UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR/S
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: DECEMBER 31
Date of reporting period: JUNE 30, 2006
ITEM 1. SEMIANNUAL REPORT TO STOCKHOLDERS.
USAA TOTAL RETURN STRATEGY FUND - SEMI-ANNUAL REPORT FOR PERIOD ENDED
JUNE 30, 2006
[LOGO OF USAA]
USAA(R)
USAA TOTAL RETURN
STRATEGY Fund(R)
[GRAPHIC OF USAA TOTAL RETURN STRATEGY FUND]
S e m i a n n u a l R e p o r t
- --------------------------------------------------------------------------------
JUNE 30, 2006
Table of CONTENTS
- --------------------------------------------------------------------------------
MESSAGE FROM THE PRESIDENT 2
MANAGERS' COMMENTARY 4
INVESTMENT OVERVIEW 7
FINANCIAL INFORMATION
Portfolio of Investments 10
Notes to Portfolio of Investments 11
Financial Statements 12
Notes to Financial Statements 15
EXPENSE EXAMPLE 25
ADVISORY AGREEMENT 27
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
"
. . . DURING THIS PERIOD OF UNCERTAINTY
[PHOTO OF CHRISTOPHER W. CLAUS] AND MARKET VOLATILITY, INVESTORS MAY
FIND IT DIFFICULT TO BE PATIENT AND LET
THEIR INVESTMENT PLAN WORK.
"
JUNE 2006
- --------------------------------------------------------------------------------
As I write these words in mid-June, investors have witnessed a healthy
- but uncomfortable - correction in the world's financial markets.
Corrections, even of this magnitude, are normal. In fact, the recent
downturn was in line with those of the past. Still, they are not
pleasant to experience.
This time, the principal cause seems to be uncertainty - mainly about
interest rates. Banks around the world, along with the Federal Reserve
Board (the Fed), have been raising short-term interest rates primarily
to contain inflation. The Fed has increased rates 17 times since June
2004, sending them back up to levels not seen since 2001.
Higher interest rates mean that the recent period of "easy money" is
over. For the last few years, companies all over the world have enjoyed
clear sailing. Money was cheap to borrow, so it was relatively painless
to obtain capital for new initiatives and infrastructure improvements.
Accordingly, global stock prices climbed, and the emerging and
commodities markets saw strong returns.
However, as interest rates rose, investors recognized that many
companies would face headwinds in the months ahead. World financial
markets declined, and some observers began to worry about the Fed's
continued rate increases. In the past, the Fed - erring on the side of
caution and to combat inflation - has been accused of going TOO far,
choking off economic growth and causing a recession.
Right now, I believe that the U.S. economy is on fairly sound footing.
The quality of corporate earnings has been excellent, and corporate
balance sheets remain healthy. Nonetheless, we ARE nearing an
inflection point. On one hand, the Fed may overshoot the mark.
3
. . . C O N T I N U E D
========================--------------------------------------------------------
On the other, it could successfully control inflation and allow
economic growth to continue.
Once the uncertainty ends, stocks have the potential to do well. In the
interim, stocks could retest their lows before regaining or exceeding
their previous highs. But should investors believe that the Fed has
raised rates too much, equity market performance may suffer.
As always, index investors can expect their returns to mirror the
performance of the underlying benchmark. However, during this period of
uncertainty and market volatility, investors may find it difficult to
be patient and let their investment plan work. Nonetheless, although
indexing remains an excellent core strategy, it is not necessarily the
only one.
At USAA Investment Management Company, we offer a range of investment
options. You can make the most of these opportunities by combining our
index and actively managed funds and using dollar-cost averaging to
maximize the amount of money you put to work. Please give us a call if
you would like to review your investment plan.
From all of us here at USAA, thank you for your business. It is a
privilege to help you with 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.
Index products incur fees and expenses and may not always be invested
in all securities of the index the fund attempts to mirror. It is not
possible to invest directly in an index.
Systematic investment plans do not assure a profit or protect against
loss in declining markets. Dollar-cost averaging involves continuous
investment in securities regardless of fluctuating price levels of such
securities. Investors should consider their financial ability to
continue purchases through periods of low price levels.
4
M A N A G E R S '
==================--------------------------------------------------------------
COMMENTARY on the Fund
[PHOTO OF STUART H. WESTER] STUART H. WESTER, CFA
USAA Investment Management Company
[PHOTO OF PAMELA BLEDSOE NOBLE] PAMELA BLEDSOE NOBLE, CFA
USAA Investment Management Company
- --------------------------------------------------------------------------------
HOW DID THE FUND PERFORM?
For the six months ended June 30, 2006, the USAA Total Return
Strategy Fund had a total return of 1.93%. This compares to a
total return of 2.71% for the S&P 500 Index and 3.07% for the
Lipper Flexible Portfolio Funds Index.
HOW WOULD YOU CHARACTERIZE THE FUND'S PERFORMANCE?
It is important to revisit the investment objective of your
Fund, which is to have a positive total return every calendar
year and to achieve returns greater than the S&P 500 Index,
with less risk, over the long term. "Long term" is defined as
five years or more, since this period usually encompasses a
full cycle that includes a bull and a bear market.
Although we did have a positive total return, six months is too
short of a time to make a judgment on the Fund's ability to
achieve its objective for the calendar year or the full market
cycle.
HOW WAS THE FUND INVESTED DURING THE SIX-MONTH REPORTING PERIOD?
The Fund's strategy is to shift assets among stocks,
investment-grade bonds, or cash equivalents so that, at any
given time, substantially all of the Fund's assets are invested
in one of these three asset classes. The Fund was invested in
money market
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
REFER TO PAGE 8 FOR BENCHMARK DEFINITIONS.
THIS FUND MAY CHANGE THE ALLOCATION OF ITS PORTFOLIO HOLDINGS
REGULARLY, WHICH MAY RESULT IN A HIGHER PROPORTION OF CAPITAL
GAINS AND A LOWER RETURN. THE FUND UTILIZES A FOCUSED
INVESTMENT STRATEGY, WHICH MAY INCREASE THE VOLATILITY OF THE
FUND'S INVESTMENT RESULTS. THERE IS NO ASSURANCE THAT THE
FUND'S OBJECTIVES WILL BE ACHIEVED.
5
. . . C O N T I N U E D
========================--------------------------------------------------------
instruments during the entire six-month period, and therefore
earned a return typical of money market funds.
The Fund was built to give you exposure, with acceptable risk
based on our proprietary investment model, to either stocks or
bonds when there is a high probability that one of those
markets will move significantly higher. During the entire six
months, the risks the model measures in the stock market were
too high to warrant an investment in stocks, and our bond
indicators were even more negative.
DIDN'T STOCKS MOVE UP FOR MUCH OF THE REPORTING PERIOD?
Yes, they did. From January 1 through May 5, 2006, the S&P 500
Index returned 6.85% on a total return basis (with dividends
reinvested). However, our model indicators showed an
insufficient risk/reward ratio, and the risks the model was
seeing in the stock market materialized after the May 5 peak
through the end of the reporting period on June 30. By sticking
to our very strict investment discipline, we were able to avoid
the losses that occurred during that market correction.
Keep in mind that your Fund is designed to avoid or minimize
big losses, which is one of the keys to investing successfully
over the long term. Since World War II, the median decline of
the 13 bear markets as measured by the S&P 500 Index is 27%. If
you lose 27% of your money, you then have to earn 37% just to
get back to even. Our long-term strategy is to minimize the big
losses associated with bear markets while still participating
to a significant degree in strong upward moves.
DO YOU EXPECT THAT THE FUND WILL BE INVESTED IN STOCKS AT SOME POINT IN THE
SECOND HALF OF THE REPORTING YEAR?
There's really no way to know, because any decisions are based
on model indicators that change frequently. What we do know is
6
. . . C O N T I N U E D
========================--------------------------------------------------------
COMMENTARY on the Fund
that on June 30, both our stock and bond market models were
more negative than they were at the beginning of 2006.
ARE WE IN A BULL MARKET OR A BEAR MARKET IN STOCKS?
We'll know only in retrospect whether we're in the midst of a
bull market correction or have entered a bear market. The bull
market began 43 months ago, and from that point to its May 5,
2006, high, was up 71%. The median bull market since the end of
World War II lasted 32 months, with a median gain of 74%.
WITHIN MONEY MARKET INSTRUMENTS, HOW HAVE THE FUND'S ASSETS BEEN INVESTED?
Because the Federal Reserve Board has been raising interest
rates, the assets have largely been invested in repurchase
agreements and government agency discount notes. These
short-term instruments capture the increases in the federal
funds rate quickly, while allowing us the flexibility to follow
the model indicators if they were to signal a move into stocks
or bonds.
ARE YOU SATISFIED WITH THE FUND'S PERFORMANCE?
Yes, the model has performed as we expected it would, but it's
too soon to judge the Fund's performance against its long-term
objective accurately. That will take a full market cycle.
As was the case in late 2005 and the first four months of 2006,
there will very likely be periods when stocks and/or bonds move
higher and the Fund is not invested in either. In these
periods, shareholders have to remain patient and maintain
discipline, confident that the Fund incorporates a tremendous
amount of knowledge about how financial markets operate.
We thank you, our shareholders, for investing in this
innovative mutual fund. We have a high degree of confidence in
the Fund's strategy, and look forward to serving you for many
years to come.
7
I N V E S T M E N T
====================------------------------------------------------------------
OVERVIEW
USAA TOTAL RETURN STRATEGY FUND (Ticker Symbol:USTRX)
OBJECTIVE
- --------------------------------------------------------------------------------
Seeks a positive return every calendar year and over the long
term (five years and more) to achieve returns greater than the
S&P 500 Index with less risk.
TYPES OF INVESTMENTS
- --------------------------------------------------------------------------------
Shifts the Fund's assets among stocks, investment-grade bonds,
or cash equivalents. Generally invests at any given time
substantially all of the Fund's assets in either (1) stocks
through the use of stock-based exchange-traded funds (ETFs),
(2) investment-grade bonds through either ETFs or direct
investment, or (3) cash equivalents through direct investment
in short-term, high-quality money market instruments or money
market funds.
- --------------------------------------------------------------------------------
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Net Assets $256.4 Million $205.6 Million
Net Asset Value Per Share $9.91 $9.89
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/06
- --------------------------------------------------------------------------------
12/31/05 TO 6/30/06* 1 YEAR SINCE INCEPTION ON 1/24/05*
1.93% 3.15% 1.65%
* TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. THIS
SIX-MONTH RETURN IS CUMULATIVE.
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 AND REALIZED CAPITAL
GAIN DISTRIBUTIONS. THE TOTAL RETURNS QUOTED DO NOT REFLECT THE
DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
8
.. . . C O N T I N U E D
=======================---------------------------------------------------------
OVERVIEW
CUMULATIVE PERFORMANCE COMPARISON
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
LIPPER FLEXIBLE USAA TOTAL
PORTFOLIO FUNDS INDEX S&P 500 INDEX RETURN STRATEGY FUND
1/31/05 $10,000.00 $10,000.00 $10,000.00
2/28/05 10,188.52 10,210.32 10,020.00
3/31/05 10,007.72 10,029.71 9,854.00
4/30/05 9,824.85 9,839.58 9,874.07
5/31/05 10,051.58 10,152.39 9,884.10
6/30/05 10,125.36 10,166.93 9,925.25
7/31/05 10,449.34 10,544.86 10,096.37
8/31/05 10,448.92 10,448.70 9,965.51
9/30/05 10,600.57 10,533.29 9,998.75
10/31/05 10,455.83 10,357.59 10,018.93
11/30/05 10,706.71 10,748.95 10,039.11
12/31/05 10,806.95 10,752.73 10,043.95
1/31/06 11,156.20 11,037.43 10,074.42
2/28/06 11,108.49 11,067.29 10,104.89
3/31/06 11,285.24 11,205.03 10,132.31
4/30/06 11,412.27 11,355.38 10,163.01
5/31/06 11,150.67 11,028.97 10,203.95
6/30/06 11,138.94 11,043.61 10,237.82
[END CHART]
*DATA FROM 1/31/05 THROUGH 6/30/06.
The graph illustrates the comparison of a $10,000 hypothetical
investment in the USAA Total Return 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 Flexible Portfolio Funds Index tracks the
performance of the 30 largest funds within the Lipper
Flexible Funds category. This category allocates its
investments across various asset classes, including domestic
common stocks, bonds, and money market instruments with a
focus on total return.
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.
*THE PERFORMANCE OF THE LIPPER FLEXIBLE PORTFOLIO FUNDS INDEX
AND THE S&P 500 INDEX IS CALCULATED FROM THE END OF THE MONTH
OF JANUARY 31, 2005, WHILE THE FUND'S INCEPTION DATE IS
JANUARY 24, 2005. THERE MAY BE A SLIGHT VARIATION OF THE
PERFORMANCE NUMBERS BECAUSE OF THIS DIFFERENCE.
9
P O R T F O L I O
==================--------------------------------------------------------------
HIGHLIGHTS
PERCENTAGE OF TIME INVESTED
IN ASSET CLASSES
[PIE CHART OF PERCENTAGE OF TIME INVESTED IN ASSET CLASSES]
Money Market Instruments 100%
[END CHART]
DATA FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006.
THE PERCENTAGE OF TIME INVESTED IN ASSET CLASSES IS CALCULATED BY
DIVIDING THE NUMBER OF MARKET DAYS (INCLUDING DAYS WHEN THE MARKET WAS
CLOSED DUE TO HOLIDAY) IN THE PERIOD THAT THE FUND HELD THE PARTICULAR
ASSET CLASS AS OF THE CLOSE OF THE MARKET DAY, BY THE TOTAL NUMBER OF
MARKET DAYS IN THE PERIOD, WHICH CONSISTED OF 130 DAYS FROM 1/01/06
THROUGH 6/30/06.
10
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
PRINCIPAL MARKET
AMOUNT VALUE
(000) SECURITY (000)
- --------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (21.5%)
DISCOUNT NOTES
$ 50,000 Freddie Mac(b,c), 5.08%, 7/03/2006 (cost: $49,986) $ 49,986
--------
REPURCHASE AGREEMENTS (88.4%)(a)
75,000 Deutsche Bank Securities, 5.15%, acquired on 6/30/2006 and due
7/03/2006 at $75,000 (collateralized by $78,748 of Fannie Mae
Notes(b), 5.00%, due 3/15/2016; market
value $76,501) 75,000
130,861 UBS Securities LLC, 5.19%, acquired on 6/30/2006 and due
7/03/2006 at $130,861 (collateralized by $67,962 of Fannie Mae
Notes(b), 3.38% - 5.75%, due 2/15/2008 - 12/15/2008; and
$68,664 of Freddie Mac Notes(b), 4.50% - 6.25%, due
3/05/2012 - 7/15/2013; combined market value of $133,482) 130,861
--------
Total repurchase agreements (cost: $205,861) 205,861
--------
TOTAL INVESTMENTS (COST: $255,847) $255,847
========
11
N O T E S
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to Portfolio of INVESTMENTS
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
GENERAL NOTES
- --------------------------------------------------------------------------------
Market values of securities are determined by procedures and practices
discussed in Note 1 to the financial statements.
The portfolio of investments category percentages shown represent the
percentages of the investments to net assets and, in total, may not
equal 100%.
SPECIFIC NOTES
- --------------------------------------------------------------------------------
(a) Collateral on repurchase agreements is received by the Fund upon
entering into the repurchase agreement. The collateral is marked-
to-market daily to ensure its market value is equal to or in excess
of the repurchase agreement price plus accrued interest.
(b) U.S. government agency issues. Securities issued by government-
sponsored enterprises (GSEs) are supported only by the credit of
the issuing agency, instrumentality, or corporation, and are
neither issued nor guaranteed by the U.S. government.
(c) Zero-coupon security. Rate represents the effective yield at date
of purchase.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
S T A T E M E N T
==================--------------------------------------------------------------
of ASSETS and LIABILITIES
(in thousands)
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
ASSETS
Investments in securities, at market value (amortized cost approximates
market value) $ 49,986
Investments in repurchase agreements (cost approximates market value) 205,861
Receivables:
Capital shares sold 756
Interest 30
USAA Investment Management Company (Note 5C) 155
--------
Total assets 256,788
--------
LIABILITIES
Payables:
Capital shares redeemed 232
Accrued management fees 127
Accrued transfer agent's fees 7
Other accrued expenses and payables 22
--------
Total liabilities 388
--------
Net assets applicable to capital shares outstanding $256,400
========
NET ASSETS CONSIST OF:
Paid-in capital $257,407
Accumulated undistributed net investment income 115
Accumulated net realized loss on investments (1,122)
--------
Net assets applicable to capital shares outstanding $256,400
========
Capital shares outstanding, unlimited number of shares
authorized, no par value 25,883
========
Net asset value, redemption price, and offering price per share $ 9.91
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
S T A T E M E N T
==================--------------------------------------------------------------
of OPERATIONS
(in thousands)
USAA TOTAL RETURN STRATEGY FUND
SIX-MONTH PERIOD ENDED JUNE 30, 2006 (UNAUDITED)
INVESTMENT INCOME
Interest $5,428
EXPENSES
Management fees 697
Administration and servicing fees 172
Transfer agent's fees 326
Custody and accounting fees 27
Postage 42
Shareholder reporting fees 24
Trustees' fees 4
Registration fees 28
Professional fees 24
Other 2
------
Total expenses 1,346
Expenses paid indirectly (2)
Expenses reimbursed (201)
------
Net expenses 1,143
------
NET INVESTMENT INCOME 4,285
------
Increase in net assets resulting from operations $4,285
======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
14
S T A T E M E N T S
====================------------------------------------------------------------
of Changes in NET ASSETS
(in thousands)
USAA TOTAL RETURN STRATEGY FUND
SIX-MONTH PERIOD ENDED JUNE 30, 2006 (UNAUDITED),
AND PERIOD ENDED DECEMBER 31, 2005*
6/30/2006 12/31/2005*
----------------------------
FROM OPERATIONS
Net investment income $ 4,285 $ 2,621
Net realized loss on investments - (1,122)
----------------------------
Increase in net assets resulting from operations 4,285 1,499
----------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (4,170) (2,621)
----------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 88,595 241,837
Shares issued for dividends reinvested 3,688 2,185
Cost of shares redeemed (41,628) (37,270)
----------------------------
Increase in net assets from
capital share transactions 50,655 206,752
----------------------------
Net increase in net assets 50,770 205,630
NET ASSETS
Beginning of period 205,630 -
----------------------------
End of period $256,400 $205,630
============================
Accumulated undistributed net investment income
End of period $ 115 $ -
============================
CHANGE IN SHARES OUTSTANDING
Shares sold 8,915 24,323
Shares issued for dividends reinvested 372 221
Shares redeemed (4,190) (3,758)
----------------------------
Increase in shares outstanding 5,097 20,786
============================
* FUND COMMENCED OPERATIONS ON JANUARY 24, 2005.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
15
N O T E S
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to FINANCIAL Statements
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
(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 a management
investment company organized as a Massachusetts business trust
consisting of 10 separate funds. Effective after the close of business
on July 31, 2006, the Fund was reorganized into a newly established
corresponding series of USAA Mutual Funds Trust, which is an existing
Delaware statutory trust that was formerly known as USAA State Tax-Free
Trust. The information presented in this semiannual report pertains
only to the USAA Total Return Strategy Fund (the Fund), which is
classified as nondiversified under the 1940 Act. The Fund's investment
objective is to seek a positive return every calendar year and over the
long term (five years and more) to achieve returns greater than the S&P
500 Index with less risk. The Fund commenced operations on January 24,
2005.
As a nondiversified fund, the Fund may invest a greater percentage of
its assets in a single issuer, such as a single stock-based or
bond-based exchange-traded fund (ETF) or a single money market
instrument. Because a relatively high percentage of the Fund's total
assets may be invested in the securities of a single issuer or a
limited number of issuers, the securities of the Fund may be more
sensitive to changes in the market value of a single issuer, a limited
number of issuers, or large companies generally. Such a focused
investment strategy may increase the volatility of the Fund's
investment results because this Fund may be more susceptible to risk
associated with a single economic, political, or regulatory event than
a diversified fund.
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 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
16
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
price or official closing price on the exchange or primary
market on which they trade. If no last sale or official closing
price is reported or available, the average of the bid and
asked prices is generally used.
2. Investments in open-end investment companies, other than ETFs,
are valued at their net asset value (NAV) at the end of each
business day.
3. Debt securities purchased with original maturities of 60 days
or less are valued at amortized cost, which approximates market
value.
4. Repurchase agreements are valued at cost, which approximates
market value.
5. 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 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.
6. 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
USAA Investment Management Company (the Manager), an affiliate
of the Fund, under valuation procedures approved by the Trust's
Board of Trustees. The effect of fair value pricing is
17
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
that securities may not be priced on the basis of quotations
from the primary market in which they are traded and the actual
price realized from the sale of a security may differ
materially from the fair value price. Valuing these securities
at fair value is intended to cause the Fund's NAV to be more
reliable than it otherwise would be.
Fair value methods used by the Manager include, but are not
limited to, obtaining market quotations from secondary pricing
services, broker-dealers, or widely used quotation systems.
General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and
duration of any restrictions on disposition of the securities,
and an evaluation of the forces that influenced the market in
which the securities are purchased and sold.
B. FEDERAL TAXES - The Fund's policy is to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
income to its shareholders. Therefore, no federal income tax
provision is required.
C. INVESTMENTS IN SECURITIES - Security transactions are accounted
for on the date the securities are purchased or sold (trade date).
Gains or losses from sales of investment securities are computed
on the identified cost basis. Dividend income, less foreign taxes,
if any, is recorded on the ex-dividend date. If the ex-dividend
date has passed, certain dividends from foreign securities are
recorded upon notification. Interest income is recorded on the
accrual basis. 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.
18
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
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. EXPENSES PAID INDIRECTLY - 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 six-month period ended June 30, 2006, these
custodian and other bank credits reduced the Fund's expenses by
$2,000.
F. 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.
19
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
G. USE OF ESTIMATES - The preparation of financial statements in
conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that may
affect the reported amounts in the financial statements.
(2) LINE OF CREDIT
- --------------------------------------------------------------------------------
The Fund participates in a joint, short-term, revolving, committed loan
agreement of $300 million with USAA Capital Corporation (CAPCO), an
affiliate of the Manager. The purpose of the agreement is to meet
temporary or emergency cash needs, including redemption requests that
might otherwise require the untimely disposition of securities. Subject
to availability under the agreement, 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 six-month period ended June 30, 2006, the Fund paid CAPCO
facility fees of less than $500, which represents 0.6% of total fees
paid to CAPCO by the USAA funds. The Fund had no borrowings under this
agreement during the six-month period ended June 30, 2006.
20
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
(3) DISTRIBUTIONS
- --------------------------------------------------------------------------------
The tax basis of distributions and accumulated undistributed net
investment income will be determined based upon the Fund's tax year-end
of December 31, 2006, in accordance with applicable tax law.
Distributions of net investment income are made quarterly.
Distributions of realized gains from security transactions not offset
by capital losses are made annually in the succeeding fiscal year or as
otherwise required to avoid the payment of federal taxes. At December
31, 2005, the Fund had capital loss carryovers of $837,000, for federal
income tax purposes, which, if not offset by subsequent capital gains,
will expire in 2013. It is unlikely that the Trust's Board of Trustees
will authorize a distribution of capital gains realized in the future
until the capital loss carryovers have been used or expire.
(4) INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
For the six-month period ended June 30, 2006, there were no purchases
or sales of long-term securities.
As of June 30, 2006, the cost of securities, including short-term
securities, for federal income tax purposes, was approximately the same
as that reported in the financial statements.
(5) TRANSACTIONS WITH MANAGER
- --------------------------------------------------------------------------------
A. MANAGEMENT FEES - The Manager carries out the Fund's investment
policies and manages the Fund's portfolio. The Fund's management
fees are accrued daily and paid monthly at an annualized rate of
0.65% of the Fund's average net assets for the fiscal year.
Beginning with the month ending January 31, 2006, the investment
management fee for the Fund is composed of a base fee and a
performance adjustment that increases or decreases
21
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
the base fee depending upon the performance of the Fund relative
to the performance of the Lipper Flexible Portfolio Funds Index,
which tracks the performance of the 30 largest funds within the
Lipper Flexible Funds category. The base fee for the Fund is
computed as referenced above. The performance adjustment is
calculated monthly by comparing the Fund's performance to that of
the Lipper index over the performance period. For the month ended
January 31, 2006, the performance period consisted of the previous
12-month period. A new month is added to the performance period
each month thereafter until the performance period consists of the
previous 36 months. Thereafter, the performance period for the
Fund will consist of the current month plus the previous 35
months.
The annual performance adjustment rate is multiplied by the
average net assets of the Fund over the entire performance period,
which is then multiplied by a fraction, the numerator of which is
the number of days in the month and the denominator of which is
365 (366 in leap years). The resulting amount is then added to (in
the case of overperformance) or subtracted from (in the case of
underperformance) the base fee, as referenced in the following
chart:
OVER/UNDER PERFORMANCE ANNUAL ADJUSTMENT RATE
RELATIVE TO INDEX(1) AS A % OF THE FUND'S AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------
+/- 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 Flexible Portfolio
22
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
Funds Index over that period, even if the Fund had overall
negative returns during the performance period.
For the six-month period ended June 30, 2006, the Fund incurred
total management fees, paid or payable to the Manager, of
$697,000, which includes a performance adjustment of $(47,000)
that decreased the base management fee of 0.65% by 0.04%.
B. ADMINISTRATION AND SERVICING FEES - The Manager provides certain
administration and shareholder servicing functions for the Fund.
For such services, the Manager receives a fee accrued daily and
paid monthly at an annualized rate of 0.15% of the Fund's average
net assets. For the six-month period ended June 30, 2006, the Fund
incurred administration and servicing fees, paid or payable to the
Manager, of $172,000.
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 six-month period ended
June 30, 2006, the Fund reimbursed the Manager $6,000 for these
legal and tax services. These expenses are included in the
professional fees expenses on the Fund's statement of operations.
C. EXPENSE LIMITATION - The Manager has voluntarily agreed to limit
the annual expenses of the Fund to 1.00% of its 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. For the
six-month period ended June 30, 2006, the Fund incurred
reimbursable expenses of $201,000, of which $155,000 was
receivable from the Manager.
Up to January 7, 2008, the Manager may recover from the Fund all
or a portion of expenses waived or reimbursed, provided that
23
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
the additional amount paid by the Fund, together with all other
expenses of the Fund, in aggregate, would not cause the Fund's
expense ratio in any period up to January 7, 2008, to exceed 1.00%
of the Fund's average net assets. As of June 30, 2006, the
carryover of excess expenses potentially reimbursable to the
Manager was $499,000. The Fund has not recorded a liability for
this potential reimbursement due to the current assessment that a
reimbursement is unlikely.
D. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services (SAS), an affiliate of the Manager,
provides transfer agent services to the Fund based on an annual
charge of $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 six-month period ended June 30, 2006, the Fund incurred
transfer agent's fees, paid or payable to SAS, of $326,000.
E. UNDERWRITING SERVICES - The Manager provides exclusive
underwriting and distribution of the Fund's shares on a continuing
best-efforts basis. The Manager receives no commissions or fees
for this service.
(6) TRANSACTIONS WITH AFFILIATES
- --------------------------------------------------------------------------------
USAA Investment Management Company is an indirectly wholly owned
subsidiary of United Services Automobile Association (the Association),
a large, diversified financial services institution. At June 30, 2006,
the Association and its affiliates owned 2,500,000 shares (9.7%) of the
Fund.
Certain trustees and officers of the Fund are also directors, officers,
and/or employees of the Manager. None of the affiliated trustees or
Fund officers received any compensation from the Fund.
24
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
(7) FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout the period is
as follows:
SIX-MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, DECEMBER 31,
2006 2005*
---------------------------------------
Net asset value at beginning of period $ 9.89 $ 10.00
-----------------------------------
Income (loss) from investment operations:
Net investment income .17 .15
Net realized and unrealized gain (loss) .02 (.11)
-----------------------------------
Total from investment operations .19 .04
-----------------------------------
Less distributions:
From net investment income (.17) (.15)
-----------------------------------
Net asset value at end of period $ 9.91 $ 9.89
===================================
Total return (%)** 1.93 .44
Net assets at end of period (000) $256,400 $205,630
Ratio of expenses to average net assets (%)***(a,b,c) 1.00 1.00
Ratio of expenses to average net assets,
excluding reimbursements (%)***(a,b) 1.17 1.21
Ratio of net investment income to average net assets (%)***(a) 3.74 1.88
Portfolio turnover (%)(d) - 443.18
* Fund commenced operations on January 24, 2005.
** Assumes reinvestment of all net investment income distributions during the
period. Total returns for periods of less than one year are not annualized.
*** For the six-month period ended June 30, 2006, average net assets were
$231,294,000.
(a) Annualized. The ratio is not necessarily indicative of 12 months of operations.
(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 by less
than 0.01%.
(c) Effective January 24, 2005, the Manager voluntarily agreed to limit the annual expenses of the
Fund to 1.00% of the Fund's average net assets.
(d) Calculated using average daily market value for the number of months during
which the Fund was invested in long-term securities, which were as follows
for each period:
0 7
25
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
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 period of January 1,
2006, through June 30, 2006.
ACTUAL EXPENSES
- --------------------------------------------------------------------------------
The first line of the table on the next page provides information about
actual account values and actual expenses. You may use the information
in this line, together with the amount you invested at the beginning of
the period, to estimate the expenses that you paid over the period.
Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the
number in the first line under the heading "Expenses Paid During
Period" to estimate the expenses you paid on your account during this
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
- --------------------------------------------------------------------------------
The second line of the table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return. The hypothetical
account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use
this information to compare the ongoing costs of investing in the
26
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE
(continued)
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
EXAMPLE
- --------------------------------------------------------------------------------
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 JANUARY 1, 2006 -
JANUARY 1, 2006 JUNE 30, 2006 JUNE 30, 2006
-------------------------------------------------------------
Actual $1,000.00 $1,019.30 $5.01
Hypothetical
(5% return before expenses) 1,000.00 1,019.84 5.01
*Expenses are equal to the Fund's annualized expense ratio of 1.00%,
which is net of any reimbursements and expenses paid indirectly,
multiplied by the average account value over the period, multiplied by
181 days/365 days (to reflect the current period). The Fund's ending
account value on the first line in the table is based on its actual
total return of 1.93% for the six-month period of January 1, 2005,
through June 30, 2006.
27
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENT
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
At a meeting of the Board of Trustees held on April 19, 2006, the
Board, including the Trustees who are not "interested persons" of the
Trust (the "Independent Trustees"), approved the continuance of the
Investment Advisory Agreement between the Trust and the Manager with
respect to the Fund.
In advance of the meeting, the Trustees received and considered a
variety of information relating to the Investment Advisory Agreement
and the Manager, and were given the opportunity to ask questions and
request additional information from management. The information
provided to the Board included, among other things: (i) a separate
report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance,
expenses, and fees to comparable investment companies; (ii) information
concerning the services rendered to the Fund, as well as information
regarding the Manager's revenues and costs of providing services to the
Fund and compensation paid to affiliates of the Manager; and (iii)
information about the Manager's operations and personnel. Prior to
voting, the Independent Trustees reviewed the proposed continuance of
the Investment Advisory Agreement with management and with experienced
independent counsel and received materials from such counsel discussing
the legal standards for their consideration of the proposed
continuation of the Investment Advisory Agreement with respect to the
Fund. The Independent Trustees also reviewed the proposed continuation
of the Investment Advisory Agreement with respect to the Fund in
private sessions with their counsel at which no representatives of
management were present.
At each regularly scheduled meeting of the Board and its committees,
the Board of Trustees of the Trust receives and reviews, among other
things, information concerning the Fund's performance and related
services provided by the Manager. At the meeting at which the renewal
of the Investment Advisory Agreement is considered, particular focus is
given to information concerning Fund performance, comparability of
28
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENT
(continued)
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
fees and total expenses, and profitability. However, the Board noted
that the evaluation process with respect to the Manager is an ongoing
one. In this regard, the Board's and its committees' consideration of
the Investment Advisory Agreement included certain information
previously received at such meetings.
After full consideration of a variety of factors, the Board of
Trustees, including the Independent Trustees, voted to approve the
Investment Advisory Agreement. In approving the Investment Advisory
Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by independent counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES. In considering the nature,
extent, and quality of the services provided by the Manager under the
Investment Advisory Agreement, the Board of Trustees reviewed
information provided by the Manager relating to its operations and
personnel. The Board also took into account its familiarity with the
Manager's management through Board meetings, discussions, and reports
during the preceding year. The Board considered the fees paid to the
Manager and the services provided to the Fund by the Manager under the
Investment Advisory Agreement, as well as other services provided by
the Manager and its affiliates under other agreements, and the
personnel who provide these services. In addition to the investment
advisory services provided to the Fund, the Manager and its affiliates
provide administrative services, stockholder services, oversight of
Fund accounting, marketing services, assistance in meeting legal and
regulatory requirements, and other services necessary for the operation
of the Fund and the Trust.
The Board considered the Manager's management style and the performance
of its duties under the Investment Advisory Agreement. The Board
considered the level and depth of knowledge of the Manager, including
the professional experience and qualifications of its senior
29
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENT
(continued)
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
and investment personnel, as well as current staffing levels. The
allocation of the Fund's brokerage, including the Manager's process for
monitoring "best execution," was also considered. The Manager's role in
coordinating the activities of the Fund's other service providers was
also considered. The Board considered the Manager's financial condition
and that it had the financial wherewithal to continue to provide the
same scope and high quality of services under the Investment Advisory
Agreement. In reviewing the Investment Advisory Agreement, the Board
focused on the experience, resources, and strengths of the Manager and
its affiliates in managing investment companies, including the Fund.
The Board also reviewed the compliance and administrative services
provided to the Fund by the Manager, including oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Manager and
its affiliates provide compliance and administrative services to the
Fund. The Trustees, guided also by information obtained from their
experiences as directors/trustees of the Fund and other investment
companies managed by the Manager, also focused on the quality of the
Manager's compliance and administrative staff.
EXPENSES AND PERFORMANCE. In connection with its consideration of the
Investment Advisory Agreement, the Board evaluated the Fund's advisory
fees and total expense ratio as compared to other open-end investment
companies deemed to be comparable to the Fund as determined by the
independent third party in its report. The Fund's expenses were
compared to (i) a group of investment companies chosen by the
independent third party to be comparable to the Fund based upon certain
factors, including fund type, comparability of investment objective and
classification, sales load type (in this case, investment companies
with no sales loads), asset size, and expense components (the "expense
group") and (ii) a larger group of investment companies that includes
all no-load retail open-end investment companies in the same investment
classification/objective as the Fund regardless of asset size,
excluding outliers (the "expense universe"). Among other data,
30
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENT
(continued)
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
the Board noted that the Fund's management fee rate -- which includes
advisory and administrative services and the effects of any performance
adjustment as well as any fee waivers or reimbursements -- was below
the median of both its expense group and expense universe. The data
indicated that the Fund's total expenses were below the median of both
its expense group and expense universe. The Board took into account the
various services provided to the Fund by the Manager and its
affiliates. The Board also noted the level and method of computing the
management fee, including the performance adjustment to such fee.
In considering the Fund's performance, the Board of Trustees noted that
the Board reviews at its regularly scheduled meetings information about
the Fund's performance results. The Trustees also reviewed various
comparative data provided to them in connection with their
consideration of the renewal of the Investment Advisory Agreement,
including, among other information, a comparison of the Fund's average
annual total return with its Lipper index and with that of other mutual
funds deemed to be in its peer group by the independent third party in
its report (the "performance universe"). The Fund's performance
universe consisted of the Fund and all retail and institutional
open-end investment companies with the same classification/objective as
the Fund regardless of asset size or primary channel of distribution.
This comparison indicated that the Fund's performance was below the
average of its performance universe and its Lipper index for the period
from the Fund's inception on January 24, 2005, through December 31,
2005. The Board took into account management's discussion of the Fund's
performance as well as the fact that the Fund only recently commenced
operations. The Board also took into account management's discussion of
the investment category in which the Fund was placed for comparison
purposes.
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
31
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENT
(continued)
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
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. The
Trustees reviewed the profitability of the Manager's relationship with
the Fund before tax expenses. In considering the profitability data
with respect to the Fund, the Directors noted that the Manager
reimbursed the Fund for expenses. In reviewing the overall
profitability of the management fee to the Manager, the Board also
considered the fact that affiliates provide shareholder servicing and
administrative services to the Fund for which they receive
compensation. The Board also considered the possible direct and
indirect benefits to the Manager from its relationship with the Trust,
including that the Manager may derive reputational and other benefits
from its association with the Fund. The Trustees recognized that the
Manager should be entitled to earn a reasonable level of profits in
exchange for the level of services it provides to the Fund and the
entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE. The Board considered whether there should be
changes in the management fee rate or structure in order to enable the
Fund to participate in any economies of scale. The Board took into
account management's discussion of the current advisory fee structure.
The Board also noted that if the Fund's assets increase over time, the
Fund may realize other economies of scale if assets increase
proportionally more than some expenses. The Board also considered the
fee waivers and expense reimbursement arrangements by the Manager. 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
32
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENT
(continued)
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2006 (UNAUDITED)
Advisory Agreement; (ii) the Manager maintains an appropriate
compliance program; (iii) the performance of the Fund is being
monitored; (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.
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
USAA SELF-SERVICE For account balance, last transaction, fund
TELEPHONE SYSTEM 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
COMPANY'S BOARD OF DIRECTORS 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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- --------------------------------------------------------------------------------
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[LOGO OF USAA] WE KNOW WHAT IT MEANS TO SERVE.(R)
USAA ----------------------------------
INSURANCE o MEMBER SERVICES
48704-0806 (C)2006, USAA. All rights reserved.
ITEM 2. CODE OF ETHICS.
NOT APPLICABLE. This item must be disclosed only in annual reports.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
NOT APPLICABLE. This item must be disclosed only in annual reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
NOT APPLICABLE. This item must be disclosed only in annual reports.
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 Fund'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. The only change to the
procedures was to document the annual disclosure controls and procedures
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). NOT APPLICABLE. This item must be disclosed only in annual reports.
(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, Total Return Strategy Fund
By:* EILEEN M. SMILEY
-----------------------------------------------------------
Signature and Title: Eileen M. Smiley, Assistant Secretary
Date: 08-17-2006
------------------------------
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:* CHRISTOPHER W. CLAUS
----------------------------------------------------
Signature and Title: Christopher W. Claus/President
Date: 08-21-2006
------------------------------
By:* DEBRA K. DUNN
--------------------------------------------
Signature and Title: Debra K. Dunn/Treasurer
Date: 08-21-2006
------------------------------
*Print the name and title of each signing officer under his or her signature.