UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR/S
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-7852
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: DECEMBER 31
Date of reporting period: JUNE 30, 2013
ITEM 1. SEMIANNUAL REPORT TO STOCKHOLDERS.
USAA MUTUAL FUNDS TRUST - SEMIANNUAL REPORT FOR PERIOD ENDED JUNE 30, 2013
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA TOTAL RETURN STRATEGY FUND]
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SEMIANNUAL REPORT
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2013
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PRESIDENT'S MESSAGE
"...[W]E BELIEVE THE MARKETS WILL FIND
A WAY TO MANAGE WITHOUT THE FED'S [PHOTO OF DANIEL S. McNAMARA]
QUANTITATIVE EASING PROGRAMS, AS THEY
HAVE FOR MOST OF THE LAST 100 YEARS."
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JULY 2013
The power of market psychology was on display during the reporting period as
investors interpreted and then reinterpreted previously misinterpreted comments
by Federal Reserve (the Fed) Chairman Ben Bernanke. At first, stocks and bonds
sold off on the realization that the Fed had an optimistic view of future U.S.
economic growth and expected it to accelerate during the second half of 2013. In
other words, good news was bad news. Meanwhile, inflation pressures, which are
very modest at the time of this writing, were expected to increase, setting the
stage for the Fed to reduce -- or "taper" -- its quantitative easing measures.
From this point of view, higher inflation, usually bad news for central bankers,
was considered good news. (The term "quantitative easing" is generally used to
reference programs in which the Fed uses newly created money to purchase
financial assets.)
The markets generally reacted as though tapering was imminent. Bond yields rose
(and prices, which move in the opposite direction, dropped) in anticipation of
reduced Fed buying. The increase in yields sparked a sell-off across the global
financial markets, including stocks, corporate bonds, emerging markets assets
and precious metals. With more sellers than buyers, liquidity grew tight and
smaller markets, such as emerging markets equities and emerging markets debt,
suffered steeper declines than larger markets, such as U.S. equities.
The sell-off was remarkable because the Fed has always said it would not start
unwinding its stimulus programs until it became clear that economic growth was
self-sustaining. In addition, Bernanke said that the Fed could increase
quantitative easing if the economy stalled or grew more slowly. Indeed,
first-quarter gross domestic product growth was revised downward during the last
week of the reporting period from 2.4% to 1.8%, suggesting that the Fed might
not be tapering any time soon.
Although interest rates did increase during the reporting period, they remain
exceptionally low by historical measures. In the years since the
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financial crisis, the 10-year U.S. Treasury yield has been near 2.5% more than
once. At those times, if I recall, many observers considered that a low yield.
When it reached the same level on June 21, 2013, it was perceived as high. In my
opinion, investors have less to fear from rising interest rates than they do
from an extended period of low rates, which some believe could result in a
Japan-like deflationary economy. That said, higher interest rates do mean that
bond investors are likely to see a decrease in their principal value, but they
will also -- for the first time in a long time -- see an increase in the income
they receive from their fixed-income investments.
Meanwhile, the June sell-off should serve as a reminder about the importance of
an investment plan and the need to keep emotion out of the investment process.
At USAA Asset Management Company, we believe every investor should hold a
diversified portfolio that is directly tied to their goals, risk tolerance and
time horizon. Diversification is important because different asset classes, such
as stocks and bonds, move up and down at different rates and often at different
times. If you think you may be over-allocated to fixed-income securities or
equities, you may want to reassess your investment risk and rebalance your
portfolio. Regular rebalancing can potentially help you protect your gains and
prepare for what happens next. I encourage you to contact a USAA advisor with
any questions or for assistance in updating your investment plan.
Whatever happens in the months ahead, you can be assured that our portfolio
management team will continue working on your behalf. "Taper talk" is
distracting and market reaction can be extreme but at USAA Asset Management
Company, we recognize that the Fed's extraordinary monetary stimulus cannot go
on forever. Also, we believe the markets will find a way to manage without the
Fed's quantitative easing programs, as they have for most of the last 100 years.
From all of us here, thank you for your investment.
Sincerely,
/S/ DANIEL S. MCNAMARA
Daniel S. McNamara
President
USAA Investment Management Company
Past performance is no guarantee of future results. o Diversification is a
technique to help reduce risk and does not guarantee a profit or prevent a loss.
o Financial Planning Services Insurance Agency, Inc. (known as USAA Financial
Insurance Agency in California, License # 0E36312), and USAA Financial Advisors,
Inc., a registered broker dealer.
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TABLE OF CONTENTS
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FUND OBJECTIVE 1
MANAGERS' COMMENTARY 2
INVESTMENT OVERVIEW 6
FINANCIAL INFORMATION
Portfolio of Investments 9
Notes to Portfolio of Investments 14
Financial Statements 16
Notes to Financial Statements 19
EXPENSE EXAMPLE 36
ADVISORY AGREEMENT 38
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 TOTAL RETURN STRATEGY FUND (THE FUND) SEEKS CAPITAL APPRECIATION
THROUGH THE USE OF A DYNAMIC ALLOCATION STRATEGY, ACROSS STOCKS, BONDS, AND CASH
INSTRUMENTS.
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TYPES OF INVESTMENTS
The Fund's assets are invested pursuant to a dynamic allocation strategy, which
allows the Fund's investment adviser to invest at any given time a portion or
substantially all of the Fund's assets allocated to it in stocks or bonds,
either directly or through the use of exchange-traded funds (ETFs), and/or cash
equivalents, through direct investment in short-term, high-quality money market
instruments or money market funds.
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
USAA Asset Management Company
JOHN P. TOOHEY, CFA JULIANNE BASS, CFA
WASIF A. LATIF TONY ERA
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o HOW DID THE USAA TOTAL RETURN STRATEGY FUND (THE FUND) PERFORM DURING THE
REPORTING PERIOD?
The Fund returned -4.45% during the reporting period versus the 13.82%
return of the S&P 500(R) Index and the 3.86% return of the Lipper Flexible
Portfolio Funds Index.
o HOW DID THE GLOBAL FINANCIAL MARKETS PERFORM DURING THE REPORTING PERIOD?
During the reporting period, financial market performance was driven
primarily by the outlook for global economic growth and central bank
policy. In the United States, the economy continued to be supported by a
rebound in the housing market, the ongoing strength in the domestic energy
sector, and a steady decline in the headline unemployment rate. The
domestic economy appears to be on track for growth of 2% to 2.5% in 2013,
which -- while below the longer-term trend -- is attractive relative to the
rest of the world.
Economic growth trends overseas were not nearly as positive as those here
at home. At a time of weak economic growth in Europe and Japan, along with
slowing growth in key emerging markets such as China and Brazil, investors
gravitated away from international equities. The developed-market MSCI EAFE
Index closed with a return
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
Refer to page 7 for benchmark definitions.
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2 | USAA TOTAL RETURN STRATEGY FUND
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of 4.11%, while the MSCI Emerging Markets Index underperformed sharply with
a return of -9.57%.
The bond market, after performing very well through the 2010-2012 period,
finished the period with a return of -2.44%, as gauged by the Barclays U.S.
Aggregate Bond Index. The bond market was pressured by both the steady
improvement in the U.S. economy as well as the fear, toward the tail end of
the period, that the U.S. Federal Reserve (the Fed) may "taper" (or reduce)
the stimulative bond-buying program known as quantitative easing (QE)
before year-end.
o WHAT SPECIFIC FACTORS HELPED AND HURT FUND PERFORMANCE?
Our approach to managing the Fund has two main components. The first is our
investment in individual stocks and exchange-traded funds (ETFs) designed
to track the performance of the major asset classes. The second component
of the Fund is our equity hedging strategy, which seeks to manage the risk
of stock market volatility.
This approach didn't add value in the short-term interval represented by
the Fund's six-month reporting period. Our allocations to gold mining
stocks and emerging market equities were the primary reasons for our
first-half underperformance.
The Fund's precious metals allocation produced a very poor return, as gold
mining stocks lost ground amid a sharp downturn in the price of gold and
weak performance for mining stocks in general. We are maintaining our
position on the belief that the sector is one of the most attractively
valued segments of the market, and also one that can benefit if inflation
picks up.
The Fund's emerging markets allocation also weighed on performance, as the
MSCI Emerging Markets Index lagged the developed markets by a wide margin.
This allocation consists of both broad-based ETFs as well as ETFs linked to
specific countries that we believe are positioned to outperform, such as
Indonesia, Brazil, China, Russia, and Turkey. While these asset classes
underperformed in the short term, we believe they remain essential to
longer-term portfolio diversification.
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MANAGERS' COMMENTARY ON THE FUND | 3
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Our domestic equity position, which we achieve via both individual stocks
and ETFs that target market segments in which we see opportunity, finished
in positive territory. The portfolio's allocation to the developed
international markets produced a modest gain, as our holdings in
exchange-traded funds linked to Germany and Japan finished in the black. We
also retain opportunistic positions in the natural gas, health care, and
luxury good sectors on the basis of their long-term outlook.
The Fund's bond allocation, which had contributed very positively to
performance in recent years, detracted from our first-half return. We use
ETFs to gain exposure to government bonds, corporate bonds, and
mortgage-backed securities, all of which were hurt by the broad bond-market
sell-off that has occurred in recent months. We are maintaining a position
in bonds to augment portfolio diversification and achieve a measure of
defensiveness in the event of increased volatility in the global financial
markets.
Our equity hedging strategy, which seeks to manage the risk of stock market
volatility through the use of options, was a slight drag on performance at
a time of strong, double-digit gains in U.S. equities. The majority of the
shortfall occurred in the first calendar quarter, during which stocks
produced the bulk of their first-half gain. However, the strategy added
modestly to our performance in the second quarter, when the concerns about
tapering led to increased market volatility. We believe this helps
illustrate how our hedging strategy provides a "smoother ride" for the Fund
during times of unsteady market performance.
o WHAT IS YOUR OUTLOOK FOR THE SECOND HALF AND BEYOND?
We remain cautiously optimistic in our broad outlook. Although the prospect
of tapering of QE caused a substantial market reaction, it is important to
remember that the Fed will only begin to pull back on QE if economic growth
is strong enough to warrant a reduction. What's more, "tapering" is not the
same as "tightening" (removing stimulus altogether). Still, the data-driven
nature of Fed policy is likely
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4 | USAA TOTAL RETURN STRATEGY FUND
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to contribute to increased market volatility as investors give even greater
scrutiny to individual economic reports in the months ahead.
Looking beyond Fed policy, the renewed strength in certain pockets of the
U.S. economy continues to act as a tailwind for the domestic financial
markets. Rising housing prices, increasing homebuilding activity, and a
year-over-year decline in the headline unemployment rate all remain
important pillars of support. In addition, corporate balance sheets are
flush with cash, which provides the opportunity for companies to increase
dividends and invest for future growth. The United States is also
experiencing a boom in domestic natural gas and oil production, leading to
lower energy costs for businesses and consumers.
At the same time, however, there is insufficient evidence to determine
whether the economy is in fact strong enough to stand on its own without
the stimulus from the Fed and other global central banks. Thus far, the
recovery has been muted even with the benefit of aggressive central bank
support. Given that investors have grown increasingly optimistic on the
second-half economic outlook, we are on the lookout for any sign that
growth could surprise to the downside.
As the stewards of our investors' capital, our response to this uncertain
environment is to look for ways to improve diversification and protect the
portfolio against the full impact of market volatility. 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 over the ups and downs of the market.
Thank you for your investment in the Fund.
AS INTEREST RATES RISE, EXISTING BOND PRICES FALL. o The unmanaged MSCI
Emerging Markets Index is a free float-adjusted market capitalization index
that is designed to measure equity market performance in the global emerging
markets. o ETFs are subject to risks similar to those of stocks. Investment
returns may fluctuate and are subject to market volatility, so that an
investor's shares, when redeemed or sold, may be worth more or less than
their original cost. Diversification is a technique to help reduce risk and
does not guarantee a profit or prevent a loss. o Foreign investing is
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 TOTAL RETURN STRATEGY FUND (THE FUND) (Ticker Symbol: USTRX)
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6/30/13 12/31/12
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Net Assets $109.2 Million $122.0 Million
Net Asset Value Per Share $8.63 $9.05
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AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/13
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12/31/2012-6/30/2013* 1 Year 5 Years Since Inception 1/24/05
-4.45% 1.26% -0.17% 0.88%
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EXPENSE RATIO AS OF 12/31/12**
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1.60%
(Includes acquired fund fees and expenses of 0.28%)
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
six-month return is cumulative.
**The expense ratio represents the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2013, and is
calculated as a percentage of average net assets. This expense ratio may differ
from the expense ratio 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.
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6 | USAA TOTAL RETURN STRATEGY FUND
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o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
S&P 500 LIPPER FLEXIBLE USAA TOTAL RETURN
INDEX PORTFOLIO FUNDS INDEX STRATEGY FUND
1/31/05 $10,000.00 $10,000.00 $10,000.00
2/28/05 10,210.44 10,188.52 10,020.00
3/31/05 10,029.64 10,007.72 9,854.00
4/30/05 9,839.42 9,824.85 9,874.07
5/31/05 10,152.49 10,051.58 9,884.10
6/30/05 10,166.90 10,125.36 9,925.25
7/31/05 10,545.00 10,449.34 10,096.37
8/31/05 10,448.78 10,448.92 9,965.51
9/30/05 10,533.41 10,600.57 9,998.75
10/31/05 10,357.81 10,455.83 10,018.93
11/30/05 10,749.57 10,706.71 10,039.11
12/31/05 10,753.25 10,806.95 10,043.95
1/31/06 11,038.03 11,156.20 10,074.42
2/28/06 11,067.98 11,108.49 10,104.89
3/31/06 11,205.75 11,285.24 10,132.31
4/30/06 11,356.22 11,412.27 10,163.01
5/31/06 11,029.37 11,150.67 10,203.95
6/30/06 11,044.32 11,138.94 10,237.82
7/31/06 11,112.45 11,175.97 10,268.81
8/31/06 11,376.85 11,373.16 10,310.14
9/30/06 11,670.03 11,498.50 10,344.23
10/31/06 12,050.31 11,802.06 10,385.98
11/30/06 12,279.46 12,066.02 10,521.68
12/31/06 12,451.71 12,187.09 10,555.63
1/31/07 12,640.03 12,331.83 10,692.86
2/28/07 12,392.80 12,283.67 10,471.19
3/31/07 12,531.41 12,399.00 10,537.71
4/30/07 13,086.50 12,785.79 10,876.27
5/31/07 13,543.15 13,073.50 11,204.26
6/30/07 13,318.15 13,014.20 11,142.87
7/31/07 12,905.23 12,882.48 11,005.04
8/31/07 13,098.68 12,873.74 11,111.06
9/30/07 13,588.55 13,381.17 11,428.12
10/31/07 13,804.70 13,737.37 11,523.97
11/30/07 13,227.57 13,412.18 11,172.50
12/31/07 13,135.81 13,353.40 11,051.97
1/31/08 12,347.90 12,919.38 10,780.68
2/29/08 11,946.77 12,837.69 10,698.12
3/31/08 11,895.18 12,666.94 10,655.48
4/30/08 12,474.52 13,124.02 11,022.50
5/31/08 12,636.09 13,331.89 11,271.13
6/30/08 11,570.83 12,733.00 10,853.18
7/31/08 11,473.56 12,492.21 10,805.73
8/31/08 11,639.52 12,449.51 10,948.07
9/30/08 10,602.35 11,283.16 10,214.35
10/31/08 8,821.71 9,548.04 8,977.69
11/30/08 8,188.71 9,010.17 8,537.72
12/31/08 8,275.84 9,344.88 8,729.62
1/31/09 7,578.30 8,948.31 8,245.31
2/28/09 6,771.38 8,344.66 7,724.68
3/31/09 7,364.52 8,897.56 8,045.34
4/30/09 8,069.37 9,610.14 8,385.12
5/31/09 8,520.72 10,222.11 8,809.83
6/30/09 8,537.62 10,054.33 8,755.23
7/31/09 9,183.38 10,872.60 9,095.24
8/31/09 9,514.94 11,137.50 9,228.81
9/30/09 9,870.00 11,609.76 9,400.03
10/31/09 9,686.64 11,428.59 9,351.45
11/30/09 10,267.68 11,916.10 9,655.07
12/31/09 10,466.00 12,070.54 9,798.67
1/31/10 10,089.50 11,755.01 9,626.55
2/28/10 10,402.05 11,958.61 9,798.67
3/31/10 11,029.76 12,542.39 10,044.54
4/30/10 11,203.89 12,733.39 10,056.85
5/31/10 10,309.25 12,001.09 9,761.43
6/30/10 9,769.58 11,610.53 9,379.83
7/31/10 10,454.07 12,234.31 9,773.74
8/31/10 9,982.13 11,943.20 9,441.38
9/30/10 10,872.98 12,702.36 9,995.31
10/31/10 11,286.69 13,120.98 10,130.71
11/30/10 11,288.13 13,110.82 10,044.54
12/31/10 12,042.54 13,628.89 10,289.47
1/31/11 12,327.96 13,913.64 10,400.50
2/28/11 12,750.31 14,194.55 10,597.90
3/31/11 12,755.38 14,259.07 10,647.25
4/30/11 13,133.13 14,663.53 10,832.32
5/31/11 12,984.47 14,536.36 10,770.63
6/30/11 12,768.03 14,324.65 10,721.28
7/31/11 12,508.40 14,209.16 10,585.57
8/31/11 11,828.92 13,587.26 10,055.05
9/30/11 10,997.36 12,674.89 9,635.58
10/31/11 12,199.29 13,727.93 10,129.08
11/30/11 12,172.34 13,517.98 10,289.47
12/31/11 12,296.85 13,471.21 10,182.31
1/31/12 12,847.93 14,092.09 10,478.88
2/29/12 13,403.50 14,535.79 10,676.59
3/31/12 13,844.60 14,670.01 10,684.01
4/30/12 13,757.70 14,634.73 10,684.01
5/31/12 12,930.86 13,855.57 10,300.67
6/30/12 13,463.64 14,245.41 10,628.80
7/31/12 13,650.63 14,420.34 10,752.68
8/31/12 13,958.08 14,716.96 11,025.22
9/30/12 14,318.78 15,036.02 11,254.41
10/31/12 14,054.40 14,932.28 11,180.04
11/30/12 14,135.93 15,063.08 11,130.46
12/31/12 14,264.77 15,268.49 11,263.45
1/31/13 15,003.62 15,737.52 11,487.48
2/28/13 15,207.29 15,753.59 11,288.34
3/31/13 15,777.61 16,016.29 11,419.03
4/30/13 16,081.59 16,237.42 11,369.22
5/31/13 16,457.77 16,230.26 11,219.78
6/30/13 16,236.76 15,857.31 10,762.40
[END CHART]
*Data from 1/31/05 to 6/30/13.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Total Return Strategy Fund to the following benchmarks:
o The unmanaged S&P 500 Index represents the weighted average performance of
a group of 500 widely held, publicly traded stocks.
o The unmanaged Lipper Flexible Portfolio Funds Index tracks the performance
of the 30 largest funds within the Lipper Flexible Funds category. This
category allocates its investments across various asset classes, including
domestic common stocks, bonds, and money market instruments, with a focus
on total return.
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index.
*The performance of the S&P 500 Index and the Lipper Flexible Portfolio Funds
Index is calculated from the end of the month, January 31, 2005, while the
Fund's inception date is January 24, 2005. There may be a slight variation of
the performance numbers because of this difference.
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INVESTMENT OVERVIEW | 7
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o TOP 10 EQUITY SECURITIES o
AS OF 6/30/13
(% of Net Assets)
iShares Barclays TIPS Bond Fund* ......................................... 6.2%
iShares Barclays 20 Year Treasury Bond Fund* ............................. 6.1%
iShares Barclays 1-3 Year Credit Bond Fund* .............................. 5.8%
iShares S&P U.S. Preferred Stock Index Fund* ............................. 4.5%
iShares Barclays 7-10 Year Treasury Bond Fund* 3.8%
iShares Barclays 0-5 Year TIPS Bond Fund* ................................ 3.7%
WisdomTree Emerging Markets SmallCap Dividend Fund* ...................... 3.4%
iShares Core MSCI Emerging Markets ETF* .................................. 2.8%
SPDR Gold Trust .......................................................... 2.7%
iShares Gold Trust ....................................................... 2.4%
o ASSET ALLOCATION** o
AS OF 6/30/13
(% of Net Assets)
[PIE CHART OF ASSET ALLOCATION]
EXCHANGE-TRADED FUNDS* ................................................... 69.2%
COMMON STOCKS ............................................................ 28.5%
MONEY MARKET INSTRUMENTS ................................................. 1.8%
[END CHART]
* The Fund may rely on certain Securities and Exchange Commission (SEC)
exemptive orders or rules that permit funds meeting various conditions to
invest in an exchange-traded fund (ETF) in amounts exceeding limits set
forth in the Investment Company Act of 1940, as amended, that would
otherwise be applicable.
** Excludes options.
Percentages are of net assets of the Fund and may not equal 100%.
You will find a complete list of securities that the Fund owns on pages 9-13.
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8 | USAA TOTAL RETURN STRATEGY FUND
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PORTFOLIO OF INVESTMENTS
June 30, 2013 (unaudited)
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MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
EQUITY SECURITIES (97.7%)
COMMON STOCKS (28.5%)
CONSUMER DISCRETIONARY (5.0%)
-----------------------------
APPAREL, ACCESSORIES & LUXURY GOODS (2.4%)
17,000 Burberry Group plc ADR $ 700
70,000 Cie Financiere Richemont S.A. ADR 619
21,000 LVMH Moet Hennessy ADR 681
24,000 Swatch Group AG ADR 656
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2,656
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AUTOMOBILE MANUFACTURERS (1.0%)
16,000 BMW AG ADR 466
10,000 Daimler AG ADR 604
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1,070
--------
DEPARTMENT STORES (0.6%)
30,000 Kering ADR(a) 621
--------
HOTELS, RESORTS & CRUISE LINES (0.6%)
20,000 Royal Caribbean Cruises Ltd. 667
--------
RESTAURANTS (0.4%)
7,000 Yum! Brands, Inc. 485
--------
Total Consumer Discretionary 5,499
--------
ENERGY (8.9%)
-------------
COAL & CONSUMABLE FUELS (0.7%)
50,000 Peabody Energy Corp. 732
--------
INTEGRATED OIL & GAS (2.2%)
6,600 Lukoil OAO ADR 380
20,000 Occidental Petroleum Corp. 1,785
6,000 Total S.A. ADR 292
--------
2,457
--------
OIL & GAS EXPLORATION & PRODUCTION (5.0%)
95,000 Encana Corp. 1,609
6,000 EOG Resources, Inc. 790
12,000 EQT Corp. 953
================================================================================
PORTFOLIO OF INVESTMENTS | 9
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
24,000 Southwestern Energy Co.* $ 877
60,000 Ultra Petroleum Corp.* 1,189
--------
5,418
--------
OIL & GAS STORAGE & TRANSPORTATION (1.0%)
40,000 Cheniere Energy, Inc.* 1,110
--------
Total Energy 9,717
--------
FINANCIALS (4.0%)
-----------------
CONSUMER FINANCE (0.3%)
6,000 Capital One Financial Corp. 377
--------
DIVERSIFIED BANKS (0.7%)
64,000 Sberbank of Russia ADR* 735
--------
LIFE & HEALTH INSURANCE (0.5%)
12,000 MetLife, Inc. 549
--------
REGIONAL BANKS (0.5%)
12,000 CIT Group, Inc.* 559
--------
REITs - OFFICE (2.0%)
35,000 Digital Realty Trust, Inc. 2,135
--------
Total Financials 4,355
--------
INDUSTRIALS (0.9%)
------------------
AEROSPACE & DEFENSE (0.9%)
2,000 Boeing Co. 205
10,000 General Dynamics Corp. 783
--------
988
--------
Total Industrials 988
--------
INFORMATION TECHNOLOGY (4.9%)
-----------------------------
COMMUNICATIONS EQUIPMENT (0.4%)
7,000 QUALCOMM, Inc. 428
--------
COMPUTER HARDWARE (1.6%)
3,500 Apple, Inc. 1,386
15,000 Hewlett-Packard Co. 372
--------
1,758
--------
INTERNET SOFTWARE & SERVICES (1.2%)
1,500 Google, Inc. "A"* 1,320
--------
SEMICONDUCTORS (1.1%)
16,000 Broadcom Corp. "A" 540
25,000 Intel Corp. 606
--------
1,146
--------
================================================================================
10 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
SYSTEMS SOFTWARE (0.6%)
20,000 Microsoft Corp. $ 691
--------
Total Information Technology 5,343
--------
MATERIALS (4.1%)
----------------
DIVERSIFIED METALS & MINING (0.4%)
10,000 Rio Tinto plc ADR 411
--------
FERTILIZERS & AGRICULTURAL CHEMICALS (0.5%)
3,000 CF Industries Holdings, Inc. 515
--------
PRECIOUS METALS & MINERALS (3.2%)
5,500 Agnico-Eagle Mines Ltd. 151
100,000 Allied Nevada Gold Corp.* 648
14,000 AngloGold Ashanti Ltd. ADR 200
9,000 Barrick Gold Corp. 142
40,000 Eldorado Gold Corp. 247
15,000 Goldcorp, Inc. 371
80,000 Harmony Gold Mining Co. Ltd. ADR 305
70,000 IAMGOLD Corp. 303
45,000 Kinross Gold Corp. 229
8,000 Newmont Mining Corp. 240
17,400 Pan American Silver Corp. 203
9,300 Silver Wheaton Corp. 183
30,000 Yamana Gold, Inc. 285
--------
3,507
--------
Total Materials 4,433
--------
TELECOMMUNICATION SERVICES (0.7%)
---------------------------------
INTEGRATED TELECOMMUNICATION SERVICES (0.3%)
10,000 CenturyLink, Inc. 354
--------
WIRELESS TELECOMMUNICATION SERVICES (0.4%)
15,000 Vodafone Group plc ADR 431
--------
Total Telecommunication Services 785
--------
Total Common Stocks (cost: $31,515) 31,120
--------
EXCHANGE-TRADED FUNDS (40.3%)
45,000 Health Care Select Sector SPDR Fund 2,142
12,000 Industrial Select Sector SPDR Fund 511
65,800 iShares Core MSCI Emerging Markets ETF 3,031
25,000 iShares Core S&P Small-Cap ETF 2,257
220,000 iShares Gold Trust* 2,638
24,000 iShares MSCI Brazil Capped Index Fund 1,053
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
90,000 iShares MSCI Germany Index Fund $ 2,223
35,000 iShares MSCI Hong Kong Index Fund 641
50,000 iShares MSCI Indonesia Investable Market Index Fund 1,558
80,000 iShares MSCI Malaysia Index Fund 1,244
20,000 iShares MSCI Philippines Investable Market Index Fund 701
50,000 iShares MSCI Russia Capped Index Fund 960
10,000 iShares MSCI South Korea Capped Index Fund 532
40,000 iShares MSCI Taiwan Index Fund 532
8,000 iShares MSCI Thailand Capped Investable Market Index Fund 627
20,000 iShares MSCI Turkey Investable Market Index Fund 1,184
14,000 iShares Russell 1000 Value Index Fund 1,173
125,000 iShares S&P U.S. Preferred Stock Index Fund 4,910
130,000 Market Vectors Junior Gold Miners ETF* 1,191
20,000 Materials Select Sector SPDR Fund 767
30,000 SPDR Dow Jones International Real Estate ETF 1,197
25,000 SPDR Gold Trust* 2,979
18,784 SPDR S&P China ETF 1,204
25,000 SPDR S&P Emerging Markets SmallCap ETF 1,100
6,000 Vanguard Energy ETF 674
25,000 Vanguard Value ETF 1,693
80,000 WisdomTree Emerging Markets SmallCap Dividend Fund 3,683
100,000 WisdomTree India Earnings Fund 1,616
--------
Total Exchange-Traded Funds (cost: $47,423) 44,021
--------
FIXED-INCOME EXCHANGE-TRADED FUNDS (28.9%)
40,000 iShares Barclays 0-5 Year TIPS Bond Fund 4,027
60,000 iShares Barclays 1-3 Year Credit Bond Fund 6,302
60,000 iShares Barclays 20+ Year Treasury Bond Fund 6,626
40,000 iShares Barclays 7-10 Year Treasury Bond Fund 4,100
10,000 iShares Barclays MBS Bond Fund 1,052
60,000 iShares Barclays TIPS Bond Fund 6,721
7,000 iShares Emerging Markets Local Currency Bond Fund 348
50,000 WisdomTree Emerging Markets Local Debt Fund 2,402
--------
Total Fixed-Income Exchange-Traded Funds (cost: $32,764) 31,578
--------
Total Equity Securities (cost: $111,702) 106,719
--------
MONEY MARKET INSTRUMENTS (1.8%)
MONEY MARKET FUNDS (1.8%)
1,911,652 State Street Institutional Liquid Reserve Fund, 0.09%(b) (cost: $1,912) 1,912
--------
TOTAL INVESTMENTS (COST: $113,614) $108,631
========
================================================================================
12 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
PURCHASED OPTIONS (0.7%)
1,200 Put - iShares MSCI EAFE Index expiring August 17, 2013 at 57 $ 170
4,800 Put - iShares MSCI Emerging Markets Index expiring August 17, 2013 at 36 285
22 Put - Russell 2000 Index expiring July 20, 2013 at 950 21
205 Put - S&P 500 Index expiring July 20, 2013 at 1570 253
--------
TOTAL PURCHASED OPTIONS (COST: $970) $ 729
========
WRITTEN OPTIONS (0.0%)
(1,100) Put - iShares MSCI EAFE Index expiring August 17, 2013 at 51 (35)
--------
TOTAL WRITTEN OPTIONS (PREMIUMS RECEIVED: $54) $ (35)
========
-------------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
-------------------------------------------------------------------------------------------------------------------
(LEVEL 1) (LEVEL 2) (LEVEL 3)
QUOTED PRICES OTHER SIGNIFICANT SIGNIFICANT
IN ACTIVE MARKETS OBSERVABLE UNOBSERVABLE
ASSETS FOR IDENTICAL ASSETS INPUTS INPUTS TOTAL
-------------------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $ 30,499 $621 $- $ 31,120
Exchange-Traded Funds 44,021 - - 44,021
Fixed-Income Exchange-Traded Funds 31,578 - - 31,578
Money Market Instruments:
Money Market Funds 1,912 - - 1,912
Purchased Options 729 - - 729
-------------------------------------------------------------------------------------------------------------------
Total $108,739 $621 $- $109,360
-------------------------------------------------------------------------------------------------------------------
(LEVEL 1) (LEVEL 2) (LEVEL 3)
QUOTED PRICES OTHER SIGNIFICANT SIGNIFICANT
IN ACTIVE MARKETS OBSERVABLE UNOBSERVABLE
LIABILITIES FOR IDENTICAL LIABILITIES INPUTS INPUTS TOTAL
-------------------------------------------------------------------------------------------------------------------
Written Options $(35) $- $- $(35)
-------------------------------------------------------------------------------------------------------------------
Total $(35) $- $- $(35)
-------------------------------------------------------------------------------------------------------------------
For the period of January 1, 2013, through June 30, 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.
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
June 30, 2013 (unaudited)
--------------------------------------------------------------------------------
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.
Investments in foreign securities were 34.7% of net assets at June 30, 2013.
The Fund may rely on certain Securities and Exchange Commission (SEC)
exemptive orders or rules that permit funds meeting various conditions to
invest in an exchange-traded fund (ETF) in amounts exceeding limits set
forth in the Investment Company Act of 1940, as amended, that would
otherwise be applicable.
o PORTFOLIO ABBREVIATION(S) AND DESCRIPTION(S)
ADR American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S.
dollars.
o SPECIFIC NOTES
(a) Security was fair valued at June 30, 2013, by USAA Asset Management
Company in accordance with valuation procedures approved by the Board
of Trustees. The total value of all such securities was $621,000,
which represented 0.57% of net assets of the fund.
================================================================================
14 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
(b) Rate represents the money market fund annualized seven-day yield at
June 30, 2013.
* Non-income-producing security.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 15
================================================================================
STATEMENT OF ASSETS AND LIABILITIES (IN THOUSANDS)
June 30, 2013 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $113,614) $108,631
Purchased options, at market value (cost of $970) 729
Cash 10
Receivables:
Capital shares sold 19
Dividends and interest 356
Securities sold 677
--------
Total assets 110,422
--------
LIABILITIES
Payables:
Securities purchased 1,005
Capital shares redeemed 69
Written options, at market value (premiums received of $54) 35
Accrued management fees 55
Accrued transfer agent's fees 4
Other accrued expenses and payables 52
--------
Total liabilities 1,220
--------
Net assets applicable to capital shares outstanding $109,202
========
NET ASSETS CONSIST OF:
Paid-in capital $145,212
Accumulated undistributed net investment income 201
Accumulated net realized loss on investments and options (31,006)
Net unrealized depreciation of investments and options (5,205)
--------
Net assets applicable to capital shares outstanding $109,202
========
Capital shares outstanding, unlimited number of shares
authorized, no par value 12,650
========
Net asset value, redemption price, and offering price per share $ 8.63
========
See accompanying notes to financial statements.
================================================================================
16 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
STATEMENT OF OPERATIONS (IN THOUSANDS)
Six-month period ended June 30, 2013 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $26) $ 1,076
Interest 6
-------
Total income 1,082
-------
EXPENSES
Management fees 350
Administration and servicing fees 88
Transfer agent's fees 186
Custody and accounting fees 26
Postage 9
Shareholder reporting fees 14
Trustees' fees 6
Registration fees 18
Professional fees 49
Other 5
-------
Total expenses 751
-------
NET INVESTMENT INCOME 331
-------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND OPTIONS
Net realized gain (loss) on:
Investments 7,166
Options (1,356)
Change in net unrealized appreciation/depreciation of:
Investments (11,319)
Options 198
-------
Net realized and unrealized loss (5,311)
-------
Decrease in net assets resulting from operations $(4,980)
=======
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 17
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS (IN THOUSANDS)
Six-month period ended June 30, 2013 (unaudited), and year ended
December 31, 2012
--------------------------------------------------------------------------------
6/30/2013 12/31/2012
-----------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 331 $ 908
Net realized gain on investments 7,166 13,814
Net realized gain on securities sold short - 2,206
Net realized loss on options (1,356) (7,877)
Change in net unrealized appreciation/depreciation of:
Investments (11,319) 2,307
Securities sold short - (312)
Options 198 1,411
----------------------
Increase (decrease) in net assets resulting from operations (4,980) 12,457
----------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (225) (872)
----------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 7,203 12,241
Reinvested dividends 221 860
Cost of shares redeemed (15,038) (28,560)
----------------------
Decrease in net assets from capital share transactions (7,614) (15,459)
----------------------
Net decrease in net assets (12,819) (3,874)
NET ASSETS
Beginning of period 122,021 125,895
----------------------
End of period $109,202 $122,021
======================
Accumulated undistributed net investment income:
End of period $ 201 $ 95
======================
CHANGE IN SHARES OUTSTANDING
Shares sold 792 1,408
Shares issued for dividends reinvested 26 97
Shares redeemed (1,656) (3,286)
----------------------
Decrease in shares outstanding (838) (1,781)
======================
See accompanying notes to financial statements.
================================================================================
18 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
June 30, 2013 (unaudited)
--------------------------------------------------------------------------------
(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 semiannual report pertains only to the USAA Total
Return Strategy Fund (the Fund), which is classified as diversified under the
1940 Act. The Fund's investment objective is to seek capital appreciation
through the use of a dynamic allocation strategy, across stocks, bonds, and cash
instruments.
The Fund's assets are invested pursuant to a dynamic allocation strategy, which
allows the Fund's investment adviser to invest at any given time a portion or
substantially all of the Fund's assets allocated to it in stocks or bonds,
either directly or through the use of exchange-traded funds (ETFs), and/or cash
equivalents, through direct investment in short-term, high-quality money market
instruments or money market funds.
Effective July 12, 2013, the Fund will consist of two classes of shares. The
existing share class will be designated "Total Return Strategy Fund Shares (Fund
Shares)" and a new share class designated "Total Return Strategy Fund
Institutional Shares (Institutional Shares)" will commence operations. Each
class of shares will have equal rights to assets and earnings, except that each
class will bear certain class-related expenses specific to the particular class.
These expenses include administration and servicing fees, transfer agent fees,
postage, shareholder reporting fees, and certain registration and custodian
fees. Expenses not attributable to a specific class, income, and realized gains
or losses on investments will be allocated to each class of shares based on each
class's relative net assets. Each class will have exclusive voting rights on
matters related solely to that class and
================================================================================
NOTES TO FINANCIAL STATEMENTS | 19
================================================================================
separate voting rights on matters that relate to both classes. The Institutional
Shares will be available for investment through a USAA discretionary managed
account program, and certain advisory programs sponsored by financial
intermediaries, such as brokerage firms, investment advisors, financial
planners, third-party administrators, and insurance companies. Institutional
Shares also will be available to institutional investors, which include
retirement plans, endowments, foundations, and bank trusts, as well as other
persons or legal entities that the Fund may approve from time to time, or for
purchase by a USAA Fund participating in a fund-of-funds investment strategy
(USAA fund-of-funds) and not to the general public.
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 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 USAA Asset Management
Company (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.
================================================================================
20 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
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. Equity securities, including ETFs and equity securities sold short,
except as otherwise noted, traded primarily on a domestic securities
exchange or the Nasdaq over-the-counter markets, are valued at the
last sales price or official closing price on the exchange or primary
market on which they trade. If no last sale or official closing price
is reported or available, the average of the bid and asked prices
generally is used.
2. Equity securities trading in various foreign markets may take place on
days when the NYSE is closed. Further, when the NYSE is open, the
foreign markets may be closed. Therefore, the calculation of the
Fund's net asset value (NAV) may not take place at the same time the
prices of certain foreign securities held by the Fund are determined.
In most cases, events affecting the values of foreign securities that
occur between the time of their last quoted sales or official closing
prices and the close of normal trading on the NYSE on a day the Fund's
NAV is calculated will not be reflected in the value of the Fund's
foreign securities. However, the Manager, an affiliate of the Fund,
and the Fund's subadviser, if applicable, will monitor for events that
would materially affect the value of the Fund's foreign securities.
The Fund's subadviser has agreed to notify the Manager of significant
events it identifies that would materially affect the value of the
Fund's foreign securities. If the Manager determines that a particular
event would materially affect the value of the Fund's foreign
securities, then the Manager, under valuation procedures approved by
the Board, will consider such available information that it deems
relevant to determine a fair value for the affected foreign
securities. In addition, the Fund may use information from an external
vendor or other sources to adjust the foreign market closing prices of
foreign equity securities to reflect what the Fund believes to be the
fair value of the securities as of the close of
================================================================================
NOTES TO FINANCIAL STATEMENTS | 21
================================================================================
the NYSE. Fair valuation of affected foreign equity securities may
occur frequently based on an assessment that events that occur on a
fairly regular basis (such as U.S. market movements) are significant.
3. Investments in open-end investment companies, hedge, or other funds,
other than ETFs, are valued at their NAV at the end of each business
day.
4. Debt securities purchased with original or remaining maturities of 60
days or less may be valued at amortized cost, which approximates
market value.
5. Debt securities with maturities greater than 60 days are valued each
business day by a pricing service (the Service) approved by the Board.
The Service uses an evaluated mean between quoted bid and asked prices
or the last sales price to price securities when, in the Service's
judgment, these prices are readily available and are representative of
the securities' market values. For many securities, such prices are
not readily available. The Service generally prices these securities
based on methods that include consideration of yields or prices of
securities of comparable quality, coupon, maturity, and type;
indications as to values from dealers in securities; and general
market conditions.
6. Repurchase agreements are valued at cost, which approximates market
value.
7. Options are valued by a pricing service at the National Best Bid/Offer
(NBBO) composite price, which is derived from the best available bid
and ask prices in all participating options exchanges determined to
most closely reflect market value of the options at the time of
computation of the Fund's NAV.
8. Securities for which market quotations are not readily available or
are considered unreliable, or whose values have been materially
affected by events occurring after the close of their primary markets
but before the pricing of the Fund, are valued in good
================================================================================
22 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
faith at fair value, using methods determined by the Manager in
consultation with the Fund's subadvisers, 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 the
Fund's NAV to be more reliable than it otherwise would be.
Fair value methods used by the Manager include, but are not limited
to, obtaining market quotations from secondary pricing services,
broker-dealers, or widely used quotation systems. General factors
considered in determining the fair value of securities include
fundamental analytical data, the nature and duration of any
restrictions on disposition of the securities, and an evaluation of
the forces that influenced the market in which the securities are
purchased and sold.
B. 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 2 securities
include common stocks traded on foreign exchanges whose fair values at the
reporting date included an adjustment to reflect changes occurring
subsequent to the close of trading in the
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
foreign markets but prior to the close of trading in comparable U.S.
securities markets.
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. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- The Fund may buy, sell,
and enter into certain types of derivatives, including, but not limited to
futures contracts, options, and options on futures contracts, under
circumstances in which such instruments are expected by the portfolio
manager to aid in achieving the Fund's investment objective. The Fund also
may use derivatives in circumstances where the portfolio manager believes
they offer an economical means of gaining exposure to a particular asset
class or securities market or to keep cash on hand to meet shareholder
redemptions or other needs while maintaining exposure to the market. With
exchange-listed futures contracts and options, counterparty credit risk to
the Fund is limited to the exchange's clearinghouse which, as counterparty
to all exchange-traded futures contracts and options, guarantees the
transactions against default from the actual counterparty to the trade.
OPTIONS TRANSACTIONS -- The Fund is subject to equity price risk in the
normal course of pursuing its investment objectives. The Fund may use
options on underlying instruments, namely, equity securities, ETFs, and
equity indexes, to gain exposure to, or hedge against, changes in the value
of equity securities, ETFs, or equity indexes. A call option gives the
purchaser the right to buy, and the writer the obligation to sell, the
underlying instrument at a specified price during a specified period.
Conversely, a put option gives the purchaser the right to sell, and the
writer the obligation to buy, the underlying instrument at a specified
price during a specified period. The purchaser of the option pays a premium
to the writer of the option.
================================================================================
24 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
Premiums paid for purchased options are included in the Fund's statement of
assets and liabilities as an investment. If a purchased option expires
unexercised, the premium paid is recognized as a realized loss. If a
purchased call option on a security is exercised, the cost of the security
acquired includes the exercise price and the premium paid. If a purchased
put option on a security is exercised, the realized gain or loss on the
security sold is determined from the exercise price, the original cost of
the security, and the premium paid. The risk associated with purchasing a
call or put option is limited to the premium paid.
Premiums received from writing options are included in the Fund's statement
of assets and liabilities as a liability. If a written option expires
unexercised, the premium received is recognized as a realized gain. If a
written call option on a security is exercised, the realized gain or loss
on the security sold is determined from the exercise price, the original
cost of the security, and the premium received. If a written put option on
a security is exercised, the cost of the security acquired is the exercise
price paid less the premium received. The Fund, as a writer of an option,
bears the market risk of an unfavorable change in the price of the security
underlying the written option.
In an attempt to reduce the Fund's volatility over time, the Fund may
implement a strategy that involves purchasing and selling options on
indexes or ETFs that represent the Fund's exposure against a highly
correlated stock portfolio. The combination of the diversified stock
portfolio with index or ETF options is designed to provide the Fund with
consistent returns over a wide range of equity market environments. This
strategy may not fully protect the Fund against declines in the portfolio's
value, and the Fund could experience a loss. Options on ETFs are similar to
options on individual securities in that the holder of the ETF call (or
put) has the right to receive (or sell) shares of the underlying ETF at the
strike price on or before exercise date. Options on securities indexes are
different from options on individual securities in that the holder of the
index option has the right to receive an amount of cash equal to the
difference between the exercise price and the settlement value of the
underlying index
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
as defined by the exchange. If an index option is exercised, the realized
gain or loss is determined by the exercise price, the settlement value, and
the premium amount paid or received.
FAIR VALUES OF DERIVATIVE INSTRUMENTS AS OF JUNE 30, 2013* (IN THOUSANDS)
ASSET DERIVATIVES LIABILITY DERIVATIVES
---------------------------------------------------------------------------------------------
STATEMENT OF STATEMENT OF
ASSETS AND ASSETS AND
DERIVATIVES NOT ACCOUNTED LIABILITIES LIABILITIES
FOR AS HEDGING INSTRUMENTS LOCATION FAIR VALUE LOCATION FAIR VALUE
---------------------------------------------------------------------------------------------
Equity contracts Purchased $729 Written $35
options options
---------------------------------------------------------------------------------------------
* For open derivative instruments as of June 30, 2013, see the portfolio of
investments, which also is indicative of activity for the period ended
June 30, 2013.
THE EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF OPERATIONS FOR THE
SIX-MONTH PERIOD ENDED JUNE 30, 2013 (IN THOUSANDS)
CHANGE IN
UNREALIZED
DERIVATIVES NOT REALIZED APPRECIATION
ACCOUNTED FOR AS STATEMENT OF GAIN (LOSS) (DEPRECIATION)
HEDGING INSTRUMENTS OPERATIONS LOCATION ON DERIVATIVES ON DERIVATIVES
---------------------------------------------------------------------------------------------
Equity contracts Net realized gain (loss) $(1,356) $198
on options; Change
in net unrealized
appreciation/depreciation
of options
---------------------------------------------------------------------------------------------
D. SHORT POSITIONS -- The Fund may engage in short sales (selling securities
it does not own) as part of its normal investment activities. Short
positions are collateralized by cash proceeds from the short sales and by
designated long positions. In order to sell securities it does not own, the
Fund must borrow the securities from a broker or lending agent. If the
borrowed security pays a dividend during this time, the Fund must pay the
amount of the dividend to the broker or lending agent. This amount is shown
as "dividend expense" on the Fund's statement of operations. The Fund is
subject to risk of loss if
================================================================================
26 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
the broker executing the short sale or the lending agent were to fail to
perform its obligation under the contractual terms.
Short sales involve the risk that the Fund will incur a loss by
subsequently buying the security at a higher price than the price at which
the Fund previously sold the security short. Short sale transactions result
in off-balance-sheet risk because the ultimate obligation may exceed the
amount shown in the accompanying statement of assets and liabilities.
Because the Fund's loss on a short sale stems from increases in the value
of the security sold short, the extent of such loss, like the price of the
security sold short, is theoretically unlimited. By contrast, a Fund's loss
on a long position arises from decreases in the value of the security held
by the Fund and therefore is limited by the fact that a security's value
cannot drop below zero. A gain, limited to the price at which the Fund sold
the security short, or a loss, unlimited in size, will be recognized upon
the termination of a short sale.
The Fund may not always be able to close out a short position at a
particular time or at an acceptable price. The lender of securities sold
short may request that borrowed securities be returned to it on short
notice, and the Fund may have to buy the borrowed securities at an
unfavorable price. If this occurs at a time when other short sellers of the
same security also want to cover their positions, it is more likely that
the Fund will have to cover its short sale at an unfavorable price and
potentially reduce or eliminate any gain, or increase or cause a loss, as a
result of the short sale.
E. 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.
F. INVESTMENTS IN SECURITIES -- Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gains or losses
from sales of investment securities are computed on the identified cost
basis. Dividend income and expense on securities sold
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
================================================================================
short, less foreign taxes, if any, is recorded on the ex-dividend date. If
the ex-dividend date has passed, certain dividends from foreign securities
are recorded upon notification. Interest income is recorded daily on the
accrual basis. Discounts and premiums are amortized over the life of the
respective securities, using the effective yield method for long-term
securities and the straight-line method for short-term securities.
G. 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
six-month period ended June 30, 2013, custodian and other bank credits
reduced the Fund's expenses by less than $500.
H. INDEMNIFICATIONS -- Under the Trust's organizational documents, its
officers and trustees are indemnified against certain liabilities arising
out of the performance of their duties to the Trust. In addition, in the
normal course of business, the Trust enters into contracts that contain a
variety of representations and warranties that provide general
indemnifications. The Trust's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the
Trust that have not yet occurred. However, the Trust expects the risk of
loss to be remote.
I. USE OF ESTIMATES -- The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
(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
================================================================================
28 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
that might otherwise require the untimely disposition of securities. Subject to
availability, the Fund may borrow from CAPCO an amount up to 5% of the Fund's
total assets at a rate per annum equal to the rate at which CAPCO obtains
funding in the capital markets, with no markup.
The USAA Funds that are party to the loan agreement are assessed facility fees
by CAPCO 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 six-month period ended June 30, 2013, the Fund paid CAPCO facility fees
of less than $500, which represents 0.2% of the total fees paid to CAPCO by the
USAA Funds. The Fund had no borrowings under this agreement during the six-month
period ended June 30, 2013.
(3) DISTRIBUTIONS
The tax basis of distributions and accumulated undistributed net investment
income will be determined based upon the Fund's tax year-end of December 31,
2013, in accordance with applicable tax law.
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are made
annually in the succeeding fiscal year or as otherwise required to avoid the
payment of federal taxes.
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 December 31, 2012, the Fund had pre-enactment capital loss carryforwards of
$25,529,000 and post-enactment long-term capital
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
loss carryforwards of $11,269,000, for federal income tax purposes. If not
offset by subsequent capital gains, the pre-enactment capital loss carryforwards
will expire between 2017 and 2018, as shown below. It is unlikely that the Board
will authorize a distribution of capital gains realized in the future until the
capital loss carryforwards have been used or expire.
PRE-ENACTMENT CAPITAL LOSS CARRYFORWARDS
-----------------------------------------
EXPIRES BALANCE
--------- -----------
2017 $17,718,000
2018 7,811,000
-----------
Total $25,529,000
===========
For the six-month period ended June 30, 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 adustments to this
conclusion are necessary. The statute of limitations on the Fund's tax return
filings generally remain open for the three preceeding fiscal reporting 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 six-month period ended June 30, 2013, were
$73,057,000 and $82,483,000, respectively.
As of June 30, 2013, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as that reported in
the financial statements.
Gross unrealized appreciation and depreciation of investments as of June 30,
2013, were $4,700,000 and $9,924,000, respectively, resulting in net unrealized
depreciation of $5,224,000.
================================================================================
30 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
For the six-month period ended June 30, 2013, transactions in written call and
put options* were as follows:
PREMIUMS
NUMBER OF RECEIVED
CONTRACTS (000's)
-----------------------------
Outstanding at December 31, 2012 - $ -
Options written 6,695 1,218
Options terminated in closing
purchase transactions (5,595) (1,164)
Options expired - -
-----------------------------
Outstanding at June 30, 2013 1,100 $ 54
=============================
*Refer to Note 1C for a discussion of derivative instruments and how they are
accounted for in the Fund's financial statements.
(5) TRANSACTIONS WITH MANAGER
A. MANAGEMENT FEES -- The Manager provides investment management services to
the Fund pursuant to an Advisory Agreement. Under this agreement, the
Manager is responsible for managing the business and affairs of the Fund
and for directly managing the day-to-day investment of a portion of the
Fund's assets, subject to the authority of and supervision by the Board.
The Manager also is authorized to select (with approval of the Board and
without shareholder approval) one or more subadvisers to manage the
day-to-day investment of a portion of the Fund's assets. The Manager
monitors each subadviser's performance through quantitative and qualitative
analysis, and periodically recommends to the Board as to whether each
subadviser's agreement should be renewed, terminated, or modified. The
Manager also is responsible for allocating assets to the subadvisers. The
allocation for each subadviser can range from 0% to 100% of the Fund's
assets, and the Manager can change the allocations without shareholder
approval.
The investment management fee for the Fund is composed of a base fee and a
performance adjustment. The Fund's base fee is accrued daily and paid
monthly at an annualized rate of 0.65% of the Fund's average net assets for
the fiscal year.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 31
================================================================================
The performance adjustment is calculated monthly by comparing the Fund's
performance to that of the Lipper Flexible Portfolio Funds Index over the
performance period. The Lipper Flexible Portfolio Funds Index tracks the
total return performance of the 30 largest funds in the Lipper Flexible
Funds category. The performance period for the Fund consists of the current
month plus the previous 35 months. The following table is utilized to
determine the extent of the performance adjustment:
OVER/UNDER PERFORMANCE ANNUAL ADJUSTMENT RATE
RELATIVE TO INDEX(1) AS A % OF THE FUND'S AVERAGE NET ASSETS(1)
--------------------------------------------------------------------------------
+/- 1.00% to 4.00% +/- 0.04%
+/- 4.01% to 7.00% +/- 0.05%
+/- 7.01% and greater +/- 0.06%
(1)Based on the difference between average annual performance of the Fund
and its relevant index, rounded to the nearest 0.01%. Average net assets
are calculated over a rolling 36-month period.
The annual performance adjustment rate is multiplied by the average net
assets of the Fund over the entire performance period, which is then
multiplied by a fraction, the numerator of which is the number of days in
the month and the denominator of which is 365 (366 in leap years). The
resulting amount is the performance adjustment; a positive adjustment in
the case of overperformance, or a negative adjustment in the case of
underperformance.
Under the performance fee arrangement, the Fund will pay a positive
performance fee adjustment for a performance period whenever the Fund
outperforms the Lipper Flexible Portfolio Funds Index over that period,
even if the Fund had overall negative returns during the performance period.
For the six-month period ended June 30, 2013, the Fund incurred total
management fees, paid or payable to the Manager, of $350,000, which
included a (0.06)% performance adjustment of $(33,000).
B. ADMINISTRATION AND SERVICING FEES -- The Manager provides certain
administration and servicing functions for the Fund. For such services, the
Manager receives a fee accrued daily and paid monthly
================================================================================
32 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
at an annualized rate of 0.15% of the Fund's average net assets. For the
six-month period ended June 30, 2013, the Fund incurred administration and
servicing fees, paid or payable to the Manager, of $88,000.
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
reimbursement of a portion of these expenses incurred by the Manager. For
the six-month period ended June 30, 2013, the Fund reimbursed the Manager
$2,000 for these compliance and legal services. These expenses are included
in the professional fees on the Fund's statement of operations.
C. TRANSFER AGENT'S FEES -- USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services (SAS), an affiliate of the Manager, provides
transfer agent services to the Fund based on an annual charge of $23 per
shareholder account plus out-of-pocket expenses. The Fund also pays SAS
fees that are related to the administration and servicing of accounts that
are traded on an omnibus basis. For the six-month period ended June 30,
2013, the Fund incurred transfer agent's fees, paid or payable to SAS, of
$186,000.
D. 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
The Manager is indirectly wholly owned by United Services Automobile Association
(USAA), a large, diversified financial services institution.
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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 33
================================================================================
(7) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2013 2012 2011 2010 2009 2008
-----------------------------------------------------------------------------
Net asset value at
beginning of period $ 9.05 $ 8.24 $ 8.34 $ 7.97 $ 7.21 $ 9.37
-----------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .03 .06 .02 .03 .03 .13
Net realized and
unrealized gain (loss) (.43) .81 (.11) .37 .85(a) (2.09)
-----------------------------------------------------------------------------
Total from investment
operations (.40) .87 (.09) .40 .88 (1.96)
-----------------------------------------------------------------------------
Less distributions from:
Net investment income (.02) (.06) (.01) (.03) (.03) (.13)
Realized capital gains - - - - (.09) (.07)
-----------------------------------------------------------------------------
Total distributions (.02) (.06) (.01) (.03) (.12) (.20)
-----------------------------------------------------------------------------
Net asset value at
end of period $ 8.63 $ 9.05 $ 8.24 $ 8.34 $ 7.97 $ 7.21
=============================================================================
Total return (%)* (4.45) 10.62 (1.04) 5.01 12.25(a),(b) (21.01)
Net assets at end of
period (000) $109,202 $122,021 $125,895 $141,291 $149,206 $142,978
Ratios to average
net assets:**
Expenses including
dividend expense on
securities sold short (%)(c)
Including reimbursements - - 1.72 1.79 1.56(b),(d) 1.31(d)
Excluding reimbursements 1.28(j) 1.32 1.72 1.79 1.70(b) 1.60
Expenses excluding
dividend expense on
securities sold short (%)(c)
Including reimbursements - - 1.35 1.35 1.29(b),(d) 1.00(d)
Excluding reimbursements 1.28(j) 1.31 1.35 1.35 1.43(b) 1.29
Net investment income (%) .56(j) .73 .23 .00(e) .41 1.00
Portfolio turnover (%)(f),(g) 67 171(i) 92 56(h) 68 384
* 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 six-month period ended June 30, 2013, average net assets were
$118,753,000.
================================================================================
34 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
(a) During the year ended December 31, 2009, the Manager reimbursed the Fund
$8,000 for a loss incurred from the sale of option contracts that were
purchased in excess of what was required to hedge the equity portion of the
Fund's portfolio. The effect of this reimbursement on the Fund's net
realized loss per share and total return was less than $0.01/0.01%.
(b) During the year ended December 31, 2009, SAS voluntarily reimbursed the
Fund $56,000 for corrections in fees paid for the administration and
servicing of certain accounts. The effect of this reimbursement on the
Fund's total return was less than 0.01%. The reimbursement decreased the
Fund's expense ratios by 0.04%. This decrease is excluded from the expense
ratios above.
(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) Prior to May 1, 2009, the Manager voluntarily agreed to limit the annual
expenses of the Fund to 1.00% of the Fund's average net assets, excluding
the effect of any dividend expense for securities sold short.
(e) Represents less than 0.01%.
(f) The Fund's various investment strategies will create a large volume of
purchase and sales transactions relative to the market value of portfolio
investments, which results in portfolio turnover rates exceeding 100%.
(g) Prior to January 27, 2012, calculated excluding securities sold short,
covers on securities sold short, and options transactions. The turnover
rate for the portion of the Fund invested in ETFs and bonds was calculated
using average daily market value for the year ended December 31, 2008, and
calculated using average monthly market value for the years ended December
31, 2009, 2010, 2011, and 2012.
(h) Revised turnover rate for the year ended December 31, 2010, to reflect
removal of short sales based on management's intent to hold the securities
less than one year.
(i) Reflects increased trading activity due to changes in subadvisers and asset
allocation strategies.
(j) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 35
================================================================================
EXPENSE EXAMPLE
June 30, 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 management fees, transfer agency fees, and other Fund operating
expenses. This example is intended to help you understand your indirect costs,
also referred to as "ongoing costs" (in dollars), of investing in the Fund and
to compare these costs with the ongoing costs of investing in other mutual
funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire six-month period of January 1, 2013, through June
30, 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 expense ratio and an
assumed rate of return of 5% per year before expenses, which is not the Fund's
actual return. The hypothetical account values and expenses may not be used to
estimate the actual ending account balance or expenses you paid for the period.
You may
================================================================================
36 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
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 JANUARY 1, 2013 -
JANUARY 1, 2013 JUNE 30, 2013 JUNE 30, 2013
------------------------------------------------------------
Actual $1,000.00 $ 955.50 $6.21
Hypothetical
(5% return before expenses) 1,000.00 1,018.45 6.41
* Expenses are equal to the Fund's annualized expense ratio of 1.28%, which is
net of any reimbursements and expenses paid indirectly and includes dividend
expense for securities sold short, multiplied by the average account value
over the period, multiplied by 181 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 (4.45)% for the six-month
period of January 1, 2013, through June 30, 2013.
================================================================================
EXPENSE EXAMPLE | 37
================================================================================
ADVISORY AGREEMENT
June 30, 2013 (unaudited)
--------------------------------------------------------------------------------
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 continuance 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 performance,
================================================================================
38 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
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 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 fees paid to the Manager and 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 including the Manager's
process for monitoring "best execution," was also considered. The Manager's role
in coordinating the
================================================================================
ADVISORY AGREEMENT | 39
================================================================================
activities of the Fund's other service providers also was considered. 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 the Manager's 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 fund type, comparability of investment objective and classification,
sales load type (in this case, retail investment companies with front-end sales
loads and no sales loads), asset size, and expense components (the "expense
group") and (ii) a larger group of investment companies that includes all
front-end and no-load retail open-end investment companies in the same
investment classification/objective as the Fund regardless of asset size,
excluding outliers (the "expense universe"). Among other data, the Board noted
that the Fund's management fee rate -- which includes advisory and
administrative services and the effects of any performance adjustment -- was
below the median of its expense group and its expense universe. The data
indicated that the Fund's total expenses were above 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. The Board also took into
account Management's discussion of the Fund's
================================================================================
40 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
expenses, including the various components contributing to the Fund's expense
ratio. The Board also noted the level and method of computing the management
fee, including any performance adjustment to such fee.
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 lower than its
Lipper index for the one-year period ended December 31, 2012 and was lower than
the average of its performance universe and its Lipper index for the three- and
five-year periods ended December 31, 2012. The Board also noted that the Fund's
percentile performance ranking was in the top 45% of its performance universe
for the one-year period ended December 31, 2012 and was in the bottom 50% of its
performance universe for the three- and five-year periods ended December 31,
2012. The Board took into account management's discussion of the Fund's
performance, as well as the various steps management has taken to address the
Fund's performance.
COMPENSATION AND PROFITABILITY -- The Board took into consideration the level
and method of computing the Fund's management fee. The information considered by
the Board included operating profit margin information for the Manager's
business as a whole. The Board also received and considered profitability
information related to the management revenues from the Fund. This information
included a review of the methodology used in the allocation of certain costs to
the Fund. The Trustees reviewed the profitability of the Manager's relationship
with the Fund before tax expenses. In reviewing the overall profitability of the
management fee to the Manager, the Board also considered the fact
================================================================================
ADVISORY AGREEMENT | 41
================================================================================
that affiliates provide shareholder servicing and administrative services to the
Fund for which they receive compensation. The Board also considered the possible
direct and indirect benefits to the Manager from its relationship with the
Trust, including that the Manager may derive reputational and other benefits
from its association with the Fund. The Trustees recognized that the Manager
should be entitled to earn a reasonable level of profits in exchange for the
level of services it provides to the Fund and the entrepreneurial risk that it
assumes as Manager.
ECONOMIES OF SCALE -- The Board considered whether there should be changes in
the management fee rate or structure in order to enable the Fund to participate
in any economies of scale. The Board took into account management's discussion
of the Fund's current advisory fee structure. The Board also considered the
effect of the Fund's growth and size on its performance and fees, noting that if
the Fund's assets increase over time, the Fund may realize other economies of
scale if assets increase proportionally more than some expenses. The Board
determined that the current investment management fee structure was reasonable.
CONCLUSIONS -- The Board reached the following conclusions regarding the Fund's
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 being
addressed; (iv) the Fund's advisory expenses are reasonable in relation to those
of similar funds and to the services to be provided by the Manager; and (v) the
Manager and its affiliates' level of profitability from their relationship with
the Fund is reasonable. Based on its conclusions, the Board determined that
continuation of the Advisory Agreement would be in the interests of the Fund and
its shareholders.
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42 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
Paul L. McNamara
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ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
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UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
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TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
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CUSTODIAN AND State Street Bank and Trust Company
ACCOUNTING AGENT P.O. Box 1713
Boston, Massachusetts 02105
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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)
=============================================================================
48704-0813 (C)2013, USAA. All rights reserved.
ITEM 2. CODE OF ETHICS.
NOT APPLICABLE. This item must be disclosed only in annual reports.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
NOT APPLICABLE. This item must be disclosed only in annual reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
NOT APPLICABLE. This item must be disclosed only in annual reports.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not Applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Filed as part of the report to shareholders.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not Applicable.
ITEM 8. 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/S was recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms, based upon such officers' evaluation of these controls and
procedures as of a date within 90 days of the filing date of the report.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Trust's internal controls
or in other factors that could significantly affect the Trust's internal
controls subsequent to the date of their evaluation. The only change to the
procedures was to document the annual disclosure controls and procedures
established for the new section of the shareholder reports detailing the factors
considered by the Funds' Board in approving the Funds' advisory agreements.
ITEM 12. EXHIBITS.
(a)(1). NOT APPLICABLE. This item must be disclosed only in annual reports.
(a)(2). Certification pursuant to Rule 30a-2(a) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit
99.CERT.
(a)(3). Not Applicable.
(b). Certification pursuant to Rule 30a-2(b) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(b))is filed and attached hereto as Exhibit
99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Registrant: USAA MUTUAL FUNDS TRUST, Period Ended June 30, 2013
By:* /S/ JAMES G. WHETZEL
-----------------------------------------------------------
Signature and Title: JAMES G. WHETZEL, Secretary
Date: 08/22/13
------------------------------
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: 08/26/13
------------------------------
By:* /S/ ROBERTO GALINDO, JR.
-----------------------------------------------------
Signature and Title: Roberto Galindo, Jr., Treasurer
Date: 08/23/13
------------------------------
*Print the name and title of each signing officer under his or her signature.