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: 811-7852
Exact name of registrant as specified in charter: USAA MUTUAL FUNDS TRUST
Address of principal executive offices and zip code: 9800 FREDERICKSBURG ROAD
SAN ANTONIO, TX 78288
Name and address of agent for service: JAMES G. WHETZEL
USAA MUTUAL FUNDS TRUST
9800 FREDERICKSBURG ROAD
SAN ANTONIO, TX 78288
Registrant's telephone number, including area code: (210) 498-0226
Date of fiscal year end: MAY 31
Date of reporting period: MAY 31, 2013
ITEM 1. REPORT TO STOCKHOLDERS.
USAA MUTUAL FUNDS TRUST - ANNUAL REPORT FOR PERIOD ENDING MAY 31, 2013
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA CORNERSTONE EQUITY FUND]
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ANNUAL REPORT
USAA CORNERSTONE EQUITY FUND
MAY 31, 2013
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PRESIDENT'S MESSAGE
"THE STRONG PERFORMANCE WAS DRIVEN, IN
MY OPINION, BY THE ONGOING QUANTITATIVE [PHOTO OF DANIEL S. McNAMARA]
EASING OF GLOBAL CENTRAL BANKS AND HOPES
FOR FUTURE ECONOMIC GROWTH."
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JUNE 2013
Global financial markets performed well during the one-year reporting period,
with developed markets equities, including U.S. stocks, generating strong gains.
The exuberance -- particularly in the U.S. equity market -- was remarkable,
given the less-than-remarkable improvement in underlying fundamentals. The
strong performance was driven, in my opinion, by the ongoing quantitative easing
of global central banks and hopes for future economic growth.
These quantitative easing measures began in 2008 when the Federal Reserve (the
Fed) took action during the financial crisis to keep the financial markets
working and the U.S. economy afloat. In the years since, the Fed has purchased
billions of dollars of mortgage-backed securities and U.S. Treasuries to push
down long-term interest rates and to help boost economic growth. The Fed's
actions have been mimicked by central bankers all over the world, most recently
by the Bank of Japan, which has said it might add stocks and real estate
investment trusts to its own purchases of fixed-income securities.
As expected, the Fed's efforts through quantitative easing allowed long-term
interest rates to remain exceptionally low during the reporting period. As a
result, investors were incentivized to seek higher yields in riskier asset
classes -- even in the face of questionable fundamentals. During the reporting
period, global economic growth was weak and according to some indicators, showed
signs of decelerating. The U.S. economy was stable, but expanded at a much
slower pace than most of us would have liked. Although the unemployment rate
fell during the reporting period, job creation was sluggish. The U.S. market,
which
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has steadily improved, was a bright spot. In some metropolitan areas, home
prices rose significantly. Meanwhile, corporate earnings growth was tepid.
Without the expansion of already high profit margins, bottom-line earnings
growth will need to come from stronger revenues and at the time of this writing,
revenues have been disappointing.
For most of the reporting period, the bond market remained relatively flat,
moving up and down in a relatively narrow range. However, during May 2013, bond
market volatility increased after Fed Chairman Ben Bernanke said that the Fed
might change course if economic data continued to strengthen. Bond investors
appeared to interpret his comments as a sign that the Fed might prematurely
"taper" its stimulus measures. In my opinion, the bond market overreacted to
Bernanke's comments. I believe he was only reiterating Fed policy -- that the
U.S. central bank would start tapering when economic conditions warranted it.
The emerging markets, meanwhile, struggled during the reporting period. Many
emerging markets countries are reliant on commodities and in the weak global
economy, commodities were less in demand. Also, investors seemed concerned about
inflation as well as rising input costs, which could pressure the profit margins
of emerging markets companies. These are short-term challenges, in my view, and
USAA Asset Management Company maintains a positive long-term outlook for the
emerging markets.
As always, we will continue to monitor events, including shifts in Fed policy,
economic trends, corporate earnings and other factors that could potentially
affect your investments. Thank you for allowing us to help you with your
investment needs.
Sincerely,
/S/ DANIEL S. MCNAMARA
Daniel S. McNamara
President
USAA Investment Management Company
Past performance is no guarantee of future results. o Emerging market countries
are less diverse and mature than other countries and tend to be politically less
stable.
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TABLE OF CONTENTS
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FUND OBJECTIVE 1
MANAGERS' COMMENTARY 2
INVESTMENT OVERVIEW 6
FINANCIAL INFORMATION
Distributions to Shareholders 9
Report of Independent Registered Public Accounting Firm 10
Portfolio of Investments 11
Notes to Portfolio of Investments 12
Financial Statements 13
Notes to Financial Statements 16
EXPENSE EXAMPLE 26
ADVISORY AGREEMENT(S) 28
TRUSTEES' AND OFFICERS' INFORMATION 33
THIS REPORT IS FOR THE INFORMATION OF THE SHAREHOLDERS AND OTHERS WHO HAVE
RECEIVED A COPY OF THE CURRENTLY EFFECTIVE PROSPECTUS OF THE FUND, MANAGED BY
USAA ASSET 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)2013, USAA. All rights reserved.
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FUND OBJECTIVE
The USAA CORNERSTONE EQUITY FUND (the Fund) seeks capital appreciation over the
long term.
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TYPES OF INVESTMENTS
The Fund invests at least 80% of its assets in a selection of USAA mutual funds
(underlying USAA Funds) consisting of a long-term target asset allocation in
equity securities. This is often referred to as a fund-of-funds investment
strategy. The target asset class allocation can deviate from time to time from
these targets as market conditions warrant. This 80% policy may be changed upon
at least 60 days' written notice to shareholders.
IRA DISTRIBUTION WITHHOLDING DISCLOSURE
We generally must withhold federal income tax at a rate of 10% of the taxable
portion of your distribution and, if you live in a state that requires state
income tax withholding, at your state's set rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. If you
wish to make such an election, please call USAA Asset Management Company at
(800) 531-USAA (8722).
If you must pay estimated taxes, you may be subject to estimated tax penalties
if your estimated tax payments are not sufficient and sufficient tax is not
withheld from your distribution.
For more specific information, please consult your tax adviser.
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FUND OBJECTIVE | 1
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MANAGERS' COMMENTARY ON THE FUND
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[PHOTO OF JOHN P. TOOHEY] [PHOTO OF WASIF A. LATIF]
JOHN P. TOOHEY, CFA WASIF A. LATIF
USAA Asset USAA Asset
Management Company Management Company
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o HOW DID THE USAA CORNERSTONE EQUITY FUND (THE FUND) PERFORM DURING THE
ABBREVIATED REPORTING FROM JUNE 8, 2012, (THE FUND'S INCEPTION DATE)
THROUGH MAY 31, 2013?
The Fund returned 18.39% during the reporting period ended May 31, 2013.
This compares to a return of 24.90% for the MSCI All-Country World Index.
The Fund is one of USAA's series of six funds that allow investors to
choose a portfolio based on their risk tolerance and long-term goals.
Reflecting our goal of maximizing long-term returns, the entire Fund is
allocated to stocks with the exception of a small cash position. The Fund
is diversified among U.S. large-cap, U.S. small-cap, developed-market
international, emerging markets, and precious metals stocks. We actively
adjust these weightings based on our near-term view regarding the economy
and financial markets.
o WHAT SPECIFIC ELEMENTS OF YOUR POSITIONING HELPED PERFORMANCE?
The majority of the Fund's holdings in stock funds provided excellent
returns during the reporting period. An environment of improving
Refer to page 7 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. o High double-digit
returns are attributable, in part, to unusually favorable market conditions
and may not be repeated or consistently achieved in the future.
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2 | USAA CORNERSTONE EQUITY FUND
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U.S. economic growth, robust corporate earnings, aggressive monetary
policies by the world's central banks, and elevated investor risk appetites
formed a nearly-ideal environment for stocks. The Fund's largest allocation
is to large-cap domestic stocks, which we achieve through a mix of growth
stocks, value stocks, dividend-paying stocks, and an index fund linked to
the S&P 500(R) Index. All of these investments delivered excellent returns
during the rally of the past year. Our allocation to U.S. small-cap stocks
performed particularly well, in a reflection of the strengthening U.S.
economy and robust earnings for companies in the asset class.
The Fund's allocation to developed-market international stocks also
delivered strong returns. Our decision to tilt toward the developed-market
international stocks largely stemmed from our favorable view on Europe,
where we believed stocks were attractively valued and offered better
earnings prospects than U.S. equities.
o WHAT ELEMENTS OF YOUR POSITIONING HURT PERFORMANCE?
The weakest performance came from our allocations to emerging market
equities and gold mining stocks. Emerging market stocks performed well on
an absolute basis with a return in the mid-teens, but the asset class
finished well behind the U.S. and international developed markets. The
primary reason for the shortfall was the concern about slowing growth in
key emerging economies, such as China, India, and Brazil.
Gold mining stocks, for their part, suffered a substantial downturn and
trailed the broader equity markets by a wide margin. The asset class
suffered from an environment of weaker gold prices, tame headline
inflation, and a strong U.S. dollar.
Although our emerging market and precious metals positions underperformed
in the short term, it's important to keep in mind that we structure the
Fund's allocations based on our long-term views
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MANAGERS' COMMENTARY ON THE FUND | 3
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rather than attempting to chase short-term results. With respect to the
emerging markets, for instance, we believe valuations appear attractive in
many regions, particularly given the potential for rising profit margins in
the years ahead. In addition, many emerging market countries have stronger
fundamentals than their developed market counterparts, as evidenced by the
manageable levels of deficits and sovereign debt. We also continue to hold
a favorable long-term view on gold mining stocks due to their very
attractive valuations and the potential that the aggressive policies of the
world's central banks could lead to increased inflation in the coming years.
o WHAT IS YOUR OUTLOOK FOR THE FINANCIAL MARKETS AS WE MOVE INTO THE SECOND
HALF OF THE YEAR?
We hold a fairly cautious outlook at this stage, since the substantial
year-to-date gains for U.S. equities indicate that the upside may be
limited from here. More important, we are not yet convinced that the U.S.
economy has reached the ability to maintain sustainable growth without easy
monetary and fiscal policies. Consensus estimates for 2013 gross domestic
product growth remain below the long-term averages. Additionally, several
factors could represent a headwind to the U.S. economy, including higher
taxes for a large majority of American taxpayers, government spending cuts,
and stubbornly high unemployment.
On the plus side, certain pockets of the economy are beginning to show
renewed strength. Many corporate balance sheets are flush with cash and
provide the opportunity to increase dividends and invest for future growth.
The United States is also experiencing a boom in domestic natural gas and
oil leading to lower energy costs for businesses and consumers.
While the economic picture may present a mixed bag, the performance of
stocks and other higher-risk assets has been exceptional. The primary
reason for this divergence is the massive liquidity being injected into the
financial system by the world's central banks, which
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4 | USAA CORNERSTONE EQUITY FUND
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has fueled unusually high investor risk appetites and a widespread sense of
complacency.
As the stewards of our investors' capital, our response to this disconnect
isn't to chase performance in the market's hottest sectors for the sake of
short-term returns, but rather to look for ways to improve diversification
and protect the portfolio against the full impact of market volatility.
Although not all elements of our positioning worked during the past year,
our goal is to capture as much market upside as possible, while at the same
time protecting capital and managing risk. We believe the value of this
approach will be evident in the Fund's performance through the ups and
downs of the market.
Thank you for your investment in the Fund.
Diversification does not guarantee a profit or prevent a loss. o Foreign
and precious metals and minerals investing are subject to additional risks,
such as currency fluctuations, market illiquidity, and political
instability. Emerging market countries are most volatile. Emerging market
countries are less diverse and mature than other countries and tend to be
politically less stable.
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MANAGERS' COMMENTARY ON THE FUND | 5
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INVESTMENT OVERVIEW
USAA CORNERSTONE EQUITY FUND (THE FUND) (Ticker Symbol: UCEQX)
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5/31/13
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Net Assets $31.6 Million
Net Asset Value Per Share $11.71
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AVERAGE ANNUAL TOTAL RETURN AS OF 5/31/13
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Since Inception 6/8/12*
18.39%
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EXPENSE RATIOS**
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Before Reimbursement 1.14% After Reimbursement 0.98%
(Includes acquired fund fees and expenses of 0.88%)
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 returns for periods of less than one year are not annualized. This return
is cumulative.
**The expense ratios are reported in the Fund's prospectus dated October 1,
2012, and are based on estimated expenses for the current fiscal year. USAA
Asset Management Company (the Manager) has agreed, through October 1, 2013, to
make payments or waive management, administration, and other fees to limit the
expenses of the Fund so that the total annual operating expenses (exclusive of
commission recapture, expense offset arrangements, acquired fund fees and
expenses, and extraordinary expenses) do not exceed an annual rate of 0.10%, of
the Fund's average net assets. This reimbursement arrangement may not be changed
or terminated during this time period without approval of the Fund's Board of
Trustees and may be changed or terminated by the Manager at any time after
October 1, 2013. If the total annual operating expense ratio of the Fund is
lower than 0.10%, the Fund will operate at the lower expense ratio. These
estimated expense ratios may differ from the expense ratios disclosed in the
Financial Highlights, which excludes acquired fund fees and expenses.
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 adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions or the
redemption of shares.
High double-digit returns are attributable, in part, to unusually favorable
market conditions and may not be repeated or consistently achieved in the
future.
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6 | USAA CORNERSTONE EQUITY FUND
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o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
MSCI ALL-COUNTRY USAA CORNERSTONE
WORLD INDEX EQUITY FUND
05/31/12 $10,000.00 $10,000.00
06/30/12 10,493.89 10,250.00
07/31/12 10,637.55 10,290.00
08/31/12 10,868.84 10,570.00
09/30/12 11,211.17 10,940.00
10/31/12 11,136.45 10,810.00
11/30/12 11,278.85 10,900.00
12/31/12 11,534.33 11,161.72
01/31/13 12,065.70 11,545.91
02/28/13 12,063.82 11,515.57
03/31/13 12,281.81 11,717.78
04/30/13 12,635.33 11,727.89
05/31/13 12,600.66 11,839.11
[END CHART]
*Data from 5/31/12 to 5/31/13.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Cornerstone Equity Fund to the following benchmarks:
o The unmanaged MSCI All-Country World Index is a free float-adjusted market
capitalization weighted index that is designed to measure the equity market
performance of developed and emerging markets.
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 distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index.
*The performance of the MSCI All-Country World Index is calculated from the end
of the month, May 31, 2012, while the Cornerstone Equity Fund's inception date
is June 8, 2012. There may be a slight variation of the performance numbers
because of this difference.
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INVESTMENT OVERVIEW | 7
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o ASSET ALLOCATION -- 5/31/2013 o
<CAPTION
INVESTMENT ALLOCATION
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USAA FUND:
Aggressive Growth ..................................................... 8.4%
Emerging Markets ...................................................... 11.8%
Growth ................................................................ 8.4%
Income Stock .......................................................... 8.3%
International ......................................................... 27.8%
Precious Metals and Minerals .......................................... 6.4%
S&P 500 Index ......................................................... 8.4%
Small Cap Stock ....................................................... 9.2%
Value ................................................................. 8.4%
Total Equity ...................................................... 97.0%
CASH:
Money Market Instruments .............................................. 2.4%
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8 | USAA CORNERSTONE EQUITY FUND
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DISTRIBUTIONS TO SHAREHOLDERS
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The following federal tax information related to the Fund's fiscal period ended
May 31, 2013, 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 2014.
33.74% of ordinary income distributions qualify for the dividends-received
deductions eligible to corporations.
For the fiscal period ended May 31, 2013, the Fund hereby designates the maximum
amount allowable of its net taxable income as qualified dividends taxed at
individual net capital gain rates.
The Fund has elected under Section 853 of the Internal Revenue Code to pass
through the credit for taxes paid in foreign countries. The gross income derived
from foreign sources and foreign taxes paid during the fiscal period ended May
31, 2013, by the Fund are $86,000 and $12,000, respectively.
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DISTRIBUTIONS TO SHAREHOLDERS | 9
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA CORNERSTONE EQUITY FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the USAA Cornerstone Equity Fund (one of the
portfolios constituting USAA Mutual Funds Trust) (the "Fund") as of May 31,
2013, and the related statement of operations, the statement of changes in net
assets, and the financial highlights for the period from June 8, 2012
(commencement of operations) to May 31, 2013. 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.
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, 2013, by correspondence with the custodian and
brokers. 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 Equity Fund at May 31, 2013, and the results of its operations,
the changes in its net assets, and the financial highlights for the period from
June 8, 2012 (commencement of operations) to May 31, 2013, in conformity with
U.S. generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
San Antonio, Texas
July 19, 2013
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10 | USAA CORNERSTONE EQUITY FUND
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PORTFOLIO OF INVESTMENTS
May 31, 2013
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MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
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EQUITY MUTUAL FUNDS (97.0%)
70,585 USAA Aggressive Growth Fund $ 2,639
213,279 USAA Emerging Markets Fund 3,713
136,589 USAA Growth Fund 2,640
167,154 USAA Income Stock Fund 2,633
322,224 USAA International Fund 8,771
120,784 USAA Precious Metals and Minerals Fund 2,026
112,990 USAA S&P 500 Index Fund 2,636
167,556 USAA Small Cap Stock Fund 2,910
150,753 USAA Value Fund 2,638
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Total Equity Mutual Funds (cost: $28,788) 30,606
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MONEY MARKET INSTRUMENTS (2.4%)
MONEY MARKET FUNDS (2.4%)
772,842 State Street Institutional Liquid Reserve Fund, 0.09%(a) (cost: $773) 773
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TOTAL INVESTMENTS (COST: $29,561) $31,379
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($ IN 000s) VALUATION HIERARCHY
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(LEVEL 1) (LEVEL 2) (LEVEL 3)
QUOTED PRICES OTHER SIGNIFICANT SIGNIFICANT
IN ACTIVE MARKETS OBSERVABLE UNOBSERVABLE
ASSETS FOR IDENTICAL ASSETS INPUTS INPUTS TOTAL
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Equity Mutual Funds $30,606 $- $- $30,606
Money Market Instruments:
Money Market Funds 773 - - 773
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Total $31,379 $- $- $31,379
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For the period of June 8, 2012, through May 31, 2013, there were no transfers of
securities between levels. The Fund's policy is to recognize any transfers into
and out of the levels as of the beginning of the period in which the event or
circumstance that caused the transfer occurred.
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PORTFOLIO OF INVESTMENTS | 11
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NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 2013
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o 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%. A category percentage of 0.0% represents less than 0.1% of net assets.
The equity mutual funds in which the USAA Cornerstone Equity Fund (the
Fund) invests are managed by USAA Asset Management Company, an affiliate of
the Funds. The Fund invests in the Reward Shares of the USAA S&P 500 Index
Fund and the Institutional Shares of the other USAA mutual funds.
o SPECIFIC NOTES
(a) Rate represents the money market fund annualized seven-day yield at May
31, 2013.
See accompanying notes to financial statements.
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12 | USAA CORNERSTONE EQUITY FUND
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STATEMENT OF ASSETS AND LIABILITIES (IN THOUSANDS)
May 31, 2013
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ASSETS
Investments in affiliated underlying funds, at value (cost of $28,788) $30,606
Investments in other securities, at value (cost of $773) 773
Receivables:
Capital shares sold 321
USAA Asset Management Company (Note 5C) 40
USAA Transfer Agency Company (Note 5D) 1
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Total assets 31,741
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LIABILITIES
Payables:
Securities purchased 114
Capital shares redeemed 32
Other accrued expenses and payables 40
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Total liabilities 186
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Net assets applicable to capital shares outstanding $31,555
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NET ASSETS CONSIST OF:
Paid-in capital $29,533
Accumulated undistributed net investment income 10
Accumulated net realized gain on investments 194
Net unrealized appreciation of investments 1,818
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Net assets applicable to capital shares outstanding $31,555
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Capital shares outstanding, unlimited number of shares authorized,
no par value 2,694
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Net asset value, redemption price, and offering price per share $ 11.71
=======
See accompanying notes to financial statements.
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FINANCIAL STATEMENTS | 13
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STATEMENT OF OPERATIONS (IN THOUSANDS)
Period ended May 31, 2013*
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INVESTMENT INCOME
Income distributions from affiliated underlying funds $ 177
Interest 1
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Total income 178
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EXPENSES
Custody and accounting fees 32
Postage 2
Shareholder reporting fees 4
Trustees' fees 12
Registration fees 69
Professional fees 44
Other 6
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Total expenses 169
Expenses reimbursed (154)
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Net expenses 15
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NET INVESTMENT INCOME 163
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NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Sales of affiliated underlying funds (1)
Capital gain distributions from affiliated underlying funds 198
Change in net unrealized appreciation/depreciation of affiliated
underlying funds 1,818
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Net realized and unrealized gain 2,015
------
Increase in net assets resulting from operations $2,178
======
*Fund commenced operations on June 8, 2012.
See accompanying notes to financial statements.
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14 | USAA CORNERSTONE EQUITY FUND
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STATEMENT OF CHANGES IN NET ASSETS (IN THOUSANDS)
Period ended May 31, 2013*
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FROM OPERATIONS
Net investment income $ 163
Net realized loss on sales of affiliated underlying funds (1)
Net realized gain on capital gain distributions from affiliated
underlying funds 198
Change in net unrealized appreciation/depreciation
of affiliated underlying funds 1,818
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Increase in net assets resulting from operations 2,178
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DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (153)
Net realized gains (3)
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Distributions to shareholders (156)
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FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 33,852
Reinvested dividends 95
Cost of shares redeemed (4,415)
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Increase in net assets from capital share transactions 29,532
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Capital contribution from USAA Transfer Agency Company (Note 5D) 1
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Net increase in net assets 31,555
NET ASSETS
Beginning of period -
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End of period $31,555
=======
Accumulated undistributed net investment income:
End of period $ 10
=======
CHANGE IN SHARES OUTSTANDING
Shares sold 3,073
Shares issued for dividends reinvested 9
Shares redeemed (388)
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Increase in shares outstanding 2,694
=======
*Fund commenced operations on June 8, 2012.
See accompanying notes to financial statements.
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FINANCIAL STATEMENTS | 15
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NOTES TO FINANCIAL STATEMENTS
May 31, 2013
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(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA MUTUAL FUNDS TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended (the 1940 Act), is an open-end management investment company
organized as a Delaware statutory trust consisting of 50 separate funds. The
information presented in this annual report pertains only to the USAA
Cornerstone Equity Fund (the Fund), which is classified as diversified under the
1940 Act. The Fund's investment objective is to seek capital appreciation over
the long term. The Fund commenced operations on June 8, 2012.
The Fund is a "fund of funds" in that it invests in a portfolio of underlying
USAA equity mutual funds (underlying USAA Funds) managed by USAA Asset
Management Company (the Manager), an affiliate of the Fund.
A. SECURITY VALUATION -- The Trust's Board of Trustees (the Board) has
established the Valuation Committee (the Committee), and subject to Board
oversight, the Committee administers and oversees the Fund's valuation
policies and procedures which are approved by the Board. Among other
things, these policies and procedures allow the Fund to utilize independent
pricing services, quotations from securities dealers, and a wide variety of
sources and information to establish and adjust the fair value of
securities as events occur and circumstances warrant.
The Committee reports to the Board on a quarterly basis and makes
recommendations to the Board as to pricing methodologies and services used
by the Fund and presents additional information to the
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16 | USAA CORNERSTONE EQUITY FUND
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Board regarding application of the pricing and fair valuation policies and
procedures during the preceding quarter.
The Committee meets as often as necessary to make pricing and fair value
determinations. In addition, the Committee holds regular monthly meetings to
review prior actions taken by the Committee and the Manager. Among other
things, these monthly meetings include a review and analysis of back testing
reports, pricing service quotation comparisons, illiquid securities and fair
value determinations, pricing movements, and daily stale price monitoring.
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 NYSE is open) as set
forth below:
1. Investments in the underlying USAA Funds and other open-end
investment companies, other than exchange-traded funds (ETFs) are valued
at their net asset value (NAV) at the end of each business day.
2. The underlying USAA Funds have specific valuation procedures.
Securities held by an underlying USAA Fund 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 a fund, are valued in
good faith at fair value, using methods determined by the Manager in
consultation with a fund's subadvisers, if applicable, under valuation
procedures approved by the Board. 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 a
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,
================================================================================
NOTES TO FINANCIAL STATEMENTS | 17
================================================================================
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. FAIR VALUE MEASUREMENTS -- Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the portfolio of investments
is based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 -- inputs to the valuation methodology are quoted prices
(unadjusted) in active markets for identical securities.
Level 2 -- inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
that are observable for the securities, either directly or indirectly, and
market-corroborated inputs such as market indices.
Level 3 -- inputs to the valuation methodology are unobservable and
significant to the fair value measurement, including the Manager's own
assumptions in determining the fair value.
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risks associated with investing in those securities.
C. 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.
D. 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
================================================================================
18 | USAA CORNERSTONE EQUITY FUND
================================================================================
identified cost basis. Dividend income and capital gain distributions from
the underlying USAA Funds are recorded on the ex-dividend date. Interest
income is recorded daily on the accrual basis. Discounts and premiums on
short-term securities are amortized on a straight-line basis over the life
of the respective securities.
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 may be used to directly reduce the Fund's expenses.
Effective January 1, 2013, the Fund's custodian suspended the bank credit
arrangement. For the period ended May 31, 2013, custodian and other bank
credits reduced the Fund's expenses by less than $500.
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.
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 $500 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 19
================================================================================
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 in the amount of 7.0 basis points of the amount of the committed loan
agreement. Prior to September 30, 2012, the Funds were assessed facility fees by
CAPCO in the amount of 7.5 basis points of the amount of the committed loan
agreement. The facility fees are allocated among the Funds based on their
respective average net assets for the period.
For the period ended May 31, 2013, the Fund paid CAPCO facility fees of less
than $500, which represents less than 0.1% of the total fees paid to CAPCO by
the USAA Funds. The Fund had no borrowings under this agreement during the
period ended May 31, 2013.
(3) DISTRIBUTIONS
The character of any distributions made during the year from net investment
income or net realized gains is determined in accordance with federal tax
regulations and may differ from those determined in accordance with U.S.
generally accepted accounting principles. Also, due to the timing of
distributions, the fiscal year in which amounts are distributed may differ from
the year that the income or realized gains were recorded by the Fund.
The tax character of distributions paid during the period ended May 31, 2013 was
as follows:
2013
--------
Ordinary income* $156,000
* Includes distribution of short-term realized capital gains, if any, which are
taxable as ordinary income.
As of May 31, 2013, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income $ 16,000
Undistributed long-term capital gains 195,000
Unrealized appreciation of investments 1,811,000
================================================================================
20 | USAA CORNERSTONE EQUITY FUND
================================================================================
The difference between book-basis and tax-basis unrealized appreciation of
investments is attributable to the tax deferral of losses on wash sales.
Distributions of net investment income and 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.
Under the Regulated Investment Company Modernization Act of 2010 (the Act), a
fund is permitted to carry forward net capital losses indefinitely.
Additionally, such capital losses that are carried forward will retain their
character as short-term and or long-term capital losses. Post-enactment capital
loss carryforwards must be used before pre-enactment capital loss carryforwards.
As a result, pre-enactment capital loss carryforwards may be more likely to
expire unused.
At May 31, 2013, the Fund had no capital loss carryforwards, for federal income
tax purposes.
For the period ended May 31, 2013, the Fund did not incur any income tax,
interest, or penalties, and has recorded no liability for net unrecognized tax
benefits relating to uncertain income tax positions. On an ongoing basis the
Manager will monitor its tax positions to determine if adjustments to this
conclusion are necessary. The statute of limitations on the Fund's tax return
filings generally remain open for the three preceding fiscal year-ends and
remain subject to examination by the Internal Revenue Service and state taxing
authorities.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the period ended May 31, 2013, were $29,617,000 and
$828,000, respectively.
As of May 31, 2013, the cost of securities, including short-term securities, for
federal income tax purposes, was $29,568,000.
Gross unrealized appreciation and depreciation of investments as of May 31,
2013, for federal income tax purposes, were $2,457,000 and $646,000,
respectively, resulting in net unrealized appreciation of $1,811,000.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 21
================================================================================
(5) AGREEMENTS WITH MANAGER
A. ADVISORY AGREEMENT -- The Manager carries out the Fund's investment policies
and manages the Fund's portfolios pursuant to an Advisory Agreement. The
Manager does not receive any management fees from the Funds for these
services.
B. ADMINISTRATION AND SERVICING FEES -- The Manager provides certain
administration and servicing functions for the Fund. The Manager does not
receive any fees from the Fund for these services.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and
legal services for the benefit of the Fund. The Board has approved the
billing of these expenses to the Fund. These expenses are included in the
professional fees on the Fund's statement of operations and, for the period
ended May 31, 2013, were $1,000 for the Fund.
C. EXPENSE LIMITATION -- The Manager has agreed, through October 1, 2013,
to limit the annual expenses of the Fund to 0.10% of its average net
assets, excluding extraordinary expenses and before reductions of any
expenses paid indirectly, and will reimburse the Fund for all expenses in
excess of that amount. This expense limitation arrangement may not be
changed or terminated through October 1, 2013, without approval of the
Board, and may be changed or terminated by the Manager at any time after
that date. For the period ended May 31, 2013, the Fund incurred
reimbursable expenses of $154,000, of which $40,000 was receivable from the
Manager.
D. TRANSFER AGENCY AGREEMENT -- USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services (SAS), an affiliate of the Manager, provides
transfer agent services to the Fund. SAS does not receive any fees from the
Fund for these services. For the period ended May 31, 2013, the Fund
recorded a capital contribution and a
================================================================================
22 | USAA CORNERSTONE EQUITY FUND
================================================================================
receivable from SAS of $1,000 for adjustments related to corrections to
shareholder transactions.
E. UNDERWRITING SERVICES -- USAA Investment Management Company provides
exclusive underwriting and distribution of the Fund's shares on a
continuing best-efforts basis and receives no commissions or fees for this
service.
(6) 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.
The Manager is indirectly wholly owned by United Services Automobile Association
(USAA), a large, diversified financial services institution. At May 31, 2013,
USAA and its affiliates owned 500,000 shares, which represents 18.6% of the
Fund.
(7) TRANSACTIONS WITH AFFILIATED FUNDS
A. SHARE OWNERSHIP -- The Fund does not invest in the underlying USAA Funds for
the purpose of exercising management or control; however, investments by the
Fund may represent a significant portion of the underlying USAA Funds' net
assets. At May 31, 2013, the Fund owned the following percentages of the
total outstanding shares of each of the underlying USAA Funds:
AFFILIATED USAA FUND OWNERSHIP %
-------------------------------------------------------------------------
Aggressive Growth 0.2
Emerging Markets 0.4
Growth 0.2
Income Stock 0.1
International 0.3
Precious Metals and Minerals 0.2
S&P 500 Index 0.1
Small Cap Stock 0.2
Value 0.3
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
B. TRANSACTIONS WITH AFFILIATED FUNDS -- The following table provides details
related to the Fund's investment in the underlying USAA Funds for the period
ended May 31, 2013 (in thousands):
PURCHASE SALES DIVIDEND REALIZED GAIN MARKET VALUE
AFFILIATED USAA FUND COST(a) PROCEEDS INCOME (LOSS)(b) 05/31/2013
--------------------------------------------------------------------------------------
Aggressive Growth $2,505 $ 26 $ 8 $(1) $2,639
Emerging Markets 3,672 16 20 - 3,713
Growth 2,534 228 7 2 2,640
Income Stock 2,355 24 20 - 2,633
International 8,371 265 66 1 8,771
Precious Metals
and Minerals 2,721 47 - (2) 2,026
S&P 500 Index 2,475 74 26 (2) 2,636
Small Cap Stock 2,676 124 10 1 2,910
Value 2,308 24 20 - 2,638
(a) Includes reinvestment of distributions from dividend income and realized
gains.
(b) Includes capital gain distributions received, if any.
(8) NEW ACCOUNTING PRONOUNCEMENTS
OFFSETTING ASSETS AND LIABILITIES -- In December 2011, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-11,
Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.
The amendments in the ASU enhance disclosures about offsetting of financial
assets and liabilities to enable investors to understand the effect of these
arrangements on a fund's financial position. In January 2013, FASB issued ASU
No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures
about Offsetting Assets and Liabilities. The amendments in ASU No. 2013-01
clarify the scope of disclosures required by ASU No. 2011-11. These ASUs are
effective for annual periods beginning on or after January 1, 2013, and interim
periods within those annual periods. The Fund believes the adoption of these
ASUs will not have a material impact on its financial statement disclosures.
================================================================================
24 | USAA CORNERSTONE EQUITY FUND
================================================================================
(9) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
PERIOD ENDED
MAY 31,
2013***
------------
Net asset value at beginning of period $ 10.00
-------
Income from investment operations:
Net investment income(a) .12
Net realized and unrealized gain(a) 1.71
-------
Total from investment operations(a) 1.83
-------
Less distributions from:
Net investment income (.12)
Realized capital gains (.00)(d)
-------
Total distributions (.12)
-------
Net asset value at end of period $ 11.71
=======
Total return (%)* 18.39
Net assets at end of period (000) $31,555
Ratios to average net assets:**
Expenses (%)(b),(c) .10
Expenses, excluding reimbursements (%)(b),(c) 1.13
Net investment income (%)(b) 1.09
Portfolio turnover (%) 5
* Assumes reinvestment of all net investment income and realized capital
gain distributions, if any, during the period. Includes adjustments in
accordance with U.S. generally accepted accounting principles and could
differ from the Lipper reported return. Total returns for periods of less
than one year are not annualized.
** For the period ended May 31, 2013, average net assets were $15,261,000.
*** Fund commenced operations on June 8, 2012.
(a) Calculated using average shares. For the period ended May 31, 2013, average
shares were 1,337,000.
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(c) 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%.
(d) Represents less than $0.01 per share.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
EXPENSE EXAMPLE
May 31, 2013 (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 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 Fund also indirectly bears its
pro-rata share of the expenses of the underlying USAA Funds in which it invests
(acquired funds). These acquired fund fees and expenses are not included in the
Fund's annualized expense ratios used to calculate the expense estimates in the
table on the next page.
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, 2012, through May
31, 2013.
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
================================================================================
26 | USAA CORNERSTONE EQUITY FUND
================================================================================
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 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, 2012 -
DECEMBER 1, 2012 MAY 31, 2013 MAY 31, 2013
----------------------------------------------------------
Actual $1,000.00 $1,086.20 $0.52
Hypothetical
(5% return before expenses) 1,000.00 1,024.43 0.50
* Expenses are equal to the Fund's annualized expense ratio of 0.10%, which
is net of any reimbursements and 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 8.62% for the
six-month period of December 1, 2012, through May 31, 2013.
================================================================================
EXPENSE EXAMPLE | 27
================================================================================
ADVISORY AGREEMENT(S)
May 31, 2013
--------------------------------------------------------------------------------
At a meeting of the Board of Trustees (the Board) held on April 30, 2013, the
Board, including the Trustees who are not "interested persons" of the Trust (the
Independent Trustees), approved for an annual period the continuance of the
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 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 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 continuance of the
Advisory Agreement with respect to the Fund. The Independent Trustees also
reviewed the proposed continuation of the 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
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 Advisory Agreement is considered, particular focus is
given to information concerning Fund
================================================================================
28 | USAA CORNERSTONE EQUITY FUND
================================================================================
performance, comparability of 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 Advisory Agreement included certain information previously received at
such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving the
Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have 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 Advisory
Agreement, the Board reviewed information provided by the Manager relating to
its operations and personnel. The Board also took into account its knowledge of
the Manager's management and the quality of the performance of the Manager's
duties through Board meetings, discussions, and reports during the preceding
year. The Board considered the services provided to the Fund by the Manager
under the 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 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 Manager's role in coordinating the activities of the Fund
other service providers also was considered.
================================================================================
ADVISORY AGREEMENT(S) | 29
================================================================================
The Board also considered the Manager's risk management processes. 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 Advisory Agreement. In reviewing the Advisory Agreement, the Board
focused on the experience, resources, and strengths of the Manager and its
affiliates in managing the Fund, as well as the other funds in the Trust.
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 Trustees, guided also by information
obtained from their experiences as trustees of the Trust, also focused on the
quality of the Manager's compliance and administrative staff.
EXPENSES AND PERFORMANCE -- In connection with its consideration of the 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 the fund type, comparability of investment objective and
classification, sales load type (in this case, investment companies with
front-end loads and no sales loads), asset size, and expense components (the
"expense group") and (ii) a larger group of investment companies that includes
all no-load and front-end load retail open-end investment companies in same
investment classifications/objectives as the Fund regardless of asset size,
excluding outliers (the "expense universe"). The Board noted that the Manager
does not receive a management fee from the Fund. The data indicated that the
Fund's total expenses, which included underlying fund expenses and any
reimbursements, were below the median of 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, including the high quality of services
provided by the Manager and the Manager's current undertakings to maintain
expense limitations for the Fund.
================================================================================
30 | USAA CORNERSTONE EQUITY FUND
================================================================================
In considering the Fund's performance, the Board noted that it 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 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, among other data, the Fund's
performance was above the average of its performance universe and its Lipper
index for the six-month period ended December 31, 2012. The Board also noted
that the Fund's percentile performance ranking was in the top 25% of its
performance universe for the six-month period ended December 31, 2012. The Board
also took into account that the Fund commenced operations on June 8, 2012.
COMPENSATION AND PROFITABILITY -- The Board took into consideration that the
Manager does not collect a management fee from the Fund. The information
considered by the Board included operating profit margin information for the
Manager's business as a whole. This information included a 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 has reimbursed the Fund for certain expenses. The Trustees reviewed the
profitability of the Manager's relationship with the Fund before tax expenses.
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 took into account the Manager's receipt of fees from the underlying
funds. 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
Board also took into account the high quality of services received by the Fund
from the Manager. The Trustees recognized that the Manager should be entitled to
earn a reasonable level of profits in exchange
================================================================================
ADVISORY AGREEMENT(S) | 31
================================================================================
for the level of services it provides to the Fund and the entrepreneurial risk
that it assumes as Manager.
ECONOMIES OF SCALE -- With respect to the consideration of any economies of
scale to be realized by the Fund, the Board took into account that the Manager
does not receive any advisory fees under the Advisory Agreement. The Board took
into account management's discussion of the Fund's current advisory fee
structure. The Board also considered the fee waiver and expense reimbursement
arrangements by the Manager. The Board also considered the effects of the Fund's
growth and size on the Fund's performance and fees, noting that if the Fund's
assets increase over time, the Fund may realize other economies of scale if
assets increase proportionally more than some expenses. The Board determined
that the current fee structure was reasonable.
CONCLUSIONS -- The Board reached the following conclusions regarding the Fund's
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 Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) the performance of the Fund is
reasonable in relation to the performance of funds with similar investment
objectives and to relevant indices; (iv) the Fund's advisory expenses are
reasonable in relation to those of similar funds and to the services to be
provided by the Manager; and (v) the Manager's level of profitability from its
relationship with the Fund is reasonable. Based on its conclusions, the Board
determined that continuation of the Advisory Agreement would be in the best
interests of the Fund and its shareholders.
================================================================================
32 | USAA CORNERSTONE EQUITY FUND
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION
TRUSTEES AND OFFICERS OF THE TRUST
--------------------------------------------------------------------------------
The Board of Trustees (the Board) of the Trust consists of five Trustees. These
Trustees and the Trust's Officers supervise the business affairs of the USAA
family of funds. The Board 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 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 Asset Management Company (AMCO) and its affiliates.
The term of office for each Trustee shall be 20 years or until the Independent
Trustee reaches age 72 or an Interested Trustee reaches age 65. The Board may
change or grant exceptions from this policy at any time without shareholder
approval. A Trustee may resign or be removed by a vote of the other Trustees or
the holders of a majority of the outstanding shares of the Trust at any time.
Vacancies on the Board can be filled by the action of a majority of the
Trustees, provided that at least two-thirds of the Trustees have been elected by
the shareholders.
Set forth below are the Trustees and Officers of the Trust, 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 the USAA family of funds consisting of one registered investment
company offering 50 individual funds. 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' Trustees, you may call (800)
531-USAA (8722) to request a free copy of the funds' statement of additional
information (SAI).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 33
================================================================================
INTERESTED TRUSTEE(1)
--------------------------------------------------------------------------------
DANIEL S. McNAMARA(2, 4)
Trustee, President, and Vice Chair of the Board of Trustees
Born: December 1966
Year of Election or Appointment: 2009
President, Financial Advice and Solutions Group, USAA (2/13-present); Director
of AMCO (01/12-present); President and Director, USAA Investment Management
Company (IMCO) and USAA Shareholder Account Services (SAS) (10/09-present);
Senior Vice President of USAA Financial Planning Services Insurance Agency, Inc.
(FPS) (04/11-present); President and Director of USAA Investment Management
Corporation (ICORP) (03/10-present); President and Director of USAA Financial
Advisors, Inc. (FAI) and FPS (10/09-04/11); President, Banc of America
Investment Advisors (9/07-9/09); Managing Director Planning and Financial
Products Group, Bank of America (09/01-09/09). Mr. McNamara brings to the Board
extensive experience in the financial services industry, including experience as
an officer of the Trust.
NON-INTERESTED (INDEPENDENT) TRUSTEES
--------------------------------------------------------------------------------
ROBERT L. MASON, PH.D.(2, 3, 4, 5, 6)
Trustee and Chair
Born: July 1946
Year of Election or Appointment: 1997(+)
Institute Analyst, Southwest Research Institute (3/02-present), which focuses in
the fields of technological research. Dr. Mason brings to the Board particular
experience with information technology matters, statistical analysis, and human
resources as well as over 15 years' experience as a Board member 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.
================================================================================
34 | USAA CORNERSTONE EQUITY FUND
================================================================================
BARBARA B. OSTDIEK, PH.D.(3, 4, 5, 6, 7)
Trustee
Born: March 1964
Year of Election or Appointment: 2008
Associate Professor of Finance at Jesse H. Jones Graduate School of Business at
Rice University (7/01-present). Academic Director, El Paso Corporation Finance
Center at Jesse H. Jones Graduate School of Business at Rice University
(7/02-6/12). Dr. Ostdiek brings to the Board particular experience with
financial investment management, education, and research as well as over four
years' experience as a Board member of the USAA family of funds. Dr. Ostdiek
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)
Trustee
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
brings to the Board particular experience with organizational development,
budgeting, finance, and capital markets as well as over 12 years' experience as
a Board member 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. Mr. Reimherr is a member of the Advisory Board
for Texas Star & Nut Company.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 35
================================================================================
PAUL L. MCNAMARA(3, 4, 5, 6)
Trustee
Born: July 1948
Year of Election or Appointment: 2012
Director, Cantor Opportunistic Alternatives Fund, LLC (3/10-present), which is a
closed-end fund of funds managed by Cantor Fitzgerald Investment Advisors, LLC.
Mr. McNamara retired from Lord Abbett & Co. LLC as an Executive Member on
9/30/09, a position he held since 10/02. He had been employed at Lord Abbett
since 1996. Mr. McNamara brings to the Board extensive experience with the
financial services industry and, in particular, institutional and retail mutual
fund markets, including experience with mutual fund marketing, distribution, and
risk management, as well as overall experience with compliance and corporate
governance issues. Mr. McNamara also has experience serving as a fund director
as well as a one-year Board Member of the USAA family of funds. Mr. McNamara
holds no other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds. Paul L. McNamara is no
relation to Daniel S. McNamara.
(1) Indicates the Trustee is an employee of AMCO 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 trustees is that of the USAA Funds,
P.O. Box 659430, San Antonio, TX 78265-9430.
(7) Dr. Ostdiek was appointed the Audit Committee Financial Expert for the
Funds' Board in November 2008.
(+) Mr. Mason was elected as Chair of the Board in January 2012.
================================================================================
36 | USAA CORNERSTONE EQUITY FUND
================================================================================
INTERESTED OFFICERS(1)
--------------------------------------------------------------------------------
R. MATTHEW FREUND
Vice President
Born: July 1963
Year of Appointment: 2010
Senior Vice President, Investment Portfolio Management, AMCO (01/12-present);
Senior Vice President, Investment Portfolio Management, IMCO (02/10-12/11); Vice
President, Fixed Income Investments, IMCO (02/04-2/10). Mr. Freund also serves
as a director of SAS.
JOHN P. TOOHEY
Vice President
Born: March 1968
Year of Appointment: 2009
Vice President, Equity Investments, AMCO (01/12-present); Vice President, Equity
Investments, IMCO (02/09-12/11); Managing Director, AIG Investments,
(12/03-01/09).
ADYM W. RYGMYR
Secretary
Born: February 1969
Year of Appointment: 2012
Director, USAA IMCO (08/12-present); Vice President, Financial Advice &
Solutions Group General Counsel, USAA (03/12-present); Managing Director and
General Counsel, TIAA-CREF (04/04-03/12). Mr. Rygmyr also holds the officer
positions of Vice President and Secretary, IMCO, AMCO, and SAS.
JAMES G. WHETZEL
Assistant Secretary
Born: February 1978
Year of Appointment: 2010
Executive Director Securities Attorney, Financial Advice & Solutions Group
General Counsel, USAA (10/12-present); Attorney, Financial Advice & Solutions
Group General Counsel, USAA (11/08-10/12); Reed Smith, LLP, Associate
(08/05-11/08). Mr. Whetzel also serves as Assistant Secretary of AMCO and SAS.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 37
================================================================================
ROBERTO GALINDO, Jr.
Treasurer
Born: November 1960
Year of Appointment: 2008
Assistant Vice President, Portfolio Accounting/Financial Administration, USAA
(12/02-present).
WILLIAM A. SMITH
Assistant Treasurer
Born: June 1948
Year of Appointment: 2009
Vice President, Senior Financial Officer, and Treasurer, IMCO, FAI, FPS, SAS and
USAA Life (2/09-present); Vice President, Senior Financial Officer, USAA
(2/07-present).
STEPHANIE HIGBY
Chief Compliance Officer
Born: July 1974
Year of Appointment: 2013
Executive Director, Institutional Asset Management Compliance, USAA
(04/13-present); Director, Compliance for Institutional Asset Management
Compliance, AMCO (03/12-04/13); Compliance Director for USAA Mutual Funds
Compliance, IMCO (06/06-02/12).
(1) Indicates those Officers who are employees of AMCO or affiliated companies
and are considered "interested persons" under the Investment Company Act
of 1940.
================================================================================
38 | USAA CORNERSTONE EQUITY FUND
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
Paul L. McNamara
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
MUTUAL FUND Under "My Accounts" on
SELF-SERVICE 24/7 usaa.com select "Investments,"
AT USAA.COM then "Mutual Funds"
OR CALL Under "Investments" view
(800) 531-USAA account balances, or click
(8722) "I want to...," and select
the desired action.
--------------------------------------------------------------------------------
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-USAA (8722); (ii) at USAA.COM;
and (iii) in summary within the Statement of Additional Information on the SEC's
website 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 without charge (i) at USAA.COM; and (ii) on the SEC's
website 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 at no charge (i) by calling (800) 531-USAA (8722); (ii) at USAA.COM;
and (iii) on the SEC's website at HTTP://WWW.SEC.GOV. These Forms N-Q also may
be reviewed and copied at the SEC's Public Reference Room in Washington, D.C.
Information on the operation of the Public Reference Room may be obtained by
calling (800) 732-0330.
================================================================================
USAA --------------
9800 Fredericksburg Road PRSRT STD
San Antonio, TX 78288 U.S. Postage
PAID
USAA
--------------
>> SAVE PAPER AND FUND COSTS
Under MY PROFILE on usaa.com select MANAGE PREFERENCES
Set your DOCUMENT PREFERENCES to USAA DOCUMENTS ONLINE.
[LOGO OF USAA]
USAA WE KNOW WHAT IT MEANS TO SERVE.(R)
=============================================================================
97449-0713 (C)2013, USAA. All rights reserved.
ITEM 2. CODE OF ETHICS.
On September 27, 2012, the Board of Trustees of USAA Mutual Funds 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. A copy of the 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.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
On November 18, 2008, the Board of Trustees of USAA Mutual Funds Trust
designated Dr. Barbara B. Ostdiek, Ph.D. as the Board's audit committee
financial expert. Dr. Ostdiek has served as an Associate Professor of Management
at Rice University since 2001. Dr. Ostdiek also has served as an Academic
Director at El Paso Corporation Finance Center since 2002. Dr. Ostdiek 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 Mutual Funds Trust.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES. The Registrant, USAA Mutual Funds Trust, consists of 50 funds in
all. Only 14 funds of the Registrant have a fiscal year-end of May 31 and
are included within this report (the Funds). The aggregate fees accrued or
billed by the Registrant's independent auditor, Ernst & Young LLP, for
professional services rendered for the audit of the Registrant's 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, 2013 and 2012 were $420,575 and $304,929, 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, 2013 and 2012 were $65,860
and $70,828, respectively. All services were preapproved by the Audit Committee.
(c) TAX FEES. The aggregate fees billed by Ernst & Young LLP to the Registrant
for tax compliance services relating to foreign tax reclaim filings for the
fiscal years ended May 31, 2013 and 2012 were $15,500 and $0, respectively. No
other fees were billed by Ernst & Young LLP for the review of federal, state
and city income and tax returns and excise calculations for fiscal years ended
May 31, 2013 and 2012.
(d) ALL OTHER FEES. No such fees were billed by Ernst & Young LLP for fiscal
years ended May 31, 2013 and 2012.
(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, USAA
Asset Management Company (AMCO), and the Funds' transfer agent, SAS, for May
31, 2013 and 2012 were $402,750 and $384,984, respectively.
(h) Ernst & Young LLP provided non-audit services to AMCO in 2013 and 2012 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 Trustees will consider Ernst & Young LLP's independence and
will consider whether the provision of these non-audit services to AMCO 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. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not Applicable.
Item 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not Applicable.
ITEM 10. 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 11. CONTROLS AND PROCEDURES
The principal executive officer and principal financial officer of USAA Mutual
Funds 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. 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
considering by the Trust's Board in approving the Trust's advisory agreements.
ITEM 12. 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 FUNDS TRUST
I. PURPOSE OF THE CODE OF ETHICS
USAA Mutual Funds Trust (the Trust or the Funds) has 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 the Trust'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 the Trust files with, or submits
to, the SEC and in other public communications made by the
Trust;
- compliance with applicable laws and governmental rules and
regulations;
- prompt internal reporting of violations of the Code to the
Chief Legal Officer of the Trust, the President of the Trust
(if the violation concerns the Treasurer), the CEO of USAA,
and if deemed material to the Funds' financial condition or
reputation, the Chair of the Trust's Board of 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 AMCO 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 AMCO, or for both), be involved in establishing policies and
implementing decisions that will have different effects on AMCO and the Funds.
The participation of Covered Officers in such activities is inherent in the
contractual relationship between the Funds and AMCO 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.
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.
- 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 the Trust, must be
approved by the USAA Funds' and Investment Code of Ethics
Committee and reported to the Trust.
- the receipt of any non-nominal (I.E., valued over $25) gifts from
any person or entity with which a Trust 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 the Trust shall be considered the Chief Legal Officer
of the Trust.
- 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 Trust's service providers, other
than IMCO or any other USAA company, must be approved by the CEO
of USAA and reported to the Trust's 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
CEO of USAA and reported to the Trust's 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 the Trust.
- 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'
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 AMCO with the goal of promoting
full, fair, accurate, timely and understandable disclosure in
the reports and documents filed by the Trust 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 AMCO'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 the Trust
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 Trustees. However, any
approvals or waivers sought by a Covered Officer will be
reported initially to the CEO of USAA and will be considered by
the Trust's Board of Trustees.
B. REQUIRED REPORTS
- EACH COVERED OFFICER MUST:
- Upon adoption of the Code, affirm in writing to the
Board 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
Trust (if the complaint involves the Treasurer), the CEO of
USAA and the Chair of the Trust's 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 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 Trust's outside counsel or the counsel to the Independent
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 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 Trust's 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.
- The Board of Trustees understands 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
Trustees will report to the Board 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 the Trust, AMCO, 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 Investment Code of Ethics (designated to
address 1940 Act and Advisers Act requirements) and AMCO's more detailed
compliance policies and procedures (including its Insider Trading Policy) are
separate requirements applying to Covered Officers and other AMCO 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 Board of 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 Trust's
Board of Trustees and counsel for the Independent Trustees (if any), the Trust
and its counsel, AMCO, and other personnel of USAA as determined by the Trust's
Chief Legal Officer or the Chair of the Trust's Board of 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 State Tax-Free
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
State Tax-Free Trust: September 14, 2005.
Approved and adopted as amended by the Board of Trustees of USAA Life Investment
Trust: December 8, 2005.
Approved and adopted as amended by IMCO's Code of Ethics Committee: August 16,
2006.
Approved and adopted by the Board of Trustees of USAA Mutual Funds Trust:
September 13, 2006.
Approved and adopted by IMCO's Code of Ethics Committee: August 28, 2007.
Approved and adopted by the Investment Code of Ethics Committee: August 29,
2008.
Approved and adopted as amended by the Board of Trustees of USAA Mutual Funds
Trust: September 19, 2008.
Approved and adopted by the Investment Code of Ethics Committee: August 17,
2009.
Approved and adopted by the Board of Trustees of USAA Mutual Funds Trust:
September 24, 2009.
Approved and adopted by the Investment Code of Ethics Committee: August 31,
2010.
Approved and adopted by the Board of Trustees of USAA Mutual Funds Trust:
September 22, 2010.
Approved and adopted by the Investment Code of Ethics Committee: August 22,
2011.
Approved and adopted by the Board of Trustees of USAA Mutual Funds Trust:
September 20, 2011.
Approved and adopted by the Investment Code of Ethics Committee: September 4,
2012.
Approved and adopted by the Board of Trustees of USAA Mutual Funds Trust:
September 27, 2012.
APPENDIX A
COVERED OFFICERS
PRESIDENT
TREASURER
(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 MUTUAL FUNDS TRUST, Period Ended May 31, 2013
By:* /s/ James G. Whetzel
--------------------------------------------------------------
Signature and Title: James G. Whetzel, Secretary
Date: 07/24/2013
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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/ Daniel S. McNamara
-----------------------------------------------------
Signature and Title: Daniel S. McNamara, President
Date: 07/25/2013
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By:* /s/ Roberto Galindo, Jr.
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Signature and Title: Roberto Galindo, Jr., Treasurer
Date: 07/24/2013
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*Print the name and title of each signing officer under his or her signature.