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: KRISTEN MILLAN
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: JULY 31
Date of reporting period: JANUARY 31, 2019
ITEM 1. SEMIANNUAL REPORT TO STOCKHOLDERS.
USAA MUTUAL FUNDS TRUST - SEMIANNUAL REPORT FOR PERIOD ENDED JANUARY 31, 2019
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA AGGRESSIVE GROWTH FUND]
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SEMIANNUAL REPORT
USAA AGGRESSIVE GROWTH FUND
FUND SHARES (USAUX) o INSTITUTIONAL SHARES (UIAGX)
JANUARY 31, 2019
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Beginning on January 1, 2021, as permitted by regulations adopted by the
Securities and Exchange Commission, paper copies of the Fund's shareholder
reports like this one will no longer be sent by mail, unless you specifically
request paper copies of the reports from the Fund or from your financial
intermediary, such as a broker-dealer or bank. Instead, the reports will be made
available on usaa.com, and you will be notified by mail each time a report is
posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will
not be affected by this change and you need not take any action. You may elect
to receive shareholder reports and other communications from the Fund or your
financial intermediary electronically by notifying your financial intermediary
directly, or if you are a direct investor, by calling (800) 531-USAA (8722) or
logging on to usaa.com.
You may elect to receive all future reports in paper free of charge. You can
inform the Fund or your financial intermediary that you wish to continue
receiving paper copies of your shareholder reports by notifying your financial
intermediary directly, or if you are a direct investor, by calling (800)
531-USAA (8722) or logging on to usaa.com. Your election to receive reports in
paper will apply to all funds held with the USAA family of funds or your
financial intermediary.
TABLE OF CONTENTS
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INVESTMENT OVERVIEW 1
FINANCIAL INFORMATION
Portfolio of Investments 2
Notes to Portfolio of Investments 7
Financial Statements 8
Notes to Financial Statements 11
Financial Highlights 25
EXPENSE EXAMPLE 27
ADVISORY AGREEMENT(S) 29
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.
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 tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. 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.
(C)2019, USAA. All rights reserved.
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INVESTMENT OVERVIEW
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o TOP 10 HOLDINGS* - 1/31/19 o
(% of Net Assets)
Amazon.com, Inc. ......................................................... 6.3%
Microsoft Corp. .......................................................... 5.7%
Facebook, Inc. "A"........................................................ 4.1%
Visa, Inc. "A"............................................................ 3.6%
Alphabet, Inc. "A"........................................................ 3.1%
HP, Inc. ................................................................. 2.4%
United Continental Holdings, Inc. ........................................ 2.3%
salesforce.com, Inc. ..................................................... 2.2%
Apple, Inc. .............................................................. 2.2%
UnitedHealth Group, Inc. ................................................. 2.1%
o SECTOR ALLOCATION* - 1/31/19 o
(% of Net Assets)
[PIE CHART OF SECTOR ALLOCATION]
TECHNOLOGY 25.5%
CONSUMER, NON-CYCLICAL 21.5%
COMMUNICATIONS 17.3%
CONSUMER, CYCLICAL 14.5%
FINANCIAL 8.1%
INDUSTRIAL 7.8%
ENERGY 2.5%
BASIC MATERIALS 1.7%
[END PIE CHART]
*Does not include money market instruments and short-term investments purchased
with cash collateral from securities loaned.
Percentages are of the net assets of the Fund and may not equal 100%.
Refer to the Portfolio of Investments for a complete list of securities.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
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INVESTMENT OVERVIEW | 1
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PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
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MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
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EQUITY SECURITIES (98.9%)
COMMON STOCKS (98.9%)
BASIC MATERIALS (1.7%)
----------------------
CHEMICALS (1.7%)
812,000 Mosaic Co. $ 26,211
----------
COMMUNICATIONS (17.3%)
----------------------
INTERNET (15.7%)
43,300 Alphabet, Inc. "A"(a) 48,751
56,700 Amazon.com, Inc.(a) 97,452
6,300 Booking Holdings, Inc.(a) 11,547
384,200 Facebook, Inc. "A"(a) 64,042
62,600 Netflix, Inc.(a) 21,253
----------
243,045
----------
MEDIA (1.6%)
225,000 Walt Disney Co. 25,092
----------
Total Communications 268,137
----------
CONSUMER, CYCLICAL (14.5%)
--------------------------
AIRLINES (3.5%)
310,000 Alaska Air Group, Inc. 19,824
400,000 United Continental Holdings, Inc.(a) 34,908
----------
54,732
----------
APPAREL (1.5%)
280,400 NIKE, Inc. "B" 22,959
----------
AUTO MANUFACTURERS (1.5%)
79,000 Tesla, Inc.(a) 24,255
----------
LEISURE TIME (2.1%)
625,000 Norwegian Cruise Line Holdings Ltd.(a) 32,144
----------
LODGING (2.0%)
210,000 Las Vegas Sands Corp. 12,256
642,000 MGM Resorts International 18,900
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31,156
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2 | USAA AGGRESSIVE GROWTH FUND
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MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
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RETAIL (3.9%)
47,000 Chipotle Mexican Grill, Inc.(a) $ 24,892
100,000 Home Depot, Inc. 18,353
360,000 Nordstrom, Inc. 16,707
----------
59,952
----------
Total Consumer, Cyclical 225,198
----------
CONSUMER, NON-CYCLICAL (21.5%)
------------------------------
BEVERAGES (1.4%)
392,000 Monster Beverage Corp.(a) 22,438
----------
BIOTECHNOLOGY (4.3%)
170,000 Alexion Pharmaceuticals, Inc.(a) 20,903
218,000 Gilead Sciences, Inc. 15,262
50,688 Illumina, Inc.(a) 14,182
86,000 Vertex Pharmaceuticals, Inc.(a) 16,419
----------
66,766
----------
COMMERCIAL SERVICES (1.7%)
300,293 PayPal Holdings, Inc.(a) 26,654
----------
FOOD (1.0%)
527,000 Kroger Co. 14,930
----------
HEALTHCARE PRODUCTS (8.1%)
75,000 Align Technology, Inc.(a) 18,671
679,500 Boston Scientific Corp.(a) 25,923
199,640 Danaher Corp. 22,144
115,000 Edwards Lifesciences Corp.(a) 19,598
24,000 Intuitive Surgical, Inc.(a) 12,568
106,050 Thermo Fisher Scientific, Inc. 26,053
----------
124,957
----------
HEALTHCARE-SERVICES (2.1%)
121,000 UnitedHealth Group, Inc. 32,694
----------
PHARMACEUTICALS (2.9%)
56,000 Allergan plc 8,063
100,000 Cigna Corp. 19,981
142,000 Eli Lilly & Co. 17,020
----------
45,064
----------
Total Consumer, Non-cyclical 333,503
----------
ENERGY (2.5%)
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OIL & GAS (1.9%)
173,000 Cimarex Energy Co. 13,034
68,000 EOG Resources, Inc. 6,745
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PORTFOLIO OF INVESTMENTS | 3
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MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
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1,200,000 Transocean Ltd.(a),(b) $ 10,284
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30,063
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OIL & GAS SERVICES (0.6%)
310,000 Halliburton Co. 9,722
----------
Total Energy 39,785
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FINANCIAL (8.1%)
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BANKS (3.3%)
450,000 Bank of America Corp. 12,811
126,500 J.P. Morgan Chase & Co. 13,093
760,000 KeyCorp 12,517
256,000 U.S. Bancorp. 13,097
----------
51,518
----------
DIVERSIFIED FINANCIAL SERVICES (4.8%)
237,455 Intercontinental Exchange, Inc. 18,227
415,047 Visa, Inc. "A"(b) 56,036
----------
74,263
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Total Financial 125,781
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INDUSTRIAL (7.8%)
-----------------
BUILDING MATERIALS (1.7%)
253,000 Vulcan Materials Co. 25,718
----------
ELECTRICAL COMPONENTS & EQUIPMENT (0.5%)
120,872 Emerson Electric Co. 7,914
----------
ELECTRONICS (1.2%)
125,686 Honeywell International, Inc. 18,052
----------
MACHINERY-DIVERSIFIED (0.7%)
64,632 Rockwell Automation, Inc. 10,956
----------
TRANSPORTATION (3.7%)
100,000 Canadian Pacific Railway Ltd. 20,490
361,000 CSX Corp. 23,718
130,000 Kansas City Southern 13,747
----------
57,955
----------
Total Industrial 120,595
----------
TECHNOLOGY (25.5%)
------------------
COMPUTERS (4.6%)
203,000 Apple, Inc. 33,788
1,675,000 HP, Inc. 36,900
----------
70,688
----------
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4 | USAA AGGRESSIVE GROWTH FUND
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MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
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SEMICONDUCTORS (8.8%)
165,000 Analog Devices, Inc. $ 16,312
540,000 Applied Materials, Inc. 21,103
45,000 ASML Holding N.V. 7,876
42,500 Broadcom, Inc. 11,401
197,000 Maxim Integrated Products, Inc. 10,691
97,100 NVIDIA Corp. 13,958
350,000 NXP Semiconductors N.V. 30,461
128,621 Texas Instruments, Inc. 12,950
110,000 Xilinx, Inc. 12,313
----------
137,065
----------
SOFTWARE (12.1%)
125,000 Adobe, Inc.(a) 30,977
120,409 Electronic Arts, Inc.(a) 11,106
849,456 Microsoft Corp. 88,709
130,000 Oracle Corp. 6,530
222,900 salesforce.com, Inc.(a) 33,874
77,700 ServiceNow, Inc.(a) 17,096
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188,292
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Total Technology 396,045
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Total Common Stocks (cost: $1,110,484) 1,535,255
----------
Total Equity Securities (cost: $1,110,484) 1,535,255
----------
MONEY MARKET INSTRUMENTS (1.1%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (1.1%)
17,133,616 State Street Institutional Treasury Money Market Fund
Premier Class, 2.31%(c) (cost: $17,134) 17,134
----------
SHORT-TERM INVESTMENTS PURCHASED WITH CASH COLLATERAL
FROM SECURITIES LOANED (0.2%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.2%)
2,464,500 Goldman Sachs Financial Square Government Fund
Institutional Class, 2.34%(c) 2,464
98,000 HSBC U.S. Government Money Market Fund Class I, 2.38%(c) 98
----------
Total Short-Term Investments Purchased with Cash Collateral from
Securities Loaned (cost: $2,562) 2,562
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TOTAL INVESTMENTS (COST: $1,130,180) $1,554,951
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PORTFOLIO OF INVESTMENTS | 5
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($ IN 000s) VALUATION HIERARCHY
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ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
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Equity Securities:
Common Stocks $1,535,255 $- $- $1,535,255
Money Market Instruments:
Government & U.S. Treasury
Money Market Funds 17,134 - - 17,134
Short-Term Investments Purchased with
Cash Collateral from Securities Loaned:
Government & U.S. Treasury
Money Market Funds 2,562 - - 2,562
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Total $1,554,951 $- $- $1,554,951
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Refer to the Portfolio of Investments for additional industry, country, or
geographic region classifications.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
At January 31, 2019, the Fund did not have any transfers into/out of Level 3.
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6 | USAA AGGRESSIVE GROWTH FUND
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NOTES TO PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
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o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A 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.
o SPECIFIC NOTES
(a) Non-income-producing security.
(b) The security, or a portion thereof, was out on loan as of January 31,
2019.
(c) Rate represents the money market fund annualized seven-day yield at
January 31, 2019.
See accompanying notes to financial statements.
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NOTES TO PORTFOLIO OF INVESTMENTS | 7
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STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 2019 (unaudited)
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ASSETS
Investments in securities, at market value (including
securities on loan of $37,704) (cost of $1,130,180) $1,554,951
Receivables:
Capital shares sold 472
USAA Asset Management Company (Note 7) 2
Dividends and interest 136
Other 11
----------
Total assets 1,555,572
----------
LIABILITIES
Payables:
Upon return of securities loaned 2,562
Capital shares redeemed 632
Accrued management fees 566
Accrued transfer agent's fees 41
Other accrued expenses and payables 125
----------
Total liabilities 3,926
----------
Net assets applicable to capital shares outstanding $1,551,646
==========
NET ASSETS CONSIST OF:
Paid-in capital $1,106,447
Distributable earnings 445,199
----------
Net assets applicable to capital shares outstanding $1,551,646
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $1,540,894/37,918 capital shares
outstanding, no par value) $ 40.64
==========
Institutional Shares (net assets of $10,752/261 capital shares
outstanding, no par value) $ 41.22
==========
See accompanying notes to financial statements.
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8 | USAA AGGRESSIVE GROWTH FUND
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STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $33) $ 7,739
Interest 266
Securities lending (net) 131
--------
Total income 8,136
--------
EXPENSES
Management fees 3,500
Administration and servicing fees:
Fund Shares 1,172
Institutional Shares 6
Transfer agent's fees:
Fund Shares 901
Institutional Shares 6
Custody and accounting fees:
Fund Shares 105
Institutional Shares 1
Postage:
Fund Shares 35
Shareholder reporting fees:
Fund Shares 18
Trustees' fees 17
Registration fees:
Fund Shares 25
Institutional Shares 15
Professional fees 46
Other 13
--------
Total expenses 5,860
Expenses reimbursed:
Institutional Shares (13)
--------
Net expenses 5,847
--------
NET INVESTMENT INCOME 2,289
--------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain on:
Investments 40,577
Foreign currency transactions 1
Change in net unrealized appreciation/(depreciation) (81,540)
--------
Net realized and unrealized loss (40,962)
--------
Decrease in net assets resulting from operations $(38,673)
========
See accompanying notes to financial statements.
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FINANCIAL STATEMENTS | 9
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STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited), and year ended July 31,
2018
--------------------------------------------------------------------------------------------------------
1/31/2019 7/31/2018
--------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 2,289 $ 4,701
Net realized gain on investments 40,577 233,389
Net realized gain on foreign currency transactions 1 2
Change in net unrealized appreciation/(depreciation)
of investments (81,540) 47,989
------------------------------
Increase (decrease) in net assets resulting
from operations (38,673) 286,081
------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (223,656) (121,917)
Institutional Shares (1,695) (648)
------------------------------
Distributions to shareholders (225,351) (122,565)
------------------------------
NET INCREASE IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (NOTE 6)
Fund Shares 209,954 89,689
Institutional Shares 1,393 5,146
------------------------------
Total net increase in net assets from
capital share transactions 211,347 94,835
------------------------------
Net increase (decrease) in net assets (52,677) 258,351
NET ASSETS
Beginning of period 1,604,323 1,345,972
------------------------------
End of period $1,551,646 $1,604,323
==============================
See accompanying notes to financial statements.
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10 | USAA AGGRESSIVE GROWTH FUND
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NOTES TO FINANCIAL STATEMENTS
January 31, 2019 (unaudited)
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(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA MUTUAL FUNDS TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended (the 1940 Act), is an open-end management investment company
organized as a Delaware statutory trust consisting of 47 separate funds. The
USAA Aggressive Growth Fund (the Fund) qualifies as a registered investment
company under Accounting Standards Codification Topic 946. The information
presented in this semiannual report pertains only to the Fund, which is
classified as diversified under the 1940 Act. The Fund's investment objective is
to seek capital appreciation.
The Fund consists of two classes of shares: Aggressive Growth Fund Shares (Fund
Shares) and Aggressive Growth Fund Institutional Shares (Institutional Shares).
Each class of shares has equal rights to assets and earnings, except that each
class bears 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 are allocated to each class of shares based on each
class' relative net assets. Each class has exclusive voting rights on matters
related solely to that class and separate voting rights on matters that relate
to all classes. The Institutional Shares are 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 are 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 11
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time, or for purchase by a USAA fund participating in a fund-of-funds investment
strategy (USAA fund-of-funds).
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of USAA Asset Management Company (AMCO or Manager), the investment
adviser to the Fund, and USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services (SAS), the transfer agent to the Fund, announced that AMCO and
SAS would be acquired by Victory Capital Holdings, Inc. (Victory), a global
investment management firm headquartered in Cleveland, Ohio (the Transaction).
The closing of the Transaction is expected to be completed during the second
quarter of 2019, pending satisfaction of certain closing conditions and
approvals, including certain approvals of the Fund's Board of Trustees and of
the Fund's shareholders at a special shareholder meeting to be held on April 18,
2019. The Transaction is not expected to result in any material changes to the
Fund's investment objectives and principal investment strategies. In connection
with the Transaction, Victory proposes to replace portfolio managers employed by
AMCO that currently manage all or a portion of the Fund with portfolio managers
from one or more investment teams employed by Victory.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Valuation and Liquidity 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.
The Fund utilizes 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 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 exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange or
the 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. Securities traded primarily on foreign securities exchanges
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12 | USAA AGGRESSIVE GROWTH FUND
================================================================================
or markets are valued at the last quoted sale price, or the most
recently determined official closing price calculated according to local
market convention, available at the time the Fund is valued. If no last
sale or official closing price is reported or available, the average of
the bid and ask prices generally is used. Actively traded equity
securities listed on a domestic exchange generally are categorized in
Level 1 of the fair value hierarchy. Certain preferred and equity
securities traded in inactive markets generally are categorized in Level
2 of the fair value hierarchy.
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 many
cases, events affecting the values of foreign securities that occur
between the time of their last quoted sale or official closing price and
the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not need to be reflected in the value of the Fund's
foreign securities. However, the Manager and the Fund's subadviser(s)
will monitor for events that would materially affect the value of the
Fund's foreign securities. The Fund's subadviser(s) have agreed to
notify the Manager of significant events they identify 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 Committee will consider
such available information that it deems relevant and will determine a
fair value for the affected foreign securities in accordance with
valuation procedures. In addition, information from an external vendor
or other sources may be used to adjust the foreign market closing prices
of foreign equity securities to reflect what the Committee believes to
be the fair value of the securities as of the close of the NYSE. Fair
valuation of affected foreign equity securities may occur frequently
based on an assessment that events which occur on a fairly regular basis
(such as U.S. market movements) are significant. Such securities are
categorized in Level 2 of the fair value hierarchy.
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NOTES TO FINANCIAL STATEMENTS | 13
================================================================================
3. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value hierarchy.
4. Short-term debt securities with original or remaining maturities of
60 days or less may be valued at amortized cost, provided that amortized
cost represents the fair value of such securities.
5. Repurchase agreements are valued at cost.
6. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has been recognized in relation to a security or class of securities,
the securities are valued in good faith by the Committee in accordance
with 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, other pricing services, 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, evaluation of
credit quality, 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.
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14 | USAA AGGRESSIVE GROWTH FUND
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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 indexes.
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. INVESTMENTS IN SECURITIES - Securities transactions are accounted for as
of the date the securities are purchased or sold (trade date). Gains or
losses from sales of investment securities are computed on the identified
cost basis. Dividend income, less foreign taxes, if any, is recorded on the
ex-dividend date. If the ex-dividend date has passed, certain dividends from
foreign securities are recorded upon notification. Interest income is
recorded daily on the accrual basis. Premiums and discounts on short-term
securities are amortized on a straight-line basis over the life of the
respective securities.
D. FEDERAL TAXES - The Fund's policy is to comply with the requirements of
the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its taxable
income and net capital gains, if any, to its shareholders. Therefore, no
federal income tax provision is required.
For the six-month period ended January 31, 2019, 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 the Fund's tax basis to determine if
adjustments to this conclusion are necessary. The statute of limitations on
the Fund's tax return filings generally remain open for the three preceding
fiscal reporting year ends and remain subject to examination by the Internal
Revenue Service and state taxing authorities.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 15
================================================================================
E. FOREIGN TAXATION - Foreign income and capital gains on some foreign
securities may be subject to foreign taxes, which are reflected as a
reduction to such income and realized gains. The Fund records a liability
based on unrealized gains to provide for potential foreign taxes payable
upon the sale of these securities. Foreign taxes have been provided for in
accordance with the Fund's understanding of the applicable countries'
prevailing tax rules and rates.
F. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the exchange
rate obtained from an independent pricing service on the respective
dates of such transactions.
2. Market value of securities, other assets, and liabilities at the
exchange rate obtained from an independent pricing service on a daily
basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the amounts received. At
the end of the Fund's fiscal year, net realized foreign currency
gains/losses are reclassified from accumulated net realized gains/losses to
accumulated undistributed net investment income on the Statement of Assets
and Liabilities, as such amounts are treated as ordinary income/loss for
federal income tax purposes. Net unrealized foreign currency exchange
gains/losses arise from changes in the value of assets and liabilities,
other than investments in securities, resulting from changes in the exchange
rate.
================================================================================
16 | USAA AGGRESSIVE GROWTH FUND
================================================================================
G. EXPENSES PAID INDIRECTLY - A portion of the brokerage commissions that
the Fund pays may be recaptured as a credit that is tracked and used by the
custodian to directly reduce expenses paid by the Fund. Effective September
30, 2018, the commission recapture program ended. For the six-month period
ended January 31, 2019, the Fund did not receive any brokerage commission
recapture credits.
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, along with other funds of the Trust and USAA ETF Trust
(together, the Trusts), 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 provide temporary or emergency
cash needs, including redemption requests that might otherwise require the
untimely disposition of securities. Subject to availability (including usage of
the facility by other funds of the Trusts), the Fund may borrow from CAPCO an
amount up to 5% of the Fund's total assets at an interest rate based on the
London Interbank Offered Rate (LIBOR), plus 100.0 basis points.
The Trusts are also assessed facility fees by CAPCO in the amount of 14.0 basis
points of the amount of the committed loan agreement. Prior to September 30,
2018, the maximum annual facility fee was 13.0 basis points of the amount of the
committed loan agreement. The facility fees are allocated
================================================================================
NOTES TO FINANCIAL STATEMENTS | 17
================================================================================
among the funds of the Trusts based on their respective average daily net assets
for the period.
The Trusts may request an optional increase of the committed loan agreement from
$500 million up to $750 million. If the Trusts increase the committed loan
agreement, the assessed facility fee on the amount of the additional commitment
will be 15.0 basis points.
For the six-month period ended January 31, 2019, the Fund paid CAPCO facility
fees of $6,000, which represents 1.9% of the total fees paid to CAPCO by the
funds of the Trusts. The Fund had no borrowings under this agreement during the
six-month period ended January 31, 2019.
(3) DISTRIBUTIONS
The tax basis of distributions and any accumulated undistributed net investment
income will be determined as of the Fund's tax year-end of July 31, 2019, in
accordance with applicable federal tax law.
Distributions of net investment income and realized gains from security
transactions not offset by capital losses are made annually in the succeeding
fiscal year or as otherwise required to avoid the payment of federal taxes.
At July 31, 2018, the Fund had no capital loss carryforwards, for federal income
tax purposes.
As of January 31, 2019, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as the cost reported
in the financial statements. The net unrealized appreciation/(depreciation) on
investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
FUND APPRECIATION DEPRECIATION (DEPRECIATION)
---------------------------------------------------------------------------------------------
USAA Aggressive Growth Fund $465,013,000 $(40,242,000) $424,771,000
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended January 31, 2019, were
$120,555,000 and $116,796,000, respectively.
================================================================================
18 | USAA AGGRESSIVE GROWTH FUND
================================================================================
(5) SECURITIES LENDING
The Fund, through a securities lending agreement with Citibank, N.A.
(Citibank), may lend its securities to qualified financial institutions, such as
certain broker-dealers, to earn additional income, net of income retained by
Citibank. The borrowers are required to secure their loans continuously with
collateral in an amount at least equal to 102% of the fair value of domestic
securities and foreign government securities loaned and 105% of the fair value
of foreign securities and all other securities loaned. Collateral may be cash,
U.S. government securities, or other securities as permitted by SEC guidelines.
Cash collateral may be invested in high-quality short-term investments.
Collateral requirements are determined daily based on the value of the Fund's
securities on loan as of the end of the prior business day. Loans are terminable
upon demand and the borrower must return the loaned securities within the lesser
of one standard settlement period or five business days. Risks relating to
securities-lending transactions include that the borrower may not provide
additional collateral when required or return the securities when due, and that
the value of the short-term investments will be less than the amount of cash
collateral required to be returned to the borrower. The Fund's agreement with
Citibank does not include master netting provisions. Non-cash collateral
received by the Fund may not be sold or re-pledged except to satisfy borrower
default. Cash collateral is listed in the Fund's Portfolio of Investments and
Financial Statements while non-cash collateral is not included.
At January 31, 2019, the Fund's value of outstanding securities on loan and the
value of collateral are as follows:
VALUE OF SECURITIES
ON LOAN NON-CASH COLLATERAL CASH COLLATERAL
------------------------------------------------------------------------------------
$37,704,000 $37,042,000 $2,562,000
(6) CAPITAL SHARE TRANSACTIONS
At January 31, 2019, there were an unlimited number of shares of capital stock
at no par value authorized for the Fund.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 19
================================================================================
Capital share transactions for the Institutional Shares resulted from purchases
and sales by the affiliated USAA fund-of-funds as well as other persons or legal
entities that the Fund may approve from time to time. Capital share transactions
for all classes were as follows, in thousands:
SIX-MONTH
PERIOD ENDED YEAR ENDED
JANUARY 31, 2019 JULY 31, 2018
---------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------
FUND SHARES:
Shares sold 1,836 $ 83,755 3,273 $ 150,920
Shares issued from
reinvested dividends 5,648 220,904 2,757 120,367
Shares redeemed (2,130) (94,705) (3,957) (181,598)
----------------------------------------------------
Net increase from capital
share transactions 5,354 $209,954 2,073 $ 89,689
====================================================
INSTITUTIONAL SHARES:
Shares sold 106 $ 5,108 528 $ 24,698
Shares issued from
reinvested dividends 42 1,661 15 648
Shares redeemed (117) (5,376) (439) (20,200)
----------------------------------------------------
Net increase from capital
share transactions 31 $ 1,393 104 $ 5,146
====================================================
(7) TRANSACTIONS WITH MANAGER
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 the Fund's assets, subject to the
authority of and supervision by the Board. The Manager 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 all or a portion of the
Fund's assets. For the six-month period ended January 31, 2019, the Fund had no
subadviser(s).
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee, which is accrued daily and paid
monthly, is computed as a percentage of the Fund's average daily net assets
================================================================================
20 | USAA AGGRESSIVE GROWTH FUND
================================================================================
at annualized rates of 0.50% of the first $750 million of average daily net
assets, 0.40% of that portion of average daily net assets over $750 million but
not over $1.5 billion, and 0.33% of that portion of average daily net assets
over $1.5 billion. For the six-month period ended January 31, 2019, the Fund's
effective annualized base fee was 0.45% of the Fund's average daily net assets
for the same period.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Large-Cap Growth Funds Index. The Lipper Large-Cap Growth
Funds Index tracks the total return performance of funds within the Lipper
Large-Cap Growth Funds category.
The performance period for each share class 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
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
------------------------------------------------------------------------
+/- 100 to 400 +/- 4
+/- 401 to 700 +/- 5
+/- 701 and greater +/- 6
(1) Based on the difference between average annual performance of the
relevant share class of the Fund and its relevant Lipper index, rounded
to the nearest basis point. Average daily net assets of the share class
are calculated over a rolling 36-month period.
Each class' annual performance adjustment rate is multiplied by the average
daily net assets of each respective class over the entire performance period,
which is then multiplied by a fraction, the numerator of which is the number of
days in the month and the denominator of which is 365 (366 in leap years). The
resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper Large-Cap Growth Funds Index over that period, even if
the class had overall negative returns during the performance period.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 21
================================================================================
For the six-month period ended January 31, 2019, the Fund incurred management
fees, paid or payable to the Manager, of $3,500,000. For the six- month period
ended January 31, 2019, the Fund Shares and Institutional Shares did not incur
any performance adjustment.
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 at an annualized rate of 0.15% and 0.10% of
average daily net assets of the Funds Shares and Institutional Shares,
respectively. For the six-month period ended January 31, 2019, the Fund Shares
and Institutional Shares incurred administration and servicing fees, paid or
payable to the Manager, of $1,172,000 and $6,000, respectively.
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 January 31, 2019, the Fund reimbursed the Manager less than $500 for these
compliance and legal services. These expenses are included in the professional
fees on the Fund's Statement of Operations.
EXPENSE LIMITATION - The Manager agreed, through November 30, 2019, to limit the
total annual operating expenses of the Institutional Shares to 0.70% of its
average daily net assets, excluding extraordinary expenses and before reductions
of any expenses paid indirectly, and to reimburse the Institutional Shares for
all expenses in excess of that amount. This expense limitation arrangement may
not be changed or terminated through November 30, 2019, without approval of the
Board, and may be changed or terminated by the Manager at any time after that
date. For the six-month period ended January 31, 2019, the Institutional Shares
incurred reimbursable expenses of $13,000, of which $2,000 was receivable from
the Manager.
TRANSFER AGENT'S FEES - SAS, an affiliate of the Manager, provides transfer
agent services to the Fund Shares based on an annual charge of $23 per
shareholder account plus out-of-pocket expenses. SAS pays a portion of these
fees to certain intermediaries for the administration and servicing of
================================================================================
22 | USAA AGGRESSIVE GROWTH FUND
================================================================================
accounts that are held with such intermediaries. Transfer agent's fees for
Institutional Shares are paid monthly based on a fee accrued daily at an
annualized rate of 0.10% of the Institutional Shares' average daily net assets,
plus out-of-pocket expenses. For the six-month period ended January 31, 2019,
the Fund Shares and Institutional Shares incurred transfer agent's fees, paid or
payable to SAS, of $901,000 and $6,000, respectively.
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 fee or other compensation for these services.
(8) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other USAA Funds and
is one of 16 USAA mutual funds in which the affiliated USAA fund-of-funds
invest. The USAA fund-of-funds do not invest in the underlying funds for the
purpose of exercising management or control, and the affiliated fund-of-funds'
annual or semiannual reports may be viewed at usaa.com. As of January 31, 2019,
the USAA fund-of-funds owned the following percentages of the total outstanding
shares of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
--------------------------------------------------------------------------------
Cornerstone Conservative 0.1
Cornerstone Equity 0.6
The Manager is indirectly wholly owned by 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.
(9) UPCOMING REGULATORY MATTERS
In October 2016, the U.S. Securities and Exchange Commission (SEC) issued Final
Rule Release No. 33-10233, INVESTMENT COMPANY LIQUIDITY RISK MANAGEMENT PROGRAMS
(Liquidity Rule). The Liquidity Rule requires funds to establish a liquidity
risk management program and enhances disclosures regarding funds' liquidity. The
requirements to implement a liquidity risk management program and establish a
15% illiquid investment limit became
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
effective December 1, 2018. However, in February 2018, the SEC issued Release
No. IC-33010, INVESTMENT COMPANY LIQUIDITY RISK MANAGEMENT PROGRAMS; COMMISSION
GUIDANCE FOR IN-KIND ETFs, which delayed certain requirements related to
liquidity classification, highly liquid investment minimums, and board approval
of the liquidity risk management programs to June 1, 2019. The Manager continues
to evaluate the impact of this rule on the Fund's financial statements and
various filings.
(10) RECENTLY ADOPTED ACCOUNTING STANDARDS
In August 2018, the SEC adopted amendments to Regulation S-X for investment
companies governing the form and content of financial statements. The amendments
to Regulation S-X took effect on November 5, 2018, and the financial statements
have been modified accordingly, for the current and prior periods.
ASU 2018-13, FAIR VALUE MEASUREMENT
-----------------------------------
In August 2018, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2018-13, Fair Value Measurement (Topic 820).
The amendments in the ASU impact disclosure requirements for fair value
measurement. ASU 2018-13 is effective for fiscal years beginning after December
15, 2019. Early adoption is permitted and can include the entire standard or
certain provisions that exclude or amend disclosures. Management has elected to
early adopt ASU 2018-13 effective with the current reporting period. The
adoption of ASU 2018-13 guidance is limited to changes in the Fund's notes to
financial statement disclosures regarding valuation method, fair value, and
transfers between levels of the fair value hierarchy.
================================================================================
24 | USAA AGGRESSIVE GROWTH FUND
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
-------------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
-------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 48.92 $ 43.96 $ 40.02 $ 42.55 $ 40.90 $ 38.44
-------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .06 .19 .36 .33 .79 .79
Net realized and
unrealized gain (loss) (1.48) 8.79 6.30 (.20) 5.75 5.47
-------------------------------------------------------------------------------------
Total from investment
operations (1.42) 8.98 6.66 .13 6.54 6.26
-------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.08) (.19) (.33) (.33) (.79) (.89)
Realized capital gains (6.78) (3.83) (2.39) (2.33) (4.10) (2.91)
-------------------------------------------------------------------------------------
Total distributions (6.86) (4.02) (2.72) (2.66) (4.89) (3.80)
-------------------------------------------------------------------------------------
Net asset value at
end of period $ 40.64 $ 48.92 $ 43.96 $ 40.02 $ 42.55 $ 40.90
=====================================================================================
Total return (%)* (2.33) 21.57 17.92 .36 16.96 16.82
Net assets at end of
period (000) $1,540,894 $1,592,944 $1,340,385 $1,208,124 $1,247,753 $1,093,796
Ratios to average daily
net assets:**
Expenses (%)(a),(b) .74(c) .75 .81 .85 .88 .93
Net investment
income (%) .29(c) .32 .57 .30 .30 .17
Portfolio turnover (%) 8 57 51 70 55 68
* 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 January 31, 2019, average daily net
assets were $1,548,681,000.
(a) Does not include acquired fund fees, if any.
(b) Reflects total annual operating expenses of the Fund Shares before
reductions of any expenses paid indirectly. The Fund's expenses paid
indirectly decreased the expense ratio by less than 0.01%.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
FINANCIAL HIGHLIGHTS | 25
================================================================================
INSTITUTIONAL SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
-----------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
-----------------------------------------------------------------------------------
Net asset value at
beginning of period $ 49.55 $ 44.36 $40.39 $ 42.92 $ 41.22 $ 38.67
-----------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .08(a) .14(a) .21(a) .44 .21(a) 1.10
Net realized and
unrealized gain (loss) (1.51)(a) 8.93(a) 6.52(a) (.24) 6.47(a) 5.29
-----------------------------------------------------------------------------------
Total from investment
operations (1.43)(a) 9.07(a) 6.73(a) .20 6.68(a) 6.39
-----------------------------------------------------------------------------------
Less distributions from:
Net investment income (.12) (.05) (.37) (.40) (.88) (.93)
Realized capital gains (6.78) (3.83) (2.39) (2.33) (4.10) (2.91)
-----------------------------------------------------------------------------------
Total distributions (6.90) (3.88) (2.76) (2.73) (4.98) (3.84)
-----------------------------------------------------------------------------------
Net asset value at
end of period $ 41.22 $ 49.55 $44.36 $ 40.39 $ 42.92 $ 41.22
===================================================================================
Total return (%)* (2.31) 21.54 17.94 .51 17.21 17.09
Net assets at end
of period (000) $10,752 $11,379 $5,587 $136,361 $163,115 $119,051
Ratios to average
daily net assets:**
Expenses (%)(b),(c) .70(d) .75(e) .73 .70 .68 .68
Expenses, excluding
reimbursements (%)(b),(c) .93(d) .94 .73 .70 .68 .68
Net investment income (%) .34(d) .30 .54 .45 .50 .43
Portfolio turnover (%) 8 57 51 70 55 68
* 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 January 31, 2019, average daily net
assets were $11,643,000.
(a) Calculated using average shares. For the six month period ended January
31, 2019, average shares were 250,000.
(b) Does not include acquired fund fees, if any.
(c) Reflects total annual operating expenses of the Institutional Shares
before reductions of any expenses paid indirectly. The Institutional Shares'
expenses paid indirectly decreased the expense ratios by less than 0.01%.
(d) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(e) Effective December, 1, 2017, the Manager has voluntarily agreed to limit
the annual expenses of the Institutional Shares to 0.70% of the
Institutional Shares' average daily net assets.
================================================================================
26 | USAA AGGRESSIVE GROWTH FUND
================================================================================
EXPENSE EXAMPLE
January 31, 2019 (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 August 1, 2018, through
January 31, 2019.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table 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 for your share
class in the "actual" 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 line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class and an assumed rate of return of
5% per year before expenses, which is not the
================================================================================
EXPENSE EXAMPLE | 27
================================================================================
Fund's actual return. The hypothetical account values and expenses may not be
used to estimate the actual ending account balance or expenses you paid for the
period. You may use this information to compare the ongoing costs of investing
in the Fund and other funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of other
funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled "hypothetical"
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 AUGUST 1, 2018 -
AUGUST 1, 2018 JANUARY 31, 2019 JANUARY 31, 2019
--------------------------------------------------------
FUND SHARES
Actual $1,000.00 $ 976.70 $3.69
Hypothetical
(5% return before expenses) 1,000.00 1,021.48 3.77
INSTITUTIONAL SHARES
Actual 1,000.00 976.90 3.49
Hypothetical
(5% return before expenses) 1,000.00 1,021.68 3.57
*Expenses are equal to the annualized expense ratio of 0.74% for Fund Shares
and 0.70% for Institutional Shares, which are net of any reimbursements and
expenses paid indirectly, multiplied by the average account value over the
period, multiplied by 184 days/365 days (to reflect the one-half-year period).
The Fund's actual ending account values are based on its actual total returns
of (2.33)% for Fund Shares and (2.31)% for Institutional Shares for the
six-month period of August 1, 2018, through January 31, 2019.
================================================================================
28 | USAA AGGRESSIVE GROWTH FUND
================================================================================
ADVISORY AGREEMENT(S)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with Victory Capital
Holdings, Inc. ("Victory Holdings") pursuant to which Victory Holdings would
acquire all of the outstanding stock of AMCO and USAA Transfer Agency Company
d/b/a USAA Shareholder Account Services ("USAA Transfer Agent") (the
"Transaction"). The Independent Trustees were advised that the Transaction, if
completed, would constitute
================================================================================
ADVISORY AGREEMENT(S) | 29
================================================================================
an "assignment" (as that term is defined in Section 2(a)(4) of the 1940 Act) and
result in the automatic termination of the Existing Management Agreements
("Change of Control Event"). The Independent Trustees also were advised that it
was proposed that Victory Capital, a subsidiary of Victory Holdings, would serve
as the investment adviser to each Fund after the closing of the Transaction
("Post-Transaction") and that the Board would be asked to consider approval of
the terms and conditions of the New Advisory Agreement with Victory Capital and
thereafter to submit the New Advisory Agreement to each Fund's shareholders for
approval. Because the Change of Control Event also would result in the
termination of each existing subadvisory agreement between AMCO and the
subadvisers to the Funds ("Existing Subadvisory Agreements"), the Independent
Trustees were advised that the Board would also be asked to approve the New
Subadvisory Agreements.
In anticipation of the Transaction, the Trustees met at a series of subsequent
in-person meetings on November 27-28, 2018, January 7-8, 2019, and January
14-15, 2019, which included meetings of the full Board and separate meetings of
the Independent Trustees for the purposes of considering, among other things:
whether it would be in the best interests of each Fund and its respective
shareholders to approve the New Agreements; and the anticipated impacts of the
Transaction on the Funds and their shareholders (each, a "Meeting"). During each
of these Meetings, the Board sought additional and clarifying information as it
deemed necessary or appropriate. In this connection, the Independent Trustees
worked with their independent legal counsel to prepare formal due diligence
requests (the "Diligence Requests") that were submitted to Victory Capital,
Victory Capital Advisers, Inc. ("VCA"), and the subadvisers. The Diligence
Requests sought information relevant to the Board's consideration of the New
Advisory Agreement, the New Subadvisory Agreements, distribution arrangements,
and other anticipated impacts of the Transaction on the Funds and their
shareholders. Victory Capital, VCA, and the subadvisers provided documents and
information in response to the Diligence Requests (the "Response Materials").
Following their review of the Response Materials, the Independent Trustees
submitted a supplemental due diligence request for additional and clarifying
information (the "Supplemental Diligence Request") to Victory Capital and VCA.
Victory
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30 | USAA AGGRESSIVE GROWTH FUND
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Capital and VCA provided further information in response to the Supplemental
Diligence Request, which the Board reviewed. Senior management representatives
of Victory Capital and/or AMCO participated in a portion of each Meeting and
addressed various questions raised by the Board. Throughout the process, the
Independent Trustees were assisted by their independent legal counsel and
counsel to the Funds, who advised them on, among other things, their duties and
obligations relating to their consideration of the New Agreements.
The Board's evaluation of the New Agreements reflected the information provided
specifically in connection with its review of the New Agreements, as well as,
where relevant, information that was previously furnished to the Board in
connection with the most recent renewal of the Existing Management Agreements
and Existing Subadvisory Agreements at an in-person meeting of the Board on
April 18, 2018 (the "2018 15(c) Meeting") and at other subsequent Board meetings
in 2018. The Board's evaluation of the New Agreements also reflected the
knowledge gained as Board members of the Funds with respect to services provided
by AMCO, its affiliates, and each subadviser to the Funds.
The Board's approvals and recommendations were based on its determination,
within its business judgment, that it would be in the best interests of each
Fund and its respective shareholders, for Victory Capital and, as applicable,
the subadvisers, to provide investment advisory, investment subadvisory, and
related services to the Funds, following the closing of the Transaction.
FACTORS CONSIDERED IN APPROVING THE NEW ADVISORY AGREEMENT
In connection with the Board's consideration of the New Advisory Agreement,
Victory Capital and AMCO advised the Board about a variety of matters, including
the following:
o The nature, extent, and quality of the services to be provided to the
Funds by Victory Capital Post-Transaction are expected to be of at least
the same level as the services currently provided to the Funds by AMCO.
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ADVISORY AGREEMENT(S) | 31
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o Victory Capital's stated commitment to maintaining and enhancing the
USAA member/USAA Fund shareholder experience, including creating a
dedicated USAA Fund sales and client service call center that will
provide ongoing client service and advice to existing and new USAA
members.
o Victory Capital proposes to: (1) replace the underlying indexes for
the USAA Extended Market Index Fund and USAA S&P 500 Index Fund with
indexes designed to provide shareholders with comparable exposure and
investment outcomes; (2) change the USAA Extended Market Index Fund's
and USAA S&P 500 Index Fund's investment objectives and strategies in
light of the changes to their underlying indexes; and (3) change the
name of the USAA S&P 500 Index Fund to the USAA 500 Index Fund.
o Victory Capital does not propose changes to the investment
objective(s) of any other Funds. Although the investment processes used
by Victory Capital's portfolio managers may differ from those used by
AMCO's portfolio managers or, if applicable, any subadviser's portfolio
managers, such differences are not currently expected to result in
changes to the principal investment strategies or principal investment
risks of the Funds.
o The New Advisory Agreement does not change any Fund's advisory fee
rate or the computation method for calculating such fees (except that
Victory Capital, subject to Board approval, may in the future use a
single designated share class to calculate the performance adjustment).
For at least two years after the Transaction closes, Victory Capital has
agreed to waive fees and/or reimburse expenses so that each Fund's
annual expense ratio (excluding certain customary items) does not exceed
the levels reflected in each Fund's most recent audited financial
statements at the time the Transaction closes (or the levels of AMCO's
then-current expense caps, if applicable), excluding the impact of any
performance adjustment to the Fund's advisory fee.
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32 | USAA AGGRESSIVE GROWTH FUND
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o The portfolio managers at AMCO that manage the Fixed Income Funds(1) as
well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be advised
by Victory Capital through its Victory Solutions platform, Victory
Capital proposes that the same subadvisers be retained Post-Transaction,
although Victory Capital may change the allocation to a particular
subadviser Post-Transaction. No changes are expected to the portfolio
managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's
(1)The Fixed Income Funds include the following Funds: California Bond Fund,
Government Securities Fund, High Income Fund, Income Fund, Intermediate-Term
Bond Fund, Tax Exempt Intermediate-Term Fund, Tax Exempt Long-Term Fund, New
York Bond Fund, Short-Term Bond Fund, Tax Exempt Short-Term Fund, Ultra
Short-Term Bond Fund, Virginia Bond Fund, Money Market Fund, Tax Exempt Money
Market Fund and Treasury Money Market Trust.
(2)The Cornerstone Funds include the following Funds: Cornerstone Aggressive
Fund, Cornerstone Conservative Fund, Cornerstone Equity Fund, Cornerstone
Moderate Fund, Cornerstone Moderately Aggressive Fund, and Cornerstone
Moderately Conservative Fund.
(3)The Target Retirement Funds include the following Funds: Target Retirement
2020 Fund, Target Retirement 2030 Fund, Target Retirement 2040 Fund, Target
Retirement 2050 Fund, Target Retirement 2060 Fund, and Target Retirement
Income Fund.
================================================================================
ADVISORY AGREEMENT(S) | 33
================================================================================
businesses to Victory Capital. Victory Capital and USAA expect to enter
into a transition services agreement under which USAA will continue to
provide Victory Capital with certain services that are currently
provided by USAA to AMCO and the USAA Transfer Agent for a specified
period of time after the closing of the Transaction to assist Victory
Capital in transitioning the USAA member distribution channel and member
support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital
================================================================================
34 | USAA AGGRESSIVE GROWTH FUND
================================================================================
is capable of providing the same level of investment management services
currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund, Growth
& Income Fund, Income Stock Fund, Global Equity Income Fund, and Precious
Metals and Minerals Fund.
================================================================================
ADVISORY AGREEMENT(S) | 35
================================================================================
The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored and managed by
Victory Capital ("Victory Funds") with similar investment
================================================================================
36 | USAA AGGRESSIVE GROWTH FUND
================================================================================
objectives and strategies managed by the portfolio managers who would manage the
Funds. Based on information presented to the Board at the Meetings and its
discussions with Victory Capital, the Board concluded that Victory Capital is
capable of generating a level of long-term investment performance that is
appropriate in light of each Fund's investment objectives, strategies and
restrictions.
FEES TO BE PAID TO VICTORY CAPITAL AND EXPENSES OF THE FUNDS - The Board
considered that it had reviewed each Fund's existing advisory fee rate and
computation method for calculating such fees at the 2018 15(c) Meeting. The
Board considered that the New Advisory Agreement does not change any Fund's
advisory fee rate or the computation method for calculating such fees, except
that Victory Capital, subject to Board approval, may in the future use a single
designated share class to calculate the performance adjustment and apply the
resulting performance adjustment across each other class of shares of the Fund.
The Board considered that the use of a single designated class to calculate the
performance adjustment for each other class of shares of the Fund could mean
that shareholders of a class other than the class used to measure the
performance adjustment may pay a performance adjustment that is higher or lower
than if the adjustment were calculated on a class by class basis, primarily due
to the impact of differences in the fees and expenses between share classes on
performance. The Board considered that the New Advisory Agreement stipulates
that the period for measuring performance for calculating a Fund's performance
adjustment begins on the date that Victory Capital begins managing the Fund;
therefore, no performance adjustments will be made for the first twelve months
of the New Advisory Agreement, consistent with applicable regulations. The Board
also considered Victory Capital's contractual commitment under the expense
limitation agreement ("ELA") to waive fees and/or reimburse expenses for at
least two years after the closing of the Transaction, so that each Fund's annual
expense ratio (excluding acquired fund fees and expenses, any performance
adjustment to a Fund's advisory fee, interest, taxes, brokerage commissions,
other expenditures which are capitalized in accordance with generally accepted
accounting principles, and other extraordinary expenses not incurred in the
ordinary course of such Fund's business) does not exceed the levels reflected in
each Fund's most recent audited financial statements at the time the
================================================================================
ADVISORY AGREEMENT(S) | 37
================================================================================
Transaction closes (or the levels of AMCO's then-current expense caps, if
applicable), excluding the impact of any performance adjustment to a Fund's
advisory fee. The Board considered that the ELA permits Victory Capital to
recoup advisory fees waived and expenses reimbursed for up to three years after
the fiscal year in which the waiver or reimbursement took place, subject to the
lesser of any operating expense limitation in effect at the time of: (1) the
original waiver or expense reimbursement; or (2) recoupment. The Board also
considered that Victory Capital and AMCO had represented to the Board that they
will use their best efforts to ensure that they and their respective affiliates
do not take any action that imposes an "unfair burden" on the Funds as a result
of the Transaction or as a result of any express or implied terms, conditions or
understandings applicable to the Change of Control Event, for so long as the
requirements of Section 15(f) of the 1940 Act apply. The Board also considered
a comparison of the proposed advisory fees to be paid by each Fund to the
advisory fees paid by funds and other accounts managed by Victory Capital deemed
to be comparable to the Fund in terms of investment objectives and strategies.
The Board considered that, with few exceptions, mostly involving weighted
average fees for separate accounts, the advisory fees to be paid by the Funds
were lower than the fees paid by these other funds and accounts. The Board
concluded that the retention of Victory Capital was unlikely to impose an unfair
burden on the Funds because, after the Transaction, none of AMCO, Victory
Capital, VCA, or any of their respective affiliates, would be entitled to
receive any compensation directly or indirectly (i) from any person in
connection with the purchase or sale of securities or other property to, from,
or on behalf of the Funds (other than ordinary fees for bona fide principal
underwriting services), or (ii) from the Funds or their shareholders for other
than bona fide investment advisory or other services. Based on its review, the
Board determined, with respect to each Fund, that Victory Capital's advisory fee
is fair and reasonable.
THE EXTENT TO WHICH VICTORY CAPITAL MAY REALIZE ECONOMIES OF SCALE AS THE FUNDS
GROW LARGER AND WHETHER FEE LEVELS REFLECT THESE ECONOMIES OF SCALE FOR THE
BENEFIT OF FUND SHAREHOLDERS - The Board considered potential or anticipated
economies of scale in relation to the services Victory Capital would provide to
each Fund. The Board considered that the New Advisory Agreement includes the
same advisory fee breakpoints for the same Funds as
================================================================================
38 | USAA AGGRESSIVE GROWTH FUND
================================================================================
the Existing Advisory Agreements. The Board also considered that Victory Capital
has contractually agreed to cap the Funds' annual operating expense ratios,
pursuant to the ELA, which will remain in effect for at least two years from the
closing of the Transaction, and may be extended. The Board also considered
Victory Capital's representation that the significant increase in its assets
under management Post-Transaction may reasonably be expected to enable the new
combined firm to reach greater economies of scale in a shorter time frame. The
Board noted that it will have the opportunity to periodically re-examine whether
a Fund or the Trust has achieved economies of scale, and the appropriateness of
investment advisory and administrative fees payable to Victory Capital, in the
future.
THE PROFITS TO BE REALIZED BY VICTORY CAPITAL AND ITS AFFILIATES FROM THEIR
RELATIONSHIP WITH THE TRUST - The Board considered the benefits Victory Capital
and its affiliates may derive from their relationship with the Funds, including
compensation to be paid to Victory Capital for the provision of certain
administrative, fund accounting and shareholder services to the Funds and
compensation to be paid to USAA Transfer Agent for the provision of transfer
agency services to the Funds. The Board considered the significant investments
Victory Capital expected to make to support and grow the USAA member channel and
the costs to integrate the USAA Fund business into Victory Capital. The Board
also considered Victory Capital's profitability report presented to the board of
trustees of the Victory Funds in connection with their most recent 15(c)
process. The Board considered Victory Capital's representation that the fully
integrated USAA Fund business, including investments to support ongoing growth,
was expected to have an overall marginally positive impact on Victory Capital's
overall financial profitability. The Board noted the difficulty of accurately
projecting profitability under the current circumstance and noted that it would
have the opportunity to give further consideration to Victory Capital's
profitability with respect to the Funds at the end of the initial two-year term
of the New Advisory Agreement.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
================================================================================
ADVISORY AGREEMENT(S) | 39
================================================================================
deliver investment products and services to USAA's direct member-based channel.
The Board also considered that Victory Capital may derive reputational and other
benefits from its ability to use "USAA" and related names in connection with
operating and marketing the Funds. The Board considered that the Transaction, if
completed, would significantly increase Victory Capital's assets under
management and expand Victory Capital's investment capabilities. This increased
size and diversification could facilitate Victory Capital's continued investment
in its business and products, which Victory Capital would be able to leverage
across a broader base of assets. Victory Capital also would be able to use
trading commission credits from the Funds' transactions in securities to
"purchase" third party research and execution services to support its investment
process. Based on its review, the Board determined that any "fall-out" benefits
and other types of benefits that may accrue to Victory Capital are fair and
reasonable.
CONCLUSIONS - Based on the foregoing and other relevant considerations, at the
Meeting of the Board held on January 15, 2019, the Board, including a majority
of the Independent Trustees, acting within its business judgment, (1) concluded
that the terms of the New Advisory Agreement are fair and reasonable and that
approval of the New Advisory Agreement is in the best interests of each Fund and
its respective shareholders, (2) voted to approve the New Advisory Agreement,
and (3) voted to recommend approval of the New Advisory Agreement by
shareholders of the Funds. The Board evaluated all information available to it
on a Fund-by-Fund basis and its determinations were made separately in respect
of each Fund. The Board noted some factors may have been more or less important
with respect to any particular Fund and that no one factor was determinative of
its decisions which, instead, were premised upon the totality of factors
considered. In this connection, the Board also noted that different Board
members likely placed emphasis on different factors in reaching their individual
conclusions to vote in favor of the New Advisory Agreement and to recommend
approval of the New Advisory Agreement by shareholders of the Funds.
FACTORS CONSIDERED IN APPROVING THE NEW SUBADVISORY AGREEMENTS
In approving the New Subadvisory Agreements with each of Barrow, Hanley,
Mewhinney & Strauss, LLC, Brandes Investment Partners, L.P., ClariVest Asset
================================================================================
40 | USAA AGGRESSIVE GROWTH FUND
================================================================================
Management LLC, Epoch Investment Partners, Inc., Granahan Investment Management,
Inc., Lazard Asset Management LLC, Loomis, Sayles & Company LP, Massachusetts
Financial Services Company, Northern Trust Investments, Inc., QS Investors, LLC,
The Renaissance Group LLP and Wellington Management Company LLP (each, a
"Subadviser" and together the "Subadvisers") with respect to the applicable
Funds, the Board considered various factors, among them: (i) the nature, extent,
and quality of services to be provided to the applicable Funds by the
Subadvisers; (ii) each Subadviser's compensation and any other benefits derived
from the subadvisory relationship; (iii) comparisons, to the extent applicable,
of subadvisory fees and performance to comparable investment companies; and (iv)
the terms of each New Subadvisory Agreement. The Board's evaluation of the New
Subadvisory Agreements reflected the information provided specifically in
connection with its review of the New Subadvisory Agreements, as well as, where
relevant, information that was previously furnished to the Board in connection
with the most recent renewal of the Existing Subadvisory Agreements at the 2018
15(c) meeting and at other subsequent Board meetings in 2018. A summary of the
Board's analysis of these factors is set forth below. After full consideration
of a variety of factors, the Board, including the Independent Trustees, voted to
approve each New Subadvisory Agreement. In approving each New Subadvisory
Agreement, the Board did not identify any single factor as controlling, and each
Trustee may have attributed different weights to various factors. The
Independent Trustees reviewed the proposed approval of the New Subadvisory
Agreements in private sessions with their independent legal counsel at which no
representatives of Victory Capital or AMCO were present.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY THE
SUBADVISERS - The Board considered information provided to them regarding the
services to be provided by each Subadviser, including information presented
periodically throughout the previous year. The Board considered each
Subadviser's level of knowledge and investment style. The Board reviewed the
experience and credentials of the investment personnel who are responsible for
managing the investment of portfolio securities with respect to each applicable
Fund and each Subadviser's level of staffing. The Board also noted each
Subadviser's brokerage practices. The Board also considered
================================================================================
ADVISORY AGREEMENT(S) | 41
================================================================================
each Subadviser's regulatory and compliance history. The Board also took into
account each Subadviser's risk management processes. The Board noted that AMCO's
monitoring processes of each Subadviser include, and Victory Capital's expected
monitoring processes of each Subadviser would include, among others: (i) regular
telephonic meetings to discuss, among other matters, investment strategies and
to review portfolio performance; (ii) monthly portfolio compliance checklists
and quarterly compliance certifications to the Board; and (iii) due diligence
visits to each Subadviser. The Board also considered that the terms and
conditions of the New Subadvisory Agreements are substantially similar to the
terms and conditions of the Existing Subadvisory Agreements.
SUBADVISER COMPENSATION - The Board took into account the financial condition of
each Subadviser. In considering the cost of services to be provided by each
Subadviser and the profitability to that Subadviser of its relationship with the
applicable Fund, the Board noted that the fees under the New Subadvisory
Agreements will be paid by Victory Capital. The Board also relied on the ability
of AMCO to negotiate each Existing Subadvisory Agreement and the fees thereunder
at arm's length. The Board considered that the fee rate to be payable under each
New Subadvisory Agreement were proposed to be identical to the fee rate
currently payable under each corresponding Existing Subadvisory Agreement. For
the above reasons, the Board determined that the expected profitability of each
Subadviser from its relationship with the applicable Fund was not a material
factor in its deliberations with respect to the consideration of the approval of
each New Subadvisory Agreement. For similar reasons, the Board concluded that
the potential for economies of scale in each Subadviser's management of the
applicable Fund was not a material factor in considering each New Subadvisory
Agreement, although the Board noted that certain New Subadvisory Agreements
contain breakpoints in their fee schedules.
SUBADVISORY FEES AND FUND PERFORMANCE - The Board previously compared the
subadvisory fees for each applicable Fund with the fees that each Subadviser
charges comparable clients, as applicable. The Board considered that each
applicable Fund will pay a management fee to Victory Capital and that, in turn,
Victory Capital will pay a subadvisory fee to each Subadviser.
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42 | USAA AGGRESSIVE GROWTH FUND
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At the 2018 15(c) meeting, the Board considered, among other data, each
applicable Fund's performance over shorter and longer term periods, as compared
to each Fund's respective peer group and noted that the Board reviews at its
regularly scheduled meetings information about each Fund's performance results.
The Board considered Victory Capital's capabilities with respect to monitoring
the performance, investment style and risk-adjusted performance of each
Subadviser. The Board also noted each Subadviser's performance record for
similar accounts, as applicable.
CONCLUSIONS - The Board reached the following conclusions regarding each New
Subadvisory Agreement, among others: (i) each Subadviser is qualified to manage
the applicable Fund's assets in accordance with its investment objective and
policies; (ii) each Subadviser maintains an appropriate compliance program;
(iii) the performance of each applicable Fund is reasonable in relation to the
performance of funds with similar investment objectives and to relevant indices
in view of the Fund's investment approach and Victory Capital is expected to
appropriately monitor each Fund's performance; and (iv) each Fund's advisory
expenses are reasonable in relation to those of similar funds and to the
services to be provided by Victory Capital and each Subadviser. Based on its
conclusions, the Board determined that the approval of each New Subadvisory
Agreement with respect to each applicable Fund would be in the best interests of
the Fund and its shareholders.
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ADVISORY AGREEMENT(S) | 43
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TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Richard Y. Newton III
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN, State Street Bank and Trust Company
ACCOUNTING AGENT, AND P.O. Box 1713
SUB-ADMINISTRATOR Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
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) or (210) 531-8722;
(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 monthly portfolio holdings with the SEC
for the first and third quarters of each fiscal year as an exhibit to its
reports on Form N-PORT (beginning with filings after March 31, 2019).
Previously, the Fund made its complete schedule of portfolio holdings available
after the first and third fiscal quarters in regulatory filings on Form N-Q. The
Fund's Forms N-CSR, N-PORT, and N-Q are available at no charge (i) by calling
(800) 531-USAA (8722) or (210) 531-8722; (ii) at USAA.COM; and (iii) on the
SEC's website at HTTP://WWW.SEC.GOV.
================================================================================
--------------
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9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
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SEMIANNUAL REPORT
USAA CAPITAL GROWTH FUND
FUND SHARES (USCGX) o INSTITUTIONAL SHARES (UICGX)
JANUARY 31, 2019
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Beginning on January 1, 2021, as permitted by regulations adopted by the
Securities and Exchange Commission, paper copies of the Fund's shareholder
reports like this one will no longer be sent by mail, unless you specifically
request paper copies of the reports from the Fund or from your financial
intermediary, such as a broker-dealer or bank. Instead, the reports will be
made available on usaa.com, and you will be notified by mail each time a report
is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will
not be affected by this change and you need not take any action. You may elect
to receive shareholder reports and other communications from the Fund or your
financial intermediary electronically by notifying your financial intermediary
directly, or if you are a direct investor, by calling (800) 531-USAA (8722) or
logging on to usaa.com.
You may elect to receive all future reports in paper free of charge. You can
inform the Fund or your financial intermediary that you wish to continue
receiving paper copies of your shareholder reports by notifying your financial
intermediary directly, or if you are a direct investor, by calling (800)
531-USAA (8722) or logging on to usaa.com. Your election to receive reports in
paper will apply to all funds held with the USAA family of funds or your
financial intermediary.
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TABLE OF CONTENTS
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INVESTMENT OVERVIEW 1
FINANCIAL INFORMATION
Portfolio of Investments 3
Notes to Portfolio of Investments 10
Financial Statements 12
Notes to Financial Statements 16
Financial Highlights 31
EXPENSE EXAMPLE 33
ADVISORY AGREEMENT(S) 35
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.
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 tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. 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.
(C)2019, USAA. All rights reserved.
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INVESTMENT OVERVIEW
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o TOP 10 HOLDINGS* - 1/31/19 o
(% of Net Assets)
Apple, Inc. ............................................................... 2.9%
Boeing Co. ................................................................ 1.6%
Microsoft Corp. ........................................................... 1.4%
Amazon.com, Inc. .......................................................... 1.3%
UnitedHealth Group, Inc. .................................................. 1.3%
Home Depot, Inc. .......................................................... 1.2%
Anglo American plc ........................................................ 1.2%
Alphabet, Inc. "A" ........................................................ 1.2%
Bank of America Corp. ..................................................... 1.1%
Lowe's Companies, Inc. .................................................... 1.0%
o SECTOR ALLOCATION* - 1/31/19
(% of Net Assets)
[PIE CHART OF PORTFOLIO RATINGS MIX]
FINANCIAL 19.9%
CONSUMER, NON-CYCLICAL 19.6%
CONSUMER, CYCLICAL 13.4%
TECHNOLOGY 12.7%
COMMUNICATIONS 10.6%
INDUSTRIAL 7.5%
ENERGY 6.0%
BASIC MATERIALS 4.7%
UTILITIES 2.3%
[END CHART]
*Does not include money market instruments.
Percentages are of the net assets of the Fund and may not equal 100%.
Refer to the Portfolio of Investments for a complete list of securities.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
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INVESTMENT OVERVIEW | 1
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o COUNTRY ALLOCATION* - 1/31/19 o
(% of Net Assets)
[PIE CHART OF PORTFOLIO RATINGS MIX]
UNITED STATES 57.9%
UNITED KINGDOM 8.0%
JAPAN 7.9%
CANADA 4.5%
NETHERLANDS 3.1%
OTHER** 15.3%
[END PIE CHART]
*Does not include money market instruments.
**Includes countries with less than 3% of portfolio.
Percentages are of the net assets of the Fund and may not equal 100%.
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2 | USAA CAPITAL GROWTH FUND
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PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
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MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
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EQUITY SECURITIES (96.7%)
COMMON STOCKS (96.7%)
BASIC MATERIALS (4.7%)
----------------------
CHEMICALS (2.0%)
120,000 Chemours Co. $ 4,290
68,875 Covestro AG(a) 3,798
175,000 Huntsman Corp. 3,845
103,000 Methanex Corp. 5,613
--------
17,546
--------
FOREST PRODUCTS & PAPER (0.9%)
256,293 UPM-Kymmene Oyj(a) 7,411
--------
MINING (1.8%)
386,005 Anglo American plc(a) 9,850
2,298,518 South32 Ltd.(a) 5,915
--------
15,765
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Total Basic Materials 40,722
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COMMUNICATIONS (10.6%)
----------------------
INTERNET (5.0%)
8,492 Alphabet, Inc. "A"(b) 9,561
6,550 Amazon.com, Inc.(b) 11,258
800,000 Auto Trader Group plc(a),(c) 4,800
2,200 Booking Holdings, Inc.(b) 4,032
49,205 F5 Networks, Inc.(b) 7,919
100,000 TripAdvisor, Inc.(b) 5,738
--------
43,308
--------
MEDIA (1.5%)
90,400 CBS Corp. "B" 4,471
88,575 Comcast Corp. "A" 3,239
165,000 Viacom, Inc. "B" 4,855
--------
12,565
--------
TELECOMMUNICATIONS (4.1%)
10,500,000 China Telecom Corp. Ltd. "H"(a) 5,712
106,948 Cisco Systems, Inc. 5,058
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PORTFOLIO OF INVESTMENTS | 3
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MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
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203,800 Juniper Networks, Inc. $ 5,287
117,600 Nippon Telegraph & Telephone Corp.(a) 5,047
284,000 NTT DOCOMO, Inc.(a) 6,800
100,000 T-Mobile US, Inc.(b) 6,962
--------
34,866
--------
Total Communications 90,739
--------
CONSUMER, CYCLICAL (13.4%)
--------------------------
AIRLINES (1.5%)
318,000 Air Canada(b) 7,181
95,000 Southwest Airlines Co. 5,392
--------
12,573
--------
APPAREL (1.7%)
222,300 Burberry Group plc(a) 5,261
55,000 NIKE, Inc. "B" 4,503
40,000 Ralph Lauren Corp. 4,646
--------
14,410
--------
AUTO MANUFACTURERS (0.8%)
114,000 Honda Motor Co. Ltd.(a) 3,402
306,600 Mazda Motor Corp.(a) 3,380
--------
6,782
--------
AUTO PARTS & EQUIPMENT (1.9%)
33,683 Lear Corp. 5,185
72,700 Magna International, Inc. 3,848
172,000 NGK Spark Plug Co. Ltd.(a) 3,695
251,200 Sumitomo Rubber Industries Ltd.(a) 3,481
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16,209
--------
DISTRIBUTION/WHOLESALE (1.7%)
107,000 HD Supply Holdings, Inc.(b) 4,488
851,100 Marubeni Corp.(a) 6,620
12,500 WW Grainger, Inc. 3,692
--------
14,800
--------
HOME BUILDERS (1.1%)
110,200 Bellway plc(a) 4,105
171,000 Persimmon plc(a) 5,332
--------
9,437
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HOME FURNISHINGS (0.4%)
162,185 Electrolux AB "B"(a) 3,844
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4 | USAA CAPITAL GROWTH FUND
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MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
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RETAIL (4.3%)
57,900 Home Depot, Inc. $ 10,626
92,500 Lowe's Companies, Inc. 8,895
1,150,196 Marks & Spencer Group plc(a) 4,360
36,076 Ross Stores, Inc. 3,323
63,000 Target Corp. 4,599
67,829 Walgreens Boots Alliance, Inc. 4,901
--------
36,704
--------
Total Consumer, Cyclical 114,759
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CONSUMER, NON-CYCLICAL (19.6%)
------------------------------
AGRICULTURE (2.2%)
137,131 Altria Group, Inc. 6,767
135,000 Archer-Daniels-Midland Co. 6,062
197,301 Imperial Brands plc(a) 6,538
--------
19,367
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BEVERAGES (1.2%)
170,000 Diageo plc(a) 6,482
37,800 PepsiCo, Inc. 4,259
--------
10,741
--------
BIOTECHNOLOGY (1.9%)
44,500 Amgen, Inc. 8,326
23,047 Biogen, Inc.(b) 7,693
--------
16,019
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COMMERCIAL SERVICES (0.6%)
81,000 Robert Half International, Inc. 5,219
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COSMETICS/PERSONAL CARE (1.0%)
86,000 Procter & Gamble Co. 8,296
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FOOD (3.0%)
290,000 Ajinomoto Co., Inc.(a) 5,010
55,063 GS Holdings Corp.(a) 2,693
245,000 Koninklijke Ahold Delhaize N.V.(a) 6,461
1,700,000 Tesco plc(a) 4,977
104,642 Tyson Foods, Inc. "A" 6,479
--------
25,620
--------
HEALTHCARE PRODUCTS (2.3%)
117,400 Baxter International, Inc. 8,510
20,000 IDEXX Laboratories, Inc.(b) 4,256
54,800 Masimo Corp.(b) 6,816
--------
19,582
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PORTFOLIO OF INVESTMENTS | 5
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MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
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HEALTHCARE-SERVICES (2.2%)
26,595 Humana, Inc. $ 8,218
40,000 UnitedHealth Group, Inc. 10,808
--------
19,026
--------
PHARMACEUTICALS (5.2%)
155,000 Bristol-Myers Squibb Co. 7,652
30,000 Cigna Corp. 5,994
130,137 CVS Health Corp. 8,531
73,400 Merck & Co., Inc. 5,463
83,000 Sanofi(a) 7,213
90,000 Shionogi & Co. Ltd.(a) 5,527
45,689 UCB S.A.(a) 3,956
--------
44,336
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Total Consumer, Non-cyclical 168,206
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ENERGY (6.0%)
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OIL & GAS (5.5%)
5,108,000 China Petroleum & Chemical Corp. "H"(a) 4,261
305,917 Eni S.p.A.(a) 5,181
36,956 Exxon Mobil Corp. 2,708
178,000 Imperial Oil Ltd. 5,050
191,500 Murphy Oil Corp. 5,238
79,248 Neste Oyj(a) 7,265
75,700 Phillips 66 7,223
253,935 Repsol S.A.(a) 4,460
69,600 Valero Energy Corp. 6,112
--------
47,498
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OIL & GAS SERVICES (0.5%)
260,781 SBM Offshore N.V.(a) 4,299
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Total Energy 51,797
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FINANCIAL (19.9%)
-----------------
BANKS (7.8%)
314,900 Bank of America Corp. 8,965
112,696 BNP Paribas S.A.(a) 5,296
75,500 Canadian Imperial Bank of Commerce 6,402
3,921,000 China Construction Bank Corp. "H"(a) 3,541
130,955 Citigroup, Inc. 8,441
173,445 Citizens Financial Group, Inc. 5,883
197,256 Danske Bank A/S(a) 3,650
345,000 ING Groep N.V.(a) 4,086
85,223 J.P. Morgan Chase & Co. 8,821
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6 | USAA CAPITAL GROWTH FUND
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MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
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9,500,000 Lloyds Banking Group plc(a) $ 7,231
450,883 Skandinaviska Enskilda Banken AB "A"(a) 4,727
--------
67,043
--------
DIVERSIFIED FINANCIAL SERVICES (1.7%)
20,400 Alliance Data Systems Corp. 3,623
73,601 Capital One Financial Corp. 5,931
325,700 ORIX Corp.(a) 4,906
--------
14,460
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INSURANCE (7.8%)
1,244,918 Aegon N.V.(a) 6,406
36,300 Allianz SE(a) 7,683
68,500 Allstate Corp. 6,019
970,000 Aviva plc(a) 5,274
230,000 AXA S.A.(a) 5,337
264,364 CNO Financial Group, Inc. 4,727
130,146 Essent Group Ltd.(b) 5,174
50,113 Lincoln National Corp. 2,931
365,000 Manulife Financial Corp. 5,864
170,000 MetLife, Inc. 7,764
21,724 Muenchener Rueckver AG-Reg(a) 4,834
122,800 Sun Life Financial, Inc. 4,430
--------
66,443
--------
REAL ESTATE (2.0%)
1,100,000 China Vanke Co. Ltd. "H"(a) 4,507
32,000 Daito Trust Construction Co. Ltd.(a) 4,452
1,512,000 Shimao Property Holdings Ltd.(a) 4,282
85,000 Vonovia SE(a) 4,260
--------
17,501
--------
REITs (0.6%)
19,000 Essex Property Trust, Inc. 5,153
--------
Total Financial 170,600
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INDUSTRIAL (7.5%)
-----------------
AEROSPACE/DEFENSE (2.9%)
36,117 Boeing Co. 13,927
227,200 Kawasaki Heavy Industries Ltd.(a) 5,708
62,000 Spirit AeroSystems Holdings, Inc. "A" 5,171
--------
24,806
--------
ELECTRONICS (0.7%)
224,712 Jabil, Inc. 5,989
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PORTFOLIO OF INVESTMENTS | 7
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MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
MACHINERY-CONSTRUCTION & MINING (1.3%)
140,000 Mitsubishi Heavy Industries Ltd.(a) $ 5,408
79,000 Oshkosh Corp. 5,929
--------
11,337
--------
MACHINERY-DIVERSIFIED (2.2%)
475,000 CNH Industrial N.V.(a) 4,658
53,312 Cummins, Inc. 7,843
35,000 Rockwell Automation, Inc. 5,933
--------
18,434
--------
MISCELLANEOUS MANUFACTURERS (0.4%)
23,223 Parker-Hannifin Corp. 3,827
--------
Total Industrial 64,393
--------
TECHNOLOGY (12.7%)
------------------
COMPUTERS (5.2%)
151,477 Apple, Inc. 25,212
37,000 Check Point Software Technologies Ltd.(b) 4,141
300,000 HP, Inc. 6,609
128,723 NetApp, Inc. 8,208
--------
44,170
--------
SEMICONDUCTORS (3.9%)
153,000 Applied Materials, Inc. 5,979
30,000 ASML Holding N.V.(a) 5,282
40,000 KLA-Tencor Corp. 4,263
206,200 Samsung Electronics Co. Ltd.(a) 8,616
34,236 Texas Instruments, Inc. 3,447
51,100 Xilinx, Inc. 5,720
--------
33,307
--------
SOFTWARE (3.6%)
44,500 Citrix Systems, Inc. 4,563
92,000 Konami Holdings Corp.(a) 4,233
111,124 Microsoft Corp. 11,605
100,000 Oracle Corp. 5,023
52,000 Veeva Systems, Inc. "A"(b) 5,671
--------
31,095
--------
Total Technology 108,572
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UTILITIES (2.3%)
----------------
ELECTRIC (2.3%)
68,000 Edison International 3,874
315,000 Engie S.A.(a) 5,051
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8 | USAA CAPITAL GROWTH FUND
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MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
137,000 Exelon Corp. $ 6,543
182,173 Fortum Oyj(a) 4,135
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Total Utilities 19,603
--------
Total Common Stocks (cost: $709,046) 829,391
--------
Total Equity Securities (cost: $709,046) 829,391
--------
MONEY MARKET INSTRUMENTS (1.7%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (1.7%)
14,322,040 State Street Institutional Treasury Money Market Fund
Premier Class, 2.31%(d) (cost: $14,322) 14,322
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TOTAL INVESTMENTS (COST: $723,368) $843,713
========
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($ IN 000s) VALUATION HIERARCHY
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ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
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Equity Securities:
Common Stocks $538,692 $290,699 $- $829,391
Money Market Instruments:
Government & U.S. Treasury
Money Market Funds 14,322 - - 14,322
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Total $553,014 $290,699 $- $843,713
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Refer to the Portfolio of Investments for additional industry, country, or
geographic region classifications.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
At January 31, 2019, the Fund did not have any transfers into/out of Level 3.
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PORTFOLIO OF INVESTMENTS | 9
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NOTES TO PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
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o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A 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 38.9% of net assets at January 31,
2019.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
REITS Real estate investment trusts - Dividend distributions from REITS may
be recorded as income and later characterized by the REIT at the end
of the fiscal year as capital gains or a return of capital. Thus, the
Fund will estimate the components of distributions from these
securities and revise when actual distributions are known.
o SPECIFIC NOTES
(a) Securities with a value of $290,699,000, which represented 33.9% of the
Fund's net assets, were classified as Level 2 as of January 31, 2019,
due to the prices being adjusted to take into account significant
market movements following the close of local trading.
(b) Non-income-producing security.
(c) Restricted security that is not registered under the Securities Act of
1933. A resale of this security in the United States may occur in an
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10 | USAA CAPITAL GROWTH FUND
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exempt transaction to a qualified institutional buyer as defined by
Rule 144A, and as such has been deemed liquid by USAA Asset Management
Company under liquidity guidelines approved by USAA Mutual Funds
Trust's Board of Trustees, unless otherwise noted as illiquid.
(d) Rate represents the money market fund annualized seven-day yield at
January 31, 2019.
See accompanying notes to financial statements.
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NOTES TO PORTFOLIO OF INVESTMENTS | 11
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STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $723,368) $843,713
Cash denominated in foreign currencies (identified cost of $23) 24
Receivables:
Affiliated transactions (Note 8) 13,315
Unaffiliated transactions 148
USAA Asset Management Company (Note 7) 1
Dividends and interest 1,297
--------
Total assets 858,498
--------
LIABILITIES
Payables:
Capital shares redeemed 340
Accrued management fees 509
Accrued transfer agent's fees 33
Other accrued expenses and payables 115
--------
Total liabilities 997
--------
Net assets applicable to capital shares outstanding $857,501
========
NET ASSETS CONSIST OF:
Paid-in capital $714,434
Distributable earnings 143,067
--------
Net assets applicable to capital shares outstanding $857,501
========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $829,170/75,248 capital shares
outstanding, no par value) $ 11.02
========
Institutional Shares (net assets of $28,331/2,566 capital shares
outstanding, no par value) $ 11.04
========
See accompanying notes to financial statements.
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12 | USAA CAPITAL GROWTH FUND
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STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $340) $ 8,678
Interest 40
Securities lending (net) 36
--------
Total income 8,754
--------
EXPENSES
Management fees 3,319
Administration and servicing fees:
Fund Shares 642
Institutional Shares 4
Transfer agent's fees:
Fund Shares 732
Institutional Shares 4
Custody and accounting fees:
Fund Shares 93
Institutional Shares 1
Postage:
Fund Shares 30
Shareholder reporting fees:
Fund Shares 19
Trustees' fees 17
Registration fees:
Fund Shares 18
Institutional Shares 8
Professional fees 45
Other 11
--------
Total expenses 4,943
--------
Expenses reimbursed:
Institutional Shares (4)
--------
Net expenses 4,939
--------
NET INVESTMENT INCOME 3,815
--------
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FINANCIAL STATEMENTS | 13
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NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments $ 44,580
Foreign currency transactions (13)
Change in net unrealized appreciation/(depreciation) of:
Investments (91,657)
Foreign currency translations 7
--------
Net realized and unrealized loss (47,083)
--------
Decrease in net assets resulting from operations $(43,268)
========
See accompanying notes to financial statements.
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14 | USAA CAPITAL GROWTH FUND
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STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited), and year ended July 31,
2018
--------------------------------------------------------------------------------------------------------
1/31/2019 7/31/2018
--------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 3,815 $ 11,305
Net realized gain on investments 44,580 51,516
Net realized gain (loss) on foreign currency transactions (13) 50
Change in net unrealized appreciation/(depreciation) of:
Investments (91,657) 35,234
Foreign currency translations 7 (60)
----------------------------
Increase (decrease) in net assets resulting
from operations (43,268) 98,045
----------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (66,864) (28,573)
Institutional Shares (620) (220)
----------------------------
Distributions to shareholders (67,484) (28,793)
----------------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 6)
Fund Shares 36,403 (2,598)
Institutional Shares 21,219 1,700
----------------------------
Total net increase (decrease) in net assets from
capital share transactions 57,622 (898)
----------------------------
Net increase (decrease) in net assets (53,130) 68,354
NET ASSETS
Beginning of period 910,631 842,277
----------------------------
End of period $857,501 $910,631
============================
See accompanying notes to financial statements.
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FINANCIAL STATEMENTS | 15
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NOTES TO FINANCIAL STATEMENTS
January 31, 2019 (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 47 separate funds. The
USAA Capital Growth Fund (the Fund) qualifies as a registered investment company
under Accounting Standards Codification Topic 946. The information presented in
this semiannual report pertains only to the Fund, which is classified as
diversified under the 1940 Act. The Fund's investment objective is to seek
capital appreciation.
The Fund consists of two classes of shares: Capital Growth Fund Shares (Fund
Shares) and Capital Growth Fund Institutional Shares (Institutional Shares).
Each class of shares has equal rights to assets and earnings, except that each
class bears 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 are allocated to each class of shares based on each
class' relative net assets. Each class has exclusive voting rights on matters
related solely to that class and separate voting rights on matters that relate
to all classes. The Institutional Shares are 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 are 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).
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16 | USAA CAPITAL GROWTH FUND
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On November 6, 2018, United Services Automobile Association (USAA), the parent
company of USAA Asset Management Company (AMCO or Manager), the investment
adviser to the Fund, and USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services (SAS), the transfer agent to the Fund, announced that AMCO and
SAS would be acquired by Victory Capital Holdings, Inc. (Victory), a global
investment management firm headquartered in Cleveland, Ohio (the Transaction).
The closing of the Transaction is expected to be completed during the second
quarter of 2019, pending satisfaction of certain closing conditions and
approvals, including certain approvals of the Fund's Board of Trustees and of
the Fund's shareholders at a special shareholder meeting to be held on April 18,
2019. The Transaction is not expected to result in any material changes to the
Fund's investment objectives and principal investment strategies. In connection
with the Transaction, Victory proposes to add portfolio managers from one or
more investment teams employed by Victory to serve as additional portfolio
managers to manage all or a portion of the Fund according to each team's own
investment process.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Valuation and Liquidity 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.
The Fund utilizes 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 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 exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange or
the 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. Securities traded primarily on foreign securities exchanges or
markets
================================================================================
NOTES TO FINANCIAL STATEMENTS | 17
================================================================================
are valued at the last quoted sale price, or the most recently
determined official closing price calculated according to local market
convention, available at the time the Fund is valued. If no last sale or
official closing price is reported or available, the average of the bid
and ask prices generally is used. Actively traded equity securities
listed on a domestic exchange generally are categorized in Level 1 of
the fair value hierarchy. Certain preferred and equity securities traded
in inactive markets generally are categorized in Level 2 of the fair
value hierarchy.
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 many
cases, events affecting the values of foreign securities that occur
between the time of their last quoted sale or official closing price and
the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not need to be reflected in the value of the Fund's
foreign securities. However, the Manager and the Fund's subadviser(s)
will monitor for events that would materially affect the value of the
Fund's foreign securities. The Fund's subadviser(s) have agreed to
notify the Manager of significant events they identify 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 Committee will consider
such available information that it deems relevant and will determine a
fair value for the affected foreign securities in accordance with
valuation procedures. In addition, information from an external vendor
or other sources may be used to adjust the foreign market closing prices
of foreign equity securities to reflect what the Committee believes to
be the fair value of the securities as of the close of the NYSE. Fair
valuation of affected foreign equity securities may occur frequently
based on an assessment that events which occur on a fairly regular basis
(such as U.S. market movements) are significant. Such securities are
categorized in Level 2 of the fair value hierarchy.
================================================================================
18 | USAA CAPITAL GROWTH FUND
================================================================================
3. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value hierarchy.
4. Short-term debt securities with original or remaining maturities of
60 days or less may be valued at amortized cost, provided that amortized
cost represents the fair value of such securities.
5. Repurchase agreements are valued at cost.
6. Forward foreign currency contracts are valued on a daily basis using
forward foreign currency exchange rates obtained from an independent
pricing service and are categorized in Level 2 of the fair value
hierarchy.
7. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has been recognized in relation to a security or class of securities,
the securities are valued in good faith by the Committee in accordance
with 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, other pricing services, 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, evaluation of
credit quality, 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 19
================================================================================
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 indexes.
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. INVESTMENTS IN SECURITIES - Securities transactions are accounted for as
of the date the securities are purchased or sold (trade date). Gains or
losses from sales of investment securities are computed on the identified
cost basis. Dividend income, less foreign taxes, if any, is recorded on the
ex-dividend date. If the ex-dividend date has passed, certain dividends from
foreign securities are recorded upon notification. Interest income is
recorded daily on the accrual basis. Premiums and discounts on short-term
securities are amortized on a straight-line basis over the life of the
respective securities.
D. FEDERAL TAXES - The Fund's policy is to comply with the requirements of
the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its taxable
income and net capital gains, if any, to its shareholders. Therefore, no
federal income tax provision is required.
For the six-month period ended January 31, 2019, 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 the Fund's tax basis to
================================================================================
20 | USAA CAPITAL GROWTH FUND
================================================================================
determine if adjustments to this conclusion are necessary. The statute of
limitations on the Fund's tax return filings generally remain open for the
three preceding fiscal reporting year ends and remain subject to examination
by the Internal Revenue Service and state taxing authorities.
E. FOREIGN TAXATION - Foreign income and capital gains on some foreign
securities may be subject to foreign taxes, which are reflected as a
reduction to such income and realized gains. The Fund records a liability
based on unrealized gains to provide for potential foreign taxes payable
upon the sale of these securities. Foreign taxes have been provided for in
accordance with the Fund's understanding of the applicable countries'
prevailing tax rules and rates.
F. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the exchange
rate obtained from an independent pricing service on the respective
dates of such transactions.
2. Market value of securities, other assets, and liabilities at the
exchange rate obtained from an independent pricing service on a daily
basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the amounts received. At
the end of the Fund's fiscal year, net realized foreign currency
gains/losses are reclassified from accumulated net realized gains/losses to
================================================================================
NOTES TO FINANCIAL STATEMENTS | 21
================================================================================
accumulated undistributed net investment income on the Statement of Assets
and Liabilities, as such amounts are treated as ordinary income/loss for
federal income tax purposes. Net unrealized foreign currency exchange
gains/losses arise from changes in the value of assets and liabilities,
other than investments in securities, resulting from changes in the exchange
rate.
G. INDEMNIFICATIONS - Under the Trust's organizational documents, its
officers and trustees are indemnified against certain liabilities arising
out of the performance of their duties to the Trust. In addition, in the
normal course of business, the Trust enters into contracts that contain a
variety of representations and warranties that provide general
indemnifications. The Trust's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the
Trust that have not yet occurred. However, the Trust expects the risk of
loss to be remote.
H. USE OF ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINE OF CREDIT
The Fund participates, along with other funds of the Trust and USAA ETF Trust
(together, the Trusts), 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 provide temporary or emergency
cash needs, including redemption requests that might otherwise require the
untimely disposition of securities. Subject to availability (including usage of
the facility by other funds of the Trusts), the Fund may borrow from CAPCO an
amount up to 5% of the Fund's total assets at an interest rate based on the
London Interbank Offered Rate (LIBOR), plus 100.0 basis points.
The Trusts are also assessed facility fees by CAPCO in the amount of 14.0 basis
points of the amount of the committed loan agreement. Prior to September 30,
2018, the maximum annual facility fee was 13.0 basis points of the amount of the
committed loan agreement. The facility fees are allocated among the funds of the
Trusts based on their respective average daily net assets for the period.
================================================================================
22 | USAA CAPITAL GROWTH FUND
================================================================================
The Trusts may request an optional increase of the committed loan agreement from
$500 million up to $750 million. If the Trusts increase the committed loan
agreement, the assessed facility fee on the amount of the additional commitment
will be 15.0 basis points.
For the six-month period ended January 31, 2019, the Fund paid CAPCO facility
fees of $4,000, which represents 1.0% of the total fees paid to CAPCO by the
funds of the Trusts. The Fund had no borrowings under this agreement during the
six-month period ended January 31, 2019.
(3) DISTRIBUTIONS
The tax basis of distributions and any accumulated undistributed net investment
income will be determined as of the Fund's tax year-end of July 31, 2019, in
accordance with applicable federal tax law.
Distributions of net investment income and realized gains from security
transactions not offset by capital losses are made annually in the succeeding
fiscal year or as otherwise required to avoid the payment of federal taxes.
At July 31, 2018, the Fund had no capital loss carryforwards, for federal
income tax purposes.
As of January 31, 2019, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as the cost reported
in the financial statements. The net unrealized appreciation/(depreciation) on
investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
FUND APPRECIATION DEPRECIATION (DEPRECIATION)
------------------------------------------------------------------------------------
USAA Capital
Growth Fund $151,964,000 $(31,619,000) $120,345,000
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended January 31, 2019, were
$286,330,000 and $310,916,000, respectively.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
(5) SECURITIES LENDING
The Fund, through a securities lending agreement with Citibank, N.A. (Citibank),
may lend its securities to qualified financial institutions, such as certain
broker-dealers, to earn additional income, net of income retained by Citibank.
The borrowers are required to secure their loans continuously with collateral in
an amount at least equal to 102% of the fair value of domestic securities and
foreign government securities loaned and 105% of the fair value of foreign
securities and all other securities loaned. Collateral may be cash, U.S.
government securities, or other securities as permitted by SEC guidelines. Cash
collateral may be invested in high-quality short-term investments. Collateral
requirements are determined daily based on the value of the Fund's securities on
loan as of the end of the prior business day. Loans are terminable upon demand
and the borrower must return the loaned securities within the lesser of one
standard settlement period or five business days. Risks relating to
securities-lending transactions include that the borrower may not provide
additional collateral when required or return the securities when due, and that
the value of the short-term investments will be less than the amount of cash
collateral required to be returned to the borrower. The Fund's agreement with
Citibank does not include master netting provisions. Non-cash collateral
received by the Fund may not be sold or re-pledged except to satisfy borrower
default. Cash collateral is listed in the Fund's Portfolio of Investments and
Financial Statements while non-cash collateral is not included. At January 31,
2019, the Fund had no securities on loan.
(6) CAPITAL SHARE TRANSACTIONS
At January 31, 2019, there were an unlimited number of shares of capital stock
at no par value authorized for the Fund.
Capital share transactions for the Institutional Shares resulted from purchases
and sales by the affiliated USAA fund-of-funds as well as other
================================================================================
24 | USAA CAPITAL GROWTH FUND
================================================================================
persons or legal entities that the Fund may approve from time to time. Capital
share transactions for all classes were as follows, in thousands:
SIX-MONTH
PERIOD ENDED YEAR ENDED
JANUARY 31, 2019 JULY 31, 2018
---------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------
FUND SHARES:
Shares sold 2,088 $ 24,470 6,263 $ 77,857
Shares issued from
reinvested dividends 6,365 66,498 2,311 28,402
Shares redeemed (4,694) (54,565) (8,773) (108,857)
----------------------------------------------------
Net increase (decrease) from
capital share transactions 3,759 $ 36,403 (199) $ (2,598)
====================================================
INSTITUTIONAL SHARES:
Shares sold 1,993 $ 21,868 147 $ 1,831
Shares issued from
reinvested dividends 14 149 2 18
Shares redeemed (70) (798) (12) (149)
----------------------------------------------------
Net increase from
capital share transactions 1,937 $ 21,219 137 $ 1,700
====================================================
(7) TRANSACTIONS WITH MANAGER
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. The Manager 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 all or
a portion of the Fund's assets.
The Manager monitors each subadviser's performance through quantitative and
qualitative analysis and periodically reports to the Board as to whether each
subadviser's agreement should be renewed, terminated, or modified. The Manager
is also responsible for determining the asset allocation for the subadviser(s).
The allocation for each subadviser could range from 0% to 100% of the Fund's
assets, and the Manager could change the allocations without shareholder
approval.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee is accrued daily and paid monthly at
an annualized rate of 0.75% of the Fund's average daily net assets. The
performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Global Funds Index. The Lipper Global Funds Index tracks
the total return performance of funds within the Lipper Global Funds category.
For the Fund Shares and Institutional Shares, the performance period 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
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
--------------------------------------------------------------------------
+/- 100 to 400 +/- 4
+/- 401 to 700 +/- 5
+/- 701 and greater +/- 6
(1) Based on the difference between average annual performance of the
relevant share class of the Fund and its relevant Lipper index, rounded
to the nearest basis point. Average daily net assets of the share class
are calculated over a rolling 36-month period.
Each class' annual performance adjustment rate is multiplied by the average
daily net assets of each respective class over the entire performance period,
which is then multiplied by a fraction, the numerator of which is the number of
days in the month and the denominator of which is 365 (366 in leap years). The
resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper Global Funds Index over that period, even if the class
had overall negative returns during the performance period.
For the six-month period ended January 31, 2019, the Fund incurred management
fees, paid or payable to the Manager, of $3,319,000, which included a
performance adjustment for the Fund Shares and Institutional
================================================================================
26 | USAA CAPITAL GROWTH FUND
================================================================================
Shares of $80,000 and $1,000, respectively. For the Fund Shares and
Institutional Shares, the performance adjustments were 0.02% and 0.01%,
respectively.
SUBADVISORY ARRANGEMENT(S) - The Manager entered into an Investment Subadvisory
Agreement with QS Investors, LLC (QS Investors), under which QS Investors
directs the investment and reinvestment of the Fund's assets (as allocated from
time to time by the Manager).
The Manager (not the Fund) pays QS Investors a subadvisory fee in the annual
amount of 0.25% of the first $250 million of assets, 0.21% on assets over $250
million and up to $500 million, and 0.17% on assets over $500 million of the
Fund's average daily net assets that QS Investors manages. For the six-month
period ended January 31, 2019, the Manager incurred subadvisory fees with
respect to the Fund, paid or payable to QS Investors, of $885,000.
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 at an annualized rate of 0.15% and 0.10% of
average daily net assets of the Funds Shares and Institutional Shares,
respectively. For the six-month period ended January 31, 2019, the Fund Shares
and Institutional Shares incurred administration and servicing fees, paid or
payable to the Manager, of $642,000 and $4,000, respectively.
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 January 31, 2019, the Fund reimbursed the Manager less than $500 for these
compliance and legal services. These expenses are included in the professional
fees on the Fund's Statement of Operations.
EXPENSE LIMITATION - The Manager agreed, through November 30, 2019, to limit the
total annual operating expenses of the Institutional Shares to 1.10% of its
average daily net assets, excluding extraordinary expenses and before reductions
of any expenses paid indirectly, and to reimburse the Institutional
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
================================================================================
Shares for all expenses in excess of that amount. This expense limitation
arrangement may not be changed or terminated through November 30, 2019, without
approval of the Board, and may be changed or terminated by the Manager at any
time after that date. For the six-month period ended January 31, 2019, the
Institutional Shares incurred reimbursable expenses of $4,000, of which $1,000
was receivable from the Manager.
TRANSFER AGENT'S FEES - SAS, an affiliate of the Manager, provides transfer
agent services to the Fund Shares based on an annual charge of $23 per
shareholder account plus out-of-pocket expenses. SAS pays a portion of these
fees to certain intermediaries for the administration and servicing of accounts
that are held with such intermediaries. Transfer agent's fees for Institutional
Shares are paid monthly based on a fee accrued daily at an annualized rate of
0.10% of the Institutional Shares' average daily net assets, plus out-of-pocket
expenses. For the six-month period ended January 31, 2019, the Fund Shares and
Institutional Shares incurred transfer agent's fees, paid or payable to SAS, of
$732,000 and $4,000, respectively.
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 fee or other compensation for these services.
(8) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other USAA Funds and
is one of 16 USAA mutual funds in which the affiliated USAA fund-of-funds
invest. The USAA fund-of-funds do not invest in the underlying funds for the
purpose of exercising management or control, and the affiliated fund-of-funds'
annual or semiannual reports may be viewed at usaa.com. As of January 31, 2019,
the Fund recorded a receivable for capital shares sold of $13,315,000 for the
USAA fund-of-funds' purchases of
================================================================================
28 | USAA CAPITAL GROWTH FUND
================================================================================
Institutional Shares. As of January 31, 2019, the USAA fund-of-funds owned the
following percentages of the total outstanding shares of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
--------------------------------------------------------------------------------
Cornerstone Conservative 0.2
Cornerstone Equity 0.7
Target Retirement Income 0.1
Target Retirement 2020 0.2
Target Retirement 2030 0.4
Target Retirement 2040 0.5
Target Retirement 2050 0.3
Target Retirement 2060 0.0*
*Represents less than 0.1%.
The Manager is indirectly wholly owned by USAA, a large, diversified financial
services institution. At January 31, 2019, USAA and its affiliates owned 490,000
Institutional Shares, which represents 19.1% of the Institutional Shares
outstanding and 0.6% of the Fund's total outstanding shares.
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
(9) UPCOMING REGULATORY MATTERS
In October 2016, the U.S. Securities and Exchange Commission (SEC) issued Final
Rule Release No. 33-10233, INVESTMENT COMPANY LIQUIDITY RISK MANAGEMENT PROGRAMS
(Liquidity Rule). The Liquidity Rule requires funds to establish a liquidity
risk management program and enhances disclosures regarding funds' liquidity. The
requirements to implement a liquidity risk management program and establish a
15% illiquid investment limit became effective December 1, 2018. However, in
February 2018, the SEC issued Release No. IC-33010, INVESTMENT COMPANY LIQUIDITY
RISK MANAGEMENT PROGRAMS; COMMISSION GUIDANCE FOR IN-KIND ETFs, which delayed
certain requirements related to liquidity classification, highly liquid
investment
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
minimums, and board approval of the liquidity risk management programs to June
1, 2019. The Manager continues to evaluate the impact of this rule on the Fund's
financial statements and various filings.
(10) RECENTLY ADOPTED ACCOUNTING STANDARDS
In August 2018, the SEC adopted amendments to Regulation S-X for investment
companies governing the form and content of financial statements. The amendments
to Regulation S-X took effect on November 5, 2018, and the financial statements
have been modified accordingly, for the current and prior periods.
ASU 2018-13, FAIR VALUE MEASUREMENT
-----------------------------------
In August 2018, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2018-13, Fair Value Measurement (Topic 820).
The amendments in the ASU impact disclosure requirements for fair value
measurement. ASU 2018-13 is effective for fiscal years beginning after December
15, 2019. Early adoption is permitted and can include the entire standard or
certain provisions that exclude or amend disclosures. Management has elected to
early adopt ASU 2018-13 effective with the current reporting period. The
adoption of ASU 2018-13 guidance is limited to changes in the Fund's notes to
financial statement disclosures regarding valuation method, fair value, and
transfers between levels of the fair value hierarchy.
================================================================================
30 | USAA CAPITAL GROWTH FUND
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
-----------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
-----------------------------------------------------------------------------------
Net asset value at
beginning of period $ 12.63 $ 11.67 $ 9.97 $ 10.16 $ 9.31 $ 8.00
-----------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .05 .15 .14 .13 .12 .12
Net realized and
unrealized gain (loss) (.71) 1.21 1.71 (.21) .88 1.28
-----------------------------------------------------------------------------------
Total from investment
operations (.66) 1.36 1.85 (.08) 1.00 1.40
-----------------------------------------------------------------------------------
Less distributions from:
Net investment income (.17) (.12) (.15) (.11) (.15) (.09)
Realized capital gains (.78) (.28) - - - -
-----------------------------------------------------------------------------------
Total distributions (.95) (.40) (.15) (.11) (.15) (.09)
-----------------------------------------------------------------------------------
Net asset value at
end of period $ 11.02 $ 12.63 $ 11.67 $ 9.97 $ 10.16 $ 9.31
===================================================================================
Total return (%)* (4.76) 11.76 18.75 (.76) 10.79 17.55
Net assets at
end of period (000) $829,170 $902,670 $836,515 $721,357 $760,764 $706,918
Ratios to average
daily net assets:**
Expenses (%)(a) 1.15(b) 1.15 1.21 1.24 1.23(c) 1.28(d)
Expenses, excluding
reimbursements (%)(a) 1.15(b) 1.15 1.21 1.24 1.23 1.28(d)
Net investment
income (%) .88(b) 1.25 1.27 1.39 .95 1.41
Portfolio turnover (%) 33 22(e) 55(f) 24 38 36
* 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 January 31, 2019, average daily net
assets were $847,879,000.
(a) Does not include acquired fund fees, if any.
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(c) Prior to December 1, 2014, the Manager had voluntarily agreed to limit
the annual expenses of the Fund Shares to 1.30% of the Fund Shares' average
daily net assets.
(d) Reflects total annual operating expenses of the Fund Shares before
reductions of any expenses paid indirectly. The Fund Shares' expenses paid
indirectly decreased the expense ratio by less than 0.01%.
(e) Reflects overall decrease in purchases and sales of securities.
(f) Reflects overall increase in purchases and sales of securities.
================================================================================
FINANCIAL HIGHLIGHTS | 31
================================================================================
INSTITUTIONAL SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31, JULY 31,
-----------------------------------------------------------------------
2019 2018 2017 2016***
-----------------------------------------------------------------------
Net asset value at
beginning of period $ 12.66 $11.70 $ 9.98 $10.20
-------------------------------------------------------------------
Income (loss) from investment
operations:
Net investment income .05(a) .17 .15 .14
Net realized and unrealized
gain (loss) (.72)(a) 1.20 1.71 (.24)
-------------------------------------------------------------------
Total from investment operations (.67)(a) 1.37 1.86 (.10)
-------------------------------------------------------------------
Less distributions from:
Net investment income (.17) (.13) (.14) (.12)
Realized capital gains (.78) (.28) - -
-------------------------------------------------------------------
Total distributions (.95) (.41) (.14) (.12)
-------------------------------------------------------------------
Net asset value at end of
period $ 11.04 $12.66 $11.70 $ 9.98
===================================================================
Total return (%)* (4.79) 11.84 18.79 (.99)
Net assets at end of
period (000) $28,331 $7,961 $5,762 $4,891
Ratios to average
daily net assets:**
Expenses (%)(b) 1.07(c) 1.10 1.10 1.10(c)
Expenses, excluding
reimbursements (%)(b) 1.18(c) 1.21 1.47 1.48(c)
Net investment income (%) .92(c) 1.38 1.38 1.57(c)
Portfolio turnover (%) 33 22(d) 55(e) 24
* 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 January 31, 2019, average daily net
assets were $7,959,000.
*** Institutional Shares commenced operations on August 7, 2015.
(a) Calculated using average shares. For the six month period ended January
31, 2019, average shares were 676,000.
(b) Does not include acquired fund fees, if any.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) Reflects overall decrease in purchases and sales of securities.
(e) Reflects overall increase in purchases and sales of securities.
================================================================================
32 | USAA CAPITAL GROWTH FUND
================================================================================
EXPENSE EXAMPLE
January 31, 2019 (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 August 1, 2018, through
January 31, 2019.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table 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 for your share
class in the "actual" 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 line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class 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
================================================================================
EXPENSE EXAMPLE | 33
================================================================================
actual ending account balance or expenses you paid for the period. You may use
this information to compare the ongoing costs of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled "hypothetical"
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 AUGUST 1, 2018 -
AUGUST 1, 2018 JANUARY 31, 2019 JANUARY 31, 2019
------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $ 952.40 $5.66
Hypothetical
(5% return before expenses) 1,000.00 1,019.41 5.85
INSTITUTIONAL SHARES
Actual 1,000.00 952.10 5.26
Hypothetical
(5% return before expenses) 1,000.00 1,019.81 5.45
*Expenses are equal to the annualized expense ratio of 1.15% for Fund Shares
and 1.07% for Institutional Shares, which are net of any reimbursements and
expenses paid indirectly, multiplied by the average account value over the
period, multiplied by 184 days/365 days (to reflect the one-half-year period).
The Fund's actual ending account values are based on its actual total returns
of (4.76)% for Fund Shares and (4.79)% for Institutional Shares for the
six-month period of August 1, 2018, through January 31, 2019.
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34 | USAA CAPITAL GROWTH FUND
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ADVISORY AGREEMENT(S)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with Victory Capital
Holdings, Inc. ("Victory Holdings") pursuant to which Victory Holdings would
acquire all of the outstanding stock of AMCO and USAA Transfer Agency Company
d/b/a USAA Shareholder Account Services ("USAA Transfer Agent") (the
"Transaction"). The Independent Trustees were advised that the Transaction, if
completed, would constitute
================================================================================
ADVISORY AGREEMENT(S) | 35
================================================================================
an "assignment" (as that term is defined in Section 2(a)(4) of the 1940 Act) and
result in the automatic termination of the Existing Management Agreements
("Change of Control Event"). The Independent Trustees also were advised that it
was proposed that Victory Capital, a subsidiary of Victory Holdings, would serve
as the investment adviser to each Fund after the closing of the Transaction
("Post-Transaction") and that the Board would be asked to consider approval of
the terms and conditions of the New Advisory Agreement with Victory Capital and
thereafter to submit the New Advisory Agreement to each Fund's shareholders for
approval. Because the Change of Control Event also would result in the
termination of each existing subadvisory agreement between AMCO and the
subadvisers to the Funds ("Existing Subadvisory Agreements"), the Independent
Trustees were advised that the Board would also be asked to approve the New
Subadvisory Agreements.
In anticipation of the Transaction, the Trustees met at a series of subsequent
in-person meetings on November 27-28, 2018, January 7-8, 2019, and January
14-15, 2019, which included meetings of the full Board and separate meetings of
the Independent Trustees for the purposes of considering, among other things:
whether it would be in the best interests of each Fund and its respective
shareholders to approve the New Agreements; and the anticipated impacts of the
Transaction on the Funds and their shareholders (each, a "Meeting"). During each
of these Meetings, the Board sought additional and clarifying information as it
deemed necessary or appropriate. In this connection, the Independent Trustees
worked with their independent legal counsel to prepare formal due diligence
requests (the "Diligence Requests") that were submitted to Victory Capital,
Victory Capital Advisers, Inc. ("VCA"), and the subadvisers. The Diligence
Requests sought information relevant to the Board's consideration of the New
Advisory Agreement, the New Subadvisory Agreements, distribution arrangements,
and other anticipated impacts of the Transaction on the Funds and their
shareholders. Victory Capital, VCA, and the subadvisers provided documents and
information in response to the Diligence Requests (the "Response Materials").
Following their review of the Response Materials, the Independent Trustees
submitted a supplemental due diligence request for additional and clarifying
information (the "Supplemental Diligence Request") to Victory Capital and VCA.
Victory
================================================================================
36 | USAA CAPITAL GROWTH FUND
================================================================================
Capital and VCA provided further information in response to the Supplemental
Diligence Request, which the Board reviewed. Senior management representatives
of Victory Capital and/or AMCO participated in a portion of each Meeting and
addressed various questions raised by the Board. Throughout the process, the
Independent Trustees were assisted by their independent legal counsel and
counsel to the Funds, who advised them on, among other things, their duties and
obligations relating to their consideration of the New Agreements.
The Board's evaluation of the New Agreements reflected the information provided
specifically in connection with its review of the New Agreements, as well as,
where relevant, information that was previously furnished to the Board in
connection with the most recent renewal of the Existing Management Agreements
and Existing Subadvisory Agreements at an in-person meeting of the Board on
April 18, 2018 (the "2018 15(c) Meeting") and at other subsequent Board meetings
in 2018. The Board's evaluation of the New Agreements also reflected the
knowledge gained as Board members of the Funds with respect to services provided
by AMCO, its affiliates, and each subadviser to the Funds.
The Board's approvals and recommendations were based on its determination,
within its business judgment, that it would be in the best interests of each
Fund and its respective shareholders, for Victory Capital and, as applicable,
the subadvisers, to provide investment advisory, investment subadvisory, and
related services to the Funds, following the closing of the Transaction.
FACTORS CONSIDERED IN APPROVING THE NEW ADVISORY AGREEMENT
In connection with the Board's consideration of the New Advisory Agreement,
Victory Capital and AMCO advised the Board about a variety of matters, including
the following:
o The nature, extent, and quality of the services to be provided to the
Funds by Victory Capital Post-Transaction are expected to be of at least
the same level as the services currently provided to the Funds by AMCO.
================================================================================
ADVISORY AGREEMENT(S) | 37
================================================================================
o Victory Capital's stated commitment to maintaining and enhancing the
USAA member/USAA Fund shareholder experience, including creating a
dedicated USAA Fund sales and client service call center that will
provide ongoing client service and advice to existing and new USAA
members.
o Victory Capital proposes to: (1) replace the underlying indexes for
the USAA Extended Market Index Fund and USAA S&P 500 Index Fund with
indexes designed to provide shareholders with comparable exposure and
investment outcomes; (2) change the USAA Extended Market Index Fund's
and USAA S&P 500 Index Fund's investment objectives and strategies in
light of the changes to their underlying indexes; and (3) change the
name of the USAA S&P 500 Index Fund to the USAA 500 Index Fund.
o Victory Capital does not propose changes to the investment
objective(s) of any other Funds. Although the investment processes used
by Victory Capital's portfolio managers may differ from those used by
AMCO's portfolio managers or, if applicable, any subadviser's portfolio
managers, such differences are not currently expected to result in
changes to the principal investment strategies or principal investment
risks of the Funds.
o The New Advisory Agreement does not change any Fund's advisory fee
rate or the computation method for calculating such fees (except that
Victory Capital, subject to Board approval, may in the future use a
single designated share class to calculate the performance adjustment).
For at least two years after the Transaction closes, Victory Capital has
agreed to waive fees and/or reimburse expenses so that each Fund's
annual expense ratio (excluding certain customary items) does not exceed
the levels reflected in each Fund's most recent audited financial
statements at the time the Transaction closes (or the levels of AMCO's
then-current expense caps, if applicable), excluding the impact of any
performance adjustment to the Fund's advisory fee.
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38 | USAA CAPITAL GROWTH FUND
================================================================================
o The portfolio managers at AMCO that manage the Fixed Income Funds(1) as
well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be advised
by Victory Capital through its Victory Solutions platform, Victory
Capital proposes that the same subadvisers be retained Post-Transaction,
although Victory Capital may change the allocation to a particular
subadviser Post-Transaction. No changes are expected to the portfolio
managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's
(1)The Fixed Income Funds include the following Funds: California Bond Fund,
Government Securities Fund, High Income Fund, Income Fund, Intermediate-Term
Bond Fund, Tax Exempt Intermediate-Term Fund, Tax Exempt Long-Term Fund, New
York Bond Fund, Short-Term Bond Fund, Tax Exempt Short- Term Fund, Ultra
Short-Term Bond Fund, Virginia Bond Fund, Money Market Fund, Tax Exempt Money
Market Fund and Treasury Money Market Trust.
(2)The Cornerstone Funds include the following Funds: Cornerstone Aggressive
Fund, Cornerstone Conservative Fund, Cornerstone Equity Fund, Cornerstone
Moderate Fund, Cornerstone Moderately Aggressive Fund, and Cornerstone
Moderately Conservative Fund.
(3)The Target Retirement Funds include the following Funds: Target Retirement
2020 Fund, Target Retirement 2030 Fund, Target Retirement 2040 Fund, Target
Retirement 2050 Fund, Target Retirement 2060 Fund, and Target Retirement
Income Fund.
================================================================================
ADVISORY AGREEMENT(S) | 39
================================================================================
businesses to Victory Capital. Victory Capital and USAA expect to enter
into a transition services agreement under which USAA will continue to
provide Victory Capital with certain services that are currently
provided by USAA to AMCO and the USAA Transfer Agent for a specified
period of time after the closing of the Transaction to assist Victory
Capital in transitioning the USAA member distribution channel and member
support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital
================================================================================
40 | USAA CAPITAL GROWTH FUND
================================================================================
is capable of providing the same level of investment management services
currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund, Growth
& Income Fund, Income Stock Fund, Global Equity Income Fund, and Precious
Metals and Minerals Fund.
================================================================================
ADVISORY AGREEMENT(S) | 41
================================================================================
The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored and managed by
Victory Capital ("Victory Funds") with similar investment
================================================================================
42 | USAA CAPITAL GROWTH FUND
================================================================================
objectives and strategies managed by the portfolio managers who would manage the
Funds. Based on information presented to the Board at the Meetings and its
discussions with Victory Capital, the Board concluded that Victory Capital is
capable of generating a level of long-term investment performance that is
appropriate in light of each Fund's investment objectives, strategies and
restrictions.
FEES TO BE PAID TO VICTORY CAPITAL AND EXPENSES OF THE FUNDS - The Board
considered that it had reviewed each Fund's existing advisory fee rate and
computation method for calculating such fees at the 2018 15(c) Meeting. The
Board considered that the New Advisory Agreement does not change any Fund's
advisory fee rate or the computation method for calculating such fees, except
that Victory Capital, subject to Board approval, may in the future use a single
designated share class to calculate the performance adjustment and apply the
resulting performance adjustment across each other class of shares of the Fund.
The Board considered that the use of a single designated class to calculate the
performance adjustment for each other class of shares of the Fund could mean
that shareholders of a class other than the class used to measure the
performance adjustment may pay a performance adjustment that is higher or lower
than if the adjustment were calculated on a class by class basis, primarily due
to the impact of differences in the fees and expenses between share classes on
performance. The Board considered that the New Advisory Agreement stipulates
that the period for measuring performance for calculating a Fund's performance
adjustment begins on the date that Victory Capital begins managing the Fund;
therefore, no performance adjustments will be made for the first twelve months
of the New Advisory Agreement, consistent with applicable regulations. The Board
also considered Victory Capital's contractual commitment under the expense
limitation agreement ("ELA") to waive fees and/or reimburse expenses for at
least two years after the closing of the Transaction, so that each Fund's annual
expense ratio (excluding acquired fund fees and expenses, any performance
adjustment to a Fund's advisory fee, interest, taxes, brokerage commissions,
other expenditures which are capitalized in accordance with generally accepted
accounting principles, and other extraordinary expenses not incurred in the
ordinary course of such Fund's business) does not exceed the levels reflected in
each Fund's most recent audited financial statements at the time the
================================================================================
ADVISORY AGREEMENT(S) | 43
================================================================================
Transaction closes (or the levels of AMCO's then-current expense caps, if
applicable), excluding the impact of any performance adjustment to a Fund's
advisory fee. The Board considered that the ELA permits Victory Capital to
recoup advisory fees waived and expenses reimbursed for up to three years after
the fiscal year in which the waiver or reimbursement took place, subject to the
lesser of any operating expense limitation in effect at the time of: (1) the
original waiver or expense reimbursement; or (2) recoupment. The Board also
considered that Victory Capital and AMCO had represented to the Board that they
will use their best efforts to ensure that they and their respective affiliates
do not take any action that imposes an "unfair burden" on the Funds as a result
of the Transaction or as a result of any express or implied terms, conditions or
understandings applicable to the Change of Control Event, for so long as the
requirements of Section 15(f) of the 1940 Act apply. The Board also considered
a comparison of the proposed advisory fees to be paid by each Fund to the
advisory fees paid by funds and other accounts managed by Victory Capital deemed
to be comparable to the Fund in terms of investment objectives and strategies.
The Board considered that, with few exceptions, mostly involving weighted
average fees for separate accounts, the advisory fees to be paid by the Funds
were lower than the fees paid by these other funds and accounts. The Board
concluded that the retention of Victory Capital was unlikely to impose an unfair
burden on the Funds because, after the Transaction, none of AMCO, Victory
Capital, VCA, or any of their respective affiliates, would be entitled to
receive any compensation directly or indirectly (i) from any person in
connection with the purchase or sale of securities or other property to, from,
or on behalf of the Funds (other than ordinary fees for bona fide principal
underwriting services), or (ii) from the Funds or their shareholders for other
than bona fide investment advisory or other services. Based on its review, the
Board determined, with respect to each Fund, that Victory Capital's advisory fee
is fair and reasonable.
THE EXTENT TO WHICH VICTORY CAPITAL MAY REALIZE ECONOMIES OF SCALE AS THE FUNDS
GROW LARGER AND WHETHER FEE LEVELS REFLECT THESE ECONOMIES OF SCALE FOR THE
BENEFIT OF FUND SHAREHOLDERS - The Board considered potential or anticipated
economies of scale in relation to the services Victory Capital would provide to
each Fund. The Board considered that the New Advisory Agreement includes the
same advisory fee breakpoints for the same Funds as
================================================================================
44 | USAA CAPITAL GROWTH FUND
================================================================================
the Existing Advisory Agreements. The Board also considered that Victory Capital
has contractually agreed to cap the Funds' annual operating expense ratios,
pursuant to the ELA, which will remain in effect for at least two years from the
closing of the Transaction, and may be extended. The Board also considered
Victory Capital's representation that the significant increase in its assets
under management Post-Transaction may reasonably be expected to enable the new
combined firm to reach greater economies of scale in a shorter time frame. The
Board noted that it will have the opportunity to periodically re-examine whether
a Fund or the Trust has achieved economies of scale, and the appropriateness of
investment advisory and administrative fees payable to Victory Capital, in the
future.
THE PROFITS TO BE REALIZED BY VICTORY CAPITAL AND ITS AFFILIATES FROM THEIR
RELATIONSHIP WITH THE TRUST - The Board considered the benefits Victory Capital
and its affiliates may derive from their relationship with the Funds, including
compensation to be paid to Victory Capital for the provision of certain
administrative, fund accounting and shareholder services to the Funds and
compensation to be paid to USAA Transfer Agent for the provision of transfer
agency services to the Funds. The Board considered the significant investments
Victory Capital expected to make to support and grow the USAA member channel and
the costs to integrate the USAA Fund business into Victory Capital. The Board
also considered Victory Capital's profitability report presented to the board of
trustees of the Victory Funds in connection with their most recent 15(c)
process. The Board considered Victory Capital's representation that the fully
integrated USAA Fund business, including investments to support ongoing growth,
was expected to have an overall marginally positive impact on Victory Capital's
overall financial profitability. The Board noted the difficulty of accurately
projecting profitability under the current circumstance and noted that it would
have the opportunity to give further consideration to Victory Capital's
profitability with respect to the Funds at the end of the initial two-year term
of the New Advisory Agreement.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
================================================================================
ADVISORY AGREEMENT(S) | 45
================================================================================
deliver investment products and services to USAA's direct member-based channel.
The Board also considered that Victory Capital may derive reputational and other
benefits from its ability to use "USAA" and related names in connection with
operating and marketing the Funds. The Board considered that the Transaction, if
completed, would significantly increase Victory Capital's assets under
management and expand Victory Capital's investment capabilities. This increased
size and diversification could facilitate Victory Capital's continued investment
in its business and products, which Victory Capital would be able to leverage
across a broader base of assets. Victory Capital also would be able to use
trading commission credits from the Funds' transactions in securities to
"purchase" third party research and execution services to support its investment
process. Based on its review, the Board determined that any "fall-out" benefits
and other types of benefits that may accrue to Victory Capital are fair and
reasonable.
CONCLUSIONS - Based on the foregoing and other relevant considerations, at the
Meeting of the Board held on January 15, 2019, the Board, including a majority
of the Independent Trustees, acting within its business judgment, (1) concluded
that the terms of the New Advisory Agreement are fair and reasonable and that
approval of the New Advisory Agreement is in the best interests of each Fund and
its respective shareholders, (2) voted to approve the New Advisory Agreement,
and (3) voted to recommend approval of the New Advisory Agreement by
shareholders of the Funds. The Board evaluated all information available to it
on a Fund-by-Fund basis and its determinations were made separately in respect
of each Fund. The Board noted some factors may have been more or less important
with respect to any particular Fund and that no one factor was determinative of
its decisions which, instead, were premised upon the totality of factors
considered. In this connection, the Board also noted that different Board
members likely placed emphasis on different factors in reaching their individual
conclusions to vote in favor of the New Advisory Agreement and to recommend
approval of the New Advisory Agreement by shareholders of the Funds.
FACTORS CONSIDERED IN APPROVING THE NEW SUBADVISORY AGREEMENTS
In approving the New Subadvisory Agreements with each of Barrow, Hanley,
Mewhinney & Strauss, LLC, Brandes Investment Partners, L.P., ClariVest Asset
================================================================================
46 | USAA CAPITAL GROWTH FUND
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Management LLC, Epoch Investment Partners, Inc., Granahan Investment Management,
Inc., Lazard Asset Management LLC, Loomis, Sayles & Company LP, Massachusetts
Financial Services Company, Northern Trust Investments, Inc., QS Investors, LLC,
The Renaissance Group LLP and Wellington Management Company LLP (each, a
"Subadviser" and together the "Subadvisers") with respect to the applicable
Funds, the Board considered various factors, among them: (i) the nature, extent,
and quality of services to be provided to the applicable Funds by the
Subadvisers; (ii) each Subadviser's compensation and any other benefits derived
from the subadvisory relationship; (iii) comparisons, to the extent applicable,
of subadvisory fees and performance to comparable investment companies; and (iv)
the terms of each New Subadvisory Agreement. The Board's evaluation of the New
Subadvisory Agreements reflected the information provided specifically in
connection with its review of the New Subadvisory Agreements, as well as, where
relevant, information that was previously furnished to the Board in connection
with the most recent renewal of the Existing Subadvisory Agreements at the 2018
15(c) meeting and at other subsequent Board meetings in 2018. A summary of the
Board's analysis of these factors is set forth below. After full consideration
of a variety of factors, the Board, including the Independent Trustees, voted to
approve each New Subadvisory Agreement. In approving each New Subadvisory
Agreement, the Board did not identify any single factor as controlling, and each
Trustee may have attributed different weights to various factors. The
Independent Trustees reviewed the proposed approval of the New Subadvisory
Agreements in private sessions with their independent legal counsel at which no
representatives of Victory Capital or AMCO were present.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY THE
SUBADVISERS - The Board considered information provided to them regarding the
services to be provided by each Subadviser, including information presented
periodically throughout the previous year. The Board considered each
Subadviser's level of knowledge and investment style. The Board reviewed the
experience and credentials of the investment personnel who are responsible for
managing the investment of portfolio securities with respect to each applicable
Fund and each Subadviser's level of staffing. The Board also noted each
Subadviser's brokerage practices. The Board also considered
================================================================================
ADVISORY AGREEMENT(S) | 47
================================================================================
each Subadviser's regulatory and compliance history. The Board also took into
account each Subadviser's risk management processes. The Board noted that AMCO's
monitoring processes of each Subadviser include, and Victory Capital's expected
monitoring processes of each Subadviser would include, among others: (i) regular
telephonic meetings to discuss, among other matters, investment strategies and
to review portfolio performance; (ii) monthly portfolio compliance checklists
and quarterly compliance certifications to the Board; and (iii) due diligence
visits to each Subadviser. The Board also considered that the terms and
conditions of the New Subadvisory Agreements are substantially similar to the
terms and conditions of the Existing Subadvisory Agreements.
SUBADVISER COMPENSATION - The Board took into account the financial condition of
each Subadviser. In considering the cost of services to be provided by each
Subadviser and the profitability to that Subadviser of its relationship with the
applicable Fund, the Board noted that the fees under the New Subadvisory
Agreements will be paid by Victory Capital. The Board also relied on the ability
of AMCO to negotiate each Existing Subadvisory Agreement and the fees thereunder
at arm's length. The Board considered that the fee rate to be payable under each
New Subadvisory Agreement were proposed to be identical to the fee rate
currently payable under each corresponding Existing Subadvisory Agreement. For
the above reasons, the Board determined that the expected profitability of each
Subadviser from its relationship with the applicable Fund was not a material
factor in its deliberations with respect to the consideration of the approval of
each New Subadvisory Agreement. For similar reasons, the Board concluded that
the potential for economies of scale in each Subadviser's management of the
applicable Fund was not a material factor in considering each New Subadvisory
Agreement, although the Board noted that certain New Subadvisory Agreements
contain breakpoints in their fee schedules.
SUBADVISORY FEES AND FUND PERFORMANCE - The Board previously compared the
subadvisory fees for each applicable Fund with the fees that each Subadviser
charges comparable clients, as applicable. The Board considered that each
applicable Fund will pay a management fee to Victory Capital and that, in turn,
Victory Capital will pay a subadvisory fee to each Subadviser.
================================================================================
48 | USAA CAPITAL GROWTH FUND
================================================================================
At the 2018 15(c) meeting, the Board considered, among other data, each
applicable Fund's performance over shorter and longer term periods, as compared
to each Fund's respective peer group and noted that the Board reviews at its
regularly scheduled meetings information about each Fund's performance results.
The Board considered Victory Capital's capabilities with respect to monitoring
the performance, investment style and risk-adjusted performance of each
Subadviser. The Board also noted each Subadviser's performance record for
similar accounts, as applicable.
CONCLUSIONS - The Board reached the following conclusions regarding each New
Subadvisory Agreement, among others: (i) each Subadviser is qualified to manage
the applicable Fund's assets in accordance with its investment objective and
policies; (ii) each Subadviser maintains an appropriate compliance program;
(iii) the performance of each applicable Fund is reasonable in relation to the
performance of funds with similar investment objectives and to relevant indices
in view of the Fund's investment approach and Victory Capital is expected to
appropriately monitor each Fund's performance; and (iv) each Fund's advisory
expenses are reasonable in relation to those of similar funds and to the
services to be provided by Victory Capital and each Subadviser. Based on its
conclusions, the Board determined that the approval of each New Subadvisory
Agreement with respect to each applicable Fund would be in the best interests of
the Fund and its shareholders.
================================================================================
ADVISORY AGREEMENT(S) | 49
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Richard Y. Newton III
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN, State Street Bank and Trust Company
ACCOUNTING AGENT, AND P.O. Box 1713
SUB-ADMINISTRATOR Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
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) or (210) 531-8722;
(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 monthly portfolio holdings with the SEC
for the first and third quarters of each fiscal year as an exhibit to its
reports on Form N-PORT (beginning with filings after March 31, 2019).
Previously, the Fund made its complete schedule of portfolio holdings available
after the first and third fiscal quarters in regulatory filings on Form N-Q. The
Fund's Forms N-CSR, N-PORT, and N-Q are available at no charge (i) by calling
(800) 531-USAA (8722) or (210) 531-8722; (ii) at USAA.COM; and (iii) on the
SEC's website at HTTP://WWW.SEC.GOV.
================================================================================
--------------
USAA PRSRT STD
9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
--------------
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================================================================================
36843-0319 (C)2019, USAA. All rights reserved.
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA GROWTH FUND]
================================================================================
SEMIANNUAL REPORT
USAA GROWTH FUND
FUND SHARES (USAAX) o INSTITUTIONAL SHARES (UIGRX)
JANUARY 31, 2019
================================================================================
Beginning on January 1, 2021, as permitted by regulations adopted by the
Securities and Exchange Commission, paper copies of the Fund's shareholder
reports like this one will no longer be sent by mail, unless you specifically
request paper copies of the reports from the Fund or from your financial
intermediary, such as a broker-dealer or bank. Instead, the reports will be made
available on usaa.com, and you will be notified by mail each time a report is
posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will
not be affected by this change and you need not take any action. You may elect
to receive shareholder reports and other communications from the Fund or your
financial intermediary electronically by notifying your financial intermediary
directly, or if you are a direct investor, by calling (800) 531-USAA (8722) or
logging on to usaa.com.
You may elect to receive all future reports in paper free of charge. You can
inform the Fund or your financial intermediary that you wish to continue
receiving paper copies of your shareholder reports by notifying your financial
intermediary directly, or if you are a direct investor, by calling (800)
531-USAA (8722) or logging on to usaa.com. Your election to receive reports in
paper will apply to all funds held with the USAA family of funds or your
financial intermediary.
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
INVESTMENT OVERVIEW 1
FINANCIAL INFORMATION
Portfolio of Investments 2
Notes to Portfolio of Investments 7
Financial Statements 8
Notes to Financial Statements 11
Financial Highlights 26
EXPENSE EXAMPLE 28
ADVISORY AGREEMENT(S) 30
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.
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 tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. 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.
(C)2019, USAA. All rights reserved.
================================================================================
================================================================================
INVESTMENT OVERVIEW
--------------------------------------------------------------------------------
o TOP 10 HOLDINGS* - 1/31/19 o
(% of Net Assets)
<c>
Visa, Inc. "A" ............................................................ 4.5%
Amazon.com, Inc. .......................................................... 4.5%
Facebook, Inc. "A" ........................................................ 4.5%
Oracle Corp. .............................................................. 4.1%
Alibaba Group Holding Ltd. ADR ............................................ 3.8%
Autodesk, Inc. ............................................................ 2.8%
Microsoft Corp. ........................................................... 2.8%
Starbucks Corp. ........................................................... 2.8%
Alphabet, Inc. "A" ........................................................ 2.6%
Cisco Systems, Inc. ....................................................... 2.6%
o SECTOR ALLOCATION* - 1/31/19 o
(% of Net Assets)
[PIE CHART OF SECTOR ALLOCATION]
CONSUMER, NON-CYCLICAL 25.5%
COMMUNICATIONS 23.5%
TECHNOLOGY 19.8%
FINANCIAL 9.9%
INDUSTRIAL 9.8%
CONSUMER, CYCLICAL 9.8%
ENERGY 1.2%
[END PIE CHART]
*Does not include money market instruments.
Percentages are of the net assets of the Fund and may not equal 100%.
Refer to the Portfolio of Investments for a complete list of securities.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
================================================================================
INVESTMENT OVERVIEW | 1
================================================================================
PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
-----------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (99.5%)
COMMON STOCKS (99.5%)
COMMUNICATIONS (23.5%)
----------------------
INTERNET (18.5%)
592,292 Alibaba Group Holding Ltd. ADR(a) $ 99,795
61,974 Alphabet, Inc. "A"(a) 69,776
46,247 Alphabet, Inc. "C"(a) 51,629
69,517 Amazon.com, Inc.(a) 119,481
180,643 CDW Corp. 15,042
711,600 Facebook, Inc. "A"(a) 118,617
83,666 IAC/InterActiveCorp(a) 17,677
----------
492,017
----------
MEDIA (2.4%)
437,807 Comcast Corp. "A" 16,011
136,308 FactSet Research Systems, Inc. 29,801
156,773 Walt Disney Co. 17,483
----------
63,295
----------
TELECOMMUNICATIONS (2.6%)
1,432,504 Cisco Systems, Inc. 67,743
----------
Total Communications 623,055
----------
CONSUMER, CYCLICAL (9.8%)
-------------------------
AIRLINES (0.7%)
312,731 Southwest Airlines Co. 17,751
----------
LEISURE TIME (0.6%)
275,307 Carnival Corp. 15,852
----------
RETAIL (8.5%)
97,762 Burlington Stores, Inc.(a) 16,787
425,524 Dick's Sporting Goods, Inc. 15,025
146,631 Dollar General Corp. 16,926
83,801 Home Depot, Inc. 15,380
44,236 O'Reilly Automotive, Inc.(a) 15,246
192,937 Ross Stores, Inc. 17,773
================================================================================
2 | USAA GROWTH FUND
================================================================================
-----------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------
1,075,308 Starbucks Corp. $ 73,271
626,223 Yum China Holdings, Inc. 22,826
345,005 Yum! Brands, Inc. 32,424
----------
225,658
----------
Total Consumer, Cyclical 259,261
----------
CONSUMER, NON-CYCLICAL (25.5%)
------------------------------
BEVERAGES (4.0%)
939,283 Coca-Cola Co. 45,208
1,054,662 Monster Beverage Corp.(a) 60,369
----------
105,577
----------
BIOTECHNOLOGY (5.5%)
162,347 Amgen, Inc. 30,377
47,821 Biogen, Inc.(a) 15,962
206,051 Celgene Corp.(a) 18,227
225,061 Gilead Sciences, Inc. 15,756
150,420 Regeneron Pharmaceuticals, Inc.(a) 64,571
----------
144,893
----------
COMMERCIAL SERVICES (2.5%)
117,764 Automatic Data Processing, Inc. 16,468
192,928 PayPal Holdings, Inc.(a) 17,124
92,427 S&P Global, Inc. 17,714
184,011 Total System Services, Inc. 16,489
----------
67,795
----------
COSMETICS/PERSONAL CARE (3.1%)
513,559 Colgate-Palmolive Co. 33,217
520,511 Procter & Gamble Co. 50,214
----------
83,431
----------
FOOD (1.8%)
3,201,314 Danone S.A. ADR 46,643
----------
HEALTHCARE PRODUCTS (1.9%)
66,616 Thermo Fisher Scientific, Inc. 16,365
256,381 Varian Medical Systems, Inc.(a) 33,850
----------
50,215
----------
HEALTHCARE-SERVICES (1.3%)
55,785 Anthem, Inc. 16,903
64,680 UnitedHealth Group, Inc. 17,476
----------
34,379
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 3
================================================================================
-----------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------
PHARMACEUTICALS (5.4%)
162,159 AbbVie, Inc. $ 13,020
80,347 Cigna Corp. 16,054
278,169 Merck & Co., Inc. 20,704
345,020 Novartis AG ADR 30,196
1,009,854 Novo Nordisk A/S ADR 47,484
197,450 Zoetis, Inc. 17,012
----------
144,470
----------
Total Consumer, Non-cyclical 677,403
----------
ENERGY (1.2%)
-------------
OIL & GAS SERVICES (1.2%)
720,592 Schlumberger Ltd. 31,857
----------
FINANCIAL (9.9%)
----------------
BANKS (0.6%)
67,838 SVB Financial Group(a) 15,832
----------
DIVERSIFIED FINANCIAL SERVICES (8.6%)
364,132 American Express Co. 37,396
83,237 Mastercard, Inc. "A" 17,574
733,706 SEI Investments Co. 34,880
605,616 Synchrony Financial 18,193
893,041 Visa, Inc. "A" 120,570
----------
228,613
----------
INSURANCE (0.7%)
264,362 Progressive Corp. 17,789
----------
Total Financial 262,234
----------
INDUSTRIAL (9.8%)
-----------------
AEROSPACE/DEFENSE (1.2%)
45,150 Boeing Co. 17,411
49,175 Lockheed Martin Corp. 14,245
----------
31,656
----------
ELECTRONICS (0.7%)
197,094 Amphenol Corp. "A" 17,329
----------
HAND/MACHINE TOOLS (0.6%)
95,243 Snap-on, Inc. 15,809
----------
MACHINERY-DIVERSIFIED (2.5%)
304,077 Deere & Co. 49,869
103,366 Rockwell Automation, Inc. 17,522
----------
67,391
----------
================================================================================
4 | USAA GROWTH FUND
================================================================================
-----------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------
MISCELLANEOUS MANUFACTURERS (0.6%)
117,164 Illinois Tool Works, Inc. $ 16,088
----------
PACKAGING & CONTAINERS (1.1%)
301,215 Berry Global Group, Inc.(a) 14,835
292,730 Crown Holdings, Inc.(a) 14,929
----------
29,764
----------
TRANSPORTATION (3.1%)
707,430 Expeditors International of Washington, Inc. 49,025
99,981 Norfolk Southern Corp. 16,771
102,256 Union Pacific Corp. 16,266
----------
82,062
----------
Total Industrial 260,099
----------
TECHNOLOGY (19.8%)
------------------
COMPUTERS (1.7%)
103,455 Apple, Inc. 17,219
226,300 Cognizant Technology Solutions Corp. "A" 15,769
94,717 International Business Machines Corp. 12,732
----------
45,720
----------
SEMICONDUCTORS (5.4%)
163,167 KLA-Tencor Corp. 17,389
87,805 Lam Research Corp. 14,890
240,918 NVIDIA Corp. 34,632
801,607 QUALCOMM, Inc. 39,695
177,168 Texas Instruments, Inc. 17,837
162,685 Xilinx, Inc. 18,211
----------
142,654
----------
SOFTWARE (12.7%)
72,111 Adobe, Inc.(a) 17,871
498,907 Autodesk, Inc.(a) 73,439
607,957 Cerner Corp.(a) 33,383
143,113 Citrix Systems, Inc. 14,675
168,148 Fidelity National Information Services, Inc. 17,576
700,112 Microsoft Corp. 73,113
2,154,036 Oracle Corp. 108,197
----------
338,254
----------
Total Technology 526,628
----------
Total Common Stocks (cost: $1,591,017) 2,640,537
----------
Total Equity Securities (cost: $1,591,017) 2,640,537
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 5
================================================================================
-----------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (0.6%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.6%)
14,764,289 State Street Institutional Treasury Money Market Fund
Premier Class, 2.31%(b) (cost: $14,764) $ 14,764
----------
TOTAL INVESTMENTS (COST: $1,605,781) $2,655,301
==========
-----------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
-----------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-----------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $2,640,537 $- $- $2,640,537
Money Market Instruments:
Government & U.S. Treasury
Money Market Funds 14,764 - - 14,764
-----------------------------------------------------------------------------------------------------------
Total $2,655,301 $- $- $2,655,301
-----------------------------------------------------------------------------------------------------------
Refer to the Portfolio of Investments for additional industry, country, or
geographic region classifications.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
At January 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
6 | USAA GROWTH FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A 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 8.5% of net assets at January 31,
2019.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
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) Non-income-producing security.
(b) Rate represents the money market fund annualized seven-day yield at
January 31, 2019.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 7
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $1,605,781) $2,655,301
Receivables:
Capital shares sold 924
Dividends and interest 2,092
Securities sold 18,837
----------
Total assets 2,677,154
----------
LIABILITIES
Payables:
Securities purchased 16,702
Capital shares redeemed:
Affiliated transactions (Note 8) 3,590
Unaffiliated transactions 1,846
Accrued management fees 1,316
Accrued transfer agent's fees 46
Other accrued expenses and payables 219
----------
Total liabilities 23,719
----------
Net assets applicable to capital shares outstanding $2,653,435
==========
NET ASSETS CONSIST OF:
Paid-in capital $1,575,632
Distributable earnings 1,077,803
----------
Net assets applicable to capital shares outstanding $2,653,435
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $1,528,744/54,185 capital shares
outstanding, no par value) $ 28.21
==========
Institutional Shares (net assets of $1,124,691/39,958
capital shares outstanding, no par value) $ 28.15
==========
See accompanying notes to financial statements.
================================================================================
8 | USAA GROWTH FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $73) $ 16,704
Interest 357
---------
Total income 17,061
---------
EXPENSES
Management fees 8,580
Administration and servicing fees:
Fund Shares 1,159
Institutional Shares 586
Transfer agent's fees:
Fund Shares 773
Institutional Shares 586
Custody and accounting fees:
Fund Shares 91
Institutional Shares 61
Postage:
Fund Shares 34
Institutional Shares 35
Shareholder reporting fees:
Fund Shares 18
Institutional Shares 4
Trustees' fees 17
Registration fees:
Fund Shares 28
Institutional Shares 19
Professional fees 61
Other 22
---------
Total expenses 12,074
---------
NET INVESTMENT INCOME 4,987
---------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain 122,724
Change in net unrealized appreciation/(depreciation) (147,962)
---------
Net realized and unrealized loss (25,238)
---------
Decrease in net assets resulting from operations $ (20,251)
=========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 9
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited), and year ended July
31, 2018
-----------------------------------------------------------------------------------------------------
1/31/2019 7/31/2018
-----------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 4,987 $ 10,480
Net realized gain on investments 122,724 213,204
Change in net unrealized appreciation/(depreciation)
of investments (147,962) 177,416
---------------------------
Increase (decrease) in net assets resulting from operations (20,251) 401,100
---------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (172,418) (36,307)
Institutional Shares (126,833) (35,406)
---------------------------
Distributions to shareholders (299,251) (71,713)
---------------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 6)
Fund Shares 133,947 36,565
Institutional Shares (66,757) (135,261)
---------------------------
Total net increase (decrease) in net assets from
capital share transactions 67,190 (98,696)
---------------------------
Net increase (decrease) in net assets (252,312) 230,691
NET ASSETS
Beginning of period 2,905,747 2,675,056
---------------------------
End of period $2,653,435 $2,905,747
===========================
See accompanying notes to financial statements.
================================================================================
10 | USAA GROWTH FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
January 31, 2019 (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 47 separate funds. The
USAA Growth Fund (the Fund) qualifies as a registered investment company under
Accounting Standards Codification Topic 946. The information presented in this
semiannual report pertains only to the Fund, which is classified as diversified
under the 1940 Act. The Fund's investment objective is to seek long-term growth
of capital.
The Fund consists of two classes of shares: Growth Fund Shares (Fund Shares) and
Growth Fund Institutional Shares (Institutional Shares). Each class of shares
has equal rights to assets and earnings, except that each class bears 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 are allocated to each class of shares based on each class' relative
net assets. Each class has exclusive voting rights on matters related solely to
that class and separate voting rights on matters that relate to all classes. The
Institutional Shares are 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 are 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).
================================================================================
NOTES TO FINANCIAL STATEMENTS | 11
================================================================================
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of USAA Asset Management Company (AMCO or Manager), the investment
adviser to the Fund, and USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services (SAS), the transfer agent to the Fund, announced that AMCO and
SAS would be acquired by Victory Capital Holdings, Inc. (Victory), a global
investment management firm headquartered in Cleveland, Ohio (the Transaction).
The closing of the Transaction is expected to be completed during the second
quarter of 2019, pending satisfaction of certain closing conditions and
approvals, including certain approvals of the Fund's Board of Trustees and of
the Fund's shareholders at a special shareholder meeting to be held on April 18,
2019. The Transaction is not expected to result in any material changes to the
Fund's investment objectives and principal investment strategies. In connection
with the Transaction, Victory proposes to add portfolio managers from one or
more investment teams employed by Victory to serve as additional portfolio
managers to manage all or a portion of the Fund according to each team's own
investment process.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Valuation and Liquidity 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.
The Fund utilizes 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 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 exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange or
the 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. Securities traded primarily on foreign securities exchanges or
markets are valued at the last quoted sale price, or the most recently
================================================================================
12 | USAA GROWTH FUND
================================================================================
determined official closing price calculated according to local market
convention, available at the time the Fund is valued. If no last sale or
official closing price is reported or available, the average of the bid
and ask prices generally is used. Actively traded equity securities
listed on a domestic exchange generally are categorized in Level 1 of the
fair value hierarchy. Certain preferred and equity securities traded in
inactive markets generally are categorized in Level 2 of the fair value
hierarchy.
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 many cases,
events affecting the values of foreign securities that occur between the
time of their last quoted sale or official closing price and the close of
normal trading on the NYSE on a day the Fund's NAV is calculated will not
need to be reflected in the value of the Fund's foreign securities.
However, the Manager and the Fund's subadviser(s) will monitor for events
that would materially affect the value of the Fund's foreign securities.
The Fund's subadviser(s) have agreed to notify the Manager of significant
events they identify 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 Committee will consider such available information that it deems
relevant and will determine a fair value for the affected foreign
securities in accordance with valuation procedures. In addition,
information from an external vendor or other sources may be used to
adjust the foreign market closing prices of foreign equity securities to
reflect what the Committee believes to be the fair value of the
securities as of the close of the NYSE. Fair valuation of affected
foreign equity securities may occur frequently based on an assessment
that events which occur on a fairly regular basis (such as U.S. market
movements) are significant. Such securities are categorized in Level 2 of
the fair value hierarchy.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 13
================================================================================
3. Investments in open-end investment companies, commingled, or other funds,
other than ETFs, are valued at their NAV at the end of each business day
and are categorized in Level 1 of the fair value hierarchy.
4. Short-term debt securities with original or remaining maturities of 60
days or less may be valued at amortized cost, provided that amortized
cost represents the fair value of such securities.
5. Repurchase agreements are valued at cost.
6. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event has
been recognized in relation to a security or class of securities, the
securities are valued in good faith by the Committee in accordance with
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, other pricing services, 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, evaluation of credit
quality, 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:
================================================================================
14 | USAA GROWTH FUND
================================================================================
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 indexes.
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. INVESTMENTS IN SECURITIES - Securities transactions are accounted for as of
the date the securities are purchased or sold (trade date). Gains or losses
from sales of investment securities are computed on the identified cost
basis. Dividend income, less foreign taxes, if any, is recorded on the ex-
dividend date. If the ex-dividend date has passed, certain dividends from
foreign securities are recorded upon notification. Interest income is
recorded daily on the accrual basis. Premiums and discounts on short-term
securities are amortized on a straight-line basis over the life of the
respective securities.
D. FEDERAL TAXES - The Fund's policy is to comply with the requirements of the
Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its taxable
income and net capital gains, if any, to its shareholders. Therefore, no
federal income tax provision is required.
For the six-month period ended January 31, 2019, 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 the Fund's tax basis to determine if
adjustments to this conclusion are necessary. The statute of limitations on
the Fund's tax return filings generally remain open for the three preceding
fiscal reporting year ends and remain
================================================================================
NOTES TO FINANCIAL STATEMENTS | 15
================================================================================
subject to examination by the Internal Revenue Service and state taxing
authorities.
E. FOREIGN TAXATION - Foreign income and capital gains on some foreign
securities may be subject to foreign taxes, which are reflected as a
reduction to such income and realized gains. The Fund records a liability
based on unrealized gains to provide for potential foreign taxes payable
upon the sale of these securities. Foreign taxes have been provided for in
accordance with the Fund's understanding of the applicable countries'
prevailing tax rules and rates.
F. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the exchange
rate obtained from an independent pricing service on the respective dates
of such transactions.
2. Market value of securities, other assets, and liabilities at the exchange
rate obtained from an independent pricing service on a daily basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the amounts received. At
the end of the Fund's fiscal year, net realized foreign currency
gains/losses are reclassified from accumulated net realized gains/losses to
accumulated undistributed net investment income on the Statement of Assets
and Liabilities, as such
================================================================================
16 | USAA GROWTH FUND
================================================================================
amounts are treated as ordinary income/loss for federal income tax purposes.
Net unrealized foreign currency exchange gains/losses arise from changes in
the value of assets and liabilities, other than investments in securities,
resulting from changes in the exchange rate.
G. EXPENSES PAID INDIRECTLY - A portion of the brokerage commissions that the
Fund pays may be recaptured as a credit that is tracked and used by the
custodian to directly reduce expenses paid by the Fund. Effective September
30, 2018, the commission recapture program ended. For the six-month period
ended January 31, 2019, the Fund did not receive any brokerage commission
recapture credits.
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, along with other funds of the Trust and USAA ETF Trust
(together, the Trusts), 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 provide temporary or emergency
cash needs, including redemption requests that might otherwise require the
untimely disposition of securities. Subject to availability (including usage of
the facility by other funds of the Trusts), the Fund may borrow from CAPCO an
amount up to 5% of the Fund's total assets at an interest rate based on the
London Interbank Offered Rate (LIBOR), plus 100.0 basis points.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 17
================================================================================
The Trusts are also assessed facility fees by CAPCO in the amount of 14.0 basis
points of the amount of the committed loan agreement. Prior to September 30,
2018, the maximum annual facility fee was 13.0 basis points of the amount of the
committed loan agreement. The facility fees are allocated among the funds of the
Trusts based on their respective average daily net assets for the period.
The Trusts may request an optional increase of the committed loan agreement from
$500 million up to $750 million. If the Trusts increase the committed loan
agreement, the assessed facility fee on the amount of the additional commitment
will be 15.0 basis points.
For the six-month period ended January 31, 2019, the Fund paid CAPCO facility
fees of $11,000, which represents 3.3% of the total fees paid to CAPCO by the
funds of the Trusts. The Fund had no borrowings under this agreement during the
six-month period ended January 31, 2019.
(3) DISTRIBUTIONS
The tax basis of distributions and any accumulated undistributed net investment
income will be determined as of the Fund's tax year-end of July 31, 2019, in
accordance with applicable federal tax law.
Distributions of net investment income and realized gains from security
transactions not offset by capital losses are made annually in the succeeding
fiscal year or as otherwise required to avoid the payment of federal taxes.
At July 31, 2018, the Fund had no capital loss carryforwards, for federal income
tax purposes.
As of January 31, 2019, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as the cost reported
in the financial statements. The net unrealized appreciation/(depreciation) on
investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
FUND APPRECIATION DEPRECIATION (DEPRECIATION)
---------------------------------------------------------------------------------
USAA Growth Fund $1,102,545,000 $(53,025,000) $1,049,520,000
================================================================================
18 | USAA GROWTH FUND
================================================================================
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended January 31, 2019, were
$253,877,000 and $462,984,000, respectively.
(5) SECURITIES LENDING
The Fund, through a securities lending agreement with Citibank, N.A.
(Citibank), may lend its securities to qualified financial institutions, such as
certain broker-dealers, to earn additional income, net of income retained by
Citibank. The borrowers are required to secure their loans continuously with
collateral in an amount at least equal to 102% of the fair value of domestic
securities and foreign government securities loaned and 105% of the fair value
of foreign securities and all other securities loaned. Collateral may be cash,
U.S. government securities, or other securities as permitted by SEC guidelines.
Cash collateral may be invested in high-quality short-term investments.
Collateral requirements are determined daily based on the value of the Fund's
securities on loan as of the end of the prior business day. Loans are terminable
upon demand and the borrower must return the loaned securities within the lesser
of one standard settlement period or five business days. Risks relating to
securities-lending transactions include that the borrower may not provide
additional collateral when required or return the securities when due, and that
the value of the short-term investments will be less than the amount of cash
collateral required to be returned to the borrower. The Fund's agreement with
Citibank does not include master netting provisions. Non-cash collateral
received by the Fund may not be sold or re-pledged except to satisfy borrower
default. Cash collateral is listed in the Fund's Portfolio of Investments and
Financial Statements while non-cash collateral is not included. At January 31,
2019, the Fund had no securities on loan.
(6) CAPITAL SHARE TRANSACTIONS
At January 31, 2019, there were an unlimited number of shares of capital stock
at no par value authorized for the Fund.
Capital share transactions for the Institutional Shares resulted from purchases
and sales by the affiliated USAA fund-of-funds as well as other
================================================================================
NOTES TO FINANCIAL STATEMENTS | 19
================================================================================
persons or legal entities that the Fund may approve from time to time. Capital
share transactions for all classes were as follows, in thousands:
SIX-MONTH
PERIOD ENDED YEAR ENDED
JANUARY 31, 2019 JULY 31, 2018
-----------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------
FUND SHARES:
Shares sold 2,591 $ 78,654 6,474 $ 199,601
Shares issued from reinvested
dividends 6,270 170,170 1,172 35,810
Shares redeemed (3,868) (114,877) (6,457) (198,846)
------------------------------------------
Net increase from capital share
transactions 4,993 $ 133,947 1,189 $ 36,565
==========================================
INSTITUTIONAL SHARES:
Shares sold 1,407 $ 42,540 4,466 $ 135,726
Shares issued from reinvested
dividends 4,682 126,793 1,161 35,400
Shares redeemed (7,402) (236,090) (9,812) (306,387)
------------------------------------------
Net decrease from capital share
transactions (1,313) $ (66,757) (4,185) $(135,261)
==========================================
(7) TRANSACTIONS WITH MANAGER
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 the Fund's assets, subject to the
authority of and supervision by the Board. The Manager 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 all or a portion of the
Fund's assets.
The Manager monitors each subadviser's performance through quantitative and
qualitative analysis and periodically reports to the Board as to whether each
subadviser's agreement should be renewed, terminated, or modified. The Manager
is also responsible for determining the asset allocation for the subadviser(s).
The allocation for each subadviser could range from 0% to
================================================================================
20 | USAA GROWTH FUND
================================================================================
100% of the Fund's assets, and the Manager could change the allocations without
shareholder approval.
The investment management fee for the Fund is comprised 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 daily net assets.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Large-Cap Growth Funds Index. The Lipper Large-Cap Growth
Funds Index tracks the total return performance of funds within the Lipper
Large-Cap Growth Funds category.
For the Fund Shares and Institutional Shares, the performance period 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
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
------------------------------------------------------------------------
+/- 100 to 400 +/- 4
+/- 401 to 700 +/- 5
+/- 701 and greater +/- 6
(1)Based on the difference between average annual performance of the
relevant share class of the Fund and its relevant Lipper index, rounded
to the nearest basis point. Average daily net assets of the share class
are calculated over a rolling 36-month period.
Each class' annual performance adjustment rate is multiplied by the average
daily net assets of each respective class over the entire performance period,
which is then multiplied by a fraction, the numerator of which is the number of
days in the month and the denominator of which is 365 (366 in leap years). The
resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper Large-Cap Growth Funds Index over that period, even if
the class had overall negative returns during the performance period.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 21
================================================================================
For the six-month period ended January 31, 2019, the Fund incurred management
fees, paid or payable to the Manager, of $8,580,000, which included a
performance adjustment for the Fund Shares and Institutional Shares of
$(134,000) and $(118,000), respectively. The performance adjustments for the
Fund Shares and Institutional Shares were each (0.02)%.
SUBADVISORY ARRANGEMENT(S) - The Manager entered into Investment Subadvisory
Agreements with Loomis, Sayles & Company, L.P. (Loomis Sayles) and Renissance
Investment Management (Renaissance), under which Loomis Sayles and Renaissance
each direct the investment and reinvestment of a portion of the Fund's assets
(as allocated from time to time by the Manager). These arrangements provide for
monthly fees that are paid by the Manager.
The Manager (not the Fund) pays Loomis Sayles a subadvisory fee in the annual
amount of 0.20% of the portion of the Fund's average daily net assets that
Loomis Sayles manages. For the six-month period ended January 31, 2019, the
Manager incurred subadvisory fees with respect to the Fund, paid or payable to
Loomis Sayles, of $1,756,000.
The Manager (not the Fund) pays Renaissance a subadvisory fee in the annual
amount of 0.20% of the portion of the Fund's average daily net assets that
Renaissance manages. For the six-month period ended January 31, 2019, the
Manager incurred subadvisory fees with respect to the Fund, paid or payable to
Renaissance, of $958,000.
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 at an annualized rate of 0.15% and 0.10% of
average daily net assets of the Funds Shares and Institutional Shares,
respectively. For the six-month period ended January 31, 2019, the Fund Shares
and Institutional Shares incurred administration and servicing fees, paid or
payable to the Manager, of $1,159,000 and $586,000, respectively.
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 January 31, 2019, the Fund reimbursed the
================================================================================
22 | USAA GROWTH FUND
================================================================================
Manager $1,000 for these compliance and legal services. These expenses are
included in the professional fees on the Fund's Statement of Operations.
TRANSFER AGENT'S FEES - SAS, an affiliate of the Manager, provides transfer
agent services to the Fund Shares based on an annual charge of $23 per
shareholder account plus out-of-pocket expenses. SAS pays a portion of these
fees to certain intermediaries for the administration and servicing of accounts
that are held with such intermediaries. Transfer agent's fees for Institutional
Shares are paid monthly based on a fee accrued daily at an annualized rate of
0.10% of the Institutional Shares' average daily net assets, plus out-of-pocket
expenses. For the six-month period ended January 31, 2019, the Fund Shares and
Institutional Shares incurred transfer agent's fees, paid or payable to SAS, of
$773,000 and $586,000, respectively.
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 fee or other compensation for these services.
(8) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other USAA Funds and
is one of 16 USAA mutual funds in which the affiliated USAA fund-of-funds
invest. The USAA fund-of-funds do not invest in the underlying funds for the
purpose of exercising management or control, and the affiliated fund-of-funds'
annual or semiannual reports may be viewed at usaa.com. As of January 31, 2019,
the Fund recorded a payable for capital shares redeemed of $3,590,000 for the
USAA fund-of-funds purchases and redemptions of Institutional Shares. As of
January 31, 2019, the USAA fund-of-funds owned the following percentages of the
total outstanding shares of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
--------------------------------------------------------------------------------
Cornerstone Conservative 0.1
Cornerstone Equity 0.3
Target Retirement Income 0.2
Target Retirement 2020 0.8
Target Retirement 2030 2.5
Target Retirement 2040 3.4
Target Retirement 2050 2.0
Target Retirement 2060 0.2
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
The Manager is indirectly wholly owned by 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.
(9) UPCOMING REGULATORY MATTERS
In October 2016, the U.S. Securities and Exchange Commission (SEC) issued Final
Rule Release No. 33-10233, INVESTMENT COMPANY LIQUIDITY RISK MANAGEMENT PROGRAMS
(Liquidity Rule). The Liquidity Rule requires funds to establish a liquidity
risk management program and enhances disclosures regarding funds' liquidity. The
requirements to implement a liquidity risk management program and establish a
15% illiquid investment limit became effective December 1, 2018. However, in
February 2018, the SEC issued Release No. IC-33010, INVESTMENT COMPANY LIQUIDITY
RISK MANAGEMENT PROGRAMS; COMMISSION GUIDANCE FOR IN-KIND ETFs, which delayed
certain requirements related to liquidity classification, highly liquid
investment minimums, and board approval of the liquidity risk management
programs to June 1, 2019. The Manager continues to evaluate the impact of this
rule on the Fund's financial statements and various filings.
(10) RECENTLY ADOPTED ACCOUNTING STANDARDS
In August 2018, the SEC adopted amendments to Regulation S-X for investment
companies governing the form and content of financial statements. The amendments
to Regulation S-X took effect on November 5, 2018, and the financial statements
have been modified accordingly, for the current and prior periods.
ASU 2018-13, FAIR VALUE MEASUREMENT
-----------------------------------
In August 2018, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2018-13, Fair Value Measurement (Topic 820).
The amendments in the ASU impact disclosure requirements for fair value
measurement. ASU 2018-13 is effective for fiscal years beginning after December
15, 2019. Early adoption is permitted and can include the
================================================================================
24 | USAA GROWTH FUND
================================================================================
entire standard or certain provisions that exclude or amend disclosures.
Management has elected to early adopt ASU 2018-13 effective with the current
reporting period. The adoption of ASU 2018-13 guidance is limited to changes in
the Fund's notes to financial statement disclosures regarding valuation method,
fair value, and transfers between levels of the fair value hierarchy.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
---------------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
---------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 32.15 $ 28.65 $ 25.53 $ 25.91 $ 23.62 $ 20.05
---------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .04 .07 .09 .10 .28 .11
Net realized and
unrealized gain (loss) (.45) 4.18 4.31 1.19 3.73 3.63
---------------------------------------------------------------------------------------
Total from investment
operations (.41) 4.25 4.40 1.29 4.01 3.74
---------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.09) (.05) (.05) (.11) (.28) (.17)
Realized capital gains (3.44) (.70) (1.23) (1.56) (1.44) -
---------------------------------------------------------------------------------------
Total distributions (3.53) (.75) (1.28) (1.67) (1.72) (.17)
---------------------------------------------------------------------------------------
Net asset value at
end of period $ 28.21 $ 32.15 $ 28.65 $ 25.53 $ 25.91 $ 23.62
=======================================================================================
Total return (%)* (.81) 14.99 18.04 5.25 17.50 18.71
Net assets at end
of period (000) $1,528,744 $1,581,693 $1,375,305 $1,143,344 $1,262,075 $1,101,533
Ratios to average
daily net assets:**
Expenses (%)(a),(b) .91(c) .97 1.09 1.11 1.08(d) 1.00
Expenses, excluding
reimbursements (%)(a),(b) .91(c) .97 1.09 1.11 1.11 1.12
Net investment
income (%) .34(c) .33 .36 .36 .25 .39
Portfolio turnover (%) 9 19 17 18 31 31
* 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 January 31, 2019, average daily net assets
were $1,532,271,000.
(a) Does not include acquired fund fees, if any.
(b) Reflects total annual operating expenses of the Fund Shares before
reductions of any expenses paid indirectly. The Fund Shares' expenses paid
indirectly decreased the expense ratio by less than 0.01%.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) Prior to December 1, 2014, the Manager had voluntarily agreed to limit the
annual expenses of the Fund Shares to 1.00% of the Fund Shares' average
daily net assets.
================================================================================
26 | USAA GROWTH FUND
================================================================================
INSTITUTIONAL SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each
period is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
---------------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
---------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 32.08 $ 28.59 $ 25.48 $ 25.86 $ 23.57 $ 20.02
---------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .06 .09 .12 .15 .30 .10
Net realized and
unrealized gain (loss) (.45) 4.18 4.30 1.16 3.72 3.62
---------------------------------------------------------------------------------------
Total from investment
operations (.39) 4.27 4.42 1.31 4.02 3.72
---------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.10) (.08) (.08) (.13) (.29) (.17)
Realized capital gains (3.44) (.70) (1.23) (1.56) (1.44) -
---------------------------------------------------------------------------------------
Total distributions (3.54) (.78) (1.31) (1.69) (1.73) (.17)
---------------------------------------------------------------------------------------
Net asset value at
end of period $ 28.15 $ 32.08 $ 28.59 $ 25.48 $ 25.86 $ 23.57
=======================================================================================
Total return (%)* (.76) 15.07 18.14 5.34 17.57 18.66
Net assets at end
of period (000) $1,124,691 $1,324,054 $1,299,751 $1,012,360 $865,996 $717,579
Ratios to average
daily net assets:**
Expenses (%)(a),(b) .86(c) .92 1.01 1.02 1.01 1.00
Net investment
income (%) .40(c) .39 .43 .47 .31 .39
Portfolio turnover (%) 9 19 17 18 31 31
* 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 January 31, 2019, average daily net assets
were $1,159,946,000.
(a) Does not include acquired fund fees, if any.
(b) Reflects total annual operating expenses of the Institutional Shares before
reductions of any expenses paid indirectly. The Institutional Shares'
expenses paid indirectly decreased the expense ratios by less than 0.01%.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
FINANCIAL HIGHLIGHTS | 27
================================================================================
EXPENSE EXAMPLE
January 31, 2019 (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 August 1, 2018, through
January 31, 2019.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table 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 for your share
class in the "actual" 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 line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class 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
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28 | USAA GROWTH FUND
================================================================================
period. You may use this information to compare the ongoing costs of investing
in the Fund and other funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of other
funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled "hypothetical"
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 AUGUST 1, 2018 -
AUGUST 1, 2018 JANUARY 31, 2019 JANUARY 31, 2019
--------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $ 991.90 $4.57
Hypothetical
(5% return before expenses) 1,000.00 1,020.62 4.63
INSTITUTIONAL SHARES
Actual 1,000.00 992.40 4.32
Hypothetical
(5% return before expenses) 1,000.00 1,020.87 4.38
*Expenses are equal to the annualized expense ratio of 0.91% for Fund Shares and
0.86% for Institutional Shares, which are net of any reimbursements and
expenses paid indirectly, multiplied by the average account value over the
period, multiplied by 184 days/365 days (to reflect the one-half-year period).
The Fund's actual ending account values are based on its actual total returns
of (0.81)% for Fund Shares and (0.76)% for Institutional Shares for the
six-month period of August 1, 2018, through January 31, 2019.
================================================================================
EXPENSE EXAMPLE | 29
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ADVISORY AGREEMENT(S)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with Victory Capital
Holdings, Inc. ("Victory Holdings") pursuant to which Victory Holdings would
acquire all of the outstanding stock of AMCO and USAA Transfer Agency Company
d/b/a USAA Shareholder Account Services ("USAA Transfer Agent") (the
"Transaction"). The Independent Trustees were advised that the Transaction, if
completed, would constitute
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30 | USAA GROWTH FUND
================================================================================
an "assignment" (as that term is defined in Section 2(a)(4) of the 1940 Act) and
result in the automatic termination of the Existing Management Agreements
("Change of Control Event"). The Independent Trustees also were advised that it
was proposed that Victory Capital, a subsidiary of Victory Holdings, would serve
as the investment adviser to each Fund after the closing of the Transaction
("Post-Transaction") and that the Board would be asked to consider approval of
the terms and conditions of the New Advisory Agreement with Victory Capital and
thereafter to submit the New Advisory Agreement to each Fund's shareholders for
approval. Because the Change of Control Event also would result in the
termination of each existing subadvisory agreement between AMCO and the
subadvisers to the Funds ("Existing Subadvisory Agreements"), the Independent
Trustees were advised that the Board would also be asked to approve the New
Subadvisory Agreements.
In anticipation of the Transaction, the Trustees met at a series of subsequent
in-person meetings on November 27-28, 2018, January 7-8, 2019, and January
14-15, 2019, which included meetings of the full Board and separate meetings of
the Independent Trustees for the purposes of considering, among other things:
whether it would be in the best interests of each Fund and its respective
shareholders to approve the New Agreements; and the anticipated impacts of the
Transaction on the Funds and their shareholders (each, a "Meeting"). During each
of these Meetings, the Board sought additional and clarifying information as it
deemed necessary or appropriate. In this connection, the Independent Trustees
worked with their independent legal counsel to prepare formal due diligence
requests (the "Diligence Requests") that were submitted to Victory Capital,
Victory Capital Advisers, Inc. ("VCA"), and the subadvisers. The Diligence
Requests sought information relevant to the Board's consideration of the New
Advisory Agreement, the New Subadvisory Agreements, distribution arrangements,
and other anticipated impacts of the Transaction on the Funds and their
shareholders. Victory Capital, VCA, and the subadvisers provided documents and
information in response to the Diligence Requests (the "Response Materials").
Following their review of the Response Materials, the Independent Trustees
submitted a supplemental due diligence request for additional and clarifying
information (the "Supplemental Diligence Request") to Victory Capital and VCA.
Victory
================================================================================
ADVISORY AGREEMENT(S) | 31
================================================================================
Capital and VCA provided further information in response to the Supplemental
Diligence Request, which the Board reviewed. Senior management representatives
of Victory Capital and/or AMCO participated in a portion of each Meeting and
addressed various questions raised by the Board. Throughout the process, the
Independent Trustees were assisted by their independent legal counsel and
counsel to the Funds, who advised them on, among other things, their duties and
obligations relating to their consideration of the New Agreements.
The Board's evaluation of the New Agreements reflected the information provided
specifically in connection with its review of the New Agreements, as well as,
where relevant, information that was previously furnished to the Board in
connection with the most recent renewal of the Existing Management Agreements
and Existing Subadvisory Agreements at an in-person meeting of the Board on
April 18, 2018 (the "2018 15(c) Meeting") and at other subsequent Board meetings
in 2018. The Board's evaluation of the New Agreements also reflected the
knowledge gained as Board members of the Funds with respect to services provided
by AMCO, its affiliates, and each subadviser to the Funds.
The Board's approvals and recommendations were based on its determination,
within its business judgment, that it would be in the best interests of each
Fund and its respective shareholders, for Victory Capital and, as applicable,
the subadvisers, to provide investment advisory, investment subadvisory, and
related services to the Funds, following the closing of the Transaction.
FACTORS CONSIDERED IN APPROVING THE NEW ADVISORY AGREEMENT
In connection with the Board's consideration of the New Advisory Agreement,
Victory Capital and AMCO advised the Board about a variety of matters, including
the following:
o The nature, extent, and quality of the services to be provided to the
Funds by Victory Capital Post-Transaction are expected to be of at least
the same level as the services currently provided to the Funds by AMCO.
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32 | USAA GROWTH FUND
================================================================================
o Victory Capital's stated commitment to maintaining and enhancing the
USAA member/USAA Fund shareholder experience, including creating a
dedicated USAA Fund sales and client service call center that will
provide ongoing client service and advice to existing and new USAA
members.
o Victory Capital proposes to: (1) replace the underlying indexes for
the USAA Extended Market Index Fund and USAA S&P 500 Index Fund with
indexes designed to provide shareholders with comparable exposure and
investment outcomes; (2) change the USAA Extended Market Index Fund's
and USAA S&P 500 Index Fund's investment objectives and strategies in
light of the changes to their underlying indexes; and (3) change the
name of the USAA S&P 500 Index Fund to the USAA 500 Index Fund.
o Victory Capital does not propose changes to the investment
objective(s) of any other Funds. Although the investment processes used
by Victory Capital's portfolio managers may differ from those used by
AMCO's portfolio managers or, if applicable, any subadviser's portfolio
managers, such differences are not currently expected to result in
changes to the principal investment strategies or principal investment
risks of the Funds.
o The New Advisory Agreement does not change any Fund's advisory fee
rate or the computation method for calculating such fees (except that
Victory Capital, subject to Board approval, may in the future use a
single designated share class to calculate the performance adjustment).
For at least two years after the Transaction closes, Victory Capital has
agreed to waive fees and/or reimburse expenses so that each Fund's
annual expense ratio (excluding certain customary items) does not exceed
the levels reflected in each Fund's most recent audited financial
statements at the time the Transaction closes (or the levels of AMCO's
then-current expense caps, if applicable), excluding the impact of any
performance adjustment to the Fund's advisory fee.
================================================================================
ADVISORY AGREEMENT(S) | 33
================================================================================
o The portfolio managers at AMCO that manage the Fixed Income Funds(1) as
well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be advised
by Victory Capital through its Victory Solutions platform, Victory
Capital proposes that the same subadvisers be retained Post-Transaction,
although Victory Capital may change the allocation to a particular
subadviser Post-Transaction. No changes are expected to the portfolio
managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's
(1)The Fixed Income Funds include the following Funds: California Bond Fund,
Government Securities Fund, High Income Fund, Income Fund, Intermediate-Term
Bond Fund, Tax Exempt Intermediate-Term Fund, Tax Exempt Long-Term Fund, New
York Bond Fund, Short-Term Bond Fund, Tax Exempt Short- Term Fund, Ultra
Short-Term Bond Fund, Virginia Bond Fund, Money Market Fund, Tax Exempt Money
Market Fund and Treasury Money Market Trust.
(2)The Cornerstone Funds include the following Funds: Cornerstone Aggressive
Fund, Cornerstone Conservative Fund, Cornerstone Equity Fund, Cornerstone
Moderate Fund, Cornerstone Moderately Aggressive Fund, and Cornerstone
Moderately Conservative Fund.
(3)The Target Retirement Funds include the following Funds: Target Retirement
2020 Fund, Target Retirement 2030 Fund, Target Retirement 2040 Fund, Target
Retirement 2050 Fund, Target Retirement 2060 Fund, and Target Retirement
Income Fund.
================================================================================
34 | USAA GROWTH FUND
================================================================================
businesses to Victory Capital. Victory Capital and USAA expect to enter
into a transition services agreement under which USAA will continue to
provide Victory Capital with certain services that are currently
provided by USAA to AMCO and the USAA Transfer Agent for a specified
period of time after the closing of the Transaction to assist Victory
Capital in transitioning the USAA member distribution channel and member
support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital
================================================================================
ADVISORY AGREEMENT(S) | 35
================================================================================
is capable of providing the same level of investment management services
currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund, Growth
& Income Fund, Income Stock Fund, Global Equity Income Fund, and Precious
Metals and Minerals Fund.
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36 | USAA GROWTH FUND
================================================================================
The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored and managed by
Victory Capital ("Victory Funds") with similar investment
================================================================================
ADVISORY AGREEMENT(S) | 37
================================================================================
objectives and strategies managed by the portfolio managers who would manage the
Funds. Based on information presented to the Board at the Meetings and its
discussions with Victory Capital, the Board concluded that Victory Capital is
capable of generating a level of long-term investment performance that is
appropriate in light of each Fund's investment objectives, strategies and
restrictions.
FEES TO BE PAID TO VICTORY CAPITAL AND EXPENSES OF THE FUNDS - The Board
considered that it had reviewed each Fund's existing advisory fee rate and
computation method for calculating such fees at the 2018 15(c) Meeting. The
Board considered that the New Advisory Agreement does not change any Fund's
advisory fee rate or the computation method for calculating such fees, except
that Victory Capital, subject to Board approval, may in the future use a single
designated share class to calculate the performance adjustment and apply the
resulting performance adjustment across each other class of shares of the Fund.
The Board considered that the use of a single designated class to calculate the
performance adjustment for each other class of shares of the Fund could mean
that shareholders of a class other than the class used to measure the
performance adjustment may pay a performance adjustment that is higher or lower
than if the adjustment were calculated on a class by class basis, primarily due
to the impact of differences in the fees and expenses between share classes on
performance. The Board considered that the New Advisory Agreement stipulates
that the period for measuring performance for calculating a Fund's performance
adjustment begins on the date that Victory Capital begins managing the Fund;
therefore, no performance adjustments will be made for the first twelve months
of the New Advisory Agreement, consistent with applicable regulations. The Board
also considered Victory Capital's contractual commitment under the expense
limitation agreement ("ELA") to waive fees and/or reimburse expenses for at
least two years after the closing of the Transaction, so that each Fund's annual
expense ratio (excluding acquired fund fees and expenses, any performance
adjustment to a Fund's advisory fee, interest, taxes, brokerage commissions,
other expenditures which are capitalized in accordance with generally accepted
accounting principles, and other extraordinary expenses not incurred in the
ordinary course of such Fund's business) does not exceed the levels reflected in
each Fund's most recent audited financial statements at the time the
================================================================================
38 | USAA GROWTH FUND
================================================================================
Transaction closes (or the levels of AMCO's then-current expense caps, if
applicable), excluding the impact of any performance adjustment to a Fund's
advisory fee. The Board considered that the ELA permits Victory Capital to
recoup advisory fees waived and expenses reimbursed for up to three years after
the fiscal year in which the waiver or reimbursement took place, subject to the
lesser of any operating expense limitation in effect at the time of: (1) the
original waiver or expense reimbursement; or (2) recoupment. The Board also
considered that Victory Capital and AMCO had represented to the Board that they
will use their best efforts to ensure that they and their respective affiliates
do not take any action that imposes an "unfair burden" on the Funds as a result
of the Transaction or as a result of any express or implied terms, conditions or
understandings applicable to the Change of Control Event, for so long as the
requirements of Section 15(f) of the 1940 Act apply. The Board also considered
a comparison of the proposed advisory fees to be paid by each Fund to the
advisory fees paid by funds and other accounts managed by Victory Capital deemed
to be comparable to the Fund in terms of investment objectives and strategies.
The Board considered that, with few exceptions, mostly involving weighted
average fees for separate accounts, the advisory fees to be paid by the Funds
were lower than the fees paid by these other funds and accounts. The Board
concluded that the retention of Victory Capital was unlikely to impose an unfair
burden on the Funds because, after the Transaction, none of AMCO, Victory
Capital, VCA, or any of their respective affiliates, would be entitled to
receive any compensation directly or indirectly (i) from any person in
connection with the purchase or sale of securities or other property to, from,
or on behalf of the Funds (other than ordinary fees for bona fide principal
underwriting services), or (ii) from the Funds or their shareholders for other
than bona fide investment advisory or other services. Based on its review, the
Board determined, with respect to each Fund, that Victory Capital's advisory fee
is fair and reasonable.
THE EXTENT TO WHICH VICTORY CAPITAL MAY REALIZE ECONOMIES OF SCALE AS THE FUNDS
GROW LARGER AND WHETHER FEE LEVELS REFLECT THESE ECONOMIES OF SCALE FOR THE
BENEFIT OF FUND SHAREHOLDERS - The Board considered potential or anticipated
economies of scale in relation to the services Victory Capital would provide to
each Fund. The Board considered that the New Advisory Agreement includes the
same advisory fee breakpoints for the same Funds as
================================================================================
ADVISORY AGREEMENT(S) | 39
================================================================================
the Existing Advisory Agreements. The Board also considered that Victory Capital
has contractually agreed to cap the Funds' annual operating expense ratios,
pursuant to the ELA, which will remain in effect for at least two years from the
closing of the Transaction, and may be extended. The Board also considered
Victory Capital's representation that the significant increase in its assets
under management Post-Transaction may reasonably be expected to enable the new
combined firm to reach greater economies of scale in a shorter time frame. The
Board noted that it will have the opportunity to periodically re-examine whether
a Fund or the Trust has achieved economies of scale, and the appropriateness of
investment advisory and administrative fees payable to Victory Capital, in the
future.
THE PROFITS TO BE REALIZED BY VICTORY CAPITAL AND ITS AFFILIATES FROM THEIR
RELATIONSHIP WITH THE TRUST - The Board considered the benefits Victory Capital
and its affiliates may derive from their relationship with the Funds, including
compensation to be paid to Victory Capital for the provision of certain
administrative, fund accounting and shareholder services to the Funds and
compensation to be paid to USAA Transfer Agent for the provision of transfer
agency services to the Funds. The Board considered the significant investments
Victory Capital expected to make to support and grow the USAA member channel and
the costs to integrate the USAA Fund business into Victory Capital. The Board
also considered Victory Capital's profitability report presented to the board of
trustees of the Victory Funds in connection with their most recent 15(c)
process. The Board considered Victory Capital's representation that the fully
integrated USAA Fund business, including investments to support ongoing growth,
was expected to have an overall marginally positive impact on Victory Capital's
overall financial profitability. The Board noted the difficulty of accurately
projecting profitability under the current circumstance and noted that it would
have the opportunity to give further consideration to Victory Capital's
profitability with respect to the Funds at the end of the initial two-year term
of the New Advisory Agreement.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
================================================================================
40 | USAA GROWTH FUND
================================================================================
deliver investment products and services to USAA's direct member-based channel.
The Board also considered that Victory Capital may derive reputational and other
benefits from its ability to use "USAA" and related names in connection with
operating and marketing the Funds. The Board considered that the Transaction, if
completed, would significantly increase Victory Capital's assets under
management and expand Victory Capital's investment capabilities. This increased
size and diversification could facilitate Victory Capital's continued investment
in its business and products, which Victory Capital would be able to leverage
across a broader base of assets. Victory Capital also would be able to use
trading commission credits from the Funds' transactions in securities to
"purchase" third party research and execution services to support its investment
process. Based on its review, the Board determined that any "fall-out" benefits
and other types of benefits that may accrue to Victory Capital are fair and
reasonable.
CONCLUSIONS - Based on the foregoing and other relevant considerations, at the
Meeting of the Board held on January 15, 2019, the Board, including a majority
of the Independent Trustees, acting within its business judgment, (1) concluded
that the terms of the New Advisory Agreement are fair and reasonable and that
approval of the New Advisory Agreement is in the best interests of each Fund and
its respective shareholders, (2) voted to approve the New Advisory Agreement,
and (3) voted to recommend approval of the New Advisory Agreement by
shareholders of the Funds. The Board evaluated all information available to it
on a Fund-by-Fund basis and its determinations were made separately in respect
of each Fund. The Board noted some factors may have been more or less important
with respect to any particular Fund and that no one factor was determinative of
its decisions which, instead, were premised upon the totality of factors
considered. In this connection, the Board also noted that different Board
members likely placed emphasis on different factors in reaching their individual
conclusions to vote in favor of the New Advisory Agreement and to recommend
approval of the New Advisory Agreement by shareholders of the Funds.
FACTORS CONSIDERED IN APPROVING THE NEW SUBADVISORY AGREEMENTS
In approving the New Subadvisory Agreements with each of Barrow, Hanley,
Mewhinney & Strauss, LLC, Brandes Investment Partners, L.P., ClariVest Asset
================================================================================
ADVISORY AGREEMENT(S) | 41
================================================================================
Management LLC, Epoch Investment Partners, Inc., Granahan Investment Management,
Inc., Lazard Asset Management LLC, Loomis, Sayles & Company LP, Massachusetts
Financial Services Company, Northern Trust Investments, Inc., QS Investors, LLC,
The Renaissance Group LLP and Wellington Management Company LLP (each, a
"Subadviser" and together the "Subadvisers") with respect to the applicable
Funds, the Board considered various factors, among them: (i) the nature, extent,
and quality of services to be provided to the applicable Funds by the
Subadvisers; (ii) each Subadviser's compensation and any other benefits derived
from the subadvisory relationship; (iii) comparisons, to the extent applicable,
of subadvisory fees and performance to comparable investment companies; and (iv)
the terms of each New Subadvisory Agreement. The Board's evaluation of the New
Subadvisory Agreements reflected the information provided specifically in
connection with its review of the New Subadvisory Agreements, as well as, where
relevant, information that was previously furnished to the Board in connection
with the most recent renewal of the Existing Subadvisory Agreements at the 2018
15(c) meeting and at other subsequent Board meetings in 2018. A summary of the
Board's analysis of these factors is set forth below. After full consideration
of a variety of factors, the Board, including the Independent Trustees, voted to
approve each New Subadvisory Agreement. In approving each New Subadvisory
Agreement, the Board did not identify any single factor as controlling, and each
Trustee may have attributed different weights to various factors. The
Independent Trustees reviewed the proposed approval of the New Subadvisory
Agreements in private sessions with their independent legal counsel at which no
representatives of Victory Capital or AMCO were present.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY THE
SUBADVISERS - The Board considered information provided to them regarding the
services to be provided by each Subadviser, including information presented
periodically throughout the previous year. The Board considered each
Subadviser's level of knowledge and investment style. The Board reviewed the
experience and credentials of the investment personnel who are responsible for
managing the investment of portfolio securities with respect to each applicable
Fund and each Subadviser's level of staffing. The Board also noted each
Subadviser's brokerage practices. The Board also considered
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42 | USAA GROWTH FUND
================================================================================
each Subadviser's regulatory and compliance history. The Board also took into
account each Subadviser's risk management processes. The Board noted that AMCO's
monitoring processes of each Subadviser include, and Victory Capital's expected
monitoring processes of each Subadviser would include, among others: (i) regular
telephonic meetings to discuss, among other matters, investment strategies and
to review portfolio performance; (ii) monthly portfolio compliance checklists
and quarterly compliance certifications to the Board; and (iii) due diligence
visits to each Subadviser. The Board also considered that the terms and
conditions of the New Subadvisory Agreements are substantially similar to the
terms and conditions of the Existing Subadvisory Agreements.
SUBADVISER COMPENSATION - The Board took into account the financial condition of
each Subadviser. In considering the cost of services to be provided by each
Subadviser and the profitability to that Subadviser of its relationship with the
applicable Fund, the Board noted that the fees under the New Subadvisory
Agreements will be paid by Victory Capital. The Board also relied on the ability
of AMCO to negotiate each Existing Subadvisory Agreement and the fees thereunder
at arm's length. The Board considered that the fee rate to be payable under each
New Subadvisory Agreement were proposed to be identical to the fee rate
currently payable under each corresponding Existing Subadvisory Agreement. For
the above reasons, the Board determined that the expected profitability of each
Subadviser from its relationship with the applicable Fund was not a material
factor in its deliberations with respect to the consideration of the approval of
each New Subadvisory Agreement. For similar reasons, the Board concluded that
the potential for economies of scale in each Subadviser's management of the
applicable Fund was not a material factor in considering each New Subadvisory
Agreement, although the Board noted that certain New Subadvisory Agreements
contain breakpoints in their fee schedules.
SUBADVISORY FEES AND FUND PERFORMANCE - The Board previously compared the
subadvisory fees for each applicable Fund with the fees that each Subadviser
charges comparable clients, as applicable. The Board considered that each
applicable Fund will pay a management fee to Victory Capital and that, in turn,
Victory Capital will pay a subadvisory fee to each Subadviser.
================================================================================
ADVISORY AGREEMENT(S) | 43
================================================================================
At the 2018 15(c) meeting, the Board considered, among other data, each
applicable Fund's performance over shorter and longer term periods, as compared
to each Fund's respective peer group and noted that the Board reviews at its
regularly scheduled meetings information about each Fund's performance results.
The Board considered Victory Capital's capabilities with respect to monitoring
the performance, investment style and risk-adjusted performance of each
Subadviser. The Board also noted each Subadviser's performance record for
similar accounts, as applicable.
CONCLUSIONS - The Board reached the following conclusions regarding each New
Subadvisory Agreement, among others: (i) each Subadviser is qualified to manage
the applicable Fund's assets in accordance with its investment objective and
policies; (ii) each Subadviser maintains an appropriate compliance program;
(iii) the performance of each applicable Fund is reasonable in relation to the
performance of funds with similar investment objectives and to relevant indices
in view of the Fund's investment approach and Victory Capital is expected to
appropriately monitor each Fund's performance; and (iv) each Fund's advisory
expenses are reasonable in relation to those of similar funds and to the
services to be provided by Victory Capital and each Subadviser. Based on its
conclusions, the Board determined that the approval of each New Subadvisory
Agreement with respect to each applicable Fund would be in the best interests of
the Fund and its shareholders.
================================================================================
44 | USAA GROWTH FUND
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Richard Y. Newton III
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN, State Street Bank and Trust Company
ACCOUNTING AGENT, AND P.O. Box 1713
SUB-ADMINISTRATOR Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
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) or (210) 531-8722;
(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 monthly portfolio holdings with the SEC
for the first and third quarters of each fiscal year as an exhibit to its
reports on Form N-PORT (beginning with filings after March 31, 2019).
Previously, the Fund made its complete schedule of portfolio holdings available
after the first and third fiscal quarters in regulatory filings on Form N-Q. The
Fund's Forms N-CSR, N-PORT, and N-Q are available at no charge (i) by calling
(800) 531-USAA (8722) or (210) 531-8722; (ii) at USAA.COM; and (iii) on the
SEC's website at HTTP://WWW.SEC.GOV.
================================================================================
--------------
USAA PRSRT STD
9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
--------------
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================================================================================
23420-0319 (C)2019, USAA. All rights reserved.
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA GROWTH & INCOME FUND]
================================================================================
SEMIANNUAL REPORT
USAA GROWTH & INCOME FUND
FUND SHARES (USGRX) o INSTITUTIONAL SHARES (UIGIX)
o ADVISER SHARES (USGIX)
JANUARY 31, 2019
================================================================================
Beginning on January 1, 2021, as permitted by regulations adopted by the
Securities and Exchange Commission, paper copies of the Fund's shareholder
reports like this one will no longer be sent by mail, unless you specifically
request paper copies of the reports from the Fund or from your financial
intermediary, such as a broker-dealer or bank. Instead, the reports will be made
available on usaa.com, and you will be notified by mail each time a report is
posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will
not be affected by this change and you need not take any action. You may elect
to receive shareholder reports and other communications from the Fund or your
financial intermediary electronically by notifying your financial intermediary
directly, or if you are a direct investor, by calling (800) 531-USAA (8722) or
logging on to usaa.com.
You may elect to receive all future reports in paper free of charge. You can
inform the Fund or your financial intermediary that you wish to continue
receiving paper copies of your shareholder reports by notifying your financial
intermediary directly, or if you are a direct investor, by calling (800)
531-USAA (8722) or logging on to usaa.com. Your election to receive reports in
paper will apply to all funds held with the USAA family of funds or your
financial intermediary.
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
INVESTMENT OVERVIEW 1
FINANCIAL INFORMATION
Portfolio of Investments 2
Notes to Portfolio of Investments 9
Financial Statements 10
Notes to Financial Statements 14
Financial Highlights 30
EXPENSE EXAMPLE 33
ADVISORY AGREEMENT(S) 35
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.
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 tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. 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.
(C)2019, USAA. All rights reserved.
================================================================================
================================================================================
INVESTMENT OVERVIEW
--------------------------------------------------------------------------------
o TOP 10 HOLDINGS* - 1/31/19 o
(% of Net Assets)
Microsoft Corp. ........................................................... 2.6%
Norwegian Cruise Line Holdings Ltd. ....................................... 2.4%
Canadian Pacific Railway Ltd. ............................................. 2.2%
CME Group, Inc. ........................................................... 1.8%
UnitedHealth Group, Inc. .................................................. 1.8%
Amazon.com, Inc. .......................................................... 1.7%
MGM Resorts International ................................................. 1.7%
Broadcom, Inc. ............................................................ 1.5%
Visa, Inc. "A" ............................................................ 1.5%
Royal Caribbean Cruises Ltd. .............................................. 1.4%
o SECTOR ALLOCATION* - 1/31/19 o
(% of Net Assets)
[PIE CHART OF SECTOR ALLOCATION]
FINANCIAL 18.9%
CONSUMER, CYCLICAL 17.5%
INDUSTRIAL 14.8%
TECHNOLOGY 14.0%
CONSUMER, NON-CYCLICAL 12.5%
ENERGY 7.7%
COMMUNICATIONS 6.8%
BASIC MATERIALS 3.2%
UTILITIES 1.2%
[END CHART]
*Does not include money market instruments and short-term investments purchased
with cash collateral from securities loaned.
Percentages are of the net assets of the Fund and may not equal 100%.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
Refer to the Portfolio of Investments for a complete list of securities.
================================================================================
INVESTMENT OVERVIEW | 1
================================================================================
PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
EQUITY SECURITIES (96.6%)
COMMON STOCKS (96.6%)
BASIC MATERIALS (3.2%)
----------------------
CHEMICALS (3.2%)
67,800 Air Products & Chemicals, Inc. $ 11,145
----------
155,903 DowDuPont, Inc. 8,389
68,000 Linde plc 11,085
68,900 LyondellBasell Industries N.V. "A" 5,992
631,000 Mosaic Co. 20,369
----------
Total Basic Materials 56,980
----------
COMMUNICATIONS (6.8%)
---------------------
INTERNET (3.8%)
18,916 Alphabet, Inc. "A"(a) 21,298
17,400 Amazon.com, Inc.(a) 29,906
96,000 Facebook, Inc. "A"(a) 16,002
----------
67,206
----------
MEDIA (2.2%)
499,964 Comcast Corp. "A" 18,284
193,200 Walt Disney Co. 21,545
----------
39,829
----------
TELECOMMUNICATIONS (0.8%)
200,000 Juniper Networks, Inc. 5,188
142,500 T-Mobile US, Inc.(a) 9,921
----------
15,109
----------
Total Communications 122,144
----------
CONSUMER, CYCLICAL (17.5%)
--------------------------
AIRLINES (2.1%)
143,000 Alaska Air Group, Inc. 9,145
77,566 Delta Air Lines, Inc. 3,834
293,000 United Continental Holdings, Inc.(a) 25,570
----------
38,549
----------
APPAREL (0.9%)
192,000 NIKE, Inc. "B" 15,721
----------
================================================================================
2 | USAA GROWTH & INCOME FUND
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
AUTO MANUFACTURERS (0.7%)
42,000 Tesla, Inc.(a) $ 12,895
----------
ENTERTAINMENT (0.2%)
23,000 Vail Resorts, Inc. 4,330
----------
FOOD SERVICE (0.4%)
200,677 Aramark 6,612
----------
HOME BUILDERS (1.1%)
412,705 Lennar Corp. "A" 19,571
----------
LEISURE TIME (3.8%)
823,622 Norwegian Cruise Line Holdings Ltd.(a) 42,359
215,533 Royal Caribbean Cruises Ltd. 25,875
----------
68,234
----------
LODGING (3.2%)
91,700 Hilton Worldwide Holdings, Inc. 6,830
341,610 Las Vegas Sands Corp. 19,936
1,013,831 MGM Resorts International 29,847
----------
56,613
----------
RETAIL (5.1%)
60,797 Advance Auto Parts, Inc. 9,679
35,100 Chipotle Mexican Grill, Inc.(a) 18,589
112,183 Dollar General Corp. 12,949
115,890 Home Depot, Inc. 21,269
108,166 Lowe's Companies, Inc. 10,401
260,000 Nordstrom, Inc. 12,067
65,000 Tiffany & Co. 5,768
----------
90,722
----------
Total Consumer, Cyclical 313,247
----------
CONSUMER, NON-CYCLICAL (12.5%)
------------------------------
AGRICULTURE (0.4%)
55,581 Altria Group, Inc. 2,743
57,174 Philip Morris International, Inc. 4,386
----------
7,129
----------
BEVERAGES (0.5%)
205,669 Coca-Cola European Partners plc 9,786
----------
COMMERCIAL SERVICES (0.9%)
22,600 AMERCO 8,196
271,932 Nielsen Holdings plc 6,983
----------
15,179
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 3
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
COSMETICS/PERSONAL CARE (0.4%)
120,000 Colgate-Palmolive Co. $ 7,762
----------
FOOD (1.0%)
162,500 Kraft Heinz Co. 7,810
382,000 Kroger Co. 10,822
----------
18,632
----------
HEALTHCARE PRODUCTS (2.6%)
45,000 Align Technology, Inc.(a) 11,203
90,000 Danaher Corp. 9,983
82,000 Edwards Lifesciences Corp.(a) 13,974
133,300 Medtronic plc 11,782
----------
46,942
----------
HEALTHCARE-SERVICES (2.7%)
52,028 Anthem, Inc. 15,765
118,100 UnitedHealth Group, Inc. 31,910
----------
47,675
----------
PHARMACEUTICALS (4.0%)
63,265 Allergan plc 9,109
50,271 Cigna Corp. 10,045
159,599 CVS Health Corp. 10,462
95,400 Johnson & Johnson 12,696
86,125 Merck & Co., Inc. 6,410
286,882 Pfizer, Inc. 12,178
155,626 Sanofi ADR 6,762
186,157 Teva Pharmaceutical Industries Ltd. ADR(a) 3,695
----------
71,357
----------
Total Consumer, Non-cyclical 224,462
----------
ENERGY (7.7%)
-------------
OIL & GAS (7.2%)
380,000 Antero Resources Corp.(a) 3,823
255,100 BP plc ADR 10,490
250,000 Cabot Oil & Gas Corp. 6,238
87,400 Chevron Corp. 10,020
101,540 Cimarex Energy Co. 7,650
199,800 ConocoPhillips 13,524
195,000 EOG Resources, Inc. 19,344
193,357 Hess Corp. 10,441
924,313 Kosmos Energy Ltd.(a) 4,742
99,400 Occidental Petroleum Corp. 6,638
283,050 Parsley Energy, Inc. "A"(a) 5,259
100,900 Phillips 66 9,627
================================================================================
4 | USAA GROWTH & INCOME FUND
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
500,000 Transocean Ltd.(a),(b) $ 4,285
102,852 Valero Energy Corp. 9,033
312,105 Vermilion Energy, Inc. 7,662
----------
128,776
----------
OIL & GAS SERVICES (0.5%)
326,000 Halliburton Co. 10,223
----------
Total Energy 138,999
----------
FINANCIAL (18.9%)
-----------------
BANKS (7.5%)
490,000 Bank of America Corp. 13,950
468,175 Bank of New York Mellon Corp. 24,495
200,000 Fifth Third Bancorp 5,364
128,292 J.P. Morgan Chase & Co. 13,278
1,171,700 KeyCorp 19,298
430,700 Morgan Stanley 18,219
131,264 State Street Corp. 9,307
435,316 U.S. Bancorp. 22,271
196,935 Wells Fargo & Co. 9,632
----------
135,814
----------
DIVERSIFIED FINANCIAL SERVICES (7.6%)
130,900 American Express Co. 13,443
83,122 Ameriprise Financial, Inc. 10,523
397,900 Charles Schwab Corp. 18,610
177,070 CME Group, Inc. 32,276
198,009 E*TRADE Financial Corp. 9,239
370,876 Jefferies Financial Group, Inc. 7,718
460,320 Navient Corp. 5,248
1,173,520 SLM Corp.(a) 12,568
195,960 Visa, Inc. "A" 26,457
----------
136,082
----------
INSURANCE (2.4%)
100,000 Allstate Corp. 8,787
123,917 American International Group, Inc. 5,357
54,700 Berkshire Hathaway, Inc. "B"(a) 11,243
157,500 Fidelity National Financial, Inc. 5,695
70,459 Willis Towers Watson plc 11,470
----------
42,552
----------
REITS (1.0%)
161,262 Liberty Property Trust 7,602
328,223 MGM Growth Properties, LLC "A" 10,175
----------
17,777
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 5
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
SAVINGS & LOANS (0.4%)
651,400 New York Community Bancorp, Inc. $ 7,569
----------
Total Financial 339,794
----------
INDUSTRIAL (14.8%)
------------------
AEROSPACE/DEFENSE (3.3%)
65,360 Boeing Co. 25,204
298,400 Spirit AeroSystems Holdings, Inc. "A" 24,886
84,405 United Technologies Corp. 9,966
----------
60,056
----------
BUILDING MATERIALS (1.9%)
228,703 Johnson Controls International plc 7,723
132,496 Owens Corning 6,942
196,500 Vulcan Materials Co. 19,974
----------
34,639
----------
ELECTRONICS (0.6%)
69,720 Honeywell International, Inc. 10,014
----------
ENVIRONMENTAL CONTROL (0.8%)
186,700 Republic Services, Inc. 14,322
----------
HAND/MACHINE TOOLS (0.6%)
79,275 Stanley Black & Decker, Inc. 10,023
----------
MACHINERY-DIVERSIFIED (1.3%)
105,000 Deere & Co. 17,220
92,898 Wabtec Corp.(b) 6,425
----------
23,645
----------
MISCELLANEOUS MANUFACTURERS (1.4%)
1,144,274 General Electric Co. 11,626
100,000 Illinois Tool Works, Inc. 13,731
----------
25,357
----------
TRANSPORTATION (4.9%)
191,500 Canadian Pacific Railway Ltd. 39,238
300,000 CSX Corp. 19,710
62,055 FedEx Corp. 11,019
162,000 Kansas City Southern 17,132
----------
87,099
----------
Total Industrial 265,155
----------
================================================================================
6 | USAA GROWTH & INCOME FUND
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
TECHNOLOGY (14.0%)
------------------
COMPUTERS (2.4%)
85,950 Apple, Inc. $ 14,306
353,455 Hewlett Packard Enterprise Co. 5,510
1,013,000 HP, Inc. 22,317
----------
42,133
----------
SEMICONDUCTORS (6.9%)
329,000 Applied Materials, Inc. 12,857
101,543 Broadcom, Inc. 27,239
358,489 Marvell Technology Group Ltd. 6,643
200,000 Maxim Integrated Products, Inc. 10,854
106,401 Microchip Technology, Inc.(b) 8,551
25,000 NVIDIA Corp. 3,594
248,300 NXP Semiconductors N.V. 21,610
137,305 QUALCOMM, Inc. 6,799
170,300 Texas Instruments, Inc. 17,146
82,000 Xilinx, Inc. 9,179
----------
124,472
----------
SOFTWARE (4.7%)
61,000 Adobe, Inc.(a) 15,117
453,433 Microsoft Corp. 47,352
430,265 Oracle Corp. 21,612
----------
84,081
----------
Total Technology 250,686
----------
UTILITIES (1.2%)
----------------
ELECTRIC (1.2%)
153,914 Dominion Energy, Inc. 10,811
238,466 Exelon Corp. 11,389
----------
Total Utilities 22,200
----------
Total Common Stocks (cost: $1,285,499) 1,733,667
----------
Total Equity Securities (cost: $1,285,499) 1,733,667
----------
MONEY MARKET INSTRUMENTS (3.6%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (3.6%)
65,286,189 State Street Institutional Treasury Money Market Fund
Premier Class, 2.31%(c) (cost: $65,286) 65,286
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 7
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (0.4%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.4%)
2,016,462 Goldman Sachs Financial Square Government Fund
Institutional Class, 2.34%(c) $ 2,016
4,296,792 HSBC U.S. Government Money Market Fund Class I, 2.38%(c) 4,297
----------
Total Short-Term Investments Purchased with Cash Collateral
from Securities Loaned (cost: $6,313) 6,313
----------
TOTAL INVESTMENTS (COST: $1,357,098) $1,805,266
==========
-----------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
-----------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-----------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $1,733,667 $- $- $1,733,667
Money Market Instruments:
Government & U.S. Treasury
Money Market Funds 65,286 - - 65,286
Short-Term Investments Purchased
with Cash Collateral from
Securities Loaned:
Government & U.S. Treasury
Money Market Funds 6,313 - - 6,313
-----------------------------------------------------------------------------------------
Total $1,805,266 $- $- $1,805,266
-----------------------------------------------------------------------------------------
Refer to the Portfolio of Investments for additional industry, country, or
geographic region classifications.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
At January 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
8 | USAA GROWTH & INCOME FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A 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 6.4% of net assets at January 31,
2019.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
ADR American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S.
dollars.
REITS Real estate investment trusts - Dividend distributions from
REITS may be recorded as income and later characterized by the REIT at
the end of the fiscal year as capital gains or a return of capital.
Thus, the Fund will estimate the components of distributions from
these securities and revise when actual distributions are known.
o SPECIFIC NOTES
(a) Non-income-producing security.
(b) The security, or a portion thereof, was out on loan as of January 31,
2019.
(c) Rate represents the money market fund annualized seven-day yield at
January 31, 2019.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 9
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (including securities on
loan of $6,144) (cost of $1,357,098) $1,805,266
Receivables:
Capital shares sold 312
Dividends and interest 1,214
Securities sold 1,665
Other 1
----------
Total assets 1,808,458
----------
LIABILITIES
Payables:
Upon return of securities loaned 6,313
Securities purchased 6,609
Capital shares redeemed 565
Accrued management fees 875
Accrued transfer agent's fees 34
Other accrued expenses and payables 162
----------
Total liabilities 14,558
----------
Net assets applicable to capital shares outstanding $1,793,900
==========
NET ASSETS CONSIST OF:
Paid-in capital $1,331,250
Distributable earnings 462,650
----------
Net assets applicable to capital shares outstanding $1,793,900
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $1,630,714/72,265 capital shares
outstanding, no par value) $ 22.57
==========
Institutional Shares (net assets of $153,762/6,820 capital shares
outstanding, no par value) $ 22.55
==========
Adviser Shares (net assets of $9,424/419 capital shares
outstanding, no par value) $ 22.49
==========
See accompanying notes to financial statements.
================================================================================
10 | USAA GROWTH & INCOME FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $96) $ 16,644
Interest 703
Securities lending (net) 43
----------
Total income 17,390
----------
EXPENSES
Management fees 5,532
Administration and servicing fees:
Fund Shares 1,261
Institutional Shares 76
Adviser Shares 8
Transfer agent's fees:
Fund Shares 855
Institutional Shares 76
Adviser Shares 1
Distribution and service fees (Note 7):
Adviser Shares 13
Custody and accounting fees:
Fund Shares 102
Institutional Shares 11
Adviser Shares 1
Postage:
Fund Shares 40
Shareholder reporting fees:
Fund Shares 25
Trustees' fees 17
Registration fees:
Fund Shares 20
Institutional Shares 10
Adviser Shares 9
================================================================================
FINANCIAL STATEMENTS | 11
================================================================================
Professional fees $ 53
Other 16
----------
Total expenses 8,126
----------
Expenses reimbursed:
Adviser Shares (4)
----------
Net expenses 8,122
----------
NET INVESTMENT INCOME 9,268
----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain on:
Investments 46,273
Foreign currency transactions 2
Change in net unrealized appreciation/(depreciation) (140,190)
----------
Net realized and unrealized loss (93,915)
----------
Decrease in net assets resulting from operations $ (84,647)
==========
See accompanying notes to financial statements.
================================================================================
12 | USAA GROWTH & INCOME FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited), and year ended
July 31, 2018
---------------------------------------------------------------------------------------------------
1/31/2019 7/31/2018
---------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 9,268 $ 14,939
Net realized gain on investments 46,273 153,769
Net realized gain on foreign currency transactions 2 4
Change in net unrealized appreciation/(depreciation) of:
Investments (140,190) 66,344
Foreign currency translations - (4)
-----------------------------
Increase (decrease) in net assets resulting from operations (84,647) 235,052
-----------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (158,045) (84,365)
Institutional Shares (14,369) (7,455)
Adviser Shares (978) (503)
-----------------------------
Distributions to shareholders (173,392) (92,323)
-----------------------------
NET INCREASE IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 6)
Fund Shares 110,253 20,836
Institutional Shares 15,351 7,556
Adviser Shares 70 71
-----------------------------
Total net increase in net assets from
capital share transactions 125,674 28,463
-----------------------------
Net increase (decrease) in net assets (132,365) 171,192
NET ASSETS
Beginning of period 1,926,265 1,755,073
-----------------------------
End of period $1,793,900 $1,926,265
=============================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 13
================================================================================
NOTES TO FINANCIAL STATEMENTS
January 31, 2019 (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 47 separate funds. The
USAA Growth & Income Fund (the Fund) qualifies as a registered investment
company under Accounting Standards Codification Topic 946. The information
presented in this semiannual report pertains only to the Fund, which is
classified as diversified under the 1940 Act. The Fund's investment objectives
are to seek capital growth and, secondarily, current income.
The Fund consists of three classes of shares: Growth & Income Fund Shares (Fund
Shares), Growth & Income Fund Institutional Shares (Institutional Shares), and
Growth & Income Fund Adviser Shares (Adviser Shares). Each class of shares has
equal rights to assets and earnings, except that each class bears certain
class-related expenses specific to the particular class. These expenses include
administration and servicing fees, transfer agent fees, postage, shareholder
reporting fees, distribution and service (12b-1) fees, and certain registration
and custodian fees. Expenses not attributable to a specific class, income, and
realized gains or losses on investments are allocated to each class of shares
based on each class' relative net assets. Each class has exclusive voting rights
on matters related solely to that class and separate voting rights on matters
that relate to all classes. The Institutional Shares are 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 are available
================================================================================
14 | USAA GROWTH & INCOME FUND
================================================================================
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). The
Adviser Shares permit investors to purchase shares through financial
intermediaries, including banks, broker-dealers, insurance companies, investment
advisers, plan sponsors, and financial professionals that provide various
administrative and distribution services.
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of USAA Asset Management Company (AMCO or Manager), the investment
adviser to the Fund, and USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services (SAS), the transfer agent to the Fund, announced that AMCO and
SAS would be acquired by Victory Capital Holdings, Inc. (Victory), a global
investment management firm headquartered in Cleveland, Ohio (the Transaction).
The closing of the Transaction is expected to be completed during the second
quarter of 2019, pending satisfaction of certain closing conditions and
approvals, including certain approvals of the Fund's Board of Trustees and of
the Fund's shareholders at a special shareholder meeting to be held on April 18,
2019. The Transaction is not expected to result in any material changes to the
Fund's investment objectives and principal investment strategies. In connection
with the Transaction, Victory proposes to replace portfolio managers employed by
AMCO that currently manage all or a portion of the Fund with portfolio managers
from one or more investment teams employed by Victory.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Valuation and Liquidity 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.
The Fund utilizes 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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 15
================================================================================
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 exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange or
the 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. Securities traded primarily on foreign securities exchanges or
markets are valued at the last quoted sale price, or the most recently
determined official closing price calculated according to local market
convention, available at the time the Fund is valued. If no last sale
or official closing price is reported or available, the average of the
bid and ask prices generally is used. Actively traded equity securities
listed on a domestic exchange generally are categorized in Level 1 of
the fair value hierarchy. Certain preferred and equity securities traded
in inactive markets generally are categorized in Level 2 of the fair
value hierarchy.
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 many
cases, events affecting the values of foreign securities that occur
between the time of their last quoted sale or official closing price and
the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not need to be reflected in the value of the Fund's
foreign securities. However, the Manager and the Fund's subadviser(s)
will monitor for events that would materially affect the value of the
Fund's foreign securities. The Fund's subadviser(s) have agreed to
notify the Manager of significant events they identify 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 Committee will consider
such available information that it deems relevant and
================================================================================
16 | USAA GROWTH & INCOME FUND
================================================================================
will determine a fair value for the affected foreign securities in
accordance with valuation procedures. In addition, information from an
external vendor or other sources may be used to adjust the foreign
market closing prices of foreign equity securities to reflect what the
Committee believes to be the fair value of the securities as of the
close of the NYSE. Fair valuation of affected foreign equity securities
may occur frequently based on an assessment that events which occur on a
fairly regular basis (such as U.S. market movements) are significant.
Such securities are categorized in Level 2 of the fair value hierarchy.
3. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value hierarchy.
4. Short-term debt securities with original or remaining maturities of
60 days or less may be valued at amortized cost, provided that amortized
cost represents the fair value of such securities.
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 ask prices or
the last sales price to value a security when, in the Service's
judgment, these prices are readily available and are representative of
the security's market value. For many securities, such prices are not
readily available. The Service generally prices those securities based
on methods which 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.
Generally, debt securities are categorized in Level 2 of the fair value
hierarchy; however, to the extent the valuations include significant
unobservable inputs, the securities would be categorized in Level 3.
6. Repurchase agreements are valued at cost.
7. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has
================================================================================
NOTES TO FINANCIAL STATEMENTS | 17
================================================================================
been recognized in relation to a security or class of securities, the
securities are valued in good faith by the Committee in accordance with
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, other pricing services, 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, evaluation of
credit quality, 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 indexes.
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.
================================================================================
18 | USAA GROWTH & INCOME FUND
================================================================================
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risks associated with investing in those securities.
C. INVESTMENTS IN SECURITIES - Securities transactions are accounted for
as of the date the securities are purchased or sold (trade date). Gains or
losses from sales of investment securities are computed on the identified
cost basis. Dividend income, less foreign taxes, if any, is recorded on the
ex-dividend date. If the ex-dividend date has passed, certain dividends
from foreign securities are recorded upon notification. Interest income is
recorded daily on the accrual basis. Premiums and discounts on short-term
securities are amortized on a straight-line basis over the life of the
respective securities.
D. FEDERAL TAXES - The Fund's policy is to comply with the requirements of
the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its taxable
income and net capital gains, if any, to its shareholders. Therefore, no
federal income tax provision is required.
For the six-month period ended January 31, 2019, 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 the Fund's tax basis to determine if
adjustments to this conclusion are necessary. The statute of limitations on
the Fund's tax return filings generally remain open for the three preceding
fiscal reporting year ends and remain subject to examination by the Internal
Revenue Service and state taxing authorities.
E. FOREIGN TAXATION - Foreign income and capital gains on some foreign
securities may be subject to foreign taxes, which are reflected as a
reduction to such income and realized gains. The Fund records a liability
based on unrealized gains to provide for potential foreign taxes payable
upon the sale of these securities. Foreign taxes have been provided for in
accordance with the Fund's understanding of the applicable countries'
prevailing tax rules and rates.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 19
================================================================================
F. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the
exchange rate obtained from an independent pricing service on the
respective dates of such transactions.
2. Market value of securities, other assets, and liabilities at the
exchange rate obtained from an independent pricing service on a daily
basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the amounts received. At
the end of the Fund's fiscal year, net realized foreign currency
gains/losses are reclassified from accumulated net realized gains/losses to
accumulated undistributed net investment income on the Statement of Assets
and Liabilities, as such amounts are treated as ordinary income/loss for
federal income tax purposes. Net unrealized foreign currency exchange
gains/losses arise from changes in the value of assets and liabilities,
other than investments in securities, resulting from changes in the exchange
rate.
G. EXPENSES PAID INDIRECTLY - A portion of the brokerage commissions that
the Fund pays may be recaptured as a credit that is tracked and used by the
custodian to directly reduce expenses paid by the Fund. Effective September
30, 2018, the commission recapture program ended. For the six-month period
ended January 31, 2019, the Fund did not receive any brokerage commission
recapture credits.
================================================================================
20 | USAA GROWTH & INCOME FUND
================================================================================
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, along with other funds of the Trust and USAA ETF Trust
(together, the Trusts), 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 provide temporary or emergency
cash needs, including redemption requests that might otherwise require the
untimely disposition of securities. Subject to availability (including usage of
the facility by other funds of the Trusts), the Fund may borrow from CAPCO an
amount up to 5% of the Fund's total assets at an interest rate based on the
London Interbank Offered Rate (LIBOR), plus 100.0 basis points.
The Trusts are also assessed facility fees by CAPCO in the amount of 14.0 basis
points of the amount of the committed loan agreement. Prior to September 30,
2018, the maximum annual facility fee was 13.0 basis points of the amount of the
committed loan agreement. The facility fees are allocated among the funds of the
Trusts based on their respective average daily net assets for the period.
The Trusts may request an optional increase of the committed loan agreement from
$500 million up to $750 million. If the Trusts increase the committed loan
agreement, the assessed facility fee on the amount of the additional commitment
will be 15.0 basis points.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 21
================================================================================
For the six-month period ended January 31, 2019, the Fund paid CAPCO facility
fees of $7,000, which represents 2.2% of the total fees paid to CAPCO by the
funds of the Trusts. The Fund had no borrowings under this agreement during the
six-month period ended January 31, 2019.
(3) DISTRIBUTIONS
The tax basis of distributions and any accumulated undistributed net investment
income will be determined as of the Fund's tax year-end of July 31, 2019, in
accordance with applicable federal tax law.
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are made
annually in the succeeding fiscal year or as otherwise required to avoid the
payment of federal taxes.
At July 31, 2018, the Fund had no capital loss carryforwards, for federal income
tax purposes.
As of January 31, 2019, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as the cost reported
in the financial statements. The net unrealized appreciation/(depreciation) on
investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
FUND APPRECIATION DEPRECIATION (DEPRECIATION)
------------------------------------------------------------------------------------
USAA Growth &
Income Fund $518,255,000 $(70,087,000) $448,168,000
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended January 31, 2019, were
$139,491,000 and $164,442,000, respectively.
(5) SECURITIES LENDING
The Fund, through a securities lending agreement with Citibank, N.A.
(Citibank), may lend its securities to qualified financial institutions, such as
certain broker-dealers, to earn additional income, net of income retained by
================================================================================
22 | USAA GROWTH & INCOME FUND
================================================================================
Citibank. The borrowers are required to secure their loans continuously with
collateral in an amount at least equal to 102% of the fair value of domestic
securities and foreign government securities loaned and 105% of the fair value
of foreign securities and all other securities loaned. Collateral may be cash,
U.S. government securities, or other securities as permitted by SEC guidelines.
Cash collateral may be invested in high-quality short-term investments.
Collateral requirements are determined daily based on the value of the Fund's
securities on loan as of the end of the prior business day. Loans are terminable
upon demand and the borrower must return the loaned securities within the lesser
of one standard settlement period or five business days. Risks relating to
securities-lending transactions include that the borrower may not provide
additional collateral when required or return the securities when due, and that
the value of the short-term investments will be less than the amount of cash
collateral required to be returned to the borrower. The Fund's agreement with
Citibank does not include master netting provisions. Non-cash collateral
received by the Fund may not be sold or re-pledged except to satisfy borrower
default. Cash collateral is listed in the Fund's Portfolio of Investments and
Financial Statements while non-cash collateral is not included.
At January 31, 2019, the Fund's value of outstanding securities on loan and the
value of collateral are as follows:
VALUE OF SECURITIES
ON LOAN NON-CASH COLLATERAL CASH COLLATERAL
------------------------------------------------------------------------------------
$6,144,000 $- $6,313,000
(6) CAPITAL SHARE TRANSACTIONS
At January 31, 2019, there were an unlimited number of shares of capital stock
at no par value authorized for the Fund.
Capital share transactions for the Institutional Shares resulted from purchases
and sales by the affiliated USAA fund-of-funds as well as other persons or
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
legal entities that the Fund may approve from time to time. Capital share
transactions for all classes were as follows, in thousands:
SIX-MONTH
PERIOD ENDED YEAR ENDED
JANUARY 31, 2019 JULY 31, 2018
------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------
FUND SHARES:
Shares sold 1,979 $ 48,026 4,764 $ 120,587
Shares issued from
reinvested dividends 7,121 155,761 3,327 83,086
Shares redeemed (3,896) (93,534) (7,236) (182,837)
----------------------------------------------------
Net increase from capital
share transactions 5,204 $110,253 855 $ 20,836
====================================================
INSTITUTIONAL SHARES:
Shares sold 359 $ 8,275 451 $ 11,224
Shares issued from
reinvested dividends 657 14,365 299 7,455
Shares redeemed (278) (7,289) (441) (11,123)
----------------------------------------------------
Net increase from capital
share transactions 738 $ 15,351 309 $ 7,556
====================================================
ADVISER SHARES:
Shares sold 3 $ 83 4 $ 105
Shares issued from
reinvested dividends 2 35 1 17
Shares redeemed (2) (48) (2) (51)
----------------------------------------------------
Net increase from capital
share transactions 3 $ 70 3 $ 71
====================================================
(7) TRANSACTIONS WITH MANAGER
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 the Fund's assets, subject to the
authority of and supervision by the Board. The Manager 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 all or a portion of the
Fund's assets.
================================================================================
24 | USAA GROWTH & INCOME FUND
================================================================================
The Manager monitors each subadviser's performance through quantitative and
qualitative analysis and periodically reports to the Board as to whether each
subadviser's agreement should be renewed, terminated, or modified. The Manager
is also responsible for determining the asset allocation for the subadviser(s).
The allocation for each subadviser could range from 0% to 100% of the Fund's
assets, and the Manager could change the allocations without shareholder
approval.
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee is accrued daily and paid monthly at
an annualized rate of 0.60% of the Fund's average daily net assets.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Multi-Cap Core Funds Index. The Lipper Multi-Cap Core
Funds Index tracks the total return performance of funds within the Lipper
Multi-Cap Core Funds category.
For the Fund Shares, Institutional Shares, and Adviser Shares, the performance
period 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
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
----------------------------------------------------------------------------
+/- 100 to 400 +/- 4
+/- 401 to 700 +/- 5
+/- 701 and greater +/- 6
(1)Based on the difference between average annual performance of the relevant
share class of the Fund and its relevant Lipper index, rounded to the nearest
basis point. Average daily net assets of the share class are calculated over
a rolling 36-month period.
Each class' annual performance adjustment rate is multiplied by the average
daily net assets of each respective class over the entire performance period,
which is then multiplied by a fraction, the numerator of which is the number of
days in the month and the denominator of which is 365 (366 in leap years). The
resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper Multi-Cap Core Funds Index over that period, even if the
class had overall negative returns during the performance period.
For the six-month period ended January 31, 2019, the Fund incurred management
fees, paid or payable to the Manager, of $5,532,000. The Fund Shares,
Institutional Shares, and Adviser Shares did not incur any performance
adjustment.
SUBADVISORY ARRANGEMENT(S) - The Manager entered into an Investment Subadvisory
Agreement with Barrow, Hanley, Mewhinney & Strauss, LLC (BHMS), under which BHMS
directs the investment and reinvestment of a portion of the Fund's assets (as
allocated from time to time by the Manager). These arrangements provide for
monthly fees that are paid by the Manager.
The Manager (not the Fund) pays BHMS a subadvisory fee based on the aggregate
net assets that BHMS manages in the USAA Value Fund and the USAA Growth & Income
Fund combined, in an annual amount of 0.75% on the first $15 million of assets,
0.55% on assets over $15 million and up to $25 million, 0.45% on assets over $25
million and up to $100 million, 0.35% on assets over $100 million and up to $200
million, 0.25% on assets over $200 million and up to $1 billion, and 0.15% on
assets over $1 billion. For the six-month period ended January 31, 2019, the
Manager incurred subadvisory fees with respect to the Fund, paid or payable to
BHMS, of $741,000.
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 at an annualized rate of 0.15% of average
daily net assets of the Fund Shares and Adviser Shares, and 0.10% of average
daily net assets of the Institutional Shares. For the six-month period ended
January 31, 2019, the Fund Shares, Institutional Shares, and Adviser Shares
incurred administration and servicing fees, paid or payable to the Manager, of
$1,261,000, $76,000, and $8,000, respectively.
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
================================================================================
26 | USAA GROWTH & INCOME FUND
================================================================================
the six-month period ended January 31, 2019, the Fund reimbursed the Manager
less than $500 for these compliance and legal services. These expenses are
included in the professional fees on the Fund's Statement of Operations.
EXPENSE LIMITATION - The Manager agreed, through November 30, 2019, to limit the
total annual operating expenses of the Adviser Shares to 1.15% of their average
daily net assets, excluding extraordinary expenses and before reductions of any
expenses paid indirectly, and to reimburse the Adviser Shares for all expenses
in excess of that amount. This expense limitation arrangement may not be changed
or terminated through November 30, 2019, without approval of the Board, and may
be changed or terminated by the Manager at any time after that date. Prior to
December 1, 2018, the Institutional Shares' expense limitation was 0.85% of its
average daily net assets. For the six-month period ended January 31, 2019, the
Adviser Shares incurred reimbursable expenses of $4,000.
TRANSFER AGENT'S FEES - SAS, an affiliate of the Manager, provides transfer
agent services to the Fund Shares and Adviser Shares based on an annual charge
of $23 per shareholder account plus out-of-pocket expenses. SAS pays a portion
of these fees to certain intermediaries for the administration and servicing of
accounts that are held with such intermediaries. Transfer agent's fees for
Institutional Shares are paid monthly based on a fee accrued daily at an
annualized rate of 0.10% of the Institutional Shares' average daily net assets,
plus out-of-pocket expenses. For the six-month period ended January 31, 2019,
the Fund Shares, Institutional Shares, and Adviser Shares incurred transfer
agent's fees, paid or payable to SAS, of $855,000, $76,000, and $1,000,
respectively.
DISTRIBUTION AND SERVICE (12b-1) FEES - The Fund has adopted a plan pursuant to
Rule 12b-1 under the 1940 Act with respect to the Adviser Shares. Under the
plan, the Adviser Shares pay fees to USAA Investment Management Company (IMCO),
the distributor, for distribution and shareholder services. IMCO pays all or a
portion of such fees to intermediaries that make the Adviser Shares available
for investment by their customers. The fee is accrued daily and paid monthly at
an annual rate of 0.25% of the Adviser Shares' average daily net assets. Adviser
Shares are offered and sold without imposition of an initial sales charge or a
contingent deferred sales charge.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
================================================================================
For the six-month period ended January 31, 2019, the Adviser Shares incurred
distribution and service (12b-1) fees of $13,000.
UNDERWRITING SERVICES - IMCO provides exclusive underwriting and distribution of
the Fund's shares on a continuing best-efforts basis and receives no fee or
other compensation for these services, but may receive 12b-1 fees as described
above, with respect to Adviser Shares.
(8) TRANSACTIONS WITH AFFILIATES
The Manager is indirectly wholly owned by USAA a large, diversified financial
services institution. At January 31, 2019, USAA and its affiliates owned 398,000
Adviser Shares, which represents 94.9% of the Adviser Shares outstanding and
0.5% of the Fund's total outstanding shares.
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
(9) UPCOMING REGULATORY MATTERS
In October 2016, the U.S. Securities and Exchange Commission (SEC) issued Final
Rule Release No. 33-10233, INVESTMENT COMPANY LIQUIDITY RISK MANAGEMENT PROGRAMS
(Liquidity Rule). The Liquidity Rule requires funds to establish a liquidity
risk management program and enhances disclosures regarding funds' liquidity. The
requirements to implement a liquidity risk management program and establish a
15% illiquid investment limit became effective December 1, 2018. However, in
February 2018, the SEC issued Release No. IC-33010, INVESTMENT COMPANY LIQUIDITY
RISK MANAGEMENT PROGRAMS; COMMISSION GUIDANCE FOR IN-KIND ETFs, which delayed
certain requirements related to liquidity classification, highly liquid
investment minimums, and board approval of the liquidity risk management
programs to June 1, 2019. The Manager continues to evaluate the impact of this
rule on the Fund's financial statements and various filings.
(10) RECENTLY ADOPTED ACCOUNTING STANDARDS
In August 2018, the SEC adopted amendments to Regulation S-X for investment
companies governing the form and content of financial statements. The
amendments to Regulation S-X took effect on November 5, 2018, and
================================================================================
28 | USAA GROWTH & INCOME FUND
================================================================================
the financial statements have been modified accordingly, for the current and
prior periods.
ASU 2018-13, FAIR VALUE MEASUREMENT
-----------------------------------
In August 2018, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2018-13, Fair Value Measurement (Topic 820).
The amendments in the ASU impact disclosure requirements for fair value
measurement. ASU 2018-13 is effective for fiscal years beginning after December
15, 2019. Early adoption is permitted and can include the entire standard or
certain provisions that exclude or amend disclosures. Management has elected to
early adopt ASU 2018-13 effective with the current reporting period. The
adoption of ASU 2018-13 guidance is limited to changes in the Fund's notes to
financial statement disclosures regarding valuation method, fair value, and
transfers between levels of the fair value hierarchy.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
--------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
--------------------------------------------------------------------------------
Net asset value at
beginning of period $ 26.19 $ 24.25 $ 20.39 $ 22.00 $ 22.63 $ 19.39
--------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .12 .19 .21 .15 .17 .21
Net realized and
unrealized gain (loss) (1.36) 3.03 3.94 (.51) 2.14 3.24
--------------------------------------------------------------------------------
Total from investment
operations (1.24) 3.22 4.15 (.36) 2.31 3.45
--------------------------------------------------------------------------------
Less distributions from:
Net investment income (.12) (.18) (.22) (.14) (.18) (.21)
Realized capital gains (2.26) (1.10) (.07) (1.11) (2.76) -
--------------------------------------------------------------------------------
Total distributions (2.38) (1.28) (.29) (1.25) (2.94) (.21)
--------------------------------------------------------------------------------
Net asset value at
end of period $ 22.57 $ 26.19 $ 24.25 $ 20.39 $ 22.00 $ 22.63
================================================================================
Total return (%)* (4.39) 13.59 20.49 (1.49) 10.70 17.86
Net assets at
end of period (000) $1,630,714 $1,756,259 $1,605,220 $1,380,560 $1,583,353 $1,514,795
Ratios to average
daily net assets:**
Expenses (%)(a) .88(b) .88 .91 .95 .93 .94(c)
Net investment
income (%) 1.00(b) .80 .89 .78 .66 .97
Portfolio turnover (%) 8 23 21 22 35 61(d)
* 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 January 31, 2019, average daily net assets
were $1,666,148,000.
(a) Does not include acquired fund fees, if any.
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(c) Reflects total annual operating expenses of the Fund Shares before
reductions of any expenses paid indirectly. The Fund Shares' expenses paid
indirectly decreased the expense ratio by less than 0.01%.
(d) Reflects decreased trading activity due to changes in subadviser(s).
================================================================================
30 | USAA GROWTH & INCOME FUND
================================================================================
INSTITUTIONAL SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH PERIOD
PERIOD ENDED ENDED
JANUARY 31, YEAR ENDED JULY 31, JULY 31,
------------------------------------------------------------
2019 2018 2017 2016***
------------------------------------------------------------
Net asset value at beginning of period $ 26.17 $ 24.23 $ 20.38 $ 22.10
------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .13 .20 .22 .16
Net realized and unrealized gain (loss) (1.36) 3.03 3.94 (.60)
------------------------------------------------------------
Total from investment operations (1.23) 3.23 4.16 (.44)
------------------------------------------------------------
Less distributions from:
Net investment income (.13) (.19) (.24) (.17)
Realized capital gains (2.26) (1.10) (.07) (1.11)
------------------------------------------------------------
Total distributions (2.39) (1.29) (.31) (1.28)
------------------------------------------------------------
Net asset value at end of period $ 22.55 $ 26.17 $ 24.23 $ 20.38
============================================================
Total return (%)* (4.37) 13.66 20.54 (1.87)
Net assets at end of period (000) $153,762 $159,148 $139,866 $177,512
Ratios to average daily net assets:**
Expenses (%)(a) .84(b),(c) .84 .85 .85(b)
Expenses, excluding reimbursements (%)(a) .84(b) .84 .85 .87(b)
Net investment income (%) 1.05(b) .85 .95 .83(b)
Portfolio turnover (%) 8 23 21 22
* 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 January 31, 2019, average daily net assets
were $150,891,000.
*** Institutional Shares commenced operations on August 7, 2015.
(a) Does not include acquired fund fees, if any.
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(c) Prior to December 1, 2018, the Manager has voluntarily agreed to limit the
annual expenses of the Institutional Shares to 0.85% of the Institutional
Shares' average daily net assets.
================================================================================
FINANCIAL HIGHLIGHTS | 31
================================================================================
ADVISER SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
----------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
----------------------------------------------------------------------------
Net asset value at
beginning of period $26.10 $ 24.17 $20.32 $21.93 $22.56 $19.34
----------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .09 .12 .15 .10 .10 .15
Net realized and
unrealized gain (loss) (1.35) 3.02 3.91 (.50) 2.14 3.23
----------------------------------------------------------------------------
Total from investment
operations (1.26) 3.14 4.06 (.40) 2.24 3.38
----------------------------------------------------------------------------
Less distributions from:
Net investment income (.09) (.11) (.14) (.10) (.11) (.16)
Realized capital gains (2.26) (1.10) (.07) (1.11) (2.76) -
----------------------------------------------------------------------------
Total distributions (2.35) (1.21) (.21) (1.21) (2.87) (.16)
----------------------------------------------------------------------------
Net asset value at
end of period $22.49 $ 26.10 $24.17 $20.32 $21.93 $22.56
============================================================================
Total return (%)* (4.50) 13.28 20.10 (1.72) 10.40 17.51
Net assets at
end of period (000) $9,424 $10,858 $9,987 $8,332 $9,098 $9,305
Ratios to average
daily net assets:**
Expenses (%)(a) 1.15(b) 1.17(c) 1.20 1.20 1.22(d) 1.22(e)
Expenses, excluding
reimbursements (%)(a) 1.22(b) 1.20 1.24 1.28 1.27 1.22(e)
Net investment
income (%) .74(b) .52 .60 .53 .37 .70
Portfolio turnover (%) 8 23 21 22 35 61(f)
* 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 January 31, 2019, average daily net assets
were $10,174,000.
(a) Does not include acquired fund fees, if any.
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(c) Prior to December 1, 2017, the Manager has voluntarily agreed to limit the
annual expenses of the Adviser Shares to 1.20% of the Adviser Shares'
average daily net assets.
(d) Prior to December 1, 2014, the Manager had voluntarily agreed to limit the
annual expenses of the Adviser Shares to 1.30% of the Adviser Shares'
average daily net assets.
(e) Reflects total annual operating expenses of the Adviser Shares before
reductions of any expenses paid indirectly. The Adviser Shares' expenses
paid indirectly decreased the expense ratio by less than 0.01%.
(f) Reflects decreased trading activity due to changes in subadviser(s).
================================================================================
32 | USAA GROWTH & INCOME FUND
================================================================================
EXPENSE EXAMPLE
January 31, 2019 (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, distribution and service
(12b-1) 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 August 1, 2018, through
January 31, 2019.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table 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 for your share
class in the "actual" 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 line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class and an assumed rate of return of
5% per year before expenses, which is not the Fund's
================================================================================
EXPENSE EXAMPLE | 33
================================================================================
actual return. The hypothetical account values and expenses may not be used to
estimate the actual ending account balance or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the
Fund and other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled "hypothetical"
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 AUGUST 1, 2018 -
AUGUST 1, 2018 JANUARY 31, 2019 JANUARY 31, 2019
--------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $ 956.10 $4.34
Hypothetical
(5% return before expenses) 1,000.00 1,020.77 4.48
INSTITUTIONAL SHARES
Actual 1,000.00 956.30 4.14
Hypothetical
(5% return before expenses) 1,000.00 1,020.97 4.28
ADVISER SHARES
Actual 1,000.00 955.00 5.67
Hypothetical
(5% return before expenses) 1,000.00 1,019.41 5.85
*Expenses are equal to the annualized expense ratio of 0.88% for Fund Shares,
0.84% for Institutional Shares, and 1.15% for Adviser Shares, which are net of
any reimbursements and expenses paid indirectly, multiplied by the average
account value over the period, multiplied by 184 days/365 days (to reflect the
one-half-year period). The Fund's actual ending account values are based on its
actual total returns of (4.39)% for Fund Shares, (4.37)% for Institutional
Shares, and (4.50)% for Adviser Shares for the six-month period of August 1,
2018, through January 31, 2019.
================================================================================
34 | USAA GROWTH & INCOME FUND
================================================================================
ADVISORY AGREEMENT(S)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with Victory Capital
Holdings, Inc. ("Victory Holdings") pursuant to which Victory Holdings would
acquire all of the outstanding stock of AMCO and USAA Transfer Agency Company
d/b/a USAA Shareholder Account Services ("USAA Transfer Agent") (the
"Transaction"). The Independent Trustees were advised that the Transaction, if
completed, would constitute
================================================================================
ADVISORY AGREEMENT(S) | 35
================================================================================
an "assignment" (as that term is defined in Section 2(a)(4) of the 1940 Act) and
result in the automatic termination of the Existing Management Agreements
("Change of Control Event"). The Independent Trustees also were advised that it
was proposed that Victory Capital, a subsidiary of Victory Holdings, would serve
as the investment adviser to each Fund after the closing of the Transaction
("Post-Transaction") and that the Board would be asked to consider approval of
the terms and conditions of the New Advisory Agreement with Victory Capital and
thereafter to submit the New Advisory Agreement to each Fund's shareholders for
approval. Because the Change of Control Event also would result in the
termination of each existing subadvisory agreement between AMCO and the
subadvisers to the Funds ("Existing Subadvisory Agreements"), the Independent
Trustees were advised that the Board would also be asked to approve the New
Subadvisory Agreements.
In anticipation of the Transaction, the Trustees met at a series of subsequent
in-person meetings on November 27-28, 2018, January 7-8, 2019, and January
14-15, 2019, which included meetings of the full Board and separate meetings of
the Independent Trustees for the purposes of considering, among other things:
whether it would be in the best interests of each Fund and its respective
shareholders to approve the New Agreements; and the anticipated impacts of the
Transaction on the Funds and their shareholders (each, a "Meeting"). During each
of these Meetings, the Board sought additional and clarifying information as it
deemed necessary or appropriate. In this connection, the Independent Trustees
worked with their independent legal counsel to prepare formal due diligence
requests (the "Diligence Requests") that were submitted to Victory Capital,
Victory Capital Advisers, Inc. ("VCA"), and the subadvisers. The Diligence
Requests sought information relevant to the Board's consideration of the New
Advisory Agreement, the New Subadvisory Agreements, distribution arrangements,
and other anticipated impacts of the Transaction on the Funds and their
shareholders. Victory Capital, VCA, and the subadvisers provided documents and
information in response to the Diligence Requests (the "Response Materials").
Following their review of the Response Materials, the Independent Trustees
submitted a supplemental due diligence request for additional and clarifying
information (the "Supplemental Diligence Request") to Victory Capital and VCA.
Victory
================================================================================
36 | USAA GROWTH & INCOME FUND
================================================================================
Capital and VCA provided further information in response to the Supplemental
Diligence Request, which the Board reviewed. Senior management representatives
of Victory Capital and/or AMCO participated in a portion of each Meeting and
addressed various questions raised by the Board. Throughout the process, the
Independent Trustees were assisted by their independent legal counsel and
counsel to the Funds, who advised them on, among other things, their duties and
obligations relating to their consideration of the New Agreements.
The Board's evaluation of the New Agreements reflected the information provided
specifically in connection with its review of the New Agreements, as well as,
where relevant, information that was previously furnished to the Board in
connection with the most recent renewal of the Existing Management Agreements
and Existing Subadvisory Agreements at an in-person meeting of the Board on
April 18, 2018 (the "2018 15(c) Meeting") and at other subsequent Board meetings
in 2018. The Board's evaluation of the New Agreements also reflected the
knowledge gained as Board members of the Funds with respect to services provided
by AMCO, its affiliates, and each subadviser to the Funds.
The Board's approvals and recommendations were based on its determination,
within its business judgment, that it would be in the best interests of each
Fund and its respective shareholders, for Victory Capital and, as applicable,
the subadvisers, to provide investment advisory, investment subadvisory, and
related services to the Funds, following the closing of the Transaction.
FACTORS CONSIDERED IN APPROVING THE NEW ADVISORY AGREEMENT
In connection with the Board's consideration of the New Advisory Agreement,
Victory Capital and AMCO advised the Board about a variety of matters, including
the following:
o The nature, extent, and quality of the services to be provided to the
Funds by Victory Capital Post-Transaction are expected to be of at least
the same level as the services currently provided to the Funds by AMCO.
================================================================================
ADVISORY AGREEMENT(S) | 37
================================================================================
o Victory Capital's stated commitment to maintaining and enhancing the
USAA member/USAA Fund shareholder experience, including creating a
dedicated USAA Fund sales and client service call center that will
provide ongoing client service and advice to existing and new USAA
members.
o Victory Capital proposes to: (1) replace the underlying indexes for
the USAA Extended Market Index Fund and USAA S&P 500 Index Fund with
indexes designed to provide shareholders with comparable exposure and
investment outcomes; (2) change the USAA Extended Market Index Fund's
and USAA S&P 500 Index Fund's investment objectives and strategies in
light of the changes to their underlying indexes; and (3) change the
name of the USAA S&P 500 Index Fund to the USAA 500 Index Fund.
o Victory Capital does not propose changes to the investment
objective(s) of any other Funds. Although the investment processes used
by Victory Capital's portfolio managers may differ from those used by
AMCO's portfolio managers or, if applicable, any subadviser's portfolio
managers, such differences are not currently expected to result in
changes to the principal investment strategies or principal investment
risks of the Funds.
o The New Advisory Agreement does not change any Fund's advisory fee
rate or the computation method for calculating such fees (except that
Victory Capital, subject to Board approval, may in the future use a
single designated share class to calculate the performance adjustment).
For at least two years after the Transaction closes, Victory Capital has
agreed to waive fees and/or reimburse expenses so that each Fund's
annual expense ratio (excluding certain customary items) does not exceed
the levels reflected in each Fund's most recent audited financial
statements at the time the Transaction closes (or the levels of AMCO's
then-current expense caps, if applicable), excluding the impact of any
performance adjustment to the Fund's advisory fee.
================================================================================
38 | USAA GROWTH & INCOME FUND
================================================================================
o The portfolio managers at AMCO that manage the Fixed Income Funds(1) as
well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be advised
by Victory Capital through its Victory Solutions platform, Victory
Capital proposes that the same subadvisers be retained Post-Transaction,
although Victory Capital may change the allocation to a particular
subadviser Post-Transaction. No changes are expected to the portfolio
managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's
(1)The Fixed Income Funds include the following Funds: California Bond Fund,
Government Securities Fund, High Income Fund, Income Fund, Intermediate-Term
Bond Fund, Tax Exempt Intermediate-Term Fund, Tax Exempt Long-Term Fund, New
York Bond Fund, Short-Term Bond Fund, Tax Exempt Short- Term Fund, Ultra
Short-Term Bond Fund, Virginia Bond Fund, Money Market Fund, Tax Exempt Money
Market Fund and Treasury Money Market Trust.
(2)The Cornerstone Funds include the following Funds: Cornerstone Aggressive
Fund, Cornerstone Conservative Fund, Cornerstone Equity Fund, Cornerstone
Moderate Fund, Cornerstone Moderately Aggressive Fund, and Cornerstone
Moderately Conservative Fund.
(3)The Target Retirement Funds include the following Funds: Target Retirement
2020 Fund, Target Retirement 2030 Fund, Target Retirement 2040 Fund, Target
Retirement 2050 Fund, Target Retirement 2060 Fund, and Target Retirement
Income Fund.
================================================================================
ADVISORY AGREEMENT(S) | 39
================================================================================
businesses to Victory Capital. Victory Capital and USAA expect to enter
into a transition services agreement under which USAA will continue to
provide Victory Capital with certain services that are currently
provided by USAA to AMCO and the USAA Transfer Agent for a specified
period of time after the closing of the Transaction to assist Victory
Capital in transitioning the USAA member distribution channel and member
support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital
================================================================================
40 | USAA GROWTH & INCOME FUND
================================================================================
is capable of providing the same level of investment management services
currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund, Growth
& Income Fund, Income Stock Fund, Global Equity Income Fund, and Precious
Metals and Minerals Fund.
================================================================================
ADVISORY AGREEMENT(S) | 41
================================================================================
The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored and managed by
Victory Capital ("Victory Funds") with similar investment
================================================================================
42 | USAA GROWTH & INCOME FUND
================================================================================
objectives and strategies managed by the portfolio managers who would manage the
Funds. Based on information presented to the Board at the Meetings and its
discussions with Victory Capital, the Board concluded that Victory Capital is
capable of generating a level of long-term investment performance that is
appropriate in light of each Fund's investment objectives, strategies and
restrictions.
FEES TO BE PAID TO VICTORY CAPITAL AND EXPENSES OF THE FUNDS - The Board
considered that it had reviewed each Fund's existing advisory fee rate and
computation method for calculating such fees at the 2018 15(c) Meeting. The
Board considered that the New Advisory Agreement does not change any Fund's
advisory fee rate or the computation method for calculating such fees, except
that Victory Capital, subject to Board approval, may in the future use a single
designated share class to calculate the performance adjustment and apply the
resulting performance adjustment across each other class of shares of the Fund.
The Board considered that the use of a single designated class to calculate the
performance adjustment for each other class of shares of the Fund could mean
that shareholders of a class other than the class used to measure the
performance adjustment may pay a performance adjustment that is higher or lower
than if the adjustment were calculated on a class by class basis, primarily due
to the impact of differences in the fees and expenses between share classes on
performance. The Board considered that the New Advisory Agreement stipulates
that the period for measuring performance for calculating a Fund's performance
adjustment begins on the date that Victory Capital begins managing the Fund;
therefore, no performance adjustments will be made for the first twelve months
of the New Advisory Agreement, consistent with applicable regulations. The Board
also considered Victory Capital's contractual commitment under the expense
limitation agreement ("ELA") to waive fees and/or reimburse expenses for at
least two years after the closing of the Transaction, so that each Fund's annual
expense ratio (excluding acquired fund fees and expenses, any performance
adjustment to a Fund's advisory fee, interest, taxes, brokerage commissions,
other expenditures which are capitalized in accordance with generally accepted
accounting principles, and other extraordinary expenses not incurred in the
ordinary course of such Fund's business) does not exceed the levels reflected in
each Fund's most recent audited financial statements at the time the
================================================================================
ADVISORY AGREEMENT(S) | 43
================================================================================
Transaction closes (or the levels of AMCO's then-current expense caps, if
applicable), excluding the impact of any performance adjustment to a Fund's
advisory fee. The Board considered that the ELA permits Victory Capital to
recoup advisory fees waived and expenses reimbursed for up to three years after
the fiscal year in which the waiver or reimbursement took place, subject to the
lesser of any operating expense limitation in effect at the time of: (1) the
original waiver or expense reimbursement; or (2) recoupment. The Board also
considered that Victory Capital and AMCO had represented to the Board that they
will use their best efforts to ensure that they and their respective affiliates
do not take any action that imposes an "unfair burden" on the Funds as a result
of the Transaction or as a result of any express or implied terms, conditions or
understandings applicable to the Change of Control Event, for so long as the
requirements of Section 15(f) of the 1940 Act apply. The Board also considered
a comparison of the proposed advisory fees to be paid by each Fund to the
advisory fees paid by funds and other accounts managed by Victory Capital deemed
to be comparable to the Fund in terms of investment objectives and strategies.
The Board considered that, with few exceptions, mostly involving weighted
average fees for separate accounts, the advisory fees to be paid by the Funds
were lower than the fees paid by these other funds and accounts. The Board
concluded that the retention of Victory Capital was unlikely to impose an unfair
burden on the Funds because, after the Transaction, none of AMCO, Victory
Capital, VCA, or any of their respective affiliates, would be entitled to
receive any compensation directly or indirectly (i) from any person in
connection with the purchase or sale of securities or other property to, from,
or on behalf of the Funds (other than ordinary fees for bona fide principal
underwriting services), or (ii) from the Funds or their shareholders for other
than bona fide investment advisory or other services. Based on its review, the
Board determined, with respect to each Fund, that Victory Capital's advisory fee
is fair and reasonable.
THE EXTENT TO WHICH VICTORY CAPITAL MAY REALIZE ECONOMIES OF SCALE AS THE FUNDS
GROW LARGER AND WHETHER FEE LEVELS REFLECT THESE ECONOMIES OF SCALE FOR THE
BENEFIT OF FUND SHAREHOLDERS - The Board considered potential or anticipated
economies of scale in relation to the services Victory Capital would provide to
each Fund. The Board considered that the New Advisory Agreement includes the
same advisory fee breakpoints for the same Funds as
================================================================================
44 | USAA GROWTH & INCOME FUND
================================================================================
the Existing Advisory Agreements. The Board also considered that Victory Capital
has contractually agreed to cap the Funds' annual operating expense ratios,
pursuant to the ELA, which will remain in effect for at least two years from the
closing of the Transaction, and may be extended. The Board also considered
Victory Capital's representation that the significant increase in its assets
under management Post-Transaction may reasonably be expected to enable the new
combined firm to reach greater economies of scale in a shorter time frame. The
Board noted that it will have the opportunity to periodically re-examine whether
a Fund or the Trust has achieved economies of scale, and the appropriateness of
investment advisory and administrative fees payable to Victory Capital, in the
future.
THE PROFITS TO BE REALIZED BY VICTORY CAPITAL AND ITS AFFILIATES FROM THEIR
RELATIONSHIP WITH THE TRUST - The Board considered the benefits Victory Capital
and its affiliates may derive from their relationship with the Funds, including
compensation to be paid to Victory Capital for the provision of certain
administrative, fund accounting and shareholder services to the Funds and
compensation to be paid to USAA Transfer Agent for the provision of transfer
agency services to the Funds. The Board considered the significant investments
Victory Capital expected to make to support and grow the USAA member channel and
the costs to integrate the USAA Fund business into Victory Capital. The Board
also considered Victory Capital's profitability report presented to the board of
trustees of the Victory Funds in connection with their most recent 15(c)
process. The Board considered Victory Capital's representation that the fully
integrated USAA Fund business, including investments to support ongoing growth,
was expected to have an overall marginally positive impact on Victory Capital's
overall financial profitability. The Board noted the difficulty of accurately
projecting profitability under the current circumstance and noted that it would
have the opportunity to give further consideration to Victory Capital's
profitability with respect to the Funds at the end of the initial two-year term
of the New Advisory Agreement.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
================================================================================
ADVISORY AGREEMENT(S) | 45
================================================================================
deliver investment products and services to USAA's direct member-based channel.
The Board also considered that Victory Capital may derive reputational and other
benefits from its ability to use "USAA" and related names in connection with
operating and marketing the Funds. The Board considered that the Transaction, if
completed, would significantly increase Victory Capital's assets under
management and expand Victory Capital's investment capabilities. This increased
size and diversification could facilitate Victory Capital's continued investment
in its business and products, which Victory Capital would be able to leverage
across a broader base of assets. Victory Capital also would be able to use
trading commission credits from the Funds' transactions in securities to
"purchase" third party research and execution services to support its investment
process. Based on its review, the Board determined that any "fall-out" benefits
and other types of benefits that may accrue to Victory Capital are fair and
reasonable.
CONCLUSIONS - Based on the foregoing and other relevant considerations, at the
Meeting of the Board held on January 15, 2019, the Board, including a majority
of the Independent Trustees, acting within its business judgment, (1) concluded
that the terms of the New Advisory Agreement are fair and reasonable and that
approval of the New Advisory Agreement is in the best interests of each Fund and
its respective shareholders, (2) voted to approve the New Advisory Agreement,
and (3) voted to recommend approval of the New Advisory Agreement by
shareholders of the Funds. The Board evaluated all information available to it
on a Fund-by-Fund basis and its determinations were made separately in respect
of each Fund. The Board noted some factors may have been more or less important
with respect to any particular Fund and that no one factor was determinative of
its decisions which, instead, were premised upon the totality of factors
considered. In this connection, the Board also noted that different Board
members likely placed emphasis on different factors in reaching their individual
conclusions to vote in favor of the New Advisory Agreement and to recommend
approval of the New Advisory Agreement by shareholders of the Funds.
FACTORS CONSIDERED IN APPROVING THE NEW SUBADVISORY AGREEMENTS
In approving the New Subadvisory Agreements with each of Barrow, Hanley,
Mewhinney & Strauss, LLC, Brandes Investment Partners, L.P., ClariVest Asset
================================================================================
46 | USAA GROWTH & INCOME FUND
================================================================================
Management LLC, Epoch Investment Partners, Inc., Granahan Investment Management,
Inc., Lazard Asset Management LLC, Loomis, Sayles & Company LP, Massachusetts
Financial Services Company, Northern Trust Investments, Inc., QS Investors, LLC,
The Renaissance Group LLP and Wellington Management Company LLP (each, a
"Subadviser" and together the "Subadvisers") with respect to the applicable
Funds, the Board considered various factors, among them: (i) the nature, extent,
and quality of services to be provided to the applicable Funds by the
Subadvisers; (ii) each Subadviser's compensation and any other benefits derived
from the subadvisory relationship; (iii) comparisons, to the extent applicable,
of subadvisory fees and performance to comparable investment companies; and (iv)
the terms of each New Subadvisory Agreement. The Board's evaluation of the New
Subadvisory Agreements reflected the information provided specifically in
connection with its review of the New Subadvisory Agreements, as well as, where
relevant, information that was previously furnished to the Board in connection
with the most recent renewal of the Existing Subadvisory Agreements at the 2018
15(c) meeting and at other subsequent Board meetings in 2018. A summary of the
Board's analysis of these factors is set forth below. After full consideration
of a variety of factors, the Board, including the Independent Trustees, voted to
approve each New Subadvisory Agreement. In approving each New Subadvisory
Agreement, the Board did not identify any single factor as controlling, and each
Trustee may have attributed different weights to various factors. The
Independent Trustees reviewed the proposed approval of the New Subadvisory
Agreements in private sessions with their independent legal counsel at which no
representatives of Victory Capital or AMCO were present.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY THE
SUBADVISERS - The Board considered information provided to them regarding the
services to be provided by each Subadviser, including information presented
periodically throughout the previous year. The Board considered each
Subadviser's level of knowledge and investment style. The Board reviewed the
experience and credentials of the investment personnel who are responsible for
managing the investment of portfolio securities with respect to each applicable
Fund and each Subadviser's level of staffing. The Board also noted each
Subadviser's brokerage practices. The Board also considered
================================================================================
ADVISORY AGREEMENT(S) | 47
================================================================================
each Subadviser's regulatory and compliance history. The Board also took into
account each Subadviser's risk management processes. The Board noted that AMCO's
monitoring processes of each Subadviser include, and Victory Capital's expected
monitoring processes of each Subadviser would include, among others: (i) regular
telephonic meetings to discuss, among other matters, investment strategies and
to review portfolio performance; (ii) monthly portfolio compliance checklists
and quarterly compliance certifications to the Board; and (iii) due diligence
visits to each Subadviser. The Board also considered that the terms and
conditions of the New Subadvisory Agreements are substantially similar to the
terms and conditions of the Existing Subadvisory Agreements.
SUBADVISER COMPENSATION - The Board took into account the financial condition of
each Subadviser. In considering the cost of services to be provided by each
Subadviser and the profitability to that Subadviser of its relationship with the
applicable Fund, the Board noted that the fees under the New Subadvisory
Agreements will be paid by Victory Capital. The Board also relied on the ability
of AMCO to negotiate each Existing Subadvisory Agreement and the fees thereunder
at arm's length. The Board considered that the fee rate to be payable under each
New Subadvisory Agreement were proposed to be identical to the fee rate
currently payable under each corresponding Existing Subadvisory Agreement. For
the above reasons, the Board determined that the expected profitability of each
Subadviser from its relationship with the applicable Fund was not a material
factor in its deliberations with respect to the consideration of the approval of
each New Subadvisory Agreement. For similar reasons, the Board concluded that
the potential for economies of scale in each Subadviser's management of the
applicable Fund was not a material factor in considering each New Subadvisory
Agreement, although the Board noted that certain New Subadvisory Agreements
contain breakpoints in their fee schedules.
SUBADVISORY FEES AND FUND PERFORMANCE - The Board previously compared the
subadvisory fees for each applicable Fund with the fees that each Subadviser
charges comparable clients, as applicable. The Board considered that each
applicable Fund will pay a management fee to Victory Capital and that, in turn,
Victory Capital will pay a subadvisory fee to each Subadviser.
================================================================================
48 | USAA GROWTH & INCOME FUND
================================================================================
At the 2018 15(c) meeting, the Board considered, among other data, each
applicable Fund's performance over shorter and longer term periods, as compared
to each Fund's respective peer group and noted that the Board reviews at its
regularly scheduled meetings information about each Fund's performance results.
The Board considered Victory Capital's capabilities with respect to monitoring
the performance, investment style and risk-adjusted performance of each
Subadviser. The Board also noted each Subadviser's performance record for
similar accounts, as applicable.
CONCLUSIONS - The Board reached the following conclusions regarding each New
Subadvisory Agreement, among others: (i) each Subadviser is qualified to manage
the applicable Fund's assets in accordance with its investment objective and
policies; (ii) each Subadviser maintains an appropriate compliance program;
(iii) the performance of each applicable Fund is reasonable in relation to the
performance of funds with similar investment objectives and to relevant indices
in view of the Fund's investment approach and Victory Capital is expected to
appropriately monitor each Fund's performance; and (iv) each Fund's advisory
expenses are reasonable in relation to those of similar funds and to the
services to be provided by Victory Capital and each Subadviser. Based on its
conclusions, the Board determined that the approval of each New Subadvisory
Agreement with respect to each applicable Fund would be in the best interests of
the Fund and its shareholders.
================================================================================
ADVISORY AGREEMENT(S) | 49
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Richard Y. Newton III
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN, State Street Bank and Trust Company
ACCOUNTING AGENT, AND P.O. Box 1713
SUB-ADMINISTRATOR Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
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) or (210) 531-8722;
(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 monthly portfolio holdings with the SEC
for the first and third quarters of each fiscal year as an exhibit to its
reports on Form N-PORT (beginning with filings after March 31, 2019).
Previously, the Fund made its complete schedule of portfolio holdings available
after the first and third fiscal quarters in regulatory filings on Form N-Q. The
Fund's Forms N-CSR, N-PORT, and N-Q are available at no charge (i) by calling
(800) 531-USAA (8722) or (210) 531-8722; (ii) at USAA.COM; and (iii) on the
SEC's website at HTTP://WWW.SEC.GOV.
================================================================================
--------------
USAA PRSRT STD
9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
--------------
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================================================================================
23432-0319 (C)2019, USAA. All rights reserved.
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA HIGH INCOME FUND]
================================================================================
SEMIANNUAL REPORT
USAA HIGH INCOME FUND
o FUND SHARES (USHYX) o INSTITUTIONAL SHARES (UIHIX)
o ADVISER SHARES (UHYOX) o R6 SHARES (URHIX)
JANUARY 31, 2019
================================================================================
Beginning on January 1, 2021, as permitted by regulations adopted by the
Securities and Exchange Commission, paper copies of the Fund's shareholder
reports like this one will no longer be sent by mail, unless you specifically
request paper copies of the reports from the Fund or from your financial
intermediary, such as a broker-dealer or bank. Instead, the reports will be
made available on usaa.com, and you will be notified by mail each time a report
is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will
not be affected by this change and you need not take any action. You may elect
to receive shareholder reports and other communications from the Fund or your
financial intermediary electronically by notifying your financial intermediary
directly, or if you are a direct investor, by calling (800) 531-USAA (8722) or
logging on to usaa.com.
You may elect to receive all future reports in paper free of charge. You can
inform the Fund or your financial intermediary that you wish to continue
receiving paper copies of your shareholder reports by notifying your financial
intermediary directly, or if you are a direct investor, by calling (800)
531-USAA (8722) or logging on to usaa.com. Your election to receive reports in
paper will apply to all funds held with the USAA family of funds or your
financial intermediary.
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
INVESTMENT OVERVIEW 1
FINANCIAL INFORMATION
Portfolio of Investments 3
Notes to Portfolio of Investments 26
Financial Statements 32
Notes to Financial Statements 36
Financial Highlights 54
EXPENSE EXAMPLE 58
ADVISORY AGREEMENT(S) 60
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.
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. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. 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.
(C)2019, USAA. All rights reserved.
================================================================================
================================================================================
INVESTMENT OVERVIEW
--------------------------------------------------------------------------------
o TOP 10 HOLDINGS - 1/31/19 o
(% of Net Assets)
SPDR Bloomberg Barclays
High Yield Bond ETF .................................................. 3.0%
iShares iBoxx $ High Yield
Corporate Bond ETF ................................................... 2.5%
HCA, Inc., 5.63%, 9/01/2028 ............................................. 1.5%
Bausch Health Cos, Inc., 6.13%, 4/15/2025 ............................... 1.4%
NuStar Logistics, LP, 9.52% ............................................. 1.4%
CSC Holdings, LLC, 10.88%, 10/15/2025 ................................... 1.2%
Sprint Corp., 7.63%, 2/15/2025 .......................................... 1.0%
Clear Channel Worldwide
Holdings, Inc., 7.63%, 3/15/2020 ..................................... 1.0%
Dairy Farmers of America, Inc.,
cumulative redeemable, 7.88% ......................................... 1.0%
ArcelorMittal, 7.00%, 10/15/2039 ........................................ 1.0%
Refer to the Portfolio of Investments for a complete list of securities.
================================================================================
INVESTMENT OVERVIEW | 1
================================================================================
o SECTOR ALLOCATION* - 1/31/19 o
(% of Net Assets)
[PIE CHART OF SECTOR ALLOCATION]
ENERGY 16.9%
COMMUNICATIONS 15.1%
CONSUMER, NON-CYCLICAL 15.0%
FINANCIAL 11.8%
CONSUMER, CYCLICAL 10.6%
BASIC MATERIALS 7.9%
INDUSTRIAL 6.1%
UTILITIES 3.9%
TECHNOLOGY 1.9%
MUNICIPAL OBLIGATIONS 0.7%
GOVERNMENT 0.6%
MORTGAGE SECURITIES 0.4%
DIVERSIFIED 0.1%
[END CHART]
*Does not include ETFs, Money Market Instruments and short-term investments
purchased with cash collateral from securities loaned.
Percentages are of the net assets of the Fund and may not equal 100%.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
================================================================================
2 | USAA HIGH INCOME FUND
================================================================================
PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------------
BONDS (89.0%)
BANK LOANS (4.1%)(a)
COMMUNICATIONS (0.7%)
--------------------
ADVERTISING (0.2%)
$ 5,000 Advantage Sales & Marketing, Inc.
(1 mo. LIBOR + 6.50%) 9.00% 7/25/2022 $ 3,809
----------
MEDIA (0.3%)
2,918 Cengage Learning Acquisitions, Inc.
(1 mo. LIBOR + 4.25%) 6.77 6/07/2023 2,486
4,310 iHeartCommunications, Inc.(c) - 7/30/2019 2,925
2,240 iHeartCommunications, Inc.(c) - 1/30/2020 1,520
----------
6,931
----------
TELECOMMUNICATIONS (0.2%)
2,970 Avaya Holdings Corp. (1 mo. LIBOR + 4.25%) 6.76 12/15/2024 2,929
1,000 Intelsat Jackson Holdings S.A. 6.63 1/02/2024 1,004
----------
3,933
----------
Total Communications 14,673
----------
CONSUMER, CYCLICAL (1.5%)
------------------------
RETAIL (1.5%)
2,517 Academy, Ltd. (1 mo. LIBOR + 4.00%) 6.50 7/01/2022 1,749
5,322 Academy, Ltd. (1 mo. LIBOR + 4.00%) 6.52 7/01/2022 3,697
3,834 J.C. Penney Co., Inc. (3 mo. LIBOR + 2.51%) 6.96 6/23/2023 3,334
8,745 Neiman Marcus Group Ltd., LLC
(1 mo. LIBOR + 3.25%) 5.76 10/25/2020 7,778
3,000 NPC International, Inc. (3 mo. LIBOR + 7.50%) 10.13 4/18/2025 2,805
1,959 Petsmart, Inc. (1 mo. LIBOR + 3.00%) 5.52 3/11/2022 1,648
8,848 Serta Simmons Bedding, LLC (1 mo. LIBOR + 8.00%) 10.51 11/08/2024 6,366
2,948 Staples, Inc. (3 mo. LIBOR + 4.00%) 6.54 9/12/2024 2,906
----------
Total Consumer, Cyclical 30,283
----------
CONSUMER, NON-CYCLICAL (0.7%)
----------------------------
COMMERCIAL SERVICES (0.2%)
2,463 Constellis Holdings, LLC (3 mo. LIBOR + 5.00%) 7.63 4/21/2024 2,370
2,500 Constellis Holdings, LLC (3 mo. LIBOR + 9.00%) 11.74 4/21/2025 2,394
----------
4,764
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 3
================================================================================
----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------------
HEALTHCARE-SERVICES (0.5%)
$ 5,000 Envision Healthcare Corp. (3 mo. LIBOR + 3.75%) 6.25% 10/10/2025 $ 4,723
4,500 Wink Holdco, Inc. (1 mo. LIBOR + 6.75%)(e) 9.25 11/03/2025 4,444
----------
9,167
----------
Total Consumer, Non-cyclical 13,931
----------
ENERGY (0.2%)
------------
OIL & GAS (0.2%)
2,000 California Resources Corp. (1 mo. LIBOR + 4.75%) 7.25 12/31/2022 1,966
3,977 KCA Deutag US Finance LLC
(3 mo. LIBOR + 6.75%) 9.55 2/28/2023 3,251
4,087 Quicksilver Resources, Inc.(c),(f),(g) - 6/21/2019 6
----------
Total Energy 5,223
----------
FINANCIAL (0.2%)
---------------
DIVERSIFIED FINANCIAL SERVICES (0.2%)
5,451 Ditech Holding Corp. (1 mo. LIBOR + 6.00%) 8.50 6/30/2022 3,707
----------
INDUSTRIAL (0.3%)
----------------
TRANSPORTATION (0.3%)
5,641 YRC Worldwide, Inc. (3 mo. LIBOR + 8.50%) 11.24 7/24/2022 5,489
----------
TECHNOLOGY (0.5%)
----------------
SOFTWARE (0.5%)
1,000 Kronos, Inc. (3 mo. LIBOR + 8.25%) 10.79 11/01/2024 1,019
5,000 Mitchell International, Inc.
(1 mo. LIBOR + 7.25%)(e) 9.75 12/01/2025 4,910
921 Press Ganey Holdings, Inc.
(1 mo. LIBOR + 6.50%)(g) 9.00 10/21/2024 920
2,451 Sirius Computer Solutions, Inc.
(1 mo. LIBOR + 4.25%) 6.75 10/30/2022 2,445
1,218 Veritas Bermuda Ltd. (1 mo. LIBOR + 4.50%) 7.00 1/27/2023 1,068
399 Veritas Bermuda Ltd. (1 mo. LIBOR + 4.50%) 7.30 1/27/2023 350
----------
Total Technology 10,712
----------
Total Bank Loans (cost: $98,917) 84,018
----------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.1%)
MORTGAGE SECURITIES (0.1%)
-------------------------
3,117 CHL Mortgage Pass-Through Trust
(1 mo. LIBOR + 0.96%) 3.47(h) 2/25/2035 1,053
1,102 Wells Fargo Mortgage Backed Securities Trust 4.50(i) 4/25/2035 1,084
----------
Total Mortgage Securities 2,137
----------
Total Collateralized Mortgage Obligations (cost: $2,153) 2,137
----------
================================================================================
4 | USAA HIGH INCOME FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE SECURITIES (0.3%)
MORTGAGE SECURITIES (0.3%)
-------------------------
COMMERCIAL MBS (0.3%)
$ 239 Banc of America Commercial Mortgage Trust 6.79%(i) 2/10/2051 $ 240
572 Bear Stearns Commercial Mortgage
Securities Trust(j) 5.66(i) 9/11/2041 574
5,000 Bear Stearns Commercial Mortgage
Securities Trust 5.47(i) 1/12/2045 4,500
1,794 Citigroup Commercial Mortgage Trust 6.33(i) 12/10/2049 946
407 Credit Suisse Commercial Mortgage Trust
(1 mo. LIBOR + 0.19%) 2.70(h) 2/15/2040 400
112 Credit Suisse First Boston Securities Corp.(f),(k) 1.87(i) 5/17/2040 -
30 GMAC Commercial Mortgage Securities, Inc. 4.97 12/10/2041 30
----------
Total Mortgage Securities 6,690
----------
Total Commercial Mortgage Securities (cost: $8,139) 6,690
----------
CORPORATE OBLIGATIONS (60.8%)
BASIC MATERIALS (3.4%)
---------------------
CHEMICALS (1.1%)
6,000 CF Industries, Inc. 5.15 3/15/2034 5,550
3,000 Hexion, Inc. 6.63 4/15/2020 2,398
3,000 Hexion, Inc.(j) 10.38 2/01/2022 2,415
3,000 Kraton Polymers, LLC / Kraton Polymers
Capital Corp.(j) 7.00 4/15/2025 2,940
5,000 Olin Corp. 5.00 2/01/2030 4,631
5,000 Starfruit Finco B.V. / Starfruit U.S. Holdco, LLC(b),(j) 8.00 10/01/2026 5,000
----------
22,934
----------
IRON/STEEL (0.9%)
7,417 AK Steel Corp. 6.38 10/15/2025 6,064
10,456 Allegheny Ludlum, LLC 6.95 12/15/2025 10,508
3,000 United States Steel Corp. 6.25 3/15/2026 2,730
----------
19,302
----------
MINING (1.4%)
4,000 Alcoa Nederland Holding B.V.(j) 6.13 5/15/2028 4,060
2,000 Aleris International, Inc.(j) 10.75 7/15/2023 2,075
5,000 Compass Minerals International, Inc.(j) 4.88 7/15/2024 4,675
20,000 Freeport-McMoRan, Inc. 5.45 3/15/2043 17,300
----------
28,110
----------
Total Basic Materials 70,346
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 5
================================================================================
----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS (11.4%)
---------------------
INTERNET (0.5%)
$ 5,000 Netflix, Inc. 4.88% 4/15/2028 $ 4,769
5,000 Zayo Group, LLC / Zayo Capital, Inc. 6.38 5/15/2025 4,900
500 Zayo Group, LLC / Zayo Capital, Inc.(j) 5.75 1/15/2027 484
----------
10,153
----------
MEDIA (4.7%)
5,000 Cablevision Systems Corp. 8.00 4/15/2020 5,212
5,000 CCO Holdings, LLC / CCO Holdings Capital Corp. 5.75 1/15/2024 5,112
5,000 CCO Holdings, LLC / CCO Holdings Capital Corp.(j) 5.75 2/15/2026 5,087
5,500 CCO Holdings, LLC / CCO Holdings Capital Corp.(j) 5.50 5/01/2026 5,500
5,000 CCO Holdings, LLC / CCO Holdings Capital Corp.(j) 5.13 5/01/2027 4,844
1,000 CCO Holdings, LLC / CCO Holdings Capital Corp.(j) 5.00 2/01/2028 953
21,000 Clear Channel Worldwide Holdings, Inc. 7.63 3/15/2020 20,947
5,000 CSC Holdings, LLC(j) 10.13 1/15/2023 5,411
21,018 CSC Holdings, LLC(j) 10.88 10/15/2025 24,280
1,000 CSC Holdings, LLC(j) 5.38 2/01/2028 964
3,000 CSC Holdings, LLC(j) 7.50 4/01/2028 3,098
4,500 CSC Holdings, LLC(j),(l) 6.50 2/01/2029 4,568
5,000 Meredith Corp.(j) 6.88 2/01/2026 5,175
3,000 Radiate Holdco, LLC / Radiate Finance, Inc.(j) 6.88 2/15/2023 2,899
5,000 Salem Media Group, Inc.(j) 6.75 6/01/2024 4,525
----------
98,575
----------
TELECOMMUNICATIONS (6.2%)
10,000 CenturyLink, Inc. 5.80 3/15/2022 10,071
5,000 CenturyLink, Inc.(l) 7.50 4/01/2024 5,087
5,000 Cincinnati Bell, Inc.(j) 7.00 7/15/2024 4,325
2,000 Cincinnati Bell, Inc.(j) 8.00 10/15/2025 1,745
5,000 Cogent Communications Finance, Inc.(j) 5.63 4/15/2021 5,037
3,000 CommScope Technologies, LLC(j) 6.00 6/15/2025 2,843
20,000 Frontier Communications Corp. 11.00 9/15/2025 12,987
2,000 Frontier Communications Corp.(j) 8.50 4/01/2026 1,820
9,000 Frontier Communications Corp. 9.00 8/15/2031 4,973
3,000 Gogo Intermediate Holdings, LLC / Gogo
Finance Co., Inc.(b),(j) 12.50 7/01/2022 3,263
5,000 Level 3 Financing, Inc. 6.13 1/15/2021 5,025
20,000 Sprint Corp. 7.63 2/15/2025 20,956
15,000 Sprint Corp. 7.63 3/01/2026 15,619
5,000 T-Mobile USA, Inc. 6.50 1/15/2024 5,187
5,000 T-Mobile USA, Inc. 6.00 4/15/2024 5,137
10,000 T-Mobile USA, Inc. 4.75 2/01/2028 9,625
5,000 Trilogy International Partners, LLC / Trilogy
International Finance, Inc.(j) 8.88 5/01/2022 4,788
================================================================================
6 | USAA HIGH INCOME FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------------
$ 12,437 Windstream Services, LLC / Windstream
Finance Corp.(j) 9.00% 6/30/2025 $ 9,390
----------
127,878
----------
Total Communications 236,606
----------
CONSUMER, CYCLICAL (7.8%)
------------------------
AIRLINES (0.7%)
14,665 Hawaiian Airlines, Inc. Pass-Through Trust 4.95 7/15/2023 14,668
----------
AUTO MANUFACTURERS (0.3%)
1,000 JB Poindexter & Co., Inc.(j) 7.13 4/15/2026 975
3,000 Navistar International Corp.(j) 6.63 11/01/2025 3,015
3,000 Tesla, Inc.(b),(j) 5.30 8/15/2025 2,674
----------
6,664
----------
AUTO PARTS & EQUIPMENT (0.1%)
3,000 Titan International, Inc. 6.50 11/30/2023 2,768
----------
DISTRIBUTION/WHOLESALE (0.1%)
2,000 H&E Equipment Services, Inc. 5.63 9/01/2025 1,963
----------
ENTERTAINMENT (1.7%)
3,000 AMC Entertainment Holdings, Inc. 5.88 11/15/2026 2,708
3,000 AMC Entertainment Holdings, Inc. 6.13 5/15/2027 2,685
3,000 Churchill Downs, Inc.(j) 4.75 1/15/2028 2,891
3,000 Downstream Development Authority of the
Quapaw Tribe(j) 10.50 2/15/2023 2,970
2,000 Eldorado Resorts, Inc. 7.00 8/01/2023 2,095
2,500 Eldorado Resorts, Inc. 6.00 4/01/2025 2,527
3,000 International Game Technology plc(j) 6.25 1/15/2027 3,047
5,000 National CineMedia, LLC 5.75 8/15/2026 4,525
8,000 Scientific Games International, Inc. 10.00 12/01/2022 8,440
4,000 Scientific Games International, Inc.(j) 5.00 10/15/2025 3,801
----------
35,689
----------
FOOD SERVICE (0.0%)
217 Aramark Services, Inc.(j) 5.00 2/01/2028 212
----------
HOME BUILDERS (0.9%)
4,000 Ashton Woods USA, LLC / Ashton Woods
Finance Co.(j) 6.75 8/01/2025 3,590
5,000 Beazer Homes USA, Inc. 5.88 10/15/2027 4,275
2,500 LGI Homes, Inc.(j) 6.88 7/15/2026 2,419
3,000 M/I Homes, Inc. 6.75 1/15/2021 3,041
3,330 M/I Homes, Inc. 5.63 8/01/2025 3,080
3,000 Williams Scotsman International, Inc.(j) 6.88 8/15/2023 2,945
----------
19,350
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 7
================================================================================
----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------------
LEISURE TIME (0.5%)
$ 10,000 Constellation Merger Sub, Inc.(b),(j) 8.50% 9/15/2025 $ 9,662
----------
LODGING (1.1%)
3,000 Boyd Gaming Corp. 6.00 8/15/2026 3,011
3,000 Hilton Worldwide Finance, LLC / Hilton
Worldwide Finance Corp. 4.88 4/01/2027 2,977
1,736 Inn of the Mountain Gods Resort & Casino(b),(m) 9.25(n) 11/30/2020 1,693
1,100 Marriott Ownership Resorts, Inc. / ILG LLC(j) 6.50 9/15/2026 1,118
3,000 Station Casinos, LLC(j) 5.00 10/01/2025 2,872
11,000 Wynn Las Vegas, LLC / Wynn Las Vegas
Capital Corp.(j) 5.25 5/15/2027 10,299
----------
21,970
----------
RETAIL (2.2%)
5,000 CEC Entertainment, Inc. 8.00 2/15/2022 4,400
1,500 Golden Nugget, Inc.(j) 6.75 10/15/2024 1,504
5,000 Golden Nugget, Inc.(j) 8.75 10/01/2025 5,137
5,000 J.C. Penney Corp., Inc.(b) 5.65 6/01/2020 4,425
1,500 J.C. Penney Corp., Inc.(j) 8.63 3/15/2025 851
10,000 L Brands, Inc. 6.95 3/01/2033 8,100
2,500 L Brands, Inc. 6.75 7/01/2036 2,125
3,162 Men's Wearhouse, Inc.(b) 7.00 7/01/2022 3,190
6,500 Party City Holdings, Inc.(b),(j) 6.63 8/01/2026 6,337
5,000 PetSmart, Inc.(j) 7.13 3/15/2023 3,163
2,000 PetSmart, Inc.(j) 5.88 6/01/2025 1,581
5,000 Staples, Inc.(j) 8.50 9/15/2025 4,825
----------
45,638
----------
TOYS/GAMES/HOBBIES (0.2%)
3,000 Mattel, Inc.(j) 6.75 12/31/2025 2,842
----------
Total Consumer, Cyclical 161,426
----------
CONSUMER, NON-CYCLICAL (10.3%)
-----------------------------
COMMERCIAL SERVICES (2.5%)
3,000 Ahern Rentals, Inc.(j) 7.38 5/15/2023 2,625
3,312 Aptim Corp(b),(j) 7.75 6/15/2025 2,626
3,000 Eastern Maine Healthcare Systems(f) 5.02 7/01/2036 2,958
15,000 Hertz Corp.(j) 7.63 6/01/2022 14,967
3,500 Matthews International Corp.(j) 5.25 12/01/2025 3,307
4,733 Midas Intermediate Holdco II, LLC / Midas
Intermediate Holdco II Finance, Inc.(j) 7.88 10/01/2022 4,402
2,433 Prime Security Services Borrower, LLC / Prime
Finance, Inc.(j) 9.25 5/15/2023 2,579
3,000 R.R. Donnelley & Sons Co.(b) 6.00 4/01/2024 2,933
3,000 Refinitiv US Holdings, Inc.(j) 6.25 5/15/2026 2,955
================================================================================
8 | USAA HIGH INCOME FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------------
$ 2,000 Refinitiv US Holdings, Inc.(j) 8.25% 11/15/2026 $ 1,880
3,000 United Rentals North America, Inc. 5.50 7/15/2025 3,045
8,000 United Rentals North America, Inc. 5.50 5/15/2027 7,902
----------
52,179
----------
FOOD (1.5%)
8,000 Albertson's Cos., LLC / Safeway, Inc. / New
Albertson's, Inc. / Albertson's, LLC 6.63 6/15/2024 7,940
12,000 Albertson's Cos., LLC / Safeway, Inc. / New
Albertson's, LP / Albertson's, LLC 5.75 3/15/2025 11,295
3,000 Matterhorn Merger Sub, LLC / Matterhorn
Finance Sub, Inc.(j) 8.50 6/01/2026 2,685
3,000 Pilgrim's Pride Corp.(j) 5.88 9/30/2027 2,903
3,000 Post Holdings, Inc.(j) 8.00 7/15/2025 3,195
3,000 Post Holdings, Inc.(j) 5.75 3/01/2027 2,954
----------
30,972
----------
HEALTHCARE PRODUCTS (0.8%)
2,000 Avanos Medical, Inc. 6.25 10/15/2022 2,045
3,930 DJO Finance, LLC / DJO Finance Corp.(j) 8.13 6/15/2021 4,094
9,000 Mallinckrodt International Finance S.A.(b) 4.75 4/15/2023 6,952
3,000 Mallinckrodt International Finance S.A. /
Mallinckrodt CB, LLC(j) 5.50 4/15/2025 2,340
----------
15,431
----------
HEALTHCARE-SERVICES (3.6%)
11,339 Community Health Systems, Inc. 6.88 2/01/2022 6,502
3,000 DaVita, Inc. 5.13 7/15/2024 2,971
2,000 Encompass Health Corp. 5.75 9/15/2025 2,030
29,500 HCA, Inc. 5.63 9/01/2028 30,579
10,000 RegionalCare Hospital Partners Holdings, Inc.(j) 8.25 5/01/2023 10,587
14,000 Tenet Healthcare Corp.(b) 6.75 6/15/2023 13,825
6,425 Tenet Healthcare Corp.(b) 7.00 8/01/2025 6,240
2,000 WellCare Health Plans, Inc.(j) 5.38 8/15/2026 2,040
----------
74,774
----------
PHARMACEUTICALS (1.9%)
30,000 Bausch Health Cos, Inc.(j) 6.13 4/15/2025 28,425
13,000 Endo Dac / Endo Finance, LLC / Endo Finco, Inc.(j) 6.00 7/15/2023 10,688
----------
39,113
----------
Total Consumer, Non-cyclical 212,469
----------
DIVERSIFIED (0.1%)
-----------------
HOLDING COMPANIES-DIVERSIFIED (0.1%)
3,000 Trident Merger Sub, Inc.(j) 6.63 11/01/2025 2,805
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 9
================================================================================
----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------------
ENERGY (11.6%)
-------------
COAL (1.1%)
$ 3,000 Alliance Resource Operating Partners,
LP/Alliance Resource Finance Corp.(j) 7.50% 5/01/2025 $ 3,128
5,000 CONSOL Energy, Inc.(j) 11.00 11/15/2025 5,512
2,000 Peabody Energy Corp.(j) 6.38 3/31/2025 1,935
5,000 SunCoke Energy Partners, LP/SunCoke Energy
Partners Finance Corp.(j) 7.50 6/15/2025 4,863
7,000 Warrior Met Coal, Inc.(j) 8.00 11/01/2024 7,080
----------
22,518
----------
OIL & GAS (5.4%)
5,162 California Resources Corp.(b),(j) 8.00 12/15/2022 4,178
1,297 California Resources Corp. 6.00 11/15/2024 934
3,000 Carrizo Oil & Gas, Inc. 8.25 7/15/2025 3,105
6,000 Chesapeake Energy Corp.(b) 7.50 10/01/2026 5,760
6,000 Chesapeake Energy Corp.(b) 8.00 6/15/2027 5,775
4,000 CITGO Petroleum Corp.(j) 6.25 8/15/2022 3,960
7,000 Diamond Offshore Drilling, Inc.(b) 7.88 8/15/2025 6,650
3,000 Ensco plc 5.20 3/15/2025 2,250
3,000 Ensco plc 7.75 2/01/2026 2,424
3,619 EP Energy, LLC / Everest Acquisition Finance, Inc. 7.75 9/01/2022 1,665
2,408 ESC Reuters Group plc ADR(f) 8.00 10/01/2020 36
6,000 HighPoint Operating Corp.(b) 7.00 10/15/2022 5,775
4,000 Murphy Oil Corp. 6.88 8/15/2024 4,209
3,000 Murphy Oil Corp. 5.75 8/15/2025 3,018
3,000 Nabors Industries, Inc.(b) 5.50 1/15/2023 2,715
3,000 Nabors Industries, Inc. 5.75 2/01/2025 2,625
5,000 Newfield Exploration Co. 5.38 1/01/2026 5,150
5,000 PBF Holding Co., LLC / PBF Finance Corp. 7.25 6/15/2025 5,000
3,000 Resolute Energy Corp. 8.50 5/01/2020 3,011
5,000 Rowan Companies, Inc. 7.38 6/15/2025 4,325
14,000 SandRidge Energy, Inc. 7.50 2/15/2023 -
3,000 Southwestern Energy Co.(b) 4.10 3/15/2022 2,895
7,000 Southwestern Energy Co. 6.20 1/23/2025 6,825
2,000 Southwestern Energy Co.(b) 7.75 10/01/2027 2,070
5,000 SRC Energy, Inc. 6.25 12/01/2025 4,463
7,000 Transocean, Inc.(j) 9.00 7/15/2023 7,330
5,000 Transocean, Inc.(j) 7.50 1/15/2026 4,781
5,750 Transocean, Inc. 7.50 4/15/2031 4,729
2,000 Whiting Petroleum Corp. 6.63 1/15/2026 1,970
3,000 WPX Energy, Inc. 8.25 8/01/2023 3,353
2,000 WPX Energy, Inc. 5.75 6/01/2026 2,000
----------
112,981
----------
================================================================================
10 | USAA HIGH INCOME FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------------
OIL & GAS SERVICES (1.1%)
$ 3,000 Archrock Partners, LP / Archrock Partners
Finance Corp. 6.00% 4/01/2021 $ 2,974
5,000 CSI Compressco, LP / CSI Compressco Finance, Inc. 7.25 8/15/2022 4,450
6,000 McDermott Technology Americas, Inc. /
McDermott Technology US, Inc.(j) 10.63 5/01/2024 5,392
7,000 Weatherford International, LLC(l) 9.88 3/01/2025 4,550
5,880 Weatherford International, Ltd.(b) 5.13 9/15/2020 4,557
----------
21,923
----------
PIPELINES (4.0%)
5,000 Andeavor Logistics, LP (3 mo. LIBOR + 4.65%) 6.88(o) -(p) 4,821
5,000 Blue Racer Midstream, LLC / Blue Racer
Finance Corp.(j) 6.13 11/15/2022 5,075
5,000 Cheniere Corpus Christi Holdings, LLC 5.88 3/31/2025 5,280
15,000 DCP Midstream Operating, LP
(3 mo. LIBOR + 3.85%)(j) 5.85(o) 5/21/2043 12,975
5,000 Energy Transfer Partners, LP
(3 mo. LIBOR + 3.02%) 5.75(h) 11/01/2066 4,050
2,500 Energy Transfer, LP 7.50 10/15/2020 2,659
5,000 EnLink Midstream Partners, LP
(3 mo. LIBOR + 4.11%) 6.00(o) -(p) 4,100
12,000 Enterprise Products Operating, LLC
(3 mo. LIBOR + 2.78%)(b) 5.52(h) 6/01/2067 11,040
3,000 Enterprise TE Partners, LP
(3 mo. LIBOR + 2.78%)(f) 5.52(h) 6/01/2067 2,751
3,000 Genesis Energy, LP / Genesis Energy Finance Corp. 6.50 10/01/2025 2,850
3,000 Holly Energy Partners, LP / Holly Energy
Finance Corp.(j) 6.00 8/01/2024 3,038
5,061 Kinder Morgan, Inc. 7.80 8/01/2031 6,323
5,000 Martin Midstream Partners, LP / Martin
Midstream Finance Corp. 7.25 2/15/2021 4,875
3,000 SemGroup Corp. 6.38 3/15/2025 2,828
5,000 Southern Union Co. (3 mo. LIBOR + 3.02%) 5.75(h) 11/01/2066 3,950
3,000 Targa Resources Partners, LP / Targa
Resources Partners Finance Corp. 5.25 5/01/2023 3,011
3,000 Transcontinental Gas Pipe Line Co., LLC 7.85 2/01/2026 3,665
----------
83,291
----------
Total Energy 240,713
----------
FINANCIAL (8.8%)
---------------
BANKS (2.0%)
5,000 Bank OZK (3 mo. LIBOR + 4.43%)(b) 5.50(o) 7/01/2026 5,094
5,100 CIT Group, Inc. 6.13 3/09/2028 5,419
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------------
$ 5,000 First Midwest Bancorp, Inc. 5.88% 9/29/2026 $ 5,285
10,409 Regions Bank(f) 6.45 6/26/2037 12,217
1,790 Regions Financial Corp.(f) 7.38 12/10/2037 2,279
10,000 Synovus Financial Corp. (5 Yr. Semi-Annual
Swap + 0.38%)(e) 5.90 2/07/2029 10,000
----------
40,294
----------
DIVERSIFIED FINANCIAL SERVICES (2.8%)
5,000 Ally Financial, Inc.(b) 5.75 11/20/2025 5,258
5,000 Credit Acceptance Corp. 6.13 2/15/2021 5,022
2,454 ILFC E-Capital Trust I (Highest of 3 mo.
LIBOR/10 Year CMT/30 Year CMT + 1.55%)(h),(j) 4.55 12/21/2065 1,869
9,362 ILFC E-Capital Trust II (Highest of 3 mo.
LIBOR/10 Year CMT/30 Year CMT + 1.80%)(h),(j) 4.80 12/21/2065 7,209
1,000 Lehman Brothers Holdings, Inc.(c),(f) 1.00 12/31/2049 21
1,500 Lehman Brothers Treasury Co. B.V.(c),(f) - 12/29/2010 45
5,000 National Rural Utilities Cooperative
Finance Corp. (3 mo. LIBOR + 2.91%) 4.75(o) 4/30/2043 4,813
12,000 Navient Corp. 7.25 1/25/2022 12,495
1,000 Navient Corp. 6.13 3/25/2024 962
7,000 Navient Corp. 6.75 6/25/2025 6,746
2,000 Navient Corp. 6.75 6/15/2026 1,890
3,000 Ocwen Loan Servicing, LLC(j) 8.38 11/15/2022 2,756
4,000 Springleaf Finance Corp. 7.13 3/15/2026 3,817
5,000 Synchrony Financial 3.95 12/01/2027 4,582
----------
57,485
----------
INSURANCE (2.7%)
5,000 American Equity Investment Life Holding Co. 5.00 6/15/2027 4,994
10,000 AmTrust Financial Services, Inc.(b) 6.13 8/15/2023 8,809
1,500 AmWINS Group, Inc.(j) 7.75 7/01/2026 1,504
14,000 Genworth Holdings, Inc. (3 mo. LIBOR + 2.00%) 4.62(h) 11/15/2036 8,330
3,000 Global Atlantic Financial Co.(j) 8.63 4/15/2021 3,300
3,780 Hanover Insurance Group, Inc. 8.21 2/03/2027 4,510
8,000 Hartford Financial Services Group, Inc.
(3 mo. LIBOR + 2.13%)(j) 4.74(h) 2/12/2047 6,852
3,000 HUB International Ltd.(j) 7.00 5/01/2026 2,917
2,000 MetLife, Inc. 10.75 8/01/2039 3,004
10,000 Prudential Financial, Inc. (3 mo. LIBOR + 3.04%) 5.20(o) 3/15/2044 9,764
2,000 Zenith National Insurance Capital Trust I(j) 8.55 8/01/2028 2,268
----------
56,252
----------
REITS (1.1%)
5,000 CBL & Associates, LP(b) 4.60 10/15/2024 3,862
2,000 EPR Properties 4.75 12/15/2026 2,001
3,000 Equinix, Inc. 5.38 5/15/2027 3,015
================================================================================
12 | USAA HIGH INCOME FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------------
$ 4,000 MGM Growth Properties Operating Partnership,
LP / MGP Finance Co-Issuer, Inc.(j) 5.75% 2/01/2027 $ 4,039
2,000 MPT Operating Partnership, LP / MPT
Finance Corp. 5.00 10/15/2027 1,952
3,000 Sabra Health Care, LP 5.13 8/15/2026 2,822
3,000 Uniti Group, LP / Uniti Fiber Holdings,
Inc. / CSL Capital, LLC(j) 7.13 12/15/2024 2,663
1,000 Uniti Group, LP / Uniti Group Finance,
Inc. / CSL Capital, LLC(j) 6.00 4/15/2023 950
2,000 Uniti Group, LP / Uniti Group Finance,
Inc. / CSL Capital, LLC 8.25 10/15/2023 1,860
----------
23,164
----------
SAVINGS & LOANS (0.2%)
5,000 Banc of California, Inc. 5.25 4/15/2025 5,021
----------
Total Financial 182,216
----------
GOVERNMENT (0.0%)
----------------
REGIONAL (STATE/PROVINCE) (0.0%)
3,000 Mashantucket (Western) Pequot Tribe(m) 7.35(n) 7/01/2026 495
----------
INDUSTRIAL (3.7%)
----------------
AEROSPACE/DEFENSE (0.2%)
5,000 Arconic, Inc. 5.95 2/01/2037 4,788
----------
ELECTRICAL COMPONENTS & EQUIPMENT (0.4%)
5,079 Artesyn Embedded Technologies, Inc.(j) 9.75 10/15/2020 4,749
3,000 Energizer Holdings, Inc.(j),(l) 7.75 1/15/2027 3,098
----------
7,847
----------
ELECTRONICS (0.1%)
1,500 Itron, Inc.(b),(j) 5.00 1/15/2026 1,434
1,500 Resideo Funding, Inc.(j) 6.13 11/01/2026 1,549
----------
2,983
----------
ENGINEERING & CONSTRUCTION (0.5%)
4,000 Brand Industrial Services, Inc.(j) 8.50 7/15/2025 3,595
1,000 New Enterprise Stone & Lime Co., Inc.(j) 10.13 4/01/2022 1,005
1,000 New Enterprise Stone & Lime Co., Inc.(j) 6.25 3/15/2026 957
5,000 Weekley Homes, LLC / Weekley Finance Corp. 6.63 8/15/2025 4,625
----------
10,182
----------
ENVIRONMENTAL CONTROL (0.3%)
3,000 Covanta Holding Corp. 5.88 7/01/2025 2,951
3,000 Waste Pro USA, Inc.(j) 5.50 2/15/2026 2,925
----------
5,876
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------------
MACHINERY-DIVERSIFIED (0.1%)
$ 1,000 Stevens Holding Co., Inc.(j) 6.13% 10/01/2026 $ 1,015
----------
METAL FABRICATION/HARDWARE (0.4%)
5,000 Novelis Corp.(j) 5.88 9/30/2026 4,837
3,000 Zekelman Industries, Inc.(j) 9.88 6/15/2023 3,203
----------
8,040
----------
MISCELLANEOUS MANUFACTURERS (0.6%)
5,000 General Electric Co. (3 mo. LIBOR + 3.33%) 5.00(o) -(p) 4,383
12,000 Textron Financial Corp. (3 mo. LIBOR + 1.74%)(j) 4.35(h) 2/15/2042 8,904
----------
13,287
----------
PACKAGING & CONTAINERS (1.0%)
10,000 BWAY Holding Co.(b),(j) 7.25 4/15/2025 9,262
3,150 Flex Acquisition Co., Inc.(j) 6.88 1/15/2025 2,961
2,000 Flex Acquisition Co., Inc.(j) 7.88 7/15/2026 1,905
3,000 Plastipak Holdings, Inc.(j) 6.25 10/15/2025 2,723
3,000 Sealed Air Corp.(j) 6.88 7/15/2033 3,045
----------
19,896
----------
TRANSPORTATION (0.1%)
4,000 Navios Maritime Holdings, Inc. / Navios
Maritime Finance II US, Inc.(b),(j) 7.38 1/15/2022 2,360
----------
Total Industrial 76,274
----------
TECHNOLOGY (1.1%)
----------------
COMPUTERS (0.1%)
1,000 Western Digital Corp.(l) 4.75 2/15/2026 932
----------
SOFTWARE (1.0%)
5,000 First Data Corp.(j) 5.38 8/15/2023 5,109
5,000 Informatica, LLC(j) 7.13 7/15/2023 5,038
2,000 Solera, LLC / Solera Finance, Inc.(j) 10.50 3/01/2024 2,180
6,000 Sophia, LP / Sophia Finance, Inc.(j) 9.00 9/30/2023 6,180
3,000 Veritas US, Inc. / Veritas Bermuda Ltd.(j) 10.50 2/01/2024 2,206
----------
20,713
----------
Total Technology 21,645
----------
UTILITIES (2.6%)
---------------
ELECTRIC (2.2%)
10,000 Calpine Corp.(b) 5.75 1/15/2025 9,450
1,980 DPL, Inc. 6.75 10/01/2019 2,015
7,000 GenOn Energy, Inc.(b),(c),(g),(q) 9.88 10/15/2020 2,751
1,518 GenOn Energy, Inc. / NRG Americas, Inc.
(3 mo. LIBOR + 6.50%) 9.39(h) 12/01/2023 1,514
================================================================================
14 | USAA HIGH INCOME FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------------
$ 3,000 NRG Energy, Inc. 7.25% 5/15/2026 $ 3,253
3,000 NRG Energy, Inc. 5.75 1/15/2028 3,050
10,000 PPL Capital Funding, Inc. (3 mo. LIBOR + 2.67%) 5.47(h) 3/30/2067 9,053
5,000 Talen Energy Supply, LLC 6.50 6/01/2025 3,925
5,000 Vistra Energy Corp. 5.88 6/01/2023 5,137
4,875 Vistra Energy Corp. 7.63 11/01/2024 5,192
----------
45,340
----------
GAS (0.4%)
5,000 NGL Energy Partners, LP / NGL Energy
Finance Corp. 7.50 11/01/2023 5,089
4,000 Southern Star Central Corp.(j) 5.13 7/15/2022 3,930
----------
9,019
----------
Total Utilities 54,359
----------
Total Corporate Obligations (cost: $1,297,065) 1,259,354
----------
EURODOLLAR AND YANKEE OBLIGATIONS (16.8%)
BASIC MATERIALS (4.1%)
---------------------
CHEMICALS (0.5%)
3,000 OCI N.V.(j) 6.63 4/15/2023 3,098
3,000 SASOL Financing USA, LLC 5.88 3/27/2024 3,098
5,000 Venator Finance Sarl / Venator Materials, LLC(b),(j) 5.75 7/15/2025 4,162
----------
10,358
----------
FOREST PRODUCTS & PAPER (0.3%)
6,200 Smurfit Kappa Treasury Funding Ltd. 7.50 11/20/2025 7,084
----------
IRON/STEEL (1.0%)
18,000 ArcelorMittal 7.00 10/15/2039 19,754
----------
MINING (2.3%)
3,000 Eldorado Gold Corp.(j) 6.13 12/15/2020 2,865
10,000 First Quantum Minerals Ltd.(j) 7.50 4/01/2025 9,356
3,000 First Quantum Minerals Ltd.(j) 6.88 3/01/2026 2,730
2,500 Kinross Gold Corp. 5.95 3/15/2024 2,588
10,000 New Gold, Inc.(j) 6.25 11/15/2022 9,275
13,000 Teck Resources Ltd. 6.13 10/01/2035 13,650
5,000 Vedanta Resources plc(j) 8.25 6/07/2021 5,157
3,000 Vedanta Resources plc(b),(j) 6.38 7/30/2022 2,908
----------
48,529
----------
Total Basic Materials 85,725
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS (2.5%)
---------------------
MEDIA (1.2%)
$ 4,000 Altice Financing S.A.(j) 7.50% 5/15/2026 $ 3,800
2,000 Altice Finco S.A.(j) 7.63 2/15/2025 1,685
10,000 Altice France S.A.(j) 7.38 5/01/2026 9,662
2,000 Altice France S.A.(j) 8.13 2/01/2027 1,970
2,000 Altice Luxembourg S.A.(b),(j) 7.75 5/15/2022 1,948
7,000 Altice Luxembourg S.A.(j) 7.63 2/15/2025 5,976
----------
25,041
----------
TELECOMMUNICATIONS (1.3%)
5,000 Digicel Ltd.(b),(j) 6.00 4/15/2021 4,650
3,000 Digicel Ltd.(b),(j) 6.75 3/01/2023 2,467
2,000 Intelsat Connect Finance S.A.(j) 9.50 2/15/2023 1,880
5,000 Intelsat Jackson Holdings S.A. 5.50 8/01/2023 4,575
5,000 Intelsat Jackson Holdings S.A.(j) 8.50 10/15/2024 5,076
5,000 Intelsat Jackson Holdings S.A.(j) 9.75 7/15/2025 5,231
2,000 Millicom International Cellular S.A.(j) 6.63 10/15/2026 2,048
500 Wind Tre S.p.A.(j) 5.00 1/20/2026 414
----------
26,341
----------
Total Communications 51,382
----------
CONSUMER, CYCLICAL (1.0%)
------------------------
AIRLINES (0.6%)
5,000 Air Canada Pass-Through Trust(j) 5.00 3/15/2020 5,025
3,571 Latam Airlines Pass-Through Trust 4.50 8/15/2025 3,472
4,048 Norwegian Air Pass-Through Trust(j) 7.50 5/10/2025 4,191
----------
12,688
----------
ENTERTAINMENT (0.1%)
3,000 Cirsa Finance Internationl Sarl(j) 7.88 12/20/2023 3,060
----------
HOME BUILDERS (0.3%)
3,000 Brookfield Residential Properties, Inc.(j) 6.38 5/15/2025 2,835
1,750 Mattamy Group Corp.(j) 6.88 12/15/2023 1,710
1,250 Mattamy Group Corp.(j) 6.50 10/01/2025 1,166
----------
5,711
----------
Total Consumer, Cyclical 21,459
----------
CONSUMER, NON-CYCLICAL (1.6%)
----------------------------
FOOD (0.6%)
1,000 JBS Investments GmbH(b),(j) 7.25 4/03/2024 1,038
3,000 JBS USA LUX S.A. / JBS USA Finance, Inc.(j) 5.88 7/15/2024 3,041
================================================================================
16 | USAA HIGH INCOME FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------------
$ 6,000 JBS USA LUX S.A. / JBS USA Finance, Inc.(j) 6.75% 2/15/2028 $ 6,158
3,000 Minerva Luxembourg S.A.(b),(j) 5.88 1/19/2028 2,711
----------
12,948
----------
HOUSEHOLD PRODUCTS/WARES (0.4%)
8,000 Kronos Acquisition Holdings, Inc.(j) 9.00 8/15/2023 6,800
----------
PHARMACEUTICALS (0.6%)
10,000 Teva Pharmaceutical Finance Netherlands III B.V. 3.15 10/01/2026 8,317
500 Teva Pharmaceutical Finance Netherlands III B.V. 6.75 3/01/2028 519
5,000 Teva Pharmaceutical Finance Netherlands III B.V. 4.10 10/01/2046 3,684
----------
12,520
----------
Total Consumer, Non-cyclical 32,268
----------
ENERGY (3.3%)
------------
OIL & GAS (2.5%)
3,000 Aker BP ASA(j) 5.88 3/31/2025 3,090
6,000 Eni SpA(j) 4.75 9/12/2028 6,074
3,060 Hunt Oil Co. of Peru, LLC Sucursal Del Peru(b),(j) 6.38 6/01/2028 3,235
5,000 MEG Energy Corp.(j) 7.00 3/31/2024 4,438
10,000 Noble Holding International Ltd.(b) 7.95 4/01/2025 8,150
3,000 Petrobras Global Finance B.V. 7.38 1/17/2027 3,261
10,000 Petroleos Mexicanos 6.50 3/13/2027 9,620
10,000 Petroleos Mexicanos 6.63 6/15/2035 9,100
5,000 Tecpetrol S.A.(b),(j) 4.88 12/12/2022 4,725
----------
51,693
----------
OIL & GAS SERVICES (0.0%)
129 Schahin II Finance Co. SPV Ltd.(g),(j),(m),(q) 8.00(n) 5/25/2020 120
5,212 Schahin II Finance Co. SPV Ltd.(c),(f),(j) 5.88 9/25/2022 573
----------
693
----------
PIPELINES (0.8%)
13,000 Transcanada Trust (3 mo. LIBOR + 3.53%) 5.63(o) 5/20/2075 12,289
5,000 Transportadora de Gas del Sur S.A.(b),(j) 6.75 5/02/2025 4,686
----------
16,975
----------
Total Energy 69,361
----------
FINANCIAL (0.9%)
---------------
BANKS (0.2%)
5,000 Royal Bank of Scotland Group plc
(3 mo. LIBOR + 2.32%) 5.12(h) -(p) 4,725
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------------
INSURANCE (0.7%)
$ 10,000 QBE Capital Funding III Ltd. (10 Yr. Semi-Annual
Swap + 4.05%)(j) 7.25%(o) 5/24/2041 $ 10,395
4,000 XLIT Ltd. (3 mo. LIBOR + 2.46%) 5.24(h) -(p) 3,820
----------
14,215
----------
Total Financial 18,940
----------
INDUSTRIAL (2.1%)
----------------
AEROSPACE/DEFENSE (0.9%)
2,500 Bombardier, Inc.(j) 7.50 12/01/2024 2,431
17,000 Bombardier, Inc.(j) 7.50 3/15/2025 16,448
----------
18,879
----------
BUILDING MATERIALS (0.3%)
3,000 Votorantim Cimentos International S.A. 7.25 4/05/2041 3,162
2,535 Votorantim Cimentos International S.A.(j) 7.25 4/05/2041 2,672
----------
5,834
----------
PACKAGING & CONTAINERS (0.7%)
3,274 ARD Securities Finance SARL(b),(j),(m) 8.75(n) 1/31/2023 2,886
5,500 Ardagh Packaging Finance plc / Ardagh
Holdings USA, Inc.(j) 7.25 5/15/2024 5,706
3,000 Ardagh Packaging Finance plc / Ardagh
Holdings USA, Inc.(j) 6.00 2/15/2025 2,925
3,250 Reynolds Group Issuer, Inc. / Reynolds Group
Issuer, LLC / Reynolds Group Issuer Lu(j) 7.00 7/15/2024 3,329
----------
14,846
----------
TRUCKING & LEASING (0.2%)
3,000 Park Aerospace Holdings Ltd.(j) 5.50 2/15/2024 3,052
----------
Total Industrial 42,611
----------
UTILITIES (1.3%)
---------------
ELECTRIC (1.3%)
7,000 AES Gener S.A. (5 Yr. Semi-Annual Swap + 6.82%)(j) 8.38(o) 12/18/2073 7,172
10,000 Electricite de France S.A. (10 Yr. Semi-Annual
Swap + 3.71%)(j) 5.25(o) -(p) 9,908
8,975 Enel S.p.A. (5 Yr. Semi-Annual Swap + 5.88%)(j) 8.75(o) 9/24/2073 9,648
----------
Total Utilities 26,728
----------
Total Eurodollar and Yankee Obligations (cost: $346,924) 348,474
----------
================================================================================
18 | USAA HIGH INCOME FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------------------------------------
EXCHANGE-TRADED FUNDS (5.5%)
611,170 iShares iBoxx $ High Yield Corporate Bond ETF(b) $ 52,017
1,741,700 SPDR Bloomberg Barclays High Yield Bond ETF(b) 61,569
----------
Total Exchange-Traded Funds (cost: $113,614) 113,586
----------
----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
----------------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT OBLIGATIONS (0.2%)
$ 3,000 Bahamas Government International Bond(j)
(cost: $3,000) 6.00% 11/21/2028 3,080
----------
MUNICIPAL OBLIGATIONS (0.7%)
FLORIDA (0.5%)
9,200 Liberty County (Put Date 2/07/2019)(j),(r) 1.59 10/01/2028 9,200
----------
ILLINOIS (0.1%)
2,000 City of Chicago 7.05 1/01/2029 2,143
----------
NEW JERSEY (0.1%)
2,500 EDA 5.71 6/15/2030 2,793
----------
Total Municipal Obligations (cost: $13,700) 14,136
----------
PREFERRED BONDS (0.1%)
FINANCIAL (0.1%)
---------------
INSURANCE (0.1%)
3,000 Catlin Insurance Co. Ltd. (3 mo. LIBOR + 2.98%)(j)
(cost: $3,000) 5.74(h) -(p) 2,892
----------
Total Preferred Bonds (cost: $3,000) 2,892
----------
U.S. GOVERNMENT AGENCY ISSUES (0.4%)(s)
COMMERCIAL MBS (0.4%)
2,428 Freddie Mac(+) 3.12(i) 10/25/2031 2,331
5,000 Freddie Mac(+) 3.15(i) 11/25/2025 5,041
----------
Total U.S. Government Agency Issues (cost: $7,543) 7,372
----------
U.S. TREASURY SECURITIES (0.0%)
NOTES (0.0%)
550 U.S. Treasury Note(l) (cost: $544) 2.00 2/15/2025 535
----------
Total Bonds (cost: $1,894,599) 1,842,274
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 19
================================================================================
----------------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (7.5%)
COMMON STOCKS (3.0%)
BASIC MATERIALS (0.4%)
---------------------
CHEMICALS (0.3%)
19,215 LyondellBasell Industries N.V. "A" $ 1,671
172,882 MPM Holdings, Inc.(t) 5,325
----------
6,996
----------
FOREST PRODUCTS & PAPER (0.0%)
534 Resolute Forest Products, Inc. 4
----------
MINING (0.1%)
245,000 Alamos Gold, Inc. "A" 1,093
33,650 Newmont Mining Corp. 1,148
----------
2,241
----------
Total Basic Materials 9,241
----------
COMMUNICATIONS (0.3%)
--------------------
MEDIA (0.1%)
77,900 Comcast Corp. "A" 2,849
----------
TELECOMMUNICATIONS (0.2%)
50,503 AT&T, Inc. 1,518
63,000 CenturyLink, Inc. 965
28,650 Verizon Communications, Inc. 1,577
----------
4,060
----------
Total Communications 6,909
----------
CONSUMER, CYCLICAL (0.3%)
------------------------
AIRLINES (0.1%)
23,000 United Continental Holdings, Inc.(t) 2,007
----------
AUTO PARTS & EQUIPMENT (0.1%)
10,356 Lear Corp. 1,594
----------
LODGING (0.1%)
25,400 Hyatt Hotels Corp. "A" 1,776
13,500 Las Vegas Sands Corp. 788
----------
2,564
----------
Total Consumer, Cyclical 6,165
----------
CONSUMER, NON-CYCLICAL (0.6%)
----------------------------
COMMERCIAL SERVICES (0.1%)
13,899 Automatic Data Processing, Inc. 1,944
----------
================================================================================
20 | USAA HIGH INCOME FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------------------------------------
HEALTHCARE-PRODUCTS (0.0%)
3,407 Diagnostic Services Holdings, Inc.(f),(g),(q) $ 267
----------
HOUSEHOLD PRODUCTS/WARES (0.1%)
11,242 Kimberly-Clark Corp. 1,252
----------
PHARMACEUTICALS (0.4%)
22,300 AbbVie, Inc. 1,791
18,400 CVS Health Corp. 1,206
16,562 Johnson & Johnson 2,204
30,900 Merck & Co., Inc. 2,300
14,607 Novartis AG ADR 1,278
----------
8,779
----------
Total Consumer, Non-cyclical 12,242
----------
ENERGY (0.3%)
------------
COAL (0.0%)
13,151 Peabody Energy Corp. 469
----------
OIL & GAS (0.3%)
414,000 Approach Resources, Inc.(b),(t) 399
8,522 Chevron Corp. 977
5,500 Comstock Resources, Inc.(t) 33
55,337 Harvest Oil & Gas Corp.(b),(t) 955
21,663 Nine Point Energy Holdings, Inc.(f),(g),(q) 108
32,263 Royal Dutch Shell plc ADR "A" 1,992
2,772 Sabine Oil & Gas Holdings, Inc., acquired 8/11/2016; cost $3,204(f),(u) 125
4,982 SilverBow Resources, Inc.(t) 121
22,883 Thunderbird Resources Equity, Inc.(f),(g),(q) 10
----------
4,720
----------
OIL & GAS SERVICES (0.0%)
3,813 Paragon Litigation "B"(f),(q) 146
2,542 Paragon Litigation "A"(f),(q) 2
----------
148
----------
Total Energy 5,337
----------
FINANCIAL (0.8%)
---------------
BANKS (0.3%)
27,800 BB&T Corp. 1,357
18,507 J.P. Morgan Chase & Co. 1,915
111,918 KeyCorp 1,843
109,207 Regions Financial Corp. 1,657
----------
6,772
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 21
================================================================================
----------------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (0.2%)
24,700 CME Group, Inc. $ 4,502
13,639 Synchrony Financial 410
----------
4,912
----------
INSURANCE (0.1%)
1,995 Brighthouse Financial, Inc.(t) 74
21,952 MetLife, Inc. 1,003
----------
1,077
----------
INVESTMENT COMPANIES (0.1%)
202,000 Prospect Capital Corp.(b) 1,374
----------
REITS (0.1%)
17,000 Crown Castle International Corp. 1,990
129,100 MFA Financial, Inc. 946
----------
2,936
----------
Total Financial 17,071
----------
INDUSTRIAL (0.0%)
----------------
MISCELLANEOUS MANUFACTURERS (0.0%)
35,316 General Electric Co. 359
----------
TECHNOLOGY (0.3%)
----------------
SEMICONDUCTORS (0.1%)
42,500 Intel Corp. 2,002
----------
SOFTWARE (0.2%)
176 Avaya Holdings Corp.(t) 3
33,200 Microsoft Corp. 3,467
----------
3,470
----------
Total Technology 5,472
----------
Total Common Stocks (cost: $53,519) 62,796
----------
PREFERRED STOCKS (4.5%)
COMMUNICATIONS (0.2%)
--------------------
TELECOMMUNICATIONS (0.2%)
200,000 Qwest Corp., 6.50% 4,234
----------
CONSUMER, NON-CYCLICAL (1.8%)
----------------------------
AGRICULTURE (0.8%)
400,000 CHS, Inc., 7.10%, (3 mo. LIBOR + 4.30%)(p) 10,690
200,000 CHS, Inc., cumulative redeemable, 7.88%(p) 5,554
----------
16,244
----------
================================================================================
22 | USAA HIGH INCOME FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------------------------------------
FOOD (1.0%)
200,000 Dairy Farmers of America, Inc., cumulative redeemable, 7.88%(j),(p) $ 19,950
----------
Total Consumer, Non-cyclical 36,194
----------
ENERGY (1.5%)
------------
OIL & GAS (0.1%)
3,800 Chesapeake Energy Corp., 5.75%(j),(p) 2,127
464 Nine Point Energy Holdings, Inc.,(f),(g),(q) 186
----------
2,313
----------
PIPELINES (1.4%)
1,127,328 NuStar Logistics, LP, 9.52%, (3 mo. LIBOR + 6.73%) 28,259
----------
Total Energy 30,572
----------
FINANCIAL (1.0%)
---------------
BANKS (0.4%)
1,265 M&T Bank Corp., cumulative redeemable, 6.38%(p) 1,268
8,000 U.S. Bancorp, 3.81%, (3 mo. LIBOR + 1.02%)(p) 6,380
----------
7,648
----------
DIVERSIFIED FINANCIAL SERVICES (0.0%)
928 Ditech Holding Corp., (Zero Coupon)(p) 1
----------
INSURANCE (0.3%)
3,000 American Overseas Group Ltd., non-cumulative, 6.29%,
(3 mo. LIBOR + 3.56%)(f),(g),(q) 750
274,059 Delphi Financial Group, Inc., cumulative redeemable, 5.93%,
(3 mo. LIBOR + 3.19%) 6,338
----------
7,088
----------
REITS (0.3%)
100,000 Equity Residential Properties Trust, 8.29%, Series K, depositary shares,
cumulative redeemable(p) 6,200
----------
Total Financial 20,937
----------
GOVERNMENT (0.0%)
----------------
SOVEREIGN (0.0%)
80,000 Freddie Mac(+), 8.38%(p) 719
20,000 Freddie Mac(+), 6.02%(p) 162
----------
Total Government 881
----------
Total Preferred Stocks (cost: $97,401) 92,818
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 23
================================================================================
----------------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------------------------------------
WARRANTS (0.0%)
ENERGY (0.0%)
-------------
OIL & GAS (0.0%)
8,791 Sabine Oil & Gas Holdings, Inc., acquired 8/11/2016; cost $0(f),(u) $ 55
1,565 Sabine Oil & Gas Holdings, Inc., acquired 8/11/2016; cost $0(f),(t),(u) 8
13,764 SandRidge Energy, Inc.(t) 1
5,795 SandRidge Energy, Inc.(t) -
----------
Total Energy 64
----------
Warrants (cost: $0) 64
----------
Total Equity Securities (cost: $150,919) 155,678
----------
----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
----------------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (2.9%)
COMMERCIAL PAPER (2.7%)
$ 2,177 Cabot Corp.(j) 2.70% 2/05/2019 2,176
8,875 Centerpoint Energy, Inc.(j) 2.74 2/07/2019 8,871
8,500 Centerpoint Energy, Inc.(j) 2.75 2/11/2019 8,494
8,437 CSLB Holdings, Inc.(j) 2.70 2/01/2019 8,437
6,000 CSLB Holdings, Inc.(j) 2.70 2/06/2019 5,998
11,009 Royal Caribbean Cruise(j) 2.91 2/04/2019 11,006
8,000 Southern Co. Gas Capital(j) 2.80 2/14/2019 7,992
2,755 Tyson Foods, Inc.(j) 2.74 2/19/2019 2,751
----------
Total Commercial Paper (cost: $55,725) 55,725
----------
----------------------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
----------------------------------------------------------------------------------------------------------------------------
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.2%)
4,973,445 State Street Institutional Treasury Money Market Fund
Premier Class, 2.31%(v) (cost: $4,973) 4,973
----------
Total Money Market Instruments (cost: $60,698) 60,698
----------
================================================================================
24 | USAA HIGH INCOME FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (6.5%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (6.5%)
32,220,861 Goldman Sachs Financial Square Government Fund Institutional
Class, 2.34%(v) $ 32,221
101,953,378 HSBC U.S. Government Money Market Fund Class I, 2.38%(v) 101,953
----------
Total Short-Term Investments Purchased with Cash Collateral from
Securities Loaned (cost: $134,174) 134,174
----------
TOTAL INVESTMENTS (COST: $2,240,391) $2,192,824
==========
----------------------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
----------------------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
----------------------------------------------------------------------------------------------------------------------------
Bonds:
Bank Loans $ - $ 84,012 $ 6 $ 84,018
Collateralized Mortgage Obligations - 2,137 - 2,137
Commercial Mortgage Securities - 6,690 - 6,690
Corporate Obligations - 1,256,603 2,751 1,259,354
Eurodollar and Yankee Obligations - 348,354 120 348,474
Exchange-Traded Funds 113,586 - - 113,586
Foreign Government Obligations - 3,080 - 3,080
Municipal Obligations - 14,136 - 14,136
Preferred Bonds - 2,892 - 2,892
U.S. Government Agency Issues - 7,372 - 7,372
U.S. Treasury Securities 535 - - 535
Equity Securities:
Common Stocks 62,138 273 385 62,796
Preferred Stocks - 91,882 936 92,818
Warrants 1 63 - 64
Money Market Instruments:
Commercial Paper - 55,725 - 55,725
Government & U.S. Treasury
Money Market Funds 4,973 - - 4,973
Short-Term Investments Purchased with
Cash Collateral from Securities Loaned:
Government & U.S. Treasury Money
Market Funds 134,174 - - 134,174
----------------------------------------------------------------------------------------------------------------------------
Total $315,407 $1,873,219 $4,198 $2,192,824
----------------------------------------------------------------------------------------------------------------------------
Refer to the Portfolio of Investments for additional industry, country, or
geographic region classifications.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
At January 31, 2019, the Fund had transfers into/out of Level 3 that were under
0.50% of net assets.
================================================================================
PORTFOLIO OF INVESTMENTS | 25
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A 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 17.8% of net assets at
January 31, 2019.
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 CATEGORIES AND DEFINITIONS
EURODOLLAR AND YANKEE OBLIGATIONS - Eurodollar obligations are U.S.
dollar-denominated instruments that are issued outside the U.S. capital
markets by foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions. Yankee
obligations are dollar-denominated instruments that are issued by foreign
issuers in the U.S. capital markets.
ASSET-BACKED AND COMMERCIAL MORTGAGE-BACKED SECURITIES - Asset-backed
securities represent a participation in, or are secured by and payable
from, a stream of payments generated by particular assets. Commercial
mortgage-backed securities reflect an interest in, and are secured by,
================================================================================
26 | USAA HIGH INCOME FUND
================================================================================
mortgage loans on commercial real property. These securities represent
ownership in a pool of loans and are divided into pieces (tranches) with
varying maturities. The stated final maturity of such securities represents
the date the final principal payment will be made for the last outstanding
loans in the pool. The weighted average life is the average time for
principal to be repaid, which is calculated by assuming prepayment rates of
the underlying loans. The weighted average life is likely to be
substantially shorter than the stated final maturity as a result of
scheduled principal payments and unscheduled principal prepayments. Stated
interest rates on commercial mortgage-backed securities may change slightly
over time as underlying mortgages paydown.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) - Collateralized mortgage
obligations are debt obligations of a legal entity that are fully
collateralized by a portfolio of mortgages or mortgage-related securities.
CMOs are issued in multiple classes (tranches), with specific adjustable or
fixed interest rates, varying maturities, and must be fully retired no
later than its final distribution date. The cash flow from the underlying
mortgages is used to pay off each tranche separately. CMOs are designed to
provide investors with more predictable cash flows than regular mortgage
securities, but such cash flows can be difficult to predict because of the
effect of prepayments.
COMMERCIAL PAPER - Consists of short-term unsecured promissory notes with
maturities ranging from one to 270 days, issued mainly by corporations.
Commercial paper is usually purchased at a discount and matures at par
value; however, it also may be interest-bearing. Rate represents an
annualized yield at time of purchase or coupon rate, if applicable.
WARRANTS - Entitle the holder to buy a proportionate amount of common
stock at a specified price for a stated period.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
ADR American depositary receipts are receipts issued by a U.S.
bank evidencing ownership of foreign shares. Dividends are
paid in U.S. dollars.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 27
================================================================================
CMT Constant Maturity Treasury
EDA Economic Development Authority
LIBOR London Interbank Offered Rate
REITS Real estate investment trusts - Dividend distributions from
REITS may be recorded as income and later characterized by
the REIT at the end of the fiscal year as capital gains or a
return of capital. Thus, the Fund will estimate the
components of distributions from these securities and revise
when actual distributions are known.
Zero Coupon Normally issued at a significant discount from face value and
do not provide for periodic interest payments. Income is
earned from the purchase date by accreting the purchase
discount of the security to par over the life of the
security.
o SPECIFIC NOTES
(a) Bank loans (loans)-are not registered under the Securities
Act of 1933. The loans contain certain restrictions on resale and
cannot be sold publicly. The stated interest rates represent the all in
interest rate of all contracts within the loan facilities. The interest
rates are adjusted periodically, and the rates disclosed represent the
current rate at January 31, 2019. The weighted average life of the
loans are likely to be shorter than the stated final maturity date due
to mandatory or optional prepayments. The loans are deemed liquid by
USAA Asset Management Company, under liquidity guidelines approved by
USAA Mutual Funds Trust's Board of Trustees, unless otherwise noted as
illiquid.
(b) The security, or a portion thereof, was out on loan as of January
31, 2019.
(c) At January 31, 2019, the issuer was in default with respect to
interest and/or principal payments.
================================================================================
28 | USAA HIGH INCOME FUND
================================================================================
(d) The bank loan will settle after January 31, 2019, at which time the
interest rate will be determined.
(e) Security or a portion of the security purchased on a delayed-delivery
and/or when-issued basis.
(f) Security deemed illiquid by USAA Asset Management Company, under
liquidity guidelines approved by USAA Mutual Funds Trust's Board of
Trustees.
(g) Security was classified as Level 3.
(h) Variable-rate security - interest rate is adjusted periodically.
The interest rate disclosed represents the rate at January 31, 2019.
(i) Stated interest rates may change slightly over time as underlying
mortgages paydown.
(j) Restricted security that is not registered under the Securities Act
of 1933. A resale of this security in the United States may occur in an
exempt transaction to a qualified institutional buyer as defined by
Rule 144A, and as such has been deemed liquid by USAA Asset Management
Company under liquidity guidelines approved by USAA Mutual Funds
Trust's Board of Trustees, unless otherwise noted as illiquid.
(k) Security is interest only. Interest-only commercial mortgage-backed
securities (CMBS IOs) represent the right to receive only the interest
payments on an underlying pool of commercial mortgage loans. The
purchase yield reflects an anticipated yield based upon interest rates
at the time of purchase and the estimated timing and amount of future
cash flows. Coupon rates after purchase vary from period to period. The
principal amount represents the notional amount of the underlying pool
on which current interest is calculated. CMBS IOs are backed by loans
that have various forms of prepayment protection, which include lock-out
provisions, yield maintenance provisions, and prepayment penalties. This
serves to moderate their prepayment risk. CMBS IOs are subject to
default-related prepayments that may have a negative impact on yield.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 29
================================================================================
(l) At January 31, 2019, the security, or a portion thereof, was
segregated to cover delayed-delivery and/or when-issued purchases.
(m) Payment-in-kind (PIK) - security in which the issuer has or will
have the option to make all or a portion of the interest or dividend
payments in additional securities in lieu of cash.
(n) All of the coupon is PIK.
(o) Fixed to floating security that initially pays a fixed rate and
converts to a floating rate coupon at a specified date in the future.
The rate presented is a fixed rate.
(p) Security is perpetual and has no final maturity date but may be
subject to calls at various dates in the future.
(q) Security was fair valued at January 31, 2019, by USAA Asset
Management Company in accordance with valuation procedures approved by
USAA Mutual Funds Trust's Board of Trustees. The total value of all
such securities was $4,340,000, which represented 0.2% of the Fund's
net assets.
(r) Variable-rate demand notes (VRDNs) - Provide the right to sell the
security at face value on either that day or within the rate-reset
period. VRDNs will normally trade as if the maturity is the earlier put
date, even though stated maturity is longer. The interest rate is reset
on the put date at a stipulated daily, weekly, monthly, quarterly, or
other specified time interval to reflect current market conditions.
These securities do not indicate a reference rate and spread in their
description.
(s) U.S. government agency issues - Mortgage-backed securities issued
by certain U.S. Government Sponsored Enterprises (GSEs) such as the
Government National Mortgage Association (GNMA or Ginnie Mae) and
certain other U.S. government guaranteed securities are supported by
the full faith and credit of the U.S. government. Securities issued by
other GSEs, such as Federal Home Loan Mortgage Corporation (Freddie Mac
or FHLMC) and Federal National Mortgage Association (Fannie Mae or
FNMA), indicated
================================================================================
30 | USAA HIGH INCOME FUND
================================================================================
with a "+", are supported only by the right of the GSE to borrow from
the U.S. Treasury, the discretionary authority of the U.S. government to
purchase the GSEs' obligations, or only by the credit of the issuing
agency, instrumentality, or corporation, and are neither issued nor
guaranteed by the U.S. Treasury. In September of 2008, the U.S. Treasury
placed Fannie Mae and Freddie Mac under conservatorship and appointed
the Federal Housing Finance Agency (FHFA) to act as conservator and
oversee their daily operations. In addition, the U.S. Treasury entered
into purchase agreements with Fannie Mae and Freddie Mac to provide them
with capital in exchange for senior preferred stock. While these
arrangements are intended to ensure that Fannie Mae and Freddie Mac can
continue to meet their obligations, it is possible that actions by the
U.S. Treasury, FHFA, or others could adversely impact the value of the
Fund's investments in securities issued by Fannie Mae and Freddie Mac.
(t) Non-income-producing security.
(u) Restricted security that is not registered under the Securities
Act of 1933. The aggregate market value of these securities at January
31, 2019, was $188,000, which represented less than 0.01% of the Fund's
net assets.
(v) Rate represents the money market fund annualized seven-day yield
at January 31, 2019.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 31
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (including securities on
loan of $130,498) (cost of $2,240,391) $2,192,824
Cash 255
Receivables:
Capital shares sold 1,198
USAA Asset Management Company (Note 7) 7
Dividends and interest 30,629
Securities sold 19,040
Other 139
----------
Total assets 2,244,092
----------
LIABILITIES
Payables:
Upon return of securities loaned 134,174
Securities purchased 35,550
Capital shares redeemed 1,592
Accrued management fees 964
Accrued transfer agent's fees 66
Other accrued expenses and payables 268
----------
Total liabilities 172,614
----------
Net assets applicable to capital shares outstanding $2,071,478
==========
NET ASSETS CONSIST OF:
Paid-in capital $2,200,223
Accumulated loss (128,745)
----------
Net assets applicable to capital shares outstanding $2,071,478
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $1,158,430/149,417 capital
shares outstanding, no par value) $ 7.75
==========
Institutional Shares (net assets of $898,720/116,060 capital
shares outstanding, no par value) $ 7.74
==========
Adviser Shares (net assets of $9,435/1,214 capital shares
outstanding, no par value) $ 7.77
==========
R6 Shares (net assets of $4,893/632 capital shares
outstanding, no par value) $ 7.75
==========
See accompanying notes to financial statements.
================================================================================
32 | USAA HIGH INCOME FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $10) $ 7,368
Interest 63,831
Securities lending (net) 769
--------
Total income 71,968
--------
EXPENSES
Management fees 5,855
Administration and servicing fees:
Fund Shares 892
Institutional Shares 464
Adviser Shares 7
R6 Shares 1
Transfer agent's fees:
Fund Shares 824
Institutional Shares 464
Adviser Shares 4
Distribution and service fees (Note 7):
Adviser Shares 12
Custody and accounting fees:
Fund Shares 90
Institutional Shares 71
Adviser Shares 1
Postage:
Fund Shares 47
Institutional Shares 52
Shareholder reporting fees:
Fund Shares 30
Institutional Shares 14
Trustees' fees 17
================================================================================
FINANCIAL STATEMENTS | 33
================================================================================
Registration fees:
Fund Shares $ 14
Institutional Shares 20
Adviser Shares 9
R6 Shares 13
Professional fees 62
Other 19
--------
Total expenses 8,982
--------
Expenses reimbursed:
Adviser Shares (11)
R6 Shares (12)
--------
Net expenses 8,959
--------
NET INVESTMENT INCOME 63,009
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FUTURES CONTRACTS
Net realized gain (loss) on:
Unaffiliated transactions (4,460)
Affiliated transactions (Note 4) 2,086
Futures transactions (692)
Change in net unrealized appreciation/(depreciation) of:
Investments (66,228)
Futures contracts (68)
--------
Net realized and unrealized loss (69,362)
--------
Decrease in net assets resulting from operations $ (6,353)
========
See accompanying notes to financial statements.
================================================================================
34 | USAA HIGH INCOME FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited), and year ended
July 31, 2018
--------------------------------------------------------------------------------------------------------------
1/31/2019 7/31/2018
--------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 63,009 $ 128,287
Net realized loss on investments (2,374) (3,914)
Net realized loss on futures transactions (692) (5,520)
Change in net unrealized appreciation/(depreciation) of:
Investments (66,228) (60,046)
Futures contracts (68) 158
--------------------------
Increase (decrease) in net assets resulting
from operations (6,353) 58,965
--------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (35,636) (70,436)
Institutional Shares (28,135) (57,110)
Adviser Shares (288) (555)
R6 Shares (155) (304)
--------------------------
Distributions to shareholders (64,214) (128,405)
--------------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 6)
Fund Shares (9,663) 20,277
Institutional Shares (37,032) 25,850
Adviser Shares (250) 232
R6 Shares 2 39
--------------------------
Total net increase (decrease) in net assets from
capital share transactions (46,943) 46,398
--------------------------
Net decrease in net assets (117,510) (23,042)
NET ASSETS
Beginning of period 2,188,988 2,212,030
--------------------------
End of period $2,071,478 $2,188,988
==========================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 35
================================================================================
NOTES TO FINANCIAL STATEMENTS
January 31, 2019 (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 47 separate funds. The
USAA High Income Fund (the Fund) qualifies as a registered investment company
under Accounting Standards Codification Topic 946. The information presented in
this semiannual report pertains only to the Fund, which is classified as
diversified under the 1940 Act. The Fund's investment objective is to seek to
provide an attractive total return primarily through high current income and
secondarily through capital appreciation.
The Fund consists of four classes of shares: High Income Fund Shares (Fund
Shares), High Income Fund Institutional Shares (Institutional Shares), High
Income Fund Adviser Shares (Adviser Shares), and High Income Fund R6 Shares (R6
Shares). Each class of shares has equal rights to assets and earnings, except
that each class bears certain class-related expenses specific to the particular
class. These expenses include administration and servicing fees, transfer agent
fees, postage, shareholder reporting fees, distribution and service (12b-1)
fees, and certain registration and custodian fees. Expenses not attributable to
a specific class, income, and realized gains or losses on investments are
allocated to each class of shares based on each class' relative net assets. Each
class has exclusive voting rights on matters related solely to that class and
separate voting rights on matters that relate to all classes. The Institutional
Shares are 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
================================================================================
36 | USAA HIGH INCOME FUND
================================================================================
insurance companies. Institutional Shares also are 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). The Adviser Shares
permit investors to purchase shares through financial intermediaries, including
banks, broker-dealers, insurance companies, investment advisers, plan sponsors,
and financial professionals that provide various administrative and distribution
services. The R6 Shares are available for investment by participants in
employer-sponsored retirement plans where a financial intermediary provides
retirement recordkeeping services to plan participants and to endowment funds
and foundations.
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of USAA Asset Management Company (AMCO or Manager), the investment
adviser to the Fund, and USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services (SAS), the transfer agent to the Fund, announced that AMCO and
SAS would be acquired by Victory Capital Holdings, Inc. (Victory), a global
investment management firm headquartered in Cleveland, Ohio (the Transaction).
The closing of the Transaction is expected to be completed during the second
quarter of 2019, pending satisfaction of certain closing conditions and
approvals, including certain approvals of the Fund's Board of Trustees and of
the Fund's shareholders at a special shareholder meeting to be held on April 18,
2019. The Transaction is not expected to result in any material changes to the
Fund's investment objectives and principal investment strategies.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Valuation and Liquidity 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.
The Fund utilizes 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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 37
================================================================================
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. 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 ask
prices or the last sales price to value a security when, in the
Service's judgment, these prices are readily available and are
representative of the security's market value. For many securities,
such prices are not readily available. The Service generally prices
those securities based on methods which 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. Generally, debt securities are categorized in Level
2 of the fair value hierarchy; however, to the extent the valuations
include significant unobservable inputs, the securities would be
categorized in Level 3.
2. Equity securities, including exchange-traded funds (ETFs),
except as otherwise noted, traded primarily on a domestic securities
exchange or the 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. Securities traded primarily on foreign securities
exchanges or markets are valued at the last quoted sale price, or the
most recently determined official closing price calculated according to
local market convention, available at the time the Fund is valued. If
no last sale or official closing price is reported or available, the
average of the bid and ask prices generally is used. Actively traded
equity securities listed on a domestic exchange generally are
categorized in Level 1 of the fair value hierarchy. Certain preferred
and equity securities traded in inactive markets generally are
categorized in Level 2 of the fair value hierarchy.
3. 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
================================================================================
38 | USAA HIGH INCOME FUND
================================================================================
prices of certain foreign securities held by the Fund are determined. In
many cases, events affecting the values of foreign securities that occur
between the time of their last quoted sale or official closing price and
the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not need to be reflected in the value of the Fund's
foreign securities. However, the Manager will monitor for events that
would materially affect the value of the Fund's foreign securities and
the Committee will consider such available information that it deems
relevant and will determine a fair value for the affected foreign
securities in accordance with valuation procedures. In addition,
information from an external vendor or other sources may be used to
adjust the foreign market closing prices of foreign equity securities to
reflect what the Committee believes to be the fair value of the
securities as of the close of the NYSE. Fair valuation of affected
foreign equity securities may occur frequently based on an assessment
that events which occur on a fairly regular basis (such as U.S. market
movements) are significant. Such securities are categorized in Level 2
of the fair value hierarchy.
4. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value hierarchy.
5. Short-term debt securities with original or remaining maturities of
60 days or less may be valued at amortized cost, provided that amortized
cost represents the fair value of such securities.
6. Repurchase agreements are valued at cost.
7. Futures are valued at the settlement price at the close of market on
the principal exchange on which they are traded or, in the absence of
any transactions that day, the settlement price on the prior trading
date if it is within the spread between the closing bid and ask price
closest to the last reported sale price.
8. 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 price in all participating options exchanges
================================================================================
NOTES TO FINANCIAL STATEMENTS | 39
================================================================================
determined to most closely reflect market value of the options at the
time of computation of the Fund's NAV.
9. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has been recognized in relation to a security or class of securities,
the securities are valued in good faith by the Committee in accordance
with 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, other pricing services, 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, evaluation of
credit quality, and an evaluation of the forces that influenced the
market in which the securities are purchased and sold. Level 2
securities include equity securities that are valued using market inputs
and other observable factors deemed by the Manager to appropriately
reflect fair value.
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.
================================================================================
40 | USAA HIGH INCOME FUND
================================================================================
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 indexes.
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. INVESTMENTS IN SECURITIES - Securities transactions are accounted for as
of the date the securities are purchased or sold (trade date). Gains or
losses from sales of investment securities are computed on the identified
cost basis. Dividend income, less foreign taxes, if any, is recorded on the
ex-dividend date. If the ex-dividend date has passed, certain dividends
from foreign securities are recorded upon notification. Interest income is
recorded daily on the accrual basis. Premiums and discounts are amortized
over the life of the respective securities, using the effective yield
method for long-term securities and the straight-line method for short-term
securities.
D. FEDERAL TAXES - The Fund's policy is to comply with the requirements of
the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its taxable
income and net capital gains, if any, to its shareholders. Therefore, no
federal income tax provision is required.
For the six-month period ended January 31, 2019, 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 the Fund's tax basis to
determine if adjustments to this conclusion are necessary. The statute of
limitations on the Fund's tax return filings generally remain open for the
three preceding fiscal reporting year ends and remain subject to
examination by the Internal Revenue Service and state taxing authorities.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 41
================================================================================
E. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the
exchange rate obtained from an independent pricing service on the
respective dates of such transactions.
2. Market value of securities, other assets, and liabilities at the
exchange rate obtained from an independent pricing service on a daily
basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held.
Such fluctuations are included with the net realized and unrealized gain or
loss from investments.
Separately, net realized foreign currency gains/losses may arise from
sales of foreign currency, currency gains/losses realized between the trade
and settlement dates on security transactions, and from the difference
between amounts of dividends, interest, and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent of the amounts
received. At the end of the Fund's fiscal year, net realized foreign
currency gains/losses are reclassified from accumulated net realized
gains/losses to accumulated undistributed net investment income on the
Statement of Assets and Liabilities, as such amounts are treated as
ordinary income/loss for federal income tax purposes. Net unrealized
foreign currency exchange gains/losses arise from changes in the value of
assets and liabilities, other than investments in securities, resulting
from changes in the exchange rate.
F. SECURITIES PURCHASED ON A DELAYED-DELIVERY OR WHEN-ISSUED BASIS - Delivery
and payment for securities that have been purchased by the Fund on a
delayed-delivery or when-issued basis or for delayed draws on loans can take
place a month or more after the trade date. During the period prior to
settlement, these securities do not earn interest, are subject to market
fluctuation, and may increase or decrease in value prior to their delivery.
================================================================================
42 | USAA HIGH INCOME FUND
================================================================================
The Fund receives a commitment fee for delayed draws on loans. The Fund
maintains segregated assets with a market value equal to or greater than the
amount of its purchase commitments. The purchase of securities on a
delayed-delivery or when-issued basis and delayed-draw loan commitments may
increase the volatility of the Fund's NAV to the extent that the Fund makes
such purchases and commitments while remaining substantially fully invested.
G. REDEMPTION FEES - All share classes held in the Fund less than 60 days
are subject to a redemption fee equal to 1.00% of the proceeds of the
redeemed or exchanged shares. All redemption fees paid will be accounted
for by the Fund as an addition to paid in capital. For the six-month
period ended January 31, 2019, the Fund Shares, Institutional Shares and
Adviser Shares charged redemption fees of $10,000, $1,000 and $1,000,
respectively. The R6 Shares did not charge any redemption fees.
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, along with other funds of the Trust and USAA ETF Trust
(together, the Trusts), 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 provide
================================================================================
NOTES TO FINANCIAL STATEMENTS | 43
================================================================================
temporary or emergency cash needs, including redemption requests that might
otherwise require the untimely disposition of securities. Subject to
availability (including usage of the facility by other funds of the Trusts), the
Fund may borrow from CAPCO an amount up to 5% of the Fund's total assets at an
interest rate based on the London Interbank Offered Rate (LIBOR), plus 100.0
basis points.
The Trusts are also assessed facility fees by CAPCO in the amount of 14.0 basis
points of the amount of the committed loan agreement. Prior to September 30,
2018, the maximum annual facility fee was 13.0 basis points of the amount of the
committed loan agreement. The facility fees are allocated among the funds of the
Trusts based on their respective average daily net assets for the period.
The Trusts may request an optional increase of the committed loan agreement from
$500 million up to $750 million. If the Trusts increase the committed loan
agreement, the assessed facility fee on the amount of the additional commitment
will be 15.0 basis points.
For the six-month period ended January 31, 2019, the Fund paid CAPCO facility
fees of $9,000, which represents 2.6% of the total fees paid to CAPCO by the
funds of the Trusts. The Fund had no borrowings under this agreement during the
six-month period ended January 31, 2019.
(3) DISTRIBUTIONS
The tax basis of distributions and any accumulated undistributed net investment
income will be determined as of the Fund's tax year-end of July 31, 2019, in
accordance with applicable federal tax law.
Distributions of net investment income are made monthly. Distributions of
realized gains from security transactions not offset by capital losses are made
annually in the succeeding fiscal year or as otherwise required to avoid the
payment of federal taxes.
At July 31, 2018, the Fund had net capital loss carryforwards of $78,822,000,
for federal income tax purposes as shown in the table below. It is unlikely
================================================================================
44 | USAA HIGH INCOME FUND
================================================================================
that the Board will authorize a distribution of capital gains realized in the
future until the capital loss carryforwards have been used.
CAPITAL LOSS CARRYFORWARDS
---------------------------------------
TAX CHARACTER
---------------------------------------
(NO EXPIRATION) BALANCE
--------------- -----------
Short-Term $15,214,000
Long-Term 63,608,000
-----------
Total $78,822,000
===========
As of January 31, 2019, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as the cost reported
in the financial statements. The net unrealized appreciation/(depreciation) on
investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
FUND APPRECIATION DEPRECIATION (DEPRECIATION)
----------------------------------------------------------------------------------------------------------
USAA High Income Fund $80,983,000 $(128,550,000) $(47,567,000)
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended January 31, 2019, were
$274,917,000 and $259,241,000, respectively.
In accordance with affiliated transaction procedures approved by the Board,
purchases and sales of security transactions were executed between the Fund and
affiliated USAA Funds at the then-current market price with no brokerage
commissions incurred. The affiliated transactions executed by the Fund,
including short-term securities, during the six-month period ended January 31,
2019 were as follows:
PURCHASES SALES NET REALIZED GAIN
------------------------------------------------------------------------------------------
$9,200,000 $26,121,000 $2,086,000
================================================================================
NOTES TO FINANCIAL STATEMENTS | 45
================================================================================
(5) SECURITIES LENDING
The Fund, through a securities lending agreement with Citibank, N.A.
(Citibank), may lend its securities to qualified financial institutions, such as
certain broker-dealers, to earn additional income, net of income retained by
Citibank. The borrowers are required to secure their loans continuously with
collateral in an amount at least equal to 102% of the fair value of domestic
securities and foreign government securities loaned and 105% of the fair value
of foreign securities and all other securities loaned. Collateral may be cash,
U.S. government securities, or other securities as permitted by SEC guidelines.
Cash collateral may be invested in high-quality short-term investments.
Collateral requirements are determined daily based on the value of the Fund's
securities on loan as of the end of the prior business day. Loans are
terminable upon demand and the borrower must return the loaned securities within
the lesser of one standard settlement period or five business days. Risks
relating to securities-lending transactions include that the borrower may not
provide additional collateral when required or return the securities when due,
and that the value of the short-term investments will be less than the amount of
cash collateral required to be returned to the borrower. The Fund's agreement
with Citibank does not include master netting provisions. Non-cash collateral
received by the Fund may not be sold or re-pledged except to satisfy borrower
default. Cash collateral is listed in the Fund's Portfolio of Investments and
Financial Statements while non-cash collateral is not included.
At January 31, 2019, the Fund's value of outstanding securities on loan and the
value of collateral are as follows:
VALUE OF SECURITIES
ON LOAN NON-CASH COLLATERAL CASH COLLATERAL
--------------------------------------------------------------------------------
$130,498,000 $- $134,174,000
(6) CAPITAL SHARE TRANSACTIONS
At January 31, 2019, there were an unlimited number of shares of capital stock
at no par value authorized for the Fund.
Capital share transactions for the Institutional Shares resulted from purchases
and sales by the affiliated USAA fund-of-funds as well as other
================================================================================
46 | USAA HIGH INCOME FUND
================================================================================
persons or legal entities that the Fund may approve from time to time. Capital
share transactions for all classes were as follows, in thousands:
SIX-MONTH PERIOD ENDED YEAR ENDED
JANUARY 31, 2019 JULY 31, 2018
----------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------
FUND SHARES:
Shares sold 12,947 $ 101,562 28,387 $ 231,121
Shares issued from reinvested
dividends 4,248 33,111 8,071 65,364
Shares redeemed** (18,531) (144,336) (34,005) (276,208)
------------------------------------------------
Net increase (decrease) from
capital share transactions (1,336) $ (9,663) 2,453 $ 20,277
================================================
INSTITUTIONAL SHARES:
Shares sold 5,014 $ 39,308 14,057 $ 114,252
Shares issued from reinvested
dividends 3,479 27,088 6,800 55,026
Shares redeemed** (13,162) (103,428) (17,670) (143,428)
------------------------------------------------
Net increase (decrease) from
capital share transactions (4,669) $ (37,032) 3,187 $ 25,850
================================================
ADVISER SHARES:
Shares sold 34 $ 270 177 $ 1,443
Shares issued from reinvested
dividends 16 128 30 242
Shares redeemed** (84) (648) (178) (1,453)
------------------------------------------------
Net increase (decrease) from
capital share transactions (34) $ (250) 29 $ 232
================================================
R6 SHARES:
Shares sold -* $ 3 5 $ 39
Shares issued from reinvested
dividends -* 1 -* -*
Shares redeemed** (-)* (2) (-)* (-)*
------------------------------------------------
Net increase from capital
share transactions -* $ 2 5 $ 39
================================================
* Represents less than 500 shares or $500.
** Net of redemption fees, if any.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 47
================================================================================
(7) TRANSACTIONS WITH MANAGER
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 the Fund's assets, subject to the
authority of and supervision by the Board. The Manager 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 all or a portion of the
Fund's assets. For the six-month period ended January 31, 2019, the Fund had no
subadviser(s).
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee is accrued daily and paid monthly at
an annualized rate of 0.50% of the Fund's average daily net assets.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper High Yield Bond Funds Index. The Lipper High Yield Bond
Funds Index tracks the total return performance of funds within the Lipper High
Yield Funds category.
The performance period for each class consists of the current month plus the
previous 35 months. The performance period for the R6 Shares commenced on
December 1, 2016, and includes the performance of the Fund Shares for periods
prior to December 1, 2016. The following table is utilized to determine the
extent of the performance adjustment:
OVER/UNDER PERFORMANCE
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
-------------------------------------------------------------------
+/- 20 to 50 +/- 4
+/- 51 to 100 +/- 5
+/- 101 and greater +/- 6
(1)Based on the difference between average annual performance of the
relevant share class of the Fund and its Lipper relevant index,
rounded to the nearest basis point. Average daily net assets of the
share class are calculated over a rolling 36-month period.
================================================================================
48 | USAA HIGH INCOME FUND
================================================================================
Each class' annual performance adjustment rate is multiplied by the average
daily net assets of each respective class over the entire performance period,
which is then multiplied by a fraction, the numerator of which is the number of
days in the month and the denominator of which is 365 (366 in leap years). The
resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper High Yield Bond Funds Index over that period, even if the
class had overall negative returns during the performance period.
For the six-month period ended January 31, 2019, the Fund incurred management
fees, paid or payable to the Manager, of $5,855,000, which included a
performance adjustment for the Fund Shares, Institutional Shares, Adviser
Shares, and R6 Shares of $283,000, $241,000, $2,000, and less than $500,
respectively. For the Fund Shares, Institutional Shares, Adviser Shares, and R6
Shares the performance adjustments were 0.05%, 0.05%, 0.03%, and 0.01%,
respectively.
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 at an annualized rate of 0.15% of average
daily net assets of the Fund Shares and Adviser Shares, 0.10% of average daily
net assets of the Institutional Shares, and 0.05% of average daily net assets of
the R6 Shares. For the six-month period ended January 31, 2019, the Fund Shares,
Institutional Shares, Adviser Shares, and R6 Shares incurred administration and
servicing fees, paid or payable to the Manager, of $892,000, $464,000, $7,000,
and $1,000, respectively.
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 January 31, 2019, the Fund reimbursed the Manager less than $500 for these
compliance and legal services. These expenses are included in the professional
fees on the Fund's Statement of Operations.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 49
================================================================================
EXPENSE LIMITATION - The Manager agreed, through November 30, 2019, to limit the
total annual operating expenses of the Adviser Shares and R6 Shares to 1.00% and
0.65%, respectively, of their average daily net assets, excluding extraordinary
expenses and before reductions of any expenses paid indirectly, and to reimburse
the Adviser Shares and R6 Shares for all expenses in excess of those amounts.
This expense limitation arrangement may not be changed or terminated through
November 30, 2019, without approval of the Board, and may be changed or
terminated by the Manager at any time after that date. For the six-month period
ended January 31, 2019, the Adviser Shares and R6 Shares incurred reimbursable
expenses of $11,000, and $12,000, respectively, of which $7,000 was receivable
from the Manager.
TRANSFER AGENT'S FEES - SAS, an affiliate of the Manager, provides transfer
agent services to the Fund Shares and Adviser Shares based on an annual charge
of $25.50 per shareholder account plus out-of-pocket expenses. SAS pays a
portion of these fees to certain intermediaries for administration and servicing
of accounts that are held with such intermediaries. Transfer agent's fees for
Institutional Shares and R6 Shares are paid monthly based on a fee accrued daily
at an annualized rate of 0.10% of the Institutional Shares' and 0.01% of the R6
Shares' average daily net assets, plus out-of-pocket expenses. For the
six-month period ended January 31, 2019, the Fund Shares, Institutional Shares,
Adviser Shares, and R6 Shares incurred transfer agent's fees, paid or payable to
SAS, of $824,000, $464,000, $4,000, and less than $500, respectively.
DISTRIBUTION AND SERVICE (12b-1) FEES - The Fund has adopted a plan pursuant to
Rule 12b-1 under the 1940 Act with respect to the Adviser Shares. Under the
plan, the Adviser Shares pay fees to USAA Investment Management Company (IMCO),
the distributor, for distribution and shareholder services. IMCO pays all or a
portion of such fees to intermediaries that make the Adviser Shares available
for investment by their customers. The fee is accrued daily and paid monthly at
an annual rate of 0.25% of the Adviser Shares' average daily net assets. Adviser
Shares are offered and sold without imposition of an initial sales charge or a
contingent deferred sales charge.
================================================================================
50 | USAA HIGH INCOME FUND
================================================================================
For the six-month period ended January 31, 2019, the Adviser Shares incurred
distribution and service (12b-1) fees of $12,000.
UNDERWRITING SERVICES - IMCO provides exclusive underwriting and distribution of
the Fund's shares on a continuing best-efforts basis and receives no fee or
other compensation for these services, but may receive 12b-1 fees as described
above, with respect to Adviser Shares.
(8) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other USAA Funds and
is one of 16 USAA mutual funds in which the affiliated USAA fund-of-funds
invest. The USAA fund-of-funds do not invest in the underlying funds for the
purpose of exercising management or control, and the affiliated fund-of-funds'
annual or semiannual reports may be viewed at usaa.com. As of January 31, 2019,
the USAA fund-of-funds owned the following percentages of the total outstanding
shares of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
-------------------------------------------------------------------------------
Cornerstone Conservative 0.3
Target Retirement Income 0.4
Target Retirement 2020 0.7
Target Retirement 2030 1.3
Target Retirement 2040 1.1
Target Retirement 2050 0.1
Target Retirement 2060 0.0*
* Represents less than 0.1%.
The Manager is indirectly wholly owned by USAA, a large, diversified financial
services institution. At January 31, 2019, USAA and its affiliates owned 617,000
Adviser Shares and 627,000 R6 Shares, which represents 50.9% of the Adviser
Shares outstanding, 99.2% of the R6 Shares outstanding, and 0.4% of the Fund's
total outstanding shares.
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 | 51
================================================================================
(9) UPCOMING REGULATORY MATTERS
In October 2016, the U.S. Securities and Exchange Commission (SEC) issued Final
Rule Release No. 33-10233, INVESTMENT COMPANY LIQUIDITY RISK MANAGEMENT PROGRAMS
(Liquidity Rule). The Liquidity Rule requires funds to establish a liquidity
risk management program and enhances disclosures regarding funds' liquidity. The
requirements to implement a liquidity risk management program and establish a
15% illiquid investment limit became effective December 1, 2018. However, in
February 2018, the SEC issued Release No. IC-33010, INVESTMENT COMPANY LIQUIDITY
RISK MANAGEMENT PROGRAMS; COMMISSION GUIDANCE FOR IN-KIND ETFs, which delayed
certain requirements related to liquidity classification, highly liquid
investment minimums, and board approval of the liquidity risk management
programs to June 1, 2019. The Manager continues to evaluate the impact of this
rule on the Fund's financial statements and various filings.
(10) RECENTLY ADOPTED ACCOUNTING STANDARDS
In August 2018, the SEC adopted amendments to Regulation S-X for investment
companies governing the form and content of financial statements. The amendments
to Regulation S-X took effect on November 5, 2018, and the financial statements
have been modified accordingly, for the current and prior periods.
ASU 2018-13, FAIR VALUE MEASUREMENT
-----------------------------------
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820).
The amendments in the ASU impact disclosure requirements for fair value
measurement. ASU 2018-13 is effective for fiscal years beginning after December
15, 2019. Early adoption is permitted and can include the entire standard or
certain provisions that exclude or amend disclosures. Management has elected to
early adopt ASU 2018-13 effective with the current reporting period. The
adoption of ASU 2018-13 guidance is limited to changes in the Fund's notes to
financial statement disclosures regarding valuation method, fair value, and
transfers between levels of the fair value hierarchy.
================================================================================
52 | USAA HIGH INCOME FUND
================================================================================
ASU 2017-08, PREMIUM AMORTIZATION OF PURCHASED CALLABLE DEBT SECURITIES
-----------------------------------------------------------------------
In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2017-08, Premium Amortization of Purchased Callable Debt
Securities. The amendments in the ASU shorten the premium amortization period on
a purchased callable debt security from the security's contractual life to the
earliest call date. ASU 2017-08 became effective for funds with fiscal years
beginning after December 15, 2018. The Manager has determined the adoption of
this standard has no impact on the financial statements and reporting
disclosures of the Fund.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 53
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
--------------------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
--------------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 8.01 $ 8.27 $ 7.90 $ 8.17 $ 8.91 $ 8.79
--------------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .23 .47 .47 .48 .47 .50
Net realized and
unrealized gain (loss) (.25) (.26) .37 (.28) (.68) .29
--------------------------------------------------------------------------------------------
Total from investment
operations (.02) .21 .84 .20 (.21) .79
--------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.24) (.47) (.47) (.47) (.47) (.51)
Realized capital gains - - - - (.06) (.16)
--------------------------------------------------------------------------------------------
Total distributions (.24) (.47) (.47) (.47) (.53) (.67)
--------------------------------------------------------------------------------------------
Redemption fees added
to beneficial interests(a) .00 .00 .00 .00 .00 .00
--------------------------------------------------------------------------------------------
Net asset value at
end of period $ 7.75 $ 8.01 $ 8.27 $ 7.90 $ 8.17 $ 8.91
============================================================================================
Total return (%)* (.27) 2.65 10.92 2.95 (2.42) 9.35
Net assets at
end of period(000) $1,158,430 $1,207,790 $1,225,990 $1,105,081 $1,322,058 $1,521,633
Ratios to average
daily net assets:**
Expenses (%)(b) .88(c) .81 .83 .82 .89 .89
Net investment
income (%) 5.88(c) 5.79 5.80 6.22 5.46 5.71
Portfolio turnover (%) 13 22 21 36 16 21
* 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 January 31, 2019, average daily net assets
were $1,178,976,000.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
54 | USAA HIGH INCOME FUND
================================================================================
INSTITUTIONAL SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
------------------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
------------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 8.00 $ 8.26 $ 7.90 $ 8.16 $ 8.91 $ 8.78
------------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .23 .48 .48 .48 .48 .52
Net realized and
unrealized gain (loss) (.25) (.26) .36 (.26) (.69) .29
------------------------------------------------------------------------------------------
Total from investment
operations (.02) .22 .84 .22 (.21) .81
------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.24) (.48) (.48) (.48) (.48) (.52)
Realized capital gains - - - - (.06) (.16)
------------------------------------------------------------------------------------------
Total distributions (.24) (.48) (.48) (.48) (.54) (.68)
------------------------------------------------------------------------------------------
Redemption fees added
to beneficial interests .00(a) .00(a) .00(a) .00(a) .00(a) -
------------------------------------------------------------------------------------------
Net asset value at
end of period $ 7.74 $ 8.00 $ 8.26 $ 7.90 $ 8.16 $ 8.91
==========================================================================================
Total return (%)* (.23) 2.74 10.89 3.19 (2.44) 9.61
Net assets at end
of period (000) $898,720 $966,124 $970,767 $990,980 $811,060 $757,419
Ratios to average
daily net assets:**
Expenses (%)(b) .80(c) .72 .75 .71 .80 .76
Net investment
income (%) 5.96(c) 5.88 5.89 6.32 5.55 5.87
Portfolio turnover (%) 13 22 21 36 16 21
* 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 January 31, 2019, average daily net assets
were $919,639,000.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
FINANCIAL HIGHLIGHTS | 55
================================================================================
ADVISER SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
--------------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
--------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 8.03 $ 8.28 $ 7.92 $ 8.18 $ 8.92 $ 8.79
--------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .23 .46 .46 .44 .45 .49
Net realized and
unrealized gain (loss) (.26) (.26) .35 (.25) (.69) .27
--------------------------------------------------------------------------------------
Total from investment
operations (.03) .20 .81 .19 (.24) .76
--------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.23) (.45) (.45) (.45) (.45) (.48)
Realized capital gains - - - - (.06) (.16)
--------------------------------------------------------------------------------------
Total distributions (.23) (.45) (.45) (.45) (.51) (.64)
--------------------------------------------------------------------------------------
Redemption fees added to
beneficial interests .00(a) .00(a) .00(a) .00(a) .01 .01
--------------------------------------------------------------------------------------
Net asset value at
end of period $ 7.77 $ 8.03 $ 8.28 $ 7.92 $ 8.18 $ 8.92
======================================================================================
Total return (%)* (.33) 2.55 10.49 2.73 (2.67) 9.16
Net assets at end of
period (000) $9,435 $10,019 $10,096 $9,183 $12,545 $9,218
Ratios to average
daily net assets:**
Expenses (%)(b) 1.00(c) 1.02(d) 1.08(e) 1.15 1.16(f) 1.19
Expenses, excluding
reimbursements (%)(b) 1.22(c) 1.13 1.15 1.19 1.21 1.19
Net investment
income (%) 5.75(c) 5.58 5.55 5.88 5.19 5.41
Portfolio turnover (%) 13 22 21 36 16 21
* 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 January 31, 2019, average daily net assets
were $9,760,000.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) Prior to December 1, 2017, the Manager voluntarily agreed to limit the
annual expenses of the Adviser Shares to 1.05% of the Adviser Shares'
average daily net assets.
(e) Prior to December 1, 2016, the Manager voluntarily agreed to limit the
annual expenses of the Adviser Shares to 1.15% of the Adviser Shares'
average daily net assets.
(f) Prior to December 1, 2014, the Manager voluntarily agreed to limit the
annual expense of the Adviser Shares to 1.20% of the Adviser Shares'
average daily net assets.
================================================================================
56 | USAA HIGH INCOME FUND
================================================================================
R6 SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED YEAR ENDED PERIOD ENDED
JANUARY 31, JULY 31, JULY 31,
--------------------------------------------------
2019 2018 2017***
--------------------------------------------------
Net asset value at beginning of period $ 8.01 $ 8.26 $ 7.98
-------------------------------------------
Income (loss) from investment operations:
Net investment income .24 .48 .32
Net realized and unrealized gain (loss) (.25) (.25) .28
-------------------------------------------
Total from investment operations (.01) .23 .60
-------------------------------------------
Less distributions from:
Net investment income (.25) (.48) (.32)
-------------------------------------------
Net asset value at end of period $ 7.75 $ 8.01 $ 8.26
===========================================
Total return (%)* (.15) 2.94 7.64
Net assets at end of period (000) $4,893 $5,055 $5,177
Ratios to average daily net assets:**
Expenses (%)(a) .65(b) .65 .65(b)
Expenses, excluding reimbursements (%)(a) 1.11(b) .92 1.26(b)
Net investment income (%) 6.11(b) 5.95 5.88(b)
Portfolio turnover (%) 13 22 21
* 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 January 31, 2019, average daily net assets
were $4,940,000.
*** R6 Shares commenced operations on December 1, 2016.
(a) Does not include acquired fund fees, if any.
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
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FINANCIAL HIGHLIGHTS | 57
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EXPENSE EXAMPLE
January 31, 2019 (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, distribution and service
(12b-1) 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 August 1, 2018, through January 31, 2019.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table 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 for your share
class in the "actual" 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 line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class and an assumed rate of return of
5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing costs of
================================================================================
58 | USAA HIGH INCOME FUND
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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 line labeled "hypothetical"
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 AUGUST 1, 2018 -
AUGUST 1, 2018 JANUARY 31, 2019 JANUARY 31, 2019
------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $ 997.30 $4.43
Hypothetical
(5% return before expenses) 1,000.00 1,020.77 4.48
INSTITUTIONAL SHARES
Actual 1,000.00 997.70 4.03
Hypothetical
(5% return before expenses) 1,000.00 1,021.17 4.08
ADVISER SHARES
Actual 1,000.00 996.70 5.03
Hypothetical
(5% return before expenses) 1,000.00 1,020.16 5.09
R6 SHARES
Actual 1,000.00 998.50 3.27
Hypothetical
(5% return before expenses) 1,000.00 1,021.93 3.31
*Expenses are equal to the annualized expense ratio of 0.88% for Fund Shares,
0.80% for Institutional Shares, 1.00% for Adviser Shares, and 0.65% for R6
Shares, which are net of any reimbursements and expenses paid indirectly,
multiplied by the average account value over the period, multiplied by 184
days/365 days for Fund Shares, Institutional Shares, Adviser Shares, and R6
Shares (to reflect the one-half-year period). The Fund's actual ending account
values are based on its actual total returns of (0.27)% for Fund Shares,
(0.23)% for Institutional Shares, (0.33)% for Adviser Shares, and (0.15)% for
R6 Shares, for the six-month period of August 1, 2018, through January 31,
2019.
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EXPENSE EXAMPLE | 59
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ADVISORY AGREEMENT(S)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with Victory Capital
Holdings, Inc. ("Victory Holdings") pursuant to which Victory Holdings would
acquire all of the outstanding stock of AMCO and USAA Transfer Agency Company
d/b/a USAA Shareholder Account Services ("USAA Transfer Agent") (the
"Transaction"). The Independent Trustees were advised that the Transaction, if
completed, would constitute
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60 | USAA HIGH INCOME FUND
================================================================================
an "assignment" (as that term is defined in Section 2(a)(4) of the 1940 Act) and
result in the automatic termination of the Existing Management Agreements
("Change of Control Event"). The Independent Trustees also were advised that it
was proposed that Victory Capital, a subsidiary of Victory Holdings, would serve
as the investment adviser to each Fund after the closing of the Transaction
("Post-Transaction") and that the Board would be asked to consider approval of
the terms and conditions of the New Advisory Agreement with Victory Capital and
thereafter to submit the New Advisory Agreement to each Fund's shareholders for
approval. Because the Change of Control Event also would result in the
termination of each existing subadvisory agreement between AMCO and the
subadvisers to the Funds ("Existing Subadvisory Agreements"), the Independent
Trustees were advised that the Board would also be asked to approve the New
Subadvisory Agreements.
In anticipation of the Transaction, the Trustees met at a series of subsequent
in-person meetings on November 27-28, 2018, January 7-8, 2019, and January
14-15, 2019, which included meetings of the full Board and separate meetings of
the Independent Trustees for the purposes of considering, among other things:
whether it would be in the best interests of each Fund and its respective
shareholders to approve the New Agreements; and the anticipated impacts of the
Transaction on the Funds and their shareholders (each, a "Meeting"). During each
of these Meetings, the Board sought additional and clarifying information as it
deemed necessary or appropriate. In this connection, the Independent Trustees
worked with their independent legal counsel to prepare formal due diligence
requests (the "Diligence Requests") that were submitted to Victory Capital,
Victory Capital Advisers, Inc. ("VCA"), and the subadvisers. The Diligence
Requests sought information relevant to the Board's consideration of the New
Advisory Agreement, the New Subadvisory Agreements, distribution arrangements,
and other anticipated impacts of the Transaction on the Funds and their
shareholders. Victory Capital, VCA, and the subadvisers provided documents and
information in response to the Diligence Requests (the "Response Materials").
Following their review of the Response Materials, the Independent Trustees
submitted a supplemental due diligence request for additional and clarifying
information (the "Supplemental Diligence Request") to Victory Capital and VCA.
Victory
================================================================================
ADVISORY AGREEMENT(S) | 61
================================================================================
Capital and VCA provided further information in response to the Supplemental
Diligence Request, which the Board reviewed. Senior management representatives
of Victory Capital and/or AMCO participated in a portion of each Meeting and
addressed various questions raised by the Board. Throughout the process, the
Independent Trustees were assisted by their independent legal counsel and
counsel to the Funds, who advised them on, among other things, their duties and
obligations relating to their consideration of the New Agreements.
The Board's evaluation of the New Agreements reflected the information provided
specifically in connection with its review of the New Agreements, as well as,
where relevant, information that was previously furnished to the Board in
connection with the most recent renewal of the Existing Management Agreements
and Existing Subadvisory Agreements at an in-person meeting of the Board on
April 18, 2018 (the "2018 15(c) Meeting") and at other subsequent Board meetings
in 2018. The Board's evaluation of the New Agreements also reflected the
knowledge gained as Board members of the Funds with respect to services provided
by AMCO, its affiliates, and each subadviser to the Funds.
The Board's approvals and recommendations were based on its determination,
within its business judgment, that it would be in the best interests of each
Fund and its respective shareholders, for Victory Capital and, as applicable,
the subadvisers, to provide investment advisory, investment subadvisory, and
related services to the Funds, following the closing of the Transaction.
FACTORS CONSIDERED IN APPROVING THE NEW ADVISORY AGREEMENT
In connection with the Board's consideration of the New Advisory Agreement,
Victory Capital and AMCO advised the Board about a variety of matters, including
the following:
o The nature, extent, and quality of the services to be provided to the
Funds by Victory Capital Post-Transaction are expected to be of at least
the same level as the services currently provided to the Funds by AMCO.
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62 | USAA HIGH INCOME FUND
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o Victory Capital's stated commitment to maintaining and enhancing the
USAA member/USAA Fund shareholder experience, including creating a
dedicated USAA Fund sales and client service call center that will
provide ongoing client service and advice to existing and new USAA
members.
o Victory Capital proposes to: (1) replace the underlying indexes for
the USAA Extended Market Index Fund and USAA S&P 500 Index Fund with
indexes designed to provide shareholders with comparable exposure and
investment outcomes; (2) change the USAA Extended Market Index Fund's
and USAA S&P 500 Index Fund's investment objectives and strategies in
light of the changes to their underlying indexes; and (3) change the
name of the USAA S&P 500 Index Fund to the USAA 500 Index Fund.
o Victory Capital does not propose changes to the investment
objective(s) of any other Funds. Although the investment processes used
by Victory Capital's portfolio managers may differ from those used by
AMCO's portfolio managers or, if applicable, any subadviser's portfolio
managers, such differences are not currently expected to result in
changes to the principal investment strategies or principal investment
risks of the Funds.
o The New Advisory Agreement does not change any Fund's advisory fee
rate or the computation method for calculating such fees (except that
Victory Capital, subject to Board approval, may in the future use a
single designated share class to calculate the performance adjustment).
For at least two years after the Transaction closes, Victory Capital has
agreed to waive fees and/or reimburse expenses so that each Fund's
annual expense ratio (excluding certain customary items) does not exceed
the levels reflected in each Fund's most recent audited financial
statements at the time the Transaction closes (or the levels of AMCO's
then-current expense caps, if applicable), excluding the impact of any
performance adjustment to the Fund's advisory fee.
================================================================================
ADVISORY AGREEMENT(S) | 63
================================================================================
o The portfolio managers at AMCO that manage the Fixed Income Funds(1) as
well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be advised
by Victory Capital through its Victory Solutions platform, Victory
Capital proposes that the same subadvisers be retained Post-Transaction,
although Victory Capital may change the allocation to a particular
subadviser Post-Transaction. No changes are expected to the portfolio
managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's
(1)The Fixed Income Funds include the following Funds: California Bond Fund,
Government Securities Fund, High Income Fund, Income Fund, Intermediate-Term
Bond Fund, Tax Exempt Intermediate-Term Fund, Tax Exempt Long-Term Fund, New
York Bond Fund, Short-Term Bond Fund, Tax Exempt Short- Term Fund, Ultra
Short-Term Bond Fund, Virginia Bond Fund, Money Market Fund, Tax Exempt Money
Market Fund and Treasury Money Market Trust.
(2)The Cornerstone Funds include the following Funds: Cornerstone Aggressive
Fund, Cornerstone Conservative Fund, Cornerstone Equity Fund, Cornerstone
Moderate Fund, Cornerstone Moderately Aggressive Fund, and Cornerstone
Moderately Conservative Fund.
(3)The Target Retirement Funds include the following Funds: Target Retirement
2020 Fund, Target Retirement 2030 Fund, Target Retirement 2040 Fund, Target
Retirement 2050 Fund, Target Retirement 2060 Fund, and Target Retirement
Income Fund.
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64 | USAA HIGH INCOME FUND
================================================================================
businesses to Victory Capital. Victory Capital and USAA expect to enter
into a transition services agreement under which USAA will continue to
provide Victory Capital with certain services that are currently
provided by USAA to AMCO and the USAA Transfer Agent for a specified
period of time after the closing of the Transaction to assist Victory
Capital in transitioning the USAA member distribution channel and member
support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital
================================================================================
ADVISORY AGREEMENT(S) | 65
================================================================================
is capable of providing the same level of investment management services
currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund, Growth
& Income Fund, Income Stock Fund, Global Equity Income Fund, and Precious
Metals and Minerals Fund.
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66 | USAA HIGH INCOME FUND
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The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored and managed by
Victory Capital ("Victory Funds") with similar investment
================================================================================
ADVISORY AGREEMENT(S) | 67
================================================================================
objectives and strategies managed by the portfolio managers who would manage the
Funds. Based on information presented to the Board at the Meetings and its
discussions with Victory Capital, the Board concluded that Victory Capital is
capable of generating a level of long-term investment performance that is
appropriate in light of each Fund's investment objectives, strategies and
restrictions.
FEES TO BE PAID TO VICTORY CAPITAL AND EXPENSES OF THE FUNDS - The Board
considered that it had reviewed each Fund's existing advisory fee rate and
computation method for calculating such fees at the 2018 15(c) Meeting. The
Board considered that the New Advisory Agreement does not change any Fund's
advisory fee rate or the computation method for calculating such fees, except
that Victory Capital, subject to Board approval, may in the future use a single
designated share class to calculate the performance adjustment and apply the
resulting performance adjustment across each other class of shares of the Fund.
The Board considered that the use of a single designated class to calculate the
performance adjustment for each other class of shares of the Fund could mean
that shareholders of a class other than the class used to measure the
performance adjustment may pay a performance adjustment that is higher or lower
than if the adjustment were calculated on a class by class basis, primarily due
to the impact of differences in the fees and expenses between share classes on
performance. The Board considered that the New Advisory Agreement stipulates
that the period for measuring performance for calculating a Fund's performance
adjustment begins on the date that Victory Capital begins managing the Fund;
therefore, no performance adjustments will be made for the first twelve months
of the New Advisory Agreement, consistent with applicable regulations. The Board
also considered Victory Capital's contractual commitment under the expense
limitation agreement ("ELA") to waive fees and/or reimburse expenses for at
least two years after the closing of the Transaction, so that each Fund's annual
expense ratio (excluding acquired fund fees and expenses, any performance
adjustment to a Fund's advisory fee, interest, taxes, brokerage commissions,
other expenditures which are capitalized in accordance with generally accepted
accounting principles, and other extraordinary expenses not incurred in the
ordinary course of such Fund's business) does not exceed the levels reflected in
each Fund's most recent audited financial statements at the time the
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68 | USAA HIGH INCOME FUND
================================================================================
Transaction closes (or the levels of AMCO's then-current expense caps, if
applicable), excluding the impact of any performance adjustment to a Fund's
advisory fee. The Board considered that the ELA permits Victory Capital to
recoup advisory fees waived and expenses reimbursed for up to three years after
the fiscal year in which the waiver or reimbursement took place, subject to the
lesser of any operating expense limitation in effect at the time of: (1) the
original waiver or expense reimbursement; or (2) recoupment. The Board also
considered that Victory Capital and AMCO had represented to the Board that they
will use their best efforts to ensure that they and their respective affiliates
do not take any action that imposes an "unfair burden" on the Funds as a result
of the Transaction or as a result of any express or implied terms, conditions or
understandings applicable to the Change of Control Event, for so long as the
requirements of Section 15(f) of the 1940 Act apply. The Board also considered
a comparison of the proposed advisory fees to be paid by each Fund to the
advisory fees paid by funds and other accounts managed by Victory Capital deemed
to be comparable to the Fund in terms of investment objectives and strategies.
The Board considered that, with few exceptions, mostly involving weighted
average fees for separate accounts, the advisory fees to be paid by the Funds
were lower than the fees paid by these other funds and accounts. The Board
concluded that the retention of Victory Capital was unlikely to impose an unfair
burden on the Funds because, after the Transaction, none of AMCO, Victory
Capital, VCA, or any of their respective affiliates, would be entitled to
receive any compensation directly or indirectly (i) from any person in
connection with the purchase or sale of securities or other property to, from,
or on behalf of the Funds (other than ordinary fees for bona fide principal
underwriting services), or (ii) from the Funds or their shareholders for other
than bona fide investment advisory or other services. Based on its review, the
Board determined, with respect to each Fund, that Victory Capital's advisory fee
is fair and reasonable.
THE EXTENT TO WHICH VICTORY CAPITAL MAY REALIZE ECONOMIES OF SCALE AS THE FUNDS
GROW LARGER AND WHETHER FEE LEVELS REFLECT THESE ECONOMIES OF SCALE FOR THE
BENEFIT OF FUND SHAREHOLDERS - The Board considered potential or anticipated
economies of scale in relation to the services Victory Capital would provide to
each Fund. The Board considered that the New Advisory Agreement includes the
same advisory fee breakpoints for the same Funds as
================================================================================
ADVISORY AGREEMENT(S) | 69
================================================================================
the Existing Advisory Agreements. The Board also considered that Victory Capital
has contractually agreed to cap the Funds' annual operating expense ratios,
pursuant to the ELA, which will remain in effect for at least two years from the
closing of the Transaction, and may be extended. The Board also considered
Victory Capital's representation that the significant increase in its assets
under management Post-Transaction may reasonably be expected to enable the new
combined firm to reach greater economies of scale in a shorter time frame. The
Board noted that it will have the opportunity to periodically re-examine whether
a Fund or the Trust has achieved economies of scale, and the appropriateness of
investment advisory and administrative fees payable to Victory Capital, in the
future.
THE PROFITS TO BE REALIZED BY VICTORY CAPITAL AND ITS AFFILIATES FROM THEIR
RELATIONSHIP WITH THE TRUST - The Board considered the benefits Victory Capital
and its affiliates may derive from their relationship with the Funds, including
compensation to be paid to Victory Capital for the provision of certain
administrative, fund accounting and shareholder services to the Funds and
compensation to be paid to USAA Transfer Agent for the provision of transfer
agency services to the Funds. The Board considered the significant investments
Victory Capital expected to make to support and grow the USAA member channel and
the costs to integrate the USAA Fund business into Victory Capital. The Board
also considered Victory Capital's profitability report presented to the board of
trustees of the Victory Funds in connection with their most recent 15(c)
process. The Board considered Victory Capital's representation that the fully
integrated USAA Fund business, including investments to support ongoing growth,
was expected to have an overall marginally positive impact on Victory Capital's
overall financial profitability. The Board noted the difficulty of accurately
projecting profitability under the current circumstance and noted that it would
have the opportunity to give further consideration to Victory Capital's
profitability with respect to the Funds at the end of the initial two-year term
of the New Advisory Agreement.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
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70 | USAA HIGH INCOME FUND
================================================================================
deliver investment products and services to USAA's direct member-based channel.
The Board also considered that Victory Capital may derive reputational and other
benefits from its ability to use "USAA" and related names in connection with
operating and marketing the Funds. The Board considered that the Transaction, if
completed, would significantly increase Victory Capital's assets under
management and expand Victory Capital's investment capabilities. This increased
size and diversification could facilitate Victory Capital's continued investment
in its business and products, which Victory Capital would be able to leverage
across a broader base of assets. Victory Capital also would be able to use
trading commission credits from the Funds' transactions in securities to
"purchase" third party research and execution services to support its investment
process. Based on its review, the Board determined that any "fall-out" benefits
and other types of benefits that may accrue to Victory Capital are fair and
reasonable.
CONCLUSIONS - Based on the foregoing and other relevant considerations, at the
Meeting of the Board held on January 15, 2019, the Board, including a majority
of the Independent Trustees, acting within its business judgment, (1) concluded
that the terms of the New Advisory Agreement are fair and reasonable and that
approval of the New Advisory Agreement is in the best interests of each Fund and
its respective shareholders, (2) voted to approve the New Advisory Agreement,
and (3) voted to recommend approval of the New Advisory Agreement by
shareholders of the Funds. The Board evaluated all information available to it
on a Fund-by-Fund basis and its determinations were made separately in respect
of each Fund. The Board noted some factors may have been more or less important
with respect to any particular Fund and that no one factor was determinative of
its decisions which, instead, were premised upon the totality of factors
considered. In this connection, the Board also noted that different Board
members likely placed emphasis on different factors in reaching their individual
conclusions to vote in favor of the New Advisory Agreement and to recommend
approval of the New Advisory Agreement by shareholders of the Funds.
FACTORS CONSIDERED IN APPROVING THE NEW SUBADVISORY AGREEMENTS
In approving the New Subadvisory Agreements with each of Barrow, Hanley,
Mewhinney & Strauss, LLC, Brandes Investment Partners, L.P., ClariVest Asset
================================================================================
ADVISORY AGREEMENT(S) | 71
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Management LLC, Epoch Investment Partners, Inc., Granahan Investment Management,
Inc., Lazard Asset Management LLC, Loomis, Sayles & Company LP, Massachusetts
Financial Services Company, Northern Trust Investments, Inc., QS Investors, LLC,
The Renaissance Group LLP and Wellington Management Company LLP (each, a
"Subadviser" and together the "Subadvisers") with respect to the applicable
Funds, the Board considered various factors, among them: (i) the nature, extent,
and quality of services to be provided to the applicable Funds by the
Subadvisers; (ii) each Subadviser's compensation and any other benefits derived
from the subadvisory relationship; (iii) comparisons, to the extent applicable,
of subadvisory fees and performance to comparable investment companies; and (iv)
the terms of each New Subadvisory Agreement. The Board's evaluation of the New
Subadvisory Agreements reflected the information provided specifically in
connection with its review of the New Subadvisory Agreements, as well as, where
relevant, information that was previously furnished to the Board in connection
with the most recent renewal of the Existing Subadvisory Agreements at the 2018
15(c) meeting and at other subsequent Board meetings in 2018. A summary of the
Board's analysis of these factors is set forth below. After full consideration
of a variety of factors, the Board, including the Independent Trustees, voted to
approve each New Subadvisory Agreement. In approving each New Subadvisory
Agreement, the Board did not identify any single factor as controlling, and each
Trustee may have attributed different weights to various factors. The
Independent Trustees reviewed the proposed approval of the New Subadvisory
Agreements in private sessions with their independent legal counsel at which no
representatives of Victory Capital or AMCO were present.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY THE
SUBADVISERS - The Board considered information provided to them regarding the
services to be provided by each Subadviser, including information presented
periodically throughout the previous year. The Board considered each
Subadviser's level of knowledge and investment style. The Board reviewed the
experience and credentials of the investment personnel who are responsible for
managing the investment of portfolio securities with respect to each applicable
Fund and each Subadviser's level of staffing. The Board also noted each
Subadviser's brokerage practices. The Board also considered
================================================================================
72 | USAA HIGH INCOME FUND
================================================================================
each Subadviser's regulatory and compliance history. The Board also took into
account each Subadviser's risk management processes. The Board noted that AMCO's
monitoring processes of each Subadviser include, and Victory Capital's expected
monitoring processes of each Subadviser would include, among others: (i) regular
telephonic meetings to discuss, among other matters, investment strategies and
to review portfolio performance; (ii) monthly portfolio compliance checklists
and quarterly compliance certifications to the Board; and (iii) due diligence
visits to each Subadviser. The Board also considered that the terms and
conditions of the New Subadvisory Agreements are substantially similar to the
terms and conditions of the Existing Subadvisory Agreements.
SUBADVISER COMPENSATION - The Board took into account the financial condition of
each Subadviser. In considering the cost of services to be provided by each
Subadviser and the profitability to that Subadviser of its relationship with the
applicable Fund, the Board noted that the fees under the New Subadvisory
Agreements will be paid by Victory Capital. The Board also relied on the ability
of AMCO to negotiate each Existing Subadvisory Agreement and the fees thereunder
at arm's length. The Board considered that the fee rate to be payable under each
New Subadvisory Agreement were proposed to be identical to the fee rate
currently payable under each corresponding Existing Subadvisory Agreement. For
the above reasons, the Board determined that the expected profitability of each
Subadviser from its relationship with the applicable Fund was not a material
factor in its deliberations with respect to the consideration of the approval of
each New Subadvisory Agreement. For similar reasons, the Board concluded that
the potential for economies of scale in each Subadviser's management of the
applicable Fund was not a material factor in considering each New Subadvisory
Agreement, although the Board noted that certain New Subadvisory Agreements
contain breakpoints in their fee schedules.
SUBADVISORY FEES AND FUND PERFORMANCE - The Board previously compared the
subadvisory fees for each applicable Fund with the fees that each Subadviser
charges comparable clients, as applicable. The Board considered that each
applicable Fund will pay a management fee to Victory Capital and that, in turn,
Victory Capital will pay a subadvisory fee to each Subadviser.
================================================================================
ADVISORY AGREEMENT(S) | 73
================================================================================
At the 2018 15(c) meeting, the Board considered, among other data, each
applicable Fund's performance over shorter and longer term periods, as compared
to each Fund's respective peer group and noted that the Board reviews at its
regularly scheduled meetings information about each Fund's performance results.
The Board considered Victory Capital's capabilities with respect to monitoring
the performance, investment style and risk-adjusted performance of each
Subadviser. The Board also noted each Subadviser's performance record for
similar accounts, as applicable.
CONCLUSIONS - The Board reached the following conclusions regarding each New
Subadvisory Agreement, among others: (i) each Subadviser is qualified to manage
the applicable Fund's assets in accordance with its investment objective and
policies; (ii) each Subadviser maintains an appropriate compliance program;
(iii) the performance of each applicable Fund is reasonable in relation to the
performance of funds with similar investment objectives and to relevant indices
in view of the Fund's investment approach and Victory Capital is expected to
appropriately monitor each Fund's performance; and (iv) each Fund's advisory
expenses are reasonable in relation to those of similar funds and to the
services to be provided by Victory Capital and each Subadviser. Based on its
conclusions, the Board determined that the approval of each New Subadvisory
Agreement with respect to each applicable Fund would be in the best interests of
the Fund and its shareholders.
================================================================================
74 | USAA HIGH INCOME FUND
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Richard Y. Newton III
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN, State Street Bank and Trust Company
ACCOUNTING AGENT, AND P.O. Box 1713
SUB-ADMINISTRATOR Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
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) or (210) 531-8722;
(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 monthly portfolio holdings with the SEC
for the first and third quarters of each fiscal year as an exhibit to its
reports on Form N-PORT (beginning with filings after March 31, 2019).
Previously, the Fund made its complete schedule of portfolio holdings available
after the first and third fiscal quarters in regulatory filings on Form N-Q. The
Fund's Forms N-CSR, N-PORT, and N-Q are available at no charge (i) by calling
(800) 531-USAA (8722) or (210) 531-8722; (ii) at USAA.COM; and (iii) on the
SEC's website at HTTP://WWW.SEC.GOV.
================================================================================
--------------
USAA PRSRT STD
9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
--------------
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USAA We know what it means to serve.(R)
================================================================================
40051-0319 (C)2019, USAA. All rights reserved.
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA INCOME FUND]
================================================================================
SEMIANNUAL REPORT
USAA INCOME FUND
FUND SHARES (USAIX) o INSTITUTIONAL SHARES (UIINX)
o ADVISER SHARES (UINCX) o R6 SHARES (URIFX)
JANUARY 31, 2019
================================================================================
Beginning on January 1, 2021, as permitted by regulations adopted by the
Securities and Exchange Commission, paper copies of the Fund's shareholder
reports like this one will no longer be sent by mail, unless you specifically
request paper copies of the reports from the Fund or from your financial
intermediary, such as a broker-dealer or bank. Instead, the reports will be
made available on usaa.com, and you will be notified by mail each time a report
is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will
not be affected by this change and you need not take any action. You may elect
to receive shareholder reports and other communications from the Fund or your
financial intermediary electronically by notifying your financial intermediary
directly, or if you are a direct investor, by calling (800) 531-USAA (8722) or
logging on to usaa.com.
You may elect to receive all future reports in paper free of charge. You can
inform the Fund or your financial intermediary that you wish to continue
receiving paper copies of your shareholder reports by notifying your financial
intermediary directly, or if you are a direct investor, by calling (800)
531-USAA (8722) or logging on to usaa.com. Your election to receive reports in
paper will apply to all funds held with the USAA family of funds or your
financial intermediary.
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
INVESTMENT OVERVIEW 1
FINANCIAL INFORMATION
Portfolio of Investments 3
Notes to Portfolio of Investments 41
Financial Statements 47
Notes to Financial Statements 51
Financial Highlights 69
EXPENSE EXAMPLE 73
ADVISORY AGREEMENT(S) 75
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.
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 tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. 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.
(C)2019, USAA. All rights reserved.
================================================================================
================================================================================
INVESTMENT OVERVIEW
--------------------------------------------------------------------------------
o PORTFOLIO RATINGS MIX - 1/31/19 o
[PIE CHART OF PORTFOLIO RATINGS MIX]
AAA 21.1%
AA 11.4%
A 31.3%
BBB 29.5%
BELOW INVESTMENT-GRADE 5.2%
UNRATED 1.5%
[END PIE CHART]
This chart reflects the highest long-term rating from a Nationally Recognized
Statistical Rating Organization (NRSRO), with the four highest long-term credit
ratings labeled, in descending order of credit quality, AAA, AA, A, and BBB.
These categories represent investment-grade quality. NRSRO ratings are shown
because they provide independent analysis of the credit quality of the Funds'
investments. USAA Asset Management Company (the Manager) also performs its own
fundamental credit analysis of each security. As part of its fundamental credit
analysis, the Manager considers various criteria, including industry specific
actions, peer comparisons, payment ranking, and structure specific
characteristics. Any of the Funds' securities that are not rated by an NRSRO
appear in the chart above as "Unrated," but these securities are analyzed and
monitored by the Manager on an ongoing basis. Government securities that are
issued or guaranteed as to principal and interest by the U.S. government and
pre-refunded and escrowed-to-maturity municipal bonds that are not rated are
treated as AAA for credit quality purposes.
Percentages are of the total market value of the Fund's investments.
Refer to the Portfolio of Investments for a complete list of securities.
================================================================================
INVESTMENT OVERVIEW | 1
================================================================================
o TOP 10 HOLDINGS* - 1/31/19 o
(% of Net Assets)
U.S. Treasury Note, 2.00%, 2/15/2025 ..................................... 1.0%
U.S. Treasury Bond, 2.50%, 2/15/2045 ..................................... 0.8%
U.S. Treasury Bond, 2.38%, 1/15/2025 ..................................... 0.8%
U.S. Treasury Bond, 2.50%, 2/15/2046 ..................................... 0.7%
U.S. Treasury Note, 2.63%, 11/15/2020 .................................... 0.6%
U.S. Treasury Note, 1.63%, 2/15/2026 ..................................... 0.6%
U.S. Treasury Bond, 2.75%, 8/15/2042 ..................................... 0.5%
U.S. Treasury Bond, 3.88%, 8/15/2040 ..................................... 0.4%
SBA Tower Trust, 3.45%, 3/15/2023 ........................................ 0.4%
Nationwide Mutual Insurance Co., 5.08%, 12/15/2024 ....................... 0.4%
o ASSET ALLOCATION** - 1/31/19 o
(% of Net Assets)
[PIE CHART OF ASSET ALLOCATION]
CORPORATE OBLIGATIONS 45.9%
EURODOLLAR AND YANKEE OBLIGATIONS 18.6%
U.S. TREASURY SECURITIES 9.4%
MUNICIPAL OBLIGATIONS 6.6%
ASSET-BACKED SECURITIES 5.6%
U.S. GOVERNMENT AGENCY ISSUES 4.5%
COMMERCIAL MORTGAGE SECURITIES 3.8%
COLLATERALIZED LOAN OBLIGATIONS 1.5%
PREFERRED STOCKS 1.1%
BANK LOANS 0.9%
FOREIGN GOVERNMENT OBLIGATIONS 0.5%
MONEY MARKET INSTRUMENTS 0.4%
COMMON STOCKS 0.3%
PREFERRED BONDS 0.1%
[END PIE CHART]
*Does not include money market instruments and short-term investments purchased
with cash collateral from securities loaned.
**Does not include short-term investments purchased with cash collateral from
securities loaned.
Percentages are of the net assets of the Fund and may not equal 100%.
Refer to the Portfolio of Investments for a complete list of securities.
================================================================================
2 | USAA INCOME FUND
================================================================================
PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
BONDS (97.4%)
ASSET-BACKED SECURITIES (5.6%)
ASSET BACKED SECURITIES (5.1%)
------------------------------
AUTOMOBILE ABS (1.9%)
$ 5,000 AmeriCredit Automobile Receivables Trust 3.65% 5/09/2022 $ 5,035
9,650 AmeriCredit Automobile Receivables Trust 2.71 9/08/2022 9,555
5,000 AmeriCredit Automobile Receivables Trust 2.60 9/18/2023 4,950
4,000 AmeriCredit Automobile Receivables Trust 3.59 6/18/2024 4,029
500 Avis Budget Rental Car Funding AESOP, LLC(a) 3.52 2/20/2020 500
9,400 Avis Budget Rental Car Funding AESOP, LLC(a) 2.96 7/20/2020 9,389
1,334 Avis Budget Rental Car Funding AESOP, LLC(a) 3.75 7/20/2020 1,335
2,827 Avis Budget Rental Car Funding AESOP, LLC(a) 4.94 6/20/2022 2,861
5,250 Avis Budget Rental Car Funding AESOP, LLC(a) 4.27 3/20/2025 5,409
6,500 California Republic Auto Receivables Trust 2.91 12/15/2022 6,441
1,250 Canadian Pacer Auto Receivables Trust(a) 3.63 1/19/2024 1,270
2,148 Centre Point Funding, LLC(a) 2.61 8/20/2021 2,122
6,000 Chesapeake Funding II, LLC(a) 3.52 8/15/2030 6,059
6,000 Chesapeake Funding II, LLC(a) 3.81 1/15/2031 6,081
4,850 Credit Acceptance Auto Loan Trust(a) 3.35 6/15/2026 4,830
3,000 Hertz Vehicle Financing II, LP(a) 2.65 7/25/2022 2,945
6,250 Hertz Vehicle Financing II, LP(a),(b) 4.10 3/25/2023 6,273
8,667 Hertz Vehicle Financing II, LP(a) 3.29 10/25/2023 8,557
5,000 Hertz Vehicle Financing, LLC(a) 4.03 7/25/2024 5,077
8,500 OneMain Direct Auto Receivables Trust(a) 2.82 7/15/2024 8,429
12,000 OSCAR U.S. Funding Trust IX, LLC(a) 3.63 9/10/2025 12,196
4,760 OSCAR U.S. Funding Trust VIII, LLC(a) 3.50 5/12/2025 4,816
16,400 Santander Drive Auto Receivables Trust 3.39 4/15/2022 16,410
3,750 TCF Auto Receivables Owner Trust(a) 2.89 7/15/2021 3,743
1,143 Tesla Auto Lease Trust(a) 2.75 2/20/2020 1,140
4,500 Westlake Automobile Receivables Trust(a) 6.41 5/15/2023 4,558
4,000 World Omni Auto Receivables Trust 3.87 8/15/2025 4,091
----------
148,101
----------
CREDIT CARD ABS (0.2%)
18,417 Synchrony Credit Card Master Note Trust 3.87 5/15/2026 18,541
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 3
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
OTHER ABS (2.2%)
$ 1,951 BCC Funding XIII, LLC(a) 4.78% 8/20/2022 $ 1,983
25,000 Element Rail Leasing I, LLC(a) 3.67 4/19/2044 24,920
15,000 Hawaii Dept. of Business Economic Dev. & Tourism 3.24 1/01/2031 14,929
8,000 InSite Issuer, LLC(a) 4.10 12/15/2048 8,000
20,000 Louisiana Environmental Facilities & Community Dev. Auth. 3.24 8/01/2028 20,070
2,750 MMAF Equipment Finance, LLC(a) 2.68 7/16/2027 2,719
10,000 MMAF Equipment Finance, LLC(a) 2.49 2/19/2036 9,939
15,625 NP SPE II, LLC 4.22 10/21/2047 15,717
15,545 PSNH Funding, LLC 3.81 2/01/2035 16,002
6,700 Renew Financial(a) 3.95 9/20/2053 6,832
1,629 Renew Financial(a) 3.22 9/22/2053 1,620
4,952 Sapphire Aviation Finance I Ltd.(a) 4.25 3/15/2040 4,984
5,000 SBA Tower Trust(a) 2.90 10/15/2044 4,984
4,297 SCF Equipment Leasing, LLC(a) 3.41 12/20/2023 4,290
9,524 Start Ltd.(a) 4.09 5/15/2043 9,517
10,000 TRIP Rail Master Funding, LLC(a) 4.09 4/15/2044 10,151
3,334 TRIP Rail Master Funding, LLC(a) 3.74 8/15/2047 3,342
7,850 VB-S1 Issuer, LLC(a) 3.41 2/15/2048 7,774
----------
167,773
----------
STUDENT LOAN ABS (0.8%)
5,312 CIT Education Loan Trust (3 mo. LIBOR + 0.30%)(a) 3.12(c) 6/25/2042 4,945
3,000 Navient Student Loan Trust (1 mo. LIBOR + 1.50%) 4.01(c) 8/25/2050 3,016
3,500 Navient Student Loan Trust (1 mo. LIBOR + 1.15%)(a) 3.66(c) 3/25/2067 3,430
1,382 Nelnet Student Loan Trust (3 mo. LIBOR + 0.28%) 3.10(c) 9/22/2035 1,253
5,000 SLM Private Education Loan Trust(a) 2.50 3/15/2047 4,978
5,521 SLM Student Loan Trust (3 mo. LIBOR + 0.23%) 3.00(c) 1/25/2041 5,061
1,735 SLM Student Loan Trust (3 mo. LIBOR + 0.30%) 3.07(c) 1/25/2041 1,648
8,017 SLM Student Loan Trust (3 mo. LIBOR + 0.22%) 2.99(c) 1/27/2042 7,498
20,862 SLM Student Loan Trust (1 mo. LIBOR + 1.00%) 3.51(c) 4/27/2043 19,527
2,326 SLM Student Loan Trust (3 mo. LIBOR + 0.22%) 2.99(c) 3/25/2044 2,175
1,939 SLM Student Loan Trust (3 mo. LIBOR + 0.55%) 3.32(c) 10/25/2065 1,845
5,740 SLM Student Loan Trust (3 mo. LIBOR + 0.75%) 3.52(c) 10/27/2070 5,287
----------
60,663
----------
Total Asset Backed Securities 395,078
----------
COMMUNICATIONS (0.1%)
---------------------
TELECOMMUNICATIONS (0.1%)
10,000 Crown Castle Towers, LLC(a) 3.22 5/15/2022 9,920
----------
================================================================================
4 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
FINANCIAL (0.4%)
----------------
REITS (0.4%)
$ 30,000 SBA Tower Trust(a) 3.45% 3/15/2023 $ 29,845
----------
Total Asset-Backed Securities (cost: $434,205) 434,843
----------
BANK LOANS (0.9%)(d)
COMMUNICATIONS (0.2%)
---------------------
MEDIA (0.1%)
2,418 CSC Holdings, LLC (1 mo. LIBOR + 2.25%) 4.76 7/17/2025 2,349
3,412 McGraw-Hill Global Education Intermediate
Holdings, LLC (1 mo. LIBOR + 4.00%) 6.50 5/04/2022 3,117
----------
5,466
----------
TELECOMMUNICATIONS (0.1%)
7,250 Sprint Communications, Inc. (1 mo. LIBOR + 3.00%) 5.50 2/02/2024 7,161
----------
Total Communications 12,627
----------
CONSUMER, CYCLICAL (0.2%)
-------------------------
RETAIL (0.2%)
4,426 1011778 B.C. Unlimited Liability Co. (1 mo. LIBOR + 2.25%) 4.75 2/16/2024 4,361
7,451 Harbor Freight Tools USA, Inc. (1 mo. LIBOR + 2.50%) 5.00 8/18/2023 7,224
3,786 J.C. Penney Co., Inc. (3 mo. LIBOR + 2.51%) 6.96 6/23/2023 3,292
2,450 Serta Simmons Bedding, LLC (1 mo. LIBOR + 3.50%) 6.01 11/08/2023 2,101
----------
Total Consumer, Cyclical 16,978
----------
CONSUMER, NON-CYCLICAL (0.2%)
-----------------------------
FOOD (0.2%)
1,955 Albertson's, LLC (3 mo. LIBOR + 3.00%) 5.82 12/21/2022 1,933
4,060 Albertson's, LLC (3 mo. LIBOR + 3.00%) 5.69 6/22/2023 4,005
5,000 Albertson's, LLC (3 mo. LIBOR + 3.00%) 5.50 11/17/2025 4,904
431 JBS USA, LLC (3 mo. LIBOR + 2.50%) 5.00 10/30/2022 428
2,516 JBS USA, LLC (3 mo. LIBOR + 2.50%) 5.30 10/30/2022 2,495
----------
Total Consumer, Non-cyclical 13,765
----------
FINANCIAL (0.0%)
----------------
REITS (0.0%)
4,344 Communications Sales & Leasing, Inc. (1 mo. LIBOR + 3.00%) 5.50 10/24/2022 4,085
----------
INDUSTRIAL (0.2%)
-----------------
MACHINERY-CONSTRUCTION & MINING (0.1%)
4,826 Terex Corp. (1 mo. LIBOR + 2.00%) 4.50 1/31/2024 4,742
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 5
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
PACKAGING & CONTAINERS (0.1%)
$ 2,706 Klockner-Pentaplast of America, Inc. (1 mo. LIBOR + 4.25%) 6.75% 6/30/2022 $ 2,345
8,630 Reynolds Group Holdings, Inc. (1 mo. LIBOR + 2.75%) 5.25 2/05/2023 8,524
----------
10,869
----------
Total Industrial 15,611
----------
TECHNOLOGY (0.1%)
-----------------
SOFTWARE (0.1%)
7,258 Solera, LLC (1 mo. LIBOR + 2.75%) 5.25 3/03/2023 7,126
----------
UTILITIES (0.0%)
----------------
ELECTRIC (0.0%)
4,825 Calpine Corp. (3 mo. LIBOR + 2.50%) 5.31 1/15/2024 4,748
----------
Total Bank Loans (cost: $77,383) 74,940
----------
COLLATERALIZED LOAN OBLIGATIONS (1.5%)
--------------------------------------
ASSET BACKED SECURITIES (1.5%)
3,500 American Money Management Corp. (3 mo. LIBOR + 1.50%)(a) 4.29(c) 10/15/2028 3,502
3,500 CIFC Funding Ltd. (3 mo. LIBOR + 1.70%)(a) 4.46(c) 4/23/2029 3,477
2,500 Dryden Ltd. (1 mo. LIBOR + 1.01%)(a) 3.62(c) 5/15/2031 2,479
5,000 Dryden Ltd. (1 mo. LIBOR + 1.50%)(a) 4.27(c) 7/17/2031 4,919
4,000 Dryden Senior Loan Fund (3 mo. LIBOR + 2.00%)(a) 4.76(c) 7/20/2029 4,006
10,000 Dryden Senior Loan Fund (1 mo. LIBOR + 1.10%)(a) 3.89(c) 1/15/2031 9,946
10,000 Eaton Vance Ltd. (1 mo. LIBOR + 1.25%)(a) 4.01(c) 1/20/2030 9,776
10,000 Grippen Park Ltd. (3 mo. LIBOR + 1.26%)(a) 4.02(c) 1/20/2030 10,002
5,000 Loomis Sayles Ltd. (1 mo. LIBOR + 0.90%)(a) 3.68(c) 4/15/2028 4,954
5,000 Magnetite VII Ltd. (1 mo. LIBOR + 0.80%)(a) 3.59(c) 1/15/2028 4,945
10,000 Oaktree EIF Ltd. (3 mo. LIBOR + 2.00%)(a) 4.76(c) 10/20/2027 10,002
10,000 Octagon Investment Partners XXIII, Ltd. (1 mo. LIBOR + 0.85%)(a) 3.64(c) 7/15/2027 9,925
4,500 Race Point Ltd. (1 mo. LIBOR + 1.10%)(a) 3.87(c) 7/25/2031 4,469
7,000 Stewart Park Ltd. (1 mo. LIBOR + 1.25%)(a) 4.04(c) 1/15/2030 6,844
7,000 TIAA Ltd. (3 mo. LIBOR + 1.70%)(a) 4.46(c) 4/20/2029 6,955
9,750 Trinitas Ltd. (3 mo. LIBOR + 1.70%) 4.47(c) 10/25/2028 9,761
10,000 Trinitas Ltd. (3 mo. LIBOR + 1.32%)(a) 4.09(c) 7/25/2029 10,003
3,000 Voya Ltd. (3 mo. LIBOR + 1.60%)(a) 4.37(c) 4/17/2030 2,985
----------
Total Asset Backed Securities 118,950
----------
Total Collateralized Loan Obligations (cost: $119,735) 118,950
----------
================================================================================
6 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE SECURITIES (3.8%)
MORTGAGE SECURITIES (3.8%)
--------------------------
COMMERCIAL MBS (3.8%)
$ 9,027 BAMLL Commercial Mortgage Securities Trust(a) 3.49% 4/14/2033 $ 9,062
2,043 Banc of America Commercial Mortgage Trust(e) 5.66(f) 7/10/2044 744
2,125 Caesars Palace Las Vegas Trust(a) 4.14 10/15/2034 2,163
8,100 Citigroup Commercial Mortgage Trust(a) 4.68 1/10/2024 8,446
10,000 Citigroup Commercial Mortgage Trust 3.36 7/10/2047 10,087
2,500 Citigroup Commercial Mortgage Trust 3.62 7/10/2047 2,556
4,000 Citigroup Commercial Mortgage Trust 3.86 7/10/2047 4,089
9,500 Citigroup Commercial Mortgage Trust 3.79(f) 9/15/2050 9,637
35,579 Commercial Mortgage Trust(e) 1.87(f) 5/15/2045 1,811
61,327 Commercial Mortgage Trust(e) 1.78(f) 10/15/2045 2,983
8,600 Commercial Mortgage Trust 3.25 10/15/2045 8,509
5,925 Commercial Mortgage Trust(a) 3.42 10/15/2045 5,927
6,000 Commercial Mortgage Trust 2.77 12/10/2045 5,950
4,000 Commercial Mortgage Trust 3.61(f) 6/10/2046 4,078
5,000 Commercial Mortgage Trust 3.80 8/10/2047 5,158
7,500 Commercial Mortgage Trust 4.08 8/10/2047 7,747
6,300 Commercial Mortgage Trust 4.16(f) 10/10/2048 6,437
15,000 Commercial Mortgage Trust 3.90 7/10/2050 15,477
2,000 Commercial Mortgage Trust 4.29(f) 7/10/2050 2,061
975 GE Capital Commercial Mortgage Corp. 5.61(f) 12/10/2049 902
190,667 GS Mortgage Securities Corp.(a),(e) 0.21(f) 5/03/2032 2,999
5,000 GS Mortgage Securities Corp. 3.28 2/10/2046 4,987
10,000 GS Mortgage Securities Corp.(a) 3.68 2/10/2046 10,012
26,242 GS Mortgage Securities Trust(e) 2.21(f) 5/10/2045 1,069
4,583 GS Mortgage Securities Trust 3.38 5/10/2045 4,607
5,000 GS Mortgage Securities Trust 4.24 8/10/2046 5,241
6,000 GS Mortgage Securities Trust 3.76 7/10/2048 6,178
15,000 J.P. Morgan Chase Commercial Mortgage Securities Trust(a) 5.60(f) 11/15/2043 15,355
10,697 J.P. Morgan Chase Commercial Mortgage Securities Trust 4.82(f) 5/15/2045 10,997
10,000 J.P. Morgan Chase Commercial Mortgage Securities Trust 4.27 6/15/2045 10,273
9,000 J.P. Morgan Chase Commercial Mortgage Securities Trust 4.44(f) 2/15/2047 9,363
1,133 J.P. Morgan Chase Commercial Mortgage Securities Trust 5.37 5/15/2047 1,138
3,200 Morgan Stanley Bank of America Merrill Lynch Trust 3.46 5/15/2046 3,211
2,750 Morgan Stanley Capital I Trust(a) 5.20(f) 6/15/2044 2,813
3,000 Morgan Stanley Capital I Trust 3.77 3/15/2045 3,035
================================================================================
PORTFOLIO OF INVESTMENTS | 7
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
$ 7,000 Morgan Stanley Capital I Trust 4.03%(f) 5/15/2048 $ 7,241
50,513 UBS Commercial Mortgage Trust(a),(e) 2.07(f) 5/10/2045 2,680
9,375 UBS Commercial Mortgage Trust 4.17 5/10/2045 9,578
15,000 UBS Commercial Mortgage Trust 4.82 5/10/2045 15,488
2,313 UBS-Barclays Commercial Mortgage Trust(a) 4.18 5/10/2063 2,367
26,513 Wells Fargo Commercial Mortgage Trust(a),(e) 1.78(f) 10/15/2045 1,375
7,000 Wells Fargo Commercial Mortgage Trust 3.54 5/15/2048 7,085
6,500 WF-RBS Commercial Mortgage Trust(a) 5.23(f) 6/15/2044 6,734
5,000 WF-RBS Commercial Mortgage Trust 3.35 5/15/2045 4,993
10,000 WF-RBS Commercial Mortgage Trust 4.09(f) 6/15/2045 10,204
5,000 WF-RBS Commercial Mortgage Trust 3.24 12/15/2045 4,956
20,000 WF-RBS Commercial Mortgage Trust 3.65 12/15/2046 20,215
----------
Total Mortgage Securities 298,018
----------
Total Commercial Mortgage Securities (cost: $293,173) 298,018
----------
CORPORATE OBLIGATIONS (45.9%)
BASIC MATERIALS (1.3%)
----------------------
CHEMICALS (0.8%)
10,000 CF Industries, Inc.(a) 4.50 12/01/2026 9,895
10,000 Chevron Phillips Chemical Co., LLC / Chevron
Phillips Chemical Co., LP(a) 3.40 12/01/2026 9,918
20,000 Dow Chemical Co. 4.25 10/01/2034 18,759
1,925 LYB International Finance II B.V. 3.50 3/02/2027 1,833
5,000 Monsanto Co. 3.38 7/15/2024 4,713
5,000 Monsanto Co. 3.95 4/15/2045 3,763
5,000 Mosaic Co. 4.05 11/15/2027 4,860
2,900 Sherwin-Williams Co. 3.45 6/01/2027 2,772
10,000 Westlake Chemical Corp. 3.60 8/15/2026 9,376
----------
65,889
----------
FOREST PRODUCTS & PAPER (0.2%)
5,000 International Paper Co. 3.80 1/15/2026 4,979
7,500 International Paper Co. 3.00 2/15/2027 7,011
----------
11,990
----------
IRON/STEEL (0.2%)
5,000 Allegheny Ludlum, LLC(g) 6.95 12/15/2025 5,025
10,000 Allegheny Technologies, Inc. 5.95 1/15/2021 10,185
----------
15,210
----------
MINING (0.1%)
5,000 Freeport-McMoRan, Inc. 3.10 3/15/2020 4,956
5,000 Freeport-McMoRan, Inc. 4.00 11/14/2021 4,956
----------
9,912
----------
Total Basic Materials 103,001
----------
================================================================================
8 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS (2.8%)
---------------------
INTERNET (0.2%)
$ 12,000 Amazon.com, Inc. 3.88% 8/22/2037 $ 12,068
4,250 VeriSign, Inc. 5.25 4/01/2025 4,397
----------
16,465
----------
MEDIA (1.1%)
5,000 CCO Holdings, LLC / CCO Holdings Capital Corp.(a) 5.75 2/15/2026 5,087
20,000 Charter Communications Operating, LLC / Charter
Communications Operating Capital 6.38 10/23/2035 21,386
15,000 Comcast Corp. 3.90 3/01/2038 14,286
3,000 CSC Holdings, LLC(a) 5.50 4/15/2027 2,940
15,000 Discovery Communications, LLC 3.95 3/20/2028 14,310
7,600 Fox Corp.(a) 4.71 1/25/2029 7,944
5,000 Meredith Corp.(a) 6.88 2/01/2026 5,175
10,000 NBCUniversal Enterprise, Inc.(a) 1.97 4/15/2019 9,985
5,000 Sirius XM Radio, Inc.(a) 5.38 7/15/2026 4,975
----------
86,088
----------
TELECOMMUNICATIONS (1.5%)
25,000 AT&T, Inc. 4.50 5/15/2035 23,651
10,000 AT&T, Inc. 5.25 3/01/2037 10,195
10,000 Centel Capital Corp. 9.00 10/15/2019 10,355
10,000 CenturyLink, Inc. 5.80 3/15/2022 10,071
2,000 CenturyLink, Inc.(g) 6.75 12/01/2023 2,018
10,000 Frontier Communications Corp. 11.00 9/15/2025 6,494
3,909 Frontier Communications Corp. 7.88 1/15/2027 1,994
10,000 Motorola Solutions, Inc. 4.60 2/23/2028 9,775
5,000 Qwest Corp. 6.75 12/01/2021 5,356
2,250 Sprint Corp. 7.25 9/15/2021 2,368
19,500 Sprint Spectrum Co., LLC / Sprint Spectrum Co. II,
LLC / Sprint Spectrum Co. III, LLC(a) 4.74 3/20/2025 19,525
10,000 Verizon Communications, Inc. 4.40 11/01/2034 10,026
5,000 Verizon Communications, Inc. 4.13 8/15/2046 4,623
----------
116,451
----------
Total Communications 219,004
----------
CONSUMER, CYCLICAL (2.9%)
-------------------------
AIRLINES (1.6%)
7,777 American Airlines, Inc. Pass-Through Trust 3.70 10/01/2026 7,622
8,816 American Airlines, Inc. Pass-Through Trust 4.00 9/22/2027 8,634
4,619 American Airlines, Inc. Pass-Through Trust(g) 4.00 2/15/2029 4,551
9,729 American Airlines, Inc. Pass-Through Trust 3.60 10/15/2029 9,428
1,636 Continental Airlines, Inc. Pass-Through Trust 5.50 10/29/2020 1,656
================================================================================
PORTFOLIO OF INVESTMENTS | 9
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
$ 7,293 Continental Airlines, Inc. Pass-Through Trust 4.15% 4/11/2024 $ 7,306
3,742 Continental Airlines, Inc. Pass-Through Trust 4.00 10/29/2024 3,726
7,638 Delta Air Lines Pass-Through Trust 3.88 7/30/2027 7,615
12,684 Hawaiian Airlines, Inc. Pass-Through Trust 3.90 1/15/2026 12,333
2,975 Spirit Airlines Pass Through Trust 4.45 4/01/2024 2,953
12,465 Spirit Airlines Pass Through Trust 4.10 4/01/2028 12,381
9,812 Spirit Airlines Pass Through Trust 3.38 2/15/2030 9,418
7,000 United Airlines, Inc. Pass-Through Trust 3.70 12/01/2022 6,867
4,012 United Airlines, Inc. Pass-Through Trust 4.30 8/15/2025 4,098
16,587 United Airlines, Inc. Pass-Through Trust 3.75 9/03/2026 16,287
2,579 US Airways Group, Inc. Pass-Through Trust 6.25 4/22/2023 2,735
7,183 US Airways Group, Inc. Pass-Through Trust 3.95 11/15/2025 7,173
----------
124,783
----------
AUTO MANUFACTURERS (0.3%)
10,000 Ford Motor Co. 4.35 12/08/2026 8,944
15,000 Hyundai Capital America(a) 3.25 9/20/2022 14,680
----------
23,624
----------
ENTERTAINMENT (0.0%)
3,000 International Game Technology plc(a) 6.50 2/15/2025 3,137
----------
HOME BUILDERS (0.2%)
4,000 KB Home 7.63 5/15/2023 4,225
5,000 Lennar Corp. 4.13 1/15/2022 4,995
5,000 Lennar Corp. 5.88 11/15/2024 5,138
----------
14,358
----------
HOUSEWARES (0.1%)
7,500 Newell Brands, Inc. 3.85 4/01/2023 7,383
----------
LEISURE TIME (0.1%)
3,000 Royal Caribbean Cruises Ltd. 5.25 11/15/2022 3,157
----------
LODGING (0.1%)
5,000 Hilton Worldwide Finance, LLC / Hilton Worldwide Finance Corp. 4.88 4/01/2027 4,962
5,000 Hyatt Hotels Corp. 3.38 7/15/2023 4,940
----------
9,902
----------
RETAIL (0.5%)
15,048 Advance Auto Parts, Inc. 4.50 12/01/2023 15,428
5,000 AutoZone, Inc. 3.75 6/01/2027 4,927
10,000 L Brands, Inc. 5.63 2/15/2022 10,200
10,000 Walgreens Boots Alliance, Inc. 3.80 11/18/2024 9,992
----------
40,547
----------
Total Consumer, Cyclical 226,891
----------
================================================================================
10 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
CONSUMER, NON-CYCLICAL (5.6%)
-----------------------------
AGRICULTURE (0.2%)
$ 3,000 Bunge Ltd. Finance Corp. 3.25% 8/15/2026 $ 2,648
10,000 Reynolds American, Inc. 4.00 6/12/2022 10,083
----------
12,731
----------
BEVERAGES (0.2%)
7,143 Keurig Dr Pepper, Inc.(a) 4.60 5/25/2028 7,325
4,667 Keurig Dr Pepper, Inc.(a) 4.99 5/25/2038 4,614
5,000 PepsiCo, Inc. 4.25 10/22/2044 5,126
----------
17,065
----------
BIOTECHNOLOGY (0.5%)
15,000 Baxalta, Inc. 4.00 6/23/2025 14,900
10,000 Celgene Corp. 3.90 2/20/2028 9,931
10,000 Gilead Sciences, Inc. 3.65 3/01/2026 10,035
----------
34,866
----------
COMMERCIAL SERVICES (0.7%)
2,750 Art Institute of Chicago(h) 3.23 3/01/2022 2,757
3,000 Bon Secours Charity Health System, Inc. 5.25 11/01/2025 3,032
4,250 Boston Medical Center Corp. 4.52 7/01/2026 4,246
17,000 Eastern Maine Healthcare Systems(h) 5.02 7/01/2036 16,762
2,500 Horace Mann School(h) 3.27 7/01/2027 2,474
2,285 Metropolitan Opera Association, Inc. 2.39 10/01/2019 2,276
6,080 Princeton Theological Seminary(h) 4.11 7/01/2023 6,208
10,000 S&P Global, Inc. 4.00 6/15/2025 10,305
5,000 Total System Services, Inc. 4.80 4/01/2026 5,112
5,000 University of Notre Dame 3.44 2/15/2045 4,755
----------
57,927
----------
FOOD (0.5%)
10,000 Flowers Foods, Inc. 3.50 10/01/2026 9,415
4,667 General Mills, Inc. 4.55 4/17/2038 4,350
5,000 J.M. Smucker Co. 4.25 3/15/2035 4,605
13,899 Kraft Heinz Foods Co.(a) 4.88 2/15/2025 14,190
10,000 Kraft Heinz Foods Co. 3.95 7/15/2025 10,007
----------
42,567
----------
HEALTHCARE PRODUCTS (0.6%)
10,000 Becton Dickinson & Co. 3.70 6/06/2027 9,763
10,000 Covidien International Finance S.A. 2.95 6/15/2023 9,837
15,000 Mallinckrodt International Finance S.A.(g) 4.75 4/15/2023 11,588
10,000 Medtronic, Inc. 4.38 3/15/2035 10,546
2,000 Teleflex, Inc. 4.88 6/01/2026 2,019
----------
43,753
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
HEALTHCARE-SERVICES (1.6%)
$ 7,000 Baylor Scott & White Holdings 3.10% 11/15/2025 $ 6,822
20,000 Baylor Scott & White Holdings 2.65 11/15/2026 18,655
10,000 Cigna Corp. 3.05 10/15/2027 9,274
10,000 Community Health Network, Inc. 4.24 5/01/2025 10,240
5,000 HCA, Inc. 5.00 3/15/2024 5,215
15,000 HCA, Inc. 5.25 4/15/2025 15,918
2,500 HCA, Inc. 4.50 2/15/2027 2,525
15,000 Mercy Health 3.38 11/01/2025 14,621
3,720 Mercy Health 4.30 7/01/2028 3,860
3,900 Northwell Healthcare, Inc. 3.39 11/01/2027 3,724
6,500 NYU Langone Hospitals 4.17 7/01/2037 6,435
10,000 Premier Health Partners 2.91 11/15/2026 9,248
8,500 SSM Health Care Corp. 3.82 6/01/2027 8,473
5,000 UnitedHealth Group, Inc. 3.10 3/15/2026 4,926
1,000 Vanderbilt University Medical Center 4.17 7/01/2037 984
----------
120,920
----------
HOUSEHOLD PRODUCTS/WARES (0.1%)
10,000 SC Johnson & Son, Inc.(a) 4.35 9/30/2044 10,002
----------
PHARMACEUTICALS (1.2%)
5,000 AbbVie, Inc. 3.20 11/06/2022 4,996
10,000 AbbVie, Inc. 3.60 5/14/2025 9,874
15,000 Allergan Funding SCS 3.80 3/15/2025 14,968
11,700 CVS Health Corp. 4.30 3/25/2028 11,874
6,088 CVS Pass-Through Trust 6.04 12/10/2028 6,545
3,835 CVS Pass-Through Trust(a) 7.51 1/10/2032 4,483
4,040 CVS Pass-Through Trust(a) 5.93 1/10/2034 4,357
8,333 Elanco Animal Health, Inc.(a) 4.27 8/28/2023 8,400
15,000 Express Scripts Holding Co. 3.40 3/01/2027 14,459
3,500 Mead Johnson Nutrition Co. 4.13 11/15/2025 3,648
5,000 Mylan N.V. 3.95 6/15/2026 4,738
5,555 Mylan, Inc. 4.55 4/15/2028 5,344
----------
93,686
----------
Total Consumer, Non-cyclical 433,517
----------
ENERGY (6.1%)
-------------
OIL & GAS (2.2%)
15,000 BP Capital Markets America, Inc. 3.59 4/14/2027 14,909
5,000 Chesapeake Energy Corp.(g) 7.00 10/01/2024 4,906
15,000 Chevron Corp. 2.95 5/16/2026 14,814
10,000 ConocoPhillips Co. 4.95 3/15/2026 10,949
10,000 ConocoPhillips Co. 4.15 11/15/2034 10,032
================================================================================
12 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
$ 5,888 Continental Resources, Inc. 5.00% 9/15/2022 $ 5,924
15,000 EOG Resources, Inc. 3.90 4/01/2035 14,686
7,500 Hess Corp. 4.30 4/01/2027 7,250
10,000 Marathon Petroleum Corp. 4.75 9/15/2044 9,316
5,000 Murphy Oil Corp. 5.75 8/15/2025 5,031
7,000 Nabors Industries, Inc. 4.63 9/15/2021 6,659
6,730 Newfield Exploration Co. 5.63 7/01/2024 7,066
5,000 Newfield Exploration Co. 5.38 1/01/2026 5,150
10,000 Noble Holding International Ltd.(g) 4.90 8/01/2020 9,350
10,000 Occidental Petroleum Corp. 3.40 4/15/2026 10,014
5,000 Occidental Petroleum Corp. 3.00 2/15/2027 4,864
10,000 Phillips 66 4.65 11/15/2034 10,380
5,000 Rowan Companies, Inc. 4.88 6/01/2022 4,446
5,000 Rowan Companies, Inc. 4.75 1/15/2024 4,025
2,000 Southwestern Energy Co. 6.20 1/23/2025 1,950
7,000 Southwestern Energy Co. 7.50 4/01/2026 7,227
2,333 Transocean Pontus Ltd.(a) 6.13 8/01/2025 2,355
2,250 Transocean, Inc. 8.38 12/15/2021 2,362
----------
173,665
----------
OIL & GAS SERVICES (0.5%)
20,000 Halliburton Co. 3.80 11/15/2025 20,104
15,000 Schlumberger Holdings Corp.(a) 4.00 12/21/2025 15,245
5,000 Weatherford International, Ltd. 4.50 4/15/2022 3,200
----------
38,549
----------
PIPELINES (3.4%)
15,000 Boardwalk Pipelines, LP 4.95 12/15/2024 15,207
10,000 Boardwalk Pipelines, LP 4.45 7/15/2027 9,438
10,000 Buckeye Partners, LP 5.60 10/15/2044 8,930
15,000 Columbia Pipeline Group, Inc. 4.50 6/01/2025 15,315
15,000 DCP Midstream Operating, LP (3 mo. LIBOR + 3.85%)(a) 5.85(i) 5/21/2043 12,975
9,307 Enable Oklahoma Intrastate Transmission, LLC(a) 6.25 3/15/2020 9,563
4,000 Enbridge Energy Partners, LP (3 mo. LIBOR + 3.80%)(g) 6.59(c) 10/01/2037 4,020
7,000 Energy Transfer Partners, LP 5.20 2/01/2022 7,280
5,000 Energy Transfer Partners, LP 4.75 1/15/2026 5,027
17,010 Energy Transfer Partners, LP (3 mo. LIBOR + 3.02%) 5.75(c) 11/01/2066 13,778
7,000 Energy Transfer Partners, LP / Regency Energy Finance Corp. 4.50 11/01/2023 7,134
14,000 EnLink Midstream Partners, LP 4.15 6/01/2025 13,143
5,000 EnLink Midstream Partners, LP 4.85 7/15/2026 4,706
5,000 Enterprise Products Operating, LLC 3.90 2/15/2024 5,110
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
$ 6,437 EQM Midstream Partners, LP 4.00% 8/01/2024 $ 6,185
14,000 EQM Midstream Partners, LP 4.13 12/01/2026 12,962
10,000 Florida Gas Transmission Co., LLC(a) 5.45 7/15/2020 10,280
7,500 MPLX, LP 4.00 2/15/2025 7,455
6,067 Northwest Pipeline, LLC 4.00 4/01/2027 6,003
10,000 ONEOK Partners, LP 4.90 3/15/2025 10,407
5,000 ONEOK, Inc. 4.25 2/01/2022 5,085
3,000 Plains All American Pipeline, LP / PAA Finance Corp. 3.85 10/15/2023 2,967
15,000 Sabal Trail Transmission, LLC(a) 4.68 5/01/2038 14,737
7,000 Sabine Pass Liquefaction, LLC 5.63 2/01/2021 7,248
5,000 Spectra Energy Partners, LP 3.38 10/15/2026 4,778
10,000 TC PipeLines, LP 4.65 6/15/2021 10,183
3,000 Transcontinental Gas Pipe Line Co., LLC 7.85 2/01/2026 3,665
10,000 Western Gas Partners, LP 5.38 6/01/2021 10,322
6,250 Western Gas Partners, LP 4.65 7/01/2026 6,167
15,000 Williams Companies, Inc. 4.55 6/24/2024 15,505
----------
265,575
----------
Total Energy 477,789
----------
FINANCIAL (16.3%)
-----------------
BANKS (6.2%)
5,000 AmSouth Bancorp. 6.75 11/01/2025 5,674
4,864 Bank of America Corp. 4.00 4/01/2024 5,021
10,000 Bank of America Corp. 4.20 8/26/2024 10,244
5,000 Bank of America Corp. 3.95 4/21/2025 5,024
8,000 Bank of America Corp. (3 mo. LIBOR + 1.51%) 3.71(i) 4/24/2028 7,896
4,383 Bank of America Corp. (1 mo. LIBOR + 1.04%) 3.42(i) 12/20/2028 4,234
5,000 Bank OZK (3 mo. LIBOR + 4.43%)(g) 5.50(i) 7/01/2026 5,094
5,000 BankUnited, Inc. 4.88 11/17/2025 5,123
8,000 BOKF Merger Corp Number Sixteen (3 mo. LIBOR + 3.17%) 5.63(i) 6/25/2030 8,137
10,000 CIT Group, Inc. 5.25 3/07/2025 10,325
20,000 Citigroup, Inc. 4.40 6/10/2025 20,424
5,000 Citigroup, Inc. 4.45 9/29/2027 5,079
10,000 Citigroup, Inc. (3 mo. LIBOR + 1.39%) 3.67(i) 7/24/2028 9,816
15,000 Citizens Financial Group, Inc.(a) 4.15 9/28/2022 15,135
5,500 Citizens Financial Group, Inc. 3.75 7/01/2024 5,387
20,000 Compass Bank 3.88 4/10/2025 19,473
3,500 Cullen/Frost Bankers, Inc. 4.50 3/17/2027 3,439
10,000 Discover Bank (5 Yr. Semi-Annual Swap + 1.73%) 4.68(i) 8/09/2028 9,969
10,000 Eagle Bancorp, Inc. (3 mo. LIBOR + 3.85%) 5.00(i) 8/01/2026 10,015
5,000 Fifth Third Bancorp. 2.30 3/01/2019 4,998
10,000 Fifth Third Bank 3.85 3/15/2026 9,924
================================================================================
14 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
$ 3,500 First Maryland Capital Trust I (3 mo. LIBOR + 1.00%) 3.79%(c) 1/15/2027 $ 3,171
10,000 FirstMerit Bank, N.A. 4.27 11/25/2026 9,804
10,000 Flagstar Bancorp., Inc. 6.13 7/15/2021 10,437
3,250 Fulton Financial Corp. 3.60 3/16/2022 3,237
10,000 Fulton Financial Corp. 4.50 11/15/2024 10,196
5,000 Hilltop Holdings, Inc. 5.00 4/15/2025 4,956
5,000 Home BancShares, Inc. (3 mo. LIBOR + 3.58%)(g) 5.63(i) 4/15/2027 5,064
10,000 Huntington BancShares, Inc. 4.35 2/04/2023 10,175
20,000 J.P. Morgan Chase & Co. 2.95 10/01/2026 19,125
4,000 J.P. Morgan Chase & Co. (1 mo. LIBOR + 0.50%)(g) 3.24(c) 2/01/2027 3,604
5,000 J.P. Morgan Chase & Co. 4.25 10/01/2027 5,083
20,000 KeyBank, N.A. 3.40 5/20/2026 19,353
5,000 LegacyTexas Financial Group, Inc. (3 mo. LIBOR + 3.89%) 5.50(i) 12/01/2025 5,042
5,000 Manufacturers & Traders Trust Co. 3.40 8/17/2027 4,956
4,417 MB Financial Bank, N.A. (3 mo. LIBOR + 1.87%) 4.00(i) 12/01/2027 4,288
10,000 Morgan Stanley 4.88 11/01/2022 10,482
16,000 MUFG Americas Holdings Corp. 3.00 2/10/2025 15,466
10,000 MUFG Union Bank, N.A. 2.25 5/06/2019 9,985
1,000 People's United Bank, N.A. 4.00 7/15/2024 999
7,000 PNC Bank, N.A. 4.20 11/01/2025 7,234
10,000 PNC Financial Services Group, Inc. 2.85 11/09/2022 9,866
5,000 PNC Financial Services Group, Inc. 3.15 5/19/2027 4,896
10,000 Santander Holdings USA, Inc. 2.65 4/17/2020 9,935
5,000 Santander Holdings USA, Inc. 4.45 12/03/2021 5,087
5,818 Santander Holdings USA, Inc. 4.40 7/13/2027 5,700
15,000 State Street Corp. (3 mo. LIBOR + 1.00%) 3.79(c) 6/15/2047 11,534
5,000 Sterling National Bank (3 mo. LIBOR + 3.94%) 5.25(i) 4/01/2026 5,071
6,021 Susquehanna Bancshares, Inc. 5.38 8/15/2022 6,379
10,000 Synovus Financial Corp. (5 Yr. Semi-Annual Swap + 0.38%)(b) 5.90 2/07/2029 10,000
10,000 TCF National Bank 6.25 6/08/2022 10,496
2,335 Texas Capital Bank NA/Dallas 5.25 1/31/2026 2,292
9,062 TowneBank (3 mo. LIBOR + 2.55%) 4.50(i) 7/30/2027 9,027
5,000 U.S. Bancorp. 3.10 4/27/2026 4,867
10,000 Union Bankshares Corp. (3 mo. LIBOR + 3.18%) 5.00(i) 12/15/2026 10,041
16,800 USB Realty Corp. (3 mo. LIBOR + 1.15%)(a) 3.93(c) -(j) 14,809
5,000 Webster Financial Corp. 4.38 2/15/2024 5,011
20,000 Wells Fargo & Co. 3.00 10/23/2026 19,137
----------
487,236
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (1.6%)
$ 10,000 Air Lease Corp. 3.63% 4/01/2027 $ 9,185
5,000 Capital One Bank USA, N.A. 3.38 2/15/2023 4,907
20,000 Capital One Financial Corp. 4.75 7/15/2021 20,675
10,000 Capital One Financial Corp. 3.75 4/24/2024 10,028
15,000 Capital One Financial Corp. 3.75 3/09/2027 14,511
10,000 Cullen/Frost Capital Trust II (3 mo. LIBOR + 1.55%) 4.29(c) 3/01/2034 8,662
4,548 Grain Spectrum Funding II, LLC(a) 3.29 10/10/2019 4,530
10,000 ILFC E-Capital Trust I (Highest of 3 mo. LIBOR/10
Year CMT/30 Year CMT + 1.55%)(a) 4.55(c) 12/21/2065 7,615
15,000 Intercontinental Exchange, Inc. 3.10 9/15/2027 14,494
15,000 National Rural Utilities Cooperative Finance Corp.
(3 mo. LIBOR + 2.91%) 4.75(i) 4/30/2043 14,440
13,500 Synchrony Financial 3.95 12/01/2027 12,372
4,561 Washington Aircraft 1 Co. (NBGA - United States Government) 2.64 9/15/2026 4,542
----------
125,961
----------
INSURANCE (5.0%)
5,000 Allstate Corp. (3 mo. LIBOR + 2.94%) 5.75(i) 8/15/2053 4,982
10,000 Alterra Finance, LLC 6.25 9/30/2020 10,440
10,000 American International Group, Inc. 3.88 1/15/2035 9,029
10,000 AmTrust Financial Services, Inc.(g) 6.13 8/15/2023 8,809
5,000 Assurant, Inc. 4.90 3/27/2028 5,019
20,000 Athene Global Funding(a) 3.00 7/01/2022 19,610
8,000 Athene Holding Ltd. 4.13 1/12/2028 7,478
15,000 AXA Equitable Holdings, Inc. 4.35 4/20/2028 14,698
15,000 Chubb INA Holdings, Inc. 3.35 5/15/2024 15,113
11,500 Genworth Holdings, Inc. (3 mo. LIBOR + 2.00%) 4.62(c) 11/15/2036 6,842
10,000 Global Atlantic Financial Co.(a) 8.63 4/15/2021 11,001
13,086 Hanover Insurance Group, Inc. 4.50 4/15/2026 13,110
14,000 Hartford Financial Services Group, Inc. (3 mo. LIBOR + 2.13%)(a) 4.74(c) 2/12/2047 11,991
10,000 Jackson National Life Global Funding(a) 2.50 6/27/2022 9,725
20,000 Jackson National Life Global Funding(a) 3.25 1/30/2024 19,885
25,500 Kemper Corp. 4.35 2/15/2025 25,437
10,000 Lincoln National Corp. 4.20 3/15/2022 10,229
15,000 Lincoln National Corp. (3 mo. LIBOR + 2.36%) 5.00(c) 5/17/2066 12,997
5,000 Loews Corp. 3.75 4/01/2026 5,039
10,000 MassMutual Global Funding II(a),(g) 3.60 4/09/2024 10,103
10,000 MassMutual Global Funding II(a) 2.75 6/22/2024 9,689
15,000 Mercury General Corp. 4.40 3/15/2027 14,703
10,000 MetLife, Inc. 4.13 8/13/2042 9,823
================================================================================
16 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
$ 29,505 Nationwide Mutual Insurance Co. (3 mo. LIBOR + 2.29%)(a) 5.08%(c) 12/15/2024 $ 29,438
5,000 Nuveen Finance, LLC(a) 4.13 11/01/2024 5,162
4,000 Ohio National Financial Services, Inc.(a) 6.38 4/30/2020 4,141
5,000 Ohio National Financial Services, Inc.(a) 6.63 5/01/2031 5,850
20,000 Old Republic International Corp. 3.88 8/26/2026 19,183
10,000 Primerica, Inc. 4.75 7/15/2022 10,356
10,000 ProAssurance Corp. 5.30 11/15/2023 10,538
10,000 Prudential Financial, Inc. (3 mo. LIBOR + 3.92%) 5.63(i) 6/15/2043 10,371
17,050 StanCorp Financial Group, Inc. 5.00 8/15/2022 17,787
7,670 Torchmark Corp. 4.55 9/15/2028 7,854
----------
386,432
----------
INVESTMENT COMPANIES (0.4%)
10,000 Ares Capital Corp. 3.50 2/10/2023 9,527
5,000 Ares Capital Corp. 4.25 3/01/2025 4,774
5,120 FS KKR Capital Corp. 4.00 7/15/2019 5,115
5,000 Main Street Capital Corp. 4.50 12/01/2019 5,009
4,500 Main Street Capital Corp. 4.50 12/01/2022 4,537
----------
28,962
----------
REITS (2.1%)
5,000 Alexandria Real Estate Equities, Inc. 4.50 7/30/2029 5,060
5,000 AvalonBay Communities, Inc. 3.63 10/01/2020 5,034
5,000 AvalonBay Communities, Inc. 3.45 6/01/2025 4,970
2,679 AvalonBay Communities, Inc. 3.20 1/15/2028 2,577
10,000 Boston Properties, LP 3.85 2/01/2023 10,143
7,500 Columbia Property Trust Operating Partnership, LP 3.65 8/15/2026 7,019
10,000 Crown Castle International Corp. 5.25 1/15/2023 10,544
8,000 EPR Properties 4.75 12/15/2026 8,002
9,000 ERP Operating, LP 2.85 11/01/2026 8,542
7,000 Federal Realty Investment Trust 3.00 8/01/2022 6,894
10,000 Federal Realty Investment Trust 2.75 6/01/2023 9,680
1,852 Federal Realty Investment Trust 3.25 7/15/2027 1,766
5,000 Hospitality Properties Trust 4.95 2/15/2027 4,848
5,000 Hudson Pacific Properties, LP 3.95 11/01/2027 4,659
4,901 MPT Operating Partnership, LP / MPT Finance Corp. 5.25 8/01/2026 4,950
5,000 National Retail Properties, Inc. 4.00 11/15/2025 5,023
7,500 Physicians Realty, LP 4.30 3/15/2027 7,238
5,000 Realty Income Corp. 4.13 10/15/2026 5,093
6,000 Realty Income Corp. 3.00 1/15/2027 5,651
4,000 Sabra Health Care, LP 5.13 8/15/2026 3,762
6,000 Sabra Health Care, LP / Sabra Capital Corp. 5.38 6/01/2023 6,000
4,444 SL Green Operating Partnership, LP 3.25 10/15/2022 4,311
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
$ 7,500 Spirit Realty, LP 4.45% 9/15/2026 $ 7,221
5,450 Starwood Property Trust, Inc. 3.63 2/01/2021 5,385
7,000 UDR, Inc. 4.63 1/10/2022 7,216
15,000 Washington REIT 3.95 10/15/2022 15,244
----------
166,832
----------
SAVINGS & LOANS (1.0%)
15,000 Banc of California, Inc. 5.25 4/15/2025 15,063
10,000 First Niagara Financial Group, Inc. 7.25 12/15/2021 11,050
10,000 New York Community Bancorp, Inc.
(1 mo. LIBOR + 2.78%) 5.90(i) 11/06/2028 10,026
19,685 People's United Financial, Inc. 3.65 12/06/2022 19,625
8,000 Sterling Bancorp. 3.50 6/08/2020 7,923
10,000 TIAA FSB Holdings, Inc. 5.75 7/02/2025 10,381
----------
74,068
----------
Total Financial 1,269,491
----------
GOVERNMENT (0.0%)
-----------------
REGIONAL(STATE/PROVINCE) (0.0%)
1,000 Mashantucket (Western) Pequot Tribe(h),(k) 7.35 7/01/2026 165
----------
INDUSTRIAL (3.7%)
-----------------
AEROSPACE/DEFENSE (0.5%)
17,750 Arconic, Inc. 5.13 10/01/2024 17,931
10,000 Lockheed Martin Corp. 3.60 3/01/2035 9,529
10,000 Raytheon Co. 4.20 12/15/2044 10,368
----------
37,828
----------
BUILDING MATERIALS (0.0%)
3,000 Eagle Materials, Inc. 4.50 8/01/2026 2,987
----------
DIVERSIFIED FINANCIAL SERVICES (0.2%)
15,000 General Electric Co. / LJ VP Holdings, LLC(a) 3.80 6/18/2019 15,016
----------
ELECTRICAL COMPONENTS & EQUIPMENT (0.3%)
10,000 Hubbell, Inc. 3.35 3/01/2026 9,503
5,000 Hubbell, Inc. 3.50 2/15/2028 4,703
10,000 Molex Electronic Technologies, LLC(a) 3.90 4/15/2025 9,978
----------
24,184
----------
ELECTRONICS (0.1%)
2,604 Keysight Technologies, Inc. 4.60 4/06/2027 2,632
3,000 Trimble, Inc. 4.15 6/15/2023 2,997
----------
5,629
----------
================================================================================
18 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
HAND/MACHINE TOOLS (0.3%)
$ 8,295 Kennametal, Inc. 4.63% 6/15/2028 $ 8,077
10,000 Snap-on, Inc. 3.25 3/01/2027 9,753
5,000 Stanley Black & Decker, Inc. (3 mo. LIBOR + 4.30%) 7.09(c) 12/15/2053 5,008
----------
22,838
----------
MACHINERY-DIVERSIFIED (0.1%)
14,050 Wabtec Corp. 3.45 11/15/2026 12,476
----------
METAL FABRICATION/HARDWARE (0.1%)
8,890 Worthington Industries, Inc. 4.30 8/01/2032 8,305
----------
MISCELLANEOUS MANUFACTURERS (0.5%)
15,000 Eaton Corp. 2.75 11/02/2022 14,785
10,000 Eaton Corp. 3.10 9/15/2027 9,597
11,842 General Electric Co. (3 mo. LIBOR + 3.33%) 5.00(i) -(j) 10,379
5,000 Hillenbrand, Inc. 5.50 7/15/2020 5,145
1,500 Ingersoll-Rand Co. 9.00 8/15/2021 1,694
----------
41,600
----------
PACKAGING & CONTAINERS (0.3%)
5,000 Ball Corp. 5.25 7/01/2025 5,243
5,000 Crown Americas, LLC / Crown Americas Capital Corp. 4.25 9/30/2026 4,769
2,000 Graphic Packaging International, LLC(g) 4.13 8/15/2024 1,930
9,000 Sealed Air Corp.(a) 6.88 7/15/2033 9,135
----------
21,077
----------
TRANSPORTATION (1.2%)
8,000 Burlington Northern Santa Fe, LLC 3.75 4/01/2024 8,193
10,000 Burlington Northern Santa Fe, LLC 3.65 9/01/2025 10,227
7,000 Burlington Northern Santa Fe, LLC 3.90 8/01/2046 6,798
10,000 FedEx Corp. 3.90 2/01/2035 9,196
5,000 J.B. Hunt Transport Services, Inc. 3.85 3/15/2024 5,046
7,000 Kansas City Southern 3.13 6/01/2026 6,563
5,000 Ryder System, Inc. 3.45 11/15/2021 5,020
9,412 Ryder System, Inc. 3.40 3/01/2023 9,289
5,000 TTX Co.(a) 4.15 1/15/2024 5,041
10,000 TTX Co.(a) 3.60 1/15/2025 9,913
10,000 Union Pacific Corp. 3.38 2/01/2035 8,907
10,000 Union Pacific Corp. 4.25 4/15/2043 9,666
----------
93,859
----------
TRUCKING & LEASING (0.1%)
5,000 Penske Truck Leasing Co., LP / PTL Finance Corp.(a) 3.95 3/10/2025 4,940
----------
Total Industrial 290,739
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 19
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
TECHNOLOGY (1.4%)
-----------------
COMPUTERS (0.2%)
$ 7,500 Dell International, LLC / EMC Corp.(a) 4.42% 6/15/2021 $ 7,633
2,500 Dell International, LLC / EMC Corp.(a) 5.88 6/15/2021 2,547
----------
10,180
----------
SEMICONDUCTORS (0.6%)
5,000 Analog Devices, Inc. 4.50 12/05/2036 4,788
10,000 Applied Materials, Inc. 3.30 4/01/2027 9,949
10,000 Applied Materials, Inc. 5.10 10/01/2035 11,055
5,000 Broadcom Corp. / Broadcom Cayman Finance Ltd. 3.63 1/15/2024 4,868
7,000 QUALCOMM, Inc. 3.25 5/20/2027 6,632
10,000 QUALCOMM, Inc. 4.65 5/20/2035 9,926
----------
47,218
----------
SOFTWARE (0.6%)
7,500 Activision Blizzard, Inc. 3.40 9/15/2026 7,212
10,000 Microsoft Corp. 3.30 2/06/2027 10,145
20,000 Microsoft Corp. 4.20 11/03/2035 21,430
10,000 Microsoft Corp. 3.45 8/08/2036 9,798
----------
48,585
----------
Total Technology 105,983
----------
UTILITIES (5.8%)
----------------
ELECTRIC (4.7%)
5,000 AES Corp. 4.88 5/15/2023 5,063
10,000 AES Corp. 5.50 4/15/2025 10,350
5,000 Atlantic City Electric Co. 3.38 9/01/2024 4,972
15,000 Berkshire Hathaway Energy Co. 4.50 2/01/2045 15,296
5,000 Black Hills Corp. 5.88 7/15/2020 5,171
10,000 Black Hills Corp. 4.25 11/30/2023 10,256
15,000 Cleco Corporate Holdings, LLC 3.74 5/01/2026 14,376
10,000 Consumers Energy Co. 3.95 7/15/2047 9,805
5,000 Delmarva Power & Light Co. 4.15 5/15/2045 4,950
7,000 Duke Energy Carolinas, LLC 3.88 3/15/2046 6,774
10,000 Duke Energy Indiana, LLC 3.75 5/15/2046 9,295
10,000 Duke Energy Progress, Inc. 4.15 12/01/2044 10,025
3,500 Duquesne Light Holdings, Inc.(a) 5.90 12/01/2021 3,691
4,000 Entergy Arkansas, LLC 3.05 6/01/2023 3,956
7,000 Entergy Louisiana, LLC 4.95 1/15/2045 7,192
5,000 Entergy Mississippi, LLC 3.25 12/01/2027 4,790
10,000 Entergy Texas, Inc. 2.55 6/01/2021 9,846
15,000 Entergy Texas, Inc. 3.45 12/01/2027 14,314
3,500 FirstEnergy Corp. 3.90 7/15/2027 3,428
================================================================================
20 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
$ 5,000 Georgia Power Co. 3.25% 4/01/2026 $ 4,751
10,000 Gulf Power Co. 3.30 5/30/2027 9,876
7,500 ITC Holdings Corp. 3.35 11/15/2027 7,224
3,168 Mississippi Power Co. 4.25 3/15/2042 2,907
10,000 Monongahela Power Co.(a) 4.10 4/15/2024 10,303
5,000 Nevada Power Co. 7.13 3/15/2019 5,024
4,000 NextEra Energy Capital Holdings, Inc.
(3 mo. LIBOR + 2.13%) 4.91(c) 6/15/2067 3,429
15,000 Northern States Power Co. 4.00 8/15/2045 14,846
20,000 Northern States Power Co. 3.60 5/15/2046 18,571
5,000 Oncor Electric Delivery Co., LLC 3.75 4/01/2045 4,761
15,000 Pacific Gas & Electric Co.(l) 2.95 3/01/2026 12,043
3,530 Pedernales Electric Cooperative, Inc.(a) 5.95 11/15/2022 3,915
5,000 Potomac Electric Power Co. 4.15 3/15/2043 4,914
26,130 PPL Capital Funding, Inc. (3 mo. LIBOR + 2.67%) 5.47(c) 3/30/2067 23,656
10,000 Public Service Electric & Gas Co. 3.80 3/01/2046 9,617
5,000 South Carolina Electric & Gas Co. 5.30 5/15/2033 5,563
5,000 South Carolina Electric & Gas Co. 4.10 6/15/2046 4,873
10,000 Southern California Edison Co.
(3 mo. LIBOR + 4.20%) 6.25(i) -(j) 9,415
10,000 Southern Co. 3.25 7/01/2026 9,555
5,000 System Energy Resources, Inc. 4.10 4/01/2023 5,095
10,000 Tri-State Generation & Transmission Association, Inc. 4.70 11/01/2044 10,052
10,000 Tri-State Generation & Transmission Association, Inc. 4.25 6/01/2046 9,223
15,000 WEC Energy Group, Inc. (3 mo. LIBOR + 2.11%) 4.73(c) 5/15/2067 13,151
10,000 Xcel Energy, Inc. 3.30 6/01/2025 9,911
----------
366,225
----------
GAS (0.8%)
4,000 Atmos Energy Corp. 8.50 3/15/2019 4,028
10,000 Atmos Energy Corp. 4.13 10/15/2044 9,847
10,000 National Fuel Gas Co. 4.90 12/01/2021 10,232
10,000 National Fuel Gas Co. 5.20 7/15/2025 10,207
10,000 National Fuel Gas Co. 3.95 9/15/2027 9,344
7,000 Southern Co. Gas Capital Corp. 3.25 6/15/2026 6,587
11,880 Spire, Inc. 3.54 2/27/2024 11,678
----------
61,923
----------
WATER (0.3%)
10,000 American Water Capital Corp. 2.95 9/01/2027 9,547
15,000 Aquarion Co.(a) 4.00 8/15/2024 15,237
----------
24,784
----------
Total Utilities 452,932
----------
Total Corporate Obligations (cost: $3,628,471) 3,579,512
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 21
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
EURODOLLAR AND YANKEE OBLIGATIONS (18.6%)
BASIC MATERIALS (2.0%)
----------------------
CHEMICALS (0.7%)
$ 10,000 Air Liquide Finance S.A.(a) 3.50% 9/27/2046 $ 9,129
10,000 Braskem Finance Ltd. 6.45 2/03/2024 10,872
10,000 Nutrien Ltd. 3.00 4/01/2025 9,376
5,000 SASOL Financing USA, LLC 5.88 3/27/2024 5,163
5,000 Syngenta Finance N.V.(a) 3.93 4/23/2021 4,966
2,000 Yara International ASA(a) 7.88 6/11/2019 2,032
11,673 Yara International ASA(a) 4.75 6/01/2028 11,755
----------
53,293
----------
IRON/STEEL (0.3%)
10,000 ArcelorMittal 6.25 2/25/2022 10,624
1,968 Vale Overseas Ltd.(g) 4.38 1/11/2022 1,977
9,000 Vale Overseas Ltd.(g) 6.25 8/10/2026 9,641
----------
22,242
----------
MINING (1.0%)
2,500 Anglo American Capital plc(a) 3.75 4/10/2022 2,479
5,000 Anglo American Capital plc(a) 4.88 5/14/2025 5,097
6,667 Anglo American Capital plc(a) 4.00 9/11/2027 6,301
20,000 Fresnillo plc(a) 5.50 11/13/2023 20,825
5,000 Glencore Funding, LLC(a) 4.13 5/30/2023 5,015
15,000 Glencore Funding, LLC(a) 4.00 3/27/2027 14,432
15,000 Goldcorp, Inc. 3.70 3/15/2023 14,985
10,000 Kinross Gold Corp. 5.95 3/15/2024 10,350
2,000 Kinross Gold Corp. 4.50 7/15/2027 1,805
----------
81,289
----------
Total Basic Materials 156,824
----------
COMMUNICATIONS (0.7%)
---------------------
INTERNET (0.1%)
3,000 Tencent Holdings Ltd.(a) 3.93 1/19/2038 2,788
----------
MEDIA (0.1%)
10,000 Pearson Funding Four plc(a),(g) 3.75 5/08/2022 9,860
----------
TELECOMMUNICATIONS (0.5%)
14,000 British Telecommunications plc 5.13 12/04/2028 14,476
15,000 Deutsche Telekom International Finance B.V.(a) 3.60 1/19/2027 14,440
5,000 Deutsche Telekom International Finance B.V.(a) 4.75 6/21/2038 4,907
6,667 Vodafone Group plc 5.00 5/30/2038 6,468
----------
40,291
----------
Total Communications 52,939
----------
================================================================================
22 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
CONSUMER, CYCLICAL (1.2%)
-------------------------
AIRLINES (1.1%)
$ 3,650 Air Canada Pass-Through Trust(a),(g) 5.38% 5/15/2021 $ 3,702
19,430 Air Canada Pass-Through Trust(a) 4.13 5/15/2025 19,431
8,637 Air Canada Pass-Through Trust(a) 3.60 3/15/2027 8,365
5,277 Air Canada Pass-Through Trust(a) 3.75 12/15/2027 5,179
15,611 British Airways Pass-Through Trust(a) 4.63 6/20/2024 16,030
4,103 British Airways Pass-Through Trust(a) 3.80 9/20/2031 4,080
12,132 Latam Airlines Pass-Through Trust 4.20 11/15/2027 11,821
7,734 Turkish Airlines Pass-Through Trust(a) 4.20 3/15/2027 6,705
678 Virgin Australia Pass-Through Trust(a) 6.00 10/23/2020 689
2,279 Virgin Australia Pass-Through Trust(a) 5.00 10/23/2023 2,313
10,000 WestJet Airlines Ltd.(a) 3.50 6/16/2021 9,710
----------
88,025
----------
AUTO MANUFACTURERS (0.1%)
5,000 Daimler Finance, N.A., LLC(a) 2.25 7/31/2019 4,984
----------
Total Consumer, Cyclical 93,009
----------
CONSUMER, NON-CYCLICAL (1.8%)
-----------------------------
AGRICULTURE (0.6%)
5,000 BAT Capital Corp. 4.39 8/15/2037 4,273
20,000 BAT International Finance plc(a) 3.95 6/15/2025 19,648
20,000 Imperial Brands Finance plc(a) 4.25 7/21/2025 20,048
----------
43,969
----------
BEVERAGES (0.8%)
20,000 Anheuser-Busch Cos., LLC / Anheuser-Busch InBev
Worldwide, Inc.(a) 4.70 2/01/2036 19,274
6,500 Anheuser-Busch InBev Worldwide, Inc. 4.38 4/15/2038 5,961
5,250 Anheuser-Busch InBev Worldwide, Inc. 5.45 1/23/2039 5,502
5,000 Bacardi Ltd.(a) 2.75 7/15/2026 4,306
10,000 Bacardi Ltd.(a) 4.70 5/15/2028 9,709
7,500 Becle S.A.B de C.V.(a) 3.75 5/13/2025 7,193
10,000 Pernod Ricard S.A.(a) 4.25 7/15/2022 10,288
----------
62,233
----------
FOOD (0.1%)
4,000 Kerry Group Financial Services(a) 3.20 4/09/2023 3,907
5,000 Smithfield Foods, Inc.(a) 4.25 2/01/2027 4,573
----------
8,480
----------
PHARMACEUTICALS (0.3%)
10,000 GlaxoSmithKline Capital, Inc. 4.20 3/18/2043 10,373
5,000 Takeda Pharmaceutical Co. Ltd.(a) 5.00 11/26/2028 5,263
================================================================================
PORTFOLIO OF INVESTMENTS | 23
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
$ 15,000 Teva Pharmaceutical Finance Netherlands III B.V. 3.15% 10/01/2026 $ 12,475
----------
28,111
----------
Total Consumer, Non-cyclical 142,793
----------
DIVERSIFIED (0.5%)
------------------
HOLDING COMPANIES-DIVERSIFIED (0.5%)
7,500 CK Hutchison International Ltd.(a) 2.75 10/03/2026 6,963
10,000 CK Hutchison International Ltd.(a),(g) 3.50 4/05/2027 9,788
10,000 CK Hutchison International Ltd.(a) 3.25 9/29/2027 9,584
5,000 Hutchison Whampoa International Ltd.(a) 4.63 1/13/2022 5,173
10,000 Hutchison Whampoa International Ltd.(a) 3.63 10/31/2024 10,000
----------
Total Diversified 41,508
----------
ENERGY (0.9%)
-------------
OIL & GAS (0.7%)
4,500 Aker BP ASA(a) 5.88 3/31/2025 4,635
5,000 BP Capital Markets plc 3.28 9/19/2027 4,903
10,000 BP Capital Markets plc 3.72 11/28/2028 10,147
3,350 Eni SpA(a) 4.75 9/12/2028 3,392
4,000 Husky Energy, Inc. 7.25 12/15/2019 4,134
5,000 Noble Holding International Ltd.(g) 7.95 4/01/2025 4,075
10,000 Petrobras Global Finance B.V. 6.13 1/17/2022 10,540
6,000 Petroleos Mexicanos 5.38 3/13/2022 5,954
10,000 Shell International Finance B.V. 3.63 8/21/2042 9,518
----------
57,298
----------
PIPELINES (0.2%)
6,000 APT Pipelines Ltd.(a) 4.25 7/15/2027 5,912
12,124 TransCanada PipeLines Ltd. (3 mo. LIBOR + 2.21%) 4.83(c) 5/15/2067 10,396
----------
16,308
----------
Total Energy 73,606
----------
FINANCIAL (8.2%)
----------------
BANKS (6.4%)
15,000 ABN AMRO Bank N.V.(a) 4.75 7/28/2025 15,306
10,000 ABN AMRO Bank N.V.(a) 4.80 4/18/2026 10,207
10,000 Australia & New Zealand Banking Group Ltd.(a) 4.40 5/19/2026 9,897
1,000 Banco Santander Mexico S.A. Institucion de Banca
Multiple Grupo Financiero Santand
(1 mo. LIBOR + 3.00%)(a) 5.95(i) 10/01/2028 1,020
7,500 Bank of Montreal (5 Yr. Semi-Annual Swap + 1.43%) 3.80(i) 12/15/2032 7,153
10,000 Bank of Nova Scotia 4.50 12/16/2025 10,251
5,000 Banque Federative du Credit Mutuel S.A.(a) 2.70 7/20/2022 4,891
12,300 Barclays plc 4.84 5/09/2028 11,828
================================================================================
24 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
$ 10,000 BBVA Bancomer S.A.(a) 4.38% 4/10/2024 $ 9,975
5,000 BNP Paribas S.A. (3 mo. LIBOR + 1.29%)(a) 7.20(i) -(j) 5,235
10,000 BNP Paribas S.A. (1 mo. LIBOR + 2.24%)(a) 4.71(i) 1/10/2025 10,219
5,000 BNP Paribas S.A.(a) 4.38 9/28/2025 5,012
10,000 BNP Paribas S.A.(a) 4.38 5/12/2026 9,795
4,000 BNP Paribas S.A.(a) 4.63 3/13/2027 3,950
9,200 BPCE S.A.(a) 3.00 5/22/2022 8,991
5,000 BPCE S.A.(a) 4.00 9/12/2023 4,993
9,524 BPCE S.A.(a) 3.50 10/23/2027 8,911
10,000 BPCE S.A.(a) 3.25 1/11/2028 9,498
3,307 Canadian Imperial Bank of Commerce(a) 7.26 4/10/2032 3,796
10,000 Commonwealth Bank of Australia(a) 3.25 7/20/2023 10,126
10,000 Cooperatieve Rabobank U.A. 3.88 2/08/2022 10,224
16,903 Cooperatieve Rabobank U.A. 3.95 11/09/2022 17,063
8,000 Cooperatieve Rabobank U.A. (5 Yr. Semi-Annual
Swap + 1.89%) 4.00(i) 4/10/2029 7,793
14,286 Credit Agricole S.A.(a) 3.25 10/04/2024 13,693
15,000 Credit Agricole S.A.(a) 4.13 1/10/2027 14,765
21,400 Credit Suisse Group AG(a) 3.57 1/09/2023 21,193
4,445 Credit Suisse Group AG (3 mo. LIBOR + 1.41%)(a) 3.87(i) 1/12/2029 4,251
10,000 Credit Suisse Group Funding Guernsey Ltd. 4.55 4/17/2026 10,176
5,000 Danske Bank A/S(a) 5.38 1/12/2024 5,076
15,000 HSBC Bank plc (6 mo. LIBOR + 0.25%) 3.13(c) -(j) 10,692
10,000 HSBC Holdings plc 3.90 5/25/2026 9,968
5,000 HSBC Holdings plc 4.38 11/23/2026 5,024
14,100 ING Groep N.V. 3.95 3/29/2027 13,772
25,000 Lloyds Banking Group plc 3.75 1/11/2027 23,995
5,000 Lloyds Banking Group plc (3 mo. LIBOR + 1.21%) 3.57(i) 11/07/2028 4,661
20,000 Mizuho Financial Group, Inc. 3.17 9/11/2027 19,222
5,000 National Australia Bank Ltd. 3.00 1/20/2023 4,946
11,000 Nordea Bank AB(a) 4.88 5/13/2021 11,261
20,000 Royal Bank of Canada 4.65 1/27/2026 20,996
10,000 Royal Bank of Scotland Group plc 6.13 12/15/2022 10,520
5,000 Royal Bank of Scotland Group plc 6.10 6/10/2023 5,249
7,000 Royal Bank of Scotland Group plc 3.88 9/12/2023 6,883
5,000 Royal Bank of Scotland Group plc 4.80 4/05/2026 5,019
10,000 Royal Bank of Scotland Group plc
(1 mo. LIBOR + 1.91%) 5.08(i) 1/27/2030 10,103
5,000 Santander UK Group Holdings plc 3.57 1/10/2023 4,901
20,000 Santander UK plc(a) 5.00 11/07/2023 20,168
5,000 Santander UK plc 4.00 3/13/2024 5,123
7,500 Standard Chartered plc (1 mo. LIBOR + 1.97%)(a) 4.87(i) 3/15/2033 7,341
7,500 Suncorp-Metway Ltd.(a) 2.80 5/04/2022 7,349
================================================================================
PORTFOLIO OF INVESTMENTS | 25
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
$ 7,500 Swedbank AB(a) 2.65% 3/10/2021 $ 7,431
10,000 Toronto-Dominion Bank (5 Yr. Semi-Annual
Swap + 2.21%) 3.63(i) 9/15/2031 9,643
10,000 Westpac Banking Corp. (5 Yr. Semi-Annual
Swap + 2.24%) 4.32(i) 11/23/2031 9,721
----------
499,276
----------
DIVERSIFIED FINANCIAL SERVICES (0.4%)
7,000 AerCap Ireland Capital DAC / AerCap Global
Aviation Trust 4.63 7/01/2022 7,031
10,000 Brookfield Finance, Inc. 4.85 3/29/2029 9,987
10,000 ORIX Corp. 3.70 7/18/2027 9,878
----------
26,896
----------
INSURANCE (0.6%)
19,300 Oil Insurance Ltd. (3 mo. LIBOR + 2.98%)(a) 5.79(c) -(j) 18,219
20,000 QBE Capital Funding III Ltd. (10 Yr. Semi-Annual
Swap + 4.05%)(a) 7.25(i) 5/24/2041 20,790
5,000 XLIT Ltd. (3 mo. LIBOR + 2.46%) 5.24(c) -(j) 4,775
5,000 XLIT Ltd. 4.45 3/31/2025 5,111
----------
48,895
----------
REITS (0.4%)
5,000 Scentre Group Trust(a) 2.38 4/28/2021 4,891
10,000 Scentre Group Trust(a) 3.25 10/28/2025 9,631
20,000 WEA Finance, LLC / Westfield UK & Europe Finance plc(a) 3.75 9/17/2024 20,118
----------
34,640
----------
SAVINGS & LOANS (0.4%)
20,000 Nationwide Building Society(a) 4.00 9/14/2026 18,684
12,000 Nationwide Building Society
(1 mo. LIBOR + 1.85%)(a) 4.13(i) 10/18/2032 10,940
----------
29,624
----------
Total Financial 639,331
----------
GOVERNMENT (0.1%)
-----------------
MULTI-NATIONAL (0.1%)
5,000 Caribbean Development Bank(a) 4.38 11/09/2027 5,200
----------
INDUSTRIAL (2.3%)
-----------------
AEROSPACE/DEFENSE (0.1%)
5,000 Rolls-Royce plc(a) 3.63 10/14/2025 4,834
----------
BUILDING MATERIALS (0.4%)
3,462 Boral Finance Proprietary Ltd.(a) 3.75 5/01/2028 3,267
9,250 Cemex SAB de CV(a),(g) 7.75 4/16/2026 10,013
================================================================================
26 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
$ 10,000 Holcim U.S. Finance Sarl & Cie SCS(a) 6.00% 12/30/2019 $ 10,237
4,000 Votorantim Cimentos International S.A. 7.25 4/05/2041 4,216
3,735 Votorantim Cimentos International S.A.(a) 7.25 4/05/2041 3,937
----------
31,670
----------
ELECTRONICS (0.1%)
4,800 Tyco Electronics Group S.A. 3.13 8/15/2027 4,525
----------
ENGINEERING & CONSTRUCTION (0.5%)
10,000 Heathrow Funding Ltd.(a) 4.88 7/15/2021 10,341
15,000 Sydney Airport Finance Co. Proprietary Ltd.(a) 3.90 3/22/2023 14,972
10,000 Sydney Airport Finance Co. Proprietary Ltd. 3.63 4/28/2026 9,699
----------
35,012
----------
MACHINERY-DIVERSIFIED (0.3%)
15,000 CNH Industrial N.V. 4.50 8/15/2023 15,228
5,000 CNH Industrial N.V. 3.85 11/15/2027 4,641
----------
19,869
----------
MISCELLANEOUS MANUFACTURERS (0.5%)
20,000 Siemens Financieringsmatschappij N.V.(a) 3.25 5/27/2025 19,935
10,000 Siemens Financieringsmatschappij N.V.(a) 3.40 3/16/2027 9,909
12,250 Smiths Group plc(a) 3.63 10/12/2022 12,088
----------
41,932
----------
PACKAGING & CONTAINERS (0.3%)
4,750 Amcor Finance USA, Inc.(a) 3.63 4/28/2026 4,566
5,500 Brambles USA, Inc.(a) 4.13 10/23/2025 5,513
7,500 CCL Industries, Inc.(a) 3.25 10/01/2026 7,011
2,500 Reynolds Group Issuer, Inc. / Reynolds Group Issuer,
LLC / Reynolds Group Issuer Lu(a) 5.13 7/15/2023 2,508
5,000 Reynolds Group Issuer, Inc. / Reynolds Group Issuer,
LLC / Reynolds Group Issuer Lu(a) 7.00 7/15/2024 5,122
----------
24,720
----------
TRANSPORTATION (0.1%)
12,000 Canadian National Railway Co. 2.75 3/01/2026 11,517
----------
TRUCKING & LEASING (0.0%)
3,000 DAE Funding, LLC(a) 5.00 8/01/2024 2,957
----------
Total Industrial 177,036
----------
UTILITIES (0.9%)
----------------
ELECTRIC (0.9%)
5,000 Comision Federal de Electricidad(a) 4.75 2/23/2027 4,888
5,000 EDP Finance B.V.(a) 5.25 1/14/2021 5,141
25,000 Electricite de France S.A. (10 Yr. Semi-Annual
Swap + 3.71%)(a) 5.25(i) -(j) 24,771
================================================================================
PORTFOLIO OF INVESTMENTS | 27
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
$ 6,000 Emera U.S. Finance, LP 3.55% 6/15/2026 $ 5,725
10,000 Enel Chile S.A. 4.88 6/12/2028 10,287
5,000 Enel Finance International N.V.(a) 4.63 9/14/2025 4,943
5,000 Enel Finance International N.V.(a) 3.63 5/25/2027 4,499
10,000 Fortis, Inc. 3.06 10/04/2026 9,318
3,500 Transelec S.A.(a) 3.88 1/12/2029 3,277
----------
Total Utilities 72,849
----------
Total Eurodollar and Yankee Obligations (cost: $1,467,082) 1,455,095
----------
FOREIGN GOVERNMENT OBLIGATIONS (0.5%)
10,000 Italy Government International Bond 5.38 6/15/2033 10,519
CAD15,000 Province of Alberta(h) 2.55 12/15/2022 11,555
20,000 Province of Ontario 2.85 6/02/2023 15,585
----------
Total Foreign Government Obligations (cost: $45,858) 37,659
----------
MUNICIPAL OBLIGATIONS (6.6%)
ARIZONA (0.0%)
3,500 School Facilities Board 2.38 9/01/2019 3,495
----------
CALIFORNIA (0.8%)
5,000 Industry Public Facilities Auth. (INS - Assured
Guaranty Municipal Corp.) 3.47 1/01/2021 5,044
5,000 Industry Public Facilities Auth. (INS - Assured
Guaranty Municipal Corp.) 3.82 1/01/2022 5,109
1,250 Las Virgenes Unified School District 5.54 8/01/2025 1,381
850 Placentia Yorba Linda Unified School District 5.40 8/01/2021 899
5,000 Port of Oakland 4.50 5/01/2030 5,262
75 Port of Oakland (PRE) 4.50 5/01/2032 82
11,625 Port of Oakland 4.50 5/01/2032 12,192
4,250 Riverside CCD 3.49 8/01/2023 4,366
3,000 Riverside CCD 3.61 8/01/2024 3,094
10,000 San Jose Redev. Agency Successor Agency 3.13 8/01/2028 9,760
5,250 San Marcos Redev. Agency Successor Agency 4.02 10/01/2025 5,492
6,500 San Marcos Redev. Agency Successor Agency 4.47 10/01/2029 6,940
2,000 Torrance Unified School District 5.52 8/01/2021 2,125
2,590 Vista Redev. Agency (INS - Assured Guaranty Municipal Corp.) 4.13 9/01/2030 2,684
----------
64,430
----------
COLORADO (0.1%)
5,000 El Paso County 4.47 10/01/2035 5,244
----------
CONNECTICUT (0.6%)
10,000 City of Bridgeport 4.03 8/15/2028 10,332
7,380 City of Bridgeport 4.08 8/15/2029 7,551
================================================================================
28 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
$ 3,500 City of New Haven 4.68% 8/01/2031 $ 3,674
5,000 State 3.23 1/15/2025 4,924
2,500 State 3.90 9/15/2028 2,513
3,845 Town of Hamden 4.93 8/15/2030 3,992
10,000 Town of Stratford 5.75 8/15/2030 10,809
----------
43,795
----------
FLORIDA (0.4%)
3,250 City of Jacksonville 2.00 10/01/2019 3,230
3,000 City of Jacksonville 2.37 10/01/2020 2,974
8,250 Miami-Dade County Aviation 2.70 10/01/2026 7,972
10,000 Miami-Dade County School Board (INS - Assured
Guaranty Municipal Corp.) 5.38 5/01/2031 10,668
6,000 Palm Beach County School District 5.40 8/01/2025 6,734
----------
31,578
----------
GEORGIA (0.0%)
2,000 Atlanta & Fulton County Recreation Auth. 3.80 12/15/2037 1,959
1,500 Atlanta & Fulton County Recreation Auth. 4.00 12/15/2046 1,442
----------
3,401
----------
HAWAII (0.3%)
900 City & County of Honolulu 2.81 11/01/2023 900
680 City & County of Honolulu 3.06 11/01/2025 684
775 City & County of Honolulu 3.16 11/01/2026 780
625 City & County of Honolulu 3.26 11/01/2027 629
690 City & County of Honolulu 3.36 11/01/2028 695
7,000 State 2.80 10/01/2027 6,768
3,000 State Department of Budget and Finance 3.25 1/01/2025 3,044
7,235 State Department of Budget and Finance 3.10 5/01/2026 7,253
----------
20,753
----------
IDAHO (0.1%)
2,500 State Building Auth. 3.78 9/01/2030 2,526
2,120 State Building Auth. 3.93 9/01/2031 2,163
2,000 State Building Auth. 3.98 9/01/2032 2,039
----------
6,728
----------
ILLINOIS (0.5%)
6,500 Chicago Midway International Airport 5.00 1/01/2025 7,217
8,000 Chicago Midway International Airport 5.00 1/01/2026 8,848
5,000 Chicago O'Hare International Airport 5.00 1/01/2021 5,272
6,500 City of Chicago Wastewater Transmission 5.84 1/01/2035 7,442
2,025 Finance Auth. 3.55 8/15/2029 1,995
3,000 Finance Auth. 3.60 8/15/2030 2,947
4,500 Winnebago & Boone County School District No. 205 3.80 12/01/2026 4,535
----------
38,256
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 29
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
INDIANA (0.3%)
$ 4,955 Finance Auth. 4.36% 7/15/2029 $ 5,269
4,260 Finance Auth. 4.53 7/15/2031 4,507
1,500 Finance Auth. 3.62 7/01/2036 1,450
9,520 Indiana Bond Bank 2.13 7/15/2019 9,497
----------
20,723
----------
KANSAS (0.1%)
10,000 Dev. Finance Auth. 4.73 4/15/2037 10,830
----------
KENTUCKY (0.1%)
1,000 Economic Dev. Finance Auth. (INS - Assured
Guaranty Municipal Corp.) 3.62 12/01/2025 1,000
2,335 Economic Dev. Finance Auth. 3.72 12/01/2026 2,329
1,985 Economic Dev. Finance Auth. 3.82 12/01/2027 1,979
1,000 Economic Dev. Finance Auth. 3.92 12/01/2028 996
1,500 Economic Dev. Finance Auth. 4.02 12/01/2029 1,496
1,300 Economic Dev. Finance Auth. 4.12 12/01/2030 1,304
----------
9,104
----------
MAINE (0.1%)
5,000 Municipal Bond Bank 4.25 6/01/2023 5,226
----------
MARYLAND (0.1%)
2,290 EDC 4.05 6/01/2027 2,271
2,390 EDC 4.15 6/01/2028 2,351
2,495 EDC 4.25 6/01/2029 2,446
1,325 EDC 4.35 6/01/2030 1,296
1,385 EDC 4.40 6/01/2031 1,348
----------
9,712
----------
MISSISSIPPI (0.2%)
1,800 State 2.83 12/01/2024 1,788
2,000 State 3.03 12/01/2025 2,003
10,000 State 3.73 10/01/2032 9,929
----------
13,720
----------
NEW JERSEY (0.6%)
2,525 City of Atlantic 4.23 9/01/2025 2,600
2,415 City of Atlantic 4.29 9/01/2026 2,494
14,310 EDA 4.45 6/15/2020 14,499
2,700 EDA 5.25 9/01/2022 2,850
2,500 EDA 5.71 6/15/2030 2,793
3,000 Educational Facilities Auth. 4.02 7/01/2039 3,038
500 South Jersey Port Corp. 5.00 1/01/2025 558
1,000 South Jersey Port Corp. 5.00 1/01/2026 1,129
================================================================================
30 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
$ 1,000 South Jersey Port Corp. 5.00% 1/01/2027 $ 1,138
500 South Jersey Port Corp. 5.00 1/01/2028 572
5,000 Transportation Trust Fund Auth. (INS - AMBAC
Assurance Corp.) 5.25 12/15/2022 5,525
3,320 Transportation Trust Fund Auth. 5.50 12/15/2022 3,677
1,810 Transportation Trust Fund Auth. 5.75 12/15/2028 1,992
----------
42,865
----------
NEW MEXICO (0.0%)
1,250 Sandoval County 2.32 6/01/2019 1,248
1,000 Sandoval County 2.72 6/01/2020 997
----------
2,245
----------
NEW YORK (0.6%)
11,400 Dormitory Auth. 5.10 8/01/2034 11,998
10,000 Long Island Power Auth.(h) 5.25 5/01/2022 10,497
2,500 Long Island Power Auth. 3.98 9/01/2025 2,547
2,500 Long Island Power Auth. 4.13 9/01/2026 2,562
5,000 New York City Transitional Finance Auth. 5.00 2/01/2035 5,278
10,825 New York City Water & Sewer 5.25 6/15/2040 10,959
600 Town of Oyster Bay 3.55 2/01/2019 600
1,830 Town of Oyster Bay 3.80 2/01/2020 1,832
1,500 Town of Oyster Bay 3.95 2/01/2021 1,504
----------
47,777
----------
NORTH CAROLINA (0.1%)
5,000 City of Kannapolis 7.28 3/01/2027 5,217
----------
OHIO (0.1%)
10,000 Cleveland Public Power 5.50 11/15/2038 10,309
----------
OKLAHOMA (0.2%)
10,250 Dev. Finance Auth. 5.45 8/15/2028 10,944
1,365 Dev. Finance Auth. 5.88 8/01/2037 1,160
----------
12,104
----------
PENNSYLVANIA (0.4%)
5,045 Commonwealth Financing Auth. 3.86 6/01/2038 4,957
1,375 Economic Dev. Finance Auth. 3.20 11/15/2027 1,351
10,000 IDA(a) 3.56 7/01/2024 9,887
10,000 Philadelphia School District 5.06 9/01/2042 10,457
1,625 Public School Building Auth. (INS - Build America
Mutual Assurance Co.) 2.84 12/01/2019 1,620
1,300 Public School Building Auth. (INS - Build America
Mutual Assurance Co.) 4.08 12/01/2023 1,345
3,620 Scranton School District (Put Date 6/15/2019)(m) 4.13 6/15/2034 3,607
----------
33,224
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 31
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
SOUTH CAROLINA (0.1%)
$ 10,000 Public Service Auth. 4.77% 12/01/2045 $ 10,121
----------
TENNESSEE (0.2%)
2,000 Jackson Energy Auth. 2.90 4/01/2022 1,991
2,745 Jackson Energy Auth. 3.05 4/01/2023 2,742
3,915 Jackson Energy Auth. 3.20 4/01/2024 3,929
8,000 Metropolitan Nashville & Davidson County Health &
Educational Board 4.05 7/01/2026 8,225
----------
16,887
----------
TEXAS (0.6%)
1,550 City of Austin CCD 6.76 8/01/2030 1,950
2,000 City of Austin CCD 6.91 8/01/2035 2,682
5,000 City of Houston Combined Utility System 5.00 11/15/2033 5,272
9,000 Colony Local Dev. Corp. (INS - Berkshire Hathaway
Assurance Corp.) 4.38 10/01/2033 9,741
12,570 Dallas-Fort Worth International Airport Facilities 4.00 11/01/2021 12,985
2,265 Dallas-Fort Worth International Airport Facilities 4.44 11/01/2021 2,364
9,700 Ector County Hospital District 7.18 9/15/2035 9,793
2,000 McLennan County Public Facility Corp. 3.90 6/01/2029 2,056
1,000 Nueces County Port of Corpus Christi Auth. 3.49 12/01/2025 1,010
----------
47,853
----------
Total Municipal Obligations (cost: $498,958) 515,597
----------
PREFERRED BONDS (0.1%)
FINANCIAL (0.1%)
----------------
INSURANCE (0.1%)
5,000 Catlin Insurance Co. Ltd. (3 mo. LIBOR +
2.98%)(a),(g) (cost: $5,000) 5.74(c) -(j) 4,820
----------
Total Preferred Bonds (cost: $5,000) 4,820
----------
U.S. GOVERNMENT AGENCY ISSUES (4.5%)(n)
AGENCY COLLATERAL CMO (0.1%)
9,630 Freddie Mac(+) 4.00 6/15/2029 10,033
----------
COMMERCIAL MBS (3.4%)
11,250 Fannie Mae(+) 2.15 1/25/2023 11,014
4,834 Fannie Mae(+) 2.64(f) 11/25/2024 4,760
3,500 Fannie Mae(+) 2.78(f) 2/25/2027 3,416
2,500 Fannie Mae(+) 2.96(f) 2/25/2027 2,458
7,105 Fannie Mae(+) 3.04(f) 3/25/2028 7,005
66,888 Freddie Mac(+)(e) 0.85(f) 10/25/2022 1,803
91,515 Freddie Mac(+)(e) 1.00(f) 11/25/2022 2,844
================================================================================
32 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
$ 56,576 Freddie Mac(+)(e) 1.35%(f) 1/25/2022 $ 1,788
89,702 Freddie Mac(+)(e) 1.41(f) 5/25/2022 3,465
68,355 Freddie Mac(+)(e) 1.44(f) 6/25/2022 2,804
32,026 Freddie Mac(+)(e) 1.49(f) 3/25/2019 11
3,500 Freddie Mac(+) 1.60 8/15/2051 3,387
10,000 Freddie Mac(+) 2.59 5/25/2026 9,655
20,000 Freddie Mac(+) 2.65 8/25/2026 19,417
17,000 Freddie Mac(+) 2.77 5/25/2025 16,849
15,000 Freddie Mac(+) 2.81 1/25/2025 14,890
12,000 Freddie Mac(+) 2.85 3/25/2026 11,756
7,000 Freddie Mac(+) 3.00 12/25/2025 6,996
8,000 Freddie Mac(+) 3.01 7/25/2025 8,020
10,000 Freddie Mac(+) 3.02 1/25/2025 10,034
4,855 Freddie Mac(+) 3.12(f) 10/25/2031 4,661
9,500 Freddie Mac(+) 3.17 3/25/2027 9,524
5,759 Freddie Mac(+) 3.19(f) 9/25/2027 5,763
4,533 Freddie Mac(+) 3.24 8/25/2027 4,557
7,500 Freddie Mac(+) 3.29(f) 3/25/2029 7,420
8,766 Freddie Mac(+) 3.30(f) 11/25/2027 8,854
10,000 Freddie Mac(+) 3.37 7/25/2025 10,123
10,000 Freddie Mac(+) 3.41 12/25/2026 10,196
9,000 Freddie Mac(+) 3.43(f) 1/25/2027 9,205
4,455 Freddie Mac(+) 3.46 11/25/2032 4,422
15,500 Freddie Mac(+) 3.51 4/25/2030 15,638
3,000 Freddie Mac(+) 3.65(f) 2/25/2028 3,106
7,000 Freddie Mac(+) 3.90 12/25/2030 7,247
5,000 Freddie Mac(+) 3.90 10/25/2033 5,174
5,000 Freddie Mac(+) 3.92(f) 9/25/2028 5,294
5,000 Freddie Mac(+) 4.05(f) 9/25/2028 5,336
6,794 Freddie Mac(+) 4.06(f) 10/25/2028 7,269
----------
266,161
----------
FGLMC COLLATERAL (0.5%)
9,402 Freddie Mac(+) 3.50 5/01/2042 9,531
10,762 Freddie Mac(+) 3.50 6/01/2046 10,831
3,876 Freddie Mac(+) 3.50 8/01/2046 3,926
8,470 Freddie Mac(+) 3.50 5/01/2047 8,535
47 Freddie Mac(+) 5.00 6/01/2020 48
254 Freddie Mac(+) 5.00 1/01/2021 259
263 Freddie Mac(+) 5.50 11/01/2020 267
133 Freddie Mac(+) 5.50 12/01/2020 135
620 Freddie Mac(+) 5.50 12/01/2035 673
451 Freddie Mac(+) 5.50 4/01/2036 487
----------
34,692
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 33
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
FNMA COLLATERAL (0.3%)
$ 7,670 Fannie Mae(+) 2.50% 2/01/2028 $ 7,593
4,901 Fannie Mae(+) 4.00 4/01/2048 5,028
1,351 Fannie Mae(+) 5.00 6/01/2033 1,447
174 Fannie Mae(+) 5.50 7/01/2021 176
1,599 Fannie Mae(+) 5.50 9/01/2035 1,739
771 Fannie Mae(+) 5.50 10/01/2035 839
244 Fannie Mae(+) 5.50 1/01/2036 266
727 Fannie Mae(+) 5.50 4/01/2036 792
822 Fannie Mae(+) 5.50 2/01/2037 895
424 Fannie Mae(+) 5.50 3/01/2037 453
369 Fannie Mae(+) 5.50 11/01/2037 396
1,153 Fannie Mae(+) 5.50 5/01/2038 1,242
699 Fannie Mae(+) 6.00 5/01/2036 766
501 Fannie Mae(+) 6.00 6/01/2036 546
726 Fannie Mae(+) 6.00 8/01/2037 795
186 Fannie Mae(+) 6.50 4/01/2031 210
4 Fannie Mae(+) 6.50 7/01/2031 4
344 Fannie Mae(+) 6.50 3/01/2032 388
7 Fannie Mae(+) 7.00 10/01/2022 7
4 Fannie Mae(+) 7.00 3/01/2023 4
----------
23,586
----------
GNMA COLLATERAL (0.1%)
2,550 Government National Mortgage Assn. I 5.00 8/15/2033 2,738
47 Government National Mortgage Assn. I 6.00 8/15/2028 50
42 Government National Mortgage Assn. I 6.00 9/15/2028 45
106 Government National Mortgage Assn. I 6.00 9/15/2028 114
1,069 Government National Mortgage Assn. I 6.00 9/15/2028 1,183
194 Government National Mortgage Assn. I 6.00 10/15/2028 211
111 Government National Mortgage Assn. I 6.00 1/15/2029 119
14 Government National Mortgage Assn. I 6.00 1/15/2029 15
145 Government National Mortgage Assn. I 6.00 1/15/2029 156
194 Government National Mortgage Assn. I 6.00 1/15/2033 215
4 Government National Mortgage Assn. I 6.50 6/15/2023 4
113 Government National Mortgage Assn. I 6.50 7/15/2023 123
2 Government National Mortgage Assn. I 6.50 7/15/2023 2
19 Government National Mortgage Assn. I 6.50 9/15/2023 21
97 Government National Mortgage Assn. I 6.50 10/15/2023 105
43 Government National Mortgage Assn. I 6.50 10/15/2023 47
10 Government National Mortgage Assn. I 6.50 10/15/2023 11
112 Government National Mortgage Assn. I 6.50 12/15/2023 122
52 Government National Mortgage Assn. I 6.50 12/15/2023 57
24 Government National Mortgage Assn. I 6.50 1/15/2024 26
================================================================================
34 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
$ 35 Government National Mortgage Assn. I 6.50% 2/15/2024 $ 38
42 Government National Mortgage Assn. I 6.50 4/15/2026 46
202 Government National Mortgage Assn. I 6.50 5/15/2028 224
433 Government National Mortgage Assn. I 6.50 10/15/2031 476
18 Government National Mortgage Assn. I 7.00 5/15/2023 19
19 Government National Mortgage Assn. I 7.00 5/15/2023 20
17 Government National Mortgage Assn. I 7.00 5/15/2023 17
11 Government National Mortgage Assn. I 7.00 5/15/2023 11
41 Government National Mortgage Assn. I 7.00 6/15/2023 43
11 Government National Mortgage Assn. I 7.00 6/15/2023 11
8 Government National Mortgage Assn. I 7.00 8/15/2023 8
7 Government National Mortgage Assn. I 7.00 8/15/2023 8
50 Government National Mortgage Assn. I 7.00 8/15/2023 52
8 Government National Mortgage Assn. I 7.00 8/15/2023 9
26 Government National Mortgage Assn. I 7.00 9/15/2023 26
11 Government National Mortgage Assn. I 7.00 1/15/2026 11
18 Government National Mortgage Assn. I 7.00 3/15/2026 19
6 Government National Mortgage Assn. I 7.00 3/15/2026 6
118 Government National Mortgage Assn. I 7.00 10/15/2027 132
155 Government National Mortgage Assn. I 7.00 6/15/2029 165
99 Government National Mortgage Assn. I 7.00 6/15/2029 103
18 Government National Mortgage Assn. I 7.00 7/15/2029 18
206 Government National Mortgage Assn. I 7.00 8/15/2031 232
66 Government National Mortgage Assn. I 7.00 7/15/2032 73
41 Government National Mortgage Assn. I 7.50 7/15/2023 43
121 Government National Mortgage Assn. I 7.50 6/15/2026 129
53 Government National Mortgage Assn. I 7.50 6/15/2026 56
40 Government National Mortgage Assn. I 7.50 7/15/2026 40
75 Government National Mortgage Assn. I 7.50 5/15/2027 80
118 Government National Mortgage Assn. I 7.50 2/15/2028 131
85 Government National Mortgage Assn. I 7.50 12/15/2028 97
71 Government National Mortgage Assn. I 7.50 8/15/2029 79
----------
7,786
----------
GNMA2 COLLATERAL (0.0%)
435 Government National Mortgage Assn. II 5.50 4/20/2033 475
406 Government National Mortgage Assn. II 6.00 8/20/2032 444
301 Government National Mortgage Assn. II 6.00 9/20/2032 331
141 Government National Mortgage Assn. II 6.50 8/20/2031 158
----------
1,408
----------
TRANSPORTATION (0.1%)
8,011 Totem Ocean Trailer Express, Inc., Title XI (NBGA -
United States Government)(o) 6.37 4/15/2028 9,080
----------
Total U.S. Government Agency Issues (cost: $351,098) 352,746
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 35
================================================================================
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------------
U.S. TREASURY SECURITIES (9.4%)
BONDS (4.3%)
$ 12,950 U.S. Treasury Bond 2.25% 8/15/2046 $ 11,110
53,490 U.S. Treasury Bond(p) 2.38 1/15/2025 58,690
65,000 U.S. Treasury Bond(q) 2.50 2/15/2045 59,112
60,000 U.S. Treasury Bond 2.50 2/15/2046 54,368
40,000 U.S. Treasury Bond 2.75 8/15/2042 38,484
10,000 U.S. Treasury Bond 2.75 11/15/2042 9,607
10,000 U.S. Treasury Bond 2.75 8/15/2047 9,501
22,000 U.S. Treasury Bond 2.75 11/15/2047 20,885
25,000 U.S. Treasury Bond 3.00 11/15/2044 25,053
5,000 U.S. Treasury Bond 3.38 5/15/2044 5,343
10,000 U.S. Treasury Bond 3.38 11/15/2048 10,727
30,000 U.S. Treasury Bond 3.88 8/15/2040 34,610
----------
337,490
----------
NOTES (5.1%)
20,000 U.S. Treasury Note 1.63 8/15/2022 19,456
20,000 U.S. Treasury Note 1.63 11/15/2022 19,416
50,000 U.S. Treasury Note 1.63 2/15/2026 47,079
15,000 U.S. Treasury Note 2.00 2/15/2022 14,812
10,000 U.S. Treasury Note 2.00 2/15/2023 9,832
80,000 U.S. Treasury Note 2.00 2/15/2025 77,769
10,000 U.S. Treasury Note 2.25 11/15/2024 9,874
5,000 U.S. Treasury Note 2.25 11/15/2025 4,914
10,000 U.S. Treasury Note 2.25 2/15/2027 9,761
10,000 U.S. Treasury Note 2.25 8/15/2027 9,733
10,000 U.S. Treasury Note 2.25 11/15/2027 9,716
5,000 U.S. Treasury Note 2.38 1/31/2023 4,989
10,000 U.S. Treasury Note 2.38 5/15/2027 9,847
5,000 U.S. Treasury Note 2.50 5/15/2024 5,009
5,000 U.S. Treasury Note 2.50 1/31/2025 5,003
50,000 U.S. Treasury Note 2.63 11/15/2020 50,118
10,000 U.S. Treasury Note 2.75 8/31/2025 10,140
5,000 U.S. Treasury Note 2.75 2/15/2028 5,052
5,000 U.S. Treasury Note 2.88 5/15/2028 5,102
15,000 U.S. Treasury Note 2.88 8/15/2028 15,304
10,000 U.S. Treasury Note 2.88 11/15/2046 9,763
15,000 U.S. Treasury Note 3.00 10/31/2025 15,446
5,000 U.S. Treasury Note 3.13 11/15/2028 5,211
20,000 U.S. Treasury Note 3.63 2/15/2020 20,217
----------
393,563
----------
Total U.S. Treasury Securities (cost: $740,018) 731,053
----------
Total Bonds (cost: $7,660,981) 7,603,233
----------
================================================================================
36 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (1.4%)
COMMON STOCKS (0.3%)
COMMUNICATIONS (0.0%)
---------------------
TELECOMMUNICATIONS (0.0%)
44,050 AT&T, Inc. $ 1,324
21,000 Verizon Communications, Inc. 1,156
----------
Total Communications 2,480
----------
CONSUMER, NON-CYCLICAL (0.1%)
-----------------------------
HOUSEHOLD PRODUCTS/WARES (0.1%)
24,000 Kimberly-Clark Corp. 2,673
----------
ENERGY (0.1%)
-------------
OIL & GAS (0.1%)
23,780 Chevron Corp. 2,727
55,000 Royal Dutch Shell plc ADR "A" 3,395
----------
Total Energy 6,122
----------
FINANCIAL (0.1%)
----------------
BANKS (0.1%)
50,000 Bank of Montreal 3,659
25,000 Canadian Imperial Bank of Commerce 2,120
----------
5,779
----------
INVESTMENT COMPANIES (0.0%)
202,000 Prospect Capital Corp.(g) 1,374
----------
REITS (0.0%)
199,850 MFA Financial, Inc. 1,465
----------
Total Financial 8,618
----------
INDUSTRIAL (0.0%)
-----------------
MISCELLANEOUS MANUFACTURERS (0.0%)
55,835 General Electric Co. 567
----------
UTILITIES (0.0%)
----------------
ELECTRIC (0.0%)
15,200 Dominion Energy, Inc. 1,068
27,500 Southern Co. 1,336
----------
Total Utilities 2,404
----------
Total Common Stocks (cost: $20,021) 22,864
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 37
================================================================================
-------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS (1.1%)
CONSUMER, NON-CYCLICAL (0.3%)
-----------------------------
AGRICULTURE (0.1%)
200,000 CHS, Inc., cumulative redeemable, 7.88%(j),(o) $ 5,554
----------
FOOD (0.2%)
172,520 Dairy Farmers of America, Inc., cumulative redeemable, 7.88%(a),(j),(o) 17,209
----------
Total Consumer, Non-cyclical 22,763
----------
FINANCIAL (0.7%)
----------------
BANKS (0.1%)
40,000 Citigroup Capital XIII, 9.12%, (3 mo. LIBOR + 6.37%)(c) 1,050
10,800 M&T Bank Corp., cumulative redeemable, 6.38%(j),(o) 10,827
----------
11,877
----------
REITS (0.6%)
142,500 Equity Residential Properties Trust, 8.29%, Series K,
depositary shares, cumulative redeemable(j),(o) 8,835
250,000 Mid-America Apartment Communities, Inc., 8.50%(h),(j) 15,715
344,500 Prologis, Inc., 8.54%(h),(j) 20,801
----------
45,351
----------
Total Financial 57,228
----------
UTILITIES (0.1%)
----------------
ELECTRIC (0.1%)
200,000 Entergy Texas, Inc., 5.63% 5,203
----------
Total Preferred Stocks (cost: $74,037) 85,194
----------
Total Equity Securities (cost: $94,058) 108,058
----------
-------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
-------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (0.4%)
COMMERCIAL PAPER (0.4%)
$ 4,561 Eversource Energy(a) 2.67% 2/20/2019 $ 4,555
10,000 Northern Illinois Gas Corp. 2.70 2/11/2019 9,992
2,000 San Diego Gas & Electric(a) 2.64 2/05/2019 1,999
1,780 San Diego Gas & Electric(a) 2.70 2/11/2019 1,779
8,987 Snap-on, Inc.(a) 2.52 2/04/2019 8,985
----------
Total Commercial Paper (cost: $27,310) 27,310
----------
================================================================================
38 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------------
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.0%)
2,426 State Street Institutional Treasury Money Market Fund
Premier Class, 2.31%(r) (cost: $3) $ 3
----------
Total Money Market Instruments (cost: $27,313) 27,313
----------
SHORT-TERM INVESTMENTS PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (0.5%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.5%)
1,133,291 Goldman Sachs Financial Square Government Fund Institutional
Class, 2.34%(r) 1,133
37,983,923 HSBC U.S. Government Money Market Fund Class I, 2.38%(r) 37,984
----------
Total Short-Term Investments Purchased with Cash Collateral
from Securities Loaned (cost: $39,117) 39,117
----------
TOTAL INVESTMENTS (COST: $7,821,469) $7,777,721
==========
-------------------------------------------------------------------------------------------------------------------
UNREALIZED
APPRECIATION/
NUMBER OF EXPIRATION NOTIONAL CONTRACT (DEPRECIATION)
CONTRACTS DESCRIPTION DATE AMOUNT (000) VALUE (000) (000)
-------------------------------------------------------------------------------------------------------------------
FUTURES (0.8%)
LONG FUTURES
INTEREST RATE CONTRACTS
444 U.S. Treasury Bond 3/20/2019 USD 65,174 $65,129 $(45)
------- ----
TOTAL LONG FUTURES $65,129 $(45)
------- ----
TOTAL FUTURES $65,129 $(45)
======= ====
================================================================================
PORTFOLIO OF INVESTMENTS | 39
================================================================================
-------------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
-------------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------------------------------------------------------------------------------------------------------------
Bonds:
Asset-Backed Securities $ - $ 434,843 $- $ 434,843
Bank Loans - 74,940 - 74,940
Collateralized Loan Obligations - 118,950 - 118,950
Commercial Mortgage Securities - 298,018 - 298,018
Corporate Obligations - 3,579,512 - 3,579,512
Eurodollar and Yankee Obligations - 1,455,095 - 1,455,095
Foreign Government Obligations - 37,659 - 37,659
Municipal Obligations - 515,597 - 515,597
Preferred Bonds - 4,820 - 4,820
U.S. Government Agency Issues - 352,746 - 352,746
U.S. Treasury Securities 731,053 - - 731,053
Equity Securities:
Common Stocks 22,864 - - 22,864
Preferred Stocks - 85,194 - 85,194
Money Market Instruments:
Commercial Paper - 27,310 - 27,310
Government & U.S. Treasury
Money Market Funds 3 - - 3
Short-Term Investments Purchased with
Cash Collateral from Securities Loaned:
Government & U.S. Treasury
Money Market Funds 39,117 - - 39,117
-------------------------------------------------------------------------------------------------------------------
Total $793,037 $6,984,684 $- $7,777,721
-------------------------------------------------------------------------------------------------------------------
LIABILITIES LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------------------------------------------------------------------------------------------------------------
Futures(1) $(45) $- $- $(45)
-------------------------------------------------------------------------------------------------------------------
Total $(45) $- $- $(45)
-------------------------------------------------------------------------------------------------------------------
(1) Futures are valued at the unrealized appreciation/(depreciation) on the
investment.
Refer to the Portfolio of Investments for additional industry, country, or
geographic region classifications.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
At January 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
40 | USAA INCOME FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A 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 21.6% of net assets at January 31,
2019.
o CATEGORIES AND DEFINITIONS
EURODOLLAR AND YANKEE OBLIGATIONS - Eurodollar obligations are U.S.
dollar-denominated instruments that are issued outside the U.S. capital
markets by foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions. Yankee obligations
are dollar-denominated instruments that are issued by foreign issuers in the
U.S. capital markets.
ASSET-BACKED AND COMMERCIAL MORTGAGE-BACKED SECURITIES - Asset-backed
securities represent a participation in, or are secured by and payable from,
a stream of payments generated by particular assets. Commercial
mortgage-backed securities reflect an interest in, and are secured by,
mortgage loans on commercial real property. These securities represent
ownership in a pool of loans and are divided into pieces (tranches) with
varying maturities. The stated final maturity of such securities represents
the date the final principal payment will be made for the last outstanding
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 41
================================================================================
loans in the pool. The weighted average life is the average time for
principal to be repaid, which is calculated by assuming prepayment rates of
the underlying loans. The weighted average life is likely to be
substantially shorter than the stated final maturity as a result of
scheduled principal payments and unscheduled principal prepayments. Stated
interest rates on commercial mortgage-backed securities may change slightly
over time as underlying mortgages paydown.
COLLATERALIZED LOAN OBLIGATIONS (CLOs) - Collateralized loan obligations are
securities issued by entities that are collateralized by a pool of loans.
CLOs are issued in multiple classes (tranches), and can be equity or debt
with specific adjustable or fixed interest rates, and varying maturities.
The cash flow from the underlying loans is used to pay off each tranche
separately within the debt, or senior tranches. Equity, or subordinated
tranches, typically are not paid a cash flow but do offer ownership in the
CLO itself in the event of a sale.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs) - Collateralized mortgage
obligations are debt obligations of a legal entity that are fully
collateralized by a portfolio of mortgages or mortgage-related securities.
CMOs are issued in multiple classes (tranches), with specific adjustable or
fixed interest rates, varying maturities, and must be fully retired no later
than its final distribution date. The cash flow from the underlying
mortgages is used to pay off each tranche separately. CMOs are designed to
provide investors with more predictable cash flows than regular mortgage
securities, but such cash flows can be difficult to predict because of the
effect of prepayments.
COMMERCIAL PAPER - Consists of short-term unsecured promissory notes with
maturities ranging from one to 270 days, issued mainly by corporations.
Commercial paper is usually purchased at a discount and matures at par
value; however, it also may be interest-bearing. Rate represents an
annualized yield at time of purchase or coupon rate, if applicable.
================================================================================
42 | USAA INCOME FUND
================================================================================
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
ADR American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S.
dollars.
CAD Canadian Dollar
CCD Community College District
CMT Constant Maturity Treasury
EDA Economic Development Authority
EDC Economic Development Corp.
IDA Industrial Development Authority/Agency
LIBOR London Interbank Offered Rate
PRE Pre-refunded to a date prior to maturity
REITS Real estate investment trusts - Dividend distributions from REITS
may be recorded as income and later characterized by the REIT at
the end of the fiscal year as capital gains or a return of capital.
Thus, the Fund will estimate the components of distributions from
these securities and revise when actual distributions are known.
Title XI The Title XI Guarantee Program provides a guarantee of payment of
principal and interest of debt obligations issued by U.S. merchant
marine and U.S. shipyards by enabling owners of eligible vessels
and shipyards to obtain financing at attractive terms. The
guarantee carries the full faith and credit of the U.S. government.
CREDIT ENHANCEMENTS - Adds the financial strength of the provider of the
enhancement to support the issuer's ability to repay the principal and
interest payments when due. The enhancement may be provided by a
high-quality bank, insurance company or other corporation, or a collateral
trust. The enhancements do not guarantee the market values of the
securities.
INS Principal and interest payments are insured by the name listed.
Although bond insurance reduces the risk of loss due to default by
an issuer, such bonds remain subject to the risk that
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 43
================================================================================
value may fluctuate for other reasons, and there is no assurance
that the insurance company will meet its obligations.
NBGA Principal and interest payments or, under certain circumstances,
underlying mortgages, are guaranteed by a nonbank guarantee
agreement from the name listed.
o SPECIFIC NOTES
(a) Restricted security that is not registered under the Securities Act of
1933. A resale of this security in the United States may occur in an
exempt transaction to a qualified institutional buyer as defined by Rule
144A, and as such has been deemed liquid by USAA Asset Management
Company under liquidity guidelines approved by USAA Mutual Funds Trust's
Board of Trustees, unless otherwise noted as illiquid.
(b) Security or a portion of the security purchased on a delayed-delivery
and/or when-issued basis.
(c) Variable-rate security - interest rate is adjusted periodically. The
interest rate disclosed represents the rate at January 31, 2019.
(d) Bank loans (loans) - are not registered under the Securities Act of
1933. The loans contain certain restrictions on resale and cannot be
sold publicly. The stated interest rates represent the all in interest
rate of all contracts within the loan facilities. The interest rates are
adjusted periodically, and the rates disclosed represent the current
rate at January 31, 2019. The weighted average life of the loans are
likely to be shorter than the stated final maturity date due to
mandatory or optional prepayments. The loans are deemed liquid by USAA
Asset Management Company, under liquidity guidelines approved by USAA
Mutual Funds Trust's Board of Trustees, unless otherwise noted as
illiquid.
(e) Security is interest only. Interest-only commercial mortgage-backed
securities (CMBS IOs) represent the right to receive only the interest
payments on an underlying pool of commercial mortgage loans. The
================================================================================
44 | USAA INCOME FUND
================================================================================
purchase yield reflects an anticipated yield based upon interest rates
at the time of purchase and the estimated timing and amount of future
cash flows. Coupon rates after purchase vary from period to period. The
principal amount represents the notional amount of the underlying pool
on which current interest is calculated. CMBS IOs are backed by loans
that have various forms of prepayment protection, which include lock-out
provisions, yield maintenance provisions, and prepayment penalties. This
serves to moderate their prepayment risk. CMBS IOs are subject to
default-related prepayments that may have a negative impact on yield.
(f) Stated interest rates may change slightly over time as underlying
mortgages paydown.
(g) The security, or a portion thereof, was out on loan as of
January 31, 2019.
(h) Security deemed illiquid by USAA Asset Management Company, under
liquidity guidelines approved by USAA Mutual Funds Trust's Board of
Trustees.
(i) Fixed to floating security that initially pays a fixed rate and converts
to a floating rate coupon at a specified date in the future. The rate
presented is a fixed rate.
(j) Security is perpetual and has no final maturity date but may be subject
to calls at various dates in the future.
(k) Payment-in-kind (PIK) - security in which the issuer has or will have
the option to make all or a portion of the interest or dividend payments
in additional securities in lieu of cash.
(l) At January 31, 2019, the issuer was in default with respect to interest
and/or principal payments.
(m) Put bond - provides the right to sell the bond at face value at specific
tender dates prior to final maturity. The put feature shortens the
effective maturity of the security.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 45
================================================================================
(n) U.S. government agency issues - Mortgage-backed securities issued by
certain U.S. Government Sponsored Enterprises (GSEs) such as the
Government National Mortgage Association (GNMA or Ginnie Mae) and
certain other U.S. government guaranteed securities are supported by the
full faith and credit of the U.S. government. Securities issued by
other GSEs, such as Federal Home Loan Mortgage Corporation (Freddie Mac
or FHLMC) and Federal National Mortgage Association (Fannie Mae or
FNMA), indicated with a "+", are supported only by the right of the GSE
to borrow from the U.S. Treasury, the discretionary authority of the
U.S. government to purchase the GSEs' obligations, or only by the
credit of the issuing agency, instrumentality, or corporation, and are
neither issued nor guaranteed by the U.S. Treasury. In September of
2008, the U.S. Treasury placed Fannie Mae and Freddie Mac under
conservatorship and appointed the Federal Housing Finance Agency (FHFA)
to act as conservator and oversee their daily operations. In addition,
the U.S. Treasury entered into purchase agreements with Fannie Mae and
Freddie Mac to provide them with capital in exchange for senior
preferred stock. While these arrangements are intended to ensure that
Fannie Mae and Freddie Mac can continue to meet their obligations, it is
possible that actions by the U.S. Treasury, FHFA, or others could
adversely impact the value of the Fund's investments in securities
issued by Fannie Mae and Freddie Mac.
(o) At January 31, 2019, the security, or a portion thereof, was segregated
to cover delayed-delivery and/or when-issued purchases.
(p) The security, or a portion thereof, is segregated to cover the value of
open futures contracts at January 31, 2019.
(q) Securities with a value of $59,112,000 are segregated as collateral for
initial margin requirements on open futures contracts.
(r) Rate represents the money market fund annualized seven-day yield at
January 31, 2019.
See accompanying notes to financial statements.
================================================================================
46 | USAA INCOME FUND
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (including
securities on loan of $38,011) (cost of $7,821,469) $7,777,721
Cash 672
Receivables:
Capital shares sold 6,283
USAA Asset Management Company (Note 7) 2
Dividends and interest 72,303
Securities sold 9,751
Other 38
----------
Total assets 7,866,770
----------
LIABILITIES
Payables:
Upon return of securities loaned 39,117
Securities purchased 16,607
Capital shares redeemed 4,426
Variation margin on futures contracts 44
Accrued management fees 1,700
Accrued transfer agent's fees 141
Other accrued expenses and payables 483
----------
Total liabilities 62,518
----------
Net assets applicable to capital shares outstanding $7,804,252
==========
NET ASSETS CONSIST OF:
Paid-in capital $7,850,737
Accumulated loss (46,485)
----------
Net assets applicable to capital shares outstanding $7,804,252
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $2,986,753/235,401 capital shares
outstanding, no par value) $ 12.69
==========
Institutional Shares (net assets of $4,703,965/371,035 capital shares
outstanding, no par value) $ 12.68
==========
Adviser Shares (net assets of $95,416/7,540 capital shares
outstanding, no par value) $ 12.65
==========
R6 Shares (net assets of $18,118/1,429 capital shares
outstanding, no par value) $ 12.68
==========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 47
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $35) $ 3,610
Interest 154,140
Securities lending (net) 343
--------
Total income 158,093
--------
EXPENSES
Management fees 10,207
Administration and servicing fees:
Fund Shares 2,269
Institutional Shares 2,340
Adviser Shares 75
R6 Shares 5
Transfer agent's fees:
Fund Shares 1,855
Institutional Shares 2,340
Adviser Shares 50
R6 Shares 1
Distribution and service fees (Note 7):
Adviser Shares 125
Custody and accounting fees:
Fund Shares 188
Institutional Shares 240
Adviser Shares 6
R6 Shares 1
Postage:
Fund Shares 83
Institutional Shares 48
Adviser Shares 3
Shareholder reporting fees:
Fund Shares 38
Institutional Shares 7
Adviser Shares 1
Trustees' fees 17
================================================================================
48 | USAA INCOME FUND
================================================================================
Registration fees:
Fund Shares $ 80
Institutional Shares 76
Adviser Shares 7
R6 Shares 13
Professional fees 66
Other 61
--------
Total expenses 20,202
--------
Expenses reimbursed:
R6 Shares (7)
--------
Net expenses 20,195
--------
NET INVESTMENT INCOME 137,898
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FOREIGN CURRENCY AND FUTURES CONTRACTS
Net realized gain (loss) on:
Unaffiliated transactions 9,427
Affiliated transactions (Note 4) (14)
Foreign currency transactions (9)
Futures transactions (64)
Change in net unrealized appreciation/(depreciation) of:
Investments 4,884
Foreign currency translations 1
Futures contracts (68)
--------
Net realized and unrealized gain 14,157
--------
Increase in net assets resulting from operations $152,055
========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 49
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited), and year ended
July 31, 2018
-------------------------------------------------------------------------------------------------------------------
1/31/2019 7/31/2018
-------------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 137,898 $ 263,650
Net realized gain (loss) on investments 9,413 (6,283)
Net realized loss on foreign currency transactions (9) (17)
Net realized loss on futures transactions (64) (44)
Change in net unrealized appreciation/(depreciation) of:
Investments 4,884 (293,352)
Foreign currency translations 1 (3)
Futures contracts (68) 23
------------------------
Increase (decrease) in net assets resulting from operations 152,055 (36,026)
------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (56,077) (133,365)
Institutional Shares (89,033) (137,846)
Adviser Shares (1,752) (3,980)
R6 Shares (360) (595)
------------------------
Distributions to shareholders (147,222) (275,786)
------------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (NOTE 6)
Fund Shares (70,648) (410,870)
Institutional Shares 71,062 1,140,204
Adviser Shares (9,637) (21,090)
R6 Shares (756) 14,567
------------------------
Total net increase (decrease) in net assets from capital share transactions (9,979) 722,811
------------------------
Net increase (decrease) in net assets (5,146) 410,999
NET ASSETS
Beginning of period 7,809,398 7,398,399
------------------------
End of period $7,804,252 $7,809,398
========================
See accompanying notes to financial statements.
================================================================================
50 | USAA INCOME FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
January 31, 2019 (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 47 separate funds.
The USAA Income Fund (the Fund) qualifies as a registered investment company
under Accounting Standards Codification Topic 946. The information presented in
this semiannual report pertains only to the Fund, which is classified as
diversified under the 1940 Act. The Fund's investment objective is to seek
maximum current income without undue risk to principal.
The Fund consists of four classes of shares: Income Fund Shares (Fund Shares),
Income Fund Institutional Shares (Institutional Shares), Income Fund Adviser
Shares (Adviser Shares), and Income Fund R6 Shares (R6 Shares). Each class of
shares has equal rights to assets and earnings, except that each class bears
certain class-related expenses specific to the particular class. These expenses
include administration and servicing fees, transfer agent fees, postage,
shareholder reporting fees, distribution and service (12b-1) fees, and certain
registration and custodian fees. Expenses not attributable to a specific class,
income, and realized gains or losses on investments are allocated to each class
of shares based on each class' relative net assets. Each class has exclusive
voting rights on matters related solely to that class and separate voting rights
on matters that relate to all classes. The Institutional Shares are 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 51
================================================================================
companies. Institutional Shares also are 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). The Adviser Shares permit investors to purchase
shares through financial intermediaries, including banks, broker-dealers,
insurance companies, investment advisers, plan sponsors, and financial
professionals that provide various administrative and distribution services. The
R6 Shares are available for investment by participants in employer-sponsored
retirement plans where a financial intermediary provides retirement
recordkeeping services to plan participants and to endowment funds and
foundations.
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of USAA Asset Management Company (AMCO or Manager), the investment
adviser to the Fund, and USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services (SAS), the transfer agent to the Fund, announced that AMCO and
SAS would be acquired by Victory Capital Holdings, Inc. (Victory), a global
investment management firm headquartered in Cleveland, Ohio (the Transaction).
The closing of the Transaction is expected to be completed during the second
quarter of 2019, pending satisfaction of certain closing conditions and
approvals, including certain approvals of the Fund's Board of Trustees and of
the Fund's shareholders at a special shareholder meeting to be held on April 18,
2019. The Transaction is not expected to result in any material changes to the
Fund's investment objectives and principal investment strategies.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Valuation and Liquidity 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.
The Fund utilizes 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.
================================================================================
52 | USAA INCOME 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. 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 ask prices or
the last sales price to value a security when, in the Service's
judgment, these prices are readily available and are representative of
the security's market value. For many securities, such prices are not
readily available. The Service generally prices those securities based
on methods which 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.
Generally, debt securities are categorized in Level 2 of the fair value
hierarchy; however, to the extent the valuations include significant
unobservable inputs, the securities would be categorized in Level 3.
2. Equity securities, including exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange or
the 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. Securities traded primarily on foreign securities exchanges or
markets are valued at the last quoted sale price, or the most recently
determined official closing price calculated according to local market
convention, available at the time the Fund is valued. If no last sale or
official closing price is reported or available, the average of the bid
and ask prices generally is used. Actively traded equity securities
listed on a domestic exchange generally are categorized in Level 1 of
the fair value hierarchy. Certain preferred and equity securities traded
in inactive markets generally are categorized in Level 2 of the fair
value hierarchy.
3. 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 53
================================================================================
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 many cases, events affecting the values of foreign securities that
occur between the time of their last quoted sale or official closing
price and the close of normal trading on the NYSE on a day the Fund's
NAV is calculated will not need to be reflected in the value of the
Fund's foreign securities. However, the Manager will monitor for events
that would materially affect the value of the Fund's foreign securities
and the Committee will consider such available information that it deems
relevant and will determine a fair value for the affected foreign
securities in accordance with valuation procedures. In addition,
information from an external vendor or other sources may be used to
adjust the foreign market closing prices of foreign equity securities to
reflect what the Committee believes to be the fair value of the
securities as of the close of the NYSE. Fair valuation of affected
foreign equity securities may occur frequently based on an assessment
that events which occur on a fairly regular basis (such as U.S. market
movements) are significant. Such securities are categorized in Level 2
of the fair value hierarchy.
4. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value hierarchy.
5. Short-term debt securities with original or remaining maturities of 60
days or less may be valued at amortized cost, provided that amortized
cost represents the fair value of such securities.
6. Repurchase agreements are valued at cost.
7. Futures are valued at the settlement price at the close of market on the
principal exchange on which they are traded or, in the absence of any
transactions that day, the settlement price on the prior trading date if
it is within the spread between the closing bid and ask price closest to
the last reported sale price.
8. Options are valued by a pricing service at the National BestBid/Offer
(NBBO) composite price, which is derived from the best available bid and
ask price in all participating options exchanges determined to
================================================================================
54 | USAA INCOME FUND
================================================================================
most closely reflect market value of the options at the time of
computation of the Fund's NAV.
9. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has been recognized in relation to a security or class of securities,
the securities are valued in good faith by the Committee in accordance
with 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, other pricing services, 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, evaluation of
credit quality, and an evaluation of the forces that influenced the
market in which the securities are purchased and sold. Level 2
securities include debt securities that are valued using market inputs
and other observable factors deemed by the Manager to appropriately
reflect fair value.
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 indexes.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 55
================================================================================
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
transaction. The Fund's derivative agreements held at January 31, 2019, did
not include master netting provisions.
FUTURES CONTRACTS - The Fund is subject to equity price risk, interest rate
risk, and foreign currency exchange rate risk in the normal course of
pursuing its investment objectives. The Fund may use futures contracts to
gain exposure to, or hedge against, changes in the value of equities,
interest rates, or foreign currencies. A futures contract represents a
commitment for the future purchase or sale of an asset at a specified price
on a specified date. Upon entering into such contracts, the Fund is required
to deposit with the broker in either cash or securities an initial margin in
an amount equal to a certain percentage of the contract amount. Subsequent
payments (variation margin) are made or received by the Fund each day,
depending on the daily fluctuations in the value of the contract, and are
recorded for financial statement purposes as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed. Upon entering into such
================================================================================
56 | USAA INCOME FUND
================================================================================
contracts, the Fund bears the risk of interest or exchange rates or
securities prices moving unexpectedly in an unfavorable direction, in which
case, the Fund may not achieve the anticipated benefits of the futures
contracts.
FAIR VALUES OF DERIVATIVE INSTRUMENTS AS OF JANUARY 31, 2019* (IN THOUSANDS)
LIABILITY DERIVATIVES
----------------------------------------------------------------------------------------------------
DERIVATIVES NOT STATEMENT OF FOREIGN
ACCOUNTED FOR AS ASSETS AND INTEREST RATE EQUITY EXCHANGE
HEDGING INSTRUMENTS LIABILITIES LOCATION CONTRACTS CONTRACTS CONTRACTS TOTAL
----------------------------------------------------------------------------------------------------
USAA Income Fund Accumulated loss $(45)** $- $- $(45)
----------------------------------------------------------------------------------------------------
*For open derivative instruments as of January 31, 2019, see the Portfolio
of Investments.
**Includes cumulative appreciation/(depreciation) of futures as reported on
the Portfolio of Investments. Only the variation margin from the last
business day of the reporting period is reported within the Statement of
Assets and Liabilities.
THE EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF OPERATIONS FOR THE
SIX-MONTH PERIOD ENDED JANUARY 31, 2019 (IN THOUSANDS)
NET REALIZED GAIN (LOSS)
----------------------------------------------------------------------------------------------------
DERIVATIVES NOT STATEMENT OF FOREIGN
ACCOUNTED FOR AS OPERATIONS INTEREST RATE EQUITY EXCHANGE
HEDGING INSTRUMENTS LOCATION CONTRACTS CONTRACTS CONTRACTS TOTAL
----------------------------------------------------------------------------------------------------
USAA Income Fund Net realized gain $(64) $- $- $(64)
(loss) on Futures
transactions
----------------------------------------------------------------------------------------------------
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
----------------------------------------------------------------------------------------------------
DERIVATIVES NOT STATEMENT OF FOREIGN
ACCOUNTED FOR AS OPERATIONS INTEREST RATE EQUITY EXCHANGE
HEDGING INSTRUMENTS LOCATION CONTRACTS CONTRACTS CONTRACTS TOTAL
----------------------------------------------------------------------------------------------------
USAA Income Fund Change in net unrealized $(68) $- $- $(68)
appreciation/
(depreciation)
of Futures contracts
----------------------------------------------------------------------------------------------------
D. INVESTMENTS IN SECURITIES - Securities transactions are accounted for as
of the date the securities are purchased or sold (trade date). Gains or
losses from sales of investment securities are computed on the identified
cost basis. Dividend income, less foreign taxes, if any, is recorded on the
ex-dividend date. If the ex-dividend date has passed, certain dividends
from foreign securities are recorded upon notification. Interest income is
recorded daily on the accrual basis. Premiums and discounts are
================================================================================
NOTES TO FINANCIAL STATEMENTS | 57
================================================================================
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.
E. FEDERAL TAXES - The Fund's policy is to comply with the requirements of
the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its taxable
income and net capital gains, if any, to its shareholders. Therefore, no
federal income tax provision is required.
For the six-month period ended January 31, 2019, 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 the Fund's tax basis to determine if
adjustments to this conclusion are necessary. The statute of limitations on
the Fund's tax return filings generally remain open for the three preceding
fiscal reporting year ends and remain subject to examination by the Internal
Revenue Service and state taxing authorities.
F. FOREIGN TAXATION - Foreign income and capital gains on some foreign
securities may be subject to foreign taxes, which are reflected as a
reduction to such income and realized gains. The Fund records a liability
based on unrealized gains to provide for potential foreign taxes payable
upon the sale of these securities. Foreign taxes have been provided for in
accordance with the Fund's understanding of the applicable countries'
prevailing tax rules and rates.
G. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the
exchange rate obtained from an independent pricing service on the
respective dates of such transactions.
2. Market value of securities, other assets, and liabilities at the
exchange rate obtained from an independent pricing service on a daily
basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
================================================================================
58 | USAA INCOME FUND
================================================================================
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the amounts received. At
the end of the Fund's fiscal year, net realized foreign currency
gains/losses are reclassified from accumulated net realized gains/losses to
accumulated undistributed net investment income on the Statement of Assets
and Liabilities, as such amounts are treated as ordinary income/loss for
federal income tax purposes. Net unrealized foreign currency exchange
gains/losses arise from changes in the value of assets and liabilities,
other than investments in securities, resulting from changes in the exchange
rate.
H. SECURITIES PURCHASED ON A DELAYED-DELIVERY OR WHEN-ISSUED BASIS -
Delivery and payment for securities that have been purchased by the Fund on
a delayed-delivery or when-issued basis or for delayed draws on loans can
take place a month or more after the trade date. During the period prior to
settlement, these securities do not earn interest, are subject to market
fluctuation, and may increase or decrease in value prior to their delivery.
The Fund receives a commitment fee for delayed draws on loans. The Fund
maintains segregated assets with a market value equal to or greater than the
amount of its purchase commitments. The purchase of securities on a
delayed-delivery or when-issued basis and delayed-draw loan commitments may
increase the volatility of the Fund's NAV to the extent that the Fund makes
such purchases and commitments while remaining substantially fully invested.
I. 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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 59
================================================================================
J. 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, along with other funds of the Trust and USAA ETF Trust
(together, the Trusts), 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 provide temporary or emergency
cash needs, including redemption requests that might otherwise require the
untimely disposition of securities. Subject to availability (including usage of
the facility by other funds of the Trusts), the Fund may borrow from CAPCO an
amount up to 5% of the Fund's total assets at an interest rate based on the
London Interbank Offered Rate (LIBOR), plus 100.0 basis points.
The Trusts are also assessed facility fees by CAPCO in the amount of 14.0 basis
points of the amount of the committed loan agreement. Prior to September 30,
2018, the maximum annual facility fee was 13.0 basis points of the amount of the
committed loan agreement. The facility fees are allocated among the funds of the
Trusts based on their respective average daily net assets for the period.
The Trusts may request an optional increase of the committed loan agreement from
$500 million up to $750 million. If the Trusts increase the committed loan
agreement, the assessed facility fee on the amount of the additional commitment
will be 15.0 basis points.
For the six-month period ended January 31, 2019, the Fund paid CAPCO facility
fees of $32,000, which represents 9.5% of the total fees paid to CAPCO by the
funds of the Trusts. The Fund had no borrowings under this agreement during the
six-month period ended January 31, 2019.
(3) DISTRIBUTIONS
The tax basis of distributions and any accumulated undistributed net investment
income will be determined as of the Fund's tax year-end of July 31, 2019, in
accordance with applicable federal tax law.
================================================================================
60 | USAA INCOME FUND
================================================================================
Distributions of net investment income are made monthly. Distributions of
realized gains from security transactions not offset by capital losses are made
annually in the succeeding fiscal year or as otherwise required to avoid the
payment of federal taxes.
At July 31, 2018, the Fund had no capital loss carryforwards, for federal income
tax purposes.
For the six-month period ended January 31, 2019, 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 the Fund's tax basis to determine if
adjustments to this conclusion are necessary. The statute of limitations on the
Fund's tax return filings generally remain open for the three preceding fiscal
reporting year ends and remain subject to examination by the Internal Revenue
Service and state taxing authorities.
As of January 31, 2019, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as the cost reported
in the financial statements. The net unrealized appreciation/(depreciation) on
investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION /
FUND APPRECIATION DEPRECIATION (DEPRECIATION)
------------------------------------------------------------------------------------------
USAA Income Fund $120,641,000 $(164,389,000) $(43,748,000)
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended January 31, 2019, were
$469,332,000 and $481,555,000, respectively.
In accordance with affiliated transaction procedures approved by the Board,
purchases and sales of security transactions were executed between the Fund and
affiliated USAA Funds at the then-current market price with no brokerage
commissions incurred. The affiliated transactions executed by the Fund,
================================================================================
NOTES TO FINANCIAL STATEMENTS | 61
================================================================================
including short-term securities, during the six-month period ended January 31,
2019 were as follows:
PURCHASES SALES NET REALIZED GAIN
------------------------------------------------------------------------------------
$20,848,000 $9,435,000 $(14,000)
(5) SECURITIES LENDING
The Fund, through a securities lending agreement with Citibank, N.A. (Citibank),
may lend its securities to qualified financial institutions, such as certain
broker-dealers, to earn additional income, net of income retained by Citibank.
The borrowers are required to secure their loans continuously with collateral in
an amount at least equal to 102% of the fair value of domestic securities and
foreign government securities loaned and 105% of the fair value of foreign
securities and all other securities loaned. Collateral may be cash, U.S.
government securities, or other securities as permitted by SEC guidelines. Cash
collateral may be invested in high-quality short-term investments. Collateral
requirements are determined daily based on the value of the Fund's securities on
loan as of the end of the prior business day. Loans are terminable upon demand
and the borrower must return the loaned securities within the lesser of one
standard settlement period or five business days. Risks relating to
securities-lending transactions include that the borrower may not provide
additional collateral when required or return the securities when due, and that
the value of the short-term investments will be less than the amount of cash
collateral required to be returned to the borrower. The Fund's agreement with
Citibank does not include master netting provisions. Non-cash collateral
received by the Fund may not be sold or re-pledged except to satisfy borrower
default. Cash collateral is listed in the Fund's Portfolio of Investments and
Financial Statements while non-cash collateral is not included.
At January 31, 2019, the Fund's value of outstanding securities on loan and the
value of collateral are as follows:
VALUE OF SECURITIES
ON LOAN NON-CASH COLLATERAL CASH COLLATERAL
------------------------------------------------------------------------------------
$38,011,000 $- $39,117,000
(6) CAPITAL SHARE TRANSACTIONS
At January 31, 2019, there were an unlimited number of shares of capital stock
at no par value authorized for the Fund.
================================================================================
62 | USAA INCOME FUND
================================================================================
Capital share transactions for the Institutional Shares resulted from purchases
and sales by the affiliated USAA fund-of-funds as well as other persons or legal
entities that the Fund may approve from time to time. Capital share transactions
for all classes were as follows, in thousands:
SIX-MONTH
PERIOD ENDED YEAR ENDED
JANUARY 31, 2019 JULY 31, 2018
-----------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------
FUND SHARES:
Shares sold 22,753 $ 286,434 74,507 $ 968,080
Shares issued from
reinvested dividends 4,258 53,455 9,880 128,134
Shares redeemed (32,613) (410,537) (117,486) (1,507,084)
-------------------------------------------------------
Net decrease from capital
share transactions (5,602) $ (70,648) (33,099) $ (410,870)
=======================================================
INSTITUTIONAL SHARES:
Shares sold 33,032 $ 415,348 117,028 $ 1,502,397
Shares issued from
reinvested dividends 6,944 87,101 10,355 134,109
Shares redeemed (34,349) (431,387) (38,331) (496,302)
-------------------------------------------------------
Net increase from capital
share transactions 5,627 $ 71,062 89,052 $ 1,140,204
=======================================================
ADVISER SHARES:
Shares sold 64 $ 811 307 $ 4,008
Shares issued from
reinvested dividends 138 1,730 304 3,941
Shares redeemed (970) (12,178) (2,247) (29,039)
-------------------------------------------------------
Net decrease from capital
share transactions (768) $ (9,637) (1,636) $ (21,090)
=======================================================
R6 SHARES:
Shares sold 128 $ 1,616 1,344 $ 17,703
Shares issued from
reinvested dividends 21 264 32 408
Shares redeemed (210) (2,636) (276) (3,544)
-------------------------------------------------------
Net increase (decrease) from
capital share transactions (61) $ (756) 1,100 $ 14,567
=======================================================
================================================================================
NOTES TO FINANCIAL STATEMENTS | 63
================================================================================
(7) TRANSACTIONS WITH MANAGER
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 the Fund's assets, subject to the
authority of and supervision by the Board. The Manager 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 all or a portion of the
Fund's assets. For the six-month period ended January 31, 2019, the Fund had no
subadviser(s).
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee is accrued daily and paid monthly at
an annualized rate of 0.24% of the Fund's average daily net assets.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper A Rated Bond Funds Index. The Lipper A Rated Bond Funds
Index tracks the total return performance of funds within the Lipper Corporate
Debt Funds A Rated category.
For the Fund Shares, Institutional Shares, and Adviser Shares, the performance
period consists of the current month plus the previous 35 months. The
performance period for the R6 Shares commenced on December 1, 2016, and includes
the performance of the Fund Shares for periods prior to December 1, 2016. The
following table is utilized to determine the extent of the performance
adjustment:
OVER/UNDER PERFORMANCE
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
---------------------------------------------------------------------------
+/- 20 to 50 +/-4
+/- 51 to 100 +/-5
+/- 101 and greater +/-6
(1)Based on the difference between average annual performance of the relevant
share class of the Fund and its relevant Lipper index, rounded to the nearest
basis point. Average daily net assets of the share class are calculated over
a rolling 36-month period.
================================================================================
64 | USAA INCOME FUND
================================================================================
Each class' annual performance adjustment rate is multiplied by the average
daily net assets of each respective class over the entire performance period,
which is then multiplied by a fraction, the numerator of which is the number of
days in the month and the denominator of which is 365 (366 in leap years). The
resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper A Rated Bond Funds Index over that period, even if the
class had overall negative returns during the performance period.
For the six-month period ended January 31, 2019, the Fund incurred management
fees, paid or payable to the Manager, of $10,207,000, which included a
performance adjustment for the Fund Shares, Institutional Shares, Adviser
Shares, and R6 Shares of $232,000, $589,000, $(5,000), and $1,000, respectively.
For the Fund Shares, Institutional Shares, Adviser Shares, and R6 Shares the
performance adjustments were 0.02%, 0.03%, (0.01)%, and 0.01%, respectively.
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 at an annualized rate of 0.15% of average
daily net assets of the Fund Shares and Adviser Shares, 0.10% of average daily
net assets of the Institutional Shares, and 0.05% of average daily net assets of
the R6 Shares. For the six-month period ended January 31, 2019, the Fund Shares,
Institutional Shares, Adviser Shares, and R6 Shares incurred administration and
servicing fees, paid or payable to the Manager, of $2,269,000, $2,340,000,
$75,000, and $5,000, respectively.
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 January 31, 2019, the Fund reimbursed the Manager $1,000 for these
compliance and legal services. These expenses are included in the professional
fees on the Fund's Statement of Operations.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 65
================================================================================
EXPENSE LIMITATION - The Manager agreed, through November 30, 2019, to limit the
total annual operating expenses of the R6 Shares to 0.39% of its average annual
net assets, excluding extraordinary expenses and before reductions of any
expenses paid indirectly, and to reimburse the R6 Shares for all expenses in
excess of that amount. This expense limitation arrangement may not be changed or
terminated through November 30, 2019, without approval of the Board, and may be
changed or terminated by the Manager at any time after that date. For the
six-month period ended January 31, 2019, the R6 Shares incurred reimbursable
expenses of $7,000, of which $2,000 was receivable from the Manager.
TRANSFER AGENT'S FEES - SAS, an affiliate of the Manager, provides transfer
agent services to the Fund Shares and Adviser Shares based on an annual charge
of $25.50 per shareholder account plus out-of-pocket expenses. SAS pays a
portion of these fees to certain intermediaries for administration and servicing
of accounts that are held with such intermediaries. Transfer agent's fees for
Institutional Shares and R6 Shares are paid monthly based on a fee accrued daily
at an annualized rate of 0.10% of the Institutional Shares' and 0.01% of the R6
Shares' average daily net assets, plus out-of-pocket expenses. For the six-month
period ended January 31, 2019, the Fund Shares, Institutional Shares, Adviser
Shares, and R6 Shares incurred transfer agent's fees, paid or payable to SAS, of
$1,855,000, $2,340,000, $50,000, and $1,000, respectively.
DISTRIBUTION AND SERVICE (12b-1) FEES - The Fund has adopted a plan pursuant to
Rule 12b-1 under the 1940 Act with respect to the Adviser Shares. Under the
plan, the Adviser Shares pay fees to USAA Investment Management Company (IMCO),
the distributor, for distribution and shareholder services. IMCO pays all or a
portion of such fees to intermediaries that make the Adviser Shares available
for investment by their customers. The fee is accrued daily and paid monthly at
an annual rate of 0.25% of the Adviser Shares' average daily net assets. Adviser
Shares are offered and sold without imposition of an initial sales charge or a
contingent deferred sales charge. For the six-month period ended January 31,
2019, the Adviser Shares incurred distribution and service (12b-1) fees of
$125,000.
UNDERWRITING SERVICES - IMCO provides exclusive underwriting and distribution of
the Fund's shares on a continuing best-efforts basis and
================================================================================
66 | USAA INCOME FUND
================================================================================
receives no fee or other compensation for these services, but may receive 12b-1
fees as described above, with respect to Adviser Shares.
(8) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other USAA Funds and
is one of 16 USAA mutual funds in which the affiliated USAA fund-of-funds
invest. The USAA fund-of-funds do not invest in the underlying funds for the
purpose of exercising management or control, and the affiliated fund-of-funds'
annual or semiannual reports may be viewed at usaa.com. As of January 31, 2019,
the USAA fund-of-funds owned the following percentages of the total outstanding
shares of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
--------------------------------------------------------------------------------
Cornerstone Conservative 0.7
Target Retirement Income 0.8
Target Retirement 2020 1.1
Target Retirement 2030 1.5
Target Retirement 2040 0.9
Target Retirement 2050 0.4
Target Retirement 2060 0.0*
*Represents less than 0.1%.
The Manager is indirectly wholly owned by United Services Automobile Association
(USAA), a large, diversified financial services institution. At January 31,
2019, USAA and its affiliates owned 390,000 R6 Shares, which represents 27.4% of
the R6 Shares outstanding, and 0.1% of the Fund's total outstanding shares.
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
(9) UPCOMING REGULATORY MATTERS
In October 2016, the U.S. Securities and Exchange Commission (SEC) issued Final
Rule Release No. 33-10233, INVESTMENT COMPANY LIQUIDITY RISK MANAGEMENT PROGRAMS
(Liquidity Rule). The Liquidity Rule requires funds
================================================================================
NOTES TO FINANCIAL STATEMENTS | 67
================================================================================
to establish a liquidity risk management program and enhances disclosures
regarding funds' liquidity. The requirements to implement a liquidity risk
management program and establish a 15% illiquid investment limit became
effective December 1, 2018. However, in February 2018, the SEC issued Release
No. IC-33010, INVESTMENT COMPANY LIQUIDITY RISK MANAGEMENT PROGRAMS; COMMISSION
GUIDANCE FOR IN-KIND ETFs, which delayed certain requirements related to
liquidity classification, highly liquid investment minimums, and board approval
of the liquidity risk management programs to June 1, 2019. The Manager continues
to evaluate the impact of this rule on the Fund's financial statements and
various filings.
(10) RECENTLY ADOPTED ACCOUNTING STANDARDS
In August 2018, the SEC adopted amendments to Regulation S-X for investment
companies governing the form and content of financial statements. The amendments
to Regulation S-X took effect on November 5, 2018, and the financial statements
have been modified accordingly, for the current and prior periods.
ASU 2018-13, FAIR VALUE MEASUREMENT
-----------------------------------
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820).
The amendments in the ASU impact disclosure requirements for fair value
measurement. ASU 2018-13 is effective for fiscal years beginning after December
15, 2019. Early adoption is permitted and can include the entire standard or
certain provisions that exclude or amend disclosures. Management has elected to
early adopt ASU 2018-13 effective with the current reporting period. The
adoption of ASU 2018-13 guidance is limited to changes in the Fund's notes to
financial statement disclosures regarding valuation method, fair value, and
transfers between levels of the fair value hierarchy.
ASU 2017-08, PREMIUM AMORTIZATION OF PURCHASED CALLABLE DEBT SECURITIES
-----------------------------------------------------------------------
In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2017-08, Premium Amortization of Purchased Callable Debt
Securities. The amendments in the ASU shorten the premium amortization period on
a purchased callable debt security from the security's contractual life to the
earliest call date. ASU 2017-08 became effective for funds with fiscal years
beginning after December 15, 2018. The Manager has determined the adoption of
this standard has no impact on the financial statements and reporting
disclosures of the Fund.
================================================================================
68 | USAA INCOME FUND
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
--------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
--------------------------------------------------------------------------------
Net asset value at
beginning of period $ 12.68 $ 13.20 $ 13.40 $ 12.99 $ 13.28 $ 13.10
--------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .22 .45 .44 .47 .47 .51
Net realized and
unrealized gain (loss) .02 (.51) (.20) .40 (.27) .18
--------------------------------------------------------------------------------
Total from investment
operations .24 (.06) .24 .87 .20 .69
--------------------------------------------------------------------------------
Less distributions from:
Net investment income (.23) (.44) (.44) (.46) (.46) (.51)
Realized capital gains (.00)(a) (.02) - - (.01) (.00)(a)
Return of capital - - - - (.02) -
--------------------------------------------------------------------------------
Total distributions (.23) (.46) (.44) (.46) (.49) (.51)
--------------------------------------------------------------------------------
Net asset value at
end of period $ 12.69 $ 12.68 $ 13.20 $ 13.40 $ 12.99 $ 13.28
================================================================================
Total return (%)* 1.97 (.47) 1.91 6.88 1.45 5.43
Net assets at end
of period (000) $2,986,753 $3,055,739 $3,617,550 $3,394,088 $3,544,344 $2,859,427
Ratios to average
daily net assets:**
Expenses (%)(b) .56(c) .52 .49 .51 .53 .59
Net investment
income (%) 3.48(c) 3.40 3.40 3.61 3.36 3.55
Portfolio turnover (%) 6 8 9 11 10 14
* 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 January 31, 2019, average daily net assets
were $3,000,036,000.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
FINANCIAL HIGHLIGHTS | 69
================================================================================
INSTITUTIONAL SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
--------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
--------------------------------------------------------------------------------
Net asset value at
beginning of period $ 12.67 $ 13.19 $ 13.39 $ 12.99 $ 13.28 $ 13.09
--------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .23 .44 .45 .48 .49 .53
Net realized and
unrealized gain (loss) .02 (.50) (.20) .39 (.28) .19
--------------------------------------------------------------------------------
Total from investment
operations .25 (.06) .25 .87 .21 .72
--------------------------------------------------------------------------------
Less distributions from:
Net investment income (.24) (.44) (.45) (.47) (.47) (.53)
Realized capital gains (.00)(a) (.02) - - (.01) (.00)(a)
Return of capital - - - - (.02) -
--------------------------------------------------------------------------------
Total distributions (.24) (.46) (.45) (.47) (.50) (.53)
--------------------------------------------------------------------------------
Net asset value at
end of period $ 12.68 $ 12.67 $ 13.19 $ 13.39 $ 12.99 $ 13.28
================================================================================
Total return (%)* 2.02 (.41) 1.97 6.89 1.51 5.63
Net assets at end
of period (000) $4,703,965 $4,629,713 $3,644,795 $3,114,810 $2,227,221 $2,098,035
Ratios to average
daily net assets:**
Expenses (%)(b) .48(c) .47 .43 .44 .46 .48
Net investment
income (%) 3.56(c) 3.46 3.45 3.66 3.43 3.65
Portfolio turnover (%) 6 8 9 11 10 14
* 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 January 31, 2019, average daily net assets
were $4,643,534,000.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
70 | USAA INCOME FUND
================================================================================
ADVISER SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
--------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
--------------------------------------------------------------------------------
Net asset value at
beginning of period $ 12.65 $ 13.16 $ 13.36 $ 12.96 $ 13.25 $ 13.08
--------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .21 .41 .42 .44 .44 .37(a)
Net realized and
unrealized gain (loss) .01 (.49) (.21) .38 (.27) .28(a)
--------------------------------------------------------------------------------
Total from investment
operations .22 (.08) .21 .82 .17 .65(a)
--------------------------------------------------------------------------------
Less distributions from:
Net investment income (.22) (.41) (.41) (.42) (.43) (.48)
Realized capital gains (.00)(b) (.02) - - (.01) (.00)(b)
Return of capital - - - - (.02) -
--------------------------------------------------------------------------------
Total distributions (.22) (.43) (.41) (.42) (.46) (.48)
--------------------------------------------------------------------------------
Net asset value at
end of period $ 12.65 $ 12.65 $ 13.16 $ 13.36 $ 12.96 $ 13.25
================================================================================
Total return (%)* 1.80 (.61) 1.67 6.53 1.23 5.11
Net assets at end
of period (000) $95,416 $105,072 $130,912 $171,518 $222,494 $42,542
Ratios to average
daily net assets:**
Expenses (%)(c) .77(d) .74 .72 .77 .79(e) .88
Expenses, excluding
reimbursements (%)(c) .77(d) .74 .72 .77 .79 .88
Net investment
income (%) 3.27(d) 3.18 3.17 3.36 3.10 3.13
Portfolio turnover (%) 6 8 9 11 10 14
* 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 January 31, 2019, average daily net assets
were $99,280,000.
(a) Calculated using average shares.
(b) Represents less than $0.01 per share.
(c) Does not include acquired fund fees, if any.
(d) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(e) Prior to December 1, 2014, the Manager had voluntarily agreed to limit the
annual expenses of the Adviser Shares to 0.90% of the Adviser Shares'
average daily net assets.
================================================================================
FINANCIAL HIGHLIGHTS | 71
================================================================================
R6 SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED YEAR ENDED PERIOD ENDED
JANUARY 31, JULY 31, JULY 31,
-----------------------------------------------------
2019 2018 2017***
-----------------------------------------------------
Net asset value at beginning of period $ 12.67 $ 13.19 $12.83
--------------------------------------------------
Income (loss) from investment operations:
Net investment income .23 .45 .30
Net realized and unrealized gain (loss) .02 (.49) .36
--------------------------------------------------
Total from investment operations .25 (.04) .66
--------------------------------------------------
Less distributions from:
Net investment income (.24) (.46) (.30)
(.00)(a)
Realized capital gains (.02) -
--------------------------------------------------
Total distributions (.24) (.48) (.30)
--------------------------------------------------
Net asset value at end of period $ 12.68 $ 12.67 $13.19
==================================================
Total return (%)* 2.07 (.32) 5.22
Net assets at end of period (000) $18,118 $18,874 $5,142
Ratios to average daily net assets:**
Expenses (%)(b) .39(c) .39 .39(c)
Expenses, excluding reimbursements (%)(b) .47(c) .58 .99(c)
Net investment income (%) 3.65(c) 3.56 3.50(c)
Portfolio turnover (%) 6 8 9
* 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 January 31, 2019, average daily net assets
were $18,361,000.
*** R6 Shares commenced operations on December 1, 2016.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
72 | USAA INCOME FUND
================================================================================
EXPENSE EXAMPLE
January 31, 2019 (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, distribution and service
(12b-1) 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 August 1, 2018, through
January 31, 2019.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table 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 for your share
class in the "actual" 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 line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class 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
================================================================================
EXPENSE EXAMPLE | 73
================================================================================
period. You may use this information to compare the ongoing costs of investing
in the Fund and other funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of other
funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled "hypothetical"
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 AUGUST 1, 2018 -
AUGUST 1, 2018 JANUARY 31, 2019 JANUARY 31, 2019
-------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,019.70 $2.85
Hypothetical
(5% return before expenses) 1,000.00 1,022.38 2.85
INSTITUTIONAL SHARES
Actual 1,000.00 1,020.20 2.44
Hypothetical
(5% return before expenses) 1,000.00 1,022.79 2.45
ADVISER SHARES
Actual 1,000.00 1,018.00 3.92
Hypothetical
(5% return before expenses) 1,000.00 1,021.32 3.92
R6 SHARES
Actual 1,000.00 1,020.70 1.99
Hypothetical
(5% return before expenses) 1,000.00 1,023.24 1.99
*Expenses are equal to the annualized expense ratio of 0.56% for Fund Shares,
0.48% for Institutional Shares, 0.77% for Adviser Shares, and 0.39% for R6
Shares, which are net of any reimbursements and expenses paid indirectly,
multiplied by the average account value over the period, multiplied by 184
days/365 days for Fund Shares, Institutional Shares, Adviser Shares, and R6
Shares (to reflect the one-half-year period). The Fund's actual ending account
values are based on its actual total returns of 1.97% for Fund Shares, 2.02%
for Institutional Shares, 1.80% for Adviser Shares, and 2.07% for R6 Shares,
for the six-month period of August 1, 2018, through January 31, 2019.
================================================================================
74 | USAA INCOME FUND
================================================================================
ADVISORY AGREEMENT(S)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with Victory Capital
Holdings, Inc. ("Victory Holdings") pursuant to which Victory Holdings would
acquire all of the outstanding stock of AMCO and USAA Transfer Agency Company
d/b/a USAA Shareholder Account Services ("USAA Transfer Agent") (the
"Transaction"). The Independent Trustees were advised that the Transaction, if
completed, would constitute
================================================================================
ADVISORY AGREEMENT(S) | 75
================================================================================
an "assignment" (as that term is defined in Section 2(a)(4) of the 1940 Act) and
result in the automatic termination of the Existing Management Agreements
("Change of Control Event"). The Independent Trustees also were advised that it
was proposed that Victory Capital, a subsidiary of Victory Holdings, would serve
as the investment adviser to each Fund after the closing of the Transaction
("Post-Transaction") and that the Board would be asked to consider approval of
the terms and conditions of the New Advisory Agreement with Victory Capital and
thereafter to submit the New Advisory Agreement to each Fund's shareholders for
approval. Because the Change of Control Event also would result in the
termination of each existing subadvisory agreement between AMCO and the
subadvisers to the Funds ("Existing Subadvisory Agreements"), the Independent
Trustees were advised that the Board would also be asked to approve the New
Subadvisory Agreements.
In anticipation of the Transaction, the Trustees met at a series of subsequent
in-person meetings on November 27-28, 2018, January 7-8, 2019, and January
14-15, 2019, which included meetings of the full Board and separate meetings of
the Independent Trustees for the purposes of considering, among other things:
whether it would be in the best interests of each Fund and its respective
shareholders to approve the New Agreements; and the anticipated impacts of the
Transaction on the Funds and their shareholders (each, a "Meeting"). During each
of these Meetings, the Board sought additional and clarifying information as it
deemed necessary or appropriate. In this connection, the Independent Trustees
worked with their independent legal counsel to prepare formal due diligence
requests (the "Diligence Requests") that were submitted to Victory Capital,
Victory Capital Advisers, Inc. ("VCA"), and the subadvisers. The Diligence
Requests sought information relevant to the Board's consideration of the New
Advisory Agreement, the New Subadvisory Agreements, distribution arrangements,
and other anticipated impacts of the Transaction on the Funds and their
shareholders. Victory Capital, VCA, and the subadvisers provided documents and
information in response to the Diligence Requests (the "Response Materials").
Following their review of the Response Materials, the Independent Trustees
submitted a supplemental due diligence request for additional and clarifying
information (the "Supplemental Diligence Request") to Victory Capital and VCA.
Victory
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76 | USAA INCOME FUND
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Capital and VCA provided further information in response to the Supplemental
Diligence Request, which the Board reviewed. Senior management representatives
of Victory Capital and/or AMCO participated in a portion of each Meeting and
addressed various questions raised by the Board. Throughout the process, the
Independent Trustees were assisted by their independent legal counsel and
counsel to the Funds, who advised them on, among other things, their duties and
obligations relating to their consideration of the New Agreements.
The Board's evaluation of the New Agreements reflected the information provided
specifically in connection with its review of the New Agreements, as well as,
where relevant, information that was previously furnished to the Board in
connection with the most recent renewal of the Existing Management Agreements
and Existing Subadvisory Agreements at an in-person meeting of the Board on
April 18, 2018 (the "2018 15(c) Meeting") and at other subsequent Board meetings
in 2018. The Board's evaluation of the New Agreements also reflected the
knowledge gained as Board members of the Funds with respect to services provided
by AMCO, its affiliates, and each subadviser to the Funds.
The Board's approvals and recommendations were based on its determination,
within its business judgment, that it would be in the best interests of each
Fund and its respective shareholders, for Victory Capital and, as applicable,
the subadvisers, to provide investment advisory, investment subadvisory, and
related services to the Funds, following the closing of the Transaction.
FACTORS CONSIDERED IN APPROVING THE NEW ADVISORY AGREEMENT
In connection with the Board's consideration of the New Advisory Agreement,
Victory Capital and AMCO advised the Board about a variety of matters, including
the following:
o The nature, extent, and quality of the services to be provided to the
Funds by Victory Capital Post-Transaction are expected to be of at least
the same level as the services currently provided to the Funds by AMCO.
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ADVISORY AGREEMENT(S) | 77
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o Victory Capital's stated commitment to maintaining and enhancing the
USAA member/USAA Fund shareholder experience, including creating a
dedicated USAA Fund sales and client service call center that will
provide ongoing client service and advice to existing and new USAA
members.
o Victory Capital proposes to: (1) replace the underlying indexes for
the USAA Extended Market Index Fund and USAA S&P 500 Index Fund with
indexes designed to provide shareholders with comparable exposure and
investment outcomes; (2) change the USAA Extended Market Index Fund's
and USAA S&P 500 Index Fund's investment objectives and strategies in
light of the changes to their underlying indexes; and (3) change the
name of the USAA S&P 500 Index Fund to the USAA 500 Index Fund.
o Victory Capital does not propose changes to the investment
objective(s) of any other Funds. Although the investment processes used
by Victory Capital's portfolio managers may differ from those used by
AMCO's portfolio managers or, if applicable, any subadviser's portfolio
managers, such differences are not currently expected to result in
changes to the principal investment strategies or principal investment
risks of the Funds.
o The New Advisory Agreement does not change any Fund's advisory fee
rate or the computation method for calculating such fees (except that
Victory Capital, subject to Board approval, may in the future use a
single designated share class to calculate the performance adjustment).
For at least two years after the Transaction closes, Victory Capital has
agreed to waive fees and/or reimburse expenses so that each Fund's
annual expense ratio (excluding certain customary items) does not exceed
the levels reflected in each Fund's most recent audited financial
statements at the time the Transaction closes (or the levels of AMCO's
then-current expense caps, if applicable), excluding the impact of any
performance adjustment to the Fund's advisory fee.
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78 | USAA INCOME FUND
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o The portfolio managers at AMCO that manage the Fixed Income Funds(1) as
well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be advised
by Victory Capital through its Victory Solutions platform, Victory
Capital proposes that the same subadvisers be retained Post-Transaction,
although Victory Capital may change the allocation to a particular
subadviser Post-Transaction. No changes are expected to the portfolio
managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's
(1)The Fixed Income Funds include the following Funds: California Bond Fund,
Government Securities Fund, High Income Fund, Income Fund, Intermediate-Term
Bond Fund, Tax Exempt Intermediate-Term Fund, Tax Exempt Long-Term Fund, New
York Bond Fund, Short-Term Bond Fund, Tax Exempt Short- Term Fund, Ultra
Short-Term Bond Fund, Virginia Bond Fund, Money Market Fund, Tax Exempt Money
Market Fund and Treasury Money Market Trust.
(2)The Cornerstone Funds include the following Funds: Cornerstone Aggressive
Fund, Cornerstone Conservative Fund, Cornerstone Equity Fund, Cornerstone
Moderate Fund, Cornerstone Moderately Aggressive Fund, and Cornerstone
Moderately Conservative Fund.
(3)The Target Retirement Funds include the following Funds: Target Retirement
2020 Fund, Target Retirement 2030 Fund, Target Retirement 2040 Fund, Target
Retirement 2050 Fund, Target Retirement 2060 Fund, and Target Retirement
Income Fund.
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ADVISORY AGREEMENT(S) | 79
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businesses to Victory Capital. Victory Capital and USAA expect to enter
into a transition services agreement under which USAA will continue to
provide Victory Capital with certain services that are currently
provided by USAA to AMCO and the USAA Transfer Agent for a specified
period of time after the closing of the Transaction to assist Victory
Capital in transitioning the USAA member distribution channel and member
support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital
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80 | USAA INCOME FUND
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is capable of providing the same level of investment management services
currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund, Growth
& Income Fund, Income Stock Fund, Global Equity Income Fund, and Precious
Metals and Minerals Fund.
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ADVISORY AGREEMENT(S) | 81
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The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored and managed by
Victory Capital ("Victory Funds") with similar investment
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82 | USAA INCOME FUND
================================================================================
objectives and strategies managed by the portfolio managers who would manage the
Funds. Based on information presented to the Board at the Meetings and its
discussions with Victory Capital, the Board concluded that Victory Capital is
capable of generating a level of long-term investment performance that is
appropriate in light of each Fund's investment objectives, strategies and
restrictions.
FEES TO BE PAID TO VICTORY CAPITAL AND EXPENSES OF THE FUNDS - The Board
considered that it had reviewed each Fund's existing advisory fee rate and
computation method for calculating such fees at the 2018 15(c) Meeting. The
Board considered that the New Advisory Agreement does not change any Fund's
advisory fee rate or the computation method for calculating such fees, except
that Victory Capital, subject to Board approval, may in the future use a single
designated share class to calculate the performance adjustment and apply the
resulting performance adjustment across each other class of shares of the Fund.
The Board considered that the use of a single designated class to calculate the
performance adjustment for each other class of shares of the Fund could mean
that shareholders of a class other than the class used to measure the
performance adjustment may pay a performance adjustment that is higher or lower
than if the adjustment were calculated on a class by class basis, primarily due
to the impact of differences in the fees and expenses between share classes on
performance. The Board considered that the New Advisory Agreement stipulates
that the period for measuring performance for calculating a Fund's performance
adjustment begins on the date that Victory Capital begins managing the Fund;
therefore, no performance adjustments will be made for the first twelve months
of the New Advisory Agreement, consistent with applicable regulations. The Board
also considered Victory Capital's contractual commitment under the expense
limitation agreement ("ELA") to waive fees and/or reimburse expenses for at
least two years after the closing of the Transaction, so that each Fund's annual
expense ratio (excluding acquired fund fees and expenses, any performance
adjustment to a Fund's advisory fee, interest, taxes, brokerage commissions,
other expenditures which are capitalized in accordance with generally accepted
accounting principles, and other extraordinary expenses not incurred in the
ordinary course of such Fund's business) does not exceed the levels reflected in
each Fund's most recent audited financial statements at the time the
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ADVISORY AGREEMENT(S) | 83
================================================================================
Transaction closes (or the levels of AMCO's then-current expense caps, if
applicable), excluding the impact of any performance adjustment to a Fund's
advisory fee. The Board considered that the ELA permits Victory Capital to
recoup advisory fees waived and expenses reimbursed for up to three years after
the fiscal year in which the waiver or reimbursement took place, subject to the
lesser of any operating expense limitation in effect at the time of: (1) the
original waiver or expense reimbursement; or (2) recoupment. The Board also
considered that Victory Capital and AMCO had represented to the Board that they
will use their best efforts to ensure that they and their respective affiliates
do not take any action that imposes an "unfair burden" on the Funds as a result
of the Transaction or as a result of any express or implied terms, conditions or
understandings applicable to the Change of Control Event, for so long as the
requirements of Section 15(f) of the 1940 Act apply. The Board also considered
a comparison of the proposed advisory fees to be paid by each Fund to the
advisory fees paid by funds and other accounts managed by Victory Capital deemed
to be comparable to the Fund in terms of investment objectives and strategies.
The Board considered that, with few exceptions, mostly involving weighted
average fees for separate accounts, the advisory fees to be paid by the Funds
were lower than the fees paid by these other funds and accounts. The Board
concluded that the retention of Victory Capital was unlikely to impose an unfair
burden on the Funds because, after the Transaction, none of AMCO, Victory
Capital, VCA, or any of their respective affiliates, would be entitled to
receive any compensation directly or indirectly (i) from any person in
connection with the purchase or sale of securities or other property to, from,
or on behalf of the Funds (other than ordinary fees for bona fide principal
underwriting services), or (ii) from the Funds or their shareholders for other
than bona fide investment advisory or other services. Based on its review, the
Board determined, with respect to each Fund, that Victory Capital's advisory fee
is fair and reasonable.
THE EXTENT TO WHICH VICTORY CAPITAL MAY REALIZE ECONOMIES OF SCALE AS THE FUNDS
GROW LARGER AND WHETHER FEE LEVELS REFLECT THESE ECONOMIES OF SCALE FOR THE
BENEFIT OF FUND SHAREHOLDERS - The Board considered potential or anticipated
economies of scale in relation to the services Victory Capital would provide to
each Fund. The Board considered that the New Advisory Agreement includes the
same advisory fee breakpoints for the same Funds as
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84 | USAA INCOME FUND
================================================================================
the Existing Advisory Agreements. The Board also considered that Victory Capital
has contractually agreed to cap the Funds' annual operating expense ratios,
pursuant to the ELA, which will remain in effect for at least two years from the
closing of the Transaction, and may be extended. The Board also considered
Victory Capital's representation that the significant increase in its assets
under management Post-Transaction may reasonably be expected to enable the new
combined firm to reach greater economies of scale in a shorter time frame. The
Board noted that it will have the opportunity to periodically re-examine whether
a Fund or the Trust has achieved economies of scale, and the appropriateness of
investment advisory and administrative fees payable to Victory Capital, in the
future.
THE PROFITS TO BE REALIZED BY VICTORY CAPITAL AND ITS AFFILIATES FROM THEIR
RELATIONSHIP WITH THE TRUST - The Board considered the benefits Victory Capital
and its affiliates may derive from their relationship with the Funds, including
compensation to be paid to Victory Capital for the provision of certain
administrative, fund accounting and shareholder services to the Funds and
compensation to be paid to USAA Transfer Agent for the provision of transfer
agency services to the Funds. The Board considered the significant investments
Victory Capital expected to make to support and grow the USAA member channel and
the costs to integrate the USAA Fund business into Victory Capital. The Board
also considered Victory Capital's profitability report presented to the board of
trustees of the Victory Funds in connection with their most recent 15(c)
process. The Board considered Victory Capital's representation that the fully
integrated USAA Fund business, including investments to support ongoing growth,
was expected to have an overall marginally positive impact on Victory Capital's
overall financial profitability. The Board noted the difficulty of accurately
projecting profitability under the current circumstance and noted that it would
have the opportunity to give further consideration to Victory Capital's
profitability with respect to the Funds at the end of the initial two-year term
of the New Advisory Agreement.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
================================================================================
ADVISORY AGREEMENT(S) | 85
================================================================================
deliver investment products and services to USAA's direct member-based channel.
The Board also considered that Victory Capital may derive reputational and other
benefits from its ability to use "USAA" and related names in connection with
operating and marketing the Funds. The Board considered that the Transaction, if
completed, would significantly increase Victory Capital's assets under
management and expand Victory Capital's investment capabilities. This increased
size and diversification could facilitate Victory Capital's continued investment
in its business and products, which Victory Capital would be able to leverage
across a broader base of assets. Victory Capital also would be able to use
trading commission credits from the Funds' transactions in securities to
"purchase" third party research and execution services to support its investment
process. Based on its review, the Board determined that any "fall-out" benefits
and other types of benefits that may accrue to Victory Capital are fair and
reasonable.
CONCLUSIONS - Based on the foregoing and other relevant considerations, at the
Meeting of the Board held on January 15, 2019, the Board, including a majority
of the Independent Trustees, acting within its business judgment, (1) concluded
that the terms of the New Advisory Agreement are fair and reasonable and that
approval of the New Advisory Agreement is in the best interests of each Fund and
its respective shareholders, (2) voted to approve the New Advisory Agreement,
and (3) voted to recommend approval of the New Advisory Agreement by
shareholders of the Funds. The Board evaluated all information available to it
on a Fund-by-Fund basis and its determinations were made separately in respect
of each Fund. The Board noted some factors may have been more or less important
with respect to any particular Fund and that no one factor was determinative of
its decisions which, instead, were premised upon the totality of factors
considered. In this connection, the Board also noted that different Board
members likely placed emphasis on different factors in reaching their individual
conclusions to vote in favor of the New Advisory Agreement and to recommend
approval of the New Advisory Agreement by shareholders of the Funds.
FACTORS CONSIDERED IN APPROVING THE NEW SUBADVISORY AGREEMENTS
In approving the New Subadvisory Agreements with each of Barrow, Hanley,
Mewhinney & Strauss, LLC, Brandes Investment Partners, L.P., ClariVest Asset
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86 | USAA INCOME FUND
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Management LLC, Epoch Investment Partners, Inc., Granahan Investment Management,
Inc., Lazard Asset Management LLC, Loomis, Sayles & Company LP, Massachusetts
Financial Services Company, Northern Trust Investments, Inc., QS Investors, LLC,
The Renaissance Group LLP and Wellington Management Company LLP (each, a
"Subadviser" and together the "Subadvisers") with respect to the applicable
Funds, the Board considered various factors, among them: (i) the nature, extent,
and quality of services to be provided to the applicable Funds by the
Subadvisers; (ii) each Subadviser's compensation and any other benefits derived
from the subadvisory relationship; (iii) comparisons, to the extent applicable,
of subadvisory fees and performance to comparable investment companies; and (iv)
the terms of each New Subadvisory Agreement. The Board's evaluation of the New
Subadvisory Agreements reflected the information provided specifically in
connection with its review of the New Subadvisory Agreements, as well as, where
relevant, information that was previously furnished to the Board in connection
with the most recent renewal of the Existing Subadvisory Agreements at the 2018
15(c) meeting and at other subsequent Board meetings in 2018. A summary of the
Board's analysis of these factors is set forth below. After full consideration
of a variety of factors, the Board, including the Independent Trustees, voted to
approve each New Subadvisory Agreement. In approving each New Subadvisory
Agreement, the Board did not identify any single factor as controlling, and each
Trustee may have attributed different weights to various factors. The
Independent Trustees reviewed the proposed approval of the New Subadvisory
Agreements in private sessions with their independent legal counsel at which no
representatives of Victory Capital or AMCO were present.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY THE
SUBADVISERS - The Board considered information provided to them regarding the
services to be provided by each Subadviser, including information presented
periodically throughout the previous year. The Board considered each
Subadviser's level of knowledge and investment style. The Board reviewed the
experience and credentials of the investment personnel who are responsible for
managing the investment of portfolio securities with respect to each applicable
Fund and each Subadviser's level of staffing. The Board also noted each
Subadviser's brokerage practices. The Board also considered
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ADVISORY AGREEMENT(S) | 87
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each Subadviser's regulatory and compliance history. The Board also took into
account each Subadviser's risk management processes. The Board noted that AMCO's
monitoring processes of each Subadviser include, and Victory Capital's expected
monitoring processes of each Subadviser would include, among others: (i) regular
telephonic meetings to discuss, among other matters, investment strategies and
to review portfolio performance; (ii) monthly portfolio compliance checklists
and quarterly compliance certifications to the Board; and (iii) due diligence
visits to each Subadviser. The Board also considered that the terms and
conditions of the New Subadvisory Agreements are substantially similar to the
terms and conditions of the Existing Subadvisory Agreements.
SUBADVISER COMPENSATION - The Board took into account the financial condition of
each Subadviser. In considering the cost of services to be provided by each
Subadviser and the profitability to that Subadviser of its relationship with the
applicable Fund, the Board noted that the fees under the New Subadvisory
Agreements will be paid by Victory Capital. The Board also relied on the ability
of AMCO to negotiate each Existing Subadvisory Agreement and the fees thereunder
at arm's length. The Board considered that the fee rate to be payable under each
New Subadvisory Agreement were proposed to be identical to the fee rate
currently payable under each corresponding Existing Subadvisory Agreement. For
the above reasons, the Board determined that the expected profitability of each
Subadviser from its relationship with the applicable Fund was not a material
factor in its deliberations with respect to the consideration of the approval of
each New Subadvisory Agreement. For similar reasons, the Board concluded that
the potential for economies of scale in each Subadviser's management of the
applicable Fund was not a material factor in considering each New Subadvisory
Agreement, although the Board noted that certain New Subadvisory Agreements
contain breakpoints in their fee schedules.
SUBADVISORY FEES AND FUND PERFORMANCE - The Board previously compared the
subadvisory fees for each applicable Fund with the fees that each Subadviser
charges comparable clients, as applicable. The Board considered that each
applicable Fund will pay a management fee to Victory Capital and that, in turn,
Victory Capital will pay a subadvisory fee to each Subadviser.
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88 | USAA INCOME FUND
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At the 2018 15(c) meeting, the Board considered, among other data, each
applicable Fund's performance over shorter and longer term periods, as compared
to each Fund's respective peer group and noted that the Board reviews at its
regularly scheduled meetings information about each Fund's performance results.
The Board considered Victory Capital's capabilities with respect to monitoring
the performance, investment style and risk-adjusted performance of each
Subadviser. The Board also noted each Subadviser's performance record for
similar accounts, as applicable.
CONCLUSIONS - The Board reached the following conclusions regarding each New
Subadvisory Agreement, among others: (i) each Subadviser is qualified to manage
the applicable Fund's assets in accordance with its investment objective and
policies; (ii) each Subadviser maintains an appropriate compliance program;
(iii) the performance of each applicable Fund is reasonable in relation to the
performance of funds with similar investment objectives and to relevant indices
in view of the Fund's investment approach and Victory Capital is expected to
appropriately monitor each Fund's performance; and (iv) each Fund's advisory
expenses are reasonable in relation to those of similar funds and to the
services to be provided by Victory Capital and each Subadviser. Based on its
conclusions, the Board determined that the approval of each New Subadvisory
Agreement with respect to each applicable Fund would be in the best interests of
the Fund and its shareholders.
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ADVISORY AGREEMENT(S) | 89
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TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Richard Y. Newton III
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN, State Street Bank and Trust Company
ACCOUNTING AGENT, AND P.O. Box 1713
SUB-ADMINISTRATOR Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
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) or (210) 531-8722;
(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 monthly portfolio holdings with the SEC
for the first and third quarters of each fiscal year as an exhibit to its
reports on Form N-PORT (beginning with filings after March 31, 2019).
Previously, the Fund made its complete schedule of portfolio holdings available
after the first and third fiscal quarters in regulatory filings on Form N-Q. The
Fund's Forms N-CSR, N-PORT, and N-Q are available at no charge (i) by calling
(800) 531-USAA (8722) or (210) 531-8722; (ii) at USAA.COM; and (iii) on the
SEC's website at HTTP://WWW.SEC.GOV.
================================================================================
--------------
USAA PRSRT STD
9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
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SEMIANNUAL REPORT
USAA INCOME STOCK FUND
FUND SHARES (USISX) o INSTITUTIONAL SHARES (UIISX)
o R6 SHARES (URISX)
JANUARY 31, 2019
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Beginning on January 1, 2021, as permitted by regulations adopted by the
Securities and Exchange Commission, paper copies of the Fund's shareholder
reports like this one will no longer be sent by mail, unless you specifically
request paper copies of the reports from the Fund or from your financial
intermediary, such as a broker-dealer or bank. Instead, the reports will be
made available on usaa.com, and you will be notified by mail each time a report
is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will
not be affected by this change and you need not take any action. You may elect
to receive shareholder reports and other communications from the Fund or your
financial intermediary electronically by notifying your financial intermediary
directly, or if you are a direct investor, by calling (800) 531-USAA (8722) or
logging on to usaa.com.
You may elect to receive all future reports in paper free of charge. You can
inform the Fund or your financial intermediary that you wish to continue
receiving paper copies of your shareholder reports by notifying your financial
intermediary directly, or if you are a direct investor, by calling (800)
531-USAA (8722) or logging on to usaa.com. Your election to receive reports in
paper will apply to all funds held with the USAA family of funds or your
financial intermediary.
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TABLE OF CONTENTS
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INVESTMENT OVERVIEW 1
FINANCIAL INFORMATION
Portfolio of Investments 2
Notes to Portfolio of Investments 10
Financial Statements 12
Notes to Financial Statements 16
Financial Highlights 32
EXPENSE EXAMPLE 35
ADVISORY AGREEMENT(S) 37
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.
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 tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. 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.
(C)2019, USAA. All rights reserved.
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INVESTMENT OVERVIEW
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o TOP 10 HOLDINGS - 1/31/19 o
(% of Net Assets)
Microsoft Corp. .......................................................... 2.1%
Johnson & Johnson ........................................................ 2.1%
Cisco Systems, Inc. ...................................................... 1.7%
J.P. Morgan Chase & Co. .................................................. 1.7%
Royal Dutch Shell plc ADR "A" ............................................ 1.7%
Pfizer, Inc. ............................................................. 1.6%
Walmart, Inc. ............................................................ 1.5%
CME Group, Inc. .......................................................... 1.5%
Procter & Gamble Co. ..................................................... 1.4%
Occidental Petroleum Corp. ............................................... 1.4%
o SECTOR ALLOCATION* - 1/31/19 o
(% of Net Assets)
[PIE CHART OF SECTOR ALLOCATION]
CONSUMER, NON-CYCLICAL 20.4%
FINANCIAL 18.6%
INDUSTRIAL 12.6%
TECHNOLOGY 10.8%
UTILITIES 9.7%
CONSUMER, CYCLICAL 7.8%
ENERGY 7.8%
COMMUNICATIONS 6.4%
BASIC MATERIALS 2.2%
[END PIE CHART]
*Does not include money market instruments and short-term investments purchased
with cash collateral from securities loaned.
Percentages are of the net assets of the Fund and may not equal 100%.
Refer to the Portfolio of Investments for a complete list of securities.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
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INVESTMENT OVERVIEW | 1
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PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (96.3%)
COMMON STOCKS (96.3%)
BASIC MATERIALS (2.2%)
----------------------
CHEMICALS (2.0%)
531,548 DowDuPont, Inc. $ 28,603
79,720 LyondellBasell Industries N.V. "A" 6,933
364,132 Nutrien Ltd. 18,869
----------
54,405
----------
IRON/STEEL (0.2%)
77,714 Reliance Steel & Aluminum Co. 6,363
----------
Total Basic Materials 60,768
----------
COMMUNICATIONS (6.4%)
---------------------
ADVERTISING (0.4%)
158,605 Omnicom Group, Inc. 12,352
----------
MEDIA (0.6%)
437,115 Comcast Corp. "A" 15,985
----------
TELECOMMUNICATIONS (5.4%)
1,052,057 AT&T, Inc. 31,625
256,207 BCE, Inc. 11,145
393,586 CenturyLink, Inc. 6,030
1,020,434 Cisco Systems, Inc. 48,256
430,900 Rogers Communications, Inc. "B" 23,299
517,774 Verizon Communications, Inc. 28,509
----------
148,864
----------
Total Communications 177,201
----------
CONSUMER, CYCLICAL (7.8%)
-------------------------
AIRLINES (0.3%)
150,140 Delta Air Lines, Inc. 7,422
----------
APPAREL (0.2%)
409,630 Hanesbrands, Inc. 6,140
----------
AUTO MANUFACTURERS (0.2%)
104,310 PACCAR, Inc. 6,834
----------
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2 | USAA INCOME STOCK FUND
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MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
AUTO PARTS & EQUIPMENT (0.6%)
330,660 Magna International, Inc. $ 17,495
----------
HOME FURNISHINGS (0.3%)
194,320 Leggett & Platt, Inc. 7,959
----------
LEISURE TIME (0.6%)
269,429 Carnival Corp. 15,514
----------
LODGING (0.7%)
336,923 Las Vegas Sands Corp. 19,663
----------
RETAIL (4.9%)
116,822 Brinker International, Inc. 4,734
64,678 Genuine Parts Co. 6,456
158,052 Home Depot, Inc. 29,007
204,323 McDonald's Corp. 36,529
100,276 Target Corp. 7,320
170,855 TJX Companies, Inc. 8,497
433,423 Walmart, Inc. 41,535
----------
134,078
----------
Total Consumer, Cyclical 215,105
----------
CONSUMER, NON-CYCLICAL (20.4%)
------------------------------
AGRICULTURE (2.3%)
504,063 Altria Group, Inc. 24,875
442,908 British American Tobacco plc ADR 15,626
310,490 Philip Morris International, Inc. 23,821
----------
64,322
----------
BEVERAGES (2.1%)
360,974 Coca-Cola Co. 17,374
198,547 Coca-Cola European Partners plc 9,447
94,761 Molson Coors Brewing Co. "B" 6,312
233,844 PepsiCo, Inc. 26,347
----------
59,480
----------
BIOTECHNOLOGY (1.2%)
38,105 Amgen, Inc. 7,130
358,265 Gilead Sciences, Inc. 25,082
----------
32,212
----------
COMMERCIAL SERVICES (0.4%)
43,118 Automatic Data Processing, Inc. 6,030
110,805 Deluxe Corp. 5,204
----------
11,234
----------
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PORTFOLIO OF INVESTMENTS | 3
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MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
COSMETICS/PERSONAL CARE (2.5%)
94,260 Colgate-Palmolive Co. $ 6,097
410,357 Procter & Gamble Co. 39,587
420,828 Unilever N.V. 22,518
----------
68,202
----------
FOOD (1.4%)
169,467 Campbell Soup Co.(a) 6,004
324,197 Kraft Heinz Co. 15,581
187,605 Mondelez International, Inc. "A" 8,679
127,400 Sysco Corp. 8,134
----------
38,398
----------
HEALTHCARE PRODUCTS (1.8%)
238,719 Abbott Laboratories 17,422
373,949 Medtronic plc 33,053
----------
50,475
----------
HEALTHCARE-SERVICES (1.0%)
98,736 UnitedHealth Group, Inc. 26,679
----------
HOUSEHOLD PRODUCTS/WARES (0.5%)
126,348 Kimberly-Clark Corp. 14,073
----------
PHARMACEUTICALS (7.2%)
273,931 AbbVie, Inc. 21,994
223,748 AstraZeneca plc ADR 8,185
299,815 Bristol-Myers Squibb Co. 14,802
242,589 CVS Health Corp. 15,902
430,123 Johnson & Johnson 57,241
506,602 Merck & Co., Inc. 37,706
1,059,189 Pfizer, Inc. 44,962
----------
200,792
----------
Total Consumer, Non-cyclical 565,867
----------
ENERGY (7.8%)
-------------
OIL & GAS (5.3%)
73,703 Chevron Corp. 8,450
244,259 ConocoPhillips 16,534
375,386 Exxon Mobil Corp. 27,508
567,153 Occidental Petroleum Corp. 37,874
746,193 Royal Dutch Shell plc ADR "A" 46,063
100,850 Valero Energy Corp. 8,857
----------
145,286
----------
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4 | USAA INCOME STOCK FUND
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MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
OIL & GAS SERVICES (0.9%)
243,552 Halliburton Co. $ 7,638
419,025 Schlumberger Ltd. 18,525
----------
26,163
----------
PIPELINES (1.6%)
523,444 Enterprise Products Partners, LP 14,484
160,442 Magellan Midstream Partners, LP 9,859
706,850 Williams Companies, Inc. 19,035
----------
43,378
----------
Total Energy 214,827
----------
FINANCIAL (18.6%)
-----------------
BANKS (8.5%)
1,187,290 Bank of America Corp. 33,802
493,128 Bank of New York Mellon Corp. 25,801
169,467 BB&T Corp. 8,270
945,915 Fifth Third Bancorp 25,369
462,307 J.P. Morgan Chase & Co. 47,849
1,522,449 KeyCorp 25,075
38,105 M&T Bank Corp. 6,270
339,820 Morgan Stanley 14,374
659,535 U.S. Bancorp. 33,742
459,120 Umpqua Holdings Corp. 8,117
118,827 Wells Fargo & Co. 5,812
----------
234,481
----------
DIVERSIFIED FINANCIAL SERVICES (2.4%)
29,080 BlackRock, Inc. 12,071
219,960 CME Group, Inc. 40,094
450,313 Synchrony Financial 13,527
----------
65,692
----------
INSURANCE (4.6%)
561,549 Allianz SE ADR 11,885
352,022 Arthur J. Gallagher & Co. 26,299
245,660 Chubb Ltd. 32,685
96,265 Marsh & McLennan Companies, Inc. 8,490
328,907 MetLife, Inc. 15,021
361,430 Progressive Corp. 24,321
64,177 Travelers Companies, Inc. 8,057
----------
126,758
----------
REITS (2.8%)
66,285 Boston Properties, Inc. 8,741
421,420 Duke Realty Corp. 12,322
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PORTFOLIO OF INVESTMENTS | 5
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MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
117,250 Equity Residential $ 8,508
366,010 Iron Mountain, Inc. 13,615
39,107 Public Storage 8,311
44,310 Simon Property Group, Inc. 8,070
245,678 Welltower, Inc. 19,038
----------
78,605
----------
SAVINGS & LOANS (0.3%)
494,364 People's United Financial, Inc. 8,098
----------
Total Financial 513,634
----------
INDUSTRIAL (12.6%)
------------------
AEROSPACE/DEFENSE (4.4%)
82,321 Boeing Co. 31,744
48,634 General Dynamics Corp. 8,325
97,800 Lockheed Martin Corp. 28,332
141,480 Raytheon Co. 23,310
259,608 United Technologies Corp. 30,652
----------
122,363
----------
BUILDING MATERIALS (0.5%)
446,217 Johnson Controls International plc 15,069
----------
ELECTRICAL COMPONENTS & EQUIPMENT (0.4%)
184,007 Emerson Electric Co. 12,047
----------
ELECTRONICS (0.4%)
73,703 Honeywell International, Inc. 10,586
----------
ENVIRONMENTAL CONTROL (1.4%)
335,534 Republic Services, Inc. 25,739
138,381 Waste Management, Inc. 13,239
----------
38,978
----------
HAND/MACHINE TOOLS (0.6%)
126,210 Stanley Black & Decker, Inc. 15,958
----------
MACHINERY-CONSTRUCTION & MINING (0.3%)
62,335 Caterpillar, Inc. 8,300
----------
MACHINERY-DIVERSIFIED (0.5%)
79,641 Deere & Co. 13,061
----------
MISCELLANEOUS MANUFACTURERS (2.1%)
75,708 3M Co. 15,164
446,871 Eaton Corp. plc 34,074
56,200 Parker-Hannifin Corp. 9,262
----------
58,500
----------
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6 | USAA INCOME STOCK FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
PACKAGING & CONTAINERS (0.7%)
206,570 Bemis Co., Inc. $ 10,089
86,525 Packaging Corp. of America 8,161
----------
18,250
----------
TRANSPORTATION (1.3%)
175,240 CSX Corp. 11,513
220,355 United Parcel Service, Inc. "B" 23,226
----------
34,739
----------
Total Industrial 347,851
----------
TECHNOLOGY (10.8%)
------------------
COMPUTERS (1.9%)
143,626 Apple, Inc. 23,905
733,770 HP, Inc. 16,165
282,135 Western Digital Corp. 12,693
----------
52,763
----------
SEMICONDUCTORS (5.7%)
150,916 Analog Devices, Inc. 14,920
85,627 Broadcom, Inc. 22,969
1,184,950 Cypress Semiconductor Corp. 16,435
457,037 Intel Corp. 21,536
418,550 Maxim Integrated Products, Inc. 22,715
79,720 Microchip Technology, Inc. 6,407
116,321 QUALCOMM, Inc. 5,760
339,953 Texas Instruments, Inc. 34,226
110,800 Xilinx, Inc. 12,403
----------
157,371
----------
SOFTWARE (3.2%)
564,025 Microsoft Corp. 58,901
370,059 Oracle Corp. 18,588
167,462 Paychex, Inc. 11,857
----------
89,346
----------
Total Technology 299,480
----------
UTILITIES (9.7%)
----------------
ELECTRIC (9.5%)
146,404 Alliant Energy Corp. 6,510
276,262 Ameren Corp. 19,156
167,462 American Electric Power Co., Inc. 13,250
106,794 Black Hills Corp. 7,250
185,511 CMS Energy Corp. 9,672
170,470 Dominion Energy, Inc. 11,974
================================================================================
PORTFOLIO OF INVESTMENTS | 7
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
301,745 Duke Energy Corp. $ 26,487
192,029 Entergy Corp. 17,127
130,861 Evergy, Inc. 7,501
158,437 Eversource Energy 10,997
369,905 Exelon Corp. 17,667
353,385 FirstEnergy Corp. 13,853
146,874 NextEra Energy, Inc. 26,287
101,279 Pinnacle West Capital Corp. 8,925
767,216 PPL Corp. 24,029
177,425 Sempra Energy 20,755
126,332 Southern Co. 6,140
208,074 WEC Energy Group, Inc. 15,196
----------
262,776
----------
GAS (0.2%)
241,666 NiSource, Inc. 6,593
----------
Total Utilities 269,369
----------
Total Common Stocks (cost: $2,083,402) 2,664,102
----------
Total Equity Securities (cost: $2,083,402) 2,664,102
----------
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PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (3.5%)
COMMERCIAL PAPER (2.7%)
$ 10,000 Anheuser-Busch InBev Worldwide Inc.(b) 2.69% 2/04/2019 9,998
9,322 Cabot Corp.(b) 2.71 2/01/2019 9,322
950 Cabot Corp.(b) 2.70 2/05/2019 950
6,953 Canadian Natural Resources Ltd.(b) 2.68 2/06/2019 6,950
4,430 Centerpoint Energy, Inc.(b) 2.74 2/07/2019 4,428
2,764 Centerpoint Energy, Inc.(b) 2.73 2/13/2019 2,761
8,000 Centerpoint Energy, Inc.(b) 2.76 2/21/2019 7,988
9,522 Leggett & Platt, Inc.(b) 2.78 2/08/2019 9,517
2,506 Leggett & Platt, Inc.(b) 2.77 2/20/2019 2,502
4,138 Southern Co. Gas Capital Corp.(b) 2.80 2/21/2019 4,132
8,676 Tyson Foods, Inc.(b) 2.75 2/15/2019 8,667
7,535 Union Electric Co. 2.80 2/14/2019 7,527
----------
Total Commercial Paper (cost: $74,742) 74,742
----------
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8 | USAA INCOME STOCK FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.8%)
22,878,411 State Street Institutional Treasury Money Market Fund
Premier Class, 2.31%(c) (cost: $22,878) $ 22,878
----------
Total Money Market Instruments (cost: $97,620) 97,620
----------
SHORT-TERM INVESTMENT PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (0.2%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.2%)
3,888,921 HSBC U.S. Government Money Market Fund Class I, 2.38%(c) 3,889
----------
Total Short-Term Investment Purchased with Cash
Collateral from Securities Loaned (cost: $3,889) 3,889
----------
TOTAL INVESTMENTS (COST: $2,184,911) $2,765,611
==========
------------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
------------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $2,664,102 $ - $- $2,664,102
Money Market Instruments:
Commercial Paper - 74,742 - 74,742
Government & U.S. Treasury
Money Market Funds 22,878 - - 22,878
Short-Term Investment Purchased
with Cash Collateral from
Securities Loaned:
Government & U.S. Treasury
Money Market Funds 3,889 - - 3,889
------------------------------------------------------------------------------------------------------------------
Total $2,690,869 $74,742 $- $2,765,611
------------------------------------------------------------------------------------------------------------------
Refer to the Portfolio of Investments for additional industry, country, or
geographic region classifications.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
At January 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
PORTFOLIO OF INVESTMENTS | 9
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A 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 6.9% of net assets at
January 31, 2019.
o CATEGORIES AND DEFINITIONS
COMMERCIAL PAPER - Consists of short-term unsecured promissory notes with
maturities ranging from one to 270 days, issued mainly by corporations.
Commercial paper is usually purchased at a discount and matures at par
value; however, it also may be interest-bearing. Rate represents an
annualized yield at time of purchase or coupon rate, if applicable.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
ADR American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in
U.S. dollars.
REITS Real estate investment trusts - Dividend distributions from REITS may
be recorded as income and later characterized by the REIT at the end
of the fiscal year as capital gains or a return of capital.
================================================================================
10 | USAA INCOME STOCK FUND
================================================================================
Thus, the Fund will estimate the components of distributions from
these securities and revise when actual distributions are known.
o SPECIFIC NOTES
(a) The security, or a portion thereof, was out on loan as of January
31, 2019.
(b) Restricted security that is not registered under the Securities Act
of 1933. A resale of this security in the United States may occur in an
exempt transaction to a qualified institutional buyer as defined by
Rule 144A, and as such has been deemed liquid by USAA Asset Management
Company under liquidity guidelines approved by USAA Mutual Funds
Trust's Board of Trustees, unless otherwise noted as illiquid.
(c) Rate represents the money market fund annualized seven-day yield at
January 31, 2019.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 11
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (including securities on
loan of $3,854) (cost of $2,184,911) $2,765,611
Receivables:
Capital shares sold 902
USAA Asset Management Company (Note 7) 4
Dividends and interest 4,268
Other 1
----------
Total assets 2,770,786
----------
LIABILITIES
Payables:
Upon return of securities loaned 3,889
Capital shares redeemed 963
Accrued management fees 1,130
Accrued transfer agent's fees 25
Other accrued expenses and payables 200
----------
Total liabilities 6,207
----------
Net assets applicable to capital shares outstanding $2,764,579
==========
NET ASSETS CONSIST OF:
Paid-in capital $2,165,289
Distributable earnings 599,290
----------
Net assets applicable to capital shares outstanding $2,764,579
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $1,626,482/87,758
capital shares outstanding, no par value) $ 18.53
==========
Institutional Shares (net assets of $1,126,193/60,831
capital shares outstanding, no par value) $ 18.51
==========
R6 Shares (net assets of $11,904/643
capital shares outstanding, no par value) $ 18.52
==========
See accompanying notes to financial statements.
================================================================================
12 | USAA INCOME STOCK FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $417) $ 41,783
Interest 888
Securities lending (net) 34
---------
Total income 42,705
---------
EXPENSES
Management fees 6,819
Administration and servicing fees:
Fund Shares 1,252
Institutional Shares 523
R6 Shares 3
Transfer agent's fees:
Fund Shares 654
Institutional Shares 523
R6 Shares 1
Custody and accounting fees:
Fund Shares 89
Institutional Shares 53
R6 Shares 1
Postage:
Fund Shares 40
Institutional Shares 18
Shareholder reporting fees:
Fund Shares 22
Institutional Shares 4
Trustees' fees 17
Registration fees:
Fund Shares 17
Institutional Shares 20
R6 Shares 12
Professional fees 57
Other 22
---------
Total expenses 10,147
Expenses reimbursed:
R6 Shares (8)
---------
Net expenses 10,139
---------
NET INVESTMENT INCOME 32,566
---------
================================================================================
FINANCIAL STATEMENTS | 13
================================================================================
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY
Net realized gain on:
Investments $ 53,453
Foreign currency transactions 4
Change in net unrealized appreciation/(depreciation) (126,620)
---------
Net realized and unrealized loss (73,163)
---------
Decrease in net assets resulting from operations $ (40,597)
=========
See accompanying notes to financial statements.
================================================================================
14 | USAA INCOME STOCK FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited), and year ended
July 31, 2018
-------------------------------------------------------------------------------------------------------------
1/31/2019 7/31/2018
-------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 32,566 $ 61,566
Net realized gain on investments 53,453 159,509
Net realized gain (loss) on foreign currency transactions 4 (2)
Change in net unrealized appreciation/(depreciation) of:
Investments (126,620) 76,550
Foreign currency translations - (1)
------------------------
Increase (decrease) in net assets resulting from operations (40,597) 297,622
------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (113,595) (131,173)
Institutional Shares (73,211) (84,820)
R6 Shares (846) (973)
------------------------
Distributions to shareholders (187,652) (216,966)
------------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 6)
Fund Shares 54,504 13,921
Institutional Shares 176,967 (94,681)
R6 Shares 211 7,300
------------------------
Total net increase (decrease) in net assets
from capital share transactions 231,682 (73,460)
------------------------
Net increase in net assets 3,433 7,196
NET ASSETS
Beginning of period 2,761,146 2,753,950
------------------------
End of period $2,764,579 $2,761,146
========================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 15
================================================================================
NOTES TO FINANCIAL STATEMENTS
January 31, 2019 (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 47 separate funds.
The USAA Income Stock Fund (the Fund) qualifies as a registered investment
company under Accounting Standards Codification Topic 946. The information
presented in this semiannual report pertains only to the Fund, which is
classified as diversified under the 1940 Act. The Fund's investment objective is
to seek current income with the prospect of increasing dividend income and the
potential for capital appreciation.
The Fund consists of three classes of shares: Income Stock Fund Shares (Fund
Shares), Income Stock Fund Institutional Shares (Institutional Shares), and
Income Stock Fund R6 Shares (R6 Shares). Each class of shares has equal rights
to assets and earnings, except that each class bears 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 are
allocated to each class of shares based on each class' relative net assets. Each
class has exclusive voting rights on matters related solely to that class and
separate voting rights on matters that relate to all classes. The Institutional
Shares are 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
================================================================================
16 | USAA INCOME STOCK FUND
================================================================================
insurance companies. Institutional Shares also are 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). The R6 Shares are
available for investment by participants in employer-sponsored retirement plans
where a financial intermediary provides retirement recordkeeping services to
plan participants and to endowment funds and foundations.
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of USAA Asset Management Company (AMCO or Manager), the investment
adviser to the Fund, and USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services (SAS), the transfer agent to the Fund, announced that AMCO and
SAS would be acquired by Victory Capital Holdings, Inc. (Victory), a global
investment management firm headquartered in Cleveland, Ohio (the Transaction).
The closing of the Transaction is expected to be completed during the second
quarter of 2019, pending satisfaction of certain closing conditions and
approvals, including certain approvals of the Fund's Board of Trustees and of
the Fund's shareholders at a special shareholder meeting to be held on April 18,
2019. The Transaction is not expected to result in any material changes to the
Fund's investment objectives and principal investment strategies. In connection
with the Transaction, Victory proposes to replace portfolio managers employed by
AMCO that currently manage all or a portion of the Fund with portfolio managers
from one or more investment teams employed by Victory.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Valuation and Liquidity 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.
The Fund utilizes 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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 17
================================================================================
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 exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange or
the 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. Securities traded primarily on foreign securities exchanges or
markets are valued at the last quoted sale price, or the most recently
determined official closing price calculated according to local market
convention, available at the time the Fund is valued. If no last sale
or official closing price is reported or available, the average of the
bid and ask prices generally is used. Actively traded equity securities
listed on a domestic exchange generally are categorized in Level 1 of
the fair value hierarchy. Certain preferred and equity securities
traded in inactive markets generally are categorized in Level 2 of the
fair value hierarchy.
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 many
cases, events affecting the values of foreign securities that occur
between the time of their last quoted sale or official closing price
and the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not need to be reflected in the value of the Fund's
foreign securities. However, the Manager and the Fund's subadviser(s)
will monitor for events that would materially affect the value of the
Fund's foreign securities. The Fund's subadviser(s) have agreed to
notify the Manager of significant events they identify 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 Committee will
consider such available information that it deems relevant and will
determine a fair value for the affected
================================================================================
18 | USAA INCOME STOCK FUND
================================================================================
foreign securities in accordance with valuation procedures. In addition,
information from an external vendor or other sources may be used to
adjust the foreign market closing prices of foreign equity securities to
reflect what the Committee believes to be the fair value of the
securities as of the close of the NYSE. Fair valuation of affected
foreign equity securities may occur frequently based on an assessment
that events which occur on a fairly regular basis (such as U.S. market
movements) are significant. Such securities are categorized in Level 2
of the fair value hierarchy.
3. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value hierarchy.
4. Short-term debt securities with original or remaining maturities of
60 days or less may be valued at amortized cost, provided that amortized
cost represents the fair value of such securities.
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 ask prices or
the last sales price to value a security when, in the Service's
judgment, these prices are readily available and are representative of
the security's market value. For many securities, such prices are not
readily available. The Service generally prices those securities based
on methods which 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.
Generally, debt securities are categorized in Level 2 of the fair value
hierarchy; however, to the extent the valuations include significant
unobservable inputs, the securities would be categorized in Level 3.
6. Repurchase agreements are valued at cost.
7. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has
================================================================================
NOTES TO FINANCIAL STATEMENTS | 19
================================================================================
been recognized in relation to a security or class of securities, the
securities are valued in good faith by the Committee in accordance with
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, other pricing services, 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, evaluation of
credit quality, 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 indexes.
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.
================================================================================
20 | USAA INCOME STOCK FUND
================================================================================
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risks associated with investing in those securities.
C. INVESTMENTS IN SECURITIES - Securities transactions are accounted for as
of the date the securities are purchased or sold (trade date). Gains or
losses from sales of investment securities are computed on the identified
cost basis. Dividend income, less foreign taxes, if any, is recorded on the
ex-dividend date. If the ex-dividend date has passed, certain dividends
from foreign securities are recorded upon notification. Interest income is
recorded daily on the accrual basis. Premiums and discounts on short-term
securities are amortized on a straight-line basis over the life of the
respective securities.
D. FEDERAL TAXES - The Fund's policy is to comply with the requirements of
the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its taxable
income and net capital gains, if any, to its shareholders. Therefore, no
federal income tax provision is required.
For the six-month period ended January 31, 2019, 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 the Fund's tax basis to determine
if adjustments to this conclusion are necessary. The statute of limitations
on the Fund's tax return filings generally remain open for the three
preceding fiscal reporting year ends and remain subject to examination by
the Internal Revenue Service and state taxing authorities.
E. FOREIGN TAXATION - Foreign income and capital gains on some foreign
securities may be subject to foreign taxes, which are reflected as a
reduction to such income and realized gains. The Fund records a liability
based on unrealized gains to provide for potential foreign taxes payable
upon the sale of these securities. Foreign taxes have been provided for in
accordance with the Fund's understanding of the applicable countries'
prevailing tax rules and rates.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 21
================================================================================
F. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the exchange
rate obtained from an independent pricing service on the respective
dates of such transactions.
2. Market value of securities, other assets, and liabilities at the
exchange rate obtained from an independent pricing service on a daily
basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held.
Such fluctuations are included with the net realized and unrealized gain or
loss from investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the amounts received. At
the end of the Fund's fiscal year, net realized foreign currency
gains/losses are reclassified from accumulated net realized gains/losses to
accumulated undistributed net investment income on the Statement of Assets
and Liabilities, as such amounts are treated as ordinary income/loss for
federal income tax purposes. Net unrealized foreign currency exchange
gains/losses arise from changes in the value of assets and liabilities,
other than investments in securities, resulting from changes in the
exchange rate.
G. EXPENSES PAID INDIRECTLY - A portion of the brokerage commissions that
the Fund pays may be recaptured as a credit that is tracked and used by the
custodian to directly reduce expenses paid by the Fund. Effective September
30, 2018, the commission recapture program ended. For the
================================================================================
22 | USAA INCOME STOCK FUND
================================================================================
six-month period ended January 31, 2019, the Fund did not receive any
brokerage commission recapture credits.
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, along with other funds of the Trust and USAA ETF Trust
(together, the Trusts), 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 provide temporary or emergency
cash needs, including redemption requests that might otherwise require the
untimely disposition of securities. Subject to availability (including usage of
the facility by other funds of the Trusts), the Fund may borrow from CAPCO an
amount up to 5% of the Fund's total assets at an interest rate based on the
London Interbank Offered Rate (LIBOR), plus 100.0 basis points.
The Trusts are also assessed facility fees by CAPCO in the amount of 14.0 basis
points of the amount of the committed loan agreement. Prior to September 30,
2018, the maximum annual facility fee was 13.0 basis points of the amount of the
committed loan agreement. The facility fees are allocated among the funds of the
Trusts based on their respective average daily net assets for the period.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
The Trusts may request an optional increase of the committed loan agreement from
$500 million up to $750 million. If the Trusts increase the committed loan
agreement, the assessed facility fee on the amount of the additional commitment
will be 15.0 basis points.
For the six-month period ended January 31, 2019, the Fund paid CAPCO facility
fees of $11,000, which represents 3.3% of the total fees paid to CAPCO by the
funds of the Trusts. The Fund had no borrowings under this agreement during the
six-month period ended January 31, 2019.
(3) DISTRIBUTIONS
The tax basis of distributions and any accumulated undistributed net investment
income will be determined as of the Fund's tax year-end of July 31, 2019, in
accordance with applicable federal tax law.
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are made
annually in the succeeding fiscal year or as otherwise required to avoid the
payment of federal taxes.
At July 31, 2018, the Fund had no capital loss carryforwards, for federal income
tax purposes.
As of January 31, 2019, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as the cost reported
in the financial statements. The net unrealized appreciation/(depreciation) on
investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
FUND APPRECIATION DEPRECIATION (DEPRECIATION)
---------------------------------------------------------------------------------
USAA Income Stock Fund $650,657,000 $(69,957,000) $580,700,000
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended January 31, 2019, were
$315,677,000 and $256,640,000, respectively.
================================================================================
24 | USAA INCOME STOCK FUND
================================================================================
(5) SECURITIES LENDING
The Fund, through a securities lending agreement with Citibank, N.A.
(Citibank), may lend its securities to qualified financial institutions, such as
certain broker-dealers, to earn additional income, net of income retained by
Citibank. The borrowers are required to secure their loans continuously with
collateral in an amount at least equal to 102% of the fair value of domestic
securities and foreign government securities loaned and 105% of the fair value
of foreign securities and all other securities loaned. Collateral may be cash,
U.S. government securities, or other securities as permitted by SEC guidelines.
Cash collateral may be invested in high-quality short-term investments.
Collateral requirements are determined daily based on the value of the Fund's
securities on loan as of the end of the prior business day. Loans are terminable
upon demand and the borrower must return the loaned securities within the lesser
of one standard settlement period or five business days. Risks relating to
securities-lending transactions include that the borrower may not provide
additional collateral when required or return the securities when due, and that
the value of the short-term investments will be less than the amount of cash
collateral required to be returned to the borrower. The Fund's agreement with
Citibank does not include master netting provisions. Non-cash collateral
received by the Fund may not be sold or re-pledged except to satisfy borrower
default. Cash collateral is listed in the Fund's Portfolio of Investments and
Financial Statements while non-cash collateral is not included.
At January 31, 2019, the Fund's value of outstanding securities on loan and the
value of collateral are as follows:
VALUE OF SECURITIES
ON LOAN NON-CASH COLLATERAL CASH COLLATERAL
----------------------------------------------------------------------------------
$3,854,000 $- $3,889,000
(6) CAPITAL SHARE TRANSACTIONS
At January 31, 2019, there were an unlimited number of shares of capital stock
at no par value authorized for the Fund.
Capital share transactions for the Institutional Shares resulted from purchases
and sales by the affiliated USAA fund-of-funds as well as other
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
persons or legal entities that the Fund may approve from time to time. Capital
share transactions for all classes were as follows, in thousands:
SIX-MONTH
PERIOD ENDED YEAR ENDED
JANUARY 31, 2019 JULY 31, 2018
---------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------
FUND SHARES:
Shares sold 2,460 $ 47,533 4,993 $ 99,734
Shares issued from
reinvested dividends 5,938 109,118 6,350 125,905
Shares redeemed (5,302) (102,147) (10,601) (211,718)
----------------------------------------------
Net increase from capital
share transactions 3,096 $ 54,504 742 $ 13,921
==============================================
INSTITUTIONAL SHARES:
Shares sold 9,931 $ 186,930 5,540 $ 110,461
Shares issued from
reinvested dividends 3,988 73,195 4,281 84,794
Shares redeemed (4,268) (83,158) (14,446) (289,936)
----------------------------------------------
Net increase (decrease) from
capital share transactions 9,651 $ 176,967 (4,625) $ (94,681)
==============================================
R6 SHARES:
Shares sold 19 $ 372 374 $ 7,678
Shares issued from
reinvested dividends 26 470 27 533
Shares redeemed (32) (631) (46) (911)
----------------------------------------------
Net increase from
capital share transactions 13 $ 211 355 $ 7,300
==============================================
(7) TRANSACTIONS WITH MANAGER
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 the Fund's assets, subject to the
authority of and supervision by the Board. The Manager 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 all or a portion of the
Fund's assets.
================================================================================
26 | USAA INCOME STOCK FUND
================================================================================
The Manager monitors each subadviser's performance through quantitative and
qualitative analysis and periodically reports to the Board as to whether each
subadviser's agreement should be renewed, terminated, or modified. The Manager
is also responsible for determining the asset allocation for the subadviser(s).
The allocation for each subadviser could range from 0% to 100% of the Fund's
assets, and the Manager could change the allocations without shareholder
approval.
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee is accrued daily and paid monthly at
an annualized rate of 0.50% of the Fund's average daily net assets.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Equity Income Funds Index. The Lipper Equity Income Funds
Index tracks the total return performance of funds within the Lipper Equity
Income Funds category.
For the Fund Shares and Institutional Shares, the performance period consists of
the current month plus the previous 35 months. The performance period for the R6
Shares commenced on December 1, 2016, and includes the performance of the Fund
Shares for periods prior to December 1, 2016. The following table is utilized to
determine the extent of the performance adjustment:
OVER/UNDER PERFORMANCE
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
-----------------------------------------------------------------
+/- 100 to 400 +/- 4
+/- 401 to 700 +/- 5
+/- 701 and greater +/- 6
(1)Based on the difference between average annual performance of the
relevant share class of the Fund and its relevant Lipper index, rounded
to the nearest basis point. Average daily net assets of the share class
are calculated over a rolling 36-month period.
Each class' annual performance adjustment rate is multiplied by the average
daily net assets of each respective class over the entire performance period,
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
================================================================================
which is then multiplied by a fraction, the numerator of which is the number of
days in the month and the denominator of which is 365 (366 in leap years). The
resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper Equity Income Funds Index over that period, even if the
class had overall negative returns during the performance period.
For the six-month period ended January 31, 2019, the Fund incurred management
fees, paid or payable to the Manager, of $6,819,000, which included less than
0.01% performance adjustment for the R6 Shares of less than $500. For the
six-month period ended January 31, 2019, the Fund Shares and Institutional
Shares did not incur any performance adjustment.
SUBADVISORY ARRANGEMENT(S) - The Manager entered into an Investment Subadvisory
Agreement with Epoch Investment Partners, Inc. (Epoch), under which Epoch
directs the investment and reinvestment of a portion of the Fund's assets (as
allocated from time to time by the Manager).
The Manager (not the Fund) pays Epoch a subadvisory fee in the annual amount of
0.30% of the Fund's average daily net assets for the first $600 million of
assets that Epoch manages, 0.20% on the next $900 million of assets, and 0.18%
on assets over $1.5 billion that Epoch manages. For the six-month period ended
January 31, 2019, the Manager incurred subadvisory fees with respect to the
Fund, paid or payable to Epoch of $1,439,000.
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 at an annualized rate of 0.15% of average
daily net assets of the Fund Shares, 0.10% of average daily net assets of the
Institutional Shares, and 0.05% of average daily net assets of the R6 Shares.
For the six-month period ended January 31, 2019, the Fund Shares, Institutional
Shares, and R6 Shares incurred administration and servicing fees, paid or
payable to the Manager, of $1,252,000, $523,000, and $3,000, respectively.
================================================================================
28 | USAA INCOME STOCK FUND
================================================================================
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 January 31, 2019, the Fund reimbursed the Manager less than $500 for these
compliance and legal services. These expenses are included in the professional
fees on the Fund's Statement of Operations.
EXPENSE LIMITATION - The Manager agreed, through November 30, 2019, to limit the
total annual operating expenses of the R6 Shares to 0.65% of its average annual
net assets, excluding extraordinary expenses and before reductions of any
expenses paid indirectly, and to reimburse the R6 Shares for all expenses in
excess of that amount. This expense limitation arrangement may not be changed or
terminated through November 30, 2019, without approval of the Board, and may be
changed or terminated by the Manager at any time after that date. For the
six-month period ended January 31, 2019, the R6 Shares incurred reimbursable
expenses of $8,000, of which $4,000 was receivable from the Manager.
TRANSFER AGENT'S FEES - SAS, an affiliate of the Manager, provides transfer
agent services to the Fund Shares based on an annual charge of $23 per
shareholder account plus out-of-pocket expenses. SAS pays a portion of these
fees to certain intermediaries for the administration and servicing of accounts
that are held with such intermediaries. Transfer agent's fees for Institutional
Shares and R6 Shares are paid monthly based on a fee accrued daily at an
annualized rate of 0.10% of the Institutional Shares' and 0.01% of the R6
Shares' average daily net assets, plus out-of-pocket expenses. For the six-month
period ended January 31, 2019, the Fund Shares, Institutional Shares, and R6
Shares incurred transfer agent's fees, paid or payable to SAS, of $654,000,
$523,000, and $1,000, respectively.
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 fee or other compensation for these services.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
(8) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other USAA Funds and
is one of 16 USAA mutual funds in which the affiliated USAA fund-of-funds
invest. The USAA fund-of-funds do not invest in the underlying funds for the
purpose of exercising management or control, and the affiliated fund-of-funds'
annual or semiannual reports may be viewed at usaa.com. As of January 31, 2019,
the USAA fund-of-funds owned the following percentages of the total outstanding
shares of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
--------------------------------------------------------------------------------
Cornerstone Conservative 0.1
Cornerstone Equity 0.3
Target Retirement Income 0.1
Target Retirement 2020 0.5
Target Retirement 2030 1.5
Target Retirement 2040 2.0
Target Retirement 2050 1.2
Target Retirement 2060 0.1
The Manager is indirectly wholly owned by USAA, a large, diversified financial
services institution. At January 31, 2019, USAA and its affiliates owned 275,000
R6 Shares, which represents 42.8% of the R6 Shares outstanding, and 0.2% of the
Fund's total outstanding shares.
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
(9) UPCOMING REGULATORY MATTERS
In October 2016, the U.S. Securities and Exchange Commission (SEC) issued Final
Rule Release No. 33-10233, INVESTMENT COMPANY LIQUIDITY RISK MANAGEMENT PROGRAMS
(Liquidity Rule). The Liquidity Rule requires funds to establish a liquidity
risk management program and enhances disclosures regarding funds' liquidity. The
requirements to implement a liquidity risk management program and establish a
15% illiquid investment limit became effective December 1, 2018. However, in
February 2018, the SEC issued Release No. IC-33010, INVESTMENT COMPANY LIQUIDITY
RISK MANAGEMENT
================================================================================
30 | USAA INCOME STOCK FUND
================================================================================
PROGRAMS; COMMISSION GUIDANCE FOR IN-KIND ETFs, which delayed certain
requirements related to liquidity classification, highly liquid investment
minimums, and board approval of the liquidity risk management programs to June
1, 2019. The Manager continues to evaluate the impact of this rule on the Fund's
financial statements and various filings.
(10) RECENTLY ADOPTED ACCOUNTING STANDARDS
In August 2018, the SEC adopted amendments to Regulation S-X for investment
companies governing the form and content of financial statements. The amendments
to Regulation S-X took effect on November 5, 2018, and the financial statements
have been modified accordingly, for the current and prior periods.
ASU 2018-13, FAIR VALUE MEASUREMENT
-----------------------------------
In August 2018, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2018-13, Fair Value Measurement (Topic 820).
The amendments in the ASU impact disclosure requirements for fair value
measurement. ASU 2018-13 is effective for fiscal years beginning after December
15, 2019. Early adoption is permitted and can include the entire standard or
certain provisions that exclude or amend disclosures. Management has elected to
early adopt ASU 2018-13 effective with the current reporting period. The
adoption of ASU 2018-13 guidance is limited to changes in the Fund's notes to
financial statement disclosures regarding valuation method, fair value, and
transfers between levels of the fair value hierarchy.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 31
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
-------------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
-------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 20.24 $ 19.68 $ 18.18 $ 17.79 $ 17.72 $ 16.29
-------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .23 .40 .42 .40 .44 .47
Net realized and
unrealized gain (loss) (.58) 1.74 1.51 .97 .51 1.77
-------------------------------------------------------------------------------------
Total from investment
operations (.35) 2.14 1.93 1.37 .95 2.24
-------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.21) (.40) (.43) (.40) (.46) (.45)
Realized capital gains (1.15) (1.18) - (.58) (.42) (.36)
-------------------------------------------------------------------------------------
Total distributions (1.36) (1.58) (.43) (.98) (.88) (.81)
-------------------------------------------------------------------------------------
Net asset value at
end of period $ 18.53 $ 20.24 $ 19.68 $ 18.18 $ 17.79 $ 17.72
=====================================================================================
Total return (%)* (1.62) 11.16 10.71 8.29 5.36 14.06
Net assets at
end of period (000) $1,626,482 $1,713,558 $1,651,374 $1,564,900 $1,657,268 $1,640,134
Ratios to average
daily net assets:**
Expenses (%)(a),(b) .76(c) .76 .77 .80 .79 .80
Net investment
income (%) 2.38(c) 2.19 2.24 2.42 2.38 2.77
Portfolio turnover (%) 10 23 23 19 12(d) 57
* 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 January 31, 2019, average daily net assets
were $1,654,282,000.
(a) Does not include acquired fund fees, if any.
(b) Reflects total annual operating expenses of the Fund Shares before
reductions of any expenses paid indirectly. The Fund Share's expenses paid
indirectly decreased the expense ratio by less than 0.01%.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) Reflects overall decrease in purchases and sales of securities.
================================================================================
32 | USAA INCOME STOCK FUND
================================================================================
INSTITUTIONAL SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
-------------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
-------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 20.22 $ 19.66 $ 18.16 $ 17.77 $ 17.71 $ 16.28
-------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .23 .41 .43 .40 .45 .49
Net realized and
unrealized gain (loss) (.58) 1.73 1.50 .98 .50 1.76
-------------------------------------------------------------------------------------
Total from investment
operations (.35) 2.14 1.93 1.38 .95 2.25
-------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.21) (.40) (.43) (.41) (.47) (.46)
Realized capital gains (1.15) (1.18) - (.58) (.42) (.36)
-------------------------------------------------------------------------------------
Total distributions (1.36) (1.58) (.43) (.99) (.89) (.82)
-------------------------------------------------------------------------------------
Net asset value at
end of period $ 18.51 $ 20.22 $ 19.66 $ 18.16 $ 17.77 $ 17.71
=====================================================================================
Total return (%)* (1.61) 11.21 10.76 8.36 5.37 14.16
Net assets at end
of period (000) $1,126,193 $1,034,842 $1,097,164 $1,158,385 $1,080,528 $1,037,014
Ratios to average
daily net assets:**
Expenses (%)(a),(b) .72(c) .72 .73 .75 .73 .73
Net investment
income (%) 2.40(c) 2.22 2.30 2.47 2.45 2.85
Portfolio turnover (%) 10 23 23 19 12(d) 57
* 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 January 31, 2019, average daily net assets
were $1,038,295,000.
(a) Does not include acquired fund fees, if any.
(b) Reflects total annual operating expenses of the Institutional Shares before
reductions of any expenses paid indirectly. The Institutional Shares'
expenses paid indirectly decreased the expense ratios by less than 0.01%.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) Reflects overall decrease in purchases and sales of securities.
================================================================================
FINANCIAL HIGHLIGHTS | 33
================================================================================
R6 SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED YEAR ENDED PERIOD ENDED
JANUARY 31, JULY 31, JULY 31,
----------------------------------------------------
2019 2018 2017***
----------------------------------------------------
Net asset value at beginning of period $ 20.23 $ 19.67 $ 18.17
-------------------------------------------------
Income (loss) from investment operations:
Net investment income .24 .47 .27
Net realized and unrealized gain (loss) (.58) 1.69 1.60
-------------------------------------------------
Total from investment operations (.34) 2.16 1.87
-------------------------------------------------
Less distributions from:
Net investment income (.22) (.42) (.37)
Realized capital gains (1.15) (1.18) -
-------------------------------------------------
Total distributions (1.37) (1.60) (.37)
-------------------------------------------------
Net asset value at end of period $ 18.52 $ 20.23 $19.67
=================================================
Total return (%)* (1.58) 11.31 10.36
Net assets at end of period (000) $11,904 $12,746 $5,412
Ratios to average daily net assets:**
Expenses (%)(a),(b) .65(c) .65 .65(c)
Expenses, excluding reimbursements (%)(a),(b) .79(c) .90 1.24(c)
Net investment income (%) 2.48(c) 2.33 2.13(c)
Portfolio turnover (%) 10 23 23
* 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 January 31, 2019, average daily net assets
were $12,229,000.
*** R6 Shares commenced operations on December 1, 2016.
(a) Does not include acquired fund fees, if any.
(b) Reflects total annual operating expenses of the R6 Shares before reductions
of any expenses paid indirectly. The R6 Shares' expenses paid indirectly
decreased the expense ratios by less than 0.01%
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
34 | USAA INCOME STOCK FUND
================================================================================
EXPENSE EXAMPLE
January 31, 2019 (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 August 1, 2018, through
January 31, 2019.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table 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 for your share
class in the "actual" 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 line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class 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
================================================================================
EXPENSE EXAMPLE | 35
================================================================================
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 line labeled "hypothetical"
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 AUGUST 1, 2018 -
AUGUST 1, 2018 JANUARY 31, 2019 JANUARY 31, 2019
-------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $ 983.80 $3.80
Hypothetical
(5% return before expenses) 1,000.00 1,021.37 3.87
INSTITUTIONAL SHARES
Actual 1,000.00 983.90 3.60
Hypothetical
(5% return before expenses) 1,000.00 1,021.58 3.67
R6 SHARES
Actual 1,000.00 984.20 3.25
Hypothetical
(5% return before expenses) 1,000.00 1,021.93 3.31
*Expenses are equal to the annualized expense ratio of 0.76% for Fund Shares,
0.72% for Institutional Shares, and 0.65% for R6 Shares, which are net of any
reimbursements and expenses paid indirectly, multiplied by the average
account value over the period, multiplied by 184 days/365 days (to reflect
the one-half-year period). The Fund's actual ending account values are based
on its actual total returns of (1.62)% for Fund Shares, (1.61)% for
Institutional Shares, and (1.58)% for R6 Shares for the six-month period of
August 1, 2018, through January 31, 2019.
================================================================================
36 | USAA INCOME STOCK FUND
================================================================================
ADVISORY AGREEMENT(S)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with Victory Capital
Holdings, Inc. ("Victory Holdings") pursuant to which Victory Holdings would
acquire all of the outstanding stock of AMCO and USAA Transfer Agency Company
d/b/a USAA Shareholder Account Services ("USAA Transfer Agent") (the
"Transaction"). The Independent Trustees were advised that the Transaction, if
completed, would constitute
================================================================================
ADVISORY AGREEMENT(S) | 37
================================================================================
an "assignment" (as that term is defined in Section 2(a)(4) of the 1940 Act) and
result in the automatic termination of the Existing Management Agreements
("Change of Control Event"). The Independent Trustees also were advised that it
was proposed that Victory Capital, a subsidiary of Victory Holdings, would serve
as the investment adviser to each Fund after the closing of the Transaction
("Post-Transaction") and that the Board would be asked to consider approval of
the terms and conditions of the New Advisory Agreement with Victory Capital and
thereafter to submit the New Advisory Agreement to each Fund's shareholders for
approval. Because the Change of Control Event also would result in the
termination of each existing subadvisory agreement between AMCO and the
subadvisers to the Funds ("Existing Subadvisory Agreements"), the Independent
Trustees were advised that the Board would also be asked to approve the New
Subadvisory Agreements.
In anticipation of the Transaction, the Trustees met at a series of subsequent
in-person meetings on November 27-28, 2018, January 7-8, 2019, and January
14-15, 2019, which included meetings of the full Board and separate meetings of
the Independent Trustees for the purposes of considering, among other things:
whether it would be in the best interests of each Fund and its respective
shareholders to approve the New Agreements; and the anticipated impacts of the
Transaction on the Funds and their shareholders (each, a "Meeting"). During each
of these Meetings, the Board sought additional and clarifying information as it
deemed necessary or appropriate. In this connection, the Independent Trustees
worked with their independent legal counsel to prepare formal due diligence
requests (the "Diligence Requests") that were submitted to Victory Capital,
Victory Capital Advisers, Inc. ("VCA"), and the subadvisers. The Diligence
Requests sought information relevant to the Board's consideration of the New
Advisory Agreement, the New Subadvisory Agreements, distribution arrangements,
and other anticipated impacts of the Transaction on the Funds and their
shareholders. Victory Capital, VCA, and the subadvisers provided documents and
information in response to the Diligence Requests (the "Response Materials").
Following their review of the Response Materials, the Independent Trustees
submitted a supplemental due diligence request for additional and clarifying
information (the "Supplemental Diligence Request") to Victory Capital and VCA.
Victory
================================================================================
38 | USAA INCOME STOCK FUND
================================================================================
Capital and VCA provided further information in response to the Supplemental
Diligence Request, which the Board reviewed. Senior management representatives
of Victory Capital and/or AMCO participated in a portion of each Meeting and
addressed various questions raised by the Board. Throughout the process, the
Independent Trustees were assisted by their independent legal counsel and
counsel to the Funds, who advised them on, among other things, their duties and
obligations relating to their consideration of the New Agreements.
The Board's evaluation of the New Agreements reflected the information provided
specifically in connection with its review of the New Agreements, as well as,
where relevant, information that was previously furnished to the Board in
connection with the most recent renewal of the Existing Management Agreements
and Existing Subadvisory Agreements at an in-person meeting of the Board on
April 18, 2018 (the "2018 15(c) Meeting") and at other subsequent Board meetings
in 2018. The Board's evaluation of the New Agreements also reflected the
knowledge gained as Board members of the Funds with respect to services provided
by AMCO, its affiliates, and each subadviser to the Funds.
The Board's approvals and recommendations were based on its determination,
within its business judgment, that it would be in the best interests of each
Fund and its respective shareholders, for Victory Capital and, as applicable,
the subadvisers, to provide investment advisory, investment subadvisory, and
related services to the Funds, following the closing of the Transaction.
FACTORS CONSIDERED IN APPROVING THE NEW ADVISORY AGREEMENT
In connection with the Board's consideration of the New Advisory Agreement,
Victory Capital and AMCO advised the Board about a variety of matters, including
the following:
o The nature, extent, and quality of the services to be provided to the
Funds by Victory Capital Post-Transaction are expected to be of at least
the same level as the services currently provided to the Funds by AMCO.
================================================================================
ADVISORY AGREEMENT(S) | 39
================================================================================
o Victory Capital's stated commitment to maintaining and enhancing the
USAA member/USAA Fund shareholder experience, including creating a
dedicated USAA Fund sales and client service call center that will
provide ongoing client service and advice to existing and new USAA
members.
o Victory Capital proposes to: (1) replace the underlying indexes for
the USAA Extended Market Index Fund and USAA S&P 500 Index Fund with
indexes designed to provide shareholders with comparable exposure and
investment outcomes; (2) change the USAA Extended Market Index Fund's
and USAA S&P 500 Index Fund's investment objectives and strategies in
light of the changes to their underlying indexes; and (3) change the
name of the USAA S&P 500 Index Fund to the USAA 500 Index Fund.
o Victory Capital does not propose changes to the investment
objective(s) of any other Funds. Although the investment processes used
by Victory Capital's portfolio managers may differ from those used by
AMCO's portfolio managers or, if applicable, any subadviser's portfolio
managers, such differences are not currently expected to result in
changes to the principal investment strategies or principal investment
risks of the Funds.
o The New Advisory Agreement does not change any Fund's advisory fee
rate or the computation method for calculating such fees (except that
Victory Capital, subject to Board approval, may in the future use a
single designated share class to calculate the performance adjustment).
For at least two years after the Transaction closes, Victory Capital has
agreed to waive fees and/or reimburse expenses so that each Fund's
annual expense ratio (excluding certain customary items) does not exceed
the levels reflected in each Fund's most recent audited financial
statements at the time the Transaction closes (or the levels of AMCO's
then-current expense caps, if applicable), excluding the impact of any
performance adjustment to the Fund's advisory fee.
================================================================================
40 | USAA INCOME STOCK FUND
================================================================================
o The portfolio managers at AMCO that manage the Fixed Income Funds(1) as
well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be advised
by Victory Capital through its Victory Solutions platform, Victory
Capital proposes that the same subadvisers be retained Post-Transaction,
although Victory Capital may change the allocation to a particular
subadviser Post-Transaction. No changes are expected to the portfolio
managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's
(1)The Fixed Income Funds include the following Funds: California Bond Fund,
Government Securities Fund, High Income Fund, Income Fund, Intermediate-Term
Bond Fund, Tax Exempt Intermediate-Term Fund, Tax Exempt Long-Term Fund, New
York Bond Fund, Short-Term Bond Fund, Tax Exempt Short- Term Fund, Ultra
Short-Term Bond Fund, Virginia Bond Fund, Money Market Fund, Tax Exempt Money
Market Fund and Treasury Money Market Trust.
(2)The Cornerstone Funds include the following Funds: Cornerstone Aggressive
Fund, Cornerstone Conservative Fund, Cornerstone Equity Fund, Cornerstone
Moderate Fund, Cornerstone Moderately Aggressive Fund, and Cornerstone
Moderately Conservative Fund.
(3)The Target Retirement Funds include the following Funds: Target Retirement
2020 Fund, Target Retirement 2030 Fund, Target Retirement 2040 Fund, Target
Retirement 2050 Fund, Target Retirement 2060 Fund, and Target Retirement
Income Fund.
================================================================================
ADVISORY AGREEMENT(S) | 41
================================================================================
businesses to Victory Capital. Victory Capital and USAA expect to enter
into a transition services agreement under which USAA will continue to
provide Victory Capital with certain services that are currently
provided by USAA to AMCO and the USAA Transfer Agent for a specified
period of time after the closing of the Transaction to assist Victory
Capital in transitioning the USAA member distribution channel and member
support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital
================================================================================
42 | USAA INCOME STOCK FUND
================================================================================
is capable of providing the same level of investment management services
currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund, Growth
& Income Fund, Income Stock Fund, Global Equity Income Fund, and Precious
Metals and Minerals Fund.
================================================================================
ADVISORY AGREEMENT(S) | 43
================================================================================
The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored and managed by
Victory Capital ("Victory Funds") with similar investment
================================================================================
44 | USAA INCOME STOCK FUND
================================================================================
objectives and strategies managed by the portfolio managers who would manage the
Funds. Based on information presented to the Board at the Meetings and its
discussions with Victory Capital, the Board concluded that Victory Capital is
capable of generating a level of long-term investment performance that is
appropriate in light of each Fund's investment objectives, strategies and
restrictions.
FEES TO BE PAID TO VICTORY CAPITAL AND EXPENSES OF THE FUNDS - The Board
considered that it had reviewed each Fund's existing advisory fee rate and
computation method for calculating such fees at the 2018 15(c) Meeting. The
Board considered that the New Advisory Agreement does not change any Fund's
advisory fee rate or the computation method for calculating such fees, except
that Victory Capital, subject to Board approval, may in the future use a single
designated share class to calculate the performance adjustment and apply the
resulting performance adjustment across each other class of shares of the Fund.
The Board considered that the use of a single designated class to calculate the
performance adjustment for each other class of shares of the Fund could mean
that shareholders of a class other than the class used to measure the
performance adjustment may pay a performance adjustment that is higher or lower
than if the adjustment were calculated on a class by class basis, primarily due
to the impact of differences in the fees and expenses between share classes on
performance. The Board considered that the New Advisory Agreement stipulates
that the period for measuring performance for calculating a Fund's performance
adjustment begins on the date that Victory Capital begins managing the Fund;
therefore, no performance adjustments will be made for the first twelve months
of the New Advisory Agreement, consistent with applicable regulations. The Board
also considered Victory Capital's contractual commitment under the expense
limitation agreement ("ELA") to waive fees and/or reimburse expenses for at
least two years after the closing of the Transaction, so that each Fund's annual
expense ratio (excluding acquired fund fees and expenses, any performance
adjustment to a Fund's advisory fee, interest, taxes, brokerage commissions,
other expenditures which are capitalized in accordance with generally accepted
accounting principles, and other extraordinary expenses not incurred in the
ordinary course of such Fund's business) does not exceed the levels reflected in
each Fund's most recent audited financial statements at the time the
================================================================================
ADVISORY AGREEMENT(S) | 45
================================================================================
Transaction closes (or the levels of AMCO's then-current expense caps, if
applicable), excluding the impact of any performance adjustment to a Fund's
advisory fee. The Board considered that the ELA permits Victory Capital to
recoup advisory fees waived and expenses reimbursed for up to three years after
the fiscal year in which the waiver or reimbursement took place, subject to the
lesser of any operating expense limitation in effect at the time of: (1) the
original waiver or expense reimbursement; or (2) recoupment. The Board also
considered that Victory Capital and AMCO had represented to the Board that they
will use their best efforts to ensure that they and their respective affiliates
do not take any action that imposes an "unfair burden" on the Funds as a result
of the Transaction or as a result of any express or implied terms, conditions or
understandings applicable to the Change of Control Event, for so long as the
requirements of Section 15(f) of the 1940 Act apply. The Board also considered
a comparison of the proposed advisory fees to be paid by each Fund to the
advisory fees paid by funds and other accounts managed by Victory Capital deemed
to be comparable to the Fund in terms of investment objectives and strategies.
The Board considered that, with few exceptions, mostly involving weighted
average fees for separate accounts, the advisory fees to be paid by the Funds
were lower than the fees paid by these other funds and accounts. The Board
concluded that the retention of Victory Capital was unlikely to impose an unfair
burden on the Funds because, after the Transaction, none of AMCO, Victory
Capital, VCA, or any of their respective affiliates, would be entitled to
receive any compensation directly or indirectly (i) from any person in
connection with the purchase or sale of securities or other property to, from,
or on behalf of the Funds (other than ordinary fees for bona fide principal
underwriting services), or (ii) from the Funds or their shareholders for other
than bona fide investment advisory or other services. Based on its review, the
Board determined, with respect to each Fund, that Victory Capital's advisory fee
is fair and reasonable.
THE EXTENT TO WHICH VICTORY CAPITAL MAY REALIZE ECONOMIES OF SCALE AS THE FUNDS
GROW LARGER AND WHETHER FEE LEVELS REFLECT THESE ECONOMIES OF SCALE FOR THE
BENEFIT OF FUND SHAREHOLDERS - The Board considered potential or anticipated
economies of scale in relation to the services Victory Capital would provide to
each Fund. The Board considered that the New Advisory Agreement includes the
same advisory fee breakpoints for the same Funds as
================================================================================
46 | USAA INCOME STOCK FUND
================================================================================
the Existing Advisory Agreements. The Board also considered that Victory Capital
has contractually agreed to cap the Funds' annual operating expense ratios,
pursuant to the ELA, which will remain in effect for at least two years from the
closing of the Transaction, and may be extended. The Board also considered
Victory Capital's representation that the significant increase in its assets
under management Post-Transaction may reasonably be expected to enable the new
combined firm to reach greater economies of scale in a shorter time frame. The
Board noted that it will have the opportunity to periodically re-examine whether
a Fund or the Trust has achieved economies of scale, and the appropriateness of
investment advisory and administrative fees payable to Victory Capital, in the
future.
THE PROFITS TO BE REALIZED BY VICTORY CAPITAL AND ITS AFFILIATES FROM THEIR
RELATIONSHIP WITH THE TRUST - The Board considered the benefits Victory Capital
and its affiliates may derive from their relationship with the Funds, including
compensation to be paid to Victory Capital for the provision of certain
administrative, fund accounting and shareholder services to the Funds and
compensation to be paid to USAA Transfer Agent for the provision of transfer
agency services to the Funds. The Board considered the significant investments
Victory Capital expected to make to support and grow the USAA member channel and
the costs to integrate the USAA Fund business into Victory Capital. The Board
also considered Victory Capital's profitability report presented to the board of
trustees of the Victory Funds in connection with their most recent 15(c)
process. The Board considered Victory Capital's representation that the fully
integrated USAA Fund business, including investments to support ongoing growth,
was expected to have an overall marginally positive impact on Victory Capital's
overall financial profitability. The Board noted the difficulty of accurately
projecting profitability under the current circumstance and noted that it would
have the opportunity to give further consideration to Victory Capital's
profitability with respect to the Funds at the end of the initial two-year term
of the New Advisory Agreement.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
================================================================================
ADVISORY AGREEMENT(S) | 47
================================================================================
deliver investment products and services to USAA's direct member-based channel.
The Board also considered that Victory Capital may derive reputational and other
benefits from its ability to use "USAA" and related names in connection with
operating and marketing the Funds. The Board considered that the Transaction, if
completed, would significantly increase Victory Capital's assets under
management and expand Victory Capital's investment capabilities. This increased
size and diversification could facilitate Victory Capital's continued investment
in its business and products, which Victory Capital would be able to leverage
across a broader base of assets. Victory Capital also would be able to use
trading commission credits from the Funds' transactions in securities to
"purchase" third party research and execution services to support its investment
process. Based on its review, the Board determined that any "fall-out" benefits
and other types of benefits that may accrue to Victory Capital are fair and
reasonable.
CONCLUSIONS - Based on the foregoing and other relevant considerations, at the
Meeting of the Board held on January 15, 2019, the Board, including a majority
of the Independent Trustees, acting within its business judgment, (1) concluded
that the terms of the New Advisory Agreement are fair and reasonable and that
approval of the New Advisory Agreement is in the best interests of each Fund and
its respective shareholders, (2) voted to approve the New Advisory Agreement,
and (3) voted to recommend approval of the New Advisory Agreement by
shareholders of the Funds. The Board evaluated all information available to it
on a Fund-by-Fund basis and its determinations were made separately in respect
of each Fund. The Board noted some factors may have been more or less important
with respect to any particular Fund and that no one factor was determinative of
its decisions which, instead, were premised upon the totality of factors
considered. In this connection, the Board also noted that different Board
members likely placed emphasis on different factors in reaching their individual
conclusions to vote in favor of the New Advisory Agreement and to recommend
approval of the New Advisory Agreement by shareholders of the Funds.
FACTORS CONSIDERED IN APPROVING THE NEW SUBADVISORY AGREEMENTS
In approving the New Subadvisory Agreements with each of Barrow, Hanley,
Mewhinney & Strauss, LLC, Brandes Investment Partners, L.P., ClariVest Asset
================================================================================
48 | USAA INCOME STOCK FUND
================================================================================
Management LLC, Epoch Investment Partners, Inc., Granahan Investment Management,
Inc., Lazard Asset Management LLC, Loomis, Sayles & Company LP, Massachusetts
Financial Services Company, Northern Trust Investments, Inc., QS Investors, LLC,
The Renaissance Group LLP and Wellington Management Company LLP (each, a
"Subadviser" and together the "Subadvisers") with respect to the applicable
Funds, the Board considered various factors, among them: (i) the nature, extent,
and quality of services to be provided to the applicable Funds by the
Subadvisers; (ii) each Subadviser's compensation and any other benefits derived
from the subadvisory relationship; (iii) comparisons, to the extent applicable,
of subadvisory fees and performance to comparable investment companies; and (iv)
the terms of each New Subadvisory Agreement. The Board's evaluation of the New
Subadvisory Agreements reflected the information provided specifically in
connection with its review of the New Subadvisory Agreements, as well as, where
relevant, information that was previously furnished to the Board in connection
with the most recent renewal of the Existing Subadvisory Agreements at the 2018
15(c) meeting and at other subsequent Board meetings in 2018. A summary of the
Board's analysis of these factors is set forth below. After full consideration
of a variety of factors, the Board, including the Independent Trustees, voted to
approve each New Subadvisory Agreement. In approving each New Subadvisory
Agreement, the Board did not identify any single factor as controlling, and each
Trustee may have attributed different weights to various factors. The
Independent Trustees reviewed the proposed approval of the New Subadvisory
Agreements in private sessions with their independent legal counsel at which no
representatives of Victory Capital or AMCO were present.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY THE
SUBADVISERS - The Board considered information provided to them regarding the
services to be provided by each Subadviser, including information presented
periodically throughout the previous year. The Board considered each
Subadviser's level of knowledge and investment style. The Board reviewed the
experience and credentials of the investment personnel who are responsible for
managing the investment of portfolio securities with respect to each applicable
Fund and each Subadviser's level of staffing. The Board also noted each
Subadviser's brokerage practices. The Board also considered
================================================================================
ADVISORY AGREEMENT(S) | 49
================================================================================
each Subadviser's regulatory and compliance history. The Board also took into
account each Subadviser's risk management processes. The Board noted that AMCO's
monitoring processes of each Subadviser include, and Victory Capital's expected
monitoring processes of each Subadviser would include, among others: (i) regular
telephonic meetings to discuss, among other matters, investment strategies and
to review portfolio performance; (ii) monthly portfolio compliance checklists
and quarterly compliance certifications to the Board; and (iii) due diligence
visits to each Subadviser. The Board also considered that the terms and
conditions of the New Subadvisory Agreements are substantially similar to the
terms and conditions of the Existing Subadvisory Agreements.
SUBADVISER COMPENSATION - The Board took into account the financial condition of
each Subadviser. In considering the cost of services to be provided by each
Subadviser and the profitability to that Subadviser of its relationship with the
applicable Fund, the Board noted that the fees under the New Subadvisory
Agreements will be paid by Victory Capital. The Board also relied on the ability
of AMCO to negotiate each Existing Subadvisory Agreement and the fees thereunder
at arm's length. The Board considered that the fee rate to be payable under each
New Subadvisory Agreement were proposed to be identical to the fee rate
currently payable under each corresponding Existing Subadvisory Agreement. For
the above reasons, the Board determined that the expected profitability of each
Subadviser from its relationship with the applicable Fund was not a material
factor in its deliberations with respect to the consideration of the approval of
each New Subadvisory Agreement. For similar reasons, the Board concluded that
the potential for economies of scale in each Subadviser's management of the
applicable Fund was not a material factor in considering each New Subadvisory
Agreement, although the Board noted that certain New Subadvisory Agreements
contain breakpoints in their fee schedules.
SUBADVISORY FEES AND FUND PERFORMANCE - The Board previously compared the
subadvisory fees for each applicable Fund with the fees that each Subadviser
charges comparable clients, as applicable. The Board considered that each
applicable Fund will pay a management fee to Victory Capital and that, in turn,
Victory Capital will pay a subadvisory fee to each Subadviser.
================================================================================
50 | USAA INCOME STOCK FUND
================================================================================
At the 2018 15(c) meeting, the Board considered, among other data, each
applicable Fund's performance over shorter and longer term periods, as compared
to each Fund's respective peer group and noted that the Board reviews at its
regularly scheduled meetings information about each Fund's performance results.
The Board considered Victory Capital's capabilities with respect to monitoring
the performance, investment style and risk-adjusted performance of each
Subadviser. The Board also noted each Subadviser's performance record for
similar accounts, as applicable.
CONCLUSIONS - The Board reached the following conclusions regarding each New
Subadvisory Agreement, among others: (i) each Subadviser is qualified to manage
the applicable Fund's assets in accordance with its investment objective and
policies; (ii) each Subadviser maintains an appropriate compliance program;
(iii) the performance of each applicable Fund is reasonable in relation to the
performance of funds with similar investment objectives and to relevant indices
in view of the Fund's investment approach and Victory Capital is expected to
appropriately monitor each Fund's performance; and (iv) each Fund's advisory
expenses are reasonable in relation to those of similar funds and to the
services to be provided by Victory Capital and each Subadviser. Based on its
conclusions, the Board determined that the approval of each New Subadvisory
Agreement with respect to each applicable Fund would be in the best interests of
the Fund and its shareholders.
================================================================================
ADVISORY AGREEMENT(S) | 51
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Richard Y. Newton III
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN, State Street Bank and Trust Company
ACCOUNTING AGENT, AND P.O. Box 1713
SUB-ADMINISTRATOR Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
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) or (210) 531-8722;
(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 monthly portfolio holdings with the SEC
for the first and third quarters of each fiscal year as an exhibit to its
reports on Form N-PORT (beginning with filings after March 31, 2019).
Previously, the Fund made its complete schedule of portfolio holdings available
after the first and third fiscal quarters in regulatory filings on Form N-Q. The
Fund's Forms N-CSR, N-PORT, and N-Q are available at no charge (i) by calling
(800) 531-USAA (8722) or (210) 531-8722; (ii) at USAA.COM; and (iii) on the
SEC's website at HTTP://WWW.SEC.GOV.
================================================================================
--------------
USAA PRSRT STD
9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
--------------
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[LOGO OF USAA]
USAA We know what it means to serve.(R)
================================================================================
23422-0319 (C)2019, USAA. All rights reserved.
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA INTERMEDIATE-TERM BOND FUND]
================================================================================
SEMIANNUAL REPORT
USAA INTERMEDIATE-TERM BOND FUND
FUND SHARES (USIBX) o INSTITUTIONAL SHARES (UIITX)
o ADVISER SHARES (UITBX) o R6 SHARES (URIBX)
JANUARY 31, 2019
================================================================================
Beginning on January 1, 2021, as permitted by regulations adopted by the
Securities and Exchange Commission, paper copies of the Fund's shareholder
reports like this one will no longer be sent by mail, unless you specifically
request paper copies of the reports from the Fund or from your financial
intermediary, such as a broker-dealer or bank. Instead, the reports will be
made available on usaa.com, and you will be notified by mail each time a report
is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will
not be affected by this change and you need not take any action. You may elect
to receive shareholder reports and other communications from the Fund or your
financial intermediary electronically by notifying your financial intermediary
directly, or if you are a direct investor, by calling (800) 531-USAA (8722) or
logging on to usaa.com.
You may elect to receive all future reports in paper free of charge. You can
inform the Fund or your financial intermediary that you wish to continue
receiving paper copies of your shareholder reports by notifying your financial
intermediary directly, or if you are a direct investor, by calling (800)
531-USAA (8722) or logging on to usaa.com. Your election to receive reports in
paper will apply to all funds held with the USAA family of funds or your
financial intermediary.
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
INVESTMENT OVERVIEW 1
FINANCIAL INFORMATION
Portfolio of Investments 3
Notes to Portfolio of Investments 31
Financial Statements 37
Notes to Financial Statements 41
Financial Highlights 60
EXPENSE EXAMPLE 64
ADVISORY AGREEMENT(S) 66
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.
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 tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. 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.
(C)2019, USAA. All rights reserved.
================================================================================
================================================================================
INVESTMENT OVERVIEW
--------------------------------------------------------------------------------
o PORTFOLIO RATINGS MIX - 1/31/19 o
[PIE CHART OF PORTFOLIO RATINGS MIX]
AAA 10.1%
AA 6.4%
A 23.1%
BBB 51.5%
BELOW INVESTMENT-GRADE 7.0%
UNRATED 1.9%
[END PIE CHART]
This chart reflects the highest long-term rating from a Nationally Recognized
Statistical Rating Organization (NRSRO), with the four highest long-term credit
ratings labeled, in descending order of credit quality, AAA, AA, A, and BBB.
These categories represent investment-grade quality. NRSRO ratings are shown
because they provide independent analysis of the credit quality of the Funds'
investments. USAA Asset Management Company (the Manager) also performs its own
fundamental credit analysis of each security. As part of its fundamental credit
analysis, the Manager considers various criteria, including industry specific
actions, peer comparisons, payment ranking, and structure specific
characteristics. Any of the Funds' securities that are not rated by an NRSRO
appear in the chart above as "Unrated," but these securities are analyzed and
monitored by the Manager on an ongoing basis. Government securities that are
issued or guaranteed as to principal and interest by the U.S. government and
pre-refunded and escrowed-to-maturity municipal bonds that are not rated are
treated as AAA for credit quality purposes.
Percentages are of the total market value of the Fund's investments.
Refer to the Portfolio of Investments for a complete list of securities.
================================================================================
INVESTMENT OVERVIEW | 1
================================================================================
o ASSET ALLOCATION* - 1/31/19 o
(% of Net Assets)
[PIE CHART OF ASSET ALLOCATION*]
CORPORATE OBLIGATIONS 54.6%
EURODOLLAR AND YANKEE OBLIGATIONS 21.6%
U.S. TREASURY SECURITIES 4.4%
MUNICIPAL OBLIGATIONS 3.6%
U.S. GOVERNMENT AGENCY ISSUES 3.0%
COMMERCIAL MORTGAGE SECURITIES 2.6%
COMMERCIAL PAPER 2.3%
BANK LOANS 1.8%
ASSET-BACKED SECURITIES 1.7%
COLLATERALIZED LOAN OBLIGATIONS 1.7%
PREFERRED STOCKS 1.7%
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS 0.4%
FOREIGN GOVERNMENT OBLIGATIONS 0.1%
PREFERRED BONDS 0.1%
COLLATERALIZED MORTGAGE OBLIGATIONS** 0.0%
[END PIE CHART]
*Does not include futures and short-term investments purchased with cash
collateral from securities loaned.
**Represents less than 0.1%.
Percentages are of the net assets of the Fund and may not equal 100%.
Refer to the Portfolio of Investments for a complete list of securities.
================================================================================
2 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
BONDS (95.2%)
ASSET-BACKED SECURITIES (1.7%)
ASSET BACKED SECURITIES (1.7%)
------------------------------
AUTOMOBILE ABS (0.4%)
$ 2,855 Avis Budget Rental Car Funding AESOP, LLC(a) 3.75% 7/20/2020 $ 2,856
1,000 Hertz Vehicle Financing II, LP(a) 2.65 7/25/2022 982
6,250 Hertz Vehicle Financing II, LP(a),(b) 4.10 3/25/2023 6,272
4,333 Hertz Vehicle Financing II, LP(a) 3.29 10/25/2023 4,278
286 Tesla Auto Lease Trust(a) 2.75 2/20/2020 285
----------
14,673
----------
CREDIT CARD ABS (0.2%)
7,583 Synchrony Credit Card Master Note Trust 3.87 5/15/2026 7,634
----------
OTHER ABS (1.0%)
5,000 Element Rail Leasing I, LLC(a) 3.67 4/19/2044 4,984
15,000 Hawaii Dept. of Business Economic Dev. & Tourism 3.24 1/01/2031 14,929
5,875 NP SPE II, LLC 4.22 10/21/2047 5,910
2,476 Sapphire Aviation Finance I Ltd.(a) 4.25 3/15/2040 2,493
2,149 SCF Equipment Leasing, LLC(a) 3.41 12/20/2023 2,145
2,084 Trinity Rail Leasing, LP(a) 5.90 5/14/2036 2,151
3,333 TRIP Rail Master Funding, LLC(a) 3.74 8/15/2047 3,341
----------
35,953
----------
STUDENT LOAN ABS (0.1%)
2,094 SLM STUDENT LOAN TRUST (3 MO. LIBOR + 0.22%) 2.99(c) 1/25/2041 1,953
2,500 SLM STUDENT LOAN TRUST (1 MO. LIBOR + 1.00%) 3.51(c) 4/27/2043 2,340
776 SLM STUDENT LOAN TRUST (3 MO. LIBOR + 0.55%) 3.32(c) 10/25/2065 738
----------
5,031
----------
Total Asset Backed Securities 63,291
----------
Total Asset-Backed Securities (cost: $63,275) 63,291
----------
BANK LOANS (1.8%)(d)
COMMUNICATIONS (0.3%)
---------------------
INTERNET (0.2%)
5,000 Zayo Group, LLC (1 mo. LIBOR + 2.25%)(b) -(e) 1/19/2024 4,970
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 3
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
MEDIA (0.1%)
$ 2,418 CSC Holdings, LLC (1 mo. LIBOR + 2.25%) 4.76% 7/17/2025 $ 2,349
988 E.W. Scripps Co. (1 mo. LIBOR + 2.00%) 4.50 10/02/2024 958
1,000 Gray Television, Inc. (3 mo. LIBOR + 2.50%) 5.02 1/02/2026 988
----------
4,295
----------
Total Communications 9,265
----------
CONSUMER, CYCLICAL (0.6%)
-------------------------
DISTRIBUTION/WHOLESALE (0.0%)
499 HD Supply, Inc. (3 mo. LIBOR + 1.75%) 4.25 10/17/2023 494
----------
FOOD SERVICE (0.1%)
2,644 Aramark Services, Inc. (1 mo. LIBOR + 1.75%) 4.25 3/11/2025 2,631
----------
RETAIL (0.5%)
1,597 Academy, Ltd. (1 mo. LIBOR + 4.00%) 6.50 7/01/2022 1,109
3,376 Academy, Ltd. (1 mo. LIBOR + 4.00%) 6.52 7/01/2022 2,345
3,491 Bass Pro Group, LLC (3 mo. LIBOR + 5.00%) 7.50 9/25/2024 3,459
2,500 Burlington Coat Factory Warehouse Corp.
(3 mo. LIBOR + 2.51%) 5.02 11/17/2024 2,479
955 J.C. Penney Co., Inc. (3 mo. LIBOR + 2.51%) 6.96 6/23/2023 831
4,000 Sally Holdings, LLC (1 mo. LIBOR + 4.50%) 4.50 7/05/2024 3,795
7,442 Serta Simmons Bedding, LLC
(1 mo. LIBOR + 3.50%)(b) 6.01 11/08/2023 6,382
----------
20,400
----------
Total Consumer, Cyclical 23,525
----------
CONSUMER, NON-CYCLICAL (0.5%)
-----------------------------
FOOD (0.3%)
5,522 Albertson's, LLC (3 mo. LIBOR + 3.00%) 5.69 6/22/2023 5,447
5,000 Albertson's, LLC (3 mo. LIBOR + 3.00%) 5.50 11/17/2025 4,905
216 JBS USA, LLC (3 mo. LIBOR + 2.50%) 5.00 10/30/2022 214
1,258 JBS USA, LLC (3 mo. LIBOR + 2.50%) 5.30 10/30/2022 1,247
----------
11,813
----------
PHARMACEUTICALS (0.2%)
4,331 Bausch HealthCos. Inc. (1 mo. LIBOR + 2.75%) 5.26 11/27/2025 4,278
985 Endo Luxembourg Finance Co. I S.a r.l.
(1 mo. LIBOR + 4.25%) 6.75 4/29/2024 978
----------
5,256
----------
Total Consumer, Non-cyclical 17,069
----------
FINANCIAL (0.0%)
----------------
REAL ESTATE (0.0%)
500 Forest City Enterprises, L.P. (3 mo. LIBOR + 4.00%) 6.51 12/07/2025 501
----------
================================================================================
4 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
INDUSTRIAL (0.1%)
-----------------
PACKAGING & CONTAINERS (0.1%)
$ 2,706 Klockner-Pentaplast of America, Inc.
(1 mo. LIBOR + 4.25%) 6.75% 6/30/2022 $ 2,346
----------
TECHNOLOGY (0.3%)
-----------------
SOFTWARE (0.3%)
7,500 First Data Corp. (3 mo. LIBOR + 2.00%)(b) -(e) 4/26/2024 7,480
4,489 Solera, LLC (1 mo. LIBOR + 2.75%) 5.25 3/03/2023 4,407
----------
Total Technology 11,887
----------
Total Bank Loans (cost: $66,578) 64,593
----------
COLLATERALIZED LOAN OBLIGATIONS (1.7%)
ASSET BACKED SECURITIES (1.7%)
------------------------------
5,000 Annisa Ltd. (3 mo. LIBOR + 1.65%)(a) 4.41(c) 7/20/2031 4,942
3,500 CIFC Funding Ltd. (3 mo. LIBOR + 1.70%)(a) 4.46(c) 4/23/2029 3,477
4,000 Dryden Senior Loan Fund
(3 mo. LIBOR + 2.00%)(a) 4.76(c) 7/20/2029 4,006
5,000 Dryden Senior Loan Fund
(3 mo. LIBOR + 1.55%)(a) 4.34(c) 7/15/2030 4,926
3,240 Magnetite XII Ltd. (3 mo. LIBOR + 1.60%)(a) 4.39(c) 10/15/2031 3,207
4,000 Neuberger Berman Loan Advisers 29 Ltd.
(3 mo. LIBOR + 1.70%)(a) 4.14(c) 10/19/2031 3,960
5,000 Neuberger Berman Loan Advisers 29 Ltd.(a) 4.60 10/19/2031 5,142
10,000 Oaktree EIF Ltd. (3 mo. LIBOR + 2.00%)(a) 4.76(c) 10/20/2027 10,002
5,000 Race Point Ltd. (1 mo. LIBOR + 1.65%)(a) 4.42(c) 7/25/2031 4,936
2,000 Stewart Park Ltd. (1 mo. LIBOR + 1.25%)(a) 4.04(c) 1/15/2030 1,955
2,500 TIAA I Ltd. (1 mo. LIBOR + 1.75%)(a) 4.51(c) 7/20/2031 2,484
2,500 TIAA I Ltd.(a) 4.59 7/20/2031 2,495
5,000 TIAA IV Ltd. (1 mo. LIBOR + 1.70%)(a) 4.52(c) 1/20/2032 4,949
3,000 Voya Ltd. (3 mo. LIBOR + 1.60%)(a) 4.37(c) 4/17/2030 2,985
2,500 Voya Ltd. (1 mo. LIBOR + 1.65%)(a) 4.11(c) 10/15/2031 2,475
----------
Total Asset Backed Securities 61,941
----------
Total Collateralized Loan Obligations (cost: $62,237) 61,941
----------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.0%)
MORTGAGE SECURITIES (0.0%)
--------------------------
1,766 Structured Asset Mortgage Investments Trust
(1 mo. LIBOR + 0.50%) (cost: $1,766) 3.00(c) 7/19/2035 1,663
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 5
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE SECURITIES (2.6%)
MORTGAGE SECURITIES (2.6%)
--------------------------
COMMERCIAL MBS (2.6%)
$ 4,000 BAMLL Commercial Mortgage Securities Trust(a) 3.49% 4/14/2033 $ 4,015
1,365 Bear Stearns Commercial Mortgage Securities Trust 5.21(f) 2/11/2041 1,359
2,125 Caesars Palace Las Vegas Trust(a) 4.14 10/15/2034 2,163
7,000 CFCRE Commercial Mortgage Trust(a) 5.76(f) 12/15/2047 7,365
1,368 Commercial Mortgage Trust 5.69(f) 7/10/2038 1,373
1,900 Commercial Mortgage Trust 4.19(f) 9/10/2047 1,965
3,000 Commercial Mortgage Trust 4.29(f) 7/10/2050 3,091
1,950 DB-UBS Mortgage Trust(a) 5.34(f) 8/10/2044 2,045
3,000 GS Mortgage Securities Trust(a) 4.95 1/10/2045 3,122
4,000 J.P. Morgan Chase Commercial Mortgage
Securities Trust(a) 5.60(f) 11/15/2043 4,095
906 J.P. Morgan Chase Commercial Mortgage
Securities Trust 5.37 5/15/2047 910
368 J.P.Morgan Chase Commercial Mortgage
Securities Trust 4.99(f) 9/12/2037 372
1,122 J.P.Morgan Chase Commercial Mortgage
Securities Trust 6.09(f) 4/17/2045 623
7,722 J.P.Morgan Chase Commercial Mortgage
Securities Trust 3.51 5/15/2045 7,815
21,999 J.P.Morgan Chase Commercial Mortgage
Securities Trust(g) 1.78(f) 10/15/2045 1,115
6,100 J.P.Morgan Chase Commercial Mortgage
Securities Trust(a) 5.37(f) 8/15/2046 6,393
19,947 Morgan Stanley Bank of America Merrill
Lynch Trust(a),(g) 1.62(f) 11/15/2045 962
5,000 Morgan Stanley Bank of America Merrill
Lynch Trust 3.74 8/15/2047 5,134
25,692 UBS Commercial Mortgage Trust(a),(g) 2.07(f) 5/10/2045 1,363
9,726 UBS Commercial Mortgage Trust 3.40 5/10/2045 9,808
4,756 UBS-Citigroup Commercial Mortgage Trust(a) 5.15 1/10/2045 4,993
1,500 Wells Fargo Commercial Mortgage Trust(a) 4.06(f) 7/17/2036 1,537
3,000 Wells Fargo Commercial Mortgage Trust(a) 5.28(f) 11/15/2043 3,089
3,500 Wells Fargo Commercial Mortgage Trust 3.97 12/15/2048 3,578
5,000 Wells Fargo Commercial Mortgage Trust 4.22(f) 12/15/2048 5,049
2,000 Wells Fargo Commercial Mortgage Trust 4.49(f) 9/15/2057 2,070
6,000 WF-RBS Commercial Mortgage Trust(a) 5.17(f) 2/15/2044 6,170
63,509 WF-RBS Commercial Mortgage Trust(a),(g) 1.56(f) 12/15/2045 3,151
----------
Total Mortgage Securities 94,725
----------
Total Commercial Mortgage Securities (cost: $90,807) 94,725
----------
================================================================================
6 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS (54.6%)
BASIC MATERIALS (1.8%)
----------------------
CHEMICALS (1.2%)
$ 7,500 CF Industries, Inc.(a) 4.50% 12/01/2026 $ 7,421
5,000 Chevron Phillips Chemical Co., LLC / Chevron
Phillips Chemical Co., LP(a) 3.40 12/01/2026 4,959
4,500 DowDuPont, Inc.(h) 4.49 11/15/2025 4,732
3,500 H.B. Fuller Co. 4.00 2/15/2027 3,028
3,850 LYB International Finance II B.V. 3.50 3/02/2027 3,666
5,000 Mosaic Co. 4.05 11/15/2027 4,860
5,000 Olin Corp. 5.00 2/01/2030 4,631
2,900 Sherwin-Williams Co. 3.45 6/01/2027 2,772
10,000 Westlake Chemical Corp. 3.60 8/15/2026 9,376
----------
45,445
----------
FOREST PRODUCTS & PAPER (0.3%)
3,000 Georgia-Pacific, LLC 7.25 6/01/2028 3,766
7,500 International Paper Co. 3.00 2/15/2027 7,011
----------
10,777
----------
IRON/STEEL (0.3%)
5,000 Allegheny Technologies, Inc. 5.95 1/15/2021 5,093
3,000 Allegheny Technologies, Inc. 7.88 8/15/2023 3,210
2,000 Carpenter Technology Corp. 5.20 7/15/2021 2,017
----------
10,320
----------
MINING (0.0%)
1,000 Alcoa Nederland Holding Co.(a) 6.75 9/30/2024 1,047
----------
Total Basic Materials 67,589
----------
COMMUNICATIONS (3.0%)
---------------------
MEDIA (1.4%)
10,000 Charter Communications Operating, LLC /
Charter Communications Operating Capital 4.91 7/23/2025 10,291
5,000 Charter Communications Operating, LLC /
Charter Communications Operating Capital(h) 5.05 3/30/2029 5,116
5,714 Comcast Corp. 3.55 5/01/2028 5,646
5,000 Comcast Corp.(h) 4.20 8/15/2034 5,046
2,000 CSC Holdings, LLC(a) 5.50 4/15/2027 1,960
5,000 Discovery Communications, LLC 3.95 3/20/2028 4,770
1,900 Fox Corp.(a),(h) 4.71 1/25/2029 1,986
10,000 Fox Corp.(a),(i) 5.48 1/25/2039 10,503
5,000 NBC Universal Enterprise, Inc.(a) 1.97 4/15/2019 4,992
----------
50,310
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 7
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (1.6%)
$ 10,000 AT&T, Inc. 4.50% 5/15/2035 $ 9,460
2,000 AT&T, Inc. 5.25 3/01/2037 2,039
3,000 Frontier Communications Corp.(j) 6.25 9/15/2021 2,085
5,000 Motorola Solutions, Inc. 4.60 2/23/2028 4,888
6,000 Qwest Corp. 6.75 12/01/2021 6,428
4,125 Sprint Spectrum Co., LLC / Sprint Spectrum
Co. II, LLC / Sprint Spectrum Co. III, LLC(a) 3.36 9/20/2021 4,113
10,000 Sprint Spectrum Co., LLC / Sprint Spectrum
Co. II, LLC / Sprint Spectrum Co. III, LLC(a) 5.15 3/20/2028 10,097
1,000 T-Mobile USA, Inc. 4.75 2/01/2028 962
20,000 Verizon Communications, Inc. 4.50 8/10/2033 20,362
----------
60,434
----------
Total Communications 110,744
----------
CONSUMER, CYCLICAL (3.9%)
-------------------------
AIRLINES (1.2%)
6,016 American Airlines, Inc. Pass-Through Trust 4.00 7/15/2025 5,981
1,946 American Airlines, Inc. Pass-Through Trust 3.60 10/15/2029 1,886
157 Continental Airlines, Inc. Pass-Through Trust 6.55 2/02/2019 157
241 Continental Airlines, Inc. Pass-Through Trust
(INS - AMBAC Assurance Corp.) 6.24 3/15/2020 244
8,022 Continental Airlines, Inc. Pass-Through Trust 4.15 4/11/2024 8,036
7,242 Hawaiian Airlines, Inc. Pass-Through Trust 3.90 1/15/2026 7,042
5,030 United Airlines, Inc. Pass-Through Trust(j) 4.63 9/03/2022 5,031
4,012 United Airlines, Inc. Pass-Through Trust 4.30 8/15/2025 4,098
361 US Airways Group, Inc. Pass-Through Trust
(INS - MBIA Insurance Corp.) 7.08 3/20/2021 379
2,579 US Airways Group, Inc. Pass-Through Trust 6.25 4/22/2023 2,734
1,671 US Airways Group, Inc. Pass-Through Trust 7.13 10/22/2023 1,829
7,183 US Airways Group, Inc. Pass-Through Trust 3.95 11/15/2025 7,173
----------
44,590
----------
AUTO MANUFACTURERS (0.3%)
4,000 Ford Motor Credit Co., LLC(h) 3.82 11/02/2027 3,373
10,000 General Motors Financial Co., Inc. 4.35 1/17/2027 9,377
----------
12,750
----------
DISTRIBUTION/WHOLESALE (0.1%)
5,000 Ferguson Finance plc(a) 4.50 10/24/2028 4,957
----------
ENTERTAINMENT (0.2%)
5,110 Scientific Games International, Inc. 10.00 12/01/2022 5,391
----------
HOME BUILDERS (0.5%)
2,000 Beazer Homes USA, Inc. 8.75 3/15/2022 2,096
2,000 D.R. Horton, Inc. 5.75 8/15/2023 2,111
================================================================================
8 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
$ 1,000 KB Home 7.63% 5/15/2023 $ 1,056
5,000 Lennar Corp. 4.50 11/15/2019 4,987
2,000 Lennar Corp. 4.13 1/15/2022 1,998
5,000 Toll Brothers Finance Corp. 4.88 3/15/2027 4,838
----------
17,086
----------
HOUSEWARES (0.2%)
7,500 Newell Brands, Inc. 3.85 4/01/2023 7,383
----------
LODGING (0.3%)
2,000 Hilton Worldwide Finance, LLC / Hilton
Worldwide Finance Corp. 4.88 4/01/2027 1,985
3,500 MGM Resorts International 8.63 2/01/2019 3,500
2,000 MGM Resorts International 5.75 6/15/2025 2,020
2,000 Wynn Las Vegas, LLC / Wynn Las Vegas
Capital Corp.(a) 5.25 5/15/2027 1,872
----------
9,377
----------
RETAIL (1.1%)
10,302 Advance Auto Parts, Inc. 4.50 12/01/2023 10,562
10,000 AutoZone, Inc. 3.75 6/01/2027 9,853
5,000 J.C. Penney Corp., Inc.(j) 5.65 6/01/2020 4,425
4,000 Party City Holdings, Inc.(a),(j) 6.63 8/01/2026 3,900
2,000 Penske Automotive Group, Inc. 3.75 8/15/2020 1,997
10,000 Walgreens Boots Alliance, Inc. 3.80 11/18/2024 9,993
----------
40,730
----------
Total Consumer, Cyclical 142,264
----------
CONSUMER, NON-CYCLICAL (6.4%)
-----------------------------
AGRICULTURE (0.1%)
5,000 Bunge Ltd. Finance Corp. 3.25 8/15/2026 4,414
----------
BEVERAGES (0.4%)
10,000 Anheuser-Busch Cos., LLC / Anheuser-Busch
InBev Worldwide, Inc.(i) 3.65 2/01/2026 9,840
3,571 Keurig Dr Pepper, Inc.(a) 4.60 5/25/2028 3,662
2,333 Keurig Dr Pepper, Inc.(a) 4.99 5/25/2038 2,307
----------
15,809
----------
BIOTECHNOLOGY (0.3%)
5,000 Baxalta, Inc. 4.00 6/23/2025 4,967
4,000 Celgene Corp. 3.90 2/20/2028 3,972
----------
8,939
----------
COMMERCIAL SERVICES (1.2%)
5,000 Bon Secours Charity Health System, Inc. 5.25 11/01/2025 5,052
3,000 Boston Medical Center Corp. 3.91 7/01/2028 2,940
================================================================================
PORTFOLIO OF INVESTMENTS | 9
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
$ 15,155 Eastern Maine Healthcare Systems(k) 3.71% 7/01/2026 $ 14,378
5,000 Eastern Maine Healthcare Systems 5.02 7/01/2036 4,930
5,000 ERAC USA Finance, LLC(a) 3.30 10/15/2022 4,937
10,000 S&P Global, Inc. 4.00 6/15/2025 10,305
1,667 United Rentals North America, Inc. 6.50 12/15/2026 1,734
----------
44,276
----------
FOOD (1.5%)
2,000 Albertson's Cos., LLC / Safeway, Inc. / New
Albertson's, LP / Albertson's, LLC 5.75 3/15/2025 1,882
1,000 Albertson's Cos., LLC / Safeway, Inc. / New
Albertson's, LP / Albertson's, LLC(a),(b) 7.50 3/15/2026 1,008
9,000 Flowers Foods, Inc. 3.50 10/01/2026 8,473
10,333 General Mills, Inc. 4.55 4/17/2038 9,632
10,000 J.M. Smucker Co. 4.25 3/15/2035 9,210
11,799 Kraft Heinz Foods Co.(a) 4.88 2/15/2025 12,046
10,000 Kraft Heinz Foods Co. 3.00 6/01/2026 9,275
1,667 Kroger Co.(h) 4.50 1/15/2029 1,679
1,042 McCormick & Co., Inc. 3.40 8/15/2027 996
----------
54,201
----------
HEALTHCARE PRODUCTS (0.3%)
10,000 Becton Dickinson & Co. 3.70 6/06/2027 9,763
2,000 Teleflex, Inc. 4.88 6/01/2026 2,019
----------
11,782
----------
HEALTHCARE-SERVICES (1.2%)
5,000 Baylor Scott & White Holdings 2.65 11/15/2026 4,664
4,302 DaVita, Inc. 5.00 5/01/2025 4,157
5,000 HCA, Inc. 5.38 9/01/2026 5,130
10,000 HCA, Inc. 4.50 2/15/2027 10,100
3,000 MEDNAX, Inc.(a) 6.25 1/15/2027 3,030
545 Orlando Health Obligated Group 3.78 10/01/2028 551
6,595 Premier Health Partners 2.91 11/15/2026 6,099
4,000 SSM Health Care Corp. 3.82 6/01/2027 3,987
5,000 UnitedHealth Group, Inc. 3.10 3/15/2026 4,926
1,445 Vanderbilt University Medical Center 4.17 7/01/2037 1,422
----------
44,066
----------
HOUSEHOLD PRODUCTS/WARES (0.1%)
5,000 Avery Dennison Corp.(h) 4.88 12/06/2028 5,156
----------
PHARMACEUTICALS (1.3%)
3,000 AbbVie, Inc. 4.25 11/14/2028 2,990
5,000 Cigna Corp.(a) 4.38 10/15/2028 5,139
3,500 CVS Health Corp. 4.30 3/25/2028 3,552
================================================================================
10 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
$ 5,000 CVS Health Corp. 4.88% 7/20/2035 $ 5,038
8,079 CVS Pass-Through Trust(a) 5.93 1/10/2034 8,715
7,000 Elanco Animal Health, Inc.(a) 4.90 8/28/2028 7,259
5,000 Mylan N.V. 3.75 12/15/2020 4,996
8,000 Mylan N.V. 3.95 6/15/2026 7,581
2,778 Mylan, Inc.(h) 4.55 4/15/2028 2,673
----------
47,943
----------
Total Consumer, Non-cyclical 236,586
----------
ENERGY (7.3%)
-------------
OIL & GAS (2.0%)
10,000 BP Capital Markets America, Inc.(h) 3.02 1/16/2027 9,616
10,000 ConocoPhillips Co. 4.95 3/15/2026 10,949
1,964 Continental Resources, Inc. 5.00 9/15/2022 1,976
4,000 Devon Energy Corp. 5.85 12/15/2025 4,365
1,000 EQT Corp. 8.13 6/01/2019 1,014
3,000 EQT Corp. 4.88 11/15/2021 3,076
5,000 Hess Corp. 4.30 4/01/2027 4,833
4,000 Hilcorp Energy I, LP / Hilcorp Finance Co.(a) 6.25 11/01/2028 3,915
5,000 Marathon Petroleum Corp. 4.75 9/15/2044 4,658
596 Motiva Enterprises, LLC(a) 5.75 1/15/2020 606
7,000 Murphy Oil Corp. 5.75 8/15/2025 7,043
10,000 Nabors Industries, Inc.(j) 4.63 9/15/2021 9,513
1,000 Noble Holding International Ltd. 4.90 8/01/2020 935
5,000 Southwestern Energy Co.(j) 6.20 1/23/2025 4,875
945 Transocean Guardian Ltd.(a) 5.88 1/15/2024 954
667 Transocean Pontus Ltd.(a) 6.13 8/01/2025 673
1,500 Transocean Poseidon Ltd.(a),(b) 6.88 2/01/2027 1,527
5,000 Transocean, Inc.(a) 7.25 11/01/2025 4,750
----------
75,278
----------
OIL & GAS SERVICES (0.1%)
2,000 SESI, LLC 7.13 12/15/2021 1,785
1,930 Weatherford International, Ltd.(j) 5.13 9/15/2020 1,496
----------
3,281
----------
PIPELINES (5.2%)
6,000 Andeavor Logistics, LP / Tesoro Logistics
Finance Corp. 4.25 12/01/2027 5,847
5,000 Antero Midstream Partners, LP / Antero
Midstream Finance Corp. 5.38 9/15/2024 4,925
4,000 Boardwalk Pipelines, LP 4.95 12/15/2024 4,055
17,000 Boardwalk Pipelines, LP 4.45 7/15/2027 16,044
10,000 Buckeye Partners, LP 4.35 10/15/2024 9,901
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
$ 5,000 Columbia Pipeline Group, Inc. 4.50% 6/01/2025 $ 5,105
3,000 DCP Midstream Operating, LP 4.95 4/01/2022 3,037
4,000 DCP Midstream Operating, LP 3.88 3/15/2023 3,900
5,000 DCP Midstream Operating, LP
(3 mo. LIBOR + 3.85%)(a),(l) 5.85 5/21/2043 4,325
9,306 Enable Oklahoma Intrastate Transmission, LLC(a) 6.25 3/15/2020 9,562
9,000 Enbridge Energy Partners, LP
(3 mo. LIBOR + 3.80%)(j) 6.59(c) 10/01/2037 9,045
1,000 Energy Transfer Operating, LP 9.70 3/15/2019 1,007
5,000 Energy Transfer Partners, LP
(3 mo. LIBOR + 3.02%) 5.75(c) 11/01/2066 4,050
7,000 EnLink Midstream Partners, LP 4.15 6/01/2025 6,571
5,000 EQM Midstream Partners, LP 4.00 8/01/2024 4,804
9,000 EQM Midstream Partners, LP 4.13 12/01/2026 8,333
5,000 EQM Midstream Partners, LP 5.50 7/15/2028 5,022
2,000 Florida Gas Transmission Co., LLC(a) 7.90 5/15/2019 2,026
3,000 Florida Gas Transmission Co., LLC(a) 5.45 7/15/2020 3,084
2,000 Kinder Morgan Energy Partners, LP 6.50 4/01/2020 2,072
1,000 Kinder Morgan, Inc. 6.50 9/15/2020 1,049
7,500 MPLX, LP 4.00 2/15/2025 7,455
6,106 Northwest Pipeline, LLC 4.00 4/01/2027 6,042
5,000 NuStar Logistics, LP 4.80 9/01/2020 5,044
3,000 NuStar Logistics, LP 4.75 2/01/2022 2,940
2,000 ONEOK Partners, LP 8.63 3/01/2019 2,007
5,000 ONEOK Partners, LP 4.90 3/15/2025 5,204
3,000 ONEOK, Inc. 4.25 2/01/2022 3,051
5,000 ONEOK, Inc. 4.55 7/15/2028 5,069
5,000 Phillips 66 Partners, LP 3.55 10/01/2026 4,761
5,000 Plains All American Pipeline, LP / PAA
Finance Corp. 3.85 10/15/2023 4,944
10,000 Sabal Trail Transmission, LLC(a) 4.68 5/01/2038 9,824
6,000 Sabine Pass Liquefaction, LLC 5.63 2/01/2021 6,213
5,000 Spectra Energy Partners, LP 3.38 10/15/2026 4,778
5,000 Tallgrass Energy Partners, LP / Tallgrass
Energy Finance Corp.(a),(h) 5.50 1/15/2028 4,898
6,250 Western Gas Partners, LP 4.65 7/01/2026 6,167
----------
192,161
----------
Total Energy 270,720
----------
FINANCIAL (21.2%)
-----------------
BANKS (7.3%)
10,000 Associated Banc-Corp. 4.25 1/15/2025 10,158
10,000 Bank of America Corp. 4.20 8/26/2024 10,244
10,000 Bank of America Corp. (3 mo. LIBOR + 1.51%)(l) 3.71 4/24/2028 9,870
================================================================================
12 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
$ 3,225 Bank OZK (3 mo. LIBOR + 4.43%)(j),(l) 5.50% 7/01/2026 $ 3,286
5,000 BankUnited, Inc. 4.88 11/17/2025 5,123
4,750 BOKF Merger Corp Number Sixteen
(3 mo. LIBOR + 3.17%)(l) 5.63 6/25/2030 4,831
15,000 Citigroup, Inc. 4.40 6/10/2025 15,318
5,000 Citigroup, Inc. (3 mo. LIBOR + 1.39%)(l) 3.67 7/24/2028 4,908
15,000 Citizens Financial Group, Inc.(a) 4.15 9/28/2022 15,135
5,500 Citizens Financial Group, Inc. 3.75 7/01/2024 5,387
2,000 Cullen/Frost Bankers, Inc. 4.50 3/17/2027 1,965
5,000 Discover Bank (5 Yr. Semi-Annual
Swap + 1.73%)(l) 4.68 8/09/2028 4,985
10,000 Eagle Bancorp, Inc. (3 mo. LIBOR + 3.85%)(l) 5.00 8/01/2026 10,015
10,000 Fifth Third Bank 3.85 3/15/2026 9,924
5,000 First Financial Bancorp 5.13 8/25/2025 5,072
1,000 First Maryland Capital Trust I
(3 mo. LIBOR + 1.00%) 3.79(c) 1/15/2027 906
5,000 First Midwest Bancorp, Inc. 5.88 9/29/2026 5,285
5,000 FirstMerit Bank, N.A. 4.27 11/25/2026 4,902
10,000 Fulton Financial Corp. 4.50 11/15/2024 10,196
5,000 Hilltop Holdings, Inc. 5.00 4/15/2025 4,956
10,000 Huntington Bancshares, Inc. 3.15 3/14/2021 10,027
10,000 Huntington BancShares, Inc. 4.35 2/04/2023 10,175
5,000 J.P. Morgan Chase & Co. 2.95 10/01/2026 4,781
10,000 KeyBank, N.A. 3.40 5/20/2026 9,677
750 KeyCorp Capital II 6.88 3/17/2029 862
5,000 LegacyTexas Financial Group, Inc.
(3 mo. LIBOR + 3.89%)(l) 5.50 12/01/2025 5,042
16,000 Manufacturers & Traders Trust Co.
(3 mo. LIBOR + 0.64%) 3.38(c) 12/01/2021 15,810
1,000 Manufacturers & Traders Trust Co. 3.40 8/17/2027 991
4,417 MB Financial Bank, N.A.
(3 mo. LIBOR + 1.87%)(l) 4.00 12/01/2027 4,288
5,000 MUFG Americas Holdings Corp. 3.50 6/18/2022 5,033
10,000 People's United Bank, N.A. 4.00 7/15/2024 9,986
5,000 Santander Holdings USA, Inc.(h) 4.45 12/03/2021 5,087
12,818 Santander Holdings USA, Inc. 4.40 7/13/2027 12,559
5,000 Sterling National Bank (3 mo. LIBOR + 3.94%)(l) 5.25 4/01/2026 5,071
5,000 SunTrust Capital I (3 mo. LIBOR + 0.67%) 3.29(c) 5/15/2027 4,364
5,000 TCF National Bank 4.60 2/27/2025 4,794
4,643 TowneBank (3 mo. LIBOR + 2.55%)(l) 4.50 7/30/2027 4,625
5,000 Webster Financial Corp. 4.38 2/15/2024 5,011
5,000 Wells Fargo & Co. 3.00 10/23/2026 4,784
3,500 Wintrust Financial Corp. 5.00 6/13/2024 3,479
----------
268,912
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (1.3%)
$ 10,000 Air Lease Corp. 3.00% 9/15/2023 $ 9,532
5,000 Capital One Financial Corp. 2.50 5/12/2020 4,966
10,000 Capital One Financial Corp. 3.75 3/09/2027 9,674
4,548 Grain Spectrum Funding II, LLC(a) 3.29 10/10/2019 4,530
7,000 ILFC E-Capital Trust I (Highest of 3 mo.
LIBOR/10 Year CMT/30 Year CMT + 1.55%)(a) 4.55(c) 12/21/2065 5,330
405 Keenan Dev. Association of Tennessee, LLC
(INS - XL Capital Assurance)(a) 5.02 7/15/2028 412
5,000 Synchrony Financial 4.25 8/15/2024 4,886
11,141 Synchrony Financial 3.95 12/01/2027 10,211
----------
49,541
----------
INSURANCE (6.4%)
5,000 Alleghany Corp. 5.63 9/15/2020 5,174
5,000 Allied World Assurance Co. Holdings Ltd. 4.35 10/29/2025 4,875
15,000 Allstate Corp. (3 mo. LIBOR + 2.94%)(l) 5.75 8/15/2053 14,947
5,000 American Equity Investment Life Holding Co. 5.00 6/15/2027 4,994
2,000 American International Group, Inc. (3 mo.
LIBOR + 4.20%)(l) 8.18 5/15/2058 2,342
7,500 AmTrust Financial Services, Inc. 6.13 8/15/2023 6,607
2,500 Assurant, Inc. 4.90 3/27/2028 2,509
1,535 Assured Guaranty U.S. Holdings, Inc. 7.00 6/01/2034 1,736
3,000 Athene Global Funding(a) 3.00 7/01/2022 2,941
8,000 Athene Holding Ltd. 4.13 1/12/2028 7,478
10,000 AXA Equitable Holdings, Inc.(h) 4.35 4/20/2028 9,799
10,000 Genworth Holdings, Inc. (3 mo. LIBOR + 2.00%) 4.62(c) 11/15/2036 5,950
2,000 Global Atlantic Financial Co.(a) 8.63 4/15/2021 2,200
7,000 Hanover Insurance Group, Inc. 4.50 4/15/2026 7,013
10,000 Hartford Financial Services Group, Inc.
(3 mo. LIBOR + 2.13%)(a) 4.74(c) 2/12/2047 8,565
15,000 Kemper Corp. 4.35 2/15/2025 14,963
13,018 Lincoln National Corp. (3 mo. LIBOR + 2.36%) 5.00(c) 5/17/2066 11,280
5,000 Loews Corp. 3.75 4/01/2026 5,039
4,000 Markel Corp. 3.63 3/30/2023 3,986
12,350 Mercury General Corp. 4.40 3/15/2027 12,106
8,000 MetLife, Inc. 6.40 12/15/2036 8,572
5,000 MetLife, Inc.(a) 9.25 4/08/2038 6,473
20,235 Nationwide Mutual Insurance Co. (3 mo.
LIBOR + 2.29%)(a) 5.08(c) 12/15/2024 20,189
8,000 Navigators Group, Inc. 5.75 10/15/2023 8,410
1,000 Ohio National Financial Services, Inc.(a) 6.38 4/30/2020 1,035
2,000 Ohio National Financial Services, Inc.(a) 6.63 5/01/2031 2,340
7,000 Old Republic International Corp. 3.88 8/26/2026 6,714
================================================================================
14 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
$ 10,025 OneBeacon U.S. Holdings, Inc. 4.60% 11/09/2022 $ 10,192
5,000 Primerica, Inc. 4.75 7/15/2022 5,178
3,000 Principal Financial Global Funding, LLC
(3 mo. LIBOR + 0.52%) 3.30(c) 1/10/2031 2,732
10,000 ProAssurance Corp. 5.30 11/15/2023 10,538
10,000 Prudential Financial, Inc.
(3 mo. LIBOR + 4.18%)(l) 5.88 9/15/2042 10,420
5,000 RLI Corp. 4.88 9/15/2023 5,116
3,830 Torchmark Corp. 4.55 9/15/2028 3,922
----------
236,335
----------
INVESTMENT COMPANIES (0.6%)
2,000 Ares Capital Corp. 3.50 2/10/2023 1,905
10,000 FS KKR Capital Corp. 4.00 7/15/2019 9,991
5,000 Main Street Capital Corp. 4.50 12/01/2019 5,009
5,000 Main Street Capital Corp. 4.50 12/01/2022 5,041
----------
21,946
----------
REITs (4.3%)
10,000 Alexandria Real Estate Equities, Inc. 4.70 7/01/2030 10,276
5,000 American Tower Corp. 3.45 9/15/2021 5,015
5,000 Boston Properties, LP 3.85 2/01/2023 5,071
5,000 Boston Properties, LP 4.50 12/01/2028 5,177
5,000 CBL & Associates, LP(j) 5.25 12/01/2023 4,225
16,454 CC Holdings GS V, LLC / Crown Castle
GS III Corp. 3.85 4/15/2023 16,533
7,500 Columbia Property Trust Operating
Partnership, LP 3.65 8/15/2026 7,019
5,000 Crown Castle International Corp.(b) 4.30 2/15/2029 5,030
9,000 ERP Operating, LP 2.85 11/01/2026 8,542
10,000 Federal Realty Investment Trust 2.75 6/01/2023 9,680
741 Federal Realty Investment Trust 3.25 7/15/2027 707
5,000 Hospitality Properties Trust 4.95 2/15/2027 4,848
2,000 Hospitality Properties Trust 4.38 2/15/2030 1,809
5,000 Hudson Pacific Properties, LP 3.95 11/01/2027 4,659
4,901 MPT Operating Partnership, LP / MPT
Finance Corp. 5.25 8/01/2026 4,950
2,000 Nationwide Health Properties, Inc.
(Put Date 10/01/2027) 6.90 10/01/2037 2,424
10,000 Omega Healthcare Investors, Inc. 4.95 4/01/2024 10,224
7,500 Physicians Realty, LP 4.30 3/15/2027 7,238
2,000 Realty Income Corp. 5.75 1/15/2021 2,081
6,000 Realty Income Corp. 3.00 1/15/2027 5,651
4,000 Sabra Health Care, LP 5.13 8/15/2026 3,762
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
$ 4,000 Sabra Health Care, LP / Sabra Capital Corp. 5.50% 2/01/2021 $ 4,043
2,000 Sabra Health Care, LP / Sabra Capital Corp. 5.38 6/01/2023 2,000
4,136 Senior Housing Properties Trust 3.25 5/01/2019 4,122
2,000 Senior Housing Properties Trust 6.75 12/15/2021 2,095
4,444 SL Green Operating Partnership, LP 3.25 10/15/2022 4,311
2,750 Starwood Property Trust, Inc.(h) 3.63 2/01/2021 2,717
2,000 Starwood Property Trust, Inc. 5.00 12/15/2021 2,025
5,000 Washington REIT 3.95 10/15/2022 5,081
3,000 Welltower, Inc. 6.13 4/15/2020 3,092
2,000 Welltower, Inc. 4.95 1/15/2021 2,054
3,000 Welltower, Inc. 4.25 4/15/2028 3,023
----------
159,484
----------
SAVINGS & LOANS (1.3%)
10,000 Banc of California, Inc. 5.25 4/15/2025 10,042
10,000 First Niagara Financial Group, Inc. 7.25 12/15/2021 11,050
10,000 People's United Financial, Inc. 3.65 12/06/2022 9,969
5,000 Sterling Bancorp. 3.50 6/08/2020 4,952
10,000 TIAA FSB Holdings, Inc. 5.75 7/02/2025 10,382
----------
46,395
----------
Total Financial 782,613
----------
INDUSTRIAL (4.7%)
-----------------
AEROSPACE/DEFENSE (1.1%)
10,000 Arconic, Inc. 5.40 4/15/2021 10,212
15,000 Lockheed Martin Corp. 3.60 3/01/2035 14,294
5,000 Northrop Grumman Corp. 3.25 1/15/2028 4,847
5,000 Spirit AeroSystems, Inc. 3.85 6/15/2026 4,719
3,500 United Technologies Corp. 3.95 8/16/2025 3,586
1,364 United Technologies Corp. 4.45 11/16/2038 1,375
----------
39,033
----------
BUILDING MATERIALS (0.5%)
3,000 CRH America, Inc. 5.75 1/15/2021 3,098
5,000 Martin Marietta Materials, Inc. 4.25 7/02/2024 5,066
6,534 Owens Corning(i) 3.40 8/15/2026 5,894
5,000 Vulcan Materials Co. 3.90 4/01/2027 4,806
----------
18,864
----------
ELECTRICAL COMPONENTS & EQUIPMENT (0.1%)
5,000 Molex Electronic Technologies, LLC(a) 3.90 4/15/2025 4,989
----------
ELECTRONICS (0.2%)
5,000 Jabil, Inc. 3.95 1/12/2028 4,503
2,604 Keysight Technologies, Inc. 4.60 4/06/2027 2,632
----------
7,135
----------
================================================================================
16 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
HAND/MACHINE TOOLS (0.2%)
$ 3,000 CFX ESCROW Corp.(a) 6.38% 2/15/2026 $ 3,000
6,000 Stanley Black & Decker, Inc. (3 mo. LIBOR + 4.30%) 7.09(c) 12/15/2053 6,009
----------
9,009
----------
MACHINERY-DIVERSIFIED (0.7%)
10,000 CNH Industrial Capital, LLC 3.38 7/15/2019 10,020
10,000 Wabtec Corp. 3.45 11/15/2026 8,879
9,091 Wabtec Corp. 4.70 9/15/2028 8,661
----------
27,560
----------
METAL FABRICATION/HARDWARE (0.4%)
5,658 Timken Co. 4.50 12/15/2028 5,510
10,000 Worthington Industries, Inc. 4.55 4/15/2026 9,930
----------
15,440
----------
PACKAGING & CONTAINERS (0.3%)
5,000 Crown Americas, LLC / Crown Americas
Capital Corp.(j) 4.75 2/01/2026 4,913
5,153 Sealed Air Corp.(a) 6.88 7/15/2033 5,230
----------
10,143
----------
TRANSPORTATION (0.6%)
4,700 BNSF Funding Trust I (3 mo. LIBOR + 2.35%)(l) 6.61 12/15/2055 5,083
10,000 FedEx Corp. 3.90 2/01/2035 9,196
1,000 Polar Tankers, Inc.(a) 5.95 5/10/2037 1,169
5,000 Ryder System, Inc. 3.45 11/15/2021 5,020
----------
20,468
----------
TRUCKING & LEASING (0.6%)
20,000 Penske Truck Leasing Co., LP / PTL
Finance Corp.(a) 4.25 1/17/2023 20,237
----------
Total Industrial 172,878
----------
TECHNOLOGY (1.4%)
-----------------
COMPUTERS (0.3%)
10,000 Dell International, LLC / EMC Corp.(a) 4.42 6/15/2021 10,177
2,500 Dell International, LLC / EMC Corp.(a) 5.88 6/15/2021 2,547
----------
12,724
----------
SEMICONDUCTORS (0.5%)
5,000 Broadcom Corp. / Broadcom Cayman Finance Ltd. 3.63 1/15/2024 4,868
10,000 QUALCOMM, Inc. 3.45 5/20/2025 9,769
3,000 QUALCOMM, Inc. 3.25 5/20/2027 2,842
----------
17,479
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
SOFTWARE (0.6%)
$ 12,500 Activision Blizzard, Inc. 3.40% 9/15/2026 $ 12,021
4,050 Fiserv, Inc. 4.20 10/01/2028 4,056
5,000 VMware, Inc. 3.90 8/21/2027 4,734
----------
20,811
----------
Total Technology 51,014
----------
UTILITIES (4.9%)
----------------
ELECTRIC (4.0%)
3,000 Black Hills Corp. 5.88 7/15/2020 3,103
5,000 Black Hills Corp. 3.95 1/15/2026 4,973
4,736 Bruce Mansfield Unit Pass-Through Trust(m) 6.85 6/01/2034 3,954
15,000 Cleco Corporate Holdings, LLC 3.74 5/01/2026 14,376
5,000 Cleveland Electric Illuminating Co.(a) 4.55 11/15/2030 5,089
6,050 Dominion Energy, Inc. (3 mo. LIBOR + 2.83%) 5.63(c) 6/30/2066 5,696
495 DPL, Inc. 6.75 10/01/2019 504
3,300 DPL, Inc. 7.25 10/15/2021 3,519
3,500 Duquesne Light Holdings, Inc.(a) 5.90 12/01/2021 3,691
13,000 Duquesne Light Holdings, Inc.(a) 3.62 8/01/2027 12,315
10,000 Entergy Texas, Inc. 2.55 6/01/2021 9,846
3,500 FirstEnergy Corp. 3.90 7/15/2027 3,428
5,000 Georgia Power Co. 3.25 4/01/2026 4,750
4,667 IPALCO Enterprises, Inc. 3.70 9/01/2024 4,587
3,750 ITC Holdings Corp. 3.35 11/15/2027 3,612
3,000 N.V. Energy, Inc. 6.25 11/15/2020 3,166
2,000 Oglethorpe Power Corp. 6.10 3/15/2019 2,007
5,000 Oncor Electric Delivery Co., LLC 3.75 4/01/2045 4,761
15,000 PPL Capital Funding, Inc. (3 mo. LIBOR + 2.67%) 5.47(c) 3/30/2067 13,580
2,000 Sempra Energy 9.80 2/15/2019 2,004
6,900 Southern California Edison Co.
(3 mo. LIBOR + 4.20%)(l) 6.25 -(n) 6,496
10,000 Southern Co. 3.25 7/01/2026 9,555
5,000 System Energy Resources, Inc. 4.10 4/01/2023 5,095
4,000 Texas-New Mexico Power Co.(a) 9.50 4/01/2019 4,040
4,500 WEC Energy Group, Inc. (3 mo. LIBOR + 2.11%) 4.73(c) 5/15/2067 3,945
10,000 Xcel Energy, Inc. 3.30 6/01/2025 9,911
----------
148,003
----------
GAS (0.6%)
1,000 Atmos Energy Corp. 8.50 3/15/2019 1,007
10,000 National Fuel Gas Co. 3.75 3/01/2023 9,899
1,000 National Fuel Gas Co. 7.38 6/13/2025 1,103
4,000 National Fuel Gas Co. 3.95 9/15/2027 3,738
6,120 Spire, Inc. 3.54 2/27/2024 6,016
----------
21,763
----------
================================================================================
18 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
WATER (0.3%)
$ 10,000 Aquarion Co.(a) 4.00% 8/15/2024 $ 10,158
----------
Total Utilities 179,924
----------
Total Corporate Obligations (cost: $2,020,263) 2,014,332
----------
EURODOLLAR AND YANKEE OBLIGATIONS (21.6%)
BASIC MATERIALS (3.2%)
----------------------
CHEMICALS (1.0%)
10,000 Braskem Finance Ltd. 6.45 2/03/2024 10,873
3,000 Incitec Pivot Finance, LLC(a) 6.00 12/10/2019 3,063
10,000 Nutrien Ltd. 3.00 4/01/2025 9,376
7,230 Yara International ASA(a) 3.80 6/06/2026 6,847
7,773 Yara International ASA(a) 4.75 6/01/2028 7,827
----------
37,986
----------
IRON/STEEL (0.4%)
2,000 ArcelorMittal 5.50 3/01/2021 2,071
4,000 ArcelorMittal 6.25 2/25/2022 4,249
5,000 Vale Overseas Ltd.(j) 4.38 1/11/2022 5,023
5,000 Vale Overseas Ltd.(j) 6.25 8/10/2026 5,356
----------
16,699
----------
MINING (1.8%)
5,000 Anglo American Capital plc(a) 4.13 4/15/2021 5,000
2,500 Anglo American Capital plc(a) 3.75 4/10/2022 2,479
3,333 Anglo American Capital plc(a) 4.00 9/11/2027 3,150
5,000 First Quantum Minerals Ltd.(a) 6.88 3/01/2026 4,550
12,000 Fresnillo plc(a),(j) 5.50 11/13/2023 12,495
15,000 Glencore Funding, LLC(a) 4.00 3/27/2027 14,432
10,000 Goldcorp, Inc. 3.70 3/15/2023 9,990
2,500 Kinross Gold Corp. 5.95 3/15/2024 2,588
3,000 Kinross Gold Corp. 4.50 7/15/2027 2,707
3,000 Southern Copper Corp. 3.88 4/23/2025 2,981
5,000 Teck Resources Ltd. 3.75 2/01/2023 4,900
----------
65,272
----------
Total Basic Materials 119,957
----------
COMMUNICATIONS (0.8%)
---------------------
INTERNET (0.2%)
5,000 Baidu, Inc. 4.38 5/14/2024 5,103
----------
MEDIA (0.1%)
4,622 Pearson Funding Four plc(a) 3.75 5/08/2022 4,558
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 19
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (0.5%)
$ 5,000 British Telecommunications plc(h) 4.50% 12/04/2023 $ 5,153
10,000 Deutsche Telekom International Finance B.V.(a) 4.38 6/21/2028 10,114
3,333 Vodafone Group plc 5.00 5/30/2038 3,233
----------
18,500
----------
Total Communications 28,161
----------
CONSUMER, CYCLICAL (1.9%)
-------------------------
AIRLINES (1.5%)
5,000 Air Canada Pass-Through Trust(a) 5.00 3/15/2020 5,025
3,079 Air Canada Pass-Through Trust(a) 5.38 5/15/2021 3,123
7,779 Air Canada Pass-Through Trust(a) 3.88 3/15/2023 7,603
7,615 Air Canada Pass-Through Trust(a) 4.13 5/15/2025 7,616
5,277 Air Canada Pass-Through Trust(a) 3.75 12/15/2027 5,179
11,708 British Airways Pass-Through Trust(a) 4.63 6/20/2024 12,023
2,875 Latam Airlines Pass-Through Trust 4.20 11/15/2027 2,801
678 Virgin Australia Pass-Through Trust(a) 6.00 10/23/2020 689
10,000 WestJet Airlines Ltd.(a) 3.50 6/16/2021 9,710
----------
53,769
----------
LEISURE TIME (0.3%)
11,400 Silversea Cruise Finance Ltd.(a) 7.25 2/01/2025 12,269
----------
RETAIL (0.1%)
3,334 Alimentation Couche-Tard, Inc.(a) 3.55 7/26/2027 3,176
----------
Total Consumer, Cyclical 69,214
----------
CONSUMER, NON-CYCLICAL (2.7%)
-----------------------------
AGRICULTURE (0.8%)
2,000 BAT Capital Corp.(h) 4.39 8/15/2037 1,710
10,000 BAT International Finance plc(a) 3.25 6/07/2022 9,877
10,000 Imperial Brands Finance plc(a) 4.25 7/21/2025 10,024
8,000 Viterra, Inc.(a) 5.95 8/01/2020 8,260
----------
29,871
----------
BEVERAGES (0.9%)
10,000 Anheuser-Busch InBev Worldwide, Inc.(i) 4.90 1/23/2031 10,436
6,500 Anheuser-Busch InBev Worldwide, Inc. 4.38 4/15/2038 5,961
10,000 Bacardi Ltd.(a) 2.75 7/15/2026 8,611
10,000 Becle S.A.B de C.V.(a) 3.75 5/13/2025 9,590
----------
34,598
----------
COMMERCIAL SERVICES (0.1%)
2,500 Ashtead Capital, Inc.(a),(h) 4.13 8/15/2025 2,400
2,500 Ashtead Capital, Inc.(a) 5.25 8/01/2026 2,534
----------
4,934
----------
================================================================================
20 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
FOOD (0.1%)
$ 5,000 Smithfield Foods, Inc.(a) 4.25% 2/01/2027 $ 4,573
----------
PHARMACEUTICALS (0.8%)
5,405 Bayer U.S. Finance II, LLC(a) 2.85 4/15/2025 4,842
5,000 Bayer U.S. Finance II, LLC(a) 4.63 6/25/2038 4,664
5,000 Takeda Pharmaceutical Co. Ltd.(a),(h) 5.00 11/26/2028 5,263
15,000 Teva Pharmaceutical Finance Netherlands III B.V. 3.15 10/01/2026 12,475
500 Teva Pharmaceutical Finance Netherlands III B.V. 6.75 3/01/2028 519
----------
27,763
----------
Total Consumer, Non-cyclical 101,739
----------
DIVERSIFIED (0.4%)
------------------
HOLDING COMPANIES-DIVERSIFIED (0.4%)
7,500 CK Hutchison International Ltd.(a) 2.75 10/03/2026 6,963
5,000 CK Hutchison International Ltd.(a) 3.50 4/05/2027 4,894
2,000 Hutchison Whampoa International Ltd.(a) 4.63 1/13/2022 2,069
----------
Total Diversified 13,926
----------
ENERGY (1.4%)
-------------
OIL & GAS (1.0%)
2,750 Aker BP ASA(a) 6.00 7/01/2022 2,826
4,880 Aker BP ASA(a) 5.88 3/31/2025 5,026
4,500 Canadian Natural Resources Ltd. 3.85 6/01/2027 4,417
3,350 Eni SpA(a) 4.75 9/12/2028 3,392
2,940 Hunt Oil Co. of Peru, LLC Sucursal Del Peru(a) 6.38 6/01/2028 3,108
1,000 Husky Energy, Inc. 7.25 12/15/2019 1,034
5,000 Petroleos Mexicanos 4.50 1/23/2026 4,412
10,000 Petroleos Mexicanos 6.50 3/13/2027 9,620
2,000 Woodside Finance Ltd.(a) 4.60 5/10/2021 2,031
----------
35,866
----------
PIPELINES (0.4%)
5,000 APT Pipelines Ltd.(a) 4.20 3/23/2025 5,021
10,000 TransCanada PipeLines Ltd. 4.75 5/15/2038 10,202
----------
15,223
----------
Total Energy 51,089
----------
FINANCIAL (7.6%)
----------------
BANKS (5.4%)
10,000 ABN AMRO Bank N.V.(a) 4.75 7/28/2025 10,204
10,000 ABN AMRO Bank N.V.(a) 4.80 4/18/2026 10,207
10,000 Australia & New Zealand Banking Group Ltd.(a) 4.40 5/19/2026 9,897
3,750 Bank of Montreal (5 Yr. Semi-Annual
Swap + 1.43%)(l) 3.80 12/15/2032 3,576
================================================================================
PORTFOLIO OF INVESTMENTS | 21
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
$ 2,450 Barclays Bank plc (6 mo. LIBOR + 0.25%) 3.13%(c) -(n) $ 1,856
6,200 Barclays plc 4.84 5/09/2028 5,962
15,000 BNP Paribas S.A.(a) 4.38 5/12/2026 14,692
5,000 BPCE S.A.(a) 4.63 9/12/2028 5,072
10,000 Cooperatieve Rabobank U.A. 3.88 2/08/2022 10,224
8,451 Cooperatieve Rabobank U.A. 3.95 11/09/2022 8,531
2,222 Credit Suisse Group AG (3 mo. LIBOR + 1.41%)(a),(l) 3.87 1/12/2029 2,125
10,000 Credit Suisse Group Funding Guernsey Ltd. 4.55 4/17/2026 10,176
10,000 HSBC Bank plc (6 mo. LIBOR + 0.25%) 3.13(c) -(n) 7,128
10,000 HSBC Holdings plc 3.90 5/25/2026 9,967
5,900 ING Groep N.V. 3.95 3/29/2027 5,763
5,000 ING Groep N.V. 4.55 10/02/2028 5,080
5,000 Lloyds Banking Group plc 4.55 8/16/2028 5,024
5,000 Lloyds Banking Group plc (3 mo. LIBOR + 1.21%)(l) 3.57 11/07/2028 4,661
10,000 Nordea Bank Abp(a) 4.25 9/21/2022 10,147
4,000 Royal Bank of Scotland Group plc
(3 mo.LIBOR + 2.32%) 5.12(c) -(n) 3,780
10,000 Royal Bank of Scotland Group plc 6.13 12/15/2022 10,520
5,000 Royal Bank of Scotland Group plc
(1 mo. LIBOR + 1.91%)(l) 5.08 1/27/2030 5,052
15,000 Santander UK plc(a) 5.00 11/07/2023 15,126
7,500 Standard Chartered plc (1 mo. LIBOR + 1.97%)(a),(l) 4.87 3/15/2033 7,341
7,500 Swedbank AB(a) 2.65 3/10/2021 7,431
10,000 Westpac Banking Corp. (5 Yr. Semi-Annual
Swap + 2.24%)(l) 4.32 11/23/2031 9,721
----------
199,263
----------
DIVERSIFIED FINANCIAL SERVICES (0.2%)
3,000 AerCap Ireland Capital DAC / AerCap
Global Aviation Trust 4.63 7/01/2022 3,013
3 Ahold Lease USA, Inc. Pass-Through Trust 7.82 1/02/2020 3
5,000 Brookfield Finance, Inc.(h) 4.85 3/29/2029 4,993
----------
8,009
----------
INSURANCE (1.2%)
10,000 Oil Insurance Ltd. (3 mo. LIBOR + 2.98%)(a) 5.79(c) -(n) 9,440
20,056 QBE Capital Funding III Ltd.
(10 Yr. Semi-Annual Swap + 4.05%)(a),(l) 7.25 5/24/2041 20,849
5,000 XLIT Ltd. (3 mo. LIBOR + 2.46%) 5.24(c) -(n) 4,775
10,000 XLIT Ltd. 4.45 3/31/2025 10,221
----------
45,285
----------
REAL ESTATE (0.1%)
4,167 Ontario Teachers' Cadillac Fairview Properties
Trust(a),(b) 4.13 2/01/2029 4,226
----------
================================================================================
22 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
REITs (0.3%)
$ 10,750 WEA Finance, LLC / Westfield UK & Europe
Finance plc(a) 3.75% 9/17/2024 $ 10,814
----------
SAVINGS & LOANS (0.4%)
2,850 Nationwide Building Society
(3 mo. LIBOR + 1.39%)(a),(l) 4.36 8/01/2024 2,862
10,000 Nationwide Building Society(a) 4.00 9/14/2026 9,342
----------
12,204
----------
Total Financial 279,801
----------
INDUSTRIAL (2.2%)
-----------------
AEROSPACE/DEFENSE (0.3%)
10,000 BAE Systems Holdings, Inc.(a) 3.85 12/15/2025 9,971
----------
BUILDING MATERIALS (0.0%)
1,154 Boral Finance Proprietary Ltd.(a) 3.75 5/01/2028 1,089
----------
ELECTRONICS (0.0%)
1,200 Tyco Electronics Group S.A. 3.13 8/15/2027 1,131
----------
ENGINEERING & CONSTRUCTION (0.6%)
10,000 Heathrow Funding Ltd.(a) 4.88 7/15/2021 10,341
10,000 Sydney Airport Finance Co. Proprietary Ltd.(a) 3.90 3/22/2023 9,981
2,000 Sydney Airport Finance Co. Proprietary Ltd. 3.63 4/28/2026 1,940
----------
22,262
----------
MACHINERY-DIVERSIFIED (0.1%)
5,000 CNH Industrial N.V. 3.85 11/15/2027 4,640
----------
MISCELLANEOUS MANUFACTURERS (0.3%)
10,000 Siemens Financieringsmatschappij N.V.(a) 3.25 5/27/2025 9,968
----------
PACKAGING & CONTAINERS (0.5%)
5,000 Amcor Finance USA, Inc.(a) 3.63 4/28/2026 4,807
1,000 Ardagh Packaging Finance plc / Ardagh
Holdings USA, Inc.(a) 4.25 9/15/2022 992
5,500 Brambles USA, Inc.(a) 4.13 10/23/2025 5,513
7,500 CCL Industries, Inc.(a) 3.25 10/01/2026 7,011
----------
18,323
----------
TRANSPORTATION (0.3%)
8,000 Canadian National Railway Co. 2.75 3/01/2026 7,678
4,261 Pacific National Finance Proprietary Ltd.(a) 4.63 9/23/2020 4,317
----------
11,995
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 23
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
TRUCKING & LEASING (0.1%)
$ 2,898 DAE Funding, LLC(a) 4.50% 8/01/2022 $ 2,869
----------
Total Industrial 82,248
----------
TECHNOLOGY (0.1%)
-----------------
SEMICONDUCTORS (0.1%)
4,614 NXP B.V. / NXP Funding, LLC(a),(h) 4.13 6/01/2021 4,643
----------
UTILITIES (1.3%)
----------------
ELECTRIC (1.3%)
5,000 Comision Federal de Electricidad(a) 4.75 2/23/2027 4,888
6,000 EDP Finance B.V.(a) 4.13 1/15/2020 6,027
10,000 Electricite de France S.A. (10 Yr. Semi-Annual
Swap + 3.71%)(a),(l) 5.25 -(n) 9,908
5,000 Emera U.S. Finance, LP 3.55 6/15/2026 4,771
5,000 Enel Finance International N.V.(a) 3.63 5/25/2027 4,499
10,000 Fortis, Inc. 3.06 10/04/2026 9,318
5,000 Infraestructura Energetica Nova S.A.B. de C.V.(a) 3.75 1/14/2028 4,531
3,500 Transelec S.A.(a) 3.88 1/12/2029 3,277
----------
Total Utilities 47,219
----------
Total Eurodollar and Yankee Obligations (cost: $800,240) 797,997
----------
FOREIGN GOVERNMENT OBLIGATIONS (0.1%)
5,000 Italy Government International Bond (cost: $5,955) 5.38 6/15/2033 5,260
----------
MUNICIPAL OBLIGATIONS (3.6%)
CALIFORNIA (0.3%)
3,000 Long Beach Unified School District 5.91 8/01/2025 3,388
3,000 Los Alamitos Unified School District 6.19 2/01/2026 3,547
5,000 San Jose Redev. Agency Successor Agency 3.23 8/01/2027 4,955
----------
11,890
----------
COLORADO (0.0%)
1,000 State Board of Governors Univ. Enterprise System 4.90 3/01/2021 1,045
----------
CONNECTICUT (0.2%)
1,250 City of New Haven 4.43 8/01/2028 1,304
2,200 State 3.69 9/15/2024 2,232
3,000 State Dev. Auth. 5.50 4/01/2021 3,190
----------
6,726
----------
FLORIDA (0.3%)
3,300 Miami-Dade County Transit System 4.59 7/01/2021 3,384
4,000 Palm Beach County School District 5.40 8/01/2025 4,489
================================================================================
24 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
$ 2,000 State Department of Environmental
Protection (PRE) 5.76% 7/01/2020 $ 2,025
2,500 Tohopekaliga Water Auth. (PRE) 5.25 10/01/2036 2,729
----------
12,627
----------
ILLINOIS (0.3%)
2,470 Chicago Midway International Airport 5.00 1/01/2025 2,743
1,500 Finance Auth. 5.45 8/01/2038 1,540
5,000 State 5.00 8/01/2019 5,065
----------
9,348
----------
MARYLAND (0.4%)
3,000 Baltimore Board of School Commissioners 5.69 12/15/2025 3,496
2,295 EDC 4.05 6/01/2027 2,276
2,390 EDC 4.15 6/01/2028 2,351
2,490 EDC 4.25 6/01/2029 2,441
1,330 EDC 4.35 6/01/2030 1,301
1,385 EDC 4.40 6/01/2031 1,348
----------
13,213
----------
NEW JERSEY (0.6%)
2,525 City of Atlantic 4.23 9/01/2025 2,600
2,410 City of Atlantic 4.29 9/01/2026 2,489
10,000 EDA 4.45 6/15/2020 10,132
2,500 EDA 5.71 6/15/2030 2,793
3,000 Transportation Trust Fund Auth. 5.75 12/15/2028 3,303
----------
21,317
----------
NEW YORK (0.6%)
5,000 City of New York 6.27 12/01/2037 6,303
5,000 MTA 6.73 11/15/2030 6,322
2,500 New York City Transitional Finance Auth. 5.00 2/01/2035 2,639
3,500 State Mortgage Agency 4.20 10/01/2027 3,577
110 Town of Oyster Bay 3.55 2/01/2019 110
1,825 Town of Oyster Bay 3.80 2/01/2020 1,827
1,500 Town of Oyster Bay 3.95 2/01/2021 1,504
----------
22,282
----------
NORTH CAROLINA (0.1%)
3,000 City of Kannapolis 7.28 3/01/2027 3,130
----------
OHIO (0.1%)
3,000 Miami University 6.67 9/01/2028 3,678
----------
OKLAHOMA (0.2%)
5,250 Dev. Finance Auth. 5.45 8/15/2028 5,605
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 25
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA (0.0%)
$ 1,000 Economic Dev. Finance Auth. 3.20% 11/15/2027 $ 982
----------
TEXAS (0.4%)
3,430 City of Austin CCD 6.76 8/01/2030 4,316
4,350 Ector County Hospital District 6.80 9/15/2025 4,422
1,480 Gainesville Hospital District 4.56 8/15/2021 1,491
4,100 Harris County 4.45 11/15/2031 3,968
----------
14,197
----------
WASHINGTON (0.1%)
5,000 State (PRE) 5.25 2/01/2036 5,351
----------
Total Municipal Obligations (cost: $122,984) 131,391
----------
PREFERRED BONDS (0.1%)
FINANCIAL (0.1%)
----------------
INSURANCE (0.1%)
3,000 Catlin Insurance Co. Ltd. (3 mo. LIBOR + 2.98%)(a)
(cost: $3,000) 5.74(c) -(n) 2,892
----------
Total Preferred Bonds (cost: $3,000) 2,892
----------
U.S. GOVERNMENT AGENCY ISSUES (3.0%)(o)
COMMERCIAL MBS (2.8%)
123,874 Fannie Mae(+)(g) 0.55(f) 4/25/2022 1,779
3,500 Fannie Mae(+) 2.78(f) 2/25/2027 3,416
2,500 Fannie Mae(+) 2.96(f) 2/25/2027 2,458
3,553 Fannie Mae(+) 3.04(f) 3/25/2028 3,503
66,888 Freddie Mac(+)(g) 0.85(f) 10/25/2022 1,803
67,720 Freddie Mac(+)(g) 1.26(f) 8/25/2022 2,526
38,247 Freddie Mac(+)(g) 1.30(f) 12/25/2021 1,176
20,644 Freddie Mac(+)(g) 1.63(f) 3/25/2022 886
20,000 Freddie Mac(+) 2.65 8/25/2026 19,417
15,000 Freddie Mac(+) 2.67 3/25/2026 14,709
12,000 Freddie Mac(+) 2.85 3/25/2026 11,757
2,922 Freddie Mac(+) 3.30(f) 11/25/2027 2,951
10,000 Freddie Mac(+) 3.37 7/25/2025 10,123
5,000 Freddie Mac(+) 3.41 12/25/2026 5,098
5,000 Freddie Mac(+) 3.43(f) 1/25/2027 5,114
891 Freddie Mac(+) 3.46 11/25/2032 884
3,000 Freddie Mac(+) 3.65(f) 2/25/2028 3,106
10,000 Freddie Mac(+) 3.77 12/25/2028 10,433
3,000 FREMF Mortgage Trust(a) 3.49(f) 11/25/2023 2,986
----------
104,125
----------
================================================================================
26 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
FGLMC COLLATERAL (0.0%)
$ 74 Freddie Mac(+) 5.00% 9/01/2020 $ 74
75 Freddie Mac(+) 5.50 4/01/2036 82
----------
156
----------
FNMA COLLATERAL (0.2%)
6,628 Fannie Mae(+) 2.50 7/01/2027 6,562
----------
Total U.S. Government Agency Issues (cost: $111,380) 110,843
----------
U.S. TREASURY SECURITIES (4.4%)
BONDS (2.3%)
5,050 U.S. Treasury Bond 2.25 8/15/2046 4,332
50,000 U.S. Treasury Bond 2.50 2/15/2045 45,471
20,000 U.S. Treasury Bond 2.75 8/15/2042 19,242
5,000 U.S. Treasury Bond 2.75 11/15/2042 4,804
10,000 U.S. Treasury Bond 3.50 2/15/2039 10,992
----------
84,841
----------
NOTES (2.1%)
10,000 U.S. Treasury Note 2.25 11/15/2027 9,716
47,900 U.S. Treasury Note(p) 2.38 5/15/2027 47,168
10,000 U.S. Treasury Note 2.75 2/15/2028 10,105
10,000 U.S. Treasury Note 2.88 11/15/2046 9,763
----------
76,752
----------
Total U.S. Treasury Securities (cost: $166,800) 161,593
----------
Total Bonds (cost: $3,515,285) 3,510,521
----------
----------------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
----------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (1.7%)
PREFERRED STOCKS (1.7%)
COMMUNICATIONS (0.3%)
---------------------
TELECOMMUNICATIONS (0.3%)
7,000 Centaur Funding Corp., 9.08%(a) 7,455
200,000 Qwest Corp., 6.50% 4,234
----------
Total Communications 11,689
----------
CONSUMER, NON-CYCLICAL (0.7%)
-----------------------------
AGRICULTURE (0.3%)
400,000 CHS, Inc., 7.10%, (3 mo. LIBOR + 4.30%)(c),(n) 10,690
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 27
================================================================================
----------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------------------------------
FOOD (0.4%)
150,000 Dairy Farmers of America, Inc., cumulative redeemable, 7.88%(a),(n) $ 14,962
----------
Total Consumer, Non-cyclical 25,652
----------
FINANCIAL (0.6%)
----------------
BANKS (0.2%)
87,500 Citigroup Capital XIII, 9.12%, (3 mo. LIBOR + 6.37%)(c) 2,298
50,000 HSBC Holdings plc, 6.20%(n) 1,268
5,000 U.S. Bancorp, 3.81%, (3 mo. LIBOR + 1.02%)(c),(n) 3,987
----------
7,553
----------
INSURANCE (0.2%)
2,000 American Overseas Group Ltd., non-cumulative, 6.29%,
(3 mo. LIBOR + 3.56%)(c),(k),(q),(r) 500
369,987 Delphi Financial Group, Inc., cumulative redeemable, 5.93%,
(3 mo. LIBOR + 3.19%)(c) 8,556
----------
9,056
----------
REITs (0.2%)
100,000 Equity Residential Properties Trust, 8.29%, Series K, depositary
shares, cumulative redeemable(n) 6,200
----------
Total Financial 22,809
----------
GOVERNMENT (0.1%)
-----------------
SOVEREIGN (0.1%)
2,000 CoBank ACB, 3.92%, (3 mo. LIBOR + 1.18%)(a),(c),(n) 1,210
----------
Total Preferred Stocks (cost: $62,432) 61,360
----------
Total Equity Securities (cost: $62,432) 61,360
----------
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
----------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (2.7%)
COMMERCIAL PAPER (2.3%)
$ 11,202 Centerpoint Energy, Inc.(a) 2.75% 2/06/2019 11,198
7,432 Centerpoint Energy, Inc.(a) 2.74 2/07/2019 7,428
9,012 CSLB Holdings, Inc.(a) 2.78 2/05/2019 9,009
10,000 CSLB Holdings, Inc.(a) 2.70 2/08/2019 9,995
12,375 CSLB Holdings, Inc.(a) 2.85 2/22/2019 12,354
12,898 E. I. du Pont(a) 2.71 2/26/2019 12,874
2,500 Eversource Energy(a) 2.69 2/05/2019 2,499
5,000 Kraft Food Group, Inc.(a) 2.67 2/01/2019 5,000
================================================================================
28 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
$ 724 Sherwin Williams Co.(a) 2.78% 2/05/2019 $ 724
9,400 Southern Co. Gas Capital Corp.(a) 2.80 2/21/2019 9,385
6,000 Spectra Energy Partners(a) 2.70 2/04/2019 5,999
----------
Total Commercial Paper (cost: $86,465) 86,465
----------
----------------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
----------------------------------------------------------------------------------------------------------------------
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.4%)
14,262,746 State Street Institutional Treasury Money Market Fund
Premier Class, 2.31%(s) (cost: $14,263) 14,263
----------
Total Money Market Instruments (cost: $100,728) 100,728
----------
SHORT-TERM INVESTMENT PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (1.1%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (1.1%)
38,945,438 HSBC U.S. Government Money Market Fund Class I, 2.38%(s) 38,946
----------
Total Short-Term Investment Purchased with Cash Collateral from
Securities Loaned (cost: $38,946) 38,946
----------
TOTAL INVESTMENTS (COST: $3,717,391) $3,711,555
==========
----------------------------------------------------------------------------------------------------------------------
UNREALIZED
NOTIONAL APPRECIATION/
NUMBER OF EXPIRATION AMOUNT CONTRACT (DEPRECIATION)
CONTRACTS DESCRIPTION DATE (000) VALUE (000) (000)
----------------------------------------------------------------------------------------------------------------------
FUTURES (2.2%)
LONG FUTURES
INTEREST RATE CONTRACTS
270 U.S. Treasury Bond 3/20/2019 USD 37,615 $39,606 $1,991
350 U.S. Treasury Note 3/20/2019 USD 41,747 42,864 1,117
------- ------
TOTAL LONG FUTURES $82,470 $3,108
------- ------
TOTAL FUTURES $82,470 $3,108
======= ======
================================================================================
PORTFOLIO OF INVESTMENTS | 29
================================================================================
------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------------------------------------------------------------------------------------------------------
Bonds:
Asset-Backed Securities $ - $ 63,291 $ - $ 63,291
Bank Loans - 64,593 - 64,593
Collateralized Loan Obligations - 61,941 - 61,941
Collateralized Mortgage Obligations - 1,663 - 1,663
Commercial Mortgage Securities - 94,725 - 94,725
Corporate Obligations - 2,014,332 - 2,014,332
Eurodollar and Yankee Obligations - 797,997 - 797,997
Foreign Government Obligations - 5,260 - 5,260
Municipal Obligations - 131,391 - 131,391
Preferred Bonds - 2,892 - 2,892
U.S. Government Agency Issues - 110,843 - 110,843
U.S. Treasury Securities 161,593 - - 161,593
Equity Securities:
Preferred Stocks 1,268 59,592 500 61,360
Money Market Instruments:
Commercial Paper - 86,465 - 86,465
Government & U.S. Treasury
Money Market Funds 14,263 - - 14,263
Short-Term Investment Purchased with
Cash Collateral from Securities Loaned:
Government & U.S. Treasury
Money Market Funds 38,946 - - 38,946
Futures(1) 3,108 - - 3,108
------------------------------------------------------------------------------------------------------------
Total $219,178 $3,494,985 $500 $3,714,663
------------------------------------------------------------------------------------------------------------
(1)Futures are valued at the unrealized appreciation/(depreciation) on the
investment.
Refer to the Portfolio of Investments for additional industry, country, or
geographic region classifications.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
At January 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
30 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A 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 24.5% of net assets at January 31,
2019.
o CATEGORIES AND DEFINITIONS
EURODOLLAR AND YANKEE OBLIGATIONS - Eurodollar obligations are U.S.
dollar-denominated instruments that are issued outside the U.S. capital
markets by foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions. Yankee obligations
are dollar-denominated instruments that are issued by foreign issuers in the
U.S. capital markets.
ASSET-BACKED AND COMMERCIAL MORTGAGE-BACKED SECURITIES - Asset-backed
securities represent a participation in, or are secured by and payable from,
a stream of payments generated by particular assets. Commercial
mortgage-backed securities reflect an interest in, and are secured by,
mortgage loans on commercial real property. These securities represent
ownership in a pool of loans and are divided into pieces (tranches) with
varying maturities. The stated final maturity of such securities represents
the date the final principal payment will be made for the last outstanding
loans in the pool. The weighted average life is the average time for
principal to be repaid, which is calculated by assuming prepayment rates of
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 31
================================================================================
the underlying loans. The weighted average life is likely to be
substantially shorter than the stated final maturity as a result of
scheduled principal payments and unscheduled principal prepayments. Stated
interest rates on commercial mortgage-backed securities may change slightly
over time as underlying mortgages paydown.
COLLATERALIZED LOAN OBLIGATIONS (CLOs) - Collateralized loan obligations are
securities issued by entities that are collateralized by a pool of loans.
CLOs are issued in multiple classes (tranches), and can be equity or debt
with specific adjustable or fixed interest rates, and varying maturities.
The cash flow from the underlying loans is used to pay off each tranche
separately within the debt, or senior tranches. Equity, or subordinated
tranches, typically are not paid a cash flow but do offer ownership in the
CLO itself in the event of a sale.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs) - Collateralized mortgage
obligations are debt obligations of a legal entity that are fully
collateralized by a portfolio of mortgages or mortgage-related securities.
CMOs are issued in multiple classes (tranches), with specific adjustable or
fixed interest rates, varying maturities, and must be fully retired no later
than its final distribution date. The cash flow from the underlying
mortgages is used to pay off each tranche separately. CMOs are designed to
provide investors with more predictable cash flows than regular mortgage
securities, but such cash flows can be difficult to predict because of the
effect of prepayments.
COMMERCIAL PAPER - Consists of short-term unsecured promissory notes with
maturities ranging from one to 270 days, issued mainly by corporations.
Commercial paper is usually purchased at a discount and matures at par
value; however, it also may be interest-bearing. Rate represents an
annualized yield at time of purchase or coupon rate, if applicable.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
CCD Community College District
CMT Constant Maturity Treasury
================================================================================
32 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
EDA Economic Development Authority
EDC Economic Development Corp.
LIBOR London Interbank Offered Rate
MTA Metropolitan Transportation Authority
PRE Pre-refunded to a date prior to maturity
REITS Real estate investment trusts - Dividend distributions from REITS
may be recorded as income and later characterized by the REIT at
the end of the fiscal year as capital gains or a return of
capital. Thus, the Fund will estimate the components of
distributions from these securities and revise when actual
distributions are known.
CREDIT ENHANCEMENTS - Adds the financial strength of the provider of the
enhancement to support the issuer's ability to repay the principal and
interest payments when due. The enhancement may be provided by a
high-quality bank, insurance company or other corporation, or a collateral
trust. The enhancements do not guarantee the market values of the
securities.
INS Principal and interest payments are insured by the name listed.
Although bond insurance reduces the risk of loss due to default
by an issuer, such bonds remain subject to the risk that value may
fluctuate for other reasons, and there is no assurance that the
insurance company will meet its obligations.
o SPECIFIC NOTES
(a) Restricted security that is not registered under the Securities Act of
1933. A resale of this security in the United States may occur in an
exempt transaction to a qualified institutional buyer as defined by Rule
144A, and as such has been deemed liquid by USAA Asset Management
Company under liquidity guidelines approved by USAA Mutual Funds Trust's
Board of Trustees, unless otherwise noted as illiquid.
(b) Security or a portion of the security purchased on a delayed-delivery
and/or when-issued basis.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 33
================================================================================
(c) Variable-rate security - interest rate is adjusted periodically. The
interest rate disclosed represents the rate at January 31, 2019.
(d) Bank loans (loans) - are not registered under the Securities Act of
1933. The loans contain certain restrictions on resale and cannot be
sold publicly. The stated interest rates represent the all in interest
rate of all contracts within the loan facilities. The interest rates are
adjusted periodically, and the rates disclosed represent the current
rate at January 31, 2019. The weighted average life of the loans are
likely to be shorter than the stated final maturity date due to
mandatory or optional prepayments. The loans are deemed liquid by USAA
Asset Management Company, under liquidity guidelines approved by USAA
Mutual Funds Trust's Board of Trustees, unless otherwise noted as
illiquid.
(e) The bank loan will settle after January 31, 2019, at which time the
interest rate will be determined.
(f) Stated interest rates may change slightly over time as underlying
mortgages paydown.
(g) Security is interest only. Interest-only commercial mortgage-backed
securities (CMBS IOs) represent the right to receive only the interest
payments on an underlying pool of commercial mortgage loans. The
purchase yield reflects an anticipated yield based upon interest rates
at the time of purchase and the estimated timing and amount of future
cash flows. Coupon rates after purchase vary from period to period. The
principal amount represents the notional amount of the underlying pool
on which current interest is calculated. CMBS IOs are backed by loans
that have various forms of prepayment protection, which include lock-out
provisions, yield maintenance provisions, and prepayment penalties. This
serves to moderate their prepayment risk. CMBS IOs are subject to
default-related prepayments that may have a negative impact on yield.
(h) The security, or a portion thereof, is segregated to cover the value of
open futures contracts at January 31, 2019.
(i) At January 31, 2019, the security, or a portion thereof, was segregated
to cover delayed-delivery and/or when-issued purchases.
================================================================================
34 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
(j) The security, or a portion thereof, was out on loan as of January 31,
2019.
(k) Security deemed illiquid by USAA Asset Management Company, under
liquidity guidelines approved by USAA Mutual Funds Trust's Board of
Trustees.
(l) Fixed to floating security that initially pays a fixed rate and converts
to a floating rate coupon at a specified date in the future. The rate
presented is a fixed rate.
(m) At January 31, 2019, the issuer was in default with respect to interest
and/or principal payments.
(n) Security is perpetual and has no final maturity date but may be subject
to calls at various dates in the future.
(o) U.S. government agency issues - Mortgage-backed securities issued by
certain U.S. Government Sponsored Enterprises (GSEs) such as the
Government National Mortgage Association (GNMA or Ginnie Mae) and
certain other U.S. government guaranteed securities are supported by the
full faith and credit of the U.S. government. Securities issued by
other GSEs, such as Federal Home Loan Mortgage Corporation (Freddie Mac
or FHLMC) and Federal National Mortgage Association (Fannie Mae or
FNMA), indicated with a "+", are supported only by the right of the GSE
to borrow from the U.S. Treasury, the discretionary authority of the
U.S. government to purchase the GSEs' obligations, or only by the
credit of the issuing agency, instrumentality, or corporation, and are
neither issued nor guaranteed by the U.S. Treasury. In September of
2008, the U.S. Treasury placed Fannie Mae and Freddie Mac under
conservatorship and appointed the Federal Housing Finance Agency (FHFA)
to act as conservator and oversee their daily operations. In addition,
the U.S. Treasury entered into purchase agreements with Fannie Mae and
Freddie Mac to provide them with capital in exchange for senior
preferred stock. While these arrangements are intended to ensure that
Fannie Mae and Freddie Mac can continue to meet their obligations, it is
possible that actions by the U.S. Treasury,
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 35
================================================================================
FHFA, or others could adversely impact the value of the Fund's
investments in securities issued by Fannie Mae and Freddie Mac.
(p) Securities with a value of $1,969,000 are segregated as collateral for
initial margin requirements on open futures contracts.
(q) Security was fair valued at January 31, 2019, by USAA Asset Management
Company in accordance with valuation procedures approved by USAA Mutual
Funds Trust's Board of Trustees. The total value of all such securities
was $500,000, which represented less than 0.1% of the Fund's net assets.
(r) Security was classified as Level 3.
(s) Rate represents the money market fund annualized seven-day yield at
January 31, 2019.
See accompanying notes to financial statements.
================================================================================
36 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (including
securities on loan of $39,019) (cost of $3,717,391) $3,711,555
Cash 58
Receivables:
Capital shares sold 2,139
USAA Asset Management Company (Note 7) 2
Interest 37,408
Securities sold 21,774
Other 29
Variation margin on futures contracts 3,110
----------
Total assets 3,776,075
----------
LIABILITIES
Payables:
Upon return of securities loaned 38,946
Securities purchased 43,420
Capital shares redeemed 2,577
Payable to broker 2,676
Dividends on capital shares 570
Accrued management fees 1,094
Accrued transfer agent's fees 85
Other accrued expenses and payables 335
----------
Total liabilities 89,703
----------
Net assets applicable to capital shares outstanding $3,686,372
==========
NET ASSETS CONSIST OF:
Paid-in capital $3,706,876
Accumulated loss (20,504)
----------
Net assets applicable to capital shares outstanding $3,686,372
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $1,866,235/180,796 capital shares
outstanding, no par value) $ 10.32
==========
Institutional Shares (net assets of $1,768,007/171,252 capital shares
outstanding, no par value) $ 10.32
==========
Adviser Shares (net assets of $47,033/4,562 capital shares
outstanding, no par value) $ 10.31
==========
R6 Shares (net assets of $5,097/494 capital shares outstanding,
no par value) $ 10.33
==========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 37
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 1,930
Interest 79,813
Securities lending (net) 154
--------
Total income 81,897
--------
EXPENSES
Management fees 6,697
Administration and servicing fees:
Fund Shares 1,415
Institutional Shares 918
Adviser Shares 37
R6 Shares 1
Transfer agent's fees:
Fund Shares 1,087
Institutional Shares 918
Adviser Shares 28
Distribution and service fees (Note 7):
Adviser Shares 63
Custody and accounting fees:
Fund Shares 113
Institutional Shares 116
Adviser Shares 3
Postage:
Fund Shares 62
Institutional Shares 36
Adviser Shares 3
Shareholder reporting fees:
Fund Shares 36
Institutional Shares 8
Adviser Shares 1
Trustees' fees 17
================================================================================
38 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
Registration fees:
Fund Shares $ 38
Institutional Shares 38
Adviser Shares 13
R6 Shares 10
Professional fees 69
Other 32
--------
Total expenses 11,759
--------
Expenses reimbursed:
R6 Shares (11)
--------
Net expenses 11,748
--------
NET INVESTMENT INCOME 70,149
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FOREIGN CURRENCY AND FUTURES CONTRACTS
Net realized gain (loss) on:
Unaffiliated transactions (12,392)
Affiliated transactions (Note 4) (1,640)
Foreign currency transactions 3
Futures transactions (1,129)
Change in net unrealized appreciation/(depreciation) of:
Investments 7,752
Foreign currency translations (1)
Futures contracts 3,994
--------
Net realized and unrealized loss (3,413)
--------
Increase in net assets resulting from operations $ 66,736
========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 39
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited), and year ended July
31, 2018
---------------------------------------------------------------------------------------------------
1/31/2019 7/31/2018
---------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 70,149 $ 141,526
Net realized gain (loss) on investments (14,032) 3,787
Net realized gain (loss) on foreign currency transactions 3 (9)
Net realized gain (loss) on futures transactions (1,129) 480
Change in net unrealized appreciation/(depreciation) of:
Investments 7,752 (146,689)
Foreign currency translations (1) -
Futures contracts 3,994 (886)
-------------------------
Increase (decrease) in net assets resulting from operations 66,736 (1,791)
-------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (34,793) (68,358)
Institutional Shares (34,421) (70,776)
Adviser Shares (844) (1,944)
R6 Shares (100) (190)
-------------------------
Distributions to shareholders (70,158) (141,268)
-------------------------
NET DECREASE IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (NOTE 6)
Fund Shares (40,164) 29,056
Institutional Shares (194,576) (14,756)
Adviser Shares (6,190) (18,998)
R6 Shares 104 17
-------------------------
Total net decrease in net assets from
capital share transactions (240,826) (4,681)
-------------------------
Net decrease in net assets (244,248) (147,740)
NET ASSETS
Beginning of period 3,930,620 4,078,360
-------------------------
End of period $3,686,372 $3,930,620
=========================
See accompanying notes to financial statements.
================================================================================
40 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
January 31, 2019 (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 47 separate funds.
The USAA Intermediate-Term Bond Fund (the Fund) qualifies as a registered
investment company under Accounting Standards Codification Topic 946. The
information presented in this semiannual report pertains only to the Fund, which
is classified as diversified under the 1940 Act. The Fund's investment objective
is to seek maximum current income without undue risk to principal.
The Fund consists of four classes of shares: Intermediate-Term Bond Fund Shares
(Fund Shares), Intermediate-Term Bond Fund Institutional Shares (Institutional
Shares), Intermediate-Term Bond Fund Adviser Shares (Adviser Shares), and
Intermediate-Term Bond Fund R6 Shares (R6 Shares). Each class of shares has
equal rights to assets and earnings, except that each class bears certain
class-related expenses specific to the particular class. These expenses include
administration and servicing fees, transfer agent fees, postage, shareholder
reporting fees, distribution and service (12b-1) fees, and certain registration
and custodian fees. Expenses not attributable to a specific class, income, and
realized gains or losses on investments are allocated to each class of shares
based on each class' relative net assets. Each class has exclusive voting rights
on matters related solely to that class and separate voting rights on matters
that relate to all classes. The Institutional Shares are 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 are
================================================================================
NOTES TO FINANCIAL STATEMENTS | 41
================================================================================
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).
The Adviser Shares permit investors to purchase shares through financial
intermediaries, including banks, broker-dealers, insurance companies, investment
advisers, plan sponsors, and financial professionals that provide various
administrative and distribution services. The R6 Shares are available for
investment by participants in employer-sponsored retirement plans where a
financial intermediary provides retirement recordkeeping services to plan
participants and to endowment funds and foundations.
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of USAA Asset Management Company (AMCO or Manager), the investment
adviser to the Fund, and USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services (SAS), the transfer agent to the Fund, announced that AMCO and
SAS would be acquired by Victory Capital Holdings, Inc. (Victory), a global
investment management firm headquartered in Cleveland, Ohio (the Transaction).
The closing of the Transaction is expected to be completed during the second
quarter of 2019, pending satisfaction of certain closing conditions and
approvals, including certain approvals of the Fund's Board of Trustees and of
the Fund's shareholders at a special shareholder meeting to be held on April 18,
2019. The Transaction is not expected to result in any material changes to the
Fund's investment objectives and principal investment strategies.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Valuation and Liquidity 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.
The Fund utilizes 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.
================================================================================
42 | USAA INTERMEDIATE-TERM BOND 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. 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 ask prices or
the last sales price to value a security when, in the Service's judgment,
these prices are readily available and are representative of the
security's market value. For many securities, such prices are not readily
available. The Service generally prices those securities based on methods
which 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. Generally,
debt securities are categorized in Level 2 of the fair value hierarchy;
however, to the extent the valuations include significant unobservable
inputs, the securities would be categorized in Level 3.
2. Equity securities, including exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange or
the 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. Securities traded primarily on foreign securities exchanges or
markets are valued at the last quoted sale price, or the most recently
determined official closing price calculated according to local market
convention, available at the time the Fund is valued. If no last sale or
official closing price is reported or available, the average of the bid
and ask prices generally is used. Actively traded equity securities
listed on a domestic exchange generally are categorized in Level 1 of the
fair value hierarchy. Certain preferred and equity securities traded in
inactive markets generally are categorized in Level 2 of the fair value
hierarchy.
3. 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 many cases,
events affecting the values of foreign securities that
================================================================================
NOTES TO FINANCIAL STATEMENTS | 43
================================================================================
occur between the time of their last quoted sale or official closing
price and the close of normal trading on the NYSE on a day the Fund's NAV
is calculated will not need to be reflected in the value of the Fund's
foreign securities. However, the Manager will monitor for events that
would materially affect the value of the Fund's foreign securities and
the Committee will consider such available information that it deems
relevant and will determine a fair value for the affected foreign
securities in accordance with valuation procedures. In addition,
information from an external vendor or other sources may be used to
adjust the foreign market closing prices of foreign equity securities to
reflect what the Committee believes to be the fair value of the
securities as of the close of the NYSE. Fair valuation of affected
foreign equity securities may occur frequently based on an assessment
that events which occur on a fairly regular basis (such as U.S. market
movements) are significant. Such securities are categorized in Level 2 of
the fair value hierarchy.
4. Investments in open-end investment companies, commingled, or other funds,
other than ETFs, are valued at their NAV at the end of each business day
and are categorized in Level 1 of the fair value hierarchy.
5. Short-term debt securities with original or remaining maturities of 60
days or less may be valued at amortized cost, provided that amortized
cost represents the fair value of such securities.
6. Repurchase agreements are valued at cost.
7. Futures are valued at the settlement price at the close of market on the
principal exchange on which they are traded or, in the absence of any
transactions that day, the settlement price on the prior trading date if
it is within the spread between the closing bid and ask price closest to
the last reported sale price.
8. 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 price 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.
================================================================================
44 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
9. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event has
been recognized in relation to a security or class of securities, the
securities are valued in good faith by the Committee in accordance with
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, other pricing services, 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, evaluation of credit
quality, 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 indexes.
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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 45
================================================================================
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
transaction. The Fund's derivative agreements held at January 31, 2019, did
not include master netting provisions.
FUTURES CONTRACTS - The Fund is subject to equity price risk, interest rate
risk, and foreign currency exchange rate risk in the normal course of
pursuing its investment objectives. The Fund may use futures contracts to
gain exposure to, or hedge against, changes in the value of equities,
interest rates, or foreign currencies. A futures contract represents a
commitment for the future purchase or sale of an asset at a specified price
on a specified date. Upon entering into such contracts, the Fund is required
to deposit with the broker in either cash or securities an initial margin in
an amount equal to a certain percentage of the contract amount. Subsequent
payments (variation margin) are made or received by the Fund each day,
depending on the daily fluctuations in the value of the contract, and are
recorded for financial statement purposes as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed. Upon entering into such
contracts, the Fund bears the risk of interest or exchange rates or
securities prices moving unexpectedly in an
================================================================================
46 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
unfavorable direction, in which case, the Fund may not achieve the
anticipated benefits of the futures contracts.
FAIR VALUES OF DERIVATIVE INSTRUMENTS AS OF JANUARY 31, 2019*
(IN THOUSANDS)
ASSET DERIVATIVES
--------------------------------------------------------------------------------------------------
STATEMENT OF
DERIVATIVES NOT ASSETS AND FOREIGN
ACCOUNTED FOR AS LIABILITIES INTEREST RATE EQUITY EXCHANGE
HEDGING INSTRUMENTS LOCATION CONTRACTS CONTRACTS CONTRACTS TOTAL
--------------------------------------------------------------------------------------------------
USAA Accumulated $3,108** $- $- $3,108
Intermediate-Term loss
Bond Fund
* For open derivative instruments as of January 31, 2019, see the Portfolio
of Investments.
** Includes cumulative appreciation/(depreciation) of futures as reported on
the Portfolio of Investments. Only the variation margin from the last
business day of the reporting period is reported within the Statement of
Assets and Liabilities.
THE EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF OPERATIONS FOR THE
SIX-MONTH PERIOD ENDED JANUARY 31, 2019 (IN THOUSANDS)
NET REALIZED GAIN (LOSS)
--------------------------------------------------------------------------------------------------
DERIVATIVES NOT STATEMENT OF FOREIGN
ACCOUNTED FOR AS OPERATIONS INTEREST RATE EQUITY EXCHANGE
HEDGING INSTRUMENTS LOCATION CONTRACTS CONTRACTS CONTRACTS TOTAL
--------------------------------------------------------------------------------------------------
USAA Net realized $(1,129) $- $- $(1,129)
Intermediate-Term gain (loss)
Bond Fund on Futures
transactions
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
--------------------------------------------------------------------------------------------------
DERIVATIVES NOT STATEMENT OF FOREIGN
ACCOUNTED FOR AS OPERATIONS INTEREST RATE EQUITY EXCHANGE
HEDGING INSTRUMENTS LOCATION CONTRACTS CONTRACTS CONTRACTS TOTAL
--------------------------------------------------------------------------------------------------
USAA Change in net $3,994 $- $- $3,994
Intermediate-Term unrealized
Bond Fund appreciation/
(depreciation)
of Futures
contracts
D. INVESTMENTS IN SECURITIES - Securities transactions are accounted for as of
the date the securities are purchased or sold (trade date). Gains or losses
================================================================================
NOTES TO FINANCIAL STATEMENTS | 47
================================================================================
from sales of investment securities are computed on the identified cost
basis. Dividend income, less foreign taxes, if any, is recorded on the ex-
dividend date. If the ex-dividend date has passed, certain dividends from
foreign securities are recorded upon notification. Interest income is
recorded daily on the accrual basis. Premiums and discounts 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.
E. FEDERAL TAXES - The Fund's policy is to comply with the requirements of the
Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its taxable
income and net capital gains, if any, to its shareholders. Therefore, no
federal income tax provision is required.
For the six-month period ended January 31, 2019, 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 the Fund's tax basis to determine if
adjustments to this conclusion are necessary. The statute of limitations on
the Fund's tax return filings generally remain open for the three preceding
fiscal reporting year ends and remain subject to examination by the Internal
Revenue Service and state taxing authorities.
F. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the exchange
rate obtained from an independent pricing service on the respective dates
of such transactions.
2. Market value of securities, other assets, and liabilities at the exchange
rate obtained from an independent pricing service on a daily basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held.
================================================================================
48 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
Such fluctuations are included with the net realized and unrealized gain or
loss from investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the amounts received. At
the end of the Fund's fiscal year, net realized foreign currency
gains/losses are reclassified from accumulated net realized gains/losses to
accumulated undistributed net investment income on the Statement of Assets
and Liabilities, as such amounts are treated as ordinary income/loss for
federal income tax purposes. Net unrealized foreign currency exchange
gains/losses arise from changes in the value of assets and liabilities,
other than investments in securities, resulting from changes in the exchange
rate.
G. SECURITIES PURCHASED ON A DELAYED-DELIVERY OR WHEN-ISSUED BASIS - Delivery
and payment for securities that have been purchased by the Fund on a
delayed-delivery or when-issued basis or for delayed draws on loans can take
place a month or more after the trade date. During the period prior to
settlement, these securities do not earn interest, are subject to market
fluctuation, and may increase or decrease in value prior to their delivery.
The Fund receives a commitment fee for delayed draws on loans. The Fund
maintains segregated assets with a market value equal to or greater than the
amount of its purchase commitments. The purchase of securities on a
delayed-delivery or when-issued basis and delayed-draw loan commitments may
increase the volatility of the Fund's NAV to the extent that the Fund makes
such purchases and commitments while remaining substantially fully invested.
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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 49
================================================================================
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, along with other funds of the Trust and USAA ETF Trust
(together, the Trusts), 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 provide temporary or emergency
cash needs, including redemption requests that might otherwise require the
untimely disposition of securities. Subject to availability (including usage of
the facility by other funds of the Trusts), the Fund may borrow from CAPCO an
amount up to 5% of the Fund's total assets at an interest rate based on the
London Interbank Offered Rate (LIBOR), plus 100.0 basis points.
The Trusts are also assessed facility fees by CAPCO in the amount of 14.0 basis
points of the amount of the committed loan agreement. Prior to September 30,
2018, the maximum annual facility fee was 13.0 basis points of the amount of the
committed loan agreement. The facility fees are allocated among the funds of the
Trusts based on their respective average daily net assets for the period.
The Trusts may request an optional increase of the committed loan agreement from
$500 million up to $750 million. If the Trusts increase the committed loan
agreement, the assessed facility fee on the amount of the additional commitment
will be 15.0 basis points.
For the six-month period ended January 31, 2019, the Fund paid CAPCO facility
fees of $15,000, which represents 4.6% of the total fees paid to CAPCO by the
funds of the Trusts. The Fund had no borrowings under this agreement during the
six-month period ended January 31, 2019.
(3) DISTRIBUTIONS
The tax basis of distributions and any accumulated undistributed net investment
income will be determined as of the Fund's tax year-end of July 31, 2019, in
accordance with applicable federal tax law.
================================================================================
50 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. Distributions of realized gains from security transactions
not offset by capital losses are made annually in the succeeding fiscal year or
as otherwise required to avoid the payment of federal taxes.
At July 31, 2018, the Fund had net capital loss carryforwards of $3,603,000, for
federal income tax purposes. 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.
CAPITAL LOSS CARRYFORWARDS
---------------------------------------
TAX CHARACTER
---------------------------------------
(NO EXPIRATION) BALANCE
--------------- ----------
Short-Term $ 885,000
Long-Term 2,718,000
----------
Total $3,603,000
==========
As of January 31, 2019, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as the cost reported
in the financial statements. The net unrealized appreciation/ (depreciation) on
investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
FUND APPRECIATION DEPRECIATION (DEPRECIATION)
---------------------------------------------------------------------------------------
USAA Intermediate-Term Bond Fund $60,873,000 $(66,709,000) $(5,836,000)
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended January 31, 2019, were
$483,476,000 and $741,868,000, respectively.
In accordance with affiliated transaction procedures approved by the Board,
purchases and sales of security transactions were executed between the Fund and
affiliated USAA Funds at the then-current market price with no brokerage
commissions incurred. The affiliated transactions executed by the
================================================================================
NOTES TO FINANCIAL STATEMENTS | 51
================================================================================
Fund, including short-term securities, during the six-month period ended January
31, 2019 were as follows:
PURCHASES SALES NET REALIZED LOSS
----------------------------------------------------------------------------------
$0 $20,389,000 $(1,640,000)
(5) SECURITIES LENDING
The Fund, through a securities lending agreement with Citibank, N.A.
(Citibank), may lend its securities to qualified financial institutions, such as
certain broker-dealers, to earn additional income, net of income retained by
Citibank. The borrowers are required to secure their loans continuously with
collateral in an amount at least equal to 102% of the fair value of domestic
securities and foreign government securities loaned and 105% of the fair value
of foreign securities and all other securities loaned. Collateral may be cash,
U.S. government securities, or other securities as permitted by SEC guidelines.
Cash collateral may be invested in high-quality short-term investments.
Collateral requirements are determined daily based on the value of the Fund's
securities on loan as of the end of the prior business day. Loans are terminable
upon demand and the borrower must return the loaned securities within the lesser
of one standard settlement period or five business days. Risks relating to
securities-lending transactions include that the borrower may not provide
additional collateral when required or return the securities when due, and that
the value of the short-term investments will be less than the amount of cash
collateral required to be returned to the borrower. The Fund's agreement with
Citibank does not include master netting provisions. Non-cash collateral
received by the Fund may not be sold or re-pledged except to satisfy borrower
default. Cash collateral is listed in the Fund's Portfolio of Investments and
Financial Statements while non-cash collateral is not included.
At January 31, 2019, the Fund's value of outstanding securities on loan and the
value of collateral are as follows:
VALUE OF SECURITIES
ON LOAN NON-CASH COLLATERAL CASH COLLATERAL
-----------------------------------------------------------------------------------
$39,019,000 $- $38,946,000
(6) CAPITAL SHARE TRANSACTIONS
At January 31, 2019, there were an unlimited number of shares of capital stock
at no par value authorized for the Fund.
================================================================================
52 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
Capital share transactions for the Institutional Shares resulted from purchases
and sales by the affiliated USAA fund-of-funds as well as other persons or legal
entities that the Fund may approve from time to time. Capital share
transactions for all classes were as follows, in thousands:
SIX-MONTH
PERIOD ENDED YEAR ENDED
JANUARY 31, 2019 JULY 31, 2018
--------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------
FUND SHARES:
Shares sold 15,687 $ 160,751 39,876 $ 420,769
Shares issued from
reinvested dividends 3,258 33,386 6,209 65,347
Shares redeemed (22,894) (234,301) (43,469) (457,060)
-------------------------------------------------
Net increase (decrease) from
capital share transactions (3,949) $ (40,164) 2,616 $ 29,056
=================================================
INSTITUTIONAL SHARES:
Shares sold 10,035 $ 102,815 36,762 $ 386,878
Shares issued from
reinvested dividends 3,179 32,582 6,331 66,622
Shares redeemed (32,141) (329,973) (44,416) (468,256)
-------------------------------------------------
Net decrease from capital
share transactions (18,927) $(194,576) (1,323) $ (14,756)
=================================================
ADVISER SHARES:
Shares sold 76 $ 778 389 $ 4,113
Shares issued from
reinvested dividends 81 822 180 1,894
Shares redeemed (763) (7,790) (2,359) (25,005)
-------------------------------------------------
Net decrease from capital
share transactions (606) $ (6,190) (1,790) $ (18,998)
=================================================
R6 SHARES:
Shares sold 12 $ 120 3 $ 32
Shares issued from
reinvested dividends -* -* -* -*
Shares redeemed (1) (16) (1) (15)
-------------------------------------------------
Net increase from capital
share transactions 11 $ 104 2 $ 17
=================================================
*Represents less than 500 shares or $500.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 53
================================================================================
(7) TRANSACTIONS WITH MANAGER
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 the Fund's assets, subject to the
authority of and supervision by the Board. The Manager 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 all or a portion of the
Fund's assets. For the six-month period ended January 31, 2019, the Fund had no
subadviser(s).
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee, accrued daily and paid monthly, is
computed as a percentage of the Fund's average daily net assets at annualized
rates of 0.50% of the first $50 million of average daily net assets, 0.40% of
that portion of average daily net assets over $50 million but not over $100
million, and 0.30% of that portion of average daily net assets over $100
million. For the six-month period ended January 31, 2019, the Fund's effective
annualized base fee was 0.30% of the Fund's average daily net assets for the
same period.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Core Plus Bond Funds Index. The Lipper Core Plus Bond
Funds Index tracks the total return performance of funds within the Lipper Core
Plus Bond Funds category.
For the Fund Shares and Institutional Shares, the performance period consists of
the current month plus the previous 35 months. The performance period for the R6
Shares commenced on December 1, 2016, and includes the
================================================================================
54 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
performance of the Fund Shares for periods prior to December 1, 2016. The
following table is utilized to determine the extent of the performance
adjustment:
OVER/UNDER PERFORMANCE
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
-------------------------------------------------------------------
+/- 20 to 50 +/- 4
+/- 51 to 100 +/- 5
+/- 101 and greater +/- 6
(1)Based on the difference between average annual performance of the
relevant share class of the Fund and its relevant index, rounded to the
nearest basis point. Average daily net assets of the share class are
calculated over a rolling 36-month period.
Each class' annual performance adjustment rate is multiplied by the average
daily net assets of each respective class over the entire performance period,
which is then multiplied by a fraction, the numerator of which is the number of
days in the month and the denominator of which is 365 (366 in leap years). The
resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper Index over that period, even if the class had overall
negative returns during the performance period.
For the six-month period ended January 31, 2019, the Fund incurred management
fees, paid or payable to the Manager, of $6,697,000, which included a
performance adjustment for the Fund Shares, Institutional Shares, Adviser
Shares, and R6 Shares of $453,000, $488,000, $16,000, and $1,000, respectively.
For the Fund Shares, Institutional Shares, Adviser Shares, and R6 Shares the
performance adjustments were 0.05%, 0.05%, 0.06%, and 0.03%, respectively.
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 at an annualized rate of 0.15% of average
daily net assets of the Fund Shares and Adviser Shares,
================================================================================
NOTES TO FINANCIAL STATEMENTS | 55
================================================================================
0.10% of average daily net assets of the Institutional Shares, and 0.05% of
average daily net assets of the R6 Shares. For the six-month period ended
January 31, 2019, the Fund Shares, Institutional Shares, Adviser Shares, and R6
Shares incurred administration and servicing fees, paid or payable to the
Manager, of $1,415,000, $918,000, $37,000, and $1,000, respectively.
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 January 31, 2019, the Fund reimbursed the Manager $1,000 for these
compliance and legal services. These expenses are included in the professional
fees on the Fund's Statement of Operations.
EXPENSE LIMITATION - The Manager agreed, through November 30, 2019, to limit the
total annual operating expenses of the R6 Shares to 0.39% of its average annual
net assets, excluding extraordinary expenses and before reductions of any
expenses paid indirectly, and to reimburse the R6 Shares for all expenses in
excess of that amount. This expense limitation arrangement may not be changed or
terminated through November 30, 2019, without approval of the Board, and may be
changed or terminated by the Manager at any time after that date. For the
six-month period ended January 31, 2019, the R6 Shares incurred reimbursable
expenses of $11,000, of which $2,000 was receivable from the Manager.
TRANSFER AGENT'S FEES - SAS, an affiliate of the Manager, provides transfer
agent services to the Fund Shares and Adviser Shares based on an annual charge
of $25.50 per shareholder account plus out-of-pocket expenses. SAS pays a
portion of these fees to certain intermediaries for administration and servicing
of accounts that are held with such intermediaries. Transfer agent's fees for
Institutional Shares and R6 Shares are paid monthly based on a fee accrued daily
at an annualized rate of 0.10% of the Institutional Shares' and 0.01% of the R6
Shares' average daily net assets, plus out-of-pocket expenses. For the six-
month period ended January 31, 2019, the Fund Shares, Institutional Shares,
Adviser Shares, and R6 Shares incurred transfer agent's fees, paid or payable to
SAS, of $1,087,000, $918,000, $28,000, and less than $500, respectively.
================================================================================
56 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
DISTRIBUTION AND SERVICE (12b-1) FEES - The Fund has adopted a plan pursuant to
Rule 12b-1 under the 1940 Act with respect to the Adviser Shares. Under the
plan, the Adviser Shares pay fees to USAA Investment Management Company (IMCO),
the distributor, for distribution and shareholder services. IMCO pays all or a
portion of such fees to intermediaries that make the Adviser Shares available
for investment by their customers. The fee is accrued daily and paid monthly at
an annual rate of 0.25% of the Adviser Shares' average daily net assets. Adviser
Shares are offered and sold without imposition of an initial sales charge or a
contingent deferred sales charge. For the six-month period ended January 31,
2019, the Adviser Shares incurred distribution and service (12b-1) fees of
$63,000.
UNDERWRITING SERVICES - IMCO provides exclusive underwriting and distribution of
the Fund's shares on a continuing best-efforts basis and receives no fee or
other compensation for these services, but may receive 12b-1 fees as described
above, with respect to Adviser Shares.
(8) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other USAA Funds and
is one of 16 USAA mutual funds in which the affiliated USAA fund-of-funds
invest. The USAA fund-of-funds do not invest in the underlying funds for the
purpose of exercising management or control, and the affiliated fund-of-funds'
annual or semiannual reports may be viewed at usaa.com. As of January 31, 2019,
the USAA fund-of-funds owned the following percentages of the total outstanding
shares of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
------------------------------------------------------------------------------
Cornerstone Conservative 0.8
Target Retirement 2020 0.0*
Target Retirement 2030 0.0*
Target Retirement 2040 0.0*
Target Retirement 2050 0.0*
Target Retirement 2060 0.0*
*Represents less than 0.1%.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 57
================================================================================
The Manager is indirectly wholly owned by USAA, a large, diversified financial
services institution. At January 31, 2019, USAA and its affiliates owned 482,000
R6 Shares, which represents 97.7% of the R6 Shares outstanding, and 0.1% of the
Fund's total outstanding shares.
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
(9) UPCOMING REGULATORY MATTERS
In October 2016, the U.S. Securities and Exchange Commission (SEC) issued Final
Rule Release No. 33-10233, INVESTMENT COMPANY LIQUIDITY RISK MANAGEMENT PROGRAMS
(Liquidity Rule). The Liquidity Rule requires funds to establish a liquidity
risk management program and enhances disclosures regarding funds' liquidity. The
requirements to implement a liquidity risk management program and establish a
15% illiquid investment limit became effective December 1, 2018. However, in
February 2018, the SEC issued Release No. IC-33010, INVESTMENT COMPANY LIQUIDITY
RISK MANAGEMENT PROGRAMS; COMMISSION GUIDANCE FOR IN-KIND ETFs, which delayed
certain requirements related to liquidity classification, highly liquid
investment minimums, and board approval of the liquidity risk management
programs to June 1, 2019. The Manager continues to evaluate the impact of this
rule on the Fund's financial statements and various filings.
(10) RECENTLY ADOPTED ACCOUNTING STANDARDS
In August 2018, the SEC adopted amendments to Regulation S-X for investment
companies governing the form and content of financial statements. The amendments
to Regulation S-X took effect on November 5, 2018, and the financial statements
have been modified accordingly, for the current and prior periods.
ASU 2018-13, FAIR VALUE MEASUREMENT
-----------------------------------
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820).
The amendments in the ASU impact disclosure requirements for fair value
measurement. ASU 2018-13 is effective for fiscal years beginning after December
15, 2019. Early adoption is permitted and can include the
================================================================================
58 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
entire standard or certain provisions that exclude or amend disclosures.
Management has elected to early adopt ASU 2018-13 effective with the current
reporting period. The adoption of ASU 2018-13 guidance is limited to changes in
the Fund's notes to financial statement disclosures regarding valuation method,
fair value, and transfers between levels of the fair value hierarchy.
ASU 2017-08, PREMIUM AMORTIZATION OF PURCHASED CALLABLE DEBT SECURITIES
-----------------------------------------------------------------------
In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2017-08, Premium Amortization of Purchased Callable Debt
Securities. The amendments in the ASU shorten the premium amortization period on
a purchased callable debt security from the security's contractual life to the
earliest call date. ASU 2017-08 became effective for funds with fiscal years
beginning after December 15, 2018. The Manager has determined the adoption of
this standard has no impact on the financial statements and reporting
disclosures of the Fund.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 59
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
----------------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
----------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 10.33 $ 10.70 $ 10.71 $ 10.58 $ 10.96 $ 10.75
----------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .19 .37 .38 .42 .43 .46
Net realized and
unrealized gain (loss) (.01) (.37) (.01) .14 (.36) .21
----------------------------------------------------------------------------------------
Total from investment
operations .18 - .37 .56 .07 .67
----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.19) (.37) (.38) (.42) (.43) (.46)
Realized capital gains - - - (.01) (.02) (.00)(a)
----------------------------------------------------------------------------------------
Total distributions (.19) (.37) (.38) (.43) (.45) (.46)
----------------------------------------------------------------------------------------
Net asset value at
end of period $ 10.32 $ 10.33 $ 10.70 $ 10.71 $ 10.58 $ 10.96
========================================================================================
Total return (%)* 1.77 (.03) 3.52 5.55 .58 6.37
Net assets at
end of period (000) $1,866,235 $1,907,941 $1,949,102 $1,812,716 $2,079,610 $1,926,334
Ratios to average daily
net assets:**
Expenses (%)(b) .65(c) .63 .63 .62 .68 .68(d)
Expenses, excluding
reimbursements (%)(b) .65(c) .63 .63 .62 .68 .70
Net investment
income (%) 3.69(c) 3.50 3.57 4.08 3.96 4.21
Portfolio turnover (%) 13 15 13 18 13 8
* 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 January 31, 2019, average daily net assets
were $1,870,516,000.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) Prior to December 1, 2013, the Manager had voluntarily agreed to limit the
annual expenses of the Fund Shares to 0.65% of the Fund Shares' average
daily net assets.
================================================================================
60 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
INSTITUTIONAL SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
----------------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
----------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 10.33 $ 10.70 $ 10.72 $ 10.58 $ 10.96 $ 10.75
----------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .19 .38 .39 .43 .44 .47
Net realized and
unrealized gain (loss) (.01) (.37) (.02) .15 (.36) .21
----------------------------------------------------------------------------------------
Total from investment
operations .18 .01 .37 .58 .08 .68
----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.19) (.38) (.39) (.43) (.44) (.47)
Realized capital gains - - - (.01) (.02) (.00)(a)
----------------------------------------------------------------------------------------
Total distributions (.19) (.38) (.39) (.44) (.46) (.47)
----------------------------------------------------------------------------------------
Net asset value at
end of period $ 10.32 $ 10.33 $ 10.70 $ 10.72 $ 10.58 $ 10.96
========================================================================================
Total return (%)* 1.81 .04 3.51 5.72 .68 6.49
Net assets at end
of period (000) $1,768,007 $1,964,377 $2,049,723 $1,771,357 $1,280,804 $1,284,768
Ratios to average
daily net assets:**
Expenses (%)(b) .58(c) .56 .56 .54 .58 .56
Net investment
income (%) 3.75(c) 3.57 3.64 4.13 4.07 4.32
Portfolio turnover (%) 13 15 13 18 13 8
* 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 January 31, 2019, average daily net assets
were $1,818,757,000.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
FINANCIAL HIGHLIGHTS | 61
================================================================================
ADVISER SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
-------------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
-------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 10.32 $ 10.69 $ 10.70 $ 10.58 $ 10.95 $ 10.74
-------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .17 .34 .35 .40 .41 .39(a)
Net realized and
unrealized gain (loss) (.01) (.37) (.01) .13 (.35) .25(a)
-------------------------------------------------------------------------------------
Total from investment
operations .16 (.03) .34 .53 .06 .64(a)
-------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.17) (.34) (.35) (.40) (.41) (.43)
Realized capital gains - - - (.01) (.02) (.00)(b)
-------------------------------------------------------------------------------------
Total distributions (.17) (.34) (.35) (.41) (.43) (.43)
-------------------------------------------------------------------------------------
Net asset value at
end of period $ 10.31 $ 10.32 $ 10.69 $ 10.70 $ 10.58 $ 10.95
=====================================================================================
Total return (%)* 1.61 (.31) 3.28 5.19 .46 6.08
Net assets at end
of period (000) $47,033 $53,308 $74,377 $98,835 $118,753 $42,799
Ratios to average
daily net assets:**
Expenses (%)(c) .97(d) .90 .87 .86 .89(e) .94
Expenses, excluding
reimbursements (%)(c) .97(d) .90 .87 .86 .89 .94
Net investment
income (%) 3.38(d) 3.22 3.44 3.85 3.74 3.83
Portfolio turnover (%) 13 15 13 18 13 8
* 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 January 31, 2019, average daily net assets
were $49,576,000.
(a) Calculated using average shares.
(b) Represents less than $0.01 per share.
(c) Does not include acquired fund fees, if any.
(d) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(e) Prior to December 1, 2014, the Manager had voluntarily agreed to limit the
annual expenses of the Adviser Shares to 0.95% of the Adviser Shares'
average daily net assets.
================================================================================
62 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
R6 SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED YEAR ENDED PERIOD ENDED
JANUARY 31, JULY 31, JULY 31,
------------------------------------------------------
2019 2018 2017***
------------------------------------------------------
Net asset value at beginning of period $10.33 $10.71 $10.38
-------------------------------------------------
Income (loss) from investment operations:
Net investment income .20 .39 .26
Net realized and unrealized gain (loss) - (.38) .33
-------------------------------------------------
Total from investment operations .20 .01 .59
-------------------------------------------------
Less distributions from:
Net investment income (.20) (.39) (.26)
-------------------------------------------------
Net asset value at end of period $10.33 $10.33 $10.71
=================================================
Total return (%)* 2.01 .12 5.79
Net assets at end of period (000) $5,097 $4,994 $5,158
Ratios to average daily net assets:**
Expenses (%)(a) .39(b) .39 .39(b)
Expenses, excluding reimbursements (%)(a) .83(b) .80 1.07(b)
Net investment income (%) 3.95(b) 3.74 3.78(b)
Portfolio turnover (%) 13 15 13
* 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 January 31, 2019, average daily net assets
were $4,998,000.
*** R6 Shares commenced operations on December 1, 2016.
(a) Does not include acquired fund fees, if any.
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
FINANCIAL HIGHLIGHTS | 63
================================================================================
EXPENSE EXAMPLE
January 31, 2019 (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, distribution and service
(12b-1) 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 August 1, 2018, through
January 31, 2019.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table 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 for your share
class in the "actual" 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 line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class 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
================================================================================
64 | USAA INTERMEDIATE-TERM BOND 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 line labeled "hypothetical"
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 AUGUST 1, 2018 -
AUGUST 1, 2018 JANUARY 31, 2019 JANUARY 31, 2019
--------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,017.70 $3.31
Hypothetical
(5% return before expenses) 1,000.00 1,021.93 3.31
INSTITUTIONAL SHARES
Actual 1,000.00 1,018.10 2.95
Hypothetical
(5% return before expenses) 1,000.00 1,022.28 2.96
ADVISER SHARES
Actual 1,000.00 1,016.10 4.93
Hypothetical
(5% return before expenses) 1,000.00 1,020.32 4.94
R6 SHARES
Actual 1,000.00 1,020.10 1.99
Hypothetical
(5% return before expenses) 1,000.00 1,023.24 1.99
*Expenses are equal to the annualized expense ratio of 0.65% for Fund Shares,
0.58% for Institutional Shares, 0.97% for Adviser Shares, and 0.39% for R6
Shares, which are net of any reimbursements and expenses paid indirectly,
multiplied by the average account value over the period, multiplied by 184
days/365 days for Fund Shares, Institutional Shares, Adviser Shares, and R6
Shares (to reflect the one-half-year period). The Fund's actual ending account
values are based on its actual total returns of 1.77% for Fund Shares, 1.81%
for Institutional Shares, 1.61% for Adviser Shares, and 2.01% for R6 Shares,
for the six-month period of August 1, 2018, through January 31, 2019.
================================================================================
EXPENSE EXAMPLE | 65
================================================================================
ADVISORY AGREEMENT(S)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with Victory Capital
Holdings, Inc. ("Victory Holdings") pursuant to which Victory Holdings would
acquire all of the outstanding stock of AMCO and USAA Transfer Agency Company
d/b/a USAA Shareholder Account Services ("USAA Transfer Agent") (the
"Transaction"). The Independent Trustees were advised that the Transaction, if
completed, would constitute
================================================================================
66 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
an "assignment" (as that term is defined in Section 2(a)(4) of the 1940 Act) and
result in the automatic termination of the Existing Management Agreements
("Change of Control Event"). The Independent Trustees also were advised that it
was proposed that Victory Capital, a subsidiary of Victory Holdings, would serve
as the investment adviser to each Fund after the closing of the Transaction
("Post-Transaction") and that the Board would be asked to consider approval of
the terms and conditions of the New Advisory Agreement with Victory Capital and
thereafter to submit the New Advisory Agreement to each Fund's shareholders for
approval. Because the Change of Control Event also would result in the
termination of each existing subadvisory agreement between AMCO and the
subadvisers to the Funds ("Existing Subadvisory Agreements"), the Independent
Trustees were advised that the Board would also be asked to approve the New
Subadvisory Agreements.
In anticipation of the Transaction, the Trustees met at a series of subsequent
in-person meetings on November 27-28, 2018, January 7-8, 2019, and January
14-15, 2019, which included meetings of the full Board and separate meetings of
the Independent Trustees for the purposes of considering, among other things:
whether it would be in the best interests of each Fund and its respective
shareholders to approve the New Agreements; and the anticipated impacts of the
Transaction on the Funds and their shareholders (each, a "Meeting"). During each
of these Meetings, the Board sought additional and clarifying information as it
deemed necessary or appropriate. In this connection, the Independent Trustees
worked with their independent legal counsel to prepare formal due diligence
requests (the "Diligence Requests") that were submitted to Victory Capital,
Victory Capital Advisers, Inc. ("VCA"), and the subadvisers. The Diligence
Requests sought information relevant to the Board's consideration of the New
Advisory Agreement, the New Subadvisory Agreements, distribution arrangements,
and other anticipated impacts of the Transaction on the Funds and their
shareholders. Victory Capital, VCA, and the subadvisers provided documents and
information in response to the Diligence Requests (the "Response Materials").
Following their review of the Response Materials, the Independent Trustees
submitted a supplemental due diligence request for additional and clarifying
information (the "Supplemental Diligence Request") to Victory Capital and VCA.
Victory
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ADVISORY AGREEMENT(S) | 67
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Capital and VCA provided further information in response to the Supplemental
Diligence Request, which the Board reviewed. Senior management representatives
of Victory Capital and/or AMCO participated in a portion of each Meeting and
addressed various questions raised by the Board. Throughout the process, the
Independent Trustees were assisted by their independent legal counsel and
counsel to the Funds, who advised them on, among other things, their duties and
obligations relating to their consideration of the New Agreements.
The Board's evaluation of the New Agreements reflected the information provided
specifically in connection with its review of the New Agreements, as well as,
where relevant, information that was previously furnished to the Board in
connection with the most recent renewal of the Existing Management Agreements
and Existing Subadvisory Agreements at an in-person meeting of the Board on
April 18, 2018 (the "2018 15(c) Meeting") and at other subsequent Board meetings
in 2018. The Board's evaluation of the New Agreements also reflected the
knowledge gained as Board members of the Funds with respect to services provided
by AMCO, its affiliates, and each subadviser to the Funds.
The Board's approvals and recommendations were based on its determination,
within its business judgment, that it would be in the best interests of each
Fund and its respective shareholders, for Victory Capital and, as applicable,
the subadvisers, to provide investment advisory, investment subadvisory, and
related services to the Funds, following the closing of the Transaction.
FACTORS CONSIDERED IN APPROVING THE NEW ADVISORY AGREEMENT
In connection with the Board's consideration of the New Advisory Agreement,
Victory Capital and AMCO advised the Board about a variety of matters, including
the following:
o The nature, extent, and quality of the services to be provided to the
Funds by Victory Capital Post-Transaction are expected to be of at least
the same level as the services currently provided to the Funds by AMCO.
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68 | USAA INTERMEDIATE-TERM BOND FUND
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o Victory Capital's stated commitment to maintaining and enhancing the
USAA member/USAA Fund shareholder experience, including creating a
dedicated USAA Fund sales and client service call center that will
provide ongoing client service and advice to existing and new USAA
members.
o Victory Capital proposes to: (1) replace the underlying indexes for
the USAA Extended Market Index Fund and USAA S&P 500 Index Fund with
indexes designed to provide shareholders with comparable exposure and
investment outcomes; (2) change the USAA Extended Market Index Fund's
and USAA S&P 500 Index Fund's investment objectives and strategies in
light of the changes to their underlying indexes; and (3) change the
name of the USAA S&P 500 Index Fund to the USAA 500 Index Fund.
o Victory Capital does not propose changes to the investment objective(s)
of any other Funds. Although the investment processes used by Victory
Capital's portfolio managers may differ from those used by AMCO's
portfolio managers or, if applicable, any subadviser's portfolio
managers, such differences are not currently expected to result in
changes to the principal investment strategies or principal investment
risks of the Funds.
o The New Advisory Agreement does not change any Fund's advisory fee
rate or the computation method for calculating such fees (except that
Victory Capital, subject to Board approval, may in the future use a
single designated share class to calculate the performance adjustment).
For at least two years after the Transaction closes, Victory Capital has
agreed to waive fees and/or reimburse expenses so that each Fund's
annual expense ratio (excluding certain customary items) does not exceed
the levels reflected in each Fund's most recent audited financial
statements at the time the Transaction closes (or the levels of AMCO's
then-current expense caps, if applicable), excluding the impact of any
performance adjustment to the Fund's advisory fee.
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ADVISORY AGREEMENT(S) | 69
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o The portfolio managers at AMCO that manage the Fixed Income Funds(1) as
well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be advised
by Victory Capital through its Victory Solutions platform, Victory
Capital proposes that the same subadvisers be retained Post-Transaction,
although Victory Capital may change the allocation to a particular
subadviser Post-Transaction. No changes are expected to the portfolio
managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's
(1)The Fixed Income Funds include the following Funds: California Bond Fund,
Government Securities Fund, High Income Fund, Income Fund, Intermediate-Term
Bond Fund, Tax Exempt Intermediate-Term Fund, Tax Exempt Long-Term Fund, New
York Bond Fund, Short-Term Bond Fund, Tax Exempt Short- Term Fund, Ultra
Short-Term Bond Fund, Virginia Bond Fund, Money Market Fund, Tax Exempt Money
Market Fund and Treasury Money Market Trust.
(2)The Cornerstone Funds include the following Funds: Cornerstone Aggressive
Fund, Cornerstone Conservative Fund, Cornerstone Equity Fund, Cornerstone
Moderate Fund, Cornerstone Moderately Aggressive Fund, and Cornerstone
Moderately Conservative Fund.
(3)The Target Retirement Funds include the following Funds: Target Retirement
2020 Fund, Target Retirement 2030 Fund, Target Retirement 2040 Fund, Target
Retirement 2050 Fund, Target Retirement 2060 Fund, and Target Retirement
Income Fund.
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70 | USAA INTERMEDIATE-TERM BOND FUND
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businesses to Victory Capital. Victory Capital and USAA expect to enter
into a transition services agreement under which USAA will continue to
provide Victory Capital with certain services that are currently
provided by USAA to AMCO and the USAA Transfer Agent for a specified
period of time after the closing of the Transaction to assist Victory
Capital in transitioning the USAA member distribution channel and member
support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital
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ADVISORY AGREEMENT(S) | 71
================================================================================
is capable of providing the same level of investment management services
currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund, Growth
& Income Fund, Income Stock Fund, Global Equity Income Fund, and Precious
Metals and Minerals Fund.
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72 | USAA INTERMEDIATE-TERM BOND FUND
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The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored and managed by
Victory Capital ("Victory Funds") with similar investment
================================================================================
ADVISORY AGREEMENT(S) | 73
================================================================================
objectives and strategies managed by the portfolio managers who would manage the
Funds. Based on information presented to the Board at the Meetings and its
discussions with Victory Capital, the Board concluded that Victory Capital is
capable of generating a level of long-term investment performance that is
appropriate in light of each Fund's investment objectives, strategies and
restrictions.
FEES TO BE PAID TO VICTORY CAPITAL AND EXPENSES OF THE FUNDS - The Board
considered that it had reviewed each Fund's existing advisory fee rate and
computation method for calculating such fees at the 2018 15(c) Meeting. The
Board considered that the New Advisory Agreement does not change any Fund's
advisory fee rate or the computation method for calculating such fees, except
that Victory Capital, subject to Board approval, may in the future use a single
designated share class to calculate the performance adjustment and apply the
resulting performance adjustment across each other class of shares of the Fund.
The Board considered that the use of a single designated class to calculate the
performance adjustment for each other class of shares of the Fund could mean
that shareholders of a class other than the class used to measure the
performance adjustment may pay a performance adjustment that is higher or lower
than if the adjustment were calculated on a class by class basis, primarily due
to the impact of differences in the fees and expenses between share classes on
performance. The Board considered that the New Advisory Agreement stipulates
that the period for measuring performance for calculating a Fund's performance
adjustment begins on the date that Victory Capital begins managing the Fund;
therefore, no performance adjustments will be made for the first twelve months
of the New Advisory Agreement, consistent with applicable regulations. The Board
also considered Victory Capital's contractual commitment under the expense
limitation agreement ("ELA") to waive fees and/or reimburse expenses for at
least two years after the closing of the Transaction, so that each Fund's annual
expense ratio (excluding acquired fund fees and expenses, any performance
adjustment to a Fund's advisory fee, interest, taxes, brokerage commissions,
other expenditures which are capitalized in accordance with generally accepted
accounting principles, and other extraordinary expenses not incurred in the
ordinary course of such Fund's business) does not exceed the levels reflected in
each Fund's most recent audited financial statements at the time the
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74 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
Transaction closes (or the levels of AMCO's then-current expense caps, if
applicable), excluding the impact of any performance adjustment to a Fund's
advisory fee. The Board considered that the ELA permits Victory Capital to
recoup advisory fees waived and expenses reimbursed for up to three years after
the fiscal year in which the waiver or reimbursement took place, subject to the
lesser of any operating expense limitation in effect at the time of: (1) the
original waiver or expense reimbursement; or (2) recoupment. The Board also
considered that Victory Capital and AMCO had represented to the Board that they
will use their best efforts to ensure that they and their respective affiliates
do not take any action that imposes an "unfair burden" on the Funds as a result
of the Transaction or as a result of any express or implied terms, conditions or
understandings applicable to the Change of Control Event, for so long as the
requirements of Section 15(f) of the 1940 Act apply. The Board also considered
a comparison of the proposed advisory fees to be paid by each Fund to the
advisory fees paid by funds and other accounts managed by Victory Capital deemed
to be comparable to the Fund in terms of investment objectives and strategies.
The Board considered that, with few exceptions, mostly involving weighted
average fees for separate accounts, the advisory fees to be paid by the Funds
were lower than the fees paid by these other funds and accounts. The Board
concluded that the retention of Victory Capital was unlikely to impose an unfair
burden on the Funds because, after the Transaction, none of AMCO, Victory
Capital, VCA, or any of their respective affiliates, would be entitled to
receive any compensation directly or indirectly (i) from any person in
connection with the purchase or sale of securities or other property to, from,
or on behalf of the Funds (other than ordinary fees for bona fide principal
underwriting services), or (ii) from the Funds or their shareholders for other
than bona fide investment advisory or other services. Based on its review, the
Board determined, with respect to each Fund, that Victory Capital's advisory fee
is fair and reasonable.
THE EXTENT TO WHICH VICTORY CAPITAL MAY REALIZE ECONOMIES OF SCALE AS THE FUNDS
GROW LARGER AND WHETHER FEE LEVELS REFLECT THESE ECONOMIES OF SCALE FOR THE
BENEFIT OF FUND SHAREHOLDERS - The Board considered potential or anticipated
economies of scale in relation to the services Victory Capital would provide to
each Fund. The Board considered that the New Advisory Agreement includes the
same advisory fee breakpoints for the same Funds as
================================================================================
ADVISORY AGREEMENT(S) | 75
================================================================================
the Existing Advisory Agreements. The Board also considered that Victory Capital
has contractually agreed to cap the Funds' annual operating expense ratios,
pursuant to the ELA, which will remain in effect for at least two years from the
closing of the Transaction, and may be extended. The Board also considered
Victory Capital's representation that the significant increase in its assets
under management Post-Transaction may reasonably be expected to enable the new
combined firm to reach greater economies of scale in a shorter time frame. The
Board noted that it will have the opportunity to periodically re-examine whether
a Fund or the Trust has achieved economies of scale, and the appropriateness of
investment advisory and administrative fees payable to Victory Capital, in the
future.
THE PROFITS TO BE REALIZED BY VICTORY CAPITAL AND ITS AFFILIATES FROM THEIR
RELATIONSHIP WITH THE TRUST - The Board considered the benefits Victory Capital
and its affiliates may derive from their relationship with the Funds, including
compensation to be paid to Victory Capital for the provision of certain
administrative, fund accounting and shareholder services to the Funds and
compensation to be paid to USAA Transfer Agent for the provision of transfer
agency services to the Funds. The Board considered the significant investments
Victory Capital expected to make to support and grow the USAA member channel and
the costs to integrate the USAA Fund business into Victory Capital. The Board
also considered Victory Capital's profitability report presented to the board of
trustees of the Victory Funds in connection with their most recent 15(c)
process. The Board considered Victory Capital's representation that the fully
integrated USAA Fund business, including investments to support ongoing growth,
was expected to have an overall marginally positive impact on Victory Capital's
overall financial profitability. The Board noted the difficulty of accurately
projecting profitability under the current circumstance and noted that it would
have the opportunity to give further consideration to Victory Capital's
profitability with respect to the Funds at the end of the initial two-year term
of the New Advisory Agreement.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
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76 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
deliver investment products and services to USAA's direct member-based channel.
The Board also considered that Victory Capital may derive reputational and other
benefits from its ability to use "USAA" and related names in connection with
operating and marketing the Funds. The Board considered that the Transaction, if
completed, would significantly increase Victory Capital's assets under
management and expand Victory Capital's investment capabilities. This increased
size and diversification could facilitate Victory Capital's continued investment
in its business and products, which Victory Capital would be able to leverage
across a broader base of assets. Victory Capital also would be able to use
trading commission credits from the Funds' transactions in securities to
"purchase" third party research and execution services to support its investment
process. Based on its review, the Board determined that any "fall-out" benefits
and other types of benefits that may accrue to Victory Capital are fair and
reasonable.
CONCLUSIONS - Based on the foregoing and other relevant considerations, at the
Meeting of the Board held on January 15, 2019, the Board, including a majority
of the Independent Trustees, acting within its business judgment, (1) concluded
that the terms of the New Advisory Agreement are fair and reasonable and that
approval of the New Advisory Agreement is in the best interests of each Fund and
its respective shareholders, (2) voted to approve the New Advisory Agreement,
and (3) voted to recommend approval of the New Advisory Agreement by
shareholders of the Funds. The Board evaluated all information available to it
on a Fund-by-Fund basis and its determinations were made separately in respect
of each Fund. The Board noted some factors may have been more or less important
with respect to any particular Fund and that no one factor was determinative of
its decisions which, instead, were premised upon the totality of factors
considered. In this connection, the Board also noted that different Board
members likely placed emphasis on different factors in reaching their individual
conclusions to vote in favor of the New Advisory Agreement and to recommend
approval of the New Advisory Agreement by shareholders of the Funds.
FACTORS CONSIDERED IN APPROVING THE NEW SUBADVISORY AGREEMENTS
In approving the New Subadvisory Agreements with each of Barrow, Hanley,
Mewhinney & Strauss, LLC, Brandes Investment Partners, L.P., ClariVest Asset
================================================================================
ADVISORY AGREEMENT(S) | 77
================================================================================
Management LLC, Epoch Investment Partners, Inc., Granahan Investment Management,
Inc., Lazard Asset Management LLC, Loomis, Sayles & Company LP, Massachusetts
Financial Services Company, Northern Trust Investments, Inc., QS Investors, LLC,
The Renaissance Group LLP and Wellington Management Company LLP (each, a
"Subadviser" and together the "Subadvisers") with respect to the applicable
Funds, the Board considered various factors, among them: (i) the nature, extent,
and quality of services to be provided to the applicable Funds by the
Subadvisers; (ii) each Subadviser's compensation and any other benefits derived
from the subadvisory relationship; (iii) comparisons, to the extent applicable,
of subadvisory fees and performance to comparable investment companies; and (iv)
the terms of each New Subadvisory Agreement. The Board's evaluation of the New
Subadvisory Agreements reflected the information provided specifically in
connection with its review of the New Subadvisory Agreements, as well as, where
relevant, information that was previously furnished to the Board in connection
with the most recent renewal of the Existing Subadvisory Agreements at the 2018
15(c) meeting and at other subsequent Board meetings in 2018. A summary of the
Board's analysis of these factors is set forth below. After full consideration
of a variety of factors, the Board, including the Independent Trustees, voted to
approve each New Subadvisory Agreement. In approving each New Subadvisory
Agreement, the Board did not identify any single factor as controlling, and each
Trustee may have attributed different weights to various factors. The
Independent Trustees reviewed the proposed approval of the New Subadvisory
Agreements in private sessions with their independent legal counsel at which no
representatives of Victory Capital or AMCO were present.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY THE
SUBADVISERS - The Board considered information provided to them regarding the
services to be provided by each Subadviser, including information presented
periodically throughout the previous year. The Board considered each
Subadviser's level of knowledge and investment style. The Board reviewed the
experience and credentials of the investment personnel who are responsible for
managing the investment of portfolio securities with respect to each applicable
Fund and each Subadviser's level of staffing. The Board also noted each
Subadviser's brokerage practices. The Board also considered
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78 | USAA INTERMEDIATE-TERM BOND FUND
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each Subadviser's regulatory and compliance history. The Board also took into
account each Subadviser's risk management processes. The Board noted that AMCO's
monitoring processes of each Subadviser include, and Victory Capital's expected
monitoring processes of each Subadviser would include, among others: (i) regular
telephonic meetings to discuss, among other matters, investment strategies and
to review portfolio performance; (ii) monthly portfolio compliance checklists
and quarterly compliance certifications to the Board; and (iii) due diligence
visits to each Subadviser. The Board also considered that the terms and
conditions of the New Subadvisory Agreements are substantially similar to the
terms and conditions of the Existing Subadvisory Agreements.
SUBADVISER COMPENSATION - The Board took into account the financial condition of
each Subadviser. In considering the cost of services to be provided by each
Subadviser and the profitability to that Subadviser of its relationship with the
applicable Fund, the Board noted that the fees under the New Subadvisory
Agreements will be paid by Victory Capital. The Board also relied on the ability
of AMCO to negotiate each Existing Subadvisory Agreement and the fees thereunder
at arm's length. The Board considered that the fee rate to be payable under each
New Subadvisory Agreement were proposed to be identical to the fee rate
currently payable under each corresponding Existing Subadvisory Agreement. For
the above reasons, the Board determined that the expected profitability of each
Subadviser from its relationship with the applicable Fund was not a material
factor in its deliberations with respect to the consideration of the approval of
each New Subadvisory Agreement. For similar reasons, the Board concluded that
the potential for economies of scale in each Subadviser's management of the
applicable Fund was not a material factor in considering each New Subadvisory
Agreement, although the Board noted that certain New Subadvisory Agreements
contain breakpoints in their fee schedules.
SUBADVISORY FEES AND FUND PERFORMANCE - The Board previously compared the
subadvisory fees for each applicable Fund with the fees that each Subadviser
charges comparable clients, as applicable. The Board considered that each
applicable Fund will pay a management fee to Victory Capital and that, in turn,
Victory Capital will pay a subadvisory fee to each Subadviser.
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ADVISORY AGREEMENT(S) | 79
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At the 2018 15(c) meeting, the Board considered, among other data, each
applicable Fund's performance over shorter and longer term periods, as compared
to each Fund's respective peer group and noted that the Board reviews at its
regularly scheduled meetings information about each Fund's performance results.
The Board considered Victory Capital's capabilities with respect to monitoring
the performance, investment style and risk-adjusted performance of each
Subadviser. The Board also noted each Subadviser's performance record for
similar accounts, as applicable.
CONCLUSIONS - The Board reached the following conclusions regarding each New
Subadvisory Agreement, among others: (i) each Subadviser is qualified to manage
the applicable Fund's assets in accordance with its investment objective and
policies; (ii) each Subadviser maintains an appropriate compliance program;
(iii) the performance of each applicable Fund is reasonable in relation to the
performance of funds with similar investment objectives and to relevant indices
in view of the Fund's investment approach and Victory Capital is expected to
appropriately monitor each Fund's performance; and (iv) each Fund's advisory
expenses are reasonable in relation to those of similar funds and to the
services to be provided by Victory Capital and each Subadviser. Based on its
conclusions, the Board determined that the approval of each New Subadvisory
Agreement with respect to each applicable Fund would be in the best interests of
the Fund and its shareholders.
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80 | USAA INTERMEDIATE-TERM BOND FUND
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TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Richard Y. Newton III
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN, State Street Bank and Trust Company
ACCOUNTING AGENT, AND P.O. Box 1713
SUB-ADMINISTRATOR Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
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) or (210) 531-8722;
(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 monthly portfolio holdings with the SEC
for the first and third quarters of each fiscal year as an exhibit to its
reports on Form N-PORT (beginning with filings after March 31, 2019).
Previously, the Fund made its complete schedule of portfolio holdings available
after the first and third fiscal quarters in regulatory filings on Form N-Q. The
Fund's Forms N-CSR, N-PORT, and N-Q are available at no charge (i) by calling
(800) 531-USAA (8722) or (210) 531-8722; (ii) at USAA.COM; and (iii) on the
SEC's website at HTTP://WWW.SEC.GOV.
================================================================================
--------------
USAA PRSRT STD
9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
--------------
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40049-0319 (C)2019, USAA. All rights reserved.
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SEMIANNUAL REPORT
USAA MONEY MARKET FUND (USAXX)
JANUARY 31, 2019
================================================================================
Beginning on January 1, 2021, as permitted by regulations adopted by the
Securities and Exchange Commission, paper copies of the Fund's shareholder
reports like this one will no longer be sent by mail, unless you specifically
request paper copies of the reports from the Fund or from your financial
intermediary, such as a broker-dealer or bank. Instead, the reports will be
made available on usaa.com, and you will be notified by mail each time a report
is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will
not be affected by this change and you need not take any action. You may elect
to receive shareholder reports and other communications from the Fund or your
financial intermediary electronically by notifying your financial intermediary
directly, or if you are a direct investor, by calling (800) 531-USAA (8722) or
logging on to usaa.com.
You may elect to receive all future reports in paper free of charge. You can
inform the Fund or your financial intermediary that you wish to continue
receiving paper copies of your shareholder reports by notifying your financial
intermediary directly, or if you are a direct investor, by calling (800)
531-USAA (8722) or logging on to usaa.com. Your election to receive reports in
paper will apply to all funds held with the USAA family of funds or your
financial intermediary.
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
INVESTMENT OVERVIEW 1
FINANCIAL INFORMATION
Portfolio of Investments 2
Notes to Portfolio of Investments 11
Financial Statements 14
Notes to Financial Statements 17
Financial Highlights 25
EXPENSE EXAMPLE 26
ADVISORY AGREEMENT(S) 28
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.
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 tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. 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.
(C)2019, USAA. All rights reserved.
================================================================================
================================================================================
INVESTMENT OVERVIEW
--------------------------------------------------------------------------------
o PORTFOLIO MIX - 1/31/19 o
(% of Net Assets)
[PIE CHART OF PORTFOLIO MIX]
COMMERCIAL PAPER 38.0%
EURODOLLAR AND YANKEE OBLIGATIONS 16.8%
CERTIFICATE OF DEPOSITS 14.0%
CORPORATE OBLIGATIONS 11.9%
MUNICIPAL OBLIGATIONS 8.6%
U.S. TREASURY SECURITIES 8.3%
REPURCHASE AGREEMENTS 2.1%
[END CHART]
Percentages are of the net assets of the Fund and may not equal 100%.
================================================================================
INVESTMENT OVERVIEW | 1
================================================================================
PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
-----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (38.0%)
$ 25,000 American Honda Finance Corp. 2.60% 3/27/2019 $ 24,903
25,000 Amphenol Corp.(a) 2.80 2/13/2019 24,977
25,000 Amphenol Corp.(a) 2.80 2/14/2019 24,975
25,000 Amphenol Corp.(a) 2.80 2/15/2019 24,973
30,000 AT&T, Inc.(a) 3.00 2/26/2019 29,938
14,000 AT&T, Inc.(a) 2.88 3/07/2019 13,962
37,471 AT&T, Inc.(a) 2.90 3/07/2019 37,368
18,750 AT&T, Inc.(a) 2.85 5/28/2019 18,578
17,800 AT&T, Inc.(a) 2.95 5/28/2019 17,631
25,000 Autozone, Inc.(a) 2.75 2/11/2019 24,981
18,250 Autozone, Inc.(a) 2.82 2/21/2019 18,221
25,000 Autozone, Inc.(a) 2.81 2/27/2019 24,949
25,000 Autozone, Inc.(a) 2.77 3/07/2019 24,935
3,400 Barton Capital Corp.(a) 2.62 2/12/2019 3,397
25,000 Barton Capital Corp.(a) 2.83 3/12/2019 24,923
30,000 Barton Capital Corp.(a) 2.75 4/10/2019 29,844
80,000 Crown Point Capital Co.(a) 2.63 4/01/2019 79,655
40,000 Crown Point Capital Co.(a) 2.75 4/18/2019 39,768
75,000 Dairy Farmers of America(a) 2.58 2/01/2019 75,000
40,000 Duke Energy Corp.(a) 2.75 2/14/2019 39,960
25,000 Duke Energy Corp.(a) 2.80 3/27/2019 24,895
20,000 Ei Du Pont De Nemours(a) 2.91 2/14/2019 19,979
25,000 Ei Du Pont De Nemours(a) 2.94 2/19/2019 24,963
25,000 Ei Du Pont De Nemours(a) 2.79 3/05/2019 24,938
20,000 Ei Du Pont De Nemours(a) 2.80 3/19/2019 19,928
25,000 Fairway Finance Corp.(a) 2.70 3/11/2019 24,929
25,000 Fairway Finance Corp.(a) 2.70 3/14/2019 24,923
30,000 Fairway Finance Corp.(a) 2.77 4/02/2019 29,862
25,000 Fairway Finance Corp.(a) 2.75 4/12/2019 24,866
8,000 Gotham Funding Corp.(a) 2.62 2/05/2019 7,998
30,000 Gotham Funding Corp.(a) 2.80 3/06/2019 29,923
27,000 Gotham Funding Corp.(a) 2.82 3/25/2019 26,890
45,000 Gotham Funding Corp.(a) 2.80 4/01/2019 44,794
25,000 Hyundai Capital America(a) 2.77 2/04/2019 24,994
13,000 Hyundai Capital America(a) 2.77 2/06/2019 12,995
12,500 Hyundai Capital America(a) 2.95 2/15/2019 12,486
================================================================================
2 | USAA MONEY MARKET FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------------
$ 25,000 Hyundai Capital America(a) 2.75% 2/25/2019 $ 24,954
39,600 Kansas City Power & Light(a) 2.70 2/01/2019 39,600
50,000 Kansas City Power & Light(a) 2.70 2/07/2019 49,978
30,000 Liberty Funding, LLC(a) 2.78 4/08/2019 29,847
30,000 Liberty Funding, LLC(a) 2.80 5/07/2019 29,778
40,000 LMA Americas, LLC(a) 2.49 2/01/2019 40,000
30,000 LMA Americas, LLC(a) 2.49 2/05/2019 29,992
6,000 LMA Americas, LLC(a) 2.65 2/07/2019 5,997
25,000 LMA Americas, LLC(a) 2.84 3/08/2019 24,931
25,000 LMA Americas, LLC(a) 2.75 3/21/2019 24,908
25,000 LMA Americas, LLC(a) 2.80 7/15/2019 24,681
25,000 LMA Americas, LLC(a) 2.90 7/17/2019 24,666
25,000 Lyondellbasell Investment(a) 2.75 2/05/2019 24,992
25,000 Lyondellbasell Investment(a) 2.75 2/26/2019 24,952
25,000 Lyondellbasell Investment(a) 2.75 2/27/2019 24,950
25,000 Lyondellbasell Investment(a) 2.75 3/06/2019 24,937
2,596 Manhattan Asset Funding Co.(a) 2.56 2/04/2019 2,595
34,000 Old Line Funding, LLC(a) 2.74 4/25/2019 33,785
23,300 Old Line Funding, LLC(a) 2.81 6/25/2019 23,038
25,000 Pacific Corp. 2.70 2/06/2019 24,991
30,000 Ridgefield Funding Co., LLC(a) 2.80 4/09/2019 29,844
25,000 Ridgefield Funding Co., LLC(a) 2.75 4/11/2019 24,868
25,000 Ridgefield Funding Co., LLC(a) 2.75 4/15/2019 24,861
25,000 Sheffield Receivable Co., LLC(a) 2.60 2/05/2019 24,993
25,000 Sheffield Receivable Co., LLC(a) 2.45 3/01/2019 24,952
40,000 Societe Generale(a) 2.50 3/19/2019 39,872
40,000 Societe Generale(a) 2.51 4/01/2019 39,835
64,000 Tyco Electronics Group S.A.(a) 2.57 2/01/2019 64,000
30,000 Victory Receivables(a) 2.68 4/02/2019 29,866
19,400 Westar Energy, Inc.(a) 2.70 2/04/2019 19,396
----------
Total Commercial Paper (cost: $1,838,360) 1,838,360
----------
EURODOLLAR AND YANKEE OBLIGATIONS (16.8%)
BANKS (16.1%)
50,000 Bank of Montreal (1 mo. LIBOR + 0.30%) 2.81(b) 6/03/2019 50,000
50,000 Bank of Nova Scotia (1 mo. LIBOR + 0.27%) 2.78(b) 3/06/2019 50,000
50,000 Bayerische Landesbank (1 mo. LIBOR + 0.24%) 2.75(b) 3/25/2019 50,000
25,000 Bayerische Landesbank (1 mo. LIBOR + 0.40%) 2.91(b) 4/23/2019 25,000
30,000 BNP Paribas S.A. (3 mo. LIBOR + 0.07%) 2.87(b) 7/11/2019 30,000
25,000 Canadian Imperial Bank of Commerce
(1 mo. LIBOR + 0.46%) 2.97(b) 3/18/2019 25,000
40,000 Canadian Imperial Bank of Commerce
(1 mo. LIBOR + 0.35%) 2.86(b) 5/20/2019 40,000
================================================================================
PORTFOLIO OF INVESTMENTS | 3
================================================================================
-----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------------
$ 25,000 Credit Suisse AG (1 mo. LIBOR + 0.46%) 2.97%(b) 5/01/2019 $ 25,000
50,000 Credit Suisse AG (3 mo. LIBOR + 0.24%) 2.98(b) 5/02/2019 50,000
25,000 Credit Suisse AG (1 mo. LIBOR + 0.22%) 2.74(b) 7/10/2019 25,000
25,000 Lloyds Bank Corporate Markets plc
(1 mo. LIBOR + 0.32%) 2.82(b) 7/01/2019 25,000
50,000 Lloyds Bank Corporate Markets plc
(1 mo. LIBOR + 0.26%) 2.77(b) 7/18/2019 50,000
40,000 Lloyds Bank Corporate Markets plc
(3 mo. LIBOR + 0.21%) 2.99(b) 7/24/2019 40,000
25,000 Mizuho Bank Ltd. (1 mo. LIBOR + 0.20%) 2.71(b) 2/13/2019 25,000
40,000 Mizuho Bank Ltd. (1 mo. LIBOR + 0.27%) 2.78(b) 4/25/2019 40,000
30,000 Mizuho Bank Ltd. (3 mo. LIBOR + 0.08%) 2.88(b) 7/09/2019 30,000
30,000 Mizuho Bank Ltd. (3 mo. LIBOR + 0.08%) 2.86(b) 7/16/2019 30,000
25,000 Natixis (1 mo. LIBOR + 0.34%) 2.85(b) 2/25/2019 25,000
40,000 Societe Generale (1 mo. LIBOR + 0.37%) 2.87(b) 6/04/2019 40,000
25,000 Standard Chartered Bank (1 mo. LIBOR + 0.28%) 2.79(b) 2/07/2019 25,000
40,000 Toronto-Dominion (1 mo. LIBOR + 0.27%) 2.78(b) 2/12/2019 40,000
40,000 Westpac Banking Corp. (1 mo. LIBOR +0.28%) 2.79(b) 6/03/2019 40,000
----------
780,000
----------
IRON/STEEL (0.7%)
20,000 SSAB AB (LOC - Swedbank AB)(c) 2.49 4/01/2034 20,000
15,000 SSAB AB (LOC - Credit Agricole Corp. Inv. Bank)(c) 2.49 5/01/2034 15,000
----------
35,000
----------
Total Eurodollar and Yankee Obligations (cost: $815,000) 815,000
----------
CERTIFICATES OF DEPOSIT (14.0%)
40,000 Bank of Montreal 2.50 2/04/2019 40,000
25,000 Bank of Montreal 2.75 3/05/2019 25,000
30,000 Landesbank Hessen-Thuringen 2.85 10/18/2019 30,000
25,000 Landesbank Baden-Wurttemberg 2.70 5/08/2019 25,000
40,000 Lloyds Bank Corporate Markets plc 3.00 7/26/2019 40,000
50,000 Mizuho Bank Ltd. 2.82 3/15/2019 50,000
30,000 Natixis 2.81 5/08/2019 30,000
30,000 Natixis 2.86 7/12/2019 30,000
30,000 Natixis 2.86 9/23/2019 30,000
30,000 Natixis 2.85 10/22/2019 30,000
30,000 Nordea Bank AB 2.76 3/13/2019 30,000
30,000 Norinchukin BK 2.70 4/14/2019 30,000
25,000 Royal Bank of Canada (1 mo. LIBOR + 0.30%) 2.80(b) 5/28/2019 25,000
50,000 Standard Chartered Bank 2.93 6/03/2019 50,000
40,000 Sumitomo Mitsui Banking Corp. 2.75 3/04/2019 40,000
30,000 Sumitomo Mitsui Banking Corp. 2.77 4/26/2019 30,000
================================================================================
4 | USAA MONEY MARKET FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------------
$ 30,000 Svenska Handelsbanken AB 2.71% 4/09/2019 $ 30,000
25,000 Toronto-Dominion 2.43 2/06/2019 25,000
50,000 Toronto-Dominion 3.01 9/04/2019 50,000
35,000 Wells Fargo Bank, N.A. (1 mo. LIBOR + 0.31%) 2.81(b) 8/01/2019 35,000
----------
Total Certificates of Deposit (cost: $675,000) 675,000
----------
CORPORATE OBLIGATIONS (11.9%)
AGRICULTURE (0.2%)
7,500 Premier Mushrooms, Inc. (LOC - CoBank, ACB)
(Put Date 3/01/2019)(c) 2.49 12/01/2037 7,500
----------
BANKS (1.9%)
50,000 Wells Fargo Bank, N.A. (1 mo. LIBOR + 0.33%) 2.84(b) 5/31/2019 50,000
40,000 Wells Fargo Bank, N.A. (1 mo. LIBOR + 0.30%) 2.80(b) 7/29/2019 40,000
----------
90,000
----------
BUILDING MATERIALS (0.0%)
2,400 Rex Lumber, LLC (LOC - Federal Home Loan
Bank of Dallas)(c) 2.49 2/01/2022 2,400
----------
COMMERCIAL SERVICES (1.5%)
50,000 AARP, Inc. (LOC - Bank of America Corp.)
(Put Date 2/07/2019)(c) 2.50 5/01/2031 50,000
20,000 Altoona-Blair County Dev. Corp. (LOC - PNC
Financial Services Group) (Put Date 2/06/2019)(a),(c) 2.47 4/01/2035 20,000
4,595 Harvest Time Tabernacle, Inc. (LOC - Federal Home
Loan Bank of Dallas)(c) 2.50 8/01/2037 4,595
----------
74,595
----------
DIVERSIFIED FINANCIAL SERVICES (6.8%)
2,670 2016 David S Pearl II Irrevocable Trust (LOC - Federal
Home Loan Bank of Dallas) (Put Date 2/11/2019)(c) 2.49 11/01/2036 2,670
12,190 ASC Admiral Way, LLC (LOC - Federal Home Loan
Bank of San Francisco)(c) 2.50 8/01/2056 12,190
25,270 Bass Pro Rossford Dev. Co., LLC (LOC - Fifth
Third Bank)(c) 2.66 11/01/2027 25,270
14,030 Bhavnani, LLC (LOC - U.S. Bancorp)
(Put Date 2/07/2019)(c) 2.45 5/01/2038 14,030
25,000 Carol Allen Family Liquidity Trust
(LOC - Comerica Bank, N.A.)(c) 2.51 3/01/2048 25,000
8,935 CEI Capital, LLC (LOC - Fifth Third Bank)(c) 2.64 3/01/2033 8,935
5,290 Chad J Himmel Irrevocable Trust (LOC - Federal Home
Loan Bank of Dallas)(c) 2.49 7/01/2048 5,290
================================================================================
PORTFOLIO OF INVESTMENTS | 5
================================================================================
-----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------------
$ 6,535 Columbus Hotel Investment One, LLC (LOC - Federal
Home Loan Bank of New York)
(Put Date 2/07/2019)(c) 2.49% 10/01/2048 $ 6,535
4,420 Debra B Kennedy Irrevocable Trust (LOC - Federal
Home Loan Bank of Dallas) (Put Date 2/07/2019)(c) 2.49 5/01/2048 4,420
2,480 Dennis Wesley Co., Inc. (LOC - Federal Home Loan
Bank of Indianapolis)(c) 2.49 6/15/2034 2,480
7,000 Desert Vistas, LP (LOC - Federal Home Loan
Bank of San Francisco) (Put Date 2/06/2019)(c) 2.74 9/01/2055 7,000
1,310 Doghouse Properties, LLC (LOC - Federal Home Loan
Bank of Atlanta) (Put Date 2/07/2019)(c) 2.52 5/01/2027 1,310
4,125 Elsinore Properties, LP (LOC - Fifth Third Bank)
(Put Date 2/07/2019)(c) 2.64 2/01/2037 4,125
7,085 EMF, LLC (LOC - Comerica Bank, N.A.)
(Put Date 2/06/2019)(c) 2.55 6/01/2042 7,085
45,000 Fiore Capital, LLC (LOC - Wells Fargo & Co.)
(Put Date 2/06/2019)(c) 2.45 8/01/2045 45,000
5,595 Foster/Schweihofer Real Estate Co., LLC
(LOC - Comerica Bank, N.A.)(c) 2.58 9/20/2033 5,595
14,215 Gerald J Rubin Special Trust No 1 (LOC - Goldman
Sachs Bank USA) (Put Date 2/06/2019)(c) 2.52 12/01/2048 14,215
3,715 Herman & Kittle Capital, LLC (LOC - Federal Home
Loan Bank of Cincinnati)(c) 2.49 2/01/2037 3,715
1,470 HP LRHS Land, LLC (LOC - U.S. Bancorp)(c) 2.70 10/01/2030 1,470
5,800 Jacob Rosenstein 2017 Irrevocable Life Insurance Trust
(LOC - Bank of Oklahoma, N.A.)
(Put Date 2/07/2019)(c) 2.52 8/01/2037 5,800
4,445 Lamar Avenue Trust (LOC - Federal Home Loan
Bank of Dallas)(c) 2.49 12/01/2037 4,445
6,000 Lavonia O Frick Family Trust (LOC - Federal Home
Loan Bank of Atlanta)(c) 2.49 8/01/2048 6,000
5,490 Linda E Krejsek Life Insurance Trust (LOC - Federal
Home Loan Bank of Dallas)(c) 2.49 9/01/2037 5,490
4,025 Mark E Potteiger Irrevocable Life Insurance Trust
(LOC - Federal Home Loan Bank of Dallas)(c) 2.49 6/01/2048 4,025
1,100 MBE Investment Co., LLC (LOC - Comerica
Bank, N.A.)(c) 2.65 2/01/2051 1,100
1,940 MCE MOB IV, LP (LOC - PNC Financial
Services Group) (Put Date 2/07/2019)(c) 2.47 8/01/2022 1,940
6,630 Medilucent MOB I, LP (LOC - PNC Financial
Services Group) (Put Date 2/07/2019)(c) 2.47 8/01/2030 6,630
2,230 NextGen Automotive, LLC (LOC - Fifth Third Bank)
(Put Date 3/02/2019)(c) 2.64 4/01/2048 2,230
================================================================================
6 | USAA MONEY MARKET FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------------
$ 22,280 OSF Finance Co., LLC (LOC - PNC Financial
Services Group) (Put Date 2/07/2019)(c) 2.47% 12/01/2037 $ 22,280
25,560 Paca-Pratt Associates, Inc. (LOC - Manufacturers &
Traders Trust Co.) (Put Date 2/07/2019)(c) 2.96 1/01/2038 25,560
3,305 Partisan Property, Inc. (LOC - Wells Fargo & Co.)
(Put Date 2/06/2019)(c) 2.53 9/01/2044 3,305
11,739 Pinnacle Properties Dev. Group, LLC (LOC - Federal
Home Loan Bank of Cincinnati)
(Put Date 2/07/2019)(c) 2.49 6/15/2041 11,739
5,140 Rathbone, LLC (LOC - Comerica Bank, N.A.)(c) 2.64 1/01/2038 5,140
10,915 Stobro Co., LP (LOC - Federal Home Loan
Bank of Pittsburgh) (Put Date 2/07/2019)(c) 2.55 1/01/2032 10,915
18,120 Sugar Creek Finance Co., LLC (LOC - Northern
Trust Corp.) (Put Date 2/07/2019)(c) 2.50 6/01/2042 18,120
----------
331,054
----------
FOOD (0.0%)
1,775 Brewster Cheese Co. (LOC - Bank of Montreal)
(Put Date 2/07/2019)(c) 2.50 4/03/2023 1,775
----------
HEALTHCARE-PRODUCTS (0.1%)
5,315 Vold Vision Ventures, LLC (LOC - Federal Home
Loan Bank of Dallas) (Put Date 2/07/2019)(c) 2.50 10/01/2039 5,315
----------
HEALTHCARE-SERVICES (0.0%)
2,280 Tallahassee Orthopedic Center LC (LOC - Wells
Fargo & Co.)(c) 2.51 4/03/2034 2,280
----------
HOME BUILDERS (0.2%)
7,235 BallenIsles Country Club, Inc. (LOC - Bank of
America Corp.) (Put Date 2/07/2019)(c) 2.47 12/01/2022 7,235
----------
INVESTMENT COMPANIES (0.0%)
1,445 Cain Capital Investments, LLC (LOC - BB&T Corp.)
(Put Date 3/02/2019)(c) 2.76 10/01/2046 1,445
----------
LEISURE TIME (0.1%)
3,650 Cattail Creek Country Club, Inc.
(LOC - Manufacturers & Traders Trust Co.)
(Put Date 2/07/2019)(c) 2.96 3/01/2031 3,650
----------
MACHINERY-DIVERSIFIED (0.3%)
15,000 Opus Inspection, Inc. (LOC - Swedbank AB)
(Put Date 2/06/2019)(c) 2.49 1/01/2034 15,000
----------
MISCELLANEOUS MANUFACTURERS (0.2%)
7,420 Labcon North America (LOC - BNP Paribas)(c) 2.53 6/01/2044 7,420
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 7
================================================================================
-----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------------
REAL ESTATE (0.6%)
$ 10,550 Delos, LLC (LOC - Wells Fargo & Co.)
(Put Date 2/07/2019)(c) 2.54% 3/01/2037 $ 10,550
9,345 Housing Venture I (LOC - Federal HomeLoan Bank
of San Francisco)(c) 2.50 12/01/2055 9,345
6,930 Stivers Realty LC (LOC - Federal Home
Loan Bank of Atlanta)(c) 2.49 7/01/2043 6,930
----------
26,825
----------
Total Corporate Obligations (cost: $576,494) 576,494
----------
MUNICIPAL OBLIGATIONS (8.6%)
ARIZONA (0.5%)
26,625 Yavapai County IDA (LOC - Bank of Nova Scotia)
(Put Date 2/07/2019)(c) 2.45 9/01/2035 26,625
----------
ARKANSAS (0.6%)
29,000 Union County (LOC - SunTrust Bank)
(Put Date 2/07/2019)(c) 2.45 10/01/2027 29,000
----------
COLORADO (0.3%)
2,600 Sheridan Redev. Agency (LOC - JP Morgan Chase & Co.)
(Put Date 2/07/2019)(c) 2.50 12/01/2029 2,600
9,785 Traer Creek Metropolitan District (LOC - BNP Paribas)
(Put Date 2/06/2019)(c) 2.55 10/01/2030 9,785
----------
12,385
----------
CONNECTICUT (0.1%)
4,490 State Dev. Auth. (LOC - Toronto-Dominion Bank)
(Put Date 2/07/2019)(c) 2.53 12/01/2028 4,490
----------
ILLINOIS (0.1%)
3,290 Finance Auth. (LOC - Federal Home Loan
Bank of Chicago) (Put Date 2/07/2019)(c) 2.52 7/01/2040 3,290
----------
INDIANA (0.3%)
11,300 City of Knox (LOC - SunTrust Bank)
(Put Date 2/07/2019)(c) 2.50 2/01/2046 11,300
5,625 City of Marion (LOC - Key Bank, N.A.)
(Put Date 2/07/2019)(c) 2.60 2/01/2035 5,625
----------
16,925
----------
LOUISIANA (0.1%)
2,050 Louisiana Public Facilities Auth.
(LOC - Capital One, N.A.) (Put Date 2/07/2019)(c) 2.57 7/01/2028 2,050
================================================================================
8 | USAA MONEY MARKET FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------------
$ 3,445 St. Charles Parish (LOC - Federal Home
Loan Bank of Atlanta) (Put Date 2/07/2019)(c) 2.48% 9/01/2024 $ 3,445
----------
5,495
----------
MICHIGAN (3.4%)
14,265 Charter Township of Commerce
(LOC - PNC Financial Services Group)
(Put Date 2/07/2019)(c) 2.50 10/01/2034 14,265
21,965 Finance Auth. (LOC - Bank of Montreal)
(Put Date 2/07/2019)(c) 2.40 9/01/2050 21,965
40,000 Finance Auth. (LOC - PNC Financial Services Group)
(Put Date 2/07/2019)(c) 2.41 9/01/2050 40,000
88,500 Finance Auth. (LOC - JP Morgan Chase & Co.)
(Put Date 2/05/2019)(c) 2.40 9/01/2053 88,500
----------
164,730
----------
MINNESOTA (0.2%)
7,740 City of St. Paul (LOC - Wells Fargo & Co.)
(Put Date 2/07/2019)(c) 2.48 11/01/2025 7,740
----------
MISSISSIPPI (0.1%)
3,040 Business Finance Corp. (LOC - Federal Home Loan
Bank of Dallas) (Put Date 2/07/2019)(c) 2.62 8/01/2021 3,040
----------
NEW YORK (2.7%)
1,525 Columbia County IDA (LOC - HSBC Bank USA, Inc.)
(Put Date 2/07/2019)(c) 2.65 7/01/2027 1,525
40,000 New York State Housing Finance Agency
(LOC - Wells Fargo & Co.) (Put Date 2/07/2019)(c) 2.44 5/01/2049 40,000
19,470 Saratoga County IDA (LOC - JP Morgan Chase & Co.)
(Put Date 2/07/2019)(c) 2.50 11/01/2021 19,470
13,350 State Housing Finance Agency (LOC - Landesbank
Hessen-Thuringen) (Put Date 2/01/2019)(c) 2.40 5/01/2042 13,350
22,350 State Housing Finance Agency (LOC - JP Morgan
Chase & Co.) (Put Date 2/07/2019)(c) 2.50 11/01/2048 22,350
5,200 State Housing Finance Agency (LOC - Landesbank
Hessen-Thuringen) (Put Date 2/01/2019)(c) 2.40 5/01/2041 5,200
29,000 State Housing Finance Agency (LOC - Landesbank
Hessen-Thuringen) (Put Date 2/07/2019)(c) 2.44 11/01/2044 29,000
----------
130,895
----------
PENNSYLVANIA (0.2%)
4,736 Allegheny County IDA (LOC - PNC Financial
Services Group) (Put Date 2/07/2019)(c) 2.50 11/01/2027 4,736
1,520 Berks County Municipal Auth. (LOC - Citizens
Financial Group) (Put Date 2/07/2019)(c) 2.68 5/15/2022 1,520
================================================================================
PORTFOLIO OF INVESTMENTS | 9
================================================================================
-----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------------
$ 3,445 Economic Dev. Financing Auth. (LOC - PNC
Financial Services Group) (Put Date 2/07/2019)(c) 2.47% 4/01/2035 $ 3,445
1,360 Lancaster IDA (LOC - Fulton Bank)
(Put Date 2/07/2019)(c) 2.70 6/01/2027 1,360
----------
11,061
----------
Total Municipal Obligations (cost: $415,676) 415,676
----------
U.S. TREASURY SECURITIES (8.3%)
NOTES (8.3%)
150,000 U.S. Treasury Note (1 mo. USTMMR + 0.048%) 2.45(b),(d) 10/31/2019 150,098
125,000 U.S. Treasury Note (3 mo. USTMMR + 0.06%) 2.46(b),(d) 7/31/2019 125,075
125,000 U.S. Treasury Note (3 mo. USTMMR + 0.07%) 2.47(b),(d) 4/30/2019 125,047
----------
Total U.S. Treasury Securities (cost: $400,220) 400,220
----------
REPURCHASE AGREEMENTS (2.1%)
100,000 Fixed Income Clearing Corp., 2.55%, acquired 1/31/2019
and due on 2/01/2019 at $100,000 (collateralized by $100,000
of U.S. Treasury, 2.88%(e) due 11/30/2023; market value
$102,000) (cost: $100,000) 100,000
----------
TOTAL INVESTMENTS (COST: $4,820,750) $4,820,750
==========
-----------------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
-----------------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-----------------------------------------------------------------------------------------------------------------------
Money Market Instruments:
Certificates of Deposit $- $ 675,000 $- $ 675,000
Commercial Paper - 1,838,360 - 1,838,360
Corporate Obligations - 576,494 - 576,494
Eurodollar and Yankee Obligations - 815,000 - 815,000
Municipal Obligations - 415,676 - 415,676
Repurchase Agreements - 100,000 - 100,000
U.S. Treasury Securities - 400,220 - 400,220
-----------------------------------------------------------------------------------------------------------------------
Total $- $4,820,750 $- $4,820,750
-----------------------------------------------------------------------------------------------------------------------
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
================================================================================
10 | USAA MONEY MARKET FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
o GENERAL NOTES
Values of securities are determined by procedures and practices discussed
in Note 1A 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.
o CATEGORIES AND DEFINITIONS
EURODOLLAR AND YANKEE OBLIGATIONS - Eurodollar obligations are U.S.
dollar-denominated instruments that are issued outside the U.S. capital
markets by foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions. Yankee
obligations are dollar-denominated instruments that are issued by foreign
issuers in the U.S. capital markets.
CERTIFICATES OF DEPOSIT - Certificates of deposit are receipts issued by a
depository institution in exchange for the deposit of funds. The issuer
agrees to pay the amount deposited plus interest to the bearer of the
receipt on the date specified on the certificate. The certificate usually
can be traded in the secondary market prior to maturity.
COMMERCIAL PAPER - Consists of short-term unsecured promissory notes with
maturities ranging from one to 270 days, issued mainly by corporations.
Commercial paper is usually purchased at a discount and matures at par
value; however, it also may be interest-bearing. Rate
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 11
================================================================================
represents an annualized yield at time of purchase or coupon rate, if
applicable.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
IDA Industrial Development Authority/Agency
LIBOR London Interbank Offered Rate
USTMMR Quarterly US Treasury Money Market Rate
CREDIT ENHANCEMENTS - Adds the financial strength of the provider of the
enhancement to support the issuer's ability to repay the principal and
interest payments when due. The enhancement may be provided by a
high-quality bank, insurance company or other corporation, or a collateral
trust. The enhancements do not guarantee the market values of the
securities.
The Fund's purchases consist of securities meeting the requirements to
qualify as "eligible securities" under the Securities and Exchange
Commission (SEC) regulations applicable to money market funds. In order to
qualify as an eligible security, USAA Mutual Funds Trust's Board of
Trustees, must determine that the particular investment presents minimal
credit risk in accordance with these SEC regulations.
LOC Principal and interest payments are guaranteed by a bank letter
of credit or other bank credit agreement.
o SPECIFIC NOTES
(a) Restricted security that is not registered under the Securities
Act of 1933. A resale of this security in the United States may occur
in an exempt transaction to a qualified institutional buyer as defined
by Rule 144A, and as such has been deemed liquid by USAA Asset
Management Company under liquidity guidelines approved by USAA Mutual
Funds Trust's Board of Trustees, unless otherwise noted as illiquid.
================================================================================
12 | USAA MONEY MARKET FUND
================================================================================
(b) Variable-rate security - interest rate is adjusted periodically.
The interest rate disclosed represents the rate at January 31, 2019.
(c) Variable-rate demand notes (VRDNs) - Provide the right to sell the
security at face value on either that day or within the rate-reset
period. VRDNs will normally trade as if the maturity is the earlier put
date, even though stated maturity is longer. The interest rate is reset
on the put date at a stipulated daily, weekly, monthly, quarterly, or
other specified time interval to reflect current market conditions.
These securities do not indicate a reference rate and spread in their
description.
(d) Rates for U.S. Treasury floating-rate notes rise and fall based on
discount rates in auctions of 13-week Treasury bills, and are paid
quarterly.
(e) Rates for U.S. Treasury notes or bonds represent the stated coupon
payment rate at time of issuance.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 13
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities (amortized cost approximates market value) $4,820,750
Cash 857
Receivables:
Capital shares sold 28,389
Interest 6,018
Securities sold 2,709
----------
Total assets 4,858,723
----------
LIABILITIES
Payables:
Capital shares redeemed 23,045
Dividends on capital shares 90
Accrued management fees 984
Other accrued expenses and payables 295
----------
Total liabilities 24,414
----------
Net assets applicable to capital shares outstanding $4,834,309
==========
NET ASSETS CONSIST OF:
Paid-in capital $4,834,311
Accumulated loss (2)
----------
Net assets applicable to capital shares outstanding $4,834,309
==========
Capital shares outstanding, no par value 4,834,833
==========
Net asset value, redemption price, and offering price per share $ 1.00
==========
See accompanying notes to financial statements.
================================================================================
14 | USAA MONEY MARKET FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income $59,309
-------
EXPENSES
Management fees 5,747
Administration and servicing fees 2,394
Transfer agent's fees 5,986
Custody and accounting fees 154
Postage 261
Shareholder reporting fees 95
Trustees' fees 17
Registration fees 65
Professional fees 43
Other 30
-------
Total expenses 14,792
-------
NET INVESTMENT INCOME 44,517
-------
NET REALIZED GAIN ON INVESTMENTS
Net realized gain 6
-------
Increase in net assets resulting from operations $44,523
=======
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 15
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited), and year ended
July 31, 2018
---------------------------------------------------------------------------------------------------
1/31/2019 7/31/2018
---------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 44,517 $ 50,016
Net realized gain on investments 6 -
-----------------------------
Increase in net assets resulting from operations 44,523 50,016
-----------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS (44,517) (50,007)
-----------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 3,159,453 5,931,753
Reinvested dividends 44,261 49,721
Cost of shares redeemed (2,993,021) (5,871,143)
-----------------------------
Increase in net assets from capital share transactions 210,693 110,331
-----------------------------
Net increase in net assets 210,699 110,340
NET ASSETS
Beginning of period 4,623,610 4,513,270
-----------------------------
End of period $ 4,834,309 $ 4,623,610
=============================
CHANGE IN SHARES OUTSTANDING
Shares sold 3,159,453 5,931,753
Shares issued for dividends reinvested 44,261 49,721
Shares redeemed (2,993,021) (5,871,143)
-----------------------------
Increase in shares outstanding 210,693 110,331
=============================
See accompanying notes to financial statements.
================================================================================
16 | USAA MONEY MARKET FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
January 31, 2019 (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 47 separate funds.
The USAA Money Market Fund (the Fund) qualifies as a registered investment
company under Accounting Standards Codification Topic 946. The information
presented in this semiannual report pertains only to the Fund, which is
classified as diversified under the 1940 Act and is authorized to issue an
unlimited number of shares. The Fund's investment objective is to seek the
highest income consistent with preservation of capital and the maintenance of
liquidity.
The Fund operates as a retail money market fund in compliance with the
requirements of Rule 2a-7 under the 1940 Act; and as a retail money market fund,
shares of the Fund are available for sale only to accounts that are beneficially
owned by natural persons.
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of USAA Asset Management Company (AMCO or Manager), the investment
adviser to the Fund, and USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services (SAS), the transfer agent to the Fund, announced that AMCO and
SAS would be acquired by Victory Capital Holdings, Inc. (Victory), a global
investment management firm headquartered in Cleveland, Ohio (the Transaction).
The closing of the Transaction is expected to be completed during the second
quarter of 2019, pending satisfaction of certain closing conditions and
approvals, including certain approvals of the Fund's Board of Trustees and of
the Fund's shareholders at a special shareholder meeting to be held on April 18,
2019.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 17
================================================================================
The Transaction is not expected to result in any material changes to the Fund's
investment objectives and principal investment strategies.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Valuation and Liquidity 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.
The Fund utilizes 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 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. All securities held in the Fund are short-term debt securities,
which are valued pursuant to Rule 2a-7 under the 1940 Act. This method
values a security at its purchase price, and thereafter, assumes a
constant amortization to maturity of any premiums or discounts.
2. Repurchase agreements are valued at cost.
3. Securities for which amortized cost valuations are considered
unreliable or whose values have been materially affected by a
significant event are valued in good faith at fair value, using methods
determined by the Committee, under procedures to stabilize net assets
and valuation procedures approved by the Board.
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.
================================================================================
18 | USAA MONEY MARKET FUND
================================================================================
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 indexes.
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. For example, money market securities are valued using amortized
cost, in accordance with rules under the 1940 Act. Generally, amortized
cost approximates the current fair value of a security, but since the value
is not obtained from a quoted price in an active market, such securities
are reflected as Level 2.
C. INVESTMENTS IN SECURITIES - Securities transactions are accounted for as
of the date the securities are purchased or sold (trade date). Gains or
losses from sales of investment securities are computed on the identified
cost basis. Interest income is recorded daily on the accrual basis.
Premiums and discounts are amortized over the life of the respective
securities using the straight-line method.
D. FEDERAL TAXES - The Fund's policy is to comply with the requirements of
the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its taxable
income and net capital gains, if any, to its shareholders. Therefore, no
federal income tax provision is required.
For the six-month period ended January 31, 2019, 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 the Fund's tax basis to
determine if adjustments to this conclusion are necessary. The statute of
limitations on the Fund's tax return filings generally remain open for the
three preceding fiscal reporting year ends and remain
================================================================================
NOTES TO FINANCIAL STATEMENTS | 19
================================================================================
subject to examination by the Internal Revenue Service and state taxing
authorities.
E. REPURCHASE AGREEMENTS - The Fund may enter into repurchase agreements
with commercial banks or recognized security dealers pursuant to the terms
of a Master Repurchase Agreement. A repurchase agreement is an arrangement
wherein the Fund purchases securities and the seller agrees to repurchase
the securities at an agreed upon time and at an agreed upon price. The
purchased securities are marked-to-market daily to ensure their value is
equal to or in excess of the purchase price plus accrued interest and are
held by the Fund, either through its regular custodian or through a special
"tri-party" custodian that maintains separate accounts for both the Fund
and its counterparty, until maturity of the repurchase agreement. Master
Repurchase Agreements typically contain netting provisions, which provide
for the net settlement of all transactions and collateral with the Fund
through a single payment in the event of default or termination. Repurchase
agreements are subject to credit risk, and the Fund's Manager monitors the
creditworthiness of sellers with which the Fund may enter into repurchase
agreements.
Investments in repurchase agreements as presented on the Portfolio of
Investments are not net settlement amounts but gross. At January 31, 2019,
the value of the related collateral exceeded the value of the repurchase
agreements, reducing the net settlement amount to zero. Details on the
collateral are included on the Portfolio of Investments.
F. SECURITIES PURCHASED ON A DELAYED-DELIVERY OR WHEN-ISSUED BASIS - Delivery
and payment for securities that have been purchased by the Fund on a
delayed-delivery or when-issued basis can take place a month or more after
the trade date. During the period prior to settlement, these securities do
not earn interest, are subject to market fluctuation, and may increase or
decrease in value prior to their delivery. The Fund maintains segregated
assets with a market value equal to or greater than the amount of its
purchase commitments.
G. INDEMNIFICATIONS - Under the Trust's organizational documents, its
officers and trustees are indemnified against certain liabilities arising
out of the performance of their duties to the Trust. In addition, in the
================================================================================
20 | USAA MONEY MARKET FUND
================================================================================
normal course of business, the Trust enters into contracts that contain a
variety of representations and warranties that provide general
indemnifications. The Trust's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the
Trust that have not yet occurred. However, the Trust expects the risk of
loss to be remote.
H. USE OF ESTIMATES - The preparation of financial statements in
conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that may affect the reported
amounts in the financial statements.
(2) LINE OF CREDIT
The Fund participates, along with other funds of the Trust and USAA ETF Trust
(together, the Trusts), 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 provide temporary or emergency
cash needs, including redemption requests that might otherwise require the
untimely disposition of securities. Subject to availability (including usage of
the facility by other funds of the Trusts), the Fund may borrow from CAPCO an
amount up to 5% of the Fund's total assets at an interest rate based on the
London Interbank Offered Rate (LIBOR), plus 100.0 basis points.
The Trusts are also assessed facility fees by CAPCO in the amount of 14.0 basis
points of the amount of the committed loan agreement. Prior to September 30,
2018, the maximum annual facility fee was 13.0 basis points of the amount of the
committed loan agreement. The facility fees are allocated among the funds of the
Trusts based on their respective average daily net assets for the period.
The Trusts may request an optional increase of the committed loan agreement from
$500 million up to $750 million. If the Trusts increase the committed loan
agreement, the assessed facility fee on the amount of the additional commitment
will be 15.0 basis points.
For the six-month period ended January 31, 2019, the Fund paid CAPCO facility
fees of $20,000, which represents 5.9% of the total fees paid to
================================================================================
NOTES TO FINANCIAL STATEMENTS | 21
================================================================================
CAPCO by the funds of the Trusts. The Fund had no borrowings under this
agreement during the six-month period ended January 31, 2019.
(3) DISTRIBUTIONS
The tax basis of distributions and any accumulated undistributed net investment
income will be determined as of the Fund's tax year-end of July 31, 2019, in
accordance with applicable federal tax law.
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. Distributions of realized gains from security transactions
not offset by capital losses are made annually in the succeeding fiscal year or
as otherwise required to avoid the payment of federal taxes.
At July 31, 2018, the Fund had no capital loss carryforwards, for federal income
tax purposes.
(4) TRANSACTIONS WITH MANAGER
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 the Fund's assets, subject to the
authority of and supervision by the Board.
The Fund's investment management fee is accrued daily and paid monthly at an
annualized rate of 0.24% of the Fund's average daily net assets. For the
six-month period ended January 31, 2019, the Fund incurred management fees, paid
or payable to the Manager, of $5,747,000.
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 at an annualized rate of 0.10% of the Fund's
average daily net assets. For the six-month period ended January 31, 2019, the
Fund incurred administration and servicing fees, paid or payable to the Manager,
of $2,394,000.
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
================================================================================
22 | USAA MONEY MARKET FUND
================================================================================
reimbursement of a portion of these expenses incurred by the Manager. For the
six-month period ended January 31, 2019, the Fund reimbursed the Manager less
than $500 for these compliance and legal services. These expenses are included
in the professional fees on the Fund's Statement of Operations.
TRANSFER AGENT'S FEES - SAS, an affiliate of the Manager, provides transfer
agent services to the Fund. The Fund's transfer agent's fees are accrued daily
and paid monthly at an annualized rate of 0.25% of the Fund's average daily net
assets for the fiscal year. SAS pays a portion of these fees to certain
intermediaries for the administration and servicing of accounts that are held
with such intermediaries. For the six-month period ended January 31, 2019, the
Fund incurred transfer agent's fees, paid or payable to SAS, of $5,986,000.
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 fee or other compensation for these services.
(5) TRANSACTIONS WITH AFFILIATES
The Manager is indirectly wholly owned by 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.
(6) UPCOMING REGULATORY MATTERS
In October 2016, the U.S. Securities and Exchange Commission (SEC) issued Final
Rule Release No. 33-10233, INVESTMENT COMPANY LIQUIDITY RISK MANAGEMENT PROGRAMS
(Liquidity Rule). The Liquidity Rule requires funds to establish a liquidity
risk management program and enhances disclosures regarding funds' liquidity. The
requirements to implement a liquidity risk management program and establish a
15% illiquid investment limit became effective December 1, 2018. However, in
February 2018, the SEC issued Release No. IC-33010, INVESTMENT COMPANY LIQUIDITY
RISK MANAGEMENT
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
PROGRAMS; COMMISSION GUIDANCE FOR IN-KIND ETFs, which delayed certain
requirements related to liquidity classification, highly liquid investment
minimums, and board approval of the liquidity risk management programs to June
1, 2019. The Manager continues to evaluate the impact of this rule on the Fund's
financial statements and various filings.
(7) RECENTLY ADOPTED ACCOUNTING STANDARDS
In August 2018, the SEC adopted amendments to Regulation S-X for investment
companies governing the form and content of financial statements. The amendments
to Regulation S-X took effect on November 5, 2018, and the financial statements
have been modified accordingly, for the current and prior periods.
ASU 2018-13, FAIR VALUE MEASUREMENT
-----------------------------------
In August 2018, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2018-13, Fair Value Measurement (Topic 820).
The amendments in the ASU impact disclosure requirements for fair value
measurement. ASU 2018-13 is effective for fiscal years beginning after December
15, 2019. Early adoption is permitted and can include the entire standard or
certain provisions that exclude or amend disclosures. Management has elected to
early adopt ASU 2018-13 effective with the current reporting period. The
adoption of ASU 2018-13 guidance is limited to changes in the Fund's notes to
financial statement disclosures regarding valuation method, fair value, and
transfers between levels of the fair value hierarchy.
================================================================================
24 | USAA MONEY MARKET FUND
================================================================================
FINANCIAL HIGHLIGHTS
(UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
----------------------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
----------------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------------------------------------------------------------------------------------------
Income from
investment operations:
Net investment income .01 .01 .00(a) .00(a) .00(a) .00(a)
Net realized and
unrealized gain(a) .00 .00 .00 .00 .00 .00
----------------------------------------------------------------------------------------------
Total from investment
operations .01 .01 .00(a) .00(a) .00(a) .00(a)
----------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.01) (.01) (.00)(a) (.00)(a) (.00)(a) (.00)(a)
Realized capital gains - - (.00)(a) (.00)(a) - (.00)(a)
----------------------------------------------------------------------------------------------
Total distributions (.01) (.01) (.00)(a) (.00)(a) (.00)(a) (.00)(a)
----------------------------------------------------------------------------------------------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
==============================================================================================
Total return (%)* .94 1.13 .31(b) .01(b) .01(b) .01(b)
Net assets at end
of period (000) $4,834,309 $4,623,610 $4,513,270 $5,606,434 $5,289,252 $5,192,675
Ratios to average
daily net assets:**
Expenses (%) .62(c) .62 .63(b),(d) .41(b),(d) .24(b),(d) .22(b)
Expenses, excluding
reimbursements (%) .62(c) .62 .63(d) .67(d) .65(d) .63
Net investment
income (%) 1.86(c) 1.12 .29 .01 .01 .01
* 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
iMoneyNet reported return. Total returns for periods of less than one year
are not annualized.
** For the six-month period ended January 31, 2019, average daily net assets
were $4,750,682,000.
(a) Represents less than $0.01 per share.
(b) The Manager voluntarily agreed, on a temporary basis, to reimburse
management, administrative, or other fees to limit the Fund's expenses and
attempt to prevent a negative yield.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) Reflects total annual operating expenses of the Fund before reductions of
any expenses paid indirectly. The Fund's expenses paid indirectly decreased
the expense ratio by less than 0.01%.
================================================================================
FINANCIAL HIGHLIGHTS | 25
================================================================================
EXPENSE EXAMPLE
January 31, 2019 (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 August 1, 2018, through
January 31, 2019.
ACTUAL EXPENSES
The line labeled "actual" in the table 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 "actual" 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 line labeled "hypothetical" in 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
================================================================================
26 | USAA MONEY MARKET FUND
================================================================================
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled "hypothetical"
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 AUGUST 1, 2018 -
AUGUST 1, 2018 JANUARY 31, 2019 JANUARY 31, 2019
-----------------------------------------------------------------
Actual $1,000.00 $1,009.40 $3.14
Hypothetical
(5% return before expenses) 1,000.00 1,022.08 3.16
*Expenses are equal to the Fund's annualized expense ratio of 0.62%, which is
net of any reimbursements and expenses paid indirectly, multiplied by the
average account value over the period, multiplied by 184 days/365 days (to
reflect the one-half-year period). The Fund's actual ending account value is
based on its actual total return of 0.94% for the six-month period of August
1, 2018, through January 31, 2019.
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EXPENSE EXAMPLE | 27
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ADVISORY AGREEMENT(S)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with Victory Capital
Holdings, Inc. ("Victory Holdings") pursuant to which Victory Holdings would
acquire all of the outstanding stock of AMCO and USAA Transfer Agency Company
d/b/a USAA Shareholder Account Services ("USAA Transfer Agent") (the
"Transaction"). The Independent Trustees were advised that the Transaction, if
completed, would constitute
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28 | USAA MONEY MARKET FUND
================================================================================
an "assignment" (as that term is defined in Section 2(a)(4) of the 1940 Act) and
result in the automatic termination of the Existing Management Agreements
("Change of Control Event"). The Independent Trustees also were advised that it
was proposed that Victory Capital, a subsidiary of Victory Holdings, would serve
as the investment adviser to each Fund after the closing of the Transaction
("Post-Transaction") and that the Board would be asked to consider approval of
the terms and conditions of the New Advisory Agreement with Victory Capital and
thereafter to submit the New Advisory Agreement to each Fund's shareholders for
approval. Because the Change of Control Event also would result in the
termination of each existing subadvisory agreement between AMCO and the
subadvisers to the Funds ("Existing Subadvisory Agreements"), the Independent
Trustees were advised that the Board would also be asked to approve the New
Subadvisory Agreements.
In anticipation of the Transaction, the Trustees met at a series of subsequent
in-person meetings on November 27-28, 2018, January 7-8, 2019, and January
14-15, 2019, which included meetings of the full Board and separate meetings of
the Independent Trustees for the purposes of considering, among other things:
whether it would be in the best interests of each Fund and its respective
shareholders to approve the New Agreements; and the anticipated impacts of the
Transaction on the Funds and their shareholders (each, a "Meeting"). During each
of these Meetings, the Board sought additional and clarifying information as it
deemed necessary or appropriate. In this connection, the Independent Trustees
worked with their independent legal counsel to prepare formal due diligence
requests (the "Diligence Requests") that were submitted to Victory Capital,
Victory Capital Advisers, Inc. ("VCA"), and the subadvisers. The Diligence
Requests sought information relevant to the Board's consideration of the New
Advisory Agreement, the New Subadvisory Agreements, distribution arrangements,
and other anticipated impacts of the Transaction on the Funds and their
shareholders. Victory Capital, VCA, and the subadvisers provided documents and
information in response to the Diligence Requests (the "Response Materials").
Following their review of the Response Materials, the Independent Trustees
submitted a supplemental due diligence request for additional and clarifying
information (the "Supplemental Diligence Request") to Victory Capital and VCA.
Victory
================================================================================
ADVISORY AGREEMENT(S) | 29
================================================================================
Capital and VCA provided further information in response to the Supplemental
Diligence Request, which the Board reviewed. Senior management representatives
of Victory Capital and/or AMCO participated in a portion of each Meeting and
addressed various questions raised by the Board. Throughout the process, the
Independent Trustees were assisted by their independent legal counsel and
counsel to the Funds, who advised them on, among other things, their duties and
obligations relating to their consideration of the New Agreements.
The Board's evaluation of the New Agreements reflected the information provided
specifically in connection with its review of the New Agreements, as well as,
where relevant, information that was previously furnished to the Board in
connection with the most recent renewal of the Existing Management Agreements
and Existing Subadvisory Agreements at an in-person meeting of the Board on
April 18, 2018 (the "2018 15(c) Meeting") and at other subsequent Board meetings
in 2018. The Board's evaluation of the New Agreements also reflected the
knowledge gained as Board members of the Funds with respect to services provided
by AMCO, its affiliates, and each subadviser to the Funds.
The Board's approvals and recommendations were based on its determination,
within its business judgment, that it would be in the best interests of each
Fund and its respective shareholders, for Victory Capital and, as applicable,
the subadvisers, to provide investment advisory, investment subadvisory, and
related services to the Funds, following the closing of the Transaction.
FACTORS CONSIDERED IN APPROVING THE NEW ADVISORY AGREEMENT
In connection with the Board's consideration of the New Advisory Agreement,
Victory Capital and AMCO advised the Board about a variety of matters, including
the following:
o The nature, extent, and quality of the services to be provided to the
Funds by Victory Capital Post-Transaction are expected to be of at least
the same level as the services currently provided to the Funds by AMCO.
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30 | USAA MONEY MARKET FUND
================================================================================
o Victory Capital's stated commitment to maintaining and enhancing the
USAA member/USAA Fund shareholder experience, including creating a
dedicated USAA Fund sales and client service call center that will
provide ongoing client service and advice to existing and new USAA
members.
o Victory Capital proposes to: (1) replace the underlying indexes for
the USAA Extended Market Index Fund and USAA S&P 500 Index Fund with
indexes designed to provide shareholders with comparable exposure and
investment outcomes; (2) change the USAA Extended Market Index Fund's
and USAA S&P 500 Index Fund's investment objectives and strategies in
light of the changes to their underlying indexes; and (3) change the
name of the USAA S&P 500 Index Fund to the USAA 500 Index Fund.
o Victory Capital does not propose changes to the investment
objective(s) of any other Funds. Although the investment processes used
by Victory Capital's portfolio managers may differ from those used by
AMCO's portfolio managers or, if applicable, any subadviser's portfolio
managers, such differences are not currently expected to result in
changes to the principal investment strategies or principal investment
risks of the Funds.
o The New Advisory Agreement does not change any Fund's advisory fee
rate or the computation method for calculating such fees (except that
Victory Capital, subject to Board approval, may in the future use a
single designated share class to calculate the performance adjustment).
For at least two years after the Transaction closes, Victory Capital has
agreed to waive fees and/or reimburse expenses so that each Fund's
annual expense ratio (excluding certain customary items) does not exceed
the levels reflected in each Fund's most recent audited financial
statements at the time the Transaction closes (or the levels of AMCO's
then-current expense caps, if applicable), excluding the impact of any
performance adjustment to the Fund's advisory fee.
================================================================================
ADVISORY AGREEMENT(S) | 31
================================================================================
o The portfolio managers at AMCO that manage the Fixed Income Funds(1) as
well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be advised
by Victory Capital through its Victory Solutions platform, Victory
Capital proposes that the same subadvisers be retained Post-Transaction,
although Victory Capital may change the allocation to a particular
subadviser Post-Transaction. No changes are expected to the portfolio
managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's
(1)The Fixed Income Funds include the following Funds: California Bond Fund,
Government Securities Fund, High Income Fund, Income Fund, Intermediate-Term
Bond Fund, Tax Exempt Intermediate-Term Fund, Tax Exempt Long-Term Fund, New
York Bond Fund, Short-Term Bond Fund, Tax Exempt Short- Term Fund, Ultra
Short-Term Bond Fund, Virginia Bond Fund, Money Market Fund, Tax Exempt Money
Market Fund and Treasury Money Market Trust.
(2)The Cornerstone Funds include the following Funds: Cornerstone Aggressive
Fund, Cornerstone Conservative Fund, Cornerstone Equity Fund, Cornerstone
Moderate Fund, Cornerstone Moderately Aggressive Fund, and Cornerstone
Moderately Conservative Fund.
(3)The Target Retirement Funds include the following Funds: Target Retirement
2020 Fund, Target Retirement 2030 Fund, Target Retirement 2040 Fund, Target
Retirement 2050 Fund, Target Retirement 2060 Fund, and Target Retirement
Income Fund.
================================================================================
32 | USAA MONEY MARKET FUND
================================================================================
businesses to Victory Capital. Victory Capital and USAA expect to enter
into a transition services agreement under which USAA will continue to
provide Victory Capital with certain services that are currently
provided by USAA to AMCO and the USAA Transfer Agent for a specified
period of time after the closing of the Transaction to assist Victory
Capital in transitioning the USAA member distribution channel and member
support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital
================================================================================
ADVISORY AGREEMENT(S) | 33
================================================================================
is capable of providing the same level of investment management services
currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund, Growth
& Income Fund, Income Stock Fund, Global Equity Income Fund, and Precious
Metals and Minerals Fund.
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34 | USAA MONEY MARKET FUND
================================================================================
The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored and managed by
Victory Capital ("Victory Funds") with similar investment
================================================================================
ADVISORY AGREEMENT(S) | 35
================================================================================
objectives and strategies managed by the portfolio managers who would manage the
Funds. Based on information presented to the Board at the Meetings and its
discussions with Victory Capital, the Board concluded that Victory Capital is
capable of generating a level of long-term investment performance that is
appropriate in light of each Fund's investment objectives, strategies and
restrictions.
FEES TO BE PAID TO VICTORY CAPITAL AND EXPENSES OF THE FUNDS - The Board
considered that it had reviewed each Fund's existing advisory fee rate and
computation method for calculating such fees at the 2018 15(c) Meeting. The
Board considered that the New Advisory Agreement does not change any Fund's
advisory fee rate or the computation method for calculating such fees, except
that Victory Capital, subject to Board approval, may in the future use a single
designated share class to calculate the performance adjustment and apply the
resulting performance adjustment across each other class of shares of the Fund.
The Board considered that the use of a single designated class to calculate the
performance adjustment for each other class of shares of the Fund could mean
that shareholders of a class other than the class used to measure the
performance adjustment may pay a performance adjustment that is higher or lower
than if the adjustment were calculated on a class by class basis, primarily due
to the impact of differences in the fees and expenses between share classes on
performance. The Board considered that the New Advisory Agreement stipulates
that the period for measuring performance for calculating a Fund's performance
adjustment begins on the date that Victory Capital begins managing the Fund;
therefore, no performance adjustments will be made for the first twelve months
of the New Advisory Agreement, consistent with applicable regulations. The Board
also considered Victory Capital's contractual commitment under the expense
limitation agreement ("ELA") to waive fees and/or reimburse expenses for at
least two years after the closing of the Transaction, so that each Fund's annual
expense ratio (excluding acquired fund fees and expenses, any performance
adjustment to a Fund's advisory fee, interest, taxes, brokerage commissions,
other expenditures which are capitalized in accordance with generally accepted
accounting principles, and other extraordinary expenses not incurred in the
ordinary course of such Fund's business) does not exceed the levels reflected in
each Fund's most recent audited financial statements at the time the
================================================================================
36 | USAA MONEY MARKET FUND
================================================================================
Transaction closes (or the levels of AMCO's then-current expense caps, if
applicable), excluding the impact of any performance adjustment to a Fund's
advisory fee. The Board considered that the ELA permits Victory Capital to
recoup advisory fees waived and expenses reimbursed for up to three years after
the fiscal year in which the waiver or reimbursement took place, subject to the
lesser of any operating expense limitation in effect at the time of: (1) the
original waiver or expense reimbursement; or (2) recoupment. The Board also
considered that Victory Capital and AMCO had represented to the Board that they
will use their best efforts to ensure that they and their respective affiliates
do not take any action that imposes an "unfair burden" on the Funds as a result
of the Transaction or as a result of any express or implied terms, conditions or
understandings applicable to the Change of Control Event, for so long as the
requirements of Section 15(f) of the 1940 Act apply. The Board also considered
a comparison of the proposed advisory fees to be paid by each Fund to the
advisory fees paid by funds and other accounts managed by Victory Capital deemed
to be comparable to the Fund in terms of investment objectives and strategies.
The Board considered that, with few exceptions, mostly involving weighted
average fees for separate accounts, the advisory fees to be paid by the Funds
were lower than the fees paid by these other funds and accounts. The Board
concluded that the retention of Victory Capital was unlikely to impose an unfair
burden on the Funds because, after the Transaction, none of AMCO, Victory
Capital, VCA, or any of their respective affiliates, would be entitled to
receive any compensation directly or indirectly (i) from any person in
connection with the purchase or sale of securities or other property to, from,
or on behalf of the Funds (other than ordinary fees for bona fide principal
underwriting services), or (ii) from the Funds or their shareholders for other
than bona fide investment advisory or other services. Based on its review, the
Board determined, with respect to each Fund, that Victory Capital's advisory fee
is fair and reasonable.
THE EXTENT TO WHICH VICTORY CAPITAL MAY REALIZE ECONOMIES OF SCALE AS THE FUNDS
GROW LARGER AND WHETHER FEE LEVELS REFLECT THESE ECONOMIES OF SCALE FOR THE
BENEFIT OF FUND SHAREHOLDERS - The Board considered potential or anticipated
economies of scale in relation to the services Victory Capital would provide to
each Fund. The Board considered that the New Advisory Agreement includes the
same advisory fee breakpoints for the same Funds as
================================================================================
ADVISORY AGREEMENT(S) | 37
================================================================================
the Existing Advisory Agreements. The Board also considered that Victory Capital
has contractually agreed to cap the Funds' annual operating expense ratios,
pursuant to the ELA, which will remain in effect for at least two years from the
closing of the Transaction, and may be extended. The Board also considered
Victory Capital's representation that the significant increase in its assets
under management Post-Transaction may reasonably be expected to enable the new
combined firm to reach greater economies of scale in a shorter time frame. The
Board noted that it will have the opportunity to periodically re-examine whether
a Fund or the Trust has achieved economies of scale, and the appropriateness of
investment advisory and administrative fees payable to Victory Capital, in the
future.
THE PROFITS TO BE REALIZED BY VICTORY CAPITAL AND ITS AFFILIATES FROM THEIR
RELATIONSHIP WITH THE TRUST - The Board considered the benefits Victory Capital
and its affiliates may derive from their relationship with the Funds, including
compensation to be paid to Victory Capital for the provision of certain
administrative, fund accounting and shareholder services to the Funds and
compensation to be paid to USAA Transfer Agent for the provision of transfer
agency services to the Funds. The Board considered the significant investments
Victory Capital expected to make to support and grow the USAA member channel and
the costs to integrate the USAA Fund business into Victory Capital. The Board
also considered Victory Capital's profitability report presented to the board of
trustees of the Victory Funds in connection with their most recent 15(c)
process. The Board considered Victory Capital's representation that the fully
integrated USAA Fund business, including investments to support ongoing growth,
was expected to have an overall marginally positive impact on Victory Capital's
overall financial profitability. The Board noted the difficulty of accurately
projecting profitability under the current circumstance and noted that it would
have the opportunity to give further consideration to Victory Capital's
profitability with respect to the Funds at the end of the initial two-year term
of the New Advisory Agreement.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
================================================================================
38 | USAA MONEY MARKET FUND
================================================================================
deliver investment products and services to USAA's direct member-based channel.
The Board also considered that Victory Capital may derive reputational and other
benefits from its ability to use "USAA" and related names in connection with
operating and marketing the Funds. The Board considered that the Transaction, if
completed, would significantly increase Victory Capital's assets under
management and expand Victory Capital's investment capabilities. This increased
size and diversification could facilitate Victory Capital's continued investment
in its business and products, which Victory Capital would be able to leverage
across a broader base of assets. Victory Capital also would be able to use
trading commission credits from the Funds' transactions in securities to
"purchase" third party research and execution services to support its investment
process. Based on its review, the Board determined that any "fall-out" benefits
and other types of benefits that may accrue to Victory Capital are fair and
reasonable.
CONCLUSIONS - Based on the foregoing and other relevant considerations, at the
Meeting of the Board held on January 15, 2019, the Board, including a majority
of the Independent Trustees, acting within its business judgment, (1) concluded
that the terms of the New Advisory Agreement are fair and reasonable and that
approval of the New Advisory Agreement is in the best interests of each Fund and
its respective shareholders, (2) voted to approve the New Advisory Agreement,
and (3) voted to recommend approval of the New Advisory Agreement by
shareholders of the Funds. The Board evaluated all information available to it
on a Fund-by-Fund basis and its determinations were made separately in respect
of each Fund. The Board noted some factors may have been more or less important
with respect to any particular Fund and that no one factor was determinative of
its decisions which, instead, were premised upon the totality of factors
considered. In this connection, the Board also noted that different Board
members likely placed emphasis on different factors in reaching their individual
conclusions to vote in favor of the New Advisory Agreement and to recommend
approval of the New Advisory Agreement by shareholders of the Funds.
FACTORS CONSIDERED IN APPROVING THE NEW SUBADVISORY AGREEMENTS
In approving the New Subadvisory Agreements with each of Barrow, Hanley,
Mewhinney & Strauss, LLC, Brandes Investment Partners, L.P., ClariVest Asset
================================================================================
ADVISORY AGREEMENT(S) | 39
================================================================================
Management LLC, Epoch Investment Partners, Inc., Granahan Investment Management,
Inc., Lazard Asset Management LLC, Loomis, Sayles & Company LP, Massachusetts
Financial Services Company, Northern Trust Investments, Inc., QS Investors, LLC,
The Renaissance Group LLP and Wellington Management Company LLP (each, a
"Subadviser" and together the "Subadvisers") with respect to the applicable
Funds, the Board considered various factors, among them: (i) the nature, extent,
and quality of services to be provided to the applicable Funds by the
Subadvisers; (ii) each Subadviser's compensation and any other benefits derived
from the subadvisory relationship; (iii) comparisons, to the extent applicable,
of subadvisory fees and performance to comparable investment companies; and (iv)
the terms of each New Subadvisory Agreement. The Board's evaluation of the New
Subadvisory Agreements reflected the information provided specifically in
connection with its review of the New Subadvisory Agreements, as well as, where
relevant, information that was previously furnished to the Board in connection
with the most recent renewal of the Existing Subadvisory Agreements at the 2018
15(c) meeting and at other subsequent Board meetings in 2018. A summary of the
Board's analysis of these factors is set forth below. After full consideration
of a variety of factors, the Board, including the Independent Trustees, voted to
approve each New Subadvisory Agreement. In approving each New Subadvisory
Agreement, the Board did not identify any single factor as controlling, and each
Trustee may have attributed different weights to various factors. The
Independent Trustees reviewed the proposed approval of the New Subadvisory
Agreements in private sessions with their independent legal counsel at which no
representatives of Victory Capital or AMCO were present.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY THE
SUBADVISERS - The Board considered information provided to them regarding the
services to be provided by each Subadviser, including information presented
periodically throughout the previous year. The Board considered each
Subadviser's level of knowledge and investment style. The Board reviewed the
experience and credentials of the investment personnel who are responsible for
managing the investment of portfolio securities with respect to each applicable
Fund and each Subadviser's level of staffing. The Board also noted each
Subadviser's brokerage practices. The Board also considered
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40 | USAA MONEY MARKET FUND
================================================================================
each Subadviser's regulatory and compliance history. The Board also took into
account each Subadviser's risk management processes. The Board noted that AMCO's
monitoring processes of each Subadviser include, and Victory Capital's expected
monitoring processes of each Subadviser would include, among others: (i) regular
telephonic meetings to discuss, among other matters, investment strategies and
to review portfolio performance; (ii) monthly portfolio compliance checklists
and quarterly compliance certifications to the Board; and (iii) due diligence
visits to each Subadviser. The Board also considered that the terms and
conditions of the New Subadvisory Agreements are substantially similar to the
terms and conditions of the Existing Subadvisory Agreements.
SUBADVISER COMPENSATION - The Board took into account the financial condition of
each Subadviser. In considering the cost of services to be provided by each
Subadviser and the profitability to that Subadviser of its relationship with the
applicable Fund, the Board noted that the fees under the New Subadvisory
Agreements will be paid by Victory Capital. The Board also relied on the ability
of AMCO to negotiate each Existing Subadvisory Agreement and the fees thereunder
at arm's length. The Board considered that the fee rate to be payable under each
New Subadvisory Agreement were proposed to be identical to the fee rate
currently payable under each corresponding Existing Subadvisory Agreement. For
the above reasons, the Board determined that the expected profitability of each
Subadviser from its relationship with the applicable Fund was not a material
factor in its deliberations with respect to the consideration of the approval of
each New Subadvisory Agreement. For similar reasons, the Board concluded that
the potential for economies of scale in each Subadviser's management of the
applicable Fund was not a material factor in considering each New Subadvisory
Agreement, although the Board noted that certain New Subadvisory Agreements
contain breakpoints in their fee schedules.
SUBADVISORY FEES AND FUND PERFORMANCE - The Board previously compared the
subadvisory fees for each applicable Fund with the fees that each Subadviser
charges comparable clients, as applicable. The Board considered that each
applicable Fund will pay a management fee to Victory Capital and that, in turn,
Victory Capital will pay a subadvisory fee to each Subadviser.
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ADVISORY AGREEMENT(S) | 41
================================================================================
At the 2018 15(c) meeting, the Board considered, among other data, each
applicable Fund's performance over shorter and longer term periods, as compared
to each Fund's respective peer group and noted that the Board reviews at its
regularly scheduled meetings information about each Fund's performance results.
The Board considered Victory Capital's capabilities with respect to monitoring
the performance, investment style and risk-adjusted performance of each
Subadviser. The Board also noted each Subadviser's performance record for
similar accounts, as applicable.
CONCLUSIONS - The Board reached the following conclusions regarding each New
Subadvisory Agreement, among others: (i) each Subadviser is qualified to manage
the applicable Fund's assets in accordance with its investment objective and
policies; (ii) each Subadviser maintains an appropriate compliance program;
(iii) the performance of each applicable Fund is reasonable in relation to the
performance of funds with similar investment objectives and to relevant indices
in view of the Fund's investment approach and Victory Capital is expected to
appropriately monitor each Fund's performance; and (iv) each Fund's advisory
expenses are reasonable in relation to those of similar funds and to the
services to be provided by Victory Capital and each Subadviser. Based on its
conclusions, the Board determined that the approval of each New Subadvisory
Agreement with respect to each applicable Fund would be in the best interests of
the Fund and its shareholders.
================================================================================
42 | USAA MONEY MARKET FUND
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Richard Y. Newton III
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN, State Street Bank and Trust Company
ACCOUNTING AGENT, AND P.O. Box 1713
SUB-ADMINISTRATOR Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
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) or (210) 531-8722;
(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 monthly portfolio holdings with the SEC
for the first and third quarters of each fiscal year as an exhibit to its
reports on Form N-PORT (beginning with filings after March 31, 2019).
Previously, the Fund made its complete schedule of portfolio holdings available
after the first and third fiscal quarters in regulatory filings on Form N-Q. The
Fund's Forms N-CSR, N-PORT, and N-Q are available at no charge (i) by calling
(800) 531-USAA (8722) or (210) 531-8722; (ii) at USAA.COM; and (iii) on the
SEC's website at HTTP://WWW.SEC.GOV.
================================================================================
--------------
USAA PRSRT STD
9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
--------------
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================================================================================
23428-0319 (C)2019, USAA. All rights reserved.
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA SMALL CAP STOCK FUND]
================================================================================
SEMIANNUAL REPORT
USAA SMALL CAP STOCK FUND
FUND SHARES (USCAX) o INSTITUTIONAL SHARES (UISCX)
JANUARY 31, 2019
================================================================================
Beginning on January 1, 2021, as permitted by regulations adopted by the
Securities and Exchange Commission, paper copies of the Fund's shareholder
reports like this one will no longer be sent by mail, unless you specifically
request paper copies of the reports from the Fund or from your financial
intermediary, such as a broker-dealer or bank. Instead, the reports will be made
available on usaa.com, and you will be notified by mail each time a report is
posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will
not be affected by this change and you need not take any action. You may elect
to receive shareholder reports and other communications from the Fund or your
financial intermediary electronically by notifying your financial intermediary
directly, or if you are a direct investor, by calling (800) 531-USAA (8722) or
logging on to usaa.com.
You may elect to receive all future reports in paper free of charge. You can
inform the Fund or your financial intermediary that you wish to continue
receiving paper copies of your shareholder reports by notifying your financial
intermediary directly, or if you are a direct investor, by calling (800)531-USAA
(8722) or logging on to usaa.com. Your election to receive reports in paper will
apply to all funds held with the USAA family of funds or your financial
intermediary.
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
INVESTMENT OVERVIEW 1
FINANCIAL INFORMATION
Portfolio of Investments 2
Notes to Portfolio of Investments 15
Financial Statements 17
Notes to Financial Statements 21
Financial Highlights 36
EXPENSE EXAMPLE 38
ADVISORY AGREEMENT(S) 40
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.
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 tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. 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.
(C)2019, USAA. All rights reserved.
================================================================================
================================================================================
INVESTMENT OVERVIEW
--------------------------------------------------------------------------------
o TOP 10 HOLDINGS - 1/31/19 o
(% of Net Assets)
TriMas Corp. .............................................................. 1.4%
Exact Sciences Corp. ...................................................... 1.3%
WNS Holdings Ltd. ADR ..................................................... 1.3%
First Midwest Bancorp, Inc. ............................................... 1.1%
Northwest Bancshares, Inc. ................................................ 1.1%
Belden, Inc. .............................................................. 1.1%
MB Financial, Inc. ........................................................ 1.1%
ESCO Technologies, Inc. ................................................... 1.0%
Mueller Industries, Inc. .................................................. 1.0%
Orion Engineered Carbons S.A. ............................................. 0.9%
o SECTOR ALLOCATION* - 1/31/19 o
(% of Net Assets)
[PIE CHART OF SECTOR ALLOCATION]
FINANCIAL 25.1%
CONSUMER, NON-CYCLICAL 22.0%
INDUSTRIAL 16.7%
TECHNOLOGY 11.2%
CONSUMER, CYCLICAL 8.0%
COMMUNICATIONS 4.5%
ENERGY 4.3%
BASIC MATERIALS 3.9%
UTILITIES 2.4%
[END PIE CHART]
*Does not include money market instruments and short-term investments purchased
with cash collateral from securities loaned.
Percentages are of the net assets of the Fund and may not equal 100%.
Refer to the Portfolio of Investments for a complete list of securities.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
================================================================================
INVESTMENT OVERVIEW | 1
================================================================================
PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
EQUITY SECURITIES (98.1%)
COMMON STOCKS (98.1%)
BASIC MATERIALS (3.9%)
----------------------
CHEMICALS (2.5%)
154,300 Huntsman Corp. $ 3,390
181,532 OMNOVA Solutions, Inc.(a) 1,618
523,947 Orion Engineered Carbons S.A. 14,456
207,732 Sensient Technologies Corp. 13,041
71,550 Stepan Co. 6,291
----------
38,796
----------
FOREST PRODUCTS & PAPER (0.9%)
138,906 Neenah, Inc. 9,678
174,000 Resolute Forest Products, Inc. 1,357
90,900 Verso Corp. "A"(a) 2,242
----------
13,277
----------
IRON/STEEL (0.5%)
378,618 Cleveland-Cliffs, Inc. 4,055
189,800 Commercial Metals Co. 3,312
88,900 Ryerson Holding Corp.(a) 625
----------
7,992
----------
Total Basic Materials 60,065
----------
COMMUNICATIONS (4.5%)
---------------------
ADVERTISING (0.1%)
5,500 Trade Desk, Inc. "A"(a) 785
----------
INTERNET (3.3%)
41,300 ANGI Homeservices, Inc. "A"(a) 702
112,300 Attunity Ltd.(a) 2,791
76,402 Etsy, Inc.(a) 4,175
2,812,344 Limelight Networks, Inc.(a) 8,774
17,400 Match Group, Inc. 931
87,190 Mimecast Ltd.(a) 3,276
56,670 Okta, Inc.(a) 4,671
205,100 Perficient, Inc.(a) 5,232
17,500 Proofpoint, Inc.(a) 1,783
================================================================================
2 | USAA SMALL CAP STOCK FUND
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
11,882 RingCentral, Inc. "A"(a) $ 1,098
93,200 Rubicon Project, Inc.(a) 416
33,010 Stamps.com, Inc.(a) 6,142
120,045 TechTarget, Inc.(a) 1,741
60,500 Twilio, Inc. "A"(a) 6,735
53,000 Zscaler, Inc.(a) 2,564
----------
51,031
----------
MEDIA (0.2%)
189,010 Gray Television, Inc.(a) 3,158
4,205 Nexstar Media Group, Inc. "A" 351
----------
3,509
----------
TELECOMMUNICATIONS (0.9%)
694,540 Aerohive Networks, Inc.(a) 2,653
195,200 Extreme Networks, Inc.(a) 1,476
115,200 Finisar Corp.(a) 2,624
81,250 GTT Communications, Inc.(a),(b) 2,080
262,400 Viavi Solutions, Inc.(a) 2,918
152,805 Vonage Holdings Corp.(a) 1,392
----------
13,143
----------
Total Communications 68,468
----------
CONSUMER, CYCLICAL (8.0%)
-------------------------
AIRLINES (0.6%)
109,500 SkyWest, Inc. 5,579
59,800 Spirit Airlines, Inc.(a) 3,518
----------
9,097
----------
APPAREL (0.2%)
27,100 Deckers Outdoor Corp.(a) 3,481
----------
AUTO PARTS & EQUIPMENT (1.7%)
125,800 Commercial Vehicle Group, Inc.(a) 940
183,260 Cooper Tire & Rubber Co. 6,451
91,177 Douglas Dynamics, Inc. 3,227
194,150 Gentherm, Inc.(a) 8,263
226,800 Meritor, Inc.(a) 4,690
88,361 Modine Manufacturing Co.(a) 1,293
77,600 Motorcar Parts of America, Inc.(a),(b) 1,552
----------
26,416
----------
DISTRIBUTION/WHOLESALE (1.0%)
74,600 G-III Apparel Group Ltd.(a) 2,601
127,152 ScanSource, Inc.(a) 4,871
195,800 Titan Machinery, Inc.(a) 3,669
================================================================================
PORTFOLIO OF INVESTMENTS | 3
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
81,130 Triton International Ltd. $ 2,917
46,600 Veritiv Corp.(a) 1,592
----------
15,650
----------
ENTERTAINMENT (0.2%)
9,100 Live Nation Entertainment, Inc.(a) 487
12,600 Vail Resorts, Inc. 2,372
----------
2,859
----------
HOME BUILDERS (0.9%)
85,492 KB Home 1,831
105,900 M/I Homes, Inc.(a) 2,805
3,300 Thor Industries, Inc. 215
661,116 TRI Pointe Group, Inc.(a) 8,892
----------
13,743
----------
OFFICE FURNISHINGS (0.7%)
631,596 Steelcase, Inc. "A" 10,421
----------
RETAIL (2.5%)
94,200 Abercrombie & Fitch Co. "A" 2,041
99,300 American Eagle Outfitters, Inc. 2,097
200,682 Cato Corp. "A" 2,980
74,800 DSW, Inc. "A" 2,038
52,100 Group 1 Automotive, Inc. 3,180
580,407 Luxfer Holdings plc 11,556
714,600 Office Depot, Inc. 2,108
62,100 PC Connection, Inc. 2,057
257,500 Rush Enterprises, Inc. "A" 9,850
----------
37,907
----------
STORAGE/WAREHOUSING (0.2%)
77,800 Mobile Mini, Inc. 2,940
----------
Total Consumer, Cyclical 122,514
----------
CONSUMER, NON-CYCLICAL (22.0%)
------------------------------
BEVERAGES (0.7%)
2,905,370 C&C Group plc(c) 10,965
2,570 MGP Ingredients, Inc.(b) 185
----------
11,150
----------
BIOTECHNOLOGY (4.1%)
76,480 Acceleron Pharma, Inc.(a) 3,243
62,900 Argenx SE ADR(a) 6,674
43,200 CytomX Therapeutics, Inc.(a) 733
63,900 Emergent BioSolutions, Inc.(a) 3,987
35,600 Esperion Therapeutics, Inc.(a),(b) 1,654
================================================================================
4 | USAA SMALL CAP STOCK FUND
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
228,470 Exact Sciences Corp.(a) $ 20,581
87,538 Harvard Bioscience, Inc.(a) 300
119,000 Immunomedics, Inc.(a) 1,760
56,480 Ligand Pharmaceuticals, Inc.(a),(b) 6,670
61,420 MacroGenics, Inc.(a) 720
306,170 Medicines Co.(a),(b) 7,076
335,486 NeoGenomics, Inc.(a) 5,576
241,829 Vericel Corp.(a) 4,159
----------
63,133
----------
COMMERCIAL SERVICES (8.9%)
41,292 2U, Inc.(a) 2,347
95,403 AMN Healthcare Services, Inc.(a) 6,181
142,370 CAI International, Inc.(a) 3,534
46,900 Cardtronics plc "A"(a) 1,270
189,037 CBIZ, Inc.(a) 3,705
86,850 Chegg, Inc.(a) 3,059
114,094 CorVel Corp.(a) 7,127
15,155 CoStar Group, Inc.(a) 5,922
101,920 Euronet Worldwide, Inc.(a) 11,722
286,479 Forrester Research, Inc. 12,866
84,890 FTI Consulting, Inc.(a) 5,800
6,470 Grand Canyon Education, Inc.(a) 601
114,400 Hackett Group, Inc. 2,058
120,600 HMS Holdings Corp.(a) 3,617
228,001 Huron Consulting Group, Inc.(a) 11,024
99,379 ICF International, Inc. 6,551
132,700 K12, Inc.(a) 4,181
141,300 Kelly Services, Inc. "A" 3,165
168,791 Matthews International Corp. "A" 7,510
334,500 Navigant Consulting, Inc. 8,670
157,120 Nutrisystem, Inc. 6,821
69,500 Quad/Graphics, Inc. 939
236,116 SEACOR Marine Holdings, Inc.(a) 3,129
249,527 SP Plus Corp.(a) 8,259
11,460 Strategic Education, Inc. 1,254
90,300 TrueBlue, Inc.(a) 2,202
73,200 Weight Watchers International, Inc.(a) 2,342
----------
135,856
----------
FOOD (0.8%)
261,031 Cranswick Plc(c) 9,882
123,800 Darling Ingredients, Inc.(a) 2,633
----------
12,515
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 5
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
HEALTHCARE PRODUCTS (3.3%)
7,370 ABIOMED, Inc.(a) $ 2,587
98,800 Cardiovascular Systems, Inc.(a) 3,076
64,510 CONMED Corp. 4,538
278,183 CytoSorbents Corp.(a),(b) 2,084
38,700 Genomic Health, Inc.(a) 2,934
41,290 Inogen, Inc.(a) 6,243
69,540 Insulet Corp.(a) 5,646
181,400 Invacare Corp. 932
147,775 Natus Medical, Inc.(a) 4,986
74,830 Nuvectra Corp.(a) 1,048
196,700 Oxford Immunotec Global plc(a) 2,860
125,720 Repligen Corp.(a) 7,167
260,780 Sientra, Inc.(a) 2,900
39,300 West Pharmaceutical Services, Inc. 4,255
----------
51,256
----------
HEALTHCARE-SERVICES (1.3%)
32,500 Charles River Laboratories International, Inc.(a) 4,004
117,640 Ensign Group, Inc. 5,125
87,600 Neuronetics, Inc.(a) 1,500
46,200 Syneos Health, Inc.(a) 2,358
66,117 Teladoc Health, Inc.(a),(b) 4,245
124,900 Triple-S Management Corp. "B"(a) 2,518
----------
19,750
----------
HOUSEHOLD PRODUCTS/WARES (1.4%)
1,297,066 ACCO Brands Corp. 11,453
56,600 Central Garden & Pet Co. "A"(a) 2,016
64,313 Helen of Troy Ltd.(a) 7,463
----------
20,932
----------
PHARMACEUTICALS (1.5%)
57,300 Aerie Pharmaceuticals, Inc.(a) 2,694
223,710 Collegium Pharmaceutical, Inc.(a),(b) 3,582
44,498 DexCom, Inc.(a) 6,275
46,100 Enanta Pharmaceuticals, Inc.(a) 3,662
162,300 Endo International plc(a) 1,582
167,490 Fennec Pharmaceuticals, Inc.(a) 1,120
130,500 Ironwood Pharmaceuticals, Inc.(a) 1,783
34,600 Jounce Therapeutics, Inc.(a) 145
68,700 Mallinckrodt plc(a) 1,502
----------
22,345
----------
Total Consumer, Non-cyclical 336,937
----------
================================================================================
6 | USAA SMALL CAP STOCK FUND
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
ENERGY (4.3%)
-------------
ENERGY-ALTERNATE SOURCES (0.4%)
207,590 Enphase Energy, Inc.(a),(b) $ 1,501
191,300 Pacific Ethanol, Inc.(a) 244
136,400 Renewable Energy Group, Inc.(a) 3,942
----------
5,687
----------
OIL & GAS (1.8%)
40,900 Bonanza Creek Energy, Inc.(a) 943
669,120 Carrizo Oil & Gas, Inc.(a) 8,217
91,300 CNX Resources Corp.(a) 1,108
51,400 Delek U.S. Holdings, Inc. 1,671
329,900 Denbury Resources, Inc.(a) 670
419,434 Northern Oil and Gas, Inc.(a) 1,061
59,700 PBF Energy, Inc. "A" 2,186
296,132 Resolute Energy Corp.(a),(b) 9,692
336,400 Ring Energy, Inc.(a) 1,978
87,800 Transocean Ltd.(a) 753
----------
28,279
----------
OIL & GAS SERVICES (2.1%)
142,400 Archrock, Inc. 1,344
146,148 DMC Global, Inc. 5,045
320,231 Era Group, Inc.(a) 3,017
151,776 McDermott International, Inc.(a) 1,339
563,590 ProPetro Holding Corp.(a) 9,209
546,760 Thermon Group Holdings, Inc.(a) 12,608
----------
32,562
----------
Total Energy 66,528
----------
FINANCIAL (25.1%)
-----------------
BANKS (9.6%)
191,216 1st Source Corp. 8,681
112,300 Cathay General Bancorp 4,168
143,300 CenterState Bank Corp. 3,554
99,100 Customers Bancorp, Inc.(a) 1,949
26,400 Eagle Bancorp, Inc.(a) 1,449
102,000 Enterprise Financial Services Corp. 4,501
55,900 Financial Institutions, Inc. 1,499
439,809 First Busey Corp. 10,890
86,500 First Hawaiian, Inc. 2,226
142,200 First Merchants Corp. 5,209
759,654 First Midwest Bancorp, Inc. 16,728
155,300 Flagstar Bancorp, Inc.(a) 4,791
================================================================================
PORTFOLIO OF INVESTMENTS | 7
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
355,450 Great Western Bancorp, Inc. $ 12,544
317,979 International Bancshares Corp. 11,279
371,372 MB Financial, Inc. 16,481
67,600 Peapack Gladstone Financial Corp. 1,804
63,900 Popular, Inc. 3,490
194,614 Synovus Financial Corp. 6,893
81,150 Texas Capital Bancshares, Inc.(a) 4,729
116,800 Umpqua Holdings Corp. 2,065
269,340 Union Bankshares Corp. 8,500
133,200 United Community Banks, Inc. 3,426
339,400 Valley National Bancorp 3,431
66,500 Walker & Dunlop, Inc. 3,197
45,000 Wintrust Financial Corp. 3,201
----------
146,685
----------
DIVERSIFIED FINANCIAL SERVICES (1.1%)
424,970 BGC Partners, Inc. "A" 2,631
71,800 Encore Capital Group, Inc.(a),(b) 2,121
50,175 Federal Agricultural Mortgage Corp. "C" 3,550
85,900 OneMain Holdings, Inc.(a) 2,568
95,600 PennyMac Financial Services, Inc. 1,977
49,100 Stifel Financial Corp. 2,350
59,789 WageWorks, Inc.(a) 1,886
----------
17,083
----------
INSURANCE (2.7%)
131,000 Ambac Financial Group, Inc.(a) 2,478
168,100 American Equity Investment Life Holding Co. 5,265
152,300 Atlas Financial Holdings, Inc.(a) 1,354
209,800 CNO Financial Group, Inc. 3,751
18,560 eHealth, Inc.(a) 1,135
33,200 James River Group Holdings Ltd. 1,281
120,813 Kemper Corp. 9,083
86,400 Kinsale Capital Group, Inc. 5,011
557,600 MGIC Investment Corp.(a) 6,959
191,500 Radian Group, Inc. 3,684
42,131 Trupanion, Inc.(a),(b) 1,119
----------
41,120
----------
INVESTMENT COMPANIES (0.4%)
314,628 Solar Capital Ltd. 6,453
----------
REAL ESTATE (1.6%)
531,130 Alexander & Baldwin, Inc. 12,237
1,062,019 Newmark Group, Inc. "A" 11,098
================================================================================
8 | USAA SMALL CAP STOCK FUND
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
138,600 Whitestone REIT $ 1,966
----------
25,301
----------
REITS (7.2%)
294,100 Anworth Mortgage Asset Corp. 1,315
97,700 Apollo Commercial Real Estate Finance, Inc. 1,778
682,200 Ashford Hospitality Trust, Inc. 3,377
234,244 Braemar Hotels & Resorts, Inc. 2,605
124,000 CareTrust REIT, Inc. 2,726
129,800 Cherry Hill Mortgage Investment Corp. 2,401
43,500 Chesapeake Lodging Trust 1,239
192,400 Chimera Investment Corp. 3,661
408,115 Corporate Office Properties Trust 10,076
161,800 Cousins Properties, Inc. 1,432
661,060 DiamondRock Hospitality Co. 6,716
258,100 Dynex Capital, Inc. 1,554
95,700 Hospitality Properties Trust 2,551
179,700 Invesco Mortgage Capital, Inc. 2,893
17,260 Investors Real Estate Trust 1,016
276,131 Ladder Capital Corp. 4,780
31,400 NexPoint Residential Trust, Inc. 1,175
717,930 Physicians Realty Trust 13,002
321,773 PotlatchDeltic Corp. 11,867
69,649 QTS Realty Trust, Inc. "A" 2,933
78,900 Ready Capital Corp.(d) 1,234
65,900 Rexford Industrial Realty, Inc. 2,214
34,500 RLJ Lodging Trust 640
930,937 RPT Realty 12,186
711,234 Summit Hotel Properties, Inc. 7,944
100,200 Sunstone Hotel Investors, Inc. 1,433
601,600 Washington Prime Group, Inc. 3,417
85,500 Xenia Hotels & Resorts, Inc. 1,605
----------
109,770
----------
SAVINGS & LOANS (2.5%)
648,594 Banc of California, Inc. 9,457
160,000 Dime Community Bancshares, Inc. 3,155
45,000 First Defiance Financial Corp. 1,268
386,250 Flushing Financial Corp. 8,567
941,741 Northwest Bancshares, Inc. 16,612
----------
39,059
----------
Total Financial 385,471
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 9
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
INDUSTRIAL (16.7%)
------------------
AEROSPACE/DEFENSE (0.4%)
144,116 Astronics Corp.(a) $ 4,420
10,700 Moog, Inc. "A" 957
----------
5,377
----------
BUILDING MATERIALS (1.4%)
134,840 American Woodmark Corp.(a) 9,432
2,877,608 Tyman plc(c) 8,757
92,600 Universal Forest Products, Inc. 2,854
----------
21,043
----------
ELECTRICAL COMPONENTS & EQUIPMENT (1.2%)
309,593 Belden, Inc. 16,597
19,300 EnerSys 1,646
----------
18,243
----------
ELECTRONICS (1.0%)
12,490 Coherent, Inc.(a) 1,476
49,783 OSI Systems, Inc.(a) 4,465
91,000 Sanmina Corp.(a) 2,841
58,900 SYNNEX Corp. 5,699
123,035 ZAGG, Inc.(a) 1,381
----------
15,862
----------
ENGINEERING & CONSTRUCTION (1.0%)
13,000 EMCOR Group, Inc. 848
93,500 KBR, Inc. 1,608
411,386 Mistras Group, Inc.(a) 6,052
274,842 Primoris Services Corp. 5,483
48,700 Tutor Perini Corp.(a) 838
30,800 VSE Corp. 1,005
----------
15,834
----------
ENVIRONMENTAL CONTROL (0.5%)
97,200 Advanced Disposal Services, Inc.(a) 2,449
147,000 Casella Waste Systems, Inc. "A"(a) 4,428
707,122 Hudson Technologies, Inc.(a),(b) 827
----------
7,704
----------
MACHINERY-DIVERSIFIED (2.1%)
209,239 Albany International Corp. "A" 14,366
77,330 Chart Industries, Inc.(a) 5,777
94,593 Columbus McKinnon Corp. 3,424
321,237 Gardner Denver Holdings, Inc.(a) 7,925
----------
31,492
----------
================================================================================
10 | USAA SMALL CAP STOCK FUND
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
METAL FABRICATION/HARDWARE (4.1%)
169,396 CIRCOR International, Inc.(a) $ 4,684
101,600 Global Brass & Copper Holdings, Inc. 3,072
607,448 Mueller Industries, Inc. 15,739
60,700 Olympic Steel, Inc. 1,170
58,814 RBC Bearings, Inc.(a) 8,200
73,600 Rexnord Corp.(a) 1,925
92,500 Timken Co. 3,940
724,540 TriMas Corp.(a) 21,004
25,872 Valmont Industries, Inc. 3,337
----------
63,071
----------
MISCELLANEOUS MANUFACTURERS (1.7%)
96,165 Axon Enterprise, Inc.(a) 4,906
245,257 ESCO Technologies, Inc. 15,969
37,100 John Bean Technologies Corp. 2,947
22,250 Proto Labs, Inc.(a) 2,762
----------
26,584
----------
PACKAGING & CONTAINERS (0.7%)
216,209 Greif, Inc. "A" 8,432
151,200 Owens-Illinois, Inc. 3,035
----------
11,467
----------
TRANSPORTATION (2.0%)
567,735 Dorian LPG Ltd.(a) 3,111
169,295 Echo Global Logistics, Inc.(a) 4,023
159,726 Forward Air Corp. 9,349
101,000 Knight-Swift Transportation Holdings, Inc. 3,207
229,109 Scorpio Tankers, Inc. 4,291
167,974 SEACOR Holdings, Inc.(a) 6,952
----------
30,933
----------
TRUCKING & LEASING (0.6%)
121,038 GATX Corp. 9,160
----------
Total Industrial 256,770
----------
TECHNOLOGY (11.2%)
------------------
COMPUTERS (4.7%)
12,900 CACI International, Inc. "A"(a) 2,157
43,421 Carbonite, Inc.(a) 1,244
70,583 Cubic Corp. 4,536
45,100 CyberArk Software Ltd.(a) 3,958
14,170 Globant S.A.(a) 958
108,800 Insight Enterprises, Inc.(a) 4,996
566,919 Kornit Digital Ltd.(a),(b) 10,862
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
76,600 Nutanix, Inc. "A"(a) $ 3,924
161,600 Perspecta, Inc. 3,240
210,320 Pure Storage, Inc. "A"(a) 3,767
44,350 Qualys, Inc.(a) 3,838
92,400 Rapid7, Inc.(a) 3,713
101,328 Virtusa Corp.(a) 4,916
402,061 WNS Holdings Ltd. ADR(a) 19,616
----------
71,725
----------
SEMICONDUCTORS (2.7%)
307,640 Adesto Technologies Corp.(a),(b) 1,517
275,060 Brooks Automation, Inc. 8,563
24,200 CEVA, Inc.(a) 688
290,489 CTS Corp. 8,241
61,300 Inphi Corp.(a) 2,418
96,200 Mellanox Technologies Ltd.(a) 8,986
15,200 Monolithic Power Systems, Inc. 1,924
22,200 Power Integrations, Inc. 1,465
184,780 Rudolph Technologies, Inc.(a) 4,014
22,500 Silicon Laboratories, Inc.(a) 1,721
67,195 Teradyne, Inc. 2,418
----------
41,955
----------
SOFTWARE (3.8%)
17,800 Akamai Technologies, Inc.(a) 1,159
1,128,315 Allscripts Healthcare Solutions, Inc.(a) 13,303
290,160 Cloudera, Inc.(a) 3,917
23,200 Cornerstone OnDemand, Inc.(a) 1,330
26,210 Coupa Software, Inc.(a) 2,279
985,905 Digital Turbine, Inc.(a),(b) 2,169
147,500 Dropbox, Inc. "A"(a) 3,645
258,320 Evolent Health, Inc. "A"(a) 4,567
129,334 LivePerson, Inc.(a) 3,035
24,950 New Relic, Inc.(a) 2,536
17,000 Paycom Software, Inc.(a) 2,520
75,700 PROS Holdings, Inc.(a) 2,619
34,600 PTC, Inc.(a) 2,934
163,800 Radware Ltd.(a) 3,966
19,060 RealPage, Inc.(a) 1,063
16,543 SPS Commerce, Inc.(a) 1,467
10,500 Ultimate Software Group, Inc.(a) 2,867
46,000 Verint Systems, Inc.(a) 2,225
----------
57,601
----------
Total Technology 171,281
----------
================================================================================
12 | USAA SMALL CAP STOCK FUND
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
UTILITIES (2.4%)
----------------
ELECTRIC (1.0%)
27,200 ALLETE, Inc. $ 2,093
47,400 Black Hills Corp. 3,218
157,457 Clearway Energy, Inc. "A" 2,315
55,000 PNM Resources, Inc. 2,342
111,600 Portland General Electric Co. 5,392
----------
15,360
----------
GAS (1.4%)
123,398 New Jersey Resources Corp. 5,985
26,300 ONE Gas, Inc. 2,160
31,500 Southwest Gas Holdings, Inc. 2,467
143,563 Spire, Inc. 11,395
----------
22,007
----------
Total Utilities 37,367
----------
Total Common Stocks (cost: $1,282,936) 1,505,401
----------
RIGHTS (0.0%)
CONSUMER, NON-CYCLICAL (0.0%)
-----------------------------
BIOTECHNOLOGY (0.0%)
133,709 NuPathe, Inc.(d),(e),(f) (cost: $80) -
----------
Total Equity Securities (cost: $1,283,016) 1,505,401
----------
MONEY MARKET INSTRUMENTS (1.9%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (1.9%)
29,417,072 State Street Institutional Treasury Money Market Fund
Premier Class, 2.31%(g) (cost: $29,417) 29,417
----------
SHORT-TERM INVESTMENT PURCHASED WITH
CASH COLLATERAL FROM SECURITIES LOANED (2.0%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (2.0%)
30,247,317 HSBC U.S. Government Money Market Fund Class I, 2.38%(g) 30,248
----------
Total Short-Term Investment Purchased with Cash Collateral
from Securities Loaned (cost: $30,248) 30,248
----------
TOTAL INVESTMENTS (COST: $1,342,681) $1,565,066
==========
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
--------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
--------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $1,475,797 $29,604 $- $1,505,401
Rights - - - -
Money Market Instruments:
Government & U.S. Treasury
Money Market Funds 29,417 - - 29,417
Short-Term Investment Purchased with Cash
Collateral from Securities Loaned:
Government & U.S. Treasury Money
Market Funds 30,248 - - 30,248
--------------------------------------------------------------------------------------------------------
Total $1,535,462 $29,604 $- $1,565,066
--------------------------------------------------------------------------------------------------------
Refer to the Portfolio of Investments for additional industry, country, or
geographic region classifications.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
At January 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
14 | USAA SMALL CAP STOCK FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A 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 8.3% of net assets at January 31,
2019.
o CATEGORIES AND DEFINITIONS
RIGHTS - Enable the holder to buy a specified number of shares of new issues
of a common stock before it is offered to the public.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
ADR American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S.
dollars.
REITS Real estate investment trusts - Dividend distributions from REITS
may be recorded as income and later characterized by the REIT at the
end of the fiscal year as capital gains or a return of capital.
Thus, the Fund will estimate the components of distributions from
these securities and revise when actual distributions are known.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 15
================================================================================
o SPECIFIC NOTES
(a) Non-income-producing security.
(b) The security, or a portion thereof, was out on loan as of January
31, 2019.
(c) Securities with a value of $29,604,000, which represented 1.9% of
the Fund's net assets, were classified as Level 2 at January 31, 2019,
due to the prices being adjusted to take into account significant market
movements following the close of local trading.
(d) Security deemed illiquid by USAA Asset Management Company, under
liquidity guidelines approved by USAA Mutual Funds Trust's Board of
Trustees.
(e) Security was fair valued at January 31, 2019, by USAA Asset
Management Company in accordance with valuation procedures approved by
USAA Mutual Funds Trust's Board of Trustees.
(f) Security was classified as Level 3.
(g) Rate represents the money market fund annualized seven-day yield at
January 31, 2019.
See accompanying notes to financial statements.
================================================================================
16 | USAA SMALL CAP STOCK FUND
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (including
securities on loan of $28,346) (cost of $1,342,681) $1,565,066
Cash 160
Receivables:
Capital shares sold 563
Dividends and interest 489
Securities sold 5,306
Other 50
----------
Total assets 1,571,634
----------
LIABILITIES
Payables:
Upon return of securities loaned 30,248
Securities purchased 4,675
Capital shares redeemed 816
Accrued management fees 879
Accrued transfer agent's fees 32
Other accrued expenses and payables 188
----------
Total liabilities 36,838
----------
Net assets applicable to capital shares outstanding $1,534,796
==========
NET ASSETS CONSIST OF:
Paid-in capital $1,319,183
Distributable earnings 215,613
----------
Net assets applicable to capital shares outstanding $1,534,796
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $668,196/42,883 capital shares
outstanding, no par value) $ 15.58
==========
Institutional Shares (net assets of $866,600/55,080 capital shares
outstanding, no par value) $ 15.73
==========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 17
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $34) $ 12,364
Interest 429
Securities lending (net) 476
---------
Total income 13,269
---------
EXPENSES
Management fees 5,761
Administration and servicing fees:
Fund Shares 531
Institutional Shares 455
Transfer agent's fees:
Fund Shares 530
Institutional Shares 455
Custody and accounting fees:
Fund Shares 67
Institutional Shares 78
Postage:
Fund Shares 22
Institutional Shares 28
Shareholder reporting fees:
Fund Shares 13
Institutional Shares 4
Trustees' fees 17
Registration fees:
Fund Shares 18
Institutional Shares 20
Professional fees 51
Other 14
---------
Total expenses 8,064
---------
NET INVESTMENT INCOME 5,205
---------
================================================================================
18 | USAA SMALL CAP STOCK FUND
================================================================================
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain on:
Investments $ 34,422
Foreign currency transactions 1
Change in net unrealized appreciation/(depreciation) of:
Investments (189,939)
Foreign currency translations (1)
---------
Net realized and unrealized loss (155,517)
---------
Decrease in net assets resulting from operations $(150,312)
=========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 19
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited), and year ended
July 31, 2018
-----------------------------------------------------------------------------------------
1/31/2019 7/31/2018
-----------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 5,205 $ 6,224
Net realized gain on investments 34,422 157,798
Net realized gain (loss) on foreign currency transactions 1 (19)
Change in net unrealized appreciation/(depreciation) of:
Investments (189,939) 130,430
Foreign currency translations (1) -
---------------------------
Increase (decrease) in net assets resulting
from operations (150,312) 294,433
---------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (75,659) (70,001)
Institutional Shares (95,200) (94,530)
---------------------------
Distributions to shareholders (170,859) (164,531)
---------------------------
NET INCREASE IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 6)
Fund Shares 53,444 47,029
Institutional Shares 48,065 26,798
---------------------------
Total net increase in net assets from
capital share transactions 101,509 73,827
---------------------------
Net increase (decrease) in net assets (219,662) 203,729
NET ASSETS
Beginning of period 1,754,458 1,550,729
---------------------------
End of period $1,534,796 $1,754,458
===========================
See accompanying notes to financial statements.
================================================================================
20 | USAA SMALL CAP STOCK FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
January 31, 2019 (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 47 separate funds. The
USAA Small Cap Stock Fund (the Fund) qualifies as a registered investment
company under Accounting Standards Codification Topic 946. The information
presented in this semiannual report pertains only to the Fund, which is
classified as diversified under the 1940 Act. The Fund's investment objective
is to seek long-term growth of capital.
The Fund consists of two classes of shares: Small Cap Stock Fund Shares (Fund
Shares) and Small Cap Stock Fund Institutional Shares (Institutional Shares).
Each class of shares has equal rights to assets and earnings, except that each
class bears 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 are allocated to each class of shares based on each
class' relative net assets. Each class has exclusive voting rights on matters
related solely to that class and separate voting rights on matters that relate
to all classes. The Institutional Shares are 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 are 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).
================================================================================
NOTES TO FINANCIAL STATEMENTS | 21
================================================================================
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of USAA Asset Management Company (AMCO or Manager), the investment
adviser to the Fund, and USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services (SAS), the transfer agent to the Fund, announced that AMCO and
SAS would be acquired by Victory Capital Holdings, Inc. (Victory), a global
investment management firm headquartered in Cleveland, Ohio (the Transaction).
The closing of the Transaction is expected to be completed during the second
quarter of 2019, pending satisfaction of certain closing conditions and
approvals, including certain approvals of the Fund's Board of Trustees and of
the Fund's shareholders at a special shareholder meeting to be held on April 18,
2019. The Transaction is not expected to result in any material changes to the
Fund's investment objectives and principal investment strategies. In connection
with the Transaction, Victory proposes to add portfolio managers from one or
more investment teams employed by Victory to serve as additional portfolio
managers to manage all or a portion of the Fund according to each team's own
investment process.
A. SECURITY VALUATION- The Trust's Board of Trustees (the Board) has
established the Valuation and Liquidity 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.
The Fund utilizes 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 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 exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange or
the over-the-counter markets, are valued at the last sales price or
official closing price on the exchange or primary market on which
================================================================================
22 | USAA SMALL CAP STOCK FUND
================================================================================
they trade. Securities traded primarily on foreign securities exchanges
or markets are valued at the last quoted sale price, or the most
recently determined official closing price calculated according to local
market convention, available at the time the Fund is valued. If no last
sale or official closing price is reported or available, the average of
the bid and ask prices generally is used. Actively traded equity
securities listed on a domestic exchange generally are categorized in
Level 1 of the fair value hierarchy. Certain preferred and equity
securities traded in inactive markets generally are categorized in Level
2 of the fair value hierarchy.
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 many
cases, events affecting the values of foreign securities that occur
between the time of their last quoted sale or official closing price and
the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not need to be reflected in the value of the Fund's
foreign securities. However, the Manager and the Fund's subadviser(s)
will monitor for events that would materially affect the value of the
Fund's foreign securities. The Fund's subadviser(s) have agreed to
notify the Manager of significant events they identify 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 Committee will consider
such available information that it deems relevant and will determine a
fair value for the affected foreign securities in accordance with
valuation procedures. In addition, information from an external vendor
or other sources may be used to adjust the foreign market closing prices
of foreign equity securities to reflect what the Committee believes to
be the fair value of the securities as of the close of the NYSE. Fair
valuation of affected foreign equity securities may occur frequently
based on an assessment that events which occur on a fairly regular basis
(such as U.S. market
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
movements) are significant. Such securities are categorized in Level 2
of the fair value hierarchy.
3. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value hierarchy.
4. Short-term debt securities with original or remaining maturities of
60 days or less may be valued at amortized cost, provided that amortized
cost represents the fair value of such securities.
5. Repurchase agreements are valued at cost.
6. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has been recognized in relation to a security or class of securities,
the securities are valued in good faith by the Committee in accordance
with 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, other pricing services, 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, evaluation of
credit quality, 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
================================================================================
24 | USAA SMALL CAP STOCK FUND
================================================================================
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 indexes.
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. INVESTMENTS IN SECURITIES - Securities transactions are accounted for as
of the date the securities are purchased or sold (trade date). Gains or
losses from sales of investment securities are computed on the identified
cost basis. Dividend income, less foreign taxes, if any, is recorded on the
ex-dividend date. If the ex-dividend date has passed, certain dividends
from foreign securities are recorded upon notification. Interest income is
recorded daily on the accrual basis. Premiums and discounts on short-term
securities are amortized on a straight-line basis over the life of the
respective securities.
D. FEDERAL TAXES - The Fund's policy is to comply with the requirements of
the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its taxable
income and net capital gains, if any, to its shareholders. Therefore, no
federal income tax provision is required.
For the six-month period ended January 31, 2019, 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
positions. On an ongoing basis, the Manager will monitor the Fund's tax
basis to determine if adjustments to this conclusion are necessary. The
statute of limitations on the Fund's tax return filings generally remain
open for the three preceding fiscal reporting year ends and remain subject
to examination by the Internal Revenue Service and state taxing authorities.
E. FOREIGN TAXATION - Foreign income and capital gains on some foreign
securities may be subject to foreign taxes, which are reflected as a
reduction to such income and realized gains. The Fund records a liability
based on unrealized gains to provide for potential foreign taxes payable
upon the sale of these securities. Foreign taxes have been provided for in
accordance with the Fund's understanding of the applicable countries'
prevailing tax rules and rates.
F. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the
exchange rate obtained from an independent pricing service on the
respective dates of such transactions.
2. Market value of securities, other assets, and liabilities at the
exchange rate obtained from an independent pricing service on a daily
basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the
================================================================================
26 | USAA SMALL CAP STOCK FUND
================================================================================
amounts received. At the end of the Fund's fiscal year, net realized foreign
currency gains/losses are reclassified from accumulated net realized
gains/losses to accumulated undistributed net investment income on the
Statement of Assets and Liabilities, as such amounts are treated as ordinary
income/loss for federal income tax purposes. Net unrealized foreign currency
exchange gains/losses arise from changes in the value of assets and
liabilities, other than investments in securities, resulting from changes in
the exchange rate.
G. EXPENSES PAID INDIRECTLY - A portion of the brokerage commissions that
the Fund pays may be recaptured as a credit that is tracked and used by the
custodian to directly reduce expenses paid by the Fund. Effective September
30, 2018, the commission recapture program ended. For the six-month period
ended January 31, 2019, brokerage commission recapture credits reduced the
expense of the Fund Shares and Institutional Shares each 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, along with other funds of the Trust and USAA ETF Trust
(together, the Trusts), 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 provide
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
================================================================================
temporary or emergency cash needs, including redemption requests that might
otherwise require the untimely disposition of securities. Subject to
availability (including usage of the facility by other funds of the Trusts), the
Fund may borrow from CAPCO an amount up to 5% of the Fund's total assets at an
interest rate based on the London Interbank Offered Rate (LIBOR), plus 100.0
basis points.
The Trusts are also assessed facility fees by CAPCO in the amount of 14.0 basis
points of the amount of the committed loan agreement. Prior to September 30,
2018, the maximum annual facility fee was 13.0 basis points of the amount of the
committed loan agreement. The facility fees are allocated among the funds of the
Trusts based on their respective average daily net assets for the period.
The Trusts may request an optional increase of the committed loan agreement from
$500 million up to $750 million. If the Trusts increase the committed loan
agreement, the assessed facility fee on the amount of the additional commitment
will be 15.0 basis points.
For the six-month period ended January 31, 2019, the Fund paid CAPCO facility
fees of $7,000, which represents 2.0% of the total fees paid to CAPCO by the
funds of the Trusts. The Fund had no borrowings under this agreement during the
six-month period ended January 31, 2019.
(3) DISTRIBUTIONS
The tax basis of distributions and any accumulated undistributed net investment
income will be determined as of the Fund's tax year-end of July 31, 2019, in
accordance with applicable federal tax law.
Distributions of net investment income and realized gains from security
transactions not offset by capital losses are made annually in the succeeding
fiscal year or as otherwise required to avoid the payment of federal taxes.
At July 31, 2018, the Fund had no capital loss carryforwards, for federal income
tax purposes.
As of January 31, 2019, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as the cost
================================================================================
28 | USAA SMALL CAP STOCK FUND
================================================================================
reported in the financial statements. The net unrealized appreciation/
(depreciation) on investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
FUND APPRECIATION DEPRECIATION (DEPRECIATION)
--------------------------------------------------------------------------------
USAA Small Cap Stock Fund $313,756,000 $(91,371,000) $222,385,000
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended January 31, 2019, were
$328,560,000 and $368,984,000, respectively.
(5) SECURITIES LENDING
The Fund, through a securities lending agreement with Citibank, N.A.
(Citibank), may lend its securities to qualified financial institutions, such as
certain broker-dealers, to earn additional income, net of income retained by
Citibank. The borrowers are required to secure their loans continuously with
collateral in an amount at least equal to 102% of the fair value of domestic
securities and foreign government securities loaned and 105% of the fair value
of foreign securities and all other securities loaned. Collateral may be cash,
U.S. government securities, or other securities as permitted by SEC guidelines.
Cash collateral may be invested in high-quality short-term investments.
Collateral requirements are determined daily based on the value of the Fund's
securities on loan as of the end of the prior business day. Loans are terminable
upon demand and the borrower must return the loaned securities within the lesser
of one standard settlement period or five business days. Risks relating to
securities-lending transactions include that the borrower may not provide
additional collateral when required or return the securities when due, and that
the value of the short-term investments will be less than the amount of cash
collateral required to be returned to the borrower. The Fund's agreement with
Citibank does not include master netting provisions. Non-cash collateral
received by the Fund may not be sold or re-pledged except to satisfy borrower
default. Cash collateral is listed in the Fund's Portfolio of Investments and
Financial Statements while non-cash collateral is not included.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
At January 31, 2019, the Fund's value of outstanding securities on loan and the
value of collateral are as follows:
VALUE OF SECURITIES
ON LOAN NON-CASH COLLATERAL CASH COLLATERAL
--------------------------------------------------------------------------------
$28,346,000 $- $30,248,000
(6) CAPITAL SHARE TRANSACTIONS
At January 31, 2019, there were an unlimited number of shares of capital stock
at no par value authorized for the Fund.
Capital share transactions for the Institutional Shares resulted from purchases
and sales by the affiliated USAA fund-of-funds as well as other persons or legal
entities that the Fund may approve from time to time. Capital share transactions
for all classes were as follows, in thousands:
SIX-MONTH PERIOD ENDED YEAR ENDED
JANUARY 31, 2019 JULY 31, 2018
-----------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------
FUND SHARES:
Shares sold 2,589 $ 45,978 5,164 $ 94,551
Shares issued from
reinvested dividends 5,005 74,755 3,951 69,134
Shares redeemed (3,931) (67,289) (6,412) (116,656)
-------------------------------------------------------
Net increase from capital
share transactions 3,663 $ 53,444 2,703 $ 47,029
=======================================================
INSTITUTIONAL SHARES:
Shares sold 3,734 $ 64,225 7,215 $ 131,299
Shares issued from
reinvested dividends 6,312 95,182 5,352 94,513
Shares redeemed (6,070) (111,342) (10,615) (199,014)
-------------------------------------------------------
Net increase from
capital share transactions 3,976 $ 48,065 1,952 $ 26,798
=======================================================
(7) TRANSACTIONS WITH MANAGER
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. The Manager is
authorized to select (with approval of the Board and without
================================================================================
30 | USAA SMALL CAP STOCK FUND
================================================================================
shareholder approval) one or more subadvisers to manage the day-to-day
investment of all or a portion of the Fund's assets.
The Manager monitors each subadviser's performance through quantitative and
qualitative analysis and periodically reports to the Board as to whether each
subadviser's agreement should be renewed, terminated, or modified. The Manager
is also responsible for determining the asset allocation for the subadviser(s).
The allocation for each subadviser could range from 0% to 100% of the Fund's
assets, and the Manager could change the allocations without shareholder
approval.
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee is accrued daily and paid monthly at
an annualized rate of 0.75% of the Fund's average daily net assets.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Small-Cap Core Funds Index. The Lipper Small-Cap Core
Funds Index tracks the total return performance of funds within the Lipper
Small-Cap Core Funds category.
The performance period for each share class 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
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
--------------------------------------------------------------------------------
+/- 100 to 400 +/- 4
+/- 401 to 700 +/- 5
+/- 701 and greater +/- 6
(1)Based on the difference between average annual performance of the relevant
share class of the Fund and its relevant Lipper index, rounded to the nearest
basis point. Average daily net assets of the share class are calculated over
a rolling 36-month period.
Each class' annual performance adjustment rate is multiplied by the average
daily net assets of each respective class 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).
================================================================================
NOTES TO FINANCIAL STATEMENTS | 31
================================================================================
The resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper Small-Cap Core Funds Index over that period, even if the
class had overall negative returns during the performance period.
For the six-month period ended January 31, 2019, the Fund incurred management
fees, paid or payable to the Manager, of $5,761,000, which included a
performance adjustment for the Fund Shares and Institutional Shares of
$(133,000) and $(177,000), respectively. For the Fund Shares and Institutional
Shares, the performance adjustments were (0.04)% and (0.04)%, respectively.
SUBADVISORY ARRANGEMENT(S) - The Manager has entered into an Investment
Subadvisory Agreement with ClariVest Asset Management LLC (ClariVest), Granahan
Investment Management, Inc. (GIMI), and Wellington Management Company LLP
(Wellington Management), under which ClariVest, GIMI, and Wellington Management,
each direct the investment and reinvestment of a portion of the Fund's assets
(as allocated from time to time by the Manager). These arrangements provide for
monthly fees that are paid by the Manager.
The Manager (not the Fund) pays ClariVest a subadvisory fee in the annual amount
of 0.47% of the Fund's average daily net assets for the first $125 million in
assets that ClariVest manages; 0.45% of the Fund's average daily net assets on
the next $125 million in assets that ClariVest manages; and 0.43% of the Fund's
average daily net assets over $250 million that ClariVest manages. Prior to
October 1, 2018, the Manager (not the Fund) paid ClariVest a subadvisory fee in
the annual amount of 0.48% of the Fund's average daily net assets for the first
$125 million in assets that ClariVest manages; 0.46% of the Fund's average daily
net assets on the next $125 million in assets that ClariVest managed; and 0.44%
of the Fund's average daily net assets over $250 million that ClariVest manages
For the six-month period ended January 31, 2019, the Manager incurred
subadvisory fees with respect to the Fund, paid or payable to ClariVest of
$819,000.
The Manager (not the Fund) pays GIMI a subadvisory fee in the annual amount of
0.55% of the Fund's average daily net assets for the first $250 million in
assets that GIMI manages, plus 0.52% of the Fund's average daily net
================================================================================
32 | USAA SMALL CAP STOCK FUND
================================================================================
assets over $250 million that GIMI manages, plus 0.45% of the Fund's average
daily net assets over $500 million that GIMI manages. Prior to October 1, 2018,
the Manager (not the Fund) paid GIMI a subadvisory fee in the annual amount of
0.55% of the Fund's average daily net assets for the first $300 million in
assets that GIMI managed, plus 0.52% of the Fund's average daily net assets over
$300 million that GIMI manages. For the six-month period ended January 31,
2019, the Manager incurred subadvisory fees with respect to the Fund, paid or
payable to GIMI of $1,425,000.
The Manager (not the Fund) pays Wellington Management a subadvisory fee in the
annual amount of 0.60% of the Fund's average daily net assets for the first $250
million in assets that Wellington Management manages, plus 0.55% of the Fund's
average daily net assets over $250 million that Wellington Management manages.
Prior to October 1, 2018, the Manager (not the Fund) paid Wellington Management
a subadvisory fee in the annual amount of 0.70% of the Fund's average daily net
assets for the first $300 million in assets that Wellington Management managed,
plus 0.65% of the Fund's average daily net assets over $300 million that
Wellington Management manages. For the six-month period ended January 31, 2019,
the Manager incurred subadvisory fees with respect to the Fund, paid or payable
to Wellington Management of $2,187,000.
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 at an annualized rate of 0.15% and 0.10% of
average daily net assets of the Funds Shares and Institutional Shares,
respectively. For the six-month period ended January 31, 2019, the Fund Shares
and Institutional Shares incurred administration and servicing fees, paid or
payable to the Manager, of $531,000 and $455,000, respectively.
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 January 31, 2019, the Fund reimbursed the Manager $1,000 for these
compliance and legal services. These expenses are included in the professional
fees on the Fund's Statement of Operations.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 33
================================================================================
TRANSFER AGENT'S FEES - SAS, an affiliate of the Manager, provides transfer
agent services to the Fund Shares based on an annual charge of $23 per
shareholder account plus out-of-pocket expenses. SAS pays a portion of these
fees to certain intermediaries for the administration and servicing of accounts
that are held with such intermediaries. Transfer agent's fees for Institutional
Shares are paid monthly based on a fee accrued daily at an annualized rate of
0.10% of the Institutional Shares' average daily net assets, plus out-of-pocket
expenses. For the six-month period ended January 31, 2019, the Fund Shares and
Institutional Shares incurred transfer agent's fees, paid or payable to SAS, of
$530,000 and $455,000, respectively.
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 fee or other compensation for these services.
(8) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other USAA Funds and
is one of 16 USAA mutual funds in which the affiliated USAA fund-of-funds
invest. The USAA fund-of-funds do not invest in the underlying funds for the
purpose of exercising management or control, and the affiliated fund-of-funds'
annual or semiannual reports may be viewed at usaa.com. As of January 31, 2019,
the USAA fund-of-funds owned the following percentages of the total outstanding
shares of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
--------------------------------------------------------------------------------
Cornerstone Conservative 0.1
Cornerstone Equity 0.4
Target Retirement Income 0.1
Target Retirement 2020 0.3
Target Retirement 2030 1.0
Target Retirement 2040 1.4
Target Retirement 2050 0.9
Target Retirement 2060 0.1
The Manager is indirectly wholly owned by USAA, a large, diversified financial
services institution.
================================================================================
34 | USAA SMALL CAP STOCK FUND
================================================================================
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
(9) UPCOMING REGULATORY MATTERS
In October 2016, the U.S. Securities and Exchange Commission (SEC) issued Final
Rule Release No. 33-10233, INVESTMENT COMPANY LIQUIDITY RISK MANAGEMENT PROGRAMS
(Liquidity Rule). The Liquidity Rule requires funds to establish a liquidity
risk management program and enhances disclosures regarding funds' liquidity. The
requirements to implement a liquidity risk management program and establish a
15% illiquid investment limit became effective December 1, 2018. However, in
February 2018, the SEC issued Release No. IC-33010, INVESTMENT COMPANY LIQUIDITY
RISK MANAGEMENT PROGRAMS; COMMISSION GUIDANCE FOR IN-KIND ETFs, which delayed
certain requirements related to liquidity classification, highly liquid
investment minimums, and board approval of the liquidity risk management
programs to June 1, 2019. The Manager continues to evaluate the impact of this
rule on the Fund's financial statements and various filings.
(10) RECENTLY ADOPTED ACCOUNTING STANDARDS
In August 2018, the SEC adopted amendments to Regulation S-X for investment
companies governing the form and content of financial statements. The amendments
to Regulation S-X took effect on November 5, 2018, and the financial statements
have been modified accordingly, for the current and prior periods.
ASU 2018-13, FAIR VALUE MEASUREMENT
-----------------------------------
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820).
The amendments in the ASU impact disclosure requirements for fair value
measurement. ASU 2018-13 is effective for fiscal years beginning after December
15, 2019. Early adoption is permitted and can include the entire standard or
certain provisions that exclude or amend disclosures. Management has elected to
early adopt ASU 2018-13 effective with the current reporting period. The
adoption of ASU 2018-13 guidance is limited to changes in the Fund's notes to
financial statement disclosures regarding valuation method, fair value, and
transfers between levels of the fair value hierarchy.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 35
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
------------------------------------------------------------------------------
Net asset value at
beginning of period $ 19.33 $ 18.02 $ 16.17 $ 17.77 $ 18.14 $ 18.27
------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment
income (loss) .05 .05 .08 .02 .02 (.01)
Net realized and
unrealized gain (loss) (1.85) 3.19 1.99 (.22) 1.63 1.62
------------------------------------------------------------------------------
Total from investment
operations (1.80) 3.24 2.07 (.20) 1.65 1.61
------------------------------------------------------------------------------
Less distributions from:
Net investment income (.04) (.07) (.03) (.05) (.02) -
Realized capital gains (1.91) (1.86) (.19) (1.35) (2.00) (1.74)
------------------------------------------------------------------------------
Total distributions (1.95) (1.93) (.22) (1.40) (2.02) (1.74)
------------------------------------------------------------------------------
Net asset value at
end of period $ 15.58 $ 19.33 $ 18.02 $ 16.17 $ 17.77 $ 18.14
==============================================================================
Total return (%)* (8.86) 19.21 12.81 (.75) 9.67 8.68
Net assets at end
of period (000) $668,196 $758,065 $658,038 $586,438 $835,256 $709,753
Ratios to average
daily net assets:**
Expenses (%)(a) 1.06(b),(c) 1.06(c) 1.09(c) 1.15(c) 1.15(c) 1.14(d)
Net investment
income (loss) (%) .59(b) .31 .42 .18 .06 (.03)
Portfolio turnover (%) 21 68 53 52 45 45
* 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 January 31, 2019, average daily net assets
were $701,896,000.
(a) Does not include acquired fund fees, if any.
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(c) Reflects total annual operating expenses of the Fund Shares before
reductions of any expenses paid indirectly. The Fund's expenses paid
indirectly decreased the expense ratios by less than 0.01%.
(d) Reflects total annual operating expenses of the Fund Shares before
reductions of any expenses paid indirectly. The Fund Shares' expenses paid
indirectly decreased the expense ratio by 0.01%.
================================================================================
36 | USAA SMALL CAP STOCK FUND
================================================================================
INSTITUTIONAL SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
------------------------------------------------------------------------------
Net asset value at
beginning of period $ 19.50 $ 18.16 $ 16.30 $ 17.89 $ 18.24 $ 18.34
------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .06 .07 .09 .07 .05 .03
Net realized and
unrealized gain (loss) (1.87) 3.22 2.02 (.24) 1.65 1.61
------------------------------------------------------------------------------
Total from investment
operations (1.81) 3.29 2.11 (.17) 1.70 1.64
------------------------------------------------------------------------------
Less distributions from:
Net investment income (.05) (.09) (.06) (.07) (.05) -
Realized capital gains (1.91) (1.86) (.19) (1.35) (2.00) (1.74)
------------------------------------------------------------------------------
Total distributions (1.96) (1.95) (.25) (1.42) (2.05) (1.74)
------------------------------------------------------------------------------
Net asset value at
end of period $ 15.73 $ 19.50 $ 18.16 $ 16.30 $ 17.89 $ 18.24
==============================================================================
Total return (%)* (8.82) 19.36 12.92 (.55) 9.85 8.81
Net assets at end of
period (000) $866,600 $996,393 $892,691 $884,187 $676,490 $661,910
Ratios to average
daily net assets:**
Expenses (%)(a),(b) .95(c) .95 .97 .99 .99 .99
Net investment
income (%) .69(c) .42 .52 .35 .22 .12
Portfolio turnover (%) 21 68 53 52 45 45
* 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 January 31, 2019, average daily net assets
were $901,985,000.
(a) Does not include acquired fund fees, if any.
(b) Reflects total annual operating expenses of the Institutional Shares before
reductions of any expenses paid indirectly. The Institutional Shares'
expenses paid indirectly decreased the expense ratios by less than 0.01%.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
FINANCIAL HIGHLIGHTS | 37
================================================================================
EXPENSE EXAMPLE
January 31, 2019 (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 August 1, 2018, through
January 31, 2019.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table 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 for your share
class in the "actual" 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 line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class 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
================================================================================
38 | USAA SMALL CAP STOCK FUND
================================================================================
estimate the actual ending account balance or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the
Fund and other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled "hypothetical"
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 AUGUST 1, 2018 -
AUGUST 1, 2018 JANUARY 31, 2019 JANUARY 31, 2019
-----------------------------------------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $ 911.40 $5.11
Hypothetical
(5% return before expenses) 1,000.00 1,019.86 5.40
INSTITUTIONAL SHARES
Actual 1,000.00 911.80 4.58
Hypothetical
(5% return before expenses) 1,000.00 $1,020.42 4.84
*Expenses are equal to the annualized expense ratio of 1.06% for Fund Shares and
0.95% for Institutional Shares, which are net of any reimbursements and
expenses paid indirectly, multiplied by the average account value over the
period, multiplied by 184 days/365 days (to reflect the one-half-year period).
The Fund's actual ending account values are based on its actual total returns
of (8.86)% for Fund Shares and (8.82)% for Institutional Shares for the
six-month period of August 1, 2018, through January 31, 2019.
================================================================================
EXPENSE EXAMPLE | 39
================================================================================
ADVISORY AGREEMENT(S)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with Victory Capital
Holdings, Inc. ("Victory Holdings") pursuant to which Victory Holdings would
acquire all of the outstanding stock of AMCO and USAA Transfer Agency Company
d/b/a USAA Shareholder Account Services ("USAA Transfer Agent") (the
"Transaction"). The Independent Trustees were advised that the Transaction, if
completed, would constitute
================================================================================
40 | USAA SMALL CAP STOCK FUND
================================================================================
an "assignment" (as that term is defined in Section 2(a)(4) of the 1940 Act) and
result in the automatic termination of the Existing Management Agreements
("Change of Control Event"). The Independent Trustees also were advised that it
was proposed that Victory Capital, a subsidiary of Victory Holdings, would serve
as the investment adviser to each Fund after the closing of the Transaction
("Post-Transaction") and that the Board would be asked to consider approval of
the terms and conditions of the New Advisory Agreement with Victory Capital and
thereafter to submit the New Advisory Agreement to each Fund's shareholders for
approval. Because the Change of Control Event also would result in the
termination of each existing subadvisory agreement between AMCO and the
subadvisers to the Funds ("Existing Subadvisory Agreements"), the Independent
Trustees were advised that the Board would also be asked to approve the New
Subadvisory Agreements.
In anticipation of the Transaction, the Trustees met at a series of subsequent
in-person meetings on November 27-28, 2018, January 7-8, 2019, and January
14-15, 2019, which included meetings of the full Board and separate meetings of
the Independent Trustees for the purposes of considering, among other things:
whether it would be in the best interests of each Fund and its respective
shareholders to approve the New Agreements; and the anticipated impacts of the
Transaction on the Funds and their shareholders (each, a "Meeting"). During each
of these Meetings, the Board sought additional and clarifying information as it
deemed necessary or appropriate. In this connection, the Independent Trustees
worked with their independent legal counsel to prepare formal due diligence
requests (the "Diligence Requests") that were submitted to Victory Capital,
Victory Capital Advisers, Inc. ("VCA"), and the subadvisers. The Diligence
Requests sought information relevant to the Board's consideration of the New
Advisory Agreement, the New Subadvisory Agreements, distribution arrangements,
and other anticipated impacts of the Transaction on the Funds and their
shareholders. Victory Capital, VCA, and the subadvisers provided documents and
information in response to the Diligence Requests (the "Response Materials").
Following their review of the Response Materials, the Independent Trustees
submitted a supplemental due diligence request for additional and clarifying
information (the "Supplemental Diligence Request") to Victory Capital and VCA.
Victory
================================================================================
ADVISORY AGREEMENT(S) | 41
================================================================================
Capital and VCA provided further information in response to the Supplemental
Diligence Request, which the Board reviewed. Senior management representatives
of Victory Capital and/or AMCO participated in a portion of each Meeting and
addressed various questions raised by the Board. Throughout the process, the
Independent Trustees were assisted by their independent legal counsel and
counsel to the Funds, who advised them on, among other things, their duties and
obligations relating to their consideration of the New Agreements.
The Board's evaluation of the New Agreements reflected the information provided
specifically in connection with its review of the New Agreements, as well as,
where relevant, information that was previously furnished to the Board in
connection with the most recent renewal of the Existing Management Agreements
and Existing Subadvisory Agreements at an in-person meeting of the Board on
April 18, 2018 (the "2018 15(c) Meeting") and at other subsequent Board meetings
in 2018. The Board's evaluation of the New Agreements also reflected the
knowledge gained as Board members of the Funds with respect to services provided
by AMCO, its affiliates, and each subadviser to the Funds.
The Board's approvals and recommendations were based on its determination,
within its business judgment, that it would be in the best interests of each
Fund and its respective shareholders, for Victory Capital and, as applicable,
the subadvisers, to provide investment advisory, investment subadvisory, and
related services to the Funds, following the closing of the Transaction.
FACTORS CONSIDERED IN APPROVING THE NEW ADVISORY AGREEMENT
In connection with the Board's consideration of the New Advisory Agreement,
Victory Capital and AMCO advised the Board about a variety of matters, including
the following:
o The nature, extent, and quality of the services to be provided to the
Funds by Victory Capital Post-Transaction are expected to be of at least
the same level as the services currently provided to the Funds by AMCO.
================================================================================
42 | USAA SMALL CAP STOCK FUND
================================================================================
o Victory Capital's stated commitment to maintaining and enhancing the
USAA member/USAA Fund shareholder experience, including creating a
dedicated USAA Fund sales and client service call center that will
provide ongoing client service and advice to existing and new USAA
members.
o Victory Capital proposes to: (1) replace the underlying indexes for
the USAA Extended Market Index Fund and USAA S&P 500 Index Fund with
indexes designed to provide shareholders with comparable exposure and
investment outcomes; (2) change the USAA Extended Market Index Fund's
and USAA S&P 500 Index Fund's investment objectives and strategies in
light of the changes to their underlying indexes; and (3) change the
name of the USAA S&P 500 Index Fund to the USAA 500 Index Fund.
o Victory Capital does not propose changes to the investment objective(s)
of any other Funds. Although the investment processes used by Victory
Capital's portfolio managers may differ from those used by AMCO's
portfolio managers or, if applicable, any subadviser's portfolio
managers, such differences are not currently expected to result in
changes to the principal investment strategies or principal investment
risks of the Funds.
o The New Advisory Agreement does not change any Fund's advisory fee
rate or the computation method for calculating such fees (except that
Victory Capital, subject to Board approval, may in the future use a
single designated share class to calculate the performance adjustment).
For at least two years after the Transaction closes, Victory Capital has
agreed to waive fees and/or reimburse expenses so that each Fund's
annual expense ratio (excluding certain customary items) does not exceed
the levels reflected in each Fund's most recent audited financial
statements at the time the Transaction closes (or the levels of AMCO's
then-current expense caps, if applicable), excluding the impact of any
performance adjustment to the Fund's advisory fee.
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ADVISORY AGREEMENT(S) | 43
================================================================================
o The portfolio managers at AMCO that manage the Fixed Income Funds(1) as
well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be advised
by Victory Capital through its Victory Solutions platform, Victory
Capital proposes that the same subadvisers be retained Post-Transaction,
although Victory Capital may change the allocation to a particular
subadviser Post-Transaction. No changes are expected to the portfolio
managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's
(1)The Fixed Income Funds include the following Funds: California Bond Fund,
Government Securities Fund, High Income Fund, Income Fund, Intermediate-Term
Bond Fund, Tax Exempt Intermediate-Term Fund, Tax Exempt Long-Term Fund, New
York Bond Fund, Short-Term Bond Fund, Tax Exempt Short-Term Fund, Ultra
Short-Term Bond Fund, Virginia Bond Fund, Money Market Fund, Tax Exempt Money
Market Fund and Treasury Money Market Trust.
(2)The Cornerstone Funds include the following Funds: Cornerstone Aggressive
Fund, Cornerstone Conservative Fund, Cornerstone Equity Fund, Cornerstone
Moderate Fund, Cornerstone Moderately Aggressive Fund, and Cornerstone
Moderately Conservative Fund.
(3)The Target Retirement Funds include the following Funds: Target Retirement
2020 Fund, Target Retirement 2030 Fund, Target Retirement 2040 Fund, Target
Retirement 2050 Fund, Target Retirement 2060 Fund, and Target Retirement
Income Fund.
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44 | USAA SMALL CAP STOCK FUND
================================================================================
businesses to Victory Capital. Victory Capital and USAA expect to enter
into a transition services agreement under which USAA will continue to
provide Victory Capital with certain services that are currently
provided by USAA to AMCO and the USAA Transfer Agent for a specified
period of time after the closing of the Transaction to assist Victory
Capital in transitioning the USAA member distribution channel and member
support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital
================================================================================
ADVISORY AGREEMENT(S) | 45
================================================================================
is capable of providing the same level of investment management services
currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund, Growth
& Income Fund, Income Stock Fund, Global Equity Income Fund, and Precious
Metals and Minerals Fund.
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46 | USAA SMALL CAP STOCK FUND
================================================================================
The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored and managed by
Victory Capital ("Victory Funds") with similar investment
================================================================================
ADVISORY AGREEMENT(S) | 47
================================================================================
objectives and strategies managed by the portfolio managers who would manage the
Funds. Based on information presented to the Board at the Meetings and its
discussions with Victory Capital, the Board concluded that Victory Capital is
capable of generating a level of long-term investment performance that is
appropriate in light of each Fund's investment objectives, strategies and
restrictions.
FEES TO BE PAID TO VICTORY CAPITAL AND EXPENSES OF THE FUNDS - The Board
considered that it had reviewed each Fund's existing advisory fee rate and
computation method for calculating such fees at the 2018 15(c) Meeting. The
Board considered that the New Advisory Agreement does not change any Fund's
advisory fee rate or the computation method for calculating such fees, except
that Victory Capital, subject to Board approval, may in the future use a single
designated share class to calculate the performance adjustment and apply the
resulting performance adjustment across each other class of shares of the Fund.
The Board considered that the use of a single designated class to calculate the
performance adjustment for each other class of shares of the Fund could mean
that shareholders of a class other than the class used to measure the
performance adjustment may pay a performance adjustment that is higher or lower
than if the adjustment were calculated on a class by class basis, primarily due
to the impact of differences in the fees and expenses between share classes on
performance. The Board considered that the New Advisory Agreement stipulates
that the period for measuring performance for calculating a Fund's performance
adjustment begins on the date that Victory Capital begins managing the Fund;
therefore, no performance adjustments will be made for the first twelve months
of the New Advisory Agreement, consistent with applicable regulations. The Board
also considered Victory Capital's contractual commitment under the expense
limitation agreement ("ELA") to waive fees and/or reimburse expenses for at
least two years after the closing of the Transaction, so that each Fund's annual
expense ratio (excluding acquired fund fees and expenses, any performance
adjustment to a Fund's advisory fee, interest, taxes, brokerage commissions,
other expenditures which are capitalized in accordance with generally accepted
accounting principles, and other extraordinary expenses not incurred in the
ordinary course of such Fund's business) does not exceed the levels reflected in
each Fund's most recent audited financial statements at the time the
================================================================================
48 | USAA SMALL CAP STOCK FUND
================================================================================
Transaction closes (or the levels of AMCO's then-current expense caps, if
applicable), excluding the impact of any performance adjustment to a Fund's
advisory fee. The Board considered that the ELA permits Victory Capital to
recoup advisory fees waived and expenses reimbursed for up to three years after
the fiscal year in which the waiver or reimbursement took place, subject to the
lesser of any operating expense limitation in effect at the time of: (1) the
original waiver or expense reimbursement; or (2) recoupment. The Board also
considered that Victory Capital and AMCO had represented to the Board that they
will use their best efforts to ensure that they and their respective affiliates
do not take any action that imposes an "unfair burden" on the Funds as a result
of the Transaction or as a result of any express or implied terms, conditions or
understandings applicable to the Change of Control Event, for so long as the
requirements of Section 15(f) of the 1940 Act apply. The Board also considered
a comparison of the proposed advisory fees to be paid by each Fund to the
advisory fees paid by funds and other accounts managed by Victory Capital deemed
to be comparable to the Fund in terms of investment objectives and strategies.
The Board considered that, with few exceptions, mostly involving weighted
average fees for separate accounts, the advisory fees to be paid by the Funds
were lower than the fees paid by these other funds and accounts. The Board
concluded that the retention of Victory Capital was unlikely to impose an unfair
burden on the Funds because, after the Transaction, none of AMCO, Victory
Capital, VCA, or any of their respective affiliates, would be entitled to
receive any compensation directly or indirectly (i) from any person in
connection with the purchase or sale of securities or other property to, from,
or on behalf of the Funds (other than ordinary fees for bona fide principal
underwriting services), or (ii) from the Funds or their shareholders for other
than bona fide investment advisory or other services. Based on its review, the
Board determined, with respect to each Fund, that Victory Capital's advisory fee
is fair and reasonable.
THE EXTENT TO WHICH VICTORY CAPITAL MAY REALIZE ECONOMIES OF SCALE AS THE FUNDS
GROW LARGER AND WHETHER FEE LEVELS REFLECT THESE ECONOMIES OF SCALE FOR THE
BENEFIT OF FUND SHAREHOLDERS - The Board considered potential or anticipated
economies of scale in relation to the services Victory Capital would provide to
each Fund. The Board considered that the New Advisory Agreement includes the
same advisory fee breakpoints for the same Funds as
================================================================================
ADVISORY AGREEMENT(S) | 49
================================================================================
the Existing Advisory Agreements. The Board also considered that Victory Capital
has contractually agreed to cap the Funds' annual operating expense ratios,
pursuant to the ELA, which will remain in effect for at least two years from the
closing of the Transaction, and may be extended. The Board also considered
Victory Capital's representation that the significant increase in its assets
under management Post-Transaction may reasonably be expected to enable the new
combined firm to reach greater economies of scale in a shorter time frame. The
Board noted that it will have the opportunity to periodically re-examine whether
a Fund or the Trust has achieved economies of scale, and the appropriateness of
investment advisory and administrative fees payable to Victory Capital, in the
future.
THE PROFITS TO BE REALIZED BY VICTORY CAPITAL AND ITS AFFILIATES FROM THEIR
RELATIONSHIP WITH THE TRUST - The Board considered the benefits Victory Capital
and its affiliates may derive from their relationship with the Funds, including
compensation to be paid to Victory Capital for the provision of certain
administrative, fund accounting and shareholder services to the Funds and
compensation to be paid to USAA Transfer Agent for the provision of transfer
agency services to the Funds. The Board considered the significant investments
Victory Capital expected to make to support and grow the USAA member channel and
the costs to integrate the USAA Fund business into Victory Capital. The Board
also considered Victory Capital's profitability report presented to the board of
trustees of the Victory Funds in connection with their most recent 15(c)
process. The Board considered Victory Capital's representation that the fully
integrated USAA Fund business, including investments to support ongoing growth,
was expected to have an overall marginally positive impact on Victory Capital's
overall financial profitability. The Board noted the difficulty of accurately
projecting profitability under the current circumstance and noted that it would
have the opportunity to give further consideration to Victory Capital's
profitability with respect to the Funds at the end of the initial two-year term
of the New Advisory Agreement.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
================================================================================
50 | USAA SMALL CAP STOCK FUND
================================================================================
deliver investment products and services to USAA's direct member-based channel.
The Board also considered that Victory Capital may derive reputational and other
benefits from its ability to use "USAA" and related names in connection with
operating and marketing the Funds. The Board considered that the Transaction, if
completed, would significantly increase Victory Capital's assets under
management and expand Victory Capital's investment capabilities. This increased
size and diversification could facilitate Victory Capital's continued investment
in its business and products, which Victory Capital would be able to leverage
across a broader base of assets. Victory Capital also would be able to use
trading commission credits from the Funds' transactions in securities to
"purchase" third party research and execution services to support its investment
process. Based on its review, the Board determined that any "fall-out" benefits
and other types of benefits that may accrue to Victory Capital are fair and
reasonable.
CONCLUSIONS - Based on the foregoing and other relevant considerations, at the
Meeting of the Board held on January 15, 2019, the Board, including a majority
of the Independent Trustees, acting within its business judgment, (1) concluded
that the terms of the New Advisory Agreement are fair and reasonable and that
approval of the New Advisory Agreement is in the best interests of each Fund and
its respective shareholders, (2) voted to approve the New Advisory Agreement,
and (3) voted to recommend approval of the New Advisory Agreement by
shareholders of the Funds. The Board evaluated all information available to it
on a Fund-by-Fund basis and its determinations were made separately in respect
of each Fund. The Board noted some factors may have been more or less important
with respect to any particular Fund and that no one factor was determinative of
its decisions which, instead, were premised upon the totality of factors
considered. In this connection, the Board also noted that different Board
members likely placed emphasis on different factors in reaching their individual
conclusions to vote in favor of the New Advisory Agreement and to recommend
approval of the New Advisory Agreement by shareholders of the Funds.
FACTORS CONSIDERED IN APPROVING THE NEW SUBADVISORY AGREEMENTS
In approving the New Subadvisory Agreements with each of Barrow, Hanley,
Mewhinney & Strauss, LLC, Brandes Investment Partners, L.P., ClariVest Asset
================================================================================
ADVISORY AGREEMENT(S) | 51
================================================================================
Management LLC, Epoch Investment Partners, Inc., Granahan Investment Management,
Inc., Lazard Asset Management LLC, Loomis, Sayles & Company LP, Massachusetts
Financial Services Company, Northern Trust Investments, Inc., QS Investors, LLC,
The Renaissance Group LLP and Wellington Management Company LLP (each, a
"Subadviser" and together the "Subadvisers") with respect to the applicable
Funds, the Board considered various factors, among them: (i) the nature, extent,
and quality of services to be provided to the applicable Funds by the
Subadvisers; (ii) each Subadviser's compensation and any other benefits derived
from the subadvisory relationship; (iii) comparisons, to the extent applicable,
of subadvisory fees and performance to comparable investment companies; and (iv)
the terms of each New Subadvisory Agreement. The Board's evaluation of the New
Subadvisory Agreements reflected the information provided specifically in
connection with its review of the New Subadvisory Agreements, as well as, where
relevant, information that was previously furnished to the Board in connection
with the most recent renewal of the Existing Subadvisory Agreements at the 2018
15(c) meeting and at other subsequent Board meetings in 2018. A summary of the
Board's analysis of these factors is set forth below. After full consideration
of a variety of factors, the Board, including the Independent Trustees, voted to
approve each New Subadvisory Agreement. In approving each New Subadvisory
Agreement, the Board did not identify any single factor as controlling, and each
Trustee may have attributed different weights to various factors. The
Independent Trustees reviewed the proposed approval of the New Subadvisory
Agreements in private sessions with their independent legal counsel at which no
representatives of Victory Capital or AMCO were present.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY THE
SUBADVISERS - The Board considered information provided to them regarding the
services to be provided by each Subadviser, including information presented
periodically throughout the previous year. The Board considered each
Subadviser's level of knowledge and investment style. The Board reviewed the
experience and credentials of the investment personnel who are responsible for
managing the investment of portfolio securities with respect to each applicable
Fund and each Subadviser's level of staffing. The Board also noted each
Subadviser's brokerage practices. The Board also considered
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52 | USAA SMALL CAP STOCK FUND
================================================================================
each Subadviser's regulatory and compliance history. The Board also took into
account each Subadviser's risk management processes. The Board noted that AMCO's
monitoring processes of each Subadviser include, and Victory Capital's expected
monitoring processes of each Subadviser would include, among others: (i) regular
telephonic meetings to discuss, among other matters, investment strategies and
to review portfolio performance; (ii) monthly portfolio compliance checklists
and quarterly compliance certifications to the Board; and (iii) due diligence
visits to each Subadviser. The Board also considered that the terms and
conditions of the New Subadvisory Agreements are substantially similar to the
terms and conditions of the Existing Subadvisory Agreements.
SUBADVISER COMPENSATION - The Board took into account the financial condition of
each Subadviser. In considering the cost of services to be provided by each
Subadviser and the profitability to that Subadviser of its relationship with the
applicable Fund, the Board noted that the fees under the New Subadvisory
Agreements will be paid by Victory Capital. The Board also relied on the ability
of AMCO to negotiate each Existing Subadvisory Agreement and the fees thereunder
at arm's length. The Board considered that the fee rate to be payable under each
New Subadvisory Agreement were proposed to be identical to the fee rate
currently payable under each corresponding Existing Subadvisory Agreement. For
the above reasons, the Board determined that the expected profitability of each
Subadviser from its relationship with the applicable Fund was not a material
factor in its deliberations with respect to the consideration of the approval of
each New Subadvisory Agreement. For similar reasons, the Board concluded that
the potential for economies of scale in each Subadviser's management of the
applicable Fund was not a material factor in considering each New Subadvisory
Agreement, although the Board noted that certain New Subadvisory Agreements
contain breakpoints in their fee schedules.
SUBADVISORY FEES AND FUND PERFORMANCE - The Board previously compared the
subadvisory fees for each applicable Fund with the fees that each Subadviser
charges comparable clients, as applicable. The Board considered that each
applicable Fund will pay a management fee to Victory Capital and that, in turn,
Victory Capital will pay a subadvisory fee to each Subadviser.
================================================================================
ADVISORY AGREEMENT(S) | 53
================================================================================
At the 2018 15(c) meeting, the Board considered, among other data, each
applicable Fund's performance over shorter and longer term periods, as compared
to each Fund's respective peer group and noted that the Board reviews at its
regularly scheduled meetings information about each Fund's performance results.
The Board considered Victory Capital's capabilities with respect to monitoring
the performance, investment style and risk-adjusted performance of each
Subadviser. The Board also noted each Subadviser's performance record for
similar accounts, as applicable.
CONCLUSIONS - The Board reached the following conclusions regarding each New
Subadvisory Agreement, among others: (i) each Subadviser is qualified to manage
the applicable Fund's assets in accordance with its investment objective and
policies; (ii) each Subadviser maintains an appropriate compliance program;
(iii) the performance of each applicable Fund is reasonable in relation to the
performance of funds with similar investment objectives and to relevant indices
in view of the Fund's investment approach and Victory Capital is expected to
appropriately monitor each Fund's performance; and (iv) each Fund's advisory
expenses are reasonable in relation to those of similar funds and to the
services to be provided by Victory Capital and each Subadviser. Based on its
conclusions, the Board determined that the approval of each New Subadvisory
Agreement with respect to each applicable Fund would be in the best interests of
the Fund and its shareholders.
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54 | USAA SMALL CAP STOCK FUND
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TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Richard Y. Newton III
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN, State Street Bank and Trust Company
ACCOUNTING AGENT, AND P.O. Box 1713
SUB-ADMINISTRATOR Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
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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) or (210) 531-8722;
(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 monthly portfolio holdings with the SEC
for the first and third quarters of each fiscal year as an exhibit to its
reports on Form N-PORT (beginning with filings after March 31, 2019).
Previously, the Fund made its complete schedule of portfolio holdings available
after the first and third fiscal quarters in regulatory filings on Form N-Q. The
Fund's Forms N-CSR, N-PORT, and N-Q are available at no charge (i) by calling
(800) 531-USAA (8722) or (210) 531-8722; (ii) at USAA.COM; and (iii) on the
SEC's website at HTTP://WWW.SEC.GOV.
================================================================================
--------------
USAA PRSRT STD
9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
--------------
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================================================================================
40053-0319 (C)2019, USAA. All rights reserved.
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA SHORT-TERM BOND FUND]
================================================================================
SEMIANNUAL REPORT
USAA SHORT-TERM BOND FUND
FUND SHARES (USSBX) o INSTITUTIONAL SHARES (UISBX)
o ADVISER SHARES (UASBX) o R6 SHARES (URSBX)
JANUARY 31, 2019
================================================================================
Beginning on January 1, 2021, as permitted by regulations adopted by the
Securities and Exchange Commission, paper copies of the Fund's shareholder
reports like this one will no longer be sent by mail, unless you specifically
request paper copies of the reports from the Fund or from your financial
intermediary, such as a broker-dealer or bank. Instead, the reports will be
made available on usaa.com, and you will be notified by mail each time a report
is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will
not be affected by this change and you need not take any action. You may elect
to receive shareholder reports and other communications from the Fund or your
financial intermediary electronically by notifying your financial intermediary
directly, or if you are a direct investor, by calling (800) 531-USAA (8722) or
logging on to usaa.com.
You may elect to receive all future reports in paper free of charge. You can
inform the Fund or your financial intermediary that you wish to continue
receiving paper copies of your shareholder reports by notifying your financial
intermediary directly, or if you are a direct investor, by calling (800)
531-USAA (8722) or logging on to usaa.com. Your election to receive reports in
paper will apply to all funds held with the USAA family of funds or your
financial intermediary.
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
INVESTMENT OVERVIEW 1
FINANCIAL INFORMATION
Portfolio of Investments 3
Notes to Portfolio of Investments 27
Financial Statements 33
Notes to Financial Statements 37
Financial Highlights 53
EXPENSE EXAMPLE 57
ADVISORY AGREEMENT(S) 59
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.
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 tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. 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.
(C)2019, USAA. All rights reserved.
================================================================================
================================================================================
INVESTMENT OVERVIEW
--------------------------------------------------------------------------------
o PORTFOLIO RATINGS MIX - 1/31/19 o
[PIE CHART OF PORTFOLIO RATINGS MIX]
AAA 19.1%
AA 7.9%
A 22.6%
BBB 42.5%
BELOW INVESTMENT-GRADE 6.4%
UNRATED 1.5%
[END CHART]
This chart reflects the highest long-term rating from a Nationally Recognized
Statistical Rating Organization (NRSRO), with the four highest long-term credit
ratings labeled, in descending order of credit quality, AAA, AA, A, and BBB.
These categories represent investment-grade quality. NRSRO ratings are shown
because they provide independent analysis of the credit quality of the Funds'
investments. USAA Asset Management Company (the Manager) also performs its own
fundamental credit analysis of each security. As part of its fundamental credit
analysis, the Manager considers various criteria, including industry specific
actions, peer comparisons, payment ranking, and structure specific
characteristics. Any of the Funds' securities that are not rated by an NRSRO
appear in the chart above as "Unrated," but these securities are analyzed and
monitored by the Manager on an ongoing basis. Government securities that are
issued or guaranteed as to principal and interest by the U.S. government and
pre-refunded and escrowed-to-maturity municipal bonds that are not rated are
treated as AAA for credit quality purposes.
Percentages are of the total market value of the Fund's investments.
Refer to the Portfolio of Investments for a complete list of securities.
================================================================================
INVESTMENT OVERVIEW | 1
================================================================================
o ASSET ALLOCATION* - 1/31/19 O
(% OF NET ASSETS)
[PIE CHART OF ASSET ALLOCATION]
CORPORATE OBLIGATIONS 50.1%
ASSET BACKED SECURITIES 13.8%
EURODOLLAR AND YANKEE OBLIGATIONS 12.6%
U.S. TREASURY SECURITIES 6.8%
MUNICIPAL OBLIGATIONS 4.3%
BANK LOANS 3.4%
COMMERCIAL MORTGAGE SECURITIES 2.8%
COLLATERALIZED LOAN OBLIGATIONS 1.6%
U.S. GOVERNMENT AGENCY ISSUES 1.3%
MONEY MARKET INSTRUMENTS 1.2%
FOREIGN GOVERNMENT OBLIGATIONS 0.9%
PREFERED STOCKS 0.9%
COLLATERALIZED MORTGAGE OBLIGATIONS 0.1%
[END CHART]
Percentages are of the net assets of the Fund and may not equal 100%.
*Does not include short-term investments purchased with cash collateral from
securities loaned.
================================================================================
2 | USAA SHORT-TERM BOND FUND
================================================================================
PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
BONDS (97.7%)
ASSET-BACKED SECURITIES (13.8%)
ASSET BACKED SECURITIES (13.5%)
-------------------------------
AUTOMOBILE ABS (9.7%)
$ 10,000 AmeriCredit Automobile Receivables Trust 2.24% 4/08/2022 $ 9,884
5,000 AmeriCredit Automobile Receivables Trust 3.65 5/09/2022 5,035
2,857 AmeriCredit Automobile Receivables Trust 3.15 3/20/2023 2,865
5,000 AmeriCredit Automobile Receivables Trust 2.60 9/18/2023 4,950
3,750 ARI Fleet Lease Trust(a) 2.55 10/15/2026 3,737
6,063 ARI Fleet Lease Trust(a) 2.84 10/15/2026 6,051
12,250 Avis Budget Rental Car Funding AESOP, LLC(a) 2.96 7/20/2020 12,236
4,188 Avis Budget Rental Car Funding AESOP, LLC(a) 3.75 7/20/2020 4,190
3,381 Avis Budget Rental Car Funding AESOP, LLC(a) 2.50 2/20/2021 3,364
3,500 Avis Budget Rental Car Funding AESOP, LLC(a) 3.29 2/20/2021 3,493
2,827 Avis Budget Rental Car Funding AESOP, LLC(a) 4.94 6/20/2022 2,861
5,455 Bank of The West Auto Trust(a) 2.33 9/15/2023 5,341
5,000 Bank of The West Auto Trust(a) 3.59 12/15/2023 5,072
5,000 Bank of The West Auto Trust(a) 2.96 2/15/2024 4,910
9,425 California Republic Auto Receivables Trust 2.57 11/16/2020 9,410
4,576 California Republic Auto Receivables Trust 2.53 6/15/2021 4,555
1,250 Canadian Pacer Auto Receivables Trust(a) 3.63 1/19/2024 1,270
2,148 Centre Point Funding, LLC(a) 2.61 8/20/2021 2,122
2,827 Chesapeake Funding II, LLC(a) 3.04 4/15/2030 2,831
5,000 Chesapeake Funding II, LLC(a) 3.23 8/15/2030 5,013
4,402 Credit Acceptance Auto Loan Trust(a) 4.29 11/15/2024 4,424
3,030 Credit Acceptance Auto Loan Trust(a) 3.01 2/16/2027 3,010
11,000 Credit Acceptance Auto Loan Trust(a) 3.60 4/15/2027 11,011
2,348 Credit Acceptance Auto Loan Trust(a) 3.55 8/15/2027 2,369
4,850 Credit Acceptance Auto Loan Trust(a) 3.35 6/15/2026 4,830
1,624 Drive Auto Receivables Trust 2.78 10/15/2020 1,623
9 Drive Auto Receivables Trust 2.36 3/15/2021 9
10,000 Drive Auto Receivables Trust 3.22 3/15/2023 10,002
3,500 Drive Auto Receivables Trust 3.66 11/15/2024 3,513
1,325 Drive Auto Receivables Trust(a) 4.59 1/17/2023 1,333
5,000 Drive Auto Receivables Trust 3.68 7/15/2023 5,041
2,325 Enterprise Fleet Financing, LLC(a) 2.04 2/22/2022 2,302
3,229 Enterprise Fleet Financing, LLC(a) 2.13 7/20/2022 3,213
================================================================================
PORTFOLIO OF INVESTMENTS | 3
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
$ 10,000 Enterprise Fleet Financing, LLC(a) 2.60% 7/20/2022 $ 9,942
1,074 Enterprise Fleet Financing, LLC(a) 1.97 1/20/2023 1,067
2,344 Enterprise Fleet Financing, LLC(a) 2.36 5/20/2023 2,303
955 Exeter Automobile Receivables Trust(a) 4.10 12/15/2020 956
6,575 Exeter Automobile Receivables Trust(a) 5.69 4/15/2021 6,617
1,442 Exeter Automobile Receivables Trust(a) 2.05 12/15/2021 1,436
3,175 Exeter Automobile Receivables Trust(a) 5.83 12/15/2021 3,219
3,157 Exeter Automobile Receivables Trust(a) 2.90 1/18/2022 3,155
5,000 Exeter Automobile Receivables Trust(a) 2.75 4/15/2022 4,983
2,926 Exeter Automobile Receivables Trust(a) 2.82 5/16/2022 2,916
4,209 Exeter Automobile Receivables Trust(a) 3.27 5/16/2022 4,211
4,000 Exeter Automobile Receivables Trust(a) 3.97 9/15/2023 4,025
3,221 GM Financial Consumer Automobile
Receivables Trust 2.08 1/19/2021 3,210
8,000 OneMain Direct Auto Receivables Trust(a) 2.55 11/14/2023 7,931
4,802 OSCAR U.S. Funding Trust IX, LLC(a) 3.15 8/10/2021 4,803
5,000 OSCAR U.S. Funding Trust IX, LLC(a) 3.39 9/12/2022 5,026
4,000 OSCAR U.S. Funding Trust VI, LLC(a) 3.30 5/10/2024 4,018
3,980 OSCAR U.S. Funding Trust VII, LLC(a) 2.45 12/10/2021 3,948
5,000 OSCAR U.S. Funding Trust VIII, LLC(a) 3.23 5/10/2022 5,007
1,740 Prestige Auto Receivables Trust(a) 2.98 11/16/2020 1,740
2,067 Prestige Auto Receivables Trust(a) 2.40 4/15/2021 2,066
3,000 Prestige Auto Receivables Trust(a) 3.05 4/15/2021 3,000
2,500 Prestige Auto Receivables Trust(a) 2.39 5/16/2022 2,483
2,468 Prestige Auto Receivables Trust(a) 2.88 11/15/2022 2,457
4,000 Santander Drive Auto Receivables Trust 2.66 11/15/2021 3,994
1,389 Santander Drive Auto Receivables Trust 2.74 12/15/2021 1,388
4,792 Santander Drive Auto Receivables Trust 3.52 12/15/2022 4,827
5,000 Securitized Term Auto Receivables Trust(a) 2.21 6/25/2021 4,971
3,906 Securitized Term Auto Receivables Trust(a) 2.29 3/25/2022 3,839
5,000 SunTrust Auto Receivables Trust B(a) 2.20 2/15/2021 4,981
8,000 SunTrust Auto Receivables Trust C(a) 2.50 4/15/2021 7,977
2,144 TCF Auto Receivables Owner Trust(a) 2.55 4/15/2021 2,139
7,500 TCF Auto Receivables Owner Trust B(a) 2.49 4/15/2021 7,492
5,000 TCF Auto Receivables Owner Trust B(a) 2.92 10/17/2022 4,974
5,706 Westlake Automobile Receivables Trust(a) 2.67 5/17/2021 5,679
1,815 Westlake Automobile Receivables Trust(a) 2.30 10/17/2022 1,813
1,430 Westlake Automobile Receivables Trust(a) 2.70 10/17/2022 1,426
2,000 Westlake Automobile Receivables Trust(a) 3.28 12/15/2022 1,986
3,000 Westlake Automobile Receivables Trust(a) 3.61 10/16/2023 3,012
5,000 Wheels SPV, LLC(a) 1.87 5/20/2025 4,968
4,000 World Omni Auto Receivables Trust 3.87 8/15/2025 4,091
================================================================================
4 | USAA SHORT-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
$ 5,000 World Omni Select Auto Trust(a) 3.68% 7/15/2023 $ 5,066
----------
317,012
----------
CREDIT CARD ABS (1.3%)
3,740 Evergreen Credit Card Trust(a) 3.59 1/15/2023 3,742
4,000 Evergreen Credit Card Trust(a) 3.98 1/15/2023 4,008
5,000 Master Credit Card Trust A(a) 2.26 7/21/2021 4,966
4,565 Synchrony Credit Card Master Note Trust 2.95 5/15/2024 4,532
5,000 Synchrony Credit Card Master Note Trust 3.87 5/15/2026 5,034
15,000 Synchrony Credit Card Master Note Trust "C"(b) 2.56 6/15/2023 14,847
5,000 Trillium Credit Card Trust ll(a),(c) 3.04 1/26/2024 5,000
----------
42,129
----------
OTHER ABS (1.9%)
1,951 BCC Funding XIII, LLC(a) 4.78 8/20/2022 1,983
8,367 BCC Funding XIV, LLC(a) 2.96 6/20/2023 8,349
5,500 CNH Equipment Trust 2.14 8/15/2022 5,493
1,200 CNH Equipment Trust 2.47 12/16/2024 1,186
1,067 Dell Equipment Finance Trust(a) 2.14 4/22/2022 1,064
1,000 Dell Equipment Finance Trust(a) 2.95 4/22/2022 998
2,750 Dell Equipment Finance Trust(a) 3.24 7/22/2022 2,750
1,750 Dell Equipment Finance Trust(a) 2.73 10/24/2022 1,738
1,185 Dell Equipment Finance Trust(a) 3.44 4/24/2023 1,183
1,882 Element Rail Leasing I, LLC(a) 2.30 4/19/2044 1,869
12,000 Element Rail Leasing I, LLC(a) 3.67 4/19/2044 11,961
5,000 GreatAmerica Leasing Receivables Funding, LLC(a) 2.83 6/17/2024 4,980
4,362 MMAF Equipment Finance, LLC(a) 1.93 7/16/2021 4,347
2,900 MMAF Equipment Finance, LLC(a) 2.41 8/16/2024 2,856
2,610 NP SPE II, LLC(a) 3.37 10/21/2047 2,590
5,000 SBA Tower Trust(a) 2.90 10/15/2044 4,984
2,020 SCF Equipment Leasing, LLC(a) 3.41 12/20/2023 2,016
2,937 Trinity Rail Leasing, LP(a) 2.27 1/15/2043 2,875
----------
63,222
----------
STUDENT LOAN ABS (0.6%)
5,312 CIT Education Loan Trust
(3 mo. LIBOR + 0.30%)(a) 3.12(d) 6/25/2042 4,945
1,610 College Loan Corp. Trust
(3 mo. LIBOR + 0.49%) 3.28(d) 1/15/2037 1,505
3,559 Collegiate Funding Services Education
Loan Trust (3 mo. LIBOR + 0.32%) 3.13(d) 3/28/2035 3,271
2,333 Iowa Student Loan Liquidity Corp.
(3 mo. LIBOR + 0.35%) 3.17(d) 9/25/2037 2,144
1,085 Nelnet Student Loan Trust
(3 mo. LIBOR + 0.28%) 3.10(d) 9/22/2037 1,035
================================================================================
PORTFOLIO OF INVESTMENTS | 5
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
$ 5,500 SLM Private Education Loan Trust(a) 2.50% 3/15/2047 $ 5,476
776 SLM Student Loan Trust (3 mo. LIBOR + 0.55%) 3.32(d) 10/25/2065 738
----------
19,114
----------
Total Asset Backed Securities 441,477
----------
FINANCIAL (0.3%)
----------------
REITS (0.3%)
10,000 SBA Tower Trust(a) 3.45 3/15/2023 9,948
----------
Total Asset-Backed Securities (cost: $451,925) 451,425
----------
BANK LOANS (3.4%)(e)
COMMUNICATIONS (0.4%)
---------------------
INTERNET (0.3%)
10,496 Symantec Corp. (1 mo. LIBOR + 1.50%)(c) 4.06 7/28/2019 10,473
----------
TELECOMMUNICATIONS (0.1%)
3,246 AT&T, Inc. (1 mo. LIBOR + 1.13%) 3.63 12/14/2020 3,242
----------
Total Communications 13,715
----------
CONSUMER, CYCLICAL (0.6%)
-------------------------
APPAREL (0.0%)
1,018 Phillips-Van Heusen Corp. (1 mo. LIBOR + 1.50%) 4.01 5/19/2021 1,017
----------
AUTO PARTS & EQUIPMENT (0.1%)
5,000 Goodyear Tire & Rubber Co. (1 mo. LIBOR + 2.00%) 4.51 3/07/2025 4,825
----------
LODGING (0.3%)
9,579 Las Vegas Sands, LLC (1 mo. LIBOR + 1.75%) 4.25 3/27/2025 9,422
----------
RETAIL (0.2%)
6,823 Petsmart, Inc. (1 mo. LIBOR + 3.00%) 5.52 3/11/2022 5,738
----------
Total Consumer, Cyclical 21,002
----------
CONSUMER, NON-CYCLICAL (0.8%)
-----------------------------
FOOD (0.2%)
1,150 JBS USA, LLC (3 mo. LIBOR + 2.50%) 5.00 10/30/2022 1,141
6,710 JBS USA, LLC (3 mo. LIBOR + 2.50%) 5.30 10/30/2022 6,653
----------
7,794
----------
HEALTHCARE-SERVICES (0.6%)
14,883 DaVita, Inc. (1 mo. LIBOR + 2.75%) 5.25 6/24/2021 14,856
4,412 HCA, Inc. (1 mo. LIBOR + 1.50%) 4.00 6/10/2020 4,394
----------
19,250
----------
Total Consumer, Non-cyclical 27,044
----------
================================================================================
6 | USAA SHORT-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
FINANCIAL (0.7%)
----------------
REITS (0.7%)
$ 10,000 American Tower Corp. (1 mo. LIBOR + 0.88%) 3.37% 3/29/2019 $ 9,994
12,686 Sabra Health Care Ltd. (1 mo. LIBOR + 1.45%) 3.95 8/17/2020 12,623
----------
Total Financial 22,617
----------
INDUSTRIAL (0.4%)
-----------------
PACKAGING & CONTAINERS (0.4%)
11,750 Berry Global, Inc. (1 mo. LIBOR + 1.75%) 4.27 2/08/2020 11,717
----------
TECHNOLOGY (0.5%)
-----------------
COMPUTERS (0.2%)
4,805 Dell International, LLC (1 mo. LIBOR + 1.75%) 4.25 9/07/2021 4,757
----------
SEMICONDUCTORS (0.0%)
1,300 Analog Devices, Inc. (1 mo. LIBOR + 1.13%) 3.63 9/23/2019 1,298
----------
SOFTWARE (0.3%)
10,000 First Data Corp. (3 mo. LIBOR + 2.00%)(c) -(f) 4/26/2024 9,974
----------
Total Technology 16,029
----------
Total Bank Loans (cost: $113,719) 112,124
----------
COLLATERALIZED LOAN OBLIGATIONS (1.6%)
ASSET BACKED SECURITIES (1.6%)
------------------------------
OTHER ABS (1.6%)
1,500 American Money Management Corp.
(3 mo. LIBOR + 1.50%)(a) 4.29(d) 10/15/2028 1,501
3,000 Annisa Ltd. (1 mo. LIBOR + 1.10%)(a) 3.86(d) 7/20/2031 2,963
5,000 Dryden 75 Ltd. (1 mo. LIBOR + 1.18%)(a),(c),(g) 1.00(d) 1/15/2029 5,000
6,750 Madison Park Funding XI Ltd.
(1 mo. LIBOR + 1.16%)(a) 3.93(d) 7/23/2029 6,752
10,500 Oaktree EIF Ltd. (3 mo. LIBOR + 2.00%)(a) 4.76(d) 10/20/2027 10,502
4,271 Palmer Square Loan Funding 2018-2 Ltd.
(1 mo. LIBOR + 0.65%)(a) 3.44(d) 7/15/2026 4,237
1,970 Palmer Square Loan Funding 2018-2 Ltd.
(1 mo. LIBOR + 1.05%)(a) 3.84(d) 7/15/2026 1,945
5,000 Palmer Square Loan Funding 2018-5 Ltd.
(1 mo. LIBOR + 0.85%)(a) 3.32(d) 1/20/2027 4,990
4,500 Race Point Ltd. (1 mo. LIBOR + 1.10%)(a) 3.87(d) 7/25/2031 4,469
2,500 TIAA Ltd. (3 mo. LIBOR + 1.28%)(a) 4.04(d) 4/20/2029 2,501
3,250 Trinitas Ltd. (3 mo. LIBOR + 1.70%) 4.47(d) 10/25/2028 3,253
5,000 Trinitas Ltd. (3 mo. LIBOR + 1.32%)(a) 4.09(d) 7/25/2029 5,002
----------
Total Asset Backed Securities 53,115
----------
Total Collateralized Loan Obligations (cost: $53,214) 53,115
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 7
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.1%)
MORTGAGE SECURITIES (0.1%)
--------------------------
WHOLE LOAN COLLATERAL CMO (0.1%)
$ 2,708 Sequoia Mortgage Trust(a) (cost: $2,743) 3.00%(h) 5/25/2043 $ 2,628
----------
COMMERCIAL MORTGAGE SECURITIES (2.8%)
MORTGAGE SECURITIES (2.8%)
--------------------------
COMMERCIAL MBS (2.8%)
3,705 Aventura Mall Trust(a) 3.74(h) 12/05/2032 3,764
7,840 Bear Stearns Deutsche Bank Trust(a) 5.01 9/15/2027 7,933
4,000 BTH-21 Mortgage-Backed Securities Trust
(1 mo. LIBOR + 2.50%)(a) 5.01(d) 10/07/2021 4,005
1,760 Citigroup Commercial Mortgage Trust 2.63 9/10/2045 1,756
7,600 Citigroup Commercial Mortgage Trust(a) 4.38 1/10/2024 7,919
4,300 Commercial Mortgage Trust
(1 mo. LIBOR + 1.60%)(a) 4.11(d) 2/13/2032 4,303
2,213 Commercial Mortgage Trust 5.69(h) 7/10/2038 2,222
61,333 Commercial Mortgage Trust(i) 1.65(h) 8/15/2045 2,901
61,327 Commercial Mortgage Trust(i) 1.78(h) 10/15/2045 2,983
4,130 FREMF Mortgage Trust(a) 3.04(h) 10/25/2047 4,123
4,730 GS Mortgage Securities Corp. 3.42 10/10/2032 4,774
5,000 GS Mortgage Securities Corp.(a) 2.86 5/10/2034 4,944
5,297 GS Mortgage Securities Trust(a) 4.95 1/10/2045 5,512
26,242 GS Mortgage Securities Trust(i) 2.21(h) 5/10/2045 1,069
23,538 GS Mortgage Securities Trust(i) 1.96(h) 11/10/2045 1,413
21,999 J.P. Morgan Chase Commercial Mortgage
Securities Trust(i) 1.78(h) 10/15/2045 1,115
2,450 JP Morgan Chase Commercial Mortgage
Securities Trust(a) 5.63 12/05/2027 2,503
969 LSTAR Commercial Mortgage Trust(a) 2.42 3/10/2050 960
19,947 Morgan Stanley Bank of America Merrill
Lynch Trust(a),(i) 1.62(h) 11/15/2045 962
389 Morgan Stanley Capital I Trust 5.27(h) 10/12/2052 390
90,452 UBS Commercial Mortgage Trust(a),(i) 2.07(h) 5/10/2045 4,799
24,275 UBS-Barclays Commercial Mortgage Trust(a),(i) 1.83(h) 8/10/2049 1,332
1,614 UBS-Barclays Commercial Mortgage Trust 2.73 8/10/2049 1,611
26,513 Wells Fargo Commercial Mortgage Trust(a),(i) 1.78(h) 10/15/2045 1,375
15,000 WFRBS Commercial Mortgage Trust(a) 4.90(h) 6/15/2044 15,585
----------
Total Mortgage Securities 90,253
----------
Total Commercial Mortgage Securities (cost: $81,614) 90,253
----------
================================================================================
8 | USAA SHORT-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS (50.1%)
BASIC MATERIALS (2.5%)
----------------------
CHEMICALS (1.9%)
$ 5,000 CF Industries, Inc.(a) 3.40% 12/01/2021 $ 4,894
5,000 DowDuPont, Inc. 3.77 11/15/2020 5,069
7,665 Ei Du Pont De Nemours & Co. 2.20 5/01/2020 7,626
4,473 Huntsman International, LLC 4.88 11/15/2020 4,568
19,185 INVISTA Finance, LLC(a) 4.25 10/15/2019 19,281
5,000 Mosaic Co. 3.25 11/15/2022 4,944
10,176 Platform Specialty Products Corp.(a) 6.50 2/01/2022 10,341
5,000 Sherwin-Williams Co. 2.75 6/01/2022 4,910
----------
61,633
----------
IRON/STEEL (0.5%)
9,350 Carpenter Technology Corp. 5.20 7/15/2021 9,431
8,403 Reliance Steel & Aluminum Co. 4.50 4/15/2023 8,517
----------
17,948
----------
MINING (0.1%)
2,000 Freeport-McMoRan, Inc. 3.10 3/15/2020 1,982
----------
Total Basic Materials 81,563
----------
COMMUNICATIONS (3.7%)
---------------------
MEDIA (1.2%)
18,000 Charter Communications Operating, LLC/Charter
Communications Operating Capital 3.58 7/23/2020 18,052
5,000 Comcast Corp. 3.30 10/01/2020 5,034
8,550 CSC Holdings, LLC 8.63 2/15/2019 8,582
2,000 CSC Holdings, LLC(a) 10.13 1/15/2023 2,165
5,000 Fox Corp.(a),(j) 3.67 1/25/2022 5,053
1,041 Time Warner Cable, LLC 5.00 2/01/2020 1,057
----------
39,943
----------
TELECOMMUNICATIONS (2.5%)
15,000 AT&T, Inc. 2.45 6/30/2020 14,910
10,000 AT&T, Inc. 3.20 3/01/2022 10,006
5,000 Centel Capital Corp. 9.00 10/15/2019 5,178
3,600 CenturyLink, Inc. 6.45 6/15/2021 3,673
20,934 Hughes Satellite Systems Corp. 6.50 6/15/2019 21,190
10,725 Sprint Spectrum Co., LLC/Sprint Spectrum Co. II,
LLC/Sprint Spectrum Co. III, LLC(a) 3.36 9/20/2021 10,693
5,000 T-Mobile USA, Inc. 6.50 1/15/2024 5,187
10,000 Verizon Communications, Inc. 3.13 3/16/2022 10,025
----------
80,862
----------
Total Communications 120,805
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 9
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
CONSUMER, CYCLICAL (2.9%)
-------------------------
AIRLINES (1.4%)
$ 4,607 American Airlines, Inc. Pass-Through Trust 4.38% 4/01/2024 $ 4,576
8,491 American Airlines, Inc. Pass-Through Trust 4.40 3/22/2025 8,412
7,660 Continental Airlines, Inc. Pass-Through Trust 5.50 10/29/2020 7,755
10,000 Delta Air Lines, Inc. 2.88 3/13/2020 9,946
1,128 United Airlines, Inc. Pass-Through Trust 4.63 9/03/2022 1,128
3,165 United Airlines, Inc. Pass-Through Trust 5.38 2/15/2023 3,232
361 US Airways Group, Inc. Pass-Through Trust
(INS - MBIA Insurance Corp.) 7.08 3/20/2021 379
10,671 US Airways Group, Inc. Pass-Through Trust 5.38 5/15/2023 10,898
----------
46,326
----------
AUTO MANUFACTURERS (0.6%)
3,928 Ford Motor Credit Co., LLC 8.13 1/15/2020 4,084
5,000 Ford Motor Credit Co., LLC(j) 5.09 1/07/2021 5,066
4,000 Ford Motor Credit Co., LLC 3.20 1/15/2021 3,913
5,000 Hyundai Capital America(a) 2.75 9/18/2020 4,937
----------
18,000
----------
HOME BUILDERS (0.3%)
10,000 Lennar Corp. 2.95 11/29/2020 9,825
----------
LODGING (0.1%)
4,074 MGM Resorts International 8.63 2/01/2019 4,074
----------
RETAIL (0.5%)
5,000 McDonald's Corp. 3.35 4/01/2023 5,048
3,000 QVC, Inc. 3.13 4/01/2019 2,996
8,000 Walgreens Boots Alliance, Inc. 2.70 11/18/2019 7,993
----------
16,037
----------
Total Consumer, Cyclical 94,262
----------
CONSUMER, NON-CYCLICAL (8.0%)
-----------------------------
AGRICULTURE (0.5%)
2,500 Cargill, Inc.(a) 3.25 3/01/2023 2,507
10,000 Philip Morris International, Inc. 2.63 2/18/2022 9,835
5,000 Philip Morris International, Inc. 2.38 8/17/2022 4,885
----------
17,227
----------
BEVERAGES (0.6%)
2,600 Constellation Brands, Inc. 2.70 5/09/2022 2,536
7,896 Constellation Brands, Inc. 2.65 11/07/2022 7,643
3,000 Constellation Brands, Inc. 3.20 2/15/2023 2,952
5,000 Molson Coors Brewing Co. 2.10 7/15/2021 4,876
----------
18,007
----------
================================================================================
10 | USAA SHORT-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
BIOTECHNOLOGY (0.6%)
$ 5,000 Amgen, Inc. 2.25% 8/19/2023 $ 4,795
10,000 Celgene Corp. 2.75 2/15/2023 9,768
5,000 Celgene Corp. 3.25 2/20/2023 4,982
----------
19,545
----------
COMMERCIAL SERVICES (0.3%)
1,650 Art Institute of Chicago 2.48 3/01/2019 1,649
2,500 Horace Mann School 2.48 7/01/2022 2,450
5,000 Moody's Corp. 2.75 12/15/2021 4,930
----------
9,029
----------
FOOD (1.9%)
5,000 Conagra Brands, Inc. (3 mo. LIBOR + 0.75%) 3.51(d) 10/22/2020 4,976
5,000 J.M. Smucker Co. 2.50 3/15/2020 4,969
20,000 Kraft Heinz Foods Co.(a) 4.88 2/15/2025 20,419
10,000 McCormick & Co., Inc. 2.70 8/15/2022 9,762
3,000 Mondelez International Holdings Netherlands B.V.(a) 1.63 10/28/2019 2,970
11,792 Mondelez International Holdings Netherlands B.V.(a) 2.00 10/28/2021 11,419
5,000 Nestle Holdings, Inc.(a) 3.35 9/24/2023 5,106
2,605 Tyson Foods, Inc. 4.50 6/15/2022 2,686
----------
62,307
----------
HEALTHCARE PRODUCTS (0.8%)
10,000 Agiliti Health, Inc. 7.63 8/15/2020 10,000
8,300 Becton Dickinson & Co. 2.40 6/05/2020 8,202
5,000 Becton Dickinson & Co. (3 mo. LIBOR + 0.88%) 3.68(d) 12/29/2020 4,979
4,500 Medtronic, Inc. 2.50 3/15/2020 4,492
----------
27,673
----------
HEALTHCARE-SERVICES (1.0%)
750 ACTS Retirement-Life Communities, Inc.(b) 2.47 11/16/2019 745
10,000 HCA, Inc. 6.50 2/15/2020 10,300
5,000 HCA, Inc. 5.88 3/15/2022 5,313
10,200 Laboratory Corp. of America Holdings 3.20 2/01/2022 10,183
750 Orlando Health Obligated Group(b) 2.72 10/01/2019 747
4,330 SSM Health Care Corp. 3.69 6/01/2023 4,377
----------
31,665
----------
HOUSEHOLD PRODUCTS/WARES (0.3%)
10,000 Church & Dwight Co., Inc. 2.45 12/15/2019 9,952
----------
PHARMACEUTICALS (2.0%)
10,000 AbbVie, Inc. 2.30 5/14/2021 9,827
5,000 AbbVie, Inc. 3.75 11/14/2023 5,067
5,000 Allergan Funding SCS 3.00 3/12/2020 4,997
5,000 CVS Health Corp. 2.13 6/01/2021 4,894
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
$ 10,000 CVS Health Corp. 3.70% 3/09/2023 $ 10,095
4,500 Elanco Animal Health, Inc.(a) 3.91 8/27/2021 4,509
1,667 Elanco Animal Health, Inc.(a) 4.27 8/28/2023 1,680
5,000 Express Scripts Holding Co. 3.00 7/15/2023 4,897
5,000 Mead Johnson Nutrition Co. 3.00 11/15/2020 4,999
2,750 Mylan NV 2.50 6/07/2019 2,744
5,000 Shire Acquisitions Investments Ireland
Designated Activity Co. 1.90 9/23/2019 4,962
8,135 Zoetis, Inc. 3.25 2/01/2023 8,084
----------
66,755
----------
Total Consumer, Non-cyclical 262,160
----------
ENERGY (6.5%)
-------------
OIL & GAS (1.4%)
11,496 Chesapeake Energy Corp. (3 mo. LIBOR + 3.25%)(k) 6.04(d) 4/15/2019 11,496
5,000 Chevron Corp. 2.42 11/17/2020 4,985
11,998 Continental Resources, Inc. 5.00 9/15/2022 12,071
5,000 Devon Energy Corp. 4.00 7/15/2021 5,044
2,000 EQT Corp. (3 mo. LIBOR + 0.77%) 3.57(d) 10/01/2020 1,967
1,500 Exxon Mobil Corp. 2.40 3/06/2022 1,489
5,105 Marathon Petroleum Corp.(a) 5.38 10/01/2022 5,137
5,000 Marathon Petroleum Corp.(a) 5.13 4/01/2024 5,076
----------
47,265
----------
OIL & GAS SERVICES (0.1%)
3,215 Weatherford International, Ltd.(k) 5.13 9/15/2020 2,492
----------
PIPELINES (5.0%)
134 Alliance Pipeline, LP(a) 7.00 12/31/2019 136
11,500 Andeavor Logistics, LP/Tesoro Logistics
Finance Corp. 5.50 10/15/2019 11,610
4,607 Andeavor Logistics, LP/Tesoro Logistics
Finance Corp. 6.25 10/15/2022 4,734
5,691 Andeavor Logistics, LP/Tesoro Logistics
Finance Corp. 3.50 12/01/2022 5,639
5,040 Boardwalk Pipelines, LP 5.75 9/15/2019 5,111
10,000 Columbia Pipeline Group, Inc. 3.30 6/01/2020 10,000
5,000 DCP Midstream Operating, LP(a) 5.35 3/15/2020 5,087
5,000 DCP Midstream Operating, LP(a) 4.75 9/30/2021 5,038
9,306 Enable Oklahoma Intrastate Transmission, LLC(a) 6.25 3/15/2020 9,562
2,000 Enbridge Energy Partners, LP 9.88 3/01/2019 2,010
1,000 Energy Transfer Operating, LP 9.70 3/15/2019 1,007
5,000 Energy Transfer Operating, LP 4.15 10/01/2020 5,051
5,000 Energy Transfer Operating, LP 4.20 9/15/2023 5,043
================================================================================
12 | USAA SHORT-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
$ 17,975 Energy Transfer, LP 7.50% 10/15/2020 $ 19,121
20,180 EnLink Midstream Partners, LP 2.70 4/01/2019 20,180
7,000 Enterprise Products Operating, LLC 2.55 10/15/2019 6,988
5,000 Enterprise Products Operating, LLC 2.80 2/15/2021 4,998
5,000 EQM Midstream Partners, LP 4.75 7/15/2023 5,076
3,713 NuStar Logistics, LP 4.80 9/01/2020 3,745
5,000 ONEOK Partners, LP 3.80 3/15/2020 5,021
10,000 Plains All American Pipeline, LP/PAA
Finance Corp. 2.60 12/15/2019 9,933
13,556 Rockies Express Pipeline, LLC(a) 5.63 4/15/2020 13,861
4,700 Sabine Pass Liquefaction, LLC 5.63 2/01/2021 4,866
----------
163,817
----------
Total Energy 213,574
----------
FINANCIAL (16.2%)
-----------------
BANKS (8.2%)
8,000 Allfirst Preferred Capital Trust
(3 mo. LIBOR + 1.50%) 4.29(d) 7/15/2029 7,088
13,000 Associated Banc-Corp. 2.75 11/15/2019 12,943
10,000 Associated Bank, N.A. 3.50 8/13/2021 10,002
3,000 Bank of America Corp. 2.15 11/09/2020 2,961
10,000 Bank of America Corp. 5.00 5/13/2021 10,417
5,000 Bank of America Corp. (3 mo. LIBOR + 0.66%)(l) 2.37 7/21/2021 4,953
5,000 Bank of America Corp. (1 mo. LIBOR + 0.63%)(l) 2.33 10/01/2021 4,938
5,000 Bank of America Corp. (3 mo. LIBOR + 1.16%)(l) 3.12 1/20/2023 4,985
1,955 BB&T Corp. 4.25 9/30/2024 2,028
16,300 Cadence BanCorp(a) 4.88 6/28/2019 16,311
5,000 Citigroup, Inc. (1 mo. LIBOR + 0.72%)(l) 3.14 1/24/2023 4,970
15,000 Citizens Bank, N.A. 2.55 5/13/2021 14,798
2,000 City National Bank of Los Angeles 5.38 7/15/2022 2,118
10,000 Comerica Bank 2.50 6/02/2020 9,902
5,000 Compass Bank 2.75 9/29/2019 4,982
2,874 Compass Bank 5.50 4/01/2020 2,940
3,750 Compass Bank 2.88 6/29/2022 3,634
5,000 Discover Bank 3.10 6/04/2020 4,989
15,000 First Republic Bank 2.38 6/17/2019 14,971
500 Flagstar Bancorp., Inc. 6.13 7/15/2021 522
9,750 Fulton Financial Corp. 3.60 3/16/2022 9,711
5,000 Huntington National Bank 2.38 3/10/2020 4,972
5,000 J.P. Morgan Chase & Co. (3 mo. LIBOR + 0.94%)(l) 2.78 4/25/2023 4,931
5,000 KeyBank, N.A. 2.30 9/14/2022 4,849
5,000 Manufacturers & Traders Trust Co. 2.05 8/17/2020 4,929
15,000 PNC Bank, N.A. 2.63 2/17/2022 14,789
5,000 Regions Bank 2.75 4/01/2021 4,949
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
$ 10,000 Regions Financial Corp. 3.20% 2/08/2021 $ 10,004
9,500 Santander Holdings USA, Inc. 4.45 12/03/2021 9,665
15,000 Santander Holdings USA, Inc. 3.70 3/28/2022 14,993
10,000 SunTrust Bank 3.00 2/02/2023 9,887
5,000 SunTrust Banks, Inc. 2.90 3/03/2021 4,987
5,487 Synchrony Bank(j) 3.00 6/15/2022 5,250
10,000 U.S. Bank, N.A. 2.85 1/23/2023 9,925
10,000 Wells Fargo & Co. 3.07 1/24/2023 9,951
5,000 Wells Fargo Bank, N.A. 2.60 1/15/2021 4,962
----------
269,206
----------
DIVERSIFIED FINANCIAL SERVICES (1.6%)
5,000 Air Lease Corp. 2.13 1/15/2020 4,955
5,000 Air Lease Corp. 3.50 1/15/2022 4,964
5,000 Aircastle Ltd. 4.40 9/25/2023 4,956
6,600 Ally Financial, Inc. 4.13 3/30/2020 6,625
5,643 Capital One Bank USA, N.A. 8.80 7/15/2019 5,781
5,000 Capital One Financial Corp. 2.50 5/12/2020 4,966
5,000 Capital One Financial Corp. 3.05 3/09/2022 4,939
4,500 Navient Corp. 8.00 3/25/2020 4,697
5,000 Synchrony Financial 2.70 2/03/2020 4,949
5,000 Synchrony Financial 4.25 8/15/2024 4,885
----------
51,717
----------
INSURANCE (1.3%)
5,000 Assurant, Inc. (3 mo. LIBOR + 1.25%) 4.07(d) 3/26/2021 4,999
5,000 Assurant, Inc. 4.20 9/27/2023 5,026
5,000 Berkshire Hathaway, Inc. 2.20 3/15/2021 4,962
5,000 Metropolitan Life Global Funding I(a) 3.45 10/09/2021 5,033
10,575 Reliance Standard Life Global Funding II(a) 2.50 1/15/2020 10,515
5,000 Reliance Standard Life Global Funding II(a) 3.85 9/19/2023 5,006
5,366 StanCorp Financial Group, Inc. 5.00 8/15/2022 5,598
----------
41,139
----------
INVESTMENT COMPANIES (1.0%)
6,000 Ares Capital Corp. 3.88 1/15/2020 6,016
24,000 FS KKR Capital Corp. 4.00 7/15/2019 23,979
2,574 FS KKR Capital Corp. 4.25 1/15/2020 2,582
----------
32,577
----------
REITS (3.2%)
10,000 American Tower Corp. 3.40 2/15/2019 9,999
7,855 CoreCivic, Inc.(k) 4.13 4/01/2020 7,816
673 GLP Capital, LP/GLP Financing II, Inc. 4.88 11/01/2020 684
5,000 Healthcare Trust of America Holdings, LP 2.95 7/01/2022 4,876
================================================================================
14 | USAA SHORT-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
$ 2,950 Nationwide Health Properties, Inc.
(Put Date 10/01/2027)(b),(m) 6.90% 10/01/2037 $ 3,575
20,850 Office Properties Income Trust 3.60 2/01/2020 20,722
10,000 Realty Income Corp. 3.25 10/15/2022 9,967
8,000 Sabra Health Care, LP/Sabra Capital Corp. 5.38 6/01/2023 8,000
9,135 Senior Housing Properties Trust 3.25 5/01/2019 9,105
5,369 Senior Housing Properties Trust 6.75 4/15/2020 5,448
6,890 Senior Housing Properties Trust 6.75 12/15/2021 7,219
2,612 SL Green Operating Partnership, LP 3.25 10/15/2022 2,534
5,000 SL Green Realty Corp. 4.50 12/01/2022 5,071
6,250 Starwood Property Trust, Inc. 3.63 2/01/2021 6,176
2,122 VEREIT Operating Partnership, LP 3.00 2/06/2019 2,122
2,505 Welltower, Inc. 4.13 4/01/2019 2,507
----------
105,821
----------
SAVINGS & LOANS (0.9%)
5,000 First Niagara Financial Group, Inc. 6.75 3/19/2020 5,203
9,500 People's United Financial, Inc. 3.65 12/06/2022 9,471
14,700 Sterling Bancorp. 3.50 6/08/2020 14,559
----------
29,233
----------
Total Financial 529,693
----------
INDUSTRIAL (3.6%)
-----------------
AEROSPACE/DEFENSE (0.7%)
4,984 Arconic, Inc. 6.15 8/15/2020 5,140
4,000 Arconic, Inc. 5.40 4/15/2021 4,085
5,000 General Dynamics Corp. 1.88 8/15/2023 4,785
5,000 Harris Corp. 2.70 4/27/2020 4,961
5,000 United Technologies Corp. 3.35 8/16/2021 5,048
----------
24,019
----------
ELECTRICAL COMPONENTS & EQUIPMENT (0.5%)
16,892 Molex Electronics Technologies, LLC(a) 2.88 4/15/2020 16,797
----------
ELECTRONICS (0.2%)
5,000 FLIR Systems, Inc. 3.13 6/15/2021 4,942
578 Fortive Corp. 1.80 6/15/2019 575
----------
5,517
----------
MACHINERY-DIVERSIFIED (0.5%)
4,583 CNH Industrial Capital, LLC 3.38 7/15/2019 4,592
5,000 CNH Industrial Capital, LLC 4.20 1/15/2024 4,994
7,417 Wabtec Corp. (3 mo. LIBOR + 1.05%) 3.84(d) 9/15/2021 7,418
----------
17,004
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS MANUFACTURERS (0.6%)
$ 5,000 General Electric Co. 6.00% 8/07/2019 $ 5,069
5,000 General Electric Co. 5.50 1/08/2020 5,106
5,000 General Electric Co. 2.20 1/09/2020 4,955
5,000 Ingersoll-Rand Global Holding Co. Ltd. 2.90 2/21/2021 4,956
----------
20,086
----------
PACKAGING & CONTAINERS (0.3%)
4,600 Greif, Inc. 7.75 8/01/2019 4,709
5,000 Packaging Corp. of America 2.45 12/15/2020 4,934
----------
9,643
----------
TRANSPORTATION (0.8%)
5,000 FedEx Corp. 2.30 2/01/2020 4,967
1,266 Ryder System, Inc. 2.50 5/11/2020 1,255
4,500 Ryder System, Inc. 2.25 9/01/2021 4,375
5,000 Ryder System, Inc.(k) 2.80 3/01/2022 4,913
5,000 Ryder System, Inc. 2.50 9/01/2022 4,839
4,706 Ryder System, Inc. 3.40 3/01/2023 4,644
----------
24,993
----------
Total Industrial 118,059
----------
TECHNOLOGY (1.1%)
-----------------
COMPUTERS (0.2%)
5,000 Dell International, LLC/EMC Corp.(a) 3.48 6/01/2019 5,002
----------
OFFICE/BUSINESS EQUIPMENT (0.2%)
5,000 Xerox Corp. 2.75 3/15/2019 5,000
----------
SEMICONDUCTORS (0.3%)
10,000 Broadcom Corp./Broadcom Cayman Finance Ltd. 2.38 1/15/2020 9,925
----------
SOFTWARE (0.4%)
10,000 Oracle Corp. 2.40 9/15/2023 9,753
5,000 VMware, Inc. 2.95 8/21/2022 4,851
----------
14,604
----------
Total Technology 34,531
----------
UTILITIES (5.6%)
----------------
ELECTRIC (4.8%)
9,167 AEP Texas, Inc. 2.40 10/01/2022 8,849
5,000 Alliant Energy Finance, LLC(a) 3.75 6/15/2023 5,036
3,000 CenterPoint Energy Inc. 2.50 9/01/2022 2,889
5,858 Delmarva Power & Light Co. 3.50 11/15/2023 5,967
6,000 Dominion Energy, Inc. 2.96 7/01/2019 5,998
5,000 Dominion Energy, Inc. 2.58 7/01/2020 4,959
5,444 DPL, Inc.(k) 6.75 10/01/2019 5,539
================================================================================
16 | USAA SHORT-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
$ 15,045 DPL, Inc. 7.25% 10/15/2021 $ 16,042
5,000 Duke Energy Corp. 2.40 8/15/2022 4,838
2,600 Eversource Energy 2.75 3/15/2022 2,567
10,000 Exelon Generation Co., LLC 2.95 1/15/2020 9,977
7,975 Exelon Generation Co., LLC 4.00 10/01/2020 8,057
5,000 Georgia Power Co. 2.00 9/08/2020 4,930
8,496 IPALCO Enterprises, Inc. 3.45 7/15/2020 8,474
7,143 ITC Holdings Corp. 2.70 11/15/2022 6,917
5,833 Mississippi Power Co. (3 mo. LIBOR + 0.65%) 3.47(d) 3/27/2020 5,831
3,333 NextEra Energy Capital Holdings, Inc. 3.34 9/01/2020 3,351
5,000 Public Service Electric & Gas Co. 3.25 9/01/2023 5,061
10,000 Sempra Energy 2.40 3/15/2020 9,904
3,600 Sempra Energy 2.90 2/01/2023 3,500
4,299 Sierra Pacific Power Co. 3.38 8/15/2023 4,329
10,000 Southern Power Co. 2.38 6/01/2020 9,907
3,630 System Energy Resources, Inc. 4.10 4/01/2023 3,699
5,000 Virginia Electric & Power Co. 2.75 3/15/2023 4,927
4,500 Vistra Energy Corp. 7.38 11/01/2022 4,691
----------
156,239
----------
GAS (0.8%)
5,000 National Fuel Gas Co. 4.90 12/01/2021 5,116
3,400 National Grid, N.A., Inc. 2.38 9/30/2020 3,339
10,000 Southern Co. Gas Capital Corp. 2.45 10/01/2023 9,505
10,000 WGL Holdings, Inc. 2.25 11/01/2019 9,866
----------
27,826
----------
Total Utilities 184,065
----------
Total Corporate Obligations (cost: $1,645,667) 1,638,712
----------
EURODOLLAR AND YANKEE OBLIGATIONS (12.6%)
BASIC MATERIALS (0.9%)
----------------------
CHEMICALS (0.7%)
5,000 Braskem Finance Ltd.(a) 5.75 4/15/2021 5,208
5,000 Braskem Netherlands Finance B.V.(a) 3.50 1/10/2023 4,860
7,932 Methanex Corp. 3.25 12/15/2019 7,895
5,000 Syngenta Finance N.V.(a) 3.70 4/24/2020 4,985
----------
22,948
----------
IRON/STEEL (0.1%)
2,000 Vale Overseas Ltd. 5.88 6/10/2021 2,062
----------
MINING (0.1%)
5,000 Fresnillo plc(a) 5.50 11/13/2023 5,206
----------
Total Basic Materials 30,216
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS (0.3%)
---------------------
TELECOMMUNICATIONS (0.3%)
$ 5,000 Deutsche Telekom International Finance BV(a) 2.23% 1/17/2020 $ 4,978
5,000 Deutsche Telekom International Finance BV(a) 2.82 1/19/2022 4,925
----------
Total Communications 9,903
----------
CONSUMER, CYCLICAL (1.7%)
-------------------------
AIRLINES (1.2%)
15,350 Air Canada Pass-Through Trust(a) 5.00 3/15/2020 15,426
3,079 Air Canada Pass-Through Trust(a) 5.38 5/15/2021 3,123
8,324 British Airways Pass-Through Trust(a),(b) 5.63 12/20/2021 8,436
7,290 Virgin Australia Pass-Through Trust(a) 5.00 10/23/2023 7,397
5,000 WestJet Airlines Ltd.(a) 3.50 6/16/2021 4,855
----------
39,237
----------
LEISURE TIME (0.4%)
10,750 Silversea Cruise Finance Ltd.(a) 7.25 2/01/2025 11,570
----------
RETAIL (0.1%)
5,000 Alimentation Couche-Tard, Inc.(a) 2.70 7/26/2022 4,871
----------
Total Consumer, Cyclical 55,678
----------
CONSUMER, NON-CYCLICAL (3.6%)
-----------------------------
AGRICULTURE (0.9%)
5,000 BAT Capital Corp. 2.30 8/14/2020 4,934
10,000 BAT Capital Corp. 2.76 8/15/2022 9,728
5,000 BAT International Finance plc 1.63 9/09/2019 4,950
10,000 Imperial Brands Finance plc(a) 2.95 7/21/2020 9,904
----------
29,516
----------
BEVERAGES (0.6%)
10,000 Anheuser-Busch InBev Worldwide, Inc. 3.75 1/15/2022 10,191
3,000 Anheuser-Busch InBev Worldwide, Inc. 3.50 1/12/2024 3,014
5,000 Anheuser-Busch InBev Worldwide, Inc.(j) 4.15 1/23/2025 5,142
----------
18,347
----------
FOOD (0.9%)
18,588 Grupo Bimbo SAB de CV(a) 4.50 1/25/2022 19,046
10,000 Smithfield Foods, Inc.(a) 2.70 1/31/2020 9,881
----------
28,927
----------
HEALTHCARE-SERVICES (0.1%)
3,176 Fresenius Medical Care U.S. Finance II, Inc.(a) 4.13 10/15/2020 3,194
----------
HOUSEHOLD PRODUCTS/WARES (0.4%)
15,000 Reckitt Benckiser Treasury Services plc(a) 2.38 6/24/2022 14,570
----------
================================================================================
18 | USAA SHORT-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS (0.7%)
$ 4,000 Hikma Pharmaceuticals plc 4.25% 4/10/2020 $ 3,991
5,000 Takeda Pharmaceutical Co. Ltd.(a) 3.80 11/26/2020 5,054
15,105 Teva Pharmaceutical Finance Netherlands III B.V. 2.20 7/21/2021 14,286
----------
23,331
----------
Total Consumer, Non-cyclical 117,885
----------
DIVERSIFIED (0.6%)
------------------
HOLDING COMPANIES-DIVERSIFIED (0.6%)
5,000 CK Hutchison International II Ltd.(a) 2.25 9/29/2020 4,923
10,000 CK Hutchison International Ltd.(a) 1.88 10/03/2021 9,645
5,000 CK Hutchison International Ltd.(a) 2.88 4/05/2022 4,927
----------
Total Diversified 19,495
----------
ENERGY (0.4%)
-------------
OIL & GAS (0.4%)
8,124 Cenovus Energy, Inc. 5.70 10/15/2019 8,238
3,000 Petroleos Mexicanos 6.38 2/04/2021 3,047
3,000 Petroleos Mexicanos 5.38 3/13/2022 2,977
----------
Total Energy 14,262
----------
FINANCIAL (2.9%)
----------------
BANKS (2.2%)
10,000 Banco Santander Chile(a) 2.50 12/15/2020 9,856
10,000 BBVA Bancomer S.A.(a) 6.50 3/10/2021 10,385
10,000 Lloyds Banking Group plc (1 mo. LIBOR + 0.81%)(l) 2.91 11/07/2023 9,614
13,000 Royal Bank of Scotland Group plc 6.13 12/15/2022 13,676
5,000 Santander UK Group Holdings plc 3.57 1/10/2023 4,901
5,000 Santander UK Group Holdings plc
(1 mo. LIBOR + 1.08%)(l) 3.37 1/05/2024 4,835
5,000 Santander UK plc 2.35 9/10/2019 4,983
5,000 Standard Chartered plc(a) 2.25 4/17/2020 4,945
10,000 UBS Group Funding AG(a) 2.95 9/24/2020 9,947
----------
73,142
----------
DIVERSIFIED FINANCIAL SERVICES (0.3%)
10,000 ORIX Corp. 2.90 7/18/2022 9,854
----------
REAL ESTATE (0.2%)
5,000 WEA Finance, LLC(a) 3.15 4/05/2022 4,960
----------
REITS (0.2%)
7,995 Scentre Group Trust(a) 2.38 4/28/2021 7,820
----------
Total Financial 95,776
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 19
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
INDUSTRIAL (1.2%)
-----------------
AEROSPACE/DEFENSE (0.1%)
$ 3,580 BAE Systems Holdings, Inc.(a) 2.85% 12/15/2020 $ 3,553
----------
BUILDING MATERIALS (0.2%)
2,000 Boral Finance Proprietary Ltd.(a) 3.00 11/01/2022 1,940
5,000 Holcim U.S. Finance Sarl & Cie SCS(a) 6.00 12/30/2019 5,119
----------
7,059
----------
ELECTRONICS (0.2%)
5,000 Tyco Electronics Group S.A. (3 mo. LIBOR + 0.45%) 3.20(d) 6/05/2020 4,996
----------
MISCELLANEOUS MANUFACTURERS (0.2%)
7,306 Smiths Group plc(a) 3.63 10/12/2022 7,209
----------
TRUCKING & LEASING (0.5%)
8,062 DAE Funding, LLC(a) 4.00 8/01/2020 7,982
5,000 DAE Funding, LLC(a) 5.25 11/15/2021 5,050
2,370 DAE Funding, LLC(a) 4.50 8/01/2022 2,346
----------
15,378
----------
Total Industrial 38,195
----------
TECHNOLOGY (0.2%)
-----------------
SEMICONDUCTORS (0.2%)
4,769 NXP B.V./NXP Funding, LLC(a) 4.13 6/15/2020 4,781
----------
UTILITIES (0.8%)
----------------
ELECTRIC (0.8%)
10,000 Comision Federal de Electricidad 4.88 5/26/2021 10,163
5,000 Comision Federal de Electricidad(a) 4.88 5/26/2021 5,081
5,000 Emera U.S. Finance, LP 2.15 6/15/2019 4,975
5,000 Emera U.S. Finance, LP 2.70 6/15/2021 4,902
----------
Total Utilities 25,121
----------
Total Eurodollar and Yankee Obligations (cost: $415,576) 411,312
----------
FOREIGN GOVERNMENT OBLIGATIONS (0.9%)
10,000 Province of Alberta(a) 1.75 8/26/2020 9,859
5,000 Province of Alberta 3.35 11/01/2023 5,105
10,000 Province of Ontario(k) 2.45 6/29/2022 9,883
5,000 Province of Quebec 2.63 2/13/2023 4,972
----------
Total Foreign Government Obligations (cost: $29,990) 29,819
----------
MUNICIPAL OBLIGATIONS (4.3%)
CALIFORNIA (0.1%)
4,750 San Jose Redev. Agency Successor Agency 2.63 8/01/2022 4,715
----------
================================================================================
20 | USAA SHORT-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
CONNECTICUT (0.4%)
$ 3,700 State 3.75% 9/15/2020 $ 3,733
3,900 State 3.67 8/15/2022 3,972
3,380 State Health & Educational Facilities Auth. 3.07 7/01/2019 3,374
3,185 State Health & Educational Facilities Auth. 3.32 7/01/2020 3,181
----------
14,260
----------
FLORIDA (0.1%)
1,375 Municipal Power Agency 2.20 10/01/2020 1,353
2,500 Municipal Power Agency 2.38 10/01/2021 2,451
----------
3,804
----------
ILLINOIS (0.4%)
2,520 City of Chicago Wastewater Transmission 4.31 1/01/2021 2,561
10,000 Finance Auth. (Put Date 2/07/2019)
(LOC - UniCredit Bank A.G.)(n) 2.68 2/01/2037 10,000
760 Village of Channahon 4.00 1/01/2020 756
----------
13,317
----------
KENTUCKY (0.1%)
545 State Property & Building Commission 2.26 5/01/2020 541
1,060 State Property & Building Commission 2.56 5/01/2021 1,049
250 State Property & Building Commission 2.76 5/01/2022 246
----------
1,836
----------
MARYLAND (0.3%)
3,625 EDC 2.80 6/01/2020 3,620
3,670 EDC 3.05 6/01/2021 3,657
3,795 EDC 3.30 6/01/2022 3,764
----------
11,041
----------
MICHIGAN (0.5%)
5,395 Clintondale Community Schools 2.61 5/01/2021 5,389
4,000 Clintondale Community Schools 2.84 5/01/2022 4,017
2,000 Mount Clemens Community School District 2.12 5/01/2019 1,997
3,635 Mount Clemens Community School District 2.46 5/01/2020 3,618
----------
15,021
----------
NEW JERSEY (0.8%)
850 EDA 3.30 6/15/2019 850
500 EDA 3.29 7/01/2019 500
850 EDA 3.50 6/15/2020 854
12,500 EDA 4.45 6/15/2020 12,666
625 EDA 3.52 7/01/2020 625
550 EDA 3.70 6/15/2021 558
495 EDA 3.65 7/01/2021 495
================================================================================
PORTFOLIO OF INVESTMENTS | 21
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
$ 2,615 Educational Facilities Auth. 2.25% 9/01/2020 $ 2,576
7,450 Educational Facilities Auth. 2.47 9/01/2021 7,313
----------
26,437
----------
NEW YORK (0.7%)
1,000 Dormitory Auth. 1.98 7/01/2019 996
3,870 Dormitory Auth. 2.30 7/01/2019 3,857
1,270 Dormitory Auth. 2.24 7/01/2020 1,257
5,125 Dormitory Auth. 2.57 7/01/2020 5,070
1,550 Dormitory Auth. 2.44 7/01/2021 1,521
2,000 Dormitory Auth. 3.18 3/15/2022 2,020
5,000 State Energy Research & Dev. Auth.
(Put Date 5/01/2020)(m) 2.38 7/01/2026 5,016
600 Town of Oyster Bay 3.55 2/01/2019 600
1,830 Town of Oyster Bay 3.80 2/01/2020 1,832
----------
22,169
----------
PENNSYLVANIA (0.2%)
4,127 IDA(a) 2.97 7/01/2021 4,091
405 Luzerne County IDA (INS - Assured Guaranty
Municipal Corp.) 3.85 12/15/2019 402
2,000 Scranton School District (Put Date 6/15/2019)(m) 4.13 6/15/2034 1,992
----------
6,485
----------
TENNESSEE (0.1%)
3,010 Metropolitan Nashville Airport Auth. (Put
Date 2/07/2019) (LOC - Regions Bank)(n) 2.77 4/01/2030 3,010
----------
TEXAS (0.4%)
5,000 A&M University 2.89 5/15/2022 5,027
1,585 A&M University 2.95 5/15/2023 1,594
1,690 City of Houston 2.62 3/01/2021 1,688
1,240 City of Houston 2.77 3/01/2022 1,242
1,900 City of Houston 2.98 3/01/2023 1,912
----------
11,463
----------
VIRGINIA (0.1%)
3,000 Small Business Financing Auth.
(Put Date 12/31/2019)(a),(m) 4.20 7/01/2050 3,005
----------
WISCONSIN (0.1%)
4,000 Public Finance Auth. (LOC - Citizens
Financial Group) 2.75 6/01/2020 3,946
----------
Total Municipal Obligations (cost: $140,710) 140,509
----------
================================================================================
22 | USAA SHORT-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY ISSUES (1.3%)(o)
AGENCY COLLATERAL CMO (0.1%)
$ 3,188 Fannie Mae(+) 1.25% 9/25/2027 $ 3,014
----------
COMMERCIAL MBS (0.5%)
65,053 Fannie Mae(+)(i) 0.56(h) 8/25/2022 1,042
65,028 Fannie Mae(+)(i) 0.70(h) 5/25/2022 1,228
67,720 Freddie Mac(+)(i) 1.26(h) 8/25/2022 2,527
71,676 Freddie Mac(+)(i) 1.65(h) 7/25/2019 241
27,500 Freddie Mac(+)(i) 1.73(h) 5/25/2019 44
2,171 Freddie Mac(+) 1.78 10/25/2020 2,152
8,000 Freddie Mac(+) 2.72 6/25/2022 7,974
----------
15,208
----------
FGLMC COLLATERAL (0.0%)
51 Freddie Mac(+) 5.00 5/01/2020 51
80 Freddie Mac(+) 5.00 9/01/2020 81
134 Freddie Mac(+) 5.50 4/01/2021 136
----------
268
----------
FHLMC COLLATERAL (0.0%)
577 Freddie Mac(+) (12 mo. LIBOR + 1.63%) 3.85(d) 4/01/2035 602
----------
FNMA COLLATERAL (0.7%)
3,002 Fannie Mae(+) 2.50 4/01/2027 2,972
9,018 Fannie Mae(+) 2.50 5/01/2027 8,928
5,368 Fannie Mae(+) 2.50 8/01/2027 5,315
4,302 Fannie Mae(+) 2.50 8/01/2027 4,259
98 Fannie Mae(+) 4.50 5/01/2023 101
56 Fannie Mae(+) 4.50 2/01/2024 57
41 Fannie Mae(+) 5.00 12/01/2021 41
135 Fannie Mae(+) 5.00 6/01/2023 138
15 Fannie Mae(+) 5.00 9/01/2023 16
165 Fannie Mae(+) 5.00 2/01/2024 168
97 Fannie Mae(+) 5.50 12/01/2020 98
128 Fannie Mae(+) 5.50 2/01/2023 132
351 Fannie Mae(+) 5.50 6/01/2023 365
93 Fannie Mae(+) 5.50 9/01/2023 95
350 Fannie Mae(+) 5.50 6/01/2024 362
156 Fannie Mae(+) 6.00 10/01/2022 160
197 Fannie Mae(+) 6.00 1/01/2023 202
374 Fannie Mae(+) 6.00 1/01/2023 388
135 Fannie Mae(+) 6.00 7/01/2023 138
----------
23,935
----------
Total U.S. Government Agency Issues (cost: $42,335) 43,027
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 23
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
U.S. TREASURY SECURITIES (6.8%)
NOTES (6.8%)
$ 10,000 U.S. Treasury Note(k) 1.13% 5/31/2019 $ 9,957
5,000 U.S. Treasury Note 1.13 2/28/2021 4,865
10,000 U.S. Treasury Note(j) 1.25 1/31/2020 9,873
15,000 U.S. Treasury Note 1.38 2/29/2020 14,814
55,000 U.S. Treasury Note 1.38 3/31/2020 54,267
45,000 U.S. Treasury Note 1.38 9/30/2020 44,188
5,000 U.S. Treasury Note 1.38 1/31/2021 4,894
25,000 U.S. Treasury Note 1.38 6/30/2023 23,888
25,000 U.S. Treasury Note 1.63 11/30/2020 24,618
10,000 U.S. Treasury Note 1.75 9/30/2022 9,763
15,000 U.S. Treasury Note 1.88 11/30/2021 14,769
5,000 U.S. Treasury Note 1.88 8/31/2022 4,905
----------
Total U.S. Treasury Securities (cost: $223,966) 220,801
----------
Total Bonds (cost: $3,201,459) 3,193,725
----------
----------------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
----------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (0.9%)
PREFERRED STOCKS (0.9%)
COMMUNICATIONS (0.7%)
---------------------
TELECOMMUNICATIONS (0.7%)
22,029 Centaur Funding Corp., 9.08%(a) 23,461
----------
FINANCIAL (0.2%)
---------------
BANKS (0.2%)
200,000 Citigroup Capital XIII, 9.12%, (3 mo. LIBOR + 6.37%)(d) 5,252
----------
Total Preferred Stocks (cost: $29,137) 28,713
----------
Total Equity Securities (cost: $29,137) 28,713
----------
================================================================================
24 | USAA SHORT-TERM BOND FUND
================================================================================
----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (1.2%)
COMMERCIAL PAPER (0.9%)
$ 10,165 Centerpoint Energy, Inc.(a) 2.76% 2/21/2019 $ 10,149
6,192 CSLB Holdings, Inc.(a) 2.78 2/05/2019 6,190
6,385 CSLB Holdings, Inc.(a) 2.82 2/14/2019 6,379
1,299 Sherwin Williams Co.(a) 2.78 2/05/2019 1,299
5,566 Southern Co. Gas Capital Corp.(a) 2.80 2/12/2019 5,561
----------
Total Commercial Paper (cost: $29,578) 29,578
----------
----------------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
----------------------------------------------------------------------------------------------------------------------
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.3%)
11,238,416 State Street Institutional Treasury Money Market Fund Premier
Class, 2.31%(p) (cost: $11,238) 11,238
----------
Total Money Market Instruments (cost: $40,816) 40,816
----------
SHORT-TERM INVESTMENTS PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (0.8%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.8%)
22,074,125 Goldman Sachs Financial Square Government Fund Institutional
Class, 2.34%(p) 22,074
2,708,775 HSBC U.S. Government Money Market Fund Class I, 2.38%(p) 2,709
----------
Total Short-Term Investments Purchased with Cash Collateral from
Securities Loaned (cost: $24,783) 24,783
----------
TOTAL INVESTMENTS (COST: $3,296,195) $3,288,037
==========
================================================================================
PORTFOLIO OF INVESTMENTS | 25
================================================================================
----------------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
----------------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
----------------------------------------------------------------------------------------------------------------------
Bonds:
Asset-Backed Securities $ - $ 451,425 $- $ 451,425
Bank Loans - 112,124 - 112,124
Collateralized Loan Obligations - 53,115 - 53,115
Collateralized Mortgage Obligations - 2,628 - 2,628
Commercial Mortgage Securities - 90,253 - 90,253
Corporate Obligations - 1,638,712 - 1,638,712
Eurodollar and Yankee Obligations - 411,312 - 411,312
Foreign Government Obligations - 29,819 - 29,819
Municipal Obligations - 140,509 - 140,509
U.S. Government Agency Issues - 43,027 - 43,027
U.S. Treasury Securities 220,801 - - 220,801
Equity Securities:
Preferred Stocks - 28,713 - 28,713
Money Market Instruments:
Commercial Paper - 29,578 - 29,578
Government & U.S. Treasury
Money Market Funds 11,238 - - 11,238
Short-Term Investments Purchased
with Cash Collateral from
Securities Loaned:
Government & U.S. Treasury Money
Market Funds 24,783 - - 24,783
----------------------------------------------------------------------------------------------------------------------
Total $256,822 $3,031,215 $- $3,288,037
----------------------------------------------------------------------------------------------------------------------
Refer to the Portfolio of Investments for additional industry, country, or
geographic region classifications.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
At January 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
26 | USAA SHORT-TERM BOND FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A 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 16.9% of net assets at January 31,
2019.
o CATEGORIES AND DEFINITIONS
EURODOLLAR AND YANKEE OBLIGATIONS - Eurodollar obligations are U.S.
dollar-denominated instruments that are issued outside the U.S. capital
markets by foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions. Yankee obligations
are dollar-denominated instruments that are issued by foreign issuers in the
U.S. capital markets.
ASSET-BACKED AND COMMERCIAL MORTGAGE-BACKED SECURITIES - Asset-backed
securities represent a participation in, or are secured by and payable from,
a stream of payments generated by particular assets. Commercial
mortgage-backed securities reflect an interest in, and are secured by,
mortgage loans on commercial real property. These securities represent
ownership in a pool of loans and are divided into pieces (tranches) with
varying maturities. The stated final maturity of such securities represents
the date the final principal payment will be made for the last outstanding
loans in the pool. The weighted average life is the average time for
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 27
================================================================================
principal to be repaid, which is calculated by assuming prepayment rates of
the underlying loans. The weighted average life is likely to be
substantially shorter than the stated final maturity as a result of
scheduled principal payments and unscheduled principal prepayments. Stated
interest rates on commercial mortgage-backed securities may change slightly
over time as underlying mortgages paydown.
COLLATERALIZED LOAN OBLIGATIONS (CLOs) - Collateralized loan obligations are
securities issued by entities that are collateralized by a pool of loans.
CLOs are issued in multiple classes (tranches), and can be equity or debt
with specific adjustable or fixed interest rates, and varying maturities.
The cash flow from the underlying loans is used to pay off each tranche
separately within the debt, or senior tranches. Equity, or subordinated
tranches, typically are not paid a cash flow but do offer ownership in the
CLO itself in the event of a sale.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs) - Collateralized mortgage
obligations are debt obligations of a legal entity that are fully
collateralized by a portfolio of mortgages or mortgage-related securities.
CMOs are issued in multiple classes (tranches), with specific adjustable or
fixed interest rates, varying maturities, and must be fully retired no later
than its final distribution date. The cash flow from the underlying
mortgages is used to pay off each tranche separately. CMOs are designed to
provide investors with more predictable cash flows than regular mortgage
securities, but such cash flows can be difficult to predict because of the
effect of prepayments.
COMMERCIAL PAPER - Consists of short-term unsecured promissory notes with
maturities ranging from one to 270 days, issued mainly by corporations.
Commercial paper is usually purchased at a discount and matures at par
value; however, it also may be interest-bearing. Rate represents an
annualized yield at time of purchase or coupon rate, if applicable.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
EDA Economic Development Authority
EDC Economic Development Corp.
================================================================================
28 | USAA SHORT-TERM BOND FUND
================================================================================
IDA Industrial Development Authority/Agency
LIBOR London Interbank Offered Rate
REITS Real estate investment trusts - Dividend distributions from REITS may
be recorded as income and later characterized by the REIT at the end
of the fiscal year as capital gains or a return of capital. Thus, the
Fund will estimate the components of distributions from these
securities and revise when actual distributions are known.
CREDIT ENHANCEMENTS - Adds the financial strength of the provider of the
enhancement to support the issuer's ability to repay the principal and
interest payments when due. The enhancement may be provided by a
high-quality bank, insurance company or other corporation, or a collateral
trust. The enhancements do not guarantee the market values of the
securities.
INS Principal and interest payments are insured by the name listed.
Although bond insurance reduces the risk of loss due to default by
an issuer, such bonds remain subject to the risk that value may
fluctuate for other reasons, and there is no assurance that the
insurance company will meet its obligations.
LOC Principal and interest payments are guaranteed by a bank letter of
credit or other bank credit agreement.
o SPECIFIC NOTES
(a) Restricted security that is not registered under the Securities Act of
1933. A resale of this security in the United States may occur in an
exempt transaction to a qualified institutional buyer as defined by
Rule 144A, and as such has been deemed liquid by USAA Asset Management
Company under liquidity guidelines approved by USAA Mutual Funds
Trust's Board of Trustees, unless otherwise noted as illiquid.
(b) Security deemed illiquid by USAA Asset Management Company, under
liquidity guidelines approved by USAA Mutual Funds Trust's Board of
Trustees.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 29
================================================================================
(c) Security or a portion of the security purchased on a delayed-delivery
and/or when-issued basis.
(d) Variable-rate security - interest rate is adjusted periodically. The
interest rate disclosed represents the rate at January 31, 2019.
(e) Bank loans (loans) - are not registered under the Securities Act of
1933. The loans contain certain restrictions on resale and cannot be
sold publicly. The stated interest rates represent the all in interest
rate of all contracts within the loan facilities. The interest rates
are adjusted periodically, and the rates disclosed represent the
current rate at January 31, 2019. The weighted average life of the
loans are likely to be shorter than the stated final maturity date due
to mandatory or optional prepayments. The loans are deemed liquid by
USAA Asset Management Company, under liquidity guidelines approved by
USAA Mutual Funds Trust's Board of Trustees, unless otherwise noted as
illiquid.
(f) The bank loan will settle after January 31, 2019, at which time the
interest rate will be determined.
(g) Security was fair valued at January 31, 2019, by USAA Asset Management
Company in accordance with valuation procedures approved by USAA Mutual
Funds Trust's Board of Trustees. The total value of all such securities
was $5,000,000, which represented 0.2% of the Fund's net assets.
(h) Stated interest rates may change slightly over time as underlying
mortgages paydown.
(i) Security is interest only. Interest-only commercial mortgage-backed
securities (CMBS IOs) represent the right to receive only the interest
payments on an underlying pool of commercial mortgage loans. The
purchase yield reflects an anticipated yield based upon interest rates
at the time of purchase and the estimated timing and amount of future
cash flows. Coupon rates after purchase vary from period to period. The
principal amount represents the notional amount of the underlying pool
on which current interest is calculated. CMBS IOs are backed by loans
that have various forms of prepayment
================================================================================
30 | USAA SHORT-TERM BOND FUND
================================================================================
protection, which include lock-out provisions, yield maintenance
provisions, and prepayment penalties. This serves to moderate their
prepayment risk. CMBS IOs are subject to default-related prepayments
that may have a negative impact on yield.
(j) At January 31, 2019, the security, or a portion thereof, was
segregated to cover delayed-delivery and/or when-issued purchases.
(k) The security, or a portion thereof, was out on loan as of January 31,
2019.
(l) Fixed to floating security that initially pays a fixed rate and
converts to a floating rate coupon at a specified date in the future.
The rate presented is a fixed rate.
(m) Put bond - provides the right to sell the bond at face value at
specific tender dates prior to final maturity. The put feature shortens
the effective maturity of the security.
(n) Variable-rate demand notes (VRDNs) - Provide the right to sell the
security at face value on either that day or within the rate-reset
period. VRDNs will normally trade as if the maturity is the earlier put
date, even though stated maturity is longer. The interest rate is reset
on the put date at a stipulated daily, weekly, monthly, quarterly, or
other specified time interval to reflect current market conditions.
These securities do not indicate a reference rate and spread in their
description.
(o) U.S. government agency issues - Mortgage-backed securities issued by
certain U.S. Government Sponsored Enterprises (GSEs) such as the
Government National Mortgage Association (GNMA or Ginnie Mae) and
certain other U.S. government guaranteed securities are supported by the
full faith and credit of the U.S. government. Securities issued by other
GSEs, such as Federal Home Loan Mortgage Corporation (Freddie Mac or
FHLMC) and Federal National Mortgage Association (Fannie Mae or FNMA),
indicated with a "+", are supported only by the right of the GSE to
borrow from the U.S. Treasury, the discretionary authority of the U.S.
government to purchase the GSEs' obligations, or only by the credit
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 31
================================================================================
of the issuing agency, instrumentality, or corporation, and are neither
issued nor guaranteed by the U.S. Treasury. In September of 2008, the
U.S. Treasury placed Fannie Mae and Freddie Mac under conservatorship
and appointed the Federal Housing Finance Agency (FHFA) to act as
conservator and oversee their daily operations. In addition, the U.S.
Treasury entered into purchase agreements with Fannie Mae and Freddie
Mac to provide them with capital in exchange for senior preferred
stock. While these arrangements are intended to ensure that Fannie Mae
and Freddie Mac can continue to meet their obligations, it is possible
that actions by the U.S. Treasury, FHFA, or others could adversely
impact the value of the Fund's investments in securities issued by
Fannie Mae and Freddie Mac.
(p) Rate represents the money market fund annualized seven-day yield at
January 31, 2019.
See accompanying notes to financial statements.
================================================================================
32 | USAA SHORT-TERM BOND FUND
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (including securities on
loan of $24,253) (cost of $3,296,195) $3,288,037
Cash 712
Receivables:
Capital shares sold 2,174
USAA Asset Management Company (Note 7) 1
Interest 24,329
Securities sold 4,619
Other 8
----------
Total assets 3,319,880
----------
LIABILITIES
Payables:
Upon return of securities loaned 24,783
Securities purchased 21,183
Capital shares redeemed 2,784
Dividends on capital shares 401
Accrued management fees 692
Accrued transfer agent's fees 64
Other accrued expenses and payables 254
----------
Total liabilities 50,161
----------
Net assets applicable to capital shares outstanding $3,269,719
==========
NET ASSETS CONSIST OF:
Paid-in capital $3,278,707
Accumulated loss (8,988)
----------
Net assets applicable to capital shares outstanding $3,269,719
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $1,161,626/127,655 capital shares
outstanding, no par value) $ 9.10
==========
Institutional Shares (net assets of $2,087,122/229,481 capital shares
outstanding, no par value) $ 9.09
==========
Adviser Shares (net assets of $15,784/1,734 capital shares
outstanding, no par value) $ 9.10
==========
R6 Shares (net assets of $5,187/570 capital shares
outstanding, no par value) $ 9.10
==========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 33
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 498
Interest 51,410
Securities lending (net) 35
-------
Total income 51,943
-------
EXPENSES
Management fees 4,048
Administration and servicing fees:
Fund Shares 883
Institutional Shares 1,041
Adviser Shares 14
R6 Shares 1
Transfer agent's fees:
Fund Shares 904
Institutional Shares 1,041
Adviser Shares 4
Distribution and service fees (Note 7):
Adviser Shares 23
Custody and accounting fees:
Fund Shares 86
Institutional Shares 125
Adviser Shares 2
Postage:
Fund Shares 42
Institutional Shares 52
Adviser Shares 1
Shareholder reporting fees:
Fund Shares 21
Institutional Shares 8
Trustees' fees 17
================================================================================
34 | USAA SHORT-TERM BOND FUND
================================================================================
Registration fees:
Fund Shares $ 17
Institutional Shares 44
Adviser Shares 10
R6 Shares 11
Professional fees 54
Other 27
-------
Total expenses 8,476
-------
Expenses reimbursed:
R6 Shares (9)
-------
Net expenses 8,467
-------
NET INVESTMENT INCOME 43,476
-------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss (882)
Change in net unrealized appreciation/(depreciation) 14,298
-------
Net realized and unrealized gain 13,416
-------
Increase in net assets resulting from operations $56,892
=======
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 35
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited), and year ended
July 31, 2018
-------------------------------------------------------------------------------------------------------------
1/31/2019 7/31/2018
-------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 43,476 $ 73,096
Net realized gain (loss) on investments (882) 3,633
Change in net unrealized appreciation/(depreciation)
of investments 14,298 (56,420)
-----------------------------------
Increase in net assets resulting from operations 56,892 20,309
-----------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (15,327) (27,523)
Institutional Shares (28,308) (44,960)
Adviser Shares (214) (488)
R6 Shares (73) (121)
-----------------------------------
Distributions to shareholders (43,922) (73,092)
-----------------------------------
NET INCREASE IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (NOTE 6)
Fund Shares (31,220) (92,473)
Institutional Shares 53,169 102,957
Adviser Shares (7,307) 1,889
R6 Shares 25 96
-----------------------------------
Total net increase in net assets from
capital share transactions 14,667 12,469
-----------------------------------
Net increase (decrease) in net assets 27,637 (40,314)
NET ASSETS
Beginning of period 3,242,082 3,282,396
-----------------------------------
End of period $3,269,719 $3,242,082
===================================
See accompanying notes to financial statements.
================================================================================
36 | USAA SHORT-TERM BOND FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
January 31, 2019 (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 47 separate funds.
The USAA Short-Term Bond Fund (the Fund) qualifies as a registered investment
company under Accounting Standards Codification Topic 946. The information
presented in this semiannual report pertains only to the Fund, which is
classified as diversified under the 1940 Act. The Fund's investment objective is
to seek high current income consistent with preservation of principal.
The Fund consists of four classes of shares: Short-Term Bond Fund Shares (Fund
Shares), Short-Term Bond Fund Institutional Shares (Institutional Shares),
Short-Term Bond Fund Adviser Shares (Adviser Shares), and Short-Term Bond Fund
R6 Shares (R6 Shares). Each class of shares has equal rights to assets and
earnings, except that each class bears certain class-related expenses specific
to the particular class. These expenses include administration and servicing
fees, transfer agent fees, postage, shareholder reporting fees, distribution and
service (12b-1) fees, and certain registration and custodian fees. Expenses not
attributable to a specific class, income, and realized gains or losses on
investments are allocated to each class of shares based on each class' relative
net assets. Each class has exclusive voting rights on matters related solely to
that class and separate voting rights on matters that relate to all classes. The
Institutional Shares are 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 are available to institutional investors, which include retirement
plans, endowments, foundations, and bank trusts, as well as other persons or
================================================================================
NOTES TO FINANCIAL STATEMENTS | 37
================================================================================
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). The Adviser Shares permit investors to purchase shares through
financial intermediaries, including banks, broker-dealers, insurance companies,
investment advisers, plan sponsors, and financial professionals that provide
various administrative and distribution services. The R6 Shares are available
for investment by participants in employer-sponsored retirement plans where a
financial intermediary provides retirement recordkeeping services to plan
participants and to endowment funds and foundations.
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of USAA Asset Management Company (AMCO or Manager), the investment
adviser to the Fund, and USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services (SAS), the transfer agent to the Fund, announced that AMCO and
SAS would be acquired by Victory Capital Holdings, Inc. (Victory), a global
investment management firm headquartered in Cleveland, Ohio (the Transaction).
The closing of the Transaction is expected to be completed during the second
quarter of 2019, pending satisfaction of certain closing conditions and
approvals, including certain approvals of the Fund's Board of Trustees and of
the Fund's shareholders at a special shareholder meeting to be held on April 18,
2019. The Transaction is not expected to result in any material changes to the
Fund's investment objectives and principal investment strategies.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Valuation and Liquidity 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.
The Fund utilizes 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 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. 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
================================================================================
38 | USAA SHORT-TERM BOND FUND
================================================================================
ask prices or the last sales price to value a security when, in the
Service's judgment, these prices are readily available and are
representative of the security's market value. For many securities,
such prices are not readily available. The Service generally prices
those securities based on methods which 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. Generally, debt securities are categorized in Level
2 of the fair value hierarchy; however, to the extent the valuations
include significant unobservable inputs, the securities would be
categorized in Level 3.
2. Equity securities, including exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange or
the 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. Securities traded primarily on foreign securities exchanges or
markets are valued at the last quoted sale price, or the most recently
determined official closing price calculated according to local market
convention, available at the time the Fund is valued. If no last sale
or official closing price is reported or available, the average of the
bid and ask prices generally is used. Actively traded equity securities
listed on a domestic exchange generally are categorized in Level 1 of
the fair value hierarchy. Certain preferred and equity securities
traded in inactive markets generally are categorized in Level 2 of the
fair value hierarchy.
3. 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 many
cases, events affecting the values of foreign securities that occur
between the time of their last quoted sale or official closing price
and the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not need to be reflected in the value of the Fund's
foreign securities. However, the Manager will monitor for events that
would materially affect the value of the Fund's foreign securities and
the Committee will consider such available information that it deems
relevant and will
================================================================================
NOTES TO FINANCIAL STATEMENTS | 39
================================================================================
determine a fair value for the affected foreign securities in
accordance with valuation procedures. In addition, information from an
external vendor or other sources may be used to adjust the foreign
market closing prices of foreign equity securities to reflect what the
Committee believes to be the fair value of the securities as of the
close of the NYSE. Fair valuation of affected foreign equity securities
may occur frequently based on an assessment that events which occur on
a fairly regular basis (such as U.S. market movements) are significant.
Such securities are categorized in Level 2 of the fair value hierarchy.
4. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value hierarchy.
5. Short-term debt securities with original or remaining maturities of 60
days or less may be valued at amortized cost, provided that amortized
cost represents the fair value of such securities.
6. Repurchase agreements are valued at cost.
7. Futures are valued at the settlement price at the close of market on
the principal exchange on which they are traded or, in the absence of
any transactions that day, the settlement price on the prior trading
date if it is within the spread between the closing bid and ask price
closest to the last reported sale price.
8. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has been recognized in relation to a security or class of securities,
the securities are valued in good faith by the Committee in accordance
with 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, other pricing services, or widely used quotation
================================================================================
40 | USAA SHORT-TERM BOND FUND
================================================================================
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, evaluation of
credit quality, and an evaluation of the forces that influenced the
market in which the securities are purchased and sold. Level 2
securities include debt securities that are valued using market inputs
and other observable factors deemed by the Manager to appropriately
reflect fair value.
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 indexes.
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. INVESTMENTS IN SECURITIES - Securities transactions are accounted for as of
the date the securities are purchased or sold (trade date). Gains or losses
from sales of investment securities are computed on the identified cost
basis. Interest income is recorded daily on the accrual basis. Premiums and
discounts 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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 41
================================================================================
D. FEDERAL TAXES - The Fund's policy is to comply with the requirements of the
Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its taxable
income and net capital gains, if any, to its shareholders. Therefore, no
federal income tax provision is required.
For the six-month period ended January 31, 2019, 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 the Fund's tax basis to determine if
adjustments to this conclusion are necessary. The statute of limitations on
the Fund's tax return filings generally remain open for the three preceding
fiscal reporting year ends and remain subject to examination by the Internal
Revenue Service and state taxing authorities.
E. SECURITIES PURCHASED ON A DELAYED-DELIVERY OR WHEN-ISSUED BASIS - Delivery
and payment for securities that have been purchased by the Fund on a
delayed-delivery or when-issued basis or for delayed draws on loans can take
place a month or more after the trade date. During the period prior to
settlement, these securities do not earn interest, are subject to market
fluctuation, and may increase or decrease in value prior to their delivery.
The Fund receives a commitment fee for delayed draws on loans. The Fund
maintains segregated assets with a market value equal to or greater than the
amount of its purchase commitments. The purchase of securities on a
delayed-delivery or when-issued basis and delayed-draw loan commitments may
increase the volatility of the Fund's NAV to the extent that the Fund makes
such purchases and commitments while remaining substantially fully invested.
F. INDEMNIFICATIONS - Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities arising out of the
performance of their duties to the Trust. In addition, in the normal course
of business, the Trust enters into contracts that contain a variety of
representations and warranties that provide general indemnifications. The
Trust's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Trust that have not yet
occurred. However, the Trust expects the risk of loss to be remote.
================================================================================
42 | USAA SHORT-TERM BOND FUND
================================================================================
G. USE OF ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINE OF CREDIT
The Fund participates, along with other funds of the Trust and USAA ETF Trust
(together, the Trusts), 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 provide temporary or emergency
cash needs, including redemption requests that might otherwise require the
untimely disposition of securities. Subject to availability (including usage of
the facility by other funds of the Trusts), the Fund may borrow from CAPCO an
amount up to 5% of the Fund's total assets at an interest rate based on the
London Interbank Offered Rate (LIBOR), plus 100.0 basis points.
The Trusts are also assessed facility fees by CAPCO in the amount of 14.0 basis
points of the amount of the committed loan agreement. Prior to September 30,
2018, the maximum annual facility fee was 13.0 basis points of the amount of the
committed loan agreement. The facility fees are allocated among the funds of the
Trusts based on their respective average daily net assets for the period.
The Trusts may request an optional increase of the committed loan agreement from
$500 million up to $750 million. If the Trusts increase the committed loan
agreement, the assessed facility fee on the amount of the additional commitment
will be 15.0 basis points.
For the six-month period ended January 31, 2019, the Fund paid CAPCO facility
fees of $13,000, which represents 4.0% of the total fees paid to CAPCO by the
funds of the Trusts. The Fund had no borrowings under this agreement during the
six-month period ended January 31, 2019.
(3) DISTRIBUTIONS
The tax basis of distributions and any accumulated undistributed net investment
income will be determined as of the Fund's tax year-end of July 31, 2019, in
accordance with applicable federal tax law.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 43
================================================================================
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. Distributions of realized gains from security transactions
not offset by capital losses are made annually in the succeeding fiscal year or
as otherwise required to avoid the payment of federal taxes.
At July 31, 2018, the Fund had net capital loss carryforwards of $3,181,000, for
federal income tax purposes. 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.
As of January 31, 2019, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as the cost reported
in the financial statements. The net unrealized appreciation/(depreciation) on
investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION /
FUND APPRECIATION DEPRECIATION (DEPRECIATION)
-------------------------------------------------------------------------------------
USAA Short-Term Bond Fund $17,145,000 $(25,303,000) $(8,158,000)
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended January 31, 2019, were
$734,656,000 and $553,422,000, respectively.
In accordance with affiliated transaction procedures approved by the Board,
purchases and sales of security transactions were executed between the Fund and
affiliated USAA Funds at the then-current market price with no brokerage
commissions incurred. The affiliated transactions executed by the Fund,
including short-term securities, during the six-month period ended January 31,
2019 were as follows:
NET REALIZED
PURCHASES SALES GAIN
--------------------------------------------------------------------------------
$3,625,000 $- $-
================================================================================
44 | USAA SHORT-TERM BOND FUND
================================================================================
(5) SECURITIES LENDING
The Fund, through a securities lending agreement with Citibank, N.A.
(Citibank), may lend its securities to qualified financial institutions, such as
certain broker-dealers, to earn additional income, net of income retained by
Citibank. The borrowers are required to secure their loans continuously with
collateral in an amount at least equal to 102% of the fair value of domestic
securities and foreign government securities loaned and 105% of the fair value
of foreign securities and all other securities loaned. Collateral may be cash,
U.S. government securities, or other securities as permitted by SEC guidelines.
Cash collateral may be invested in high-quality short-term investments.
Collateral requirements are determined daily based on the value of the Fund's
securities on loan as of the end of the prior business day. Loans are
terminable upon demand and the borrower must return the loaned securities within
the lesser of one standard settlement period or five business days. Risks
relating to securities-lending transactions include that the borrower may not
provide additional collateral when required or return the securities when due,
and that the value of the short-term investments will be less than the amount of
cash collateral required to be returned to the borrower. The Fund's agreement
with Citibank does not include master netting provisions. Non-cash collateral
received by the Fund may not be sold or re-pledged except to satisfy borrower
default. Cash collateral is listed in the Fund's Portfolio of Investments and
Financial Statements while non-cash collateral is not included.
At January 31, 2019, the Fund's value of outstanding securities on loan and the
value of collateral are as follows:
VALUE OF SECURITIES
ON LOAN NON-CASH COLLATERAL CASH COLLATERAL
--------------------------------------------------------------------------------
$24,253,000 $- $24,783,000
(6) CAPITAL SHARE TRANSACTIONS
At January 31, 2019, there were an unlimited number of shares of capital stock
at no par value authorized for the Fund.
Capital share transactions for the Institutional Shares resulted from purchases
and sales by the affiliated USAA fund-of-funds as well as other
================================================================================
NOTES TO FINANCIAL STATEMENTS | 45
================================================================================
persons or legal entities that the Fund may approve from time to time. Capital
share transactions for all classes were as follows, in thousands:
SIX-MONTH
PERIOD ENDED YEAR ENDED
JANUARY 31, 2019 JULY 31, 2018
----------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------
FUND SHARES:
Shares sold 13,228 $ 119,821 27,583 $ 252,252
Shares issued from
reinvested dividends 1,644 14,895 2,930 26,728
Shares redeemed (18,320) (165,936) (40,697) (371,453)
----------------------------------------------------------
Net decrease from capital
share transactions (3,448) $ (31,220) (10,184) $ (92,473)
==========================================================
INSTITUTIONAL SHARES:
Shares sold 23,098 $ 209,044 49,960 $ 455,625
Shares issued from
reinvested dividends 2,935 26,587 4,718 43,023
Shares redeemed (20,162) (182,462) (43,344) (395,691)
----------------------------------------------------------
Net increase from capital
share transactions 5,871 $ 53,169 11,334 $ 102,957
==========================================================
ADVISER SHARES:
Shares sold 110 $ 1,003 1,774 $ 16,258
Shares issued from
reinvested dividends 12 111 20 177
Shares redeemed (929) (8,421) (1,590) (14,546)
----------------------------------------------------------
Net increase (decrease) from
capital share transactions (807) $ (7,307) 204 $ 1,889
==========================================================
R6 SHARES:
Shares sold 3 $ 23 11 $ 98
Shares issued from
reinvested dividends -* 3 -* 3
Shares redeemed (-)* (1) (1) (5)
----------------------------------------------------------
Net increase from capital
share transactions 3 $ 25 10 $ 96
==========================================================
*Represents less than 500 shares.
================================================================================
46 | USAA SHORT-TERM BOND FUND
================================================================================
(7) TRANSACTIONS WITH MANAGER
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 the Fund's assets, subject to the
authority of and supervision by the Board. The Manager 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 all or a portion of the
Fund's assets. For the six-month period ended January 31, 2019, the Fund had no
subadviser(s).
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee is accrued daily and paid monthly at
an annualized rate of 0.20% of the Fund's average daily net assets.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Short Investment Grade Bond Funds Index. The Lipper Short
Investment Grade Bond Funds Index tracks the total return performance of funds
within the Lipper Short Investment Grade Debt Funds category.
For the Fund Shares, Institutional Shares, and Adviser Shares the performance
period consists of the current month plus the previous 35 months. The
performance period for the R6 Shares commenced on December 1, 2016, and includes
the performance of the Fund Shares for periods prior to December 1, 2016. The
following table is utilized to determine the extent of the performance
adjustment:
OVER/UNDER PERFORMANCE
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
------------------------------------------------------------------------
+/- 20 to 50 +/- 4
+/- 51 to 100 +/- 5
+/- 101 and greater +/- 6
(1)Based on the difference between average annual performance of the
relevant share class of the Fund and its relevant Lipper index, rounded
to the nearest basis point. Average daily net assets of the share class
are calculated over a rolling 36-month period.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 47
================================================================================
Each class' annual performance adjustment rate is multiplied by the average
daily net assets of each respective class over the entire performance period,
which is then multiplied by a fraction, the numerator of which is the number of
days in the month and the denominator of which is 365 (366 in leap years). The
resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper Short Investment Grade Funds Index over that period, even
if the class had overall negative returns during the performance period.
For the six-month period ended January 31, 2019, the Fund incurred management
fees, paid or payable to the Manager, of $4,048,000, which included a
performance adjustment for the Fund Shares, Institutional Shares, Adviser
Shares, and R6 Shares of $281,000, $480,000, $3,000, and $1,000, respectively.
For the Fund Shares, Institutional Shares, Adviser Shares, and R6 Shares the
performance adjustments were 0.05%, 0.05%, 0.04%, and 0.03%, respectively.
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 at an annualized rate of 0.15% of average
daily net assets of the Fund Shares and Adviser Shares, 0.10% of average daily
net assets of the Institutional Shares, and 0.05% of average daily net assets of
the R6 Shares. For the six-month period ended January 31, 2019, the Fund Shares,
Institutional Shares, Adviser Shares, and R6 Shares incurred administration and
servicing fees, paid or payable to the Manager, of $883,000, $1,041,000,
$14,000, and $1,000, respectively.
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 January 31, 2019, the Fund reimbursed the Manager less than $500
for these compliance and legal services. These expenses are included in the
professional fees on the Fund's Statement of Operations.
================================================================================
48 | USAA SHORT-TERM BOND FUND
================================================================================
EXPENSE LIMITATION - The Manager agreed, through November 30, 2019, to limit the
total annual operating expenses of the R6 Shares to 0.39% of its average annual
net assets, excluding extraordinary expenses and before reductions of any
expenses paid indirectly, and to reimburse the R6 Shares for all expenses in
excess of that amount. This expense limitation arrangement may not be changed or
terminated through November 30, 2019, without approval of the Board, and may be
changed or terminated by the Manager at any time after that date. For the
six-month period ended January 31, 2019, the R6 Shares incurred reimbursable
expenses of $9,000, of which $1,000 was receivable from the Manager.
TRANSFER AGENT'S FEES - SAS, an affiliate of the Manager, provides transfer
agent services to the Fund Shares and Adviser Shares based on an annual charge
of $25.50 per shareholder account plus out-of-pocket expenses. SAS pays a
portion of these fees to certain intermediaries for administration and servicing
of accounts that are held with such intermediaries. Transfer agent's fees for
Institutional Shares and R6 Shares are paid monthly based on a fee accrued daily
at an annualized rate of 0.10% of the Institutional Shares' and 0.01% of the R6
Shares' average daily net assets, plus out-of-pocket expenses. For the
six-month period ended January 31, 2019, the Fund Shares, Institutional Shares,
Adviser Shares, and R6 Shares incurred transfer agent's fees, paid or payable to
SAS, of $904,000, $1,041,000, $4,000, and less than $500, respectively.
DISTRIBUTION AND SERVICE (12b-1) FEES - The Fund has adopted a plan pursuant to
Rule 12b-1 under the 1940 Act with respect to the Adviser Shares. Under the
plan, the Adviser Shares pay fees to USAA Investment Management Company (IMCO),
the distributor, for distribution and shareholder services. IMCO pays all or a
portion of such fees to intermediaries that make the Adviser Shares available
for investment by their customers. The fee is accrued daily and paid monthly at
an annual rate of 0.25% of the Adviser Shares' average daily net assets. Adviser
Shares are offered and sold without imposition of an initial sales charge or a
contingent deferred sales charge. For the six-month period ended January 31,
2019, the Adviser Shares incurred distribution and service (12b-1) fees of
$23,000.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 49
================================================================================
UNDERWRITING SERVICES - IMCO provides exclusive underwriting and distribution of
the Fund's shares on a continuing best-efforts basis and receives no fee or
other compensation for these services, but may receive 12b-1 fees as described
above, with respect to Adviser Shares.
(8) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other USAA Funds and
is one of 16 USAA mutual funds in which the affiliated USAA fund-of-funds
invest. The USAA fund-of-funds do not invest in the underlying funds for the
purpose of exercising management or control, and the affiliated fund-of-funds'
annual or semiannual reports may be viewed at usaa.com. As of January 31, 2019,
the USAA fund-of-funds owned the following percentages of the total outstanding
shares of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
--------------------------------------------------------------------------------
Cornerstone Conservative 0.2
Target Retirement Income 1.5
Target Retirement 2020 1.5
Target Retirement 2030 1.6
Target Retirement 2040 0.7
Target Retirement 2050 0.3
Target Retirement 2060 0.0*
* Represents less than 0.1%.
The Manager is indirectly wholly owned by USAA, a large, diversified financial
services institution. At January 31, 2019, USAA and its affiliates owned 542,000
Adviser Shares and 548,000 R6 Shares, which represents 31.3% of the Adviser
Shares outstanding, 96.2% of the R6 Shares outstanding, and 0.3% of the Fund's
total outstanding shares.
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.
================================================================================
50 | USAA SHORT-TERM BOND FUND
================================================================================
(9) UPCOMING REGULATORY MATTERS
In October 2016, the U.S. Securities and Exchange Commission (SEC) issued Final
Rule Release No. 33-10233, INVESTMENT COMPANY LIQUIDITY RISK MANAGEMENT PROGRAMS
(Liquidity Rule). The Liquidity Rule requires funds to establish a liquidity
risk management program and enhances disclosures regarding funds' liquidity. The
requirements to implement a liquidity risk management program and establish a
15% illiquid investment limit became effective December 1, 2018. However, in
February 2018, the SEC issued Release No. IC-33010, INVESTMENT COMPANY LIQUIDITY
RISK MANAGEMENT PROGRAMS; COMMISSION GUIDANCE FOR IN-KIND ETFs, which delayed
certain requirements related to liquidity classification, highly liquid
investment minimums, and board approval of the liquidity risk management
programs to June 1, 2019. The Manager continues to evaluate the impact of this
rule on the Fund's financial statements and various filings.
(10) RECENTLY ADOPTED ACCOUNTING STANDARDS
In August 2018, the SEC adopted amendments to Regulation S-X for investment
companies governing the form and content of financial statements. The amendments
to Regulation S-X took effect on November 5, 2018, and the financial statements
have been modified accordingly, for the current and prior periods.
ASU 2018-13, FAIR VALUE MEASUREMENT
-----------------------------------
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820).
The amendments in the ASU impact disclosure requirements for fair value
measurement. ASU 2018-13 is effective for fiscal years beginning after December
15, 2019. Early adoption is permitted and can include the entire standard or
certain provisions that exclude or amend disclosures. Management has elected to
early adopt ASU 2018-13 effective with the current reporting period. The
adoption of ASU 2018-13 guidance is limited to changes in the Fund's notes to
financial statement disclosures regarding valuation method, fair value, and
transfers between levels of the fair value hierarchy.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 51
================================================================================
ASU 2017-08, PREMIUM AMORTIZATION OF PURCHASED CALLABLE DEBT SECURITIES
-----------------------------------------------------------------------
In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2017-08, Premium Amortization of Purchased Callable Debt
Securities. The amendments in the ASU shorten the premium amortization period on
a purchased callable debt security from the security's contractual life to the
earliest call date. ASU 2017-08 became effective for funds with fiscal years
beginning after December 15, 2018. The Manager has determined the adoption of
this standard has no impact on the financial statements and reporting
disclosures of the Fund.
================================================================================
52 | USAA SHORT-TERM BOND FUND
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
------------------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
------------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 9.06 $ 9.21 $ 9.20 $ 9.15 $ 9.23 $ 9.19
------------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .12 .20 .17 .16 .15 .17
Net realized and
unrealized gain (loss) .04 (.15) .01 .05 (.08) .04
------------------------------------------------------------------------------------------
Total from investment
operations .16 .05 .18 .21 .07 .21
------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.12) (.20) (.17) (.16) (.15) (.17)
Realized capital gains (.00)(a) (.00)(a) - - (.00)(a) -
------------------------------------------------------------------------------------------
Total distributions (.12) (.20) (.17) (.16) (.15) (.17)
------------------------------------------------------------------------------------------
Net asset value at
end of period $ 9.10 $ 9.06 $ 9.21 $ 9.20 $ 9.15 $ 9.23
==========================================================================================
Total return (%)* 1.77 .54 2.02 2.34 .83 2.28
Net assets at end
of period (000) $1,161,626 $1,188,259 $1,301,428 $1,400,054 $1,823,922 $1,683,052
Ratios to average
daily net assets:**
Expenses (%)(b) .59(c) .59 .63 .61 .62 .63(d)
Net investment
income (%) 2.58(c) 2.18 1.90 1.76 1.65 1.83
Portfolio turnover (%) 18 39 31 22 31 28
* 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 January 31, 2019, average daily net assets
were $1,167,382,000.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) Reflects total annual operating expenses of the Fund Shares before
reductions of any expenses paid indirectly. The Fund Shares' expenses paid
indirectly decreased the expense ratio by less than 0.01%.
================================================================================
FINANCIAL HIGHLIGHTS | 53
================================================================================
INSTITUTIONAL SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
------------------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
------------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 9.06 $ 9.21 $ 9.20 $ 9.15 $ 9.23 $ 9.18
------------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .12 .21 .18 .17 .16 .18
Net realized and
unrealized gain (loss) .03 (.15) .01 .05 (.08) .05
------------------------------------------------------------------------------------------
Total from investment
operations .15 .06 .19 .22 .08 .23
------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.12) (.21) (.18) (.17) (.16) (.18)
Realized capital gains (.00)(a) (.00)(a) - - (.00)(a) -
------------------------------------------------------------------------------------------
Total distributions (.12) (.21) (.18) (.17) (.16) (.18)
------------------------------------------------------------------------------------------
Net asset value at
end of period $ 9.09 $ 9.06 $ 9.21 $ 9.20 $ 9.15 $ 9.23
==========================================================================================
Total return (%)* 1.71 .65 2.13 2.44 .95 2.54
Net assets at end
of period (000) $2,087,122 $2,025,651 $1,954,307 $1,942,385 $2,237,771 $1,977,300
Ratios to average
daily net assets:**
Expenses (%)(b) .47(c) .48 .53 .51 .50 .49(d)
Net investment
income (%) 2.69(c) 2.29 2.00 1.87 1.76 1.96
Portfolio turnover (%) 18 39 31 22 31 28
* 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 January 31, 2019, average daily net assets
were $2,065,782,000.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) Reflects total annual operating expenses of the Institutional Shares before
reductions of any expenses paid indirectly. The Institutional Shares'
expenses paid indirectly decreased the expense ratios by less than 0.01%.
================================================================================
54 | USAA SHORT-TERM BOND FUND
================================================================================
ADVISER SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
----------------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
----------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 9.06 $ 9.21 $ 9.20 $ 9.15 $ 9.23 $ 9.19
----------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .11 .18 .16 .14 .13 .15
Net realized and
unrealized gain (loss) .04 (.15) .01 .05 (.08) .04
----------------------------------------------------------------------------------------
Total from investment
operations .15 .03 .17 .19 .05 .19
----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.11) (.18) (.16) (.14) (.13) (.15)
Realized capital gains (.00)(a) (.00)(a) - - (.00)(a) -
----------------------------------------------------------------------------------------
Total distributions (.11) (.18) (.16) (.14) (.13) (.15)
----------------------------------------------------------------------------------------
Net asset value at
end of period $ 9.10 $ 9.06 $ 9.21 $ 9.20 $ 9.15 $ 9.23
========================================================================================
Total return (%)* 1.64 .38 1.82 2.08 .59 2.07
Net assets at end
of period (000) $ 15,784 $23,030 $21,532 $12,747 $13,304 $13,056
Ratios to average
daily net assets:**
Expenses (%)(b) .83(c) .74 .82 .86 .85(d) .84(e)
Expenses, excluding
reimbursements (%)(b) .83(c) .74 .82 .86 .85 .84(e)
Net investment
income(loss) (%) 2.33(c) 2.02 1.70 1.52 1.41 1.62
Portfolio turnover (%) 18 39 31 22 31 28
* 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 January 31, 2019, average daily net assets
were $18,078,000.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) Prior to December 1, 2014, the Manager had voluntarily agreed to limit the
annual expenses of the Adviser Shares to 0.90% of the Adviser Shares'
average daily net assets.
(e) Reflects total annual operating expenses of the Adviser Shares before
reductions of any expenses paid indirectly. The Adviser Shares' expenses
paid indirectly decreased the expense ratio by less than 0.01%.
================================================================================
FINANCIAL HIGHLIGHTS | 55
================================================================================
R6 SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED YEAR ENDED PERIOD ENDED
JANUARY 31, JULY 31, JULY 31,
-------------------------------------------------
2019 2018 2017***
-------------------------------------------------
Net asset value at beginning of period $ 9.07 $ 9.21 $ 9.12
------------------------------------------
Income (loss) from investment operations:
Net investment income .13 .22 .13
Net realized and unrealized gain (loss) .03 (.14) .09
------------------------------------------
Total from investment operations .16 .08 .22
------------------------------------------
Less distributions from:
Net investment income (.13) (.22) (.13)
Realized capital gains (.00)(a) (.00)(a) -
------------------------------------------
Total distributions (.13) (.22) (.13)
------------------------------------------
Net asset value at end of period $ 9.10 $ 9.07 $ 9.21
==========================================
Total return (%)* 1.75 .85 2.43
Net assets at end of period (000) $5,187 $5,142 $5,129
Ratios to average daily net assets:**
Expenses (%)(b) .39(c) .39 .39(c)
Expenses, excluding reimbursements (%)(b) .75(c) .67 1.02(c)
Net investment income (%) 2.77(c) 2.38 2.14(c)
Portfolio turnover (%) 18 39 31
* 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 January 31, 2019, average daily net assets
were $5,149,000.
*** R6 Shares commenced operations on December 1, 2016.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
56 | USAA SHORT-TERM BOND FUND
================================================================================
EXPENSE EXAMPLE
January 31, 2019 (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, distribution and service
(12b-1) 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 August 1, 2018, through
January 31, 2019.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table 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 for your share
class in the "actual" 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 line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class and an assumed rate of return of
5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing costs of investing in the Fund
================================================================================
EXPENSE EXAMPLE | 57
================================================================================
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 line labeled "hypothetical"
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 AUGUST 1, 2018 -
AUGUST 1, 2018 JANUARY 31, 2019 JANUARY 31, 2019
------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,017.70 $3.00
Hypothetical
(5% return before expenses) 1,000.00 1,022.23 3.01
INSTITUTIONAL SHARES
Actual 1,000.00 1,017.10 2.39
Hypothetical
(5% return before expenses) 1,000.00 1,022.84 2.40
ADVISER SHARES
Actual 1,000.00 1,016.40 4.22
Hypothetical
(5% return before expenses) 1,000.00 1,021.02 4.23
R6 SHARES
Actual 1,000.00 1,017.50 1.98
Hypothetical
(5% return before expenses) 1,000.00 1,023.24 1.99
*Expenses are equal to the annualized expense ratio of 0.59% for Fund Shares,
0.47% for Institutional Shares, 0.83% for Adviser Shares, and 0.39% for R6
Shares, which are net of any reimbursements and expenses paid indirectly,
multiplied by the average account value over the period, multiplied by 184
days/365 days for Fund Shares, Institutional Shares, Adviser Shares, and R6
Shares (to reflect the one-half-year period). The Fund's actual ending account
values are based on its actual total returns of 1.77% for Fund Shares, 1.71%
for Institutional Shares, 1.64% for Adviser Shares, and 1.75% for R6 Shares,
for the six-month period of August 1, 2018, through January 31, 2019.
================================================================================
58 | USAA SHORT-TERM BOND FUND
================================================================================
ADVISORY AGREEMENT(S)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with Victory Capital
Holdings, Inc. ("Victory Holdings") pursuant to which Victory Holdings would
acquire all of the outstanding stock of AMCO and USAA Transfer Agency Company
d/b/a USAA Shareholder Account Services ("USAA Transfer Agent") (the
"Transaction"). The Independent Trustees were advised that the Transaction, if
completed, would constitute
================================================================================
ADVISORY AGREEMENT(S) | 59
================================================================================
an "assignment" (as that term is defined in Section 2(a)(4) of the 1940 Act) and
result in the automatic termination of the Existing Management Agreements
("Change of Control Event"). The Independent Trustees also were advised that it
was proposed that Victory Capital, a subsidiary of Victory Holdings, would serve
as the investment adviser to each Fund after the closing of the Transaction
("Post-Transaction") and that the Board would be asked to consider approval of
the terms and conditions of the New Advisory Agreement with Victory Capital and
thereafter to submit the New Advisory Agreement to each Fund's shareholders for
approval. Because the Change of Control Event also would result in the
termination of each existing subadvisory agreement between AMCO and the
subadvisers to the Funds ("Existing Subadvisory Agreements"), the Independent
Trustees were advised that the Board would also be asked to approve the New
Subadvisory Agreements.
In anticipation of the Transaction, the Trustees met at a series of subsequent
in-person meetings on November 27-28, 2018, January 7-8, 2019, and January
14-15, 2019, which included meetings of the full Board and separate meetings of
the Independent Trustees for the purposes of considering, among other things:
whether it would be in the best interests of each Fund and its respective
shareholders to approve the New Agreements; and the anticipated impacts of the
Transaction on the Funds and their shareholders (each, a "Meeting"). During each
of these Meetings, the Board sought additional and clarifying information as it
deemed necessary or appropriate. In this connection, the Independent Trustees
worked with their independent legal counsel to prepare formal due diligence
requests (the "Diligence Requests") that were submitted to Victory Capital,
Victory Capital Advisers, Inc. ("VCA"), and the subadvisers. The Diligence
Requests sought information relevant to the Board's consideration of the New
Advisory Agreement, the New Subadvisory Agreements, distribution arrangements,
and other anticipated impacts of the Transaction on the Funds and their
shareholders. Victory Capital, VCA, and the subadvisers provided documents and
information in response to the Diligence Requests (the "Response Materials").
Following their review of the Response Materials, the Independent Trustees
submitted a supplemental due diligence request for additional and clarifying
information (the "Supplemental Diligence Request") to Victory Capital and VCA.
Victory
================================================================================
60 | USAA SHORT-TERM BOND FUND
================================================================================
Capital and VCA provided further information in response to the Supplemental
Diligence Request, which the Board reviewed. Senior management representatives
of Victory Capital and/or AMCO participated in a portion of each Meeting and
addressed various questions raised by the Board. Throughout the process, the
Independent Trustees were assisted by their independent legal counsel and
counsel to the Funds, who advised them on, among other things, their duties and
obligations relating to their consideration of the New Agreements.
The Board's evaluation of the New Agreements reflected the information provided
specifically in connection with its review of the New Agreements, as well as,
where relevant, information that was previously furnished to the Board in
connection with the most recent renewal of the Existing Management Agreements
and Existing Subadvisory Agreements at an in-person meeting of the Board on
April 18, 2018 (the "2018 15(c) Meeting") and at other subsequent Board meetings
in 2018. The Board's evaluation of the New Agreements also reflected the
knowledge gained as Board members of the Funds with respect to services provided
by AMCO, its affiliates, and each subadviser to the Funds.
The Board's approvals and recommendations were based on its determination,
within its business judgment, that it would be in the best interests of each
Fund and its respective shareholders, for Victory Capital and, as applicable,
the subadvisers, to provide investment advisory, investment subadvisory, and
related services to the Funds, following the closing of the Transaction.
FACTORS CONSIDERED IN APPROVING THE NEW ADVISORY AGREEMENT
In connection with the Board's consideration of the New Advisory Agreement,
Victory Capital and AMCO advised the Board about a variety of matters, including
the following:
o The nature, extent, and quality of the services to be provided to the
Funds by Victory Capital Post-Transaction are expected to be of at least
the same level as the services currently provided to the Funds by AMCO.
================================================================================
ADVISORY AGREEMENT(S) | 61
================================================================================
o Victory Capital's stated commitment to maintaining and enhancing the
USAA member/USAA Fund shareholder experience, including creating a
dedicated USAA Fund sales and client service call center that will
provide ongoing client service and advice to existing and new USAA
members.
o Victory Capital proposes to: (1) replace the underlying indexes for
the USAA Extended Market Index Fund and USAA S&P 500 Index Fund with
indexes designed to provide shareholders with comparable exposure and
investment outcomes; (2) change the USAA Extended Market Index Fund's
and USAA S&P 500 Index Fund's investment objectives and strategies in
light of the changes to their underlying indexes; and (3) change the
name of the USAA S&P 500 Index Fund to the USAA 500 Index Fund.
o Victory Capital does not propose changes to the investment
objective(s) of any other Funds. Although the investment processes used
by Victory Capital's portfolio managers may differ from those used by
AMCO's portfolio managers or, if applicable, any subadviser's portfolio
managers, such differences are not currently expected to result in
changes to the principal investment strategies or principal investment
risks of the Funds.
o The New Advisory Agreement does not change any Fund's advisory fee
rate or the computation method for calculating such fees (except that
Victory Capital, subject to Board approval, may in the future use a
single designated share class to calculate the performance adjustment).
For at least two years after the Transaction closes, Victory Capital has
agreed to waive fees and/or reimburse expenses so that each Fund's
annual expense ratio (excluding certain customary items) does not exceed
the levels reflected in each Fund's most recent audited financial
statements at the time the Transaction closes (or the levels of AMCO's
then-current expense caps, if applicable), excluding the impact of any
performance adjustment to the Fund's advisory fee.
================================================================================
62 | USAA SHORT-TERM BOND FUND
================================================================================
o The portfolio managers at AMCO that manage the Fixed Income Funds(1) as
well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be advised
by Victory Capital through its Victory Solutions platform, Victory
Capital proposes that the same subadvisers be retained Post-Transaction,
although Victory Capital may change the allocation to a particular
subadviser Post-Transaction. No changes are expected to the portfolio
managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's
(1)The Fixed Income Funds include the following Funds: California Bond Fund,
Government Securities Fund, High Income Fund, Income Fund, Intermediate-Term
Bond Fund, Tax Exempt Intermediate-Term Fund, Tax Exempt Long-Term Fund, New
York Bond Fund, Short-Term Bond Fund, Tax Exempt Short- Term Fund, Ultra
Short-Term Bond Fund, Virginia Bond Fund, Money Market Fund, Tax Exempt Money
Market Fund and Treasury Money Market Trust.
(2)The Cornerstone Funds include the following Funds: Cornerstone Aggressive
Fund, Cornerstone Conservative Fund, Cornerstone Equity Fund, Cornerstone
Moderate Fund, Cornerstone Moderately Aggressive Fund, and Cornerstone
Moderately Conservative Fund.
(3)The Target Retirement Funds include the following Funds: Target Retirement
2020 Fund, Target Retirement 2030 Fund, Target Retirement 2040 Fund, Target
Retirement 2050 Fund, Target Retirement 2060 Fund, and Target Retirement
Income Fund.
================================================================================
ADVISORY AGREEMENT(S) | 63
================================================================================
businesses to Victory Capital. Victory Capital and USAA expect to enter
into a transition services agreement under which USAA will continue to
provide Victory Capital with certain services that are currently
provided by USAA to AMCO and the USAA Transfer Agent for a specified
period of time after the closing of the Transaction to assist Victory
Capital in transitioning the USAA member distribution channel and member
support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital
================================================================================
64 | USAA SHORT-TERM BOND FUND
================================================================================
is capable of providing the same level of investment management services
currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund, Growth
& Income Fund, Income Stock Fund, Global Equity Income Fund, and Precious
Metals and Minerals Fund.
================================================================================
ADVISORY AGREEMENT(S) | 65
================================================================================
The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored and managed by
Victory Capital ("Victory Funds") with similar investment
================================================================================
66 | USAA SHORT-TERM BOND FUND
================================================================================
objectives and strategies managed by the portfolio managers who would manage the
Funds. Based on information presented to the Board at the Meetings and its
discussions with Victory Capital, the Board concluded that Victory Capital is
capable of generating a level of long-term investment performance that is
appropriate in light of each Fund's investment objectives, strategies and
restrictions.
FEES TO BE PAID TO VICTORY CAPITAL AND EXPENSES OF THE FUNDS - The Board
considered that it had reviewed each Fund's existing advisory fee rate and
computation method for calculating such fees at the 2018 15(c) Meeting. The
Board considered that the New Advisory Agreement does not change any Fund's
advisory fee rate or the computation method for calculating such fees, except
that Victory Capital, subject to Board approval, may in the future use a single
designated share class to calculate the performance adjustment and apply the
resulting performance adjustment across each other class of shares of the Fund.
The Board considered that the use of a single designated class to calculate the
performance adjustment for each other class of shares of the Fund could mean
that shareholders of a class other than the class used to measure the
performance adjustment may pay a performance adjustment that is higher or lower
than if the adjustment were calculated on a class by class basis, primarily due
to the impact of differences in the fees and expenses between share classes on
performance. The Board considered that the New Advisory Agreement stipulates
that the period for measuring performance for calculating a Fund's performance
adjustment begins on the date that Victory Capital begins managing the Fund;
therefore, no performance adjustments will be made for the first twelve months
of the New Advisory Agreement, consistent with applicable regulations. The Board
also considered Victory Capital's contractual commitment under the expense
limitation agreement ("ELA") to waive fees and/or reimburse expenses for at
least two years after the closing of the Transaction, so that each Fund's annual
expense ratio (excluding acquired fund fees and expenses, any performance
adjustment to a Fund's advisory fee, interest, taxes, brokerage commissions,
other expenditures which are capitalized in accordance with generally accepted
accounting principles, and other extraordinary expenses not incurred in the
ordinary course of such Fund's business) does not exceed the levels reflected in
each Fund's most recent audited financial statements at the time the
================================================================================
ADVISORY AGREEMENT(S) | 67
================================================================================
Transaction closes (or the levels of AMCO's then-current expense caps, if
applicable), excluding the impact of any performance adjustment to a Fund's
advisory fee. The Board considered that the ELA permits Victory Capital to
recoup advisory fees waived and expenses reimbursed for up to three years after
the fiscal year in which the waiver or reimbursement took place, subject to the
lesser of any operating expense limitation in effect at the time of: (1) the
original waiver or expense reimbursement; or (2) recoupment. The Board also
considered that Victory Capital and AMCO had represented to the Board that they
will use their best efforts to ensure that they and their respective affiliates
do not take any action that imposes an "unfair burden" on the Funds as a result
of the Transaction or as a result of any express or implied terms, conditions or
understandings applicable to the Change of Control Event, for so long as the
requirements of Section 15(f) of the 1940 Act apply. The Board also considered
a comparison of the proposed advisory fees to be paid by each Fund to the
advisory fees paid by funds and other accounts managed by Victory Capital deemed
to be comparable to the Fund in terms of investment objectives and strategies.
The Board considered that, with few exceptions, mostly involving weighted
average fees for separate accounts, the advisory fees to be paid by the Funds
were lower than the fees paid by these other funds and accounts. The Board
concluded that the retention of Victory Capital was unlikely to impose an unfair
burden on the Funds because, after the Transaction, none of AMCO, Victory
Capital, VCA, or any of their respective affiliates, would be entitled to
receive any compensation directly or indirectly (i) from any person in
connection with the purchase or sale of securities or other property to, from,
or on behalf of the Funds (other than ordinary fees for bona fide principal
underwriting services), or (ii) from the Funds or their shareholders for other
than bona fide investment advisory or other services. Based on its review, the
Board determined, with respect to each Fund, that Victory Capital's advisory fee
is fair and reasonable.
THE EXTENT TO WHICH VICTORY CAPITAL MAY REALIZE ECONOMIES OF SCALE AS THE FUNDS
GROW LARGER AND WHETHER FEE LEVELS REFLECT THESE ECONOMIES OF SCALE FOR THE
BENEFIT OF FUND SHAREHOLDERS - The Board considered potential or anticipated
economies of scale in relation to the services Victory Capital would provide to
each Fund. The Board considered that the New Advisory Agreement includes the
same advisory fee breakpoints for the same Funds as
================================================================================
68 | USAA SHORT-TERM BOND FUND
================================================================================
the Existing Advisory Agreements. The Board also considered that Victory Capital
has contractually agreed to cap the Funds' annual operating expense ratios,
pursuant to the ELA, which will remain in effect for at least two years from the
closing of the Transaction, and may be extended. The Board also considered
Victory Capital's representation that the significant increase in its assets
under management Post-Transaction may reasonably be expected to enable the new
combined firm to reach greater economies of scale in a shorter time frame. The
Board noted that it will have the opportunity to periodically re-examine whether
a Fund or the Trust has achieved economies of scale, and the appropriateness of
investment advisory and administrative fees payable to Victory Capital, in the
future.
THE PROFITS TO BE REALIZED BY VICTORY CAPITAL AND ITS AFFILIATES FROM THEIR
RELATIONSHIP WITH THE TRUST - The Board considered the benefits Victory Capital
and its affiliates may derive from their relationship with the Funds, including
compensation to be paid to Victory Capital for the provision of certain
administrative, fund accounting and shareholder services to the Funds and
compensation to be paid to USAA Transfer Agent for the provision of transfer
agency services to the Funds. The Board considered the significant investments
Victory Capital expected to make to support and grow the USAA member channel and
the costs to integrate the USAA Fund business into Victory Capital. The Board
also considered Victory Capital's profitability report presented to the board of
trustees of the Victory Funds in connection with their most recent 15(c)
process. The Board considered Victory Capital's representation that the fully
integrated USAA Fund business, including investments to support ongoing growth,
was expected to have an overall marginally positive impact on Victory Capital's
overall financial profitability. The Board noted the difficulty of accurately
projecting profitability under the current circumstance and noted that it would
have the opportunity to give further consideration to Victory Capital's
profitability with respect to the Funds at the end of the initial two-year term
of the New Advisory Agreement.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
================================================================================
ADVISORY AGREEMENT(S) | 69
================================================================================
deliver investment products and services to USAA's direct member-based channel.
The Board also considered that Victory Capital may derive reputational and other
benefits from its ability to use "USAA" and related names in connection with
operating and marketing the Funds. The Board considered that the Transaction, if
completed, would significantly increase Victory Capital's assets under
management and expand Victory Capital's investment capabilities. This increased
size and diversification could facilitate Victory Capital's continued investment
in its business and products, which Victory Capital would be able to leverage
across a broader base of assets. Victory Capital also would be able to use
trading commission credits from the Funds' transactions in securities to
"purchase" third party research and execution services to support its investment
process. Based on its review, the Board determined that any "fall-out" benefits
and other types of benefits that may accrue to Victory Capital are fair and
reasonable.
CONCLUSIONS - Based on the foregoing and other relevant considerations, at the
Meeting of the Board held on January 15, 2019, the Board, including a majority
of the Independent Trustees, acting within its business judgment, (1) concluded
that the terms of the New Advisory Agreement are fair and reasonable and that
approval of the New Advisory Agreement is in the best interests of each Fund and
its respective shareholders, (2) voted to approve the New Advisory Agreement,
and (3) voted to recommend approval of the New Advisory Agreement by
shareholders of the Funds. The Board evaluated all information available to it
on a Fund-by-Fund basis and its determinations were made separately in respect
of each Fund. The Board noted some factors may have been more or less important
with respect to any particular Fund and that no one factor was determinative of
its decisions which, instead, were premised upon the totality of factors
considered. In this connection, the Board also noted that different Board
members likely placed emphasis on different factors in reaching their individual
conclusions to vote in favor of the New Advisory Agreement and to recommend
approval of the New Advisory Agreement by shareholders of the Funds.
FACTORS CONSIDERED IN APPROVING THE NEW SUBADVISORY AGREEMENTS
In approving the New Subadvisory Agreements with each of Barrow, Hanley,
Mewhinney & Strauss, LLC, Brandes Investment Partners, L.P., ClariVest Asset
================================================================================
70 | USAA SHORT-TERM BOND FUND
================================================================================
Management LLC, Epoch Investment Partners, Inc., Granahan Investment Management,
Inc., Lazard Asset Management LLC, Loomis, Sayles & Company LP, Massachusetts
Financial Services Company, Northern Trust Investments, Inc., QS Investors, LLC,
The Renaissance Group LLP and Wellington Management Company LLP (each, a
"Subadviser" and together the "Subadvisers") with respect to the applicable
Funds, the Board considered various factors, among them: (i) the nature, extent,
and quality of services to be provided to the applicable Funds by the
Subadvisers; (ii) each Subadviser's compensation and any other benefits derived
from the subadvisory relationship; (iii) comparisons, to the extent applicable,
of subadvisory fees and performance to comparable investment companies; and (iv)
the terms of each New Subadvisory Agreement. The Board's evaluation of the New
Subadvisory Agreements reflected the information provided specifically in
connection with its review of the New Subadvisory Agreements, as well as, where
relevant, information that was previously furnished to the Board in connection
with the most recent renewal of the Existing Subadvisory Agreements at the 2018
15(c) meeting and at other subsequent Board meetings in 2018. A summary of the
Board's analysis of these factors is set forth below. After full consideration
of a variety of factors, the Board, including the Independent Trustees, voted to
approve each New Subadvisory Agreement. In approving each New Subadvisory
Agreement, the Board did not identify any single factor as controlling, and each
Trustee may have attributed different weights to various factors. The
Independent Trustees reviewed the proposed approval of the New Subadvisory
Agreements in private sessions with their independent legal counsel at which no
representatives of Victory Capital or AMCO were present.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY THE
SUBADVISERS - The Board considered information provided to them regarding the
services to be provided by each Subadviser, including information presented
periodically throughout the previous year. The Board considered each
Subadviser's level of knowledge and investment style. The Board reviewed the
experience and credentials of the investment personnel who are responsible for
managing the investment of portfolio securities with respect to each applicable
Fund and each Subadviser's level of staffing. The Board also noted each
Subadviser's brokerage practices. The Board also considered
================================================================================
ADVISORY AGREEMENT(S) | 71
================================================================================
each Subadviser's regulatory and compliance history. The Board also took into
account each Subadviser's risk management processes. The Board noted that AMCO's
monitoring processes of each Subadviser include, and Victory Capital's expected
monitoring processes of each Subadviser would include, among others: (i) regular
telephonic meetings to discuss, among other matters, investment strategies and
to review portfolio performance; (ii) monthly portfolio compliance checklists
and quarterly compliance certifications to the Board; and (iii) due diligence
visits to each Subadviser. The Board also considered that the terms and
conditions of the New Subadvisory Agreements are substantially similar to the
terms and conditions of the Existing Subadvisory Agreements.
SUBADVISER COMPENSATION - The Board took into account the financial condition of
each Subadviser. In considering the cost of services to be provided by each
Subadviser and the profitability to that Subadviser of its relationship with the
applicable Fund, the Board noted that the fees under the New Subadvisory
Agreements will be paid by Victory Capital. The Board also relied on the ability
of AMCO to negotiate each Existing Subadvisory Agreement and the fees thereunder
at arm's length. The Board considered that the fee rate to be payable under each
New Subadvisory Agreement were proposed to be identical to the fee rate
currently payable under each corresponding Existing Subadvisory Agreement. For
the above reasons, the Board determined that the expected profitability of each
Subadviser from its relationship with the applicable Fund was not a material
factor in its deliberations with respect to the consideration of the approval of
each New Subadvisory Agreement. For similar reasons, the Board concluded that
the potential for economies of scale in each Subadviser's management of the
applicable Fund was not a material factor in considering each New Subadvisory
Agreement, although the Board noted that certain New Subadvisory Agreements
contain breakpoints in their fee schedules.
SUBADVISORY FEES AND FUND PERFORMANCE - The Board previously compared the
subadvisory fees for each applicable Fund with the fees that each Subadviser
charges comparable clients, as applicable. The Board considered that each
applicable Fund will pay a management fee to Victory Capital and that, in turn,
Victory Capital will pay a subadvisory fee to each Subadviser.
================================================================================
72 | USAA SHORT-TERM BOND FUND
================================================================================
At the 2018 15(c) meeting, the Board considered, among other data, each
applicable Fund's performance over shorter and longer term periods, as compared
to each Fund's respective peer group and noted that the Board reviews at its
regularly scheduled meetings information about each Fund's performance results.
The Board considered Victory Capital's capabilities with respect to monitoring
the performance, investment style and risk-adjusted performance of each
Subadviser. The Board also noted each Subadviser's performance record for
similar accounts, as applicable.
CONCLUSIONS - The Board reached the following conclusions regarding each New
Subadvisory Agreement, among others: (i) each Subadviser is qualified to manage
the applicable Fund's assets in accordance with its investment objective and
policies; (ii) each Subadviser maintains an appropriate compliance program;
(iii) the performance of each applicable Fund is reasonable in relation to the
performance of funds with similar investment objectives and to relevant indices
in view of the Fund's investment approach and Victory Capital is expected to
appropriately monitor each Fund's performance; and (iv) each Fund's advisory
expenses are reasonable in relation to those of similar funds and to the
services to be provided by Victory Capital and each Subadviser. Based on its
conclusions, the Board determined that the approval of each New Subadvisory
Agreement with respect to each applicable Fund would be in the best interests of
the Fund and its shareholders.
================================================================================
ADVISORY AGREEMENT(S) | 73
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Richard Y. Newton III
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN, State Street Bank and Trust Company
ACCOUNTING AGENT, AND P.O. Box 1713
SUB-ADMINISTRATOR Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
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) or (210) 531-8722;
(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 monthly portfolio holdings with the SEC
for the first and third quarters of each fiscal year as an exhibit to its
reports on Form N-PORT (beginning with filings after March 31, 2019).
Previously, the Fund made its complete schedule of portfolio holdings available
after the first and third fiscal quarters in regulatory filings on Form N-Q. The
Fund's Forms N-CSR, N-PORT, and N-Q are available at no charge (i) by calling
(800) 531-USAA (8722) or (210) 531-8722; (ii) at USAA.COM; and (iii) on the
SEC's website at HTTP://WWW.SEC.GOV.
================================================================================
--------------
USAA PRSRT STD
9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
--------------
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[LOGO OF USAA]
USAA We know what it means to serve.(R)
================================================================================
23426-0319 (C)2019, USAA. All rights reserved.
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA SCIENCE & TECHNOLOGY FUND]
================================================================================
SEMIANNUAL REPORT
USAA SCIENCE & TECHNOLOGY FUND
FUND SHARES (USSCX) o ADVISER SHARES (USTCX)
JANUARY 31, 2019
================================================================================
Beginning on January 1, 2021, as permitted by regulations adopted by the
Securities and Exchange Commission, paper copies of the Fund's shareholder
reports like this one will no longer be sent by mail, unless you specifically
request paper copies of the reports from the Fund or from your financial
intermediary, such as a broker-dealer or bank. Instead, the reports will be made
available on usaa.com, and you will be notified by mail each time a report is
posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will
not be affected by this change and you need not take any action. You may elect
to receive shareholder reports and other communications from the Fund or your
financial intermediary electronically by notifying your financial intermediary
directly, or if you are a direct investor, by calling (800) 531-USAA (8722) or
logging on to usaa.com.
You may elect to receive all future reports in paper free of charge. You can
inform the Fund or your financial intermediary that you wish to continue
receiving paper copies of your shareholder reports by notifying your financial
intermediary directly, or if you are a direct investor, by calling (800)
531-USAA (8722) or logging on to usaa.com. Your election to receive reports in
paper will apply to all funds held with the USAA family of funds or your
financial intermediary.
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
INVESTMENT OVERVIEW 1
FINANCIAL INFORMATION
Portfolio of Investments 2
Notes to Portfolio of Investments 8
Financial Statements 10
Notes to Financial Statements 14
Financial Highlights 29
EXPENSE EXAMPLE 31
ADVISORY AGREEMENT(S) 33
THIS REPORT IS FOR THE INFORMATION OF THE SHAREHOLDERS AND OTHERS WHO HAVE
RECEIVED A COPY OF THE CURRENTLY EFFECTIVE PROSPECTUS OF THE FUND, MANAGED BY
USAA ASSET MANAGEMENT COMPANY. IT MAY BE USED AS SALES LITERATURE ONLY WHEN
PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS, WHICH PROVIDES FURTHER DETAILS
ABOUT THE FUND.
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 tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. 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.
(C)2019, USAA. All rights reserved.
================================================================================
================================================================================
INVESTMENT OVERVIEW
--------------------------------------------------------------------------------
o TOP 10 HOLDINGS - 1/31/19 o
(% of Net Assets)
Amazon.com, Inc. .......................................................... 5.6%
Visa, Inc. "A" ............................................................ 4.2%
Microsoft Corp. ........................................................... 4.2%
Advanced Micro Devices, Inc. .............................................. 3.5%
Alphabet, Inc. "A" ........................................................ 3.3%
salesforce.com, Inc. ...................................................... 3.0%
Facebook, Inc. "A" ........................................................ 2.9%
Global Payments, Inc. ..................................................... 2.8%
Workday, Inc. "A" ......................................................... 2.6%
PayPal Holdings, Inc. ..................................................... 2.3%
o SECTOR ALLOCATION* - 1/31/19 o
(% of Net Assets)
[PIE CHART OS SECTOR ALLOCATION]
CONSUMER, NON-CYCLICAL 35.0%
TECHNOLOGY 32.8%
COMMUNICATIONS 21.9%
FINANCIAL 4.2%
INDUSTRIAL 3.5%
CONSUMER, CYCLICAL 0.2%
[END PIE CHART]
*Does not include money market instruments and short-term investments purchased
with cash collateral from securities loaned.
Percentages are of the net assets of the Fund and may not equal 100%.
Refer to the Portfolio of Investments for a complete list of securities.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
================================================================================
INVESTMENT OVERVIEW | 1
================================================================================
PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
EQUITY SECURITIES (97.6%)
COMMON STOCKS (97.4%)
COMMUNICATIONS (21.7%)
----------------------
INTERNET (21.2%)
131,196 Alibaba Group Holding Ltd. ADR(a) $ 22,105
38,778 Alphabet, Inc. "A"(a) 43,660
43,576 Amazon.com, Inc.(a) 74,895
7,204 Booking Holdings, Inc.(a) 13,204
96,394 Expedia Group, Inc. 11,495
226,705 Facebook, Inc. "A"(a) 37,789
148,290 GoDaddy, Inc. "A"(a) 10,177
59,846 Netflix, Inc.(a) 20,318
57,959 Spotify Technology S.A.(a) 7,851
463,512 Tencent Holdings Ltd.(b) 20,855
70,357 VeriSign, Inc.(a) 11,909
204,813 Yandex N.V. "A"(a) 6,878
----------
281,136
----------
TELECOMMUNICATIONS (0.5%)
59,208 Motorola Solutions, Inc. 6,922
----------
Total Communications 288,058
----------
CONSUMER, CYCLICAL (0.2%)
-------------------------
HOME FURNISHINGS (0.2%)
57,600 Roku, Inc.(a),(c) 2,589
----------
CONSUMER, NON-CYCLICAL (35.0%)
------------------------------
AGRICULTURE (0.1%)
52,586 Genus plc(b) 1,535
----------
BIOTECHNOLOGY (4.4%)
70,318 Alder Biopharmaceuticals, Inc.(a) 990
33,109 Alnylam Pharmaceuticals, Inc.(a) 2,766
41,191 Arena Pharmaceuticals, Inc.(a) 1,893
49,060 Assembly Biosciences, Inc.(a) 1,117
49,223 Audentes Therapeutics, Inc.(a) 1,221
13,694 Biogen, Inc.(a) 4,571
================================================================================
2 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
32,742 Bluebird Bio, Inc.(a) $ 4,369
47,064 Calithera Biosciences, Inc.(a) 210
37,037 Celgene Corp.(a) 3,276
86,333 CytomX Therapeutics, Inc.(a) 1,466
71,665 Forty Seven, Inc.(a) 1,053
15,800 Genmab A/S(a),(b) 2,294
113,452 GlycoMimetics, Inc.(a) 1,271
28,959 Incyte Corp.(a) 2,334
99,470 Karyopharm Therapeutics, Inc.(a) 842
14,791 Loxo Oncology, Inc.(a) 3,470
74,095 Medicines Co.(a),(c) 1,712
45,665 Neon Therapeutics, Inc.(a) 194
62,758 Nightstar Therapeutics plc ADR(a) 855
38,741 Radius Health, Inc.(a) 708
367,197 Rigel Pharmaceuticals, Inc.(a) 793
123,966 Seattle Genetics, Inc.(a) 9,475
26,785 Spark Therapeutics, Inc.(a) 1,281
120,242 Syndax Pharmaceuticals, Inc.(a) 673
23,203 Ultragenyx Pharmaceutical, Inc.(a) 1,144
43,696 Vertex Pharmaceuticals, Inc.(a) 8,342
----------
58,320
----------
COMMERCIAL SERVICES (12.3%)
114,961 Equifax, Inc. 12,303
129,959 FleetCor Technologies, Inc.(a) 26,227
331,321 Global Payments, Inc. 37,201
62,002 HMS Holdings Corp.(a) 1,860
344,966 PayPal Holdings, Inc.(a) 30,619
223,516 Total System Services, Inc. 20,029
204,803 TransUnion 12,456
143,198 WEX, Inc.(a) 23,102
----------
163,797
----------
HEALTHCARE PRODUCTS (6.2%)
226,334 Abbott Laboratories 16,518
52,408 AtriCure, Inc.(a) 1,622
31,978 Baxter International, Inc. 2,318
4,100 Bio-Techne Corp. 715
295,105 Boston Scientific Corp.(a) 11,258
70,237 Danaher Corp. 7,791
34,460 Edwards Lifesciences Corp.(a) 5,873
25,752 Globus Medical, Inc. "A"(a) 1,160
14,802 Intersect ENT, Inc.(a) 439
38,964 Koninklijke Philips N.V.(b) 1,534
================================================================================
PORTFOLIO OF INVESTMENTS | 3
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
137,534 Medtronic plc $ 12,157
21,027 NuVasive, Inc.(a) 1,054
102,166 Smith & Nephew plc(b) 1,924
19,540 Stryker Corp. 3,470
1,316 Tecan Group AG(b) 266
42,252 Thermo Fisher Scientific, Inc. 10,380
32,631 Zimmer Biomet Holdings, Inc. 3,575
----------
82,054
----------
HEALTHCARE-SERVICES (4.5%)
84,990 Acadia Healthcare Co., Inc.(a) 2,325
33,251 Anthem, Inc. 10,075
709,905 China Resources Medical Holdings Co. Ltd.(b) 502
10,826 Evolus, Inc.(a),(c) 177
1,831 Fresenius SE & Co. KGaA(b) 95
60,417 HCA Healthcare, Inc. 8,424
10,574 Humana, Inc. 3,267
12,595 ICON plc(a) 1,762
11,824 Molina Healthcare, Inc.(a) 1,573
41,804 NMC Health plc(b) 1,414
34,168 Syneos Health, Inc.(a) 1,744
26,312 Teladoc Health, Inc.(a),(c) 1,689
80,826 UnitedHealth Group, Inc. 21,839
17,954 WellCare Health Plans, Inc.(a) 4,964
----------
59,850
----------
PHARMACEUTICALS (7.5%)
28,212 Aimmune Therapeutics, Inc.(a) 663
125,551 Alkermes plc(a) 4,127
60,698 Allergan plc 8,739
92,726 Amneal Pharmaceuticals, Inc.(a) 1,139
207,157 AstraZeneca plc ADR 7,578
217,494 Bristol-Myers Squibb Co. 10,738
26,420 Chugai Pharmaceutical Co. Ltd.(b) 1,558
76,106 Clementia Pharmaceuticals, Inc.(a),(c) 1,034
207,752 Coherus Biosciences, Inc.(a) 2,796
43,000 Daiichi Sankyo Co. Ltd.(b) 1,489
47,241 Dermira, Inc.(a) 312
56,250 Eisai Co. Ltd.(b) 4,364
15,860 Elanco Animal Health, Inc.(a),(c) 463
90,944 Eli Lilly & Co. 10,901
77,731 G1 Therapeutics, Inc.(a) 1,663
17,902 Galapagos N.V.(a) 1,840
================================================================================
4 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
56,134 Global Blood Therapeutics, Inc.(a),(c) $ 2,689
57,743 Heron Therapeutics, Inc.(a) 1,553
14,234 Hikma Pharmaceuticals plc(b) 301
158,230 Ironwood Pharmaceuticals, Inc.(a) 2,161
16,905 Kala Pharmaceuticals, Inc.(a) 93
42,794 Laboratorios Farmaceuticos Rovi S.A.(b) 906
26,523 McKesson Corp. 3,402
198,587 MediWound Ltd.(a) 965
201,479 Momenta Pharmaceuticals, Inc.(a) 2,389
107,347 Mylan N.V.(a) 3,215
43,048 MyoKardia, Inc.(a) 1,781
26,025 Novartis AG(b) 2,271
26,480 ObsEva S.A.(a) 335
81,570 Ono Pharmaceutical Co. Ltd.(b) 1,776
92,614 PhaseBio Pharmaceuticals, Inc.(a) 306
112,819 Portola Pharmaceuticals, Inc.(a),(c) 3,057
66,200 Ra Pharmaceuticals, Inc.(a) 1,359
76,757 Revance Therapeutics, Inc.(a) 1,326
842,435 Sino Biopharmaceutical Ltd.(b) 726
23,815 Takeda Pharmaceutical Co. Ltd.(b) 961
49,654 Teva Pharmaceutical Industries Ltd. ADR(a) 986
21,235 Tricida, Inc.(a) 466
32,692 UCB S.A.(b) 2,831
50,135 UroGen Pharma Ltd.(a),(c) 2,077
188,434 WuXi AppTec Co. Ltd. "H"(a),(d) 1,921
21,903 Zealand Pharma A/S ADR(a),(c) 321
----------
99,578
----------
Total Consumer, Non-cyclical 465,134
----------
FINANCIAL (4.2%)
----------------
DIVERSIFIED FINANCIAL SERVICES (4.2%)
414,140 Visa, Inc. "A" 55,913
----------
INDUSTRIAL (3.5%)
-----------------
AEROSPACE/DEFENSE (1.5%)
132,664 Harris Corp. 20,322
----------
ELECTRONICS (2.0%)
2,013,872 Flex Ltd.(a) 19,373
116,819 Itron, Inc.(a) 6,382
----------
25,755
----------
Total Industrial 46,077
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 5
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
TECHNOLOGY (32.8%)
------------------
COMPUTERS (2.0%)
54,895 Accenture plc "A" $ 8,429
614,345 Genpact Ltd. 18,326
----------
26,755
----------
OFFICE/BUSINESS EQUIPMENT (0.4%)
34,001 Zebra Technologies Corp. "A"(a) 5,903
----------
SEMICONDUCTORS (12.9%)
1,915,059 Advanced Micro Devices, Inc.(a) 46,747
23,400 FormFactor, Inc.(a) 351
228,830 KLA-Tencor Corp. 24,386
1,258,154 Marvell Technology Group Ltd. 23,314
599,615 Micron Technology, Inc.(a) 22,917
2,841,986 Taiwan Semiconductor Manufacturing Co. Ltd.(b) 21,061
248,336 Teradyne, Inc. 8,938
72,500 Tokyo Electron Ltd.(b) 10,428
112,666 Xilinx, Inc. 12,612
----------
170,754
----------
SOFTWARE (17.5%)
79,992 Adobe, Inc.(a) 19,824
58,743 Cerner Corp.(a) 3,225
76,400 Electronic Arts, Inc.(a) 7,047
185,287 Guidewire Software, Inc.(a) 16,061
532,961 Microsoft Corp. 55,657
746,800 Nexon Co. Ltd.(a),(b) 11,417
262,263 salesforce.com, Inc.(a) 39,856
125,783 ServiceNow, Inc.(a) 27,675
137,625 Splunk, Inc.(a) 17,181
187,411 Workday, Inc. "A"(a) 34,021
----------
231,964
----------
Total Technology 435,376
----------
Total Common Stocks (cost: $942,333) 1,293,147
----------
PREFERRED STOCKS (0.2%)
COMMUNICATIONS (0.2%)
---------------------
INTERNET (0.2%)
55,796 Uber Technologies, Inc.(a),(e),(f),(g) (cost: $866) 2,424
----------
Total Equity Securities (cost: $943,199) 1,295,571
----------
================================================================================
6 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
-----------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (1.8%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (1.8%)
23,821,829 State Street Institutional Treasury Money Market Fund Premier
Class, 2.31%(h) (cost: $23,822) $ 23,822
----------
SHORT-TERM INVESTMENTS PURCHASED WITH
CASH COLLATERAL FROM SECURITIES LOANED (0.8%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.8%)
805,609 Goldman Sachs Financial Square Government Fund
Institutional Class, 2.34%(h) 805
9,885,730 HSBC U.S. Government Money Market Fund Class I, 2.38%(h) 9,886
----------
Total Short-Term Investments Purchased with Cash Collateral from
Securities Loaned (cost: $10,691) 10,691
----------
TOTAL INVESTMENTS (COST: $977,712) $1,330,084
==========
-----------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
-----------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-----------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $1,202,639 $90,508 $ - $1,293,147
Preferred Stocks - - 2,424 2,424
Money Market Instruments:
Government & U.S. Treasury
Money Market Funds 23,822 - - 23,822
Short-Term Investments
Purchased with Cash Collateral
from Securities Loaned:
Government & U.S. Treasury
Money Market Funds 10,691 - - 10,691
-----------------------------------------------------------------------------------------
Total $1,237,152 $90,508 $2,424 $1,330,084
-----------------------------------------------------------------------------------------
Refer to the Portfolio of Investments for additional industry, country, or
geographic region classifications.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
At January 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
PORTFOLIO OF INVESTMENTS | 7
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A 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 12.0% of net assets at January 31,
2019.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
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) Non-income-producing security.
(b) Securities with a value of $90,508,000, which represented 6.8% of
the Fund's net assets, were classified as Level 2 at January 31, 2019,
due to the prices being adjusted to take into account significant
market movements following the close of local trading.
(c) The security, or a portion thereof, was out on loan as of January
31, 2019.
================================================================================
8 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
(d) Restricted security that is not registered under the Securities Act
of 1933. A resale of this security in the United States may occur in an
exempt transaction to a qualified institutional buyer as defined by
Rule 144A, and as such has been deemed liquid by USAA Asset Management
Company under liquidity guidelines approved by USAA Mutual Funds
Trust's Board of Trustees, unless otherwise noted as illiquid.
(e) Security was fair valued at January 31, 2019, by USAA Asset Management
Company in accordance with valuation procedures approved by USAA Mutual
Funds Trust's Board of Trustees. The total value of all such securities
was $2,424,000, which represented 0.2% of the Fund's net assets.
(f) Security deemed illiquid by USAA Asset Management Company, under
liquidity guidelines approved by USAA Mutual Funds Trust's Board of
Trustees.
(g) Security was classified as Level 3.
(h) Rate represents the money market fund annualized seven-day yield at
January 31, 2019.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 9
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (including securities on
loan of $10,539) (cost of $977,712) $1,330,084
Receivables:
Capital shares sold 719
Dividends and interest 192
Securities sold 19,435
Other 5
----------
Total assets 1,350,435
----------
LIABILITIES
Payables:
Upon return of securities loaned 10,691
Securities purchased 10,038
Capital shares redeemed 913
Accrued management fees 754
Accrued transfer agent's fees 60
Other accrued expenses and payables 180
----------
Total liabilities 22,636
----------
Net assets applicable to capital shares outstanding $1,327,799
==========
NET ASSETS CONSIST OF:
Paid-in capital $ 972,416
Distributable earnings 355,383
----------
Net assets applicable to capital shares outstanding $1,327,799
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $1,229,600/50,237
capital shares outstanding, no par value) $ 24.48
==========
Adviser Shares (net assets of $98,199/4,133
capital shares outstanding, no par value) $ 23.76
==========
See accompanying notes to financial statements.
================================================================================
10 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $101) $ 4,001
Interest 234
Securities lending (net) 73
--------
Total income 4,308
--------
EXPENSES
Management fees 4,839
Administration and servicing fees:
Fund Shares 941
Adviser Shares 79
Transfer agent's fees:
Fund Shares 757
Adviser Shares 69
Distribution and service fees (Note 7):
Adviser Shares 132
Custody and accounting fees:
Fund Shares 123
Adviser Shares 11
Postage:
Fund Shares 39
Adviser Shares 4
Shareholder reporting fees:
Fund Shares 25
Adviser Shares 1
Trustees' fees 17
Registration fees:
Fund Shares 16
Adviser Shares 5
Professional fees 50
Other 13
--------
Total expenses 7,121
--------
================================================================================
FINANCIAL STATEMENTS | 11
================================================================================
Expense paid indirectly:
Fund Shares $ (1)
--------
Net expenses 7,120
--------
NET INVESTMENT LOSS (2,812)
--------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain on:
Investments 55,103
Foreign currency transactions 13
Change in net unrealized appreciation/(depreciation) of:
Investments (97,368)
Foreign currency translations 7
--------
Net realized and unrealized loss (42,245)
--------
Decrease in net assets resulting from operations $(45,057)
========
See accompanying notes to financial statements.
================================================================================
12 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited), and year ended
July 31, 2018
----------------------------------------------------------------------------------------------
1/31/2019 7/31/2018
----------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment loss $ (2,812) $ (4,529)
Net realized gain on investments 55,103 166,058
Net realized gain (loss) on foreign currency transactions 13 (54)
Change in net unrealized appreciation/(depreciation) of:
Investments (97,368) 56,447
Foreign currency translations 7 (9)
-----------------------------
Increase (decrease) in net assets resulting
from operations (45,057) 217,913
-----------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (162,096) (93,868)
Adviser Shares (13,848) (9,146)
-----------------------------
Distributions to shareholders (175,944) (103,014)
-----------------------------
NET INCREASE IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 6)
Fund Shares 104,368 85,311
Adviser Shares 1,123 (9,718)
-----------------------------
Total net increase in net assets
from capital share transactions 105,491 75,593
-----------------------------
Capital contribution from USAA Transfer
Agency Company - 2
-----------------------------
Net increase (decrease) in net assets (115,510) 190,494
NET ASSETS
Beginning of period 1,443,309 1,252,815
-----------------------------
End of period $1,327,799 $1,443,309
=============================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 13
================================================================================
NOTES TO FINANCIAL STATEMENTS
January 31, 2019 (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 47 separate funds.
The USAA Science & Technology Fund (the Fund) qualifies as a registered
investment company under Accounting Standards Codification Topic 946. The
information presented in this semiannual report pertains only to the Fund, which
is classified as diversified under the 1940 Act. The Fund's investment objective
is to seek long-term capital appreciation.
The Fund consists of two classes of shares: Science & Technology Fund Shares
(Fund Shares) and Science & Technology Fund Adviser Shares (Adviser Shares).
Each class of shares has equal rights to assets and earnings, except that each
class bears certain class-related expenses specific to the particular class.
These expenses include administration and servicing fees, transfer agent fees,
postage, shareholder reporting fees, distribution and service (12b-1) fees, and
certain registration and custodian fees. Expenses not attributable to a specific
class, income, and realized gains or losses on investments are allocated to each
class of shares based on each class' relative net assets. Each class has
exclusive voting rights on matters related solely to that class and separate
voting rights on matters that relate to all classes. The Adviser Shares permit
investors to purchase shares through financial intermediaries, including banks,
broker-dealers, insurance companies, investment advisers, plan sponsors, and
financial professionals that provide various administrative and distribution
services.
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of USAA Asset Management Company (AMCO or Manager), the investment
adviser to the Fund, and USAA Transfer Agency
================================================================================
14 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
Company, d/b/a USAA Shareholder Account Services (SAS), the transfer agent to
the Fund, announced that AMCO and SAS would be acquired by Victory Capital
Holdings, Inc. (Victory), a global investment management firm headquartered in
Cleveland, Ohio (the Transaction). The closing of the Transaction is expected to
be completed during the second quarter of 2019, pending satisfaction of certain
closing conditions and approvals, including certain approvals of the Fund's
Board of Trustees and of the Fund's shareholders at a special shareholder
meeting to be held on April 18, 2019. The Transaction is not expected to result
in any material changes to the Fund's investment objectives and principal
investment strategies. In connection with the Transaction, Victory proposes to
add portfolio managers from one or more investment teams employed by Victory to
serve as additional portfolio managers to manage all or a portion of the Fund
according to each team's own investment process.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Valuation and Liquidity 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.
The Fund utilizes 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 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 exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange or
the 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. Securities traded primarily on foreign securities exchanges or
markets are valued at the last quoted sale price, or the most recently
determined official closing price calculated according to local market
convention, available at the time the Fund is valued. If no last sale or
official closing price is reported or available, the average of the bid
and ask prices
================================================================================
NOTES TO FINANCIAL STATEMENTS | 15
================================================================================
generally is used. Actively traded equity securities listed on a
domestic exchange generally are categorized in Level 1 of the fair value
hierarchy. Certain preferred and equity securities traded in inactive
markets generally are categorized in Level 2 of the fair value
hierarchy.
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 many
cases, events affecting the values of foreign securities that occur
between the time of their last quoted sale or official closing price and
the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not need to be reflected in the value of the Fund's
foreign securities. However, the Manager and the Fund's subadviser(s)
will monitor for events that would materially affect the value of the
Fund's foreign securities. The Fund's subadviser(s) have agreed to
notify the Manager of significant events they identify 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 Committee will consider
such available information that it deems relevant and will determine a
fair value for the affected foreign securities in accordance with
valuation procedures. In addition, information from an external vendor
or other sources may be used to adjust the foreign market closing prices
of foreign equity securities to reflect what the Committee believes to
be the fair value of the securities as of the close of the NYSE. Fair
valuation of affected foreign equity securities may occur frequently
based on an assessment that events which occur on a fairly regular basis
(such as U.S. market movements) are significant. Such securities are
categorized in Level 2 of the fair value hierarchy.
3. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value hierarchy.
================================================================================
16 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
4. Short-term debt securities with original or remaining maturities of
60 days or less may be valued at amortized cost, provided that amortized
cost represents the fair value of such securities.
5. Repurchase agreements are valued at cost.
6. Forward foreign currency contracts are valued on a daily basis using
forward foreign currency exchange rates obtained from an independent
pricing service and are categorized in Level 2 of the fair value
hierarchy.
7. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has been recognized in relation to a security or class of securities,
the securities are valued in good faith by the Committee in accordance
with 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, other pricing services, 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, evaluation of
credit quality, 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 17
================================================================================
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 indexes.
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. INVESTMENTS IN SECURITIES - Securities transactions are accounted for as
of the date the securities are purchased or sold (trade date). Gains or
losses from sales of investment securities are computed on the identified
cost basis. Dividend income, less foreign taxes, if any, is recorded on the
ex-dividend date. If the ex-dividend date has passed, certain dividends from
foreign securities are recorded upon notification. Interest income is
recorded daily on the accrual basis. Premiums and discounts on short-term
securities are amortized on a straight-line basis over the life of the
respective securities.
D. FEDERAL TAXES - The Fund's policy is to comply with the requirements of
the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its taxable
income and net capital gains, if any, to its shareholders. Therefore, no
federal income tax provision is required.
For the six-month period ended January 31, 2019, 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
================================================================================
18 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
positions. On an ongoing basis, the Manager will monitor the Fund's tax
basis to determine if adjustments to this conclusion are necessary. The
statute of limitations on the Fund's tax return filings generally remain
open for the three preceding fiscal reporting year ends and remain subject
to examination by the Internal Revenue Service and state taxing authorities.
E. FOREIGN TAXATION - Foreign income and capital gains on some foreign
securities may be subject to foreign taxes, which are reflected as a
reduction to such income and realized gains. The Fund records a liability
based on unrealized gains to provide for potential foreign taxes payable
upon the sale of these securities. Foreign taxes have been provided for in
accordance with the Fund's understanding of the applicable countries'
prevailing tax rules and rates.
F. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the
exchange rate obtained from an independent pricing service on the
respective dates of such transactions.
2. Market value of securities, other assets, and liabilities at the
exchange rate obtained from an independent pricing service on a daily
basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes
================================================================================
NOTES TO FINANCIAL STATEMENTS | 19
================================================================================
recorded on the Fund's books and the U.S. dollar equivalent of the amounts
received. At the end of the Fund's fiscal year, net realized foreign
currency gains/losses are reclassified from accumulated net realized
gains/losses to accumulated undistributed net investment income on the
Statement of Assets and Liabilities, as such amounts are treated as ordinary
income/loss for federal income tax purposes. Net unrealized foreign currency
exchange gains/losses arise from changes in the value of assets and
liabilities, other than investments in securities, resulting from changes in
the exchange rate.
G. EXPENSES PAID INDIRECTLY - A portion of the brokerage commissions that
the Fund pays may be recaptured as a credit that is tracked and used by the
custodian to directly reduce expenses paid by the Fund. Effective September
30, 2018, the commission recapture program ended. For the six-month period
ended January 31, 2019, brokerage commission recapture credits reduced the
Fund Shares and Adviser Shares by $1,000 and less than $500 respectively.
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, along with other funds of the Trust and USAA ETF Trust
(together, the Trusts), in a joint, short-term, revolving, committed loan
agreement of $500 million with USAA Capital Corporation (CAPCO), an
================================================================================
20 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
affiliate of the Manager. The purpose of the agreement is to provide temporary
or emergency cash needs, including redemption requests that might otherwise
require the untimely disposition of securities. Subject to availability
(including usage of the facility by other funds of the Trusts), the Fund may
borrow from CAPCO an amount up to 5% of the Fund's total assets at an interest
rate based on the London Interbank Offered Rate (LIBOR), plus 100.0 basis
points.
The Trusts are also assessed facility fees by CAPCO in the amount of 14.0 basis
points of the amount of the committed loan agreement. Prior to September 30,
2018, the maximum annual facility fee was 13.0 basis points of the amount of the
committed loan agreement. The facility fees are allocated among the funds of the
Trusts based on their respective average daily net assets for the period.
The Trusts may request an optional increase of the committed loan agreement from
$500 million up to $750 million. If the Trusts increase the committed loan
agreement, the assessed facility fee on the amount of the additional commitment
will be 15.0 basis points.
For the six-month period ended January 31, 2019, the Fund paid CAPCO facility
fees of $6,000, which represents 1.7% of the total fees paid to CAPCO by the
funds of the Trusts. The Fund had no borrowings under this agreement during the
six-month period ended January 31, 2019.
(3) DISTRIBUTIONS
The tax basis of distributions and any accumulated undistributed net investment
income will be determined as of the Fund's tax year-end of July 31, 2019, in
accordance with applicable federal tax law.
Distributions of net investment income and realized gains from security
transactions not offset by capital losses are made annually in the succeeding
fiscal year or as otherwise required to avoid the payment of federal taxes.
At July 31, 2018, the Fund had no capital loss carryforwards, for federal income
tax purposes.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 21
================================================================================
As of January 31, 2019, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as the cost reported
in the financial statements. The net unrealized appreciation/(depreciation) on
investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
FUND APPRECIATION DEPRECIATION (DEPRECIATION)
------------------------------------------------------------------------------------
USAA Science & Technology Fund $388,790,000 $(36,418,000) $352,372,000
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended January 31, 2019, were
$433,552,000 and $523,804,000, respectively.
(5) SECURITIES LENDING
The Fund, through a securities lending agreement with Citibank, N.A.
(Citibank), may lend its securities to qualified financial institutions, such as
certain broker-dealers, to earn additional income, net of income retained by
Citibank. The borrowers are required to secure their loans continuously with
collateral in an amount at least equal to 102% of the fair value of domestic
securities and foreign government securities loaned and 105% of the fair value
of foreign securities and all other securities loaned. Collateral may be cash,
U.S. government securities, or other securities as permitted by SEC guidelines.
Cash collateral may be invested in high-quality short-term investments.
Collateral requirements are determined daily based on the value of the Fund's
securities on loan as of the end of the prior business day. Loans are terminable
upon demand and the borrower must return the loaned securities within the lesser
of one standard settlement period or five business days. Risks relating to
securities-lending transactions include that the borrower may not provide
additional collateral when required or return the securities when due, and that
the value of the short-term investments will be less than the amount of cash
collateral required to be returned to the borrower. The Fund's agreement with
Citibank does not include master netting provisions. Non-cash collateral
received by the Fund may not be sold or re-pledged except to satisfy borrower
================================================================================
22 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
default. Cash collateral is listed in the Fund's Portfolio of Investments and
Financial Statements while non-cash collateral is not included.
At January 31, 2019, the Fund's value of outstanding securities on loan and the
value of collateral are as follows:
VALUE OF SECURITIES
ON LOAN NON-CASH COLLATERAL CASH COLLATERAL
--------------------------------------------------------------------------------
$10,539,000 $- $10,691,000
(6) CAPITAL SHARE TRANSACTIONS
At January 31, 2019, there were an unlimited number of shares of capital stock
at no par value authorized for the Fund.
Capital share transactions for all classes were as follows, in thousands:
SIX-MONTH PERIOD ENDED YEAR ENDED
JANUARY 31, 2019 JULY 31, 2018
----------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------
FUND SHARES:
Shares sold 2,368 $ 62,909 7,012 $ 196,505
Shares issued from
reinvested dividends 6,997 159,454 3,464 91,940
Shares redeemed (4,622) (117,995) (7,270) (203,134)
-------------------------------------------------------
Net increase from capital
share transactions 4,743 $ 104,368 3,206 $ 85,311
=======================================================
ADVISER SHARES:
Shares sold 264 $ 6,791 537 $ 14,724
Shares issued from
reinvested dividends 609 13,484 344 8,928
Shares redeemed (784) (19,152) (1,220) (33,370)
-------------------------------------------------------
Net increase (decrease) from capital
share transactions 89 $ 1,123 (339) $ (9,718)
=======================================================
(7) TRANSACTIONS WITH MANAGER
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,
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
and for directly managing the day-to-day investment of the Fund's assets,
subject to the authority of and supervision by the Board. The Manager 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 all or
a portion of the Fund's assets.
The Manager monitors each subadviser's performance through quantitative and
qualitative analysis and periodically reports to the Board as to whether each
subadviser's agreement should be renewed, terminated, or modified. The Manager
is also responsible for determining the asset allocation for the subadviser(s).
The allocation for each subadviser could range from 0% to 100% of the Fund's
assets, and the Manager could change the allocations without shareholder
approval.
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee is accrued daily and paid monthly at
an annualized rate of 0.75% of the Fund's average daily net assets.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Science & Technology Funds Index. The Lipper Science &
Technology Funds Index tracks the total return performance of funds within the
Lipper Science & Technology Funds category.
For the Fund Shares and Adviser Shares, the performance period 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
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
--------------------------------------------------------------------------------
+/- 100 to 400 +/- 4
+/- 401 to 700 +/- 5
+/- 701 and greater +/- 6
(1)Based on the difference between average annual performance of the relevant
share class of the Fund and its relevant Lipper index, rounded to the nearest
basis point. Average daily net assets of the share class are calculated over
a rolling 36-month period.
================================================================================
24 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
Each class' annual performance adjustment rate is multiplied by the average
daily net assets of each respective class over the entire performance period,
which is then multiplied by a fraction, the numerator of which is the number of
days in the month and the denominator of which is 365 (366 in leap years). The
resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper Science & Technology Funds Index over that period, even
if the class had overall negative returns during the performance period.
For the six-month period ended January 31, 2019, the Fund incurred management
fees, paid or payable to the Manager, of $4,839,000, which included a
performance adjustment for the Fund Shares and Adviser Shares of $(234,000) and
$(26,000), respectively. For the Fund Shares and Adviser Shares, the performance
adjustments were (0.04)% and (0.05)%, respectively.
SUBADVISORY ARRANGEMENT(S) - The Manager entered into an Investment Subadvisory
Agreement with Wellington Management Company LLP (Wellington Management), under
which Wellington Management directs the investment and reinvestment of the
Fund's assets (as allocated from time to time by the Manager). This arrangement
provides for monthly fees that are paid by the Manager.
The Manager (not the Fund) pays Wellington Management a subadvisory fee in the
annual amount of 0.45% of the Fund's average daily net assets for the first $100
million in assets that Wellington Management manages, plus 0.35% of the Fund's
average daily net assets for assets over $100 million that Wellington Management
manages. For the six-month periodended January 31, 2019, the Manager incurred
subadvisory fees with respect to the Fund, paid or payable to Wellington
Management, of $2,427,000.
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 at an annualized rate of 0.15% of average
daily net assets for both the Fund Shares and Adviser Shares. For the six-month
period ended January 31, 2019, the Fund Shares
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
and Adviser Shares incurred administration and servicing fees, paid or payable
to the Manager, of $941,000 and $79,000, respectively.
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 January 31, 2019, the Fund reimbursed the Manager $1,000 for these
compliance and legal services. These expenses are included in the professional
fees on the Fund's Statement of Operations.
EXPENSE LIMITATION - The Manager agreed, through November 30, 2018, to limit the
total annual operating expenses of the Adviser Shares to 1.35% of its average
daily net assets, excluding extraordinary expenses and before reductions of any
expenses paid indirectly, and to reimburse the Adviser Shares for all expenses
in excess of that amount. Effective December 1, 2018, the Manager terminated
this agreement. For the six-month period ended January 31, 2019, the Adviser
Shares did not incur any reimbursable expenses.
TRANSFER AGENT'S FEES - SAS, an affiliate of the Manager, provides transfer
agent services to the Fund Shares and Adviser Shares based on an annual charge
of $23 per shareholder account plus out-of-pocket expenses. SAS pays a portion
of these fees to certain intermediaries for the administration and servicing of
accounts that are held with such intermediaries. For the six-month period ended
January 31, 2019, the Fund Shares and Adviser Shares incurred transfer agent's
fees, paid or payable to SAS, of $757,000 and $69,000, respectively.
DISTRIBUTION AND SERVICE (12b-1) FEES - The Fund has adopted a plan pursuant to
Rule 12b-1 under the 1940 Act with respect to the Adviser Shares. Under the
plan, the Adviser Shares pay fees to USAA Investment Management Company (IMCO),
the distributor, for distribution and shareholder services. IMCO pays all or a
portion of such fees to intermediaries that make the Adviser Shares available
for investment by their customers. The fee is accrued daily and paid monthly at
an annual rate of 0.25% of the Adviser Shares' average daily net assets. Adviser
Shares are offered and sold without imposition of an initial sales charge or a
contingent deferred sales charge.
================================================================================
26 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
For the six-month period ended January 31, 2019, the Adviser Shares incurred
distribution and service (12b-1) fees of $132,000.
UNDERWRITING SERVICES - IMCO provides exclusive underwriting and distribution of
the Fund's shares on a continuing best-efforts basis and receives no fee or
other compensation for these services, but may receive 12b-1 fees as described
above, with respect to Adviser Shares.
(8) TRANSACTIONS WITH AFFILIATES
The Manager is indirectly wholly owned by 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.
(9) UPCOMING REGULATORY MATTERS
In October 2016, the U.S. Securities and Exchange Commission (SEC) issued Final
Rule Release No. 33-10233, INVESTMENT COMPANY LIQUIDITY RISK MANAGEMENT PROGRAMS
(Liquidity Rule). The Liquidity Rule requires funds to establish a liquidity
risk management program and enhances disclosures regarding funds' liquidity. The
requirements to implement a liquidity risk management program and establish a
15% illiquid investment limit became effective December 1, 2018. However, in
February 2018, the SEC issued Release No. IC-33010, INVESTMENT COMPANY LIQUIDITY
RISK MANAGEMENT PROGRAMS; COMMISSION GUIDANCE FOR IN-KIND ETFs, which delayed
certain requirements related to liquidity classification, highly liquid
investment minimums, and board approval of the liquidity risk management
programs to June 1, 2019. The Manager continues to evaluate the impact of this
rule on the Fund's financial statements and various filings.
(10) RECENTLY ADOPTED ACCOUNTING STANDARDS
In August 2018, the SEC adopted amendments to Regulation S-X for investment
companies governing the form and content of financial statements. The
amendments to Regulation S-X took effect on November 5, 2018, and
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
================================================================================
the financial statements have been modified accordingly, for the current and
prior periods.
ASU 2018-13, FAIR VALUE MEASUREMENT
-----------------------------------
In August 2018, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2018-13, Fair Value Measurement (Topic 820).
The amendments in the ASU impact disclosure requirements for fair value
measurement. ASU 2018-13 is effective for fiscal years beginning after December
15, 2019. Early adoption is permitted and can include the entire standard or
certain provisions that exclude or amend disclosures. Management has elected to
early adopt ASU 2018-13 effective with the current reporting period. The
adoption of ASU 2018-13 guidance is limited to changes in the Fund's notes to
financial statement disclosures regarding valuation method, fair value, and
transfers between levels of the fair value hierarchy.
================================================================================
28 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
--------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
--------------------------------------------------------------------------------
Net asset value at
beginning of period $ 29.19 $ 26.89 $ 22.03 $ 23.07 $ 20.96 $ 17.78
--------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment
income (loss) (.05) .00(a) .05 (.01) .27 (.09)(b)
Net realized and
unrealized gain (loss) (1.02) 4.50 5.68 .37 4.35 4.86(b)
--------------------------------------------------------------------------------
Total from investment
operations (1.07) 4.50 5.73 .36 4.62 4.77(b)
--------------------------------------------------------------------------------
Less distributions from:
Net investment income - - - - (.31) (.40)
Realized capital gains (3.64) (2.20) (.87) (1.40) (2.20) (1.19)
--------------------------------------------------------------------------------
Total distributions (3.64) (2.20) (.87) (1.40) (2.51) (1.59)
--------------------------------------------------------------------------------
Net asset value at
end of period $ 24.48 $ 29.19 $ 26.89 $ 22.03 $ 23.07 $ 20.96
================================================================================
Total return (%)* (2.75) 17.55 27.05 1.74 23.45 27.94
Net assets at end
of period (000) $1,229,600 $1,328,080 $1,137,256 $901,629 $853,755 $589,615
Ratios to average
daily net assets:**
Expenses (%)(c),(d) 1.03(e) 1.04 1.14 1.17 1.18 1.24
Net investment
income (loss) (%) (.39)(e) (.31) (.28) (.24) .52 (.44)
Portfolio turnover (%) 32 56 75 83 73 91
* 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 January 31, 2019, average daily net assets
were $1,242,435,000.
(a) Represents less than $0.01 per share.
(b) Calculated using average shares.
(c) Does not include acquired fund fees, if any.
(d) Reflects total annual operating expenses of the Fund Shares before
reductions of any expenses paid indirectly. The Fund Shares' expenses paid
indirectly decreased the expense ratio by less than 0.01%.
(e) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
FINANCIAL HIGHLIGHTS | 29
================================================================================
ADVISER SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
------------------------------------------------------------------------------
Net asset value at
beginning of period $ 28.49 $ 26.36 $ 21.67 $ 22.77 $ 20.78 $ 17.64
------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment
income (loss) (.08) (.08) (.02) (.07) .13(a) (.12)(a)
Net realized and
unrealized gain (loss) (1.01) 4.41 5.58 .37 4.39(a) 4.82(a)
------------------------------------------------------------------------------
Total from investment
operations (1.09) 4.33 5.56 .30 4.52(a) 4.70(a)
------------------------------------------------------------------------------
Less distributions from:
Net investment income - - - - (.33) (.37)
Realized capital gains (3.64) (2.20) (.87) (1.40) (2.20) (1.19)
------------------------------------------------------------------------------
Total distributions (3.64) (2.20) (.87) (1.40) (2.53) (1.56)
------------------------------------------------------------------------------
Net asset value
at end of period $ 23.76 $ 28.49 $ 26.36 $ 21.67 $ 22.77 $ 20.78
==============================================================================
Total return (%)* (2.89) 17.24 26.71 1.48 23.18 27.73
Net assets at end of
period (000) $ 98,199 $115,229 $115,559 $122,430 $122,019 $17,901
Ratios to average
daily net assets:**
Expenses (%)(b),(c) 1.29(d) 1.31(e) 1.41(f) 1.42 1.42 1.41(g)
Expenses, excluding
reimbursements (%)(b),(c) 1.29(d) 1.31 1.42 1.42 1.42 1.41
Net investment
income (loss) (%) (.65)(d) (.57) (.55) (.50) .59 (.61)
Portfolio turnover (%) 32 56 75 83 73 91
* 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 January 31, 2019, average daily net assets
were $104,637,000.
(a) Calculated using average shares.
(b) Does not include acquired fund fees, if any.
(c) Reflects total annual operating expenses of the Adviser Shares before
reductions of any expenses paid indirectly. The Adviser Shares' expenses
paid indirectly decreased the expense ratio by less than 0.01%.
(d) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(e) Prior to December 1, 2017, the Manager voluntarily agreed to limit the
annual expenses of the Adviser Shares to 1.35% of the Adviser Shares'
average daily net assets.
(f) Prior to December 1, 2016, the Manager voluntarily agreed to limit the
annual expenses of the Adviser Shares to 1.40% of the Adviser Shares'
average daily net assets.
(g) Prior to December 1, 2013, the Manager had voluntarily agreed to limit the
annual expenses of the Adviser Shares to 1.65% of the Adviser Shares'
average daily net assets.
================================================================================
30 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
EXPENSE EXAMPLE
January 31, 2019 (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, distribution and service
(12b-1) 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 August 1, 2018, through
January 31, 2019.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table 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 for your share
class in the "actual" 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 line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class and an assumed rate of return of
5% per year before expenses, which is not the Fund's actual
================================================================================
EXPENSE EXAMPLE | 31
================================================================================
return. The hypothetical account values and expenses may not be used to estimate
the actual ending account balance or expenses you paid for the period. You may
use this information to compare the ongoing costs of investing in the Fund and
other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled "hypothetical"
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 AUGUST 1, 2018 -
AUGUST 1, 2018 JANUARY 31, 2019 JANUARY 31, 2019
--------------------------------------------------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $ 972.50 $5.12
Hypothetical
(5% return before expenses) 1,000.00 1,020.01 5.24
ADVISER SHARES
Actual 1,000.00 971.10 6.41
Hypothetical
(5% return before expenses) 1,000.00 1,018.70 6.56
*Expenses are equal to the annualized expense ratio of 1.03% for Fund Shares and
1.29% for Adviser Shares, which are net of any reimbursements and expenses paid
indirectly, multiplied by the average account value over the period, multiplied
by 184 days/365 days (to reflect the one-half-year period). The Fund's actual
ending account values are based on its actual total returns of (2.75)% for Fund
Shares and (2.89)% for Adviser Shares for the six-month period of August 1,
2018, through January 31, 2019.
================================================================================
32 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
ADVISORY AGREEMENT(S)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with Victory Capital
Holdings, Inc. ("Victory Holdings") pursuant to which Victory Holdings would
acquire all of the outstanding stock of AMCO and USAA Transfer Agency Company
d/b/a USAA Shareholder Account Services ("USAA Transfer Agent") (the
"Transaction"). The Independent Trustees were advised that the Transaction, if
completed, would constitute
================================================================================
ADVISORY AGREEMENT(S) | 33
================================================================================
an "assignment" (as that term is defined in Section 2(a)(4) of the 1940 Act) and
result in the automatic termination of the Existing Management Agreements
("Change of Control Event"). The Independent Trustees also were advised that it
was proposed that Victory Capital, a subsidiary of Victory Holdings, would serve
as the investment adviser to each Fund after the closing of the Transaction
("Post-Transaction") and that the Board would be asked to consider approval of
the terms and conditions of the New Advisory Agreement with Victory Capital and
thereafter to submit the New Advisory Agreement to each Fund's shareholders for
approval. Because the Change of Control Event also would result in the
termination of each existing subadvisory agreement between AMCO and the
subadvisers to the Funds ("Existing Subadvisory Agreements"), the Independent
Trustees were advised that the Board would also be asked to approve the New
Subadvisory Agreements.
In anticipation of the Transaction, the Trustees met at a series of subsequent
in-person meetings on November 27-28, 2018, January 7-8, 2019, and January
14-15, 2019, which included meetings of the full Board and separate meetings of
the Independent Trustees for the purposes of considering, among other things:
whether it would be in the best interests of each Fund and its respective
shareholders to approve the New Agreements; and the anticipated impacts of the
Transaction on the Funds and their shareholders (each, a "Meeting"). During each
of these Meetings, the Board sought additional and clarifying information as it
deemed necessary or appropriate. In this connection, the Independent Trustees
worked with their independent legal counsel to prepare formal due diligence
requests (the "Diligence Requests") that were submitted to Victory Capital,
Victory Capital Advisers, Inc. ("VCA"), and the subadvisers. The Diligence
Requests sought information relevant to the Board's consideration of the New
Advisory Agreement, the New Subadvisory Agreements, distribution arrangements,
and other anticipated impacts of the Transaction on the Funds and their
shareholders. Victory Capital, VCA, and the subadvisers provided documents and
information in response to the Diligence Requests (the "Response Materials").
Following their review of the Response Materials, the Independent Trustees
submitted a supplemental due diligence request for additional and clarifying
information (the "Supplemental Diligence Request") to Victory Capital and VCA.
Victory
================================================================================
34 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
Capital and VCA provided further information in response to the Supplemental
Diligence Request, which the Board reviewed. Senior management representatives
of Victory Capital and/or AMCO participated in a portion of each Meeting and
addressed various questions raised by the Board. Throughout the process, the
Independent Trustees were assisted by their independent legal counsel and
counsel to the Funds, who advised them on, among other things, their duties and
obligations relating to their consideration of the New Agreements.
The Board's evaluation of the New Agreements reflected the information provided
specifically in connection with its review of the New Agreements, as well as,
where relevant, information that was previously furnished to the Board in
connection with the most recent renewal of the Existing Management Agreements
and Existing Subadvisory Agreements at an in-person meeting of the Board on
April 18, 2018 (the "2018 15(c) Meeting") and at other subsequent Board meetings
in 2018. The Board's evaluation of the New Agreements also reflected the
knowledge gained as Board members of the Funds with respect to services provided
by AMCO, its affiliates, and each subadviser to the Funds.
The Board's approvals and recommendations were based on its determination,
within its business judgment, that it would be in the best interests of each
Fund and its respective shareholders, for Victory Capital and, as applicable,
the subadvisers, to provide investment advisory, investment subadvisory, and
related services to the Funds, following the closing of the Transaction.
FACTORS CONSIDERED IN APPROVING THE NEW ADVISORY AGREEMENT
In connection with the Board's consideration of the New Advisory Agreement,
Victory Capital and AMCO advised the Board about a variety of matters, including
the following:
o The nature, extent, and quality of the services to be provided to the
Funds by Victory Capital Post-Transaction are expected to be of at least
the same level as the services currently provided to the Funds by AMCO.
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ADVISORY AGREEMENT(S) | 35
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o Victory Capital's stated commitment to maintaining and enhancing the
USAA member/USAA Fund shareholder experience, including creating a
dedicated USAA Fund sales and client service call center that will
provide ongoing client service and advice to existing and new USAA
members.
o Victory Capital proposes to: (1) replace the underlying indexes for
the USAA Extended Market Index Fund and USAA S&P 500 Index Fund with
indexes designed to provide shareholders with comparable exposure and
investment outcomes; (2) change the USAA Extended Market Index Fund's
and USAA S&P 500 Index Fund's investment objectives and strategies in
light of the changes to their underlying indexes; and (3) change the
name of the USAA S&P 500 Index Fund to the USAA 500 Index Fund.
o Victory Capital does not propose changes to the investment
objective(s) of any other Funds. Although the investment processes used
by Victory Capital's portfolio managers may differ from those used by
AMCO's portfolio managers or, if applicable, any subadviser's portfolio
managers, such differences are not currently expected to result in
changes to the principal investment strategies or principal investment
risks of the Funds.
o The New Advisory Agreement does not change any Fund's advisory fee
rate or the computation method for calculating such fees (except that
Victory Capital, subject to Board approval, may in the future use a
single designated share class to calculate the performance adjustment).
For at least two years after the Transaction closes, Victory Capital has
agreed to waive fees and/or reimburse expenses so that each Fund's
annual expense ratio (excluding certain customary items) does not exceed
the levels reflected in each Fund's most recent audited financial
statements at the time the Transaction closes (or the levels of AMCO's
then-current expense caps, if applicable), excluding the impact of any
performance adjustment to the Fund's advisory fee.
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36 | USAA SCIENCE & TECHNOLOGY FUND
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o The portfolio managers at AMCO that manage the Fixed Income Funds(1) as
well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be advised
by Victory Capital through its Victory Solutions platform, Victory
Capital proposes that the same subadvisers be retained Post-Transaction,
although Victory Capital may change the allocation to a particular
subadviser Post-Transaction. No changes are expected to the portfolio
managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's
(1)The Fixed Income Funds include the following Funds: California Bond Fund,
Government Securities Fund, High Income Fund, Income Fund, Intermediate-Term
Bond Fund, Tax Exempt Intermediate-Term Fund, Tax Exempt Long-Term Fund, New
York Bond Fund, Short-Term Bond Fund, Tax Exempt Short- Term Fund, Ultra
Short-Term Bond Fund, Virginia Bond Fund, Money Market Fund, Tax Exempt Money
Market Fund and Treasury Money Market Trust.
(2)The Cornerstone Funds include the following Funds: Cornerstone Aggressive
Fund, Cornerstone Conservative Fund, Cornerstone Equity Fund, Cornerstone
Moderate Fund, Cornerstone Moderately Aggressive Fund, and Cornerstone
Moderately Conservative Fund.
(3)The Target Retirement Funds include the following Funds: Target Retirement
2020 Fund, Target Retirement 2030 Fund, Target Retirement 2040 Fund, Target
Retirement 2050 Fund, Target Retirement 2060 Fund, and Target Retirement
Income Fund.
================================================================================
ADVISORY AGREEMENT(S) | 37
================================================================================
businesses to Victory Capital. Victory Capital and USAA expect to enter
into a transition services agreement under which USAA will continue to
provide Victory Capital with certain services that are currently
provided by USAA to AMCO and the USAA Transfer Agent for a specified
period of time after the closing of the Transaction to assist Victory
Capital in transitioning the USAA member distribution channel and member
support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital
================================================================================
38 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
is capable of providing the same level of investment management services
currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund, Growth
& Income Fund, Income Stock Fund, Global Equity Income Fund, and Precious
Metals and Minerals Fund.
================================================================================
ADVISORY AGREEMENT(S) | 39
================================================================================
The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored and managed by
Victory Capital ("Victory Funds") with similar investment
================================================================================
40 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
objectives and strategies managed by the portfolio managers who would manage the
Funds. Based on information presented to the Board at the Meetings and its
discussions with Victory Capital, the Board concluded that Victory Capital is
capable of generating a level of long-term investment performance that is
appropriate in light of each Fund's investment objectives, strategies and
restrictions.
FEES TO BE PAID TO VICTORY CAPITAL AND EXPENSES OF THE FUNDS - The Board
considered that it had reviewed each Fund's existing advisory fee rate and
computation method for calculating such fees at the 2018 15(c) Meeting. The
Board considered that the New Advisory Agreement does not change any Fund's
advisory fee rate or the computation method for calculating such fees, except
that Victory Capital, subject to Board approval, may in the future use a single
designated share class to calculate the performance adjustment and apply the
resulting performance adjustment across each other class of shares of the Fund.
The Board considered that the use of a single designated class to calculate the
performance adjustment for each other class of shares of the Fund could mean
that shareholders of a class other than the class used to measure the
performance adjustment may pay a performance adjustment that is higher or lower
than if the adjustment were calculated on a class by class basis, primarily due
to the impact of differences in the fees and expenses between share classes on
performance. The Board considered that the New Advisory Agreement stipulates
that the period for measuring performance for calculating a Fund's performance
adjustment begins on the date that Victory Capital begins managing the Fund;
therefore, no performance adjustments will be made for the first twelve months
of the New Advisory Agreement, consistent with applicable regulations. The Board
also considered Victory Capital's contractual commitment under the expense
limitation agreement ("ELA") to waive fees and/or reimburse expenses for at
least two years after the closing of the Transaction, so that each Fund's annual
expense ratio (excluding acquired fund fees and expenses, any performance
adjustment to a Fund's advisory fee, interest, taxes, brokerage commissions,
other expenditures which are capitalized in accordance with generally accepted
accounting principles, and other extraordinary expenses not incurred in the
ordinary course of such Fund's business) does not exceed the levels reflected in
each Fund's most recent audited financial statements at the time the
================================================================================
ADVISORY AGREEMENT(S) | 41
================================================================================
Transaction closes (or the levels of AMCO's then-current expense caps, if
applicable), excluding the impact of any performance adjustment to a Fund's
advisory fee. The Board considered that the ELA permits Victory Capital to
recoup advisory fees waived and expenses reimbursed for up to three years after
the fiscal year in which the waiver or reimbursement took place, subject to the
lesser of any operating expense limitation in effect at the time of: (1) the
original waiver or expense reimbursement; or (2) recoupment. The Board also
considered that Victory Capital and AMCO had represented to the Board that they
will use their best efforts to ensure that they and their respective affiliates
do not take any action that imposes an "unfair burden" on the Funds as a result
of the Transaction or as a result of any express or implied terms, conditions or
understandings applicable to the Change of Control Event, for so long as the
requirements of Section 15(f) of the 1940 Act apply. The Board also considered
a comparison of the proposed advisory fees to be paid by each Fund to the
advisory fees paid by funds and other accounts managed by Victory Capital deemed
to be comparable to the Fund in terms of investment objectives and strategies.
The Board considered that, with few exceptions, mostly involving weighted
average fees for separate accounts, the advisory fees to be paid by the Funds
were lower than the fees paid by these other funds and accounts. The Board
concluded that the retention of Victory Capital was unlikely to impose an unfair
burden on the Funds because, after the Transaction, none of AMCO, Victory
Capital, VCA, or any of their respective affiliates, would be entitled to
receive any compensation directly or indirectly (i) from any person in
connection with the purchase or sale of securities or other property to, from,
or on behalf of the Funds (other than ordinary fees for bona fide principal
underwriting services), or (ii) from the Funds or their shareholders for other
than bona fide investment advisory or other services. Based on its review, the
Board determined, with respect to each Fund, that Victory Capital's advisory fee
is fair and reasonable.
THE EXTENT TO WHICH VICTORY CAPITAL MAY REALIZE ECONOMIES OF SCALE AS THE FUNDS
GROW LARGER AND WHETHER FEE LEVELS REFLECT THESE ECONOMIES OF SCALE FOR THE
BENEFIT OF FUND SHAREHOLDERS - The Board considered potential or anticipated
economies of scale in relation to the services Victory Capital would provide to
each Fund. The Board considered that the New Advisory Agreement includes the
same advisory fee breakpoints for the same Funds as
================================================================================
42 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
the Existing Advisory Agreements. The Board also considered that Victory Capital
has contractually agreed to cap the Funds' annual operating expense ratios,
pursuant to the ELA, which will remain in effect for at least two years from the
closing of the Transaction, and may be extended. The Board also considered
Victory Capital's representation that the significant increase in its assets
under management Post-Transaction may reasonably be expected to enable the new
combined firm to reach greater economies of scale in a shorter time frame. The
Board noted that it will have the opportunity to periodically re-examine whether
a Fund or the Trust has achieved economies of scale, and the appropriateness of
investment advisory and administrative fees payable to Victory Capital, in the
future.
THE PROFITS TO BE REALIZED BY VICTORY CAPITAL AND ITS AFFILIATES FROM THEIR
RELATIONSHIP WITH THE TRUST - The Board considered the benefits Victory Capital
and its affiliates may derive from their relationship with the Funds, including
compensation to be paid to Victory Capital for the provision of certain
administrative, fund accounting and shareholder services to the Funds and
compensation to be paid to USAA Transfer Agent for the provision of transfer
agency services to the Funds. The Board considered the significant investments
Victory Capital expected to make to support and grow the USAA member channel and
the costs to integrate the USAA Fund business into Victory Capital. The Board
also considered Victory Capital's profitability report presented to the board of
trustees of the Victory Funds in connection with their most recent 15(c)
process. The Board considered Victory Capital's representation that the fully
integrated USAA Fund business, including investments to support ongoing growth,
was expected to have an overall marginally positive impact on Victory Capital's
overall financial profitability. The Board noted the difficulty of accurately
projecting profitability under the current circumstance and noted that it would
have the opportunity to give further consideration to Victory Capital's
profitability with respect to the Funds at the end of the initial two-year term
of the New Advisory Agreement.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
================================================================================
ADVISORY AGREEMENT(S) | 43
================================================================================
deliver investment products and services to USAA's direct member-based channel.
The Board also considered that Victory Capital may derive reputational and other
benefits from its ability to use "USAA" and related names in connection with
operating and marketing the Funds. The Board considered that the Transaction, if
completed, would significantly increase Victory Capital's assets under
management and expand Victory Capital's investment capabilities. This increased
size and diversification could facilitate Victory Capital's continued investment
in its business and products, which Victory Capital would be able to leverage
across a broader base of assets. Victory Capital also would be able to use
trading commission credits from the Funds' transactions in securities to
"purchase" third party research and execution services to support its investment
process. Based on its review, the Board determined that any "fall-out" benefits
and other types of benefits that may accrue to Victory Capital are fair and
reasonable.
CONCLUSIONS - Based on the foregoing and other relevant considerations, at the
Meeting of the Board held on January 15, 2019, the Board, including a majority
of the Independent Trustees, acting within its business judgment, (1) concluded
that the terms of the New Advisory Agreement are fair and reasonable and that
approval of the New Advisory Agreement is in the best interests of each Fund and
its respective shareholders, (2) voted to approve the New Advisory Agreement,
and (3) voted to recommend approval of the New Advisory Agreement by
shareholders of the Funds. The Board evaluated all information available to it
on a Fund-by-Fund basis and its determinations were made separately in respect
of each Fund. The Board noted some factors may have been more or less important
with respect to any particular Fund and that no one factor was determinative of
its decisions which, instead, were premised upon the totality of factors
considered. In this connection, the Board also noted that different Board
members likely placed emphasis on different factors in reaching their individual
conclusions to vote in favor of the New Advisory Agreement and to recommend
approval of the New Advisory Agreement by shareholders of the Funds.
FACTORS CONSIDERED IN APPROVING THE NEW SUBADVISORY AGREEMENTS
In approving the New Subadvisory Agreements with each of Barrow, Hanley,
Mewhinney & Strauss, LLC, Brandes Investment Partners, L.P., ClariVest Asset
================================================================================
44 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
Management LLC, Epoch Investment Partners, Inc., Granahan Investment Management,
Inc., Lazard Asset Management LLC, Loomis, Sayles & Company LP, Massachusetts
Financial Services Company, Northern Trust Investments, Inc., QS Investors, LLC,
The Renaissance Group LLP and Wellington Management Company LLP (each, a
"Subadviser" and together the "Subadvisers") with respect to the applicable
Funds, the Board considered various factors, among them: (i) the nature, extent,
and quality of services to be provided to the applicable Funds by the
Subadvisers; (ii) each Subadviser's compensation and any other benefits derived
from the subadvisory relationship; (iii) comparisons, to the extent applicable,
of subadvisory fees and performance to comparable investment companies; and (iv)
the terms of each New Subadvisory Agreement. The Board's evaluation of the New
Subadvisory Agreements reflected the information provided specifically in
connection with its review of the New Subadvisory Agreements, as well as, where
relevant, information that was previously furnished to the Board in connection
with the most recent renewal of the Existing Subadvisory Agreements at the 2018
15(c) meeting and at other subsequent Board meetings in 2018. A summary of the
Board's analysis of these factors is set forth below. After full consideration
of a variety of factors, the Board, including the Independent Trustees, voted to
approve each New Subadvisory Agreement. In approving each New Subadvisory
Agreement, the Board did not identify any single factor as controlling, and each
Trustee may have attributed different weights to various factors. The
Independent Trustees reviewed the proposed approval of the New Subadvisory
Agreements in private sessions with their independent legal counsel at which no
representatives of Victory Capital or AMCO were present.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY THE
SUBADVISERS - The Board considered information provided to them regarding the
services to be provided by each Subadviser, including information presented
periodically throughout the previous year. The Board considered each
Subadviser's level of knowledge and investment style. The Board reviewed the
experience and credentials of the investment personnel who are responsible for
managing the investment of portfolio securities with respect to each applicable
Fund and each Subadviser's level of staffing. The Board also noted each
Subadviser's brokerage practices. The Board also considered
================================================================================
ADVISORY AGREEMENT(S) | 45
================================================================================
each Subadviser's regulatory and compliance history. The Board also took into
account each Subadviser's risk management processes. The Board noted that AMCO's
monitoring processes of each Subadviser include, and Victory Capital's expected
monitoring processes of each Subadviser would include, among others: (i) regular
telephonic meetings to discuss, among other matters, investment strategies and
to review portfolio performance; (ii) monthly portfolio compliance checklists
and quarterly compliance certifications to the Board; and (iii) due diligence
visits to each Subadviser. The Board also considered that the terms and
conditions of the New Subadvisory Agreements are substantially similar to the
terms and conditions of the Existing Subadvisory Agreements.
SUBADVISER COMPENSATION - The Board took into account the financial condition of
each Subadviser. In considering the cost of services to be provided by each
Subadviser and the profitability to that Subadviser of its relationship with the
applicable Fund, the Board noted that the fees under the New Subadvisory
Agreements will be paid by Victory Capital. The Board also relied on the ability
of AMCO to negotiate each Existing Subadvisory Agreement and the fees thereunder
at arm's length. The Board considered that the fee rate to be payable under each
New Subadvisory Agreement were proposed to be identical to the fee rate
currently payable under each corresponding Existing Subadvisory Agreement. For
the above reasons, the Board determined that the expected profitability of each
Subadviser from its relationship with the applicable Fund was not a material
factor in its deliberations with respect to the consideration of the approval of
each New Subadvisory Agreement. For similar reasons, the Board concluded that
the potential for economies of scale in each Subadviser's management of the
applicable Fund was not a material factor in considering each New Subadvisory
Agreement, although the Board noted that certain New Subadvisory Agreements
contain breakpoints in their fee schedules.
SUBADVISORY FEES AND FUND PERFORMANCE - The Board previously compared the
subadvisory fees for each applicable Fund with the fees that each Subadviser
charges comparable clients, as applicable. The Board considered that each
applicable Fund will pay a management fee to Victory Capital and that, in turn,
Victory Capital will pay a subadvisory fee to each Subadviser.
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46 | USAA SCIENCE & TECHNOLOGY FUND
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At the 2018 15(c) meeting, the Board considered, among other data, each
applicable Fund's performance over shorter and longer term periods, as compared
to each Fund's respective peer group and noted that the Board reviews at its
regularly scheduled meetings information about each Fund's performance results.
The Board considered Victory Capital's capabilities with respect to monitoring
the performance, investment style and risk-adjusted performance of each
Subadviser. The Board also noted each Subadviser's performance record for
similar accounts, as applicable.
CONCLUSIONS - The Board reached the following conclusions regarding each New
Subadvisory Agreement, among others: (i) each Subadviser is qualified to manage
the applicable Fund's assets in accordance with its investment objective and
policies; (ii) each Subadviser maintains an appropriate compliance program;
(iii) the performance of each applicable Fund is reasonable in relation to the
performance of funds with similar investment objectives and to relevant indices
in view of the Fund's investment approach and Victory Capital is expected to
appropriately monitor each Fund's performance; and (iv) each Fund's advisory
expenses are reasonable in relation to those of similar funds and to the
services to be provided by Victory Capital and each Subadviser. Based on its
conclusions, the Board determined that the approval of each New Subadvisory
Agreement with respect to each applicable Fund would be in the best interests of
the Fund and its shareholders.
================================================================================
ADVISORY AGREEMENT(S) | 47
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TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Richard Y. Newton III
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN, State Street Bank and Trust Company
ACCOUNTING AGENT, AND P.O. Box 1713
SUB-ADMINISTRATOR Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
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) or (210) 531-8722;
(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 monthly portfolio holdings with the SEC
for the first and third quarters of each fiscal year as an exhibit to its
reports on Form N-PORT (beginning with filings after March 31, 2019).
Previously, the Fund made its complete schedule of portfolio holdings available
after the first and third fiscal quarters in regulatory filings on Form N-Q. The
Fund's Forms N-CSR, N-PORT, and N-Q are available at no charge (i) by calling
(800) 531-USAA (8722) or (210) 531-8722; (ii) at USAA.COM; and (iii) on the
SEC's website at HTTP://WWW.SEC.GOV.
================================================================================
--------------
USAA PRSRT STD
9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
--------------
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31704-0319 (C)2019, USAA. All rights reserved.
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA VALUE FUND]
================================================================================
SEMIANNUAL REPORT
USAA VALUE FUND
FUND SHARES (UVALX) o INSTITUTIONAL SHARES (UIVAX)
o ADVISER SHARES (UAVAX)
JANUARY 31, 2019
================================================================================
Beginning on January 1, 2021, as permitted by regulations adopted by the
Securities and Exchange Commission, paper copies of the Fund's shareholder
reports like this one will no longer be sent by mail, unless you specifically
request paper copies of the reports from the Fund or from your financial
intermediary, such as a broker-dealer or bank. Instead, the reports will be made
available on usaa.com, and you will be notified by mail each time a report is
posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will
not be affected by this change and you need not take any action. You may elect
to receive shareholder reports and other communications from the Fund or your
financial intermediary electronically by notifying your financial intermediary
directly, or if you are a direct investor, by calling (800) 531-USAA (8722) or
logging on to usaa.com.
You may elect to receive all future reports in paper free of charge. You can
inform the Fund or your financial intermediary that you wish to continue
receiving paper copies of your shareholder reports by notifying your financial
intermediary directly, or if you are a direct investor, by calling (800)
531-USAA (8722) or logging on to usaa.com. Your election to receive reports in
paper will apply to all funds held with the USAA family of funds or your
financial intermediary.
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
INVESTMENT OVERVIEW 1
FINANCIAL INFORMATION
Portfolio of Investments 2
Notes to Portfolio of Investments 9
Financial Statements 11
Notes to Financial Statements 15
Financial Highlights 30
EXPENSE EXAMPLE 33
ADVISORY AGREEMENT(S) 35
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.
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 tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. 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.
(C)2019, USAA. All rights reserved.
================================================================================
================================================================================
INVESTMENT OVERVIEW
--------------------------------------------------------------------------------
o TOP 10 HOLDINGS* - 1/31/19 o
(% of Net Assets)
Anthem, Inc. .............................................................. 2.8%
Medtronic plc ............................................................. 2.2%
Johnson Controls International plc ........................................ 2.1%
Pfizer, Inc. .............................................................. 2.1%
Oracle Corp. .............................................................. 2.0%
Wells Fargo & Co. ......................................................... 1.9%
J.P. Morgan Chase & Co. ................................................... 1.7%
BP plc ADR ................................................................ 1.7%
ConocoPhillips ............................................................ 1.7%
Dollar General Corp. ...................................................... 1.7%
o SECTOR ALLOCATION* - 1/31/19 o
(% of Net Assets)
[PIE CHART OF SECTOR ALLOCATION]
FINANCIAL 21.5%
CONSUMER, NON-CYCLICAL 18.7%
INDUSTRIAL 14.7%
ENERGY 11.6%
TECHNOLOGY 11.4%
CONSUMER, CYCLICAL 11.3%
BASIC MATERIALS 5.3%
UTILITIES 3.0%
COMMUNICATIONS 1.9%
[END CHART]
*Does not include money market instruments and short-term investments purchased
with cash collateral from securities loaned.
Percentages are of the net assets of the Fund and may not equal 100%.
Refer to the Portfolio of Investments for a complete list of securities.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
================================================================================
INVESTMENT OVERVIEW | 1
================================================================================
PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (99.4%)
COMMON STOCKS (99.4%)
BASIC MATERIALS (5.3%)
----------------------
CHEMICALS (4.3%)
112,769 Air Products & Chemicals, Inc. $ 18,538
246,510 DowDuPont, Inc. 13,265
113,476 Linde plc 18,498
144,656 PolyOne Corp. 4,682
----------
54,983
----------
IRON/STEEL (0.7%)
324,199 Allegheny Technologies, Inc.(a) 8,880
----------
MINING (0.3%)
542,408 Ferroglobe plc 1,242
65,069 Materion Corp. 3,054
----------
4,296
----------
Total Basic Materials 68,159
----------
COMMUNICATIONS (1.9%)
---------------------
MEDIA (1.5%)
525,833 Comcast Corp. "A" 19,230
----------
TELECOMMUNICATIONS (0.4%)
132,115 Ciena Corp.(a) 5,032
----------
Total Communications 24,262
----------
CONSUMER, CYCLICAL (11.3%)
--------------------------
AUTO PARTS & EQUIPMENT (0.6%)
533,396 American Axle & Manufacturing Holdings, Inc.(a) 7,884
----------
FOOD SERVICE (0.9%)
339,297 Aramark 11,180
----------
HOME BUILDERS (0.8%)
217,344 Lennar Corp. "A" 10,306
----------
HOME FURNISHINGS (0.6%)
53,384 Whirlpool Corp. 7,101
----------
================================================================================
2 | USAA VALUE FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
LEISURE TIME (2.8%)
334,092 Norwegian Cruise Line Holdings Ltd.(a) $ 17,183
159,836 Royal Caribbean Cruises Ltd. 19,188
----------
36,371
----------
LODGING (0.9%)
383,341 MGM Resorts International 11,285
----------
RETAIL (4.2%)
101,397 Advance Auto Parts, Inc. 16,142
183,834 Dollar General Corp. 21,220
175,185 Lowe's Companies, Inc. 16,846
----------
54,208
----------
STORAGE/WAREHOUSING (0.5%)
153,722 Mobile Mini, Inc. 5,809
----------
Total Consumer, Cyclical 144,144
----------
CONSUMER, NON-CYCLICAL (18.7%)
------------------------------
AGRICULTURE (1.0%)
93,915 Altria Group, Inc. 4,635
112,190 Philip Morris International, Inc. 8,607
----------
13,242
----------
BEVERAGES (1.3%)
341,208 Coca-Cola European Partners plc 16,235
----------
COMMERCIAL SERVICES (2.0%)
38,007 AMERCO 13,783
452,284 Nielsen Holdings plc 11,615
----------
25,398
----------
FOOD (0.7%)
316,274 Darling Ingredients, Inc.(a) 6,727
633,406 SunOpta, Inc.(a) 2,635
----------
9,362
----------
HEALTHCARE PRODUCTS (2.2%)
222,246 Invacare Corp. 1,142
309,268 Medtronic plc 27,336
----------
28,478
----------
HEALTHCARE-SERVICES (4.4%)
118,947 Anthem, Inc. 36,041
76,568 Encompass Health Corp. 5,118
52,409 UnitedHealth Group, Inc. 14,161
----------
55,320
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 3
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
PHARMACEUTICALS (7.1%)
82,378 Cigna Corp. $ 16,460
267,112 CVS Health Corp. 17,509
142,594 Merck & Co., Inc. 10,613
634,119 Pfizer, Inc. 26,918
267,585 Sanofi ADR 11,627
366,286 Teva Pharmaceutical Industries Ltd. ADR(a) 7,271
----------
90,398
----------
Total Consumer, Non-cyclical 238,433
----------
ENERGY (11.6%)
--------------
OIL & GAS (11.6%)
519,839 BP plc ADR 21,376
540,360 Callon Petroleum Co.(a) 4,399
152,464 Chevron Corp. 17,480
315,532 ConocoPhillips 21,358
322,009 Hess Corp. 17,388
1,604,276 Kosmos Energy Ltd.(a) 8,230
489,463 Parsley Energy, Inc. "A"(a) 9,094
213,376 Phillips 66 20,358
168,542 Valero Energy Corp. 14,801
522,352 Vermilion Energy, Inc. 12,824
----------
Total Energy 147,308
----------
FINANCIAL (21.5%)
-----------------
BANKS (9.8%)
368,252 Bank of New York Mellon Corp. 19,267
200,660 Cadence BanCorp 3,762
214,645 J.P. Morgan Chase & Co. 22,216
612,900 KeyCorp 10,094
83,661 Prosperity Bancshares, Inc. 5,952
224,125 State Street Corp. 15,890
115,447 Texas Capital Bancshares, Inc.(a) 6,727
235,831 U.S. Bancorp. 12,065
79,032 UMB Financial Corp. 5,087
492,632 Wells Fargo & Co. 24,095
----------
125,155
----------
DIVERSIFIED FINANCIAL SERVICES (4.9%)
194,603 American Express Co. 19,986
213,571 E*TRADE Financial Corp. 9,965
618,624 Jefferies Financial Group, Inc. 12,873
490,862 Navient Corp. 5,596
================================================================================
4 | USAA VALUE FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
127,584 PRA Group, Inc.(a) $ 3,765
966,443 SLM Corp.(a) 10,351
----------
62,536
----------
INSURANCE (3.5%)
265,374 American International Group, Inc. 11,472
176,000 Fidelity National Financial, Inc. 6,364
535,355 MGIC Investment Corp.(a) 6,681
117,885 Willis Towers Watson plc 19,191
----------
43,708
----------
REITS (2.3%)
275,395 Liberty Property Trust 12,982
529,189 MGM Growth Properties, LLC "A" 16,405
----------
29,387
----------
SAVINGS & LOANS (1.0%)
1,096,877 New York Community Bancorp, Inc. 12,746
----------
Total Financial 273,532
----------
INDUSTRIAL (14.7%)
------------------
AEROSPACE/DEFENSE (2.8%)
67,255 Barnes Group, Inc. 3,973
144,531 Spirit AeroSystems Holdings, Inc. "A" 12,054
168,388 United Technologies Corp. 19,882
----------
35,909
----------
BUILDING MATERIALS (4.0%)
146,200 Gibraltar Industries, Inc.(a) 5,212
809,211 Johnson Controls International plc 27,327
221,679 Owens Corning 11,614
108,659 Simpson Manufacturing Co., Inc. 6,669
----------
50,822
----------
ELECTRICAL COMPONENTS & EQUIPMENT (0.3%)
80,039 Encore Wire Corp. 4,314
----------
ELECTRONICS (1.3%)
95,138 FARO Technologies, Inc.(a) 4,045
177,778 II-VI, Inc.(a) 6,749
77,846 Park Electrochemical Corp. 1,773
220,526 Vishay Intertechnology, Inc. 4,300
----------
16,867
----------
ENGINEERING & CONSTRUCTION (0.3%)
201,245 Primoris Services Corp. 4,015
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 5
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
HAND/MACHINE TOOLS (1.4%)
137,886 Stanley Black & Decker, Inc. $ 17,434
----------
MACHINERY-CONSTRUCTION & MINING (0.5%)
190,921 Terex Corp. 5,863
----------
MACHINERY-DIVERSIFIED (0.9%)
161,938 Wabtec Corp.(b) 11,200
----------
MISCELLANEOUS MANUFACTURERS (2.7%)
234,601 Actuant Corp. "A" 5,370
180,519 Colfax Corp.(a) 4,468
252,032 Federal Signal Corp. 5,540
1,891,376 General Electric Co. 19,216
----------
34,594
----------
TRANSPORTATION (0.5%)
264,066 Air Transport Services Group, Inc.(a) 6,272
----------
Total Industrial 187,290
----------
TECHNOLOGY (11.4%)
------------------
COMPUTERS (1.0%)
590,093 Hewlett Packard Enterprise Co. 9,199
78,883 MTS Systems Corp. 3,949
----------
13,148
----------
SEMICONDUCTORS (7.0%)
68,809 Broadcom, Inc. 18,458
242,778 Brooks Automation, Inc. 7,558
222,104 Cohu, Inc. 3,896
204,723 Diodes, Inc.(a) 6,885
579,675 Marvell Technology Group Ltd. 10,741
123,784 Microchip Technology, Inc.(b) 9,948
344,069 Photronics, Inc.(a) 3,678
229,724 QUALCOMM, Inc. 11,376
164,329 Texas Instruments, Inc. 16,545
----------
89,085
----------
SOFTWARE (3.4%)
167,215 Microsoft Corp. 17,462
511,055 Oracle Corp. 25,671
----------
43,133
----------
Total Technology 145,366
----------
================================================================================
6 | USAA VALUE FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
UTILITIES (3.0%)
----------------
ELECTRIC (3.0%)
254,983 Dominion Energy, Inc. $ 17,910
413,096 Exelon Corp. 19,729
----------
Total Utilities 37,639
----------
Total Common Stocks (cost: $1,030,934) 1,266,133
----------
RIGHTS (0.0%)
BASIC MATERIALS (0.0%)
----------------------
MINING (0.0%)
545,600 Ferroglobe Representation & Warranty Insurance Trust(a),(c),(d),(e) (cost: $0) -
----------
Total Equity Securities (cost: $1,030,934) 1,266,133
----------
MONEY MARKET INSTRUMENTS (0.7%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.7%)
8,994,526 State Street Institutional Treasury Money Market Fund Premier Class, 2.31%(f)
(cost: $8,995) 8,995
----------
SHORT-TERM INVESTMENT PURCHASED WITH
CASH COLLATERAL FROM SECURITIES LOANED (0.6%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.6%)
8,135,330 HSBC U.S. Government Money Market Fund Class I, 2.38%(f) 8,135
----------
Total Short-Term Investment Purchased with Cash Collateral
from Securities Loaned (cost: $8,135) 8,135
----------
TOTAL INVESTMENTS (COST: $1,048,064) $1,283,263
==========
================================================================================
PORTFOLIO OF INVESTMENTS | 7
================================================================================
--------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
--------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $1,266,133 $- $- $1,266,133
Rights - - - -
Money Market Instruments:
Government & U.S. Treasury
Money Market Funds 8,995 - - 8,995
Short-Term Investment Purchased with
Cash Collateral from Securities Loaned:
Government & U.S. Treasury
Money Market Funds 8,135 - - 8,135
--------------------------------------------------------------------------------------------------------
Total $1,283,263 $- $- $1,283,263
--------------------------------------------------------------------------------------------------------
Refer to the Portfolio of Investments for additional industry, country, or
geographic region classifications.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
At January 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
8 | USAA VALUE FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A 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 8.6% of net assets at January 31,
2019.
o CATEGORIES AND DEFINITIONS
RIGHTS - Enable the holder to buy a specified number of shares of new issues
of a common stock before it is offered to the public.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
ADR American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S.
dollars.
REITS Real estate investment trusts - Dividend distributions from REITs may
be recorded as income and later characterized by the REIT at the end
of the fiscal year as capital gains or a return of capital. Thus, the
Fund will estimate the components of distributions from these
securities and revise when actual distributions are known.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 9
================================================================================
o SPECIFIC NOTES
(a) Non-income-producing security.
(b) The security, or a portion thereof, was out on loan as of January 31,
2019.
(c) Security was fair valued at January 31, 2019, by USAA Asset Management
Company in accordance with valuation procedures approved by USAA Mutual
Funds Trust's Board of Trustees.
(d) Security deemed illiquid by USAA Asset Management Company, under
liquidity guidelines approved by USAA Mutual Funds Trust's Board of
Trustees.
(e) Security was classified as Level 3.
(f) Rate represents the money market fund annualized seven-day yield at
January 31, 2019.
See accompanying notes to financial statements.
================================================================================
10 | USAA VALUE FUND
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (including securities on
loan of $8,011) (cost of $1,048,064) $1,283,263
Receivables:
Capital shares sold 414
Dividends and interest 1,273
Securities sold 2,686
Other 2
----------
Total assets 1,287,638
----------
LIABILITIES
Payables:
Upon return of securities loaned 8,135
Securities purchased 75
Capital shares redeemed:
Affiliated transactions (Note 8) 3,590
Unaffiliated transactions 789
Accrued management fees 679
Accrued transfer agent's fees 42
Other accrued expenses and payables 138
----------
Total liabilities 13,448
----------
Net assets applicable to capital shares outstanding $1,274,190
==========
NET ASSETS CONSIST OF:
Paid-in capital $1,000,553
Distributable earnings 273,637
----------
Net assets applicable to capital shares outstanding $1,274,190
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $919,516/50,456 capital
shares outstanding, no par value) $ 18.22
==========
Institutional Shares (net assets of $346,520/19,015 capital
shares outstanding, no par value) $ 18.22
==========
Adviser Shares (net assets of $8,154/449 capital
shares outstanding, no par value) $ 18.17
==========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 11
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $87) $ 16,167
Interest 164
Securities lending (net) 8
----------
Total income 16,339
----------
EXPENSES
Management fees 4,759
Administration and servicing fees:
Fund Shares 719
Institutional Shares 248
Adviser Shares 7
Transfer agent's fees:
Fund Shares 597
Institutional Shares 248
Distribution and service fees (Note 7):
Adviser Shares 11
Custody and accounting fees:
Fund Shares 52
Institutional Shares 38
Adviser Shares 1
Postage:
Fund Shares 30
Shareholder reporting fees:
Fund Shares 21
Trustees' fees 17
Registration fees:
Fund Shares 20
Institutional Shares 13
Adviser Shares 9
================================================================================
12 | USAA VALUE FUND
================================================================================
Professional fees $ 52
Other 15
----------
Total expenses 6,857
----------
NET INVESTMENT INCOME 9,482
----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain 92,886
Change in net unrealized appreciation/(depreciation) (197,551)
----------
Net realized and unrealized loss (104,665)
----------
Decrease in net assets resulting from operations $ (95,183)
==========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 13
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended January 31, 2019 (unaudited), and year ended
July 31, 2018
--------------------------------------------------------------------------------------------------------
1/31/2019 7/31/2018
--------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 9,482 $ 18,162
Net realized gain on investments 92,886 104,388
Net realized loss on foreign currency transactions - (2)
Change in net unrealized appreciation/(depreciation)
of investments (197,551) 25,409
------------------------------
Increase (decrease) in net assets resulting from
operations (95,183) 147,957
------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (109,577) (69,470)
Institutional Shares (48,387) (44,214)
Adviser Shares (1,039) (688)
------------------------------
Distributions to shareholders (159,003) (114,372)
------------------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 6)
Fund Shares 80,649 50,610
Institutional Shares (210,091) 35,983
Adviser Shares 18 (18)
------------------------------
Total net increase (decrease) in net assets from capital
share transactions (129,424) 86,575
------------------------------
Net increase (decrease) in net assets (383,610) 120,160
NET ASSETS
Beginning of period 1,657,800 1,537,640
------------------------------
End of period $1,274,190 $1,657,800
==============================
See accompanying notes to financial statements.
================================================================================
14 | USAA VALUE FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
January 31, 2019 (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 47 separate funds. The
USAA Value Fund (the Fund) qualifies as a registered investment company under
Accounting Standards Codification Topic 946. The information presented in this
semiannual report pertains only to the Fund, which is classified as diversified
under the 1940 Act. The Fund's investment objective is to seek long-term growth
of capital.
The Fund consists of three classes of shares: Value Fund Shares (Fund Shares),
Value Fund Institutional Shares (Institutional Shares), and Value Fund Adviser
Shares (Adviser Shares). Each class of shares has equal rights to assets and
earnings, except that each class bears certain class-related expenses specific
to the particular class. These expenses include administration and servicing
fees, transfer agent fees, postage, shareholder reporting fees, distribution and
service (12b-1) fees, and certain registration and custodian fees. Expenses not
attributable to a specific class, income, and realized gains or losses on
investments are allocated to each class of shares based on each class' relative
net assets. Each class has exclusive voting rights on matters related solely to
that class and separate voting rights on matters that relate to all classes. The
Institutional Shares are 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 are available to institutional investors, which include
================================================================================
NOTES TO FINANCIAL STATEMENTS | 15
================================================================================
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). The Adviser Shares permit investors to purchase shares
through financial intermediaries, including banks, broker-dealers, insurance
companies, investment advisers, plan sponsors, and financial professionals that
provide various administrative and distribution services.
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of USAA Asset Management Company (AMCO or Manager), the investment
adviser to the Fund, and USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services (SAS), the transfer agent to the Fund, announced that AMCO and
SAS would be acquired by Victory Capital Holdings, Inc. (Victory), a global
investment management firm headquartered in Cleveland, Ohio (the Transaction).
The closing of the Transaction is expected to be completed during the second
quarter of 2019, pending satisfaction of certain closing conditions and
approvals, including certain approvals of the Fund's Board of Trustees and of
the Fund's shareholders at a special shareholder meeting to be held on April 18,
2019. The Transaction is not expected to result in any material changes to the
Fund's investment objectives and principal investment strategies. In connection
with the Transaction, Victory proposes to add portfolio managers from one or
more investment teams employed by Victory to serve as additional portfolio
managers to manage all or a portion of the Fund according to each team's own
investment process.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Valuation and Liquidity 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.
The Fund utilizes 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.
================================================================================
16 | USAA VALUE 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 exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange or
the 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. Securities traded primarily on foreign securities exchanges or
markets are valued at the last quoted sale price, or the most recently
determined official closing price calculated according to local market
convention, available at the time the Fund is valued. If no last sale or
official closing price is reported or available, the average of the bid
and ask prices generally is used. Actively traded equity securities
listed on a domestic exchange generally are categorized in Level 1 of
the fair value hierarchy. Certain preferred and equity securities traded
in inactive markets generally are categorized in Level 2 of the fair
value hierarchy.
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 many
cases, events affecting the values of foreign securities that occur
between the time of their last quoted sale or official closing price and
the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not need to be reflected in the value of the Fund's
foreign securities. However, the Manager and the Fund's subadviser(s)
will monitor for events that would materially affect the value of the
Fund's foreign securities. The Fund's subadviser(s) have agreed to
notify the Manager of significant events they identify 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 Committee will consider
such available information that it deems relevant and will determine a
fair value for the affected foreign securities in
================================================================================
NOTES TO FINANCIAL STATEMENTS | 17
================================================================================
accordance with valuation procedures. In addition, information from an
external vendor or other sources may be used to adjust the foreign
market closing prices of foreign equity securities to reflect what the
Committee believes to be the fair value of the securities as of the
close of the NYSE. Fair valuation of affected foreign equity securities
may occur frequently based on an assessment that events which occur on a
fairly regular basis (such as U.S. market movements) are significant.
Such securities are categorized in Level 2 of the fair value hierarchy.
3. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value hierarchy.
4. Short-term debt securities with original or remaining maturities of
60 days or less may be valued at amortized cost, provided that amortized
cost represents the fair value of such securities.
5. Repurchase agreements are valued at cost.
6. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has been recognized in relation to a security or class of securities,
the securities are valued in good faith by the Committee in accordance
with 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, other pricing services, 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,
================================================================================
18 | USAA VALUE FUND
================================================================================
evaluation of credit quality, 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 indexes.
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. INVESTMENTS IN SECURITIES - Securities transactions are accounted for as
of the date the securities are purchased or sold (trade date). Gains or
losses from sales of investment securities are computed on the identified
cost basis. Dividend income, less foreign taxes, if any, is recorded on the
ex-dividend date. If the ex-dividend date has passed, certain dividends from
foreign securities are recorded upon notification. Interest income is
recorded daily on the accrual basis. Premiums and discounts on short-term
securities are amortized on a straight-line basis over the life of the
respective securities.
D. FEDERAL TAXES - The Fund's policy is to comply with the requirements of
the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its taxable
income and net capital gains, if any, to its shareholders. Therefore, no
federal income tax provision is required.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 19
================================================================================
For the six-month period ended January 31, 2019, 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 the Fund's tax basis to determine if
adjustments to this conclusion are necessary. The statute of limitations on
the Fund's tax return filings generally remain open for the three preceding
fiscal reporting year ends and remain subject to examination by the Internal
Revenue Service and state taxing authorities.
E. FOREIGN TAXATION - Foreign income and capital gains on some foreign
securities may be subject to foreign taxes, which are reflected as a
reduction to such income and realized gains. The Fund records a liability
based on unrealized gains to provide for potential foreign taxes payable
upon the sale of these securities. Foreign taxes have been provided for in
accordance with the Fund's understanding of the applicable countries'
prevailing tax rules and rates.
F. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the exchange
rate obtained from an independent pricing service on the respective
dates of such transactions.
2. Market value of securities, other assets, and liabilities at the
exchange rate obtained from an independent pricing service on a daily
basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the amounts received.
================================================================================
20 | USAA VALUE FUND
================================================================================
At the end of the Fund's fiscal year, net realized foreign currency
gains/losses are reclassified from accumulated net realized gains/losses to
accumulated undistributed net investment income on the Statement of Assets
and Liabilities, as such amounts are treated as ordinary income/loss for
federal income tax purposes. Net unrealized foreign currency exchange
gains/losses arise from changes in the value of assets and liabilities,
other than investments in securities, resulting from changes in the exchange
rate.
G. EXPENSES PAID INDIRECTLY - A portion of the brokerage commissions that
the Fund pays may be recaptured as a credit that is tracked and used by the
custodian to directly reduce expenses paid by the Fund. Effective September
30, 2018, the commission recapture program ended. For the six-month period
ended January 31, 2019, the Fund did not receive any brokerage commission
recapture credits.
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, along with other funds of the Trust and USAA ETF Trust
(together, the Trusts), 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 provide temporary or emergency
cash needs, including redemption requests that might otherwise require the
untimely disposition of securities. Subject to availability (including usage of
the facility by other funds of the Trusts), the Fund may borrow from
================================================================================
NOTES TO FINANCIAL STATEMENTS | 21
================================================================================
CAPCO an amount up to 5% of the Fund's total assets at an interest rate based on
the London Interbank Offered Rate (LIBOR), plus 100.0 basis points.
The Trusts are also assessed facility fees by CAPCO in the amount of 14.0 basis
points of the amount of the committed loan agreement. Prior to September 30,
2018, the maximum annual facility fee was 13.0 basis points of the amount of the
committed loan agreement. The facility fees are allocated among the funds of the
Trusts based on their respective average daily net assets for the period.
The Trusts may request an optional increase of the committed loan agreement from
$500 million up to $750 million. If the Trusts increase the committed loan
agreement, the assessed facility fee on the amount of the additional commitment
will be 15.0 basis points.
For the six-month period ended January 31, 2019, the Fund paid CAPCO facility
fees of $6,000, which represents 1.8% of the total fees paid to CAPCO by the
funds of the Trusts. The Fund had no borrowings under this agreement during the
six-month period ended January 31, 2019.
(3) DISTRIBUTIONS
The tax basis of distributions and any accumulated undistributed net investment
income will be determined as of the Fund's tax year-end of July 31, 2019, in
accordance with applicable federal tax law.
Distributions of net investment income and realized gains from security
transactions not offset by capital losses are made annually in the succeeding
fiscal year or as otherwise required to avoid the payment of federal taxes.
At July 31, 2018, the Fund had no capital loss carryforwards, for federal income
tax purposes.
As of January 31, 2019, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as the cost reported
in the financial statements. The net unrealized appreciation/(depreciation) on
investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
FUND APPRECIATION DEPRECIATION (DEPRECIATION)
----------------------------------------------------------------------------------------
USAA Value Fund $319,566,000 $(84,367,000) $235,199,000
================================================================================
22 | USAA VALUE FUND
================================================================================
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended January 31, 2019, were
$213,084,000 and $452,149,000, respectively.
(5) SECURITIES LENDING
The Fund, through a securities lending agreement with Citibank, N.A. (Citibank),
may lend its securities to qualified financial institutions, such as certain
broker-dealers, to earn additional income, net of income retained by Citibank.
The borrowers are required to secure their loans continuously with collateral in
an amount at least equal to 102% of the fair value of domestic securities and
foreign government securities loaned and 105% of the fair value of foreign
securities and all other securities loaned. Collateral may be cash, U.S.
government securities, or other securities as permitted by SEC guidelines. Cash
collateral may be invested in high-quality short-term investments. Collateral
requirements are determined daily based on the value of the Fund's securities on
loan as of the end of the prior business day. Loans are terminable upon demand
and the borrower must return the loaned securities within the lesser of one
standard settlement period or five business days. Risks relating to
securities-lending transactions include that the borrower may not provide
additional collateral when required or return the securities when due, and that
the value of the short-term investments will be less than the amount of cash
collateral required to be returned to the borrower. The Fund's agreement with
Citibank does not include master netting provisions. Non-cash collateral
received by the Fund may not be sold or re-pledged except to satisfy borrower
default. Cash collateral is listed in the Fund's Portfolio of Investments and
Financial Statements while non-cash collateral is not included.
At January 31, 2019, the Fund's value of outstanding securities on loan and the
value of collateral are as follows:
VALUE OF SECURITIES NON-CASH COLLATERAL CASH COLLATERAL
ON LOAN RECEIVED RECEIVED
------------------------------------------------------------------------------------
$8,011,000 $- $8,135,000
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
(6) CAPITAL SHARE TRANSACTIONS
At January 31, 2019, there were an unlimited number of shares of capital stock
at no par value authorized for the Fund.
Capital share transactions for the Institutional Shares resulted from purchases
and sales by the affiliated USAA fund-of-funds as well as other persons or legal
entities that the Fund may approve from time to time. Capital share transactions
for all classes were as follows, in thousands:
SIX-MONTH
PERIOD ENDED YEAR ENDED
JANUARY 31, 2019 JULY 31, 2018
-------------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------
FUND SHARES:
Shares sold 2,164 $ 44,109 5,478 $ 119,297
Shares issued from reinvested
dividends 6,172 108,344 3,176 68,754
Shares redeemed (3,659) (71,804) (6,340) (137,441)
-------------------------------------------------------
Net increase from capital
share transactions 4,677 $ 80,649 2,314 $ 50,610
=======================================================
INSTITUTIONAL SHARES:
Shares sold 1,204 $ 23,327 2,751 $ 59,818
Shares issued from reinvested
dividends 2,756 48,382 2,043 44,214
Shares redeemed (14,045) (281,800) (3,148) (68,049)
-------------------------------------------------------
Net increase (decrease) from capital
share transactions (10,085) $(210,091) 1,646 $ 35,983
=======================================================
ADVISER SHARES:
Shares sold 1 $ 22 1 $ 30
Shares issued from reinvested
dividends 1 14 1 11
Shares redeemed (1) (18) (3) (59)
-------------------------------------------------------
Net increase (decrease) from
capital share transactions 1 $ 18 (1) $ (18)
=======================================================
(7) TRANSACTIONS WITH MANAGER
MANAGEMENT FEES - The Manager provides investment management services to the
Fund pursuant to an Advisory Agreement. Under this agreement, the
================================================================================
24 | USAA VALUE FUND
================================================================================
Manager is responsible for managing the business and affairs of the Fund. The
Manager 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 all or a portion of the Fund's assets.
The Manager monitors each subadviser's performance through quantitative and
qualitative analysis and periodically reports to the Board as to whether each
subadviser's agreement should be renewed, terminated, or modified. The Manager
is also responsible for determining the asset allocation for the subadviser(s).
The allocation for each subadviser could range from 0% to 100% of the Fund's
assets, and the Manager could change the allocations without shareholder
approval.
The investment management fee for the Fund is comprised 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 daily net assets.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Multi-Cap Value Funds Index. The Lipper Multi-Cap Value
Funds Index tracks the total return performance of funds within the Lipper
Multi-Cap Value Funds category.
The performance period for each share class 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
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
-----------------------------------------------------------------
+/- 100 to 400 +/- 4
+/- 401 to 700 +/- 5
+/- 701 and greater +/- 6
(1)Based on the difference between average annual performance of the
relevant share class of the Fund and its relevant Lipper index, rounded
to the nearest basis point. Average daily net assets of the share class
are calculated over a rolling 36-month period.
Each class' annual performance adjustment rate is multiplied by the average
daily net assets of each respective class over the entire performance period,
which is then multiplied by a fraction, the numerator of which is the number
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
of days in the month and the denominator of which is 365 (366 in leap years).
The resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Multi-Cap Value Funds Index. The Lipper Multi-Cap Value
Funds Index tracks the total return performance of funds within the Lipper
Multi-Cap Value Funds category.
For the six-month period ended January 31, 2019, the Fund incurred management
fees, paid or payable to the Manager, of $4,759,000. The Fund Shares,
Institutional Shares, and Adviser Shares did not incur any performance
adjustment.
SUBADVISORY ARRANGEMENT(S) - The Manager entered into an Investment Subadvisory
Agreement with Barrow, Hanley, Mewhinney & Strauss, LLC (BHMS), under which BHMS
directs the investment and reinvestment of the Fund's assets (as allocated from
time to time by the Manager). This arrangement provides for monthly fees that
are paid by the Manager.
The Manager (not the Fund) pays BHMS a subadvisory fee based on the aggregate
average daily net assets that BHMS manages in the USAA Value Fund and the USAA
Growth & Income Fund combined, in the annual amount of 0.75% on the first $15
million in assets, 0.55% on assets over $15 million and up to $25 million, 0.45%
on assets over $25 million and up to $100 million, 0.35% on assets over $100
million and up to $200 million, 0.25% on assets over $200 million and up to $1
billion, and 0.15% on assets over $1 billion. For the six-month period ended
January 31, 2019, the Manager incurred subadvisory fees with respect to the
Fund, paid or payable to BHMS, of $1,558,000.
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 at an annualized rate of 0.15% of average
daily net assets of the Fund Shares and Adviser Shares, and 0.10% of average
daily net assets of the Institutional Shares. For the six-month period ended
January 31, 2019, the Fund Shares, Institutional Shares, and Adviser Shares
incurred administration and servicing fees, paid or payable to the Manager, of
$719,000, $248,000, and $7,000, respectively.
================================================================================
26 | USAA VALUE FUND
================================================================================
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 January 31, 2019, the Fund reimbursed the Manager $1,000 for these
compliance and legal services. These expenses are included in the professional
fees on the Fund's Statement of Operations.
EXPENSE LIMITATION - The Manager agreed, through November 30, 2018, to limit the
total annual operating expenses of the Adviser Shares to 1.30% of its average
daily net assets, excluding extraordinary expenses and before reductions of any
expenses paid indirectly, and to reimburse the Adviser Shares for all expenses
in excess of that amount. Effective December 1, 2018, the Manager terminated
this agreement. For the six-month period ended January 31, 2019, the Adviser
Shares did not incur any reimbursable expenses.
TRANSFER AGENT'S FEES - SAS, an affiliate of the Manager, provides transfer
agent services to the Fund Shares and Adviser Shares based on an annual charge
of $23 per shareholder account plus out-of-pocket expenses. SAS pays a portion
of these fees to certain intermediaries for the administration and servicing of
accounts that are held with such intermediaries. Transfer agent's fees for
Institutional Shares are paid monthly based on a fee accrued daily at an
annualized rate of 0.10% of the Institutional Shares' average daily net assets,
plus out-of-pocket expenses. For the six-month period ended January 31, 2019,
the Fund Shares, Institutional Shares, and Adviser Shares incurred transfer
agent's fees, paid or payable to SAS, of $597,000, $248,000, and less than $500,
respectively.
DISTRIBUTION AND SERVICE (12b-1) FEES - The Fund has adopted a plan pursuant to
Rule 12b-1 under the 1940 Act with respect to the Adviser Shares. Under the
plan, the Adviser Shares pay fees to USAA Investment Management Company (IMCO),
the distributor, for distribution and shareholder services. IMCO pays all or a
portion of such fees to intermediaries that make the Adviser Shares available
for investment by their customers. The fee is accrued daily and paid monthly at
an annual rate of 0.25% of the Adviser Shares' average daily net assets. Adviser
Shares are offered and sold without imposition of an initial sales charge or a
contingent deferred sales charge.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
================================================================================
For the six-month period ended January 31, 2019, the Adviser Shares incurred
distribution and service (12b-1) fees of $11,000.
UNDERWRITING SERVICES - IMCO provides exclusive underwriting and distribution of
the Fund's shares on a continuing best-efforts basis and receives no fee or
other compensation for these services, but may receive 12b-1 fees as described
above, with respect to Adviser Shares.
(8) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other USAA Funds and
is one of 16 USAA mutual funds in which the affiliated USAA fund-of-funds
invest. The USAA fund-of-funds do not invest in the underlying funds for the
purpose of exercising management or control, and the affiliated fund-of-funds'
annual or semiannual reports may be viewed at usaa.com. As of January 31, 2019,
the Fund recorded a payable for capital shares redeemed of $3,590,000 for the
USAA fund-of-funds purchases and redemptions of Institutional Shares. As of
January 31, 2019, the USAA fund-of-funds owned the following percentages of the
total outstanding shares of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
-------------------------------------------------------------------------------
Cornerstone Conservative 0.1
Cornerstone Equity 0.7
Target Retirement Income 0.3
Target Retirement 2020 0.9
Target Retirement 2030 3.0
Target Retirement 2040 4.1
Target Retirement 2050 2.4
Target Retirement 2060 0.3
The Manager is indirectly wholly owned by USAA a large, diversified financial
services institution. At January 31, 2019, USAA and its affiliates owned 441,000
Adviser Shares, which represents 98.1% of the Adviser Shares outstanding and
0.6% of the Fund's total outstanding shares.
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.
================================================================================
28 | USAA VALUE FUND
================================================================================
(9) UPCOMING REGULATORY MATTERS
In October 2016, the U.S. Securities and Exchange Commission (SEC) issued Final
Rule Release No. 33-10233, INVESTMENT COMPANY LIQUIDITY RISK MANAGEMENT PROGRAMS
(Liquidity Rule). The Liquidity Rule requires funds to establish a liquidity
risk management program and enhances disclosures regarding funds' liquidity. The
requirements to implement a liquidity risk management program and establish a
15% illiquid investment limit became effective December 1, 2018. However, in
February 2018, the SEC issued Release No. IC-33010, INVESTMENT COMPANY LIQUIDITY
RISK MANAGEMENT PROGRAMS; COMMISSION GUIDANCE FOR IN-KIND ETFs, which delayed
certain requirements related to liquidity classification, highly liquid
investment minimums, and board approval of the liquidity risk management
programs to June 1, 2019. The Manager continues to evaluate the impact of this
rule on the Fund's financial statements and various filings.
(10) RECENTLY ADOPTED ACCOUNTING STANDARDS
In August 2018, the SEC adopted amendments to Regulation S-X for investment
companies governing the form and content of financial statements. The amendments
to Regulation S-X took effect on November 5, 2018, and the financial statements
have been modified accordingly, for the current and prior periods.
ASU 2018-13, FAIR VALUE MEASUREMENT
-----------------------------------
In August 2018, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2018-13, Fair Value Measurement (Topic 820).
The amendments in the ASU impact disclosure requirements for fair value
measurement. ASU 2018-13 is effective for fiscal years beginning after December
15, 2019. Early adoption is permitted and can include the entire standard or
certain provisions that exclude or amend disclosures. Management has elected to
early adopt ASU 2018-13 effective with the current reporting period. The
adoption of ASU 2018-13 guidance is limited to changes in the Fund's notes to
financial statement disclosures regarding valuation method, fair value, and
transfers between levels of the fair value hierarchy.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
-----------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
-----------------------------------------------------------------------------------
Net asset value at
beginning of period $ 22.01 $ 21.55 $ 19.41 $ 20.50 $ 20.00 $ 18.37
-----------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .11 .21 .27 .23 .20 .27
Net realized and
unrealized gain (loss) (1.50) 1.84 2.74 (.31) 1.28 2.11
-----------------------------------------------------------------------------------
Total from investment
operations (1.39) 2.05 3.01 (.08) 1.48 2.38
-----------------------------------------------------------------------------------
Less distributions from:
Net investment income (.24) (.21) (.29) (.23) (.25) (.20)
Realized capital gains (2.16) (1.38) (.58) (.78) (.73) (.55)
-----------------------------------------------------------------------------------
Total distributions (2.40) (1.59) (.87) (1.01) (.98) (.75)
-----------------------------------------------------------------------------------
Net asset value at
end of period $ 18.22 $ 22.01 $ 21.55 $ 19.41 $ 20.50 $ 20.00
===================================================================================
Total return (%)* (5.80) 9.69 15.72 (.14) 7.47 13.21
Net assets at end
of period (000) $919,516 $1,007,712 $936,630 $807,052 $960,925 $844,121
Ratios to average
daily net assets:**
Expenses (%)(a) .96(b) .99 1.08(c) 1.11(c) 1.09 1.11(c),(d)
Expenses, excluding
reimbursements (%)(a) .96(b) .99 1.08(c) 1.11(c) 1.09 1.11(c)
Net investment
income (%) 1.28(b) 1.10 1.37 1.28 1.06 1.55
Portfolio turnover (%) 15 29 27 20 30 20
* 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 January 31, 2019, average daily net
assets were $949,667,000.
(a) Does not include acquired fund fees, if any.
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(c) Reflects total annual operating expenses of the Fund Shares before
reductions of any expenses paid indirectly. The Fund Shares' expenses paid
indirectly decreased the expense ratio by less than 0.01%.
(d) Prior to December 1, 2013, the Manager had voluntarily agreed to limit
the annual expenses of the Fund Shares to 1.15% of the Fund Shares' average
daily net assets.
================================================================================
30 | USAA VALUE FUND
================================================================================
INSTITUTIONAL SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
-----------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
-----------------------------------------------------------------------------------
Net asset value at
beginning of period $ 22.00 $ 21.54 $ 19.40 $ 20.49 $ 20.00 $ 18.36
-----------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .17 .23 .30 .25 .26(a) .29
Net realized and
unrealized gain (loss) (1.55) 1.84 2.73 (.31) 1.24(a) 2.11
-----------------------------------------------------------------------------------
Total from investment
operations (1.38) 2.07 3.03 (.06) 1.50(a) 2.40
-----------------------------------------------------------------------------------
Less distributions from:
Net investment income (.24) (.23) (.31) (.25) (.28) (.21)
Realized capital gains (2.16) (1.38) (.58) (.78) (.73) (.55)
-----------------------------------------------------------------------------------
Total distributions (2.40) (1.61) (.89) (1.03) (1.01) (.76)
-----------------------------------------------------------------------------------
Net asset value at
end of period $ 18.22 $ 22.00 $ 21.54 $ 19.40 $ 20.49 $ 20.00
===================================================================================
Total return (%)* (5.76) 9.79 15.86 (.04) 7.57 13.34
Net assets at end
of period (000) $346,520 $640,281 $591,384 $522,721 $299,990 $330,114
Ratios to average
daily net assets:**
Expenses (%)(b) .89(c) .91 .98(d) .98(d) .98 1.00(d)
Net investment
income (%) 1.35(c) 1.18 1.48 1.41 1.23 1.59
Portfolio turnover (%) 15 29 27 20 30 20
* 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 January 31, 2019, average daily net
assets were $490,313,000.
(a) Calculated using average shares.
(b) Does not include acquired fund fees, if any.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) Reflects total annual operating expenses of the Institutional Shares
before reductions of any expenses paid indirectly. The Institutional Shares'
expenses paid indirectly decreased the expense ratios by less than 0.01%.
================================================================================
FINANCIAL HIGHLIGHTS | 31
================================================================================
ADVISER SHARES (UNAUDITED)
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
---------------------------------------------------------------------------------
2019 2018 2017 2016 2015 2014
---------------------------------------------------------------------------------
Net asset value at
beginning of period $21.91 $21.46 $19.32 $20.43 $19.94 $18.29
---------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .10 .15 .23 .17 .17 .25
Net realized and
unrealized gain (loss) (1.52) 1.83 2.72 (.32) 1.26 2.08
---------------------------------------------------------------------------------
Total from investment
operations (1.42) 1.98 2.95 (.15) 1.43 2.33
---------------------------------------------------------------------------------
Less distributions from:
Net investment income (.16) (.15) (.23) (.18) (.21) (.13)
Realized capital gains (2.16) (1.38) (.58) (.78) (.73) (.55)
---------------------------------------------------------------------------------
Total distributions (2.32) (1.53) (.81) (.96) (.94) (.68)
---------------------------------------------------------------------------------
Net asset value at
end of period $18.17 $21.91 $21.46 $19.32 $20.43 $19.94
=================================================================================
Total return (%)* (5.98) 9.41 15.46 (.52) 7.22 12.94
Net assets at end
of period (000) $8,154 $9,807 $9,626 $8,767 $9,269 $8,861
Ratios to average
daily net assets:**
Expenses (%)(a) 1.28(b),(f) 1.30 1.33(c),(d) 1.42(d) 1.34 1.35(d),(e)
Expenses, excluding
reimbursements (%)(a) 1.28(b) 1.30 1.38(d) 1.42(d) 1.34 1.35(d)
Net investment
income (%) .96(b) .79 1.13 .97 .82 1.30
Portfolio turnover (%) 15 29 27 20 30 20
* 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 January 31, 2019, average daily net
assets were $9,048,000.
(a) Does not include acquired fund fees, if any.
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(c) Effective December 1, 2016, the Manager had voluntarily agreed to limit
the annual expenses of the Adviser Shares to 1.30% of the Adviser Shares'
average daily net assets.
(d) Reflects total annual operating expenses of the Adviser Shares before
reductions of any expenses paid indirectly. The Adviser Shares' expenses
paid indirectly decreased the expense ratio by 0.01%.
(e) Prior to December 1, 2013, the Manager had voluntarily agreed to limit
the annual expenses of the Adviser Shares to 1.65% of the Adviser Shares'
average daily net assets.
(f) Prior to December 1, 2018, the Manager voluntarily agreed to limit the
annual expenses of the Adviser Shares to 1.30% of the Adviser Shares'
average daily net assets.
================================================================================
32 | USAA VALUE FUND
================================================================================
EXPENSE EXAMPLE
January 31, 2019 (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, distribution and service
(12b-1) 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 August 1, 2018, through
January 31, 2019.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table 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 for your share
class in the "actual" 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 line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class and an assumed rate of return of
5% per year before expenses, which is not the Fund's actual
================================================================================
EXPENSE EXAMPLE | 33
================================================================================
return. The hypothetical account values and expenses may not be used to estimate
the actual ending account balance or expenses you paid for the period. You may
use this information to compare the ongoing costs of investing in the Fund and
other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled "hypothetical"
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 AUGUST 1, 2018 -
AUGUST 1, 2018 JANUARY 31, 2019 JANUARY 31, 2019
--------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $ 942.00 $4.70
Hypothetical
(5% return before expenses) 1,000.00 1,020.37 4.89
INSTITUTIONAL SHARES
Actual 1,000.00 942.40 4.36
Hypothetical
(5% return before expenses) 1,000.00 1,020.72 4.53
ADVISER SHARES
Actual 1,000.00 940.20 6.26
Hypothetical
(5% return before expenses) 1,000.00 1,018.75 6.51
*Expenses are equal to the annualized expense ratio of 0.96% for Fund Shares,
0.89% for Institutional Shares, and 1.28% for Adviser Shares, which are net of
any reimbursements and expenses paid indirectly, multiplied by the average
account value over the period, multiplied by 184 days/365 days (to reflect the
one-half-year period). The Fund's actual ending account values are based on its
actual total returns of (5.80)% for Fund Shares, (5.76)% for Institutional
Shares, and (5.98)% for Adviser Shares for the six-month period of August 1,
2018, through January 31, 2019.
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34 | USAA VALUE FUND
================================================================================
ADVISORY AGREEMENT(S)
January 31, 2019 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with Victory Capital
Holdings, Inc. ("Victory Holdings") pursuant to which Victory Holdings would
acquire all of the outstanding stock of AMCO and USAA Transfer Agency Company
d/b/a USAA Shareholder Account Services ("USAA Transfer Agent") (the
"Transaction"). The Independent Trustees were advised that the Transaction, if
completed, would constitute
================================================================================
ADVISORY AGREEMENT(S) | 35
================================================================================
an "assignment" (as that term is defined in Section 2(a)(4) of the 1940 Act) and
result in the automatic termination of the Existing Management Agreements
("Change of Control Event"). The Independent Trustees also were advised that it
was proposed that Victory Capital, a subsidiary of Victory Holdings, would serve
as the investment adviser to each Fund after the closing of the Transaction
("Post-Transaction") and that the Board would be asked to consider approval of
the terms and conditions of the New Advisory Agreement with Victory Capital and
thereafter to submit the New Advisory Agreement to each Fund's shareholders for
approval. Because the Change of Control Event also would result in the
termination of each existing subadvisory agreement between AMCO and the
subadvisers to the Funds ("Existing Subadvisory Agreements"), the Independent
Trustees were advised that the Board would also be asked to approve the New
Subadvisory Agreements.
In anticipation of the Transaction, the Trustees met at a series of subsequent
in-person meetings on November 27-28, 2018, January 7-8, 2019, and January
14-15, 2019, which included meetings of the full Board and separate meetings of
the Independent Trustees for the purposes of considering, among other things:
whether it would be in the best interests of each Fund and its respective
shareholders to approve the New Agreements; and the anticipated impacts of the
Transaction on the Funds and their shareholders (each, a "Meeting"). During each
of these Meetings, the Board sought additional and clarifying information as it
deemed necessary or appropriate. In this connection, the Independent Trustees
worked with their independent legal counsel to prepare formal due diligence
requests (the "Diligence Requests") that were submitted to Victory Capital,
Victory Capital Advisers, Inc. ("VCA"), and the subadvisers. The Diligence
Requests sought information relevant to the Board's consideration of the New
Advisory Agreement, the New Subadvisory Agreements, distribution arrangements,
and other anticipated impacts of the Transaction on the Funds and their
shareholders. Victory Capital, VCA, and the subadvisers provided documents and
information in response to the Diligence Requests (the "Response Materials").
Following their review of the Response Materials, the Independent Trustees
submitted a supplemental due diligence request for additional and clarifying
information (the "Supplemental Diligence Request") to Victory Capital and VCA.
Victory
================================================================================
36 | USAA VALUE FUND
================================================================================
Capital and VCA provided further information in response to the Supplemental
Diligence Request, which the Board reviewed. Senior management representatives
of Victory Capital and/or AMCO participated in a portion of each Meeting and
addressed various questions raised by the Board. Throughout the process, the
Independent Trustees were assisted by their independent legal counsel and
counsel to the Funds, who advised them on, among other things, their duties and
obligations relating to their consideration of the New Agreements.
The Board's evaluation of the New Agreements reflected the information provided
specifically in connection with its review of the New Agreements, as well as,
where relevant, information that was previously furnished to the Board in
connection with the most recent renewal of the Existing Management Agreements
and Existing Subadvisory Agreements at an in-person meeting of the Board on
April 18, 2018 (the "2018 15(c) Meeting") and at other subsequent Board meetings
in 2018. The Board's evaluation of the New Agreements also reflected the
knowledge gained as Board members of the Funds with respect to services provided
by AMCO, its affiliates, and each subadviser to the Funds.
The Board's approvals and recommendations were based on its determination,
within its business judgment, that it would be in the best interests of each
Fund and its respective shareholders, for Victory Capital and, as applicable,
the subadvisers, to provide investment advisory, investment subadvisory, and
related services to the Funds, following the closing of the Transaction.
FACTORS CONSIDERED IN APPROVING THE NEW ADVISORY AGREEMENT
In connection with the Board's consideration of the New Advisory Agreement,
Victory Capital and AMCO advised the Board about a variety of matters, including
the following:
o The nature, extent, and quality of the services to be provided to the
Funds by Victory Capital Post-Transaction are expected to be of at least
the same level as the services currently provided to the Funds by AMCO.
================================================================================
ADVISORY AGREEMENT(S) | 37
================================================================================
o Victory Capital's stated commitment to maintaining and enhancing the
USAA member/USAA Fund shareholder experience, including creating a
dedicated USAA Fund sales and client service call center that will
provide ongoing client service and advice to existing and new USAA
members.
o Victory Capital proposes to: (1) replace the underlying indexes for
the USAA Extended Market Index Fund and USAA S&P 500 Index Fund with
indexes designed to provide shareholders with comparable exposure and
investment outcomes; (2) change the USAA Extended Market Index Fund's
and USAA S&P 500 Index Fund's investment objectives and strategies in
light of the changes to their underlying indexes; and (3) change the
name of the USAA S&P 500 Index Fund to the USAA 500 Index Fund.
o Victory Capital does not propose changes to the investment
objective(s) of any other Funds. Although the investment processes used
by Victory Capital's portfolio managers may differ from those used by
AMCO's portfolio managers or, if applicable, any subadviser's portfolio
managers, such differences are not currently expected to result in
changes to the principal investment strategies or principal investment
risks of the Funds.
o The New Advisory Agreement does not change any Fund's advisory fee
rate or the computation method for calculating such fees (except that
Victory Capital, subject to Board approval, may in the future use a
single designated share class to calculate the performance adjustment).
For at least two years after the Transaction closes, Victory Capital has
agreed to waive fees and/or reimburse expenses so that each Fund's
annual expense ratio (excluding certain customary items) does not exceed
the levels reflected in each Fund's most recent audited financial
statements at the time the Transaction closes (or the levels of AMCO's
then-current expense caps, if applicable), excluding the impact of any
performance adjustment to the Fund's advisory fee.
================================================================================
38 | USAA VALUE FUND
================================================================================
o The portfolio managers at AMCO that manage the Fixed Income Funds(1) as
well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be advised
by Victory Capital through its Victory Solutions platform, Victory
Capital proposes that the same subadvisers be retained Post-Transaction,
although Victory Capital may change the allocation to a particular
subadviser Post-Transaction. No changes are expected to the portfolio
managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's
(1)The Fixed Income Funds include the following Funds: California Bond Fund,
Government Securities Fund, High Income Fund, Income Fund, Intermediate-Term
Bond Fund, Tax Exempt Intermediate-Term Fund, Tax Exempt Long-Term Fund, New
York Bond Fund, Short-Term Bond Fund, Tax Exempt Short- Term Fund, Ultra
Short-Term Bond Fund, Virginia Bond Fund, Money Market Fund, Tax Exempt Money
Market Fund and Treasury Money Market Trust.
(2)The Cornerstone Funds include the following Funds: Cornerstone Aggressive
Fund, Cornerstone Conservative Fund, Cornerstone Equity Fund, Cornerstone
Moderate Fund, Cornerstone Moderately Aggressive Fund, and Cornerstone
Moderately Conservative Fund.
(3)The Target Retirement Funds include the following Funds: Target Retirement
2020 Fund, Target Retirement 2030 Fund, Target Retirement 2040 Fund, Target
Retirement 2050 Fund, Target Retirement 2060 Fund, and Target Retirement
Income Fund.
================================================================================
ADVISORY AGREEMENT(S) | 39
================================================================================
businesses to Victory Capital. Victory Capital and USAA expect to enter
into a transition services agreement under which USAA will continue to
provide Victory Capital with certain services that are currently
provided by USAA to AMCO and the USAA Transfer Agent for a specified
period of time after the closing of the Transaction to assist Victory
Capital in transitioning the USAA member distribution channel and member
support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital
================================================================================
40 | USAA VALUE FUND
================================================================================
is capable of providing the same level of investment management services
currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund, Growth
& Income Fund, Income Stock Fund, Global Equity Income Fund, and Precious
Metals and Minerals Fund.
================================================================================
ADVISORY AGREEMENT(S) | 41
================================================================================
The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored and managed by
Victory Capital ("Victory Funds") with similar investment
================================================================================
42 | USAA VALUE FUND
================================================================================
objectives and strategies managed by the portfolio managers who would manage the
Funds. Based on information presented to the Board at the Meetings and its
discussions with Victory Capital, the Board concluded that Victory Capital is
capable of generating a level of long-term investment performance that is
appropriate in light of each Fund's investment objectives, strategies and
restrictions.
FEES TO BE PAID TO VICTORY CAPITAL AND EXPENSES OF THE FUNDS - The Board
considered that it had reviewed each Fund's existing advisory fee rate and
computation method for calculating such fees at the 2018 15(c) Meeting. The
Board considered that the New Advisory Agreement does not change any Fund's
advisory fee rate or the computation method for calculating such fees, except
that Victory Capital, subject to Board approval, may in the future use a single
designated share class to calculate the performance adjustment and apply the
resulting performance adjustment across each other class of shares of the Fund.
The Board considered that the use of a single designated class to calculate the
performance adjustment for each other class of shares of the Fund could mean
that shareholders of a class other than the class used to measure the
performance adjustment may pay a performance adjustment that is higher or lower
than if the adjustment were calculated on a class by class basis, primarily due
to the impact of differences in the fees and expenses between share classes on
performance. The Board considered that the New Advisory Agreement stipulates
that the period for measuring performance for calculating a Fund's performance
adjustment begins on the date that Victory Capital begins managing the Fund;
therefore, no performance adjustments will be made for the first twelve months
of the New Advisory Agreement, consistent with applicable regulations. The Board
also considered Victory Capital's contractual commitment under the expense
limitation agreement ("ELA") to waive fees and/or reimburse expenses for at
least two years after the closing of the Transaction, so that each Fund's annual
expense ratio (excluding acquired fund fees and expenses, any performance
adjustment to a Fund's advisory fee, interest, taxes, brokerage commissions,
other expenditures which are capitalized in accordance with generally accepted
accounting principles, and other extraordinary expenses not incurred in the
ordinary course of such Fund's business) does not exceed the levels reflected in
each Fund's most recent audited financial statements at the time the
================================================================================
ADVISORY AGREEMENT(S) | 43
================================================================================
Transaction closes (or the levels of AMCO's then-current expense caps, if
applicable), excluding the impact of any performance adjustment to a Fund's
advisory fee. The Board considered that the ELA permits Victory Capital to
recoup advisory fees waived and expenses reimbursed for up to three years after
the fiscal year in which the waiver or reimbursement took place, subject to the
lesser of any operating expense limitation in effect at the time of: (1) the
original waiver or expense reimbursement; or (2) recoupment. The Board also
considered that Victory Capital and AMCO had represented to the Board that they
will use their best efforts to ensure that they and their respective affiliates
do not take any action that imposes an "unfair burden" on the Funds as a result
of the Transaction or as a result of any express or implied terms, conditions or
understandings applicable to the Change of Control Event, for so long as the
requirements of Section 15(f) of the 1940 Act apply. The Board also considered
a comparison of the proposed advisory fees to be paid by each Fund to the
advisory fees paid by funds and other accounts managed by Victory Capital deemed
to be comparable to the Fund in terms of investment objectives and strategies.
The Board considered that, with few exceptions, mostly involving weighted
average fees for separate accounts, the advisory fees to be paid by the Funds
were lower than the fees paid by these other funds and accounts. The Board
concluded that the retention of Victory Capital was unlikely to impose an unfair
burden on the Funds because, after the Transaction, none of AMCO, Victory
Capital, VCA, or any of their respective affiliates, would be entitled to
receive any compensation directly or indirectly (i) from any person in
connection with the purchase or sale of securities or other property to, from,
or on behalf of the Funds (other than ordinary fees for bona fide principal
underwriting services), or (ii) from the Funds or their shareholders for other
than bona fide investment advisory or other services. Based on its review, the
Board determined, with respect to each Fund, that Victory Capital's advisory fee
is fair and reasonable.
THE EXTENT TO WHICH VICTORY CAPITAL MAY REALIZE ECONOMIES OF SCALE AS THE FUNDS
GROW LARGER AND WHETHER FEE LEVELS REFLECT THESE ECONOMIES OF SCALE FOR THE
BENEFIT OF FUND SHAREHOLDERS - The Board considered potential or anticipated
economies of scale in relation to the services Victory Capital would provide to
each Fund. The Board considered that the New Advisory Agreement includes the
same advisory fee breakpoints for the same Funds as
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44 | USAA VALUE FUND
================================================================================
the Existing Advisory Agreements. The Board also considered that Victory Capital
has contractually agreed to cap the Funds' annual operating expense ratios,
pursuant to the ELA, which will remain in effect for at least two years from the
closing of the Transaction, and may be extended. The Board also considered
Victory Capital's representation that the significant increase in its assets
under management Post-Transaction may reasonably be expected to enable the new
combined firm to reach greater economies of scale in a shorter time frame. The
Board noted that it will have the opportunity to periodically re-examine whether
a Fund or the Trust has achieved economies of scale, and the appropriateness of
investment advisory and administrative fees payable to Victory Capital, in the
future.
THE PROFITS TO BE REALIZED BY VICTORY CAPITAL AND ITS AFFILIATES FROM THEIR
RELATIONSHIP WITH THE TRUST - The Board considered the benefits Victory Capital
and its affiliates may derive from their relationship with the Funds, including
compensation to be paid to Victory Capital for the provision of certain
administrative, fund accounting and shareholder services to the Funds and
compensation to be paid to USAA Transfer Agent for the provision of transfer
agency services to the Funds. The Board considered the significant investments
Victory Capital expected to make to support and grow the USAA member channel and
the costs to integrate the USAA Fund business into Victory Capital. The Board
also considered Victory Capital's profitability report presented to the board of
trustees of the Victory Funds in connection with their most recent 15(c)
process. The Board considered Victory Capital's representation that the fully
integrated USAA Fund business, including investments to support ongoing growth,
was expected to have an overall marginally positive impact on Victory Capital's
overall financial profitability. The Board noted the difficulty of accurately
projecting profitability under the current circumstance and noted that it would
have the opportunity to give further consideration to Victory Capital's
profitability with respect to the Funds at the end of the initial two-year term
of the New Advisory Agreement.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
================================================================================
ADVISORY AGREEMENT(S) | 45
================================================================================
deliver investment products and services to USAA's direct member-based channel.
The Board also considered that Victory Capital may derive reputational and other
benefits from its ability to use "USAA" and related names in connection with
operating and marketing the Funds. The Board considered that the Transaction, if
completed, would significantly increase Victory Capital's assets under
management and expand Victory Capital's investment capabilities. This increased
size and diversification could facilitate Victory Capital's continued investment
in its business and products, which Victory Capital would be able to leverage
across a broader base of assets. Victory Capital also would be able to use
trading commission credits from the Funds' transactions in securities to
"purchase" third party research and execution services to support its investment
process. Based on its review, the Board determined that any "fall-out" benefits
and other types of benefits that may accrue to Victory Capital are fair and
reasonable.
CONCLUSIONS - Based on the foregoing and other relevant considerations, at the
Meeting of the Board held on January 15, 2019, the Board, including a majority
of the Independent Trustees, acting within its business judgment, (1) concluded
that the terms of the New Advisory Agreement are fair and reasonable and that
approval of the New Advisory Agreement is in the best interests of each Fund and
its respective shareholders, (2) voted to approve the New Advisory Agreement,
and (3) voted to recommend approval of the New Advisory Agreement by
shareholders of the Funds. The Board evaluated all information available to it
on a Fund-by-Fund basis and its determinations were made separately in respect
of each Fund. The Board noted some factors may have been more or less important
with respect to any particular Fund and that no one factor was determinative of
its decisions which, instead, were premised upon the totality of factors
considered. In this connection, the Board also noted that different Board
members likely placed emphasis on different factors in reaching their individual
conclusions to vote in favor of the New Advisory Agreement and to recommend
approval of the New Advisory Agreement by shareholders of the Funds.
FACTORS CONSIDERED IN APPROVING THE NEW SUBADVISORY AGREEMENTS
In approving the New Subadvisory Agreements with each of Barrow, Hanley,
Mewhinney & Strauss, LLC, Brandes Investment Partners, L.P., ClariVest Asset
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46 | USAA VALUE FUND
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Management LLC, Epoch Investment Partners, Inc., Granahan Investment Management,
Inc., Lazard Asset Management LLC, Loomis, Sayles & Company LP, Massachusetts
Financial Services Company, Northern Trust Investments, Inc., QS Investors, LLC,
The Renaissance Group LLP and Wellington Management Company LLP (each, a
"Subadviser" and together the "Subadvisers") with respect to the applicable
Funds, the Board considered various factors, among them: (i) the nature, extent,
and quality of services to be provided to the applicable Funds by the
Subadvisers; (ii) each Subadviser's compensation and any other benefits derived
from the subadvisory relationship; (iii) comparisons, to the extent applicable,
of subadvisory fees and performance to comparable investment companies; and (iv)
the terms of each New Subadvisory Agreement. The Board's evaluation of the New
Subadvisory Agreements reflected the information provided specifically in
connection with its review of the New Subadvisory Agreements, as well as, where
relevant, information that was previously furnished to the Board in connection
with the most recent renewal of the Existing Subadvisory Agreements at the 2018
15(c) meeting and at other subsequent Board meetings in 2018. A summary of the
Board's analysis of these factors is set forth below. After full consideration
of a variety of factors, the Board, including the Independent Trustees, voted to
approve each New Subadvisory Agreement. In approving each New Subadvisory
Agreement, the Board did not identify any single factor as controlling, and each
Trustee may have attributed different weights to various factors. The
Independent Trustees reviewed the proposed approval of the New Subadvisory
Agreements in private sessions with their independent legal counsel at which no
representatives of Victory Capital or AMCO were present.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY THE
SUBADVISERS - The Board considered information provided to them regarding the
services to be provided by each Subadviser, including information presented
periodically throughout the previous year. The Board considered each
Subadviser's level of knowledge and investment style. The Board reviewed the
experience and credentials of the investment personnel who are responsible for
managing the investment of portfolio securities with respect to each applicable
Fund and each Subadviser's level of staffing. The Board also noted each
Subadviser's brokerage practices. The Board also considered
================================================================================
ADVISORY AGREEMENT(S) | 47
================================================================================
each Subadviser's regulatory and compliance history. The Board also took into
account each Subadviser's risk management processes. The Board noted that AMCO's
monitoring processes of each Subadviser include, and Victory Capital's expected
monitoring processes of each Subadviser would include, among others: (i) regular
telephonic meetings to discuss, among other matters, investment strategies and
to review portfolio performance; (ii) monthly portfolio compliance checklists
and quarterly compliance certifications to the Board; and (iii) due diligence
visits to each Subadviser. The Board also considered that the terms and
conditions of the New Subadvisory Agreements are substantially similar to the
terms and conditions of the Existing Subadvisory Agreements.
SUBADVISER COMPENSATION - The Board took into account the financial condition of
each Subadviser. In considering the cost of services to be provided by each
Subadviser and the profitability to that Subadviser of its relationship with the
applicable Fund, the Board noted that the fees under the New Subadvisory
Agreements will be paid by Victory Capital. The Board also relied on the ability
of AMCO to negotiate each Existing Subadvisory Agreement and the fees thereunder
at arm's length. The Board considered that the fee rate to be payable under each
New Subadvisory Agreement were proposed to be identical to the fee rate
currently payable under each corresponding Existing Subadvisory Agreement. For
the above reasons, the Board determined that the expected profitability of each
Subadviser from its relationship with the applicable Fund was not a material
factor in its deliberations with respect to the consideration of the approval of
each New Subadvisory Agreement. For similar reasons, the Board concluded that
the potential for economies of scale in each Subadviser's management of the
applicable Fund was not a material factor in considering each New Subadvisory
Agreement, although the Board noted that certain New Subadvisory Agreements
contain breakpoints in their fee schedules.
SUBADVISORY FEES AND FUND PERFORMANCE - The Board previously compared the
subadvisory fees for each applicable Fund with the fees that each Subadviser
charges comparable clients, as applicable. The Board considered that each
applicable Fund will pay a management fee to Victory Capital and that, in turn,
Victory Capital will pay a subadvisory fee to each Subadviser.
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48 | USAA VALUE FUND
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At the 2018 15(c) meeting, the Board considered, among other data, each
applicable Fund's performance over shorter and longer term periods, as compared
to each Fund's respective peer group and noted that the Board reviews at its
regularly scheduled meetings information about each Fund's performance results.
The Board considered Victory Capital's capabilities with respect to monitoring
the performance, investment style and risk-adjusted performance of each
Subadviser. The Board also noted each Subadviser's performance record for
similar accounts, as applicable.
CONCLUSIONS - The Board reached the following conclusions regarding each New
Subadvisory Agreement, among others: (i) each Subadviser is qualified to manage
the applicable Fund's assets in accordance with its investment objective and
policies; (ii) each Subadviser maintains an appropriate compliance program;
(iii) the performance of each applicable Fund is reasonable in relation to the
performance of funds with similar investment objectives and to relevant indices
in view of the Fund's investment approach and Victory Capital is expected to
appropriately monitor each Fund's performance; and (iv) each Fund's advisory
expenses are reasonable in relation to those of similar funds and to the
services to be provided by Victory Capital and each Subadviser. Based on its
conclusions, the Board determined that the approval of each New Subadvisory
Agreement with respect to each applicable Fund would be in the best interests of
the Fund and its shareholders.
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ADVISORY AGREEMENT(S) | 49
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TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Richard Y. Newton III
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN, State Street Bank and Trust Company
ACCOUNTING AGENT, AND P.O. Box 1713
SUB-ADMINISTRATOR Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
Accounting Firm San Antonio, Texas 78205
--------------------------------------------------------------------------------
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) or (210) 531-8722;
(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 monthly portfolio holdings with the SEC
for the first and third quarters of each fiscal year as an exhibit to its
reports on Form N-PORT (beginning with filings after March 31, 2019).
Previously, the Fund made its complete schedule of portfolio holdings available
after the first and third fiscal quarters in regulatory filings on Form N-Q. The
Fund's Forms N-CSR, N-PORT, and N-Q are available at no charge (i) by calling
(800) 531-USAA (8722) or (210) 531-8722; (ii) at USAA.COM; and (iii) on the
SEC's website at HTTP://WWW.SEC.GOV.
================================================================================
--------------
USAA PRSRT STD
9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
--------------
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40847-0319 (C)2019, USAA. All rights reserved.
ITEM 2. CODE OF ETHICS.
NOT APPLICABLE. This item is only required in annual reports.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
NOT APPLICABLE. This item is only required annual reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
NOT APPLICABLE. This item is only required in annual reports.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
NOT APPLICABLE.
ITEM 6. SCHEDULE OF INVESTMENTS.
Included as part of the Report to Stockholders filed under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not Applicable to open-end management investment companies.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not Applicable to open-end management investment companies.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not Applicable to open-end management investment companies.
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 trustees. The Corporate Governance
Committee has adopted procedures to consider Board candidates suggested by
shareholders. The procedures are initiated by the receipt of nominations
submitted by a fund shareholder sent to Board member(s) at the address specified
in fund disclosure documents or as received by AMCO or a fund officer. Any
recommendations for a nomination by a shareholder, to be considered by the
Board, must include at least the following information: name; date of birth;
contact information; education; business profession and other expertise;
affiliations; experience relating to serving on the Board; and references. The
Corporate Governance Committee gives shareholder recommendations the same
consideration as any other candidate.
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 changes in the Trust's internal controls over financial
reporting (as defined in rule 30a-3(d)under the 1940 Act) that occurred
during the period covered by this report that have materially affected,
or are reasonably likely to materially affect, the Trust's internal control
over financial reporting.
ITEM 12. DISCLOSURE OF SECURITIES LENDING ACTIVITIES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not Applicable to open-end management investment companies.
ITEM 13. EXHIBITS.
(a)(1). NOT APPLICABLE. This item is only required 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.
(a)(4). 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 January 31, 2019
By:* /S/ KRISTEN MILLAN
-----------------------------------------------------------
Signature and Title: Kristen Millan, Secretary
Date: 03/25/2019
------------------------------
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: 03/26/2019
------------------------------
By:* /S/ JAMES K. DE VRIES
-----------------------------------------------------
Signature and Title: James K. De Vries, Treasurer
Date: 03/25/2019
------------------------------
*Print the name and title of each signing officer under his or her signature.