain
other U.S. government agencies are supported by the full faith and
credit of the U.S. government. Securities issued by government-
sponsored enterprises (GSEs) indicated with "+" are supported only
by the credit of the issuing agency, instrumentality, or
corporation, and are neither issued nor guaranteed by the U.S.
government.
(k) Zero-coupon security. Rate represents the effective yield at date
of purchase.
(l) Callable security expected to be called prior to maturity due to a
scheduled change from a fixed to a floating interest rate, which
is likely to be uneconomical to the issuer.
(m) Put bond - provides the right to sell the bond at face value at
specific tender dates prior to final maturity. The put feature may
shorten the effective maturity of the security.
(n) Security deemed illiquid by the Manager, under liquidity
guidelines approved by the Board of Trustees. The aggregate market
value of these securities at May 31, 2006, was $511,000, which
represented 0.03% of the Fund's net assets.
(o) Variable-rate demand notes (VRDNs) - provide the right to sell the
security at face value on either that day or within the rate-reset
period. The interest rate is adjusted at a stipulated daily,
weekly, monthly, quarterly, or other specified time interval to a
rate that reflects current market conditions. VRDNs will normally
trade as if the maturity is the earlier put date, even though
stated maturity is longer.
58
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
(p) Security was fair valued at May 31, 2006, by the Manager in
accordance with valuation procedures approved by the Board of
Trustees.
(q) Represents less than 0.1% of net assets.
(r) Stepped coupon security that is initially issued in zero-coupon
form and converts to coupon form at the specified date and rate
shown in the security's description. The rate presented in the
coupon rate column represents the effective yield at the date of
purchase.
* Non-income-producing security for the year ended May 31, 2006.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
59
S T A T E M E N T
==================--------------------------------------------------------------
of ASSETS and LIABILITIES
(in thousands)
USAA CORNERSTONE STRATEGY FUND
May 31, 2006
ASSETS
Investments in securities, at market value (including securities
on loan of $182,039) (identified cost of $1,760,460) $1,887,381
Cash denominated in foreign currencies (identified cost of $1,188) 1,199
Receivables:
Capital shares sold 675
Dividends and interest 9,459
Securities sold 10,553
Other 232
----------
Total assets 1,909,499
----------
LIABILITIES
Payables:
Upon return of securities loaned 189,324
Securities purchased 4,982
Capital shares redeemed 545
Accrued management fees 1,162
Accrued transfer agent's fees 13
Bank overdraft 1,306
Other accrued expenses and payables 34
Unrealized depreciation on foreign currency contracts held, at value 10
----------
Total liabilities 197,376
----------
Net assets applicable to capital shares outstanding $1,712,123
==========
NET ASSETS CONSIST OF:
Paid-in capital $1,478,122
Accumulated undistributed net investment income 21,206
Accumulated net realized gain on investments 85,838
Net unrealized appreciation of investments 126,921
Net unrealized appreciaton on foreign currency translations 36
----------
Net assets applicable to capital shares outstanding $1,712,123
==========
Capital shares outstanding, unlimited number of shares
authorized, no par value 64,602
==========
Net asset value, redemption price, and offering price per share $ 26.50
==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
60
S T A T E M E N T
==================--------------------------------------------------------------
of OPERATIONS
(in thousands)
USAA CORNERSTONE STRATEGY FUND
YEAR ENDED MAY 31, 2006
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $1,541) $ 22,603
Interest 28,657
Securities lending (net) 955
--------
Total income 52,215
--------
EXPENSES
Management fees 11,903
Administration and servicing fees 2,463
Transfer agent's fees 3,402
Custody and accounting fees 718
Postage 432
Shareholder reporting fees 153
Trustees' fees 10
Registration fees 61
Professional fees 91
Other 40
--------
Total expenses 19,273
Expenses paid indirectly (148)
--------
Net expenses 19,125
--------
NET INVESTMENT INCOME 33,090
--------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments:
Unaffiliated transactions 181,561
Affiliated transactions (91)
Foreign currency transactions (181)
Change in net unrealized appreciation/depreciation of:
Investments (80,363)
Foreign currency translations 78
--------
Net realized and unrealized gain 101,004
--------
Increase in net assets resulting from operations $134,094
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
61
S T A T E M E N T S
====================------------------------------------------------------------
of Changes in NET ASSETS
(in thousands)
USAA CORNERSTONE STRATEGY FUND
YEARS ENDED MAY 31,
2006 2005
---------------------------
FROM OPERATIONS
Net investment income $ 33,090 $ 16,556
Net realized gain on investments 181,470 70,129
Net realized loss on foreign currency transactions (181) (248)
Change in net unrealized appreciation/depreciation of:
Investments (80,363) 41,840
Foreign currency translations 78 (70)
---------------------------
Increase in net assets resulting from operations 134,094 128,207
---------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (14,156) (24,372)
Net realized gains (119,993) (66,035)
---------------------------
Distributions to shareholders (134,149) (90,407)
---------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 237,362 213,808
Shares issued for dividends reinvested 131,463 88,378
Cost of shares redeemed (200,027) (146,650)
---------------------------
Increase in net assets from capital
share transactions 168,798 155,536
---------------------------
Net increase in net assets 168,743 193,336
NET ASSETS
Beginning of period 1,543,380 1,350,044
---------------------------
End of period $1,712,123 $1,543,380
===========================
Accumulated undistributed (overdistributed) net
investment income:
End of period $ 21,206 $ (157)
===========================
CHANGE IN SHARES OUTSTANDING
Shares sold 8,801 8,114
Shares issued for dividends reinvested 5,036 3,311
Shares redeemed (7,413) (5,575)
---------------------------
Increase in shares outstanding 6,424 5,850
===========================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
62
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
USAA INVESTMENT TRUST (the Trust), registered under the Investment
Company Act of 1940 (the 1940 Act), as amended, is an open-end
management investment company organized as a Massachusetts business
trust consisting of 10 separate funds. The information presented in
this annual report pertains only to the USAA Cornerstone Strategy Fund
(the Fund), which is classified as diversified under the 1940 Act. The
Fund's investment objective is to achieve a positive, inflation-
adjusted rate of return and a reasonably stable value of Fund shares,
thereby preserving the purchasing power of shareholders' capital.
A. SECURITY VALUATION - The value of each security is determined (as
of the close of trading on the New York Stock Exchange (NYSE) on
each business day the exchange is open) as set forth below:
1. Equity securities, including exchange-traded funds (ETFs),
except as otherwise noted, traded primarily on a domestic
securities exchange or the Nasdaq over-the-counter markets are
valued at the last sales price or official closing price on
the exchange or primary market on which they trade. Equity
securities traded primarily on foreign securities exchanges or
markets are valued at the last quoted sales price, or the most
recently determined official closing price calculated
according to local market convention, available at the time
the Fund is valued. If no last sale or official closing price
is reported or available, the average of the bid and asked
prices is generally used.
2. Equity securities trading in various foreign markets may take
place on days when the NYSE is closed. Further, when the NYSE
is open, the foreign markets may be closed. Therefore, the
calculation of the Fund's net asset value (NAV) may not take
place at the same time the prices of certain foreign
securities held by the Fund are determined. In most cases,
63
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
events affecting the values of foreign securities that occur
between the time of their last quoted sales or official
closing prices and the close of normal trading on the NYSE on
a day the Fund's NAV is calculated will not be reflected in
the value of the Fund's foreign securities. However, USAA
Investment Management Company (the Manager), an affiliate of
the Fund, and the Fund's subadvisers, if applicable, will
monitor for events that would materially affect the value of
the Fund's foreign securities and, if necessary, the Manager
will value the foreign securities in good faith, considering
such available information that the Manager deems relevant,
under valuation procedures approved by the Trust's Board of
Trustees. In addition, the Fund may use information from an
external vendor or other sources to adjust the foreign market
closing prices of foreign equity securities to reflect what
the Fund believes to be the fair value of the securities as of
the close of the NYSE. Fair valuation of affected foreign
equity securities may occur frequently based on an assessment
that events that occur on a fairly regular basis (such as U.S.
market movements) are significant.
3. Investments in open-end investment companies, other than ETFs,
are valued at their NAV at the end of each business day.
4. Debt securities purchased with original maturities of 60 days
or less are valued at amortized cost, which approximates
market value.
5. Repurchase agreements are valued at cost, which approximates
market value.
6. Other debt securities are valued each business day by a
pricing service (the Service) approved by the Trust's Board of
Trustees. The Service uses the mean between quoted bid and
asked prices or the last sales price to price securities when,
in the Service's judgment, these prices are readily available
and are representative of the securities' market values. For
many
64
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
securities, such prices are not readily available. The Service
generally prices these securities based on methods that
include consideration of yields or prices of securities of
comparable quality, coupon, maturity, and type; indications as
to values from dealers in securities; and general market
conditions.
7. Securities for which market quotations are not readily
available or are considered unreliable, or whose values have
been materially affected by events occurring after the close
of their primary markets but before the pricing of the Fund,
are valued in good faith at fair value, using methods
determined by the Manager in consultation with the Fund's
subadvisers, if applicable, under valuation procedures
approved by the Trust's Board of Trustees. The effect of fair
value pricing is that securities may not be priced on the
basis of quotations from the primary market in which they are
traded and the actual price realized from the sale of a
security may differ materially from the fair value price.
Valuing these securities at fair value is intended to cause
the Fund's NAV to be more reliable than it otherwise would be.
Fair value methods used by the Manager include, but are not
limited to, obtaining market quotations from secondary pricing
services, broker-dealers, or widely used quotation systems.
General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and
duration of any restrictions on disposition of the securities,
and an evaluation of the forces that influenced the market in
which the securities are purchased and sold.
B. FEDERAL TAXES - The Fund's policy is to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
income to its shareholders. Therefore, no federal income tax
provision is required.
65
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
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. Dividend income, less
foreign taxes, if any, is recorded on the ex-dividend date. If
the ex-dividend date has passed, certain dividends from foreign
securities are recorded upon notification. Interest income is
recorded on the accrual basis. Discounts and premiums are
amortized over the life of the respective securities, using the
effective yield method for long-term securities and the
straight-line method for short-term securities.
D. REPURCHASE AGREEMENTS - The Fund may enter into repurchase
agreements with commercial banks or recognized security dealers.
These agreements are collateralized by obligations issued or
guaranteed as to both principal and interest by the U.S.
government, its agencies, or its instrumentalities. Government-
sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac,
are supported only by the credit of the issuing U.S. government
agency, and are neither issued nor guaranteed by the U.S.
government. Obligations pledged as collateral are required to
maintain a value equal to or in excess of the repurchase
agreement price plus accrued interest and are held by the Fund,
either through its regular custodian or through a special
"tri-party" custodian that maintains separate accounts for both
the Fund and its counterparty, until maturity of the repurchase
agreement. The Fund's Manager monitors the creditworthiness of
sellers with which the Fund may enter into repurchase agreements.
E. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested
in the securities of foreign issuers and may be traded in foreign
currency. Since the Fund's accounting records are maintained in
U.S. dollars, foreign currency amounts are translated into U.S.
dollars on the following basis:
66
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
1. Purchases and sales of securities, income, and expenses at the
exchange rate obtained from an independent pricing service on
the respective dates of such transactions.
2. Market value of securities, other assets, and liabilities at
the exchange rate obtained from an independent pricing service
on a daily basis.
The Fund does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market
prices of securities held. Such fluctuations are included with
the net realized and unrealized gain or loss from investments.
Separately, net realized foreign currency gains/losses may arise
from sales of foreign currency, currency gains/losses realized
between the trade and settlement dates on security transactions,
and from the difference between amounts of dividends, interest,
and foreign withholding taxes recorded on the Fund's books and
the U.S. dollar equivalent of the amounts received. At the end of
the Fund's fiscal year, net realized foreign currency
gains/losses are reclassified from accumulated net realized
gain/loss to accumulated undistributed net investment income on
the statements of assets and liabilities as such amounts are
treated as ordinary income/loss for tax purposes. Net unrealized
foreign currency exchange gains/losses arise from changes in the
value of assets and liabilities, other than investments in
securities, resulting from changes in the exchange rate.
F. 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
67
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to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
assets with a market value equal to or greater than the amount of
its purchase commitments. The purchase of securities on a
delayed-delivery or when-issued basis may increase the volatility
of the Fund's NAV to the extent that the Fund makes such
purchases while remaining substantially fully invested. As of May
31, 2006, there were no outstanding delayed-delivery commitments
or when-issued securities.
G. EXPENSES PAID INDIRECTLY - A portion of the brokerage commissions
that the Fund pays may be recaptured as a credit that is tracked
and used by the custodian to directly reduce expenses paid by the
Fund. In addition, through arrangements with the Fund's custodian
and other banks utilized by the Fund for cash management
purposes, realized credits, if any, generated from cash balances
in the Fund's bank accounts are used to reduce the Fund's
expenses. For the year ended May 31, 2006, brokerage commission
recapture credits and custodian and other bank credits reduced
the Fund's expenses by $121,000 and $27,000, respectively,
resulting in a total reduction in Fund expenses of $148,000.
H. INDEMNIFICATIONS - Under the Trust's organizational documents,
its officers and trustees are indemnified against certain
liabilities arising out of the performance of their duties to the
Trust. In addition, in the normal course of business the Trust
enters into contracts that contain a variety of representations
and warranties that provide general indemnifications. The Trust's
maximum exposure under these arrangements is unknown, as this
would involve future claims that may be made against the Trust
that have not yet occurred. However, the Trust expects the risk
of loss to be remote.
I. USE OF ESTIMATES - The preparation of financial statements in
conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that may
affect the reported amounts in the financial statements.
68
N O T E S
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to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
(2) LINE OF CREDIT
- --------------------------------------------------------------------------------
The Fund participates in a joint, short-term, revolving, committed
loan agreement of $300 million with USAA Capital Corporation (CAPCO),
an affiliate of the Manager. The purpose of the agreement is to meet
temporary or emergency cash needs, including redemption requests that
might otherwise require the untimely disposition of securities.
Subject to availability, the Fund may borrow from CAPCO an amount up
to 5% of the Fund's total assets at a rate per annum equal to the rate
at which CAPCO obtains funding in the capital markets, with no markup.
The USAA funds that are party to the loan agreement are assessed
facility fees by CAPCO based on the funds' assessed proportionate
share of CAPCO's operating expenses related to obtaining and
maintaining CAPCO's funding programs in total (in no event to exceed
0.07% annually of the $300 million loan agreement). The facility fees
are allocated among the funds based on their respective average net
assets for the period. Prior to January 6, 2006, the facility fees
assessed by CAPCO were limited to an amount not to exceed 0.09%
annually of the $300 million loan agreement.
For the year ended May 31, 2006, the Fund paid CAPCO facility fees of
$3,000, which represents 5.0% 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.
69
N O T E S
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to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
During the current fiscal year, permanent differences between
book-basis and tax-basis accounting resulted in reclassifications to
the statement of assets and liabilities to increase paid-in capital by
$7,596,000, increase accumulated undistributed net investment income
by $2,429,000, and decrease accumulated net realized gain on
investments by $10,025,000. This includes differences in the
accounting for foreign currency gains and losses, security paydowns,
and passive foreign investment corporation gains and losses, and the
utilization of earnings and profits distributed to shareholders on
redemption of shares as part of the dividends-paid deduction for
federal income tax purposes. This reclassification has no effect on
net assets.
The tax character of distributions paid during the years ended May 31,
2006, and 2005, was as follows:
2006 2005
---------------------------
Ordinary income* $ 16,721,000 $38,916,000
Long-term realized capital gains 117,428,000 51,491,000
*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 $ 34,552,000
Undistributed long-term capital gains 75,982,000
Unrealized appreciation of investments 123,421,000
Unrealized appreciation on foreign currency translations 46,000
The difference between book-basis and tax-basis unrealized
appreciation of investments is attributable to the tax deferral of
losses on wash sales. The difference between book-basis and tax-basis
appreciation on foreign currency translations is due to the tax
deferral of gains on foreign currency contracts.
Distributions of net investment income and realized gains from
security transactions not offset by capital losses are made annually
in the
70
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to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
succeeding fiscal year or as otherwise required to avoid the payment
of federal taxes.
(4) INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
Cost of purchases and proceeds from sales/maturities of securities,
excluding short-term securities, for the year ended May 31, 2006, were
$2,445,413,000 and $2,382,783,000, respectively.
As of May 31, 2006, the cost of securities, including short-term
securities, for federal income tax purposes, was $1,763,960,000.
Gross unrealized appreciation and depreciation of investments as of
May 31, 2006, for federal income tax purposes, were $166,024,000 and
$42,603,000, respectively, resulting in net unrealized appreciation of
$123,421,000.
(5) FORWARD FOREIGN CURRENCY CONTRACTS
- --------------------------------------------------------------------------------
The Fund may enter into forward currency contracts to hedge against
foreign currency exchange risks on the non-U.S. dollar denominated
securities held in the Fund's portfolio. A forward currency contract
is an agreement to purchase or sell a specified currency at a
specified future date or over a specified time period at a price set
at the trade date of the contract. Forward currency contracts are
valued on a daily basis using foreign currency exchange rates obtained
from an independent pricing service. Risks of entering into currency
contracts include the potential inability of the counterparty to meet
the terms of the contract and the Fund's giving up the opportunity for
potential profit.
At May 31, 2006, the Fund had no open forward foreign currency
contracts.
71
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to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
(6) LENDING OF PORTFOLIO SECURITIES
- --------------------------------------------------------------------------------
The Fund, through its third-party securities-lending agent,
Metropolitan West Securities LLC (MetWest), may lend its securities to
qualified financial institutions, such as certain broker-dealers, to
earn additional income. The borrowers are required to secure their
loans continuously with cash collateral in an amount at least equal to
the fair value of the securities loaned, initially in an amount at
least equal to 102% of the fair value of domestic securities loaned
and 105% of the fair value of international securities loaned. Cash
collateral is invested in high-quality short-term investments. The
Fund and MetWest retain 80% and 20%, respectively, of the income
earned from the investment of cash received as collateral, net of any
expenses associated with the lending transactions. MetWest receives no
other fees from the Fund for its services as securities-lending agent.
Risks to the Fund in securities-lending transactions are that the
borrower may not provide additional collateral when required or return
the securities when due, and that the value of the short-term
investments will be less than the amount of cash collateral required
to be returned to the borrower. Wachovia Corp., parent company of
MetWest, has agreed to indemnify the Fund against any losses due to
counterparty default in securities-lending transactions. For the year
ended May 31, 2006, the Fund received securities-lending income of
$955,000, which is net of the 20% income retained by MetWest. As of
May 31, 2006, the Fund loaned securities having a fair market value of
approximately $182,039,000, which excluded $751,000 of securities on
loan that were sold prior to May 31, 2006. The Fund received cash
collateral of $189,324,000 for the loans. Of this amount, $189,301,000
was invested in short-term investments, as noted in the Fund's
portfolio of investments, and $23,000 remained in cash.
72
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to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
(7) TRANSACTIONS WITH MANAGER
- --------------------------------------------------------------------------------
A. MANAGEMENT FEES - The Manager provides investment management
services to the Fund pursuant to an Investment Advisory Agreement.
Under this agreement, the Manager is responsible for managing the
business and affairs of the Fund and for directly managing the
day-to-day investment of a portion of the Fund's assets, subject to
the authority of and supervision by the Trust's Board of Trustees.
The Manager is also authorized to select (with approval of the
Trust's Board of Trustees) one or more subadvisers to manage the
day-to-day investment of a portion of the Fund's assets. The Manager
monitors each subadviser's performance through quantitative and
qualitative analysis, and periodically recommends to the Trust's
Board of Trustees as to whether each subadviser's agreement should
be renewed, terminated, or modified. The Manager also is responsible
for allocating assets to the subadvisers. The allocation for each
subadviser can range from 0% to 100% of the Fund's assets, and the
Manager can change the allocations without shareholder approval.
The investment management fee for the Fund is composed of a base fee
and a performance adjustment that increases or decreases the base
fee depending upon the performance of the Fund relative to the
performance of the Lipper Global Flexible Funds Index, which tracks
the total return performance of the 10 largest funds in the Lipper
Global Flexible Portfolio Funds category. The Fund's base fee is
accrued daily and paid monthly at an annualized rate of 0.75% of the
Fund's average net assets for the fiscal year.
The performance adjustment is calculated monthly by comparing the
Fund's performance to that of the Lipper index over the performance
period. The performance period for the Fund consists of the current
month plus the previous 35 months.
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to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
The annual performance adjustment rate is multiplied by the average
net assets of the Fund over the entire performance period, which is
then multiplied by a fraction, the numerator of which is the number
of days in the month and the denominator of which is 365 (366 in
leap years). The resulting amount is then added to (in the case of
overperformance) or subtracted from (in the case of
underperformance) the base fee, as referenced in the following chart:
OVER/UNDER PERFORMANCE ANNUAL ADJUSTMENT RATE
RELATIVE TO INDEX(1) AS A % OF THE FUND'S AVERAGE NET ASSETS
- -------------------------------------------------------------------------
+/- 1.00% to 4.00% +/- 0.04%
+/- 4.01% to 7.00% +/- 0.05%
+/- 7.01% and greater +/- 0.06%
(1)Based on the difference between average annual performance of the Fund and
its relevant index, rounded to the nearest 0.01%.
Under the performance fee arrangement, the Fund will pay a positive
performance fee adjustment for a performance period whenever the
Fund outperforms the Lipper Global Flexible Funds Index over that
period, even if the Fund had overall negative returns during the
performance period.
For the year ended May 31, 2006, the Fund incurred total management
fees, paid or payable to the Manager, of $11,903,000, which is net
of a performance adjustment of $(412,000) that decreased the base
management fee of 0.75% by 0.03%.
B. SUBADVISORY ARRANGEMENTS - The Manager has entered into investment
subadvisory agreements with Wellington Management Company, LLP
(Wellington Management), MFS Investment Management (MFSIM), and
effective December 1, 2005, with Batterymarch Financial Management,
Inc. (Batterymarch), under which Wellington Management directs the
investment and reinvestment of a portion of the Fund's assets
74
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to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
invested in U.S. stocks (as allocated from time to time by the
Manager), MFSIM directs the investment and reinvestment of a portion
of the Fund's assets invested in international stocks (as allocated
from time to time by the Manager), and Batterymarch directs the
investment and reinvestment of a portion of the Fund's assets
invested in U.S. and international stocks (as allocated from time to
time by the Manager). Prior to March 1, 2006, Wellington Management
also directed the investment and reinvestment of the portion of the
Fund's assets invested in real estate securities.
Effective March 1, 2006, the Manager (not the Fund) pays Wellington
Management a subadvisory fee in the annual amount of 0.20% of the
portion of the Fund's average net assets that Wellington Management
manages. Wellington Management has agreed to waive all fees in excess
of 0.18% of the portion of the Fund's average net assets that
Wellington Management manages through June 30, 2006. Wellington
Management may terminate this waiver if the Manager allocates less
than 100% of certain USAA funds' assets investable in U.S. stocks to
Wellington Management. The Manager has allocated less than 100% of
these funds' assets investable in U.S. stocks to Wellington
Management, so Wellington Management may terminate this waiver at
any time. Prior to March 1, 2006, the Manager (not the Fund) paid
Wellington Management a subadvisory fee in the annual amount of
0.40% of the first $50 million of the portion of the Fund's average
net assets that Wellington Management managed and invested in real
estate securities, plus 0.35% of the portion of the Fund's average
net assets over $50 million that Wellington Management managed and
invested in real estate securities, plus 0.20% of the portion of the
Fund's average net assets that Wellington Management managed and
invested in securities other than real estate securities. For the
year ended May 31, 2006, the Manager incurred subadvisory fees, paid
or payable to Wellington Management, of $1,092,000.
75
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to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
Effective January 3, 2006, the Manager (not the Fund) pays MFSIM a
subadvisory fee in the annual amount of 0.29% of the portion of the
Fund's average net assets that MFSIM manages. Prior to January 3,
2006, the Manager (not the Fund) paid MFSIM a subadvisory fee based
on the aggregate average net assets that MFSIM managed in the USAA
World Growth Fund, the USAA International Fund, the USAA Life
Investment Trust World Growth Fund, and the USAA Cornerstone
Strategy Fund combined (MFSIM Funds), in the annual amount of 0.335%
of the first $350 million of assets, plus 0.225% of assets over $350
million but not over $1 billion, plus 0.200% of assets over $1
billion. For the year ended May 31, 2006, the Manager incurred
subadvisory fees for the Fund, paid or payable to MFSIM, of $830,000.
Effective March 1, 2006, the Manager (not the Fund) pays
Batterymarch a subadvisory fee based on the aggregate net assets
that Batterymarch manages in the USAA Cornerstone Strategy Fund and
the USAA Capital Growth Fund combined in an annual amount of 0.25%
on the first $250 million of assets; 0.21% on assets over $250
million and up to $500 million; and 0.17% on assets over $500
million. For the period of December 1, 2005, through February 28,
2006, the Manager (not the Fund) paid Batterymarch a subadvisory fee
based on the Fund's net assets that Batterymarch managed, in an
annual amount of 0.25% on the first $250 million of assets, 0.21% on
assets over $250 million and up to $500 million, and 0.17% on assets
over $500 million. For the year ended May 31, 2006, the Manager
incurred subadvisory fees, paid or payable to Batterymarch, of
$303,000.
C. ADMINISTRATION AND SERVICING FEES - The Manager provides certain
administration and shareholder servicing functions for the Fund.
For such services, the Manager receives a fee accrued daily and paid
monthly at an annualized rate of 0.15% of the Fund's
76
N O T E S
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to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
average net assets. For the year ended May 31, 2006, the Fund
incurred administration and servicing fees, paid or payable to the
Manager, of $2,463,000.
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 $52,000 for these legal and tax services.
These expenses are included in the professional fees expenses on the
Fund's statement of operations.
D. EXPENSE LIMITATION - The Manager has voluntarily agreed to limit the
annual expenses of the Fund to 1.19% of the Fund's average annual
net assets, before reductions of any expenses paid indirectly, and
will reimburse the Fund for all expenses in excess of that amount.
This agreement may be modified or terminated at any time. The Fund
had no reimbursable expenses as of May 31, 2006.
E. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services (SAS), an affiliate of the Manager,
provides transfer agent services to the Fund based on an annual
charge of $23 per shareholder account plus out-of-pocket expenses.
The Fund also pays SAS fees that are related to the administration
and servicing of accounts that are traded on an omnibus basis. For
the year ended May 31, 2006, the Fund incurred transfer agent's
fees, paid or payable to SAS, of $3,402,000.
F. UNDERWRITING SERVICES - The Manager provides exclusive underwriting
and distribution of the Fund's shares on a continuing best-efforts
basis. The Manager receives no commissions or fees for this service.
77
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to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
(8) TRANSACTIONS WITH AFFILIATES
- --------------------------------------------------------------------------------
Certain trustees and officers of the Fund are also directors,
officers, and/or employees of the Manager. None of the affiliated
Trustees or Fund officers received any compensation from the Fund.
(9) SECURITY TRANSACTIONS WITH AFFILIATED FUNDS
- --------------------------------------------------------------------------------
During the year ended May 31, 2006, in accordance with affiliated
transaction procedures approved by the Trust's Board of Trustees,
purchases and sales of security transactions were executed between the
Fund and the following affiliated USAA funds at the then-current
market price with no brokerage commissions incurred:
NET REALIZED
COST TO GAIN (LOSS)
SELLER PURCHASER PURCHASER TO SELLER
---------------------------------------------------------------------------------
USAA Cornerstone USAA Balanced $ 866,000 $ (91,000)
Strategy Fund Strategy Fund
USAA Precious Metals and USAA Cornerstone
Minerals Fund Strategy Fund 816,000 573,000
USAA High-Yield USAA Cornerstone
Opportunities Fund Strategy Fund 1,562,000 1,000
78
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to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
(10) 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 $ 26.53 $ 25.80 $ 22.22 $ 23.57 $ 25.26
---------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .56 .30(a) .22 .27 .39(d)
Net realized and unrealized gain (loss) 1.68 2.13(a) 3.57 (.93) (1.16)(d)
---------------------------------------------------------------------
Total from investment operations 2.24 2.43(a) 3.79 (.66) (.77)
---------------------------------------------------------------------
Less distributions:
From net investment income (.22) (.45) (.21) (.26) (.57)
From realized capital gains (2.05) (1.25) - (.43) (.35)
---------------------------------------------------------------------
Total distributions (2.27) (1.70) (.21) (.69) (.92)
---------------------------------------------------------------------
Net asset value at end of period $ 26.50 $ 26.53 $ 25.80 $ 22.22 $ 23.57
=====================================================================
Total return (%)* 8.67 9.42 17.08 (2.59) (2.96)
Net assets at end of period (000) $1,712,123 $1,543,380 $1,350,044 $1,132,544 $1,197,131
Ratio of expenses to average
net assets (%)**(b,c) 1.17 1.18 1.19 1.19 1.16
Ratio of expenses to average
net assets, excluding
reimbursements (%)**(b) - - 1.20 1.27 1.17
Ratio of net investment income to
average net assets (%)** 2.01 1.15 .81 1.34 1.69(d)
Portfolio turnover (%) 150.51 64.88 90.94 131.07 30.52
* Assumes reinvestment of all net investment income and realized capital gain distributions during the period.
** For the year ended May 31, 2006, average net assets were $1,643,437,000.
(a) Calculated using average shares.
(b) Reflects total operating expenses of the Fund before reductions of any expenses paid indirectly. The Fund's expenses
paid indirectly decreased the expense ratios as follows:
(.01%) (.02%) (.02%) (.01%) (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(c) Effective April 26, 2002, the Manager voluntarily agreed to limit the annual expenses of the Fund to 1.19% of the
Fund's average net assets.
(d) In 2001, a change in amortization method was made as required by an accounting pronouncement. Without that change,
these amounts would have been:
Net investment income $ .39
Net realized and unrealized loss $(1.16)
Ratio of net investment income to average net assets 1.70%
79
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
EXAMPLE
- --------------------------------------------------------------------------------
As a shareholder of the Fund, you incur two types of costs: direct
costs, such as wire fees, redemption fees, and low balance fees; and
indirect costs, including management fees, transfer agency fees, and
other Fund operating expenses. This example is intended to help you
understand your indirect costs, also referred to as "ongoing costs"
(in dollars), of investing in the Fund and to compare these costs with
the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the
beginning of the period and held for the entire six-month period of
December 1, 2005, through May 31, 2006.
ACTUAL EXPENSES
- --------------------------------------------------------------------------------
The first line of the table on the next page provides information
about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested at the
beginning of the period, to estimate the expenses that you paid over
the period. Simply divide your account value by $1,000 (for example,
an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the first line under the heading "Expenses
Paid During Period" to estimate the expenses you paid on your account
during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
- --------------------------------------------------------------------------------
The second line of the table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return. The hypothetical
account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may
80
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
use this information to compare the ongoing costs of investing in the
Fund and other funds. To do so, compare this 5% hypothetical example
with the 5% hypothetical examples that appear in the shareholder
reports of other funds.
Please note that the expenses shown in the table are meant to
highlight your ongoing costs only and do not reflect any direct costs,
such as wire fees, redemption fees, or low balance fees. Therefore,
the second line of the table is useful in comparing ongoing costs
only, and will not help you determine the relative total costs of
owning different funds. In addition, if these direct costs were
included, your costs would have been higher.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE DECEMBER 1, 2005 -
DECEMBER 1, 2005 MAY 31, 2006 MAY 31, 2006
-------------------------------------------------------------
Actual $1,000.00 $1,039.60 $5.95
Hypothetical
(5% return before expenses) 1,000.00 1,019.10 5.89
*Expenses are equal to the Fund's annualized expense ratio of 1.17%,
which is net of any expenses paid indirectly, multiplied by the
average account value over the period, multiplied by 182 days/365
days (to reflect the one-half year period). The Fund's ending account
value on the first line in the table is based on its actual total
return of 3.96% for the six-month period of December 1, 2005, through
May 31, 2006.
81
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
SEPTEMBER BOARD MEETING
- --------------------------------------------------------------------------------
As disclosed in the Information Statement to shareholders dated
December 1, 2005, the Board of Trustees, including the Trustees who
are not "interested persons" of the Trust (the "Independent
Trustees"), at a meeting held on September 14, 2005, approved the
adoption of an Investment Subadvisory Agreement with Batterymarch
Financial Management, Inc. (Batterymarch). In advance of the meeting,
the Board received and considered a variety of information relating to
the Investment Subadvisory Agreement and Batterymarch, and were given
the opportunity to ask questions and request additional information
from management. The information provided to the Board included, among
other things: (i) materials about Batterymarch's new "best ideas"
global investment strategy; (ii) the qualifications of the individuals
at Batterymarch responsible for these investment activities; (iii) the
fees to be paid to Batterymarch; and (iv) the complementary nature of
the investment strategies of Batterymarch with the existing
subadvisers Wellington Management Company, LLP and MFS Investment
Management. Prior to voting, the Independent Trustees reviewed the
proposed Investment Subadvisory Agreement with management and with
experienced independent counsel and received materials from such
counsel discussing the legal standards for their consideration of the
proposed Investment Subadvisory Agreement. The Independent Trustees
also reviewed the proposed Investment Subadvisory Agreement in private
sessions with their counsel at which no representatives of management
were present.
In approving the Fund's Investment Subadvisory Agreement with
Batterymarch, the Board considered various factors, among them: (i)
the nature, extent, and quality of services to be provided to the Fund
by Batterymarch, including the personnel that will be providing
services; (ii) Batterymarch's compensation and any other benefits that
will be derived from the subadvisory relationship by Batterymarch;
(iii) comparisons, to the extent available, of subadvisory fees and
82
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
performance to comparable investment companies; and (iv) the terms of
the Investment Subadvisory Agreement. The Board's analysis of these
factors is set forth below.
After full consideration of a variety of factors, the Board, including
the Independent Trustees, voted to approve the Investment Subadvisory
Agreement with Batterymarch. In approving the Investment Subadvisory
Agreement, the Board did not identify any single factor as
controlling, and each Independent Board Member attributed different
weights to various factors. Throughout their deliberations, the
Independent Trustees were represented and assisted by independent
counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES PROVIDED; INVESTMENT
PERSONNEL. The Board considered information provided to them
regarding the services to be provided by Batterymarch. The Board
considered Batterymarch's level of knowledge and investment style. The
Board reviewed the experience and credentials of the investment
personnel who will be responsible for managing the investment of
portfolio securities with respect to the Fund and Batterymarch's level
of staffing. The Board noted that the materials provided to them
indicated that the method of compensating portfolio managers is
reasonable and includes appropriate mechanisms to prevent a manager
with underperformance from taking undue risks. The Board also noted
Batterymarch's brokerage practices. The Board also considered
Batterymarch's regulatory and compliance history. The Board noted that
the Manager's monitoring processes of Batterymarch will include: (i)
regular telephonic meetings to discuss, among other matters,
investment strategies and to review portfolio performance; (ii)
monthly portfolio compliance checklists and quarterly compliance
certifications to the Board; and (iii) due diligence visits to
Batterymarch.
SUBADVISER COMPENSATION. The Board also took into consideration the
financial condition of Batterymarch. In considering the cost of
services to be provided by Batterymarch and the profitability to
Batterymarch
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(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
of its relationship with the Fund, the Board noted that the fees under
the Investment Subadvisory Agreement will be paid by the Manager. The
Board also relied on the ability of the Manager to negotiate the
Investment Subadvisory Agreement and the fees thereunder at arm's
length. The Board also considered information relating to the cost of
services to be provided by Batterymarch, Batterymarch's anticipated
profitability with respect to the Fund, and the potential economies of
scale in Batterymarch's management of the Fund, to the extent
available. However, this information was less significant to the
Board's consideration of the Investment Subadvisory Agreement than the
other factors considered.
SUBADVISORY FEES AND FUND PERFORMANCE. The Board noted that the "best
ideas" global investment strategy is a new product offering from
Batterymarch; and as a result, the Board received no information about
the fees that Batterymarch charges to comparable clients. The Board
considered that the Fund pays a management fee to the Manager and
that, in turn, the Manager will pay a subadvisory fee to Batterymarch.
The Board noted the Manager's expertise and resources in monitoring
the performance, investment style, and risk-adjusted performance of
Batterymarch. The Board also noted Batterymarch's long-term
performance record for other accounts.
CONCLUSION. The Board reached the following conclusions regarding the
Investment Subadvisory Agreement, among others: (i) Batterymarch is
qualified to manage a portion of the Fund's assets in accordance with
its investment objectives and policies; (ii) Batterymarch maintains an
appropriate compliance program; (iii) Batterymarch's performance in
managing other accounts is reasonable; and (iv) the Fund's advisory
expenses are reasonable in relation to those of similar funds and to
the services to be provided by the Manager and Batterymarch. Based on
its conclusions, the Board determined that approval of the Investment
Subadvisory Agreement with Batterymarch would be in the interests of
the Fund and its shareholders.
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AGREEMENTS (unaudited)
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
APRIL BOARD MEETING
- --------------------------------------------------------------------------------
At a meeting of the Board of Trustees held on April 19, 2006, the
Board, including the Independent Trustees, approved the continuance of
the Investment Advisory Agreement between the Trust and the Manager
with respect to the Fund and the Subadvisory Agreements with respect
to the Fund.
In advance of the meeting, the Trustees received and considered a
variety of information relating to the Investment Advisory Agreement
and Subadvisory Agreements and the Manager and the Subadvisers, and
were given the opportunity to ask questions and request additional
information from management. The information provided to the Board
included, among other things: (i) a separate report prepared by an
independent third party, which provided a statistical analysis
comparing the Fund's investment performance, expenses, and fees to
comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the
Manager's revenues and costs of providing services to the Fund and
compensation paid to affiliates of the Manager; and (iii) information
about the Manager's and Subadvisers' operations and personnel. Prior
to voting, the Independent Trustees reviewed the proposed continuance
of the Investment Advisory Agreement and the Subadvisory Agreements
with management and with experienced independent counsel and received
materials from such counsel discussing the legal standards for their
consideration of the proposed continuation of the Investment Advisory
Agreement and the Subadvisory Agreements with respect to the Fund. The
Independent Trustees also reviewed the proposed continuation of the
Investment Advisory Agreement and the Subadvisory Agreements 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
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AGREEMENTS (unaudited)
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
things, information concerning the Fund's performance and related
services provided by the Manager and by each Subadviser. At the
meeting at which the renewal of the Investment Advisory Agreement and
Subadvisory Agreements is considered, particular focus is given to
information concerning Fund performance, comparability of fees and
total expenses, and profitability. However, the Board noted that the
evaluation process with respect to the Manager and the Subadvisers is
an ongoing one. In this regard, the Board's and its committees'
consideration of the Investment Advisory Agreement and Subadvisory
Agreements included certain information previously received at such
meetings.
INVESTMENT ADVISORY AGREEMENT
- --------------------------------------------------------------------------------
After full consideration of a variety of factors, the Board of
Trustees, including the Independent Trustees, voted to approve the
Investment Advisory Agreement. In approving the Investment Advisory
Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by independent counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES. In considering the nature,
extent, and quality of the services provided by the Manager under the
Investment Advisory Agreement, the Board of Trustees reviewed
information provided by the Manager relating to its operations and
personnel. The Board also took into account its familiarity with the
Manager's management through Board meetings, discussions, and reports
during the preceding year. The Board considered the fees paid to the
Manager and the services provided to the Fund by the Manager under the
Investment Advisory Agreement, as well as other services provided by
the Manager and its affiliates under other agreements, and the
personnel who provide these services. In addition to the investment
advisory services provided to the Fund, the Manager and its affiliates
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AGREEMENTS (unaudited)
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
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
and investment personnel, as well as current staffing levels. The
Board discussed the Manager's effectiveness in monitoring the
performance of the Subadvisers and its timeliness in responding to
performance issues. The allocation of the Fund's brokerage, including
the Manager's process for monitoring "best execution" and the
utilization of "soft dollars," were 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
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AGREEMENTS (unaudited)
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
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 universe").
Among other data, the Board noted that the Fund's management fee rate
- which includes advisory and administrative services and the effects
of any performance fee adjustment as well as any fee waivers or
reimbursements - was above the median of its expense group and below
the median of its expense universe. The data indicated that the Fund's
total expenses, after reimbursements, were lower than the median of
both its expense group and its expense universe. The Board took into
account the various services provided to the Fund by the Manager and
its affiliates. The Board also noted the level and method of
computing the management fee, including any performance adjustment to
such fee. The Trustees also took into account the Manager's current
voluntary undertakings to maintain expense limitations for the Fund
and that the subadvisory fees under the Subadvisory Agreements are
paid by the Manager.
In considering the Fund's performance, the Board of Trustees noted
that the Board reviews at its regularly scheduled meetings information
about the Fund's performance results. The Trustees also reviewed
various comparative data provided to them in connection with their
consideration of the renewal of the Investment Advisory Agreement,
including, among other information, a comparison of the Fund's average
annual total return with its Lipper index and with that of other
mutual funds deemed to be in its peer group by the independent third
party in
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AGREEMENTS (unaudited)
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
its report (the "performance universe"). The Fund's performance
universe consisted of the Fund and all retail and institutional
open-end investment companies with the same classification/objective
as the Fund regardless of asset size or primary channel of
distribution. This comparison indicated that the Fund's performance
was lower than the average of its performance universe and its Lipper
index for the one- and three-year periods ended December 31, 2005, and
was lower than the average of its performance universe and exceeded
the average of its Lipper index for the five-year period ended
December 31, 2005. The Board also noted that the Fund's percentile
performance ranking was in the bottom 50% of its performance universe
for the one- and three-year periods ending December 31, 2005. The
Trustees considered the Manager's discussion of the factors
contributing to the Fund's underperformance and its plan to address
such performance.
COMPENSATION AND PROFITABILITY. The Board took into consideration the
level and method of computing the management fee. The information
considered by the Board included operating profit margin information
for the Manager's business as a whole. The Board also received and
considered profitability information related to the management
revenues from the Fund. This consideration included a broad review of
the methodology used in the allocation of certain costs to the Fund.
In considering the profitability data with respect to the Fund, the
Trustees noted that the Manager pays the subadvisory fees. The
Trustees reviewed the profitability of the Manager's relationship with
the Fund before tax expenses. In reviewing the overall profitability
of the management fee to the Manager, the Board also considered the
fact that affiliates provide shareholder servicing and administrative
services to the Fund for which they receive compensation. The Board
also considered the possible direct and indirect benefits to the
Manager from its relationship with the Trust, including that the
Manager may derive reputational and other benefits from its
association with the Fund. The Trustees recognized that the Manager
should be entitled to earn a reasonable
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AGREEMENTS (unaudited)
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
level of profits in exchange for the level of services it provides to
the Fund and the entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE. The Board considered whether there should be
changes in the management fee rate or structure in order to enable the
Fund to participate in any economies of scale. The Board took into
account management's discussions of the current advisory fee
structure. The Board also noted that the Fund's contractual
management fees are 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 considered the fee
waivers and expense reimbursement arrangements by the Manager and the
fact that the Manager pays the subadvisory fees. The Board also took
into account other economies of scale achieved by the Fund with
respect to certain fixed expenses as a result of the Fund's asset
size. The Board determined that the current investment management fee
structure was reasonable.
CONCLUSIONS. The Board reached the following conclusions regarding the
Fund's Investment Advisory Agreement with the Manager, among others:
(i) the Manager has demonstrated that it possesses the capability and
resources to perform the duties required of it under the Investment
Advisory Agreement; (ii) the Manager maintains an appropriate
compliance program; (iii) the performance of the Fund is being
addressed; (iv) the Fund's advisory expenses are reasonable in
relation to those of similar funds and to the services to be provided
by the Manager; and (v) the Manager's level of profitability from its
relationship with the Fund is reasonable. Based on its conclusions,
the Board determined that continuation of the Investment Advisory
Agreement would be in the interests of the Fund and its shareholders.
SUBADVISORY AGREEMENTS
- --------------------------------------------------------------------------------
In approving each Subadvisory Agreement with respect to the Fund, the
Board considered various factors, among them: (i) the nature, extent,
90
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AGREEMENTS (unaudited)
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
and quality of services provided to the Fund by the respective
Subadviser, including the personnel providing services; (ii) the
Subadviser's compensation and any other benefits derived from the
subadvisory relationship; (iii) comparisons of subadvisory fees and
performance to comparable investment companies; and (iv) the terms of
the Subadvisory Agreement. The Board's analysis of these factors is
set forth below.
After full consideration of a variety of factors, the Board of
Trustees, including the Independent Trustees, voted to approve each
Subadvisory Agreement. In approving each Subadvisory Agreement, the
Trustees did not identify any single factor as controlling, and each
Trustee attributed different weights to various factors. Throughout
their deliberations, the Independent Trustees were represented and
assisted by independent counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES PROVIDED; INVESTMENT
PERSONNEL. The Trustees considered information provided to them
regarding the services provided by the Subadvisers, including
information presented periodically throughout the previous year. The
Board considered each Subadviser's level of knowledge and investment
style. The Board reviewed the experience and credentials of the
investment personnel who are responsible for managing the investment
of portfolio securities with respect to the Fund and each Subadviser's
level of staffing. The Trustees noted that the materials provided to
them by each Subadviser indicated that the method of compensating
portfolio managers is reasonable and includes appropriate mechanisms
to prevent a manager with underperformance from taking undue risks.
The Trustees also noted each Subadviser's brokerage practices. The
Board also considered each Subadviser's regulatory and compliance
history. The Board noted that the Manager's monitoring processes of
each Subadviser include: (i) regular telephonic meetings to discuss,
among other matters, investment strategies, and to review portfolio
performance; (ii) monthly portfolio compliance checklists and
quarterly compliance certifications to the Board; and (iii) due
diligence visits to the Subadviser.
91
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AGREEMENTS (unaudited)
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
SUBADVISER COMPENSATION. The Board also took into consideration the
financial condition of each Subadviser. In considering the cost of
services to be provided by each Subadviser and the profitability to
that Subadviser of its relationship with the Fund, the Trustees noted
the undertakings of the Manager to maintain expense limitations for
the Fund and also noted that the fees under the Subadvisory Agreement
were paid by the Manager. The Trustees also relied on the ability of
the Manager to negotiate each Subadvisory Agreement and the fees
thereunder at arm's length. The Board also considered information
relating to the cost of services to be provided by each Subadviser,
each Subadviser's profitability with respect to the Fund, and the
potential economies of scale in each Subadviser's management of the
Fund, to the extent available. However, for the reasons noted above,
this information was less significant to the Board's consideration of
the Subadvisory Agreements than the other factors considered.
SUBADVISORY FEES AND FUND PERFORMANCE. The Board compared the
subadvisory fees for the Fund with the fees that each Subadviser
charges to comparable clients. The Board considered that the Fund pays
a management fee to the Manager and that, in turn, the Manager pays a
subadvisory fee to each Subadviser. As noted above, the Board
considered the Fund's performance during the one-, three-, and five-
year periods ended December 31, 2005, as compared to the Fund's
respective peer group and noted that the Board reviews at its
regularly scheduled meetings information about the Fund's performance
results. The Board also considered the performance of each
Subadviser. The Board noted the Manager's expertise and resources in
monitoring the performance, investment style, and risk-adjusted
performance of each Subadviser. The Board was mindful of the Manager's
focus on each Subadviser's performance and the explanations of
management regarding the factors that contributed to the recent
performance of the Fund. The Board also noted each Subadviser's
long-term performance record for similar accounts.
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AGREEMENTS (unaudited)
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2006
CONCLUSION. The Board reached the following conclusions regarding each
Subadvisory Agreement, among others: (i) each Subadviser is qualified
to manage the Fund's assets in accordance with its investment
objectives and policies; (ii) each Subadviser maintains an appropriate
compliance program; (iii) the performance of the Fund is being
addressed; and (iv) the Fund's advisory expenses are reasonable in
relation to those of similar funds and to the services to be provided
by the Manager and each Subadviser. Based on the Board's conclusions,
the Board of Trustees determined that approval of each Subadvisory
Agreement with respect to the Fund would be in the interests of the
Fund and its shareholders.
93
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.
94
. . . 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.
95
. . . C O N T I N U E D
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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.
96
. . . C O N T I N U E D
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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.
97
. . . C O N T I N U E D
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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.
98
. . . C O N T I N U E D
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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.
99
. . . C O N T I N U E D
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INFORMATION
JEFFREY D. HILL
Chief Compliance Officer
Born: December 1967
Year of Appointment: 2004
Assistant Vice President, Mutual Funds Compliance, USAA
(9/04-present); Assistant Vice President, Investment Management
Administration & Compliance, USAA (12/02-9/04); Assistant Vice
President, Investment Management Administration & Compliance,
IMCO (9/01-12/02); Senior Manager, Investment Management
Assurance and Advisory Services, KPMG LLP (6/98-8/01). Mr. Hill
also serves as Chief Compliance Officer of USAA Life Investment
Trust, a registered investment company offering five individual
funds.
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TRUSTEES Christopher W. Claus
Barbara B. Dreeben
Robert L. Mason, Ph.D.
Michael F. Reimherr
Richard A. Zucker
ADMINISTRATOR, USAA Investment Management Company
INVESTMENT ADVISER, P.O. Box 659453
UNDERWRITER, San Antonio, Texas 78265-9825
AND DISTRIBUTOR
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN AND State Street Bank and Trust Company
ACCOUNTING AGENT P.O. Box 1713
Boston, Massachusetts 02105
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1800
ACCOUNTING FIRM San Antonio, Texas 78205
TELEPHONE Call toll free - Central time
ASSISTANCE HOURS Monday - Friday, 7 a.m. to 10 p.m.
Saturday, 8:30 a.m. to 5 p.m.
FOR ADDITIONAL (800) 531-8181
INFORMATION ABOUT For account servicing, exchanges,
MUTUAL FUNDS or redemptions (800) 531-8448
RECORDED MUTUAL 24-hour service (from any phone)
FUND PRICE QUOTES (800) 531-8066
MUTUAL FUND (from touch-tone phones only)
USAA TOUCHLINE For account balance, last transaction, fund
prices, or to exchange or redeem fund shares
(800) 531-8777
INTERNET ACCESS USAA.COM
COPIES OF THE MANAGER'S PROXY VOTING POLICIES AND PROCEDURES, APPROVED BY THE
TRUST'S BOARD OF TRUSTEES FOR USE IN VOTING PROXIES ON BEHALF OF THE FUND, ARE
AVAILABLE WITHOUT CHARGE (I) BY CALLING (800) 531-8448; (II) AT USAA.COM; AND
(III) ON THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. INFORMATION REGARDING HOW
THE FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT
12-MONTH PERIOD ENDED JUNE 30, IS AVAILABLE (I) AT USAA.COM; AND (II) ON THE
SEC'S WEB SITE AT HTTP://WWW.SEC.GOV.
THE FUND FILES ITS COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE
FIRST AND THIRD QUARTERS OF EACH FISCAL YEAR ON FORM N-Q. THESE FORMS N-Q ARE
AVAILABLE (I) BY CALLING (800) 531-8448; (II) AT USAA.COM; AND (III) ON THE
SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. THESE FORMS N-Q ALSO MAY BE REVIEWED AND
COPIED AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE
OPERATION OF THE PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING (800)
SEC-0330.
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and others electronically.
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[LOGO OF USAA] WE KNOW WHAT IT MEANS TO SERVE.(R)
USAA ----------------------------------
INSURANCE o MEMBER SERVICES
23405-0706 (C)2006, USAA. All rights reserved.
ITEM 2. CODE OF ETHICS.
On June 25, 2003, the Board of Trustees of USAA Investment Trust approved a Code
of Ethics (Sarbanes Code) applicable solely to its senior financial officers,
including its principal executive officer (President), as defined under the
Sarbanes-Oxley Act of 2002 and implementing regulations of the Securities and
Exchange Commission. On September 14, 2005, the Board of Trustees of USAA
Investment Trust approved a revised Sarbanes Code applicable to the Funds'
senior financial officers. There were no substantive changes to the ethical
duties or responsibilities of the Funds' senior financial officers. The changes
to the Sarbanes Code were necessary because of the change of the Funds' Chairman
of the Board to an independent director. The revised Sarbanes Code clarifies
that the same USAA personnel will continue to receive reports of all violations
of the Sarbanes Code and be required to approve outside employment and certain
financial interests in transactions. Under the revised Sarbanes Code, the Funds'
Board of Directors will continue to receive the same notifications, reports and
have the same power that it had before under the original Sarbanes Code. A copy
of the revised Sarbanes Code is attached as an Exhibit to this Form N-CSR.
No waivers (explicit or implicit) have been granted from a provision of the
Sarbanes Code or the revised Sarbanes Code.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Dr. Laura T. Starks, Ph.D. has been designated as an audit committee financial
expert for USAA Investment Trust. Dr. Starks has served as a professor of
Finance at the University of Texas at Austin since 1987, and has served as the
Chair Professor of Finance since 1996. Dr. Starks also has served as a
consultant to numerous clients, including accounting firms, on a range of
finance, accounting and auditing issues and an expert witness in cases involving
financial reporting matters. Dr. Starks is an independent trustee who serves as
a member of the Audit Committee, Pricing and Investment Committee and the
Corporate Governance Committee of the Board of Trustees of USAA Investment
Trust. Dr. Starks resigned from the Board of Trustees effective May 22, 2006.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES. The Registrant, USAA Investment Trust, consists of 10 funds in
all. Only 9 funds of the Registrant (excluding the Total Return Strategy Fund)
have a fiscal year-end of May 31 and are included within this report (the
Funds). The aggregate fees billed by the Registrant's independent auditor, Ernst
& Young LLP, for professional services rendered for the audit of the Funds'
annual financial statements and services provided in connection with statutory
and regulatory filings by the Registrant for the Funds for fiscal years ended
May 31, 2006 and 2005 were $221,400 and $150,400, respectively.
(b) AUDIT RELATED FEE. The aggregate fees accrued or paid to Ernst & Young, LLP
by USAA Shareholder Account Services (SAS) for professional services rendered
for audit related services related to the annual study of internal controls of
the transfer agent for fiscal years ended May 31, 2006 and 2005 were $50,000 and
$15,500, respectively. All services were preapproved by the Audit Committee.
(c) TAX FEES. The aggregate fees paid or accrued by the Registrant for
professional services rendered by Ernst & Young, LLP for tax services are
detailed in the table below:
- ----------------------------------------------------------------------------------------------
Review of Federal,
State and City Passive Quarterly
Income and tax Foreign Diversification
returns and excise Investment Review under Excise Tax
tax calculations Company Subchapter M Assistance TOTAL
- ----------------------------------------------------------------------------------------------
FYE 5-31-2006 $44,390 $11,125 $11,633 $ 8,494 $ 75,642
FYE 5-31-2005 $41,100 $14,050 $10,993 $ 0 $ 66,143
- ----------------------------------------------------------------------------------------------
TOTAL $85,490 $25,175 $22,626 $ 8,494 $141,785
- ----------------------------------------------------------------------------------------------
(d) ALL OTHER FEES. No such fees were billed by Ernst & Young LLP for fiscal
years ended May 31, 2006 or 2005.
(e)(1) AUDIT COMMITTEE PRE-APPROVAL POLICY. All audit and non-audit services to
be performed for the Registrant by Ernst & Young LLP must be pre-approved by the
Audit Committee. The Audit Committee Charter also permits the Chair of the Audit
Committee to pre-approve any permissible non-audit service that must be
commenced prior to a scheduled meeting of the Audit Committee. All non-audit
services were pre-approved by the Audit Committee or its Chair, consistent with
the Audit Committee's preapproval procedures.
(2) Not applicable.
(f) Not applicable.
(g) The aggregate non-audit fees billed by Ernst & Young LLP for services
rendered to the Registrant and the Registrant's investment adviser, IMCO, and
the Funds' transfer agent, SAS, for May 31, 2006 and 2005 were $187,642 and
$109,143, respectively.
(h) Ernst & Young LLP provided non-audit services to IMCO in 2006 and 2005 that
were not required to be pre-approved by the Registrant's Audit Committee because
the services were not directly related to the operations of the Registrant's
funds. The Board of Directors/Trustees will consider Ernst & Young LLP's
independence and will consider whether the provision of these non-audit services
to IMCO is compatible with maintaining Ernst & Young LLP's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not Applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Filed as part of the report to shareholders.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not Applicable.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not Applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Corporate Governance Committee selects and nominates candidates for
membership on the Board as independent directors. Currently, there is no
procedure for shareholders to recommend candidates to serve on the Board.
ITEM 10. CONTROLS AND PROCEDURES
The principal executive officer and principal financial officer of USAA
Investment Trust (Trust) have concluded that the Trust's disclosure controls and
procedures are sufficient to ensure that information required to be disclosed by
the Trust in this Form N-CSR was recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms, based upon such officers' evaluation of these controls and
procedures as of a date within 90 days of the filing date of the report.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Trust's internal controls
or in other factors that could significantly affect the Trust's internal
controls subsequent to the date of their evaluation. Disclosure controls and
procedures were established for the new section of the shareholder reports
detailing the factors considered by the Funds' Board in approving the Funds'
advisory agreements.
ITEM 11. EXHIBITS.
(a)(1). Code of Ethics pursuant to Item 2 of Form N-CSR is filed hereto exactly
as set forth below:
CODE OF ETHICS
FOR PRINCIPAL EXECUTIVE OFFICER
AND SENIOR FINANCIAL OFFICERS
USAA MUTUAL FUND, INC.
USAA TAX-EXEMPT FUND, INC.
USAA INVESTMENT TRUST
USAA MUTUAL FUNDS TRUST
USAA LIFE INVESTMENT TRUST
I. PURPOSE OF THE CODE OF ETHICS
-----------------------------
USAA Mutual Fund, Inc., USAA Tax-Exempt Fund, Inc., USAA Investment
Trust, USAA Mutual Funds Trust and USAA Life Investment Trust (collectively,
the Funds, and each a Company) have adopted this code of ethics (the Code) to
comply with Section 406 of the Sarbanes-Oxley Act of 2002 (the Act) and
implementing regulations of the Securities and Exchange Commission (SEC). The
Code applies to each Company's Principal Executive Officer, Principal Financial
Officer and Principal Accounting Officer (each a Covered Officer), as detailed
in Appendix A.
The purpose of the Code is to promote:
- honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between the Covered
Officers' personal and professional relationships;
- full, fair, accurate, timely and understandable disclosure in
reports and documents that each Company files with, or submits
to, the SEC and in other public communications made by each
Company;
- compliance with applicable laws and governmental rules and
regulations;
- prompt internal reporting of violations of the Code to the Chief
Legal Officer of each Company, the President of each Company (if
the violation concerns the Treasurer), the Chair/CEO of USAA,
and if deemed material to the Funds' financial condition or
reputation, the Chair of the relevant Funds' Board of Directors/
Trustees; and
- accountability for adherence to the Code.
Each Covered Officer should adhere to a high standard of business
ethics and should be sensitive to actual and apparent conflicts of interest.
II. CONFLICTS OF INTEREST
---------------------
A. DEFINITION OF A CONFLICT OF INTEREST.
------------------------------------
A conflict of interest exists when a Covered Officer's private
interest influences, or reasonably appears to influence, the Covered Officer's
judgment or ability to act in the best interests of the Funds and their
shareholders. For example, a conflict of interest could arise if a Covered
Officer, or an immediate family member, receives personal benefits as a result
of his or her position with the Funds.
Certain conflicts of interest arise out of relationships between
Covered Officers and the Funds and are already subject to conflict of interest
provisions in the Investment Company Act of 1940 (the 1940 Act) and the
Investment Advisers Act of 1940 (the Advisers Act). For example, Covered
Officers may not individually engage in certain transactions with the Funds
because of their status as "affiliated persons" of the Funds. The USAA Funds'
and USAA Investment Management Company's (IMCO) compliance programs and
procedures are designed to prevent, or identify and correct, violations of these
provisions. This Code does not, and is not intended to, repeat or replace these
programs and procedures, and such conflicts fall outside of the parameters of
this Code.
Although typically not presenting an opportunity for improper personal
benefit, conflicts could arise from, or as a result of, the contractual
relationships between the Funds and IMCO of which the Covered Officers are also
officers or employees. As a result, this Code recognizes that the Covered
Officers will, in the normal course of their duties (whether formally for the
Funds or for IMCO, or for both), be involved in establishing policies and
implementing decisions that will have different effects on IMCO and the Funds.
The participation of Covered Officers in such activities is inherent in the
contractual relationship between the Funds and IMCO and is consistent with the
performance by the Covered Officers of their duties as officers of the Funds.
Thus, if performed in compliance with the provisions of the 1940 Act and the
Advisers Act, such activities will be deemed to have been handled ethically. In
addition, it is recognized by each Company's Board of Directors/Trustees (each a
Board, and collectively the Boards) that the Covered Officers also may be
officers or employees of one or more other investment companies covered by this
joint USAA Funds' Code.
B. GENERAL RULE. Covered Officers Should Avoid Actual and
Apparent Conflicts of Interest.
Conflicts of interest, other than the conflicts described in the two
preceding paragraphs, are covered by the Code. The following list provides
examples of conflicts of interest under the Code, but Covered Officers should
keep in mind that these examples are not exhaustive. The overarching principle
is that the personal interest of a Covered Officer should not be placed
improperly before the interest of the Funds and their shareholders.
Each Covered Officer must not engage in conduct that constitutes an
actual conflict of interest between the Covered Officer's personal interest and
the interests of the Funds and their shareholders. Examples of actual conflicts
of interest are listed below but are not exclusive. Each Covered Officer must
not:
- use his personal influence or personal relationships improperly to
influence investment decisions or financial reporting by the Funds
whereby the Covered Officer would benefit personally to the
detriment of the Funds and their shareholders;
- cause the Funds to take action, or fail to take action, for the
individual personal benefit of the Covered Officer rather than the
benefit of the Funds and their shareholders.
- accept gifts, gratuities, entertainment or any other benefit from
any person or entity that does business or is seeking to do business
with the Funds DURING CONTRACT NEGOTIATIONS.
- accept gifts, gratuities, entertainment or any other benefit with a
market value over $100 per person, per year, from or on behalf of
any person or entity that does, or seeks to do, business with or on
behalf of the Funds.
o EXCEPTION. Business-related entertainment such as meals, and
tickets to sporting or theatrical events, which are
infrequent and not lavish are excepted from this prohibition.
Such entertainment must be appropriate as to time and place,
reasonable and customary in nature, modest in cost and value,
incidental to the business, and not so frequent as to raise
any question of impropriety (Customary Business
Entertainment).
Certain situations that could present the appearance of a conflict of
interest should be discussed with, and approved by, or reported to, an
appropriate person. Examples of these include:
- service as a director on the board or an officer of any public or
private company, other than a USAA company or a Company, must be
approved by the USAA Funds' and IMCO's Code of Ethics Committee and
reported to each affected Company.
- the receipt of any non-nominal (i.e., valued over $25) gifts from
any person or entity with which a Company has current or prospective
business dealings must be reported to the Chief Legal Officer. For
purposes of this Code, the individual holding the title of Secretary
of a Company shall be considered the Chief Legal Officer of a
Company.
- the receipt of any business-related entertainment from any person or
entity with which the Funds have current or prospective business
dealings must be approved in advance by the Chief Legal Officer
unless such entertainment qualifies as Customary Business
Entertainment.
- any ownership interest in, or any consulting or employment
relationship with, any of the Company's service providers, other
than IMCO or any other USAA company, must be approved by the Chair/
CEO of USAA and reported to each affected Board.
- any material direct or indirect financial interest in commissions,
transaction charges or spreads paid by the Funds for effecting
portfolio transactions or for selling or redeeming shares other than
an interest arising from the Covered Officer's employment, such as
compensation or equity ownership should be approved by the Chair/CEO
of USAA and reported to each affected Board.
III. DISCLOSURE AND COMPLIANCE REQUIREMENTS
--------------------------------------
- Each Covered Officer should familiarize himself with the disclosure
requirements applicable to the Funds, and the procedures and
policies implemented to promote full, fair, accurate, timely and
understandable disclosure by each Company.
- Each Covered Officer should not knowingly misrepresent, or cause
others to misrepresent, facts about the Funds to others, whether
within or outside the Funds, including to the Funds' Directors/
Trustees and auditors, and to government regulators and self-
regulatory organizations.
- Each Covered Officer should, to the extent appropriate within his
area of responsibility, consult with other officers and employees of
the Funds and IMCO with the goal of promoting full, fair, accurate,
timely and understandable disclosure in the reports and documents
filed by a Company with, or submitted to, the SEC, and in other
public communications made by the Funds.
- Each Covered Officer is responsible for promoting compliance with
the standards and restrictions imposed by applicable laws, rules and
regulations, and promoting compliance with the USAA Funds' and
IMCO's operating policies and procedures.
- A Covered Officer should not retaliate against any person who
reports a potential violation of this Code in good faith.
- A Covered Officer should notify the Chief Legal Officer promptly if
he knows of any violation of the Code. Failure to do so itself is a
violation of this Code.
IV. REPORTING AND ACCOUNTABILITY
----------------------------
A. INTERPRETATION OF THE CODE. The Chief Legal Officer of each
Company is responsible for applying this Code to specific
situations in which questions are presented under it and has the
authority to interpret the Code in any particular situation. The
Chief Legal Officer should consult, if appropriate, the USAA
Funds' outside counsel or counsel for the Independent
Directors/Trustees. However, any approvals or waivers sought by
a Covered Officer will be reported initially to the Chair/CEO of
USAA and will be considered by the Board of Directors/Trustees.
B. REQUIRED REPORTS
----------------
- EACH COVERED OFFICER MUST:
-------------------------
- Upon adoption of the Code, affirm in writing to
the Boards that he has received, read and
understands the Code.
- Annually thereafter affirm to the Chief Legal
Officer that he has complied with the requirements
of the Code.
- THE CHIEF LEGAL OFFICER MUST:
----------------------------
- report to the Board about any matter or situation
submitted by a Covered Officer for interpretation
under the Code, and the advice given by the Chief
Legal Officer;
- report annually to the Board and the Corporate
Governance Committee describing any issues that
arose under the Code, or informing the Board and
Corporate Governance Committee that no reportable
issues occurred during the year.
C. INVESTIGATION PROCEDURES
------------------------
The Funds will follow these procedures in investigating and enforcing
this Code:
- INITIAL COMPLAINT. All complaints or other inquiries
concerning potential violations of the Code must be reported
to the Chief Legal Officer. The Chief Legal Officer shall be
responsible for documenting any complaint. The Chief Legal
Officer also will report immediately to the President of the
Company (if the complaint involves the Treasurer), the
Chairman/CEO of USAA and the Chair of the relevant Funds'
Audit Committee (if the complaint involves the President) any
material potential violations that could have a material
effect on the Funds' financial condition or reputation. For
all other complaints, the Chief Legal Officer will report
quarterly to the Board.
- INVESTIGATIONS. The Chief Legal Officer will take all
appropriate action to investigate any potential violation
unless the Chair/CEO of USAA directs another person to
undertake such investigation. The Chief Legal Officer may
utilize USAA's Office of Ethics to do a unified investigation
under this Code and USAA's Code of Conduct. The Chief Legal
Officer may direct the Company's outside counsel or the
counsel to the Independent Directors/Trustees (if any) to
participate in any investigation under this Code.
- STATUS REPORTS. The Chief Legal Officer will provide monthly
status reports to the Board about any alleged violation of the
Code that could have a material effect on the Funds' financial
condition or reputation, and quarterly updates regarding all
other alleged violations of the Code.
- VIOLATIONS OF THE CODE. If after investigation, the Chief
Legal Officer, or other investigating person, believes that a
violation of the Code has occurred, he will report immediately
to the Chair/CEO of USAA the nature of the violation, and his
recommendation regarding the materiality of the violation. If,
in the opinion of the investigating person, the violation
could materially affect the Funds' financial condition or
reputation, the Chief Legal Officer also will notify the Chair
of the relevant Funds' Audit Committee. The Chief Legal
Officer will inform, and make a recommendation to, the Board,
which will consider what further action is appropriate.
Appropriate action could include: (1) review of, and
modifications to, the Code or other applicable policies or
procedures; (2) notifications to appropriate personnel of IMCO
or USAA; (3) dismissal of the Covered Officer; and/or (4)
other disciplinary actions including reprimands or fines.
o The Boards of Directors/Trustees understand that
Covered Officers also are subject to USAA's Code of
Business Conduct. If a violation of this Code also
violates USAA's Code of Business Conduct, these
procedures do not limit or restrict USAA's ability to
discipline such Covered Officer under USAA's Code of
Business Conduct. In that event, the Chairman of the
Board of Directors/Trustees will report to the Boards
the action taken by USAA with respect to a Covered
Officer.
V. OTHER POLICIES AND PROCEDURES
-----------------------------
This Code shall be the sole code of ethics adopted by the Funds for
purposes of Section 406 of the Act and the implementing regulations adopted by
the SEC applicable to registered investment companies. If other policies and
procedures of a Company, IMCO, or other service providers govern or purport to
govern the behavior or activities of Covered Officers, they are superseded by
this Code to the extent that they overlap, conflict with, or are more lenient
than the provisions of this Code. The USAA Funds' and IMCO's Joint Code of
Ethics under Rule 17j-1 under the 1940 Act, and IMCO's more detailed compliance
policies and procedures (including its Insider Trading Policy) are separate
requirements applying to Covered Officers and other IMCO employees, and are not
part of this Code. Also, USAA's Code of Conduct imposes separate requirements on
Covered Officers and all employees of USAA, and also is not part of this Code.
VI. AMENDMENTS
----------
Any amendment to this Code, other than amendments to Appendix A, must
be approved or ratified by majority vote of the Boards of Directors/Trustees.
VII. CONFIDENTIALITY AND DOCUMENT RETENTION
--------------------------------------
The Chief Legal Officer shall retain material investigation documents
and reports required to be prepared under the Code for six years from the date
of the resolution of any such complaint. All reports and records prepared or
maintained pursuant to this Code will be considered confidential and shall be
maintained and protected accordingly. Except as otherwise required by law or
this Code, such matters shall not be disclosed to anyone other than the
appropriate Board of Directors/Trustees and counsel for the Independent
Directors/Trustees (if any), the appropriate Company and its counsel, IMCO, and
other personnel of USAA as determined by the affected Company's Chief Legal
Officer or the Chairman of the Board of Directors/Trustees.
Approved and adopted by IMCO's Code of Ethics Committee: June 12, 2003
Approved and adopted by the Boards of Directors/Trustees of USAA Mutual Fund,
Inc., USAA Tax-Exempt Fund, Inc., USAA Investment Trust & USAA Mutual Funds
Trust: June 25, 2003.
Approved and adopted by the Board of Trustees of USAA Life Investment Trust:
August 20, 2003.
Approved and adopted as amended by IMCO's Code of Ethics Committee: August 15,
2005.
Approved and adopted as amended by the Boards of Directors/Trustees of USAA
Mutual Fund, Inc., USAA Tax-Exempt Fund, Inc., USAA Investment Trust & USAA
Mutual Funds Trust: September 14, 2005.
Approved and adopted as amended by the Board of Trustees of USAA Life Investment
Trust: December 8, 2005.
APPENDIX A
COVERED OFFICERS
----------------
TITLE COMPANY
- ----- -------
PRESIDENT USAA Mutual Fund, Inc.
USAA Tax-Exempt Fund, Inc.
USAA Investment Trust
USAA Mutual Funds Trust
USAA Life Investment Trust
TREASURER USAA Mutual Fund, Inc.
USAA Tax-Exempt Fund, Inc.
USAA Investment Trust
USAA Mutual Funds Trust
USAA Life Investment Trust
(a)(2). Certification pursuant to Rule 30a-2(a) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit
99.CERT.
(a)(3). Not Applicable.
(b). Certification pursuant to Rule 30a-2(b) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(b))is filed and attached hereto as Exhibit
99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Registrant: USAA INVESTMENT TRUST (EXCEPT TOTAL RETURN STRATEGY FUND)
By:* /s/ EILEEN M. SMILEY
-----------------------------------------------------------
Signature and Title: Eileen M. Smiley, Assistant Secretary
Date: JULY 31, 2006
------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:* /s/ CHRISTOPHER W. CLAUS
----------------------------------------------------
Signature and Title: Christopher W. Claus/President
Date: JULY 31, 2006
------------------------------
By:* /s/ DEBRA K. DUNN
---------------------------------------------
Signature and Title: Debra K. Dunn/Treasurer
Date: JULY 31, 2006
------------------------------
*Print the name and title of each signing officer under his or her signature.