UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-7852
Exact name of registrant as specified in charter: USAA MUTUAL FUNDS TRUST
Address of principal executive offices and zip code: 9800 FREDERICKSBURG ROAD
SAN ANTONIO, TX 78288
Name and address of agent for service: CHRISTOPHER K. DYER
USAA MUTUAL FUNDS TRUST
9800 FREDERICKSBURG ROAD
SAN ANTONIO, TX 78288
Registrant's telephone number, including area code: 800-235-8396
Date of fiscal year end: MAY 31
Date of reporting period: MAY 31, 2019
ITEM 1. REPORTS TO STOCKHOLDERS.
USAA MUTUAL FUNDS TRUST - ANNUAL REPORTS FOR PERIOD ENDING MAY 31, 2019
[LOGO OF USAA USAA(R)]
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MUTUAL FUNDS
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May 31, 2019
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ANNUAL REPORT
USAA Cornerstone Aggressive Fund
FUND
SHARES
UCAGX
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) 235-8396 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)
235-8396 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.
Victory Capital means Victory Capital Management Inc., the investment manager of
the USAA Mutual Funds. USAA Mutual Funds are distributed by Victory Capital
Advisers, Inc., a broker dealer registered with FINRA and an affiliate of
Victory Capital. Victory Capital and its affiliates are not affiliated with
United Services Automobile Association or its affiliates. USAA and the USAA
logos are registered trademarks and the USAA Mutual Funds and USAA Investments
logos are trademarks of United Services Automobile Association and are being
used by Victory Capital and its affiliates under license.
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PRESIDENT'S MESSAGE
"... LONG-TERM INVESTORS SHOULD NEVER MAKE
DECISIONS IN HASTE. THEY SHOULD MAKE [PHOTO OF BROOKS ENGLEHARDT]
THOUGHTFUL DECISIONS BASED ON THEIR LONG-TERM
OBJECTIVES, TIME HORIZON, AND RISK TOLERANCE."
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JULY 2019
As previously announced, USAA, the parent company of USAA Asset Management
Company ("AMCO"), the prior investment adviser to the USAA Mutual Funds,
announced that AMCO would be acquired by Victory Capital Holdings, Inc. (Victory
Holdings), a global investment management firm headquartered in Cleveland, Ohio
(the Transaction). In connection with the Transaction, also as previous
announced, shareholders of each USAA Mutual Fund approved a new investment
advisory agreement with Victory Capital Management Inc. ("Victory Capital"), an
indirect wholly-owned subsidiary of Victory Holdings. The closing of the
Transaction occurred on July 1, 2019; and Victory Capital became the investment
adviser to each USAA Mutual Fund. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO
THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION ABOUT CHANGES THAT TOOK EFFECT ON JULY 1, 2019.
Softening global economic conditions and escalating trade tensions rattled
investors during the 12-month reporting period ended May 31, 2019. When the
reporting period began in June 2018, the global economy was expanding across
most regions and countries, led by the U.S. In this environment, stocks
generally advanced. In the fixed income market, U.S. Treasury yields rose, as
the U.S. Federal Reserve ("Fed") continued to tighten monetary policy.
Signs of trouble emerged during the summer of 2018. The U.S. economic expansion
continued, but growth in a number of other economies, including some European
countries and China, showed a weakening trend. By the autumn of 2018, investors'
fears of a global economic slowdown, combined with harsh U.S.-China trade
rhetoric and Brexit-related uncertainty in Europe, sparked a surge in market
volatility. Global stocks dropped, with most of the decline occurring in
December 2018. At the same time, intermediate- and longer-term yields fell, as
investors anticipated a change in Fed monetary policy. Indeed, after having
raised short-term interest rates four times during 2018, Fed officials announced
in January 2019 that they would "pause," retreating from their earlier plan to
raise interest rates in 2019. Stocks rallied in response and by April 2019 had
recovered most of the ground they had lost. In May 2019, ongoing trade tensions
between the United States and China, as well as President Trump administration's
threat to impose tariffs on Mexico, drove a renewed decline in stock prices. In
the fixed income market, concerns that trade disputes would seriously undermine
global
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economic growth pushed down intermediate- and longer-term yields, which ended
the reporting period lower than they started. The yield on the 10-year U.S.
Treasury note, which began June 2018 at 2.89%, rose to 3.24% on November 8,
2018--its high point of the period--and fell to 2.13% by May 31, 2019.
In the final months of the reporting period, the Treasury yield curve inverted,
which means that shorter-term yields were higher than longer-term yields. A
yield-curve inversion warrants attention because it has been a reliable
recession indicator. Although recessions do not automatically follow
inversions, a downward-sloped yield curve has preceded every U.S. recession
since the 1960s. That said, the lag between an inversion and a recession has
been inconsistent. At USAA Investments, A Victory Capital Investment Franchise,
we have found that during the past six decades, the time between inversion and
recession has ranged between six months and two years, with no clear pattern to
provide useful guidance. And as I write to you, we see no recession on the
horizon. First, the U.S. economy continues to grow, albeit at a slower pace than
in 2018. Second, the Fed has made clear its commitment to pause its interest
rate hikes, and there is a growing belief in the markets that policymakers may
even cut interest rates in 2019. (In early June 2019, after the end of the
reporting period, Fed Chair Jerome Powell stated that the U.S. central bank was
monitoring the escalation in trade tensions and could potentially respond by
cutting interest rates if U.S. economic conditions deteriorate.)
At USAA Investments, our team of portfolio managers will continue to monitor the
financial markets, economic conditions, the global trade regime, Fed policy, the
direction of longer-term interest rates, and other issues that have the
potential to affect your investments. In the meantime, I would advise you to
ignore media "noise" about such matters. Media "noise" is meant to provoke an
emotional reaction, which can lead to hasty decision-making. In my opinion,
long-term investors should never make decisions in haste. They should make
thoughtful decisions based on their long-term objectives, time horizon, and risk
tolerance. Dollar-cost averaging, in which you invest a set amount on a regular
basis, is a strategy that can help you stay on track. Another effective strategy
is diversification, which can potentially insulate a portfolio from market
turbulence or changes in performance leadership.
If you would like to review your portfolio to confirm that it is properly
aligned with your investment plan, please contact one of our financial advisors.
You might want to make that call before the summer gets fully underway. When we
are traveling and spending time with family and friends, it can be tempting to
put off decisions on financial matters.
From all of us at USAA Investments, A Victory Capital Investment Franchise,
thank you for the opportunity to help you with your investment needs.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
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TABLE OF CONTENTS
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MANAGERS' COMMENTARY 1
INVESTMENT OVERVIEW 5
SHAREHOLDER VOTING RESULTS 9
FINANCIAL INFORMATION
Distributions to Shareholders 10
Report of Independent Registered
Public Accounting Firm 11
Portfolio of Investments 12
Notes to Portfolio of Investments 35
Financial Statements 41
Notes to Financial Statements 44
Financial Highlights 62
EXPENSE EXAMPLE 63
ADVISORY AGREEMENT(S) 65
TRUSTEES' AND OFFICERS' INFORMATION 83
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) 235-8396.
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.
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MANAGERS' COMMENTARY ON THE FUND
WASIF A. LATIF ARNOLD J. ESPE, CFA
LANCE HUMPHREY, CFA
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o HOW DID THE GLOBAL FINANCIAL MARKETS PERFORM DURING THE 12-MONTH REPORTING
PERIOD ENDED MAY 31, 2019?
The world financial markets produced mixed results, reflecting investors'
struggle to assess the shifting outlook for economic growth.
During the reporting period, large-cap U.S. equities were the best performer
among the major asset classes. Domestic stocks performed very well in the
first half of the reporting period, during which both economic data and
corporate earnings came in above expectations. However, the market sold off
sharply in late 2018 due to the combination of worries about U.S. Federal
Reserve ("Fed") policy, the trade dispute between the United States and
China, and signs of slowing economic growth overseas. Stocks quickly
recovered from the downturn, and the main U.S. equity indexes went on to
post their best quarter in nearly 10 years during the first three months of
2019. A rapid shift in Fed policy was likely the key catalyst for the
rebound. Whereas the markets generally were expecting as late as October
2018 that the Fed would raise interest rates three to four times in 2019, a
series of statements from key officials indicated the Fed was in fact likely
finished raising interest rates for the foreseeable future. The reporting
period ended on a down note with a weak showing in May 2019, as stocks lost
some of their previous gains due to renewed worries about slowing growth and
the failure of the United States and China to resolve their trade impasse.
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MANAGERS' COMMENTARY ON THE FUND | 1
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The net effect of these sentiment swings was a narrow advance for large-cap
U.S. stocks, as gauged by the 3.47% gain of the Russell 1000 Index. The
Russell 2000 Index, a measure of performance for smaller companies, lagged
considerably with a return of -9.04%.
Developed-market international equities posted a loss over the 12-month
reporting period, largely as a result of the unexpectedly slow growth
outside of the United States. In combination with the weakness in foreign
currencies versus the U.S. dollar, the slowdown led to a loss of -5.75% for
the MSCI EAFE Index. Emerging-market stocks also closed in negative
territory, as gauged by the -8.70% return of the MSCI Emerging Markets
Index. Concerns about the global trade outlook and the prospect of slowing
growth in the developed world contributed to the underperformance for the
asset class.
Investment-grade bonds, after producing sluggish performance in the first
half of the reporting period, staged a strong rally from early November 2018
onward due in part to the Fed's shift toward a more accommodative policy.
The gains propelled the Bloomberg Barclays U.S. Aggregate Bond Index to a
return of 6.40% for the full reporting period. High-yield bonds also
performed reasonably well, as gauged by the 5.93% gain for the ICE BofAML
U.S. High Yield Index. Although high-yield issues fell sharply in late 2018
amid the evaporation of investor risk appetites, the category returned to
positive territory in early 2019.
o HOW DID THE USAA CORNERSTONE AGGRESSIVE FUND (THE "FUND") PERFORM DURING THE
REPORTING PERIOD?
For the reporting period ended May 31, 2019, the Fund had a total return of
-3.04%. This compares to a return of -1.29% for the MSCI
Refer to page 5 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
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2 | USAA CORNERSTONE AGGRESSIVE FUND
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All-Country World Index and 0.44% for the Cornerstone Aggressive Composite
Index.
Effective July 1, 2019, Victory Capital serves as the Fund's investment
adviser. Prior to July 1, 2019, AMCO served as the Fund's investment
adviser. The investment adviser provides day-to-day discretionary management
for the Fund's assets.
o PLEASE DISCUSS THE FACTORS THAT HELPED AND HURT PERFORMANCE.
Consistent with the broader market environment, the Fund's allocation to
large-cap U.S. equities was the key contributor to performance in the
reporting period. The Fund was weighted toward large-cap stocks over small
caps, which aided results. However, our preference for the value style
versus growth was out of step with the market. Performance was also hurt
somewhat by our bias in favor of international equities over U.S. equities.
We believe both developed- and emerging-market equities offer more
compelling valuations and greater upside potential than U.S. equities, but
this aspect of our approach detracted in the reporting period given the
outperformance of U.S. equities compared to international equities.
The Fund's bond portfolio performed well and made a meaningful contribution
to results. We generated robust performance from our decision to maintain a
sizable weighting in long-term U.S. Treasury securities based on our belief
that investors were overestimating the potential for accelerating economic
growth. Once the economy indeed began to slow in the fourth quarter of 2018,
our holdings in government bonds rallied in kind. An allocation to corporate
issues further benefited results at a time of relative strength for
credit-sensitive investments. We also would note that the Fund's bond
investments fulfilled their role of reducing portfolio volatility at a time
of significant swings in equities and other segments of the financial
markets. A weighting in high-yield bonds was an additional contributor.
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MANAGERS' COMMENTARY ON THE FUND | 3
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The majority of the key trends in the market have been in place for a
multi-year period, with domestic stocks outperforming bonds, the growth
style outpacing value, and U.S. equities exceeding the returns of the
foreign markets, to name just a few. Given the persistence of these
tendencies, it can be easy for investors to forget that asset class returns
tend to run in cycles. We, therefore, prefer to take a long-term view based
on the knowledge that even well-established market trends can--and do--shift
abruptly. Rather than trying to chase short-term performance, we continue to
emphasize diversification, fundamentals, and valuations. We believe this
steady approach, rather than one that attempts to respond to the latest
headlines, is the most effective way to navigate volatile markets.
Thank you for allowing us to help you manage your investments.
Asset Allocation funds may be invested in, among other things: (1)
exchange-traded funds (ETFs); (2) futures, options, and other derivatives;
(3) non-investment-grade securities; (4) precious metals and minerals
companies; (5) real estate investment trusts; (6) money market instruments;
(7) foreign and emerging markets. These types of investments and asset
classes may be more volatile and prone to experience significant loss than
others. In addition, it is possible that a particular asset allocation may
not produce the intended result. o As interest rates rise, bond prices
generally fall; given the historically low interest rate environment, risks
associated with rising interest rates may be heightened. o Foreign investing
is subject to additional risks, such as currency fluctuations, market
illiquidity, and political instability. Emerging market countries are less
diverse and mature than other countries and tend to be politically less
stable. o Precious metals and minerals is a volatile asset class and is
subject to additional risks, such as currency fluctuation, market
illiquidity, political instability, and increased price volatility. It may
be more volatile than other asset classes that diversify across many
industries and companies. o Non-investment-grade securities are considered
speculative and are subject to significant credit risk. They are sometimes
referred to as "junk" bonds since they represent a greater risk of default
than more credit worthy investment-grade securities. o Diversification is a
technique intended to help reduce risk and does not guarantee a profit or
prevent a loss. o ETFs are subject to risks similar to those of stocks.
Investment returns may fluctuate and are subject to market volatility, so
that an investor's shares, when redeemed or sold, may be worth more or less
than their original cost.
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4 | USAA CORNERSTONE AGGRESSIVE FUND
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INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/19 o
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SINCE INCEPTION
1 YEAR 5 YEAR 10 YEAR INCEPTION* DATE
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USAA Cornerstone
Aggressive Fund -3.04% 2.91% - 5.92% 6/08/12
MSCI All-Country
World Index** (reflects no
deduction for fees, expenses,
or taxes) -1.29% 5.21% 9.39% - -
Cornerstone Aggressive
Composite Index***
(reflects no deduction for
fees, expenses, or taxes) 0.44% 5.37% 9.42% - -
*Since inception returns are shown when a share class has less than 10 years of
performance. Total returns for periods of less than one year are not annualized.
**The unmanaged MSCI All-Country World Index is a free float-adjusted market
capitalization weighted index that is designed to measure the equity market
performance of developed and emerging markets.
***The Cornerstone Aggressive Composite Index is a combination of unmanaged
indexes representing the Fund's model allocation, and consists of the MSCI USA
Investable Market Index (IMI) Gross (46%), the MSCI ACWI ex USA IMI Net (30%),
the Bloomberg Barclays U.S. Universal Index (18%), the Bloomberg Commodity Index
Total Return (2%), the MSCI U.S. Real Estate Investment Trust (REIT) Index Gross
(2%), and the Bloomberg Barclays U.S. Treasury - Bills (1-3M) (2%).
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
usaa.com.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on net investment income and
realized capital gain distributions, including reinvested distributions, or
redemptions of shares.
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INVESTMENT OVERVIEW | 5
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o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
CORNERSTONE
MSCI ALL-COUNTRY AGGRESSIVE USAA CORNERSTONE
WORLD INDEX COMPOSITE INDEX AGGRESSIVE FUND
05/31/12 $10,000.00 $10,000.00 $10,000.00
06/30/12 10,493.89 10,375.19 10,330.00
07/31/12 10,637.55 10,512.07 10,390.00
08/31/12 10,868.84 10,708.77 10,610.00
09/30/12 11,211.17 10,965.51 10,850.00
10/31/12 11,136.45 10,884.98 10,810.00
11/30/12 11,278.85 10,984.63 10,870.00
12/31/12 11,534.33 11,164.56 11,071.00
01/31/13 12,065.70 11,586.21 11,400.00
02/28/13 12,063.82 11,627.36 11,328.00
03/31/13 12,284.39 11,858.61 11,502.00
04/30/13 12,635.33 12,110.82 11,656.00
05/31/13 12,600.66 12,100.44 11,605.00
06/30/13 12,232.36 11,814.94 11,276.00
07/31/13 12,817.95 12,280.90 11,698.00
08/31/13 12,550.90 12,052.86 11,472.00
09/30/13 13,199.17 12,536.33 11,821.00
10/31/13 13,729.68 12,947.18 12,211.00
11/30/13 13,924.12 13,100.30 12,345.00
12/31/13 14,164.33 13,292.33 12,510.00
01/31/14 13,597.75 12,973.13 12,155.00
02/28/14 14,254.63 13,499.26 12,625.00
03/31/14 14,318.01 13,541.51 12,645.00
04/30/14 14,454.31 13,631.63 12,739.00
05/31/14 14,761.74 13,875.31 12,938.00
06/30/14 15,039.67 14,121.09 13,188.00
07/31/14 14,857.27 13,926.31 12,990.00
08/31/14 15,185.48 14,250.64 13,219.00
09/30/14 14,693.04 13,846.68 12,812.00
10/31/14 14,796.48 14,021.69 12,896.00
11/30/14 15,043.97 14,208.40 13,052.00
12/31/14 14,753.68 14,042.85 12,856.00
01/31/15 14,523.01 13,914.63 12,758.00
02/28/15 15,331.53 14,497.23 13,290.00
03/31/15 15,093.97 14,359.85 13,106.00
04/30/15 15,531.92 14,614.57 13,344.00
05/31/15 15,511.65 14,641.37 13,410.00
06/30/15 15,146.48 14,370.10 13,116.00
07/31/15 15,278.01 14,457.58 13,192.00
08/31/15 14,230.68 13,708.05 12,454.00
09/30/15 13,715.12 13,351.28 12,074.00
10/31/15 14,791.55 14,148.43 12,769.00
11/30/15 14,669.41 14,074.73 12,682.00
12/31/15 14,404.86 13,859.39 12,415.00
01/31/16 13,536.09 13,224.63 11,805.00
02/29/16 13,442.98 13,194.21 11,727.00
03/31/16 14,439.21 14,014.89 12,393.00
04/30/16 14,652.35 14,202.69 12,537.00
05/31/16 14,670.82 14,266.61 12,570.00
06/30/16 14,582.01 14,285.15 12,603.00
07/31/16 15,210.40 14,780.85 13,014.00
08/31/16 15,261.58 14,807.45 13,014.00
09/30/16 15,355.08 14,885.93 13,092.00
10/31/16 15,094.44 14,626.92 12,881.00
11/30/16 15,209.15 14,754.17 12,914.00
12/31/16 15,537.71 15,021.22 13,117.00
01/31/17 15,962.58 15,329.77 13,376.00
02/28/17 16,410.38 15,704.34 13,646.00
03/31/17 16,611.09 15,812.48 13,781.00
04/30/17 16,870.00 16,016.32 13,961.00
05/31/17 17,242.53 16,259.45 14,153.00
06/30/17 17,320.93 16,345.00 14,220.00
07/31/17 17,804.96 16,697.12 14,502.00
08/31/17 17,873.19 16,768.72 14,535.00
09/30/17 18,218.49 17,039.20 14,772.00
10/31/17 18,596.81 17,314.62 15,008.00
11/30/17 18,956.82 17,605.46 15,233.00
12/31/17 19,262.45 17,835.03 15,465.00
01/31/18 20,349.13 18,535.72 16,030.00
02/28/18 19,494.53 17,870.19 15,404.00
03/31/18 19,077.24 17,688.86 15,320.00
04/30/18 19,259.40 17,761.92 15,356.00
05/31/18 19,283.42 17,929.71 15,404.00
06/30/18 19,179.04 17,879.76 15,296.00
07/31/18 19,757.44 18,283.11 15,621.00
08/31/18 19,912.60 18,477.72 15,693.00
09/30/18 19,999.30 18,486.40 15,681.00
10/31/18 18,500.57 17,353.28 14,683.00
11/30/18 18,771.15 17,596.10 14,851.00
12/31/18 17,449.01 16,581.72 14,019.00
01/31/19 18,826.78 17,729.43 14,987.00
02/28/19 19,330.37 18,122.36 15,216.00
03/31/19 19,573.40 18,351.29 15,318.00
04/30/19 20,234.35 18,840.88 15,649.00
05/31/19 19,034.05 18,008.41 14,936.00
[END CHART]
Data from 5/31/12 through 5/31/19.*
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Cornerstone Aggressive Fund to the benchmarks listed above (see page 5 for
benchmark definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged,
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes.
*The performance of the MSCI All-Country World Index and the Cornerstone
Aggressive Composite Index are calculated from the end of the month, May 31,
2012, while the inception date of the USAA Cornerstone Aggressive Fund is June
8, 2012. There may be a slight variation of performance numbers because of this
difference.
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6 | USAA CORNERSTONE AGGRESSIVE FUND
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o TOP 10 HOLDINGS* - 5/31/19 o
(% of Net Assets)
iShares Core S&P 500 ETF .................................................. 6.6%
iShares Core MSCI EAFE ETF ................................................ 6.3%
Schwab Fundamental International Large Company Index ETF .................. 5.9%
Vanguard FTSE Europe ETF .................................................. 3.4%
Schwab Fundamental Emerging Markets Large Company Index ETF ............... 3.1%
Vanguard FTSE Developed Markets ETF ....................................... 3.0%
iShares Core MSCI Emerging Markets ETF .................................... 2.9%
Vanguard Real Estate ETF .................................................. 2.7%
U.S. Treasury Note, 1.13%, 2/28/2021 ...................................... 2.1%
iShares MSCI Canada ETF ................................................... 2.1%
*Does not include futures, money market instruments and short-term investments
purchased with cash collateral from securities loaned.
Refer to the Portfolio of Investments for a complete list of securities.
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INVESTMENT OVERVIEW | 7
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o ASSET ALLOCATION* - 5/31/19 o
(% of Net Assets)
[PIE CHART OF ASSET ALLOCATION]
U.S. EQUITY SECURITIES 35.5%
INTERNATIONAL EQUITY SECURITIES 34.5%
U.S. TREASURY SECURITIES 10.6%
FIXED-INCOME EXCHANGE-TRADED FUNDS 5.3%
U.S. GOVERNMENT AGENCY ISSUES 4.2%
GLOBAL REAL ESTATE EQUITY SECURITIES 4.1%
MONEY MARKET INSTRUMENTS 2.0%
CORPORATE OBLIGATIONS 1.3%
PRECIOUS METALS AND COMMODITY-RELATED SECURITIES 1.3%
ASSET-BACKED SECURITIES 0.5%
EURODOLLAR AND YANKEE OBLIGATIONS 0.3%
COMMERCIAL MORTGAGE SECURITIES 0.2%
BANK LOANS 0.1%
COLLATERALIZED MORTGAGE OBLIGATIONS 0.1%
CONVERTIBLE SECURITIES 0.1%
[END CHART]
*Does not include futures and short-term investments purchased with cash
collateral from securities loaned.
Percentages are of net assets of the Fund and may not equal 100%.
================================================================================
8 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
SHAREHOLDER VOTING RESULTS
--------------------------------------------------------------------------------
On April 18, 2019, a special meeting of shareholders was held to vote on two
proposals relating to the series of the USAA Mutual Funds Trust (Trust).
Shareholders of record on February 8, 2019, were entitled to vote on each
proposal shown below. The proposals were approved by the shareholders.
The following proposals and voting results pertain to one or more series within
the Trust. Votes shown for Proposal 1 are for the Fund, a series of the Trust.
Votes shown for Proposal 2 are for all entire series of the Trust. The effective
date of the Proposals was July 1, 2019.
PROPOSAL 1
To approve a new Investment Advisory Agreement between the Trust, on behalf of
the Fund, and Victory Capital, an independent investment adviser. The new
Investment Advisory Agreement became effective upon the closing of the
Transaction (as defined and discussed in Note 1 to the Financial Statements)
whereby AMCO was acquired by Victory Holdings, the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
--------------------------------------------------------------------------------
12,893,399 1,049,197 1,522,145
PROPOSAL 2
Election of two new trustees to the Trust's Board of Trustees to serve upon the
closing of the Transaction: (1) David C. Brown, to serve as an "interested
trustee" as defined in the Investment Company Act of 1940, as amended (1940
Act); and (2) John C. Walters, to serve as a trustee who is not an "interested
person" as is defined under the 1940 Act ("Independent Trustee").
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
TRUSTEES FOR VOTES WITHHELD
--------------------------------------------------------------------------------
David C. Brown 8,299,565,565 820,887,736
John C. Walters 8,317,935,885 802,517,416
================================================================================
SHAREHOLDER VOTING RESULTS | 9
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
May 31, 2019, is provided for information purposes only and should not be used
for reporting to federal or state revenue agencies. Federal tax information for
the calendar year will be reported to you on Form 1099-DIV in January 2020.
With respect to distributions paid, the Fund designates the following amounts
(or, if subsequently determined to be different, the maximum amount allowable)
for the fiscal year ended May 31, 2019:
DIVIDEND RECEIVED LONG-TERM
DEDUCTION (CORPORATE CAPITAL GAIN QUALIFIED INTEREST
SHAREHOLDERS)(1) DISTRIBUTIONS(2) INCOME
--------------------------------------------------------------------------------
23.60% $7,317,000 $976,000
--------------------------------------------------------------------------------
(1) Presented as a percentage of net investment income and short-term capital
gain distributions paid, if any.
(2) Pursuant to Section 852 of the Internal Revenue Code.
For the fiscal year ended May 31, 2019, the Fund hereby designates the maximum
amount allowable of its net taxable income as qualified dividends taxed at
individual net capital gain rates.
================================================================================
10 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA CORNERSTONE AGGRESSIVE FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Cornerstone Aggressive Fund (the "Fund") (one of the funds constituting USAA
Mutual Funds Trust (the "Trust")), including the portfolio of investments, as of
May 31, 2019, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended, the financial highlights for each of the five years in the period
then ended and the related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Fund (one of the funds
constituting USAA Mutual Funds Trust) at May 31, 2019, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and its financial highlights for each of
the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
BASIS FOR OPINION
These financial statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on the Fund's financial statements based
on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and are required to
be independent with respect to the Trust in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Trust is not required to have,
nor were we engaged to perform, an audit of the Trust's internal control over
financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the Trust's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of May 31, 2019, by correspondence with the custodian and brokers or by
other appropriate auditing procedures where replies from brokers were not
received. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the auditor of one or more Victory Capital investment
companies since 1995.
San Antonio, Texas
July 23, 2019
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 11
================================================================================
PORTFOLIO OF INVESTMENTS
May 31, 2019
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
U.S. EQUITY SECURITIES (35.5%)
COMMON STOCKS (26.6%)
BASIC MATERIALS (0.4%)
----------------------
CHEMICALS (0.1%)
4,180 Huntsman Corp. $ 73
3,680 LyondellBasell Industries N.V. "A" 273
1,850 Rayonier Advanced Materials, Inc. 12
--------
358
--------
FOREST PRODUCTS & PAPER (0.2%)
12,830 International Paper Co. 532
9,960 Resolute Forest Products, Inc. 64
3,510 Schweitzer-Mauduit International, Inc. 110
--------
706
--------
IRON/STEEL (0.1%)
3,960 Cleveland-Cliffs, Inc. 34
3,830 Nucor Corp. 184
1,390 Reliance Steel & Aluminum Co. 116
6,990 Steel Dynamics, Inc. 176
--------
510
--------
Total Basic Materials 1,574
--------
COMMUNICATIONS (3.1%)
---------------------
ADVERTISING (0.3%)
16,110 Interpublic Group of Companies, Inc. 342
8,610 Omnicom Group, Inc. 666
--------
1,008
--------
INTERNET (0.3%)
260 Alphabet, Inc. "A"(a) 288
2,170 CDW Corp. 213
1,560 F5 Networks, Inc.(a) 206
1,300 IAC/InterActiveCorp(a) 287
7,270 NIC, Inc. 116
620 Stamps.com, Inc.(a) 21
--------
1,131
--------
================================================================================
12 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
MEDIA (1.0%)
29,490 Altice USA, Inc. "A" $ 693
17,940 CBS Corp. "B" 866
17,240 Comcast Corp. "A" 707
15,450 DISH Network Corp. "A"(a) 558
18,110 Entravision Communications Corp. "A" 53
1,660 Sinclair Broadcast Group, Inc. "A" 89
42,860 Sirius XM Holdings, Inc. 227
11,610 Viacom, Inc. "B" 337
--------
3,530
--------
TELECOMMUNICATIONS (1.5%)
15,710 AT&T, Inc. 481
3,280 Ciena Corp.(a) 115
25,260 Cisco Systems, Inc. 1,314
24,410 Corning, Inc. 704
1,010 InterDigital, Inc. 64
11,930 Juniper Networks, Inc. 294
950 Shenandoah Telecommunications Co. 38
5,860 T-Mobile US, Inc.(a) 430
35,330 Verizon Communications, Inc. 1,920
2,940 Vonage Holdings Corp.(a) 35
--------
5,395
--------
Total Communications 11,064
--------
CONSUMER, CYCLICAL (3.8%)
-------------------------
AIRLINES (0.3%)
7,270 Delta Air Lines, Inc. 374
5,230 Southwest Airlines Co. 249
3,310 United Continental Holdings, Inc.(a) 257
--------
880
--------
APPAREL (0.2%)
1,710 Carter's, Inc. 144
6,230 NIKE, Inc. "B" 480
--------
624
--------
AUTO MANUFACTURERS (0.1%)
8,030 General Motors Co. 268
5,460 Wabash National Corp. 74
--------
342
--------
AUTO PARTS & EQUIPMENT (0.2%)
2,620 Allison Transmission Holdings, Inc. 109
6,460 BorgWarner, Inc. 229
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
7,800 Dana, Inc. $ 114
2,110 Lear Corp. 251
4,820 Meritor, Inc.(a) 97
1,930 Methode Electronics, Inc. 48
2,860 Tenneco, Inc. "A" 28
--------
876
--------
DISTRIBUTION/WHOLESALE (0.2%)
13,800 Fastenal Co. 422
1,500 KAR Auction Services, Inc. 85
1,820 WESCO International, Inc.(a) 85
760 WW Grainger, Inc. 199
--------
791
--------
ENTERTAINMENT (0.1%)
8,390 Live Nation Entertainment, Inc.(a) 510
200 Red Rock Resorts, Inc. "A" 4
--------
514
--------
HOME BUILDERS (0.1%)
80 NVR, Inc.(a) 256
5,710 PulteGroup, Inc. 177
--------
433
--------
HOME FURNISHINGS (0.0%)
2,160 Ethan Allen Interiors, Inc. 46
--------
LEISURE TIME (0.3%)
1,120 Brunswick Corp. 47
5,650 Carnival Corp. 289
10,180 Harley-Davidson, Inc. 333
4,830 Norwegian Cruise Line Holdings Ltd.(a) 264
--------
933
--------
LODGING (0.1%)
4,440 Las Vegas Sands Corp. 244
--------
OFFICE FURNISHINGS (0.1%)
2,360 Herman Miller, Inc. 84
3,640 Knoll, Inc. 72
6,010 Steelcase, Inc. "A" 96
--------
252
--------
RETAIL (2.0%)
780 Asbury Automotive Group, Inc.(a) 58
5,070 Best Buy Co., Inc. 318
1,260 Big Lots, Inc. 35
5,470 Bloomin'Brands, Inc. 105
================================================================================
14 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
2,070 Buckle, Inc. $ 31
720 Cracker Barrel Old Country Store, Inc. 113
7,530 Del Taco Restaurants, Inc.(a) 81
1,790 Dick's Sporting Goods, Inc. 62
1,600 Foot Locker, Inc. 63
14,820 Gap, Inc. 277
1,180 Group 1 Automotive, Inc. 85
2,300 Home Depot, Inc. 436
5,510 Kohl's Corp. 272
1,680 La-Z-Boy, Inc. 54
710 Lithia Motors, Inc. "A" 81
4,350 Lowe's Cos, Inc. 406
1,430 Lululemon Athletica, Inc.(a) 237
11,750 Macy's, Inc. 242
1,880 McDonald's Corp. 373
1,300 MSC Industrial Direct Co., Inc. "A" 92
890 Nu Skin Enterprises, Inc. "A" 41
970 O'Reilly Automotive, Inc.(a) 360
1,190 Penske Automotive Group, Inc. 51
23,770 Qurate Retail, Inc.(a) 298
4,430 Ross Stores, Inc. 412
2,460 Rush Enterprises, Inc. "A" 87
7,260 Starbucks Corp. 552
9,300 TJX Companies, Inc. 468
3,480 Tractor Supply Co. 351
1,050 Ulta Salon Cosmetics & Fragrance, Inc.(a) 350
2,250 Urban Outfitters, Inc.(a) 50
9,020 Walgreens Boots Alliance, Inc. 445
1,300 Williams-Sonoma, Inc. 76
--------
6,962
--------
TEXTILES (0.1%)
2,700 Mohawk Industries, Inc.(a) 366
--------
Total Consumer, Cyclical 13,263
--------
CONSUMER, NON-CYCLICAL (6.3%)
-----------------------------
AGRICULTURE (0.1%)
7,710 Altria Group, Inc. 378
--------
BEVERAGES (0.5%)
15,280 Coca-Cola Co. 751
5,240 Molson Coors Brewing Co. "B" 288
6,360 PepsiCo, Inc. 814
--------
1,853
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
BIOTECHNOLOGY (0.9%)
4,960 Amgen, Inc. $ 827
2,400 Biogen, Inc.(a) 526
280 Bio-Rad Laboratories, Inc. "A"(a) 80
1,160 Cambrex Corp.(a) 46
5,230 Celgene Corp.(a) 491
1,240 Emergent BioSolutions, Inc.(a) 50
6,850 Exelixis, Inc.(a) 134
8,400 Gilead Sciences, Inc. 523
4,160 Halozyme Therapeutics, Inc.(a) 61
1,790 Myriad Genetics, Inc.(a) 44
90 REGENXBIO, Inc.(a) 4
3,700 United Therapeutics Corp.(a) 311
--------
3,097
--------
COMMERCIAL SERVICES (0.9%)
1,680 AMN Healthcare Services, Inc.(a) 81
1,780 Automatic Data Processing, Inc. 285
1,900 Avis Budget Group, Inc.(a) 54
950 Cardtronics plc "A"(a) 29
3,170 Ecolab, Inc. 584
940 Euronet Worldwide, Inc.(a) 146
880 FTI Consulting, Inc.(a) 74
6,730 Hackett Group, Inc. 108
2,960 Moody's Corp. 541
4,200 PayPal Holdings, Inc.(a) 461
3,620 Quad/Graphics, Inc. 30
2,570 S&P Global, Inc. 550
2,560 United Rentals, Inc.(a) 282
--------
3,225
--------
COSMETICS/PERSONAL CARE (0.3%)
2,320 Estee Lauder Companies, Inc. "A" 373
7,810 Procter & Gamble Co. 804
--------
1,177
--------
FOOD (0.8%)
1,490 Cal-Maine Foods, Inc. 55
4,220 Flowers Foods, Inc. 94
3,340 Hershey Co. 441
6,020 Hostess Brands, Inc.(a) 81
1,470 Ingles Markets, Inc. "A" 44
3,330 Ingredion, Inc. 254
3,080 JM Smucker Co. 374
19,780 Kroger Co. 451
================================================================================
16 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
740 Sanderson Farms, Inc. $ 101
5,710 Sysco Corp. 393
6,000 Tyson Foods, Inc. "A" 455
--------
2,743
--------
HEALTHCARE PRODUCTS (0.6%)
2,290 Bruker Corp. 96
4,100 Danaher Corp. 541
1,170 Edwards Lifesciences Corp.(a) 200
1,180 Hill-Rom Holdings, Inc. 113
1,450 IDEXX Laboratories, Inc.(a) 362
920 Masimo Corp.(a) 120
7,020 Meridian Bioscience, Inc. 79
3,850 Patterson Companies, Inc. 81
110 STERIS plc(a) 15
1,880 Thermo Fisher Scientific, Inc. 502
--------
2,109
--------
HEALTHCARE-SERVICES (0.7%)
1,040 Amedisys, Inc.(a) 117
340 Chemed Corp. 112
8,460 DaVita, Inc.(a) 367
1,460 Encompass Health Corp. 86
1,920 HCA Healthcare, Inc. 232
2,150 MEDNAX, Inc.(a) 53
310 Molina Healthcare, Inc.(a) 44
3,830 Quest Diagnostics, Inc. 367
4,800 Select Medical Holdings Corp.(a) 67
2,070 UnitedHealth Group, Inc. 501
3,850 Universal Health Services, Inc."B" 460
470 WellCare Health Plans, Inc.(a) 130
--------
2,536
--------
HOUSEHOLD PRODUCTS/WARES (0.1%)
6,970 ACCO Brands Corp. 52
510 Helen of Troy Ltd.(a) 68
780 Spectrum Brands Holdings, Inc. 41
--------
161
--------
PHARMACEUTICALS (1.4%)
5,730 AmerisourceBergen Corp. 446
4,900 Bristol-Myers Squibb Co. 222
8,400 Cardinal Health, Inc. 353
5,540 Corcept Therapeutics, Inc.(a) 54
6,270 CVS Health Corp. 328
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
840 Eagle Pharmaceuticals, Inc.(a) $ 43
2,600 Eli Lilly & Co. 301
760 Enanta Pharmaceuticals, Inc.(a) 69
7,120 Johnson & Johnson 934
3,150 McKesson Corp. 385
5,450 Merck & Co., Inc. 432
10,730 Pfizer, Inc. 446
1,360 Phibro Animal Health Corp. "A" 40
860 PRA Health Sciences, Inc.(a) 75
1,840 Prestige Consumer Healthcare, Inc.(a) 53
1,700 Supernus Pharmaceuticals, Inc.(a) 51
930 USANA Health Sciences, Inc.(a) 66
6,250 Zoetis, Inc. 632
--------
4,930
--------
Total Consumer, Non-cyclical 22,209
--------
ENERGY (1.4%)
-------------
COAL (0.0%)
2,170 Warrior Met Coal, Inc. 56
--------
ENERGY-ALTERNATE SOURCES (0.0%)
1,210 Renewable Energy Group, Inc.(a) 19
1,800 SolarEdge Technologies, Inc.(a) 96
--------
115
--------
OIL & GAS (1.1%)
11,860 ConocoPhillips 699
10,660 Exxon Mobil Corp. 754
9,100 HollyFrontier Corp. 346
10,790 Laredo Petroleum, Inc.(a) 28
7,490 Marathon Petroleum Corp. 344
2,960 Matador Resources Co.(a) 49
11,560 Occidental Petroleum Corp. 575
4,510 Par Pacific Holdings, Inc.(a) 88
2,140 PBF Energy, Inc."A" 57
6,320 Phillips 66 511
4,440 Valero Energy Corp. 313
--------
3,764
--------
OIL & GAS SERVICES (0.0%)
1,130 Core Laboratories N.V. 54
--------
PIPELINES (0.3%)
7,210 Antero Midstream Corp. 88
5,860 ONEOK, Inc. 373
11,370 Plains GP Holdings, LP "A"(a) 256
================================================================================
18 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
6,550 Tallgrass Energy, LP $ 156
--------
873
--------
Total Energy 4,862
--------
FINANCIAL (3.8%)
----------------
BANKS (1.7%)
29,040 Bank of America Corp. 773
1,970 Bank of Hawaii Corp. 149
4,170 BankUnited, Inc. 135
5,620 Cadence BanCorp 104
7,150 CIT Group, Inc. 340
20,260 Citigroup, Inc. 1,259
1,600 Cullen/Frost Bankers, Inc. 146
3,730 Great Western Bancorp, Inc. 116
14,140 J.P. Morgan Chase & Co. 1,498
15,270 KeyCorp. 244
2,590 PNC Financial Services Group, Inc. 330
15,250 Regions Financial Corp. 211
1,410 Synovus Financial Corp. 45
8,850 U.S. Bancorp. 444
1,790 Webster Financial Corp. 79
3,050 Western Alliance Bancorp(a) 126
--------
5,999
--------
DIVERSIFIED FINANCIAL SERVICES (1.3%)
3,080 Alliance Data Systems Corp. 423
12,610 Ally Financial, Inc. 364
6,420 American Express Co. 736
4,070 Capital One Financial Corp. 349
3,610 Discover Financial Services 269
1,570 LPL Financial Holdings, Inc. 126
3,640 Mastercard, Inc. "A" 915
2,130 Nelnet, Inc. "A" 126
10,634 Synchrony Financial 358
5,460 Virtu Financial, Inc. "A" 126
4,330 Visa, Inc. "A" 699
6,070 Waddell & Reed Financial, Inc."A" 98
1,040 World Acceptance Corp.(a) 138
--------
4,727
--------
INSURANCE (0.8%)
3,150 American Equity Investment Life Holding Co. 89
2,660 Aon plc 479
1,160 Berkshire Hathaway, Inc. "B"(a) 229
2,470 Employers Holdings, Inc. 103
================================================================================
PORTFOLIO OF INVESTMENTS | 19
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
3,990 Essent Group Ltd.(a) $ 187
6,490 MetLife, Inc. 300
4,970 MGIC Investment Corp.(a) 67
1,070 Primerica, Inc. 123
5,490 Principal Financial Group, Inc. 283
6,440 Progressive Corp. 511
2,850 Prudential Financial, Inc. 263
3,680 Radian Group, Inc. 83
2,410 Universal Insurance Holdings, Inc. 70
--------
2,787
--------
Total Financial 13,513
--------
INDUSTRIAL (2.5%)
-----------------
AEROSPACE/DEFENSE (0.4%)
1,200 Boeing Co. 410
1,750 Lockheed Martin Corp. 592
5,770 Spirit AeroSystems Holdings, Inc. "A" 468
--------
1,470
--------
BUILDING MATERIALS (0.2%)
2,090 Apogee Enterprises, Inc. 76
6,700 Cornerstone Building Brands, Inc.(a) 29
1,550 Masonite International Corp.(a) 74
7,740 Owens Corning 375
1,630 Patrick Industries, Inc.(a) 66
--------
620
--------
ELECTRICAL COMPONENTS & EQUIPMENT (0.0%)
2,030 Generac Holdings, Inc.(a) 112
--------
ELECTRONICS (0.8%)
3,260 Allegion plc 316
3,870 Atkore International Group, Inc.(a) 91
3,420 Garmin Ltd. 262
6,160 Gentex Corp. 132
4,050 Honeywell International, Inc. 665
3,220 Jabil, Inc. 79
5,490 KEMET Corp. 87
530 Mettler-Toledo International, Inc.(a) 383
2,150 PerkinElmer, Inc. 186
2,520 SMART Global Holdings, Inc.(a) 43
970 Tech Data Corp.(a) 88
1,480 Waters Corp.(a) 297
--------
2,629
--------
================================================================================
20 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
HAND/MACHINE TOOLS (0.0%)
1,390 Regal Beloit Corp. $ 101
--------
MACHINERY-CONSTRUCTION & MINING (0.1%)
3,220 Caterpillar, Inc. 386
--------
METAL FABRICATION/HARDWARE (0.0%)
2,350 Timken Co. 103
--------
MISCELLANEOUS MANUFACTURERS (0.4%)
3,050 3M Co. 487
1,300 Crane Co. 100
2,100 Hillenbrand, Inc. 78
3,150 Illinois Tool Works, Inc. 440
870 Sturm Ruger & Co., Inc. 43
2,470 Trinseo S.A. 91
--------
1,239
--------
PACKAGING & CONTAINERS (0.1%)
3,140 Berry Global Group, Inc.(a) 148
4,630 Silgan Holdings, Inc. 134
--------
282
--------
TRANSPORTATION (0.5%)
2,730 Air Transport Services Group, Inc.(a) 60
4,820 CSX Corp. 359
2,100 Norfolk Southern Corp. 410
2,380 Union Pacific Corp. 397
5,160 United Parcel Service, Inc. "B" 479
1,670 Werner Enterprises, Inc. 47
--------
1,752
--------
TRUCKING & LEASING (0.0%)
1,790 Greenbrier Companies, Inc. 49
--------
Total Industrial 8,743
--------
TECHNOLOGY (4.5%)
-----------------
COMPUTERS (1.3%)
2,600 Accenture plc "A" 463
6,940 Apple, Inc. 1,215
750 CACI International, Inc. "A"(a) 153
34,880 Hewlett Packard Enterprise Co. 478
1,610 Insight Enterprises, Inc.(a) 83
4,030 International Business Machines Corp. 512
2,250 MAXIMUS, Inc. 160
3,120 NCR Corp.(a) 95
================================================================================
PORTFOLIO OF INVESTMENTS | 21
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
4,190 NetApp, Inc. $ 248
3,140 Perspecta, Inc. 68
1,630 Science Applications International Corp. 125
14,120 Seagate Technology plc 591
9,560 Western Digital Corp. 356
--------
4,547
--------
OFFICE/BUSINESS EQUIPMENT (0.1%)
10,390 Pitney Bowes, Inc. 38
12,840 Xerox Corp. 393
--------
431
--------
SEMICONDUCTORS (1.1%)
6,270 Applied Materials, Inc. 243
2,050 Cirrus Logic, Inc.(a) 77
13,590 Intel Corp. 599
2,040 Lam Research Corp. 356
16,560 Micron Technology, Inc.(a) 540
690 MKS Instruments, Inc. 49
2,270 NVIDIA Corp. 307
3,170 Skyworks Solutions, Inc. 211
3,730 Teradyne, Inc. 157
6,540 Texas Instruments, Inc. 682
8,480 Ultra Clean Holdings, Inc.(a) 108
4,120 Xilinx, Inc. 422
--------
3,751
--------
SOFTWARE (2.0%)
1,260 Adobe, Inc.(a) 341
1,116 Covetrus, Inc.(a) 28
3,310 CSG Systems International, Inc. 148
3,910 Electronic Arts, Inc.(a) 364
2,900 Intuit, Inc. 710
1,760 j2 Global, Inc. 148
2,670 Manhattan Associates, Inc.(a) 175
22,740 Microsoft Corp. 2,813
1,860 MSCI, Inc. 409
6,980 Paychex, Inc. 599
3,440 Veeva Systems, Inc. "A"(a) 531
3,780 VMware, Inc. "A" 669
--------
6,935
--------
Total Technology 15,664
--------
================================================================================
22 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
UTILITIES (0.8%)
----------------
ELECTRIC (0.7%)
34,910 AES Corp. $ 552
2,040 Dominion Energy, Inc. 153
11,280 Exelon Corp. 542
1,370 IDACORP, Inc. 137
2,010 NextEra Energy, Inc. 399
10,270 PPL Corp. 306
7,480 Southern Co. 400
--------
2,489
--------
GAS (0.1%)
2,810 New Jersey Resources Corp. 134
1,600 Southwest Gas Holdings, Inc. 136
--------
270
--------
Total Utilities 2,759
--------
Total Common Stocks (cost: $96,473) 93,651
--------
EXCHANGE-TRADED FUNDS (8.6%)
84,000 iShares Core S&P 500 ETF 23,293
5,000 Vanguard Small-Cap Value ETF(b) 615
43,870 Vanguard Total Stock Market ETF 6,172
--------
Total Exchange-Traded Funds (cost: $30,566) 30,080
--------
PREFERRED STOCKS (0.3%)
COMMUNICATIONS (0.0%)
---------------------
TELECOMMUNICATIONS (0.0%)
8,000 Qwest Corp., 6.50%(c) 184
--------
CONSUMER, NON-CYCLICAL (0.1%)
-----------------------------
AGRICULTURE (0.1%)
8,000 CHS, Inc., cumulative redeemable "B", 7.88%(c),(d) 220
--------
FOOD (0.0%)
2,000 Dairy Farmers of America, Inc., cumulative redeemable, 7.88%(c),(d),(e) 197
--------
Total Consumer, Non-cyclical 417
--------
ENERGY (0.1%)
-------------
OIL & GAS (0.1%)
600 Chesapeake Energy Corp., 5.75%(c),(d),(e) 289
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 23
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
FINANCIAL (0.1%)
----------------
BANKS (0.1%)
235 M&T Bank Corp., cumulative redeemable, 6.38%(c),(d) $ 239
--------
Total Preferred Stocks (cost: $1,298) 1,129
--------
Total U.S. Equity Securities (cost: $128,337) 124,860
--------
INTERNATIONAL EQUITY SECURITIES (34.5%)
COMMON STOCKS (0.3%)
CONSUMER, CYCLICAL (0.1%)
-------------------------
AUTO PARTS & EQUIPMENT (0.1%)
3,860 Autoliv, Inc. 238
--------
CONSUMER, NON-CYCLICAL (0.1%)
-----------------------------
PHARMACEUTICALS (0.1%)
1,980 Jazz Pharmaceuticals plc(a) 248
--------
INDUSTRIAL (0.1%)
-----------------
ELECTRONICS (0.1%)
6,450 TE Connectivity Ltd. 543
--------
TECHNOLOGY (0.0%)
-----------------
SEMICONDUCTORS (0.0%)
3,130 Kulicke & Soffa Industries, Inc. 61
--------
Total Common Stocks (cost: $1,148) 1,090
--------
EXCHANGE-TRADED FUNDS (34.1%)
51,700 Invesco FTSE RAFI Developed Markets ex-US ETF 2,018
224,100 Invesco FTSE RAFI Emerging Markets ETF 4,614
369,200 iShares Core MSCI EAFE ETF 21,927
209,380 iShares Core MSCI Emerging Markets ETF 10,285
61,900 iShares Edge MSCI Min Vol EAFE ETF 4,397
66,200 iShares Edge MSCI Min Vol Emerging Markets ETF 3,780
262,000 iShares MSCI Canada ETF(b) 7,160
72,000 iShares MSCI United Kingdom ETF 2,282
397,400 Schwab Fundamental Emerging Markets Large Company Index ETF 10,869
783,300 Schwab Fundamental International Large Company Index ETF 20,781
91,800 Schwab Fundamental International Small Company Index ETF 2,750
14,790 SPDR S&P Emerging Markets SmallCap ETF 638
16,000 USAA MSCI Emerging Markets Value Momentum Blend Index ETF(f) 680
85,410 Vanguard FTSE All-World ex-US ETF 4,161
267,600 Vanguard FTSE Developed Markets ETF 10,661
800 Vanguard FTSE Emerging Markets ETF 33
================================================================================
24 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
228,200 Vanguard FTSE Europe ETF $ 11,992
16,645 WisdomTree Emerging Markets SmallCap Dividend Fund 748
--------
Total Exchange-Traded Funds (cost: $116,893) 119,776
--------
PREFERRED STOCKS (0.1%)
FINANCIAL (0.1%)
----------------
INSURANCE (0.1%)
12,000 Delphi Financial Group, Inc., cumulative redeemable, 5.71%,
(3 mo. LIBOR + 3.19%)(g) (cost: $302) 279
--------
Total International Equity Securities (cost: $118,343) 121,145
--------
------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
------------------------------------------------------------------------------------------------------------------
BONDS (22.7%)
ASSET-BACKED SECURITIES (0.5%)
ASSET BACKED SECURITIES (0.5%)
------------------------------
AUTOMOBILE ABS (0.4%)
$ 86 Americredit Automobile Receivables Trust 3.15% 3/20/2023 87
240 Americredit Automobile Receivables Trust 3.50 1/18/2024 246
42 Avis Budget Rental Car Funding AESOP, LLC(e) 2.96 7/20/2020 42
30 Avis Budget Rental Car Funding AESOP, LLC(e) 3.75 7/20/2020 30
271 Avis Budget Rental Car Funding AESOP, LLC(e) 2.50 2/20/2021 271
162 Credit Acceptance Auto Loan Trust(e) 4.29 11/15/2024 162
165 Credit Acceptance Auto Loan Trust(e) 3.55 8/15/2027 168
280 OSCAR U.S. Funding Trust IX, LLC(e) 3.63 9/10/2025 290
--------
1,296
--------
CREDIT CARD ABS (0.0%)
137 Synchrony Credit Card Master Note Trust 2.95 5/15/2024 136
--------
OTHER ABS (0.1%)
120 Element Rail Leasing I, LLC(e) 3.67 4/19/2044 124
38 NP SPE II, LLC(e) 3.37 10/21/2047 38
77 SCF Equipment Leasing, LLC(e) 3.41 12/20/2023 78
--------
240
--------
STUDENT LOAN ABS (0.0%)
50 Navient Student Loan Trust (1 mo. LIBOR + 1.50%) 3.93(g) 8/25/2050 50
--------
Total Asset Backed Securities 1,722
--------
Total Asset-Backed Securities (cost: $1,692) 1,722
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 25
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
BANK LOANS (0.1%)(H)
CONSUMER, CYCLICAL (0.1%)
-------------------------
RETAIL (0.1%)
$ 194 Academy, Ltd. (1 mo. LIBOR + 4.00%) 6.44% 7/01/2022 $ 141
100 Academy, Ltd. (1 mo. LIBOR + 4.00%) 6.48 7/01/2022 73
--------
Total Consumer, Cyclical 214
--------
Total Bank Loans (cost: $242) 214
--------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.1%)
MORTGAGE SECURITIES (0.1%)
--------------------------
WHOLE LOAN COLLATERAL CMO (0.1%)
29 Sequoia Mortgage Trust (1 mo. LIBOR + 0.90%) 3.34%(g) 9/20/2033 29
170 Structured Asset Mortgage Investments Trust
(1 mo. LIBOR + 0.50%) 2.94(g) 7/19/2035 164
30 Wells Fargo Mortgage Backed Securities Trust 5.16(i) 4/25/2035 30
--------
Total Mortgage Securities 223
--------
Total Collateralized Mortgage Obligations (cost: $229) 223
--------
COMMERCIAL MORTGAGE SECURITIES (0.2%)
MORTGAGE SECURITIES (0.2%)
--------------------------
COMMERCIAL MBS (0.2%)
39 Banc of America Commercial Mortgage Trust 5.66(i) 7/10/2044 14
7 Banc of America Commercial Mortgage Trust 6.57(i) 2/10/2051 6
9 Bear Stearns Commercial Mortgage Securities Trust(e) 5.66(i) 9/11/2041 9
160 BT-h21 Mortgage-Backed Securities Trust
(1 mo. LIBOR + 2.50%)(e) 4.81(g) 10/07/2021 160
2 Credit Suisse Commercial Mortgage Trust
(1 mo. LIBOR + 0.19%) 2.62(g) 2/15/2040 2
802 CSAIL Commercial Mortgage Trust(j) 1.79(i) 1/15/2049 68
250 FREMF Mortgage Trust(e) 3.51(i) 8/25/2045 250
20 GE Capital Commercial Mortgage Corp. 5.61(i) 12/10/2049 17
846 UBS Commercial Mortgage Trust(e),(j) 2.06(i) 5/10/2045 40
--------
Total Mortgage Securities 566
--------
Total Commercial Mortgage Securities (cost: $591) 566
--------
CONVERTIBLE SECURITIES (0.1%)
BASIC MATERIALS (0.1%)
----------------------
MINING (0.1%)
400 Pretium Resources, Inc. (cost: $376) 2.25 03/15/2022 378
--------
================================================================================
26 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS (1.3%)
COMMUNICATIONS (0.1%)
---------------------
TELECOMMUNICATIONS (0.1%)
$ 250 Hughes Satellite Systems Corp.(c) 6.50% 6/15/2019 $ 250
--------
CONSUMER, CYCLICAL (0.2%)
-------------------------
AIRLINES (0.0%)
27 Continental Airlines, Inc. Pass-Through Trust "B" 6.25 10/11/2021 28
--------
AUTO MANUFACTURERS (0.2%)
300 Harley-Davidson Financial Services, Inc.(c),(e) 3.55 5/21/2021 303
350 Hyundai Capital America(c),(e) 3.75 7/08/2021 356
--------
659
--------
Total Consumer, Cyclical 687
--------
CONSUMER, NON-CYCLICAL (0.0%)
-----------------------------
HEALTHCARE-SERVICES (0.0%)
300 Community Health Systems, Inc.(c) 6.88 2/01/2022 201
--------
ENERGY (0.2%)
-------------
PIPELINES (0.2%)
100 Enbridge Energy Partners, LP(c) 7.38 10/15/2045 143
400 EQM Midstream Partners, LP(c) 4.75 7/15/2023 408
190 Southern Union Co. (3 mo. LIBOR + 3.02%)(c) 5.60(g) 11/01/2066 148
150 Tallgrass Energy Partners, LP/Tallgrass
Energy Finance Corp.(c),(e) 5.50 9/15/2024 154
--------
Total Energy 853
--------
FINANCIAL (0.5%)
----------------
BANKS (0.1%)
200 Compass Bank(c) 3.88 4/10/2025 203
50 First Maryland Capital I (3 mo. LIBOR + 1.00%)(c) 3.60(g) 1/15/2027 46
200 SunTrust Capital I (3 mo. LIBOR + 0.67%)(c) 3.19(g) 5/15/2027 187
--------
436
--------
DIVERSIFIED FINANCIAL SERVICES (0.0%)
175 Cullen/Frost Capital Trust II (3 mo. LIBOR + 1.55%)(c) 4.07(g) 3/01/2034 151
--------
INSURANCE (0.4%)
200 Allstate Corp. (3 mo. LIBOR + 2.94%)(c) 5.75(k) 8/15/2053 205
350 Athene Holding Ltd.(c) 4.13 1/12/2028 344
200 HSB Group, Inc. (3 mo. LIBOR + 0.91%)(c) 3.51(g) 7/15/2027 172
300 Nationwide Mutual Insurance Co. (3 mo. LIBOR + 2.29%)(c),(e) 4.90(g) 12/15/2024 299
================================================================================
PORTFOLIO OF INVESTMENTS | 27
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
$ 200 Prudential Financial, Inc. (3 mo. LIBOR + 3.92%)(c) 5.63%(k) 6/15/2043 $ 208
--------
1,228
--------
INVESTMENT COMPANIES (0.0%)
100 Ares Capital Corp.(c) 3.63 1/19/2022 101
--------
Total Financial 1,916
--------
INDUSTRIAL (0.2%)
-----------------
ELECTRICAL COMPONENTS & EQUIPMENT (0.0%)
100 Artesyn Embedded Technologies, Inc.(c),(e) 9.75 10/15/2020 102
--------
MISCELLANEOUS MANUFACTURERS (0.1%)
105 General Electric Co.(c) 5.50 1/08/2020 107
--------
TRANSPORTATION (0.1%)
350 Ryder System, Inc.(c) 3.50 6/01/2021 355
--------
Total Industrial 564
--------
UTILITIES (0.1%)
----------------
ELECTRIC (0.1%)
267 NextEra Energy Capital Holdings, Inc.(c) 3.34 9/01/2020 269
--------
Total Corporate Obligations (cost: $4,650) 4,740
--------
EURODOLLAR AND YANKEE OBLIGATIONS (0.3%)
BASIC MATERIALS (0.0%)
----------------------
MINING (0.0%)
100 Newcrest Finance Pty. Ltd.(c),(e) 4.45 11/15/2021 103
--------
CONSUMER, CYCLICAL (0.1%)
-------------------------
AUTO MANUFACTURERS (0.1%)
400 BMW U.S. Capital, LLC(c),(e) 3.25 8/14/2020 403
--------
ENERGY (0.1%)
-------------
OIL & GAS (0.1%)
400 Petroleos Mexicanos(c) 5.38 3/13/2022 414
--------
OIL & GAS SERVICES (0.0%)
6 Schahin II Finance Co. SPV Ltd.(e),(l),(m),(n) 8.00(o) 5/25/2020 6
261 Schahin II Finance Co. SPV Ltd.(e),(p),(q) 5.88 9/25/2023 27
--------
33
--------
Total Energy 447
--------
================================================================================
28 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
FINANCIAL (0.1%)
----------------
INSURANCE (0.1%)
$ 200 QBE Capital Funding III Ltd. (USD Swap
Semi-Annual 30/360 10 YR + 4.05%)(c),(e) 7.25%(k) 5/24/2041 $ 211
--------
Total Eurodollar and Yankee Obligations (cost: $1,326) 1,164
--------
------------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
------------------------------------------------------------------------------------------------------------------
FIXED-INCOME EXCHANGE-TRADED FUNDS (5.3%)
42,587 Invesco Fundamental High Yield Corporate Bond ETF 788
18,470 iShares 20+ Year Treasury Bond ETF 2,435
23,690 iShares Core U.S. Aggregate Bond ETF 2,615
73,610 iShares iBoxx $ High Yield Corporate Bond ETF (b) 6,249
32,960 iShares iBoxx $ Investment Grade Corporate Bond ETF 3,983
5,500 Vanguard Short-Term Bond ETF 441
12,700 Vanguard Total Bond Market ETF 1,044
26,000 Xtrackers USD High Yield Corporate Bond ETF 1,273
--------
Total Fixed-Income Exchange-Traded Funds (cost: $18,458) 18,828
--------
------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY ISSUES (4.2%)(r)
COMMERCIAL MBS (0.5%)
$ 250 Fannie Mae(+) 2.15% 1/25/2023 248
700 Freddie Mac(+) 3.00 12/25/2025 723
300 Freddie Mac(+) 3.33(i) 5/25/2025 315
500 Freddie Mac(+) 3.51 4/25/2030 532
--------
1,818
--------
FGLMC COLLATERAL (3.4%)
440 Freddie Mac(+) 3.00 4/01/2046 444
1,313 Freddie Mac(+) 3.00 6/01/2046 1,325
477 Freddie Mac(+) 3.00 9/01/2046 481
240 Freddie Mac(+) 3.00 10/01/2046 243
811 Freddie Mac(+) 3.00 11/01/2046 818
1,674 Freddie Mac(+) 3.00 1/01/2047 1,688
846 Freddie Mac(+) 3.00 1/01/2047 853
814 Freddie Mac(+) 3.00 3/01/2047 820
866 Freddie Mac(+) 3.00 4/01/2047 872
================================================================================
PORTFOLIO OF INVESTMENTS | 29
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
$ 261 Freddie Mac(+) 3.00% 4/01/2047 $ 263
675 Freddie Mac(+) 3.00 9/01/2047 680
454 Freddie Mac(+) 3.00 10/01/2047 457
2,417 Freddie Mac(+)(c) 3.50 4/01/2046 2,475
467 Freddie Mac(+) 3.50 4/01/2048 478
--------
11,897
--------
UMBS COLLATERAL (0.3%)(S)
989 Fannie Mae(+) 4.00 4/01/2049 1,022
--------
Total U.S. Government Agency Issues (cost: $14,698) 14,737
--------
U.S. TREASURY SECURITIES (10.6%)
BONDS (2.4%)
30 U.S. Treasury Bond (STRIPS Principal) (Zero Coupon) 0.00 8/15/2044 16
3,100 U.S. Treasury Bond (STRIPS Principal) (Zero Coupon) 0.00 5/15/2045 1,579
100 U.S. Treasury Bond 2.50 2/15/2045 99
200 U.S. Treasury Bond 3.00 11/15/2044 216
700 U.S. Treasury Bond 3.00 5/15/2047 759
500 U.S. Treasury Bond 3.00 8/15/2048 542
1,500 U.S. Treasury Bond 3.00 2/15/2049 1,630
2,250 U.S. Treasury Bond 3.13 8/15/2044 2,485
1,000 U.S. Treasury Bond 3.38 11/15/2048 1,165
--------
8,491
--------
INFLATION-INDEXED NOTES (0.9%)
2,145 Inflation-Index Note 0.13 4/15/2021 2,124
1,060 Inflation-Index Note 0.13 7/15/2026 1,047
--------
3,171
--------
NOTES (7.3%)
7,500 U.S. Treasury Note(t) 1.13 2/28/2021 7,388
800 U.S. Treasury Note 1.63 4/30/2023 791
3,200 U.S. Treasury Note 1.63 2/15/2026 3,121
600 U.S. Treasury Note 1.63 5/15/2026 584
100 U.S. Treasury Note 2.00 2/15/2025 100
1,000 U.S. Treasury Note 2.25 11/15/2025 1,014
2,600 U.S. Treasury Note 2.25 2/15/2027 2,635
1,250 U.S. Treasury Note 2.25 8/15/2027 1,265
2,500 U.S. Treasury Note 2.25 11/15/2027 2,528
1,500 U.S. Treasury Note 2.38 5/15/2027 1,533
500 U.S. Treasury Note 2.50 1/31/2021 504
2,000 U.S. Treasury Note 2.75 2/15/2028 2,101
================================================================================
30 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
$ 2,000 U.S. Treasury Note 2.88% 5/15/2028 $ 2,123
--------
25,687
--------
Total U.S. Treasury Securities (cost: $36,191) 37,349
--------
Total Bonds (cost: $78,453) 79,921
--------
------------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
------------------------------------------------------------------------------------------------------------------
GLOBAL REAL ESTATE EQUITY SECURITIES (4.1%)
COMMON STOCKS (1.4%)
FINANCIAL (1.4%)
----------------
REAL ESTATE (0.4%)
13,820 CBRE Group, Inc. "A"(a) 632
3,710 HFF, Inc. "A" 160
2,510 Jones Lang LaSalle, Inc. 312
9,300 Realogy Holdings Corp. 66
1,910 RMR Group, Inc. "A" 92
--------
1,262
--------
REITS (1.0%)
2,740 American Tower Corp. 572
7,350 Chimera Investment Corp. 134
1,840 EPR Properties 144
4,900 Gaming and Leisure Properties, Inc. 193
6,760 GEO Group, Inc. 148
20,980 Kimco Realty Corp. 365
7,233 Ladder Capital Corp. 115
2,450 Lamar Advertising Co. "A" 192
3,650 LTC Properties, Inc. 163
11,600 Medical Properties Trust, Inc. 206
5,910 Omega Healthcare Investors, Inc. 211
3,896 PotlatchDeltic Corp. 131
3,150 Simon Property Group, Inc. 511
6,880 Tanger Factory Outlet Centers, Inc. 117
5,910 Washington Prime Group, Inc. 24
3,510 Welltower, Inc. 285
--------
3,511
--------
Total Financial 4,773
--------
Total Common Stocks (cost: $5,190) 4,773
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 31
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
EXCHANGE-TRADED FUNDS (2.7%)
109,760 Vanguard Real Estate ETF (cost: $8,983) $ 9,537
--------
Total Global Real Estate Equity Securities (cost: $14,173) 14,310
--------
PRECIOUS METALS AND COMMODITY-RELATED SECURITIES (1.3%)
COMMON STOCKS (0.0%)
BASIC MATERIALS (0.0%)
----------------------
MINING (0.0%)
8,197 Hycroft Mining Corp.(a),(l),(m),(q) (cost: $258) 1
--------
EXCHANGE-TRADED FUNDS (1.3%)
16,300 First Trust Global Tactical Commodity Strategy Fund 293
28,600 Invesco DB Commodity Index Tracking Fund 433
48,800 United States Commodity Index Fund(a) 1,774
77,900 VanEck Vectors Gold Miners ETF 1,682
12,000 VanEck Vectors Junior Gold Miners ETF 354
Total Exchange-Traded Funds (cost: $5,288) 4,536
--------
Total Precious Metals and Commodity-Related Securities (cost: $5,546) 4,537
--------
------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (2.0%)
COMMERCIAL PAPER (0.6%)
$ 500 CSLB Holdings, Inc.(e) 2.60% 6/14/2019 499
427 Enbridge, Inc.(e) 2.60 6/03/2019 427
500 Eversource Energy(e) 2.55 6/04/2019 500
488 PUBLIC SEVC. ENT. GR(e) 2.60 6/05/2019 488
--------
Total Commercial Paper (cost: $1,914) 1,914
--------
================================================================================
32 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (1.4%)
5,033,729 State Street Institutional Treasury Money Market Fund
Premier Class, 2.30%(c),(u) (cost: $5,034) $ 5,034
--------
Total Money Market Instruments (cost: $6,948) 6,948
--------
SHORT-TERM INVESTMENT PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (1.0%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (1.0%)
3,607,717 Goldman Sachs Financial Square Government Fund Institutional Class, 2.30%(u) 3,608
--------
Total Short-Term Investment Purchased with Cash Collateral from
Securities Loaned (cost: $3,608) 3,608
--------
TOTAL INVESTMENTS (COST: $355,408) $355,329
========
------------------------------------------------------------------------------------------------------------------
UNREALIZED
NOTIONAL CONTRACT APPRECIATION/
NUMBER OF EXPIRATION AMOUNT VALUE (DEPRECIATION)
CONTRACTS DESCRIPTION DATE (000) (000) (000)
------------------------------------------------------------------------------------------------------------------
FUTURES (3.6%)
LONG FUTURES
EQUITY CONTRACTS
91 E-mini S&P 500 6/21/2019 USD 12,564 $12,524 $ (40)
------- -----
TOTAL LONG FUTURES $12,524 $ (40)
------- -----
TOTAL FUTURES $12,524 $ (40)
======= =====
================================================================================
PORTFOLIO OF INVESTMENTS | 33
================================================================================
------------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
------------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------------------------------------------------------------------------------------------------------------
U.S. Equity Securities:
Common Stocks $ 93,651 $ - $- $ 93,651
Exchange-Traded Funds 30,080 - - 30,080
Preferred Stocks - 1,129 - 1,129
International Equity Securities:
Common Stocks 1,090 - - 1,090
Exchange-Traded Funds 119,776 - - 119,776
Preferred Stocks - 279 - 279
Bonds:
Asset-Backed Securities - 1,722 - 1,722
Bank Loans - 214 - 214
Collateralized Mortgage Obligations - 223 - 223
Commercial Mortgage Securities - 566 - 566
Convertible Securities - 378 - 378
Corporate Obligations - 4,740 - 4,740
Eurodollar and Yankee Obligations - 1,158 6 1,164
Fixed-Income Exchange-Traded Funds 18,828 - - 18,828
U.S. Government Agency Issues - 14,737 - 14,737
U.S. Treasury Securities 35,754 1,595 - 37,349
Global Real Estate Equity Securities:
Common Stocks 4,773 - - 4,773
Exchange-Traded Funds 9,537 - - 9,537
Precious Metals and Commodity-Related
Securities:
Common Stocks - - 1 1
Exchange-Traded Funds 4,536 - - 4,536
Money Market Instruments:
Commercial Paper - 1,914 - 1,914
Government & U.S. Treasury Money
Market Funds 5,034 - - 5,034
Short-Term Investment Purchased with
Cash Collateral from Securities Loaned:
Government & U.S. Treasury Money
Market Funds 3,608 - - 3,608
------------------------------------------------------------------------------------------------------------------
Total $326,667 $28,655 $7 $355,329
------------------------------------------------------------------------------------------------------------------
LIABILITIES LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------------------------------------------------------------------------------------------------------------
Futures(1) $ (40) $ - $- $ (40)
------------------------------------------------------------------------------------------------------------------
Total $ (40) $ - $- $ (40)
------------------------------------------------------------------------------------------------------------------
(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 May 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
34 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 2019
--------------------------------------------------------------------------------
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 35.7% of net assets at May 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,
mortgage loans on commercial real property. These securities represent
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 35
================================================================================
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.
U.S. TREASURY INFLATION-INDEXED NOTES - Designed to provide a real rate of
return after being adjusted over time to reflect the impact of inflation.
Their principal value periodically adjusts to the rate of inflation. They
trade at the prevailing real, or after-inflation, interest rates. The U.S.
Treasury guarantees repayment of these securities of at least their face
value in the event of sustained deflation or a drop in prices. Inflation
adjustments to the face value of these securities are included in interest
income.
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.
================================================================================
36 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
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.
STRIPS Separate trading of registered interest and principal of
securities
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) Non-income-producing security.
(b) The security, or a portion thereof, was out on loan as of May 31, 2019.
(c) The security, or a portion thereof, is segregated to cover the value of
open futures contracts at May 31, 2019.
(d) Security is perpetual and has no final maturity date but may be subject
to calls at various dates in the future.
(e) 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.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 37
================================================================================
(f) Investment in affiliated exchange-traded fund.
(g) Variable-rate security - interest rate is adjusted periodically. The
interest rate disclosed represents the rate at May 31, 2019.
(h) 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 May 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.
(i) Stated interest rates may change slightly over time as underlying
mortgages paydown.
(j) 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.
(k) 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.
================================================================================
38 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
(l) Security was fair valued at May 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 $7,000, which represented less than 0.1% of the Fund's net assets.
(m) Security was classified as Level 3.
(n) 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.
(o) All of the coupon is PIK.
(p) At May 31, 2019, the issuer was in default with respect to interest
and/or principal payments.
(q) Security deemed illiquid by USAA Asset Management Company, under
liquidity guidelines approved by USAA Mutual Funds Trust's Board of
Trustees.
(r) 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
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 39
================================================================================
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.
(s) Effective June 3, 2019, UMBS Collateral, new BICS industry, replaces
FNMA Collateral, former BICS industry.
(t) Securities with a value of $1,970,000 are segregated as collateral for
initial margin requirements on open futures contracts.
(u) Rate represents the money market fund annualized seven-day yield at
May 31, 2019.
See accompanying notes to financial statements.
================================================================================
40 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in unaffiliated securities, at market value (including securities on
loan of $3,510) (cost of $354,638) $354,649
Investments in affiliated underlying funds, at market value (cost of $770) 680
Cash 1,382
Receivables:
Capital shares sold 317
USAA Asset Management Company (Note 6) 148
Dividends and interest 495
Securities sold 256
Other 2
--------
Total assets 357,929
--------
LIABILITIES
Payables:
Upon return of securities loaned 3,608
Securities purchased 2,162
Capital shares redeemed 182
Bank overdraft 1
Payable to broker 194
Variation margin on futures contracts 40
Accrued management fees 183
Accrued transfer agent's fees 64
Other accrued expenses and payables 85
--------
Total liabilities 6,519
--------
Net assets applicable to capital shares outstanding $351,410
========
NET ASSETS CONSIST OF:
Paid-in capital $350,371
Distributable earnings 1,039
--------
Net assets applicable to capital shares outstanding $351,410
========
Capital shares outstanding, no par value 29,963
========
Net asset value, redemption price, and offering price per share $ 11.73
========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 41
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Income distributions from affiliated underlying funds $ 14
Dividends 7,334
Interest 1,723
Securities lending (net) 121
--------
Total income 9,192
--------
EXPENSES
Management fees 2,086
Administration and servicing fees 521
Transfer agent's fees. 1,230
Custody and accounting fees 191
Postage 71
Shareholder reporting fees 28
Trustees' fees 37
Registration fees 39
Professional fees 83
Other 14
--------
Total expenses 4,300
Expenses reimbursed (478)
--------
Net expenses 3,822
--------
NET INVESTMENT INCOME 5,370
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FOREIGN CURRENCY, AND FUTURES CONTRACTS
Net realized gain (loss) on:
Investments 4,460
Foreign currency transactions 2
Futures transactions (264)
Change in net unrealized appreciation/(depreciation) of:
Unaffiliated investments (20,205)
Affiliated investments (Note 8) (88)
Foreign currency translations 1
Futures contracts (178)
--------
Net realized and unrealized loss (16,272)
--------
Decrease in net assets resulting from operations $(10,902)
========
See accompanying notes to financial statements.
================================================================================
42 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
-------------------------------------------------------------------------------------------------------------
2019 2018
-------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 5,370 $ 3,742
Net realized gain on investments 4,460 20,754
Net realized gain on foreign currency transactions 2 138
Net realized gain on long-term capital gain distributions
from other investment companies - 8
Net realized gain (loss) on futures transactions (264) 3,040
Change in net unrealized appreciation/(depreciation) of:
Investments (20,293) (1,046)
Foreign currency translations 1 (16)
Futures contracts (178) (990)
------------------------------
Increase (decrease) in net assets resulting from operations (10,902) 25,630
------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS: (18,397) (20,579)
------------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 78,995 99,547
Reinvested dividends 17,634 19,583
Cost of shares redeemed (60,688) (63,280)
------------------------------
Increase in net assets from capital share transactions 35,941 55,850
------------------------------
Net increase in net assets 6,642 60,901
NET ASSETS
Beginning of year 344,768 283,867
------------------------------
End of year $351,410 $344,768
------------------------------
CHANGE IN SHARES OUTSTANDING
Shares sold 6,440 7,677
Shares issued for dividends reinvested 1,557 1,525
Shares redeemed (4,947) (4,870)
------------------------------
Increase in shares outstanding 3,050 4,332
==============================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 43
================================================================================
NOTES TO FINANCIAL STATEMENTS
May 31, 2019
--------------------------------------------------------------------------------
(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 Cornerstone Aggressive Fund (the Fund) qualifies as a registered
investment company under Accounting Standards Codification Topic 946. The
information presented in this annual 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 capital
appreciation over the long term and also considers the potential for current
income.
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 Holdings, a global investment management firm
headquartered in Cleveland, Ohio (the Transaction), on July 1, 2019.
A special shareholder meeting was held on April 18, 2019, at which shareholders
of the Fund approved a new investment advisory agreement between the Trust, on
behalf of the Fund, and Victory Capital, an independent investment management
company. In addition, shareholders of the Fund also elected the following two
new directors to the Board of the Trust to serve upon the closing of the
Transaction: (1) David C. Brown, to serve as an Interested Trustee; and (2) John
C. Walters, to serve as an Independent Trustee. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION.
================================================================================
44 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
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 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 45
================================================================================
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.
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.
================================================================================
46 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
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.
9. 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.
10. 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 net asset value (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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 47
================================================================================
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. 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
================================================================================
48 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
agreements held at May 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 unfavorable direction, in which
case, the Fund may not achieve the anticipated benefits of the futures
contracts.
FAIR VALUES OF DERIVATIVE INSTRUMENTS AS OF MAY 31, 2019*
(IN THOUSANDS)
LIABILITY DERIVATIVES
--------------------------------------------------------------------------------------------------
STATEMENT OF
DERIVATIVES NOT ASSETS AND FOREIGN
ACCOUNTED FOR AS LIABILITIES INTEREST RATE EQUITY EXCHANGE
HEDGING INSTRUMENTS LOCATION CONTRACTS CONTRACTS CONTRACTS TOTAL
--------------------------------------------------------------------------------------------------
USAA Cornerstone Distributable
Aggressive Fund earnings $- $(40)** $- $(40)
--------------------------------------------------------------------------------------------------
* For open derivative instruments as of May 31, 2019, see the Portfolio of
Investments, which also is indicative of activity for the year ended
May 31, 2019.
** 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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 49
================================================================================
THE EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF OPERATIONS FOR THE
YEAR ENDED MAY 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 Cornerstone Net realized gain
Aggressive Fund on Futures
transactions $- $(264) $- $(264)
------------------------------------------------------------------------------------------------------
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 Cornerstone Change in net
Aggressive Fund unrealized
appreciation/
(depreciation)
of Futures
contracts $- $(178) $- $(178)
------------------------------------------------------------------------------------------------------
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 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 year ended May 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
================================================================================
50 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
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
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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 51
================================================================================
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.
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.
================================================================================
52 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
(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 year ended May 31, 2019, the Fund paid CAPCO facility fees of $3,000,
which represents 0.4% of the total fees paid to CAPCO by the funds of the
Trusts. The Fund had no borrowings under this agreement during the year ended
May 31, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL
STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
(3) DISTRIBUTIONS
The character of any distributions made during the year from net investment
income or net realized gains is determined in accordance with federal tax
regulations and may differ from those determined in accordance with U.S.
generally accepted accounting principles. Also, due to the timing of
distributions, the fiscal year in which amounts are distributed may differ from
the year that the income or realized gains were recorded by the Fund.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 53
================================================================================
During the current fiscal year, permanent differences between book-basis and
tax-basis accounting for foreign currency, partnership basis, non-REIT return of
capital dividend, non-REIT capital gain dividend and additional adjustments
resulted in reclassifications to the Statement of Assets and Liabilities to
decrease distributable earnings by less than $500 and increase in paid in
capital by less than $500. These reclassifications had no effect on net assets.
The tax character of distributions paid during the years ended May 31, 2019, and
2018, was as follows:
2019 2018
--------------------------------
Ordinary income* $11,080,000 $ 9,090,000
Long-term realized capital gains 7,317,000 11,489,000
----------- -----------
Total distributions paid $18,397,000 $20,579,000
=========== ===========
As of May 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed long-term capital gains $1,965,000
Accumulated capital and other losses (209,000)
Unrealized depreciation of investments (716,000)
The difference between book-basis and tax-basis unrealized depreciation of
investments is attributable to the tax deferral of losses on wash sales, REIT
return of capital dividend, non-REIT return of capital dividend, futures
contracts marked-to-market, hybrid interest accrual adjustment, partnership
basis adjustments and rounding adjustments.
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 May 31, 2019, the Fund had no capital loss carryforwards, for federal income
tax purposes. Net capital losses incurred after October 31, and within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. For the year ended May 31, 2019, the Fund deferred to June 1,
2019, post October capital losses of $209,000.
================================================================================
54 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
TAX BASIS OF INVESTMENTS - At May 31, 2019, the aggregate cost of investments
for federal income tax purposes and net unrealized appreciation/(depreciation)
on investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION /
FUND TAX COST APPRECIATION DEPRECIATION (DEPRECIATION)
------------------------------------------------------------------------------------------------
USAA Cornerstone
Aggressive Fund $356,044,000 $12,848,000 $(13,563,000) $(715,000)
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended May 31, 2019, were $346,769,000 and
$325,474,000, 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 year ended May 31, 2019 were as
follows:
PURCHASES SALES NET REALIZED GAIN (LOSS)
--------------------------------------------------------------------------------
$268,000 $- $-
(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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 55
================================================================================
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 May 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
--------------------------------------------------------------------------------
$3,510,000 $- $3,608,000
(6) 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 year ended May 31, 2019, the Fund had no subadviser(s).
The Fund's investment management fee is accrued daily and paid monthly at an
annualized rate of 0.60% of the Fund's average daily net assets. For the year
ended May 31, 2019, the Fund incurred management fees, paid or payable to the
Manager, of $2,086,000.
In addition, the Fund invests in affiliated USAA exchange-traded fund(s) (ETFs).
The Fund's management fee is reimbursed by the Manager
================================================================================
56 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
to the extent of the indirect management fee incurred through the Fund's
proportional investment in the affiliated ETF(s). For the year ended May 31,
2019, the Fund's management fee was reimbursed by the Manager in an amount of
$2,000, of which less than $500 was receivable from the Manager. PLEASE REFER TO
THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR
ADDITIONAL IMPORTANT information.
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 the Fund's
average daily net assets for the fiscal year. For the year ended May 31, 2019,
the Fund incurred administration and servicing fees, paid or payable to the
Manager, of $521,000.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and legal
services for the benefit of the Fund. The Board has approved the reimbursement
of a portion of these expenses incurred by the Manager. For the year ended May
31, 2019, the Fund reimbursed the Manager $2,000 for these compliance and legal
services. These expenses are included in the professional fees on the Fund's
Statement of Operations. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
EXPENSE LIMITATION - The Manager agreed, through September 30, 2019, to limit
the total annual operating expenses of the Fund to 1.10% of its average daily
net assets, excluding extraordinary expenses and before reductions of any
expenses paid indirectly, and to reimburse the Fund for all expenses in excess
of that amount. This expense limitation arrangement may not be changed or
terminated through September 30, 2019, without approval of the Board, and may be
changed or terminated by the Manager at any time after that date. For the year
ended May 31, 2019, the Fund incurred reimbursable expenses of $478,000, of
which $148,000 was receivable from the Manager.
TRANSFER AGENT'S FEES - SAS, an affiliate of the Manager, provides transfer
agent services to the Fund based on an annual charge of $23 per shareholder
account plus out-of-pocket expenses. SAS pays a portion of these fees to
================================================================================
NOTES TO FINANCIAL STATEMENTS | 57
================================================================================
certain intermediaries for the administration and servicing of accounts that are
held with such intermediaries. For the year ended May 31, 2019, the Fund
incurred transfer agent's fees, paid or payable to SAS, of $1,230,000. PLEASE
REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL
REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
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. PLEASE REFER
TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT
FOR ADDITIONAL IMPORTANT INFORMATION.
(7) TRANSACTIONS WITH AFFILIATES
The Manager is indirectly wholly owned by USAA, a large, diversified financial
services institution. At May 31, 2019, USAA and its affiliates owned 1,111,000
shares, which represents 3.7% of the Fund's 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. PLEASE REFER TO THE SUBSEQUENT EVENT
NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
(8) TRANSACTIONS WITH AFFILIATED FUNDS
A. SHARE OWNERSHIP - The Fund does not invest in the affiliated USAA Funds for
the purpose of exercising management or control; however, investments by the
Fund may represent a significant portion of the affiliated USAA Funds' net
assets. The affiliated funds' annual or semiannual reports may be viewed at
usaa.com. At May 31, 2019, the Fund owned the following percentages of the
total outstanding shares of each of USAA Funds:
AFFILIATED USAA FUND OWNERSHIP %
--------------------------------------------------------------------------------
MSCI Emerging Markets Value
Momentum Blend Index ETF 0.4
================================================================================
58 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
B. TRANSACTIONS WITH AFFILIATED FUNDS - The following table provides details
related to the Fund's investment in the underlying USAA Funds for the year
ended May 31, 2019:
CHANGE IN
NET
($ IN 000s) REALIZED CAPITAL UNREALIZED
AFFILIATED PURCHASE SALES DIVIDEND GAIN GAIN APPRECIATION/ MARKET VALUE
USAA FUND COST PROCEEDS INCOME (LOSS) DISTRIBUTIONS DEPRECIATION 5/31/2018 5/31/2019
-----------------------------------------------------------------------------------------------------------------------------
MSCI
Emerging
Markets
Value
Momentum
Blend Index
ETF $468 $- $14 $- $- $(88) $300 $680
(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.
(10) RECENT ACCOUNTING PRONOUNCEMENTS
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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 59
================================================================================
(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 FASB issued 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 significant impact on the
financial statements and reporting disclosures of the Fund.
(11) SUBSEQUENT EVENT NOTE
As previously announced, and as discussed in Note 1 to the Financial Statements,
effective July 1, 2019, AMCO, the prior investment adviser to the Fund, and SAS,
the prior transfer agent to the Fund, were acquired by Victory Holdings. PLEASE
SEE THE SUPPLEMENT DATED JULY 1, 2019 TO THE FUND'S PROSPECTUS FOR ADDITIONAL
IMPORTANT INFORMATION.
Effective July 1, 2019, Victory Capital is the new investment adviser and
administrator to the USAA Mutual Funds; SAS was renamed Victory Capital Transfer
Agency, Inc.; Victory Capital Advisers, Inc. is the new distributor to the USAA
Mutual Funds; Citi Fund Services of Ohio, Inc. serves as sub-administrator and
sub-fund accountant for the USAA Mutual Funds; and FIS Investor Services LLC
serve as sub-transfer agent and dividend disbursing agent for the USAA Mutual
Funds. Effective August 5, 2019, Citibank, N.A. is the new custodian for the
USAA Mutual Funds.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2019 permitting the
use of a "manager-of-managers" structure for certain funds. Prior to that
================================================================================
60 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
date, the Trust relied on a similar exemptive order granted by the SEC to the
Trust and its affiliated persons. Under a manager of managers structure, the
investment adviser may select (with approval of the Board and without
shareholder approval) one or more subadvisers to manage the day-to-day
investment of a fund's assets.
Effective July 1, 2019, under the investment advisory agreement with Victory
Capital, which took effect on July 1, 2019, no performance adjustments will be
made for periods beginning July 1, 2019, through June 30, 2020, and only
performance beginning as of July 1, 2020, and thereafter will be utilized in
calculating performance adjustments through June 30, 2020.
Effective July 1, 2019, the line of credit (as discussed in the Notes to the
Financial Statements in this annual report) among the Trust, with respect to its
Funds, and CAPCO terminated; the Trust, with respect to its Funds, along with
series of Victory Portfolios, Victory Portfolios II and Victory Variable
Insurance Funds, entered into a 364 day committed credit facility and a 364 day
uncommitted, demand credit facility with Citibank, N.A. (Citibank). Each such
credit facility may be renewed if so agreed by the parties. Under the agreement
with Citibank, the Funds may borrow up to $600 million, of which $300 million is
committed and $300 million is uncommitted. Of this amount, $40 million of the
line of credit is reserved for use by the Victory Floating Rate Fund (a series
of Victory Portfolios), with that Fund paying the related commitment fees for
that amount. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption request that might otherwise require the untimely
disposition of securities. Citibank receives an annual commitment fee of 0.15%.
Each Fund pays a pro-rata portion of this commitment fee plus any interest on
amounts borrowed.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2017 (the IFL
Order), permitting the establishment and operation of an Interfund Lending
Facility (the Facility). The Facility allows each Fund to directly lend and
borrow money to or from certain other affiliated Funds relying upon the IFL
Order at rates beneficial to both the borrowing and lending funds. Advances
under the Facility are allowed for temporary or emergency purposes, including
the meeting of redemption requests that are subject to each Fund's borrowing
restrictions. The interfund loan rate is determined, as specified in the IFL
Order, by averaging the current repurchase agreement rate and the current bank
loan rate.
================================================================================
FINANCIAL HIGHLIGHTS | 61
================================================================================
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
------------------------------------------------------------------------
2019 2018 2017 2016 2015
------------------------------------------------------------------------
Net asset value at
beginning of period $ 12.81 $ 12.57 $ 11.33 $ 12.35 $ 12.40
------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .15 .16 .15 .17 .15
Net realized and
unrealized gain (loss) (.57) .94 1.26 (.95) .29
------------------------------------------------------------------------
Total from investment
operations (.42) 1.10 1.41 (.78) .44
------------------------------------------------------------------------
Less distributions from:
Net investment income (.18) (.14) (.17) (.16) (.17)
Realized capital gains (.48) (.72) - (.08) (.32)
------------------------------------------------------------------------
Total distributions (.66) (.86) (.17) (.24) (.49)
------------------------------------------------------------------------
Net asset value at
end of period $ 11.73 $ 12.81 $ 12.57 $ 11.33 $ 12.35
========================================================================
Total return (%)* (3.04) 8.85 12.59 (6.26) 3.65
Net assets at
end of period (000) $351,410 $344,768 $283,867 $222,224 $202,327
Ratios to average daily
net assets:**
Expenses (%)(a) 1.10 1.10 1.10 1.10 1.10
Expenses, excluding
reimbursements (%)(a) 1.24 1.25 1.36 1.46 1.45
Net investment income 1.54 1.18 1.32 1.57 1.32
Portfolio turnover (%) 95(c) 65 70 81(b) 46
* 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 year ended May 31, 2019, average daily net assets were $347,744,000.
(a) Does not include acquired fund fees, if any.
(b) Reflects increased trading activity due to changes in asset allocation
strategies.
(c) Reflects increased trading activity due to usage of quantitative investment
strategies.
================================================================================
62 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
EXPENSE EXAMPLE
May 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 December 1, 2018, through May
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
================================================================================
EXPENSE EXAMPLE | 63
================================================================================
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 DECEMBER 1, 2018 -
DECEMBER 1, 2018 MAY 31, 2019 MAY 31, 2019
-----------------------------------------------------------------
Actual $1,000.00 $1,005.70 $5.50
Hypothetical
(5% return before expenses) 1,000.00 1,019.45 5.54
*Expenses are equal to the Fund's annualized expense ratio of 1.10%, which is
net of any reimbursements and expenses paid indirectly, multiplied by the
average account value over the period, multiplied by 182 days/365 days (to
reflect the one-half-year period). The Fund's actual ending account value is
based on its actual total return of 0.57% for the six-month period of December
1, 2018, through May 31, 2019.
================================================================================
64 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the (i) new investment
advisory agreement between the Trust and Victory Capital and (ii) new investment
subadvisory agreements between certain subadvisers and Victory Capital, which
became effective on July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO
THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
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.
================================================================================
ADVISORY AGREEMENT(S) | 65
================================================================================
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 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
================================================================================
66 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
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 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.
================================================================================
ADVISORY AGREEMENT(S) | 67
================================================================================
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.
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).
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68 | USAA CORNERSTONE AGGRESSIVE FUND
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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.
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.
(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) | 69
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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 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.
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70 | USAA CORNERSTONE AGGRESSIVE FUND
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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 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,
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ADVISORY AGREEMENT(S) | 71
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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.
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.
(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 CORNERSTONE AGGRESSIVE FUND
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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 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
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ADVISORY AGREEMENT(S) | 73
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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 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.
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74 | USAA CORNERSTONE AGGRESSIVE FUND
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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 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.
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ADVISORY AGREEMENT(S) | 75
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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
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.
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76 | USAA CORNERSTONE AGGRESSIVE FUND
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND THE MANAGER)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the continuation of the (i)
investment advisory agreement between the Trust and AMCO and (ii) investment
subadvisory agreements between certain subadvisers and AMCO, which were
effective until July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
At an in-person meeting of the Board of Trustees (the Board) held on April 17,
2019, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to the
Fund.(1)
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and the Manager, and were given
the opportunity to ask questions and request additional information from
management. The information provided to the Board included, among other things:
(i) a separate report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance, expenses, and
fees to comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the Manager's
revenues and costs of providing services to the Fund and compensation paid to
affiliates of the Manager;
(1)At an in-person meeting held on January 15, 2019, the Board, including the
Independent Trustees, approved a new investment advisory agreement between
the Trust, on behalf of the Fund, and Victory Capital Management Inc.
("Victory Capital"). Upon the closing of the transaction, on behalf of the
Fund, Victory Capital Holdings, Inc., the parent company of Victory Capital,
the Advisory Agreement between the Trust and the Manager will terminate and
the new investment advisory agreement between the Trust and Victory Capital
will go into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are included in this
annual report.
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ADVISORY AGREEMENT(S) | 77
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and (iii) information about the Manager's operations and personnel. Prior to
voting, the Independent Trustees reviewed the proposed continuance of the
Advisory Agreement with management and with experienced independent legal
counsel retained by the Independent Trustees (Independent Counsel) and received
materials from such Independent Counsel discussing the legal standards for their
consideration of the proposed continuation of the Advisory Agreement with
respect to the Fund. The Independent Trustees also reviewed the proposed
continuation of the Advisory Agreement with respect to the Fund in private
sessions with Independent Counsel at which no representatives of management were
present.
At each regularly scheduled meeting of the Board and its committees, the Board
receives and reviews, among other things, information concerning the Fund's
performance and related services provided by the Manager. At the meeting at
which the renewal of the Advisory Agreement is considered, particular focus is
given to information concerning Fund performance, fees and total expenses as
compared to comparable investment companies, and the Manager's profitability
with respect to the Fund. However, the Board noted that the evaluation process
with respect to the Manager is an ongoing one. In this regard, the Board's and
its committees' consideration of the Advisory Agreement included certain
information previously received at such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving the
Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent, and
quality of the services provided by the Manager under the Advisory Agreement,
the Board reviewed information provided by the Manager relating to its
operations and personnel. The Board also took into account its knowledge of the
Manager's management and the quality of the
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78 | USAA CORNERSTONE AGGRESSIVE FUND
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performance of the Manager's duties through Board meetings, discussions, and
reports during the preceding year. The Board considered the fees paid to the
Manager and the services provided to the Fund by the Manager under the Advisory
Agreement, as well as other services provided by the Manager and its affiliates
under other agreements, and the personnel who provide these services. In
addition to the investment advisory services provided to the Fund, the Manager
and its affiliates provide administrative services, shareholder services,
oversight of Fund accounting, marketing services, assistance in meeting legal
and regulatory requirements, and other services necessary for the operation of
the Fund and the Trust. The Board also considered the significant risks assumed
by the Manager in connection with the services provided to the Fund, including
investment, operational, enterprise, litigation, regulatory and compliance
risks.
The Board considered the Manager's management style and the performance of the
Manager's duties under the Advisory Agreement. The Board considered the level
and depth of experience of the Manager, including the professional experience
and qualifications of its senior and investment personnel, as well as current
staffing levels. The allocation of the Fund's brokerage, including the Manager's
process for monitoring "best execution," also was considered. The Manager's role
in coordinating the activities of the Fund's other service providers also was
considered. The Board also considered the Manager's risk management processes.
The Board considered the Manager's financial condition and that it had the
financial wherewithal to continue to provide the same scope and high quality of
services under the Advisory Agreement. In reviewing the Advisory Agreement, the
Board focused on the experience, resources, and strengths of the Manager and its
affiliates in managing the Fund, as well as the other funds in the Trust.
The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager and its affiliates, including oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust,
also focused on the quality of the Manager's compliance and administrative
staff.
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ADVISORY AGREEMENT(S) | 79
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EXPENSES AND PERFORMANCE - In connection with its consideration of the Advisory
Agreement, the Board evaluated the Fund's advisory fees and total expense ratio
as compared to other open-end investment companies deemed to be comparable to
the Fund as determined by the independent third party in its report. The Fund's
expenses were compared to (i) a group of investment companies chosen by the
independent third party to be comparable to the Fund based upon certain factors,
including fund type, comparability of investment objective and classifications,
sales load type (in this case, retail investment companies with no sales loads),
asset size, and expense components (the "expense group") and (ii) a larger group
of investment companies that includes all no-load retail open-end investment
companies with the same investment classification/objective as the Fund
regardless of asset size, excluding outliers (the "expense universe"). Among
other data, the Board noted that the Fund's management fee rate - which includes
advisory and administrative services as well as any fee waivers or
reimbursements - was below the median of its expense group and its expense
universe. The data indicated that the Fund's total expenses, after
reimbursements, were below the median of its expense group and above the median
of its expense universe. The Board took into account the various services
provided to the Fund by the Manager and its affiliates, including the high
quality of services received by the Fund from the Manager. The Board also noted
the level and method of computing the management fee. The Board also took into
account the Manager's undertaking to maintain expense limitations for the Fund.
The Board also took into account management's discussion of the Fund's expenses.
The Board also considered that the Fund's management fee rate was reduced in
October 2016 and reduced further in October 2017.
In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total return with its Lipper index and with that of other mutual funds deemed to
be in its peer group by the independent third party in its report (the
"performance universe"). The Fund's performance
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80 | USAA CORNERSTONE AGGRESSIVE FUND
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universe consisted of the Fund and all retail and institutional open-end
investment companies with the same classification/objective as the Fund
regardless of asset size or primary channel of distribution. This comparison
indicated that, among other data, the Fund's performance was lower than the
average of its performance universe and its Lipper index for the one-, three-
and five-year periods ended December 31, 2018. The Board also noted that the
Fund's percentile performance ranking was in the bottom 50% of its performance
universe for the one-, three- and five-year periods ended December 31, 2018. The
Board took into account management's discussion of the Fund's performance,
including the Fund's investment approach and the impact of market conditions on
the Fund's performance.
COMPENSATION AND PROFITABILITY - The Board took into consideration the level and
method of computing the Fund's management fee. The information considered by the
Board included operating profit margin information for the Manager's business as
a whole. The Board also received and considered profitability information
related to the management revenues from the Fund. This information included a
review of the methodology used in the allocation of certain costs to the Fund.
In considering the profitability data with respect to the Fund, the Trustees
noted that the Manager has reimbursed a portion of its management fees to the
Fund. The Trustees reviewed the profitability of the Manager's relationship with
the Fund before tax expenses. The Board was also provided with an Investment
Management Profitability Analysis prepared by an independent information
service. In reviewing the overall profitability of the management fee to the
Manager, the Board also considered the fact that the manager and its affiliates
provide shareholder servicing and administrative services to the Fund for which
they receive compensation. The Board also considered the possible direct and
indirect benefits to the Manager from its relationship with the Trust, including
that the Manager may derive reputational and other benefits from its association
with the Fund. The Trustees recognized that the Manager should be entitled to
earn a reasonable level of profits in exchange for the level of services it
provides to the Fund and the entrepreneurial and other risks that it assumes as
Manager.
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ADVISORY AGREEMENT(S) | 81
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ECONOMIES OF SCALE - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussions of
the current advisory fee structure. The Board also considered the fee waiver and
expense reimbursement arrangements by the Manager. The Board also considered the
effect of the Fund's growth and size on its performance and fees, noting that if
the Fund's assets increase over time, the Fund may realize other economies of
scale if assets increase proportionally more than some expenses. The Board
determined that the current investment management fee structure was reasonable.
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) the performance of the Fund is
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
management is appropriately monitoring the Fund's performance; (iv) the Fund's
advisory expenses are reasonable in relation to those of similar funds and to
the services to be provided by the Manager; and (v) the Manager's and its
affiliates' level of profitability from its relationship with the Fund is
reasonable in light of the nature and high quality of services provided by the
Manager and the type of fund. Based on its conclusions, the Board determined
that continuation of the Advisory Agreement would be in the best interests of
the Fund and its shareholders.
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82 | USAA CORNERSTONE AGGRESSIVE FUND
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TRUSTEES' AND OFFICERS' INFORMATION
TRUSTEES AND OFFICERS OF THE TRUST
--------------------------------------------------------------------------------
As of July 1, 2019, the Board of Trustees (the Board) of the Trust consists of
ten Trustees. These Trustees and the Trust's Officers supervise the business
affairs of the USAA family of funds. The Board is responsible for the general
oversight of the funds' business and for assuring that the funds are managed in
the best interests of each fund's respective shareholders. The Board
periodically reviews the funds' investment performance as well as the quality of
other services provided to the funds and their shareholders by each of the
fund's service providers, including the adviser and its affiliates. Pursuant to
a policy adopted by the Board, the term of office for each Trustee shall be
until the Trustee reaches age 75. The Board may change or grant exceptions from
this policy at any time without shareholder approval. A Trustee may resign or be
removed by a vote of two-thirds of the Trustees before the removal or by the
holders of two-thirds of the outstanding shares of the Trust at any time.
Vacancies on the Board can be filled by the action of a majority of the
Trustees, provided that after filling such vacancy at least two-thirds of the
Trustees have been elected by the shareholders.
Set forth below are the Trustees and Officers of the Trust, their respective
offices and principal occupations during the last five years, length of time
served, and information relating to any other directorships held. As of July 1,
2019, each serves on the Board of the USAA family of funds consisting of one
registered investment company, which offers 47 individual funds. Unless
otherwise indicated, the business address for each is P.O. Box 659430, San
Antonio, TX 78265-9430.
If you would like more information about the funds' Trustees, you may call (800)
235-8396 to request a free copy of the funds' Statement of Additional
Information (SAI).
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TRUSTEES' AND OFFICERS' INFORMATION | 83
================================================================================
In connection with the Transaction, the Board of the Trust nominated, and
shareholders of each USAA mutual fund approved, two new Trustees to serve on the
Trust's Board, effective upon the closing of the Transaction. Effective July 1,
2019, David C. Brown serves as an Interested Trustee and John C. Walters serves
as an Independent Trustee. Information about the current Trustees of the Trust
is provided below.
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
DANIEL S. McNAMARA(1, 2, 4, 6, +)
Trustee and Chair of the Board of Trustees
Born: June 1966
Year of Election or Appointment: 2012
Trustee, President, and Vice Chairman, USAA ETF Trust (06/17-06/19); President
of Financial Advice & Solutions Group (FASG), USAA (02/13-present); Director of
USAA Asset Management Company (AMCO), (08/11-present); Director of USAA
Investment Management Company (IMCO) (09/09-present); President, IMCO
(09/09-04/14); President and Director of USAA Shareholder Account Services (SAS)
(10/09-present); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director of FPS (12/13-present);
President and Director of USAA Investment Corporation (ICORP) (03/10-present);
Director of USAA Financial Advisors, Inc. (FAI) (12/13-present). Mr. McNamara
brings to the Board extensive experience in the financial services industry,
including experience as an officer of the Trust.
DAVID C. BROWN(2, 4, 6, 10)
Trustee
Born: May 1972
Year of Election or Appointment: 2019
Chairman and Chief Executive Officer (2013-present), Co-Chief Executive Officer,
(2011-2013), Victory Capital Management Inc.; Chairman and Chief Executive
Officer (2013-present), Victory Capital Holdings, Inc. Mr. Brown brings to the
Board extensive business, finance and leadership skills gained
================================================================================
84 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
and developed through years of experience in the financial services industry,
including his tenure overseeing the strategic direction as CEO of Victory
Capital. These skills, combined with Mr. Brown's extensive knowledge of the
financial services industry and demonstrated success in the development and
distribution of investment strategies and products, enable him to provide
valuable insights to the Board and strategic direction for the Funds. Mr. Brown
serves on the Boards of the Victory Funds family of funds consisting of five
registered investment companies offering approximately 104 mutual funds and 24
ETFs. Mr. Brown is considered an Interested Trustee of the Trust due to his
position with Victory Capital and its affiliated companies.
NON-INTERESTED (INDEPENDENT) TRUSTEES
--------------------------------------------------------------------------------
ROBERT L. MASON, Ph.D.(3, 4, 5, 6, 7)
Trustee
Born: July 1946
Year of Election or Appointment: 1997
Trustee, USAA ETF Trust (06/17-06/19); Adjunct Professor in the Department of
Management Science and Statistics in the College of Business at the University
of Texas at San Antonio (2001-present); Institute Analyst, Southwest Research
Institute (03/02-01/16), which focuses on providing innovative technology,
science, and engineering services to clients around the world and is one of the
oldest independent, nonprofit, applied research and development organizations in
the United States. He was employed at Southwest Research Institute for 40 years.
Dr. Mason brings to the Board particular experience with information technology
matters, statistical analysis, and human resources as well as over 22 years'
experience as a Board member of the USAA family of funds. Dr. Mason holds no
other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 85
================================================================================
JEFFERSON C. BOYCE(3, 4, 5, 6, 7)
Lead Trustee and Vice Chair
Born: September 1957
Year of Election or Appointment: 2013
Trustee, USAA ETF Trust (06/17-06/19); Senior Managing Director, New York Life
Investments, LLC (1992-2012), an investment manager. Mr. Boyce brings to the
Board experience in financial investment management, and, in particular,
institutional and retail mutual funds, variable annuity products, broker
dealers, and retirement programs, including experience in organizational
development, marketing, product development, and money management as well as
five years' experience as a Board member of the USAA family of funds. Mr. Boyce
is a board member of Westhab, Inc.
DAWN M. HAWLEY(3, 4, 5, 6, 7, 9)
Trustee
Born: February 1954
Year of Election or Appointment: 2014
Trustee, USAA ETF Trust (06/17-06/19); Manager of Finance, Menil Foundation,
Inc. (05/07-06/11), which is a private foundation that oversees the assemblage
of sculptures, prints, drawings, photographs, and rare books. Director of
Financial Planning and Analysis and Chief Financial Officer, AIM Management
Group, Inc. (10/87-01/06). Ms. Hawley brings to the Board experience in
financial investment management and, in particular, institutional and retail
mutual funds, variable annuity products, broker dealers, and retirement
programs, including experience in financial planning, budgeting, accounting
practices, and asset/liability management functions including major acquisitions
and mergers, as well as over five years' experience as a Board member of the
USAA family of funds. Ms. Hawley holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
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86 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
PAUL L. McNAMARA(3, 4, 5, 6, 7)
Trustee
Born: July 1948
Year of Election or Appointment: 2012
Trustee, USAA ETF Trust (06/17-06/19); Director, Cantor Opportunistic
Alternatives Fund, LLC (03/10-02/14), which is a closed-end fund of funds by
Cantor Fitzgerald Investment Advisors, LLC. Mr. McNamara retired from Lord
Abbett & Co. LLC, an independent U.S. investment management firm, as an
Executive Member on 09/30/09, a position he held since 10/02. He had been
employed at Lord Abbett since 1996. Mr. McNamara brings to the Board extensive
experience with the financial services industry and, in particular,
institutional and retail mutual fund markets, including experience with mutual
fund marketing, distribution, and risk management, as well as overall experience
with compliance and corporate governance issues. Mr. McNamara also has
experience serving as a fund director as well as seven years' experience as a
Board member of the USAA family of funds. Paul L. McNamara is of no relation to
Daniel S. McNamara. Mr. McNamara holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
RICHARD Y. NEWTON III(3, 4, 5, 6, 7)
Trustee
Born: January 1956
Year of Election or Appointment: 2017
Trustee, USAA ETF Trust (06/17-06/19); Director, Elta North America
(01/18-present), which is a global leader in the design, manufacture and support
of innovative electronic systems in the ground, maritime, airborne, and security
domains for the nation's warfighters, security personnel, and first responders;
Managing Partner, Pioneer Partnership Development Group (12/15-present);
Executive Director, The Union League Club of New York (06/14-11/15); Executive
Vice President, Air Force Association (08/12-05/14); Lieutenant General, United
States Air Force (01/08-06/12). Lieutenant General Newton (Ret.) served 34 years
of active duty in the United States Air Force. Lt. Gen. Newton retired as the
Assistant Vice Chief of Staff and Director of Air Staff at the Headquarters of
the U.S. Air Force where he was responsible for overseeing the administration
and organization
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 87
================================================================================
of the Air Staff, which develops policies, plans and programs, establishes
requirements, and provides resources to support the Air Force's mission. Lt.
Gen. Newton is a graduate of the United States Air Force Academy, Webster
University, and The National War College. Lt. Gen. Newton brings to the Board
extensive management and military experience, as well as over two years of
experience as a Board member of the USAA family of funds. Lt. Gen. Newton holds
no other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
BARBARA B. OSTDIEK, Ph.D.(3, 4, 5, 6, 7, 8)
Trustee
Born: March 1964
Year of Election or Appointment: 2008
Trustee, USAA ETF Trust (06/17-06/19); Senior Associate Dean of Degree programs
at Jesse H. Jones Graduate School of Business at Rice University
(07/13-present); Associate Professor of Finance at Jesse H. Jones Graduate
School of Business at Rice University (07/01-present); Academic Director, El
Paso Corporation Finance Center at Jesse H. Jones Graduate School of Business at
Rice University (07/02-06/12). Dr. Ostdiek brings to the Board particular
experience with financial investment management, education, and research as well
as over eleven years' experience as a Board member of the USAA family of funds.
Dr. Ostdiek holds no other directorships of any publicly held corporations or
other investment companies outside the USAA family of funds.
MICHAEL F. REIMHERR(3, 4, 5, 6, 7)
Trustee
Born: August 1945
Year of Election or Appointment: 2000
Trustee, USAA ETF Trust (06/17-06/19); President of Reimherr Business Consulting
performing business valuations of medium to large companies; developing business
plans, budgets, and internal financial reporting; and work with mergers and
acquisitions (05/95-12/17). St. Mary's University Investment Committee
overseeing University Endowment (06/14-present). Mr. Reimherr brings to the
Board particular experience with organizational development, budgeting, finance,
capital markets, and mergers and acquisitions, as well as
================================================================================
88 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
over 19 years' experience as a Board member of the USAA family of funds. Mr.
Reimherr holds no other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
JOHN C. WALTERS(3, 4, 5, 6, 7)
Trustee
Born: February 1962
Year of Election or Appointment: 2019
Retired. Mr. Walters brings significant Board experience including active
involvement with the board of a Fortune 500 company, and a proven record of
leading large, complex financial organizations. He has a demonstrated record of
success in distribution, manufacturing, investment brokerage, and investment
management in both the retail and institutional investment businesses. He has
substantial experience in the investment management business with a demonstrated
ability to develop and drive strategy while managing operational, financial, and
investment risk. Mr. Walters is a board member of Guardian Variable Products
Trust (16 series), Lead Independent Director; Amerilife Holdings LLC, Director;
Stadion Money Management; Director; and University of North Carolina (Chapel
Hill), Member Board of Governors.
(1) Indicates the Trustee is an employee of AMCO or affiliated companies and
is considered an "interested person" under the Investment Company Act of
1940.
(2) Member of Executive Committee.
(3) Member of Audit and Compliance Committee.
(4) Member of Product Management and Distribution Committee.
(5) Member of Corporate Governance Committee.
(6) Member of Investments Committee.
(7) The address for all non-interested trustees is that of the USAA Funds,
P.O. Box 659430, San Antonio, TX 78265-9430.
(8) Dr. Ostdiek has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(9) Ms. Hawley has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(10) Indicates the Trustee is an employee of Victory Capital or affiliated
companies and is considered an "interested person" under the Investment
Company Act of 1940.
(+) Mr. D. McNamara was elected as Chair of the Board in July 2019.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 89
================================================================================
Effective July 1, 2019, the Board of the Trust appointed certain new officers of
the Trust. The current officers of the Trust are stated below.
OFFICERS
--------------------------------------------------------------------------------
CHRISTOPHER K. DYER
President
Born: February 1962
Year of Appointment: 2019
Director of Mutual Fund Administration, the Victory Capital.
SCOTT A. STAHORSKY
Vice President
Born: July 1969
Year of Appointment: 2019
Manager, Fund Administration, the Adviser (since 2015); Senior Analyst, Fund
Administration, the Victory Capital (prior to 2015).
ALLAN SHAER
Assistant Treasurer
Born: March 1965
Year of Appointment: 2019
Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc.
(since 2016); Vice President, Mutual Fund Administration, JP Morgan Chase
(2011-2016).
================================================================================
90 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Treasurer, USAA ETF Trust (09/18-06/19); Executive Director, Investment and
Financial Administration, USAA (04/12-present); Assistant Treasurer, USAA ETF
Trust (06/17-09/18); Assistant Treasurer, USAA Mutual Funds Trust (12/13-02/18).
Mr. De Vries also serves as the Funds' Principal Financial Officer.
CAROL D. TREVINO
Assistant Treasurer
Born: October 1965
Year of Appointment: 2018
Assistant Treasurer, USAA ETF Trust (09/18-06/19); Accounting/Financial
Director, USAA (12/13-present); Senior Accounting Analyst, USAA (03/11-12/13).
ERIN G. WAGNER
Secretary
Born: February 1974
Year of Appointment: 2019
Associate General Counsel, the Adviser (since 2013).
CHARLES BOOTH
Anti-Money Laundering Compliance Officer and Identity Theft Officer
Born: April 1960
Year of Appointment: 2019
Director, Regulatory Administration and CCO Support Services, Citi Fund Services
Ohio, Inc. (2007-present).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 91
================================================================================
AMY CAMPOS
Chief Compliance Officer
Born: August 1976
Year of Appointment: 2019
Chief Compliance Officer, USAA Mutual Funds Trust (7/1/19-present); Executive
Director, Deputy Chief Compliance Officer, USAA Mutual Funds Trust and USAA ETF
Trust (7/17-6/19); Compliance Director, USAA Mutual Funds Trust (2014-7/17);
Senior Compliance Advisor, USAA Mutual Funds Trust (2010-2014).
THE FOLLOWING OFFICERS SERVED IN THEIR RESPECTIVE OFFICE UNTIL JULY 1, 2019, AT
WHICH POINT EACH OF THE FOLLOWING OFFICERS RESIGNED FROM THEIR RESPECTIVE OFFICE
AND NO LONGER SERVE IN THESE POSITIONS.
JOHN C. SPEAR
Vice President
Born: May 1964
Year of Appointment: 2016
Vice President, USAA ETF Trust (06/17-06/19); Senior Vice President and Chief
Investment Officer, USAA Investments, (03/17-present); Vice President and Chief
Investment Officer, USAA Investments, (11/16-03/17); Vice President, Long Term
Fixed Income (05/12-11/16).
JOHN P. TOOHEY
Vice President
Born: March 1968
Year of Appointment: 2009
Vice President, USAA ETF Trust (06/17-06/19); Head of Equities, Equity
Investments, AMCO (01/12-present).
================================================================================
92 | USAA CORNERSTONE AGGRESSIVE FUND
================================================================================
KRISTEN MILLAN
Secretary
Born: April 1983
Year of Appointment: 2019
Secretary, USAA ETF Trust (04/19-06/19); Assistant Secretary, USAA ETF Trust
(01/19-06/19); Senior Attorney, FASG General Counsel, USAA (09/17-06/19);
Attorney, FASG General Counsel, USAA (06/13-09/17). Ms. Millan also serves as
Assistant Secretary of AMCO, ICORP, and SAS.
STEPHANIE A. HIGBY
Chief Compliance Officer
Born: July 1974
Year of Appointment: 2013
Chief Compliance Officer, USAA ETF Trust (06/17-06/19); Assistant Vice
President, Compliance-Investments, USAA (02/18-present); Assistant Vice
President, Compliance Mutual Funds, USAA (12/16-01/18); Executive Director,
Institutional Asset Management Compliance, USAA (04/13-12/16). Ms. Higby also
serves as the Funds' anti-money laundering compliance officer and as the Chief
Compliance Officer for AMCO and IMCO.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 93
================================================================================
AS OF JULY 1, 2019
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
David C. Brown
John C. Walters
--------------------------------------------------------------------------------
ADMINISTRATOR AND Victory Capital Management Inc.
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND Victory Capital Advisers Inc.
DISTRIBUTOR 4900 Tiedeman Road
Brooklyn, Ohio 44144
--------------------------------------------------------------------------------
TRANSFER AGENT Victory Capital Transfer Agency Inc.
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 USAA AMCO'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) 235-8396; (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) 235-8396; (ii) at usaa.com; and (iii) on the SEC's website at
http://www.sec.gov.
================================================================================
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----------------------
MUTUAL FUNDS
--------------------------------------------------------------------------------
May 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA Cornerstone Conservative Fund
FUND
SHARES
USCCX
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) 235-8396 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)
235-8396 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.
Victory Capital means Victory Capital Management Inc., the investment manager of
the USAA Mutual Funds. USAA Mutual Funds are distributed by Victory Capital
Advisers, Inc., a broker dealer registered with FINRA and an affiliate of
Victory Capital. Victory Capital and its affiliates are not affiliated with
United Services Automobile Association or its affiliates. USAA and the USAA
logos are registered trademarks and the USAA Mutual Funds and USAA Investments
logos are trademarks of United Services Automobile Association and are being
used by Victory Capital and its affiliates under license.
================================================================================
PRESIDENT'S MESSAGE
"... LONG-TERM INVESTORS SHOULD NEVER MAKE
DECISIONS IN HASTE. THEY SHOULD MAKE [PHOTO OF BROOKS ENGLEHARDT]
THOUGHTFUL DECISIONS BASED ON THEIR LONG-TERM
OBJECTIVES, TIME HORIZON, AND RISK TOLERANCE."
--------------------------------------------------------------------------------
JULY 2019
As previously announced, USAA, the parent company of USAA Asset Management
Company ("AMCO"), the prior investment adviser to the USAA Mutual Funds,
announced that AMCO would be acquired by Victory Capital Holdings, Inc.
(Victory Holdings), a global investment management firm headquartered in
Cleveland, Ohio (the Transaction). In connection with the Transaction, also as
previous announced, shareholders of each USAA Mutual Fund approved a new
investment advisory agreement with Victory Capital Management Inc. ("Victory
Capital"), an indirect wholly-owned subsidiary of Victory Holdings. The closing
of the Transaction occurred on July 1, 2019; and Victory Capital became the
investment adviser to each USAA Mutual Fund. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION ABOUT CHANGES THAT TOOK EFFECT ON JULY 1, 2019.
Softening global economic conditions and escalating trade tensions rattled
investors during the 12-month reporting period ended May 31, 2019. When the
reporting period began in June 2018, the global economy was expanding across
most regions and countries, led by the U.S. In this environment, stocks
generally advanced. In the fixed income market, U.S. Treasury yields rose, as
the U.S. Federal Reserve ("Fed") continued to tighten monetary policy.
Signs of trouble emerged during the summer of 2018. The U.S. economic expansion
continued, but growth in a number of other economies, including some European
countries and China, showed a weakening trend. By the autumn of 2018, investors'
fears of a global economic slowdown, combined with harsh U.S.-China trade
rhetoric and Brexit-related uncertainty in Europe, sparked a surge in market
volatility. Global stocks dropped, with most of the decline occurring in
December 2018. At the same time, intermediate- and longer-term yields fell, as
investors anticipated a change in Fed monetary policy. Indeed, after having
raised short-term interest rates four times during 2018, Fed officials announced
in January 2019 that they would "pause," retreating from their earlier plan to
raise interest rates in 2019. Stocks rallied in response and by April 2019 had
recovered most of the ground they had lost. In May 2019, ongoing trade tensions
between the United States and China, as well as President Trump administration's
threat to impose tariffs on Mexico, drove a renewed decline in stock prices. In
the fixed income market, concerns that trade disputes would seriously undermine
global
================================================================================
================================================================================
economic growth pushed down intermediate- and longer-term yields, which ended
the reporting period lower than they started. The yield on the 10-year U.S.
Treasury note, which began June 2018 at 2.89%, rose to 3.24% on November 8,
2018--its high point of the period--and fell to 2.13% by May 31, 2019.
In the final months of the reporting period, the Treasury yield curve inverted,
which means that shorter-term yields were higher than longer-term yields. A
yield-curve inversion warrants attention because it has been a reliable
recession indicator. Although recessions do not automatically follow
inversions, a downward-sloped yield curve has preceded every U.S. recession
since the 1960s. That said, the lag between an inversion and a recession has
been inconsistent. At USAA Investments, A Victory Capital Investment Franchise,
we have found that during the past six decades, the time between inversion and
recession has ranged between six months and two years, with no clear pattern to
provide useful guidance. And as I write to you, we see no recession on the
horizon. First, the U.S. economy continues to grow, albeit at a slower pace than
in 2018. Second, the Fed has made clear its commitment to pause its interest
rate hikes, and there is a growing belief in the markets that policymakers may
even cut interest rates in 2019. (In early June 2019, after the end of the
reporting period, Fed Chair Jerome Powell stated that the U.S. central bank was
monitoring the escalation in trade tensions and could potentially respond by
cutting interest rates if U.S. economic conditions deteriorate.)
At USAA Investments, our team of portfolio managers will continue to monitor the
financial markets, economic conditions, the global trade regime, Fed policy, the
direction of longer-term interest rates, and other issues that have the
potential to affect your investments. In the meantime, I would advise you to
ignore media "noise" about such matters. Media "noise" is meant to provoke an
emotional reaction, which can lead to hasty decision-making. In my opinion,
long-term investors should never make decisions in haste. They should make
thoughtful decisions based on their long-term objectives, time horizon, and risk
tolerance. Dollar-cost averaging, in which you invest a set amount on a regular
basis, is a strategy that can help you stay on track. Another effective strategy
is diversification, which can potentially insulate a portfolio from market
turbulence or changes in performance leadership.
If you would like to review your portfolio to confirm that it is properly
aligned with your investment plan, please contact one of our financial advisors.
You might want to make that call before the summer gets fully underway. When we
are traveling and spending time with family and friends, it can be tempting to
put off decisions on financial matters.
From all of us at USAA Investments, A Victory Capital Investment Franchise,
thank you for the opportunity to help you with your investment needs.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGERS' COMMENTARY 1
INVESTMENT OVERVIEW 5
SHAREHOLDER VOTING RESULTS 8
FINANCIAL INFORMATION
DISTRIBUTIONS TO SHAREHOLDERS 9
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 10
PORTFOLIO OF INVESTMENTS 11
NOTES TO PORTFOLIO OF INVESTMENTS 13
FINANCIAL STATEMENTS 14
NOTES TO FINANCIAL STATEMENTS 17
FINANCIAL HIGHLIGHTS 31
EXPENSE EXAMPLE 32
ADVISORY AGREEMENT(S) 34
TRUSTEES' AND OFFICERS' INFORMATION 52
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) 235-8396.
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.
================================================================================
================================================================================
MANAGERS' COMMENTARY ON THE FUND
--------------------------------------------------------------------------------
[PHOTO OF LANCE HUMPHREY] [PHOTO OF WASIF A. LATIF]
LANCE HUMPHREY, CFA WASIF A. LATIF
--------------------------------------------------------------------------------
o HOW DID THE GLOBAL FINANCIAL MARKETS PERFORM DURING THE 12-MONTH REPORTING
PERIOD ENDED MAY 31, 2019?
The world financial markets produced mixed results, reflecting investors'
struggles to assess the shifting outlook for economic growth.
During the reporting period, large-cap U.S. equities were the best performer
among the major asset classes. Domestic stocks performed very well in the
first half of the reporting period, during which both economic data and
corporate earnings came in above expectations. However, the market sold off
sharply in late 2018 due to the combination of worries about U.S. Federal
Reserve ("Fed") policy, the trade dispute between the United States and
China, and signs of slowing economic growth overseas. Stocks quickly
recovered from the downturn, and the main U.S. equity indexes went on to
post their best quarter in nearly 10 years during the first three months of
2019. A rapid shift in Fed policy was likely the key catalyst for the
rebound. Whereas the markets generally were expecting as late as October
2018 that the Fed would raise interest rates three to four times in 2019, a
series of statements from key officials indicated the Fed was in fact likely
finished raising interest rates for the foreseeable future. The reporting
period ended on a down note with a weak showing in May 2019, as stocks lost
some of their previous gains due to renewed worries about slowing growth and
the failure of the United States and China to resolve their trade impasse.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
The net effect of these sentiment swings was a narrow advance for large-cap
U.S. stocks, as gauged by the 3.47% gain of the Russell 1000 Index. The
Russell 2000 Index, a measure of performance for smaller companies, lagged
considerably with a return of -9.04%.
Developed-market international equities posted a loss over the 12-month
reporting period, largely as a result of the unexpectedly slow growth
outside of the United States. In combination with the weakness in foreign
currencies versus the U.S. dollar, the slowdown led to a loss of -5.75% for
the MSCI EAFE Index. Emerging-market stocks also closed in negative
territory, as gauged by the -8.70% return of the MSCI Emerging Markets
Index. Concerns about the global trade outlook and the prospect of slowing
growth in the developed world contributed to the underperformance for the
asset class.
Investment-grade bonds, after producing sluggish performance in the first
half of the reporting period, staged a strong rally from early November 2018
onward due in part to the Fed's shift toward a more accommodative policy.
The gains propelled the Bloomberg Barclays U.S. Aggregate Index to a return
of 6.40% for the full reporting period. High- yield bonds also performed
reasonably well, as gauged by the 5.93% gain for the ICE BofAML U.S. High
Yield Index. Although high-yield issues fell sharply in late 2018 amid the
evaporation of investor risk appetites, the category returned to positive
territory in early 2019.
o HOW DID THE USAA CORNERSTONE CONSERVATIVE FUND (THE "FUND") PERFORM DURING
THE REPORTING PERIOD?
For the reporting period ended May 31, 2019, the Fund had a total return of
3.84%. This compares to returns of 6.41% for the Bloomberg Barclays U.S.
Universal Index and 4.93% for the Cornerstone Conservative Composite Index.
Refer to page 5 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
2 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
Effective July 1, 2019, Victory Capital serves as the Fund's investment
adviser. Prior to July 1, 2019, AMCO served as the Fund's investment
adviser. The investment adviser provides day-to-day discretionary management
for the Fund's assets.
o PLEASE DISCUSS THE FACTORS THAT HELPED AND HURT PERFORMANCE.
The Fund's bond allocation, which makes up more than three-quarters of the
portfolio, was the key contributor to relative performance over the past
year. We invest in bonds via holdings in several USAA mutual funds. The
underlying funds combined for outperformance relative to the broader
fixed-income market, with the best returns coming from intermediate-term and
multi-sector funds that were positioned to capitalize on the outperformance
of longer-dated issues. An allocation to high-yield bonds was an additional
contributor.
The Fund's allocation to equities had a mixed effect on results. On the
positive side, our position in large-cap U.S. stocks helped us capture the
category's outperformance. However, our preference for the value style
versus growth style was out of step with the market. Performance also was
hurt somewhat by our bias in favor of international equities over U.S.
equities. We believe both developed- and emerging-market equities offer more
compelling valuations and greater upside potential than the United States,
but this aspect of our approach detracted in the reporting period, given the
relative strength of U.S. equities compared to international equities.
The majority of the key trends in the market have been in place for a
multi-year period, with domestic stocks outperforming bonds, the growth
style outpacing value, and U.S. equities exceeding the returns of the
foreign markets, to name just a few. Given the persistence of these
tendencies, it can be easy for investors to forget that asset class returns
tend to run in cycles. We, therefore, prefer to take a long-term view based
on the knowledge that even well-established market trends can--and do--shift
abruptly. Rather than trying to chase short-term performance, we continue to
emphasize diversification, fundamentals, and valuations.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
We believe this steady approach, rather than one that attempts to respond to
the latest headlines, is the most effective way to navigate volatile
markets.
Thank you for allowing us to help you manage your investments.
As interest rates rise, bond prices generally fall; given the historically
low interest rate environment, risks associated with rising interest rates
may be heightened. o The underlying funds may be invested in, among other
things: (1) exchange-traded funds; (2) futures, options, and other
derivatives; (3) non-investment-grade securities; (4) precious metals and
minerals companies; (5) real estate investment trusts; (6) money market
instruments; and (7) foreign and emerging markets. These types of
investments and asset classes may be more volatile and prone to experience
significant loss than others. In addition, it is possible that a particular
asset allocation may not produce the intended result. The assets of the
Cornerstone Conservative Fund will be invested in other USAA funds and will
indirectly bear expenses and reflect the risks of the underlying funds in
which it invests. o Non-investment-grade securities are considered
speculative and are subject to significant credit risk. They are sometimes
referred to as "junk" bonds since they represent a greater risk of default
than more credit worthy investment-grade securities. o Diversification is a
technique intended to help reduce risk and does not guarantee a profit or
prevent a loss. o Foreign investing is subject to additional risks, such as
currency fluctuations, market illiquidity, and political instability.
Emerging market countries are less diverse and mature than other countries
and tend to be politically less stable. o The USAA Precious Metals and
Minerals Fund is subject to additional risks, such as currency fluctuation,
market illiquidity, political instability and increased price volatility. It
may be more volatile than a fund that diversifies across many industries and
companies.
================================================================================
4 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/19 o
------------------------------------------------------------------------------------------------------
SINCE INCEPTION
1 YEAR 5 YEAR 10 YEAR INCEPTION* DATE
------------------------------------------------------------------------------------------------------
USAA Cornerstone
Conservative Fund 3.84% 3.14% - 4.11% 6/08/12
Bloomberg Barclays U.S.
Universal Index** (reflects
no deduction for fees,
expenses, or taxes) 6.41% 2.92% 4.30% - -
Cornerstone Conservative
Composite Index*** (reflects
no deduction for fees,
expenses, or taxes) 4.93% 3.54% 5.58% - -
*Since inception returns are shown when a share class has less than 10 years of
performance. Total returns for periods of less than one year are not annualized.
**The unmanaged Bloomberg Barclays U.S. Universal Index is an index that
represents the union of the U.S. Aggregate Index, U.S. Corporate High-Yield,
Investment Grade 144A Index, Eurodollar Index, U.S. Emerging Markets Index, and
the non-ERISA eligible portion of the CMBS Index. The index covers USD
denominated, taxable bonds that are rated either investment-grade or below
investment-grade.
***The Cornerstone Conservative Composite Index is a combination of unmanaged
indexes representing the Fund's model allocation, and consists of the MSCI USA
Investable Market Index (IMI) Gross (11%), the MSCI ACWI ex USA IMI Net (8%),
the Bloomberg Barclays U.S. Universal Index (78%), the Bloomberg Commodity Index
Total Return (0.5%), the MSCI U.S. Real Estate Investment Trust (REIT) Index
Gross (0.5%), and the Bloomberg Barclays U.S. Treasury - Bills (1-3M) (2%).
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
usaa.com.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on net investment income and
realized capital gain distributions, including reinvested distributions, or
redemptions of shares.
================================================================================
INVESTMENT OVERVIEW | 5
================================================================================
o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
CORNERSTONE CONSERVATIVE USAA CORNERSTONE BLOOMBERG BARCLAYS
COMPOSITE INDEX CONSERVATIVE FUND U.S. UNIVERSAL INDEX
05/31/12 $10,000.00 $10,000.00 $10,000.00
06/30/12 10,113.27 10,095.00 10,025.20
07/31/12 10,257.57 10,205.00 10,174.72
08/31/12 10,321.22 10,305.00 10,196.08
09/30/12 10,406.09 10,426.00 10,225.98
10/31/12 10,412.33 10,477.00 10,258.45
11/30/12 10,454.97 10,527.00 10,283.01
12/31/12 10,500.52 10,580.00 10,284.93
01/31/13 10,558.69 10,661.00 10,231.32
02/28/13 10,604.16 10,712.00 10,280.45
03/31/13 10,664.38 10,780.00 10,292.62
04/30/13 10,808.14 10,882.00 10,405.61
05/31/13 10,668.50 10,811.00 10,229.19
06/30/13 10,465.93 10,587.00 10,049.13
07/31/13 10,593.68 10,710.00 10,081.81
08/31/13 10,500.81 10,649.00 10,024.35
09/30/13 10,684.73 10,767.00 10,124.10
10/31/13 10,849.74 10,922.00 10,224.27
11/30/13 10,854.35 10,942.00 10,191.17
12/31/13 10,858.43 10,947.00 10,146.52
01/31/14 10,898.40 10,999.00 10,281.09
02/28/14 11,066.13 11,146.00 10,354.35
03/31/14 11,067.18 11,160.00 10,344.74
04/30/14 11,153.50 11,234.00 10,430.39
05/31/14 11,301.89 11,350.00 10,555.98
06/30/14 11,364.12 11,427.00 10,572.00
07/31/14 11,299.38 11,374.00 10,539.11
08/31/14 11,453.25 11,501.00 10,653.38
09/30/14 11,303.61 11,363.00 10,568.80
10/31/14 11,418.49 11,427.00 10,672.39
11/30/14 11,500.75 11,491.00 10,728.99
12/31/14 11,450.11 11,424.00 10,710.62
01/31/15 11,585.66 11,522.00 10,914.39
02/28/15 11,657.00 11,586.00 10,850.74
03/31/15 11,664.47 11,576.00 10,895.60
04/30/15 11,708.96 11,630.00 10,882.99
05/31/15 11,697.67 11,619.00 10,863.98
06/30/15 11,546.94 11,479.00 10,742.66
07/31/15 11,612.70 11,479.00 10,805.25
08/31/15 11,436.28 11,293.00 10,773.42
09/30/15 11,393.93 11,193.00 10,815.50
10/31/15 11,590.39 11,391.00 10,850.10
11/30/15 11,542.81 11,325.00 10,810.59
12/31/15 11,456.24 11,144.00 10,756.55
01/31/16 11,417.29 11,032.00 10,875.30
02/29/16 11,469.81 11,054.00 10,952.63
03/31/16 11,751.96 11,388.00 11,086.76
04/30/16 11,851.86 11,580.00 11,162.37
05/31/16 11,869.63 11,614.00 11,171.13
06/30/16 12,026.31 11,791.00 11,367.64
07/31/16 12,204.30 12,019.00 11,461.40
08/31/16 12,220.17 12,076.00 11,473.79
09/30/16 12,239.72 12,111.00 11,476.57
10/31/16 12,127.11 12,020.00 11,400.32
11/30/16 11,948.85 11,871.00 11,144.00
12/31/16 12,028.90 11,968.00 11,177.11
01/31/17 12,122.90 12,108.00 11,216.63
02/28/17 12,264.58 12,235.00 11,303.13
03/31/17 12,284.16 12,279.00 11,299.50
04/30/17 12,399.52 12,395.00 11,393.27
05/31/17 12,518.34 12,535.00 11,481.05
06/30/17 12,526.80 12,551.00 11,471.23
07/31/17 12,641.36 12,668.00 11,528.47
08/31/17 12,735.50 12,762.00 11,628.01
09/30/17 12,753.75 12,771.00 11,587.00
10/31/17 12,816.51 12,830.00 11,600.88
11/30/17 12,854.88 12,854.00 11,583.37
12/31/17 12,939.49 12,940.00 11,634.41
01/31/18 12,975.45 12,976.00 11,522.49
02/28/18 12,767.86 12,773.00 11,413.13
03/31/18 12,783.79 12,759.00 11,470.80
04/30/18 12,734.87 12,723.00 11,394.34
05/31/18 12,813.28 12,759.00 11,456.28
06/30/18 12,789.28 12,700.00 11,439.83
07/31/18 12,880.75 12,796.00 11,463.75
08/31/18 12,958.38 12,869.00 11,520.14
09/30/18 12,919.45 12,822.00 11,470.80
10/31/18 12,641.76 12,542.00 11,374.90
11/30/18 12,727.61 12,603.00 11,425.95
12/31/18 12,693.68 12,519.00 11,604.72
01/31/19 13,041.84 12,863.00 11,764.71
02/28/19 13,123.76 12,961.00 11,777.52
03/31/19 13,339.22 13,162.00 11,990.26
04/30/19 13,441.55 13,286.00 12,007.13
05/31/19 13,445.45 13,249.00 12,191.04
[END CHART]
Data from 5/31/12 through 5/31/19.*
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Cornerstone Equity Fund to the benchmarks listed above (see page 5 for
benchmark definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged,
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes.
*The performance of the Bloomberg Barclays U.S. Universal Index and the
Cornerstone Conservative Composite Index are calculated from the end of the
month, May 31, 2012, while the inception date of the USAA Cornerstone
Conservative Fund is June 8, 2012. There may be a slight variation of
performance numbers because of this difference.
================================================================================
6 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
o ASSET ALLOCATION - 5/31/19 o
(% of Net Assets)
[PIE CHART OF ASSET ALLOCATION]
FIXED-INCOME FUNDS 79.0%
EQUITY & ALTERNATIVE 20.2%
MONEY MARKET INSTRUMENTS 0.8%
[END CHART]
Percentages are of net assets of the Fund and may not equal 100%.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
SHAREHOLDER VOTING RESULTS
--------------------------------------------------------------------------------
On April 18, 2019, a special meeting of shareholders was held to vote on two
proposals relating to the series of the USAA Mutual Funds Trust (Trust).
Shareholders of record on February 8, 2019, were entitled to vote on each
proposal shown below. The proposals were approved by the shareholders. The
following proposals and voting results pertain to one or more series within the
Trust. Votes shown for Proposal 1 are for the Fund, a series of the Trust.
Votes shown for Proposal 2 are for all series of the Trust. The effective date
of the Proposals was July 1, 2019.
PROPOSAL 1
To approve a new Investment Advisory Agreement between the Trust, on behalf of
the Fund, and Victory Capital, an independent investment adviser. The new
Investment Advisory Agreement became effective upon the closing of the
Transaction (as defined and discussed in Note 1 to the Financial Statements)
whereby AMCO was acquired by Victory Holdings, the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
-----------------------------------------------------------------------------
FOR AGAINST ABSTAIN
-----------------------------------------------------------------------------
8,175,349 852,381 796,679
PROPOSAL 2
Election of two new trustees to the Trust's Board of Trustees to serve upon the
closing of the Transaction: (1) David C. Brown, to serve as an "interested
trustee" as defined in the Investment Company Act of 1940, as amended (1940
Act); and (2) John C. Walters, to serve as a trustee who is not an "interested
person" as is defined under the 1940 Act ("Independent Trustee").
NUMBER OF SHARES VOTING
-------------------------------------------------------------------------------
TRUSTEES FOR VOTES WITHHELD
-------------------------------------------------------------------------------
David C. Brown 8,299,565,565 820,887,736
John C. Walters 8,317,935,885 802,517,416
================================================================================
8 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
May 31, 2019, is provided for information purposes only and should not be used
for reporting to federal or state revenue agencies. Federal tax information for
the calendar year will be reported to you on Form 1099-DIV in January 2020.
With respect to distributions paid, the Fund designates the following amounts
(or, if subsequently determined to be different, the maximum amount allowable)
for the fiscal year ended May 31, 2019:
DIVIDEND RECEIVED
DEDUCTION (CORPORATE FOREIGN TAXES FOREIGN SOURCE QUALIFIED INTEREST
SHAREHOLDERS)(1) PAID(2) INCOME INCOME
------------------------------------------------------------------------------------------------
4.82% $37,000 $261,000 $15,000
------------------------------------------------------------------------------------------------
(1)Presented as a percentage of net investment income and short-term capital
gain distributions paid, if any.
(2)The Fund has elected under Section 853 of the Internal Revenue Code to pass
through the credit for taxes paid in foreign countries.
For the fiscal year ended May 31, 2019, the Fund hereby designates the maximum
amount allowable of its net taxable income as qualified dividends taxed at
individual net capital gain rates.
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS | 9
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA CORNERSTONE CONSERVATIVE FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Cornerstone Conservative Fund (the "Fund") (one of the funds constituting USAA
Mutual Funds Trust (the "Trust")), including the portfolio of investments, as of
May 31, 2019, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended, the financial highlights for each of the five years in the period
then ended and the related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Fund (one of the funds
constituting USAA Mutual Funds Trust) at May 31, 2019, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and its financial highlights for each of
the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
BASIS FOR OPINION
These financial statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on the Fund's financial statements based
on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and are required to
be independent with respect to the Trust in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Trust is not required to have,
nor were we engaged to perform, an audit of the Trust's internal control over
financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the Trust's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of May 31, 2019, by correspondence with the custodian and brokers or by
other appropriate auditing procedures where replies from brokers were not
received. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the auditor of one or more Victory Capital investment
companies since 1995.
San Antonio, Texas
July 23, 2019
================================================================================
10 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
PORTFOLIO OF INVESTMENTS
May 31, 2019
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
BONDS (79.0%)
FIXED-INCOME FUNDS (79.0%)
254,500 USAA Core Intermediate-Term Bond ETF(a) $ 12,842
4,500 USAA Core Short-Term Bond ETF(a) 227
3,989,615 USAA Government Securities Fund Institutional Shares 39,258
734,115 USAA High Income Fund Institutional Shares 5,704
4,418,886 USAA Income Fund Institutional Shares 57,887
2,930,766 USAA Intermediate-Term Bond Fund Institutional Shares 31,183
607,386 USAA Short-Term Bond Fund Institutional Shares 5,582
--------
Total Fixed-Income Funds (cost: $151,389) 152,683
--------
Total Bonds (cost: $151,389) 152,683
--------
EQUITY SECURITIES (20.2%)
EQUITY & ALTERNATIVE (20.2%)
27,891 USAA Aggressive Growth Fund Institutional Shares 1,160
172,185 USAA Capital Growth Fund Institutional Shares 1,834
146,108 USAA Emerging Markets Fund Institutional Shares 2,497
55,786 USAA Growth Fund Institutional Shares 1,633
137,991 USAA Income Stock Fund Institutional Shares 2,572
238,942 USAA International Fund Institutional Shares 6,841
18,900 USAA MSCI Emerging Markets Value Momentum Blend Index ETF 803
55,200 USAA MSCI International Value Momentum Blend Index ETF 2,410
12,800 USAA MSCI USA Small Cap Value Momentum Blend Index ETF 620
94,400 USAA MSCI USA Value Momentum Blend Index ETF 4,553
56,945 USAA Precious Metals and Minerals Fund Institutional Shares(b) 706
147,325 USAA S&P 500 Index Fund Reward Shares 5,716
124,068 USAA Small Cap Stock Fund Institutional Shares 1,949
381,539 USAA Target Managed Allocation Fund 3,838
101,710 USAA Value Fund Institutional Shares 1,835
--------
Total Equity & Alternative (cost: $35,590) 38,967
--------
Total Equity Securities (cost: $35,590) 38,967
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (0.8%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.8%)
1,553,524 State Street Institutional Treasury Money Market Fund
Premier Class, 2.30%(c) (cost: $1,554) $ 1,554
--------
SHORT-TERM INVESTMENT PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (0.3%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.3%)
696,000 Goldman Sachs Financial Square Government Fund
Institutional Class, 2.30%(c) (cost: $696) 696
--------
TOTAL INVESTMENTS (COST: $189,229) $193,900
========
----------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
----------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
----------------------------------------------------------------------------------------------
Bonds:
Fixed-Income Funds $152,683 $- $- $152,683
Equity Securities:
Equity & Alternative 38,967 - - 38,967
Money Market Instruments:
Government & U.S. Treasury
Money Market Funds 1,554 - - 1,554
Short-Term Investment Purchased with
Cash Collateral from Securities Loaned:
Government & U.S. Treasury
Money Market Funds 696 - - 696
----------------------------------------------------------------------------------------------
Total $193,900 $- $- $193,900
----------------------------------------------------------------------------------------------
At May 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
12 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 2019
--------------------------------------------------------------------------------
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 6.5% of net assets at May 31, 2019.
The underlying USAA Funds in which the Fund invests are managed by USAA
Asset Management Company, an affiliate of the Fund. The Fund invests in the
Reward Shares of the USAA S&P 500 Index Fund, the Institutional Shares of
the other USAA Mutual Funds Trust and the series of the USAA ETF Trust.
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 SPECIFIC NOTES
(a) The security, or a portion thereof, was out on loan as of May 31, 2019.
(b) Non-income-producing security.
(c) Rate represents the money market fund annualized seven-day yield at
May 31, 2019.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 13
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in affiliated underlying funds, at market value
(cost of $186,979) $191,650
Investments in unaffiliated securities, at market value
(including securities on loan of $676) (cost of $2,250) 2,250
Receivables:
Capital shares sold 124
USAA Asset Management Company (Note 6) 46
Dividends from affiliated underlying funds 202
Interest 3
--------
Total assets 194,275
--------
LIABILITIES
Payables:
Upon return of securities loaned 696
Securities purchased 202
Capital shares redeemed 61
Other accrued expenses and payables 51
--------
Total liabilities 1,010
--------
Net assets applicable to capital shares outstanding $193,265
========
NET ASSETS CONSIST OF:
Paid-in capital $190,215
Distributable earnings 3,050
--------
Net assets applicable to capital shares outstanding $193,265
========
Capital shares outstanding, no par value 18,020
========
Net asset value, redemption price, and offering price per share $ 10.72
========
See accompanying notes to financial statements.
================================================================================
14 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Income distributions from affiliated underlying funds $ 5,840
Interest 15
Securities lending (net) 16
-------
Total income 5,871
-------
EXPENSES
Custody and accounting fees 57
Postage 21
Shareholder reporting fees 14
Trustees' fees 37
Registration fees 28
Professional fees 67
Other 12
-------
Total expenses 236
Expenses reimbursed (46)
-------
Net expenses 190
-------
NET INVESTMENT INCOME 5,681
-------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Sales of affiliated underlying funds (2,760)
Capital gain distributions from affiliated underlying funds 1,718
Change in net unrealized appreciation/(depreciation) of affiliated
underlying funds 2,580
-------
Net realized and unrealized gain 1,538
-------
Increase in net assets resulting from operations $ 7,219
=======
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 15
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
-----------------------------------------------------------------------------------
2019 2018
-----------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 5,681 $ 5,504
Net realized gain (loss) on sales of affiliated
underlying funds (2,760) 145
Net realized gain on capital gain distributions from
affiliated underlying funds 1,718 787
Change in net unrealized appreciation/(depreciation)
of affiliated underlying funds 2,580 (3,428)
----------------------
Increase in net assets resulting from operations 7,219 3,008
----------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS (5,667) (5,500)
----------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 39,964 70,509
Reinvested dividends 5,638 5,478
Cost of shares redeemed (50,181) (51,957)
----------------------
Increase (decrease) in net assets from capital share
transactions (4,579) 24,030
----------------------
Net increase (decrease) in net assets (3,027) 21,538
NET ASSETS
Beginning of year 196,292 174,754
----------------------
End of year $193,265 $196,292
======================
CHANGE IN SHARES OUTSTANDING
Shares sold 3,799 6,527
Shares issued for dividends reinvested 542 509
Shares redeemed (4,778) (4,819)
----------------------
Increase (decrease) in shares outstanding (437) 2,217
======================
See accompanying notes to financial statements.
================================================================================
16 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
May 31, 2019
--------------------------------------------------------------------------------
(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 Cornerstone Conservative Fund (the Fund) qualifies as a registered
investment company under Accounting Standards Codification Topic 946. The
information presented in this annual 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 current
income. The Fund also considers the potential for capital appreciation.
The Fund is a "fund of funds" in that it invests in a selection of USAA mutual
funds and exchange-traded funds (ETFs) (underlying USAA Funds) managed by USAA
Asset Management Company (AMCO or Manager), an affiliate of the Fund.
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of AMCO, 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 Holdings, a
global investment management firm headquartered in Cleveland, Ohio (the
Transaction), on July 1, 2019.
A special shareholder meeting was held on April 18, 2019, at which shareholders
of the Fund approved a new investment advisory agreement between the Trust, on
behalf of the Fund, and Victory Capital, an independent investment management
company. In addition, shareholders of the Fund also elected the following two
new directors to the Board of the Trust to serve upon the closing
================================================================================
NOTES TO FINANCIAL STATEMENTS | 17
================================================================================
of the Transaction: (1) David C. Brown, to serve as an Interested Trustee; and
(2) John C. Walters, to serve as an Independent Trustee. PLEASE REFER TO THE
SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR
ADDITIONAL IMPORTANT INFORMATION.
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. Investments in the underlying USAA Funds and other open-end investment
companies, other than ETFs are valued at their net asset value (NAV) at
the end of each business day and are categorized in Level 1 of the fair
value hierarchy.
2. Equity securities, including 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 a 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.
3. The underlying USAA Funds have specific valuation procedures. 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
================================================================================
18 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
valuation procedures approved by the Board. The effect of fair value
pricing is that securities may not be priced on the basis of quotations
from the primary market in which they are traded and the actual price
realized from the sale of a security may differ materially from the fair
value price. Valuing these securities at fair value is intended to cause
a fund's NAV to be more reliable than it otherwise would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
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.
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risks associated with investing in those securities.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 19
================================================================================
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 and capital gain distributions from the underlying
USAA Funds are recorded on the ex-dividend date. Interest income is recorded
daily on the accrual basis. 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 year ended May 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. 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.
F. 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.
================================================================================
20 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
(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 year ended May 31, 2019, the Fund paid CAPCO facility fees of
$2,000, which represents 0.2% of the total fees paid to CAPCO by the funds
of the Trusts. The Fund had no borrowings under this agreement during the
year ended May 31, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
(3) DISTRIBUTIONS
The character of any distributions made during the year from net investment
income or net realized gains is determined in accordance with federal tax
regulations and may differ from those determined in accordance with U.S.
generally accepted accounting principles. Also, due to the timing of
distributions, the fiscal year in which amounts are distributed may differ from
the year that the income or realized gains were recorded by the Fund.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 21
================================================================================
The tax character of distributions paid during the years ended May 31, 2019,
and 2018, was as follows:
2019 2018
--------------------------------------
Ordinary income* $5,667,000 $ 5,500,000
As of May 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 1,081,000
Accumulated capital and other losses (2,145,000)
Unrealized appreciation of investments 4,114,000
*Includes short-term realized capital gains, if any, which are taxable as
ordinary income.
The difference between book-basis and tax-basis unrealized appreciation of
investments is attributable to the tax deferral of losses on wash sales
adjustments.
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 May 31, 2019, the Fund had net capital loss carryforwards of $2,145,000, for
federal income tax purposes as shown in the table below. It is unlikely that the
Board will authorize a distribution of capital gains realized in the future
until the capital loss carryforwards have been used.
CAPITAL LOSS CARRYFORWARDS
--------------------------------------
TAX CHARACTER
--------------------------------------
(NO EXPIRATION) BALANCE
--------------- ----------
Short-Term $ 310,000
Long-Term 1,835,000
----------
Total $2,145,000
==========
TAX BASIS OF INVESTMENTS - At May 31, 2019, the aggregate cost of investments
for federal income tax purposes and net unrealized appreciation/(depreciation)
on investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
FUND TAX COST APPRECIATION DEPRECIATION (DEPRECIATION)
-----------------------------------------------------------------------------------------------------------
USAA Cornerstone
Conservative Fund $189,785,000 $4,676,000 $(562,000) $4,114,000
================================================================================
22 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended May 31, 2019, were $41,934,000 and
$46,862,000, 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 May 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
------------------------------------------------------------------------------------
$676,000 $- $696,000
(6) AGREEMENTS WITH MANAGER
ADVISORY AGREEMENT - The Manager carries out the Fund's investment policies and
manages the Fund's portfolio pursuant to an Advisory Agreement. The
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
Manager does not receive any management fees from the Fund for these services.
ADMINISTRATION AND SERVICING FEES - The Manager provides certain administration
and servicing functions for the Fund. The Manager does not receive any fees from
the Fund for these services.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and legal
services for the benefit of the Fund. The Board has approved the billing of
these expenses to the Fund. These expenses are included in the professional fees
on the Fund's Statement of Operations and, for the year ended May 31, 2019, were
$1,000 for the Fund. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL
STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
EXPENSE LIMITATION - The Manager agreed, through September 30, 2019, to limit
the total annual operating expenses of the Fund to 0.10% of its average daily
net assets, excluding extraordinary expenses and before reductions of any
expenses paid indirectly, and to reimburse the Fund for all expenses in excess
of that amount. This expense limitation arrangement may not be changed or
terminated through September 30, 2019, without approval of the Board, and may be
changed or terminated by the Manager at any time after that date. For the year
ended May 31, 2019, the Fund incurred reimbursable expenses of $46,000, of which
all was receivable from the Manager.
TRANSFER AGENCY AGREEMENT - SAS, an affiliate of the Manager, provides transfer
agent services to the Fund. SAS does not receive any fees from the Fund for
these services. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL
STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
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. PLEASE
REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL
REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
(7) TRANSACTIONS WITH AFFILIATES
The Manager is indirectly wholly owned by USAA, a large, diversified financial
services institution.
================================================================================
24 | USAA CORNERSTONE CONSERVATIVE 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. PLEASE REFER TO THE SUBSEQUENT EVENT
NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
(8) TRANSACTIONS WITH AFFILIATED FUNDS
A. SHARE OWNERSHIP - The Fund does not invest in the affiliated underlying USAA
Funds for the purpose of exercising management or control; however,
investments by the Fund may represent a significant portion of the
affiliated underlying USAA Funds' net assets. The affiliated underlying
funds' annual or semiannual reports may be viewed at usaa.com. At May 31,
2019, the Fund owned the following percentages of the total outstanding
shares of each of the underlying USAA Funds:
AFFILIATED USAA FUND OWNERSHIP %
----------------------------------------------------------------------------
Aggressive Growth Fund Institutional Shares 0.1
Capital Growth Fund Institutional Shares 0.2
Core Intermediate-Term Bond ETF 5.0
Core Short-Term Bond ETF 0.3
Emerging Markets Fund Institutional Shares 0.3
Government Securities Fund Institutional Shares 3.6
Growth Fund Institutional Shares 0.1
High Income Fund Institutional Shares 0.3
Income Fund Institutional Shares 0.7
Income Stock Fund Institutional Shares 0.1
Intermediate-Term Bond Fund Institutional Shares 0.8
International Fund Institutional Shares 0.2
MSCI Emerging Markets Value Momentum Blend Index ETF 0.5
MSCI International Value Momentum Blend Index ETF 0.8
MSCI USA Small Cap Value Momentum Blend Index ETF 0.7
MSCI USA Value Momentum Blend Index ETF 1.1
Precious Metals and Minerals Fund Institutional Shares 0.1
S&P 500 Index Reward Shares 0.1
Short-Term Bond Fund Institutional Shares 0.2
Small Cap Stock Fund Institutional Shares 0.1
Target Managed Fund Institutional Shares 0.8
Value Fund Institutional Shares 0.2
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
B. TRANSACTIONS WITH AFFILIATED FUNDS - The following table provides details
related to the Fund's investment in the underlying USAA Funds for the year
ended May 31, 2019:
CHANGE IN
NET
($ IN 000s) REALIZED CAPITAL UNREALIZED
AFFILIATED PURCHASE SALES DIVIDEND GAIN GAIN APPRECIATION/ MARKET VALUE
USAA FUND COST PROCEEDS INCOME (LOSS) DISTRIBUTIONS DEPRECIATION 5/31/2018 5/31/2019
----------------------------------------------------------------------------------------------------------------------
Aggressive
Growth Fund
Institutional
Shares $ 178 $ 92 $ 19 $ (8) $159 $ (141) $ 1,223 $ 1,160
Capital Growth
Fund
Institutional
Shares 1,849 - - - - (15) - 1,834
Core
Intermediate-
Term
Bond ETF 486 - 395 - - 461 11,895 12,842
Core
Short-Term
Bond ETF - - 6 - - 4 223 227
Emerging
Markets Fund
Institutional
Shares 43 516 43 (13) - (283) 3,266 2,497
Flexible
Income Fund
Institutional
Shares 9 10,826 8 (1,040) - 669 11,188 -
Government
Securities Fund
Institutional
Shares 18,841 111 841 (6) - 1,299 19,235 39,258
Growth Fund
Institutional
Shares 202 240 15 (2) 187 (101) 1,774 1,633
High
Income Fund
Institutional
Shares 339 110 339 (5) - (140) 5,620 5,704
Income Fund
Institutional
Shares 8,750 3,162 1,986 (167) 15 1,815 50,651 57,887
Income
Stock Fund
Institutional
Shares 718 - 50 - 121 (85) 1,939 2,572
================================================================================
26 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
CHANGE IN
NET
($ IN 000s) REALIZED CAPITAL UNREALIZED
AFFILIATED PURCHASE SALES DIVIDEND GAIN GAIN APPRECIATION/ MARKET VALUE
USAA FUND COST PROCEEDS INCOME (LOSS) DISTRIBUTIONS DEPRECIATION 5/31/2018 5/31/2019
---------------------------------------------------------------------------------------------------------------
Intermediate-
Term Bond
Fund
Institutional
Shares $1,303 $15,425 $1,303 $(791) $ - $ 1,457 $44,639 $31,183
International
Fund
Institutional
Shares 839 4,602 265 (236) 574 (1,401) 12,241 6,841
MSCI Emerging
Markets Value
Momentum
Blend
Index ETF 738 - 2 - - (40) 105 803
MSCI
International
Value Momentum
Blend
Index ETF 181 - 59 - - (366) 2,595 2,410
MSCI USA
Small Cap
Value
Momentum
Blend
Index ETF 573 - 1 - - (12) 59 620
MSCI USA
Value
Momentum
Blend
Index ETF 2,070 - 49 - - (168) 2,651 4,553
Precious
Metals and
Minerals Fund
Institutional
Shares - - - - - (38) 744 706
S&P 500
Index Fund
Reward Shares 165 250 113 30 52 22 5,749 5,716
Short-Term
Bond Fund
Institutional
Shares 232 8,934 231 (141) 1 189 14,236 5,582
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
================================================================================
CHANGE IN
NET
($ IN 000s) REALIZED CAPITAL UNREALIZED
AFFILIATED PURCHASE SALES DIVIDEND GAIN GAIN APPRECIATION/ MARKET VALUE
USAA FUND COST PROCEEDS INCOME (LOSS) DISTRIBUTIONS DEPRECIATION 5/31/2018 5/31/2019
---------------------------------------------------------------------------------------------------------------
Small Cap
Stock Fund
Institutional
Shares $ 306 $ 793 $ 69 $ (111) $ 236 $ (410) $ 2,957 $ 1,949
Target
Managed
Allocation
Fund 3,693 - - - - 145 3,838
Value Fund
Institutional
Shares 419 1,801 46 (270) 373 (281) 3,768 1,835
---------------------------------------------------------------------------------------------------------------
Total $41,934 $46,862 $5,840 $(2,760) $1,718 $2,580 $196,758 $191,650
---------------------------------------------------------------------------------------------------------------
(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.
(10) RECENT ACCOUNTING PRONOUNCEMENTS
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.
================================================================================
28 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
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.
(11) SUBSEQUENT EVENT NOTE
As previously announced, and as discussed in Note 1 to the Financial Statements,
effective July 1, 2019, AMCO, the prior investment adviser to the Fund, and SAS,
the prior transfer agent to the Fund, were acquired by Victory Holdings. Please
see the supplement dated July 1, 2019 to the Fund's prospectus for additional
important information.
Effective July 1, 2019, Victory Capital is the new investment adviser and
administrator to the USAA Mutual Funds; SAS was renamed Victory Capital Transfer
Agency, Inc.; Victory Capital Advisers, Inc. is the new distributor to the USAA
Mutual Funds; Citi Fund Services of Ohio, Inc. serves as sub-administrator and
sub-fund accountant for the USAA Mutual Funds; and FIS Investor Services LLC
serve as sub-transfer agent and dividend disbursing agent for the USAA Mutual
Funds. Effective August 5, 2019, Citibank, N.A. is the new custodian for the
USAA Mutual Funds.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2019 permitting the
use of a "manager-of-managers" structure for certain funds. Prior to that date,
the Trust relied on a similar exemptive order granted by the SEC to the Trust
and its affiliated persons. Under a manager of managers structure, the
investment adviser may select (with
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
approval of the Board and without shareholder approval) one or more subadvisers
to manage the day-to-day investment of a fund's assets.
Effective July 1, 2019, under the investment advisory agreement with Victory
Capital, which took effect on July 1, 2019, no performance adjustments will be
made for periods beginning July 1, 2019, through June 30, 2020, and only
performance beginning as of July 1, 2020, and thereafter will be utilized in
calculating performance adjustments through June 30, 2020.
Effective July 1, 2019, the line of credit (as discussed in the Notes to the
Financial Statements in this annual report) among the Trust, with respect to its
Funds, and CAPCO terminated; the Trust, with respect to its Funds, along with
series of Victory Portfolios, Victory Portfolios II and Victory Variable
Insurance Funds, entered into a 364 day committed credit facility and a 364 day
uncommitted, demand credit facility with Citibank, N.A. (Citibank). Each such
credit facility may be renewed if so agreed by the parties. Under the agreement
with Citibank, the Funds may borrow up to $600 million, of which $300 million is
committed and $300 million is uncommitted. Of this amount, $40 million of the
line of credit is reserved for use by the Victory Floating Rate Fund (a series
of Victory Portfolios), with that Fund paying the related commitment fees for
that amount. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption request that might otherwise require the untimely
disposition of securities. Citibank receives an annual commitment fee of 0.15%.
Each Fund pays a pro-rata portion of this commitment fee plus any interest on
amounts borrowed.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2017 (the IFL
Order), permitting the establishment and operation of an Interfund Lending
Facility (the Facility). The Facility allows each Fund to directly lend and
borrow money to or from certain other affiliated Funds relying upon the IFL
Order at rates beneficial to both the borrowing and lending funds. Advances
under the Facility are allowed for temporary or emergency purposes, including
the meeting of redemption requests that are subject to each Fund's borrowing
restrictions. The interfund loan rate is determined, as specified in the IFL
Order, by averaging the current repurchase agreement rate and the current bank
loan rate.
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30 | USAA CORNERSTONE CONSERVATIVE FUND
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FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
------------------------------------------------------------------------
2019 2018 2017 2016 2015
------------------------------------------------------------------------
Net asset value at
beginning of period $ 10.64 $ 10.76 $ 10.27 $ 10.68 $ 10.77
------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .32 .30 .31 .35 .31
Net realized and
unrealized gain (loss) .08 (.11) .49 (.37) (.06)
------------------------------------------------------------------------
Total from investment
operations .40 .19 .80 (.02) .25
------------------------------------------------------------------------
Less distributions from:
Net investment income (.32) (.31) (.31) (.34) (.32)
Realized capital gains - - - (.05) (.02)
------------------------------------------------------------------------
Total distributions (.32) (.31) (.31) (.39) (.34)
------------------------------------------------------------------------
Net asset value at end
of period $ 10.72 $ 10.64 $ 10.76 $ 10.27 $ 10.68
========================================================================
Total return (%)* 3.84 1.79 7.93 (.05) 2.37
Net assets at end
of period (000) $193,265 $196,292 $174,754 $137,705 $145,626
Ratios to average
daily net assets:**
Expenses (%)(a) .10 .10 .10 .10 .10
Expenses, excluding(a)
reimbursements (%) .12 .12 .15 .15 .15
Net investment income (%) 2.99 2.87 3.02 3.38 3.03
Portfolio turnover (%) 22 5 7(b) 43(c) 5
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the year ended May 31, 2019, average daily net assets were $189,947,000.
(a) Does not include acquired fund fees, if any.
(b) Reflects a return to normal trading levels after a prior year transition or
allocation shift.
(c) Reflects increased trading activity due to changes in asset allocation
strategies.
================================================================================
FINANCIAL HIGHLIGHTS | 31
================================================================================
EXPENSE EXAMPLE
May 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 Fund operating expenses. This example is intended to help you
understand your indirect costs, also referred to as "ongoing costs" (in
dollars), of investing in the Fund and to compare these costs with the ongoing
costs of investing in other mutual funds. The Fund also indirectly bears its
pro-rata share of the expenses of the underlying USAA Funds in which it invests
(acquired funds). These acquired fund fees and expenses are not included in the
Fund's annualized expense ratios used to calculate the expense estimates in the
table on the next page.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire six-month period of December 1, 2018, through May
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
================================================================================
32 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return. The hypothetical account values
and expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in the 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. Acquired fund fees and
expenses are not included in the Fund's annualized expense ratio used to
calculate the expenses paid in the table below.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE DECEMBER 1, 2018 -
DECEMBER 1, 2018 MAY 31, 2019 MAY 31, 2019
----------------------------------------------------------------
Actual $1,000.00 $1,051.20 $0.51
Hypothetical
(5% return before expenses) 1,000.00 1,024.43 0.50
*Expenses are equal to the Fund's annualized expense ratio of 0.10%, which is
net of any reimbursements and expenses paid indirectly, multiplied by the
average account value over the period, multiplied by 182 days/365 days (to
reflect the one-half-year period). The Fund's actual ending account value is
based on its actual total return of 5.12% for the six-month period of December
1, 2018, through May 31, 2019.
================================================================================
EXPENSE EXAMPLE | 33
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the (i) new investment
advisory agreement between the Trust and Victory Capital and (ii) new investment
subadvisory agreements between certain subadvisers and Victory Capital, which
became effective on July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO
THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
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.
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34 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
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 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
================================================================================
ADVISORY AGREEMENT(S) | 35
================================================================================
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 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.
================================================================================
36 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
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.
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).
================================================================================
ADVISORY AGREEMENT(S) | 37
================================================================================
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.
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.
(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.
================================================================================
38 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
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 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.
================================================================================
ADVISORY AGREEMENT(S) | 39
================================================================================
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 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,
================================================================================
40 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
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.
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.
(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
================================================================================
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 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
================================================================================
42 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
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 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.
================================================================================
ADVISORY AGREEMENT(S) | 43
================================================================================
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 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.
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44 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
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
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.
================================================================================
ADVISORY AGREEMENT(S) | 45
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND THE MANAGER)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the continuation of the (i)
investment advisory agreement between the Trust and AMCO and (ii) investment
subadvisory agreements between certain subadvisers and AMCO, which were
effective until July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
At an in-person meeting of the Board of Trustees (the Board) held on April 17,
2019, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to the
Fund.(1)
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and the Manager and were given
the opportunity to ask questions and request additional information from
management. The information provided to the Board included, among other things:
(i) a separate report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance, expenses, and
fees to comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the Manager's
revenues and costs of providing
(1)At an in-person meeting held on January 15, 2019, the Board, including the
Independent Trustees, approved a new investment advisory agreement between
the Trust, on behalf of the Fund, and Victory Capital Management Inc.
("Victory Capital"). Upon the closing of the transaction, on behalf of the
Fund, Victory Capital Holdings, Inc., the parent company of Victory Capital,
the Advisory Agreement between the Trust and the Manager will terminate and
the new investment advisory agreement between the Trust and Victory Capital
will go into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are included in this
annual report.
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46 | USAA CORNERSTONE CONSERVATIVE FUND
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services to the Fund and compensation paid to affiliates of the Manager; and
(iii) information about the Manager's operations and personnel. Prior to voting,
the Independent Trustees reviewed the proposed continuance of the Advisory
Agreement with management and with experienced independent legal counsel
retained by the Independent Trustees (Independent Counsel) and received
materials from such Independent Counsel discussing the legal standards for their
consideration of the proposed continuance of the Advisory Agreement with respect
to the Fund. The Independent Trustees also reviewed the proposed continuation of
the Advisory Agreement with respect to the Fund in private sessions with
Independent Counsel at which no representatives of management were present.
At each regularly scheduled meeting of the Board and its committees, the Board
receives and reviews, among other things, information concerning the Fund's
performance and related services provided by the Manager. At the meeting at
which the renewal of the Advisory Agreement is considered, particular focus is
given to information concerning Fund performance, fees and total expenses as
compared to comparable investment companies, and the Manager's profitability
with respect to the Fund. However, the Board noted that the evaluation process
with respect to the Manager is an ongoing one. In this regard, the Board's and
its committees' consideration of the Advisory Agreement included certain
information previously received at such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving the
Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent, and
quality of the services provided by the Manager under the Advisory Agreement,
the Board reviewed information provided by the Manager relating to its
operations and personnel. The Board also took into account its knowledge of the
Manager's management and the quality of the performance
================================================================================
ADVISORY AGREEMENT(S) | 47
================================================================================
of the Manager's duties through Board meetings, discussions, and reports during
the preceding year. The Board considered the services provided to the Fund by
the Manager under the Advisory Agreement, as well as other services provided by
the Manager and its affiliates under other agreements, and the personnel who
provide these services. In addition to the investment advisory services provided
to the Fund, the Manager and its affiliates provide administrative services,
shareholder services, oversight of Fund accounting, marketing services,
assistance in meeting legal and regulatory requirements, and other services
necessary for the operation of the Fund and the Trust. The Board also considered
the significant risks assumed by the Manager in connection with the services
provided to the Fund, including investment, operational, enterprise, litigation,
regulatory and compliance risks.
The Board considered the Manager's management style and the performance of the
Manager's duties under the Advisory Agreement. The Board considered the level
and depth of experience of the Manager, including the professional experience
and qualifications of its senior and investment personnel, as well as current
staffing levels. The Manager's role in coordinating the activities of the Fund
other service providers also was considered. The Board also considered the
Manager's risk management processes. The Board considered the Manager's
financial condition and that it had the financial wherewithal to continue to
provide the same scope and high quality of services under the Advisory
Agreement. In reviewing the Advisory Agreement, the Board focused on the
experience, resources, and strengths of the Manager and its affiliates in
managing the Fund, as well as the other funds in the Trust.
The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager and its affiliates, including oversight of the Fund's
day- to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust,
also focused on the quality of the Manager's compliance and administrative
staff.
EXPENSES AND PERFORMANCE - In connection with its consideration of the Advisory
Agreement, the Board evaluated the Fund's advisory fees and total expense ratio
as compared to other open-end investment companies deemed to be comparable to
the Fund as determined by the independent third party in its report. The Fund's
expenses were compared to (i) a group of investment
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48 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
companies chosen by the independent third party to be comparable to the Fund
based upon certain factors, including the fund type (in this case, other funds-
of-funds that invest in affiliated funds of the investing fund with front-end
loads and no sales loads), comparability of investment objective and
classification, sales load type, asset size, and expense components (the
"expense group") and (ii) a larger group of investment companies that includes
all affiliated no-load and front-end load retail open-end investment companies
with similar investment classifications/objectives as the Fund regardless of
asset size, excluding outliers (the "expense universe"). The Board noted that
the Manager does not receive a management fee from the Fund. The data indicated
that the Fund's total expenses, which included underlying fund expenses and any
reimbursements, were below the median of its expense group and its expense
universe. The Board took into account the various services provided to the Fund
by the Manager and its affiliates, including the high quality of services
provided by the Manager. The Board also took into account the Manager's
undertaking to maintain expense limitations for the Fund.
In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total return with its Lipper index and with that of other mutual funds deemed to
be in its peer group by the independent third party in its report (the
"performance universe"). The Fund's performance universe consisted of the Fund
and all retail and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or primary channel
of distribution. This comparison indicated that, among other data, the Fund's
performance was above the average of its performance universe and its Lipper
index for the one- and three-year periods ended December 31, 2018 and above the
average of its performance universe and below its Lipper index for the five-year
period ended December 31, 2018. The Board also noted that the Fund's percentile
performance ranking was in the top 40% of its performance universe for the one-
and five-year periods ended December 31, 2018, and was in the top 25% of its
performance universe for the three-year period ended December 31, 2018.
================================================================================
ADVISORY AGREEMENT(S) | 49
================================================================================
COMPENSATION AND PROFITABILITY - The Board took into consideration that the
Manager does not collect a management fee from the Fund. The information
considered by the Board included operating profit margin information for the
Manager's business as a whole. This information included a review of the
methodology used in the allocation of certain costs to the Fund. In considering
the profitability data with respect to the Fund, the Trustees noted that the
Manager has reimbursed the Fund for certain expenses. The Trustees reviewed the
profitability of the Manager's relationship with the Fund before tax expenses.
The Board was also provided with an Investment Management Profitability Analysis
prepared by an independent information service. The Board also considered the
fact that the Manager and its affiliates provide shareholder servicing and
administrative services to the Fund for which they receive compensation. The
Board also took into account the Manager's receipt of fees from the underlying
funds in which the Fund invests. The Board also considered the possible direct
and indirect benefits to the Manager from its relationship with the Trust,
including that the Manager may derive reputational and other benefits from its
association with the Fund. The Board also took into account the high quality of
services received by the Fund from the Manager. The Trustees recognized that the
Manager should be entitled to earn a reasonable level of profits in exchange for
the level of services it provides to the Fund and the entrepreneurial and other
risks that it assumes as Manager.
ECONOMIES OF SCALE - With respect to the consideration of any economies of scale
to be realized by the Fund, the Board took into account that the Manager does
not receive any advisory fees under the Advisory Agreement. The Board took into
account management's discussion of the Fund's current advisory fee structure.
The Board also considered the fee waiver and expense reimbursement arrangements
by the Manager. The Board also considered the effects of the Fund's growth and
size on the Fund's performance and fees, noting that if the Fund's assets
increase over time, the Fund may realize other economies of scale if assets
increase proportionally more than some expenses. The Board determined that the
current fee structure was reasonable.
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the
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50 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
Manager maintains an appropriate compliance program; (iii) the performance of
the Fund is reasonable in relation to the performance of the funds with similar
investment objectives and to relevant indices in view of the Fund's investment
approach and management is appropriately monitoring the Fund's performance;
(iv) the Fund's advisory expenses are reasonable in relation to those of similar
funds and to the services to be provided by the Manager; and (v) the Manager's
and its affiliates' level of profitability from its relationship with the Fund
is reasonable in light of the nature and high quality of services provided by
the Manager and the type of fund. Based on its conclusions, the Board determined
that continuation of the Advisory Agreement would be in the best interests of
the Fund and its shareholders.
================================================================================
ADVISORY AGREEMENT(S) | 51
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION
TRUSTEES AND OFFICERS OF THE TRUST
--------------------------------------------------------------------------------
As of July 1, 2019, the Board of Trustees (the Board) of the Trust consists of
ten Trustees. These Trustees and the Trust's Officers supervise the business
affairs of the USAA family of funds. The Board is responsible for the general
oversight of the funds' business and for assuring that the funds are managed in
the best interests of each fund's respective shareholders. The Board
periodically reviews the funds' investment performance as well as the quality of
other services provided to the funds and their shareholders by each of the
fund's service providers, including the adviser and its affiliates. Pursuant to
a policy adopted by the Board, the term of office for each Trustee shall be
until the Trustee reaches age 75. The Board may change or grant exceptions from
this policy at any time without shareholder approval. A Trustee may resign or be
removed by a vote of two-thirds of the Trustees before the removal or by the
holders of two-thirds of the outstanding shares of the Trust at any time.
Vacancies on the Board can be filled by the action of a majority of the
Trustees, provided that after filling such vacancy at least two-thirds of the
Trustees have been elected by the shareholders.
Set forth below are the Trustees and Officers of the Trust, their respective
offices and principal occupations during the last five years, length of time
served, and information relating to any other directorships held. As of July 1,
2019, each serves on the Board of the USAA family of funds consisting of one
registered investment company, which offers 47 individual funds. Unless
otherwise indicated, the business address for each is P.O. Box 659430, San
Antonio, TX 78265-9430.
If you would like more information about the funds' Trustees, you may call (800)
235-8396 to request a free copy of the funds' Statement of Additional
Information (SAI).
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52 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
In connection with the Transaction, the Board of the Trust nominated, and
shareholders of each USAA mutual fund approved, two new Trustees to serve on the
Trust's Board, effective upon the closing of the Transaction. Effective July 1,
2019, David C. Brown serves as an Interested Trustee and John C. Walters serves
as an Independent Trustee. Information about the current Trustees of the Trust
is provided below.
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
DANIEL S. McNAMARA(1, 2, 4, 6, +)
Trustee and Chair of the Board of Trustees
Born: June 1966
Year of Election or Appointment: 2012
Trustee, President, and Vice Chairman, USAA ETF Trust (06/17-06/19); President
of Financial Advice & Solutions Group (FASG), USAA (02/13-present); Director of
USAA Asset Management Company (AMCO), (08/11-present); Director of USAA
Investment Management Company (IMCO) (09/09-present); President, IMCO
(09/09-04/14); President and Director of USAA Shareholder Account Services (SAS)
(10/09-present); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director of FPS (12/13-present);
President and Director of USAA Investment Corporation (ICORP) (03/10-present);
Director of USAA Financial Advisors, Inc. (FAI) (12/13-present). Mr. McNamara
brings to the Board extensive experience in the financial services industry,
including experience as an officer of the Trust.
DAVID C. BROWN(2, 4, 6, 10)
Trustee
Born: May 1972
Year of Election or Appointment: 2019
Chairman and Chief Executive Officer (2013-present), Co-Chief Executive Officer,
(2011-2013), Victory Capital Management Inc.; Chairman and Chief Executive
Officer (2013-present), Victory Capital Holdings, Inc. Mr. Brown brings to the
Board extensive business, finance and leadership skills gained
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 53
================================================================================
and developed through years of experience in the financial services industry,
including his tenure overseeing the strategic direction as CEO of Victory
Capital. These skills, combined with Mr. Brown's extensive knowledge of the
financial services industry and demonstrated success in the development and
distribution of investment strategies and products, enable him to provide
valuable insights to the Board and strategic direction for the Funds. Mr. Brown
serves on the Boards of the Victory Funds family of funds consisting of five
registered investment companies offering approximately 104 mutual funds and 24
ETFs. Mr. Brown is considered an Interested Trustee of the Trust due to his
position with Victory Capital and its affiliated companies.
NON-INTERESTED (INDEPENDENT) TRUSTEES
--------------------------------------------------------------------------------
ROBERT L. MASON, Ph.D.(3, 4, 5, 6, 7)
Trustee
Born: July 1946
Year of Election or Appointment: 1997
Trustee, USAA ETF Trust (06/17-06/19); Adjunct Professor in the Department of
Management Science and Statistics in the College of Business at the University
of Texas at San Antonio (2001-present); Institute Analyst, Southwest Research
Institute (03/02-01/16), which focuses on providing innovative technology,
science, and engineering services to clients around the world and is one of the
oldest independent, nonprofit, applied research and development organizations in
the United States. He was employed at Southwest Research Institute for 40 years.
Dr. Mason brings to the Board particular experience with information technology
matters, statistical analysis, and human resources as well as over 22 years'
experience as a Board member of the USAA family of funds. Dr. Mason holds no
other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
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54 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
JEFFERSON C. BOYCE(3, 4, 5, 6, 7)
Lead Trustee and Vice Chair
Born: September 1957
Year of Election or Appointment: 2013
Trustee, USAA ETF Trust (06/17-06/19); Senior Managing Director, New York Life
Investments, LLC (1992-2012), an investment manager. Mr. Boyce brings to the
Board experience in financial investment management, and, in particular,
institutional and retail mutual funds, variable annuity products, broker
dealers, and retirement programs, including experience in organizational
development, marketing, product development, and money management as well as
five years' experience as a Board member of the USAA family of funds. Mr. Boyce
is a board member of Westhab, Inc.
DAWN M. HAWLEY(3, 4, 5, 6, 7, 9)
Trustee
Born: February 1954
Year of Election or Appointment: 2014
Trustee, USAA ETF Trust (06/17-06/19); Manager of Finance, Menil Foundation,
Inc. (05/07-06/11), which is a private foundation that oversees the assemblage
of sculptures, prints, drawings, photographs, and rare books. Director of
Financial Planning and Analysis and Chief Financial Officer, AIM Management
Group, Inc. (10/87-01/06). Ms. Hawley brings to the Board experience in
financial investment management and, in particular, institutional and retail
mutual funds, variable annuity products, broker dealers, and retirement
programs, including experience in financial planning, budgeting, accounting
practices, and asset/liability management functions including major acquisitions
and mergers, as well as over five years' experience as a Board member of the
USAA family of funds. Ms. Hawley holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 55
================================================================================
PAUL L. McNAMARA(3, 4, 5, 6, 7)
Trustee
Born: July 1948
Year of Election or Appointment: 2012
Trustee, USAA ETF Trust (06/17-06/19); Director, Cantor Opportunistic
Alternatives Fund, LLC (03/10-02/14), which is a closed-end fund of funds by
Cantor Fitzgerald Investment Advisors, LLC. Mr. McNamara retired from Lord
Abbett & Co. LLC, an independent U.S. investment management firm, as an
Executive Member on 09/30/09, a position he held since 10/02. He had been
employed at Lord Abbett since 1996. Mr. McNamara brings to the Board extensive
experience with the financial services industry and, in particular,
institutional and retail mutual fund markets, including experience with mutual
fund marketing, distribution, and risk management, as well as overall experience
with compliance and corporate governance issues. Mr. McNamara also has
experience serving as a fund director as well as seven years' experience as a
Board member of the USAA family of funds. Paul L. McNamara is of no relation to
Daniel S. McNamara. Mr. McNamara holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
RICHARD Y. NEWTON III(3, 4, 5, 6, 7)
Trustee
Born: January 1956
Year of Election or Appointment: 2017
Trustee, USAA ETF Trust (06/17-06/19); Director, Elta North America
(01/18-present), which is a global leader in the design, manufacture and support
of innovative electronic systems in the ground, maritime, airborne, and security
domains for the nation's warfighters, security personnel, and first responders;
Managing Partner, Pioneer Partnership Development Group (12/15-present);
Executive Director, The Union League Club of New York (06/14-11/15); Executive
Vice President, Air Force Association (08/12-05/14); Lieutenant General, United
States Air Force (01/08-06/12). Lieutenant General Newton (Ret.) served 34 years
of active duty in the United States Air Force. Lt. Gen. Newton retired as the
Assistant Vice Chief of Staff and Director of Air Staff at the Headquarters of
the U.S. Air Force where he was responsible for overseeing the administration
and organization
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56 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
of the Air Staff, which develops policies, plans and programs, establishes
requirements, and provides resources to support the Air Force's mission. Lt.
Gen. Newton is a graduate of the United States Air Force Academy, Webster
University, and The National War College. Lt. Gen. Newton brings to the Board
extensive management and military experience, as well as over two years of
experience as a Board member of the USAA family of funds. Lt. Gen. Newton holds
no other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
BARBARA B. OSTDIEK, Ph.D.(3, 4, 5, 6, 7, 8)
Trustee
Born: March 1964
Year of Election or Appointment: 2008
Trustee, USAA ETF Trust (06/17-06/19); Senior Associate Dean of Degree programs
at Jesse H. Jones Graduate School of Business at Rice University
(07/13-present); Associate Professor of Finance at Jesse H. Jones Graduate
School of Business at Rice University (07/01-present); Academic Director, El
Paso Corporation Finance Center at Jesse H. Jones Graduate School of Business at
Rice University (07/02-06/12). Dr. Ostdiek brings to the Board particular
experience with financial investment management, education, and research as well
as over eleven years' experience as a Board member of the USAA family of funds.
Dr. Ostdiek holds no other directorships of any publicly held corporations or
other investment companies outside the USAA family of funds.
MICHAEL F. REIMHERR(3, 4, 5, 6, 7)
Trustee
Born: August 1945
Year of Election or Appointment: 2000
Trustee, USAA ETF Trust (06/17-06/19); President of Reimherr Business Consulting
performing business valuations of medium to large companies; developing business
plans, budgets, and internal financial reporting; and work with mergers and
acquisitions (05/95-12/17). St. Mary's University Investment Committee
overseeing University Endowment (06/14-present). Mr. Reimherr brings to the
Board particular experience with organizational development, budgeting, finance,
capital markets, and mergers and acquisitions, as well as
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 57
================================================================================
over 19 years' experience as a Board member of the USAA family of funds. Mr.
Reimherr holds no other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
JOHN C. WALTERS(3, 4, 5, 6, 7)
Trustee
Born: February 1962
Year of Election or Appointment: 2019
Retired. Mr. Walters brings significant Board experience including active
involvement with the board of a Fortune 500 company, and a proven record of
leading large, complex financial organizations. He has a demonstrated record of
success in distribution, manufacturing, investment brokerage, and investment
management in both the retail and institutional investment businesses. He has
substantial experience in the investment management business with a demonstrated
ability to develop and drive strategy while managing operational, financial, and
investment risk. Mr. Walters is a board member of Guardian Variable Products
Trust (16 series), Lead Independent Director; Amerilife Holdings LLC, Director;
Stadion Money Management; Director; and University of North Carolina (Chapel
Hill), Member Board of Governors.
(1) Indicates the Trustee is an employee of AMCO or affiliated companies and
is considered an "interested person" under the Investment Company Act of
1940.
(2) Member of Executive Committee.
(3) Member of Audit and Compliance Committee.
(4) Member of Product Management and Distribution Committee.
(5) Member of Corporate Governance Committee.
(6) Member of Investments Committee.
(7) The address for all non-interested trustees is that of the USAA Funds,
P.O. Box 659430, San Antonio, TX 78265-9430.
(8) Dr. Ostdiek has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(9) Ms. Hawley has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(10) Indicates the Trustee is an employee of Victory Capital or affiliated
companies and is considered an "interested person" under the Investment
Company Act of 1940.
(+) Mr. D. McNamara was elected as Chair of the Board in July 2019.
================================================================================
58 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
Effective July 1, 2019, the Board of the Trust appointed certain new officers of
the Trust. The current officers of the Trust are stated below.
OFFICERS
--------------------------------------------------------------------------------
CHRISTOPHER K. DYER
President
Born: February 1962
Year of Appointment: 2019
Director of Mutual Fund Administration, the Victory Capital.
SCOTT A. STAHORSKY
Vice President
Born: July 1969
Year of Appointment: 2019
Manager, Fund Administration, the Adviser (since 2015); Senior Analyst, Fund
Administration, the Victory Capital (prior to 2015).
ALLAN SHAER
Assistant Treasurer
Born: March 1965
Year of Appointment: 2019
Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc.
(since 2016); Vice President, Mutual Fund Administration, JP Morgan Chase
(2011-2016).
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TRUSTEES' AND OFFICERS' INFORMATION | 59
================================================================================
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Treasurer, USAA ETF Trust (09/18-06/19); Executive Director, Investment and
Financial Administration, USAA (04/12-present); Assistant Treasurer, USAA ETF
Trust (06/17-09/18); Assistant Treasurer, USAA Mutual Funds Trust (12/13-02/18).
Mr. De Vries also serves as the Funds' Principal Financial Officer.
CAROL D. TREVINO
Assistant Treasurer
Born: October 1965
Year of Appointment: 2018
Assistant Treasurer, USAA ETF Trust (09/18-06/19); Accounting/Financial
Director, USAA (12/13-present); Senior Accounting Analyst, USAA (03/11-12/13).
ERIN G. WAGNER
Secretary
Born: February 1974
Year of Appointment: 2019
Associate General Counsel, the Adviser (since 2013).
CHARLES BOOTH
Anti-Money Laundering Compliance Officer and Identity Theft Officer
Born: April 1960
Year of Appointment: 2019
Director, Regulatory Administration and CCO Support Services, Citi Fund Services
Ohio, Inc. (2007-present).
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60 | USAA CORNERSTONE CONSERVATIVE FUND
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AMY CAMPOS
Chief Compliance Officer
Born: August 1976
Year of Appointment: 2019
Chief Compliance Officer, USAA Mutual Funds Trust (7/1/19-present); Executive
Director, Deputy Chief Compliance Officer, USAA Mutual Funds Trust and USAA ETF
Trust (7/17-6/19); Compliance Director, USAA Mutual Funds Trust (2014-7/17);
Senior Compliance Advisor, USAA Mutual Funds Trust (2010-2014).
THE FOLLOWING OFFICERS SERVED IN THEIR RESPECTIVE OFFICE UNTIL JULY 1, 2019, AT
WHICH POINT EACH OF THE FOLLOWING OFFICERS RESIGNED FROM THEIR RESPECTIVE OFFICE
AND NO LONGER SERVE IN THESE POSITIONS.
JOHN C. SPEAR
Vice President
Born: May 1964
Year of Appointment: 2016
Vice President, USAA ETF Trust (06/17-06/19); Senior Vice President and Chief
Investment Officer, USAA Investments, (03/17-present); Vice President and Chief
Investment Officer, USAA Investments, (11/16-03/17); Vice President, Long Term
Fixed Income (05/12-11/16).
JOHN P. TOOHEY
Vice President
Born: March 1968
Year of Appointment: 2009
Vice President, USAA ETF Trust (06/17-06/19); Head of Equities, Equity
Investments, AMCO (01/12-present).
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TRUSTEES' AND OFFICERS' INFORMATION | 61
================================================================================
KRISTEN MILLAN
Secretary
Born: April 1983
Year of Appointment: 2019
Secretary, USAA ETF Trust (04/19-06/19); Assistant Secretary, USAA ETF Trust
(01/19-06/19); Senior Attorney, FASG General Counsel, USAA (09/17-06/19);
Attorney, FASG General Counsel, USAA (06/13-09/17). Ms. Millan also serves as
Assistant Secretary of AMCO, ICORP, and SAS.
STEPHANIE A. HIGBY
Chief Compliance Officer
Born: July 1974
Year of Appointment: 2013
Chief Compliance Officer, USAA ETF Trust (06/17-06/19); Assistant Vice
President, Compliance-Investments, USAA (02/18-present); Assistant Vice
President, Compliance Mutual Funds, USAA (12/16-01/18); Executive Director,
Institutional Asset Management Compliance, USAA (04/13-12/16). Ms. Higby also
serves as the Funds' anti-money laundering compliance officer and as the Chief
Compliance Officer for AMCO and IMCO.
================================================================================
62 | USAA CORNERSTONE CONSERVATIVE FUND
================================================================================
AS OF JULY 1, 2019
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
David C. Brown
John C. Walters
--------------------------------------------------------------------------------
ADMINISTRATOR AND Victory Capital Management Inc.
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND Victory Capital Advisers Inc.
DISTRIBUTOR 4900 Tiedeman Road
Brooklyn, Ohio 44144
--------------------------------------------------------------------------------
TRANSFER AGENT Victory Capital Transfer Agency Inc.
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 USAA AMCO'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) 235-8396; (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) 235-8396; (ii) at usaa.com; and (iii) on the SEC's website at
http://www.sec.gov.
===============================================================================
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----------------------
MUTUAL FUNDS
--------------------------------------------------------------------------------
May 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA Cornerstone Equity Fund
FUND
SHARES
UCEQX
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) 235-8396 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)
235-8396 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.
Victory Capital means Victory Capital Management Inc., the investment manager of
the USAA Mutual Funds. USAA Mutual Funds are distributed by Victory Capital
Advisers, Inc., a broker dealer registered with FINRA and an affiliate of
Victory Capital. Victory Capital and its affiliates are not affiliated with
United Services Automobile Association or its affiliates. USAA and the USAA
logos are registered trademarks and the USAA Mutual Funds and USAA Investments
logos are trademarks of United Services Automobile Association and are being
used by Victory Capital and its affiliates under license.
================================================================================
================================================================================
PRESIDENT'S MESSAGE
"... LONG-TERM INVESTORS SHOULD NEVER MAKE
DECISIONS IN HASTE. THEY SHOULD MAKE [PHOTO OF BROOKS ENGLEHARDT]
THOUGHTFUL DECISIONS BASED ON THEIR LONG-TERM
OBJECTIVES, TIME HORIZON, AND RISK TOLERANCE."
--------------------------------------------------------------------------------
JULY 2019
As previously announced, USAA, the parent company of USAA Asset Management
Company ("AMCO"), the prior investment adviser to the USAA Mutual Funds,
announced that AMCO would be acquired by Victory Capital Holdings, Inc.
(Victory Holdings), a global investment management firm headquartered in
Cleveland, Ohio (the Transaction). In connection with the Transaction, also as
previous announced, shareholders of each USAA Mutual Fund approved a new
investment advisory agreement with Victory Capital Management Inc. ("Victory
Capital"), an indirect wholly-owned subsidiary of Victory Holdings. The closing
of the Transaction occurred on July 1, 2019; and Victory Capital became the
investment adviser to each USAA Mutual Fund. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION ABOUT CHANGES THAT TOOK EFFECT ON JULY 1, 2019.
Softening global economic conditions and escalating trade tensions rattled
investors during the 12-month reporting period ended May 31, 2019. When the
reporting period began in June 2018, the global economy was expanding across
most regions and countries, led by the U.S. In this environment, stocks
generally advanced. In the fixed income market, U.S. Treasury yields rose, as
the U.S. Federal Reserve ("Fed") continued to tighten monetary policy.
Signs of trouble emerged during the summer of 2018. The U.S. economic expansion
continued, but growth in a number of other economies, including some European
countries and China, showed a weakening trend. By the autumn of 2018, investors'
fears of a global economic slowdown, combined with harsh U.S.-China trade
rhetoric and Brexit-related uncertainty in Europe, sparked a surge in market
volatility. Global stocks dropped, with most of the decline occurring in
December 2018. At the same time, intermediate- and longer-term yields fell, as
investors anticipated a change in Fed monetary policy. Indeed, after having
raised short-term interest rates four times during 2018, Fed officials announced
in January 2019 that they would "pause," retreating from their earlier plan to
raise interest rates in 2019. Stocks rallied in response and by April 2019 had
recovered most of the ground they had lost. In May 2019, ongoing trade tensions
between the United States and China, as well as President Trump administration's
threat to impose tariffs on Mexico, drove a renewed decline in stock prices. In
the fixed income market, concerns that trade disputes would seriously undermine
global
================================================================================
================================================================================
economic growth pushed down intermediate- and longer-term yields, which ended
the reporting period lower than they started. The yield on the 10-year U.S.
Treasury note, which began June 2018 at 2.89%, rose to 3.24% on November 8,
2018--its high point of the period--and fell to 2.13% by May 31, 2019.
In the final months of the reporting period, the Treasury yield curve inverted,
which means that shorter-term yields were higher than longer-term yields. A
yield-curve inversion warrants attention because it has been a reliable
recession indicator. Although recessions do not automatically follow
inversions, a downward-sloped yield curve has preceded every U.S. recession
since the 1960s. That said, the lag between an inversion and a recession has
been inconsistent. At USAA Investments, A Victory Capital Investment Franchise,
we have found that during the past six decades, the time between inversion and
recession has ranged between six months and two years, with no clear pattern to
provide useful guidance. And as I write to you, we see no recession on the
horizon. First, the U.S. economy continues to grow, albeit at a slower pace than
in 2018. Second, the Fed has made clear its commitment to pause its interest
rate hikes, and there is a growing belief in the markets that policymakers may
even cut interest rates in 2019. (In early June 2019, after the end of the
reporting period, Fed Chair Jerome Powell stated that the U.S. central bank was
monitoring the escalation in trade tensions and could potentially respond by
cutting interest rates if U.S. economic conditions deteriorate.)
At USAA Investments, our team of portfolio managers will continue to monitor the
financial markets, economic conditions, the global trade regime, Fed policy, the
direction of longer-term interest rates, and other issues that have the
potential to affect your investments. In the meantime, I would advise you to
ignore media "noise" about such matters. Media "noise" is meant to provoke an
emotional reaction, which can lead to hasty decision-making. In my opinion,
long-term investors should never make decisions in haste. They should make
thoughtful decisions based on their long-term objectives, time horizon, and risk
tolerance. Dollar-cost averaging, in which you invest a set amount on a regular
basis, is a strategy that can help you stay on track. Another effective strategy
is diversification, which can potentially insulate a portfolio from market
turbulence or changes in performance leadership.
If you would like to review your portfolio to confirm that it is properly
aligned with your investment plan, please contact one of our financial advisors.
You might want to make that call before the summer gets fully underway. When we
are traveling and spending time with family and friends, it can be tempting to
put off decisions on financial matters.
From all of us at USAA Investments, A Victory Capital Investment Franchise,
thank you for the opportunity to help you with your investment needs.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGERS' COMMENTARY 1
INVESTMENT OVERVIEW 4
SHAREHOLDER VOTING RESULTS 7
FINANCIAL INFORMATION
Distributions to Shareholders 8
Report of Independent Registered
Public Accounting Firm 9
Portfolio of Investments 10
Notes to Portfolio of Investments 11
Financial Statements 12
Notes to Financial Statements 15
Financial Highlights 29
EXPENSE EXAMPLE 30
ADVISORY AGREEMENT(S) 32
TRUSTEES' AND OFFICERS' INFORMATION 50
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) 235-8396.
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.
================================================================================
================================================================================
MANAGERS' COMMENTARY ON THE FUND
--------------------------------------------------------------------------------
[PHOTO OF LANCE HUMPHREY] [PHOTO OF WASIF A. LATIF]
LANCE HUMPHREY, CFA WASIF A. LATIF
--------------------------------------------------------------------------------
o HOW DID THE GLOBAL FINANCIAL MARKETS PERFORM DURING THE REPORTING 12-MONTH
PERIOD ENDED MAY 31, 2019?
The world financial markets produced mixed results, reflecting investors'
struggle to assess the shifting outlook for economic growth. During the
reporting period, large-cap U.S. equities were the best performer among the
major asset classes. Domestic stocks performed very well in the first half
of the reporting period, during which both economic data and corporate
earnings came in above expectations. However, the market sold off sharply in
late 2018 due to the combination of worries about U.S. Federal Reserve
("Fed") policy, the trade dispute between the United States and China, and
signs of slowing economic growth overseas. Stocks quickly recovered from
the downturn, and the main U.S. equity indexes went on to post their best
quarter in nearly 10 years during the first three months of 2019. A rapid
shift in Fed policy was likely the key catalyst for the rebound. Whereas the
markets generally were expecting as late as October 2018 that the Fed would
raise interest rates three to four times in 2019, a series of statements
from key officials indicated the Fed was in fact likely finished raising
interest rates for the foreseeable future. The reporting period ended on a
down note with a weak showing in May 2019, as stocks lost some of their
previous gains due to renewed worries about slowing growth and the failure
of the United States and China to resolve their trade impasse.
The net effect of these sentiment swings was a narrow advance for large-cap
U.S. stocks, as gauged by the 3.47% gain of the Russell 1000 Index.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
The Russell 2000 Index, a measure of performance for smaller companies,
lagged considerably with a return of -9.04%.
Developed-market international equities posted a loss over the 12-month
reporting period, largely as a result of the unexpectedly slow growth
outside of the United States. In combination with the weakness in foreign
currencies versus the U.S. dollar, the slowdown led to a loss of 5.75% for
the MSCI EAFE Index. Emerging-market stocks also closed in negative
territory, as gauged by the -8.70% return of the MSCI Emerging Markets
Index. Concerns about the global trade outlook and the prospect of slowing
growth in the developed world contributed to the underperformance for the
asset class.
o HOW DID THE USAA CORNERSTONE EQUITY FUND (THE "FUND") PERFORM DURING THE
REPORTING PERIOD?
For the reporting period ended May 31, 2019, the Fund had a total return of
-4.35%. This compares to a return of -1.29% for the MSCI All-Country World
Index and -1.10% for the Cornerstone Equity Composite Index. Effective July
1, 2019, Victory Capital serves as the Fund's investment adviser. Prior to
July 1, 2019, AMCO served as the Fund's investment adviser. The investment
adviser provides day-to-day discretionary management for the Fund's assets.
o PLEASE DISCUSS THE FACTORS THAT HELPED AND HURT PERFORMANCE.
Consistent with the broader market environment, the Fund's allocation to
large-cap U.S. equities was the key contributor to performance in the
reporting period. The Fund was weighted toward large-cap stocks over small
caps, which aided results, but performance was hurt somewhat by favoring
international equities over the U.S. equities. We believe both developed-
and emerging-market equities offer more compelling valuations and greater
upside potential than U.S. equities, but this aspect
Refer to page 4 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
2 | USAA CORNERSTONE EQUITY FUND
================================================================================
of our approach detracted in the reporting period given the outperformance
of U.S. stocks.
Over the course of the reporting period, we added several exchange-traded
funds ("ETFs") that combine the value and price momentum factors. We believe
these factors have historically provided excess returns relative to
traditional capitalization-weighted indexes. Additionally, the two factors
may provide additional correlation benefits when combined into a single
portfolio. During the reporting period, however, these holdings detracted
from performance compared to traditional ETFs with a structure based on
market capitalization. Much of this shortfall can be attributed to the
largest growth stocks in the traditional indexes producing exceptional
returns and causing the broader growth style to outperform value.
The majority of the key trends in the market have been in place for a
multi-year period, with domestic stocks outperforming bonds, the growth
style outpacing value, and U.S. equities exceeding the returns of the
foreign markets, to name just a few. Given the persistence of these
tendencies, it can be easy for investors to forget that asset class returns
tend to run in cycles. We therefore prefer to take a long-term view based on
the knowledge that even well-established market trends can--and do--shift
abruptly. Rather than trying to chase short-term performance, we continue
to emphasize diversification, fundamentals, and valuations. We believe this
steady approach, rather than one that attempts to respond to the latest
headlines, is the most effective way to navigate volatile markets.
Thank you for allowing us to help you manage your investments.
The assets of the Cornerstone Equity Fund will be invested in other USAA
funds and will indirectly bear expenses and reflect the risks of the
underlying funds in which it invests. o The underlying funds may be invested
in, among other things: (1) exchange-traded funds; (2) futures, options, and
other derivatives; (3) non-investment-grade securities; (4) precious metals
and minerals companies; (5) real estate investment trusts; (6) money market
instruments; and (7) foreign and emerging markets. o These types of
investments and asset classes may be more volatile than others. In addition,
it is possible that a particular asset allocation may not produce the
intended result. o Foreign investing is subject to additional risks, such as
currency fluctuations, market illiquidity, and political instability.
Emerging market countries are most volatile. Emerging market countries are
less diverse and mature than other countries and tend to be politically less
stable. o The USAA Precious Metals and Minerals Fund is subject to
additional risks, such as currency fluctuation, market illiquidity,
political instability and increased price volatility. It may be more
volatile than a fund that diversifies across many industries and companies.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/19 o
------------------------------------------------------------------------------------------------------
SINCE INCEPTION
1 YEAR 5 YEAR 10 YEAR INCEPTION* DATE
------------------------------------------------------------------------------------------------------
USAA Cornerstone
Equity Fund -4.35% 4.49% - 7.84% 6/08/12
MSCI All-Country
World Index** (reflects
no deduction for fees,
expenses, or taxes) -1.29% 5.21% 9.39% - -
Cornerstone Equity
Composite Index***
(reflects no deduction
for fees, expenses, or taxes) -1.10% 5.80% 10.43% - -
*Since inception returns are shown when a share class has less than 10 years of
performance. Total returns for periods of less than one year are not annualized.
**The unmanaged MSCI All-Country World Index is a free float-adjusted market
capitalization weighted index that is designed to measure the equity market
performance of developed and emerging markets.
***The Cornerstone Equity Composite Index is a combination of unmanaged indexes
representing the Fund's model allocation, and consists of the MSCI USA
Investable Market Index (IMI) Gross (56%), the MSCI ACWI ex USA IMI Net (37%),
the Bloomberg Commodity Index Total Return (2.5%), the MSCI U.S. Real Estate
Investment Trust (REIT) Index Gross (2.5%), and the Bloomberg Barclays U.S.
Treasury - Bills (1-3M) (2%).
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
usaa.com.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on net investment income and
realized capital gain distributions, including reinvested distributions, or
redemptions of shares.
================================================================================
4 | USAA CORNERSTONE EQUITY FUND
================================================================================
o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
CORNERSTONE MSCI USAA
EQUITY COMPOSITE ALL-COUNTRY CORNERSTONE
INDEX WORLD INDEX EQUITY FUND
05/31/12 $10,000.00 $10,000.00 $10,000.00
06/30/12 10,454.60 10,493.89 10,250.00
07/31/12 10,589.58 10,637.55 10,290.00
08/31/12 10,827.10 10,868.84 10,570.00
09/30/12 11,138.14 11,211.17 10,940.00
10/31/12 11,030.66 11,136.45 10,810.00
11/30/12 11,148.74 11,278.85 10,900.00
12/31/12 11,372.54 11,534.33 11,162.00
01/31/13 11,911.10 12,065.70 11,546.00
02/28/13 11,949.36 12,063.82 11,516.00
03/31/13 12,236.03 12,284.39 11,718.00
04/30/13 12,525.80 12,635.33 11,728.00
05/31/13 12,557.29 12,600.66 11,839.00
06/30/13 12,241.81 12,232.36 11,455.00
07/31/13 12,823.59 12,817.95 12,062.00
08/31/13 12,548.66 12,550.90 11,839.00
09/30/13 13,138.37 13,199.17 12,355.00
10/31/13 13,636.56 13,729.68 12,779.00
11/30/13 13,842.16 13,924.12 12,941.00
12/31/13 14,103.21 14,164.33 13,133.00
01/31/14 13,647.54 13,597.75 12,650.00
02/28/14 14,304.34 14,254.63 13,308.00
03/31/14 14,361.97 14,318.01 13,308.00
04/30/14 14,453.58 14,454.31 13,339.00
05/31/14 14,731.26 14,761.74 13,596.00
06/30/14 15,045.40 15,039.67 13,925.00
07/31/14 14,801.75 14,857.27 13,596.00
08/31/14 15,186.81 15,185.48 13,966.00
09/30/14 14,684.35 14,693.04 13,442.00
10/31/14 14,878.84 14,796.48 13,534.00
11/30/14 15,102.65 15,043.97 13,812.00
12/31/14 14,891.46 14,753.68 13,520.00
01/31/15 14,664.01 14,523.01 13,415.00
02/28/15 15,433.86 15,331.53 14,098.00
03/31/15 15,240.37 15,093.97 13,856.00
04/30/15 15,577.10 15,531.92 14,245.00
05/31/15 15,616.59 15,511.65 14,287.00
06/30/15 15,300.22 15,146.48 13,961.00
07/31/15 15,393.23 15,278.01 13,919.00
08/31/15 14,425.51 14,230.68 13,048.00
09/30/15 13,953.00 13,715.12 12,628.00
10/31/15 14,962.73 14,791.55 13,541.00
11/30/15 14,877.68 14,669.41 13,510.00
12/31/15 14,614.35 14,404.86 13,213.00
01/31/16 13,759.41 13,536.09 12,474.00
02/29/16 13,698.87 13,442.98 12,441.00
03/31/16 14,705.73 14,439.21 13,333.00
04/30/16 14,926.32 14,652.35 13,540.00
05/31/16 15,003.93 14,670.82 13,605.00
06/30/16 14,969.43 14,582.01 13,540.00
07/31/16 15,578.68 15,210.40 14,149.00
08/31/16 15,608.28 15,261.58 14,225.00
09/30/16 15,709.73 15,355.08 14,301.00
10/31/16 15,400.25 15,094.44 14,040.00
11/30/16 15,637.42 15,209.15 14,301.00
12/31/16 15,975.19 15,537.71 14,549.00
01/31/17 16,365.03 15,962.58 14,964.00
02/28/17 16,825.88 16,410.38 15,290.00
03/31/17 16,969.59 16,611.09 15,503.00
04/30/17 17,206.69 16,870.00 15,772.00
05/31/17 17,497.93 17,242.53 16,052.00
06/30/17 17,613.72 17,320.93 16,176.00
07/31/17 18,059.87 17,804.96 16,557.00
08/31/17 18,120.48 17,873.19 16,580.00
09/30/17 18,491.82 18,218.49 16,984.00
10/31/17 18,852.58 18,596.81 17,286.00
11/30/17 19,245.37 18,956.82 17,578.00
12/31/17 19,534.73 19,262.45 17,835.00
01/31/18 20,515.10 20,349.13 18,738.00
02/28/18 19,654.67 19,494.53 17,903.00
03/31/18 19,389.69 19,077.24 17,617.00
04/30/18 19,516.75 19,259.40 17,709.00
05/31/18 19,716.68 19,283.42 17,709.00
06/30/18 19,654.18 19,179.04 17,503.00
07/31/18 20,186.83 19,757.44 17,972.00
08/31/18 20,424.59 19,912.60 18,040.00
09/30/18 20,455.45 19,999.30 18,075.00
10/31/18 18,957.58 18,500.57 16,669.00
11/30/18 19,263.21 18,771.15 16,943.00
12/31/18 17,838.68 17,449.01 15,684.00
01/31/19 19,296.44 18,826.78 17,000.00
02/28/19 19,814.18 19,330.37 17,390.00
03/31/19 20,041.27 19,573.40 17,487.00
04/30/19 20,688.46 20,234.35 17,999.00
05/31/19 19,500.12 19,034.05 16,939.00
[END CHART]
Data from 5/31/12 through 5/31/19.*
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Cornerstone Equity Fund to the benchmarks listed above (see page 4 for
benchmark definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes.
*The performance of the Cornerstone Equity Composite Index and MSCI All-Country
World Index is calculated from the end of the month, May 31, 2012, while the
inception date of the USAA Cornerstone Equity Fund is June 8, 2012. There may be
a slight variation of the performance numbers because of this difference.
================================================================================
INVESTMENT OVERVIEW | 5
================================================================================
o ASSET ALLOCATION - 5/31/19 o
(% of Net Assets)
[PIE CHART OF ASSET ALLOCATION]
EQUITY & ALTERNATIVE 99.3%
MONEY MARKET INSTRUMENTS 0.7%
[END CHART]
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.
================================================================================
6 | USAA CORNERSTONE EQUITY FUND
================================================================================
SHAREHOLDER VOTING RESULTS
--------------------------------------------------------------------------------
On April 18, 2019, a special meeting of shareholders was held to vote on two
proposals relating to the series of the USAA Mutual Funds Trust (Trust).
Shareholders of record on February 8, 2019, were entitled to vote on each
proposal shown below. The proposals were approved by the shareholders.
The following proposals and voting results pertain to one or more series within
the Trust. Votes shown for Proposal 1 are for the Fund, a series of the Trust.
Votes shown for Proposal 2 are for the all series of the Trust. The effective
date of the Proposals was July 1, 2019.
PROPOSAL 1
To approve a new Investment Advisory Agreement between the Trust, on behalf of
the Fund, and Victory Capital, an independent investment adviser. The new
Investment Advisory Agreement became effective upon the closing of the
Transaction (as defined and discussed in Note 1 to the Financial Statements)
whereby AMCO was acquired by Victory Holdings, the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
--------------------------------------------------------------------------------
5,850,463 420,246 924,779
PROPOSAL 2
Election of two new trustees to the Trust's Board of Trustees to serve upon the
closing of the Transaction: (1) David C. Brown, to serve as an "interested
trustee" as defined in the Investment Company Act of 1940, as amended (1940
Act); and (2) John C. Walters, to serve as a trustee who is not an "interested
person" as is defined under the 1940 Act ("Independent Trustee").
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
TRUSTEES FOR VOTES WITHHELD
--------------------------------------------------------------------------------
David C. Brown 8,299,565,565 820,887,736
John C. Walters 8,317,935,885 802,517,416
================================================================================
SHAREHOLDER VOTING RESULTS | 7
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
May 31, 2019, is provided for information purposes only and should not be used
for reporting to federal or state revenue agencies. Federal tax information for
the calendar year will be reported to you on Form 1099-DIV in January 2020.
With respect to distributions paid, the Fund designates the following amounts
(or, if subsequently determined to be different, the maximum amount allowable)
for the fiscal year ended May 31, 2019:
DIVIDEND RECEIVED LONG-TERM
DEDUCTION (CORPORATE CAPITAL GAIN FOREIGN TAXES FOREIGN SOURCE QUALIFIED INTEREST
SHAREHOLDERS)(1) DISTRIBUTIONS(2) PAID(3) INCOME INCOME
---------------------------------------------------------------------------------------------------------
31.72% $6,800,000 $184,000 $1,542,000 $33,000
---------------------------------------------------------------------------------------------------------
(1) Presented as a percentage of net investment income and short-term capital
gain distributions paid, if any.
(2) Pursuant to Section 852 of the Internal Revenue Code.
(3) The Fund has elected under Section 853 of the Internal Revenue Code to pass
through the credit for taxes paid in foreign countries.
For the fiscal year ended May 31, 2019, the Fund hereby designates the maximum
amount allowable of its net taxable income as qualified dividends taxed at
individual net capital gain rates.
================================================================================
8 | USAA CORNERSTONE EQUITY FUND
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA CORNERSTONE EQUITY FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Cornerstone Equity Fund (the "Fund") (one of the funds constituting USAA Mutual
Funds Trust (the "Trust")), including the portfolio of investments, as of May
31, 2019, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, the financial highlights for each of the five years in the period then
ended and the related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Fund (one of the funds
constituting USAA Mutual Funds Trust) at May 31, 2019, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and its financial highlights for each of
the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
BASIS FOR OPINION
These financial statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on the Fund's financial statements based
on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and are required to
be independent with respect to the Trust in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Trust is not required to have,
nor were we engaged to perform, an audit of the Trust's internal control over
financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the Trust's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of May 31, 2019, by correspondence with the custodian. Our audits also
included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
/s/ Ernst & Young LLP
We have served as the auditor of one or more Victory Capital investment
companies since 1995.
San Antonio, Texas
July 23, 2019
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 9
================================================================================
PORTFOLIO OF INVESTMENTS
May 31, 2019
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (99.3%)
EQUITY & ALTERNATIVE (99.3%)
218,441 USAA Aggressive Growth Fund Institutional Shares $ 9,083
540,273 USAA Capital Growth Fund Institutional Shares 5,754
472,321 USAA Emerging Markets Fund Institutional Shares 8,072
318,637 USAA Growth Fund Institutional Shares 9,330
481,319 USAA Income Stock Fund Institutional Shares 8,972
1,030,344 USAA International Fund Institutional Shares 29,499
240,400 USAA MSCI Emerging Markets Value Momentum Blend Index ETF 10,209
589,400 USAA MSCI International Value Momentum Blend Index ETF 25,738
134,800 USAA MSCI USA Small Cap Value Momentum Blend Index ETF 6,530
624,755 USAA MSCI USA Value Momentum Blend Index ETF 30,132
81,815 USAA Precious Metals and Minerals Fund Institutional Shares(a) 1,014
711,531 USAA S&P 500 Index Fund Reward Shares 27,607
423,519 USAA Small Cap Stock Fund Institutional Shares 6,653
1,333,868 USAA Target Managed Allocation Fund 13,419
494,798 USAA Value Fund Institutional Shares 8,926
--------
Total Equity & Alternative (cost: $195,903) 200,938
--------
Total Equity Securities (cost: $195,903) 200,938
--------
MONEY MARKET INSTRUMENTS (0.7%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.7%)
1,300,851 State Street Institutional Treasury Money Market Fund Premier
Class, 2.30%(b) (cost: $1,301) 1,301
--------
TOTAL INVESTMENTS (COST: $197,204) $202,239
========
--------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
--------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------------------------------------------------------------
Equity Securities:
Equity & Alternative $200,938 $- $- $200,938
Money Market Instruments:
Government & U.S. Treasury Money
Market Funds 1,301 - - 1,301
--------------------------------------------------------------------------------------------------------
Total $202,239 $- $- $202,239
--------------------------------------------------------------------------------------------------------
At May 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
10 | USAA CORNERSTONE EQUITY FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 2019
--------------------------------------------------------------------------------
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 36.3% of net assets at May 31, 2019.
The underlying USAA Funds in which the Fund invests are managed by USAA
Asset Management Company, an affiliate of the Fund. The Fund invests in the
Reward Shares of the USAA S&P 500 Index Fund, the Institutional Shares of
the other USAA Mutual Funds Trust and the series of the USAA ETF Trust.
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 SPECIFIC NOTES
(a) Non-income-producing security.
(b) Rate represents the money market fund annualized seven-day yield at May
31, 2019.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 11
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in affiliated underlying funds, at market value
(cost of $195,903) $200,938
Investments in unaffiliated securities, at market value (cost of $1,301) 1,301
Receivables:
Capital shares sold 218
USAA Asset Management Company (Note 6) 56
USAA Transfer Agency Company (Note 6) 1
Interest 3
--------
Total assets 202,517
--------
LIABILITIES
Payables:
Capital shares redeemed 171
Other accrued expenses and payables 58
--------
Total liabilities 229
--------
Net assets applicable to capital shares outstanding $202,288
--------
NET ASSETS CONSIST OF:
Paid-in capital $191,772
Distributable earnings 10,516
--------
Net assets applicable to capital shares outstanding $202,288
========
Capital shares outstanding, no par value 14,552
========
Net asset value, redemption price, and offering price per share $ 13.90
========
See accompanying notes to financial statements.
================================================================================
12 | USAA CORNERSTONE EQUITY FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Income distributions from affiliated underlying funds $ 3,759
Interest 35
Securities lending (net) 3
--------
Total income 3,797
--------
EXPENSES
Custody and accounting fees 54
Postage 43
Shareholder reporting fees 16
Trustees' fees 37
Registration fees 29
Professional fees 66
Other 12
--------
Total expenses 257
Expenses reimbursed (56)
--------
Net expenses 201
--------
NET INVESTMENT INCOME 3,596
--------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized gain (loss) on:
Sales of affiliated underlying funds (1,095)
Capital gain distributions from affiliated underlying funds 6,767
Change in net unrealized appreciation/(depreciation) of
affiliated underlying funds (18,237)
--------
Net realized and unrealized loss (12,565)
--------
Decrease in net assets resulting from operations $ (8,969)
========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 13
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
--------------------------------------------------------------------------------------------------------
2019 2018
--------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 3,596 $ 2,582
Net realized gain (loss) on sales of affiliated underlying funds (1,095) 5,665
Net realized gain on capital gain distributions
from affiliated underlying funds 6,767 2,528
Change in net unrealized appreciation/(depreciation) of
affiliated underlying funds (18,237) 4,757
---------------------------
Increase (decrease) in net assets resulting from operations (8,969) 15,532
---------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS (11,645) (3,424)
---------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 54,835 78,676
Reinvested dividends 11,622 3,420
Cost of shares redeemed (43,742) (37,676)
---------------------------
Increase in net assets from capital share transactions 22,715 44,420
---------------------------
Capital contribution from USAA Transfer Agency Company 1 1
---------------------------
Net increase in net assets 2,102 56,529
NET ASSETS
Beginning of year 200,186 143,657
---------------------------
End of year $202,288 $200,186
===========================
CHANGE IN SHARES OUTSTANDING
Shares sold 3,727 5,111
Shares issued for dividends reinvested 873 220
Shares redeemed (2,970) (2,448)
---------------------------
Increase in shares outstanding 1,630 2,883
===========================
See accompanying notes to financial statements.
================================================================================
14 | USAA CORNERSTONE EQUITY FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
May 31, 2019
--------------------------------------------------------------------------------
(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 Cornerstone Equity Fund (the Fund) qualifies as a registered investment
company under Accounting Standards Codification Topic 946. The information
presented in this annual 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 capital appreciation over
the long term.
The Fund is a "fund of funds" in that it invests in a selection of USAA mutual
funds and exchange-traded funds (ETFs) (underlying USAA Funds) managed by USAA
Asset Management Company (AMCO or Manager), an affiliate of the Fund.
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of AMCO, 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 Holdings, a
global investment management firm headquartered in Cleveland, Ohio (the
Transaction), on July 1, 2019.
A special shareholder meeting was held on April 18, 2019, at which shareholders
of the Fund approved a new investment advisory agreement between the Trust, on
behalf of the Fund, and Victory Capital, an independent investment management
company. In addition, shareholders of the Fund also elected the following two
new directors to the Board of the
================================================================================
NOTES TO FINANCIAL STATEMENTS | 15
================================================================================
Trust to serve upon the closing of the Transaction: (1) David C. Brown, to serve
as an Interested Trustee; and (2) John C. Walters, to serve as an Independent
Trustee. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS
IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
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. Investments in the underlying USAA Funds and other open-end investment
companies, other than ETFs are valued at their net asset value (NAV) at
the end of each business day and are categorized in Level 1 of the fair
value hierarchy.
2. Equity securities, including 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 a 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.
3. The underlying USAA Funds have specific valuation procedures. 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
================================================================================
16 | USAA CORNERSTONE EQUITY FUND
================================================================================
valuation procedures approved by the Board. The effect of fair value
pricing is that securities may not be priced on the basis of quotations
from the primary market in which they are traded and the actual price
realized from the sale of a security may differ materially from the fair
value price. Valuing these securities at fair value is intended to cause
a fund's NAV to be more reliable than it otherwise would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
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.
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risks associated with investing in those securities.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 17
================================================================================
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 and capital gain distributions from the
underlying USAA Funds are recorded on the ex-dividend date. Interest income
is recorded daily on the accrual basis. 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 year ended May 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. 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.
F. 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.
================================================================================
18 | USAA CORNERSTONE EQUITY FUND
================================================================================
(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 year ended May 31, 2019, the Fund paid CAPCO facility fees of $2,000,
which represents 0.2% of the total fees paid to CAPCO by the funds of the
Trusts. The Fund had no borrowings under this agreement during the year ended
May 31, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL
STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
(3) DISTRIBUTIONS
The character of any distributions made during the year from net investment
income or net realized gains is determined in accordance with federal tax
regulations and may differ from those determined in accordance with U.S.
generally accepted accounting principles. Also, due to the timing of
distributions, the fiscal year in which amounts are distributed may differ from
the year that the income or realized gains were recorded by the Fund.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 19
================================================================================
The tax character of distributions paid during the years ended May 31, 2019,
and 2018, was as follows:
2019 2018
------------------------------
Ordinary income* $ 4,845,000 $2,570,000
Long-term realized capital gains 6,800,000 854,000
----------- ----------
Total distributions paid $11,645,000 $3,424,000
=========== ==========
As of May 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 226,000
Undistributed long-term capital gains 5,540,000
Unrealized appreciation of investments 4,750,000
*Includes short-term realized capital gains, if any, which are taxable as
ordinary income.
The difference between book-basis and tax-basis unrealized appreciation of
investments is attributable to the tax deferral of losses on wash sales
adjustments.
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 May 31, 2019, the Fund had no capital loss carryforwards, for federal income
tax purposes.
TAX BASIS OF INVESTMENTS - At May 31, 2019, the aggregate cost of investments
for federal income tax purposes and net unrealized appreciation/(depreciation)
on investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
FUND TAX COST APPRECIATION DEPRECIATION (DEPRECIATION)
-----------------------------------------------------------------------------------------------------------
USAA Cornerstone
Equity Fund $197,490,000 $13,809,000 $(9,059,000) $4,750,000
================================================================================
20 | USAA CORNERSTONE EQUITY FUND
================================================================================
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended May 31, 2019, were $44,777,000 and
$22,050,000, 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 May 31, 2019,
the Fund had no securities on loan.
(6) AGREEMENTS WITH MANAGER
ADVISORY AGREEMENT - The Manager carries out the Fund's investment policies and
manages the Fund's portfolio pursuant to an Advisory Agreement. The Manager does
not receive any management fees from the Fund for these services.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 21
================================================================================
ADMINISTRATION AND SERVICING FEES - The Manager provides certain administration
and servicing functions for the Fund. The Manager does not receive any fees from
the Fund for these services. In addition to the services provided under its
Administration and Servicing Agreement with the Fund, the Manager also provides
certain compliance and legal services for the benefit of the Fund. The Board has
approved the billing of these expenses to the Fund. These expenses are included
in the professional fees on the Fund's Statement of Operations and, for the year
ended May 31, 2019, were $1,000 for the Fund. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION.
EXPENSE LIMITATION - The Manager agreed, through September 30, 2019, to limit
the total annual operating expenses of the Fund to 0.10% of its average daily
net assets, excluding extraordinary expenses and before reductions of any
expenses paid indirectly, and to reimburse the Fund for all expenses in excess
of that amount. This expense limitation arrangement may not be changed or
terminated through September 30, 2019, without approval of the Board, and may be
changed or terminated by the Manager at any time after that date. For the year
ended May 31, 2019, the Fund incurred reimbursable expenses of $56,000, of which
$56,000 was receivable from the Manager.
TRANSFER AGENCY AGREEMENT - SAS, an affiliate of the Manager, provides transfer
agent services to the Fund. SAS does not receive any fees from the Fund for
these services. For the year ended May 31, 2019, the Fund recorded a capital
contribution and a receivable from SAS of $1,000 for adjustments related to
corrections to certain shareholder transactions. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION.
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. PLEASE
REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL
REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
================================================================================
22 | USAA CORNERSTONE EQUITY FUND
================================================================================
(7) 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. PLEASE REFER TO THE SUBSEQUENT EVENT
NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
(8) TRANSACTIONS WITH AFFILIATED FUNDS
A. SHARE OWNERSHIP - The Fund does not invest in the affiliated underlying
USAA Funds for the purpose of exercising management or control; however,
investments by the Fund may represent a significant portion of the
affiliated underlying USAA Funds' net assets. The affiliated underlying
funds' annual or semiannual reports may be viewed at usaa.com. At May 31,
2019, the Fund owned the following percentages of the total outstanding
shares of each of the underlying USAA Funds:
AFFILIATED USAA FUND OWNERSHIP %
----------------------------------------------------------------------------
Aggressive Growth Fund Institutional Shares 0.6
Capital Growth Fund Institutional Shares 0.6
Emerging Markets Fund Institutional Shares 1.0
Growth Fund Institutional Shares 0.3
Income Stock Fund Institutional Shares 0.3
International Fund Institutional Shares 0.8
MSCI Emerging Markets Value Momentum Blend Index ETF 5.9
MSCI International Value Momentum Blend Index ETF 8.4
MSCI USA Small Cap Value Momentum Blend Index ETF 6.9
MSCI USA Value Momentum Blend Index ETF 7.0
Precious Metals and Minerals Fund Institutional Shares 0.2
S&P 500 Index Fund Reward Shares 0.4
Small Cap Stock Fund Institutional Shares 0.4
Target Managed Allocation Fund 2.7
Value Fund Institutional Shares 0.7
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
B. TRANSACTIONS WITH AFFILIATED FUNDS - The following table provides details
related to the Fund's investment in the underlying USAA Funds for the year
ended May 31, 2019:
CHANGE IN
NET
($ IN 000s) REALIZED CAPITAL UNREALIZED
AFFILIATED PURCHASE SALES DIVIDEND GAIN GAIN APPRECIATION/ MARKET VALUE
USAA FUND COST PROCEEDS INCOME (LOSS) DISTRIBUTIONS DEPRECIATION 5/31/2018 5/31/2019
-----------------------------------------------------------------------------------------------------------------------
Aggressive
Growth Fund
Institutional
Shares $ 2,901 $ 773 $ 154 $ (168) $1,247 $ (1,042) $ 8,165 $ 9,083
Capital Growth
Fund
Institutional
Shares 5,802 - - - - (48) - 5,754
Emerging
Markets
Fund
Institutional
Shares 121 1,833 121 72 - (1,011) 10,723 8,072
Growth Fund
Institutional
Shares 1,187 1,642 88 41 1,099 (663) 10,407 9,330
Income Stock
Fund
Institutional
Shares 810 1,314 225 (114) 586 (388) 9,978 8,972
International
Fund
Institutional
Shares 6,978 11,479 893 (597) 1,939 (4,798) 39,395 29,499
MSCI
Emerging
Markets Value
Momentum
Blend
Index ETF 1,908 - 225 - - (1,653) 9,954 10,209
MSCI
International
Value
Momentum
Blend
Index ETF 936 - 664 - - (4,102) 28,904 25,738
================================================================================
24 | USAA CORNERSTONE EQUITY FUND
================================================================================
CHANGE IN
NET
($ IN 000s) REALIZED CAPITAL UNREALIZED
AFFILIATED PURCHASE SALES DIVIDEND GAIN GAIN APPRECIATION/ MARKET VALUE
USAA FUND COST PROCEEDS INCOME (LOSS) DISTRIBUTIONS DEPRECIATION 5/31/2018 5/31/2019
-----------------------------------------------------------------------------------------------------------------------
MSCI USA
Small Cap
Value
Momentum
Blend
Index ETF $ 3,147 $ - $ 74 $ - $ - $ (718) $ 4,101 $ 6,530
MSCI USA
Value
Momentum
Blend
Index ETF 3,653 - 472 - - (2,065) 28,544 30,132
Precious
Metals and
Minerals Fund
Institutional
Shares - 464 - (50) - (57) 1,585 1,014
S&P 500
Index Fund
Reward
Shares 1,228 1,861 563 (31) 265 167 28,104 27,607
Small Cap
Stock Fund
Institutional
Shares 1,850 - 135 - 459 (946) 5,749 6,653
Target
Managed
Allocation
Fund 12,940 - - - - 479 - 13,419
Value Fund
Institutional
Shares 1,316 2,684 145 (248) 1,172 (1,392) 11,934 8,926
-----------------------------------------------------------------------------------------------------------------------
TOTAL $44,777 $22,050 $3,759 $(1,095) $6,767 $(18,237) $197,543 $200,938
-----------------------------------------------------------------------------------------------------------------------
(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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
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.
(10) RECENT ACCOUNTING PRONOUNCEMENTS
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.
(11) SUBSEQUENT EVENT NOTE
As previously announced, and as discussed in Note 1 to the Financial Statements,
effective July 1, 2019, AMCO, the prior investment adviser to the Fund, and SAS,
the prior transfer agent to the Fund, were acquired by Victory Holdings. PLEASE
SEE THE SUPPLEMENT DATED JULY 1, 2019 TO THE FUND'S PROSPECTUS FOR ADDITIONAL
IMPORTANT INFORMATION.
Effective July 1, 2019, Victory Capital is the new investment adviser and
administrator to the USAA Mutual Funds; SAS was renamed Victory Capital Transfer
Agency, Inc. is the new transfer agent to the USAA Mutual
================================================================================
26 | USAA CORNERSTONE EQUITY FUND
================================================================================
Funds; Victory Capital Advisers, Inc.; Citi Fund Services of Ohio, Inc. serves
as sub-administrator and sub-fund accountant for the USAA Mutual Funds; and FIS
Investor Services LLC serve as sub-transfer agent and dividend disbursing agent
for the USAA Mutual Funds. Effective August 5, 2019, Citibank, N.A. is the new
custodian for the USAA Mutual Funds.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2019 permitting the
use of a "manager-of-managers" structure for certain funds. Prior to that date,
the Trust relied on a similar exemptive order granted by the SEC to the Trust
and its affiliated persons. Under a manager of managers structure, the
investment adviser may select (with approval of the Board and without
shareholder approval) one or more subadvisers to manage the day-to-day
investment of a fund's assets.
Effective July 1, 2019, under the investment advisory agreement with Victory
Capital, which took effect on July 1, 2019, no performance adjustments will be
made for periods beginning July 1, 2019, through June 30, 2020, and only
performance beginning as of July 1, 2020, and thereafter will be utilized in
calculating performance adjustments through June 30, 2020.
Effective July 1, 2019, the line of credit (as discussed in the Notes to the
Financial Statements in this annual report) among the Trust, with respect to its
Funds, and CAPCO terminated; the Trust, with respect to its Funds, along with
series of Victory Portfolios, Victory Portfolios II and Victory Variable
Insurance Funds, entered into a 364 day committed credit facility and a 364 day
uncommitted, demand credit facility with Citibank, N.A. (Citibank). Each such
credit facility may be renewed if so agreed by the parties. Under the agreement
with Citibank, the Funds may borrow up to $600 million, of which $300 million is
committed and $300 million is uncommitted. Of this amount, $40 million of the
line of credit is reserved for use by the Victory Floating Rate Fund (a series
of Victory Portfolios), with that Fund paying the related commitment fees for
that amount. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption request that might otherwise require the untimely
disposition of securities. Citibank receives an annual commitment fee of 0.15%.
Each Fund pays a pro-rata portion of this commitment fee plus any interest on
amounts borrowed.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
================================================================================
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2017 (the IFL
Order), permitting the establishment and operation of an Interfund Lending
Facility (the Facility). The Facility allows each Fund to directly lend and
borrow money to or from certain other affiliated Funds relying upon the IFL
Order at rates beneficial to both the borrowing and lending funds. Advances
under the Facility are allowed for temporary or emergency purposes, including
the meeting of redemption requests that are subject to each Fund's borrowing
restrictions. The interfund loan rate is determined, as specified in the IFL
Order, by averaging the current repurchase agreement rate and the current bank
loan rate.
================================================================================
28 | USAA CORNERSTONE EQUITY FUND
================================================================================
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
--------------------------------------------------------------------------
2019 2018 2017 2016 2015
--------------------------------------------------------------------------
Net asset value at
beginning of period $ 15.49 $ 14.31 $ 12.51 $ 13.61 $ 13.22
--------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .26 .22 .19 .16 .24
Net realized and
unrealized gain (loss) (.99) 1.26 2.02 (.82) .42
--------------------------------------------------------------------------
Total from investment
operations (.73) 1.48 2.21 (.66) .66
--------------------------------------------------------------------------
Less distributions from:
Net investment income (.25) (.22) (.19) (.15) (.24)
Realized capital gains (.61) (.08) (.22) (.29) (.03)
--------------------------------------------------------------------------
Total distributions (.86) (.30) (.41) (.44) (.27)
--------------------------------------------------------------------------
Net asset value at
end of period $ 13.90 $ 15.49 $ 14.31 $ 12.51 $ 13.61
==========================================================================
Total return (%)* (4.35) 10.32 17.99 (4.77) 5.08
Net assets at end
of period (000) $202,288 $200,186 $143,657 $99,974 $91,726
Ratios to average daily
net assets:**
Expenses (%)(a) .10 .10 .10 .10 .10
Expenses, excluding
reimbursements (%)(a) .13 .13 .20 .22 .24
Net investment income (%) 1.79(c) 1.46 1.39 1.36 1.77
Portfolio turnover (%) 11 38(b) 7 15 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 year ended May 31, 2019, average daily net assets were
$201,099,000.
(a) Does not include acquired fund fees, if any.
(b) Reflects an increase in trading activity due to asset allocation shifts.
(c) Reflects increased usage of quantitative investment strategies.
================================================================================
FINANCIAL HIGHLIGHTS | 29
================================================================================
EXPENSE EXAMPLE
May 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 Fund operating expenses. This example is intended to help you
understand your indirect costs, also referred to as "ongoing costs" (in
dollars), of investing in the Fund and to compare these costs with the ongoing
costs of investing in other mutual funds. The Fund also indirectly bears its
pro-rata share of the expenses of the underlying USAA Funds in which it invests
(acquired funds). These acquired fund fees and expenses are not included in the
Fund's annualized expense ratios used to calculate the expense estimates in the
table on the next page.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire six-month period of December 1, 2018, through May
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
================================================================================
30 | USAA CORNERSTONE EQUITY FUND
================================================================================
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return. The hypothetical account values
and expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in the 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. Acquired fund fees and
expenses are not included in the Fund's annualized expense ratio used to
calculate the expenses paid in the table below.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE DECEMBER 1, 2018 -
DECEMBER 1, 2018 MAY 31, 2019 MAY 31, 2019
----------------------------------------------------------------
Actual $1,000.00 $ 999.80 $0.50
Hypothetical
(5% return before expenses) 1,000.00 1,024.43 0.50
*Expenses are equal to the Fund's annualized expense ratio of 0.10%, which is
net of any reimbursements and expenses paid indirectly, multiplied by the
average account value over the period, multiplied by 182 days/365 days (to
reflect the one-half-year period). The Fund's actual ending account value is
based on its actual total return of (0.02)% for the six-month period of
December 1, 2018, through May 31, 2019.
================================================================================
EXPENSE EXAMPLE | 31
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the (i) new investment
advisory agreement between the Trust and Victory Capital and (ii) new investment
subadvisory agreements between certain subadvisers and Victory Capital, which
became effective on July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO
THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
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.
================================================================================
32 | USAA CORNERSTONE EQUITY FUND
================================================================================
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 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
================================================================================
ADVISORY AGREEMENT(S) | 33
================================================================================
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 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.
================================================================================
34 | USAA CORNERSTONE EQUITY FUND
================================================================================
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.
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).
================================================================================
ADVISORY AGREEMENT(S) | 35
================================================================================
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.
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.
(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.
================================================================================
36 | USAA CORNERSTONE EQUITY FUND
================================================================================
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 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.
================================================================================
ADVISORY AGREEMENT(S) | 37
================================================================================
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 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,
================================================================================
38 | USAA CORNERSTONE EQUITY FUND
================================================================================
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.
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.
(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) | 39
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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 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
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40 | USAA CORNERSTONE EQUITY FUND
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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 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.
================================================================================
ADVISORY AGREEMENT(S) | 41
================================================================================
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 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.
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42 | USAA CORNERSTONE EQUITY FUND
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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
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.
================================================================================
ADVISORY AGREEMENT(S) | 43
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND THE MANAGER)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the continuation of the (i)
investment advisory agreement between the Trust and AMCO and (ii) investment
subadvisory agreements between certain subadvisers and AMCO, which were
effective until July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
At an in-person meeting of the Board of Trustees (the Board) held on April 17,
2019, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to the
Fund.(1)
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and the Manager and were given
the opportunity to ask questions and request additional information from
management. The information provided to the Board included, among other things:
(i) a separate report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance, expenses, and
fees to comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the Manager's
revenues and costs of providing
(1)At an in-person meeting held on January 15, 2019, the Board, including the
Independent Trustees, approved a new investment advisory agreement between
the Trust, on behalf of the Fund, and Victory Capital Management Inc.
("Victory Capital"). Upon the closing of the transaction, on behalf of the
Fund, Victory Capital Holdings, Inc., the parent company of Victory Capital,
the Advisory Agreement between the Trust and the Manager will terminate and
the new investment advisory agreement between the Trust and Victory Capital
will go into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are included in this
annual report.
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44 | USAA CORNERSTONE EQUITY FUND
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services to the Fund and compensation paid to affiliates of the Manager; and
(iii) information about the Manager's operations and personnel. Prior to
voting, the Independent Trustees reviewed the proposed continuance of the
Advisory Agreement with management and with experienced independent legal
counsel retained by the Independent Trustees (Independent Counsel) and received
materials from such Independent Counsel discussing the legal standards for
their consideration of the proposed continuance of the Advisory Agreement with
respect to the Fund. The Independent Trustees also reviewed the proposed
continuation of the Advisory Agreement with respect to the Fund in private
sessions with Independent Counsel at which no representatives of management
were present.
At each regularly scheduled meeting of the Board and its committees, the Board
receives and reviews, among other things, information concerning the Fund's
performance and related services provided by the Manager. At the meeting at
which the renewal of the Advisory Agreement is considered, particular focus is
given to information concerning Fund performance, fees and total expenses as
compared to comparable investment companies, and the Manager's profitability
with respect to the Fund. However, the Board noted that the evaluation process
with respect to the Manager is an ongoing one. In this regard, the Board's and
its committees' consideration of the Advisory Agreement included certain
information previously received at such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving the
Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent,
and quality of the services provided by the Manager under the Advisory
Agreement, the Board reviewed information provided by the Manager relating to
its operations and personnel. The Board also took into account its knowledge of
the Manager's management and the quality of the performance
================================================================================
ADVISORY AGREEMENT(S) | 45
================================================================================
of the Manager's duties through Board meetings, discussions, and reports during
the preceding year. The Board considered the services provided to the Fund by
the Manager under the Advisory Agreement, as well as other services provided by
the Manager and its affiliates under other agreements, and the personnel who
provide these services. In addition to the investment advisory services
provided to the Fund, the Manager and its affiliates provide administrative
services, shareholder services, oversight of Fund accounting, marketing
services, assistance in meeting legal and regulatory requirements, and other
services necessary for the operation of the Fund and the Trust. The Board also
considered the significant risks assumed by the Manager in connection with the
services provided to the Fund, including investment, operational, enterprise,
litigation, regulatory and compliance risks.
The Board considered the Manager's management style and the performance of the
Manager's duties under the Advisory Agreement. The Board considered the level
and depth of experience of the Manager, including the professional experience
and qualifications of its senior and investment personnel, as well as current
staffing levels. The Manager's role in coordinating the activities of the Fund
other service providers also was considered. The Board also considered the
Manager's risk management processes. The Board considered the Manager's
financial condition and that it had the financial wherewithal to continue to
provide the same scope and high quality of services under the Advisory
Agreement. In reviewing the Advisory Agreement, the Board focused on the
experience, resources, and strengths of the Manager and its affiliates in
managing the Fund, as well as the other funds in the Trust.
The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager and its affiliates, including oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust,
also focused on the quality of the Manager's compliance and administrative
staff.
EXPENSES AND PERFORMANCE - In connection with its consideration of the Advisory
Agreement, the Board evaluated the Fund's advisory fees and total expense ratio
as compared to other open-end investment companies deemed to be comparable to
the Fund as determined by the independent third party in its report. The Fund's
expenses were compared to (i) a group of investment
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46 | USAA CORNERSTONE EQUITY FUND
================================================================================
companies chosen by the independent third party to be comparable to the Fund
based upon certain factors, including the fund type (in this case, other
funds-of- funds that invest in affiliated funds of the investing fund with
front-end loads and no sales loads), comparability of investment objective and
classification, sales load type, asset size, and expense components (the
"expense group") and (ii) a larger group of investment companies that includes
all no-load and front-end load retail open-end investment companies with
similar investment classifications/objectives as the Fund regardless of asset
size, excluding outliers (the "expense universe"). The Board noted that the
Manager does not receive a management fee from the Fund. The data indicated that
the Fund's total expenses, which included underlying fund expenses and any
reimbursements, were below the median of its expense group and its expense
universe. The Board took into account the various services provided to the Fund
by the Manager and its affiliates, including the high quality of services
provided by the Manager. The Board also took into account the Manager's current
undertakings to maintain expense limitations for the Fund.
In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total return with its Lipper index and with that of other mutual funds deemed to
be in its peer group by the independent third party in its report (the
"performance universe"). The Fund's performance universe consisted of the Fund
and all retail and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or primary channel
of distribution. This comparison indicated that, among other data, the Fund's
performance was below the average of its performance universe and its Lipper
index for the one- and five-year periods ended December 31, 2018, and above the
average of its performance universe and its Lipper index for the three-year
period ended December 31, 2018. The Board also noted that the Fund's percentile
performance ranking was in the bottom 50% of its performance universe for the
one-, three- and five-year periods ended December 31, 2018. The Board also took
into account management's discussion of the Fund's performance, including the
Fund's investment approach and the impact of market conditions on the Fund's
performance.
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ADVISORY AGREEMENT(S) | 47
================================================================================
COMPENSATION AND PROFITABILITY - The Board took into consideration that the
Manager does not collect a management fee from the Fund. The information
considered by the Board included operating profit margin information for the
Manager's business as a whole. This information included a review of the
methodology used in the allocation of certain costs to the Fund. In considering
the profitability data with respect to the Fund, the Trustees noted that the
Manager has reimbursed the Fund for certain expenses. The Trustees reviewed the
profitability of the Manager's relationship with the Fund before tax expenses.
The Board was also provided with an Investment Management Profitability Analysis
prepared by an independent information service. The Board also considered the
fact that the Manager and its affiliates provide shareholder servicing and
administrative services to the Fund for which they receive compensation. The
Board also took into account the Manager's receipt of fees from the underlying
funds.
The Board also considered the possible direct and indirect benefits to the
Manager from its relationship with the Trust, including that the Manager may
derive reputational and other benefits from its association with the Fund. The
Board also took into account the high quality of services received by the Fund
from the Manager. The Trustees recognized that the Manager should be entitled to
earn a reasonable level of profits in exchange for the level of services it
provides to the Fund and the entrepreneurial and other risks that it assumes as
Manager.
ECONOMIES OF SCALE - With respect to the consideration of any economies of scale
to be realized by the Fund, the Board took into account that the Manager does
not receive any advisory fees under the Advisory Agreement. The Board took into
account management's discussion of the Fund's current advisory fee structure.
The Board also considered the fee waiver and expense reimbursement arrangements
by the Manager. The Board also considered the effects of the Fund's growth and
size on the Fund's performance and fees, noting that if the Fund's assets
increase over time, the Fund may realize other economies of scale if assets
increase proportionally more than some expenses. The Board determined that the
current fee structure was reasonable.
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48 | USAA CORNERSTONE EQUITY FUND
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CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) the performance of the Fund is
reasonable in relation to the performance of the funds with similar investment
objectives and to relevant indices in view of the Fund's investment approach and
management is appropriately monitoring the Fund's performance; (iv) the Fund's
advisory expenses are reasonable in relation to those of similar funds and to
the services to be provided by the Manager; and (v) the Manager's and its
affiliates' level of profitability from its relationship with the Fund is
reasonable in light of the nature and high quality of services provided by the
Manager and the type of fund. Based on its conclusions, the Board determined
that continuation of the Advisory Agreement would be in the best interests of
the Fund and its shareholders.
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ADVISORY AGREEMENT(S) | 49
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION
TRUSTEES AND OFFICERS OF THE TRUST
--------------------------------------------------------------------------------
As of July 1, 2019, the Board of Trustees (the Board) of the Trust consists of
ten Trustees. These Trustees and the Trust's Officers supervise the business
affairs of the USAA family of funds. The Board is responsible for the general
oversight of the funds' business and for assuring that the funds are managed in
the best interests of each fund's respective shareholders. The Board
periodically reviews the funds' investment performance as well as the quality of
other services provided to the funds and their shareholders by each of the
fund's service providers, including the adviser and its affiliates. Pursuant to
a policy adopted by the Board, the term of office for each Trustee shall be
until the Trustee reaches age 75. The Board may change or grant exceptions from
this policy at any time without shareholder approval. A Trustee may resign or be
removed by a vote of two-thirds of the Trustees before the removal or by the
holders of two-thirds of the outstanding shares of the Trust at any time.
Vacancies on the Board can be filled by the action of a majority of the
Trustees, provided that after filling such vacancy at least two-thirds of the
Trustees have been elected by the shareholders.
Set forth below are the Trustees and Officers of the Trust, their respective
offices and principal occupations during the last five years, length of time
served, and information relating to any other directorships held. As of July 1,
2019, each serves on the Board of the USAA family of funds consisting of one
registered investment company, which offers 47 individual funds. Unless
otherwise indicated, the business address for each is P.O. Box 659430, San
Antonio, TX 78265-9430.
If you would like more information about the funds' Trustees, you may call (800)
235-8396 to request a free copy of the funds' Statement of Additional
Information (SAI).
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50 | USAA CORNERSTONE EQUITY FUND
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In connection with the Transaction, the Board of the Trust nominated, and
shareholders of each USAA mutual fund approved, two new Trustees to serve on the
Trust's Board, effective upon the closing of the Transaction. Effective July 1,
2019, David C. Brown serves as an Interested Trustee and John C. Walters serves
as an Independent Trustee. Information about the current Trustees of the Trust
is provided below.
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
DANIEL S. McNAMARA(1, 2, 4, 6, +)
Trustee and Chair of the Board of Trustees
Born: June 1966
Year of Election or Appointment: 2012
Trustee, President, and Vice Chairman, USAA ETF Trust (06/17-06/19); President
of Financial Advice & Solutions Group (FASG), USAA (02/13-present); Director of
USAA Asset Management Company (AMCO), (08/11-present); Director of USAA
Investment Management Company (IMCO) (09/09-present); President, IMCO
(09/09-04/14); President and Director of USAA Shareholder Account Services (SAS)
(10/09-present); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director of FPS (12/13-present);
President and Director of USAA Investment Corporation (ICORP) (03/10-present);
Director of USAA Financial Advisors, Inc. (FAI) (12/13-present). Mr. McNamara
brings to the Board extensive experience in the financial services industry,
including experience as an officer of the Trust.
DAVID C. BROWN(2, 4, 6, 10)
Trustee
Born: May 1972
Year of Election or Appointment: 2019
Chairman and Chief Executive Officer (2013-present), Co-Chief Executive Officer,
(2011-2013), Victory Capital Management Inc.; Chairman and Chief Executive
Officer (2013-present), Victory Capital Holdings, Inc. Mr. Brown brings to the
Board extensive business, finance and leadership skills gained
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 51
================================================================================
and developed through years of experience in the financial services industry,
including his tenure overseeing the strategic direction as CEO of Victory
Capital. These skills, combined with Mr. Brown's extensive knowledge of the
financial services industry and demonstrated success in the development and
distribution of investment strategies and products, enable him to provide
valuable insights to the Board and strategic direction for the Funds. Mr. Brown
serves on the Boards of the Victory Funds family of funds consisting of five
registered investment companies offering approximately 104 mutual funds and 24
ETFs. Mr. Brown is considered an Interested Trustee of the Trust due to his
position with Victory Capital and its affiliated companies.
NON-INTERESTED (INDEPENDENT) TRUSTEES
--------------------------------------------------------------------------------
ROBERT L. MASON, Ph.D.(3, 4, 5, 6, 7)
Trustee
Born: July 1946
Year of Election or Appointment: 1997
Trustee, USAA ETF Trust (06/17-06/19); Adjunct Professor in the Department of
Management Science and Statistics in the College of Business at the University
of Texas at San Antonio (2001-present); Institute Analyst, Southwest Research
Institute (03/02-01/16), which focuses on providing innovative technology,
science, and engineering services to clients around the world and is one of the
oldest independent, nonprofit, applied research and development organizations in
the United States. He was employed at Southwest Research Institute for 40 years.
Dr. Mason brings to the Board particular experience with information technology
matters, statistical analysis, and human resources as well as over 22 years'
experience as a Board member of the USAA family of funds. Dr. Mason holds no
other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
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52 | USAA CORNERSTONE EQUITY FUND
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JEFFERSON C. BOYCE(3, 4, 5, 6, 7)
Lead Trustee and Vice Chair
Born: September 1957
Year of Election or Appointment: 2013
Trustee, USAA ETF Trust (06/17-06/19); Senior Managing Director, New York Life
Investments, LLC (1992-2012), an investment manager. Mr. Boyce brings to the
Board experience in financial investment management, and, in particular,
institutional and retail mutual funds, variable annuity products, broker
dealers, and retirement programs, including experience in organizational
development, marketing, product development, and money management as well as
five years' experience as a Board member of the USAA family of funds. Mr. Boyce
is a board member of Westhab, Inc.
DAWN M. HAWLEY(3, 4, 5, 6, 7, 9)
Trustee
Born: February 1954
Year of Election or Appointment: 2014
Trustee, USAA ETF Trust (06/17-06/19); Manager of Finance, Menil Foundation,
Inc. (05/07-06/11), which is a private foundation that oversees the assemblage
of sculptures, prints, drawings, photographs, and rare books. Director of
Financial Planning and Analysis and Chief Financial Officer, AIM Management
Group, Inc. (10/87-01/06). Ms. Hawley brings to the Board experience in
financial investment management and, in particular, institutional and retail
mutual funds, variable annuity products, broker dealers, and retirement
programs, including experience in financial planning, budgeting, accounting
practices, and asset/liability management functions including major acquisitions
and mergers, as well as over five years' experience as a Board member of the
USAA family of funds. Ms. Hawley holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
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TRUSTEES' AND OFFICERS' INFORMATION | 53
================================================================================
PAUL L. McNAMARA(3, 4, 5, 6, 7)
Trustee
Born: July 1948
Year of Election or Appointment: 2012
Trustee, USAA ETF Trust (06/17-06/19); Director, Cantor Opportunistic
Alternatives Fund, LLC (03/10-02/14), which is a closed-end fund of funds by
Cantor Fitzgerald Investment Advisors, LLC. Mr. McNamara retired from Lord
Abbett & Co. LLC, an independent U.S. investment management firm, as an
Executive Member on 09/30/09, a position he held since 10/02. He had been
employed at Lord Abbett since 1996. Mr. McNamara brings to the Board extensive
experience with the financial services industry and, in particular,
institutional and retail mutual fund markets, including experience with mutual
fund marketing, distribution, and risk management, as well as overall experience
with compliance and corporate governance issues. Mr. McNamara also has
experience serving as a fund director as well as seven years' experience as a
Board member of the USAA family of funds. Paul L. McNamara is of no relation to
Daniel S. McNamara. Mr. McNamara holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
RICHARD Y. NEWTON III(3, 4, 5, 6, 7)
Trustee
Born: January 1956
Year of Election or Appointment: 2017
Trustee, USAA ETF Trust (06/17-06/19); Director, Elta North America
(01/18-present), which is a global leader in the design, manufacture and support
of innovative electronic systems in the ground, maritime, airborne, and security
domains for the nation's warfighters, security personnel, and first responders;
Managing Partner, Pioneer Partnership Development Group (12/15-present);
Executive Director, The Union League Club of New York (06/14-11/15); Executive
Vice President, Air Force Association (08/12-05/14); Lieutenant General, United
States Air Force (01/08-06/12). Lieutenant General Newton (Ret.) served 34 years
of active duty in the United States Air Force. Lt. Gen. Newton retired as the
Assistant Vice Chief of Staff and Director of Air Staff at the Headquarters of
the U.S. Air Force where he was responsible for overseeing the administration
and organization
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54 | USAA CORNERSTONE EQUITY FUND
================================================================================
of the Air Staff, which develops policies, plans and programs, establishes
requirements, and provides resources to support the Air Force's mission. Lt.
Gen. Newton is a graduate of the United States Air Force Academy, Webster
University, and The National War College. Lt. Gen. Newton brings to the Board
extensive management and military experience, as well as over two years of
experience as a Board member of the USAA family of funds. Lt. Gen. Newton holds
no other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
BARBARA B. OSTDIEK, Ph.D.(3, 4, 5, 6, 7, 8)
Trustee
Born: March 1964
Year of Election or Appointment: 2008
Trustee, USAA ETF Trust (06/17-06/19); Senior Associate Dean of Degree programs
at Jesse H. Jones Graduate School of Business at Rice University
(07/13-present); Associate Professor of Finance at Jesse H. Jones Graduate
School of Business at Rice University (07/01-present); Academic Director, El
Paso Corporation Finance Center at Jesse H. Jones Graduate School of Business at
Rice University (07/02-06/12). Dr. Ostdiek brings to the Board particular
experience with financial investment management, education, and research as well
as over eleven years' experience as a Board member of the USAA family of funds.
Dr. Ostdiek holds no other directorships of any publicly held corporations or
other investment companies outside the USAA family of funds.
MICHAEL F. REIMHERR(3, 4, 5, 6, 7)
Trustee
Born: August 1945
Year of Election or Appointment: 2000
Trustee, USAA ETF Trust (06/17-06/19); President of Reimherr Business Consulting
performing business valuations of medium to large companies; developing business
plans, budgets, and internal financial reporting; and work with mergers and
acquisitions (05/95-12/17). St. Mary's University Investment Committee
overseeing University Endowment (06/14-present). Mr. Reimherr brings to the
Board particular experience with organizational development, budgeting, finance,
capital markets, and mergers and acquisitions, as well as
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 55
================================================================================
over 19 years' experience as a Board member of the USAA family of funds. Mr.
Reimherr holds no other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
JOHN C. WALTERS(3, 4, 5, 6, 7)
Trustee
Born: February 1962
Year of Election or Appointment: 2019
Retired. Mr. Walters brings significant Board experience including active
involvement with the board of a Fortune 500 company, and a proven record of
leading large, complex financial organizations. He has a demonstrated record of
success in distribution, manufacturing, investment brokerage, and investment
management in both the retail and institutional investment businesses. He has
substantial experience in the investment management business with a demonstrated
ability to develop and drive strategy while managing operational, financial, and
investment risk. Mr. Walters is a board member of Guardian Variable Products
Trust (16 series), Lead Independent Director; Amerilife Holdings LLC, Director;
Stadion Money Management; Director; and University of North Carolina (Chapel
Hill), Member Board of Governors.
(1) Indicates the Trustee is an employee of AMCO or affiliated companies and
is considered an "interested person" under the Investment Company Act of
1940.
(2) Member of Executive Committee.
(3) Member of Audit and Compliance Committee.
(4) Member of Product Management and Distribution Committee.
(5) Member of Corporate Governance Committee.
(6) Member of Investments Committee.
(7) The address for all non-interested trustees is that of the USAA Funds,
P.O. Box 659430, San Antonio, TX 78265-9430.
(8) Dr. Ostdiek has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(9) Ms. Hawley has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(10) Indicates the Trustee is an employee of Victory Capital or affiliated
companies and is considered an "interested person" under the Investment
Company Act of 1940.
(+) Mr. D. McNamara was elected as Chair of the Board in July 2019.
================================================================================
56 | USAA CORNERSTONE EQUITY FUND
================================================================================
Effective July 1, 2019, the Board of the Trust appointed certain new officers of
the Trust. The current officers of the Trust are stated below.
OFFICERS
--------------------------------------------------------------------------------
CHRISTOPHER K. DYER
President
Born: February 1962
Year of Appointment: 2019
Director of Mutual Fund Administration, the Victory Capital.
SCOTT A. STAHORSKY
Vice President
Born: July 1969
Year of Appointment: 2019
Manager, Fund Administration, the Adviser (since 2015); Senior Analyst, Fund
Administration, the Victory Capital (prior to 2015).
ALLAN SHAER
Assistant Treasurer
Born: March 1965
Year of Appointment: 2019
Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc.
(since 2016); Vice President, Mutual Fund Administration, JP Morgan Chase
(2011-2016).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 57
================================================================================
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Treasurer, USAA ETF Trust (09/18-06/19); Executive Director, Investment and
Financial Administration, USAA (04/12-present); Assistant Treasurer, USAA ETF
Trust (06/17-09/18); Assistant Treasurer, USAA Mutual Funds Trust (12/13-02/18).
Mr. De Vries also serves as the Funds' Principal Financial Officer.
CAROL D. TREVINO
Assistant Treasurer
Born: October 1965
Year of Appointment: 2018
Assistant Treasurer, USAA ETF Trust (09/18-06/19); Accounting/Financial
Director, USAA (12/13-present); Senior Accounting Analyst, USAA (03/11-12/13).
ERIN G. WAGNER
Secretary
Born: February 1974
Year of Appointment: 2019
Associate General Counsel, the Adviser (since 2013).
CHARLES BOOTH
Anti-Money Laundering Compliance Officer and Identity Theft Officer
Born: April 1960
Year of Appointment: 2019
Director, Regulatory Administration and CCO Support Services, Citi Fund Services
Ohio, Inc. (2007-present).
================================================================================
58 | USAA CORNERSTONE EQUITY FUND
================================================================================
AMY CAMPOS
Chief Compliance Officer
Born: August 1976
Year of Appointment: 2019
Chief Compliance Officer, USAA Mutual Funds Trust (7/1/19-present); Executive
Director, Deputy Chief Compliance Officer, USAA Mutual Funds Trust and USAA ETF
Trust (7/17-6/19); Compliance Director, USAA Mutual Funds Trust (2014-7/17);
Senior Compliance Advisor, USAA Mutual Funds Trust (2010-2014).
THE FOLLOWING OFFICERS SERVED IN THEIR RESPECTIVE OFFICE UNTIL JULY 1, 2019, AT
WHICH POINT EACH OF THE FOLLOWING OFFICERS RESIGNED FROM THEIR RESPECTIVE OFFICE
AND NO LONGER SERVE IN THESE POSITIONS.
JOHN C. SPEAR
Vice President
Born: May 1964
Year of Appointment: 2016
Vice President, USAA ETF Trust (06/17-06/19); Senior Vice President and Chief
Investment Officer, USAA Investments, (03/17-present); Vice President and Chief
Investment Officer, USAA Investments, (11/16-03/17); Vice President, Long Term
Fixed Income (05/12-11/16).
JOHN P. TOOHEY
Vice President
Born: March 1968
Year of Appointment: 2009
Vice President, USAA ETF Trust (06/17-06/19); Head of Equities, Equity
Investments, AMCO (01/12-present).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 59
================================================================================
KRISTEN MILLAN
Secretary
Born: April 1983
Year of Appointment: 2019
Secretary, USAA ETF Trust (04/19-06/19); Assistant Secretary, USAA ETF Trust
(01/19-06/19); Senior Attorney, FASG General Counsel, USAA (09/17-06/19);
Attorney, FASG General Counsel, USAA (06/13-09/17). Ms. Millan also serves as
Assistant Secretary of AMCO, ICORP, and SAS.
STEPHANIE A. HIGBY
Chief Compliance Officer
Born: July 1974
Year of Appointment: 2013
Chief Compliance Officer, USAA ETF Trust (06/17-06/19); Assistant Vice
President, Compliance-Investments, USAA (02/18-present); Assistant Vice
President, Compliance Mutual Funds, USAA (12/16-01/18); Executive Director,
Institutional Asset Management Compliance, USAA (04/13-12/16). Ms. Higby also
serves as the Funds' anti-money laundering compliance officer and as the Chief
Compliance Officer for AMCO and IMCO.
================================================================================
60 | USAA CORNERSTONE EQUITY FUND
================================================================================
AS OF JULY 1, 2019
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
David C. Brown
John C. Walters
--------------------------------------------------------------------------------
ADMINISTRATOR AND Victory Capital Management Inc.
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND Victory Capital Advisers Inc.
DISTRIBUTOR 4900 Tiedeman Road
Brooklyn, Ohio 44144
--------------------------------------------------------------------------------
TRANSFER AGENT Victory Capital Transfer Agency Inc.
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 USAA AMCO'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) 235-8396; (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) 235-8396; (ii) at usaa.com; and (iii) on the SEC's website at
http://www.sec.gov.
================================================================================
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----------------------
MUTUAL FUNDS
--------------------------------------------------------------------------------
May 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA Cornerstone Moderately Aggressive Fund
FUND
SHARES
USCRX
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) 235-8396 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)
235-8396 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.
Victory Capital means Victory Capital Management Inc., the investment manager of
the USAA Mutual Funds. USAA Mutual Funds are distributed by Victory Capital
Advisers, Inc., a broker dealer registered with FINRA and an affiliate of
Victory Capital. Victory Capital and its affiliates are not affiliated with
United Services Automobile Association or its affiliates. USAA and the USAA
logos are registered trademarks and the USAA Mutual Funds and USAA Investments
logos are trademarks of United Services Automobile Association and are being
used by Victory Capital and its affiliates under license.
================================================================================
PRESIDENT'S MESSAGE
"... LONG-TERM INVESTORS SHOULD NEVER MAKE
DECISIONS IN HASTE. THEY SHOULD MAKE [PHOTO OF BROOKS ENGLEHARDT]
THOUGHTFUL DECISIONS BASED ON THEIR LONG-TERM
OBJECTIVES, TIME HORIZON, AND RISK TOLERANCE."
--------------------------------------------------------------------------------
JULY 2019
As previously announced, USAA, the parent company of USAA Asset Management
Company ("AMCO"), the prior investment adviser to the USAA Mutual Funds,
announced that AMCO would be acquired by Victory Capital Holdings, Inc.
(Victory Holdings), a global investment management firm headquartered in
Cleveland, Ohio (the Transaction). In connection with the Transaction, also as
previous announced, shareholders of each USAA Mutual Fund approved a new
investment advisory agreement with Victory Capital Management Inc. ("Victory
Capital"), an indirect wholly-owned subsidiary of Victory Holdings. The closing
of the Transaction occurred on July 1, 2019; and Victory Capital became the
investment adviser to each USAA Mutual Fund. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION ABOUT CHANGES THAT TOOK EFFECT ON JULY 1, 2019.
Softening global economic conditions and escalating trade tensions rattled
investors during the 12-month reporting period ended May 31, 2019. When the
reporting period began in June 2018, the global economy was expanding across
most regions and countries, led by the U.S. In this environment, stocks
generally advanced. In the fixed income market, U.S. Treasury yields rose, as
the U.S. Federal Reserve ("Fed") continued to tighten monetary policy.
Signs of trouble emerged during the summer of 2018. The U.S. economic expansion
continued, but growth in a number of other economies, including some European
countries and China, showed a weakening trend. By the autumn of 2018, investors'
fears of a global economic slowdown, combined with harsh U.S.-China trade
rhetoric and Brexit-related uncertainty in Europe, sparked a surge in market
volatility. Global stocks dropped, with most of the decline occurring in
December 2018. At the same time, intermediate- and longer-term yields fell, as
investors anticipated a change in Fed monetary policy. Indeed, after having
raised short-term interest rates four times during 2018, Fed officials announced
in January 2019 that they would "pause," retreating from their earlier plan to
raise interest rates in 2019. Stocks rallied in response and by April 2019 had
recovered most of the ground they had lost. In May 2019, ongoing trade tensions
between the United States and China, as well as President Trump administration's
threat to impose tariffs on Mexico, drove a renewed decline in stock prices. In
the fixed income market, concerns that trade disputes would seriously undermine
global
================================================================================
================================================================================
economic growth pushed down intermediate- and longer-term yields, which ended
the reporting period lower than they started. The yield on the 10-year U.S.
Treasury note, which began June 2018 at 2.89%, rose to 3.24% on November 8,
2018--its high point of the period--and fell to 2.13% by May 31, 2019.
In the final months of the reporting period, the Treasury yield curve inverted,
which means that shorter-term yields were higher than longer-term yields. A
yield-curve inversion warrants attention because it has been a reliable
recession indicator. Although recessions do not automatically follow
inversions, a downward-sloped yield curve has preceded every U.S. recession
since the 1960s. That said, the lag between an inversion and a recession has
been inconsistent. At USAA Investments, A Victory Capital Investment Franchise,
we have found that during the past six decades, the time between inversion and
recession has ranged between six months and two years, with no clear pattern to
provide useful guidance. And as I write to you, we see no recession on the
horizon. First, the U.S. economy continues to grow, albeit at a slower pace than
in 2018. Second, the Fed has made clear its commitment to pause its interest
rate hikes, and there is a growing belief in the markets that policymakers may
even cut interest rates in 2019. (In early June 2019, after the end of the
reporting period, Fed Chair Jerome Powell stated that the U.S. central bank was
monitoring the escalation in trade tensions and could potentially respond by
cutting interest rates if U.S. economic conditions deteriorate.)
At USAA Investments, our team of portfolio managers will continue to monitor the
financial markets, economic conditions, the global trade regime, Fed policy, the
direction of longer-term interest rates, and other issues that have the
potential to affect your investments. In the meantime, I would advise you to
ignore media "noise" about such matters. Media "noise" is meant to provoke an
emotional reaction, which can lead to hasty decision-making. In my opinion,
long-term investors should never make decisions in haste. They should make
thoughtful decisions based on their long-term objectives, time horizon, and risk
tolerance. Dollar-cost averaging, in which you invest a set amount on a regular
basis, is a strategy that can help you stay on track. Another effective strategy
is diversification, which can potentially insulate a portfolio from market
turbulence or changes in performance leadership.
If you would like to review your portfolio to confirm that it is properly
aligned with your investment plan, please contact one of our financial advisors.
You might want to make that call before the summer gets fully underway. When we
are traveling and spending time with family and friends, it can be tempting to
put off decisions on financial matters.
From all of us at USAA Investments, A Victory Capital Investment Franchise,
thank you for the opportunity to help you with your investment needs.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGERS' COMMENTARY 1
INVESTMENT OVERVIEW 5
SHAREHOLDER VOTING RESULTS 9
FINANCIAL INFORMATION
Distributions to Shareholders 10
Report of Independent Registered
Public Accounting Firm 11
Portfolio of Investments 12
Notes to Portfolio of Investments 37
Financial Statements 43
Notes to Financial Statements 46
Financial Highlights 65
EXPENSE EXAMPLE 66
ADVISORY AGREEMENT(S) 68
TRUSTEES' AND OFFICERS' INFORMATION 89
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) 235-8396.
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.
================================================================================
================================================================================
MANAGERS' COMMENTARY ON THE FUND
WASIF A. LATIF LANCE HUMPHREY, CFA
ARNOLD J. ESPE, CFA
--------------------------------------------------------------------------------
o HOW DID THE GLOBAL FINANCIAL MARKETS PERFORM DURING THE 12-MONTH REPORTING
PERIOD ENDED MAY 31, 2019?
The world financial markets produced mixed results, reflecting investors'
struggle to assess the shifting outlook for economic growth.
During the reporting period, large-cap U.S. equities were the best performer
among the major asset classes. Domestic stocks performed very well in the
first half of the reporting period, during which both economic data and
corporate earnings came in above expectations. However, the market sold off
sharply in late 2018 due to the combination of worries about U.S. Federal
Reserve ("Fed") policy, the trade dispute between the United States and
China, and signs of slowing economic growth overseas. Stocks quickly
recovered from the downturn, and the main U.S. equity indexes went on to
post their best quarter in nearly 10 years during the first three months of
2019. A rapid shift in Fed policy was likely the key catalyst for the
rebound. Whereas the markets generally were expecting as late as October
2018 that the Fed would raise interest rates three to four times in 2019, a
series of statements from key officials indicated the Fed was in fact likely
finished raising interest rates for the forseeable future. The reporting
period ended on a down note with a weak showing in May 2019, as stocks lost
some of their previous gains due to renewed worries about slowing growth and
the failure of the United States and China to resolve their trade impasse.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
The net effect of these sentiment swings was a narrow advance for large-cap
U.S. stocks, as gauged by the 3.47% gain of the Russell 1000 Index. The
Russell 2000 Index, a measure of performance for smaller companies, lagged
considerably with a return of -9.04%.
Developed-market international equities posted a loss over the 12-month
reporting period, largely as a result of the unexpectedly slow growth
outside of the United States. In combination with the weakness in foreign
currencies versus the U.S. dollar, the slowdown led to a -5.75% return for
the MSCI EAFE Index. Emerging-market stocks also closed in negative
territory, as gauged by the -8.70% return of the MSCI Emerging Markets
Index. Concerns about the global trade outlook and the prospect of slowing
growth in the developed world contributed to the underperformance for the
asset class.
Investment-grade bonds, after producing sluggish performance in the first
half of the reporting period, staged a strong rally from early November 2018
onward due in part to the Fed's shift toward a more accommodative policy.
The gains propelled the Bloomberg Barclays U.S. Aggregate Bond Index to a
return of 6.40% for the full reporting period. High-yield bonds also
performed reasonably well, as gauged by the 5.93% gain for the ICE BofAML
U.S. High Yield Index. Although high-yield issues fell sharply in late 2018
amid the evaporation of investor risk appetites, the category returned to
positive territory in early 2019.
o HOW DID THE USAA CORNERSTONE MODERATELY AGGRESSIVE FUND (THE "FUND") PERFORM
DURING THE REPORTING PERIOD?
For the reporting period ended May 31, 2019, the Fund had a total return of
-1.20%. This compares to returns of -1.29% for the MSCI All-Country World
Index and 1.99% for the Cornerstone Moderately Aggressive Composite Index.
Refer to page 5 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
2 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
Effective July 1, 2019, Victory Capital serves as the Fund's investment
adviser. Prior to July 1, 2019, AMCO served as the Fund's investment
adviser. The investment adviser provides day-to-day discretionary management
for the Fund's assets.
o PLEASE DISCUSS THE FACTORS THAT HELPED AND HURT PERFORMANCE.
Consistent with the broader market environment, the Fund's allocation to
large-cap U.S. equities was the key contributor to performance during the
reporting period. The Fund was weighted toward large-cap stocks over
small-cap stocks, which aided results. However, our preference for the value
style versus growth style was out of step with the market. Performance also
was hurt somewhat by favoring international equities over U.S. equities. We
believe both developed- and emerging-market equities offer more compelling
valuations and greater upside potential than U.S. equities, but this aspect
of our approach detracted in the reporting period, given the outperformance
of U.S. equities compared to international equities.
The Fund's bond portfolio performed well and made a meaningful contribution
to results. We generated robust performance from our decision to maintain a
sizable weighting in long-term U.S. Treasury securities based on our belief
that investors were overestimating the potential for accelerating economic
growth. Once the economy indeed began to slow in the fourth quarter of 2018,
our holdings in government bonds rallied in kind. An allocation to corporate
issuers further benefited results at a time of relative strength for
credit-sensitive investments. We also would note that the Fund's bond
investments fulfilled their role of reducing portfolio volatility at a time
of significant swings in equities and other segments of the financial
markets. A weighting in high-yield bonds was an additional contributor.
The majority of the key trends in the market have been in place for a
multi-year period, with domestic stocks outperforming bonds, the growth
style outpacing value, and U.S. equities exceeding the returns of the
foreign markets, to name just a few. Given the persistence of these
tendencies, it can be easy for investors to forget that asset class returns
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
tend to run in cycles. We, therefore, prefer to take a long-term view based
on the knowledge that even well-established market trends can--and
do--shift abruptly. Rather than trying to chase short-term performance, we
continue to emphasize diversification, fundamentals, and valuations. We
believe this steady approach, rather than one that attempts to respond to
the latest headlines, is the most effective way to navigate volatile
markets.
Thank you for allowing us to help you manage your investments.
Asset Allocation funds may be invested in, among other things: (1)
exchange-traded funds (ETFs); (2) futures, options, and other derivatives;
(3) non-investment-grade securities; (4) precious metals and minerals
companies; (5) real estate investment trusts; (6) money market instruments;
(7) foreign and emerging markets. These types of investments and asset
classes may be more volatile and prone to experience significant loss than
others. In addition, it is possible that a particular asset allocation may
not produce the intended result. o As interest rates rise, bond prices
generally fall; given the historically low interest rate environment, risks
associated with rising interest rates may be heightened. o Foreign investing
is subject to additional risks, such as currency fluctuations, market
illiquidity, and political instability. Emerging market countries are less
diverse and mature than other countries and tend to be politically less
stable. o Precious metals and minerals is a volatile asset class and is
subject to additional risks, such as currency fluctuation, market
illiquidity, political instability, and increased price volatility. It may
be more volatile than other asset classes that diversify across many
industries and companies. o Non-investment-grade securities are considered
speculative and are subject to significant credit risk. They are sometimes
referred to as "junk" bonds since they represent a greater risk of default
than more credit worthy investment-grade securities. o Diversification is a
technique intended to help reduce risk and does not guarantee a profit or
prevent a loss. o ETFs are subject to risks similar to those of stocks.
Investment returns may fluctuate and are subject to market volatility, so
that an investor's shares, when redeemed or sold, may be worth more or less
than their original cost.
================================================================================
4 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/19 o
--------------------------------------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
--------------------------------------------------------------------------------
USAA Cornerstone Moderately
Aggressive Fund -1.20% 2.57% 7.00%
MSCI All-Country World Index*
(reflects no deduction for fees,
expenses, or taxes) -1.29% 5.21% 9.39%
Cornerstone Moderately Aggressive
Composite Index** (reflects no deduction
for fees, expenses, or taxes) 1.99% 4.79% 8.18%
*The unmanaged MSCI All-Country World Index is a free float-adjusted market
capitalization weighted index that is designed to measure the equity market
performance of developed and emerging markets.
**The Cornerstone Moderately Aggressive Composite Index is a combination of
unmanaged indexes representing the Fund's model allocation, and consists of the
MSCI USA Investable Market Index (IMI) Gross (34%), the MSCI ACWI ex USA IMI Net
(23%), the Bloomberg Barclays U.S. Universal Index (38%), the Bloomberg
Commodity Index Total Return (1.5%), the MSCI U.S. Real Estate Investment Trust
(REIT) Index Gross (1.5%), and the Bloomberg Barclays U.S. Treasury - Bills
(1-3M) (2%).
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
usaa.com.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on net investment income and
realized capital gain distributions, including reinvested distributions, or
redemptions of shares.
================================================================================
INVESTMENT OVERVIEW | 5
================================================================================
o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
CORNERSTONE
MODERATELY USAA CORNERSTONE
MSCI ALL-COUNTRY AGGRESSIVE MODERATELY
WORLD INDEX COMPOSITE INDEX AGGRESSIVE FUND
05/31/09 $10,000.00 $10,000.00 $10,000.00
06/30/09 9,943.93 10,012.57 10,105.00
07/31/09 10,819.27 10,593.99 10,709.00
08/31/09 11,206.22 10,890.41 11,046.00
09/30/09 11,720.33 11,246.53 11,627.00
10/31/09 11,539.21 11,141.95 11,644.00
11/30/09 12,013.80 11,498.06 12,010.00
12/31/09 12,262.58 11,625.03 12,237.00
01/31/10 11,732.64 11,411.02 12,076.00
02/28/10 11,882.09 11,571.29 12,261.00
03/31/10 12,646.50 12,023.22 12,776.00
04/30/10 12,667.78 12,162.91 12,896.00
05/31/10 11,466.81 11,532.11 12,225.00
06/30/10 11,113.54 11,339.87 11,980.00
07/31/10 12,017.83 11,927.03 12,566.00
08/31/10 11,597.70 11,714.03 12,369.00
09/30/10 12,707.21 12,398.94 13,153.00
10/31/10 13,166.47 12,706.20 13,488.00
11/30/10 12,873.51 12,585.81 13,381.00
12/31/10 13,816.22 13,100.79 13,906.00
01/31/11 14,033.04 13,244.50 13,998.00
02/28/11 14,441.67 13,510.30 14,386.00
03/31/11 14,427.24 13,535.17 14,521.00
04/30/11 15,017.50 13,912.15 14,951.00
05/31/11 14,694.69 13,823.62 14,792.00
06/30/11 14,463.15 13,657.28 14,564.00
07/31/11 14,227.67 13,606.46 14,472.00
08/31/11 13,188.35 13,104.49 13,709.00
09/30/11 11,943.20 12,382.60 12,860.00
10/31/11 13,222.84 13,227.52 13,537.00
11/30/11 12,827.02 13,030.67 13,482.00
12/31/11 12,801.10 13,090.54 13,373.00
01/31/12 13,545.45 13,598.28 13,880.00
02/29/12 14,226.96 13,991.38 14,235.00
03/31/12 14,321.42 14,071.13 14,273.00
04/30/12 14,157.68 14,056.04 14,229.00
05/31/12 12,888.33 13,397.36 13,614.00
06/30/12 13,524.87 13,783.79 13,950.00
07/31/12 13,710.03 13,970.69 14,090.00
08/31/12 14,008.13 14,173.70 14,324.00
09/30/12 14,449.33 14,439.72 14,641.00
10/31/12 14,353.02 14,372.91 14,679.00
11/30/12 14,536.56 14,480.75 14,761.00
12/31/12 14,865.82 14,661.03 14,982.00
01/31/13 15,550.67 15,056.56 15,385.00
02/28/13 15,548.25 15,112.75 15,372.00
03/31/13 15,832.53 15,339.97 15,574.00
04/30/13 16,284.83 15,627.35 15,840.00
05/31/13 16,240.15 15,548.73 15,723.00
06/30/13 15,765.47 15,204.11 15,313.00
07/31/13 16,520.20 15,665.21 15,756.00
08/31/13 16,176.02 15,426.29 15,509.00
09/30/13 17,011.53 15,930.62 15,892.00
10/31/13 17,695.26 16,360.33 16,354.00
11/30/13 17,945.87 16,490.13 16,445.00
12/31/13 18,255.46 16,652.44 16,607.00
01/31/14 17,525.24 16,405.70 16,361.00
02/28/14 18,371.84 16,933.61 16,900.00
03/31/14 18,453.53 16,969.32 16,954.00
04/30/14 18,629.20 17,089.29 17,094.00
05/31/14 19,025.42 17,368.57 17,333.00
06/30/14 19,383.63 17,605.06 17,646.00
07/31/14 19,148.54 17,410.23 17,473.00
08/31/14 19,571.55 17,757.48 17,746.00
09/30/14 18,936.88 17,342.87 17,327.00
10/31/14 19,070.20 17,545.51 17,413.00
11/30/14 19,389.18 17,742.33 17,593.00
12/31/14 19,015.04 17,576.56 17,389.00
01/31/15 18,717.74 17,540.43 17,362.00
02/28/15 19,759.78 18,065.75 17,826.00
03/31/15 19,453.62 17,955.18 17,635.00
04/30/15 20,018.05 18,193.11 17,874.00
05/31/15 19,991.93 18,207.86 17,928.00
06/30/15 19,521.28 17,904.14 17,566.00
07/31/15 19,690.81 18,009.52 17,621.00
08/31/15 18,340.98 17,295.07 16,809.00
09/30/15 17,676.51 16,972.79 16,419.00
10/31/15 19,063.85 17,745.56 17,116.00
11/30/15 18,906.42 17,658.19 16,986.00
12/31/15 18,565.46 17,433.93 16,648.00
01/31/16 17,445.77 16,881.27 16,023.00
02/29/16 17,325.76 16,881.27 15,967.00
03/31/16 18,609.74 17,720.27 16,690.00
04/30/16 18,884.44 17,931.14 16,873.00
05/31/16 18,908.24 17,992.11 16,908.00
06/30/16 18,793.78 18,085.67 17,041.00
07/31/16 19,603.67 18,593.88 17,512.00
08/31/16 19,669.63 18,623.63 17,533.00
09/30/16 19,790.14 18,699.98 17,610.00
10/31/16 19,454.22 18,426.96 17,350.00
11/30/16 19,602.06 18,439.86 17,252.00
12/31/16 20,025.51 18,703.55 17,437.00
01/31/17 20,573.11 19,009.39 17,766.00
02/28/17 21,150.25 19,391.84 18,082.00
03/31/17 21,408.92 19,492.70 18,247.00
04/30/17 21,742.62 19,722.01 18,447.00
05/31/17 22,222.75 19,986.01 18,698.00
06/30/17 22,323.80 20,060.26 18,763.00
07/31/17 22,947.63 20,410.67 19,049.00
08/31/17 23,035.57 20,519.97 19,164.00
09/30/17 23,480.60 20,750.08 19,358.00
10/31/17 23,968.19 21,007.51 19,601.00
11/30/17 24,432.19 21,262.24 19,795.00
12/31/17 24,826.09 21,494.68 20,049.00
01/31/18 26,226.64 22,077.77 20,582.00
02/28/18 25,125.20 21,430.56 19,902.00
03/31/18 24,587.39 21,295.35 19,848.00
04/30/18 24,822.16 21,327.15 19,856.00
05/31/18 24,853.12 21,501.88 19,918.00
06/30/18 24,718.59 21,446.60 19,791.00
07/31/18 25,464.04 21,819.56 20,093.00
08/31/18 25,664.02 22,014.14 20,180.00
09/30/18 25,775.76 21,999.04 20,148.00
10/31/18 23,844.15 20,941.77 19,099.00
11/30/18 24,192.88 21,183.96 19,282.00
12/31/18 22,488.86 20,354.08 18,562.00
01/31/19 24,264.58 21,478.82 19,556.00
02/28/19 24,913.63 21,839.90 19,778.00
03/31/19 25,226.85 22,142.69 19,966.00
04/30/19 26,078.70 22,592.30 20,270.00
05/31/19 24,531.72 21,929.69 19,679.00
[END CHART]
Data from 5/31/09 through 5/31/19.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Cornerstone Moderately Aggressive Fund to the benchmarks listed above (see
page 5 for benchmark definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes.
================================================================================
6 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
O TOP 10 HOLDINGS* - 5/31/19 O
(% of Net Assets)
Vanguard FTSE Developed Markets ETF ...................................... 4.3%
iShares iBoxx $ High Yield Corporate Bond ETF ............................ 3.6%
iShares Core MSCI EAFE ETF .............................................. 3.5%
U.S. Treasury Bond, 3.13%, 8/15/44 ....................................... 3.3%
Schwab Fundamental International Large Company Index ETF ................. 2.9%
Vanguard FTSE Europe ETF ................................................. 2.8%
iShares Core MSCI Emerging Markets ETF ................................... 2.7%
iShares Core S&P 500 ETF ................................................. 2.4%
U.S. Treasury Bond, 3.00%, 5/15/45 ....................................... 2.3%
Vanguard Real Estate ETF ................................................. 2.3%
*Does not include futures, money market instruments and short-term investments
purchased with cash collateral from securities loaned.
Refer to the Portfolio of Investments for a complete list of securities.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
o ASSET ALLOCATION* - 5/31/19 o
(% of Net Assets)
[PIE CHART OF ASSET ALLOCATION]
INTERNATIONAL EQUITY SECURITIES 25.6%
U.S. EQUITY SECURITIES 24.4%
U.S. TREASURY SECURITIES 15.7%
FIXED-INCOME EXCHANGE-TRADED FUNDS 11.1%
U.S. GOVERNMENT AGENCY ISSUES 8.8%
CORPORATE OBLIGATIONS 4.3%
GLOBAL REAL ESTATE EQUITY SECURITIES 3.2%
MONEY MARKET INSTRUMENTS 2.4%
PRECIOUS METALS AND COMMODITY-RELATED SECURITIES 1.3%
ASSET-BACKED SECURITIES 1.2%
EURODOLLAR AND YANKEE OBLIGATIONS 0.9%
COMMERCIAL MORTGAGE SECURITIES 0.6%
CONVERTIBLE SECURITIES 0.2%
BANK LOANS 0.1%
COLLATERALIZED MORTGAGE OBLIGATIONS 0.1%
[END CHART]
*Does not include futures 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%.
================================================================================
8 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
SHAREHOLDER VOTING RESULTS
--------------------------------------------------------------------------------
On April 18, 2019, a special meeting of shareholders was held to vote on two
proposals relating to the series of the USAA Mutual Funds Trust (Trust).
Shareholders of record on February 8, 2019, were entitled to vote on each
proposal shown below. The proposals were approved by the shareholders.
The following proposals and voting results pertain to one or more series within
the Trust. Votes shown for Proposal 1 are for the Fund, a series of the Trust.
Votes shown for Proposal 2 are for all series of the Trust. The effective date
of the Proposals was July 1, 2019.
PROPOSAL 1
To approve a new Investment Advisory Agreement between the Trust, on behalf of
the Fund, and Victory Capital, an independent investment adviser. The new
Investment Advisory Agreement became effective upon the closing of the
Transaction (as defined and discussed in Note 1 to the Financial Statements)
whereby AMCO was acquired by Victory Holdings, the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
-------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
-------------------------------------------------------------------------------
62,597,257 6,663,115 5,502,901
PROPOSAL 2
Election of two new trustees to the Trust's Board of Trustees to serve upon the
closing of the Transaction: (1) David C. Brown, to serve as an "interested
trustee" as defined in the Investment Company Act of 1940, as amended (1940
Act); and (2) John C. Walters, to serve as a trustee who is not an "interested
person" as is defined under the 1940 Act ("Independent Trustee").
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
TRUSTEES FOR VOTES WITHHELD
--------------------------------------------------------------------------------
David C. Brown 8,299,565,565 820,887,736
John C. Walters 8,317,935,885 802,517,416
================================================================================
SHAREHOLDER VOTING RESULTS | 9
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
May 31, 2019, is provided for information purposes only and should not be used
for reporting to federal or state revenue agencies. Federal tax information for
the calendar year will be reported to you on Form 1099-DIV in January 2020.
With respect to distributions paid, the Fund designates the following amounts
(or, if subsequently determined to be different, the maximum amount allowable)
for the fiscal year ended May 31, 2019:
DIVIDEND RECEIVED
DEDUCTION (CORPORATE LONG-TERM CAPITAL GAIN QUALIFIED INTEREST
SHAREHOLDERS)(1) DISTRIBUTIONS(2) INCOME
--------------------------------------------------------------------------------
17.38% $86,725,000 $19,052,000
--------------------------------------------------------------------------------
(1) Presented as a percentage of net investment income and short-term capital
gain distributions paid, if any.
(2) All or a portion of these amounts may be exempt from taxation at the state
level.
For the fiscal year ended May 31, 2019, the Fund hereby designates the maximum
amount allowable of its net taxable income as qualified dividends taxed at
individual net capital gain rates.
================================================================================
10 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
USAA CORNERSTONE MODERATELY AGGRESSIVE FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Cornerstone Moderately Aggressive Fund (the "Fund") (one of the funds
constituting USAA Mutual Funds Trust (the "Trust")), including the portfolio of
investments, as of May 31, 2019, and the related statement of operations for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended, the financial highlights for each of the five
years in the period then ended and the related notes (collectively referred to
as the "financial statements"). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Fund (one of the
funds constituting USAA Mutual Funds Trust) at May 31, 2019, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and its financial highlights for each of
the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
BASIS FOR OPINION
These financial statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on the Fund's financial statements based
on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and are required to
be independent with respect to the Trust in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Trust is not required to have,
nor were we engaged to perform, an audit of the Trust's internal control over
financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the Trust's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of May 31, 2019, by correspondence with the custodian and brokers or by
other appropriate auditing procedures where replies from brokers were not
received. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the auditor of one or more Victory Capital investment
companies since 1995.
San Antonio, Texas
July 23, 2019
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 11
================================================================================
PORTFOLIO OF INVESTMENTS
May 31, 2019
-----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------------
BONDS (43.0%)
ASSET-BACKED SECURITIES (1.2%)
ASSET BACKED SECURITIES (1.2%)
------------------------------
AUTOMOBILE ABS (0.8%)
$ 571 Americredit Automobile Receivables Trust 3.15% 3/20/2023 $ 578
4,640 Americredit Automobile Receivables Trust 3.50 1/18/2024 4,760
1,017 Avis Budget Rental Car Funding AESOP, LLC(a) 2.96 7/20/2020 1,016
644 Avis Budget Rental Car Funding AESOP, LLC(a) 3.75 7/20/2020 645
4,530 Avis Budget Rental Car Funding AESOP, LLC(a) 2.50 2/20/2021 4,526
2,665 Credit Acceptance Auto Loan Trust(a) 4.29 11/15/2024 2,671
2,701 Credit Acceptance Auto Loan Trust(a) 3.55 8/15/2027 2,753
4,600 OSCAR U.S. Funding Trust IX, LLC(a) 3.63 9/10/2025 4,761
----------
21,710
----------
CREDIT CARD ABS (0.1%)
2,648 Synchrony Credit Card Master Note Trust 2.95 5/15/2024 2,639
----------
OTHER ABS (0.2%)
2,320 Element Rail Leasing I, LLC(a) 3.67 4/19/2044 2,395
726 NP SPE II, LLC(a) 3.37 10/21/2047 739
1,504 SCF Equipment Leasing, LLC(a) 3.41 12/20/2023 1,515
----------
4,649
----------
STUDENT LOAN ABS (0.1%)
1,800 Navient Student Loan Trust (1 mo. LIBOR + 1.50%) 3.93(b) 8/25/2050 1,792
2,094 SLM Student Loan Trust (3 mo. LIBOR + 0.22%) 2.80(b) 1/25/2041 1,947
754 SLM Student Loan Trust (3 mo. LIBOR + 0.55%) 3.13(b) 10/25/2065 716
----------
4,455
----------
Total Asset Backed Securities 33,453
----------
Total Asset-Backed Securities (cost: $32,805) 33,453
----------
================================================================================
12 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------------
BANK LOANS (0.1%)(c)
CONSUMER, CYCLICAL (0.1%)
-------------------------
RETAIL (0.1%)
$ 3,502 Academy, Ltd. (1 mo. LIBOR + 4.00%) 6.44% 7/01/2022 $ 2,543
1,801 Academy, Ltd. (1 mo. LIBOR + 4.00%) 6.48 7/01/2022 1,314
----------
Total Consumer, Cyclical 3,857
----------
Total Bank Loans (cost: $4,398) 3,857
----------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.1%)
MORTGAGE SECURITIES (0.1%)
--------------------------
WHOLE LOAN COLLATERAL CMO (0.1%)
410 Sequoia Mortgage Trust (1 mo. LIBOR + 0.90%) 3.34(b) 9/20/2033 404
567 Structured Asset Mortgage Investments
Trust (1 mo. LIBOR + 0.50%) 2.94(b) 7/19/2035 546
449 Wells Fargo Mortgage Backed Securities Trust 5.16(e) 4/25/2035 450
----------
Total Mortgage Securities 1,400
----------
Total Collateralized Mortgage Obligations (cost: $1,406) 1,400
----------
COMMERCIAL MORTGAGE SECURITIES (0.6%)
MORTGAGE SECURITIES (0.6%)
--------------------------
COMMERCIAL MBS (0.6%)
3,874 Banc of America Commercial Mortgage Trust 5.66(e) 7/10/2044 1,453
130 Banc of America Commercial Mortgage Trust 6.57(e) 2/10/2051 130
181 Bear Stearns Commercial Mortgage Securities Trust(a) 5.66(e) 9/11/2041 180
2,320 BT-h21 Mortgage-Backed Securities Trust
(1 mo. LIBOR + 2.50%)(a) 4.81(b) 10/07/2021 2,323
74 Credit Suisse Commercial Mortgage Trust
(1 mo. LIBOR + 0.19%) 2.62(b) 2/15/2040 72
28,580 CSAIL Commercial Mortgage Trust(f) 1.79(e) 1/15/2049 2,420
7,800 FREMF Mortgage Trust(a) 3.51(e) 8/25/2045 7,787
899 GE Capital Commercial Mortgage Corp. 5.61(e) 12/10/2049 772
1,225 GMAC Commercial Mortgage Securities, Inc. 4.98(e) 12/10/2041 1,226
22,888 UBS Commercial Mortgage Trust(a),(f) 2.06(e) 5/10/2045 1,079
----------
Total Mortgage Securities 17,442
----------
Total Commercial Mortgage Securities (cost: $19,500) 17,442
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
-----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------------
CONVERTIBLE SECURITIES (0.2%)
BASIC MATERIALS (0.2%)
----------------------
MINING (0.2%)
$ 1,130 Hycroft Mining Corp.(g),(h),(i),(j) 15.00%(k) 10/22/2020 $ 34
5,800 Pretium Resources, Inc. 2.25 3/15/2022 5,474
----------
Total Basic Materials 5,508
----------
Total Convertible Securities (cost: $6,682) 5,508
----------
CORPORATE OBLIGATIONS (4.3%)
COMMUNICATIONS (0.2%)
---------------------
TELECOMMUNICATIONS (0.2%)
4,000 Hughes Satellite Systems Corp.(l) 6.50 6/15/2019 4,000
----------
CONSUMER, CYCLICAL (0.4%)
-------------------------
AUTO MANUFACTURERS (0.4%)
5,700 Harley-Davidson Financial Services, Inc.(a),(l) 3.55 5/21/2021 5,756
5,700 Hyundai Capital America(a),(l) 3.75 7/08/2021 5,797
----------
Total Consumer, Cyclical 11,553
----------
CONSUMER, NON-CYCLICAL (0.1%)
-----------------------------
HEALTHCARE-SERVICES (0.1%)
5,600 Community Health Systems, Inc.(l) 6.88 2/01/2022 3,752
----------
ENERGY (0.6%)
-------------
PIPELINES (0.6%)
1,300 ENBRIDGE ENERGY Partners, LP(l) 7.38 10/15/2045 1,865
3,530 Energy Transfer Operating, LP (3 mo. LIBOR + 3.02%)(l) 5.60(b) 11/01/2066 2,815
500 Enterprise TE Partners, LP (3 mo. LIBOR + 2.78%) 5.30(b) 6/01/2067 457
5,600 EQM Midstream Partners, LP(l) 4.75 7/15/2023 5,715
2,352 Southern Union Co. (3 mo. LIBOR + 3.02%) 5.60(b) 11/01/2066 1,829
2,550 Tallgrass Energy Partners, LP / Tallgrass
Energy Finance Corp.(a),(l) 5.50 9/15/2024 2,614
----------
Total Energy 15,295
----------
FINANCIAL (2.4%)
----------------
BANKS (0.6%)
1,000 Allfirst Preferred Capital Trust (3 mo.LIBOR + 1.50%) 4.10(b) 7/15/2029 936
2,700 Compass Bank(l) 3.88 4/10/2025 2,742
4,000 First Maryland Capital I (3 mo. LIBOR +1.00%) 3.60(b) 1/15/2027 3,704
================================================================================
14 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------------
$ 2,000 Huntington Capital (3 mo. LIBOR + 0.63%) 3.24%(b) 6/15/2028 $ 1,772
6,039 Manufacturers & Traders Trust Co. (3 mo. LIBOR + 0.64%) 3.16(b) 12/01/2021 6,037
1,000 SunTrust Capital I (3 mo. LIBOR + 0.67%) 3.19(b) 5/15/2027 933
----------
16,124
----------
DIVERSIFIED FINANCIAL SERVICES (0.3%)
9,000 Cullen/Frost Capital Trust II (3 mo. LIBOR + 1.55%) 4.07(b) 3/01/2034 7,781
----------
INSURANCE (1.3%)
5,900 Allstate Corp. (3 mo. LIBOR + 2.94%)(l) 5.75(m) 8/15/2053 6,058
3,607 AmTrust Financial Services, Inc.(l) 6.13 8/15/2023 3,506
5,750 Athene Holding Ltd.(l) 4.13 1/12/2028 5,643
4,550 HSB Group, Inc. (3 mo. LIBOR + 0.91%) 3.51(b) 7/15/2027 3,918
11,510 Nationwide Mutual Insurance Co. (3 mo. LIBOR + 2.29%)(a),(l) 4.90(b) 12/15/2024 11,484
5,400 Prudential Financial, Inc. (3 mo. LIBOR + 3.92%)(l) 5.63(m) 6/15/2043 5,598
----------
36,207
----------
INVESTMENT COMPANIES (0.2%)
5,950 Ares Capital Corp.(l) 3.63 1/19/2022 5,982
----------
REITS (0.0%)
1,000 Sabra Health Care, LP(l) 5.13 8/15/2026 1,016
----------
Total Financial 67,110
----------
INDUSTRIAL (0.5%)
-----------------
ELECTRICAL COMPONENTS & EQUIPMENT (0.0%)
800 Artesyn Embedded Technologies, Inc.(a),(l) 9.75 10/15/2020 816
----------
MISCELLANEOUS MANUFACTURERS (0.1%)
1,725 General Electric Co.(l) 5.50 1/08/2020 1,752
----------
TRANSPORTATION (0.4%)
5,325 BNSF Funding Trust I (3 mo. LIBOR + 2.35%) 6.61(m) 12/15/2055 5,707
5,750 Ryder System, Inc.(l) 3.50 6/01/2021 5,834
----------
11,541
----------
Total Industrial 14,109
----------
UTILITIES (0.1%)
----------------
ELECTRIC (0.1%)
3,800 NextEra Energy Capital Holdings, Inc.(l) 3.34 9/01/2020 3,836
----------
Total Corporate Obligations (cost: $117,315) 119,655
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
-----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------------
EURODOLLAR AND YANKEE OBLIGATIONS (0.9%)
BASIC MATERIALS (0.2%)
----------------------
CHEMICALS (0.1%)
$ 500 Braskem Finance Ltd.(l) 6.45% 2/03/2024 $ 539
----------
MINING (0.1%)
3,000 Newcrest Finance Pty. Ltd.(a),(l) 4.45 11/15/2021 3,106
----------
Total Basic Materials 3,645
----------
CONSUMER, CYCLICAL (0.2%)
-------------------------
AUTO MANUFACTURERS (0.2%)
5,700 BMW U.S. Capital, LLC(a),(l) 3.25 8/14/2020 5,742
----------
ENERGY (0.3%)
-------------
OIL & GAS (0.2%)
5,800 Petroleos Mexicanos(l) 5.38 3/13/2022 5,994
----------
OIL & GAS SERVICES (0.0%)
111 Schahin II Finance Co. SPV Ltd.(a),(g),(i) 8.00 5/25/2020 103
4,465 Schahin II Finance Co. SPV Ltd.(a),(h),(n) 5.88 9/25/2023 469
----------
572
----------
PIPELINES (0.1%)
1,400 Transcanada Trust (3 mo. LIBOR + 3.53%)(l) 5.63(m) 5/20/2075 1,374
----------
Total Energy 7,940
----------
FINANCIAL (0.2%)
----------------
INSURANCE (0.2%)
5,900 QBE Capital Funding III Ltd. (USD Swap
Semi-Annual 30/360 10 YR + 4.05%)(a),(l) 7.25(m) 5/24/2041 6,226
----------
Total Eurodollar and Yankee Obligations (cost: $26,220) 23,553
----------
-----------------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
-----------------------------------------------------------------------------------------------------------------------
FIXED-INCOME EXCHANGE-TRADED FUNDS (11.1%)
277,500 Invesco Fundamental High Yield Corporate Bond ETF 5,134
201,930 iShares 20+ Year Treasury Bond ETF(o) 26,620
50,000 iShares 7-10 Year Treasury Bond ETF(o) "B" 5,445
178,840 iShares Core U.S. Aggregate Bond ETF 19,744
1,192,920 iShares iBoxx $High Yield Corporate Bond ETF(o) 101,279
================================================================================
16 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------------------
407,760 Shares iBoxx $Investment Grade Corporate Bond ETF $ 49,270
906,900 Vanguard Mortgage-Backed Securities ETF 47,712
100,700 Vanguard Short-Term Bond ETF(o) 8,069
422,700 Vanguard Total Bond Market ETF 34,763
205,000 Xtrackers USD High Yield Corporate Bond ETF 10,037
----------
Total Fixed-Income Exchange-Traded Funds (cost: $303,126) 308,073
----------
-----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
-----------------------------------------------------------------------------------------------------------------------
MUNICIPAL OBLIGATIONS (0.0%)
TEXAS (0.0%)
$ 150 Ector County Hospital District 6.80% 9/15/2025 153
300 Ector County Hospital District 7.18 9/15/2035 303
----------
456
----------
Total Municipal Obligations (cost: $454) 456
----------
U.S. GOVERNMENT AGENCY ISSUES (8.8%)(p)
COMMERCIAL MBS (1.5%)
3,750 Fannie Mae(+) 2.15 1/25/2023 3,729
14,000 Freddie Mac(+) 3.00 12/25/2025 14,456
8,400 Freddie Mac(+) 3.33(e) 5/25/2025 8,816
9,000 Freddie Mac(+) 3.51 4/25/2030 9,570
4,285 Freddie Mac(+) 3.70(e) 1/25/2033 4,635
----------
41,206
----------
FGLMC COLLATERAL (7.1%)
12,975 Freddie Mac(+) 3.00 4/01/2046 13,103
34,743 Freddie Mac(+) 3.00 6/01/2046 35,081
3,945 Freddie Mac(+) 3.00 8/01/2046 3,984
12,140 Freddie Mac(+) 3.00 1/01/2047 12,239
11,842 Freddie Mac(+) 3.00 1/01/2047 11,940
36,580 Freddie Mac(+) 3.00 3/01/2047 36,871
7,913 Freddie Mac(+) 3.00 4/01/2047 7,977
24,320 Freddie Mac(+) 3.00 4/01/2047 24,533
13,331 Freddie Mac(+) 3.00 6/01/2047 13,438
20,674 Freddie Mac(+) 3.50 4/01/2046 21,174
7,466 Freddie Mac(+) 3.50 4/01/2048 7,641
9,211 Freddie Mac(+) 4.00 7/01/2048 9,548
----------
197,529
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
-----------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------------
GNMA Collateral (0.0%)
$ 4 Ginnie Mae I Pool 6.50% 4/15/2024 $ 4
----------
UMBS Collateral (0.2%)(q)
5,380 Fannie Mae (+) 4.00 11/01/2045 5,582
----------
Total U.S. Government Agency Issues (cost: $242,244) 244,321
----------
U.S. TREASURY SECURITIES (15.7%)
BONDS (7.0%)
15,820 U.S. Treasury Bond (STRIPS Principal) (Zero Coupon) 0.00 8/15/2044 8,202
15,000 U.S. Treasury Bond 3.00 11/15/2044 16,225
59,700 U.S. Treasury Bond 3.00 5/15/2045 64,660
5,000 U.S. Treasury Bond 3.00 5/15/2047 5,422
7,000 U.S. Treasury Bond 3.00 2/15/2049 7,606
82,200 U.S. Treasury Bond 3.13 8/15/2044 90,793
----------
192,908
----------
INFLATION-INDEXED NOTES (0.9%)
25,737 Inflation-Index Note 0.13 4/15/2021 25,488
----------
NOTES (7.8%)
63,000 U.S. Treasury Note(r) 1.13 2/28/2021 62,060
1,970 U.S. Treasury Note 1.63 8/15/2022 1,953
390 U.S. Treasury Note 1.63 11/15/2022 386
29,000 U.S. Treasury Note 1.63 4/30/2023 28,678
52,000 U.S. Treasury Note 1.63 2/15/2026 50,709
6,000 U.S. Treasury Note 1.88 7/31/2022 5,995
1,000 U.S. Treasury Note 2.25 11/15/2024 1,014
5,000 U.S. Treasury Note 2.25 11/15/2025 5,070
30,800 U.S. Treasury Note 2.25 11/15/2027 31,150
1,800 U.S. Treasury Note 2.38 8/15/2024 1,837
8,100 U.S. Treasury Note 2.38 5/15/2027 8,280
10,000 U.S. Treasury Note 2.50 6/30/2020 10,030
1,000 U.S. Treasury Note 2.75 11/15/2023 1,035
7,800 U.S. Treasury Note 2.75 2/15/2028 8,195
----------
216,392
----------
Total U.S. Treasury Securities (cost: $416,965) 434,788
----------
Total Bonds (cost: $1,171,115) 1,192,506
----------
================================================================================
18 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY SECURITIES (25.6%)
COMMON STOCKS (0.2%)
CONSUMER, CYCLICAL (0.0%)
-------------------------
AUTO PARTS & EQUIPMENT (0.0%)
24,460 Autoliv, Inc. $ 1,506
----------
CONSUMER, NON-CYCLICAL (0.1%)
-----------------------------
PHARMACEUTICALS (0.1%)
12,530 Jazz Pharmaceuticals plc(s) 1,573
----------
INDUSTRIAL (0.1%)
-----------------
ELECTRONICS (0.1%)
41,190 TE Connectivity Ltd. 3,469
----------
TECHNOLOGY (0.0%)
-----------------
SEMICONDUCTORS (0.0%)
10,720 Kulicke & Soffa Industries, Inc. 208
----------
Total Common Stocks (cost: $7,063) 6,756
----------
EXCHANGE-TRADED FUNDS (25.1%)
527,552 Invesco FTSE RAFI Developed Markets ex-US ETF 20,596
1,361,600 Invesco FTSE RAFI Emerging Markets ETF 28,035
1,610,315 iShares Core MSCI EAFE ETF 95,637
1,532,210 iShares Core MSCI Emerging Markets ETF 75,262
258,500 iShares Edge MSCI Min Vol EAFE ETF 18,364
260,200 iShares Edge MSCI Min Vol Emerging Markets ETF 14,857
1,655,000 iShares MSCI Canada ETF 45,231
617,520 iShares MSCI United Kingdom ETF(o) 19,569
2,076,900 Schwab Fundamental Emerging Markets Large Company Index ETF 56,803
2,993,200 Schwab Fundamental International Large Company Index ETF 79,410
593,600 Schwab Fundamental International Small Company Index ETF 17,784
107,983 SPDR S&P Emerging Markets SmallCap ETF 4,660
68,000 USAA MSCI Emerging Markets Value Momentum Blend Index ETF(t) 2,888
241,890 Vanguard FTSE All-World ex-US ETF 11,785
2,965,000 Vanguard FTSE Developed Markets ETF 118,126
1,498,400 Vanguard FTSE Europe ETF 78,741
202,622 WisdomTree Emerging Markets SmallCap Dividend Fund 9,102
----------
Total Exchange-Traded Funds (cost: $659,381) 696,850
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 19
================================================================================
-----------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS (0.3%)
FINANCIAL (0.3%)
----------------
INSURANCE (0.3%)
309,253 Delphi Financial Group, Inc., cumulative redeemable, 5.71%,
(3 mo. LIBOR + 3.19%)(b),(h) (cost: $7,389) $ 7,190
----------
Total International Equity Securities (cost: $673,833) 710,796
----------
U.S. EQUITY SECURITIES (24.4%)
COMMON STOCKS (19.9%)
BASIC MATERIALS (0.2%)
----------------------
CHEMICALS (0.1%)
14,310 Huntsman Corp. 249
23,170 LyondellBasell Industries N.V. "A" 1,720
6,090 Rayonier Advanced Materials, Inc. 40
----------
2,009
----------
FOREST PRODUCTS & PAPER (0.1%)
81,280 International Paper Co. 3,371
34,130 Resolute Forest Products, Inc. 219
12,010 Schweitzer-Mauduit International, Inc. 376
----------
3,966
----------
Total Basic Materials 5,975
----------
COMMUNICATIONS (2.5%)
---------------------
ADVERTISING (0.2%)
102,100 Interpublic Group of Companies, Inc. 2,166
54,610 Omnicom Group, Inc. 4,225
----------
6,391
----------
INTERNET (0.3%)
1,650 Alphabet, Inc. "A"(s) 1,826
13,810 CDW Corp. 1,359
9,840 F5 Networks, Inc.(s) 1,300
8,280 IAC/InterActiveCorp(s) 1,829
25,060 NIC, Inc. 400
2,130 Stamps.com, Inc.(s) 71
----------
6,785
----------
MEDIA (0.8%)
186,700 Altice USA, Inc. "A" 4,386
113,720 CBS Corp. "B" 5,490
================================================================================
20 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------------------
109,340 Comcast Corp. "A" $ 4,483
98,000 DISH Network Corp. "A"(s) 3,539
62,010 Entravision Communications Corp. "A" 182
5,730 Sinclair Broadcast Group, Inc. "A" 308
266,390 Sirius XM Holdings, Inc. 1,415
73,490 Viacom, Inc. "B" 2,133
----------
21,936
----------
TELECOMMUNICATIONS (1.2%)
99,660 AT&T, Inc. 3,048
11,200 Ciena Corp.(s) 391
159,950 Cisco Systems, Inc. 8,322
154,590 Corning, Inc. 4,458
3,460 InterDigital, Inc. 220
75,520 Juniper Networks, Inc. 1,859
3,250 Shenandoah Telecommunications Co. 131
37,150 T-Mobile US, Inc.(s) 2,728
223,680 Verizon Communications, Inc. 12,157
10,060 Vonage Holdings Corp.(s) 119
----------
33,433
----------
Total Communications 68,545
----------
CONSUMER, CYCLICAL (2.8%)
-------------------------
AIRLINES (0.2%)
46,250 Delta Air Lines, Inc. 2,382
33,320 Southwest Airlines Co. 1,586
21,020 United Continental Holdings, Inc.(s) 1,632
----------
5,600
----------
APPAREL (0.1%)
5,870 Carter's, Inc. 494
39,590 NIKE, Inc. "B" 3,054
----------
3,548
----------
AUTO MANUFACTURERS (0.1%)
50,820 General Motors Co. 1,694
18,700 Wabash National Corp. 253
----------
1,947
----------
AUTO PARTS & EQUIPMENT (0.2%)
8,970 Allison Transmission Holdings, Inc. 371
40,900 BorgWarner, Inc. 1,451
26,690 Dana, Inc. 389
13,380 Lear Corp. 1,593
16,490 Meritor, Inc.(s) 333
================================================================================
PORTFOLIO OF INVESTMENTS | 21
================================================================================
-----------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------------------
6,610 Methode Electronics, Inc. $ 163
9,790 Tenneco, Inc. "A" 97
----------
4,397
----------
DISTRIBUTION/WHOLESALE (0.2%)
87,480 Fastenal Co. 2,676
5,110 KAR Auction Services, Inc. 287
6,240 WESCO International, Inc.(s) 292
4,910 WW Grainger, Inc. 1,285
----------
4,540
----------
ENTERTAINMENT (0.1%)
53,210 Live Nation Entertainment, Inc.(s) 3,236
680 Red Rock Resorts, Inc. "A" 14
----------
3,250
----------
HOME BUILDERS (0.1%)
550 NVR, Inc.(s) 1,761
36,140 PulteGroup, Inc. 1,120
----------
2,881
----------
HOME FURNISHINGS (0.0%)
7,360 Ethan Allen Interiors, Inc. 156
----------
LEISURE TIME (0.2%)
3,850 Brunswick Corp. 160
36,610 Carnival Corp. 1,874
64,440 Harley-Davidson, Inc. 2,108
30,590 Norwegian Cruise Line Holdings Ltd.(s) 1,674
----------
5,816
----------
LODGING (0.0%)
28,120 Las Vegas Sands Corp. 1,547
----------
OFFICE FURNISHINGS (0.0%)
8,060 Herman Miller, Inc. 286
12,470 Knoll, Inc. 245
20,590 Steelcase, Inc. "A" 330
----------
861
----------
RETAIL (1.5%)
2,650 Asbury Automotive Group, Inc.(s) 197
32,280 Best Buy Co., Inc. 2,023
4,320 Big Lots, Inc. 119
18,710 Bloomin' Brands, Inc. 361
7,060 Buckle, Inc.(o) 106
2,460 Cracker Barrel Old Country Store, Inc. 387
================================================================================
22 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------------------
25,790 Del Taco Restaurants, Inc.(s) $ 279
6,140 Dick's Sporting Goods, Inc. 212
5,470 Foot Locker, Inc. 215
94,220 Gap, Inc. 1,760
4,050 Group 1 Automotive, Inc. 292
14,520 Home Depot, Inc. 2,757
34,980 Kohl's Corp. 1,725
5,730 La-Z-Boy, Inc. 185
2,460 Lithia Motors, Inc. "A" 281
27,590 Lowe's Cos, Inc. 2,574
9,100 Lululemon Athletica, Inc.(s) 1,507
74,690 Macy's, Inc. 1,536
11,930 McDonald's Corp. 2,365
4,470 MSC Industrial Direct Co., Inc. "A" 316
3,050 Nu Skin Enterprises, Inc. "A" 142
6,180 O'Reilly Automotive, Inc.(s) 2,295
4,070 Penske Automotive Group, Inc. 174
147,920 Qurate Retail, Inc.(s) 1,853
28,040 Ross Stores, Inc. 2,608
8,400 Rush Enterprises, Inc. "A" 296
46,010 Starbucks Corp. 3,500
58,680 TJX Companies, Inc. 2,951
22,040 Tractor Supply Co. 2,221
6,700 Ulta Salon Cosmetics & Fragrance, Inc.(s) 2,234
7,660 Urban Outfitters, Inc.(s) 172
57,170 Walgreens Boots Alliance, Inc. 2,821
4,450 Williams-Sonoma, Inc. 260
----------
40,724
----------
TEXTILES (0.1%)
17,110 Mohawk Industries, Inc.(s) 2,319
----------
Total Consumer, Cyclical 77,586
----------
CONSUMER, NON-CYCLICAL (4.8%)
----------------------------
AGRICULTURE (0.1%)
48,850 Altria Group, Inc. 2,397
----------
BEVERAGES (0.4%)
96,760 Coca-Cola Co. 4,754
32,620 Molson Coors Brewing Co. "B" 1,793
40,260 PepsiCo, Inc. 5,153
----------
11,700
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 23
================================================================================
-----------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------------------
BIOTECHNOLOGY (0.7%)
31,540 Amgen, Inc. $ 5,258
15,200 Biogen, Inc.(s) 3,333
970 Bio-Rad Laboratories, Inc. "A"(s) 278
3,970 Cambrex Corp.(s) 158
33,100 Celgene Corp.(s) 3,105
4,220 Emergent BioSolutions, Inc.(s) 169
23,570 Exelixis, Inc.(s) 462
53,110 Gilead Sciences, Inc. 3,306
14,260 Halozyme Therapeutics, Inc.(s) 210
6,130 Myriad Genetics, Inc.(s) 152
310 REGENXBIO, Inc.(s) 13
23,380 United Therapeutics Corp.(s) 1,963
----------
18,407
----------
COMMERCIAL SERVICES (0.7%)
5,750 AMN Healthcare Services, Inc.(s) 279
11,250 Automatic Data Processing, Inc. 1,801
6,490 Avis Budget Group, Inc.(s) 184
3,270 Cardtronics plc "A"(s) 99
20,120 Ecolab, Inc. 3,704
3,240 Euronet Worldwide, Inc.(s) 502
3,040 FTI Consulting, Inc.(s) 255
23,010 Hackett Group, Inc. 370
18,960 Moody's Corp. 3,467
26,530 PayPal Holdings, Inc.(s) 2,912
12,400 Quad/Graphics, Inc. 104
16,440 S&P Global, Inc. 3,516
16,400 United Rentals, Inc.(s) 1,806
----------
18,999
----------
COSMETICS/PERSONAL CARE (0.3%)
14,650 Estee Lauder Companies, Inc. "A" 2,359
50,160 Procter & Gamble Co. 5,162
----------
7,521
----------
FOOD (0.6%)
5,110 Cal-Maine Foods, Inc. 189
14,430 Flowers Foods, Inc. 323
21,140 Hershey Co. 2,790
20,580 Hostess Brands, Inc.(s) 275
5,010 Ingles Markets, Inc. "A" 149
21,340 Ingredion, Inc. 1,625
20,400 JM Smucker Co. 2,480
================================================================================
24 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------------------
125,200 Kroger Co. $ 2,856
2,530 Sanderson Farms, Inc. 346
35,770 Sysco Corp. 2,462
36,690 Tyson Foods, Inc. "A" 2,784
----------
16,279
----------
HEALTHCARE PRODUCTS (0.4%)
7,810 Bruker Corp. 326
25,960 Danaher Corp. 3,427
7,390 Edwards Lifesciences Corp.(s) 1,261
4,020 Hill-Rom Holdings, Inc. 387
9,220 IDEXX Laboratories, Inc.(s) 2,303
3,150 Masimo Corp.(s) 412
24,160 Meridian Bioscience, Inc. 273
13,200 Patterson Companies, Inc. 277
350 STERIS plc(s) 47
11,940 Thermo Fisher Scientific, Inc. 3,188
----------
11,901
----------
HEALTHCARE-SERVICES (0.5%)
3,640 Amedisys, Inc.(s) 409
1,150 Chemed Corp. 377
53,760 DaVita, Inc.(s) 2,334
5,000 Encompass Health Corp. 295
12,300 HCA Healthcare, Inc. 1,488
7,360 MEDNAX, Inc.(s) 181
1,040 Molina Healthcare, Inc.(s) 148
24,210 Quest Diagnostics, Inc. 2,322
16,410 Select Medical Holdings Corp.(s) 231
13,190 UnitedHealth Group, Inc. 3,189
24,360 Universal Health Services, Inc. "B" 2,912
1,610 WellCare Health Plans, Inc.(s) 445
----------
14,331
----------
HOUSEHOLD PRODUCTS/WARES (0.0%)
23,850 ACCO Brands Corp. 175
1,760 Helen of Troy Ltd.(s) 235
2,670 Spectrum Brands Holdings, Inc. 141
----------
551
----------
PHARMACEUTICALS (1.1%)
36,740 AmerisourceBergen Corp. 2,860
31,060 Bristol-Myers Squibb Co. 1,409
52,830 Cardinal Health, Inc. 2,222
18,950 Corcept Therapeutics, Inc.(s) 185
================================================================================
PORTFOLIO OF INVESTMENTS | 25
================================================================================
-----------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------------------
39,620 CVS Health Corp. $ 2,075
2,850 Eagle Pharmaceuticals, Inc.(s) 145
16,420 Eli Lilly & Co. 1,904
2,600 Enanta Pharmaceuticals, Inc.(s) 235
45,130 Johnson & Johnson 5,919
19,950 McKesson Corp. 2,437
34,480 Merck & Co., Inc. 2,731
68,150 Pfizer, Inc. 2,830
4,630 Phibro Animal Health Corp. "A" 137
2,940 PRA Health Sciences, Inc.(s) 255
6,270 Prestige Consumer Healthcare, Inc.(s) 182
5,820 Supernus Pharmaceuticals, Inc.(s) 175
3,230 USANA Health Sciences, Inc.(s) 229
39,240 Zoetis, Inc. 3,965
----------
29,895
----------
Total Consumer, Non-cyclical 131,981
----------
ENERGY (1.0%)
-------------
COAL (0.0%)
7,430 Warrior Met Coal, Inc. 192
----------
ENERGY-ALTERNATE SOURCES (0.0%)
4,140 Renewable Energy Group, Inc.(s) 65
6,170 SolarEdge Technologies, Inc.(s) 330
----------
395
----------
OIL & GAS (0.8%)
75,060 ConocoPhillips 4,426
67,410 Exxon Mobil Corp. 4,771
57,580 HollyFrontier Corp. 2,187
36,930 Laredo Petroleum, Inc.(s) 97
47,650 Marathon Petroleum Corp. 2,191
10,150 Matador Resources Co.(s) 167
73,220 Occidental Petroleum Corp. 3,644
15,440 Par Pacific Holdings, Inc.(s) 303
7,320 PBF Energy, Inc. "A" 193
39,960 Phillips 66 3,229
28,090 Valero Energy Corp. 1,977
----------
23,185
----------
OIL & GAS SERVICES (0.0%)
3,910 Core Laboratories N.V. 186
----------
PIPELINES (0.2%)
24,830 Antero Midstream Corp. 304
37,110 ONEOK, Inc. 2,361
================================================================================
26 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------------------
72,030 Plains GP Holdings, LP "A"(s) $ 1,622
22,400 Tallgrass Energy, LP 533
----------
4,820
----------
Total Energy 28,778
----------
FINANCIAL (2.8%)
----------------
BANKS (1.3%)
183,890 Bank of America Corp. 4,891
6,750 Bank of Hawaii Corp. 511
14,300 BankUnited, Inc. 464
19,240 Cadence BanCorp 356
45,280 CIT Group, Inc. 2,153
128,280 Citigroup, Inc. 7,972
5,500 Cullen/Frost Bankers, Inc. 502
12,770 Great Western Bancorp, Inc. 397
89,540 J.P. Morgan Chase & Co. 9,488
96,700 KeyCorp. 1,544
16,450 PNC Financial Services Group, Inc. 2,093
96,540 Regions Financial Corp. 1,335
4,850 Synovus Financial Corp. 155
56,090 U.S. Bancorp. 2,816
6,180 Webster Financial Corp. 274
10,450 Western Alliance Bancorp(s) 430
----------
35,381
----------
DIVERSIFIED FINANCIAL SERVICES (1.0%)
19,450 Alliance Data Systems Corp. 2,674
79,870 Ally Financial, Inc. 2,306
40,660 American Express Co. 4,664
25,670 Capital One Financial Corp. 2,204
22,910 Discover Financial Services 1,708
5,370 LPL Financial Holdings, Inc. 431
23,040 Mastercard, Inc. "A" 5,794
7,290 Nelnet, Inc. "A" 432
67,114 Synchrony Financial 2,257
18,710 Virtu Financial, Inc. "A" 431
27,690 Visa, Inc. "A" 4,467
20,770 Waddell & Reed Financial, Inc. "A" 336
3,530 World Acceptance Corp.(s) 467
----------
28,171
----------
INSURANCE (0.5%)
10,790 American Equity Investment Life Holding Co. 305
16,880 Aon plc 3,040
7,290 Berkshire Hathaway, Inc. "B"(s) 1,439
================================================================================
PORTFOLIO OF INVESTMENTS | 27
================================================================================
-----------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------------------
8,430 Employers Holdings, Inc. $ 350
13,660 Essent Group Ltd.(s) 641
41,150 MetLife, Inc. 1,902
17,120 MGIC Investment Corp.(s) 232
3,650 Primerica, Inc. 419
34,740 Principal Financial Group, Inc. 1,792
40,610 Progressive Corp. 3,220
18,050 Prudential Financial, Inc. 1,667
12,660 Radian Group, Inc. 284
8,250 Universal Insurance Holdings, Inc. 240
----------
15,531
----------
Total Financial 79,083
----------
INDUSTRIAL (1.8%)
-----------------
AEROSPACE/DEFENSE (0.4%)
7,720 Boeing Co. 2,637
11,080 Lockheed Martin Corp. 3,751
36,500 Spirit AeroSystems Holdings, Inc. "A" 2,958
----------
9,346
----------
BUILDING MATERIALS (0.1%)
7,160 Apogee Enterprises, Inc. 259
22,950 Cornerstone Building Brands, Inc.(s) 101
5,300 Masonite International Corp.(s) 252
48,020 Owens Corning 2,327
5,580 Patrick Industries, Inc.(s) 228
----------
3,167
----------
ELECTRICAL COMPONENTS & EQUIPMENT (0.0%)
6,930 Generac Holdings, Inc.(s) 382
----------
ELECTRONICS (0.5%)
20,660 Allegion plc 2,005
13,230 Atkore International Group, Inc.(s) 309
21,700 Garmin Ltd. 1,660
21,070 Gentex Corp. 450
25,700 Honeywell International, Inc. 4,223
11,020 Jabil, Inc. 271
18,930 KEMET Corp. 301
3,340 Mettler-Toledo International, Inc.(s) 2,415
7,380 PerkinElmer, Inc. 637
8,630 SMART Global Holdings, Inc.(s) 147
3,300 Tech Data Corp.(s) 299
9,370 Waters Corp.(s) 1,881
----------
14,598
----------
================================================================================
28 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------------------
HAND/MACHINE TOOLS (0.0%)
4,740 Regal Beloit Corp. $ 345
----------
MACHINERY-CONSTRUCTION & MINING (0.1%)
20,390 Caterpillar, Inc. 2,443
----------
METAL FABRICATION/HARDWARE (0.0%)
8,040 Timken Co. 354
----------
MISCELLANEOUS MANUFACTURERS (0.3%)
19,290 3M Co. 3,082
4,450 Crane Co. 340
7,180 Hillenbrand, Inc. 267
19,950 Illinois Tool Works, Inc. 2,786
2,960 Sturm Ruger & Co., Inc. 147
8,490 Trinseo S.A. 313
----------
6,935
----------
PACKAGING & CONTAINERS (0.0%)
10,760 Berry Global Group, Inc.(s) 506
15,860 Silgan Holdings, Inc. 460
----------
966
----------
TRANSPORTATION (0.4%)
9,350 Air Transport Services Group, Inc.(s) 205
30,540 CSX Corp. 2,274
13,340 Norfolk Southern Corp. 2,603
15,140 Union Pacific Corp. 2,525
32,700 United Parcel Service, Inc. "B" 3,039
5,690 Werner Enterprises, Inc. 159
----------
10,805
----------
TRUCKING & LEASING (0.0%)
6,100 Greenbrier Companies, Inc. 166
----------
Total Industrial 49,507
----------
TECHNOLOGY (3.4%)
-----------------
AGRICULTURE (0.0%)
7,056 Covetrus, Inc.(s) 174
----------
COMPUTERS (1.0%)
16,460 Accenture plc "A" 2,931
43,900 Apple, Inc. 7,685
2,560 CACI International, Inc. "A"(s) 521
222,300 Hewlett Packard Enterprise Co. 3,050
5,500 Insight Enterprises, Inc.(s) 283
================================================================================
PORTFOLIO OF INVESTMENTS | 29
================================================================================
-----------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------------------
25,410 International Business Machines Corp. $ 3,227
7,700 MAXIMUS, Inc. 548
10,710 NCR Corp.(s) 328
26,390 NetApp, Inc. 1,562
10,810 Perspecta, Inc. 235
5,560 Science Applications International Corp. 427
88,980 Seagate Technology plc 3,724
61,020 Western Digital Corp. 2,271
----------
26,792
----------
OFFICE/BUSINESS EQUIPMENT (0.1%)
35,540 Pitney Bowes, Inc. 130
81,080 Xerox Corp. 2,482
----------
2,612
----------
SEMICONDUCTORS (0.8%)
39,980 Applied Materials, Inc. 1,547
6,990 Cirrus Logic, Inc.(s) 261
85,600 Intel Corp. 3,770
13,340 Lam Research Corp. 2,329
105,460 Micron Technology, Inc.(s) 3,439
2,390 MKS Instruments, Inc. 171
14,360 NVIDIA Corp. 1,945
20,050 Skyworks Solutions, Inc. 1,336
12,770 Teradyne, Inc. 538
41,430 Texas Instruments, Inc. 4,322
29,040 Ultra Clean Holdings, Inc.(s) 370
26,310 Xilinx, Inc. 2,692
----------
22,720
----------
SOFTWARE (1.5%)
7,900 Adobe, Inc.(s) 2,140
11,290 CSG Systems International, Inc. 506
24,790 Electronic Arts, Inc.(s) 2,307
18,340 Intuit, Inc. 4,491
6,020 j2 Global, Inc. 507
9,130 Manhattan Associates, Inc.(s) 598
144,010 Microsoft Corp. 17,811
11,720 MSCI, Inc. 2,579
44,220 Paychex, Inc. 3,794
21,810 Veeva Systems, Inc. "A"(s) 3,365
23,970 VMware, Inc. "A" 4,242
----------
42,340
----------
Total Technology 94,638
----------
================================================================================
30 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------------------
UTILITIES (0.6%)
----------------
ELECTRIC (0.6%)
221,030 AES Corp. $ 3,492
12,930 Dominion Energy, Inc. 972
72,000 Exelon Corp. 3,462
4,680 IDACORP, Inc. 469
12,690 NextEra Energy, Inc. 2,515
65,550 PPL Corp. 1,951
47,350 Southern Co. 2,533
----------
15,394
----------
GAS (0.0%)
9,640 New Jersey Resources Corp. 457
5,490 Southwest Gas Holdings, Inc. 468
----------
925
----------
Total Utilities 16,319
----------
Total Common Stocks (cost: $559,795) 552,412
----------
EXCHANGE-TRADED FUNDS (3.9%)
50,000 Invesco S&P MidCap Low Volatility ETF 2,481
238,000 iShares Core S&P 500 ETF 65,997
14,000 Vanguard Mid-Cap ETF 2,193
158,000 Vanguard Small-Cap Value ETF 19,415
124,180 Vanguard Total Stock Market ETF 17,471
----------
Total Exchange-Traded Funds (cost: $107,826) 107,557
----------
PREFERRED STOCKS (0.6%)
COMMUNICATIONS (0.2%)
---------------------
TELECOMMUNICATIONS (0.2%)
220,000 Qwest Corp., 6.50% 5,063
----------
CONSUMER, NON-CYCLICAL (0.2%)
-----------------------------
AGRICULTURE (0.0%)
30,000 CHS, Inc., cumulative redeemable "B", 7.88%(u) 824
----------
FOOD (0.2%)
45,000 Dairy Farmers of America, Inc., cumulative redeemable, 7.88%(a),(u) 4,445
----------
Total Consumer, Non-cyclical 5,269
----------
ENERGY (0.2%)
-------------
OIL & GAS (0.2%)
11,400 Chesapeake Energy Corp., 5.75%(a),(u) 5,492
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 31
================================================================================
-----------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------------------
FINANCIAL (0.0%)
----------------
BANKS (0.0%)
500 M&T Bank Corp., cumulative redeemable, 6.38%(u) $ 508
----------
INSURANCE (0.0%)
3,500 American Overseas Group Ltd., non-cumulative, 6.06%,
(3 mo. LIBOR + 3.56%)(b),(g),(h),(i) 875
----------
Total Financial 1,383
----------
Total Preferred Stocks (cost: $22,261) 17,207
----------
Total U.S. Equity Securities (cost: $689,882) 677,176
----------
GLOBAL REAL ESTATE EQUITY SECURITIES (3.2%)
COMMON STOCKS (0.9%)
FINANCIAL (0.9%)
----------------
REAL ESTATE (0.3%)
87,510 CBRE Group, Inc. "A"(s) 3,999
12,720 HFF, Inc. "A" 549
15,870 Jones Lang LaSalle, Inc. 1,975
31,810 Realogy Holdings Corp. 226
6,560 RMR Group, Inc. "A" 316
----------
7,065
----------
REITS (0.6%)
17,430 American Tower Corp. 3,639
25,180 Chimera Investment Corp. 459
6,290 EPR Properties 491
16,770 Gaming and Leisure Properties, Inc. 662
23,160 GEO Group, Inc. 508
132,450 Kimco Realty Corp. 2,305
24,786 Ladder Capital Corp. 394
8,370 Lamar Advertising Co. "A" 655
12,480 LTC Properties, Inc. 559
39,730 Medical Properties Trust, Inc. 706
20,200 Omega Healthcare Investors, Inc. 720
13,344 PotlatchDeltic Corp. 449
19,970 Simon Property Group, Inc. 3,237
23,550 Tanger Factory Outlet Centers, Inc. 399
20,230 Washington Prime Group, Inc.(o) 83
22,250 Welltower, Inc. 1,807
----------
17,073
----------
Total Financial 24,138
----------
Total Common Stocks (cost: $25,831) 24,138
----------
================================================================================
32 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------------------
EXCHANGE-TRADED FUNDS (2.3%)
743,720 Vanguard Real Estate ETF (cost: $61,181) $ 64,622
----------
Total Global Real Estate Equity Securities (cost: $87,012) 88,760
----------
PRECIOUS METALS AND COMMODITY-RELATED SECURITIES (1.3%)
COMMON STOCKS (0.1%)
BASIC MATERIALS (0.1%)
----------------------
IRON/STEEL (0.1%)
13,650 Cleveland-Cliffs, Inc. 119
24,480 Nucor Corp. 1,175
4,760 Reliance Steel & Aluminum Co. 396
45,140 Steel Dynamics, Inc. 1,135
----------
2,825
----------
MINING (0.0%)
216,393 Hycroft Mining Corp.(g),(h),(i),(s) 11
----------
Total Basic Materials 2,836
----------
Total Common Stocks (cost: $12,328) 2,836
----------
EXCHANGE-TRADED FUNDS (1.2%)
10,000 First Trust Global Tactical Commodity Strategy Fund 180
256,100 Invesco DB Commodity Index Tracking Fund 3,875
220,000 United States Commodity Index Fund(s) 7,997
893,000 VanEck Vectors Gold Miners ETF 19,280
101,000 VanEck Vectors Junior Gold Miners ETF 2,983
----------
Total Exchange-Traded Funds (cost: $37,605) 34,315
----------
Total Precious Metals and Commodity-Related Securities (cost: $49,933) 37,151
----------
-----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
-----------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (2.4%)
COMMERCIAL PAPER (0.9%)
$ 2,545 Amphenol Corp.(a) 2.58% 6/05/2019 2,544
4,880 CSLB Holdings, Inc.(a) 2.62 6/05/2019 4,879
2,277 CSLB Holdings, Inc.(a) 2.60 6/14/2019 2,275
4,400 Energy Transfer Partners(a) 3.00 6/03/2019 4,400
4,144 Leggett & Platt(a) 2.62 6/04/2019 4,144
5,571 Tyson Foods, Inc.(a) 2.53 6/06/2019 5,570
----------
Total Commercial Paper (cost: $23,809) 23,812
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 33
================================================================================
-----------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------------------
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (1.5%)
42,730,810 State Street Institutional Treasury Money Market Fund
Premier Class, 2.30%(d) (cost: $42,731) $ 42,731
----------
Total Money Market Instruments (cost: $66,540) 66,543
----------
SHORT-TERM INVESTMENTS PURCHASED WITH CASH COLLATERAL FROM SECURITIES LOANED (2.6%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (2.6%)
47,006,694 Goldman Sachs Financial Square Government Fund Institutional Class, 2.30%(d) 47,007
690,136 HSBC U.S. Government Money Market Fund Class I, 2.33%(d) 690
25,000,000 State Street Institutional U.S. Government Money Market Fund, 2.32%(d) 25,000
----------
Total Short-Term Investments Purchased with Cash Collateral from
Securities Loaned (cost: $72,697) 72,697
----------
TOTAL INVESTMENTS (COST: $2,811,012) $2,845,629
==========
-----------------------------------------------------------------------------------------------------------------------
UNREALIZED
NOTIONAL CONTRACT APPRECIATION/
NUMBER OF EXPIRATION AMOUNT VALUE (DEPRECIATION)
CONTRACTS DESCRIPTION DATE (000) (000) (000)
-----------------------------------------------------------------------------------------------------------------------
FUTURES (1.6%)
LONG FUTURES
EQUITY CONTRACTS
224 E-mini S&P 500 6/21/2019 USD 30,823 $ 30,829 $ 6
-------- -------
TOTAL LONG FUTURES $ 30,829 $ 6
-------- -------
SHORT FUTURES
INTEREST RATE CONTRACTS
490 U.S. Treasury Bond 9/19/2019 USD (73,663) $(75,322) $(1,659)
-------- -------
TOTAL SHORT FUTURES $(75,322) $(1,659)
-------- -------
TOTAL FUTURES $(44,493) $(1,653)
======== =======
================================================================================
34 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
-----------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-----------------------------------------------------------------------------------------------------------
Bonds:
Asset-Backed Securities $ - $ 33,453 $ - $ 33,453
Bank Loans - 3,857 - 3,857
Collateralized Mortgage Obligations - 1,400 - 1,400
Commercial Mortgage Securities - 17,442 - 17,442
Convertible Securities - 5,474 34 5,508
Corporate Obligations - 119,655 - 119,655
Eurodollar and Yankee Obligations - 23,450 103 23,553
Fixed-Income Exchange-Traded Funds 308,073 - - 308,073
Municipal Obligations - 456 - 456
U.S. Government Agency Issues - 244,321 - 244,321
U.S. Treasury Securities 426,586 8,202 - 434,788
International Equity Securities:
Common Stocks 6,756 - - 6,756
Exchange-Traded Funds 696,850 - - 696,850
Preferred Stocks - 7,190 - 7,190
U.S. Equity Securities:
Common Stocks 552,412 - - 552,412
Exchange-Traded Funds 107,557 - - 107,557
Preferred Stocks - 16,332 875 17,207
Global Real Estate Equity Securities:
Common Stocks 24,138 - - 24,138
Exchange-Traded Funds 64,622 - - 64,622
Precious Metals and Commodity-Related
Securities:
Common Stocks 2,825 - 11 2,836
Exchange-Traded Funds 34,315 - - 34,315
Money Market Instruments:
Commercial Paper - 23,812 - 23,812
Government & U.S. Treasury
Money Market Funds 42,731 - - 42,731
Short-Term Investments Purchased with
Cash Collateral from Securities Loaned:
Government & U.S. Treasury
Money Market Funds 72,697 - - 72,697
Futures(1) 6 - - 6
-----------------------------------------------------------------------------------------------------------
Total $2,339,568 $505,044 $1,023 $2,845,635
-----------------------------------------------------------------------------------------------------------
LIABILITIES LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-----------------------------------------------------------------------------------------------------------
Futures(1) $ (1,659) $ - $ - $ (1,659)
-----------------------------------------------------------------------------------------------------------
Total $ (1,659) $ - $ - $ (1,659)
-----------------------------------------------------------------------------------------------------------
(1) Futures are valued at the unrealized appreciation/(depreciation) on the
investment.
================================================================================
PORTFOLIO OF INVESTMENTS | 35
================================================================================
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 compliance classification.
At May 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
36 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 2019
--------------------------------------------------------------------------------
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 27.8% of net assets at May 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,
mortgage loans on commercial real property. These securities represent
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 37
================================================================================
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.
U.S. TREASURY INFLATION-INDEXED NOTES - Designed to provide a real rate of
return after being adjusted over time to reflect the impact of inflation.
Their principal value periodically adjusts to the rate of inflation. They
trade at the prevailing real, or after-inflation, interest rates. The U.S.
Treasury guarantees repayment of these securities of at least their face
value in the event of sustained deflation or a drop in prices. Inflation
adjustments to the face value of these securities are included in interest
income.
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.
================================================================================
38 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
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.
STRIPS Separate trading of registered interest and principal of
securities
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) 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) Variable-rate security - interest rate is adjusted periodically. The
interest rate disclosed represents the rate at May 31, 2019.
(c) 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 May 31, 2019. The weighted average life of the loans
are
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 39
================================================================================
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.
(d) Rate represents the money market fund annualized seven-day yield at
May 31, 2019.
(e) Stated interest rates may change slightly over time as underlying
mortgages paydown.
(f) 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.
(g) Security was fair valued at May 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 $1,023,000, which represented less than 0.1% of the Fund's net
assets.
(h) Security deemed illiquid by USAA Asset Management Company, under
liquidity guidelines approved by USAA Mutual Funds Trust's Board of
Trustees.
(i) Security was classified as Level 3.
================================================================================
40 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
(j) 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.
(k) All of the coupon is PIK.
(l) The security, or a portion thereof, is segregated to cover the value of
open futures contracts at May 31, 2019.
(m) 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.
(n) At May 31, 2019, the issuer was in default with respect to interest
and/or principal payments.
(o) The security, or a portion thereof, was out on loan as of May 31, 2019.
(p) 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
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 41
================================================================================
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.
(q) Effective June 3, 2019, UMBS Collateral, new BICS industry, replaces
FNMA Collateral, former BICS industry.
(r) Securities with a value of $9,851,000 are segregated as collateral for
initial margin requirements on open futures contracts.
(s) Non-income-producing security.
(t) Investment in affiliated exchange-traded fund.
(u) Security is perpetual and has no final maturity date but may be subject
to calls at various dates in the future.
See accompanying notes to financial statements.
================================================================================
42 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in unaffiliated securities, at market value (including securities
on loan of $70,758) (cost of $2,807,549) $2,842,741
Investments in affiliated underlying funds, at market value (cost of $3,463) 2,888
Cash 22,122
Cash denominated in foreign currencies (identified cost of $134) 123
Receivables:
Capital shares sold 1,859
USAA Asset Management Company (Note 6) 392
Dividends and interest 5,977
Securities sold 14,828
Other 30
----------
Total assets 2,890,960
----------
LIABILITIES
Payables:
Upon return of securities loaned 72,697
Securities purchased 34,944
Capital shares redeemed 1,084
Payable to broker 1,746
Variation margin on futures contracts 1,651
Accrued management fees 1,413
Accrued transfer agent's fees 145
Other accrued expenses and payables 242
----------
Total liabilities 113,922
----------
Net assets applicable to capital shares outstanding $2,777,038
==========
NET ASSETS CONSIST OF:
Paid-in capital $2,721,783
Distributable earnings 55,255
----------
Net assets applicable to capital shares outstanding $2,777,038
==========
Capital shares outstanding, no par value 115,847
==========
Net asset value, redemption price, and offering price per share $ 23.97
==========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 43
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Income distributions from affiliated underlying funds $ 64
Dividends 50,923
Interest 29,410
Securities lending (net) 915
--------
Total income 81,312
--------
EXPENSES
Management fees 16,575
Administration and servicing fees 4,214
Transfer agent's fees 6,501
Custody and accounting fees 427
Postage 310
Shareholder reporting fees 149
Trustees' fees 37
Registration fees 114
Professional fees 119
Other 41
--------
Total expenses 28,487
Expenses reimbursed (963)
--------
Net expenses 27,524
--------
NET INVESTMENT INCOME 53,788
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FOREIGN CURRENCY, AND FUTURES CONTRACTS
Net realized gain (loss) on:
Investments 58,428
Foreign currency transactions 5
Futures transactions (3,190)
Change in net unrealized appreciation/(depreciation) of:
Unaffiliated investments (81,452)
Affiliated investments (Note 8) (421)
Foreign capital gains tax 51
Foreign currency translations (3)
Futures contracts (3,242)
--------
Net realized and unrealized loss (29,824)
--------
Increase in net assets resulting from operations $ 23,964
========
See accompanying notes to financial statements.
================================================================================
44 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
------------------------------------------------------------------------------------------------------------
2019 2018
------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 53,788 $ 40,658
Net realized gain on investments 58,428 137,280
Net realized gain on foreign currency transactions 5 1,093
Net realized gain on long-term capital gain
distributions from other investment companies - 46
Net realized gain (loss) on futures transactions (3,190) 28,848
Change in net unrealized appreciation/(depreciation) of:
Investments (81,873) (45,009)
Foreign capital gains tax 51 (41)
Foreign currency translations (3) (118)
Futures contracts (3,242) (7,268)
-------------------------------------
Increase in net assets resulting from operations 23,964 155,489
-------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS (156,279) (184,409)
-------------------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 223,097 224,649
Reorganization (Note 9) 381,150 -
Reinvested dividends 155,094 182,859
Cost of shares redeemed (343,871) (283,112)
-------------------------------------
Increase in net assets from capital share transactions 415,470 124,396
-------------------------------------
Net increase in net assets 283,155 95,476
NET ASSETS
Beginning of year 2,493,883 2,398,407
-------------------------------------
End of year $2,777,038 $2,493,883
=====================================
CHANGE IN SHARES OUTSTANDING
Shares sold 9,139 8,519
Reorganization shares (Note 9) 17,570 0
Shares issued for dividends reinvested 6,492 7,016
Shares redeemed (14,084) (10,732)
-------------------------------------
Increase in shares outstanding 19,117 4,803
=====================================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 45
================================================================================
NOTES TO FINANCIAL STATEMENTS
May 31, 2019
--------------------------------------------------------------------------------
(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 Cornerstone Moderately Aggressive Fund (the Fund) qualifies as a
registered investment company under Accounting Standards Codification Topic 946.
The information presented in this annual 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 capital
appreciation with a secondary focus on current income.
The Cornerstone Moderately Aggressive Fund acquired the assets and liabilities
of the First Start Growth Fund, in a reorganization that was effective at the
close of business on June 22, 2018. The shareholders of the First Start Growth
Fund approved a Plan of Reorganization and Termination on May 30, 2018. See Note
9 for additional information.
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 Holdings, a global investment management firm
headquartered in Cleveland, Ohio (the Transaction), on July 1, 2019.
A special shareholder meeting was held on April 18, 2019, at which shareholders
of the Fund approved a new investment advisory agreement between the Trust, on
behalf of the Fund, and Victory Capital, an independent investment management
company. In addition, shareholders of the Fund also elected the following two
new directors to the Board of the Trust to serve upon the closing
================================================================================
46 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
of the Transaction: (1) David C. Brown, to serve as an Interested Trustee; and
(2) John C. Walters, to serve as an Independent Trustee. PLEASE REFER TO THE
SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR
ADDITIONAL IMPORTANT INFORMATION.
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 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 47
================================================================================
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.
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.
================================================================================
48 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
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.
9. 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.
10. 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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 49
================================================================================
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. 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, and forward
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 May 31, 2019, did not
include master netting provisions.
================================================================================
50 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
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 unfavorable direction, in which
case, the Fund may not achieve the anticipated benefits of the futures
contracts.
FAIR VALUES OF DERIVATIVE INSTRUMENTS AS OF MAY 31, 2019*
(IN THOUSANDS)
LIABILITY DERIVATIVES
--------------------------------------------------------------------------------------------------
STATEMENT OF
DERIVATIVES NOT ASSETS AND FOREIGN
ACCOUNTED FOR AS LIABILITIES INTEREST RATE EQUITY EXCHANGE
HEDGING INSTRUMENTS LOCATION CONTRACTS CONTRACTS CONTRACTS TOTAL
--------------------------------------------------------------------------------------------------
USAA Cornerstone Distributable
Moderately earnings
Aggressive Fund $(1,659)** $6** $- $(1,653)
--------------------------------------------------------------------------------------------------
*For open derivative instruments as of May 31, 2019, see the Portfolio of
Investments, which also is indicative of activity for the year ended May 31,
2019.
**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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 51
================================================================================
THE EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF OPERATIONS FOR
THE YEAR ENDED MAY 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 Cornerstone Net realized
Moderately gain (loss)
Aggressive Fund on Futures
transactions $(3,714) $524 $- $(3,190)
---------------------------------------------------------------------------------------------
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 Cornerstone Change in net
Moderately Aggressive unrealized
Fund appreciation/
(depreciation)
of Futures
contracts $(1,801) $(1,441) $- $(3,242)
---------------------------------------------------------------------------------------------
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 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 year ended May 31, 2019, the Fund did not incur any income tax,
interest, or penalties, and has recorded no liability for net unrecognized
================================================================================
52 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
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
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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 53
================================================================================
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.
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.
================================================================================
54 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
(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 year ended May 31, 2019, the Fund paid CAPCO facility fees of $22,000,
which represents 3.4% of the total fees paid to CAPCO by the funds of the
Trusts. The Fund had no borrowings under this agreement during the year ended
May 31, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL
STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
(3) DISTRIBUTIONS
The character of any distributions made during the year from net investment
income or net realized gains is determined in accordance with federal tax
regulations and may differ from those determined in accordance with U.S.
generally accepted accounting principles. Also, due to the timing of
================================================================================
NOTES TO FINANCIAL STATEMENTS | 55
================================================================================
distributions, the fiscal year in which amounts are distributed may differ from
the year that the income or realized gains were recorded by the Fund.
During the current fiscal year, permanent differences between book-basis and
tax-basis accounting for foreign currency, partnership basis, non-REIT return of
capital dividend, REIT return of capital dividend, REIT capital gain dividend,
hybrid adjustment, distribution re-designations, merger, passive foreign
investment company, additional adjustments resulted in reclassifications to the
Statement of Assets and Liabilities to decrease distributable earnings by
$478,000, and increase paid in capital by $478,000. These reclassifications had
no effect on net assets.
The tax character of distributions paid during the years ended May 31, 2019, and
2018, was as follows:
2019 2018
---------------------------------
Ordinary income* $ 69,554,000 $ 66,495,000
Long-term realized capital gains 86,725,000 117,914,000
------------ ------------
Total distributions paid $156,279,000 $184,409,000
============ ============
As of May 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $11,345,000
Undistributed long-term capital gains 15,204,000
Unrealized appreciation of investments 31,393,000
*Includes short-term realized capital gains, if any, which are taxable as
ordinary income.
The difference between book-basis and tax-basis unrealized appreciation of
investments is attributable to the tax deferral of losses on wash sales, REIT
return of capital dividend, non-REIT return of capital dividend, futures
contracts marked-to-market, hybrid interest accrual adjustment and partnership
basis adjustments.
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 May 31, 2019, the Fund had no capital loss carryforwards, for federal income
tax purposes.
================================================================================
56 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
TAX BASIS OF INVESTMENTS - At May 31, 2019, the aggregate cost of investments
for federal income tax purposes and net unrealized appreciation/(depreciation)
on investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
FUND TAX COST APPRECIATION DEPRECIATION (DEPRECIATION)
---------------------------------------------------------------------------------------
USAA Cornerstone
Moderately
Aggressive Fund $2,814,212,000 $128,062,000 $(96,645,000) $31,417,000
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended May 31, 2019, were $2,606,110,000 and
$2,661,869,000, 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 year ended May 31, 2019 were as
follows:
PURCHASES SALES NET REALIZED GAIN (LOSS)
--------------------------------------------------------------------------------
$1,222,000 $- $-
(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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 57
================================================================================
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 May 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
--------------------------------------------------------------------------------
$70,758,000 $- $72,697,000
(6) 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 year ended May 31, 2019, the Fund had no subadviser(s).
The Fund's investment management fee is accrued daily and paid monthly at an
annualized rate of 0.59% of the Fund's average daily net assets. For the year
ended May 31, 2019, the Fund incurred management fees, paid or payable to the
Manager, of $16,575,000.
In addition, the Fund invests in affiliated USAA exchange-traded fund(s) (ETFs).
The Fund's management fee is reimbursed by the Manager to the extent of the
indirect management fee incurred through the Fund's proportional investment in
the affiliated ETF(s). For the year ended May 31, 2019, the Fund's management
fee was reimbursed by the Manager in an amount of $7,000, of which $1,000 was
receivable from the Manager. PLEASE
================================================================================
58 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL
REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
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 the Fund's
average daily net assets for the fiscal year. For the year ended May 31, 2019,
the Fund incurred administration and servicing fees, paid or payable to the
Manager, of $4,214,000.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and legal
services for the benefit of the Fund. The Board has approved the reimbursement
of a portion of these expenses incurred by the Manager. For the year ended May
31, 2019, the Fund reimbursed the Manager $17,000 for these compliance and legal
services. These expenses are included in the professional fees on the Fund's
Statement of Operations. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
EXPENSE LIMITATION - The Manager agreed, through September 30, 2019, to limit
the total annual operating expenses of the Fund Shares to 0.98% of its average
daily net assets, excluding extraordinary expenses and before reductions of any
expenses paid indirectly, and to reimburse the Fund Shares for all expenses in
excess of that amount. This expense limitation arrangement may not be changed or
terminated through September 30, 2019, without approval of the Board, and may be
changed or terminated by the Manager at any time after that date. For the year
ended May 31, 2019, the Fund incurred reimbursable expenses of $963,000, of
which $392,000 was receivable from the Manager, which includes affiliated ETF(s)
management fee reimbursement expenses and receivable.
TRANSFER AGENT'S FEES - SAS, an affiliate of the Manager, provides transfer
agent services to the Fund based on an annual charge of $23 per shareholder
account plus out-of-pocket expenses. 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 year ended May 31, 2019, the Fund incurred
transfer agent's fees, paid or payable to SAS, of $6,501,000. PLEASE REFER TO
THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR
ADDITIONAL IMPORTANT INFORMATION.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 59
================================================================================
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. PLEASE
REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL
REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
(7) 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. PLEASE REFER TO THE SUBSEQUENT EVENT
NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
(8) TRANSACTIONS WITH AFFILIATED FUNDS
A. SHARE OWNERSHIP - The Fund does not invest in the affiliated underlying USAA
Funds for the purpose of exercising management or control; however,
investments by the Fund may represent a significant portion of the
affiliated underlying USAA Funds' net assets. The affiliated underlying
funds' annual or semiannual reports may be viewed at usaa.com. At May 31,
2019, the Fund owned the following percentages of the total outstanding
shares of each of the underlying USAA Funds:
AFFILIATED USAA FUND OWNERSHIP %
--------------------------------------------------------------------------------
MSCI Emerging Markets Value Momentum Blend Index ETF 1.7
B. TRANSACTIONS WITH AFFILIATED FUNDS - The following table provides details
related to the Fund's investment in the underlying USAA Funds for the year
ended May 31, 2019:
CHANGE IN
NET
($ IN 000s) REALIZED CAPITAL UNREALIZED
AFFILIATED PURCHASE SALES DIVIDEND GAIN GAIN APPRECIATION/ MARKET VALUE
USAA FUND COST PROCEEDS INCOME (LOSS) DISTRIBUTIONS DEPRECIATION 05/31/2018 05/31/2019
--------------------------------------------------------------------------------------------------------------------------
MSCI
Emerging
Markets Value
Momentum
Blend Index
ETF $511 $- $64 $- $- $(421) $2,798 $2,888
================================================================================
60 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
(9) ACQUISITION OF USAA FIRST START GROWTH FUND
On June 22, 2018, the USAA First Start Growth Fund was acquired by the Fund
pursuant to a Plan of Reorganization and Termination, which was approved by
shareholders of the First Start Growth Fund on May 30, 2018. The
reorganization was accomplished by a tax-free exchange of 17,570,000 shares
of the Fund (valued at $440,752,000) for 32,676,000 shares of the USAA First
Start Growth Fund (100% of the voting equity interests) outstanding on June
22, 2018. The reason for the transaction was to combine two funds with
comparable investment objectives to create one larger fund with the
potential for lower total operating expenses borne by shareholders. The
tax-free exchange of shares by the Fund for the assets and liabilities of
the USAA First Start Growth Fund on the date of the reorganization was as
follows:
PRIOR TO AFTER
REORGANIZATION REORGANIZATION
SHARES ISSUED BY USAA TOTAL NET ASSETS TOTAL NET ASSETS TOTAL NET ASSETS
CORNERSTONE OF THE OF THE CORNERSTONE OF THE CORNERSTONE
MODERATELY USAA FIRST START MODERATELY MODERATELY
AGGRESSIVE FUND GROWTH FUND MERGER RATIO AGGRESSIVE FUND AGGRESSIVE FUND
------------------------------------------------------------------------------------------------------------
17,570,000 $440,752,000(b) .538 $2,490,669,000(a) $2,931,421,000
(a) Includes undistributed net investment income of $6,090,000 and unrealized
appreciation on investments of $107,487,000 with a fair value of $2,486,634,000
and identified cost of $2,379,147,000.
(b) Includes $59,602,000 of unrealized appreciation on investments.
Assets received, and shares issued by the Fund were recorded at fair value;
however, the cost basis of the investments received by the Fund was carried
forward to align ongoing reporting of the portfolio's realized and unrealized
gains and losses with amounts distributable for tax purposes.
The pro forma results of operations for the year ended May 31, 2019, assuming
the reorganization had been completed on June 1, 2018 (the beginning of the
annual period), are as follows:
Net investment income $ 55,441,000
Net realized gain on investments $ 55,309,000
Change in unrealized appreciation/(depreciation)
on investments and foreign currency translations $(86,226,000)
Net increase in net assets resulting from operations $ 24,524,000
The combined investment portfolios have been managed as a single portfolio since
the merger was completed on June 22, 2018. Thus, it is not practicable
================================================================================
NOTES TO FINANCIAL STATEMENTS | 61
================================================================================
to separate the amounts of revenue and earnings of the First Start Growth Fund
that has been included in the Fund's Statement of Operations since June 22,
2018.
(10) 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.
(11) RECENT ACCOUNTING PRONOUNCEMENTS
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.
================================================================================
62 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
ASU 2017-08, PREMIUM AMORTIZATION OF PURCHASED CALLABLE DEBT SECURITIES
-----------------------------------------------------------------------
In March 2017, the FASB issued 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 significant impact on the
financial statements and reporting disclosures of the Fund.
(12) SUBSEQUENT EVENT NOTE
As previously announced, and as discussed in Note 1 to the Financial Statements,
effective July 1, 2019, AMCO, the prior investment adviser to the Fund, and SAS,
the prior transfer agent to the Fund, were acquired by Victory Holdings. PLEASE
SEE THE SUPPLEMENT DATED JULY 1, 2019 TO THE FUND'S PROSPECTUS FOR ADDITIONAL
IMPORTANT INFORMATION.
Effective July 1, 2019, Victory Capital is the new investment adviser and
administrator to the USAA Mutual Funds; Victory Capital Transfer Agency, Inc.
SAS was renamed Victory Capital Advisers, Inc. is the new distributor to the
USAA Mutual Funds; Citi Fund Services of Ohio, Inc. serves as sub-administrator
and sub-fund accountant for the USAA Mutual Funds; and FIS Investor Services LLC
serve as sub-transfer agent and dividend disbursing agent for the USAA Mutual
Funds. Effective August 5, 2019, Citibank, N.A. is the new custodian for the
USAA Mutual Funds.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2019 permitting the
use of a "manager-of-managers" structure for certain funds. Prior to that date,
the Trust relied on a similar exemptive order granted by the SEC to the Trust
and its affiliated persons. Under a manager of managers structure, the
investment adviser may select (with approval of the Board and without
shareholder approval) one or more subadvisers to manage the day-to-day
investment of a fund's assets.
Effective July 1, 2019, under the investment advisory agreement with Victory
Capital, which took effect on July 1, 2019, no performance adjustments will
================================================================================
NOTES TO FINANCIAL STATEMENTS | 63
================================================================================
be made for periods beginning July 1, 2019, through June 30, 2020, and only
performance beginning as of July 1, 2020, and thereafter will be utilized in
calculating performance adjustments through June 30, 2020.
Effective July 1, 2019, the line of credit (as discussed in the Notes to the
Financial Statements in this annual report) among the Trust, with respect to its
Funds, and CAPCO terminated; the Trust, with respect to its Funds, along with
series of Victory Portfolios, Victory Portfolios II and Victory Variable
Insurance Funds, entered into a 364 day committed credit facility and a 364 day
uncommitted, demand credit facility, with Citibank, N.A. (Citibank). Each such
credit facility may be renewed if so agreed by the parties. Under the agreement
with Citibank, the Funds may borrow up to $600 million, of which $300 million is
committed and $300 million is uncommitted. Of this amount, $40 million of the
line of credit is reserved for use by the Victory Floating Rate Fund (a series
of Victory Portfolios), with that Fund paying the related commitment fees for
that amount. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption requests that might otherwise require the untimely
disposition of securities. Citibank receives an annual commitment fee of 0.15%.
Each Fund pays a pro-rata portion of this commitment fee plus any interest on
amounts borrowed.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2017 (the IFL
Order), permitting the establishment and operation of an Interfund Lending
Facility (the Facility). The Facility allows each Fund to directly lend and
borrow money to or from certain other affiliated Funds relying upon the IFL
Order at rates beneficial to both the borrowing and lending funds. Advances
under the Facility are allowed for temporary or emergency purposes, including
the meeting of redemption requests that are subject to each Fund's borrowing
restrictions. The interfund loan rate is determined, as specified in the IFL
Order, by averaging the current repurchase agreement rate and the current bank
loan rate.
================================================================================
64 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
------------------------------------------------------------------------------
2019 2018 2017 2016 2015
------------------------------------------------------------------------------
Net asset value at
beginning of period $ 25.78 $ 26.09 $ 24.08 $ 26.27 $ 26.02
------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .46 .42 .45 .55 .56
Net realized and
unrealized gain (loss) (.79) 1.28 2.06 (2.06) .33
------------------------------------------------------------------------------
Total from investment
operations (.33) 1.70 2.51 (1.51) .89
------------------------------------------------------------------------------
Less distributions from:
Net investment income (.39) (.44) (.50) (.56) (.64)
Realized capital gains (1.09) (1.57) - (.12) -
------------------------------------------------------------------------------
Total distributions (1.48) (2.01) (.50) (.68) (.64)
------------------------------------------------------------------------------
Net asset value at
end of period $ 23.97 $ 25.78 $ 26.09 $ 24.08 $ 26.27
==============================================================================
Total return (%)* (1.20) 6.52 10.59 (5.73) 3.47
Net assets at end of
period (000) $2,777,038 $2,493,883 $2,398,407 $2,278,762 $2,526,548
Ratios to average
daily net assets:**
Expenses (%)(a) .98(b) .97 1.06 1.13 1.16
Expenses, excluding
reimbursements (%)(a) 1.01 .97 1.06 1.13 1.16
Net investment income (%) 1.91 1.64 1.78 2.18 2.14
Portfolio turnover (%) 95(c) 56 69 87(d) 62
* 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 year ended May 31, 2019, average daily net assets were
$2,809,255,000.
(a) Does not include acquired fund fees, if any.
(b) Effective June 22, 2018, the Manager has voluntarily agreed to limit the
annual expenses of the Fund to 0.98% of the Fund's average daily net assets.
(c) For the year ended May 31, 2019, the portfolio turnover calculation excludes
the value of securities purchased of $370,785,000 and sold of $3,096,000
after the Fund's acquisition of First Start Growth Fund. Reflects increased
trading activity due to usage of quantitative investment strategies.
(d) Reflects increased trading activity due to changes in subadviser(s) and
asset allocation strategies.
================================================================================
FINANCIAL HIGHLIGHTS | 65
================================================================================
EXPENSE EXAMPLE
May 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 December 1, 2018, through May
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 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
================================================================================
66 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
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 DECEMBER 1, 2018 -
DECEMBER 1, 2018 MAY 31, 2019 MAY 31, 2019
------------------------------------------------------------------
Actual $1,000.00 $1,020.60 $4.94
Hypothetical
(5% return before expenses) 1,000.00 1,020.04 4.94
*Expenses are equal to the Fund's annualized expense ratio of 0.98%, which is
net of any reimbursements and expenses paid indirectly, multiplied by the
average account value over the period, multiplied by 182 days/365 days (to
reflect the one-half-year period). The Fund's actual ending account value is
based on its actual total return of 2.06% for the six-month period of December
1, 2018, through May 31, 2019.
================================================================================
EXPENSE EXAMPLE | 67
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the (i) new investment
advisory agreement between the Trust and Victory Capital and (ii) new investment
subadvisory agreements between certain subadvisers and Victory Capital, which
became effective on July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO
THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
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.
================================================================================
68 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
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 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
================================================================================
ADVISORY AGREEMENT(S) | 69
================================================================================
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 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.
================================================================================
70 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
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.
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).
================================================================================
ADVISORY AGREEMENT(S) | 71
================================================================================
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.
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.
(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.
================================================================================
72 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
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 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.
================================================================================
ADVISORY AGREEMENT(S) | 73
================================================================================
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 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,
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74 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
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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.
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.
(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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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 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
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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 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.
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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 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.
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78 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
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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
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.
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ADVISORY AGREEMENT(S) | 79
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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
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
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80 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
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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 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.
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ADVISORY AGREEMENT(S) | 81
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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. 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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82 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND THE MANAGER)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the continuation of the (i)
investment advisory agreement between the Trust and AMCO and (ii) investment
subadvisory agreements between certain subadvisers and AMCO, which were
effective until July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
At an in-person meeting of the Board of Trustees (the Board) held on April 17,
2019, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to the
Fund.(1)
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and the Manager, and were given
the opportunity to ask questions and request additional information from
management. The information provided to the Board included, among other things:
(i) a separate report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance, expenses, and
fees to comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the Manager's
revenues and costs of providing services to the Fund and compensation paid to
affiliates of the Manager;
(1)At an in-person meeting held on January 15, 2019, the Board, including the
Independent Trustees, ap- proved a new investment advisory agreement between
the Trust, on behalf of the Fund, and Victory Capital Management Inc.
("Victory Capital"). Upon the closing of the transaction, on behalf of the
Fund, Victory Capital Holdings, Inc., the parent company of Victory Capital,
the Advisory Agreement between the Trust and the Manager will terminate and
the new investment advisory agreement between the Trust and Victory Capital
will go into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are included in this
annual report.
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ADVISORY AGREEMENT(S) | 83
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and (iii) information about the Manager's operations and personnel. Prior to
voting, the Independent Trustees reviewed the proposed continuance of the
Advisory Agreement with management and with experienced independent legal
counsel retained by the Independent Trustees (Independent Counsel) and received
materials from such Independent Counsel discussing the legal standards for their
consideration of the proposed continuation of the Advisory Agreement with
respect to the Fund. The Independent Trustees also reviewed the proposed
continuation of the Advisory Agreement with respect to the Fund in private
sessions with Independent Counsel at which no representatives of management were
present.
At each regularly scheduled meeting of the Board and its committees, the Board
receives and reviews, among other things, information concerning the Fund's
performance and related services provided by the Manager. At the meeting at
which the renewal of the Advisory Agreement is considered, particular focus is
given to information concerning Fund performance, fees and total expenses as
compared to comparable investment companies, and the Manager's profitability
with respect to the Fund. However, the Board noted that the evaluation process
with respect to the Manager is an ongoing one. In this regard, the Board's and
its committees' consideration of the Advisory Agreement included certain
information previously received at such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving the
Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent, and
quality of the services provided by the Manager under the Advisory Agreement,
the Board reviewed information provided by the Manager relating to its
operations and personnel. The Board also took into account its knowledge of the
Manager's management and the quality of the performance of the Manager's duties
through Board meetings, discussions, and reports
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84 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
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during the preceding year. The Board considered the fees paid to the Manager and
the services provided to the Fund by the Manager under the Advisory Agreement,
as well as other services provided by the Manager and its affiliates under other
agreements, and the personnel who provide these services. In addition to the
investment advisory services provided to the Fund, the Manager and its
affiliates provide administrative services, shareholder services, oversight of
Fund accounting, marketing services, assistance in meeting legal and regulatory
requirements, and other services necessary for the operation of the Fund and the
Trust. The Board also considered the significant risks assumed by the Manager in
connection with the services provided to the Fund, including investment,
operational, enterprise, litigation, regulatory and compliance risks.
The Board considered the Manager's management style and the performance of the
Manager's duties under the Advisory Agreement. The Board considered the level
and depth of experience of the Manager, including the professional experience
and qualifications of its senior and investment personnel, as well as current
staffing levels. The allocation of the Fund's brokerage, including the Manager's
process for monitoring "best execution" and the utilization of "soft dollars,"
also were considered. The Manager's role in coordinating the activities of the
Fund's other service providers also was considered.
The Board also considered the Manager's risk management processes. The Board
considered the Manager's financial condition and that it had the financial
wherewithal to continue to provide the same scope and high quality of services
under the Advisory Agreement. In reviewing the Advisory Agreement, the Board
focused on the experience, resources, and strengths of the Manager and its
affiliates in managing the Fund, as well as the other funds in the Trust.
The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager and its affiliates, including oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust
also focused on the quality of the Manager's compliance and administrative
staff.
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ADVISORY AGREEMENT(S) | 85
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EXPENSES AND PERFORMANCE - In connection with its consideration of the Advisory
Agreement, the Board evaluated the Fund's advisory fees and total expense ratio
as compared to other open-end investment companies deemed to be comparable to
the Fund as determined by the independent third party in its report. The Fund's
expenses were compared to (i) a group of investment companies chosen by the
independent third party to be comparable to the Fund based upon certain factors,
including fund type, comparability of investment objective and classification,
sales load type (in this case, retail investment companies with no sales loads),
asset size, and expense components (the "expense group") and (ii) a larger group
of investment companies that includes all no-load retail open-end investment
companies with the same investment classification/objective as the Fund
regardless of asset size, excluding outliers (the "expense universe"). Among
other data, the Board noted that the Fund's management fee rate - which includes
advisory and administrative services - was below the median of its expense group
and equal to the median of its expense universe. The data indicated that the
Fund's total expenses were below the median of its expense group and equal to
the median of its expense universe. The Board took into account the various
services provided to the Fund by the Manager and its affiliates, including the
high quality of services received by the Fund from the Manager. The Board also
noted the level and method of computing the Fund's management fee. The Board
also took into account management's discussion with respect to the Fund's
expenses. The Board also considered that the Fund's management fee rate was
reduced in October 2016. The Board also considered that the Fund's management
fee was reduced further and that the performance fee component was eliminated in
April 2017.
In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total return with its Lipper index and with that of other mutual funds deemed to
be in its peer group by the independent third party in its report (the
"performance universe"). The Fund's performance universe consisted of the Fund
and all retail and institutional open-end
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86 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
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investment companies with the same classification/objective as the Fund
regardless of asset size or primary channel of distribution. This comparison
indicated that, among other data, the Fund's performance was lower than the
average of its performance universe and its Lipper index for the one-, three-,
five-, and ten-year periods ended December 31, 2018. The Board also noted that
the Fund's percentile performance ranking was in the bottom 50% of its
performance universe for the one-, three-, five-, and ten-year periods ended
December 31, 2018. The Board took into account management's discussion of the
Fund's performance, including the Fund's investment approach and the impact of
market conditions on the Fund's performance.
COMPENSATION AND PROFITABILITY - The Board took into consideration the level and
method of computing the Fund's management fee. The information considered by the
Board included operating profit margin information for the Manager's business as
a whole. The Board also received and considered profitability information
related to the management revenues from the Fund. This information included a
review of the methodology used in the allocation of certain costs to the Fund.
The Trustees reviewed the profitability of the Manager's relationship with the
Fund before tax expenses. The Board was also provided with an Investment
Management Profitability Analysis prepared by an independent information
service. In reviewing the overall profitability of the management fee to the
Manager, the Board also considered the fact that affiliates provide shareholder
servicing and administrative services to the Fund for which they receive
compensation. The Board also considered the possible direct and indirect
benefits to the Manager from its relationship with the Trust, including that the
Manager may derive reputational and other benefits from its association with the
Fund. The Trustees recognized that the Manager should be entitled to earn a
reasonable level of profits in exchange for the level of services it provides to
the Fund and the entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussions of
the current advisory fee structure. The Board also considered the effect of the
Fund's growth and size on its performance
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ADVISORY AGREEMENT(S) | 87
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and fees, noting that if the Fund's assets increase over time, the Fund may
realize other economies of scale if assets increase proportionally more than
some expenses. The Board determined that the current investment management fee
structure was reasonable.
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) the performance of the Fund is
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
management is appropriately monitoring the Fund's performance; (iv) the Fund's
advisory expenses are reasonable in relation to those of similar funds and to
the services to be provided by the Manager; and (v) the Manager and its
affiliates' level of profitability from their relationship with the Fund is
reasonable in light of the nature and high quality of services provided by the
Manager and the type of fund. Based on its conclusions, the Board determined
that continuation of the Advisory Agreement would be in the best interests of
the Fund and its shareholders.
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TRUSTEES' AND OFFICERS' INFORMATION
TRUSTEES AND OFFICERS OF THE TRUST
--------------------------------------------------------------------------------
As of July 1, 2019, the Board of Trustees (the Board) of the Trust consists of
ten Trustees. These Trustees and the Trust's Officers supervise the business
affairs of the USAA family of funds. The Board is responsible for the general
oversight of the funds' business and for assuring that the funds are managed in
the best interests of each fund's respective shareholders. The Board
periodically reviews the funds' investment performance as well as the quality of
other services provided to the funds and their shareholders by each of the
fund's service providers, including the adviser and its affiliates. Pursuant to
a policy adopted by the Board, the term of office for each Trustee shall be
until the Trustee reaches age 75. The Board may change or grant exceptions from
this policy at any time without shareholder approval. A Trustee may resign or be
removed by a vote of two-thirds of the Trustees before the removal or by the
holders of two-thirds of the outstanding shares of the Trust at any time.
Vacancies on the Board can be filled by the action of a majority of the
Trustees, provided that after filling such vacancy at least two-thirds of the
Trustees have been elected by the shareholders.
Set forth below are the Trustees and Officers of the Trust, their respective
offices and principal occupations during the last five years, length of time
served, and information relating to any other directorships held. As of July 1,
2019, each serves on the Board of the USAA family of funds consisting of one
registered investment company, which offers 47 individual funds. Unless
otherwise indicated, the business address for each is P.O. Box 659430, San
Antonio, TX 78265-9430.
If you would like more information about the funds' Trustees, you may call (800)
235-8396 to request a free copy of the funds' Statement of Additional
Information (SAI).
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TRUSTEES' AND OFFICERS' INFORMATION | 89
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In connection with the Transaction, the Board of the Trust nominated, and
shareholders of each USAA mutual fund approved, two new Trustees to serve on the
Trust's Board, effective upon the closing of the Transaction. Effective July 1,
2019, David C. Brown serves as an Interested Trustee and John C. Walters serves
as an Independent Trustee. Information about the current Trustees of the Trust
is provided below.
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
DANIEL S. McNAMARA(1, 2, 4, 6, +)
Trustee and Chair of the Board of Trustees
Born: June 1966
Year of Election or Appointment: 2012
Trustee, President, and Vice Chairman, USAA ETF Trust (06/17-06/19); President
of Financial Advice & Solutions Group (FASG), USAA (02/13-present); Director of
USAA Asset Management Company (AMCO), (08/11-present); Director of USAA
Investment Management Company (IMCO) (09/09-present); President, IMCO
(09/09-04/14); President and Director of USAA Shareholder Account Services (SAS)
(10/09-present); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director of FPS (12/13-present);
President and Director of USAA Investment Corporation (ICORP) (03/10-present);
Director of USAA Financial Advisors, Inc. (FAI) (12/13-present). Mr. McNamara
brings to the Board extensive experience in the financial services industry,
including experience as an officer of the Trust.
DAVID C. BROWN(2, 4, 6, 10)
Trustee
Born: May 1972
Year of Election or Appointment: 2019
Chairman and Chief Executive Officer (2013-present), Co-Chief Executive Officer,
(2011-2013), Victory Capital Management Inc.; Chairman and Chief Executive
Officer (2013-present), Victory Capital Holdings, Inc. Mr. Brown brings to the
Board extensive business, finance and leadership skills gained
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90 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
and developed through years of experience in the financial services industry,
including his tenure overseeing the strategic direction as CEO of Victory
Capital. These skills, combined with Mr. Brown's extensive knowledge of the
financial services industry and demonstrated success in the development and
distribution of investment strategies and products, enable him to provide
valuable insights to the Board and strategic direction for the Funds. Mr. Brown
serves on the Boards of the Victory Funds family of funds consisting of five
registered investment companies offering approximately 104 mutual funds and 24
ETFs. Mr. Brown is considered an Interested Trustee of the Trust due to his
position with Victory Capital and its affiliated companies.
NON-INTERESTED (INDEPENDENT) TRUSTEES
--------------------------------------------------------------------------------
ROBERT L. MASON, Ph.D.(3, 4, 5, 6, 7)
Trustee
Born: July 1946
Year of Election or Appointment: 1997
Trustee, USAA ETF Trust (06/17-06/19); Adjunct Professor in the Department of
Management Science and Statistics in the College of Business at the University
of Texas at San Antonio (2001-present); Institute Analyst, Southwest Research
Institute (03/02-01/16), which focuses on providing innovative technology,
science, and engineering services to clients around the world and is one of the
oldest independent, nonprofit, applied research and development organizations in
the United States. He was employed at Southwest Research Institute for 40 years.
Dr. Mason brings to the Board particular experience with information technology
matters, statistical analysis, and human resources as well as over 22 years'
experience as a Board member of the USAA family of funds. Dr. Mason holds no
other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
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TRUSTEES' AND OFFICERS' INFORMATION | 91
================================================================================
JEFFERSON C. BOYCE(3, 4, 5, 6, 7)
Lead Trustee and Vice Chair
Born: September 1957
Year of Election or Appointment: 2013
Trustee, USAA ETF Trust (06/17-06/19); Senior Managing Director, New York Life
Investments, LLC (1992-2012), an investment manager. Mr. Boyce brings to the
Board experience in financial investment management, and, in particular,
institutional and retail mutual funds, variable annuity products, broker
dealers, and retirement programs, including experience in organizational
development, marketing, product development, and money management as well as
five years' experience as a Board member of the USAA family of funds. Mr. Boyce
is a board member of Westhab, Inc.
DAWN M. HAWLEY(3, 4, 5, 6, 7, 9)
Trustee
Born: February 1954
Year of Election or Appointment: 2014
Trustee, USAA ETF Trust (06/17-06/19); Manager of Finance, Menil Foundation,
Inc. (05/07-06/11), which is a private foundation that oversees the assemblage
of sculptures, prints, drawings, photographs, and rare books. Director of
Financial Planning and Analysis and Chief Financial Officer, AIM Management
Group, Inc. (10/87-01/06). Ms. Hawley brings to the Board experience in
financial investment management and, in particular, institutional and retail
mutual funds, variable annuity products, broker dealers, and retirement
programs, including experience in financial planning, budgeting, accounting
practices, and asset/liability management functions including major acquisitions
and mergers, as well as over five years' experience as a Board member of the
USAA family of funds. Ms. Hawley holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
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92 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
PAUL L. McNAMARA(3, 4, 5, 6, 7)
Trustee
Born: July 1948
Year of Election or Appointment: 2012
Trustee, USAA ETF Trust (06/17-06/19); Director, Cantor Opportunistic
Alternatives Fund, LLC (03/10-02/14), which is a closed-end fund of funds by
Cantor Fitzgerald Investment Advisors, LLC. Mr. McNamara retired from Lord
Abbett & Co. LLC, an independent U.S. investment management firm, as an
Executive Member on 09/30/09, a position he held since 10/02. He had been
employed at Lord Abbett since 1996. Mr. McNamara brings to the Board extensive
experience with the financial services industry and, in particular,
institutional and retail mutual fund markets, including experience with mutual
fund marketing, distribution, and risk management, as well as overall experience
with compliance and corporate governance issues. Mr. McNamara also has
experience serving as a fund director as well as seven years' experience as a
Board member of the USAA family of funds. Paul L. McNamara is of no relation to
Daniel S. McNamara. Mr. McNamara holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
RICHARD Y. NEWTON III(3, 4, 5, 6, 7)
Trustee
Born: January 1956
Year of Election or Appointment: 2017
Trustee, USAA ETF Trust (06/17-06/19); Director, Elta North America
(01/18-present), which is a global leader in the design, manufacture and support
of innovative electronic systems in the ground, maritime, airborne, and security
domains for the nation's warfighters, security personnel, and first responders;
Managing Partner, Pioneer Partnership Development Group (12/15-present);
Executive Director, The Union League Club of New York (06/14-11/15); Executive
Vice President, Air Force Association (08/12-05/14); Lieutenant General, United
States Air Force (01/08-06/12). Lieutenant General Newton (Ret.) served 34 years
of active duty in the United States Air Force. Lt. Gen. Newton retired as the
Assistant Vice Chief of Staff and Director of Air Staff at the Headquarters of
the U.S. Air Force where he was responsible for overseeing the administration
and organization
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 93
================================================================================
of the Air Staff, which develops policies, plans and programs, establishes
requirements, and provides resources to support the Air Force's mission. Lt.
Gen. Newton is a graduate of the United States Air Force Academy, Webster
University, and The National War College. Lt. Gen. Newton brings to the Board
extensive management and military experience, as well as over two years of
experience as a Board member of the USAA family of funds. Lt. Gen. Newton holds
no other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
BARBARA B. OSTDIEK, Ph.D.(3, 4, 5, 6, 7, 8)
Trustee
Born: March 1964
Year of Election or Appointment: 2008
Trustee, USAA ETF Trust (06/17-06/19); Senior Associate Dean of Degree programs
at Jesse H. Jones Graduate School of Business at Rice University
(07/13-present); Associate Professor of Finance at Jesse H. Jones Graduate
School of Business at Rice University (07/01-present); Academic Director, El
Paso Corporation Finance Center at Jesse H. Jones Graduate School of Business at
Rice University (07/02-06/12). Dr. Ostdiek brings to the Board particular
experience with financial investment management, education, and research as well
as over eleven years' experience as a Board member of the USAA family of funds.
Dr. Ostdiek holds no other directorships of any publicly held corporations or
other investment companies outside the USAA family of funds.
MICHAEL F. REIMHERR(3, 4, 5, 6, 7)
Trustee
Born: August 1945
Year of Election or Appointment: 2000
Trustee, USAA ETF Trust (06/17-06/19); President of Reimherr Business Consulting
performing business valuations of medium to large companies; developing business
plans, budgets, and internal financial reporting; and work with mergers and
acquisitions (05/95-12/17). St. Mary's University Investment Committee
overseeing University Endowment (06/14-present). Mr. Reimherr brings to the
Board particular experience with organizational development, budgeting, finance,
capital markets, and mergers and acquisitions, as well as
================================================================================
94 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
over 19 years' experience as a Board member of the USAA family of funds. Mr.
Reimherr holds no other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
JOHN C. WALTERS(3, 4, 5, 6, 7)
Trustee
Born: February 1962
Year of Election or Appointment: 2019
Retired. Mr. Walters brings significant Board experience including active
involvement with the board of a Fortune 500 company, and a proven record of
leading large, complex financial organizations. He has a demonstrated record of
success in distribution, manufacturing, investment brokerage, and investment
management in both the retail and institutional investment businesses. He has
substantial experience in the investment management business with a demonstrated
ability to develop and drive strategy while managing operational, financial, and
investment risk. Mr. Walters is a board member of Guardian Variable Products
Trust (16 series), Lead Independent Director; Amerilife Holdings LLC, Director;
Stadion Money Management; Director; and University of North Carolina (Chapel
Hill), Member Board of Governors.
(1) Indicates the Trustee is an employee of AMCO or affiliated companies and
is considered an "interested person" under the Investment Company Act of
1940.
(2) Member of Executive Committee.
(3) Member of Audit and Compliance Committee.
(4) Member of Product Management and Distribution Committee.
(5) Member of Corporate Governance Committee.
(6) Member of Investments Committee.
(7) The address for all non-interested trustees is that of the USAA Funds,
P.O. Box 659430, San Antonio, TX 78265-9430.
(8) Dr. Ostdiek has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(9) Ms. Hawley has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(10) Indicates the Trustee is an employee of Victory Capital or affiliated
companies and is considered an "interested person" under the Investment
Company Act of 1940.
(+) Mr. D. McNamara was elected as Chair of the Board in July 2019.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 95
================================================================================
Effective July 1, 2019, the Board of the Trust appointed certain new officers of
the Trust. The current officers of the Trust are stated below.
OFFICERS
--------------------------------------------------------------------------------
CHRISTOPHER K. DYER
President
Born: February 1962
Year of Appointment: 2019
Director of Mutual Fund Administration, the Victory Capital.
SCOTT A. STAHORSKY
Vice President
Born: July 1969
Year of Appointment: 2019
Manager, Fund Administration, the Adviser (since 2015); Senior Analyst, Fund
Administration, the Victory Capital (prior to 2015).
ALLAN SHAER
Assistant Treasurer
Born: March 1965
Year of Appointment: 2019
Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc.
(since 2016); Vice President, Mutual Fund Administration, JP Morgan Chase
(2011-2016).
================================================================================
96 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Treasurer, USAA ETF Trust (09/18-06/19); Executive Director, Investment and
Financial Administration, USAA (04/12-present); Assistant Treasurer, USAA ETF
Trust (06/17-09/18); Assistant Treasurer, USAA Mutual Funds Trust (12/13-02/18).
Mr. De Vries also serves as the Funds' Principal Financial Officer.
CAROL D. TREVINO
Assistant Treasurer
Born: October 1965
Year of Appointment: 2018
Assistant Treasurer, USAA ETF Trust (09/18-06/19); Accounting/Financial
Director, USAA (12/13-present); Senior Accounting Analyst, USAA (03/11-12/13).
ERIN G. WAGNER
Secretary
Born: February 1974
Year of Appointment: 2019
Associate General Counsel, the Adviser (since 2013).
CHARLES BOOTH
Anti-Money Laundering Compliance Officer and Identity Theft Officer
Born: April 1960
Year of Appointment: 2019
Director, Regulatory Administration and CCO Support Services, Citi Fund Services
Ohio, Inc. (2007-present).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 97
================================================================================
AMY CAMPOS
Chief Compliance Officer
Born: August 1976
Year of Appointment: 2019
Chief Compliance Officer, USAA Mutual Funds Trust (7/1/19-present); Executive
Director, Deputy Chief Compliance Officer, USAA Mutual Funds Trust and USAA ETF
Trust (7/17-6/19); Compliance Director, USAA Mutual Funds Trust (2014-7/17);
Senior Compliance Advisor, USAA Mutual Funds Trust (2010-2014).
THE FOLLOWING OFFICERS SERVED IN THEIR RESPECTIVE OFFICE UNTIL JULY 1, 2019, AT
WHICH POINT EACH OF THE FOLLOWING OFFICERS RESIGNED FROM THEIR RESPECTIVE OFFICE
AND NO LONGER SERVE IN THESE POSITIONS.
JOHN C. SPEAR
Vice President
Born: May 1964
Year of Appointment: 2016
Vice President, USAA ETF Trust (06/17-06/19); Senior Vice President and Chief
Investment Officer, USAA Investments, (03/17-present); Vice President and Chief
Investment Officer, USAA Investments, (11/16-03/17); Vice President, Long Term
Fixed Income (05/12-11/16).
JOHN P. TOOHEY
Vice President
Born: March 1968
Year of Appointment: 2009
Vice President, USAA ETF Trust (06/17-06/19); Head of Equities, Equity
Investments, AMCO (01/12-present).
================================================================================
98 | USAA CORNERSTONE MODERATELY AGGRESSIVE FUND
================================================================================
KRISTEN MILLAN
Secretary
Born: April 1983
Year of Appointment: 2019
Secretary, USAA ETF Trust (04/19-06/19); Assistant Secretary, USAA ETF Trust
(01/19-06/19); Senior Attorney, FASG General Counsel, USAA (09/17-06/19);
Attorney, FASG General Counsel, USAA (06/13-09/17). Ms. Millan also serves as
Assistant Secretary of AMCO, ICORP, and SAS.
STEPHANIE A. HIGBY
Chief Compliance Officer
Born: July 1974
Year of Appointment: 2013
Chief Compliance Officer, USAA ETF Trust (06/17-06/19); Assistant Vice
President, Compliance-Investments, USAA (02/18-present); Assistant Vice
President, Compliance Mutual Funds, USAA (12/16-01/18); Executive Director,
Institutional Asset Management Compliance, USAA (04/13-12/16). Ms. Higby also
serves as the Funds' anti-money laundering compliance officer and as the Chief
Compliance Officer for AMCO and IMCO.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 99
================================================================================
AS OF JULY 1, 2019
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
David C. Brown
John C. Walters
--------------------------------------------------------------------------------
ADMINISTRATOR AND Victory Capital Management Inc.
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND Victory Capital Advisers Inc.
DISTRIBUTOR 4900 Tiedeman Road
Brooklyn, Ohio 44144
--------------------------------------------------------------------------------
TRANSFER AGENT Victory Capital Transfer Agency Inc.
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 USAA AMCO'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) 235-8396; (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) 235-8396; (ii) at usaa.com; and (iii) on the SEC's website at
http://www.sec.gov.
===============================================================================
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----------------------
MUTUAL FUNDS
--------------------------------------------------------------------------------
May 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA Cornerstone Moderately Conservative Fund
FUND
SHARES
UCMCX
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) 235-8396 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)
235-8396 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.
Victory Capital means Victory Capital Management Inc., the investment manager of
the USAA Mutual Funds. USAA Mutual Funds are distributed by Victory Capital
Advisers, Inc., a broker dealer registered with FINRA and an affiliate of
Victory Capital. Victory Capital and its affiliates are not affiliated with
United Services Automobile Association or its affiliates. USAA and the USAA
logos are registered trademarks and the USAA Mutual Funds and USAA Investments
logos are trademarks of United Services Automobile Association and are being
used by Victory Capital and its affiliates under license.
================================================================================
PRESIDENT'S MESSAGE
"... LONG-TERM INVESTORS SHOULD NEVER MAKE
DECISIONS IN HASTE. THEY SHOULD MAKE [PHOTO OF BROOKS ENGLEHARDT]
THOUGHTFUL DECISIONS BASED ON THEIR LONG-TERM
OBJECTIVES, TIME HORIZON, AND RISK TOLERANCE."
--------------------------------------------------------------------------------
JULY 2019
As previously announced, USAA, the parent company of USAA Asset Management
Company ("AMCO"), the prior investment adviser to the USAA Mutual Funds,
announced that AMCO would be acquired by Victory Capital Holdings, Inc.
(Victory Holdings), a global investment management firm headquartered in
Cleveland, Ohio (the Transaction). In connection with the Transaction, also as
previous announced, shareholders of each USAA Mutual Fund approved a new
investment advisory agreement with Victory Capital Management Inc. ("Victory
Capital"), an indirect wholly-owned subsidiary of Victory Holdings. The closing
of the Transaction occurred on July 1, 2019; and Victory Capital became the
investment adviser to each USAA Mutual Fund. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION ABOUT CHANGES THAT TOOK EFFECT ON JULY 1, 2019.
Softening global economic conditions and escalating trade tensions rattled
investors during the 12-month reporting period ended May 31, 2019. When the
reporting period began in June 2018, the global economy was expanding across
most regions and countries, led by the U.S. In this environment, stocks
generally advanced. In the fixed income market, U.S. Treasury yields rose, as
the U.S. Federal Reserve ("Fed") continued to tighten monetary policy.
Signs of trouble emerged during the summer of 2018. The U.S. economic expansion
continued, but growth in a number of other economies, including some European
countries and China, showed a weakening trend. By the autumn of 2018, investors'
fears of a global economic slowdown, combined with harsh U.S.-China trade
rhetoric and Brexit-related uncertainty in Europe, sparked a surge in market
volatility. Global stocks dropped, with most of the decline occurring in
December 2018. At the same time, intermediate- and longer-term yields fell, as
investors anticipated a change in Fed monetary policy. Indeed, after having
raised short-term interest rates four times during 2018, Fed officials announced
in January 2019 that they would "pause," retreating from their earlier plan to
raise interest rates in 2019. Stocks rallied in response and by April 2019 had
recovered most of the ground they had lost. In May 2019, ongoing trade tensions
between the United States and China, as well as President Trump administration's
threat to impose tariffs on Mexico, drove a renewed decline in stock prices. In
the fixed income market, concerns that trade disputes would seriously undermine
global
================================================================================
================================================================================
economic growth pushed down intermediate- and longer-term yields, which ended
the reporting period lower than they started. The yield on the 10-year U.S.
Treasury note, which began June 2018 at 2.89%, rose to 3.24% on November 8,
2018--its high point of the period--and fell to 2.13% by May 31, 2019.
In the final months of the reporting period, the Treasury yield curve inverted,
which means that shorter-term yields were higher than longer-term yields. A
yield-curve inversion warrants attention because it has been a reliable
recession indicator. Although recessions do not automatically follow
inversions, a downward-sloped yield curve has preceded every U.S. recession
since the 1960s. That said, the lag between an inversion and a recession has
been inconsistent. At USAA Investments, A Victory Capital Investment Franchise,
we have found that during the past six decades, the time between inversion and
recession has ranged between six months and two years, with no clear pattern to
provide useful guidance. And as I write to you, we see no recession on the
horizon. First, the U.S. economy continues to grow, albeit at a slower pace than
in 2018. Second, the Fed has made clear its commitment to pause its interest
rate hikes, and there is a growing belief in the markets that policymakers may
even cut interest rates in 2019. (In early June 2019, after the end of the
reporting period, Fed Chair Jerome Powell stated that the U.S. central bank was
monitoring the escalation in trade tensions and could potentially respond by
cutting interest rates if U.S. economic conditions deteriorate.)
At USAA Investments, our team of portfolio managers will continue to monitor the
financial markets, economic conditions, the global trade regime, Fed policy, the
direction of longer-term interest rates, and other issues that have the
potential to affect your investments. In the meantime, I would advise you to
ignore media "noise" about such matters. Media "noise" is meant to provoke an
emotional reaction, which can lead to hasty decision-making. In my opinion,
long-term investors should never make decisions in haste. They should make
thoughtful decisions based on their long-term objectives, time horizon, and risk
tolerance. Dollar-cost averaging, in which you invest a set amount on a regular
basis, is a strategy that can help you stay on track. Another effective strategy
is diversification, which can potentially insulate a portfolio from market
turbulence or changes in performance leadership.
If you would like to review your portfolio to confirm that it is properly
aligned with your investment plan, please contact one of our financial advisors.
You might want to make that call before the summer gets fully underway. When we
are traveling and spending time with family and friends, it can be tempting to
put off decisions on financial matters.
From all of us at USAA Investments, A Victory Capital Investment Franchise,
thank you for the opportunity to help you with your investment needs.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGERS' COMMENTARY 1
INVESTMENT OVERVIEW 5
SHAREHOLDER VOTING RESULTS 9
FINANCIAL INFORMATION
Distributions to Shareholders 10
Report of Independent Registered
Public Accounting Firm 11
Portfolio of Investments 12
Notes to Portfolio of Investments 31
Financial Statements 37
Notes to Financial Statements 40
Financial Highlights 57
EXPENSE EXAMPLE 58
ADVISORY AGREEMENT(S) 60
TRUSTEES' AND OFFICERS' INFORMATION 81
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) 235-8396.
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.
================================================================================
================================================================================
MANAGERS' COMMENTARY ON THE FUND
WASIF A. LATIF ARNOLD J. ESPE, CFA
LANCE HUMPHREY, CFA
--------------------------------------------------------------------------------
o HOW DID THE GLOBAL FINANCIAL MARKETS PERFORM DURING THE 12-MONTH REPORTING
PERIOD ENDED MAY 31, 2019?
The world financial markets produced mixed results, reflecting investors'
struggle to assess the shifting outlook for economic growth.
During the reporting period, large-cap U.S. equities were the best performer
among the major asset classes. Domestic stocks performed very well in the
first half of the reporting period, during which both economic data and
corporate earnings came in above expectations. However, the market sold off
sharply in late 2018 due to the combination of worries about U.S. Federal
Reserve (Fed) policy, the trade dispute between the United States and China,
and signs of slowing economic growth overseas. Stocks quickly recovered from
the downturn, and the main U.S. equity indexes went on to post their best
quarter in nearly 10 years during the first three months of 2019. A rapid
shift in Fed policy was likely the key catalyst for the rebound. Whereas the
markets generally were expecting as late as October 2018 that the Fed would
raise interest rates three to four times in 2019, a series of statements
from key officials indicated the Fed was in fact likely finished raising
interest rates for the foreseeable future. The reporting period ended on a
down note with a weak showing in May 2019, as stocks lost some of their
previous gains due to renewed worries about slowing growth and the failure
of the United States and China to resolve their trade impasse.
The net effect of these sentiment swings was a narrow advance for large-cap
U.S. stocks, as gauged by the 3.47% gain of the Russell 1000 Index.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
The Russell 2000 Index, a measure of performance for smaller companies,
lagged considerably with a return of -9.04%.
Developed-market international equities posted a loss over the 12-month
reporting period, largely as a result of the unexpectedly slow growth
outside of the United States. In combination with the weakness in foreign
currencies versus the U.S. dollar, the slowdown led to a loss of -5.75% for
the MSCI EAFE Index. Emerging-market stocks also closed in negative
territory, as gauged by the -8.70% return of the MSCI Emerging Markets
Index. Concerns about the global trade outlook and the prospect of slowing
growth in the developed world contributed to the underperformance for the
asset class.
Investment-grade bonds, after producing sluggish performance in the first
half of the reporting period, staged a strong rally from early November 2018
onward due in part to the Fed's shift toward a more accommodative policy.
The gains propelled the Bloomberg Barclays U.S. Aggregate Index to a return
of 6.40% for the full reporting period. High-yield bonds also performed
reasonably well, as gauged by the 5.93% gain for the ICE BofAML U.S. High
Yield Index. Although high-yield issues fell sharply in late 2018 amid the
evaporation of investor risk appetites, the category returned to positive
territory in early 2019.
o HOW DID THE USAA CORNERSTONE MODERATELY CONSERVATIVE FUND (THE "FUND")
PERFORM DURING THE REPORTING PERIOD?
For the reporting period ended May 31, 2019, the Fund had a total return of
0.99%. This compares to returns of 6.41% for the Bloomberg Barclays U.S.
Universal Index and 3.56% for the Cornerstone Moderately Conservative
Composite Index.
Refer to page 5 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
2 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
Effective July 1, 2019, Victory Capital serves as the Fund's investment
adviser. Prior to July 1, 2019, AMCO served as the Fund's investment
adviser. The investment adviser provides day-to-day discretionary management
for the Fund's assets.
o PLEASE DISCUSS THE FACTORS THAT HELPED AND HURT PERFORMANCE.
Consistent with the broader economic environment, the Fund's allocation to
large-cap U.S. equities was the key contributor to performance in the past
year. The Fund was weighted toward large-cap stocks over small caps, which
aided results. However, our preference for the value style versus growth was
out of step with the market. Performance also was hurt somewhat by favoring
international equities over U.S. equities. We believe both developed- and
emerging-market equities offer more compelling valuations and greater upside
potential than U.S. equities, but this aspect of our approach detracted in
the reporting period, given the outperformance of U.S. equities compared to
international equities.
The Fund's bond portfolio performed well and made a meaningful contribution
to results. We generated robust performance from our decision to maintain a
sizable weighting in long-term U.S. Treasury securities based on our belief
that investors were overestimating the potential for accelerating economic
growth. Once the economy indeed began to slow in the fourth quarter of 2018,
our holdings in government bonds rallied in kind. An allocation to corporate
issuers further benefited results at a time of relative strength for
credit-sensitive investments. We also would note that the Fund's bond
investments fulfilled their role of reducing portfolio volatility at a time
of significant swings in equities and other segments of the financial
markets. A weighting in high-yield bonds was an additional contributor.
The majority of the key trends in the market have been in place for a
multi-year period, with domestic stocks outperforming bonds, the growth
style outpacing value, and U.S. equities exceeding the returns of the
foreign markets, to name just a few. Given the persistence of these
tendencies, it can be easy for investors to forget that asset class returns
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
tend to run in cycles. We, therefore, prefer to take a long-term view based
on the knowledge that even well-established market trends can--and
do--shift abruptly. Rather than trying to chase short-term performance, we
continue to emphasize diversification, fundamentals, and valuations. We
believe this steady approach, rather than one that attempts to respond to
the latest headlines, is the most effective way to navigate volatile
markets.
Thank you for allowing us to help you manage your investments.
Asset Allocation funds may be invested in, among other things:
(1) exchange-traded funds (ETFs); (2) futures, options, and other
derivatives; (3) non-investment-grade securities; (4) precious metals and
minerals companies; (5) real estate investment trusts; (6) money market
instruments; (7) foreign and emerging markets. These types of investments
and asset classes may be more volatile and prone to experience significant
loss than others. In addition, it is possible that a particular asset
allocation may not produce the intended result. o As interest rates rise,
bond prices generally fall; given the historically low interest rate
environment, risks associated with rising interest rates may be heightened.
o Foreign investing is subject to additional risks, such as currency
fluctuations, market illiquidity, and political instability. Emerging market
countries are less diverse and mature than other countries and tend to be
politically less stable. o Precious metals and minerals is a volatile asset
class and is subject to additional risks, such as currency fluctuation,
market illiquidity, political instability, and increased price volatility.
It may be more volatile than other asset classes that diversify across many
industries and companies. o Non-investment-grade securities are considered
speculative and are subject to significant credit risk. They are sometimes
referred to as "junk" bonds since they represent a greater risk of default
than more credit worthy investment-grade securities. o Diversification is a
technique intended to help reduce risk and does not guarantee a profit or
prevent a loss. o ETFs are subject to risks similar to those of stocks.
Investment returns may fluctuate and are subject to market volatility, so
that an investor's shares, when redeemed or sold, may be worth more or less
than their original cost.
================================================================================
4 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/19 o
-----------------------------------------------------------------------------------------
SINCE INCEPTION
1 YEAR 5 YEAR 10 YEAR INCEPTION* DATE
-----------------------------------------------------------------------------------------
USAA Cornerstone Moderately
Conservative Fund 0.99% 2.44% - 4.66% 6/08/12
Bloomberg Barclays U.S.
Universal Index** (reflects
no deduction for fees,
expenses, or taxes) 6.41% 2.92% 4.30% - -
Cornerstone Moderately
Conservative Composite
Index*** (reflects no
deduction for fees,
expenses, or taxes) 3.56% 4.22% 6.94% - -
*Since inception returns are shown when a share class has less than 10 years of
performance. Total returns for periods of less than one year are not annualized.
**The Bloomberg Barclays U.S. Universal Index is an index that represents the
union of the U.S. Aggregate Index, U.S. Corporate High-Yield, Investment Grade
144A Index, Eurodollar Index, U.S. Emerging Markets Index, and the non-ERISA
eligible portion of the CMBS Index. The index covers USD denominated, taxable
bonds that are rated either investment-grade or below investment-grade.
***The Cornerstone Moderately Conservative Composite Index is a combination of
unmanaged indexes representing the Fund's model allocation, and consists of the
MSCI USA Investable Market Index (IMI) Gross (23%), the MSCI ACWI ex USA IMI Net
(15%), the Bloomberg Barclays U.S. Universal Index (58%), the Bloomberg
Commodity Index Total Return (1%), the MSCI U.S. Real Estate Investment Trust
(REIT) Index Gross (1%), and the Bloomberg Barclays U.S. Treasury - Bills (1-3M)
(2%).
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
usaa.com.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on net investment income and
realized capital gain distributions, including reinvested distributions, or
redemptions of shares.
================================================================================
INVESTMENT OVERVIEW | 5
================================================================================
o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
CORNERSTONE USAA CORNERSTONE BLOOMBERG
MODERATELY MODERATELY BARCLAYS
CONSERVATIVE CONSERVATIVE U.S. UNIVERSAL
COMPOSITE INDEX FUND INDEX
05/31/12 $10,000.00 $10,000.00 $10,000.00
06/30/12 10,200.03 10,170.00 10,025.20
07/31/12 10,341.82 10,311.00 10,174.72
08/31/12 10,449.23 10,461.00 10,196.08
09/30/12 10,589.56 10,623.00 10,225.98
10/31/12 10,567.13 10,693.00 10,258.45
11/30/12 10,627.87 10,754.00 10,283.01
12/31/12 10,715.94 10,887.00 10,284.93
01/31/13 10,890.90 11,070.00 10,231.32
02/28/13 10,935.85 11,090.00 10,280.45
03/31/13 11,051.03 11,200.00 10,292.62
04/30/13 11,228.00 11,363.00 10,405.61
05/31/13 11,129.80 11,292.00 10,229.19
06/30/13 10,902.56 11,034.00 10,049.13
07/31/13 11,134.97 11,239.00 10,081.81
08/31/13 11,000.41 11,106.00 10,024.35
09/30/13 11,274.70 11,287.00 10,124.10
10/31/13 11,514.19 11,555.00 10,224.27
11/30/13 11,563.91 11,617.00 10,191.17
12/31/13 11,623.95 11,700.00 10,146.52
01/31/14 11,559.83 11,595.00 10,281.09
02/28/14 11,834.59 11,869.00 10,354.35
03/31/14 11,847.80 11,919.00 10,344.74
04/30/14 11,935.29 12,025.00 10,430.39
05/31/14 12,112.38 12,184.00 10,555.98
06/30/14 12,228.69 12,327.00 10,572.00
07/31/14 12,125.69 12,231.00 10,539.11
08/31/14 12,331.36 12,380.00 10,653.38
09/30/14 12,108.61 12,158.00 10,568.80
10/31/14 12,243.23 12,222.00 10,672.39
11/30/14 12,357.12 12,318.00 10,728.99
12/31/14 12,274.19 12,228.00 10,710.62
01/31/15 12,332.64 12,294.00 10,914.39
02/28/15 12,555.60 12,468.00 10,850.74
03/31/15 12,521.51 12,399.00 10,895.60
04/30/15 12,625.45 12,486.00 10,882.99
05/31/15 12,626.20 12,497.00 10,863.98
06/30/15 12,440.18 12,268.00 10,742.66
07/31/15 12,513.54 12,301.00 10,805.25
08/31/15 12,171.11 11,894.00 10,773.42
09/30/15 12,036.08 11,706.00 10,815.50
10/31/15 12,414.24 12,049.00 10,850.10
11/30/15 12,359.73 11,949.00 10,810.59
12/31/15 12,234.89 11,737.00 10,756.55
01/31/16 12,020.78 11,490.00 10,875.30
02/29/16 12,048.43 11,524.00 10,952.63
03/31/16 12,495.43 11,902.00 11,086.76
04/30/16 12,621.63 12,037.00 11,162.37
05/31/16 12,654.45 12,060.00 11,171.13
06/30/16 12,772.13 12,251.00 11,367.64
07/31/16 13,045.46 12,524.00 11,461.40
08/31/16 13,063.72 12,536.00 11,473.79
09/30/16 13,100.30 12,582.00 11,476.57
10/31/16 12,944.41 12,422.00 11,400.32
11/30/16 12,857.68 12,239.00 11,144.00
12/31/16 12,992.68 12,343.00 11,177.11
01/31/17 13,148.63 12,527.00 11,216.63
02/28/17 13,359.04 12,711.00 11,303.13
03/31/17 13,402.87 12,803.00 11,299.50
04/30/17 13,543.83 12,930.00 11,393.27
05/31/17 13,697.90 13,103.00 11,481.05
06/30/17 13,728.35 13,117.00 11,471.23
07/31/17 13,909.84 13,268.00 11,528.47
08/31/17 13,998.59 13,373.00 11,628.01
09/30/17 14,087.46 13,424.00 11,587.00
10/31/17 14,209.73 13,541.00 11,600.88
11/30/17 14,318.65 13,622.00 11,583.37
12/31/17 14,443.06 13,757.00 11,634.41
01/31/18 14,658.83 13,974.00 11,522.49
02/28/18 14,327.70 13,601.00 11,413.13
03/31/18 14,290.60 13,612.00 11,470.80
04/30/18 14,273.58 13,576.00 11,394.34
05/31/18 14,379.35 13,612.00 11,456.28
06/30/18 14,349.33 13,537.00 11,439.83
07/31/18 14,526.12 13,658.00 11,463.75
08/31/18 14,638.73 13,731.00 11,520.14
09/30/18 14,611.68 13,680.00 11,470.80
10/31/18 14,104.24 13,157.00 11,374.90
11/30/18 14,234.26 13,266.00 11,425.95
12/31/18 13,933.37 13,028.00 11,604.72
01/31/19 14,509.99 13,516.00 11,764.71
02/28/19 14,678.80 13,604.00 11,777.52
03/31/19 14,901.70 13,797.00 11,990.26
04/30/19 15,110.99 13,910.00 12,007.13
05/31/19 14,890.92 13,747.00 12,191.04
[END CHART]
Data from 5/31/12 through 5/31/19.*
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Cornerstone Moderately Conservative Fund to the benchmarks listed above
(see page 5 for benchmark definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged,
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes.
*The performance of the Cornerstone Moderately Conservative Composite Index and
the Bloomberg Barclays U.S. Universal Index is calculated from the end of the
month, May 31, 2012, while the inception date of the USAA Cornerstone Moderately
Conservative Fund is June 8, 2012. There may be a slight variation of
performance numbers because of this difference.
================================================================================
6 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
o TOP 10 HOLDINGS* - 5/31/19 o
(% of Net Assets)
iShares iBoxx $ High Yield Corporate Bond ETF ............................ 5.1%
U.S. Treasury Bond, 3.13%, 8/15/2044 ..................................... 4.2%
U.S. Treasury Note, 1.13%, 2/28/2021 ..................................... 3.3%
iShares Core S&P 500 ETF ................................................. 3.1%
Vanguard FTSE Europe ETF ................................................. 2.8%
U.S. Treasury Note, 2.25%, 11/15/2025 .................................... 2.8%
Vanguard Total Bond Market ETF ........................................... 2.7%
Schwab Fundamental International Large Company Index ETF ................. 2.5%
Freddie Mac, 3.00%, 3/01/2047 ............................................ 2.0%
iShares iBoxx $ Investment Grade Corporate Bond ETF ...................... 2.0%
*Does not include futures, money market instruments and short-term investments
purchased with cash collateral from securities loaned.
Refer to the Portfolio of Investments for a complete list of securities.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
o ASSET ALLOCATION* - 5/31/19 o
(% of Net Assets)
[PIE CHART OF ASSET ALLOCATION]
U.S. TREASURY SECURITIES 23.5%
INTERNATIONAL EQUITY SECURITIES 18.0%
U.S. EQUITY SECURITIES 16.4%
U.S. GOVERNMENT AGENCY ISSUES 13.1%
FIXED-INCOME EXCHANGE-TRADED FUNDS 12.8%
CORPORATE OBLIGATIONS 5.7%
MONEY MARKET INSTRUMENTS 3.6%
GLOBAL REAL ESTATE EQUITY SECURITIES 1.8%
ASSET-BACKED SECURITIES 1.6%
EURODOLLAR AND YANKEE OBLIGATIONS 0.9%
COMMERCIAL MORTGAGE SECURITIES 0.8%
PRECIOUS METALS AND COMMODITY-RELATED SECURITIES 0.8%
COLLATERALIZED MORTGAGE OBLIGATIONS 0.3%
CONVERTIBLE SECURITIES 0.3%
BANK LOANS 0.2%
[END CHART]
*Does not include futures 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%.
================================================================================
8 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
SHAREHOLDER VOTING RESULTS
--------------------------------------------------------------------------------
On April 18, 2019, a special meeting of shareholders was held to vote on two
proposals relating to the series of the USAA Mutual Funds Trust (Trust).
Shareholders of record on February 8, 2019, were entitled to vote on each
proposal shown below. The proposals were approved by the shareholders.
The following proposals and voting results pertain to one or more series within
the Trust. Votes shown for Proposal 1 are for the Fund, a series of the Trust.
Votes shown for Proposal 2 are for all series of the Trust. The effective date
of the Proposals was July 1, 2019.
PROPOSAL 1
To approve a new Investment Advisory Agreement between the Trust, on behalf of
the Fund, and Victory Capital, an independent investment adviser. The new
Investment Advisory Agreement became effective upon the closing of the
Transaction (as defined and discussed in Note 1 to the Financial Statements)
whereby AMCO was acquired by Victory Holdings, the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
--------------------------------------------------------------------------------
10,166,352 696,808 1,090,346
PROPOSAL 2
Election of two new trustees to the Trust's Board of Trustees to serve upon the
closing of the Transaction: (1) David C. Brown, to serve as an "interested
trustee" as defined in the Investment Company Act of 1940, as amended (1940
Act); and (2) John C. Walters, to serve as a trustee who is not an "interested
person" as is defined under the 1940 Act ("Independent Trustee").
NUMBER OF SHARES VOTING
-------------------------------------------------------------------------------
TRUSTEES FOR VOTES WITHHELD
-------------------------------------------------------------------------------
David C. Brown 8,299,565,565 820,887,736
John C. Walters 8,317,935,885 802,517,416
================================================================================
SHAREHOLDER VOTING RESULTS | 9
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
May 31, 2019, is provided for information purposes only and should not be used
for reporting to federal or state revenue agencies. Federal tax information for
the calendar year will be reported to you on Form 1099-DIV in January 2020.
With respect to distributions paid, the Fund designates the following amounts
(or, if subsequently determined to be different, the maximum amount allowable)
for the fiscal year ended May 31, 2019:
DIVIDEND RECEIVED LONG-TERM
DEDUCTION (CORPORATE CAPITAL GAIN QUALIFIED INTEREST
SHAREHOLDERS)(1) DISTRIBUTIONS(2) INCOME
--------------------------------------------------------------------------------
13.09% $2,581,000 $2,419,000
--------------------------------------------------------------------------------
(1)Presented as a percentage of net investment income and short-term capital
gain distributions paid, if any.
(2)Pursuant to Section 852 of the Internal Revenue Code.
For the fiscal year ended May 31, 2019, the Fund hereby designates the maximum
amount allowable of its net taxable income as qualified dividends taxed at
individual net capital gain rates.
================================================================================
10 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
USAA CORNERSTONE MODERATELY CONSERVATIVE FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Cornerstone Moderately Conservative Fund (the "Fund") (one of the funds
constituting USAA Mutual Funds Trust (the "Trust")), including the portfolio of
investments, as of May 31, 2019, and the related statement of operations for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended, the financial highlights for each of the five
years in the period then ended and the related notes (collectively referred to
as the "financial statements"). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Fund (one of the
funds constituting USAA Mutual Funds Trust) at May 31, 2019, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and its financial highlights for each of
the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
BASIS FOR OPINION
These financial statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on the Fund's financial statements based
on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and are required to
be independent with respect to the Trust in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Trust is not required to have,
nor were we engaged to perform, an audit of the Trust's internal control over
financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the Trust's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of May 31, 2019, by correspondence with the custodian and brokers or by
other appropriate auditing procedures where replies from brokers were not
received. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the auditor of one or more Victory Capital investment
companies since 1995.
San Antonio, Texas
July 23, 2019
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 11
================================================================================
PORTFOLIO OF INVESTMENTS
May 31, 2019
-----------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------
BONDS (59.2%)
ASSET-BACKED SECURITIES (1.6%)
ASSET BACKED SECURITIES (1.6%)
------------------------------
AUTOMOBILE ABS (1.2%)
$ 143 Americredit Automobile Receivables Trust 3.15% 3/20/2023 $ 145
480 Americredit Automobile Receivables Trust 3.50 1/18/2024 492
125 Avis Budget Rental Car Funding AESOP, LLC(a) 2.96 7/20/2020 125
78 Avis Budget Rental Car Funding AESOP, LLC(a) 3.75 7/20/2020 78
608 Avis Budget Rental Car Funding AESOP, LLC(a) 2.50 2/20/2021 607
324 Credit Acceptance Auto Loan Trust(a) 4.29 11/15/2024 325
329 Credit Acceptance Auto Loan Trust(a) 3.55 8/15/2027 335
560 OSCAR U.S. Funding Trust IX, LLC(a) 3.63 9/10/2025 580
--------
2,687
--------
CREDIT CARD ABS (0.1%)
320 Synchrony Credit Card Master Note Trust 2.95 5/15/2024 319
--------
OTHER ABS (0.2%)
240 Element Rail Leasing I, LLC(a) 3.67 4/19/2044 248
88 NP SPE II, LLC(a) 3.37 10/21/2047 89
174 SCF Equipment Leasing, LLC(a) 3.41 12/20/2023 175
--------
512
--------
STUDENT LOAN ABS (0.1%)
200 Navient Student Loan Trust (1 mo. LIBOR + 1.50%) 3.93(b) 8/25/2050 199
--------
Total Asset Backed Securities 3,717
--------
Total Asset-Backed Securities (cost: $3,649) 3,717
--------
BANK LOANS (0.2%)(c)
CONSUMER, CYCLICAL (0.2%)
-------------------------
RETAIL (0.2%)
387 Academy, Ltd. (1 mo. LIBOR + 4.00%) 6.44 7/01/2022 283
200 Academy, Ltd. (1 mo. LIBOR + 4.00%) 6.48 7/01/2022 146
--------
Total Consumer, Cyclical 429
--------
Total Bank Loans (cost: $486) 429
--------
================================================================================
12 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.3%)
MORTGAGE SECURITIES (0.3%)
--------------------------
WHOLE LOAN COLLATERAL CMO (0.3%)
$ 29 Sequoia Mortgage Trust (1 mo. LIBOR + 0.90%) 3.34%(b) 9/20/2033 $ 29
623 Structured Asset Mortgage Investments Trust
(1 mo. LIBOR + 0.50%) 2.94(b) 7/19/2035 600
30 Wells Fargo Mortgage Backed Securities Trust 5.16(d) 4/25/2035 30
--------
Total Mortgage Securities 659
--------
Total Collateralized Mortgage Obligations (cost: $682) 659
--------
COMMERCIAL MORTGAGE SECURITIES (0.8%)
MORTGAGE SECURITIES (0.8%)
--------------------------
COMMERCIAL MBS (0.8%)
155 Banc of America Commercial Mortgage Trust 5.66(d) 7/10/2044 58
26 Banc of America Commercial Mortgage Trust 6.57(d) 2/10/2051 26
54 Bear Stearns Commercial Mortgage Securities Trust(a) 5.66(d) 9/11/2041 54
320 BT-h21 Mortgage-Backed Securities Trust
(1 mo. LIBOR + 2.50%)(a) 4.81(b) 10/07/2021 320
4 Credit Suisse Commercial Mortgage Trust
(1 mo. LIBOR + 0.19%) 2.62(b) 2/15/2040 4
3,186 CSAIL Commercial Mortgage Trust(e) 1.79(d) 1/15/2049 270
830 FREMF Mortgage Trust(a) 3.51(d) 8/25/2045 829
88 GE Capital Commercial Mortgage Corp. 5.61(d) 12/10/2049 75
2,668 UBS Commercial Mortgage Trust(a),(e) 2.06(d) 5/10/2045 126
--------
Total Mortgage Securities 1,762
--------
Total Commercial Mortgage Securities (cost: $1,865) 1,762
--------
CONVERTIBLE SECURITIES (0.3%)
BASIC MATERIALS (0.3%)
----------------------
MINING (0.3%)
753 Hycroft Mining Corp.(f),(g),(h),(i) 15.00(j) 10/22/2020 23
700 Pretium Resources, Inc. 2.25 3/15/2022 660
--------
Total Basic Materials 683
--------
Total Convertible Securities (cost: $1,416) 683
--------
CORPORATE OBLIGATIONS (5.7%)
COMMUNICATIONS (0.2%)
---------------------
TELECOMMUNICATIONS (0.2%)
500 Hughes Satellite Systems Corp. 6.50 6/15/2019 500
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
-----------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------
CONSUMER, CYCLICAL (0.7%)
-------------------------
AIRLINES (0.1%)
$ 118 Continental Airlines, Inc. Pass-Through Trust "B" 6.25% 10/11/2021 $ 120
--------
AUTO MANUFACTURERS (0.6%)
700 Harley-Davidson Financial Services, Inc.(a) 3.55 5/21/2021 707
700 Hyundai Capital America(a) 3.75 7/08/2021 712
--------
1,419
--------
Total Consumer, Cyclical 1,539
--------
CONSUMER, NON-CYCLICAL (0.2%)
-----------------------------
HEALTHCARE-SERVICES (0.2%)
600 Community Health Systems, Inc. 6.88 2/01/2022 402
--------
ENERGY (1.2%)
-------------
PIPELINES (1.2%)
650 Enbridge Energy Partners, LP 7.38 10/15/2045 932
400 Energy Transfer Operating, LP (3 mo.
LIBOR + 3.02%) 5.60(b) 11/01/2066 319
700 EQM Midstream Partners, LP 4.75 7/15/2023 714
200 Martin Midstream Partners, LP / Martin
Midstream Finance Corp. 7.25 2/15/2021 195
200 Southern Union Co. (3 mo. LIBOR + 3.02%) 5.60(b) 11/01/2066 156
300 Tallgrass Energy Partners, LP / Tallgrass
Energy Finance Corp.(a) 5.50 9/15/2024 308
--------
Total Energy 2,624
--------
FINANCIAL (2.8%)
----------------
BANKS (0.5%)
100 Compass Bank 3.88 4/10/2025 101
100 First Maryland Capital I (3 mo. LIBOR + 1.00%) 3.60(b) 1/15/2027 93
1,000 SunTrust Capital I (3 mo. LIBOR + 0.67%) 3.19(b) 5/15/2027 933
--------
1,127
--------
DIVERSIFIED FINANCIAL SERVICES (0.4%)
1,000 Cullen/Frost Capital Trust II (3 mo. LIBOR + 1.55%) 4.07(b) 3/01/2034 865
--------
INSURANCE (1.7%)
700 Allstate Corp. (3 mo. LIBOR + 2.94%) 5.75(k) 8/15/2053 719
332 AmTrust Financial Services, Inc. 6.13 8/15/2023 323
700 Athene Holding Ltd. 4.13 1/12/2028 687
550 HSB Group, Inc. (3 mo. LIBOR + 0.91%) 3.51(b) 7/15/2027 473
1,100 Nationwide Mutual Insurance Co. (3 mo.
LIBOR + 2.29%)(a) 4.90(b) 12/15/2024 1,097
================================================================================
14 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------
$ 600 Prudential Financial, Inc. (3 mo. LIBOR + 3.92%) 5.63%(k) 6/15/2043 $ 622
--------
3,921
--------
INVESTMENT COMPANIES (0.2%)
350 Ares Capital Corp. 3.63 1/19/2022 352
--------
Total Financial 6,265
--------
INDUSTRIAL (0.4%)
-----------------
ELECTRICAL COMPONENTS & EQUIPMENT (0.0%)
100 Artesyn Embedded Technologies, Inc.(a) 9.75 10/15/2020 102
--------
MISCELLANEOUS MANUFACTURERS (0.1%)
210 General Electric Co. 5.50 1/08/2020 213
--------
TRANSPORTATION (0.3%)
700 Ryder System, Inc. 3.50 6/01/2021 711
--------
Total Industrial 1,026
--------
UTILITIES (0.2%)
----------------
ELECTRIC (0.2%)
467 NextEra Energy Capital Holdings, Inc. 3.34 9/01/2020 471
--------
Total Corporate Obligations (cost: $12,491) 12,827
--------
EURODOLLAR AND YANKEE OBLIGATIONS (0.9%)
BASIC MATERIALS (0.1%)
----------------------
MINING (0.1%)
300 Newcrest Finance Pty. Ltd.(a) 4.45 11/15/2021 311
--------
CONSUMER, CYCLICAL (0.3%)
-------------------------
AUTO MANUFACTURERS (0.3%)
700 BMW U.S. Capital, LLC(a) 3.25 8/14/2020 705
--------
ENERGY (0.4%)
-------------
OIL & GAS (0.3%)
700 Petroleos Mexicanos 5.38 3/13/2022 723
--------
OIL & GAS SERVICES (0.1%)
23 Schahin II Finance Co. SPV Ltd.(a),(f),(h) 8.00 5/25/2020 21
912 Schahin II Finance Co. SPV Ltd.(a),(g),(l) 5.88 9/25/2023 96
--------
117
--------
Total Energy 840
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
-----------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------
FINANCIAL (0.1%)
----------------
INSURANCE (0.1%)
$ 250 QBE Capital Funding III Ltd. (USD Swap
Semi-Annual 30/360 10 YR + 4.05%)(a) 7.25%(k) 5/24/2041 $ 264
--------
Total Eurodollar and Yankee Obligations (cost: $2,746) 2,120
--------
-----------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
-----------------------------------------------------------------------------------------------------------
FIXED-INCOME EXCHANGE-TRADED FUNDS (12.8%)
16,600 Invesco Fundamental High Yield Corporate Bond ETF(m) 307
16,540 iShares 20+ Year Treasury Bond ETF 2,180
136,610 iShares iBoxx $ High Yield Corporate Bond ETF(m) 11,598
37,560 iShares iBoxx $ Investment Grade Corporate Bond ETF 4,538
63,300 Vanguard Mortgage-Backed Securities ETF 3,330
5,000 Vanguard Short-Term Bond ETF 401
75,000 Vanguard Total Bond Market ETF 6,168
8,000 Xtrackers USD High Yield Corporate Bond ETF(m) 392
--------
Total Fixed-Income Exchange-Traded Funds (cost: $28,493) 28,914
--------
-----------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
-----------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY ISSUES (13.1%)(n)
COMMERCIAL MBS (1.4%)
$ 500 Fannie Mae(+) 2.15% 1/25/2023 497
1,100 Freddie Mac(+) 3.33(d) 5/25/2025 1,155
1,000 Freddie Mac(+) 3.51 4/25/2030 1,063
536 Freddie Mac(+) 3.70(d) 1/25/2033 580
--------
3,295
--------
FGLMC COLLATERAL (11.7%)
1,466 Freddie Mac(+) 3.00 4/01/2046 1,481
3,474 Freddie Mac(+) 3.00 6/01/2046 3,508
1,590 Freddie Mac(+) 3.00 9/01/2046 1,605
801 Freddie Mac(+) 3.00 10/01/2046 809
1,623 Freddie Mac(+) 3.00 11/01/2046 1,636
3,768 Freddie Mac(+) 3.00 1/01/2047 3,798
================================================================================
16 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------
$ 2,538 Freddie Mac(+) 3.00% 1/01/2047 $ 2,558
4,583 Freddie Mac(+) 3.00 3/01/2047 4,620
4,370 Freddie Mac(+) 3.50 4/01/2046 4,476
1,866 Freddie Mac(+) 3.50 4/01/2048 1,910
--------
26,401
--------
Total U.S. Government Agency Issues (cost: $29,567) 29,696
--------
U.S. TREASURY SECURITIES (23.5%)
BONDS (9.8%)
4,000 U.S. Treasury Bond (STRIPS Principal)
(Zero Coupon) 0.00 8/15/2044 2,074
300 U.S. Treasury Bond 2.50 2/15/2045 296
2,285 U.S. Treasury Bond 3.00 11/15/2044 2,472
3,000 U.S. Treasury Bond 3.00 5/15/2045 3,249
1,000 U.S. Treasury Bond 3.00 5/15/2047 1,084
1,000 U.S. Treasury Bond(o) 3.00 8/15/2048 1,085
1,000 U.S. Treasury Bond(o) 3.00 2/15/2049 1,086
8,700 U.S. Treasury Bond 3.13 8/15/2044 9,609
1,000 U.S. Treasury Bond(o) 3.38 11/15/2048 1,165
--------
22,120
--------
NOTES (13.7%)
7,600 U.S. Treasury Note(p) 1.13 2/28/2021 7,487
3,800 U.S. Treasury Note 1.63 4/30/2023 3,758
2,000 U.S. Treasury Note 1.63 2/15/2026 1,950
618 U.S. Treasury Note 2.00 2/15/2023 619
800 U.S. Treasury Note 2.25 11/15/2024 811
6,200 U.S. Treasury Note 2.25 11/15/2025 6,287
1,000 U.S. Treasury Note 2.25 2/15/2027 1,013
1,000 U.S. Treasury Note 2.25 11/15/2027 1,011
1,500 U.S. Treasury Note 2.38 8/15/2024 1,531
2,000 U.S. Treasury Note 2.38 5/15/2027 2,045
2,000 U.S. Treasury Note(o) 2.50 1/31/2021 2,016
1,500 U.S. Treasury Note 2.50 5/15/2024 1,539
1,000 U.S. Treasury Note 2.75 2/15/2028 1,051
--------
31,118
--------
Total U.S. Treasury Securities (cost: $51,012) 53,238
--------
Total Bonds (cost: $132,407) 134,045
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
-----------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY SECURITIES (18.0%)
COMMON STOCKS (0.1%)
CONSUMER, CYCLICAL (0.0%)
-------------------------
AUTO PARTS & EQUIPMENT (0.0%)
1,130 Autoliv, Inc. $ 70
--------
CONSUMER, NON-CYCLICAL (0.0%)
-----------------------------
PHARMACEUTICALS (0.0%)
580 Jazz Pharmaceuticals plc(q) 73
--------
INDUSTRIAL (0.1%)
-----------------
ELECTRONICS (0.1%)
1,890 TE Connectivity Ltd. 159
--------
Total Common Stocks (cost: $313) 302
--------
EXCHANGE-TRADED FUNDS (17.6%)
31,400 Invesco FTSE RAFI Developed Markets ex-US ETF 1,226
87,600 Invesco FTSE RAFI Emerging Markets ETF 1,804
63,935 iShares Core MSCI EAFE ETF 3,797
76,168 iShares Core MSCI Emerging Markets ETF 3,741
30,300 iShares Edge MSCI Min Vol EAFE ETF 2,152
19,800 iShares Edge MSCI Min Vol Emerging Markets ETF 1,131
130,000 iShares MSCI Canada ETF 3,553
44,000 iShares MSCI United Kingdom ETF 1,394
151,700 Schwab Fundamental Emerging Markets Large Company Index ETF 4,149
216,800 Schwab Fundamental International Large Company Index ETF 5,752
50,100 Schwab Fundamental International Small Company Index ETF 1,501
7,496 SPDR S&P Emerging Markets SmallCap ETF 323
9,770 USAA MSCI Emerging Markets Value Momentum Blend Index ETF(r) 415
58,200 Vanguard FTSE Developed Markets ETF 2,319
121,100 Vanguard FTSE Europe ETF 6,364
5,259 WisdomTree Emerging Markets SmallCap Dividend Fund 236
--------
Total Exchange-Traded Funds (cost: $38,563) 39,857
--------
PREFERRED STOCKS (0.3%)
FINANCIAL (0.3%)
----------------
INSURANCE (0.3%)
27,414 Delphi Financial Group, Inc., cumulative redeemable, 5.71%,
(3 mo. LIBOR + 3.19%) (cost: $690) 637
--------
Total International Equity Securities (cost: $39,566) 40,796
--------
================================================================================
18 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------
U.S. EQUITY SECURITIES (16.4%)
COMMON STOCKS (10.3%)
BASIC MATERIALS (0.0%)
----------------------
IRON/STEEL (0.0%)
1,120 Nucor Corp. $ 54
2,050 Steel Dynamics, Inc. 51
--------
Total Basic Materials 105
--------
COMMUNICATIONS (1.4%)
---------------------
ADVERTISING (0.1%)
4,740 Interpublic Group of Companies, Inc. 100
2,530 Omnicom Group, Inc. 196
--------
296
--------
INTERNET (0.1%)
70 Alphabet, Inc. "A"(q) 77
640 CDW Corp. 63
460 F5 Networks, Inc.(q) 61
380 IAC/InterActiveCorp(q) 84
--------
285
--------
MEDIA (0.5%)
8,670 Altice USA, Inc. "A" 204
5,270 CBS Corp. "B" 254
5,070 Comcast Corp. "A" 208
4,540 DISH Network Corp. "A"(q) 164
12,600 Sirius XM Holdings, Inc. 67
3,420 Viacom, Inc. "B" 99
--------
996
--------
TELECOMMUNICATIONS (0.7%)
4,620 AT&T, Inc. 141
7,430 Cisco Systems, Inc. 387
7,180 Corning, Inc. 207
3,510 Juniper Networks, Inc. 87
1,720 T-Mobile US, Inc.(q) 126
10,390 Verizon Communications, Inc. 565
--------
1,513
--------
Total Communications 3,090
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 19
================================================================================
-----------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------
CONSUMER, CYCLICAL (1.4%)
-------------------------
AIRLINES (0.1%)
2,130 Delta Air Lines, Inc. $ 110
1,540 Southwest Airlines Co. 73
970 United Continental Holdings, Inc.(q) 75
--------
258
--------
APPAREL (0.1%)
1,840 NIKE, Inc."B" 142
--------
AUTO MANUFACTURERS (0.0%)
2,360 General Motors Co. 79
--------
AUTO PARTS & EQUIPMENT (0.1%)
1,900 BorgWarner, Inc. 67
620 Lear Corp. 74
--------
141
--------
DISTRIBUTION/WHOLESALE (0.1%)
4,060 Fastenal Co. 124
220 WW Grainger, Inc. 58
--------
182
--------
ENTERTAINMENT (0.1%)
2,460 Live Nation Entertainment, Inc.(q) 150
--------
HOME BUILDERS (0.1%)
20 NVR, Inc.(q) 64
1,680 PulteGroup, Inc. 52
--------
116
--------
LEISURE TIME (0.1%)
1,660 Carnival Corp. 85
2,990 Harley-Davidson, Inc. 98
1,420 Norwegian Cruise Line Holdings Ltd.(q) 77
--------
260
--------
LODGING (0.0%)
1,300 Las Vegas Sands Corp. 72
--------
RETAIL (0.7%)
1,490 Best Buy Co., Inc. 93
4,370 Gap, Inc. 82
680 Home Depot, Inc. 129
1,630 Kohl's Corp. 80
1,280 Lowe's Cos, Inc. 119
420 Lululemon Athletica, Inc.(q) 70
3,460 Macy's, Inc. 71
================================================================================
20 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------
550 McDonald's Corp. $ 109
280 O'Reilly Automotive, Inc. (q) 104
6,990 Qurate Retail, Inc.(q) 88
1,300 Ross Stores, Inc. 121
2,130 Starbucks Corp. 162
2,720 TJX Companies, Inc. 137
1,020 Tractor Supply Co. 103
310 Ulta Salon Cosmetics & Fragrance, Inc.(q) 103
2,640 Walgreens Boots Alliance, Inc. 130
--------
1,701
--------
TEXTILES (0.0%)
790 Mohawk Industries, Inc.(q) 107
--------
Total Consumer, Cyclical 3,208
--------
CONSUMER, NON-CYCLICAL (2.5%)
-----------------------------
AGRICULTURE (0.0%)
2,270 Altria Group, Inc. 111
--------
BEVERAGES (0.2%)
4,480 Coca-Cola Co. 220
1,550 Molson Coors Brewing Co. "B" 85
1,870 PepsiCo, Inc. 240
--------
545
--------
BIOTECHNOLOGY (0.3%)
1,460 Amgen, Inc. 243
700 Biogen, Inc.(q) 154
1,540 Celgene Corp.(q) 144
2,480 Gilead Sciences, Inc. 154
1,090 United Therapeutics Corp.(q) 92
--------
787
--------
COMMERCIAL SERVICES (0.4%)
520 Automatic Data Processing, Inc. 83
930 Ecolab, Inc. 171
870 Moody's Corp. 159
1,230 PayPal Holdings, Inc.(q) 135
750 S&P Global, Inc. 161
780 United Rentals, Inc.(q) 86
--------
795
--------
COSMETICS/PERSONAL CARE (0.2%)
690 Estee Lauder Companies, Inc. "A" 111
2,290 Procter & Gamble Co. 236
--------
347
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 21
================================================================================
-----------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------
FOOD (0.3%)
990 Hershey Co. $ 131
980 Ingredion, Inc. 75
910 JM Smucker Co. 111
5,810 Kroger Co. 132
1,680 Sysco Corp. 115
1,770 Tyson Foods, Inc. "A" 134
--------
698
--------
HEALTHCARE PRODUCTS (0.2%)
1,200 Danaher Corp. 158
350 Edwards Lifesciences Corp.(q) 60
420 IDEXX Laboratories, Inc.(q) 105
550 Thermo Fisher Scientific, Inc. 147
--------
470
--------
HEALTHCARE-SERVICES (0.3%)
2,490 DaVita, Inc.(q) 108
570 HCA Healthcare, Inc. 69
1,130 Quest Diagnostics, Inc. 108
610 UnitedHealth Group, Inc. 148
1,130 Universal Health Services, Inc. "B" 135
--------
568
--------
PHARMACEUTICALS (0.6%)
1,680 AmerisourceBergen Corp. 131
1,440 Bristol-Myers Squibb Co. 65
2,470 Cardinal Health, Inc. 104
1,850 CVS Health Corp. 97
760 Eli Lilly & Co. 88
2,090 Johnson & Johnson 274
930 McKesson Corp. 114
1,610 Merck & Co., Inc. 127
3,160 Pfizer, Inc. 131
1,830 Zoetis, Inc. 185
--------
1,316
--------
Total Consumer, Non-cyclical 5,637
--------
ENERGY (0.5%)
-------------
OIL & GAS (0.4%)
3,490 ConocoPhillips 206
3,130 Exxon Mobil Corp. 221
2,680 HollyFrontier Corp. 102
2,210 Marathon Petroleum Corp. 102
================================================================================
22 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------
3,400 Occidental Petroleum Corp. $ 169
1,850 Phillips 66 149
1,310 Valero Energy Corp. 92
--------
1,041
--------
PIPELINES (0.1%)
1,720 ONEOK, Inc. 110
3,340 Plains GP Holdings, LP "A"(q) 75
--------
185
--------
Total Energy 1,226
--------
FINANCIAL (1.5%)
----------------
BANKS (0.7%)
8,540 Bank of America Corp. 227
2,100 CIT Group, Inc. 100
5,960 Citigroup, Inc. 370
4,160 J.P. Morgan Chase & Co. 441
4,490 KeyCorp. 72
760 PNC Financial Services Group, Inc. 97
4,490 Regions Financial Corp. 62
2,610 U.S. Bancorp. 131
--------
1,500
--------
DIVERSIFIED FINANCIAL SERVICES (0.5%)
900 Alliance Data Systems Corp. 124
3,710 Ally Financial, Inc. 107
1,880 American Express Co. 216
1,190 Capital One Financial Corp. 102
1,060 Discover Financial Services 79
1,070 Mastercard, Inc. "A" 269
3,127 Synchrony Financial 105
1,270 Visa, Inc."A" 205
--------
1,207
--------
INSURANCE (0.3%)
780 Aon plc 140
340 Berkshire Hathaway, Inc. "B"(q) 67
1,910 MetLife, Inc. 88
1,610 Principal Financial Group, Inc. 83
1,900 Progressive Corp. 151
830 Prudential Financial, Inc. 77
--------
606
--------
Total Financial 3,313
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 23
================================================================================
-----------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------
INDUSTRIAL (0.9%)
-----------------
AEROSPACE/DEFENSE (0.2%)
360 Boeing Co. $ 123
510 Lockheed Martin Corp. 173
1,690 Spirit AeroSystems Holdings, Inc. "A" 137
--------
433
--------
BUILDING MATERIALS (0.0%)
2,260 Owens Corning 109
--------
ELECTRONICS (0.3%)
950 Allegion plc 92
1,000 Garmin Ltd. 76
1,190 Honeywell International, Inc. 196
160 Mettler-Toledo International, Inc.(q) 116
440 Waters Corp.(q) 88
--------
568
--------
MACHINERY-CONSTRUCTION & MINING (0.1%)
940 Caterpillar, Inc. 113
--------
MISCELLANEOUS MANUFACTURERS (0.1%)
890 3M Co. 142
920 Illinois Tool Works, Inc. 129
--------
271
--------
TRANSPORTATION (0.2%)
1,410 CSX Corp. 105
620 Norfolk Southern Corp. 121
700 Union Pacific Corp. 117
1,510 United Parcel Service, Inc. "B" 140
--------
483
--------
Total Industrial 1,977
--------
TECHNOLOGY (1.8%)
-----------------
COMPUTERS (0.5%)
760 Accenture plc "A" 135
2,040 Apple, Inc. 357
10,250 Hewlett Packard Enterprise Co. 141
1,190 International Business Machines Corp. 151
1,240 NetApp, Inc. 73
4,170 Seagate Technology plc 175
2,810 Western Digital Corp. 105
--------
1,137
--------
================================================================================
24 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------
OFFICE/BUSINESS EQUIPMENT (0.1%)
3,770 Xerox Corp. $ 115
--------
SEMICONDUCTORS (0.4%)
1,840 Applied Materials, Inc. 71
4,020 Intel Corp. 177
600 Lam Research Corp. 105
4,860 Micron Technology, Inc.(q) 159
660 NVIDIA Corp. 89
930 Skyworks Solutions, Inc. 62
1,920 Texas Instruments, Inc. 200
1,210 Xilinx, Inc. 124
--------
987
--------
SOFTWARE (0.8%)
370 Adobe, Inc.(q) 100
328 Covetrus, Inc.(q) 8
1,150 Electronic Arts, Inc.(q) 107
850 Intuit, Inc. 208
6,690 Microsoft Corp. 827
550 MSCI, Inc. 121
2,050 Paychex, Inc. 176
1,010 Veeva Systems, Inc. "A"(q) 156
1,110 VMware, Inc. "A" 197
--------
1,900
--------
Total Technology 4,139
--------
UTILITIES (0.3%)
----------------
ELECTRIC (0.3%)
10,270 AES Corp. 162
600 Dominion Energy, Inc. 45
3,310 Exelon Corp. 159
590 NextEra Energy, Inc. 117
3,020 PPL Corp. 90
2,200 Southern Co. 118
--------
Total Utilities 691
--------
Total Common Stocks (cost: $23,684) 23,386
--------
EXCHANGE-TRADED FUNDS (4.6%)
25,200 iShares Core S&P 500 ETF 6,988
27,400 Vanguard Small-Cap Value ETF 3,367
--------
Total Exchange-Traded Funds (cost: $10,071) 10,355
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 25
================================================================================
-----------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------
PREFERRED STOCKS (1.5%)
COMMUNICATIONS (0.2%)
---------------------
TELECOMMUNICATIONS (0.2%)
20,000 Qwest Corp., 6.50% $ 460
--------
CONSUMER, NON-CYCLICAL (0.6%)
-----------------------------
AGRICULTURE (0.4%)
32,000 CHS, Inc., cumulative redeemable "B", 7.88%(s) 879
--------
FOOD (0.2%)
5,000 Dairy Farmers of America, Inc., cumulative redeemable, 7.88%(a),(s) 494
--------
Total Consumer, Non-cyclical 1,373
--------
ENERGY (0.2%)
-------------
OIL & GAS (0.2%)
1,220 Chesapeake Energy Corp., 5.75%(a),(s) 588
--------
FINANCIAL (0.5%)
----------------
BANKS (0.5%)
1,035 M&T Bank Corp., cumulative redeemable, 6.38%(s) 1,051
--------
Total Preferred Stocks (cost: $3,808) 3,472
--------
Total U.S. Equity Securities (cost: $37,563) 37,213
--------
GLOBAL REAL ESTATE EQUITY SECURITIES (1.8%)
COMMON STOCKS (0.3%)
FINANCIAL (0.3%)
----------------
REAL ESTATE (0.1%)
4,060 CBRE Group, Inc. "A"(q) 185
730 Jones Lang LaSalle, Inc. 91
--------
276
--------
REITS (0.2%)
810 American Tower Corp. 169
6,180 Kimco Realty Corp. 108
920 Simon Property Group, Inc. 149
1,030 Welltower, Inc. 84
--------
510
--------
Total Financial 786
--------
Total Common Stocks (cost: $813) 786
--------
================================================================================
26 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------
EXCHANGE-TRADED FUNDS (1.5%)
38,080 Vanguard Real Estate ETF (cost: $3,091) $ 3,309
--------
Total Global Real Estate Equity Securities (cost: $3,904) 4,095
--------
PRECIOUS METALS AND COMMODITY-RELATED SECURITIES (0.8%)
COMMON STOCKS (0.1%)
BASIC MATERIALS (0.1%)
----------------------
CHEMICALS (0.0%)
1,100 LyondellBasell Industries N.V. "A" 82
--------
FOREST PRODUCTS & PAPER (0.1%)
3,770 International Paper Co. 156
--------
MINING (0.0%)
24,262 Hycroft Mining Corp.(f),(g),(h),(q) 1
--------
Total Basic Materials 239
--------
Total Common Stocks (cost: $1,144) 239
--------
EXCHANGE-TRADED FUNDS (0.7%)
6,700 First Trust Global Tactical Commodity Strategy Fund 121
22,900 Invesco DB Commodity Index Tracking Fund 347
5,900 United States Commodity Index Fund(q) 214
23,800 VanEck Vectors Gold Miners ETF 514
8,800 VanEck Vectors Junior Gold Miners ETF 260
--------
Total Exchange-Traded Funds (cost: $1,704) 1,456
--------
Total Precious Metals and Commodity-Related Securities (cost: $2,848) 1,695
--------
-----------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
-----------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (3.6%)
COMMERCIAL PAPER (1.7%)
$ 598 Amphenol Corp.(a) 2.58% 6/05/2019 598
1,000 CSLB Holdings, Inc.(a) 2.58 6/06/2019 1,000
331 Enbridge (US), Inc.(a) 2.65 6/04/2019 331
600 Energy Transfer Partners(a) 3.00 6/03/2019 600
770 Eversource Energy(a) 2.55 6/04/2019 770
589 Puget Sound Energy Capital Trust 2.60 6/19/2019 588
--------
Total Commercial Paper (cost: $3,887) 3,887
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 27
================================================================================
-----------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (1.9%)
4,344,163 State Street Institutional Treasury Money Market Fund
Premier Class, 2.30%(t) (cost: $4,344) $ 4,344
--------
Total Money Market Instruments (cost: $8,231) 8,231
--------
SHORT-TERM INVESTMENT PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (3.1%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (3.1%)
6,978,749 HSBC U.S. Government Money Market Fund Class I, 2.33%(t) 6,979
--------
Total Short-Term Investment Purchased with Cash Collateral from
Securities Loaned (cost: $6,979) 6,979
--------
TOTAL INVESTMENTS (COST: $231,498) $233,054
========
-----------------------------------------------------------------------------------------------------------
UNREALIZED
NOTIONAL CONTRACT APPRECIATION/
NUMBER OF EXPIRATION AMOUNT VALUE (DEPRECIATION)
CONTRACTS DESCRIPTION DATE (000) (000) (000)
-----------------------------------------------------------------------------------------------------------
FUTURES (2.0%)
SHORT FUTURES
INTEREST RATE CONTRACTS
29 U.S. Treasury Bond 9/19/2019 USD (4,360) $(4,458) $(98)
------- ----
TOTAL SHORT FUTURES $(4,458) $(98)
------- ----
TOTAL FUTURES $(4,458) $(98)
======= ====
================================================================================
28 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
-----------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
-----------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-----------------------------------------------------------------------------------------------------------
Bonds:
Asset-Backed Securities $ - $ 3,717 $ - $ 3,717
Bank Loans - 429 - 429
Collateralized Mortgage Obligations - 659 - 659
Commercial Mortgage Securities - 1,762 - 1,762
Convertible Securities - 660 23 683
Corporate Obligations - 12,827 - 12,827
Eurodollar and Yankee Obligations - 2,099 21 2,120
Fixed-Income Exchange-Traded Funds 28,914 - - 28,914
U.S. Government Agency Issues - 29,696 - 29,696
U.S. Treasury Securities 51,164 2,074 - 53,238
International Equity Securities:
Common Stocks 302 - - 302
Exchange-Traded Funds 39,857 - - 39,857
Preferred Stocks - 637 - 637
U.S. Equity Securities:
Common Stocks 23,386 - - 23,386
Exchange-Traded Funds 10,355 - - 10,355
Preferred Stocks - 3,472 - 3,472
Global Real Estate Equity Securities:
Common Stocks 786 - - 786
Exchange-Traded Funds 3,309 - - 3,309
Precious Metals and Commodity-Related
Securities:
Common Stocks 238 - 1 239
Exchange-Traded Funds 1,456 - - 1,456
Money Market Instruments:
Commercial Paper - 3,887 - 3,887
Government & U.S. Treasury Money
Market Funds 4,344 - - 4,344
Short-Term Investment Purchased with
Cash Collateral from Securities Loaned:
Government & U.S. Treasury Money
Market Funds 6,979 - - 6,979
-----------------------------------------------------------------------------------------------------------
Total $171,090 $61,919 $45 $233,054
-----------------------------------------------------------------------------------------------------------
LIABILITIES LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-----------------------------------------------------------------------------------------------------------
Futures(1) $ (98) $ - $ - $ (98)
-----------------------------------------------------------------------------------------------------------
Total $ (98) $ - $ - $ (98)
-----------------------------------------------------------------------------------------------------------
(1) Futures are valued at the unrealized appreciation/(depreciation) on the
investment.
================================================================================
PORTFOLIO OF INVESTMENTS | 29
================================================================================
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 compliance classification.
At May 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
30 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 2019
--------------------------------------------------------------------------------
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 20.1% of net assets at May 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,
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 31
================================================================================
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.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
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
================================================================================
32 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
will estimate the components of distributions from these
securities and revise when actual distributions are known.
STRIPS Separate trading of registered interest and principal of
securities
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) 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) Variable-rate security - interest rate is adjusted periodically. The
interest rate disclosed represents the rate at May 31, 2019.
(c) 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 May 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.
(d) Stated interest rates may change slightly over time as underlying
mortgages paydown.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 33
================================================================================
(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
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) Security was fair valued at May 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 $45,000, which represented less than 0.1% of the Fund's net assets.
(g) Security deemed illiquid by USAA Asset Management Company, under
liquidity guidelines approved by USAA Mutual Funds Trust's Board of
Trustees.
(h) Security was classified as Level 3.
(i) 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.
(j) All of the coupon is PIK.
(k) 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.
================================================================================
34 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
(l) At May 31, 2019, the issuer was in default with respect to interest
and/or principal payments.
(m) The security, or a portion thereof, was out on loan as of May 31,
2019.
(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) The security, or a portion thereof, is segregated to cover the value
of open futures contracts at May 31, 2019.
(p) Securities with a value of $985,000 are segregated as collateral for
initial margin requirements on open futures contracts.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 35
================================================================================
(q) Non-income-producing security.
(r) Investment in affiliated exchange-traded fund.
(s) Security is perpetual and has no final maturity date but may be
subject to calls at various dates in the future.
(t) Rate represents the money market fund annualized seven-day yield at
May 31, 2019.
See accompanying notes to financial statements.
================================================================================
36 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in unaffiliated securities, at market value
(including securities on loan of $6,790) (cost of $231,029) $232,639
Investments in affiliated underlying funds, at market value (cost of $469) 415
Cash 2,361
Cash denominated in foreign currencies (identified cost of $7) 3
Receivables:
Capital shares sold 149
USAA Asset Management Company (Note 6) 96
Dividends and interest 589
Securities sold 163
Other 1
--------
Total assets 236,416
--------
LIABILITIES
Payables:
Upon return of securities loaned 6,979
Securities purchased 2,456
Capital shares redeemed 86
Payable to broker 120
Variation margin on futures contracts 98
Accrued management fees 97
Accrued transfer agent's fees 25
Other accrued expenses and payables 71
--------
Total liabilities 9,932
--------
Net assets applicable to capital shares outstanding $226,484
========
NET ASSETS CONSIST OF:
Paid-in capital $225,720
Distributable earnings 764
--------
Net assets applicable to capital shares outstanding $226,484
========
Capital shares outstanding, no par value 20,701
========
Net asset value, redemption price, and offering price per share $ 10.94
========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 37
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Income distributions from affiliated underlying funds $ 9
Dividends 3,427
Interest 3,391
Securities lending (net) 93
-------
Total income 6,920
-------
EXPENSES
Management fees 1,110
Administration and servicing fees 333
Transfer agent's fees 561
Custody and accounting fees 172
Postage 27
Shareholder reporting fees 22
Trustees' fees 37
Registration fees 33
Professional fees 81
Other 15
-------
Total expenses 2,391
-------
Expenses reimbursed (394)
-------
Net expenses 1,997
-------
NET INVESTMENT INCOME 4,923
-------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FOREIGN CURRENCY, AND FUTURES CONTRACTS
Net realized gain (loss) on:
Investments 5
Foreign currency transactions 1
Futures transactions (242)
Change in net unrealized appreciation/(depreciation) of:
Unaffiliated investments (2,196)
Affiliated investments (Note 8) (53)
Futures contracts (268)
-------
Net realized and unrealized loss (2,753)
-------
Increase in net assets resulting from operations $ 2,170
=======
See accompanying notes to financial statements.
================================================================================
38 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
-----------------------------------------------------------------------------------------
2019 2018
-----------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 4,923 $ 3,989
Net realized gain on investments 5 7,893
Net realized gain on foreign currency transactions 1 50
Net realized gain on long-term capital gain
distributions from other investment companies - 6
Net realized gain (loss) on futures transactions (242) 1,573
Change in net unrealized appreciation/(depreciation) of:
Investments (2,249) (4,872)
Foreign currency translations - (11)
Futures contracts (268) (381)
-------------------------
Increase in net assets resulting from operations 2,170 8,247
-------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS (8,928) (9,089)
-------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 46,063 54,580
Reinvested dividends 8,481 8,519
Cost of shares redeemed (43,023) (49,806)
-------------------------
Increase in net assets from capital share
transactions 11,521 13,293
-------------------------
Net increase in net assets 4,763 12,451
NET ASSETS
Beginning of year 221,721 209,270
-------------------------
End of year $226,484 $221,721
=========================
CHANGE IN SHARES OUTSTANDING
Shares sold 4,196 4,770
Shares issued for dividends reinvested 792 746
Shares redeemed (3,919) (4,344)
-------------------------
Increase in shares outstanding 1,069 1,172
=========================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 39
================================================================================
NOTES TO FINANCIAL STATEMENTS
May 31, 2019
--------------------------------------------------------------------------------
(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 Cornerstone Moderately Conservative Fund (the Fund) qualifies as a
registered investment company under Accounting Standards Codification Topic 946.
The information presented in this annual 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 current
income with a secondary focus on capital appreciation.
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 Holdings, a global investment management firm
headquartered in Cleveland, Ohio (the Transaction), on July 1, 2019.
A special shareholder meeting was held on April 18, 2019, at which shareholders
of the Fund approved a new investment advisory agreement between the Trust, on
behalf of the Fund, and Victory Capital, an independent investment management
company. In addition, shareholders of the Fund also elected the following two
new directors to the Board of the Trust to serve upon the closing of the
Transaction: (1) David C. Brown, to serve as an Interested Trustee; and (2) John
C. Walters, to serve as an Independent Trustee. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION.
================================================================================
40 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
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 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 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 | 41
================================================================================
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. 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.
================================================================================
42 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
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.
9. 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.
10. 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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 43
================================================================================
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. 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 May 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
================================================================================
44 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
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 unfavorable direction, in which case, the Fund
may not achieve the anticipated benefits of the futures contracts.
FAIR VALUES OF DERIVATIVE INSTRUMENTS AS OF MAY 31, 2019*
(IN THOUSANDS)
LIABILITY DERIVATIVES
--------------------------------------------------------------------------------------------------
STATEMENT OF
DERIVATIVES NOT ASSETS AND FOREIGN
ACCOUNTED FOR AS LIABILITIES INTEREST RATE EQUITY EXCHANGE
HEDGING INSTRUMENTS LOCATION CONTRACTS CONTRACTS CONTRACTS TOTAL
--------------------------------------------------------------------------------------------------
USAA Cornerstone
Moderately Distributable
Conservative Fund earnings $(98)** $- $- $(98)
--------------------------------------------------------------------------------------------------
* For open derivative instruments as of May 31, 2019, see the Portfolio of
Investments, which also is indicative of activity for the year ended
May 31, 2019.
** 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
YEAR ENDED MAY 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 Cornerstone Net realized
Moderately gain on
Conservative Fund Futures
transactions $(220) $(22) $- $(242)
--------------------------------------------------------------------------------------------------
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 Cornerstone Change in net
Moderately unrealized
Conservative Fund appreciation/
(depreciation)
of Futures
contracts $(106) $(162) $- $(268)
--------------------------------------------------------------------------------------------------
================================================================================
NOTES TO FINANCIAL STATEMENTS | 45
================================================================================
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 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 year ended May 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. Such
fluctuations
================================================================================
46 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
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 | 47
================================================================================
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 year ended May 31, 2019, the Fund paid CAPCO facility fees of $2,000,
which represents 0.3% of the total fees paid to CAPCO by the funds of the
Trusts. The Fund had no borrowings under this agreement during the year ended
May 31, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL
STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
(3) DISTRIBUTIONS
The character of any distributions made during the year from net investment
income or net realized gains is determined in accordance with federal tax
================================================================================
48 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
regulations and may differ from those determined in accordance with U.S.
generally accepted accounting principles. Also, due to the timing of
distributions, the fiscal year in which amounts are distributed may differ from
the year that the income or realized gains were recorded by the Fund.
During the current fiscal year, permanent differences between book-basis and
tax-basis accounting for foreign currency, partnership basis, non-REIT return of
capital dividend, non-REIT capital gain dividend, REIT return of capital
dividend, REIT capital gain dividend, and additional adjustments resulted in
reclassifications to the Statement of Assets and Liabilities to increase
distributable earnings by less than $500 and decrease paid in capital by less
than $500. These reclassifications had no effect on net assets.
The tax character of distributions paid during the years ended May 31, 2019, and
2018, was as follows:
2019 2018
------------------------------
Ordinary income* $6,347,000 $5,355,000
Long-term realized capital gains 2,581,000 3,734,000
---------- ----------
Total distributions paid $8,928,000 $9,089,000
========== ==========
As of May 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 617,000
Accumulated capital and other losses (991,000)
Unrealized appreciation of investments 1,308,000
*Includes short-term realized capital gains, if any, which are taxable as
ordinary income.
The difference between book-basis and tax-basis unrealized appreciation of
investments is attributable to the tax deferral of losses on wash sales, REIT
return of capital dividend, non-REIT return of capital dividend, futures
contracts marked-to-market, hybrid interest accrual adjustment and partnership
basis adjustments.
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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 49
================================================================================
At May 31, 2019, the Fund had no capital loss carryforwards, for federal income
tax purposes. Net capital losses incurred after October 31, and within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. For the year ended May 31, 2019, the Fund deferred to June 1,
2019, post October capital losses of $991,000.
TAX BASIS OF INVESTMENTS - At May 31, 2019, the aggregate cost of investments
for federal income tax purposes and net unrealized appreciation/(depreciation)
on investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
FUND TAX COST APPRECIATION DEPRECIATION (DEPRECIATION)
---------------------------------------------------------------------------------------------------
USAA Cornerstone
Moderately Conservative Fund $231,742,000 $7,794,000 $(6,482,000) $1,312,000
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended May 31, 2019, were $172,917,000 and
$166,364,000, 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 year ended May 31, 2019 were as
follows:
NET REALIZED
PURCHASES SALES GAIN (LOSS)
----------------------------------------------------------------------------
$61,000 $- $-
(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
================================================================================
50 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
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 May 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
--------------------------------------------------------------------------------
$6,790,000 $- $6,979,000
(6) 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 year ended May 31, 2019, the Fund had no subadviser(s).
The Fund's investment management fee is accrued daily and paid monthly at an
annualized rate of 0.50% of the Fund's average daily net assets. For the year
ended May 31, 2019, the Fund incurred management fees, paid or payable to the
Manager, of $1,110,000.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 51
================================================================================
In addition, the Fund invests in affiliated USAA exchange-traded fund(s) (ETFs).
The Fund's management fee is reimbursed by the Manager to the extent of the
indirect management fee incurred through the Fund's proportional investment in
the affiliated ETF(s). For the year ended May 31, 2019, the Fund's management
fee was reimbursed by the Manager in an amount of $1,000, of which less than
$500 was receivable from the Manager. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE
TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
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 the Fund's
average daily net assets. For the year ended May 31, 2019, the Fund incurred
administration and servicing fees, paid or payable to the Manager, of $333,000.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and legal
services for the benefit of the Fund. The Board has approved the reimbursement
of a portion of these expenses incurred by the Manager. For the year ended
May 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. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
EXPENSE LIMITATION - The Manager agreed, through September 30, 2019, to limit
the total annual operating expenses of the Fund to 0.90% of its average daily
net assets, excluding extraordinary expenses and before reductions of any
expenses paid indirectly, and to reimburse the Fund for all expenses in excess
of that amount. This expense limitation arrangement may not be changed or
terminated through September 30, 2019, without approval of the Board, and may be
changed or terminated by the Manager at any time after that date. For the year
ended May 31, 2019, the Fund incurred reimbursable expenses of $394,000, of
which $96,000 was receivable from the Manager, which includes affiliated ETF(s)
management fee reimbursement expenses and receivables.
================================================================================
52 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
TRANSFER AGENT'S FEES - SAS, an affiliate of the Manager, provides transfer
agent services to the Fund based on an annual charge of $23 per shareholder
account plus out-of-pocket expenses. 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 year ended May 31, 2019, the Fund incurred
transfer agent's fees, paid or payable to SAS, of $561,000. PLEASE REFER TO THE
SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR
ADDITIONAL IMPORTANT INFORMATION.
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. PLEASE
REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL
REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
(7) TRANSACTIONS WITH AFFILIATES
The Manager is indirectly wholly owned by USAA, a large, diversified financial
services institution. At May 31, 2019, USAA and its affiliates owned 890,000
shares, which represents 4.3% 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. PLEASE REFER TO THE SUBSEQUENT EVENT
NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
(8) TRANSACTIONS WITH AFFILIATED FUNDS
A. SHARE OWNERSHIP - The Fund does not invest in the affiliated USAA Funds
for the purpose of exercising management or control; however, investments by
the Fund may represent a significant portion of the affiliated USAA Funds'
net assets. The affiliated funds' annual or semiannual reports may be viewed
at usaa.com. At May 31, 2019, the Fund owned the following percentages of
the total outstanding shares of each of USAA Funds:
AFFILIATED USAA FUND OWNERSHIP %
--------------------------------------------------------------------------------
MSCI Emerging Markets Value Momentum Blend Index ETF 0.2
================================================================================
NOTES TO FINANCIAL STATEMENTS | 53
================================================================================
B. TRANSACTIONS WITH AFFILIATED FUNDS - The following table provides details
related to the Fund's investment in the underlying USAA Funds for the year
ended May 31, 2019:
CHANGE
IN NET
($ IN 000s) REALIZED CAPITAL UNREALIZED
AFFILIATED PURCHASE SALES DIVIDEND GAIN GAIN APPRECIATION/ MARKET VALUE
USAA FUND COST PROCEEDS INCOME (LOSS) DISTRIBUTIONS DEPRECIATION 5/31/2018 5/31/2019
------------------------------------------------------------------------------------------------------------------
MSCI
Emerging
Markets
Value
Momentum
Blend Index
ETF $268 $- $9 $- $- $(53) $200 $415
(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.
(10) RECENT ACCOUNTING PRONOUNCEMENTS
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
================================================================================
54 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
(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 FASB issued 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 significant impact on the
financial statements and reporting disclosures of the Fund.
(11) SUBSEQUENT EVENT NOTE
As previously announced, and as discussed in Note 1 to the Financial Statements,
effective July 1, 2019, AMCO, the prior investment adviser to the Fund, and SAS,
the prior transfer agent to the Fund, were acquired by Victory Holdings. PLEASE
SEE THE SUPPLEMENT DATED JULY 1, 2019 TO THE FUND'S PROSPECTUS FOR ADDITIONAL
IMPORTANT INFORMATION.
Effective July 1, 2019, Victory Capital is the new investment adviser and
administrator to the USAA Mutual Funds; SAS was renamed Victory Capital Transfer
Agency, Inc.; Victory Capital Advisers, Inc. is the new distributor to the USAA
Mutual Funds; Citi Fund Services of Ohio, Inc. serves as sub-administrator and
sub-fund accountant for the USAA Mutual Funds; and FIS Investor Services LLC
serve as sub-transfer agent and dividend disbursing agent for the USAA Mutual
Funds. Effective August 5, 2019, Citibank, N.A. is the new custodian for the
USAA Mutual Funds.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2019 permitting the
use of a "manager-of-managers" structure for certain funds. Prior to that date,
the Trust relied on a similar exemptive order granted by the SEC to the
================================================================================
NOTES TO FINANCIAL STATEMENTS | 55
================================================================================
Trust and its affiliated persons. Under a manager of managers structure, the
investment adviser may select (with approval of the Board and without
shareholder approval) one or more subadvisers to manage the day-to-day
investment of a fund's assets.
Effective July 1, 2019, under the investment advisory agreement with Victory
Capital, which took effect on July 1, 2019, no performance adjustments will be
made for periods beginning July 1, 2019, through June 30, 2020, and only
performance beginning as of July 1, 2020, and thereafter will be utilized in
calculating performance adjustments through June 30, 2020.
Effective July 1, 2019, the line of credit (as discussed in the Notes to the
Financial Statements in this annual report) among the Trust, with respect to its
Funds, and CAPCO terminated; the Trust, with respect to its Funds, along with
series of Victory Portfolios, Victory Portfolios II and Victory Variable
Insurance Funds, entered into a 364 day committed credit facility and a 364 day
uncommitted, demand credit facility with Citibank, N.A. (Citibank). Each such
credit facility may be renewed if so agreed by the parties. Under the agreement
with Citibank, the Funds may borrow up to $600 million, of which $300 million is
committed and $300 million is uncommitted. Of this amount, $40 million of the
line of credit is reserved for use by the Victory Floating Rate Fund (a series
of Victory Portfolios), with that Fund paying the related commitment fees for
that amount. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption request that might otherwise require the untimely
disposition of securities. Citibank receives an annual commitment fee of 0.15%.
Each Fund pays a pro-rata portion of this commitment fee plus any interest on
amounts borrowed.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2017 (the IFL
Order), permitting the establishment and operation of an Interfund Lending
Facility (the Facility). The Facility allows each Fund to directly lend and
borrow money to or from certain other affiliated Funds relying upon the IFL
Order at rates beneficial to both the borrowing and lending funds. Advances
under the Facility are allowed for temporary or emergency purposes, including
the meeting of redemption requests that are subject to each Fund's borrowing
restrictions. The interfund loan rate is determined, as specified in the IFL
Order, by averaging the current repurchase agreement rate and the current bank
loan rate.
================================================================================
56 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
--------------------------------------------------------------------
2019 2018 2017 2016 2015
--------------------------------------------------------------------
Net asset value at
beginning of period $ 11.29 $ 11.34 $ 10.67 $ 11.42 $ 11.52
--------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .24 .21 .23 .28 .26
Net realized and
unrealized gain (loss) (.14) .23 .68 (.68) .03
--------------------------------------------------------------------
Total from investment
operations .10 .44 .91 (.40) .29
--------------------------------------------------------------------
Less distributions from:
Net investment income (.24) (.21) (.24) (.26) (.27)
Realized capital gains (.21) (.28) - (.09) (.12)
--------------------------------------------------------------------
Total distributions (.45) (.49) (.24) (.35) (.39)
--------------------------------------------------------------------
Net asset value at
end of period $ 10.94 $ 11.29 $ 11.34 $ 10.67 $ 11.42
====================================================================
Total return (%)* .99 3.89 8.65 (3.50) 2.58
Net assets at end of
period (000) $226,484 $221,721 $209,270 $194,376 $204,535
Ratios to average
daily net assets:**
Expenses (%)(a) .90 .90 .90 .90 .90
Expenses, excluding
reimbursements (%)(a) 1.08 1.07 1.09 1.09 1.05
Net investment income (%) 2.22 1.84 2.12 2.56 2.43
Portfolio turnover (%) 77(c) 45 55 70(b) 37
* 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 year ended May 31, 2019, average daily net assets were $222,070,000.
(a) Does not include acquired fund fees, if any.
(b) Reflects increased trading activity due to changes in asset allocation
strategies.
(c) Reflects increased usage of quantitative investment strategies.
================================================================================
FINANCIAL HIGHLIGHTS | 57
================================================================================
EXPENSE EXAMPLE
May 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 December 1, 2018, through
May 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 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,
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58 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
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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 DECEMBER 1, 2018 -
DECEMBER 1, 2018 MAY 31, 2019 MAY 31, 2019
------------------------------------------------------------------
Actual $1,000.00 $1,036.20 $4.57
Hypothetical
(5% return before expenses) 1,000.00 1,020.44 4.53
*Expenses are equal to the Fund's annualized expense ratio of 0.90%, which is
net of any reimbursements and expenses paid indirectly, multiplied by the
average account value over the period, multiplied by 182 days/365 days (to
reflect the one-half-year period). The Fund's actual ending account value is
based on its actual total return of 3.62% for the six-month period of
December 1, 2018, through May 31, 2019.
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EXPENSE EXAMPLE | 59
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the (i) new investment
advisory agreement between the Trust and Victory Capital and (ii) new investment
subadvisory agreements between certain subadvisers and Victory Capital, which
became effective on July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO
THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
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.
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60 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
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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 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
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ADVISORY AGREEMENT(S) | 61
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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 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.
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62 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
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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.
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).
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ADVISORY AGREEMENT(S) | 63
================================================================================
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.
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.
(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 CORNERSTONE MODERATELY CONSERVATIVE FUND
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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 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.
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ADVISORY AGREEMENT(S) | 65
================================================================================
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 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,
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66 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
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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.
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.
(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) | 67
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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 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
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68 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
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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 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.
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ADVISORY AGREEMENT(S) | 69
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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 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.
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70 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
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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
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.
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ADVISORY AGREEMENT(S) | 71
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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
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
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72 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
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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 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.
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ADVISORY AGREEMENT(S) | 73
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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. 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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74 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND THE MANAGER)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the continuation of the
(i) investment advisory agreement between the Trust and AMCO and (ii) investment
subadvisory agreements between certain subadvisers and AMCO, which were
effective until July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
At an in-person meeting of the Board of Trustees (the Board) held on April 17,
2019, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to the
Fund.(1)
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and the Manager, and were given
the opportunity to ask questions and request additional information from
management. The information provided to the Board included, among other things:
(i) a separate report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance, expenses, and
fees to comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the Manager's
revenues and costs of providing
(1)At an in-person meeting held on January 15, 2019, the Board, including
the Independent Trustees, approved a new investment advisory agreement
between the Trust, on behalf of the Fund, and Victory Capital Management
Inc. ("Victory Capital"). Upon the closing of the transaction, on behalf of
the Fund, Victory Capital Holdings, Inc., the parent company of Victory
Capital, the Advisory Agreement between the Trust and the Manager will
terminate and the new investment advisory agreement between the Trust and
Victory Capital will go into effect. The factors the Board considered in
approving the new investment advisory agreement with Victory Capital are
included in this annual report.
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ADVISORY AGREEMENT(S) | 75
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services to the Fund and compensation paid to affiliates of the Manager; and
(iii) information about the Manager's operations and personnel. Prior to voting,
the Independent Trustees reviewed the proposed continuance of the Advisory
Agreement with management and with experienced independent legal counsel
retained by the Independent Trustees (Independent Counsel) and received
materials from such Independent Counsel discussing the legal standards for their
consideration of the proposed continuation of the Advisory Agreement with
respect to the Fund. The Independent Trustees also reviewed the proposed
continuation of the Advisory Agreement with respect to the Fund in private
sessions with Independent Counsel at which no representatives of management were
present.
At each regularly scheduled meeting of the Board and its committees, the Board
receives and reviews, among other things, information concerning the Fund's
performance and related services provided by the Manager. At the meeting at
which the renewal of the Advisory Agreement is considered, particular focus is
given to information concerning Fund performance, fees and total expenses as
compared to comparable investment companies, and the Manager's profitability
with respect to the Fund. However, the Board noted that the evaluation process
with respect to the Manager is an ongoing one. In this regard, the Board's and
its committees' consideration of the Advisory Agreement included certain
information previously received at such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving the
Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent, and
quality of the services provided by the Manager under the Advisory Agreement,
the Board reviewed information provided by the Manager relating to its
operations and personnel. The Board also took into account its
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76 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
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knowledge of the Manager's management and the quality of the performance of the
Manager's duties through Board meetings, discussions, and reports during the
preceding year. The Board considered the fees paid to the Manager and the
services provided to the Fund by the Manager under the Advisory Agreement, as
well as other services provided by the Manager and its affiliates under other
agreements, and the personnel who provide these services. In addition to the
investment advisory services provided to the Fund, the Manager and its
affiliates provide administrative services, shareholder services, oversight of
Fund accounting, marketing services, assistance in meeting legal and regulatory
requirements, and other services necessary for the operation of the Fund and the
Trust. The Board also considered the significant risks assumed by the Manager in
connection with the services provided to the Fund, including investment,
operational, enterprise, litigation, regulatory and compliance risks.
The Board considered the Manager's management style and the performance of the
Manager's duties under the Advisory Agreement. The Board considered the level
and depth of experience of the Manager, including the professional experience
and qualifications of its senior and investment personnel, as well as current
staffing levels. The allocation of the Fund's brokerage, including the Manager's
process for monitoring "best execution" and the utilization of "soft dollars,"
also were considered. The Manager's role in coordinating the activities of the
Fund's other service providers also was considered.
The Board also considered the Manager's risk management processes. The Board
considered the Manager's financial condition and that it had the financial
wherewithal to continue to provide the same scope and high quality of services
under the Advisory Agreement. In reviewing the Advisory Agreement, the Board
focused on the experience, resources, and strengths of the Manager and its
affiliates in managing the Fund, as well as the other funds in the Trust.
The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager and its affiliates, including oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as
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ADVISORY AGREEMENT(S) | 77
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trustees of the Trust also focused on the quality of the Manager's compliance
and administrative staff.
EXPENSES AND PERFORMANCE - In connection with its consideration of the Advisory
Agreement, the Board evaluated the Fund's advisory fees and total expense ratio
as compared to other open-end investment companies deemed to be comparable to
the Fund as determined by the independent third party in its report. The Fund's
expenses were compared to (i) a group of investment companies chosen by the
independent third party to be comparable to the Fund based upon certain factors,
including fund type, comparability of investment objective and classification,
sales load type (in this case, retail investment companies with no sales loads),
asset size, and expense components (the "expense group") and (ii) a larger group
of investment companies that includes all no-load retail open-end investment
companies with the same investment classification/objective as the Fund
regardless of asset size, excluding outliers (the "expense universe"). Among
other data, the Board noted that the Fund's management fee rate - which includes
advisory and administrative services - was below the median of its expense group
and equal to the median of its expense universe. The data indicated that the
Fund's total expenses were below the median of its expense group and equal to
the median of its expense universe. The Board took into account the various
services provided to the Fund by the Manager and its affiliates, including the
high quality of services received by the Fund from the Manager. The Board also
noted the level and method of computing the Fund's management fee. The Board
also took into account management's discussion with respect to the Fund's
expenses. The Board also considered that the Fund's management fee rate was
reduced in October 2016. The Board also considered that the Fund's management
fee was reduced further and that the performance fee component was eliminated in
April 2017. In considering the Fund's performance, the Board noted that it
reviews at its regularly scheduled meetings information about the Fund's
performance results. The Trustees also reviewed various comparative data
provided to them in connection with their consideration of the renewal of the
Advisory Agreement, including, among other information, a comparison of the
Fund's average annual total return with its Lipper index and with that of other
mutual funds deemed to be in its peer group by the independent third
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78 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
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party in its report (the "performance universe"). The Fund's performance
universe consisted of the Fund and all retail and institutional open-end
investment companies with the same classification/objective as the Fund
regardless of asset size or primary channel of distribution. This comparison
indicated that, among other data, the Fund's performance was lower than the
average of its performance universe and its Lipper index for the one-, three-,
five-, and ten-year periods ended December 31, 2018. The Board also noted that
the Fund's percentile performance ranking was in the bottom 50% of its
performance universe for the one-, three-, five-, and ten-year periods ended
December 31, 2018. The Board took into account management's discussion of the
Fund's performance, including the Fund's investment approach and the impact of
market conditions on the Fund's performance.
COMPENSATION AND PROFITABILITY - The Board took into consideration the level and
method of computing the Fund's management fee. The information considered by the
Board included operating profit margin information for the Manager's business as
a whole. The Board also received and considered profitability information
related to the management revenues from the Fund. This information included a
review of the methodology used in the allocation of certain costs to the Fund.
The Trustees reviewed the profitability of the Manager's relationship with the
Fund before tax expenses. The Board was also provided with an Investment
Management Profitability Analysis prepared by an independent information
service. In reviewing the overall profitability of the management fee to the
Manager, the Board also considered the fact that affiliates provide shareholder
servicing and administrative services to the Fund for which they receive
compensation. The Board also considered the possible direct and indirect
benefits to the Manager from its relationship with the Trust, including that the
Manager may derive reputational and other benefits from its association with the
Fund. The Trustees recognized that the Manager should be entitled to earn a
reasonable level of profits in exchange for the level of services it provides to
the Fund and the entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussions of
the current advisory fee structure. The Board
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ADVISORY AGREEMENT(S) | 79
================================================================================
also considered the effect of the Fund's growth and size on its performance and
fees, noting that if the Fund's assets increase over time, the Fund may realize
other economies of scale if assets increase proportionally more than some
expenses. The Board determined that the current investment management fee
structure was reasonable.
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) the performance of the Fund is
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
management is appropriately monitoring the Fund's performance; (iv) the Fund's
advisory expenses are reasonable in relation to those of similar funds and to
the services to be provided by the Manager; and (v) the Manager and its
affiliates' level of profitability from their relationship with the Fund is
reasonable in light of the nature and high quality of services provided by the
Manager and the type of fund. Based on its conclusions, the Board determined
that continuation of the Advisory Agreement would be in the best interests of
the Fund and its shareholders.
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80 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
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TRUSTEES' AND OFFICERS' INFORMATION
TRUSTEES AND OFFICERS OF THE TRUST
--------------------------------------------------------------------------------
As of July 1, 2019, the Board of Trustees (the Board) of the Trust consists of
ten Trustees. These Trustees and the Trust's Officers supervise the business
affairs of the USAA family of funds. The Board is responsible for the general
oversight of the funds' business and for assuring that the funds are managed in
the best interests of each fund's respective shareholders. The Board
periodically reviews the funds' investment performance as well as the quality of
other services provided to the funds and their shareholders by each of the
fund's service providers, including the adviser and its affiliates. Pursuant to
a policy adopted by the Board, the term of office for each Trustee shall be
until the Trustee reaches age 75. The Board may change or grant exceptions from
this policy at any time without shareholder approval. A Trustee may resign or be
removed by a vote of two-thirds of the Trustees before the removal or by the
holders of two-thirds of the outstanding shares of the Trust at any time.
Vacancies on the Board can be filled by the action of a majority of the
Trustees, provided that after filling such vacancy at least two-thirds of the
Trustees have been elected by the shareholders.
Set forth below are the Trustees and Officers of the Trust, their respective
offices and principal occupations during the last five years, length of time
served, and information relating to any other directorships held. As of July 1,
2019, each serves on the Board of the USAA family of funds consisting of one
registered investment company, which offers 47 individual funds. Unless
otherwise indicated, the business address for each is P.O. Box 659430, San
Antonio, TX 78265-9430.
If you would like more information about the funds' Trustees, you may call (800)
235-8396 to request a free copy of the funds' Statement of Additional
Information (SAI).
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TRUSTEES' AND OFFICERS' INFORMATION | 81
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In connection with the Transaction, the Board of the Trust nominated, and
shareholders of each USAA mutual fund approved, two new Trustees to serve on the
Trust's Board, effective upon the closing of the Transaction. Effective July 1,
2019, David C. Brown serves as an Interested Trustee and John C. Walters serves
as an Independent Trustee. Information about the current Trustees of the Trust
is provided below.
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
DANIEL S. McNAMARA(1, 2, 4, 6, +)
Trustee and Chair of the Board of Trustees
Born: June 1966
Year of Election or Appointment: 2012
Trustee, President, and Vice Chairman, USAA ETF Trust (06/17-06/19); President
of Financial Advice & Solutions Group (FASG), USAA (02/13-present); Director of
USAA Asset Management Company (AMCO), (08/11-present); Director of USAA
Investment Management Company (IMCO) (09/09-present); President, IMCO
(09/09-04/14); President and Director of USAA Shareholder Account Services (SAS)
(10/09-present); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director of FPS (12/13-present);
President and Director of USAA Investment Corporation (ICORP) (03/10-present);
Director of USAA Financial Advisors, Inc. (FAI) (12/13-present). Mr. McNamara
brings to the Board extensive experience in the financial services industry,
including experience as an officer of the Trust.
DAVID C. BROWN(2, 4, 6, 10)
Trustee
Born: May 1972
Year of Election or Appointment: 2019
Chairman and Chief Executive Officer (2013-present), Co-Chief Executive Officer,
(2011-2013), Victory Capital Management Inc.; Chairman and Chief Executive
Officer (2013-present), Victory Capital Holdings, Inc. Mr. Brown brings to the
Board extensive business, finance and leadership skills gained
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82 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
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and developed through years of experience in the financial services industry,
including his tenure overseeing the strategic direction as CEO of Victory
Capital. These skills, combined with Mr. Brown's extensive knowledge of the
financial services industry and demonstrated success in the development and
distribution of investment strategies and products, enable him to provide
valuable insights to the Board and strategic direction for the Funds. Mr. Brown
serves on the Boards of the Victory Funds family of funds consisting of five
registered investment companies offering approximately 104 mutual funds and 24
ETFs. Mr. Brown is considered an Interested Trustee of the Trust due to his
position with Victory Capital and its affiliated companies.
NON-INTERESTED (INDEPENDENT) TRUSTEES
--------------------------------------------------------------------------------
ROBERT L. MASON, Ph.D.(3, 4, 5, 6, 7)
Trustee
Born: July 1946
Year of Election or Appointment: 1997
Trustee, USAA ETF Trust (06/17-06/19); Adjunct Professor in the Department of
Management Science and Statistics in the College of Business at the University
of Texas at San Antonio (2001-present); Institute Analyst, Southwest Research
Institute (03/02-01/16), which focuses on providing innovative technology,
science, and engineering services to clients around the world and is one of the
oldest independent, nonprofit, applied research and development organizations in
the United States. He was employed at Southwest Research Institute for 40 years.
Dr. Mason brings to the Board particular experience with information technology
matters, statistical analysis, and human resources as well as over 22 years'
experience as a Board member of the USAA family of funds. Dr. Mason holds no
other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
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TRUSTEES' AND OFFICERS' INFORMATION | 83
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JEFFERSON C. BOYCE(3, 4, 5, 6, 7)
Lead Trustee and Vice Chair
Born: September 1957
Year of Election or Appointment: 2013
Trustee, USAA ETF Trust (06/17-06/19); Senior Managing Director, New York Life
Investments, LLC (1992-2012), an investment manager. Mr. Boyce brings to the
Board experience in financial investment management, and, in particular,
institutional and retail mutual funds, variable annuity products, broker
dealers, and retirement programs, including experience in organizational
development, marketing, product development, and money management as well as
five years' experience as a Board member of the USAA family of funds. Mr. Boyce
is a board member of Westhab, Inc.
DAWN M. HAWLEY(3, 4, 5, 6, 7, 9)
Trustee
Born: February 1954
Year of Election or Appointment: 2014
Trustee, USAA ETF Trust (06/17-06/19); Manager of Finance, Menil Foundation,
Inc. (05/07-06/11), which is a private foundation that oversees the assemblage
of sculptures, prints, drawings, photographs, and rare books. Director of
Financial Planning and Analysis and Chief Financial Officer, AIM Management
Group, Inc. (10/87-01/06). Ms. Hawley brings to the Board experience in
financial investment management and, in particular, institutional and retail
mutual funds, variable annuity products, broker dealers, and retirement
programs, including experience in financial planning, budgeting, accounting
practices, and asset/liability management functions including major acquisitions
and mergers, as well as over five years' experience as a Board member of the
USAA family of funds. Ms. Hawley holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
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84 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
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PAUL L. McNAMARA(3, 4, 5, 6, 7)
Trustee
Born: July 1948
Year of Election or Appointment: 2012
Trustee, USAA ETF Trust (06/17-06/19); Director, Cantor Opportunistic
Alternatives Fund, LLC (03/10-02/14), which is a closed-end fund of funds by
Cantor Fitzgerald Investment Advisors, LLC. Mr. McNamara retired from Lord
Abbett & Co. LLC, an independent U.S. investment management firm, as an
Executive Member on 09/30/09, a position he held since 10/02. He had been
employed at Lord Abbett since 1996. Mr. McNamara brings to the Board extensive
experience with the financial services industry and, in particular,
institutional and retail mutual fund markets, including experience with mutual
fund marketing, distribution, and risk management, as well as overall experience
with compliance and corporate governance issues. Mr. McNamara also has
experience serving as a fund director as well as seven years' experience as a
Board member of the USAA family of funds. Paul L. McNamara is of no relation to
Daniel S. McNamara. Mr. McNamara holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
RICHARD Y. NEWTON III(3, 4, 5, 6, 7)
Trustee
Born: January 1956
Year of Election or Appointment: 2017
Trustee, USAA ETF Trust (06/17-06/19); Director, Elta North America
(01/18-present), which is a global leader in the design, manufacture and support
of innovative electronic systems in the ground, maritime, airborne, and security
domains for the nation's warfighters, security personnel, and first responders;
Managing Partner, Pioneer Partnership Development Group (12/15-present);
Executive Director, The Union League Club of New York (06/14-11/15); Executive
Vice President, Air Force Association (08/12-05/14); Lieutenant General, United
States Air Force (01/08-06/12). Lieutenant General Newton (Ret.) served 34 years
of active duty in the United States Air Force. Lt. Gen. Newton retired as the
Assistant Vice Chief of Staff and Director of Air Staff at the Headquarters of
the U.S. Air Force where he was responsible for overseeing the administration
and organization
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TRUSTEES' AND OFFICERS' INFORMATION | 85
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of the Air Staff, which develops policies, plans and programs, establishes
requirements, and provides resources to support the Air Force's mission. Lt.
Gen. Newton is a graduate of the United States Air Force Academy, Webster
University, and The National War College. Lt. Gen. Newton brings to the Board
extensive management and military experience, as well as over two years of
experience as a Board member of the USAA family of funds. Lt. Gen. Newton holds
no other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
BARBARA B. OSTDIEK, Ph.D.(3, 4, 5, 6, 7, 8)
Trustee
Born: March 1964
Year of Election or Appointment: 2008
Trustee, USAA ETF Trust (06/17-06/19); Senior Associate Dean of Degree programs
at Jesse H. Jones Graduate School of Business at Rice University
(07/13-present); Associate Professor of Finance at Jesse H. Jones Graduate
School of Business at Rice University (07/01-present); Academic Director, El
Paso Corporation Finance Center at Jesse H. Jones Graduate School of Business at
Rice University (07/02-06/12). Dr. Ostdiek brings to the Board particular
experience with financial investment management, education, and research as well
as over eleven years' experience as a Board member of the USAA family of funds.
Dr. Ostdiek holds no other directorships of any publicly held corporations or
other investment companies outside the USAA family of funds.
MICHAEL F. REIMHERR(3, 4, 5, 6, 7)
Trustee
Born: August 1945
Year of Election or Appointment: 2000
Trustee, USAA ETF Trust (06/17-06/19); President of Reimherr Business Consulting
performing business valuations of medium to large companies; developing business
plans, budgets, and internal financial reporting; and work with mergers and
acquisitions (05/95-12/17). St. Mary's University Investment Committee
overseeing University Endowment (06/14-present). Mr. Reimherr brings to the
Board particular experience with organizational development, budgeting, finance,
capital markets, and mergers and acquisitions, as well as
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86 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
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over 19 years' experience as a Board member of the USAA family of funds. Mr.
Reimherr holds no other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
JOHN C. WALTERS(3, 4, 5, 6, 7)
Trustee
Born: February 1962
Year of Election or Appointment: 2019
Retired. Mr. Walters brings significant Board experience including active
involvement with the board of a Fortune 500 company, and a proven record of
leading large, complex financial organizations. He has a demonstrated record of
success in distribution, manufacturing, investment brokerage, and investment
management in both the retail and institutional investment businesses. He has
substantial experience in the investment management business with a demonstrated
ability to develop and drive strategy while managing operational, financial, and
investment risk. Mr. Walters is a board member of Guardian Variable Products
Trust (16 series), Lead Independent Director; Amerilife Holdings LLC, Director;
Stadion Money Management; Director; and University of North Carolina (Chapel
Hill), Member Board of Governors.
(1) Indicates the Trustee is an employee of AMCO or affiliated companies and
is considered an "interested person" under the Investment Company Act of
1940.
(2) Member of Executive Committee.
(3) Member of Audit and Compliance Committee.
(4) Member of Product Management and Distribution Committee.
(5) Member of Corporate Governance Committee.
(6) Member of Investments Committee.
(7) The address for all non-interested trustees is that of the USAA Funds,
P.O. Box 659430, San Antonio, TX 78265-9430.
(8) Dr. Ostdiek has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(9) Ms. Hawley has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(10) Indicates the Trustee is an employee of Victory Capital or affiliated
companies and is considered an "interested person" under the Investment
Company Act of 1940.
(+) Mr. D. McNamara was elected as Chair of the Board in July 2019.
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TRUSTEES' AND OFFICERS' INFORMATION | 87
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Effective July 1, 2019, the Board of the Trust appointed certain new officers of
the Trust. The current officers of the Trust are stated below.
OFFICERS
--------------------------------------------------------------------------------
CHRISTOPHER K. DYER
President
Born: February 1962
Year of Appointment: 2019
Director of Mutual Fund Administration, the Victory Capital.
SCOTT A. STAHORSKY
Vice President
Born: July 1969
Year of Appointment: 2019
Manager, Fund Administration, the Adviser (since 2015); Senior Analyst, Fund
Administration, the Victory Capital (prior to 2015).
ALLAN SHAER
Assistant Treasurer
Born: March 1965
Year of Appointment: 2019
Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc.
(since 2016); Vice President, Mutual Fund Administration, JP Morgan Chase
(2011-2016).
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88 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
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JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Treasurer, USAA ETF Trust (09/18-06/19); Executive Director, Investment and
Financial Administration, USAA (04/12-present); Assistant Treasurer, USAA ETF
Trust (06/17-09/18); Assistant Treasurer, USAA Mutual Funds Trust (12/13-02/18).
Mr. De Vries also serves as the Funds' Principal Financial Officer.
CAROL D. TREVINO
Assistant Treasurer
Born: October 1965
Year of Appointment: 2018
Assistant Treasurer, USAA ETF Trust (09/18-06/19); Accounting/Financial
Director, USAA (12/13-present); Senior Accounting Analyst, USAA (03/11-12/13).
ERIN G. WAGNER
Secretary
Born: February 1974
Year of Appointment: 2019
Associate General Counsel, the Adviser (since 2013).
CHARLES BOOTH
Anti-Money Laundering Compliance Officer and Identity Theft Officer
Born: April 1960
Year of Appointment: 2019
Director, Regulatory Administration and CCO Support Services, Citi Fund Services
Ohio, Inc. (2007-present).
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TRUSTEES' AND OFFICERS' INFORMATION | 89
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AMY CAMPOS
Chief Compliance Officer
Born: August 1976
Year of Appointment: 2019
Chief Compliance Officer, USAA Mutual Funds Trust (7/1/19-present); Executive
Director, Deputy Chief Compliance Officer, USAA Mutual Funds Trust and USAA ETF
Trust (7/17-6/19); Compliance Director, USAA Mutual Funds Trust (2014-7/17);
Senior Compliance Advisor, USAA Mutual Funds Trust (2010-2014).
THE FOLLOWING OFFICERS SERVED IN THEIR RESPECTIVE OFFICE UNTIL JULY 1, 2019, AT
WHICH POINT EACH OF THE FOLLOWING OFFICERS RESIGNED FROM THEIR RESPECTIVE OFFICE
AND NO LONGER SERVE IN THESE POSITIONS.
JOHN C. SPEAR
Vice President
Born: May 1964
Year of Appointment: 2016
Vice President, USAA ETF Trust (06/17-06/19); Senior Vice President and Chief
Investment Officer, USAA Investments, (03/17-present); Vice President and Chief
Investment Officer, USAA Investments, (11/16-03/17); Vice President, Long Term
Fixed Income (05/12-11/16).
JOHN P. TOOHEY
Vice President
Born: March 1968
Year of Appointment: 2009
Vice President, USAA ETF Trust (06/17-06/19); Head of Equities, Equity
Investments, AMCO (01/12-present).
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90 | USAA CORNERSTONE MODERATELY CONSERVATIVE FUND
================================================================================
KRISTEN MILLAN
Secretary
Born: April 1983
Year of Appointment: 2019
Secretary, USAA ETF Trust (04/19-06/19); Assistant Secretary, USAA ETF Trust
(01/19-06/19); Senior Attorney, FASG General Counsel, USAA (09/17-06/19);
Attorney, FASG General Counsel, USAA (06/13-09/17). Ms. Millan also serves as
Assistant Secretary of AMCO, ICORP, and SAS.
STEPHANIE A. HIGBY
Chief Compliance Officer
Born: July 1974
Year of Appointment: 2013
Chief Compliance Officer, USAA ETF Trust (06/17-06/19); Assistant Vice
President, Compliance-Investments, USAA (02/18-present); Assistant Vice
President, Compliance Mutual Funds, USAA (12/16-01/18); Executive Director,
Institutional Asset Management Compliance, USAA (04/13-12/16). Ms. Higby also
serves as the Funds' anti-money laundering compliance officer and as the Chief
Compliance Officer for AMCO and IMCO.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 91
================================================================================
AS OF JULY 1, 2019
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
David C. Brown
John C. Walters
--------------------------------------------------------------------------------
ADMINISTRATOR AND Victory Capital Management Inc.
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
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UNDERWRITER AND Victory Capital Advisers Inc.
DISTRIBUTOR 4900 Tiedeman Road
Brooklyn, Ohio 44144
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TRANSFER AGENT Victory Capital Transfer Agency Inc.
9800 Fredericksburg Road
San Antonio, Texas 78288
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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 USAA AMCO'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) 235-8396; (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) 235-8396; (ii) at usaa.com; and (iii) on the SEC's website at
http://www.sec.gov.
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----------------------
MUTUAL FUNDS
--------------------------------------------------------------------------------
May 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA Cornerstone Moderate Fund
FUND
SHARES
USBSX
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) 235-8396 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)
235-8396 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.
Victory Capital means Victory Capital Management Inc., the investment manager of
the USAA Mutual Funds. USAA Mutual Funds are distributed by Victory Capital
Advisers, Inc., a broker dealer registered with FINRA and an affiliate of
Victory Capital. Victory Capital and its affiliates are not affiliated with
United Services Automobile Association or its affiliates. USAA and the USAA
logos are registered trademarks and the USAA Mutual Funds and USAA Investments
logos are trademarks of United Services Automobile Association and are being
used by Victory Capital and its affiliates under license.
================================================================================
PRESIDENT'S MESSAGE
"... LONG-TERM INVESTORS SHOULD NEVER MAKE
DECISIONS IN HASTE. THEY SHOULD MAKE [PHOTO OF BROOKS ENGLEHARDT]
THOUGHTFUL DECISIONS BASED ON THEIR LONG-TERM
OBJECTIVES, TIME HORIZON, AND RISK TOLERANCE."
--------------------------------------------------------------------------------
JULY 2019
As previously announced, USAA, the parent company of USAA Asset Management
Company ("AMCO"), the prior investment adviser to the USAA Mutual Funds,
announced that AMCO would be acquired by Victory Capital Holdings, Inc.
(Victory Holdings), a global investment management firm headquartered in
Cleveland, Ohio (the Transaction). In connection with the Transaction, also as
previous announced, shareholders of each USAA Mutual Fund approved a new
investment advisory agreement with Victory Capital Management Inc. ("Victory
Capital"), an indirect wholly-owned subsidiary of Victory Holdings. The closing
of the Transaction occurred on July 1, 2019; and Victory Capital became the
investment adviser to each USAA Mutual Fund. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION ABOUT CHANGES THAT TOOK EFFECT ON JULY 1, 2019.
Softening global economic conditions and escalating trade tensions rattled
investors during the 12-month reporting period ended May 31, 2019. When the
reporting period began in June 2018, the global economy was expanding across
most regions and countries, led by the U.S. In this environment, stocks
generally advanced. In the fixed income market, U.S. Treasury yields rose, as
the U.S. Federal Reserve ("Fed") continued to tighten monetary policy.
Signs of trouble emerged during the summer of 2018. The U.S. economic expansion
continued, but growth in a number of other economies, including some European
countries and China, showed a weakening trend. By the autumn of 2018, investors'
fears of a global economic slowdown, combined with harsh U.S.-China trade
rhetoric and Brexit-related uncertainty in Europe, sparked a surge in market
volatility. Global stocks dropped, with most of the decline occurring in
December 2018. At the same time, intermediate- and longer-term yields fell, as
investors anticipated a change in Fed monetary policy. Indeed, after having
raised short-term interest rates four times during 2018, Fed officials announced
in January 2019 that they would "pause," retreating from their earlier plan to
raise interest rates in 2019. Stocks rallied in response and by April 2019 had
recovered most of the ground they had lost. In May 2019, ongoing trade tensions
between the United States and China, as well as President Trump administration's
threat to impose tariffs on Mexico, drove a renewed decline in stock prices. In
the fixed income market, concerns that trade disputes would seriously undermine
global
================================================================================
================================================================================
economic growth pushed down intermediate- and longer-term yields, which ended
the reporting period lower than they started. The yield on the 10-year U.S.
Treasury note, which began June 2018 at 2.89%, rose to 3.24% on November 8,
2018--its high point of the period--and fell to 2.13% by May 31, 2019.
In the final months of the reporting period, the Treasury yield curve inverted,
which means that shorter-term yields were higher than longer-term yields. A
yield-curve inversion warrants attention because it has been a reliable
recession indicator. Although recessions do not automatically follow
inversions, a downward-sloped yield curve has preceded every U.S. recession
since the 1960s. That said, the lag between an inversion and a recession has
been inconsistent. At USAA Investments, A Victory Capital Investment Franchise,
we have found that during the past six decades, the time between inversion and
recession has ranged between six months and two years, with no clear pattern to
provide useful guidance. And as I write to you, we see no recession on the
horizon. First, the U.S. economy continues to grow, albeit at a slower pace than
in 2018. Second, the Fed has made clear its commitment to pause its interest
rate hikes, and there is a growing belief in the markets that policymakers may
even cut interest rates in 2019. (In early June 2019, after the end of the
reporting period, Fed Chair Jerome Powell stated that the U.S. central bank was
monitoring the escalation in trade tensions and could potentially respond by
cutting interest rates if U.S. economic conditions deteriorate.)
At USAA Investments, our team of portfolio managers will continue to monitor the
financial markets, economic conditions, the global trade regime, Fed policy, the
direction of longer-term interest rates, and other issues that have the
potential to affect your investments. In the meantime, I would advise you to
ignore media "noise" about such matters. Media "noise" is meant to provoke an
emotional reaction, which can lead to hasty decision-making. In my opinion,
long-term investors should never make decisions in haste. They should make
thoughtful decisions based on their long-term objectives, time horizon, and risk
tolerance. Dollar-cost averaging, in which you invest a set amount on a regular
basis, is a strategy that can help you stay on track. Another effective strategy
is diversification, which can potentially insulate a portfolio from market
turbulence or changes in performance leadership.
If you would like to review your portfolio to confirm that it is properly
aligned with your investment plan, please contact one of our financial advisors.
You might want to make that call before the summer gets fully underway. When we
are traveling and spending time with family and friends, it can be tempting to
put off decisions on financial matters.
From all of us at USAA Investments, A Victory Capital Investment Franchise,
thank you for the opportunity to help you with your investment needs.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGERS' COMMENTARY 1
INVESTMENT OVERVIEW 5
SHAREHOLDER VOTING RESULTS 9
FINANCIAL INFORMATION
Distributions to Shareholders 10
Report of Independent Registered
Public Accounting Firm 11
Portfolio of Investments 12
Notes to Portfolio of Investments 36
Financial Statements 42
Notes to Financial Statements 45
Financial Highlights 63
EXPENSE EXAMPLE 64
ADVISORY AGREEMENT(S) 66
TRUSTEES' AND OFFICERS' INFORMATION 87
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) 235-8396.
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.
================================================================================
================================================================================
MANAGERS' COMMENTARY ON THE FUND
WASIF A. LATIF ARNOLD J. ESPE, CFA
LANCE HUMPHREY, CFA
--------------------------------------------------------------------------------
o HOW DID THE GLOBAL FINANCIAL MARKETS PERFORM DURING THE 12-MONTH REPORTING
PERIOD ENDED MAY 31, 2019?
The world financial markets produced mixed results, reflecting investors'
struggle to assess the shifting outlook for economic growth.
During the reporting period, large-cap U.S. equities were the best
performers among the major asset classes. Domestic stocks performed well in
the first half of the reporting period, during which both economic data and
corporate earnings came in above expectations. However, the market sold off
sharply in late 2018 due to the combination of worries about U.S. Federal
Reserve ("Fed") policy, the trade dispute between the United States and
China, and signs of slowing economic growth overseas. Stocks quickly
recovered from the downturn in 2019, and the main U.S. equity indexes went
on to post their best quarter in nearly 10 years during the first three
months of 2019. A rapid shift in Fed policy was likely the key catalyst for
the rebound. Whereas the markets generally were expecting as late as October
2018 that the Fed would raise interest rates three to four times in 2019, a
series of statements from key officials indicated the Fed was in fact likely
finished raising interest rates for the foreseeable future. The reporting
period ended on a down note with a weak showing in May 2019, as stocks lost
some of their previous gains due to renewed worries about slowing growth and
the failure of the United States and China to resolve their trade impasse.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
The net effect of these sentiment swings was a narrow advance for large-cap
U.S. stocks, as gauged by the 3.47% gain of the Russell 1000 Index. The
Russell 2000 Index, a measure of performance for smaller companies, lagged
considerably with a return of -9.04%.
Developed-market international equities posted a loss over the 12-month
reporting period, largely as a result of the unexpectedly slow growth
outside of the United States. In combination with the weakness in foreign
currencies versus the U.S. dollar, the slowdown led to a loss of -5.75% for
the MSCI EAFE Index. Emerging-market stocks also closed in negative
territory, as gauged by the -8.70% return of the MSCI Emerging Markets
Index. Concerns about the global trade outlook and the prospect of slowing
growth in the developed world contributed to the underperformance for the
asset class.
Investment-grade bonds, after producing sluggish performance in the first
half of the reporting period, staged a strong rally from early November 2018
onward due in part to the Fed's shift toward a more accommodative policy.
The gains propelled the Bloomberg Barclays U.S. Aggregate Index to a return
of 6.40% for the full reporting period. High-yield bonds also performed
reasonably well, as gauged by the 5.93% gain for the ICE BofAML U.S. High
Yield Index. Although high-yield issues fell sharply in late 2018 amid the
evaporation of investor risk appetites, the category returned to positive
territory in early 2019.
O HOW DID THE USAA CORNERSTONE MODERATE FUND (THE "FUND") PERFORM DURING THE
REPORTING PERIOD?
For the reporting period ended May 31, 2019, the Fund had a total return of
0.13%. This compares to returns of -1.29% for the MSCI All-Country World
Index and 2.80% for the Cornerstone Moderate Composite Index.
Refer to page 5 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
2 | USAA CORNERSTONE MODERATE FUND
================================================================================
Effective July 1, 2019, Victory Capital serves as the Fund's investment
adviser. Prior to July 1, 2019, AMCO served as the Fund's investment
adviser. The investment adviser provides day-to-day discretionary management
for the Fund's assets.
o PLEASE DISCUSS THE FACTORS THAT HELPED AND HURT PERFORMANCE.
Consistent with the broader environment, the Fund's allocation to large-cap
U.S. equities was the key contributor to performance during the reporting
period. The Fund was weighted toward large-cap stocks over small-cap
stocks, which aided results. However, our preference for the value style
versus growth style was out of step with the market. Performance also was
hurt somewhat by favoring international equities over U.S. equities. We
believe both developed-and emerging-market equities offer more compelling
valuations and greater upside potential than U.S. equities, but this aspect
of our approach detracted in the reporting period, given the outperformance
of U.S. equities compared to international equities.
The Fund's bond portfolio performed well and made a meaningful contribution
to results. We generated robust performance from our decision to maintain a
sizable weighting in long-term U.S. Treasury securities based on our belief
that investors were overestimating the potential for accelerating economic
growth. Once the economy indeed began to slow in the fourth quarter of 2018,
our holdings in government bonds rallied in kind. An allocation to corporate
issues further benefited results at a time of relative strength for
credit-sensitive investments. We also would note that the Fund's bond
investments fulfilled their role of reducing portfolio volatility at a time
of significant swings in equities and other segments of the financial
markets. A weighting in high-yield bonds was an additional contributor.
The majority of the key trends in the market have been in place for a
multi-year period, with domestic stocks outperforming bonds, the growth
style outpacing value, and U.S. equities exceeding the returns of the
foreign markets, to name just a few. Given the persistence of these
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
tendencies, it can be easy for investors to forget that asset class returns
tend to run in cycles. We, therefore, prefer to take a long-term view based
on the knowledge that even well-established market trends can--and do--shift
abruptly. Rather than trying to chase short-term performance, we continue to
emphasize diversification, fundamentals, and valuations. We believe this
steady approach, rather than one that attempts to respond to the latest
headlines, is the most effective way to navigate volatile markets.
Thank you for allowing us to help you manage your investments.
Asset Allocation funds may be invested in, among other things: (1)
exchange-traded funds (ETFs); (2) futures, options, and other derivatives;
(3) non-investment-grade securities; (4) precious metals and minerals
companies; (5) real estate investment trusts; (6) money market instruments;
(7) foreign and emerging markets. These types of investments and asset
classes may be more volatile and prone to experience significant loss than
others. In addition, it is possible that a particular asset allocation may
not produce the intended result. o As interest rates rise, bond prices
generally fall; given the historically low interest rate environment, risks
associated with rising interest rates may be heightened. o Foreign investing
is subject to additional risks, such as currency fluctuations, market
illiquidity, and political instability. Emerging market countries are less
diverse and mature than other countries and tend to be politically less
stable. o Precious metals and minerals is a volatile asset class and is
subject to additional risks, such as currency fluctuation, market
illiquidity, political instability, and increased price volatility. It may
be more volatile than other asset classes that diversify across many
industries and companies. o Non-investment-grade securities are considered
speculative and are subject to significant credit risk. They are sometimes
referred to as "junk" bonds since they represent a greater risk of default
than more credit worthy investment-grade securities. o Diversification is a
technique intended to help reduce risk and does not guarantee a profit or
prevent a loss. o ETFs are subject to risks similar to those of stocks.
Investment returns may fluctuate and are subject to market volatility, so
that an investor's shares, when redeemed or sold, may be worth more or less
than their original cost.
================================================================================
4 | USAA CORNERSTONE MODERATE FUND
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/19 o
-------------------------------------------------------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
-------------------------------------------------------------------------------------------------
USAA Cornerstone Moderate Fund 0.13% 2.61% 7.41%
MSCI All-Country World Index*
(reflects no deduction for fees,
expenses, or taxes) -1.29% 5.21% 9.39%
Cornerstone Moderate Composite
Index** (reflects no deduction for
fees, expenses, or taxes) 2.80% 4.56% 7.61%
*The unmanaged MSCI All-Country World Index is a free float-adjusted market
capitalization weighted index that is designed to measure the equity market
performance of developed and emerging markets.
**The Cornerstone Moderate Composite Index is a combination of unmanaged indexes
representing the Fund's model allocation, and consists of the MSCI USA
Investable Market Index (IMI) Gross (29%), the MSCI ACWI ex USA IMI Net (19%),
the Bloomberg Barclays U.S. Universal Index (48%), the Bloomberg Commodity Index
Total Return (1%), the MSCI U.S. Real Estate Investment Trust (REIT) Index Gross
(1%), and the Bloomberg Barclays U.S. Treasury - Bills (1-3M) (2%).
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
usaa.com.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on net investment income and
realized capital gain distributions, including reinvested distributions, or
redemptions of shares.
================================================================================
INVESTMENT OVERVIEW | 5
================================================================================
o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
CORNERSTONE USAA
MSCI MODERATE CORNERSTONE
ALL-COUNTRY COMPOSITE MODERATE
WORLD INDEX INDEX FUND
05/31/09 $10,000.00 $10,000.00 $10,000.00
06/30/09 9,943.93 10,024.60 10,254.00
07/31/09 10,819.27 10,540.78 10,827.00
08/31/09 11,206.22 10,804.93 11,240.00
09/30/09 11,720.33 11,123.16 11,843.00
10/31/09 11,539.21 11,046.20 11,873.00
11/30/09 12,013.80 11,364.10 12,229.00
12/31/09 12,262.58 11,444.66 12,486.00
01/31/10 11,732.64 11,299.33 12,414.00
02/28/10 11,882.09 11,438.41 12,640.00
03/31/10 12,646.50 11,814.13 13,120.00
04/30/10 12,667.78 11,949.06 13,348.00
05/31/10 11,466.81 11,440.90 12,676.00
06/30/10 11,113.54 11,308.27 12,354.00
07/31/10 12,017.83 11,819.07 12,918.00
08/31/10 11,597.70 11,665.27 12,678.00
09/30/10 12,707.21 12,241.69 13,402.00
10/31/10 13,166.47 12,504.22 13,749.00
11/30/10 12,873.51 12,394.01 13,686.00
12/31/10 13,816.22 12,797.97 14,173.00
01/31/11 14,033.04 12,920.20 14,406.00
02/28/11 14,441.67 13,143.71 14,788.00
03/31/11 14,427.24 13,166.66 14,906.00
04/30/11 15,017.50 13,498.72 15,322.00
05/31/11 14,694.69 13,455.29 15,237.00
06/30/11 14,463.15 13,314.81 15,043.00
07/31/11 14,227.67 13,304.12 14,828.00
08/31/11 13,188.35 12,915.28 14,054.00
09/30/11 11,943.20 12,332.44 13,273.00
10/31/11 13,222.84 13,046.11 14,052.00
11/30/11 12,827.02 12,880.82 13,965.00
12/31/11 12,801.10 12,955.38 13,995.00
01/31/12 13,545.45 13,396.98 14,433.00
02/29/12 14,226.96 13,726.88 14,826.00
03/31/12 14,321.42 13,784.56 14,962.00
04/30/12 14,157.68 13,795.64 14,929.00
05/31/12 12,888.33 13,273.04 14,368.00
06/30/12 13,524.87 13,596.12 14,675.00
07/31/12 13,710.03 13,780.65 14,830.00
08/31/12 14,008.13 13,953.66 15,063.00
09/30/12 14,449.33 14,180.13 15,326.00
10/31/12 14,353.02 14,132.74 15,382.00
11/30/12 14,536.56 14,227.02 15,460.00
12/31/12 14,865.82 14,374.98 15,655.00
01/31/13 15,550.67 14,687.99 16,027.00
02/28/13 15,548.25 14,747.68 16,038.00
03/31/13 15,832.53 14,937.74 16,245.00
04/30/13 16,284.83 15,197.08 16,506.00
05/31/13 16,240.15 15,097.26 16,415.00
06/30/13 15,765.47 14,777.39 16,005.00
07/31/13 16,520.20 15,162.19 16,415.00
08/31/13 16,176.02 14,954.14 16,210.00
09/30/13 17,011.53 15,387.51 16,553.00
10/31/13 17,695.26 15,760.58 17,001.00
11/30/13 17,945.87 15,861.77 17,104.00
12/31/13 18,255.46 15,982.50 17,255.00
01/31/14 17,525.24 15,815.66 17,047.00
02/28/14 18,371.84 16,257.40 17,521.00
03/31/14 18,453.53 16,283.66 17,595.00
04/30/14 18,629.20 16,399.10 17,746.00
05/31/14 19,025.42 16,656.78 17,978.00
06/30/14 19,383.63 16,851.57 18,241.00
07/31/14 19,148.54 16,687.78 18,077.00
08/31/14 19,571.55 16,998.41 18,323.00
09/30/14 18,936.88 16,649.85 17,956.00
10/31/14 19,070.20 16,838.12 18,062.00
11/30/14 19,389.18 17,013.77 18,227.00
12/31/14 19,015.04 16,879.57 18,035.00
01/31/15 18,717.74 16,898.64 18,059.00
02/28/15 19,759.78 17,309.83 18,465.00
03/31/15 19,453.62 17,233.90 18,331.00
04/30/15 20,018.05 17,420.15 18,499.00
05/31/15 19,991.93 17,430.26 18,535.00
06/30/15 19,521.28 17,156.26 18,179.00
07/31/15 19,690.81 17,260.87 18,264.00
08/31/15 18,340.98 16,680.20 17,526.00
09/30/15 17,676.51 16,429.97 17,169.00
10/31/15 19,063.85 17,066.40 17,790.00
11/30/15 18,906.42 16,990.77 17,656.00
12/31/15 18,565.46 16,795.37 17,309.00
01/31/16 17,445.77 16,380.53 16,809.00
02/29/16 17,325.76 16,400.18 16,759.00
03/31/16 18,609.74 17,111.95 17,403.00
04/30/16 18,884.44 17,296.76 17,579.00
05/31/16 18,908.24 17,348.65 17,629.00
06/30/16 18,793.78 17,470.09 17,809.00
07/31/16 19,603.67 17,906.84 18,265.00
08/31/16 19,669.63 17,937.29 18,303.00
09/30/16 19,790.14 17,998.27 18,376.00
10/31/16 19,454.22 17,760.69 18,134.00
11/30/16 19,602.06 17,710.96 17,969.00
12/31/16 20,025.51 17,930.58 18,148.00
01/31/17 20,573.11 18,186.52 18,482.00
02/28/17 21,150.25 18,516.70 18,777.00
03/31/17 21,408.92 18,597.67 18,926.00
04/30/17 21,742.62 18,806.47 19,132.00
05/31/17 22,222.75 19,041.19 19,377.00
06/30/17 22,323.80 19,097.65 19,430.00
07/31/17 22,947.63 19,390.85 19,689.00
08/31/17 23,035.57 19,504.74 19,831.00
09/30/17 23,480.60 19,678.50 19,979.00
10/31/17 23,968.19 19,887.55 20,187.00
11/30/17 24,432.19 20,086.27 20,356.00
12/31/17 24,826.09 20,282.95 20,580.00
01/31/18 26,226.64 20,716.09 21,020.00
02/28/18 25,125.20 20,179.48 20,402.00
03/31/18 24,587.39 20,086.03 20,372.00
04/30/18 24,822.16 20,087.46 20,358.00
05/31/18 24,853.12 20,244.32 20,427.00
06/30/18 24,718.59 20,197.40 20,335.00
07/31/18 25,464.04 20,501.53 20,598.00
08/31/18 25,664.02 20,675.30 20,709.00
09/30/18 25,775.76 20,649.62 20,650.00
10/31/18 23,844.15 19,789.89 19,691.00
11/30/18 24,192.88 19,995.43 19,858.00
12/31/18 22,488.86 19,390.69 19,297.00
01/31/19 24,264.58 20,327.71 20,193.00
02/28/19 24,913.63 20,619.55 20,381.00
03/31/19 25,226.85 20,918.97 20,627.00
04/30/19 26,078.70 21,282.73 20,874.00
05/31/19 24,531.72 20,810.42 20,453.00
[END CHART]
Data from 5/31/09 through 5/31/19.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Cornerstone Moderate Fund to the benchmarks listed above (see page 5 for
benchmark definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes.
================================================================================
6 | USAA CORNERSTONE MODERATE FUND
================================================================================
o TOP 10 HOLDINGS* - 5/31/19 o
(% of Net Assets)
iShares iBoxx $ High Yield Corporate Bond ETF ............................ 4.5%
U.S. Treasury Bond, 3.13%, 8/15/2044 ..................................... 4.2%
iShares Core S&P 500 ETF ................................................. 3.8%
U.S. Treasury Bond, 3.00%, 5/15/2045 ..................................... 3.6%
Schwab Fundamental International Large Company Index ETF ................. 3.2%
iShares Core MSCI EAFE ETF ............................................... 2.5%
U.S. Treasury Note, 1.13% , 2/28/2021 .................................... 2.4%
Vanguard Total Bond Market ETF ........................................... 2.4%
U.S. Treasury Note, 1.63%, 2/15/2026 ..................................... 2.1%
iShares iBoxx $ Investment Grade Corporate Bond ETF ...................... 2.1%
*Does not include money market instruments.
Refer to the Portfolio of Investments for a complete list of securities.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
o ASSET ALLOCATION* - 5/31/19 o
(% of Net Assets)
[PIE CHART OF ASSET ALLOCATION]
INTERNATIONAL EQUITY SECURITIES 21.6%
U.S. TREASURY SECURITIES 19.3%
U.S. EQUITY SECURITIES 17.8%
FIXED-INCOME EXCHANGE-TRADED FUNDS 12.6%
U.S. GOVERNMENT AGENCY ISSUES 11.6%
CORPORATE OBLIGATIONS 6.5%
MONEY MARKET INSTRUMENTS 3.2%
GLOBAL REAL ESTATE EQUITY SECURITIES 2.6%
ASSET-BACKED SECURITIES 1.5%
EURODOLLAR AND YANKEE OBLIGATIONS 1.1%
COMMERCIAL MORTGAGE SECURITIES 0.7%
PRECIOUS METALS AND COMMODITY-RELATED SECURITIES 0.7%
CONVERTIBLE SECURITIES 0.3%
BANK LOANS 0.2%
COLLATERALIZED MORTGAGE OBLIGATIONS 0.2%
[END CHART]
*Does not include futures and short-term investments purchased with cash
collateral from securities loaned.
Percentages are of net assets of the Fund and may not equal 100%.
================================================================================
8 | USAA CORNERSTONE MODERATE FUND
================================================================================
SHAREHOLDER VOTING RESULTS
--------------------------------------------------------------------------------
On April 18, 2019, a special meeting of shareholders was held to vote on two
proposals relating to the series of the USAA Mutual Funds Trust (Trust).
Shareholders of record on February 8, 2019, were entitled to vote on each
proposal shown below. The proposals were approved by the shareholders.
The following proposals and voting results pertain to one or more series within
the Trust. Votes shown for Proposal 1 are for the Fund, a series of the Trust.
Votes shown for Proposal 2 are for all series of the Trust. The effective date
of the Proposals was July 1, 2019.
PROPOSAL 1
To approve a new Investment Advisory Agreement between the Trust, on behalf of
the Fund, and Victory Capital, an independent investment adviser. The new
Investment Advisory Agreement became effective upon the closing of the
Transaction (as defined and discussed in Note 1 to the Financial Statements)
whereby AMCO was acquired by Victory Holdings, the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
--------------------------------------------------------------------------------
46,030,220 5,470,704 4,161,183
PROPOSAL 2
Election of two new trustees to the Trust's Board of Trustees to serve upon the
closing of the Transaction: (1) David C. Brown, to serve as an "interested
trustee" as defined in the Investment Company Act of 1940, as amended (1940
Act); and (2) John C. Walters, to serve as a trustee who is not an "interested
person" as is defined under the 1940 Act ("Independent Trustee").
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
TRUSTEES FOR VOTES WITHHELD
--------------------------------------------------------------------------------
David C. Brown 8,299,565,565 820,887,736
John C. Walters 8,317,935,885 802,517,416
================================================================================
SHAREHOLDER VOTING RESULTS | 9
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
May 31, 2019, is provided for information purposes only and should not be used
for reporting to federal or state revenue agencies. Federal tax information for
the calendar year will be reported to you on Form 1099-DIV in January 2020.
With respect to distributions paid, the Fund designates the following amounts
(or, if subsequently determined to be different, the maximum amount allowable)
for the fiscal year ended May 31, 2019:
DIVIDEND RECEIVED
DEDUCTION (CORPORATE LONG-TERM CAPITAL QUALIFIED INTEREST
SHAREHOLDERS)(1) GAIN DISTRIBUTIONS(2) INCOME
--------------------------------------------------------------------------------
13.67% $22,595,000 $10,785,000
--------------------------------------------------------------------------------
(1) Presented as a percentage of net investment income and short-term capital
gain distributions paid, if any.
(2) Pursuant to Section 852 of the Internal Revenue Code.
For the fiscal year ended May 31, 2019, the Fund hereby designates the maximum
amount allowable of its net taxable income as qualified dividends taxed at
individual net capital gain rates.
================================================================================
10 | USAA CORNERSTONE MODERATE FUND
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA CORNERSTONE MODERATE FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Cornerstone Moderate Fund (the "Fund") (one of the funds constituting USAA
Mutual Funds Trust (the "Trust")), including the portfolio of investments, as of
May 31, 2019, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended, the financial highlights for each of the five years in the period
then ended and the related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Fund (one of the funds
constituting USAA Mutual Funds Trust) at May 31, 2019, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and its financial highlights for each of
the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
BASIS FOR OPINION
These financial statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on the Fund's financial statements based
on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and are required to
be independent with respect to the Trust in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Trust is not required to have,
nor were we engaged to perform, an audit of the Trust's internal control over
financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the Trust's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of May 31, 2019, by correspondence with the custodian and brokers or by
other appropriate auditing procedures where replies from brokers were not
received. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the auditor of one or more Victory Capital investment
companies since 1995.
San Antonio, Texas
July 23, 2019
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 11
================================================================================
PORTFOLIO OF INVESTMENTS
May 31, 2019
--------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
--------------------------------------------------------------------------------------------------------------
BONDS (54.0%)
ASSET-BACKED SECURITIES (1.5%)
ASSET BACKED SECURITIES (1.5%)
------------------------------
AUTOMOBILE ABS (1.1%)
$ 343 Americredit Automobile Receivables Trust 3.15% 3/20/2023 $ 347
2,640 Americredit Automobile Receivables Trust 3.50 1/18/2024 2,708
567 Avis Budget Rental Car Funding AESOP, LLC(a) 2.96 7/20/2020 567
311 Avis Budget Rental Car Funding AESOP, LLC(a) 3.75 7/20/2020 311
2,704 Avis Budget Rental Car Funding AESOP, LLC(a) 2.50 2/20/2021 2,702
1,483 Credit Acceptance Auto Loan Trust(a) 4.29 11/15/2024 1,486
1,503 Credit Acceptance Auto Loan Trust(a) 3.55 8/15/2027 1,532
2,560 OSCAR U.S. Funding Trust IX, LLC(a) 3.63 9/10/2025 2,649
----------
12,302
----------
CREDIT CARD ABS (0.1%)
1,461 Synchrony Credit Card Master Note Trust 2.95 5/15/2024 1,456
----------
OTHER ABS (0.2%)
1,320 Element Rail Leasing I, LLC(a) 3.67 4/19/2044 1,362
401 NP SPE II, LLC(a) 3.37 10/21/2047 408
848 SCF Equipment Leasing, LLC(a) 3.41 12/20/2023 855
----------
2,625
----------
STUDENT LOAN ABS (0.1%)
950 Navient Student Loan Trust (1 mo. LIBOR + 1.50%) 3.93(b) 8/25/2050 946
377 SLM Student Loan Trust (3 mo. LIBOR + 0.55%) 3.13(b) 10/25/2065 358
----------
1,304
----------
Total Asset Backed Securities 17,687
----------
Total Asset-Backed Securities (cost: $17,376) 17,687
----------
BANK LOANS (0.2%)(c)
CONSUMER, CYCLICAL (0.2%)
-------------------------
RETAIL (0.2%)
1,872 Academy, Ltd. (1 mo. LIBOR + 4.00%) 6.44 7/01/2022 1,366
967 Academy, Ltd. (1 mo. LIBOR + 4.00%) 6.48 7/01/2022 705
----------
Total Consumer, Cyclical 2,071
----------
Total Bank Loans (cost: $2,341) 2,071
----------
================================================================================
12 | USAA CORNERSTONE MODERATE FUND
================================================================================
--------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
--------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.2%)
MORTGAGE SECURITIES (0.2%)
--------------------------
WHOLE LOAN COLLATERAL CMO (0.2%)
$ 146 Sequoia Mortgage Trust (1 mo. LIBOR + 0.90%) 3.34%(b) 9/20/2033 $ 144
1,807 Structured Asset Mortgage Investments Trust
(1 mo. LIBOR + 0.50%) 2.94(b) 7/19/2035 1,741
177 Wells Fargo Mortgage Backed Securities Trust 5.16(d) 4/25/2035 177
----------
Total Mortgage Securities 2,062
----------
Total Collateralized Mortgage Obligations (cost: $2,125) 2,062
----------
COMMERCIAL MORTGAGE SECURITIES (0.7%)
MORTGAGE SECURITIES (0.7%)
--------------------------
COMMERCIAL MBS (0.7%)
1,254 Banc of America Commercial Mortgage Trust 5.66(d) 7/10/2044 470
130 Banc of America Commercial Mortgage Trust 6.57(d) 2/10/2051 131
183 Bear Stearns Commercial Mortgage Securities Trust(a) 5.66(d) 9/11/2041 182
1,200 BT-h21 Mortgage-Backed Securities Trust
(1 mo. LIBOR + 2.50%)(a) 4.81(b) 10/07/2021 1,202
33 Credit Suisse Commercial Mortgage Trust
(1 mo. LIBOR + 0.19%) 2.62(b) 2/15/2040 33
15,099 CSAIL Commercial Mortgage Trust(e) 1.79(d) 1/15/2049 1,278
4,200 FREMF Mortgage Trust(a) 3.51(d) 8/25/2045 4,193
107 GE Capital Commercial Mortgage Corp. 5.61(d) 12/10/2049 92
490 GMAC Commercial Mortgage Securities, Inc. 4.98(d) 12/10/2041 490
12,412 UBS Commercial Mortgage Trust(a),(e) 2.06(d) 5/10/2045 585
----------
Total Mortgage Securities 8,656
----------
Total Commercial Mortgage Securities (cost: $9,278) 8,656
----------
CONVERTIBLE SECURITIES (0.3%)
BASIC MATERIALS (0.3%)
----------------------
MINING (0.3%)
395 Hycroft Mining Corp.(f),(g),(h),(i) 15.00(j) 10/22/2020 12
3,100 Pretium Resources, Inc. 2.25 3/15/2022 2,926
----------
Total Basic Materials 2,938
----------
Total Convertible Securities (cost: $3,381) 2,938
----------
CORPORATE OBLIGATIONS (6.5%)
COMMUNICATIONS (0.2%)
---------------------
TELECOMMUNICATIONS (0.2%)
2,250 Hughes Satellite Systems Corp.(k) 6.50 6/15/2019 2,250
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
--------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
--------------------------------------------------------------------------------------------------------------
CONSUMER, CYCLICAL (0.6%)
-------------------------
AUTO MANUFACTURERS (0.6%)
$ 3,300 Harley-Davidson Financial Services, Inc.(a),(k) 3.55% 5/21/2021 $ 3,333
3,250 Hyundai Capital America(a),(k) 3.75 7/08/2021 3,305
----------
Total Consumer, Cyclical 6,638
----------
CONSUMER, NON-CYCLICAL (0.2%)
-----------------------------
HEALTHCARE-SERVICES (0.2%)
3,000 Community Health Systems, Inc.(k) 6.88 2/01/2022 2,010
----------
ENERGY (1.2%)
-------------
PIPELINES (1.2%)
2,950 Enbridge Energy Partners, LP(k) 7.38 10/15/2045 4,231
1,900 Energy Transfer Operating, LP
(3 mo. LIBOR + 3.02%)(k) 5.60(b) 11/01/2066 1,515
2,500 Enterprise TE Partners, LP
(3 mo. LIBOR + 2.78%)(g) 5.30(b) 6/01/2067 2,287
3,300 EQM Midstream Partners, LP(k) 4.75 7/15/2023 3,368
800 Martin Midstream Partners, LP /
Martin Midstream Finance Corp.(k) 7.25 2/15/2021 780
1,000 Southern Union Co. (3 mo. LIBOR + 3.02%)(k) 5.60(b) 11/01/2066 778
1,400 Tallgrass Energy Partners, LP /
Tallgrass Energy Finance Corp.(a),(k) 5.50 9/15/2024 1,435
----------
Total Energy 14,394
----------
FINANCIAL (3.4%)
----------------
BANKS (1.3%)
1,000 Allfirst Preferred Capital Trust
(3 mo. LIBOR + 1.50%) 4.10(b) 7/15/2029 936
2,000 Compass Bank(k) 3.88 4/10/2025 2,031
2,850 First Maryland Capital I (3 mo. LIBOR + 1.00%)(k) 3.60(b) 1/15/2027 2,639
2,000 Huntington Capital (3 mo. LIBOR + 0.63%)(k) 3.24(b) 6/15/2028 1,772
2,000 Manufacturers & Traders Trust Co.
(3 mo. LIBOR + 0.64%)(k) 3.16(b) 12/01/2021 2,000
6,000 SunTrust Capital I (3 mo. LIBOR + 0.67%)(k) 3.19(b) 5/15/2027 5,600
----------
14,978
----------
DIVERSIFIED FINANCIAL SERVICES (0.3%)
4,000 Cullen/Frost Capital Trust II
(3 mo. LIBOR + 1.55%)(k) 4.07(b) 3/01/2034 3,458
----------
INSURANCE (1.6%)
3,200 Allstate Corp. (3 mo. LIBOR + 2.94%)(k) 5.75(l) 8/15/2053 3,285
1,921 AmTrust Financial Services, Inc.(k) 6.13 8/15/2023 1,867
3,200 Athene Holding Ltd.(k) 4.13 1/12/2028 3,141
================================================================================
14 | USAA CORNERSTONE MODERATE FUND
================================================================================
--------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
--------------------------------------------------------------------------------------------------------------
$ 2,575 HSB Group, Inc. (3 mo. LIBOR + 0.91%)(k) 3.51%(b) 7/15/2027 $ 2,217
5,670 Nationwide Mutual Insurance Co.
(3 mo. LIBOR + 2.29%)(a),(k) 4.90(b) 12/15/2024 5,657
2,800 Prudential Financial, Inc. (3 mo. LIBOR + 3.92%)(k) 5.63(l) 6/15/2043 2,903
----------
19,070
----------
INVESTMENT COMPANIES (0.1%)
1,600 Ares Capital Corp.(k) 3.63 1/19/2022 1,609
----------
REITS (0.1%)
1,000 Sabra Health Care, LP(k) 5.13 8/15/2026 1,016
----------
Total Financial 40,131
----------
INDUSTRIAL (0.7%)
-----------------
ELECTRICAL COMPONENTS & EQUIPMENT (0.0%)
500 Artesyn Embedded Technologies, Inc.(a),(m) 9.75 10/15/2020 510
----------
MISCELLANEOUS MANUFACTURERS (0.1%)
960 General Electric Co.(k) 5.50 1/08/2020 975
----------
TRANSPORTATION (0.6%)
3,000 BNSF Funding Trust I (3 mo. LIBOR + 2.35%)(k) 6.61(l) 12/15/2055 3,215
3,200 Ryder System, Inc.(k) 3.50 6/01/2021 3,247
----------
6,462
----------
Total Industrial 7,947
----------
UTILITIES (0.2%)
----------------
ELECTRIC (0.2%)
2,133 NextEra Energy Capital Holdings, Inc.(k) 3.34 9/01/2020 2,153
----------
Total Corporate Obligations (cost: $73,486) 75,523
----------
EURODOLLAR AND YANKEE OBLIGATIONS (1.1%)
BASIC MATERIALS (0.2%)
----------------------
MINING (0.2%)
2,285 Newcrest Finance Pty. Ltd.(a),(k) 4.45 11/15/2021 2,366
----------
CONSUMER, CYCLICAL (0.3%)
-------------------------
AUTO MANUFACTURERS (0.3%)
3,200 BMW U.S. Capital, LLC(a),(k) 3.25 8/14/2020 3,223
----------
ENERGY (0.3%)
-------------
OIL & GAS (0.3%)
3,100 Petroleos Mexicanos(k) 5.38 3/13/2022 3,204
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
--------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
--------------------------------------------------------------------------------------------------------------
OIL & GAS SERVICES (0.0%)
$ 35 Schahin II Finance Co. SPV Ltd.(a),(f),(h) 8.00% 5/25/2020 $ 32
1,407 Schahin II Finance Co. SPV Ltd.(a),(g),(n) 5.88 9/25/2023 148
----------
180
----------
PIPELINES (0.0%)
600 Transcanada Trust (3 mo. LIBOR + 3.53%)(k) 5.63(l) 5/20/2075 589
----------
Total Energy 3,973
----------
FINANCIAL (0.3%)
----------------
INSURANCE (0.3%)
3,430 QBE Capital Funding III Ltd. (USD Swap
Semi-Annual 30/360 10 YR + 4.05%)(a),(k) 7.25(l) 5/24/2041 3,620
----------
Total Eurodollar and Yankee Obligations (cost: $13,850) 13,182
----------
--------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
--------------------------------------------------------------------------------------------------------------
FIXED-INCOME EXCHANGE-TRADED FUNDS (12.6%)
44,400 Invesco Fundamental High Yield Corporate Bond ETF 821
91,690 iShares 20+ Year Treasury Bond ETF 12,088
611,920 iShares iBoxx $ High Yield Corporate Bond ETF(m) 51,952
197,740 iShares iBoxx $ Investment Grade Corporate Bond ETF 23,893
340,800 Vanguard Mortgage-Backed Securities ETF 17,930
75,000 Vanguard Short-Term Bond ETF(m) 6,010
340,800 Vanguard Total Bond Market ETF 28,027
113,000 Xtrackers USD High Yield Corporate Bond ETF 5,532
----------
Total Fixed-Income Exchange-Traded Funds (cost: $143,964) 146,253
----------
--------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
--------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY ISSUES (11.6%)(o)
COMMERCIAL MBS (2.1%)
$ 2,250 Fannie Mae(+) 2.15% 1/25/2023 2,238
8,300 Freddie Mac(+) 3.00 12/25/2025 8,570
5,200 Freddie Mac(+) 3.33(d) 5/25/2025 5,457
5,000 Freddie Mac(+) 3.51 4/25/2030 5,317
2,679 Freddie Mac(+) 3.70(d) 1/25/2033 2,898
----------
24,480
----------
================================================================================
16 | USAA CORNERSTONE MODERATE FUND
================================================================================
--------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
--------------------------------------------------------------------------------------------------------------
FGLMC COLLATERAL (9.3%)
$ 7,111 Freddie Mac(+) 3.00% 4/01/2046 $ 7,181
10,037 Freddie Mac(+) 3.00 6/01/2046 10,135
7,891 Freddie Mac(+) 3.00 8/01/2046 7,967
7,535 Freddie Mac(+) 3.00 1/01/2047 7,596
14,380 Freddie Mac(+) 3.00 1/01/2047 14,498
15,420 Freddie Mac(+) 3.00 3/01/2047 15,543
19,977 Freddie Mac(+) 3.00 4/01/2047 20,152
8,974 Freddie Mac(+) 3.00 8/01/2047 9,040
7,614 Freddie Mac(+) 3.50 4/01/2046 7,799
7,466 Freddie Mac(+) 3.50 4/01/2048 7,641
----------
107,552
----------
UMBS COLLATERAL (0.2%)(u)
2,690 Fannie Mae(+) 4.00 11/01/2045 2,791
----------
Total U.S. Government Agency Issues (cost: $133,451) 134,823
----------
U.S. TREASURY SECURITIES (19.3%)
BONDS (9.1%)
250 U.S. Treasury Bond (STRIPS Principal) (Zero Coupon) 0.00 8/15/2044 130
6,000 U.S. Treasury Bond 3.00 11/15/2044 6,490
38,200 U.S. Treasury Bond 3.00 5/15/2045 41,374
4,000 U.S. Treasury Bond 3.00 5/15/2047 4,337
5,000 U.S. Treasury Bond 3.00 2/15/2049 5,433
44,100 U.S. Treasury Bond 3.13 8/15/2044 48,710
----------
106,474
----------
INFLATION-INDEXED NOTES (1.0%)
11,796 Inflation-Index Note 0.13 4/15/2021 11,682
----------
NOTES (9.2%)
28,500 U.S. Treasury Note(p) 1.13 2/28/2021 28,075
17,000 U.S. Treasury Note 1.63 4/30/2023 16,811
25,000 U.S. Treasury Note 1.63 2/15/2026 24,379
2,000 U.S. Treasury Note 2.25 11/15/2024 2,029
5,000 U.S. Treasury Note 2.25 11/15/2025 5,070
5,000 U.S. Treasury Note 2.25 2/15/2027 5,067
15,000 U.S. Treasury Note 2.25 11/15/2027 15,171
5,000 U.S. Treasury Note 2.50 1/31/2021 5,039
5,000 U.S. Treasury Note 2.75 2/15/2028 5,253
----------
106,894
----------
Total U.S. Treasury Securities (cost: $215,133) 225,050
----------
Total Bonds (cost: $614,385) 628,245
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
--------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY SECURITIES (21.6%)
COMMON STOCKS (0.2%)
CONSUMER, CYCLICAL (0.0%)
-------------------------
AUTO PARTS & EQUIPMENT (0.0%)
5,860 Autoliv, Inc. $ 361
----------
CONSUMER, NON-CYCLICAL (0.1%)
-----------------------------
PHARMACEUTICALS (0.1%)
3,000 Jazz Pharmaceuticals plc(q) 377
----------
INDUSTRIAL (0.1%)
-----------------
ELECTRONICS (0.1%)
9,810 TE Connectivity Ltd. 826
----------
TECHNOLOGY (0.0%)
-----------------
SEMICONDUCTORS (0.0%)
6,040 Kulicke & Soffa Industries, Inc. 117
----------
Total Common Stocks (cost: $1,777) 1,681
----------
EXCHANGE-TRADED FUNDS (21.1%)
224,400 Invesco FTSE RAFI Developed Markets ex-US ETF(m) 8,761
597,600 Invesco FTSE RAFI Emerging Markets ETF 12,305
488,080 iShares Core MSCI EAFE ETF 28,987
411,660 iShares Core MSCI Emerging Markets ETF 20,221
274,500 iShares Edge MSCI Min Vol EAFE ETF 19,500
130,400 iShares Edge MSCI Min Vol Emerging Markets ETF 7,446
748,000 iShares MSCI Canada ETF 20,443
258,080 iShares MSCI United Kingdom ETF 8,179
856,200 Schwab Fundamental Emerging Markets Large Company Index ETF 23,417
1,389,900 Schwab Fundamental International Large Company Index ETF 36,874
266,700 Schwab Fundamental International Small Company Index ETF 7,990
34,497 SPDR S&P Emerging Markets SmallCap ETF 1,489
51,500 USAA MSCI Emerging Markets Value Momentum Blend Index ETF(r) 2,187
519,000 Vanguard FTSE Developed Markets ETF 20,677
47,000 Vanguard FTSE Emerging Markets ETF 1,910
421,000 Vanguard FTSE Europe ETF 22,123
59,797 WisdomTree Emerging Markets SmallCap Dividend Fund 2,686
----------
Total Exchange-Traded Funds (cost: $237,746) 245,195
----------
================================================================================
18 | USAA CORNERSTONE MODERATE FUND
================================================================================
--------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS (0.3%)
FINANCIAL (0.3%)
----------------
INSURANCE (0.3%)
167,198 Delphi Financial Group, Inc., cumulative redeemable, 5.71%,
(3 mo. LIBOR + 3.19%)(b) (cost: $4,062) $ 3,887
----------
Total International Equity Securities (cost: $243,585) 250,763
----------
U.S. EQUITY SECURITIES (17.8%)
COMMON STOCKS (12.7%)
BASIC MATERIALS (0.2%)
----------------------
CHEMICALS (0.0%)
8,060 Huntsman Corp. 140
5,570 LyondellBasell Industries N.V. "A" 413
3,480 Rayonier Advanced Materials, Inc. 23
----------
576
----------
FOREST PRODUCTS & PAPER (0.1%)
19,490 International Paper Co. 808
19,240 Resolute Forest Products, Inc. 124
6,780 Schweitzer-Mauduit International, Inc. 212
----------
1,144
----------
IRON/STEEL (0.1%)
7,720 Cleveland-Cliffs, Inc.(m) 67
5,820 Nucor Corp. 280
2,680 Reliance Steel & Aluminum Co. 223
10,610 Steel Dynamics, Inc. 267
----------
837
----------
Total Basic Materials 2,557
----------
COMMUNICATIONS (1.5%)
---------------------
ADVERTISING (0.1%)
24,460 Interpublic Group of Companies, Inc. 519
13,080 Omnicom Group, Inc. 1,012
----------
1,531
----------
INTERNET (0.2%)
390 Alphabet, Inc. "A"(q) 432
3,290 CDW Corp. 324
2,370 F5 Networks, Inc.(q) 313
1,980 IAC/InterActiveCorp(q) 437
================================================================================
PORTFOLIO OF INVESTMENTS | 19
================================================================================
--------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------------
14,160 NIC, Inc. $ 226
1,200 Stamps.com, Inc.(q) 40
----------
1,772
----------
MEDIA (0.5%)
44,780 Altice USA, Inc. "A" 1,052
27,240 CBS Corp. "B" 1,315
26,180 Comcast Corp. "A" 1,073
23,470 DISH Network Corp. "A"(q) 847
34,970 Entravision Communications Corp. "A" 103
3,240 Sinclair Broadcast Group, Inc. "A" 174
65,070 Sirius XM Holdings, Inc. 346
17,630 Viacom, Inc. "B" 512
----------
5,422
----------
TELECOMMUNICATIONS (0.7%)
23,870 AT&T, Inc. 730
6,320 Ciena Corp.(q) 221
38,360 Cisco Systems, Inc. 1,996
37,080 Corning, Inc. 1,069
1,950 InterDigital, Inc. 124
18,120 Juniper Networks, Inc. 446
1,830 Shenandoah Telecommunications Co. 73
8,890 T-Mobile US, Inc.(q) 653
53,650 Verizon Communications, Inc. 2,916
5,670 Vonage Holdings Corp.(q) 67
----------
8,295
----------
Total Communications 17,020
----------
CONSUMER, CYCLICAL (1.8%)
-------------------------
AIRLINES (0.1%)
11,030 Delta Air Lines, Inc. 568
7,930 Southwest Airlines Co. 377
5,030 United Continental Holdings, Inc.(q) 391
----------
1,336
----------
APPAREL (0.1%)
3,310 Carter's, Inc. 279
9,480 NIKE, Inc. "B" 731
----------
1,010
----------
AUTO MANUFACTURERS (0.0%)
12,170 General Motors Co. 406
10,550 Wabash National Corp. 142
----------
548
----------
================================================================================
20 | USAA CORNERSTONE MODERATE FUN
================================================================================
--------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------------
AUTO PARTS & EQUIPMENT (0.1%)
5,060 Allison Transmission Holdings, Inc. $ 209
9,800 BorgWarner, Inc. 348
15,050 Dana, Inc. 220
3,200 Lear Corp. 381
9,300 Meritor, Inc.(q) 187
3,730 Methode Electronics, Inc. 92
5,520 Tenneco, Inc. "A" 55
----------
1,492
----------
DISTRIBUTION/WHOLESALE (0.1%)
20,980 Fastenal Co. 642
2,880 KAR Auction Services, Inc. 162
3,520 WESCO International, Inc.(q) 165
1,160 WW Grainger, Inc. 303
----------
1,272
----------
ENTERTAINMENT (0.1%)
12,740 Live Nation Entertainment, Inc.(q) 775
390 Red Rock Resorts, Inc. "A" 8
----------
783
----------
HOME BUILDERS (0.1%)
130 NVR, Inc.(q) 416
8,670 PulteGroup, Inc. 269
----------
685
----------
HOME FURNISHINGS (0.0%)
4,160 Ethan Allen Interiors, Inc. 88
----------
LEISURE TIME (0.1%)
2,170 Brunswick Corp. 90
8,580 Carnival Corp. 439
15,440 Harley-Davidson, Inc. 505
7,330 Norwegian Cruise Line Holdings Ltd.(q) 401
----------
1,435
----------
LODGING (0.0%)
6,740 Las Vegas Sands Corp. 371
----------
OFFICE FURNISHINGS (0.0%)
4,550 Herman Miller, Inc. 162
7,030 Knoll, Inc. 138
11,610 Steelcase, Inc. "A" 186
----------
486
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 21
================================================================================
--------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------------
RETAIL (1.0%)
1,500 Asbury Automotive Group, Inc.(q) $ 111
7,720 Best Buy Co., Inc. 484
2,440 Big Lots, Inc. 67
10,560 Bloomin' Brands, Inc. 204
3,980 Buckle, Inc.(m) 60
1,390 Cracker Barrel Old Country Store, Inc. 218
14,550 Del Taco Restaurants, Inc.(q) 157
3,460 Dick's Sporting Goods, Inc. 119
3,090 Foot Locker, Inc. 122
22,550 Gap, Inc. 421
2,280 Group 1 Automotive, Inc. 165
3,490 Home Depot, Inc. 663
8,380 Kohl's Corp. 413
3,230 La-Z-Boy, Inc. 104
1,380 Lithia Motors, Inc. "A" 158
6,610 Lowe's Cos, Inc. 617
2,180 Lululemon Athletica, Inc.(q) 361
17,880 Macy's, Inc. 368
2,860 McDonald's Corp. 567
2,520 MSC Industrial Direct Co., Inc. "A" 178
1,720 Nu Skin Enterprises, Inc. "A" 80
1,480 O'Reilly Automotive, Inc.(q) 550
2,290 Penske Automotive Group, Inc. 98
36,090 Qurate Retail, Inc.(q) 452
6,730 Ross Stores, Inc. 626
4,740 Rush Enterprises, Inc. "A" 167
11,030 Starbucks Corp. 839
14,120 TJX Companies, Inc. 710
5,280 Tractor Supply Co. 532
1,600 Ulta Salon Cosmetics & Fragrance, Inc.(q) 533
4,330 Urban Outfitters, Inc.(q) 97
13,710 Walgreens Boots Alliance, Inc. 677
2,510 Williams-Sonoma, Inc. 147
----------
11,065
----------
TEXTILES (0.1%)
4,100 Mohawk Industries, Inc.(q) 556
----------
Total Consumer, Cyclical 21,127
----------
CONSUMER, NON-CYCLICAL (3.0%)
-----------------------------
AGRICULTURE (0.0%)
11,710 Altria Group, Inc. 574
----------
================================================================================
22 | USAA CORNERSTONE MODERATE FUND
================================================================================
--------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------------
BEVERAGES (0.2%)
23,200 Coca-Cola Co. $ 1,140
7,960 Molson Coors Brewing Co. "B" 438
9,650 PepsiCo, Inc. 1,235
----------
2,813
----------
BIOTECHNOLOGY (0.4%)
7,540 Amgen, Inc. 1,257
3,650 Biogen, Inc.(q) 800
540 Bio-Rad Laboratories, Inc. "A"(q) 155
2,240 Cambrex Corp.(q) 89
7,950 Celgene Corp.(q) 746
2,380 Emergent BioSolutions, Inc.(q) 95
13,330 Exelixis, Inc.(q) 261
12,760 Gilead Sciences, Inc. 794
8,040 Halozyme Therapeutics, Inc.(q) 119
3,460 Myriad Genetics, Inc.(q) 86
180 REGENXBIO, Inc.(q) 8
5,610 United Therapeutics Corp.(q) 471
----------
4,881
----------
COMMERCIAL SERVICES (0.4%)
3,250 AMN Healthcare Services, Inc.(q) 158
2,700 Automatic Data Processing, Inc. 432
3,660 Avis Budget Group, Inc.(q) 104
1,850 Cardtronics plc "A"(q) 56
4,820 Ecolab, Inc. 887
1,830 Euronet Worldwide, Inc.(q) 284
1,720 FTI Consulting, Inc.(q) 144
12,980 Hackett Group, Inc. 209
4,500 Moody's Corp. 823
6,380 PayPal Holdings, Inc.(q) 700
6,990 Quad/Graphics, Inc. 59
3,910 S&P Global, Inc. 836
3,980 United Rentals, Inc.(q) 438
----------
5,130
----------
COSMETICS/PERSONAL CARE (0.2%)
3,520 Estee Lauder Companies, Inc. "A" 567
11,860 Procter & Gamble Co. 1,220
----------
1,787
----------
FOOD (0.4%)
2,880 Cal-Maine Foods, Inc. 107
8,140 Flowers Foods, Inc. 182
================================================================================
PORTFOLIO OF INVESTMENTS | 23
================================================================================
--------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------------
5,070 Hershey Co. $ 669
11,610 Hostess Brands, Inc.(q) 156
2,830 Ingles Markets, Inc. "A" 84
5,060 Ingredion, Inc. 385
4,680 JM Smucker Co. 569
30,050 Kroger Co. 685
1,430 Sanderson Farms, Inc. 196
8,660 Sysco Corp. 596
9,110 Tyson Foods, Inc. "A" 691
----------
4,320
----------
HEALTHCARE PRODUCTS (0.3%)
4,410 Bruker Corp. 184
6,220 Danaher Corp. 821
1,770 Edwards Lifesciences Corp.(q) 302
2,270 Hill-Rom Holdings, Inc. 218
2,210 IDEXX Laboratories, Inc.(q) 552
1,780 Masimo Corp.(q) 233
13,670 Meridian Bioscience, Inc. 155
7,440 Patterson Companies, Inc. 156
200 STERIS plc(q) 27
2,850 Thermo Fisher Scientific, Inc. 761
----------
3,409
----------
HEALTHCARE-SERVICES (0.4%)
2,050 Amedisys, Inc.(q) 230
650 Chemed Corp. 213
12,850 DaVita, Inc.(q) 558
2,820 Encompass Health Corp. 166
2,920 HCA Healthcare, Inc. 353
4,150 MEDNAX, Inc.(q) 103
590 Molina Healthcare, Inc.(q) 84
5,810 Quest Diagnostics, Inc. 557
9,260 Select Medical Holdings Corp.(q) 130
3,150 UnitedHealth Group, Inc. 762
5,850 Universal Health Services, Inc. "B" 700
910 WellCare Health Plans, Inc.(q) 251
----------
4,107
----------
HOUSEHOLD PRODUCTS/WARES (0.0%)
13,460 ACCO Brands Corp. 99
990 Helen of Troy Ltd.(q) 132
1,500 Spectrum Brands Holdings, Inc. 79
----------
310
----------
================================================================================
24 | USAA CORNERSTONE MODERATE FUND
================================================================================
--------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS (0.7%)
8,700 AmerisourceBergen Corp. $ 677
7,450 Bristol-Myers Squibb Co. 338
12,750 Cardinal Health, Inc. 536
10,690 Corcept Therapeutics, Inc.(q) 104
9,510 CVS Health Corp. 498
1,610 Eagle Pharmaceuticals, Inc.(q) 82
3,940 Eli Lilly & Co. 457
1,460 Enanta Pharmaceuticals, Inc.(q) 132
10,820 Johnson & Johnson 1,419
4,790 McKesson Corp. 585
8,280 Merck & Co., Inc. 656
16,300 Pfizer, Inc. 677
2,610 Phibro Animal Health Corp. "A" 77
1,660 PRA Health Sciences, Inc.(q) 144
3,540 Prestige Consumer Healthcare, Inc.(q) 103
3,290 Supernus Pharmaceuticals, Inc.(q) 99
1,820 USANA Health Sciences, Inc.(q) 129
9,490 Zoetis, Inc. 959
----------
7,672
----------
Total Consumer, Non-cyclical 35,003
----------
ENERGY (0.6%)
-------------
COAL (0.0%)
4,190 Warrior Met Coal, Inc. 108
----------
ENERGY-ALTERNATE SOURCES (0.0%)
2,350 Renewable Energy Group, Inc.(q) 37
3,480 SolarEdge Technologies, Inc.(q) 186
----------
223
----------
OIL & GAS (0.5%)
18,010 ConocoPhillips 1,062
16,200 Exxon Mobil Corp. 1,146
13,820 HollyFrontier Corp. 525
20,830 Laredo Petroleum, Inc.(q) 55
11,370 Marathon Petroleum Corp. 523
5,720 Matador Resources Co.(q) 94
17,560 Occidental Petroleum Corp. 874
8,710 Par Pacific Holdings, Inc.(q) 171
4,130 PBF Energy, Inc. "A" 109
9,600 Phillips 66 776
6,740 Valero Energy Corp. 474
----------
5,809
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 25
================================================================================
--------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------------
OIL & GAS SERVICES (0.0%)
2,210 Core Laboratories N.V. $ 106
----------
PIPELINES (0.1%)
14,050 Antero Midstream Corp. 172
8,900 ONEOK, Inc. 566
17,280 Plains GP Holdings, LP "A"(q) 389
12,640 Tallgrass Energy, LP 301
----------
1,428
----------
Total Energy 7,674
----------
FINANCIAL (1.9%)
----------------
BANKS (0.8%)
44,110 Bank of America Corp. 1,173
3,800 Bank of Hawaii Corp. 288
8,060 BankUnited, Inc. 262
10,850 Cadence BanCorp 201
10,860 CIT Group, Inc. 516
30,770 Citigroup, Inc. 1,912
3,100 Cullen/Frost Bankers, Inc. 283
7,200 Great Western Bancorp, Inc. 224
21,470 J.P. Morgan Chase & Co. 2,275
23,190 KeyCorp. 370
3,940 PNC Financial Services Group, Inc. 501
23,160 Regions Financial Corp. 320
2,740 Synovus Financial Corp. 88
13,430 U.S. Bancorp. 674
3,490 Webster Financial Corp. 155
5,890 Western Alliance Bancorp(q) 242
----------
9,484
----------
DIVERSIFIED FINANCIAL SERVICES (0.7%)
4,670 Alliance Data Systems Corp. 642
19,160 Ally Financial, Inc. 553
9,750 American Express Co. 1,118
6,180 Capital One Financial Corp. 531
5,490 Discover Financial Services 409
3,030 LPL Financial Holdings, Inc. 243
5,520 Mastercard, Inc. "A" 1,388
4,110 Nelnet, Inc. "A" 244
16,152 Synchrony Financial 543
10,550 Virtu Financial, Inc. "A" 243
6,570 Visa, Inc. "A" 1,060
================================================================================
26 | USAA CORNERSTONE MODERATE FUND
================================================================================
--------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------------
11,720 Waddell & Reed Financial, Inc. "A" $ 189
2,000 World Acceptance Corp.(q) 265
----------
7,428
----------
INSURANCE (0.4%)
6,080 American Equity Investment Life Holding Co. 172
4,040 Aon plc 727
1,750 Berkshire Hathaway, Inc. "B"(q) 346
4,760 Employers Holdings, Inc. 198
7,700 Essent Group Ltd.(q) 362
9,850 MetLife, Inc. 455
9,680 MGIC Investment Corp.(q) 131
2,060 Primerica, Inc. 237
8,340 Principal Financial Group, Inc. 430
9,780 Progressive Corp. 775
4,330 Prudential Financial, Inc. 400
7,160 Radian Group, Inc. 161
4,660 Universal Insurance Holdings, Inc. 135
----------
4,529
----------
REITS (0.0%)
13,982 Ladder Capital Corp. 223
----------
Total Financial 21,664
----------
INDUSTRIAL (1.2%)
-----------------
AEROSPACE/DEFENSE (0.2%)
1,820 Boeing Co. 622
2,650 Lockheed Martin Corp. 897
8,780 Spirit AeroSystems Holdings, Inc. "A" 711
----------
2,230
----------
BUILDING MATERIALS (0.1%)
4,030 Apogee Enterprises, Inc. 146
12,940 Cornerstone Building Brands, Inc.(q) 57
2,990 Masonite International Corp.(q) 142
11,740 Owens Corning 569
3,150 Patrick Industries, Inc.(q) 128
----------
1,042
----------
ELECTRICAL COMPONENTS & EQUIPMENT (0.0%)
3,910 Generac Holdings, Inc.(q) 216
----------
ELECTRONICS (0.4%)
4,950 Allegion plc 480
7,460 Atkore International Group, Inc.(q) 174
5,200 Garmin Ltd. 398
================================================================================
PORTFOLIO OF INVESTMENTS | 27
================================================================================
--------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------------
11,890 Gentex Corp. $ 254
6,160 Honeywell International, Inc. 1,012
6,210 Jabil, Inc. 153
10,690 KEMET Corp. 170
800 Mettler-Toledo International, Inc.(q) 578
4,150 PerkinElmer, Inc. 358
4,860 SMART Global Holdings, Inc.(q) 83
1,860 Tech Data Corp.(q) 169
2,240 Waters Corp.(q) 450
----------
4,279
----------
HAND/MACHINE TOOLS (0.0%)
2,670 Regal Beloit Corp. 194
----------
MACHINERY-CONSTRUCTION & MINING (0.1%)
4,890 Caterpillar, Inc. 586
----------
METAL FABRICATION/HARDWARE (0.0%)
4,540 Timken Co. 200
----------
MISCELLANEOUS MANUFACTURERS (0.2%)
4,640 3M Co. 741
2,510 Crane Co. 192
4,050 Hillenbrand, Inc. 151
4,800 Illinois Tool Works, Inc. 670
1,670 Sturm Ruger & Co., Inc. 83
4,790 Trinseo S.A. 177
----------
2,014
----------
PACKAGING & CONTAINERS (0.0%)
6,070 Berry Global Group, Inc.(q) 285
8,940 Silgan Holdings, Inc. 259
----------
544
----------
TRANSPORTATION (0.2%)
5,270 Air Transport Services Group, Inc.(q) 116
7,320 CSX Corp. 545
3,200 Norfolk Southern Corp. 624
3,620 Union Pacific Corp. 604
7,840 United Parcel Service, Inc. "B" 728
3,210 Werner Enterprises, Inc. 90
----------
2,707
----------
TRUCKING & LEASING (0.0%)
3,440 Greenbrier Companies, Inc. 94
----------
Total Industrial 14,106
----------
================================================================================
28 | USAA CORNERSTONE MODERATE FUND
================================================================================
--------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------------
TECHNOLOGY (2.1%)
-----------------
COMPUTERS (0.6%)
3,950 Accenture plc "A" $ 703
10,540 Apple, Inc. 1,845
1,450 CACI International, Inc. "A"(q) 295
52,950 Hewlett Packard Enterprise Co. 726
3,100 Insight Enterprises, Inc.(q) 160
6,110 International Business Machines Corp. 776
4,340 MAXIMUS, Inc. 309
6,040 NCR Corp.(q) 185
6,360 NetApp, Inc. 376
6,110 Perspecta, Inc. 133
3,140 Science Applications International Corp. 241
21,450 Seagate Technology plc 898
14,530 Western Digital Corp. 541
----------
7,188
----------
OFFICE/BUSINESS EQUIPMENT (0.1%)
20,050 Pitney Bowes, Inc. 73
19,500 Xerox Corp. 597
----------
670
----------
SEMICONDUCTORS (0.5%)
9,520 Applied Materials, Inc. 368
3,940 Cirrus Logic, Inc.(q) 147
20,640 Intel Corp. 909
3,100 Lam Research Corp. 541
25,160 Micron Technology, Inc.(q) 821
1,340 MKS Instruments, Inc. 96
3,450 NVIDIA Corp. 467
4,820 Skyworks Solutions, Inc. 321
7,190 Teradyne, Inc. 303
9,940 Texas Instruments, Inc. 1,037
16,380 Ultra Clean Holdings, Inc.(q) 209
6,260 Xilinx, Inc. 641
----------
5,860
----------
SOFTWARE (0.9%)
1,910 Adobe, Inc.(q) 517
1,692 Covetrus, Inc.(q) 42
6,370 CSG Systems International, Inc. 286
5,940 Electronic Arts, Inc.(q) 553
4,400 Intuit, Inc. 1,077
3,390 j2 Global, Inc. 286
================================================================================
PORTFOLIO OF INVESTMENTS | 29
================================================================================
--------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------------
5,150 Manhattan Associates, Inc.(q) $ 337
34,540 Microsoft Corp. 4,272
2,820 MSCI, Inc. 620
10,600 Paychex, Inc. 909
5,230 Veeva Systems, Inc. "A"(q) 807
5,750 VMware, Inc. "A" 1,018
----------
10,724
----------
Total Technology 24,442
----------
UTILITIES (0.4%)
----------------
ELECTRIC (0.3%)
53,020 AES Corp. 838
3,100 Dominion Energy, Inc. 233
17,120 Exelon Corp. 823
2,640 IDACORP, Inc. 265
3,050 NextEra Energy, Inc. 604
15,600 PPL Corp. 464
11,360 Southern Co. 608
----------
3,835
----------
GAS (0.1%)
5,430 New Jersey Resources Corp. 258
3,090 Southwest Gas Holdings, Inc. 263
----------
521
----------
Total Utilities 4,356
----------
Total Common Stocks (cost: $152,808) 147,949
----------
EXCHANGE-TRADED FUNDS (4.0%)
160,600 iShares Core S&P 500 ETF 44,534
16,000 Vanguard Small-Cap Value ETF 1,966
----------
Total Exchange-Traded Funds (cost: $44,087) 46,500
----------
PREFERRED STOCKS (1.1%)
COMMUNICATIONS (0.2%)
---------------------
TELECOMMUNICATIONS (0.2%)
112,000 Qwest Corp., 6.50%(k) 2,578
----------
CONSUMER, NON-CYCLICAL (0.6%)
-----------------------------
AGRICULTURE (0.4%)
161,682 CHS, Inc., cumulative redeemable "B", 7.88%(k),(s) 4,443
----------
FOOD (0.2%)
28,000 Dairy Farmers of America, Inc., cumulative redeemable, 7.88%(a),(s) 2,765
----------
Total Consumer, Non-cyclical 7,208
----------
================================================================================
30 | USAA CORNERSTONE MODERATE FUND
================================================================================
--------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------------
ENERGY (0.2%)
-------------
OIL & GAS (0.2%)
5,500 Chesapeake Energy Corp., 5.75%(a),(s) $ 2,650
----------
FINANCIAL (0.1%)
----------------
INSURANCE (0.1%)
1,500 American Overseas Group Ltd., non-cumulative, 6.06%,
(3 mo. LIBOR + 3.56%)(b),(f),(g),(h) 375
----------
Total Preferred Stocks (cost: $14,852) 12,811
----------
Total U.S. Equity Securities (cost: $211,747) 207,260
----------
GLOBAL REAL ESTATE EQUITY SECURITIES (2.6%)
COMMON STOCKS (0.7%)
FINANCIAL (0.7%)
------------------
REAL ESTATE (0.2%)
20,990 CBRE Group, Inc. "A"(q) 959
7,170 HFF, Inc. "A" 310
3,810 Jones Lang LaSalle, Inc. 474
17,950 Realogy Holdings Corp. 127
3,700 RMR Group, Inc. "A" 179
----------
2,049
----------
REITS (0.5%)
4,160 American Tower Corp. 869
14,280 Chimera Investment Corp. 260
3,560 EPR Properties 278
9,460 Gaming and Leisure Properties, Inc. 374
13,060 GEO Group, Inc. 286
31,870 Kimco Realty Corp. 555
4,720 Lamar Advertising Co. "A" 369
7,040 LTC Properties, Inc. 315
22,380 Medical Properties Trust, Inc. 398
11,400 Omega Healthcare Investors, Inc. 406
7,526 PotlatchDeltic Corp. 253
4,790 Simon Property Group, Inc. 776
13,280 Tanger Factory Outlet Centers, Inc. 225
11,400 Washington Prime Group, Inc.(m) 47
5,330 Welltower, Inc. 433
----------
5,844
----------
Total Financial 7,893
----------
Total Common Stocks (cost: $8,641) 7,893
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 31
================================================================================
--------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------------
EXCHANGE-TRADED FUNDS (1.9%)
258,780 Vanguard Real Estate ETF (cost: $21,225) $ 22,485
----------
Total Global Real Estate Equity Securities (cost: $29,866) 30,378
----------
PRECIOUS METALS AND COMMODITY-RELATED SECURITIES (0.7%)
COMMON STOCKS (0.0%)
BASIC MATERIALS (0.0%)
----------------------
MINING (0.0%)
110,164 Hycroft Mining Corp.(f),(g),(h),(q) (cost: $3,919) 6
----------
EXCHANGE-TRADED FUNDS (0.7%)
39,300 First Trust Global Tactical Commodity Strategy Fund(m) 708
114,500 Invesco DB Commodity Index Tracking Fund 1,732
19,300 United States Commodity Index Fund(q) 701
153,400 VanEck Vectors Gold Miners ETF 3,312
47,200 VanEck Vectors Junior Gold Miners ETF 1,394
----------
Total Exchange-Traded Funds (cost: $8,891) 7,847
----------
Total Precious Metals and Commodity-Related Securities (cost: $12,810) 7,853
----------
--------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
--------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (3.2%)
COMMERCIAL PAPER (1.5%)
$ 1,553 Amphenol Corp.(a) 2.53% 6/03/2019 1,553
2,413 AutoZone, Inc.(a) 2.54 6/10/2019 2,412
4,070 CSLB Holdings, Inc.(a) 2.62 6/05/2019 4,069
2,600 Energy Transfer Partners(a) 3.00 6/03/2019 2,600
2,515 Eversource Energy(a) 2.55 6/04/2019 2,515
1,471 Southwestern Public Service Co.(a) 2.63 6/04/2019 1,471
2,256 Tyson Foods, Inc.(a) 2.53 6/06/2019 2,255
----------
Total Commercial Paper (cost: $16,873) 16,875
----------
================================================================================
32 | USAA CORNERSTONE MODERATE FUND
================================================================================
--------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------------
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (1.7%)
20,255,697 State Street Institutional Treasury Money Market Fund Premier Class,
2.30%(t) (cost: $20,256) $ 20,256
----------
Total Money Market Instruments (cost: $37,129) 37,131
----------
SHORT-TERM INVESTMENTS PURCHASED WITH CASH COLLATERAL
FROM SECURITIES LOANED (2.9%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (2.9%)
7,653,130 Goldman Sachs Financial Square Government Fund Institutional Class, 2.30%(t) 7,653
26,781,144 HSBC U.S. Government Money Market Fund Class I, 2.33%(t) 26,781
----------
Total Short-Term Investments Purchased with Cash Collateral from
Securities Loaned (cost: $34,434) 34,434
----------
TOTAL INVESTMENTS (COST: $1,183,956) $1,196,064
==========
--------------------------------------------------------------------------------------------------------------
UNREALIZED
APPRECIATION/
NUMBER OF EXPIRATION NOTIONAL CONTRACT (DEPRECIATION)
CONTRACTS DESCRIPTION DATE AMOUNT (000) VALUE (000) (000)
--------------------------------------------------------------------------------------------------------------
FUTURES (0.7%)
LONG FUTURES
EQUITY CONTRACTS
344 E-mini S&P 500 6/21/2019 USD 47,335 $ 47,344 $ 9
-------- -----
TOTAL LONG FUTURES $ 47,344 $ 9
-------- -----
SHORT FUTURES
INTEREST RATE CONTRACTS
257 U.S. Treasury Bond 9/19/2019 USD (38,635) $(39,505) $(870)
-------- -----
TOTAL SHORT FUTURES $(39,505) $(870)
-------- -----
TOTAL FUTURES $ 7,839 $(861)
======== =====
================================================================================
PORTFOLIO OF INVESTMENTS | 33
================================================================================
--------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
--------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------------------------------------------------------------------
Bonds:
Asset-Backed Securities $ - $ 17,687 $- $ 17,687
Bank Loans - 2,071 - 2,071
Collateralized Mortgage Obligations - 2,062 - 2,062
Commercial Mortgage Securities - 8,656 - 8,656
Convertible Securities - 2,926 12 2,938
Corporate Obligations - 75,523 - 75,523
Eurodollar and Yankee Obligations - 13,150 32 13,182
Fixed-Income Exchange-Traded Funds 146,253 - - 146,253
U.S. Government Agency Issues - 134,823 - 134,823
U.S. Treasury Securities 224,920 130 - 225,050
International Equity Securities:
Common Stocks 1,681 - - 1,681
Exchange-Traded Funds 245,195 - - 245,195
Preferred Stocks - 3,887 - 3,887
U.S. Equity Securities:
Common Stocks 147,949 - - 147,949
Exchange-Traded Funds 46,500 - - 46,500
Preferred Stocks - 12,436 375 12,811
Global Real Estate Equity Securities:
Common Stocks 7,893 - - 7,893
Exchange-Traded Funds 22,485 - - 22,485
Precious Metals and Commodity-Related
Securities:
Common Stocks - - 6 6
Exchange-Traded Funds 7,847 - - 7,847
Money Market Instruments:
Commercial Paper - 16,875 - 16,875
Government & U.S. Treasury Money Market
Funds 20,256 - - 20,256
Short-Term Investments Purchased with Cash
Collateral from Securities Loaned:
Government & U.S. Treasury Money Market
Funds 34,434 - - 34,434
Futures(1) 9 - - 9
--------------------------------------------------------------------------------------------------------------
Total $905,422 $290,226 $425 $1,196,073
--------------------------------------------------------------------------------------------------------------
LIABILITIES LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------------------------------------------------------------------
Futures(1) $(870) $- $- $(870)
--------------------------------------------------------------------------------------------------------------
Total $(870) $- $- $(870)
--------------------------------------------------------------------------------------------------------------
(1) Futures are valued at the unrealized appreciation/(depreciation) on the
investment.
================================================================================
34 | USAA CORNERSTONE MODERATE FUND
================================================================================
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 May 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
PORTFOLIO OF INVESTMENTS | 35
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 2019
--------------------------------------------------------------------------------
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 23.8% of net assets at May 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,
================================================================================
36 | USAA CORNERSTONE MODERATE 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.
U.S. TREASURY INFLATION-INDEXED NOTES - Designed to provide a real rate of
return after being adjusted over time to reflect the impact of inflation.
Their principal value periodically adjusts to the rate of inflation. They
trade at the prevailing real, or after-inflation, interest rates. The U.S.
Treasury guarantees repayment of these securities of at least their face
value in the event of sustained deflation or a drop in prices. Inflation
adjustments to the face value of these securities are included in interest
income.
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.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 37
================================================================================
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
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.
STRIPS Separate trading of registered interest and principal of
securities
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) 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) Variable-rate security - interest rate is adjusted periodically. The
interest rate disclosed represents the rate at May 31, 2019.
(c) 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 May 31, 2019. The weighted average life of the loans
are likely to be shorter than the stated final maturity date due to
================================================================================
38 | USAA CORNERSTONE MODERATE FUND
================================================================================
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.
(d) Stated interest rates may change slightly over time as underlying
mortgages paydown.
(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
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) Security was fair valued at May 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 $425,000, which represented less than 0.1% of the Fund's net
assets.
(g) Security deemed illiquid by USAA Asset Management Company, under
liquidity guidelines approved by USAA Mutual Funds Trust's Board of
Trustees.
(h) Security was classified as Level 3.
(i) 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.
(j) All of the coupon is PIK.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 39
================================================================================
(k) The security, or a portion thereof, is segregated to cover the value of
open futures contracts at May 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) The security, or a portion thereof, was out on loan as of May 31, 2019.
(n) At May 31, 2019, the issuer was in default with respect to interest
and/or principal payments.
(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, FHFA, or others could
adversely impact the value of the Fund's investments in securities
issued by Fannie Mae and Freddie Mac.
================================================================================
40 | USAA CORNERSTONE MODERATE FUND
================================================================================
(p) Securities with a value of $4,925,500 are segregated as collateral for
initial margin requirements on open futures contracts.
(q) Non-income-producing security.
(r) Investment in affiliated exchange-traded fund.
(s) Security is perpetual and has no final maturity date but may be subject
to calls at various dates in the future.
(t) Rate represents the money market fund annualized seven-day yield at
May 31, 2019.
(u) Effective June 3, 2019, UMBS Collateral, new BICS industry, replaces
FNMA Collateral, former BICS industry.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 41
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in unaffiliated securities, at market value (including
securities on loan of $33,500) (cost of $1,181,320) $1,193,877
Investments in affiliated underlying funds, at market value (cost of $2,636) 2,187
Cash 11,567
Cash denominated in foreign currencies (identified cost of $37) 28
Receivables:
Capital shares sold 922
USAA Asset Management Company (Note 6) 205
Dividends and interest 2,857
Securities sold 4,470
Other 9
----------
Total assets 1,216,122
----------
LIABILITIES
Payables:
Upon return of securities loaned 34,434
Securities purchased 15,348
Capital shares redeemed 506
Payable to broker 807
Variation margin on futures contracts 859
Accrued management fees 588
Accrued transfer agent's fees 70
Other accrued expenses and payables 136
----------
Total liabilities 52,748
----------
Net assets applicable to capital shares outstanding $1,163,374
==========
NET ASSETS CONSIST OF:
Paid-in capital $1,157,510
Distributable earnings 5,864
----------
Net assets applicable to capital shares outstanding $1,163,374
==========
Capital shares outstanding, no par value 82,468
==========
Net asset value, redemption price, and offering price per share $ 14.11
==========
See accompanying notes to financial statements.
================================================================================
42 | USAA CORNERSTONE MODERATE FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Income distributions from affiliated underlying funds $ 48
Dividends 19,367
Interest 16,225
Securities lending (net) 404
----------
Total income 36,044
----------
EXPENSES
Management fees 6,856
Administration and servicing fees 1,743
Transfer agent's fees 2,618
Custody and accounting fees 275
Postage 132
Shareholder reporting fees 63
Trustees' fees 37
Registration fees 49
Professional fees 105
Other 22
----------
Total expenses 11,900
Expenses reimbursed (285)
----------
Net expenses 11,615
----------
NET INVESTMENT INCOME 24,429
----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FOREIGN CURRENCY, AND FUTURES CONTRACTS
Net realized gain (loss) on:.
Investments 8,066
Foreign currency transactions 9
Futures transactions (2,963)
Change in net unrealized appreciation/(depreciation) of:
Unaffiliated investments (26,829)
Affiliated investments (Note 8) (356)
Foreign currency translations. (1)
Futures contracts (1,584)
----------
Net realized and unrealized loss (23,658)
----------
Increase in net assets resulting from operations $ 771
==========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 43
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
--------------------------------------------------------------------------------------------------------------
2019 2018
--------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 24,429 $ 20,170
Net realized gain on investments 8,066 49,970
Net realized gain on foreign currency transactions 9 482
Net realized gain on long-term capital gain
distributions from other investment companies - 23
Net realized gain (loss) on futures transactions (2,963) 12,503
Change in net unrealized appreciation/(depreciation) of:
Investments (27,185) (19,375)
Foreign currency translations (1) (54)
Futures contracts (1,584) (3,135)
-------------------------------
Increase in net assets resulting from operations 771 60,584
-------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS (57,045) (77,733)
-------------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 126,718 154,614
Reinvested dividends 56,759 77,303
Cost of shares redeemed (147,861) (150,230)
-------------------------------
Increase in net assets from capital share transactions 35,616 81,687
-------------------------------
Net increase (decrease) in net assets (20,658) 64,538
NET ASSETS
Beginning of year 1,184,032 1,119,494
-------------------------------
End of year. $1,163,374 $1,184,032
===============================
CHANGE IN SHARES OUTSTANDING
Shares sold 8,845 10,216
Shares issued for dividends reinvested 4,109 5,165
Shares redeemed (10,306) (9,922)
-------------------------------
Increase in shares outstanding 2,648 5,459
===============================
See accompanying notes to financial statements.
================================================================================
44 | USAA CORNERSTONE MODERATE FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
May 31, 2019
--------------------------------------------------------------------------------
(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 Cornerstone Moderate Fund (the Fund) qualifies as a registered
investment company under Accounting Standards Codification Topic 946. The
information presented in this annual 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 a high
total return.
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 Holdings, a global investment management firm
headquartered in Cleveland, Ohio (the Transaction), on July 1, 2019.
A special shareholder meeting was held on April 18, 2019, at which shareholders
of the Fund approved a new investment advisory agreement between the Trust, on
behalf of the Fund, and Victory Capital, an independent investment management
company. In addition, shareholders of the Fund also elected the following two
new directors to the Board of the Trust to serve upon the closing of the
Transaction: (1) David C. Brown, to serve as an Interested Trustee; and (2) John
C. Walters, to serve as an Independent Trustee. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION.
A. SECURITY VALUATION- The Trust's Board of Trustees (the Board) has
established the Valuation and Liquidity Committee (the Committee),
================================================================================
NOTES TO FINANCIAL STATEMENTS | 45
================================================================================
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 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 will monitor for events that
would materially affect the value of the Fund's foreign securities and
the Committee will consider such available
================================================================================
46 | USAA CORNERSTONE MODERATE FUND
================================================================================
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.
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. 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 47
================================================================================
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.
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.
================================================================================
48 | USAA CORNERSTONE MODERATE 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. 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 May 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 49
================================================================================
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 unfavorable
direction, in which case, the Fund may not achieve the anticipated benefits
of the futures contracts.
FAIR VALUES OF DERIVATIVE INSTRUMENTS AS OF MAY 31, 2019*
(IN THOUSANDS)
ASSET (LIABILITY) DERIVATIVES
--------------------------------------------------------------------------------------------------------
STATEMENT OF
DERIVATIVES NOT ASSETS AND FOREIGN
ACCOUNTED FOR AS LIABILITIES INTEREST RATE EQUITY EXCHANGE
HEDGING INSTRUMENTS LOCATION CONTRACTS CONTRACTS CONTRACTS TOTAL
--------------------------------------------------------------------------------------------------------
USAA Cornerstone Distributable
Moderate Fund earnings $(870)** $9** $- $(861)
--------------------------------------------------------------------------------------------------------
* For open derivative instruments as of May 31, 2019, see the Portfolio of
Investments, which also is indicative of activity for the year ended
May 31, 2019.
** 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
YEAR ENDED MAY 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 Cornerstone Net realized
Moderate Fund gain (loss)
on Futures
transactions $(1,948) $(1,015) $- $(2,963)
---------------------------------------------------------------------------------------------------
================================================================================
50 | USAA CORNERSTONE MODERATE FUND
================================================================================
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 Cornerstone Change in net
Moderate Fund unrealized
appreciation/
(depreciation) of
Futures contracts $(944) $(640) $- $(1,584)
----------------------------------------------------------------------------------------------------
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 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 year ended May 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 51
================================================================================
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
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
================================================================================
52 | USAA CORNERSTONE MODERATE FUND
================================================================================
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.
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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 53
================================================================================
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 year ended May 31, 2019, the Fund paid CAPCO facility fees of $9,000,
which represents 1.4% of the total fees paid to CAPCO by the funds of the
Trusts. The Fund had no borrowings under this agreement during the year ended
May 31, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL
STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
(3) DISTRIBUTIONS
The character of any distributions made during the year from net investment
income or net realized gains is determined in accordance with federal tax
regulations and may differ from those determined in accordance with U.S.
generally accepted accounting principles. Also, due to the timing of
distributions, the fiscal year in which amounts are distributed may differ from
the year that the income or realized gains were recorded by the Fund.
During the current fiscal year, permanent differences between book-basis and
tax-basis accounting for foreign currency, partnership basis, REIT return of
capital dividend, REIT capital gain dividend, non-REIT return of capital
dividend, distribution re-designations additional adjustments and prior period
adjustments resulted in reclassifications to the Statement of Assets and
Liabilities to decrease distributable earnings by less than $500 and increase
paid in capital by less than $500. These reclassifications had no effect on net
assets.
================================================================================
54 | USAA CORNERSTONE MODERATE FUND
================================================================================
The tax character of distributions paid during the years ended May 31, 2019, and
2018, was as follows:
2019 2018
-----------------------------------
Ordinary income* $34,450,000 $35,085,000
Long-term realized capital gains 22,595,000 42,648,000
----------- -----------
Total distributions paid $57,045,000 $77,733,000
=========== ===========
As of May 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
>
Undistributed ordinary income* $ 2,842,000
Accumulated capital and other losses (5,660,000)
Unrealized appreciation of investments 10,368,000
*Includes short-term realized capital gains, if any, which are taxable as
ordinary income.
The difference between book-basis and tax-basis unrealized appreciation of
investments is attributable to the tax deferral of losses on wash sales, REIT
return of capital dividend, non-REIT return of capital dividend, futures
contracts marked-to-market, hybrid interest accrual adjustment and partnership
basis adjustments.
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 May 31, 2019, the Fund had no capital loss carryforwards, for federal income
tax purposes. Net capital losses incurred after October 31, and within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. For the year ended May 31, 2019, the Fund deferred to June 1,
2019, post October capital losses of $5,660,000.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 55
================================================================================
TAX BASIS OF INVESTMENTS - At May 31, 2019, the aggregate cost of investments
for federal income tax purposes and net unrealized appreciation/(depreciation)
on investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
FUND TAX COST APPRECIATION DEPRECIATION (DEPRECIATION)
--------------------------------------------------------------------------------------------------
USAA Cornerstone
Moderate Fund $1,185,687,000 $45,162,000 $(34,785,000) $10,377,000
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended May 31, 2019, were $922,617,000 and
$923,719,000, 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 year ended May 31, 2019 were as
follows:
PURCHASES SALES NET REALIZED GAIN (LOSS)
------------------------------------------------------------------------------------------------
$366,000 $- $-
(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
================================================================================
56 | USAA CORNERSTONE MODERATE FUND
================================================================================
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 May 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
--------------------------------------------------------------------------------
$33,500,000 $- $34,434,000
(6) 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 year ended May 31, 2019, the Fund had no subadviser(s).
The Fund's investment management fee is accrued daily and paid monthly at an
annualized rate of 0.59% of the Fund's average daily net assets. For the year
ended May 31, 2019, the Fund incurred management fees, paid or payable to the
Manager, of $6,856,000.
In addition, the Fund invests in affiliated USAA exchange-traded fund(s) (ETFs).
The Fund's management fee is reimbursed by the Manager to the extent of the
indirect management fee incurred through the Fund's proportional investment in
the affiliated ETF(s). For the year ended May 31, 2019, the Fund's management
fee was reimbursed by the Manager in an amount of $6,000, of which less than
$500 was receivable from the
================================================================================
NOTES TO FINANCIAL STATEMENTS | 57
================================================================================
Manager. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS
IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
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 the Fund's
average daily net assets for the fiscal year. For the year ended May 31, 2019,
the Fund incurred administration and servicing fees, paid or payable to the
Manager, of $1,743,000.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and legal
services for the benefit of the Fund. The Board has approved the reimbursement
of a portion of these expenses incurred by the Manager. For the year ended May
31, 2019, the Fund reimbursed the Manager $7,000 for these compliance and legal
services. These expenses are included in the professional fees on the Fund's
Statement of Operations. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
EXPENSE LIMITATION - The Manager agreed, through September 30, 2019, to limit
the total annual operating expenses of the Fund to 1.00% of its average daily
net assets, excluding extraordinary expenses and before reductions of any
expenses paid indirectly, and to reimburse the Fund for all expenses in excess
of that amount. This expense limitation arrangement may not be changed or
terminated through September 30, 2019, without approval of the Board, and may be
changed or terminated by the Manager at any time after that date. For the year
ended May 31, 2019, the Fund incurred reimbursable expenses of $285,000, of
which $205,000 was receivable from the Manager, which includes affiliated ETF(s)
management fee reimbursement expenses and receivables.
TRANSFER AGENT'S FEES - SAS, an affiliate of the Manager, provides transfer
agent services to the Fund based on an annual charge of $23 per shareholder
account plus out-of-pocket expenses. 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 year ended May 31, 2019, the Fund incurred
transfer agent's fees, paid or payable to SAS, of $2,618,000.
================================================================================
58 | USAA CORNERSTONE MODERATE FUND
================================================================================
PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS
ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
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. PLEASE REFER
TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT
FOR ADDITIONAL IMPORTANT INFORMATION.
(7) 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. PLEASE REFER TO THE SUBSEQUENT EVENT
NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
(8) TRANSACTIONS WITH AFFILIATED FUNDS
A. SHARE OWNERSHIP - The Fund does not invest in the affiliated USAA Funds
for the purpose of exercising management or control; however, investments by
the Fund may represent a significant portion of the affiliated USAA Funds'
net assets. The affiliated funds' annual or semiannual reports may be viewed
at usaa.com. At May 31, 2019, the Fund owned the following percentages of
the total outstanding shares of each of USAA Funds:
AFFILIATED USAA FUND OWNERSHIP %
------------------------------------------------------------------------------------------
MSCI Emerging Markets Value
Momentum Blend Index 1.3
================================================================================
NOTES TO FINANCIAL STATEMENTS | 59
================================================================================
B. TRANSACTIONS WITH AFFILIATED FUNDS - The following table provides details
related to the Fund's investment in the underlying USAA Funds for the year
ended May 31, 2019:
CHANGE
IN NET
($ IN 000S) REALIZED CAPITAL UNREALIZED
AFFILIATED PURCHASE SALES DIVIDEND GAIN GAIN APPRECIATION/ MARKET VALUE
USAA FUND COST PROCEEDS INCOME (LOSS) DISTRIBUTIONS DEPRECIATION 5/31/18 5/31/19
--------------------------------------------------------------------------------------------------------
MSCI
Emerging
Markets Value
Momentum
Blend Index
ETF $569 $- $48 $- $- $(356) $1,974 $2,187
(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.
(10) RECENT ACCOUNTING PRONOUNCEMENTS
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
================================================================================
60 | USAA CORNERSTONE MODERATE FUND
================================================================================
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 FASB issued 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 significant impact on the
financial statements and reporting disclosures of the Fund.
(11) SUBSEQUENT EVENT NOTE
As previously announced, and as discussed in Note 1 to the Financial Statements,
effective July 1, 2019, AMCO, the prior investment adviser to the Fund, and SAS,
the prior transfer agent to the Fund, were acquired by Victory Holdings. PLEASE
SEE THE SUPPLEMENT DATED JULY 1, 2019 TO THE FUND'S PROSPECTUS FOR ADDITIONAL
IMPORTANT INFORMATION.
Effective July 1, 2019, Victory Capital is the new investment adviser and
administrator to the USAA Mutual Funds; SAS was renamed Victory Capital Transfer
Agency, Inc. Victory Capital Advisers, Inc. is the new distributor to the USAA
Mutual Funds; Citi Fund Services of Ohio, Inc. serves as sub-administrator and
sub-fund accountant for the USAA Mutual Funds; and FIS Investor Services LLC
serve as sub-transfer agent and dividend disbursing agent for the USAA Mutual
Funds. Effective August 5, 2019, Citibank, N.A. is the new custodian for the
USAA Mutual Funds.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2019 permitting the
use of a "manager-of-managers" structure for certain funds. Prior to that date,
the Trust relied on a similar exemptive order granted by the SEC to the Trust
and its affiliated persons. Under a manager of managers structure, the
================================================================================
NOTES TO FINANCIAL STATEMENTS | 61
================================================================================
investment adviser may select (with approval of the Board and without
shareholder approval) one or more subadvisers to manage the day-to-day
investment of a fund's assets.
Effective July 1, 2019, under the investment advisory agreement with Victory
Capital, which took effect on July 1, 2019, no performance adjustments will be
made for periods beginning July 1, 2019, through June 30, 2020, and only
performance beginning as of July 1, 2020, and thereafter will be utilized in
calculating performance adjustments through June 30, 2020.
Effective July 1, 2019, the line of credit (as discussed in the Notes to the
Financial Statements in this annual report) among the Trust, with respect to its
Funds, and CAPCO terminated; the Trust, with respect to its Funds, along with
series of Victory Portfolios, Victory Portfolios II and Victory Variable
Insurance Funds, entered into a 364 day committed credit facility and a 364 day
uncommitted, demand credit facility, with Citibank, N.A. (Citibank). Each such
credit facility may be renewed if so agreed by the parties. Under the agreement
with Citibank, the Funds may borrow up to $600 million, of which $300 million is
committed and $300 million is uncommitted. Of this amount, $40 million of the
line of credit is reserved for use by the Victory Floating Rate Fund (a series
of Victory Portfolios), with that Fund paying the related commitment fees for
that amount. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption requests that might otherwise require the untimely
disposition of securities. Citibank receives an annual commitment fee of 0.15%.
Each Fund pays a pro-rata portion of this commitment fee plus any interest on
amounts borrowed.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2017 (the IFL
Order), permitting the establishment and operation of an Interfund Lending
Facility (the Facility). The Facility allows each Fund to directly lend and
borrow money to or from certain other affiliated Funds relying upon the IFL
Order at rates beneficial to both the borrowing and lending funds. Advances
under the Facility are allowed for temporary or emergency purposes, including
the meeting of redemption requests that are subject to each Fund's borrowing
restrictions. The interfund loan rate is determined, as specified in the IFL
Order, by averaging the current repurchase agreement rate and the current bank
loan rate.
================================================================================
62 | USAA CORNERSTONE MODERATE FUND
================================================================================
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
---------------------------------------------------------------------------
2019 2018 2017 2016 2015
---------------------------------------------------------------------------
Net asset value at
beginning of period $ 14.83 $ 15.05 $ 14.01 $ 15.43 $ 15.46
---------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .30 .26 .31 .39 .37
Net realized and
unrealized gain (loss) (.31) .55 1.06 (1.15) .10
---------------------------------------------------------------------------
Total from investment
operations (.01) .81 1.37 (.76) .47
---------------------------------------------------------------------------
Less distributions from:
Net investment income (.29) (.26) (.33) (.38) (.38)
Realized capital gains (.42) (.77) - (.28) (.12)
---------------------------------------------------------------------------
Total distributions (.71) (1.03) (.33) (.66) (.50)
---------------------------------------------------------------------------
Net asset value at end
of period $ 14.11 $ 14.83 $ 15.05 $ 14.01 $ 15.43
===========================================================================
Total return (%)* .13 5.42 9.91 (4.89) 3.10
Net assets at end of
period (000) $1,163,374 $1,184,032 $1,119,494 $1,057,659 $1,150,798
Ratios to average daily net
assets:**
Expenses (%)(a) 1.00 1.00 1.00 1.00 1.00
Expenses, excluding
reimbursements (%)(a) 1.02 1.03 1.10 1.16 1.19
Net investment income (%) 2.10 1.73 2.14 2.72 2.46
Portfolio turnover (%) 81(c) 51 66 70(b) 44
* 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 year ended May 31, 2019, average daily net assets were
$1,162,164,000.
(a) Does not include acquired fund fees, if any.
(b) Reflects increased trading activity due to changes in asset allocation
strategies.
(c) Reflects increased trading activity due to usage of quantitative
investment strategies.
================================================================================
FINANCIAL HIGHLIGHTS | 63
================================================================================
EXPENSE EXAMPLE
May 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 December 1, 2018, through May
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 balance or
expenses you paid for the period. You may use this information to
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64 | USAA CORNERSTONE MODERATE FUND
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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 DECEMBER 1, 2018 -
DECEMBER 1, 2018 MAY 31, 2019 MAY 31, 2019
-------------------------------------------------------------------
Actual $1,000.00 $1,030.00 $5.06
Hypothetical
(5% return before expenses) 1,000.00 1,019.95 5.04
*Expenses are equal to the Fund's annualized expense ratio of 1.00%, which is
net of any reimbursements and expenses paid indirectly, multiplied by the
average account value over the period, multiplied by 182 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 3.00% for the six-month period of December
1, 2018, through May 31, 2019.
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EXPENSE EXAMPLE | 65
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the (i) new investment
advisory agreement between the Trust and Victory Capital and (ii) new investment
subadvisory agreements between certain subadvisers and Victory Capital, which
became effective on July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO
THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
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.
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66 | USAA CORNERSTONE MODERATE FUND
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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 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
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ADVISORY AGREEMENT(S) | 67
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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 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 then-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.
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68 | USAA CORNERSTONE MODERATE FUND
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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.
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).
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ADVISORY AGREEMENT(S) | 69
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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.
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.
(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 CORNERSTONE MODERATE FUND
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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 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.
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ADVISORY AGREEMENT(S) | 71
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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 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,
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72 | USAA CORNERSTONE MODERATE FUND
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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.
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.
(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) | 73
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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 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
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74 | USAA CORNERSTONE MODERATE FUND
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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 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.
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ADVISORY AGREEMENT(S) | 75
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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 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.
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76 | USAA CORNERSTONE MODERATE FUND
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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
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.
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ADVISORY AGREEMENT(S) | 77
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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
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
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78 | USAA CORNERSTONE MODERATE FUND
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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 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.
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ADVISORY AGREEMENT(S) | 79
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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. 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 CORNERSTONE MODERATE FUND
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND THE MANAGER)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the continuation of the (i)
investment advisory agreement between the Trust and AMCO and (ii) investment
subadvisory agreements between certain subadvisers and AMCO, which were
effective until July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
At an in-person meeting of the Board of Trustees (the Board) held on April 17,
2019, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to the
Fund.(1)
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and the Manager, and were given
the opportunity to ask questions and request additional information from
management. The information provided to the Board included, among other things:
(i) a separate report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance, expenses, and
fees to comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the Manager's
revenues and costs of providing services to the Fund and compensation paid to
affiliates of the
(1)At an in-person meeting held on January 15, 2019, the Board, including the
Independent Trustees, approved a new investment advisory agreement between
the Trust, on behalf of the Fund, and Victory Capital Management Inc.
("Victory Capital"). Upon the closing of the transaction, on behalf of the
Fund, Victory Capital Holdings, Inc., the parent company of Victory Capital,
the Advisory Agreement between the Trust and the Manager will terminate and
the new investment advisory agreement between the Trust and Victory Capital
will go into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are included in this
annual report.
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ADVISORY AGREEMENT(S) | 81
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Manager; and (iii) information about the Manager's operations and personnel.
Prior to voting, the Independent Trustees reviewed the proposed continuance of
the Advisory Agreement with management and with experienced independent legal
counsel retained by the Independent Trustees (Independent Counsel) and
received materials from such Independent Counsel discussing the legal
standards for their consideration of the proposed continuation of the Advisory
Agreement with respect to the Fund. The Independent Trustees also reviewed the
proposed continuation of the Advisory Agreement with respect to the Fund in
private sessions with Independent Counsel at which no representatives of
management were present.
At each regularly scheduled meeting of the Board and its committees, the Board
receives and reviews, among other things, information concerning the Fund's
performance and related services provided by the Manager. At the meeting at
which the renewal of the Advisory Agreement is considered, particular focus is
given to information concerning Fund performance, fees and total expenses as
compared to comparable investment companies, and the Manager's profitability
with respect to the Fund. However, the Board noted that the evaluation process
with respect to the Manager is an ongoing one. In this regard, the Board's and
its committees' consideration of the Advisory Agreement included certain
information previously received at such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving
the Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent,
and quality of the services provided by the Manager under the Advisory
Agreement, the Board reviewed information provided by the Manager relating to
its operations and personnel. The Board also took into account its knowledge
of the Manager's management and the quality of the performance
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82 | USAA CORNERSTONE MODERATE FUND
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of the Manager's duties through Board meetings, discussions, and reports
during the preceding year. The Board considered the fees paid to the Manager
and the services provided to the Fund by the Manager under the Advisory
Agreement, as well as other services provided by the Manager and its
affiliates under other agreements, and the personnel who provide these
services. In addition to the investment advisory services provided to the
Fund, the Manager and its affiliates provide administrative services,
shareholder services, oversight of Fund accounting, marketing services,
assistance in meeting legal and regulatory requirements, and other services
necessary for the operation of the Fund and the Trust. The Board also
considered the significant risks assumed by the Manager in connection with the
services provided to the Fund, including investment, operational, enterprise,
litigation, regulatory and compliance risks.
The Board considered the Manager's management style and the performance of the
Manager's duties under the Advisory Agreement. The Board considered the level
and depth of experience of the Manager, including the professional experience
and qualifications of its senior and investment personnel, as well as current
staffing levels. The allocation of the Fund's brokerage, including the
Manager's process for monitoring "best execution" and the utilization of "soft
dollars," also were considered. The Manager's role in coordinating the
activities of the Fund's other service providers also was considered.
The Board also considered the Manager's risk management processes. The Board
considered the Manager's financial condition and that it had the financial
wherewithal to continue to provide the same scope and high quality of services
under the Advisory Agreement. In reviewing the Advisory Agreement, the Board
focused on the experience, resources, and strengths of the Manager and its
affiliates in managing the Fund, as well as the other funds in the Trust.
The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager and its affiliates, including oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust
also focused on the quality of the Manager's compliance and administrative
staff.
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ADVISORY AGREEMENT(S) | 83
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EXPENSES AND PERFORMANCE - In connection with its consideration of the
Advisory Agreement, the Board evaluated the Fund's advisory fees and total
expense ratio as compared to other open-end investment companies deemed to be
comparable to the Fund as determined by the independent third party in its
report. The Fund's expenses were compared to (i) a group of investment
companies chosen by the independent third party to be comparable to the Fund
based upon certain factors, including fund type, comparability of investment
objective and classification, sales load type (in this case, retail investment
companies with no sales loads), asset size, and expense components (the
"expense group") and (ii) a larger group of investment companies that includes
all no-load retail open-end investment companies with the same investment
classification/objective as the Fund regardless of asset size, excluding
outliers (the "expense universe"). Among other data, the Board noted that the
Fund's management fee rate - which includes advisory and administrative
services - was below the median of its expense group and equal to the median
of its expense universe. The data indicated that the Fund's total expenses
were below the median of its expense group and equal to the median of its
expense universe. The Board took into account the various services provided to
the Fund by the Manager and its affiliates, including the high quality of
services received by the Fund from the Manager. The Board also noted the level
and method of computing the Fund's management fee. The Board also took into
account management's discussion with respect to the Fund's expenses. The Board
also considered that the Fund's management fee rate was reduced in October
2016. The Board also considered that the Fund's management fee was reduced
further and that the performance fee component was eliminated in April 2017.
In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total return with its Lipper index and with that of other mutual funds deemed
to be in its peer group by the independent third party in its report (the
"performance universe"). The Fund's performance universe consisted of the Fund
and all retail and institutional open-end
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84 | USAA CORNERSTONE MODERATE FUND
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investment companies with the same classification/objective as the Fund
regardless of asset size or primary channel of distribution. This comparison
indicated that, among other data, the Fund's performance was lower than the
average of its performance universe and its Lipper index for the one-, three-,
five-, and ten-year periods ended December 31, 2018. The Board also noted that
the Fund's percentile performance ranking was in the bottom 50% of its
performance universe for the one-, three-, five-, and ten-year periods ended
December 31, 2018. The Board took into account management's discussion of the
Fund's performance, including the Fund's investment approach and the impact of
market conditions on the Fund's performance.
COMPENSATION AND PROFITABILITY - The Board took into consideration the level
and method of computing the Fund's management fee. The information considered
by the Board included operating profit margin information for the Manager's
business as a whole. The Board also received and considered profitability
information related to the management revenues from the Fund. This
information included a review of the methodology used in the allocation of
certain costs to the Fund. The Trustees reviewed the profitability of the
Manager's relationship with the Fund before tax expenses. The Board was also
provided with an Investment Management Profitability Analysis prepared by an
independent information service. In reviewing the overall profitability of the
management fee to the Manager, the Board also considered the fact that
affiliates provide shareholder servicing and administrative services to the
Fund for which they receive compensation. The Board also considered the
possible direct and indirect benefits to the Manager from its relationship
with the Trust, including that the Manager may derive reputational and other
benefits from its association with the Fund. The Trustees recognized that the
Manager should be entitled to earn a reasonable level of profits in exchange
for the level of services it provides to the Fund and the entrepreneurial risk
that it assumes as Manager.
ECONOMIES OF SCALE - The Board considered whether there should be changes in
the management fee rate or structure in order to enable the Fund to
participate in any economies of scale. The Board took into account
management's discussions of the current advisory fee structure. The Board also
considered the effect of the Fund's growth and size on its performance
================================================================================
ADVISORY AGREEMENT(S) | 85
================================================================================
and fees, noting that if the Fund's assets increase over time, the Fund may
realize other economies of scale if assets increase proportionally more than
some expenses. The Board determined that the current investment management fee
structure was reasonable.
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) the performance of the Fund is
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 management is appropriately monitoring the Fund's performance; (iv) the
Fund's advisory expenses are reasonable in relation to those of similar funds
and to the services to be provided by the Manager; and (v) the Manager and its
affiliates' level of profitability from their relationship with the Fund is
reasonable in light of the nature and high quality of services provided by the
Manager and the type of fund. Based on its conclusions, the Board determined
that continuation of the Advisory Agreement would be in the best interests of
the Fund and its shareholders.
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86 | USAA CORNERSTONE MODERATE FUND
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TRUSTEES' AND OFFICERS' INFORMATION
TRUSTEES AND OFFICERS OF THE TRUST
--------------------------------------------------------------------------------
As of July 1, 2019, the Board of Trustees (the Board) of the Trust consists of
ten Trustees. These Trustees and the Trust's Officers supervise the business
affairs of the USAA family of funds. The Board is responsible for the general
oversight of the funds' business and for assuring that the funds are managed in
the best interests of each fund's respective shareholders. The Board
periodically reviews the funds' investment performance as well as the quality of
other services provided to the funds and their shareholders by each of the
fund's service providers, including the adviser and its affiliates. Pursuant to
a policy adopted by the Board, the term of office for each Trustee shall be
until the Trustee reaches age 75. The Board may change or grant exceptions from
this policy at any time without shareholder approval. A Trustee may resign or be
removed by a vote of two-thirds of the Trustees before the removal or by the
holders of two-thirds of the outstanding shares of the Trust at any time.
Vacancies on the Board can be filled by the action of a majority of the
Trustees, provided that after filling such vacancy at least two-thirds of the
Trustees have been elected by the shareholders.
Set forth below are the Trustees and Officers of the Trust, their respective
offices and principal occupations during the last five years, length of time
served, and information relating to any other directorships held. As of July 1,
2019, each serves on the Board of the USAA family of funds consisting of one
registered investment company, which offers 47 individual funds. Unless
otherwise indicated, the business address for each is P.O. Box 659430, San
Antonio, TX 78265-9430.
If you would like more information about the funds' Trustees, you may call (800)
235-8396 to request a free copy of the funds' Statement of Additional
Information (SAI).
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TRUSTEES' AND OFFICERS' INFORMATION | 87
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In connection with the Transaction, the Board of the Trust nominated, and
shareholders of each USAA mutual fund approved, two new Trustees to serve on the
Trust's Board, effective upon the closing of the Transaction. Effective July 1,
2019, David C. Brown serves as an Interested Trustee and John C. Walters serves
as an Independent Trustee. Information about the current Trustees of the Trust
is provided below.
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
DANIEL S. McNAMARA(1, 2, 4, 6, +)
Trustee and Chair of the Board of Trustees
Born: June 1966
Year of Election or Appointment: 2012
Trustee, President, and Vice Chairman, USAA ETF Trust (06/17-06/19); President
of Financial Advice & Solutions Group (FASG), USAA (02/13-present); Director of
USAA Asset Management Company (AMCO), (08/11-present); Director of USAA
Investment Management Company (IMCO) (09/09-present); President, IMCO
(09/09-04/14); President and Director of USAA Shareholder Account Services (SAS)
(10/09-present); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director of FPS (12/13-present);
President and Director of USAA Investment Corporation (ICORP) (03/10-present);
Director of USAA Financial Advisors, Inc. (FAI) (12/13-present). Mr. McNamara
brings to the Board extensive experience in the financial services industry,
including experience as an officer of the Trust.
DAVID C. BROWN(2, 4, 6, 10)
Trustee
Born: May 1972
Year of Election or Appointment: 2019
Chairman and Chief Executive Officer (2013-present), Co-Chief Executive Officer,
(2011-2013), Victory Capital Management Inc.; Chairman and Chief Executive
Officer (2013-present), Victory Capital Holdings, Inc. Mr. Brown brings to the
Board extensive business, finance and leadership skills gained
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88 | USAA CORNERSTONE MODERATE FUND
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and developed through years of experience in the financial services industry,
including his tenure overseeing the strategic direction as CEO of Victory
Capital. These skills, combined with Mr. Brown's extensive knowledge of the
financial services industry and demonstrated success in the development and
distribution of investment strategies and products, enable him to provide
valuable insights to the Board and strategic direction for the Funds. Mr. Brown
serves on the Boards of the Victory Funds family of funds consisting of five
registered investment companies offering approximately 104 mutual funds and 24
ETFs. Mr. Brown is considered an Interested Trustee of the Trust due to his
position with Victory Capital and its affiliated companies.
NON-INTERESTED (INDEPENDENT) TRUSTEES
--------------------------------------------------------------------------------
ROBERT L. MASON, Ph.D.(3, 4, 5, 6, 7)
Trustee
Born: July 1946
Year of Election or Appointment: 1997
Trustee, USAA ETF Trust (06/17-06/19); Adjunct Professor in the Department of
Management Science and Statistics in the College of Business at the University
of Texas at San Antonio (2001-present); Institute Analyst, Southwest Research
Institute (03/02-01/16), which focuses on providing innovative technology,
science, and engineering services to clients around the world and is one of the
oldest independent, nonprofit, applied research and development organizations in
the United States. He was employed at Southwest Research Institute for 40 years.
Dr. Mason brings to the Board particular experience with information technology
matters, statistical analysis, and human resources as well as over 22 years'
experience as a Board member of the USAA family of funds. Dr. Mason holds no
other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
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TRUSTEES' AND OFFICERS' INFORMATION | 89
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JEFFERSON C. BOYCE(3, 4, 5, 6, 7)
Lead Trustee and Vice Chair
Born: September 1957
Year of Election or Appointment: 2013
Trustee, USAA ETF Trust (06/17-06/19); Senior Managing Director, New York Life
Investments, LLC (1992-2012), an investment manager. Mr. Boyce brings to the
Board experience in financial investment management, and, in particular,
institutional and retail mutual funds, variable annuity products, broker
dealers, and retirement programs, including experience in organizational
development, marketing, product development, and money management as well as
five years' experience as a Board member of the USAA family of funds. Mr. Boyce
is a board member of Westhab, Inc.
DAWN M. HAWLEY(3, 4, 5, 6, 7, 9)
Trustee
Born: February 1954
Year of Election or Appointment: 2014
Trustee, USAA ETF Trust (06/17-06/19); Manager of Finance, Menil Foundation,
Inc. (05/07-06/11), which is a private foundation that oversees the assemblage
of sculptures, prints, drawings, photographs, and rare books. Director of
Financial Planning and Analysis and Chief Financial Officer, AIM Management
Group, Inc. (10/87-01/06). Ms. Hawley brings to the Board experience in
financial investment management and, in particular, institutional and retail
mutual funds, variable annuity products, broker dealers, and retirement
programs, including experience in financial planning, budgeting, accounting
practices, and asset/liability management functions including major acquisitions
and mergers, as well as over five years' experience as a Board member of the
USAA family of funds. Ms. Hawley holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
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90 | USAA CORNERSTONE MODERATE FUND
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PAUL L. McNAMARA(3, 4, 5, 6, 7)
Trustee
Born: July 1948
Year of Election or Appointment: 2012
Trustee, USAA ETF Trust (06/17-06/19); Director, Cantor Opportunistic
Alternatives Fund, LLC (03/10-02/14), which is a closed-end fund of funds by
Cantor Fitzgerald Investment Advisors, LLC. Mr. McNamara retired from Lord
Abbett & Co. LLC, an independent U.S. investment management firm, as an
Executive Member on 09/30/09, a position he held since 10/02. He had been
employed at Lord Abbett since 1996. Mr. McNamara brings to the Board extensive
experience with the financial services industry and, in particular,
institutional and retail mutual fund markets, including experience with mutual
fund marketing, distribution, and risk management, as well as overall experience
with compliance and corporate governance issues. Mr. McNamara also has
experience serving as a fund director as well as seven years' experience as a
Board member of the USAA family of funds. Paul L. McNamara is of no relation to
Daniel S. McNamara. Mr. McNamara holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
RICHARD Y. NEWTON III(3, 4, 5, 6, 7)
Trustee
Born: January 1956
Year of Election or Appointment: 2017
Trustee, USAA ETF Trust (06/17-06/19); Director, Elta North America
(01/18-present), which is a global leader in the design, manufacture and support
of innovative electronic systems in the ground, maritime, airborne, and security
domains for the nation's warfighters, security personnel, and first responders;
Managing Partner, Pioneer Partnership Development Group (12/15-present);
Executive Director, The Union League Club of New York (06/14-11/15); Executive
Vice President, Air Force Association (08/12-05/14); Lieutenant General, United
States Air Force (01/08-06/12). Lieutenant General Newton (Ret.) served 34 years
of active duty in the United States Air Force. Lt. Gen. Newton retired as the
Assistant Vice Chief of Staff and Director of Air Staff at the Headquarters of
the U.S. Air Force where he was responsible for overseeing the administration
and organization
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TRUSTEES' AND OFFICERS' INFORMATION | 91
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of the Air Staff, which develops policies, plans and programs, establishes
requirements, and provides resources to support the Air Force's mission. Lt.
Gen. Newton is a graduate of the United States Air Force Academy, Webster
University, and The National War College. Lt. Gen. Newton brings to the Board
extensive management and military experience, as well as over two years of
experience as a Board member of the USAA family of funds. Lt. Gen. Newton holds
no other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
BARBARA B. OSTDIEK, Ph.D.(3, 4, 5, 6, 7, 8)
Trustee
Born: March 1964
Year of Election or Appointment: 2008
Trustee, USAA ETF Trust (06/17-06/19); Senior Associate Dean of Degree programs
at Jesse H. Jones Graduate School of Business at Rice University
(07/13-present); Associate Professor of Finance at Jesse H. Jones Graduate
School of Business at Rice University (07/01-present); Academic Director, El
Paso Corporation Finance Center at Jesse H. Jones Graduate School of Business at
Rice University (07/02-06/12). Dr. Ostdiek brings to the Board particular
experience with financial investment management, education, and research as well
as over eleven years' experience as a Board member of the USAA family of funds.
Dr. Ostdiek holds no other directorships of any publicly held corporations or
other investment companies outside the USAA family of funds.
MICHAEL F. REIMHERR(3, 4, 5, 6, 7)
Trustee
Born: August 1945
Year of Election or Appointment: 2000
Trustee, USAA ETF Trust (06/17-06/19); President of Reimherr Business Consulting
performing business valuations of medium to large companies; developing business
plans, budgets, and internal financial reporting; and work with mergers and
acquisitions (05/95-12/17). St. Mary's University Investment Committee
overseeing University Endowment (06/14-present). Mr. Reimherr brings to the
Board particular experience with organizational development, budgeting, finance,
capital markets, and mergers and acquisitions, as well as
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92 | USAA CORNERSTONE MODERATE FUND
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over 19 years' experience as a Board member of the USAA family of funds. Mr.
Reimherr holds no other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
JOHN C. WALTERS(3, 4, 5, 6, 7)
Trustee
Born: February 1962
Year of Election or Appointment: 2019
Retired. Mr. Walters brings significant Board experience including active
involvement with the board of a Fortune 500 company, and a proven record of
leading large, complex financial organizations. He has a demonstrated record of
success in distribution, manufacturing, investment brokerage, and investment
management in both the retail and institutional investment businesses. He has
substantial experience in the investment management business with a demonstrated
ability to develop and drive strategy while managing operational, financial, and
investment risk. Mr. Walters is a board member of Guardian Variable Products
Trust (16 series), Lead Independent Director; Amerilife Holdings LLC, Director;
Stadion Money Management; Director; and University of North Carolina (Chapel
Hill), Member Board of Governors.
(1) Indicates the Trustee is an employee of AMCO or affiliated companies and
is considered an "interested person" under the Investment Company Act of
1940.
(2) Member of Executive Committee.
(3) Member of Audit and Compliance Committee.
(4) Member of Product Management and Distribution Committee.
(5) Member of Corporate Governance Committee.
(6) Member of Investments Committee.
(7) The address for all non-interested trustees is that of the USAA Funds,
P.O. Box 659430, San Antonio, TX 78265-9430.
(8) Dr. Ostdiek has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(9) Ms. Hawley has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(10) Indicates the Trustee is an employee of Victory Capital or affiliated
companies and is considered an "interested person" under the Investment
Company Act of 1940.
(+) Mr. D. McNamara was elected as Chair of the Board in July 2019.
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TRUSTEES' AND OFFICERS' INFORMATION | 93
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Effective July 1, 2019, the Board of the Trust appointed certain new officers of
the Trust. The current officers of the Trust are stated below.
OFFICERS
--------------------------------------------------------------------------------
CHRISTOPHER K. DYER
President
Born: February 1962
Year of Appointment: 2019
Director of Mutual Fund Administration, the Victory Capital.
SCOTT A. STAHORSKY
Vice President
Born: July 1969
Year of Appointment: 2019
Manager, Fund Administration, the Adviser (since 2015); Senior Analyst, Fund
Administration, the Victory Capital (prior to 2015).
ALLAN SHAER
Assistant Treasurer
Born: March 1965
Year of Appointment: 2019
Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc.
(since 2016); Vice President, Mutual Fund Administration, JP Morgan Chase
(2011-2016).
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94 | USAA CORNERSTONE MODERATE FUND
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JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Treasurer, USAA ETF Trust (09/18-06/19); Executive Director, Investment and
Financial Administration, USAA (04/12-present); Assistant Treasurer, USAA ETF
Trust (06/17-09/18); Assistant Treasurer, USAA Mutual Funds Trust (12/13-02/18).
Mr. De Vries also serves as the Funds' Principal Financial Officer.
CAROL D. TREVINO
Assistant Treasurer
Born: October 1965
Year of Appointment: 2018
Assistant Treasurer, USAA ETF Trust (09/18-06/19); Accounting/Financial
Director, USAA (12/13-present); Senior Accounting Analyst, USAA (03/11-12/13).
ERIN G. WAGNER
Secretary
Born: February 1974
Year of Appointment: 2019
Associate General Counsel, the Adviser (since 2013).
CHARLES BOOTH
Anti-Money Laundering Compliance Officer and Identity Theft Officer
Born: April 1960
Year of Appointment: 2019
Director, Regulatory Administration and CCO Support Services, Citi Fund Services
Ohio, Inc. (2007-present).
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TRUSTEES' AND OFFICERS' INFORMATION | 95
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AMY CAMPOS
Chief Compliance Officer
Born: August 1976
Year of Appointment: 2019
Chief Compliance Officer, USAA Mutual Funds Trust (7/1/19-present); Executive
Director, Deputy Chief Compliance Officer, USAA Mutual Funds Trust and USAA ETF
Trust (7/17-6/19); Compliance Director, USAA Mutual Funds Trust (2014-7/17);
Senior Compliance Advisor, USAA Mutual Funds Trust (2010-2014).
THE FOLLOWING OFFICERS SERVED IN THEIR RESPECTIVE OFFICE UNTIL JULY 1, 2019, AT
WHICH POINT EACH OF THE FOLLOWING OFFICERS RESIGNED FROM THEIR RESPECTIVE OFFICE
AND NO LONGER SERVE IN THESE POSITIONS.
JOHN C. SPEAR
Vice President
Born: May 1964
Year of Appointment: 2016
Vice President, USAA ETF Trust (06/17-06/19); Senior Vice President and Chief
Investment Officer, USAA Investments, (03/17-present); Vice President and Chief
Investment Officer, USAA Investments, (11/16-03/17); Vice President, Long Term
Fixed Income (05/12-11/16).
JOHN P. TOOHEY
Vice President
Born: March 1968
Year of Appointment: 2009
Vice President, USAA ETF Trust (06/17-06/19); Head of Equities, Equity
Investments, AMCO (01/12-present).
================================================================================
96 | USAA CORNERSTONE MODERATE FUND
================================================================================
KRISTEN MILLAN
Secretary
Born: April 1983
Year of Appointment: 2019
Secretary, USAA ETF Trust (04/19-06/19); Assistant Secretary, USAA ETF Trust
(01/19-06/19); Senior Attorney, FASG General Counsel, USAA (09/17-06/19);
Attorney, FASG General Counsel, USAA (06/13-09/17). Ms. Millan also serves as
Assistant Secretary of AMCO, ICORP, and SAS.
STEPHANIE A. HIGBY
Chief Compliance Officer
Born: July 1974
Year of Appointment: 2013
Chief Compliance Officer, USAA ETF Trust (06/17-06/19); Assistant Vice
President, Compliance-Investments, USAA (02/18-present); Assistant Vice
President, Compliance Mutual Funds, USAA (12/16-01/18); Executive Director,
Institutional Asset Management Compliance, USAA (04/13-12/16). Ms. Higby also
serves as the Funds' anti-money laundering compliance officer and as the Chief
Compliance Officer for AMCO and IMCO.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 97
================================================================================
AS OF JULY 1, 2019
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
David C. Brown
John C. Walters
--------------------------------------------------------------------------------
ADMINISTRATOR AND Victory Capital Management Inc.
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND Victory Capital Advisers Inc.
DISTRIBUTOR 4900 Tiedeman Road
Brooklyn, Ohio 44144
--------------------------------------------------------------------------------
TRANSFER AGENT Victory Capital Transfer Agency Inc.
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 USAA AMCO'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) 235-8396; (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) 235-8396; (ii) at usaa.com; and (iii) on the SEC's website at
http://www.sec.gov.
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----------------------
MUTUAL FUNDS
--------------------------------------------------------------------------------
May 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA Emerging Markets Fund
FUND INSTITUTIONAL ADVISER
SHARES SHARES SHARES
USEMX UIEMX UAEMX
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) 235-8396 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)
235-8396 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.
Victory Capital means Victory Capital Management Inc., the investment manager of
the USAA Mutual Funds. USAA Mutual Funds are distributed by Victory Capital
Advisers, Inc., a broker dealer registered with FINRA and an affiliate of
Victory Capital. Victory Capital and its affiliates are not affiliated with
United Services Automobile Association or its affiliates. USAA and the USAA
logos are registered trademarks and the USAA Mutual Funds and USAA Investments
logos are trademarks of United Services Automobile Association and are being
used by Victory Capital and its affiliates under license.
================================================================================
PRESIDENT'S MESSAGE
"... LONG-TERM INVESTORS SHOULD NEVER MAKE
DECISIONS IN HASTE. THEY SHOULD MAKE [PHOTO OF BROOKS ENGLEHARDT]
THOUGHTFUL DECISIONS BASED ON THEIR LONG-TERM
OBJECTIVES, TIME HORIZON, AND RISK TOLERANCE."
--------------------------------------------------------------------------------
JULY 2019
As previously announced, USAA, the parent company of USAA Asset Management
Company ("AMCO"), the prior investment adviser to the USAA Mutual Funds,
announced that AMCO would be acquired by Victory Capital Holdings, Inc.
(Victory Holdings), a global investment management firm headquartered in
Cleveland, Ohio (the Transaction). In connection with the Transaction, also as
previous announced, shareholders of each USAA Mutual Fund approved a new
investment advisory agreement with Victory Capital Management Inc. ("Victory
Capital"), an indirect wholly-owned subsidiary of Victory Holdings. The closing
of the Transaction occurred on July 1, 2019; and Victory Capital became the
investment adviser to each USAA Mutual Fund. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION ABOUT CHANGES THAT TOOK EFFECT ON JULY 1, 2019.
Softening global economic conditions and escalating trade tensions rattled
investors during the 12-month reporting period ended May 31, 2019. When the
reporting period began in June 2018, the global economy was expanding across
most regions and countries, led by the U.S. In this environment, stocks
generally advanced. In the fixed income market, U.S. Treasury yields rose, as
the U.S. Federal Reserve ("Fed") continued to tighten monetary policy.
Signs of trouble emerged during the summer of 2018. The U.S. economic expansion
continued, but growth in a number of other economies, including some European
countries and China, showed a weakening trend. By the autumn of 2018, investors'
fears of a global economic slowdown, combined with harsh U.S.-China trade
rhetoric and Brexit-related uncertainty in Europe, sparked a surge in market
volatility. Global stocks dropped, with most of the decline occurring in
December 2018. At the same time, intermediate- and longer-term yields fell, as
investors anticipated a change in Fed monetary policy. Indeed, after having
raised short-term interest rates four times during 2018, Fed officials announced
in January 2019 that they would "pause," retreating from their earlier plan to
raise interest rates in 2019. Stocks rallied in response and by April 2019 had
recovered most of the ground they had lost. In May 2019, ongoing trade tensions
between the United States and China, as well as President Trump administration's
threat to impose tariffs on Mexico, drove a renewed decline in stock prices. In
the fixed income market, concerns that trade disputes would seriously undermine
global
================================================================================
================================================================================
economic growth pushed down intermediate- and longer-term yields, which ended
the reporting period lower than they started. The yield on the 10-year U.S.
Treasury note, which began June 2018 at 2.89%, rose to 3.24% on November 8,
2018--its high point of the period--and fell to 2.13% by May 31, 2019.
In the final months of the reporting period, the Treasury yield curve inverted,
which means that shorter-term yields were higher than longer-term yields. A
yield-curve inversion warrants attention because it has been a reliable
recession indicator. Although recessions do not automatically follow
inversions, a downward-sloped yield curve has preceded every U.S. recession
since the 1960s. That said, the lag between an inversion and a recession has
been inconsistent. At USAA Investments, A Victory Capital Investment Franchise,
we have found that during the past six decades, the time between inversion and
recession has ranged between six months and two years, with no clear pattern to
provide useful guidance. And as I write to you, we see no recession on the
horizon. First, the U.S. economy continues to grow, albeit at a slower pace than
in 2018. Second, the Fed has made clear its commitment to pause its interest
rate hikes, and there is a growing belief in the markets that policymakers may
even cut interest rates in 2019. (In early June 2019, after the end of the
reporting period, Fed Chair Jerome Powell stated that the U.S. central bank was
monitoring the escalation in trade tensions and could potentially respond by
cutting interest rates if U.S. economic conditions deteriorate.)
At USAA Investments, our team of portfolio managers will continue to monitor the
financial markets, economic conditions, the global trade regime, Fed policy, the
direction of longer-term interest rates, and other issues that have the
potential to affect your investments. In the meantime, I would advise you to
ignore media "noise" about such matters. Media "noise" is meant to provoke an
emotional reaction, which can lead to hasty decision-making. In my opinion,
long-term investors should never make decisions in haste. They should make
thoughtful decisions based on their long-term objectives, time horizon, and risk
tolerance. Dollar-cost averaging, in which you invest a set amount on a regular
basis, is a strategy that can help you stay on track. Another effective strategy
is diversification, which can potentially insulate a portfolio from market
turbulence or changes in performance leadership.
If you would like to review your portfolio to confirm that it is properly
aligned with your investment plan, please contact one of our financial advisors.
You might want to make that call before the summer gets fully underway. When we
are traveling and spending time with family and friends, it can be tempting to
put off decisions on financial matters.
From all of us at USAA Investments, A Victory Capital Investment Franchise,
thank you for the opportunity to help you with your investment needs.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGER'S COMMENTARY 1
INVESTMENT OVERVIEW 5
SHAREHOLDER VOTING RESULTS 9
FINANCIAL INFORMATION
Distributions to Shareholders 10
Report of Independent Registered
Public Accounting Firm 11
Portfolio of Investments 12
Notes to Portfolio of Investments 22
Financial Statements 24
Notes to Financial Statements 28
Financial Highlights 50
EXPENSE EXAMPLE 53
ADVISORY AGREEMENT(S) 55
TRUSTEES' AND OFFICERS' INFORMATION 78
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) 235-8396.
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.
================================================================================
================================================================================
MANAGERS' COMMENTARY ON THE FUND
Lazard Asset Management LLC Brandes Investment Partners, L.P.
JAI JACOB *DOUGLAS C. EDMAN, CFA
JAMES M. DONALD, CFA CHRISTOPHER J. GARRETT, CFA
KEVIN O'HARE, CFA LOUIS Y. LAU, CFA
STEPHEN MARRA, CFA MAURICIO ABADIA
GERARDO ZAMORANO, CFA
Victory Capital Management Inc.
MARGARET LINDSAY
TIFFANY KUO, CFA
JOSHUA LINDLAND, CFA
--------------------------------------------------------------------------------
o PLEASE CHARACTERIZE THE PERFORMANCE OF EMERGING MARKETS DURING THE 12-MONTH
REPORTING PERIOD ENDED MAY 31, 2019.
During the reporting period, emerging market stocks experienced significant
weakness, caused in part by the continuing strength of the U.S. dollar.
Uncertainty regarding the future trade relationship between the United
States and China also weighed on sentiment, as the period saw increasingly
protectionist rhetoric and tariff increases. Eastern European and Latin
American stocks generally reported positive performance for the period,
while Asian stocks registered negative performance. In terms of individual
countries, stocks in Turkey were hurt by the strong U.S. dollar and the
unwillingness of Turkey's central bank to raise interest rates. Russian
equities rose as crude oil prices recovered and Russia's economy
strengthened. South African stocks were negatively impacted by strength in
the U.S. dollar and a lackluster local economy. Within Latin America, the
election of the conservative politician Jair Bolsonaro helped the Brazilian
market rally, while the Mexican market fell during the reporting period, as
decisions
*Effective December 31, 2018, Douglas C. Edman retired.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
implemented by the new president were perceived as unfriendly to business
interests. In India, Prime Minister Modi's overwhelming reelection supported
stock performance. In Asia, trade issues pressured currencies and markets
during the second half of the reporting period, most notably in China but
also in Korea and Taiwan, which were negatively affected by weakness in
semiconductor prices. In terms of market sectors, energy, financials, and
utilities stocks led performance, while communication services, consumer
discretionary, information technology, and health care issues significantly
lagged the benchmark.
o HOW DID THE USAA EMERGING MARKETS FUND (THE "FUND") PERFORM DURING THE
REPORTING PERIOD?
The Fund has three share classes: Fund Shares, Institutional Shares, and
Adviser Shares. For the reporting period ended May 31, 2019, the Fund
Shares, Institutional Shares, and Adviser Shares had total returns of
-7.86%, -7.64%, and -8.07%, respectively. This compares to returns of -8.70%
for the MSCI Emerging Markets Index and -7.37% for the Lipper Emerging
Markets Fund Index.
Effective July 1, 2019, Victory Capital serves as the Fund's investment
adviser. Prior to July 1, 2019, AMCO served as the Fund's investment
adviser. As the investment adviser, AMCO employs dedicated resources to
support the research, selection, and monitoring of the Fund's subadvisers.
Brandes Investment Partners L.P. ("Brandes"), Lazard Asset Management LLC
("Lazard"), and Victory Capital are subadvisers to the Fund. The subadvisers
each provide day-to-day discretionary management for a portion of the Fund's
assets.
Refer to the Portfolio of Investments for a complete list of securities.
Refer to page 5 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
2 | USAA EMERGING MARKETS FUND
================================================================================
o HOW DID BRANDES' PORTION OF THE FUND PERFORM?
For the reporting period, Brandes' portion of the Fund outperformed the
benchmark. Holdings in the oil, gas & consumable fuels, wireless
telecommunication services, and food & staples retailing industries
contributed to relative return. A lack of exposure to the interactive media
& services industry also added to performance. Conversely, holdings in
multi-line retail, IT services, and construction materials detracted from
the Fund's performance. From a country perspective, Brandes' performance
benefited from stock selection in Russia, South Korea, and Indonesia, as
well as a significant underweight position in China and an overweight
position in Brazil. Allocations to Turkey, India, and Hong Kong weighed on
performance. At a company level, top contributors included Brazilian oil and
gas company Petroleo Brasileiro S.A. Preference Shares, Russian oil and gas
company Gazprom PJSC, Bank Rakyat Indonesia (Persero) Tbk PT, and Chinese
apparel manufacturer Bosideng International Holdings Ltd.* Individual
detractors included Hong Kong-based retailer Lifestyle International
Holdings Ltd., Mexican building materials company Cemex S.A.B. de C.V. ADR,
and Turkish real estate developer Emlak Konut Gayrimenkul Yatirim Ortakligi
A.S.
o HOW DID LAZARD'S PORTION OF THE FUND PERFORM?
For the reporting period, Lazard's portion of the Fund outperformed the
benchmark. On a sector basis, stock selection within the communication
services, consumer discretionary, consumer staples, and financials sectors
contributed to performance, as did underweight position in the to consumer
discretionary and health care sectors. Conversely, stock selection within
the health care, information technology, and materials sectors, as well as
an overweight position in the information technology sectors, detracted from
returns. On a country basis, stock selection in China, India, Indonesia, and
Korea, added value, along with an
*Bosideng International Holdings Ltd. was sold out of the Fund prior to May
31, 2019.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
overweight positions in Russia. In contrast, stock selection in Russia and
Taiwan detracted from the Fund's performance during the reporting period, as
did an underweight to Qatar, overweight positions in Turkey and Argentina,
and non-benchmark holdings in Canada.
o HOW DID VICTORY CAPITAL'S PORTION OF THE FUND PERFORM?
During the reporting period, Victory Capital's portion of the Fund
underperformed the benchmark. By sector, positioning in the technology
services and consumer durables sectors contributed most to relative return,
while holdings in the electronic technology, non-energy minerals, and
utilities sectors lagged. On a regional basis, relative performance was
strongest within Latin America and Africa, most notably selections in
Brazil, Argentina, and South Africa. The Fund's positioning within India,
South Korea, Taiwan, and Thailand weighed most heavily on performance. On an
individual stock level, positive contributions to relative performance were
led by Linx S.A., a retail software manager in Brazil, and Yihai
International Holding Ltd., a condiments maker in Hong Kong. The largest
individual detractor from the Fund's performance was the Indian lingerie
manufacturer Ashapura Intimates Fashion Ltd.* Other notable detractors
included Samwha Capacitor*, a semiconductor component manufacturer, and
Matahari Department Store*, which operates in Indonesia.
Thank you for allowing us to help you manage your investments.
*Ashapura Intimates Fashion Ltd, Samwha Capacitor, and Matahari Department
Store were sold out of the Fund prior to May 31, 2019.
Investments in foreign securities are subject to additional and more
diverse risks, including but not limited to currency fluctuations, market
illiquidity, and political and economic instability. Foreign investing may
result in more rapid and extreme changes in value than investments made
exclusively in the securities of U.S. companies. There may be less publicly
available information relating to foreign companies than those in the
United States. Foreign securities also may be subject to foreign taxes.
Investments made in emerging market countries may be particularly volatile.
Economies of emerging market countries generally are less diverse and
mature than more developed countries and may have less stable political
systems.
================================================================================
4 | USAA EMERGING MARKETS FUND
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/19 o
-------------------------------------------------------------------------------------------------------
SINCE INCEPTION
1 YEAR 5 YEAR 10 YEAR INCEPTION* DATE
-------------------------------------------------------------------------------------------------------
Fund Shares -7.86% -0.16% 2.95% - -
Institutional Shares -7.64% 0.07% 3.25%
Adviser Shares -8.07% -0.38% -0.33% 8/01/10
MSCI Emerging Markets
Index** (reflects no deduction
for fees, expenses, or taxes) -8.70% 1.79% 5.03% - -
Lipper Emerging Markets Funds
Index*** (reflects no deduction
for fees, expenses, or taxes) -7.37% 1.83% 5.57% - -
*Since inception returns are shown when a share class has less than 10 years of
performance. Total returns for periods of less than one year are not annualized.
**The unmanaged MSCI Emerging Markets Index is a free-float-adjusted market
capitalization index that is designed to measure equity market performance in
the global emerging markets.
***The unmanaged Lipper Emerging Markets Funds Index tracks the total return
performance of the Lipper Emerging Markets Funds category.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
usaa.com.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on net investment income and
realized capital gain distributions, including reinvested distributions, or
redemptions of shares.
================================================================================
INVESTMENT OVERVIEW | 5
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
LIPPER EMERGING USAA EMERGING
MARKETS FUNDS MSCI EMERGING MARKETS FUND
INDEX MARKETS INDEX SHARES
05/31/09 $10,000.00 $10,000.00 $10,000.00
06/30/09 9,881.76 9,865.30 9,827.00
07/31/09 11,024.78 10,974.62 10,951.00
08/31/09 11,069.37 10,935.35 10,985.00
09/30/09 12,057.76 11,927.95 12,033.00
10/31/09 11,911.30 11,942.71 11,901.00
11/30/09 12,564.17 12,455.69 12,519.00
12/31/09 13,006.55 12,947.60 12,957.00
01/31/10 12,279.08 12,225.49 12,252.00
02/28/10 12,382.94 12,268.49 12,336.00
03/31/10 13,407.69 13,258.98 13,320.00
04/30/10 13,503.37 13,419.62 13,369.00
05/31/10 12,229.87 12,239.26 12,000.00
06/30/10 12,234.69 12,149.31 11,973.00
07/31/10 13,376.17 13,161.04 13,103.00
08/31/10 13,115.94 12,905.45 12,775.00
09/30/10 14,602.27 14,339.60 14,179.00
10/31/10 15,054.30 14,755.97 14,514.00
11/30/10 14,672.91 14,366.44 14,199.00
12/31/10 15,626.48 15,391.62 15,188.00
01/31/11 15,121.73 14,974.05 14,696.00
02/28/11 14,980.95 14,834.40 14,513.00
03/31/11 15,757.14 15,706.59 15,244.00
04/30/11 16,323.33 16,193.79 15,630.00
05/31/11 15,893.68 15,769.03 15,153.00
06/30/11 15,687.17 15,526.46 14,886.00
07/31/11 15,658.26 15,457.51 14,710.00
08/31/11 14,372.07 14,076.16 13,312.00
09/30/11 12,137.80 12,023.93 11,120.00
10/31/11 13,626.33 13,616.57 12,497.00
11/30/11 13,179.51 12,709.10 12,076.00
12/31/11 12,755.21 12,555.92 11,575.00
01/31/12 14,092.56 13,980.08 12,961.00
02/29/12 14,931.85 14,817.50 13,636.00
03/31/12 14,611.70 14,322.89 13,020.00
04/30/12 14,432.57 14,151.70 12,785.00
05/31/12 12,869.87 12,564.66 11,333.00
06/30/12 13,466.13 13,049.60 11,809.00
07/31/12 13,595.18 13,304.17 11,905.00
08/31/12 13,690.97 13,259.86 11,890.00
09/30/12 14,410.90 14,059.99 12,616.00
10/31/12 14,370.64 13,974.62 12,360.00
11/30/12 14,530.55 14,152.05 12,330.00
12/31/12 15,319.75 14,844.02 13,034.00
01/31/13 15,541.39 15,048.68 13,264.00
02/28/13 15,395.25 14,859.62 13,315.00
03/31/13 15,232.96 14,603.68 13,049.00
04/30/13 15,450.21 14,713.74 13,116.00
05/31/13 15,053.06 14,336.25 12,894.00
06/30/13 14,093.02 13,423.64 11,962.00
07/31/13 14,316.80 13,563.88 12,132.00
08/31/13 13,853.81 13,330.90 11,807.00
09/30/13 14,853.32 14,197.80 12,687.00
10/31/13 15,500.13 14,887.59 13,241.00
11/30/13 15,242.18 14,669.89 13,116.00
12/31/13 15,122.08 14,457.80 12,985.00
01/31/14 14,105.39 13,518.98 12,003.00
02/28/14 14,622.54 13,966.80 12,345.00
03/31/14 15,056.74 14,395.53 12,806.00
04/30/14 15,154.47 14,443.60 12,806.00
05/31/14 15,711.16 14,947.78 13,483.00
06/30/14 16,109.85 15,344.92 13,839.00
07/31/14 16,213.70 15,641.64 13,832.00
08/31/14 16,661.82 15,994.12 14,196.00
09/30/14 15,535.66 14,808.62 13,037.00
10/31/14 15,685.57 14,983.21 13,260.00
11/30/14 15,535.78 14,824.75 13,007.00
12/31/14 14,720.03 14,141.52 12,063.00
01/31/15 14,777.72 14,226.30 11,934.00
02/28/15 15,198.72 14,666.79 12,130.00
03/31/15 14,874.92 14,458.22 11,881.00
04/30/15 15,796.73 15,570.25 12,749.00
05/31/15 15,324.70 14,946.72 12,425.00
06/30/15 14,973.45 14,558.56 12,198.00
07/31/15 14,133.05 13,549.37 11,481.00
08/31/15 12,849.68 12,323.86 10,432.00
09/30/15 12,471.51 11,953.14 10,107.00
10/31/15 13,291.93 12,805.77 10,870.00
11/30/15 12,925.51 12,306.25 10,681.00
12/31/15 12,586.31 12,031.92 10,359.00
01/31/16 11,925.65 11,251.38 9,849.00
02/29/16 11,835.34 11,232.96 9,720.00
03/31/16 13,299.10 12,719.38 10,892.00
04/30/16 13,506.97 12,788.52 11,166.00
05/31/16 13,088.31 12,311.46 10,831.00
06/30/16 13,678.14 12,803.52 11,303.00
07/31/16 14,350.42 13,447.83 11,752.00
08/31/16 14,571.64 13,782.03 12,026.00
09/30/16 14,797.69 13,959.26 12,231.00
10/31/16 14,786.97 13,992.54 12,216.00
11/30/16 14,057.46 13,348.44 11,615.00
12/31/16 14,109.78 13,377.92 11,626.00
01/31/17 14,940.85 14,110.00 12,294.00
02/28/17 15,373.58 14,541.94 12,540.00
03/31/17 15,869.91 14,909.03 13,031.00
04/30/17 16,215.96 15,235.42 13,400.00
05/31/17 16,602.20 15,685.84 13,515.00
06/30/17 16,745.24 15,843.77 13,584.00
07/31/17 17,623.75 16,788.19 14,398.00
08/31/17 18,021.04 17,162.68 14,767.00
09/30/17 17,965.48 17,094.43 14,813.00
10/31/17 18,421.80 17,693.69 15,051.00
11/30/17 18,467.46 17,729.20 15,012.00
12/31/17 19,126.60 18,365.62 15,496.00
01/31/18 20,601.30 19,896.35 16,474.00
02/28/18 19,666.87 18,978.73 15,827.00
03/31/18 19,521.05 18,625.86 15,542.00
04/30/18 19,161.28 18,543.45 15,126.00
05/31/18 18,570.80 17,886.38 14,517.00
06/30/18 17,796.41 17,143.24 13,908.00
07/31/18 18,219.34 17,519.85 14,232.00
08/31/18 17,595.01 17,046.11 13,616.00
09/30/18 17,442.18 16,955.66 13,438.00
10/31/18 16,017.54 15,479.10 12,421.00
11/30/18 16,692.90 16,117.01 12,914.00
12/31/18 16,193.20 15,690.03 12,416.00
01/31/19 17,673.53 17,063.82 13,813.00
02/28/19 17,709.52 17,102.18 13,883.00
03/31/19 17,947.94 17,245.70 13,953.00
04/30/19 18,357.36 17,608.78 14,218.00
05/31/19 17,202.97 16,331.04 13,376.00
[END CHART]
Data from 5/31/09 through 5/31/19.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Emerging Markets Fund to the benchmarks listed above (see page 5 for
benchmark definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes, except
that the Lipper Emerging Markets Funds Index reflects the fees and expenses of
the underlying funds included in the index.
================================================================================
6 | USAA EMERGING MARKETS FUND
================================================================================
TOP 10 INDUSTRIES - 5/31/19
(% of Net Assets)
Banks ................................................................... 18.8%
Semiconductors .......................................................... 7.7%
Internet ................................................................ 6.4%
Oil & Gas ............................................................... 6.0%
Software ................................................................ 5.4%
Telecommunications ...................................................... 5.0%
Commercial Services ..................................................... 3.0%
Building Materials ...................................................... 2.0%
Insurance ............................................................... 1.9%
Engineering & Construction .............................................. 1.9%
o TOP 10 EQUITY HOLDINGS - 5/31/19 o
(% of Net Assets)
iShares MSCI Emerging Markets ETF ........................................ 4.5%
Samsung Electronics Co. Ltd. ............................................. 3.1%
NetEase, Inc. ADR ........................................................ 2.7%
Sberbank of Russia PJSC .................................................. 2.4%
ICICI Bank Ltd. ADR ...................................................... 1.9%
China Construction Bank Corp. "H" ........................................ 1.9%
Axis Bank Ltd. GDR ....................................................... 1.7%
Ping An Insurance Group Co. of China Ltd. "H" ............................ 1.7%
Bank Rakyat Indonesia (Persero) Tbk PT ................................... 1.5%
Alibaba Group Holding Ltd. ADR ........................................... 1.4%
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 Fund's compliance classification.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
o COUNTRY ALLOCATION - 5/31/19 o
(% of Net Assets)
[PIE CHART OF COUNTRY ALLOCATION]
CHINA 20.2%
SOUTH KOREA 11.0%
INDIA 9.5%
BRAZIL 8.4%
RUSSIA 7.2%
TAIWAN 5.3%
INDONESIA 3.9%
MEXICO 3.3%
OTHER* 28.7%
[END CHART]
*Includes countries with less than 3.0% of portfolio, money market instruments
and short-term investment purchased with cash collateral from securities loaned.
Percentages are of the net assets of the Fund and may not equal 100%.
================================================================================
8 | USAA EMERGING MARKETS FUND
================================================================================
SHAREHOLDER VOTING RESULTS
--------------------------------------------------------------------------------
On April 18, 2019, a special meeting of shareholders was held to vote on two
proposals relating to the series of the USAA Mutual Funds Trust (Trust).
Shareholders of record on February 8, 2019, were entitled to vote on each
proposal shown below. The proposals were approved by the shareholders. The
following proposals and voting results pertain to one or more series within the
Trust. Votes shown for Proposal 1 are for the Fund, a series of the Trust.
Votes shown for Proposal 2 are for the all series of the Trust. The effective
date of the Proposals was July 1, 2019.
PROPOSAL 1
To approve a new Investment Advisory Agreement between the Trust, on behalf of
the Fund and Victory Capital, an independent investment adviser. The new
Investment Advisory Agreement became effective upon the closing of the
Transaction (as defined and discussed in Note 1 to the Financial Statements)
whereby AMCO was acquired by Victory Holdings, the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
--------------------------------------------------------------------------------
40,182,344 1,256,829 819,116
PROPOSAL 2
Election of two new trustees to the Trust's Board of Trustees to serve upon the
closing of the Transaction: (1) David C. Brown, to serve as an "interested
trustee" as defined in the Investment Company Act of 1940, as amended (1940
Act); and (2) John C. Walters, to serve as a trustee who is not an "interested
person" as is defined under the 1940 Act ("Independent Trustee").
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
TRUSTEES FOR VOTES WITHHELD
--------------------------------------------------------------------------------
David C. Brown 8,299,565,565 820,887,736
John C. Walters 8,317,935,885 802,517,416
================================================================================
SHAREHOLDER VOTING RESULTS | 9
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
May 31, 2019, is provided for information purposes only and should not be used
for reporting to federal or state revenue agencies. Federal tax information for
the calendar year will be reported to you on Form 1099-DIV in January 2020.
With respect to distributions paid, the Fund designates the following amounts
(or, if subsequently determined to be different, the maximum amount allowable)
for the fiscal year ended May 31, 2019:
FOREIGN TAXES FOREIGN SOURCE QUALIFIED INTEREST
PAID(1) INCOME INCOME
------------------------------------------------------------------------
$2,440,000 $24,073,000 $258,000
------------------------------------------------------------------------
(1)The Fund has elected under Section 853 of the Internal Revenue Code to pass
through the credit for taxes paid in foreign countries.
For the fiscal year ended May 31, 2019, the Fund hereby designates the maximum
amount allowable of its net taxable income as qualified dividends taxed at
individual net capital gain rates.
================================================================================
10 | USAA EMERGING MARKETS FUND
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA EMERGING MARKETS FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Emerging Markets Fund (the "Fund") (one of the funds constituting USAA Mutual
Funds Trust (the "Trust")), including the portfolio of investments, as of May
31, 2019, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, the financial highlights for each of the five years in the period then
ended and the related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Fund (one of the funds
constituting USAA Mutual Funds Trust) at May 31, 2019, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and its financial highlights for each of
the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
BASIS FOR OPINION
These financial statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on the Fund's financial statements based
on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and are required to
be independent with respect to the Trust in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Trust is not required to have,
nor were we engaged to perform, an audit of the Trust's internal control over
financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the Trust's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of May 31, 2019, by correspondence with the custodian and brokers or by
other appropriate auditing procedures where replies from brokers were not
received. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the auditor of one or more Victory Capital investment
companies since 1995.
San Antonio, Texas
July 23, 2019
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 11
================================================================================
PORTFOLIO OF INVESTMENTS
May 31, 2019
-------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (88.9%)
COMMON STOCKS (82.6%)
BASIC MATERIALS (1.2%)
----------------------
IRON/STEEL (0.2%)
10,859 POSCO(a) $ 2,157
--------
MINING (1.0%)
532,424 First Quantum Minerals Ltd. 3,876
1,222,500 Grupo Mexico S.A.B. de C.V. "B" 3,044
85,306 NAC Kazatomprom JSC GDR(b),(c) 1,301
--------
8,221
--------
Total Basic Materials 10,378
--------
COMMUNICATIONS (11.3%)
----------------------
INTERNET (6.4%)
77,667 Alibaba Group Holding Ltd. ADR(c) 11,593
93,200 Autohome, Inc. ADR(c) 8,006
48,219 Baidu, Inc. ADR(c) 5,304
18,133 NCSoft Corp.(a) 7,256
261,500 Tencent Holdings Ltd.(a) 10,845
279,300 Yandex N.V. "A"(c) 10,032
--------
53,036
--------
TELECOMMUNICATIONS (4.9%)
255,636 America Movil S.A.B. de C.V. ADR "L" 3,586
446,600 China Mobile Ltd.(a) 3,899
130,070 China Mobile Ltd. ADR 5,700
137,607 Empresa Nacional de Telecomunicaciones S.A. 1,313
54,696 Hellenic Telecommunications Organization S.A.(a) 748
874,804 Magyar Telekom Telecommunications plc(a) 1,250
338,294 Megacable Holdings S.A.B. de C.V. 1,396
662,500 Mobile TeleSystems PJSC ADR 5,181
568,486 Mobile TeleSystems PJSC(b) 2,226
4,950,200 Oi S.A.(c) 1,854
124,570 PLDT, Inc. ADR 3,152
222,932 Sistema PJSCFC GDR(d) 613
57,300 Telefonica Brasil S.A. Preference Shares 702
================================================================================
12 | USAA EMERGING MARKETS FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------
220,200 Telekomunikasi Indonesia (Persero) Tbk PT ADR $ 5,939
17,716,562 XL Axiata Tbk PT(a),(c) 3,546
--------
41,105
--------
Total Communications 94,141
--------
CONSUMER, CYCLICAL (4.8%)
-------------------------
AIRLINES (0.3%)
26,908 Copa Holdings S.A. "A" 2,411
--------
APPAREL (0.4%)
127,000 Eclat Textile Co. Ltd.(a) 1,639
43,388 Handsome Co. Ltd.(a) 1,492
--------
3,131
--------
AUTO MANUFACTURERS (0.5%)
2,508,000 Dongfeng Motor Group Co. Ltd. "H"(a) 2,062
73,331 Kia Motors Corp.(a) 2,419
--------
4,481
--------
AUTO PARTS & EQUIPMENT (1.1%)
27,800 China Yuchai International Ltd. 387
49,256 Hyundai Mobis Co. Ltd.(a) 8,957
--------
9,344
--------
ENTERTAINMENT (0.2%)
2,147,800 Major Cineplex Group PCL NVDR(a) 1,954
--------
LEISURE TIME (0.7%)
143,617 Bajaj Auto Ltd.(a) 6,022
--------
LODGING (0.3%)
1,872,900 Genting Berhad(a) 2,855
--------
RETAIL (1.2%)
973,000 Lifestyle International Holdings Ltd.(a) 1,422
481,000 Luk Fook Holdings International Ltd.(a) 1,541
164,000 Poya International Co. Ltd.(a) 1,933
720,500 Shanghai Pharmaceuticals Holding Co. Ltd. "H"(a) 1,420
8,004 Shinsegae International, Inc.(a) 1,786
4,722,700 Wilcon Depot, Inc.(a) 1,537
--------
9,639
--------
TEXTILES (0.1%)
1,769,000 Weiqiao Textile Co. "H"(a) 618
--------
Total Consumer, Cyclical 40,455
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
-------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------
CONSUMER, NON-CYCLICAL (9.0%)
-----------------------------
AGRICULTURE (1.0%)
329,169 Adecoagro S.A.(c) $ 2,189
24,615 Astral Foods Ltd.(a) 280
74,313 KT&G Corp.(a) 6,298
--------
8,767
--------
BEVERAGES (1.7%)
973,100 Ambev S.A. ADR 4,350
109,910 Distell Group Holdings Ltd.(a) 967
9,790 Lotte Chilsung Beverage Co. Ltd.(a) 1,406
435,294 Radico Khaitan Ltd.(a) 2,107
349,095 Wuliangye Yibin Co. Ltd. "A"(a) 5,101
--------
13,931
--------
BIOTECHNOLOGY (0.2%)
32,089 OliX Pharmaceuticals, Inc.(a),(c) 1,571
--------
COMMERCIAL SERVICES (3.0%)
1,640,420 CCR S.A. 5,590
485,500 Cielo S.A. 829
1,497,565 Cielo S.A. ADR 2,306
373,000 Estacio Participacoes S.A. 2,800
2,808,000 Huifu Payment Ltd.(a),(c),(e),(f) 1,482
1,846,209 ITE Group plc(a) 1,832
516,700 Kroton Educacional S.A. 1,362
221,900 Localiza Rent a Car S.A. 2,151
684,281 Prosegur Cash S.A.(a),(e) 1,284
89,079 QIWI plc ADR 1,498
13,833 S-1 Corp.(a) 1,113
134,125 StoneCo Ltd. "A"(c) 3,380
--------
25,627
--------
FOOD (1.4%)
8,047 Binggrae Co. Ltd.(a) 489
86,425 Cia Brasileira de Distribuicao Preference Shares 1,921
186,196 Cosan Ltd. "A" 2,352
3,428,000 First Pacific Co. Ltd.(a) 1,387
821,494 Marfrig Global Foods S.A.(c) 1,430
60,939 X5 Retail Group N.V. GDR(a) 1,791
16,139 X5 Retail Group N.V. GDR 475
354,000 Yihai International Holding Ltd.(a) 1,738
--------
11,583
--------
================================================================================
14 | USAA EMERGING MARKETS FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------
HEALTHCARE-SERVICES (0.3%)
2,595,000 Genertec Universal Medical Group Co. Ltd.(a) $ 1,964
105,400 Hapvida Participacoes e Investimentos S.A. 988
--------
2,952
--------
HOUSEHOLD PRODUCTS/WARES (0.6%)
2,671,000 Kimberly-Clark de Mexico S.A.B. de C.V. "A"(c) 4,817
--------
PHARMACEUTICALS (0.8%)
1,673,000 China Animal Healthcare Ltd.(b),(c),(d),(g) 56
1,818,000 Lee's Pharmaceutical Holdings Ltd.(a) 1,199
37,279 NeoPharm Co. Ltd.(a) 1,597
383,055 Suven Life Sciences Ltd.(a) 1,497
132,447 TCI Co. Ltd.(a) 2,094
--------
6,443
--------
Total Consumer, Non-cyclical 75,691
--------
DIVERSIFIED (0.7%)
------------------
HOLDING COMPANIES-DIVERSIFIED (0.7%)
399,380 KOC Holding A.S. ADR 5,472
--------
ENERGY (6.6%)
-------------
COAL (0.7%)
3,059,500 China Shenhua Energy Co. Ltd. "H"(a) 6,271
--------
OIL & GAS (5.7%)
4,133,000 CNOOC Ltd.(a) 6,719
955,068 Gazprom PJSC ADR(a) 6,242
233,100 Gazprom PJSC ADR 1,515
69,954 Gazprom PJSC(b) 230
101,760 LUKOIL PJSC ADR 8,113
323,700 Petroleo Brasileiro S.A. Preference Shares 2,108
567,023 Reliance Industries Ltd.(a) 10,825
1,365,238 Vivo Energy plc(a) 2,180
641,026 YPF S.A. ADR 9,506
--------
47,438
--------
OIL & GAS SERVICES (0.2%)
10,244,000 Anton Oilfield Services Group(a) 1,301
--------
Total Energy 55,010
--------
FINANCIAL (23.3%)
-----------------
BANKS (18.8%)
102,864 Absa Group Ltd.(a) 1,192
963,823 Akbank T.A.S.(a),(c) 987
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
-------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------
247,978 Axis Bank Ltd. GDR(a),(c) $ 14,370
863,432 Banco Bradesco S.A. ADR 8,082
679,833 Banco del Bajio S.A. 1,314
777,795 Banco do Brasil S.A. 10,278
242,976 Bancolombia S.A. ADR 11,413
197,100 Bangkok Bank PCL NVDR(a) 1,224
14,907,290 Bank Mandiri (Persero) Tbk PT(a) 8,001
44,466,500 Bank Rakyat Indonesia (Persero) Tbk PT(a) 12,758
11,343,500 Bank Tabungan Pensiunan Nasional Syariah Tbk PT(a),(c) 2,265
281,733 BRAC Bank Ltd.(a),(c),(d) 215
19,679,000 China Construction Bank Corp. "H"(a) 15,528
590,500 China Merchants Bank Co. Ltd. "H"(a) 2,834
1,210,142 Commercial International Bank Egypt SAE GDR(a) 4,889
42,893 Erste Group Bank AG(a),(c) 1,520
213,218 Grupo Aval Acciones y Valores S.A. ADR 1,478
1,817,902 Grupo Aval Acciones y Valores S.A. Preference Shares 632
286,625 Grupo Supervielle S.A. ADR(f) 1,674
1,362,520 ICICI Bank Ltd. ADR 16,350
212,799 Nova Ljubljanska Banka dd GDR(b),(c),(e) 2,900
13,322 Nova Ljubljanska Banka dd GDR(a),(c) 182
149,617 OTP Bank Nyrt(a) 6,243
167,725 RBL Bank Ltd.(a) 1,653
5,589,642 Sberbank of Russia PJSC(b) 19,911
420,600 Siam Commercial Bank PCL(b) 1,722
466,422 Standard Bank Group Ltd.(a) 6,356
54,811 TBC Bank Group plc(a) 1,126
219,055 Turkiye Garanti Bankasi A.S.(a) 298
--------
157,395
--------
DIVERSIFIED FINANCIAL SERVICES (1.0%)
366,920 Chailease Holding Co. Ltd.(a) 1,345
25,200 Pagseguro Digital Ltd. "A"(c) 807
175,028 Shinhan Financial Group Co. Ltd.(a) 6,534
--------
8,686
--------
INSURANCE (1.9%)
246,401 Hanwha Life Insurance Co. Ltd.(a) 663
161,299 Korean Reinsurance Co.(a) 1,136
1,282,500 Ping An Insurance Group Co. of China Ltd. "H"(a) 14,119
--------
15,918
--------
REAL ESTATE (0.7%)
1,154,574 Corp. Inmobiliaria Vesta S.A.B. de C.V. 1,641
4,325,204 Emlak Konut Gayrimenkul Yatirim Ortakligi A.S.(a) 846
================================================================================
16 | USAA EMERGING MARKETS FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------
795,900 LPS Brasil Consultoria de Imoveis S.A.(c) $ 821
19,426,800 Megaworld Corp.(a) 2,199
--------
5,507
--------
REITS (0.9%)
2,045,994 Fibra Uno Administracion S.A. de C.V. 2,617
2,509,910 Macquarie Mexico Real Estate Management S.A. de C.V.(c),(e) 2,625
1,727,779 PLA Administradora Industria S de RL de C.V. 2,644
--------
7,886
--------
Total Financial 195,392
--------
GOVERNMENT (0.4%)
-----------------
MULTI-NATIONAL (0.4%)
157,861 Banco Latinoamericano de Comercio Exterior S.A. "E" 3,149
--------
INDUSTRIAL (9.6%)
-----------------
AEROSPACE/DEFENSE (0.6%)
268,184 Embraer S.A. ADR 5,157
--------
BUILDING MATERIALS (2.0%)
951,000 Anhui Conch Cement Co. Ltd. "H"(a) 5,537
910,106 Cemex S.A.B. de C.V. ADR(c) 3,750
1,583,900 Duratex S.A. 4,254
1,878,525 Star Cement Ltd.(a) 3,246
1,496,390 Urbi Desarrollos Urbanos S.A.B. de C.V.(c) 75
--------
16,862
--------
ELECTRONICS (0.8%)
202,516 Flex Ltd.(c) 1,811
818,181 Hon Hai Precision Industry Co. Ltd. GDR(a) 3,835
96,070 WiSoL Co. Ltd.(a) 1,416
--------
7,062
--------
ENGINEERING & CONSTRUCTION (1.9%)
9,628,538 China State Construction International Holdings Ltd.(a) 9,839
300,603 Gayatri Projects Ltd.(a),(c) 784
800,523 HG Infra Engineering Ltd.(a) 3,466
5,420,000 Jasmine Broadband Internet Infrastructure Fund(b) 1,746
--------
15,835
--------
ENVIRONMENTAL CONTROL (0.6%)
1,469,930 Focused Photonics Hangzhou, Inc. "A"(a) 4,701
--------
HAND/MACHINE TOOLS (1.0%)
1,294,500 Techtronic Industries Co. Ltd.(a) 8,231
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
-------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------
MACHINERY-CONSTRUCTION & MINING (0.1%)
1,473,473 Ferreycorp SAA $ 946
--------
MISCELLANEOUS MANUFACTURERS (1.6%)
1,862,000 China Railway Signal & Communication Corp. Ltd. "H"(a) 1,222
49,406 Largan Precision Co. Ltd.(a) 5,861
43,114 POSCO Chemtech Co. Ltd.(a) 1,963
762,700 Zhuzhou CRRC Times Electric Co. Ltd. "H"(a) 4,104
--------
13,150
--------
TRANSPORTATION (1.0%)
4,449,353 KAP Industrial Holdings Ltd.(a) 2,112
346,231 ZTO Express (Cayman), Inc. ADR 6,246
--------
8,358
--------
Total Industrial 80,302
--------
TECHNOLOGY (14.9%)
------------------
COMPUTERS (1.8%)
303,000 Asustek Computer, Inc.(a) 2,068
12,619 Globant S.A.(c) 1,172
341,200 Infosys Ltd. ADR 3,572
272,026 Tata Consultancy Services Ltd.(a) 8,586
--------
15,398
--------
SEMICONDUCTORS (7.7%)
690,000 MediaTek, Inc.(a) 6,755
723,222 Samsung Electronics Co. Ltd.(a) 25,673
135,999 Silicon Motion Technology Corp. ADR 5,183
201,301 SK Hynix, Inc.(a) 10,936
259,700 Taiwan Semiconductor Manufacturing Co. Ltd. ADR 9,959
47,000 Taiwan Semiconductor Manufacturing Co. Ltd.(a) 348
37,332 Tokai Carbon Korea Co. Ltd.(a) 1,815
1,004,000 Vanguard International Semiconductor Corp.(a) 1,902
770,000 Visual Photonics Epitaxy Co. Ltd.(a) 1,798
--------
64,369
--------
SOFTWARE (5.4%)
17,296 11 bit studios S.A.(a),(c) 1,792
69,494 Arco Platform Ltd. "A"(c) 2,669
4,394,000 Chinasoft International Ltd.(a),(c),(f) 2,104
17,629 Com2uS Corp.(a) 1,442
217,900 HCL Technologies Ltd.(a) 3,408
1,154,000 IGG, Inc.(a) 1,364
612,597 Intellect Design Arena Ltd.(a),(c) 2,258
211,000 Linx S.A. 1,847
================================================================================
18 | USAA EMERGING MARKETS FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------
32,344 Momo, Inc. ADR $ 892
803,500 NetDragon Websoft Holdings Ltd. "L"(a) 2,113
90,760 NetEase, Inc. ADR 22,564
116,712 Tech Mahindra Ltd.(a) 1,279
28,577 Webcash Corp.(a) 1,488
--------
45,220
--------
Total Technology 124,987
--------
UTILITIES (0.8%)
----------------
ELECTRIC (0.2%)
561,200 AES Tiete Energia S.A. 1,642
--------
WATER (0.6%)
9,342,000 Beijing Enterprises Water Group Ltd.(a),(c) 4,958
--------
Total Utilities 6,600
--------
Total Common Stocks (cost: $586,497) 691,577
--------
EXCHANGE-TRADED FUNDS (5.4%)
145,561 iShares Core MSCI Emerging Markets ETF 7,150
927,086 iShares MSCI Emerging Markets ETF 37,742
--------
Total Exchange-Traded Funds (cost: $44,403) 44,892
--------
PREFERRED STOCKS (0.7%)
COMMUNICATIONS (0.1%)
---------------------
TELECOMMUNICATIONS (0.1%)
94,263 Telefonica Brasil S.A. ADR 1,154
--------
CONSUMER, CYCLICAL (0.3%)
-------------------------
AUTO MANUFACTURERS (0.3%)
31,301 Hyundai Motor Co. Preference Shares(a) 2,058
--------
ENERGY (0.3%)
-------------
OIL & GAS (0.3%)
4,105,862 Surgutneftegas PJSC Preference Shares(b) 2,534
--------
Total Preferred Stocks (cost: $6,040) 5,746
--------
WARRANTS (0.2%)
COMMUNICATIONS (0.2%)
---------------------
MEDIA (0.2%)
799,380 China South Publishing & Media Group Co. Ltd.(b),(c),(e) (cost: $1,479) 1,504
--------
Total Equity Securities (cost: $638,419) 743,719
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 19
================================================================================
-------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (8.3%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (8.3%)
69,371,149 State Street Institutional Treasury Money Market Fund Premier Class,
2.30%(h) (cost: $69,371) $ 69,371
--------
SHORT-TERM INVESTMENT PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (0.3%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.3%)
2,782,065 HSBC U.S. Government Money Market Fund Class I, 2.33%(h) 2,782
--------
Total Short-Term Investment Purchased with Cash Collateral from
Securities Loaned (cost: $2,782) 2,782
--------
TOTAL INVESTMENTS (COST: $710,572) $815,872
========
-------------------------------------------------------------------------------------------------------------
FORWARD CONTRACT UNREALIZED
NUMBER OF CURRENCY SETTLEMENT VALUE APPRECIATION
CONTRACTS COUNTERPARTY CONTRACTS DATE (000) (DEPRECIATION)
-------------------------------------------------------------------------------------------------------------
CONTRACTS TO SELL (0.1%)
11,704,819,000 State Street Bank and Indonesian
Trust Rupiah 6/10/19 $820 $(7)
---- ---
Receivable Amount ($813) $820 $(7)
==== ===
================================================================================
20 | USAA EMERGING MARKETS FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
-------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $276,500 $415,021 $56 $691,577
Exchange-Traded Funds 44,892 - - 44,892
Preferred Stocks 1,154 4,592 - 5,746
Warrants - 1,504 - 1,504
Money Market Instruments:
Government & U.S. Treasury
Money Market Funds 69,371 - - 69,371
Short-Term Investment Purchased
with Cash Collateral from
Securities Loaned:
Government & U.S. Treasury
Money Market Funds 2,782 - - 2,782
-------------------------------------------------------------------------------------------------------------
Total $394,699 $421,117 $56 $815,872
-------------------------------------------------------------------------------------------------------------
LIABILITIES
-------------------------------------------------------------------------------------------------------------
Forward Currency Contracts to Sell* $ - $ (7) $ - $ (7)
-------------------------------------------------------------------------------------------------------------
*Forward currency contracts are valued at the unrealized appreciation/
(depreciation) of the contract.
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 May 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
PORTFOLIO OF INVESTMENTS | 21
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 2019
--------------------------------------------------------------------------------
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 88.4% of net assets at May 31, 2019.
o CATEGORIES AND DEFINITIONS
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.
GDR Global depositary receipts are receipts issued by a U.S. or foreign
bank evidencing ownership of foreign shares. Dividends are paid in
U.S. dollars.
NVDR Non-voting depositary receipts are receipts issued by Thai NVDR
Company Limited.
REITS Real estate investment trusts - Dividend distributions from REITS
may be recorded as income and later characterized by
================================================================================
22 | USAA EMERGING MARKETS FUND
================================================================================
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 $387,038,000, which represented 46.2% of the
Fund's net assets, were classified as Level 2 at May 31, 2019, due to
the prices being adjusted to take into account significant market
movements following the close of local trading.
(b) Security was fair valued at May 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 $34,130,000, which represented 4.1% of the Fund's net assets.
(c) Non-income-producing security.
(d) Security deemed illiquid by USAA Asset Management Company, under
liquidity guidelines approved by USAA Mutual Funds Trust's Board of
Trustees.
(e) 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.
(f) The security, or a portion thereof, was out on loan as of May 31, 2019.
(g) Security was classified as Level 3.
(h) Rate represents the money market fund annualized seven-day yield at
May 31, 2019.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 23
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (including securities
on loan of $3,339) (cost of $710,572) $815,872
Cash denominated in foreign currencies (identified cost of $2,206) 2,196
Receivables:
Capital shares sold 182
USAA Asset Management Company (Note 7) 2
Dividends and interest 3,281
Securities sold 19,975
Other 4
--------
Total assets 841,512
--------
LIABILITIES
Payables:
Upon return of securities loaned 2,782
Securities purchased 103
Capital shares redeemed 411
Unrealized depreciation on foreign currency contracts held, at value 28
Accrued management fees 691
Accrued transfer agent's fees 27
Other accrued expenses and payables 282
--------
Total liabilities 4,324
--------
Net assets applicable to capital shares outstanding $837,188
========
NET ASSETS CONSIST OF:
Paid-in capital $892,919
Accumulated loss (55,731)
--------
Net assets applicable to capital shares outstanding $837,188
========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $340,465/19,859 capital shares
outstanding, no par value) $ 17.14
========
Institutional Shares (net assets of $491,978/28,778
capital shares outstanding, no par value) $ 17.10
========
Adviser Shares (net assets of $4,745/278 capital shares
outstanding, no par value) $ 17.08
========
See accompanying notes to financial statements.
================================================================================
24 | USAA EMERGING MARKETS FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $2,437) $ 21,718
Interest 504
Securities lending (net) 69
--------
Total income 22,291
--------
EXPENSES
Management fees 8,544
Administration and servicing fees:
Fund Shares 534
Institutional Shares 532
Adviser Shares 7
Transfer agent's fees:
Fund Shares 925
Institutional Shares 532
Distribution and service fees (Note 7):
Adviser Shares 12
Custody and accounting fees:
Fund Shares 225
Institutional Shares 332
Adviser Shares 3
Postage:
Fund Shares 43
Institutional Shares 49
Shareholder reporting fees:
Fund Shares 26
Institutional Shares 10
Trustees' fees 37
Registration fees:
Fund Shares 25
Institutional Shares 10
Adviser Shares 16
Professional fees 139
Other 25
--------
Total expenses 12,026
--------
================================================================================
FINANCIAL STATEMENTS | 25
================================================================================
Expenses reimbursed:
Adviser Shares $ (2)
Net expenses 12,024
--------
NET INVESTMENT INCOME 10,267
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
Net realized (loss) on:
Investments (net of foreign taxes withheld of $57) (39,328)
Foreign currency transactions (1,316)
Change in net unrealized appreciation/(depreciation) of:
Investments (45,841)
Foreign capital gains tax 602
Foreign currency translations 66
--------
Net realized and unrealized loss (85,817)
--------
Decrease in net assets resulting from operations $(75,550)
========
See accompanying notes to financial statements.
================================================================================
26 | USAA EMERGING MARKETS FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
-------------------------------------------------------------------------------------------------------------
2019 2018
-------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 10,267 $ 10,454
Net realized gain (loss) on investments (39,328) 115,322
Net realized loss on foreign currency transactions (1,316) (406)
Change in net unrealized appreciation/(depreciation) of:
Investments (45,841) (50,544)
Foreign capital gains tax 602 (380)
Foreign currency translations 66 (143)
-------------------------------
Increase (decrease) in net assets resulting from operations (75,550) 74,303
-------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (4,143) (1,440)
Institutional Shares (7,618) (3,191)
Adviser Shares (43) (10)
-------------------------------
Distributions to shareholders (11,804) (4,641)
-------------------------------
NET DECREASE IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 6)
Fund Shares (26,531) 2,256
Institutional Shares (52,722) (32,591)
Adviser Shares 23 (17)
-------------------------------
Total net decrease in net assets from
capital share transactions (79,230) (30,352)
-------------------------------
Net increase (decrease) in net assets (166,584) 39,310
NET ASSETS
Beginning of year 1,003,772 964,462
-------------------------------
End of year $ 837,188 $1,003,772
===============================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 27
================================================================================
NOTES TO FINANCIAL STATEMENTS
May 31, 2019
--------------------------------------------------------------------------------
(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 Emerging Markets Fund (the Fund) qualifies as a registered investment
company under Accounting Standards Codification Topic 946. The information
presented in this annual 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 three classes of shares: Emerging Markets Fund Shares (Fund
Shares), Emerging Markets Fund Institutional Shares (Institutional Shares), and
Emerging Markets 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 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
================================================================================
28 | USAA EMERGING MARKETS 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 Holdings, a global investment management firm
headquartered in Cleveland, Ohio (the Transaction), on July 1, 2019.
A special shareholder meeting was held on April 18, 2019, at which shareholders
of the Fund approved a new investment advisory agreement between the Trust, on
behalf of the Fund, and Victory Capital, an independent investment management
company. In addition, shareholders of the Fund also elected the following two
new directors to the Board of the Trust to serve upon the closing of the
Transaction: (1) David C. Brown, to serve as an Interested Trustee; and (2) John
C. Walters, to serve as an Independent Trustee. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION.
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),
exchange-traded notes (ETNs), and equity-linked structured notes,
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
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
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
================================================================================
30 | USAA EMERGING MARKETS FUND
================================================================================
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. 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.
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. 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 31
================================================================================
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.
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.
================================================================================
32 | USAA EMERGING MARKETS FUND
================================================================================
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 May 31, 2019, did not
include master netting provisions.
FORWARD CURRENCY CONTRACTS - The Fund is subject to foreign currency
exchange rate risk in the normal course of pursuing its investment
objectives. The Fund may enter into transactions to purchase or sell forward
currency contracts in order to gain exposure to, or hedge against, changes
in foreign exchange rates on its investment in securities traded in foreign
countries. Forward currency contracts are agreements to exchange one
currency for another at a future date and at a specified price. When the
Fund believes that the currency of a specific country may deteriorate
relative to the U.S. dollar, it may enter into a forward contract to sell
that currency. The Fund bears the market risk that arises from changes in
foreign exchange rates and the credit risk that a counterparty may fail to
perform under a contract. When the contracts are settled, the Fund records a
realized gain or loss equal to the difference in the forward currency
exchange rates at the trade dates and at the settlement dates. Certain of
the Fund's foreign currency contracts are entered into pursuant to
International Swaps and Derivative Association (ISDA) Master Agreements,
which may contain netting provisions providing for the net settlement of all
transactions and collateral with the Fund through a single payment in the
event of default or termination. The Fund's net equity in open forward
currency contracts is included in
================================================================================
NOTES TO FINANCIAL STATEMENTS | 33
================================================================================
the statement of assets and liabilities as net unrealized appreciation or
depreciation and is generated from differences in the forward currency
exchange rates at the trade dates of the contracts and the rates at the
reporting date. For the six-month period ended May 31, 2019, the Fund held
investments in forward currency contracts with a net value of $(7,000), on
the Statement of Assets and Liabilities. Details on the collateral are
included below the portfolio of investments.
FAIR VALUES OF DERIVATIVE INSTRUMENTS AS OF MAY 31, 2019* (IN THOUSANDS)
LIABILITY DERIVATIVES
---------------------------------------------------------------------------------------------------------
STATEMENT OF
DERIVATIVES NOT ASSETS AND FOREIGN
ACCOUNTED FOR AS LIABILITIES INTEREST RATE EQUITY EXCHANGE
HEDGING INSTRUMENTS LOCATION CONTRACTS CONTRACTS CONTRACTS TOTAL
---------------------------------------------------------------------------------------------------------
USAA Emerging Unrealized
Markets Fund depreciation
on foreign
currency
contracts
held, at value $- $- $(7)** $(7)
---------------------------------------------------------------------------------------------------------
* For open derivative instruments as of May 31, 2019, see the Portfolio of
Investments, which also is indicative of activity for the year ended
May 31, 2019.
** Includes cumulative appreciation (depreciation) of forward currency
contracts as reported on the portfolio of investments. Only current day's
variation margin is reported within the statement of assets and
liabilities.
THE EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF OPERATIONS FOR THE
YEAR ENDED MAY 31, 2019 (IN THOUSANDS)
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 Emerging Change in net
Markets Fund unrealized
appreciation/
depreciation
of Foreign
currency
translations $- $- $(7)* $(7)
---------------------------------------------------------------------------------------------------------
* Includes forward currency contracts as reported on the portfolio of
investments, which are reported as a component of foreign currency
transactions/translations.
================================================================================
34 | USAA EMERGING MARKETS FUND
================================================================================
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 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 year ended May 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 35
================================================================================
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.
H. 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 year ended May 31,
2019, brokerage commission recapture credits reduced the expenses of the
Fund Shares, Institutional Shares and Adviser Shares all by less than $500,
respectively.
I. INDEMNIFICATIONS - Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities arising out of the
================================================================================
36 | USAA EMERGING MARKETS FUND
================================================================================
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.
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 year ended May 31, 2019, the Fund paid CAPCO facility fees of $7,000,
which represents 1.1% of the total fees paid to CAPCO by the funds of the
Trusts. The Fund had no borrowings under this agreement during the year
================================================================================
NOTES TO FINANCIAL STATEMENTS | 37
================================================================================
ended May 31, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL
STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
(3) DISTRIBUTIONS
The character of any distributions made during the year from net investment
income or net realized gains is determined in accordance with federal tax
regulations and may differ from those determined in accordance with U.S.
generally accepted accounting principles. Also, due to the timing of
distributions, the fiscal year in which amounts are distributed may differ from
the year that the income or realized gains were recorded by the Fund.
The tax character of distributions paid during the years ended May 31, 2019, and
2018, was as follows:
2019 2018
----------------------------------
Ordinary income* $11,804,000 $4,641,000
As of May 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 1,279,000
Accumulated capital and other losses (142,663,000)
Unrealized appreciation of investments 85,660,000
*Includes short-term realized capital gains, if any, which are taxable as
ordinary income.
The difference between book-basis and tax-basis unrealized appreciation of
investments is attributable to the tax deferral of losses on wash sales,
and passive foreign investment company.
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 May 31, 2019, the Fund had net capital loss carryforwards of $142,663,000,
for federal income tax purposes as shown in the table below. It is unlikely that
================================================================================
38 | USAA EMERGING MARKETS FUND
================================================================================
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 $(103,676,000)
Long-Term (38,987,000)
-------------
Total $(142,663,000)
=============
TAX BASIS OF INVESTMENTS - At May 31, 2019, the aggregate cost of investments
for federal income tax purposes and net unrealized appreciation/(depreciation)
on investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION /
FUND TAX COST APPRECIATION DEPRECIATION (DEPRECIATION)
---------------------------------------------------------------------------------------
USAA Emerging
Markets Fund $730,045,000 $137,240,000 $(51,431,000) $85,809,000
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended May 31, 2019, were $588,682,000 and
$722,909,000, 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 39
================================================================================
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 May 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
--------------------------------------------------------------------------------
$3,339,000 $822,000 $2,782,000
(6) CAPITAL SHARE TRANSACTIONS
At May 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
================================================================================
40 | USAA EMERGING MARKETS FUND
================================================================================
entities that the Fund may approve from time to time. Capital share transactions
for all classes were as follows, in thousands:
YEAR ENDED YEAR ENDED
MAY 31, 2019 MAY 31, 2018
----------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------
FUND SHARES:
Shares sold 2,810 $ 48,985 4,265 $ 83,918
Shares issued from reinvested
dividends 255 4,094 73 1,422
Shares redeemed (4,569) (79,610) (4,233) (83,084)
---------------------------------------------------------
Net increase (decrease) from
capital share transactions (1,504) $ (26,531) 105 $ 2,256
=========================================================
INSTITUTIONAL SHARES:
Shares sold 4,211 $ 73,201 6,010 $ 117,069
Shares issued from reinvested
dividends 455 7,272 156 3,034
Shares redeemed (7,617) (133,195) (7,789) (152,694)
---------------------------------------------------------
Net decrease from capital share
transactions (2,951) $ (52,722) (1,623) $ (32,591)
=========================================================
ADVISER SHARES:
Shares sold 2 $ 34 1 $ 28
Shares issued from reinvested
dividends -* 1 -* -*
Shares redeemed (-)* (12) (2) (45)
---------------------------------------------------------
Net increase (decrease) from
capital share transactions 2 $ 23 (1) $ (17)
=========================================================
*Represents less than 500 shares or $500.
(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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 41
================================================================================
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 1.00% 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 Emerging Markets Funds Index. 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
================================================================================
42 | USAA EMERGING MARKETS FUND
================================================================================
outperforms the Lipper Emerging Markets Funds Index over that period, even if
the class had overall negative returns during the performance period.
For the year ended May 31, 2019, the Fund incurred management fees, paid or
payable to the Manager, of $8,544,000, which included a performance adjustment
for the Fund Shares, Institutional Shares, and Adviser Shares of $(148,000),
$(237,000), and $(2,000), respectively. For the Fund Shares, Institutional
Shares, and Adviser Shares, the performance adjustments were all (0.04)%,
respectively. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL
STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
SUBADVISORY ARRANGEMENT(s) - The Manager entered into Investment Subadvisory
Agreements with Brandes Investment Partners, L.P. (Brandes), Lazard Asset
Management LLC (Lazard), and Victory Capital Management Inc. (Victory Capital),
under which Brandes, Lazard, and Victory Capital 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 Brandes a subadvisory fee in the annual amount
of 0.65% for assets up to $500 million; 0.60% for assets over $500 million on
the portion of the Fund's average daily net assets that Brandes manages. In
addition, Brandes will apply a 5 basis point Distribution Platform Discount to
the fee schedule. Prior to October 1, 2018, the Manager (not the Fund) paid
Brandes a subadvisory fee in the annual amount of 0.75% for assets up to $300
million; 0.70% for assets over $300 million up to $600 million; and 0.60% for
assets over $600 million on the portion of the Fund's average net assets that
Brandes managed. For the year ended May 31, 2019, the Manager incurred
subadvisory fees with respect to the Fund, paid or payable to Brandes, of
$955,000.
The Manager (not the Fund) pays Lazard a subadvisory fee in the annual amount of
0.65% for assets up to $200 million; 0.55% for assets up to $400 million; 0.50%
for assets up to $600 million; and 0.45% for assets over $600 million on the
portion of the Fund's average daily net assets that Lazard manages. Prior to
October 1, 2018, the Manager (not the Fund) paid Lazard a subadvisory fee in the
annual amount of 0.75% for assets up to $200 million; 0.70% for assets over $200
million up to $400 million; 0.65% for assets over
================================================================================
NOTES TO FINANCIAL STATEMENTS | 43
================================================================================
$400 million up to $600 million; and 0.60% for assets over $600 million on the
portion of the Fund's average daily net assets that Lazard managed. For the year
ended May 31, 2019, the Manager incurred subadvisory fees with respect to the
Fund, paid or payable to Lazard, of $3,734,000.
The Manager (not the Fund) pays Victory Capital a subadvisory fee in the annual
amount of 0.55% for all assets on the portion of the Fund's average daily net
assets that Victory Capital manages. Prior to October 1, 2018, the Manager (not
the Fund) paid Victory Capital a subadvisory fee in the annual amount of 0.85%
for assets up to $50 million; 0.75% for assets over $50 million up to $150
million; and 0.70% for assets over $150 million on the portion of the Fund's
average daily net assets that Victory Capital managed. For the year ended May
31, 2019, the Manager incurred subadvisory fees with respect to the Fund, paid
or payable to Victory Capital, of $863,000.
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 year ended May 31, 2019,
the Fund Shares, Institutional Shares, and Adviser Shares incurred
administration and servicing fees, paid or payable to the Manager, of $534,000,
$532,000, and $7,000, 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 year ended May
31, 2019, the Fund reimbursed the Manager $6,000 for these compliance and legal
services. These expenses are included in the professional fees on the Fund's
Statement of Operations. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
EXPENSE LIMITATION - The Manager agreed, through September 30, 2019, to limit
the total annual operating expenses of the Adviser Shares to 1.75% of its
average daily net assets, excluding extraordinary expenses and before
================================================================================
44 | USAA EMERGING MARKETS FUND
================================================================================
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 September 30, 2019, without approval of
the Board, and may be changed or terminated by the Manager at any time after
that date. For the year ended May 31, 2019, the Adviser Shares incurred
reimbursable expenses of $2,000, of which all 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 $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 year ended May 31, 2019, the Fund Shares,
Institutional Shares, and Adviser Shares incurred transfer agent's fees, paid or
payable to SAS, of $925,000, $532,000, and less than $500, respectively. PLEASE
REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL
REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
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 year ended May 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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 45
================================================================================
PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS
ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
(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 May 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
Cornerstone Equity 1.0
Target Retirement Income 0.2
Target Retirement 2020 0.3
Target Retirement 2030 0.9
Target Retirement 2040 1.2
Target Retirement 2050 0.9
Target Retirement 2060 0.1
The Manager is indirectly wholly owned by USAA a large, diversified financial
services institution. At May 31, 2019, USAA and its affiliates owned 271,000
Adviser Shares, which represents 97.7% 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. Please refer to the Subsequent Event Note to the Financial Statements in
this annual report for additional important information.
(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
================================================================================
46 | USAA EMERGING MARKETS FUND
================================================================================
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.
(10) RECENT ACCOUNTING PRONOUNCEMENTS
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.
(11) SUBSEQUENT EVENT NOTE
As previously announced, and as discussed in Note 1 to the Financial Statements,
effective July 1, 2019, AMCO, the prior investment adviser to the Fund, and SAS,
the prior transfer agent to the Fund, were acquired by Victory Holdings. PLEASE
SEE THE SUPPLEMENT DATED JULY 1, 2019 TO THE FUND'S PROSPECTUS FOR ADDITIONAL
IMPORTANT INFORMATION.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 47
================================================================================
Effective July 1, 2019, Victory Capital is the new investment adviser and
administrator to the USAA Mutual Funds; SAS was renamed Victory Capital Transfer
Agency, Inc. Victory Capital Advisers, Inc. is the new distributor to the USAA
Mutual Funds; Citi Fund Services of Ohio, Inc. serves as sub-administrator and
sub-fund accountant for the USAA Mutual Funds; and FIS Investor Services LLC
serve as sub- transfer agent and dividend disbursing agent for the USAA Mutual
Funds. Effective August 5, 2019, Citibank, N.A. is the new custodian for the
USAA Mutual Funds.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2019 permitting
the use of a "manager-of-managers" structure for certain funds. Prior to
that date, the Trust relied on a similar exemptive order granted by the SEC
to the Trust and its affiliated persons. Under a manager of managers
structure, the investment adviser may select (with approval of the Board and
without shareholder approval) one or more subadvisers to manage the
day-to-day investment of a fund's assets.
Effective July 1, 2019, Victory Capital added new portfolio managers from one or
more investment teams employed by Victory Capital to serve as additional
portfolio managers, or replace current portfolio managers, to manage all or a
portion of the Fund according to each team's own investment process.
Effective July 1, 2019, members of Victory Capital's investment franchises,
Sophus Capital and Trivalent Investments, were also named as portfolio managers
of the Fund to manage all or a position of the Fund.
Effective July 1, 2019, under the investment advisory agreement with Victory
Capital, which took effect on July 1, 2019, no performance adjustments will be
made for periods beginning July 1, 2019, through June 30, 2020, and only
performance beginning as of July 1, 2020, and thereafter will be utilized in
calculating performance adjustments through June 30, 2020.
Effective July 1, 2019, the line of credit (as discussed in the Notes to the
Financial Statements in this annual report) among the Trust, with respect to its
Funds, and CAPCO terminated; the Trust, with respect to its Funds, along with
series of Victory Portfolios, Victory Portfolios II and Victory
================================================================================
48 | USAA EMERGING MARKETS FUND
================================================================================
Variable Insurance Funds, entered into a 364 day committed credit facility and a
364 day uncommitted, demand credit facility, with Citibank, N.A. (Citibank).
Each such credit facility may be renewed if so agreed by the parties. Under the
agreement with Citibank, the Funds may borrow up to $600 million, of which $300
million is committed and $300 million is uncommitted. Of this amount, $40
million of the line of credit is reserved for use by the Victory Floating Rate
Fund (a series of Victory Portfolios), with that Fund paying the related
commitment fees for that amount. The purpose of the agreement is to meet
temporary or emergency cash needs, including redemption requests that might
otherwise require the untimely disposition of securities. Citibank receives an
annual commitment fee of 0.15%. Each Fund pays a pro-rata portion of this
commitment fee plus any interest on amounts borrowed.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2017 (the IFL
Order), permitting the establishment and operation of an Interfund Lending
Facility (the Facility). The Facility allows each Fund to directly lend and
borrow money to or from certain other affiliated Funds relying upon the IFL
Order at rates beneficial to both the borrowing and lending funds. Advances
under the Facility are allowed for temporary or emergency purposes, including
the meeting of redemption requests that are subject to each Fund's borrowing
restrictions. The interfund loan rate is determined, as specified in the IFL
Order, by averaging the current repurchase agreement rate and the current bank
loan rate.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 49
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
-------------------------------------------------------------------
2019 2018 2017 2016 2015
-------------------------------------------------------------------
Net asset value at
beginning of period $ 18.84 $ 17.60 $ 14.24 $ 16.46 $ 18.14
-------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .17 .16 .07 .11(a) .08
Net realized and
unrealized gain (loss) (1.67) 1.15 3.43 (2.22)(a) (1.52)
-------------------------------------------------------------------
Total from investment
operations (1.50) 1.31 3.50 (2.11)(a) (1.44)
-------------------------------------------------------------------
Less distributions from:
Net investment income (.20) (.07) (.14) (.11) (.24)
-------------------------------------------------------------------
Net asset value at
end of period $ 17.14 $ 18.84 $ 17.60 $ 14.24 $ 16.46
===================================================================
Total return (%)* (7.86) 7.41 24.70 (12.77) (7.84)
Net assets at end of
period (000) $340,465 $402,401 $374,130 $302,012 $500,510
Ratios to average daily
net assets:**
Expenses (%)(b),(c) 1.48 1.46 1.51 1.58 1.50
Net investment income (%) 1.02 .86 .50 .73 .71
Portfolio turnover (%) 68 59 45 47 46
* 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 year ended May 31, 2019, average daily net assets were $356,086,000.
(a) Calculated using average shares.
(b) Does not include acquired fund fees, if any.
(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%.
================================================================================
50 | USAA EMERGING MARKETS FUND
================================================================================
INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
--------------------------------------------------------------------
2019 2018 2017 2016 2015
--------------------------------------------------------------------
Net asset value at
beginning of period $ 18.79 $ 17.55 $ 14.21 $ 16.42 $ 18.10
--------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .18 .20 .12(a) .18 .13
Net realized and
unrealized gain (loss) (1.62) 1.14 3.40(a) (2.25) (1.53)
--------------------------------------------------------------------
Total from investment
operations (1.44) 1.34 3.52(a) (2.07) (1.40)
--------------------------------------------------------------------
Less distributions from:
Net investment income (.25) (.10) (.18) (.14) (.28)
--------------------------------------------------------------------
Net asset value at
end of period $ 17.10 $ 18.79 $ 17.55 $ 14.21 $ 16.42
====================================================================
Total return (%)* (7.58) 7.62 24.93 (12.53) (7.64)
Net assets at end
of period (000) $491,978 $596,185 $585,468 $603,981 $637,007
Ratios to average
daily net assets:**
Expenses (%)(b),(c) 1.25 1.28 1.29 1.30 1.27
Net investment income (%) 1.24 1.09 .75 1.11 .93
Portfolio turnover (%) 68 59 45 47 46
* 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 year ended May 31, 2019, average daily net assets were $531,865,000.
(a) Calculated using average shares.
(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%.
================================================================================
FINANCIAL HIGHLIGHTS | 51
================================================================================
ADVISER SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
------------------------------------------------------------------
2019 2018 2017 2016 2015
------------------------------------------------------------------
Net asset value at
beginning of period $18.76 $17.55 $14.20 $ 16.40 $18.08
------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .10 .12 .05 .09 .05
Net realized and
unrealized gain (loss) (1.62) 1.13 3.42 (2.21) (1.53)
------------------------------------------------------------------
Total from investment
operations (1.52) 1.25 3.47 (2.12) (1.48)
------------------------------------------------------------------
Less distributions from:
Net investment income (.16) (.04) (.12) (.08) (.20)
------------------------------------------------------------------
Redemption fees added to
beneficial interests - - - - .00(a)
------------------------------------------------------------------
Net asset value at
end of period $17.08 $18.76 $17.55 $ 14.20 $16.40
==================================================================
Total return (%)* (8.07) 7.09 24.53 (12.93) (8.09)
Net assets at end
of period (000) $4,745 $5,186 $4,864 $ 3,931 $4,560
Ratios to average daily
net assets:**
Expenses (%)(b),(c) 1.75 1.7(d) 1.66(e) 1.75 1.79(f)
Expenses, excluding
reimbursements (%)(b),(c) 1.79 1.81 1.87 1.92 1.95
Net investment income (%) .73 .61 .35 .60 .41
Portfolio turnover (%) 68 59 45 47 46
* 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 year ended May 31, 2019, average daily net assets were $4,802,000.
(a) Represents less than $0.01 per share.
(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) Prior to October 1, 2017, the Manager voluntarily agreed to limit the annual
expenses of the Adviser Shares to 1.65% of the Advisers Shares' average
daily net assets.
(e) Prior to October 1, 2016, the Manager voluntarily agreed to limit the annual
expenses of the Adviser Shares to 1.75% of the Advisers Shares' average
daily net assets.
(f) Prior to October 1, 2014, the Manager voluntarily agreed to limit the annual
expenses of the Adviser Shares to 2.00% of the Advisers Shares' average
daily net assets.
================================================================================
52 | USAA EMERGING MARKETS FUND
================================================================================
EXPENSE EXAMPLE
May 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 December 1, 2018, through May
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 | 53
================================================================================
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 DECEMBER 1, 2018 -
DECEMBER 1, 2018 MAY 31, 2019 MAY 31, 2019
-----------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,035.70 $7.51
Hypothetical
(5% return before expenses) 1,000.00 1,017.55 7.44
INSTITUTIONAL SHARES
Actual 1,000.00 1,037.70 6.40
Hypothetical
(5% return before expenses) 1,000.00 1,018.65 6.34
ADVISER SHARES
Actual 1,000.00 1,034.00 8.87
Hypothetical
(5% return before expenses) 1,000.00 1,016.21 8.80
*Expenses are equal to the annualized expense ratio of 1.48% for Fund Shares,
1.26% for Institutional Shares, and 1.75% for Adviser Shares, which are net of
any reimbursements and expenses paid indirectly, multiplied by the average
account value over the period, multiplied by 182 days/365 days (to reflect the
one-half-year period). The Fund's actual ending account values are based on its
actual total returns of 3.57% for Fund Shares, 3.73% for Institutional Shares,
and 3.40% for Adviser Shares for the six-month period of December 1, 2018,
through May 31, 2019.
================================================================================
54 | USAA EMERGING MARKETS FUND
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the (i) new investment
advisory agreement between the Trust and Victory Capital and (ii) new investment
subadvisory agreements between certain subadvisers and Victory Capital, which
became effective on July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO
THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
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.
================================================================================
ADVISORY AGREEMENT(S) | 55
================================================================================
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 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
================================================================================
56 | USAA EMERGING MARKETS FUND
================================================================================
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 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 then-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.
================================================================================
ADVISORY AGREEMENT(S) | 57
================================================================================
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.
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).
================================================================================
58 | USAA EMERGING MARKETS FUND
================================================================================
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.
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.
(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) | 59
================================================================================
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.
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 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.
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.
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.
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.
================================================================================
60 | USAA EMERGING MARKETS FUND
================================================================================
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 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,
================================================================================
ADVISORY AGREEMENT(S) | 61
================================================================================
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.
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.
(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.
================================================================================
62 | USAA EMERGING MARKETS FUND
================================================================================
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 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
================================================================================
ADVISORY AGREEMENT(S) | 63
================================================================================
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 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.
================================================================================
64 | USAA EMERGING MARKETS FUND
================================================================================
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 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.
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ADVISORY AGREEMENT(S) | 65
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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
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.
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66 | USAA EMERGING MARKETS FUND
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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
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
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ADVISORY AGREEMENT(S) | 67
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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 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.
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68 | USAA EMERGING MARKETS FUND
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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. 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) | 69
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND THE MANAGER)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the continuation of the (i)
investment advisory agreement between the Trust and AMCO and (ii) investment
subadvisory agreements between certain subadvisers and AMCO, which were
effective until July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
At an in-person meeting of the Board of Trustees (the Board) held on April 17,
2019, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to the
Fund and the Subadvisory Agreements (each, a Subadvisory Agreement and together,
the Subadvisory Agreements) between the Manager and each of Lazard Asset
Management LLC, Victory Capital Management Inc., and Brandes Investment
Partners, L.P. (each, a Subadviser and together, the Subadvisers) with respect
to the Fund.(1)
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and Subadvisory Agreements and
the Manager and each Subadviser, and were given the opportunity to ask questions
and request additional information from management. The information provided to
the Board included, among other things: (i) a separate
(1)At an in-person meeting held on January 15, 2019, the Board, including the
Independent Trustees, approved a new investment advisory agreement between
the Trust, on behalf of the Fund, and Victory Capital Management Inc.
("Victory Capital"). Upon the closing of the transaction, on behalf of the
Fund, Victory Capital Holdings, Inc., the parent company of Victory Capital,
the Advisory Agreement between the Trust and the Manager will terminate and
the new investment advisory agreement between the Trust and Victory Capital
will go into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are included in this
annual report.
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70 | USAA EMERGING MARKETS FUND
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report prepared by an independent third party, which provided a statistical
analysis comparing the Fund's investment performance, expenses, and fees to
comparable investment companies; (ii) information concerning the services
rendered to the Fund, as well as information regarding the Manager's revenues
and costs of providing services to the Fund and compensation paid to affiliates
of the Manager; and (iii) information about the Manager's and Subadvisers'
operations and personnel. Prior to voting, the Independent Trustees reviewed the
proposed continuance of the Advisory Agreement and the Subadvisory Agreements
with management and with experienced independent legal counsel retained by the
Independent Trustees (Independent Counsel) and received materials from such
Independent Counsel discussing the legal standards for their consideration of
the proposed continuation of the Advisory Agreement and the Subadvisory
Agreements with respect to the Fund. The Independent Trustees also reviewed the
proposed continuation of the Advisory Agreement and the Subadvisory Agreements
with respect to the Fund in private sessions with Independent Counsel at which
no representatives of management were present. The Board considered the Advisory
Agreement and the Subadvisory Agreements separately in the course of its review.
In doing so, the Board noted the respective roles of the Manager and the
Subadvisers in providing services to the Fund.
At each regularly scheduled meeting of the Board and its committees, the Board
receives and reviews, among other things, information concerning the Fund's
performance and related services provided by the Manager and by each Subadviser.
At the meeting at which the renewal of the Advisory Agreement and Subadvisory
Agreements is considered, particular focus is given to information concerning
Fund performance, fees and total expenses as compared to comparable investment
companies, and the Manager's profitability with respect to the Fund. However,
the Board noted that the evaluation process with respect to the Manager and the
Subadvisers is an ongoing one. In this regard, the Board's and its committees'
consideration of the Advisory Agreement and Subadvisory Agreements included
certain information previously received at such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving
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ADVISORY AGREEMENT(S) | 71
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the Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent, and
quality of the services provided by the Manager under the Advisory Agreement,
the Board reviewed information provided by the Manager relating to its
operations and personnel. The Board also took into account its knowledge of the
Manager's management and the quality of the Manager's duties through Board
meetings, discussions, and reports during the preceding year. The Board
considered the fees paid to the Manager and the services provided to the Fund by
the Manager under the Advisory Agreement, as well as other services provided by
the Manager and its affiliates under other agreements, and the personnel who
provide these services. In addition to the investment advisory services provided
to the Fund, the Manager and its affiliates provide administrative services,
shareholder services, oversight of Fund accounting, marketing services,
assistance in meeting legal and regulatory requirements, and other services
necessary for the operation of the Fund and the Trust. The Board also considered
the significant risks assumed by the Manager in connection with the services
provided to the Fund, including investment, operational, enterprise, litigation,
regulatory and compliance risks.
The Board considered the level and depth of experience of the Manager, including
the professional experience and qualifications of senior and investment
personnel, as well as current staffing levels. The Board considered the
Manager's process for monitoring the performance of each Subadviser and its
timeliness in responding to performance issues. The allocation of the Fund's
brokerage, including the Manager's process for monitoring "best execution," also
was considered. The Manager's role in coordinating the activities of the Fund's
other service providers also was considered. The Board also considered the
Manager's risk management processes. The Board considered the Manager's
financial condition and that it had the financial wherewithal to continue to
provide the same scope and high quality of services under the Advisory
Agreement. In reviewing the Advisory Agreement, the Board focused on the
experience, resources, and strengths of the Manager and its affiliates in
managing the Fund, as well as the other funds in the Trust.
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72 | USAA EMERGING MARKETS FUND
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The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager and its affiliates, including oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust,
also focused on the quality of the Manager's compliance and administrative
staff.
EXPENSES AND PERFORMANCE - In connection with its consideration of the Advisory
Agreement, the Board evaluated the advisory fees and total expense ratio of the
Fund as compared to other open-end investment companies deemed to be comparable
to the Fund as determined by the independent third party in its report. The
expenses of the Fund were compared to (i) a group of investment companies chosen
by the independent third party to be comparable to the Fund based upon certain
factors, including fund type, comparability of investment objective and
classification, sales load type (in this case, retail investment companies with
no sales loads), asset size, and expense components (the "expense group") and
(ii) a larger group of investment companies that includes all no-load retail
open-end investment companies with the same investment classification/objective
as the Fund regardless of asset size, excluding outliers (the "expense
universe"). Among other data, the Board noted that the Fund's management fee
rate - which includes advisory and administrative services and the effects of
any performance adjustment - was above the median of its expense group and its
expense universe. The data indicated that the Fund's total expenses were above
the median of its expense group and its expense universe. The Board took into
account management's discussion of the Fund's expenses. The Board took into
account the various services provided to the Fund by the Manager and its
affiliates, including the high quality of services received by the Fund from the
Manager. The Board also noted the level and method of computing the Fund's
management fee, including any performance adjustment to such fee.
The Board also took into account that the subadvisory fees under each
Subadvisory Agreement relating to the Fund are paid by the Manager. The Board
also considered and discussed information about the Subadvisers' fees, including
the amount of the management fees retained by the Manager after payment of the
subadvisory fees.
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ADVISORY AGREEMENT(S) | 73
================================================================================
In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total return with its Lipper index and with that of other mutual funds deemed to
be in its peer group by the independent third party in its report (the
"performance universe"). The Fund's performance universe consisted of the Fund
and all retail and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or primary channel
of distribution. This comparison indicated that, among other data, the Fund's
performance was below the average of its performance universe and its Lipper
index for the one-, three-, five- and ten-year periods ended December 31, 2018.
The Board also noted that the Fund's percentile performance ranking was in the
bottom 50% of its performance universe for the one-, three-, five-, and ten-year
periods ended December 31, 2018. The Board also took into account management's
discussion of the reasons for the Fund's underperformance, as well as
management's continued monitoring of the Fund's performance.
COMPENSATION AND PROFITABILITY - The Board took into consideration the level and
method of computing the Fund's management fee. The information considered by the
Board included operating profit margin information for the Manager's business as
a whole. The Board also received and considered profitability information
related to the management revenues from the Fund. This information included a
review of the methodology used in the allocation of certain costs to the Fund.
In considering the profitability data with respect to the Fund, the Trustees
noted that the Manager pays the Fund's subadvisory fees. The Trustees reviewed
the profitability of the Manager's relationship with the Fund before tax
expenses. The Board was also provided with an Investment Management
Profitability Analysis prepared by an independent information service. In
reviewing the overall profitability of the management fee to the Manager, the
Board also considered the fact that affiliates provide shareholder servicing and
administrative services to the Fund for which they receive compensation. The
Board also considered the possible direct and indirect
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74 | USAA EMERGING MARKETS FUND
================================================================================
benefits to the Manager from its relationship with the Trust, including that the
Manager may derive reputational and other benefits from its association with the
Fund. The Trustees recognized that the Manager should be entitled to earn a
reasonable level of profits in exchange for the level of services it provides to
the Fund and the entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussions of
the current advisory fee structure. The Board also considered the fact that the
Manager pays the Fund's subadvisory fees.
The Board also considered the effect of the Fund's growth and size on its
performance and fees, noting that if the Fund's assets increase over time, the
Fund may realize other economies of scale if assets increase proportionally more
than some expenses. The Board determined that the current investment management
fee structure was reasonable.
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) management is appropriately monitoring
the Fund's performance; (iv) the Fund's advisory expenses are reasonable in
relation to those of similar funds and to the services to be provided by the
Manager; and (v) the Manager and its affiliates' level of profitability from
their relationship with the Fund is reasonable in light of the nature and high
quality of services provided by the Manager and the type of fund. Based on its
conclusions, the Board determined that continuation of the Advisory Agreement
would be in the best interests of the Fund and its shareholders.
SUBADVISORY AGREEMENTS
In approving each Subadvisory Agreement with respect to the Fund, the Board
considered various factors, among them: (i) the nature, extent, and quality of
services provided to the Fund by the respective Subadviser, including the
personnel providing services; (ii) each Subadviser's compensation and any other
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ADVISORY AGREEMENT(S) | 75
================================================================================
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 Subadvisory Agreement. 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 Subadvisory Agreement. In approving each Subadvisory Agreement, the
Trustees did not identify any single factor as controlling, and each Trustee may
have attributed different weights to various factors. Throughout their
deliberations, the Independent Trustees were represented and assisted by
Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES PROVIDED; INVESTMENT PERSONNEL - The
Trustees considered information provided to them regarding the services 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 the Fund and each Subadviser's level of
staffing. The Trustees also noted each Subadviser's brokerage practices. The
Board also considered each Subadviser's regulatory and compliance history. The
Board also took into account each Subadviser's risk management processes. The
Board noted that the Manager's monitoring processes of each Subadviser 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.
SUBADVISER COMPENSATION - The Board also took into consideration the financial
condition of each Subadviser. In considering the cost of services to be provided
by each Subadviser and the profitability to that Subadviser of its relationship
with the Fund, the Trustees noted that the fees under the Subadvisory Agreements
were paid by the Manager. The Trustees also relied on the ability of the Manager
to negotiate each Subadvisory Agreement and the fees thereunder at arm's length.
For the above reasons, the Board determined that the profitability of each
Subadviser from its relationship with the Fund
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76 | USAA EMERGING MARKETS FUND
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was not a material factor in its deliberations with respect to the consideration
of the approval of the Subadvisory Agreement, although the Trustees noted that
each Subadviser's subadvisory fee was reduced effective October 2018. For
similar reasons, the Board concluded that the potential for economies of scale
in each Subadviser's management of the Fund was not a material factor in
considering the Subadvisory Agreement, although the Board noted that each
Subadvisory Agreement contains breakpoints in its fee schedule.
SUBADVISORY FEES AND FUND PERFORMANCE - The Board compared the subadvisory fees
for the Fund with the fees that each Subadviser charges to comparable clients,
as applicable. The Board considered that the Fund pays a management fee to the
Manager and that, in turn, the Manager pays a subadvisory fee to each
Subadviser. As noted above, the Board considered, among other data, the Fund's
performance during the one-, three-, five-, and ten-year periods ended December
31, 2018, as compared to the Fund's respective peer group and noted that the
Board reviews at its regularly scheduled meetings information about the Fund's
performance results. The Board noted the Manager's experience and resources in
monitoring the performance, investment style, and risk-adjusted performance of
each Subadviser. The Board was mindful of the Manager's focus on each
Subadviser's performance and the explanations of management regarding the
performance of the Fund. The Board also noted each Subadviser's performance
record for similar accounts, as applicable.
CONCLUSIONS - The Board reached the following conclusions regarding each
Subadvisory Agreement, among others: (i) each Subadviser is qualified to manage
the Fund's assets in accordance with its investment objective and policies; (ii)
each Subadviser maintains an appropriate compliance program; management is
appropriately monitoring the Fund's performance; and (iv) the Fund's advisory
expenses are reasonable in relation to those of similar funds and to the
services to be provided by the Manager and each Subadviser. Based on its
conclusions, the Board determined that approval of each Subadvisory Agreement
with respect to the Fund would be in the best interests of the Fund and its
shareholders.
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ADVISORY AGREEMENT(S) | 77
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TRUSTEES' AND OFFICERS' INFORMATION
TRUSTEES AND OFFICERS OF THE TRUST
--------------------------------------------------------------------------------
As of July 1, 2019, the Board of Trustees (the Board) of the Trust consists of
ten Trustees. These Trustees and the Trust's Officers supervise the business
affairs of the USAA family of funds. The Board is responsible for the general
oversight of the funds' business and for assuring that the funds are managed in
the best interests of each fund's respective shareholders. The Board
periodically reviews the funds' investment performance as well as the quality of
other services provided to the funds and their shareholders by each of the
fund's service providers, including the adviser and its affiliates. Pursuant to
a policy adopted by the Board, the term of office for each Trustee shall be
until the Trustee reaches age 75. The Board may change or grant exceptions from
this policy at any time without shareholder approval. A Trustee may resign or be
removed by a vote of two-thirds of the Trustees before the removal or by the
holders of two-thirds of the outstanding shares of the Trust at any time.
Vacancies on the Board can be filled by the action of a majority of the
Trustees, provided that after filling such vacancy at least two-thirds of the
Trustees have been elected by the shareholders.
Set forth below are the Trustees and Officers of the Trust, their respective
offices and principal occupations during the last five years, length of time
served, and information relating to any other directorships held. As of July 1,
2019, each serves on the Board of the USAA family of funds consisting of one
registered investment company, which offers 47 individual funds. Unless
otherwise indicated, the business address for each is P.O. Box 659430, San
Antonio, TX 78265-9430.
If you would like more information about the funds' Trustees, you may call (800)
235-8396 to request a free copy of the funds' Statement of Additional
Information (SAI).
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78 | USAA EMERGING MARKETS FUND
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In connection with the Transaction, the Board of the Trust nominated, and
shareholders of each USAA mutual fund approved, two new Trustees to serve on the
Trust's Board, effective upon the closing of the Transaction. Effective July 1,
2019, David C. Brown serves as an Interested Trustee and John C. Walters serves
as an Independent Trustee. Information about the current Trustees of the Trust
is provided below.
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
DANIEL S. McNAMARA(1, 2, 4, 6, +)
Trustee and Chair of the Board of Trustees
Born: June 1966
Year of Election or Appointment: 2012
Trustee, President, and Vice Chairman, USAA ETF Trust (06/17-06/19); President
of Financial Advice & Solutions Group (FASG), USAA (02/13-present); Director of
USAA Asset Management Company (AMCO), (08/11-present); Director of USAA
Investment Management Company (IMCO) (09/09-present); President, IMCO
(09/09-04/14); President and Director of USAA Shareholder Account Services (SAS)
(10/09-present); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director of FPS (12/13-present);
President and Director of USAA Investment Corporation (ICORP) (03/10-present);
Director of USAA Financial Advisors, Inc. (FAI) (12/13-present). Mr. McNamara
brings to the Board extensive experience in the financial services industry,
including experience as an officer of the Trust.
DAVID C. BROWN(2, 4, 6, 10)
Trustee
Born: May 1972
Year of Election or Appointment: 2019
Chairman and Chief Executive Officer (2013-present), Co-Chief Executive Officer,
(2011-2013), Victory Capital Management Inc.; Chairman and Chief Executive
Officer (2013-present), Victory Capital Holdings, Inc. Mr. Brown brings to the
Board extensive business, finance and leadership skills gained
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TRUSTEES' AND OFFICERS' INFORMATION | 79
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and developed through years of experience in the financial services industry,
including his tenure overseeing the strategic direction as CEO of Victory
Capital. These skills, combined with Mr. Brown's extensive knowledge of the
financial services industry and demonstrated success in the development and
distribution of investment strategies and products, enable him to provide
valuable insights to the Board and strategic direction for the Funds. Mr. Brown
serves on the Boards of the Victory Funds family of funds consisting of five
registered investment companies offering approximately 104 mutual funds and 24
ETFs. Mr. Brown is considered an Interested Trustee of the Trust due to his
position with Victory Capital and its affiliated companies.
NON-INTERESTED (INDEPENDENT) TRUSTEES
--------------------------------------------------------------------------------
ROBERT L. MASON, Ph.D.(3, 4, 5, 6, 7)
Trustee
Born: July 1946
Year of Election or Appointment: 1997
Trustee, USAA ETF Trust (06/17-06/19); Adjunct Professor in the Department of
Management Science and Statistics in the College of Business at the University
of Texas at San Antonio (2001-present); Institute Analyst, Southwest Research
Institute (03/02-01/16), which focuses on providing innovative technology,
science, and engineering services to clients around the world and is one of the
oldest independent, nonprofit, applied research and development organizations in
the United States. He was employed at Southwest Research Institute for 40 years.
Dr. Mason brings to the Board particular experience with information technology
matters, statistical analysis, and human resources as well as over 22 years'
experience as a Board member of the USAA family of funds. Dr. Mason holds no
other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
================================================================================
80 | USAA EMERGING MARKETS FUND
================================================================================
JEFFERSON C. BOYCE(3, 4, 5, 6, 7)
Lead Trustee and Vice Chair
Born: September 1957
Year of Election or Appointment: 2013
Trustee, USAA ETF Trust (06/17-06/19); Senior Managing Director, New York Life
Investments, LLC (1992-2012), an investment manager. Mr. Boyce brings to the
Board experience in financial investment management, and, in particular,
institutional and retail mutual funds, variable annuity products, broker
dealers, and retirement programs, including experience in organizational
development, marketing, product development, and money management as well as
five years' experience as a Board member of the USAA family of funds. Mr. Boyce
is a board member of Westhab, Inc.
DAWN M. HAWLEY(3, 4, 5, 6, 7, 9)
Trustee
Born: February 1954
Year of Election or Appointment: 2014
Trustee, USAA ETF Trust (06/17-06/19); Manager of Finance, Menil Foundation,
Inc. (05/07-06/11), which is a private foundation that oversees the assemblage
of sculptures, prints, drawings, photographs, and rare books. Director of
Financial Planning and Analysis and Chief Financial Officer, AIM Management
Group, Inc. (10/87-01/06). Ms. Hawley brings to the Board experience in
financial investment management and, in particular, institutional and retail
mutual funds, variable annuity products, broker dealers, and retirement
programs, including experience in financial planning, budgeting, accounting
practices, and asset/liability management functions including major acquisitions
and mergers, as well as over five years' experience as a Board member of the
USAA family of funds. Ms. Hawley holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 81
================================================================================
PAUL L. McNAMARA(3, 4, 5, 6, 7)
Trustee
Born: July 1948
Year of Election or Appointment: 2012
Trustee, USAA ETF Trust (06/17-06/19); Director, Cantor Opportunistic
Alternatives Fund, LLC (03/10-02/14), which is a closed-end fund of funds by
Cantor Fitzgerald Investment Advisors, LLC. Mr. McNamara retired from Lord
Abbett & Co. LLC, an independent U.S. investment management firm, as an
Executive Member on 09/30/09, a position he held since 10/02. He had been
employed at Lord Abbett since 1996. Mr. McNamara brings to the Board extensive
experience with the financial services industry and, in particular,
institutional and retail mutual fund markets, including experience with mutual
fund marketing, distribution, and risk management, as well as overall experience
with compliance and corporate governance issues. Mr. McNamara also has
experience serving as a fund director as well as seven years' experience as a
Board member of the USAA family of funds. Paul L. McNamara is of no relation to
Daniel S. McNamara. Mr. McNamara holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
RICHARD Y. NEWTON III(3, 4, 5, 6, 7)
Trustee
Born: January 1956
Year of Election or Appointment: 2017
Trustee, USAA ETF Trust (06/17-06/19); Director, Elta North America
(01/18-present), which is a global leader in the design, manufacture and support
of innovative electronic systems in the ground, maritime, airborne, and security
domains for the nation's warfighters, security personnel, and first responders;
Managing Partner, Pioneer Partnership Development Group (12/15-present);
Executive Director, The Union League Club of New York (06/14-11/15); Executive
Vice President, Air Force Association (08/12-05/14); Lieutenant General, United
States Air Force (01/08-06/12). Lieutenant General Newton (Ret.) served 34 years
of active duty in the United States Air Force. Lt. Gen. Newton retired as the
Assistant Vice Chief of Staff and Director of Air Staff at the Headquarters of
the U.S. Air Force where he was responsible for overseeing the administration
and organization
================================================================================
82 | USAA EMERGING MARKETS FUND
================================================================================
of the Air Staff, which develops policies, plans and programs, establishes
requirements, and provides resources to support the Air Force's mission. Lt.
Gen. Newton is a graduate of the United States Air Force Academy, Webster
University, and The National War College. Lt. Gen. Newton brings to the Board
extensive management and military experience, as well as over two years of
experience as a Board member of the USAA family of funds. Lt. Gen. Newton holds
no other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
BARBARA B. OSTDIEK, Ph.D.(3, 4, 5, 6, 7, 8)
Trustee
Born: March 1964
Year of Election or Appointment: 2008
Trustee, USAA ETF Trust (06/17-06/19); Senior Associate Dean of Degree programs
at Jesse H. Jones Graduate School of Business at Rice University
(07/13-present); Associate Professor of Finance at Jesse H. Jones Graduate
School of Business at Rice University (07/01-present); Academic Director, El
Paso Corporation Finance Center at Jesse H. Jones Graduate School of Business at
Rice University (07/02-06/12). Dr. Ostdiek brings to the Board particular
experience with financial investment management, education, and research as well
as over eleven years' experience as a Board member of the USAA family of funds.
Dr. Ostdiek holds no other directorships of any publicly held corporations or
other investment companies outside the USAA family of funds.
MICHAEL F. REIMHERR(3, 4, 5, 6, 7)
Trustee
Born: August 1945
Year of Election or Appointment: 2000
Trustee, USAA ETF Trust (06/17-06/19); President of Reimherr Business Consulting
performing business valuations of medium to large companies; developing business
plans, budgets, and internal financial reporting; and work with mergers and
acquisitions (05/95-12/17). St. Mary's University Investment Committee
overseeing University Endowment (06/14-present). Mr. Reimherr brings to the
Board particular experience with organizational development, budgeting, finance,
capital markets, and mergers and acquisitions, as well as
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 83
================================================================================
over 19 years' experience as a Board member of the USAA family of funds. Mr.
Reimherr holds no other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
JOHN C. WALTERS(3, 4, 5, 6, 7)
Trustee
Born: February 1962
Year of Election or Appointment: 2019
Retired. Mr. Walters brings significant Board experience including active
involvement with the board of a Fortune 500 company, and a proven record of
leading large, complex financial organizations. He has a demonstrated record of
success in distribution, manufacturing, investment brokerage, and investment
management in both the retail and institutional investment businesses. He has
substantial experience in the investment management business with a demonstrated
ability to develop and drive strategy while managing operational, financial, and
investment risk. Mr. Walters is a board member of Guardian Variable Products
Trust (16 series), Lead Independent Director; Amerilife Holdings LLC, Director;
Stadion Money Management; Director; and University of North Carolina (Chapel
Hill), Member Board of Governors.
(1) Indicates the Trustee is an employee of AMCO or affiliated companies and
is considered an "interested person" under the Investment Company Act of
1940.
(2) Member of Executive Committee.
(3) Member of Audit and Compliance Committee.
(4) Member of Product Management and Distribution Committee.
(5) Member of Corporate Governance Committee.
(6) Member of Investments Committee.
(7) The address for all non-interested trustees is that of the USAA Funds,
P.O. Box 659430, San Antonio, TX 78265-9430.
(8) Dr. Ostdiek has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(9) Ms. Hawley has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(10) Indicates the Trustee is an employee of Victory Capital or affiliated
companies and is considered an "interested person" under the Investment
Company Act of 1940.
(+) Mr. D. McNamara was elected as Chair of the Board in July 2019.
================================================================================
84 | USAA EMERGING MARKETS FUND
================================================================================
Effective July 1, 2019, the Board of the Trust appointed certain new officers of
the Trust. The current officers of the Trust are stated below.
OFFICERS
--------------------------------------------------------------------------------
CHRISTOPHER K. DYER
President
Born: February 1962
Year of Appointment: 2019
Director of Mutual Fund Administration, the Victory Capital.
SCOTT A. STAHORSKY
Vice President
Born: July 1969
Year of Appointment: 2019
Manager, Fund Administration, the Adviser (since 2015); Senior Analyst, Fund
Administration, the Victory Capital (prior to 2015).
ALLAN SHAER
Assistant Treasurer
Born: March 1965
Year of Appointment: 2019
Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc.
(since 2016); Vice President, Mutual Fund Administration, JP Morgan Chase
(2011-2016).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 85
================================================================================
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Treasurer, USAA ETF Trust (09/18-06/19); Executive Director, Investment and
Financial Administration, USAA (04/12-present); Assistant Treasurer, USAA ETF
Trust (06/17-09/18); Assistant Treasurer, USAA Mutual Funds Trust (12/13-02/18).
Mr. De Vries also serves as the Funds' Principal Financial Officer.
CAROL D. TREVINO
Assistant Treasurer
Born: October 1965
Year of Appointment: 2018
Assistant Treasurer, USAA ETF Trust (09/18-06/19); Accounting/Financial
Director, USAA (12/13-present); Senior Accounting Analyst, USAA (03/11-12/13).
ERIN G. WAGNER
Secretary
Born: February 1974
Year of Appointment: 2019
Associate General Counsel, the Adviser (since 2013).
CHARLES BOOTH
Anti-Money Laundering Compliance Officer and Identity Theft Officer
Born: April 1960
Year of Appointment: 2019
Director, Regulatory Administration and CCO Support Services, Citi Fund Services
Ohio, Inc. (2007-present).
================================================================================
86 | USAA EMERGING MARKETS FUND
================================================================================
AMY CAMPOS
Chief Compliance Officer
Born: August 1976
Year of Appointment: 2019
Chief Compliance Officer, USAA Mutual Funds Trust (7/1/19-present); Executive
Director, Deputy Chief Compliance Officer, USAA Mutual Funds Trust and USAA ETF
Trust (7/17-6/19); Compliance Director, USAA Mutual Funds Trust (2014-7/17);
Senior Compliance Advisor, USAA Mutual Funds Trust (2010-2014).
THE FOLLOWING OFFICERS SERVED IN THEIR RESPECTIVE OFFICE UNTIL JULY 1, 2019, AT
WHICH POINT EACH OF THE FOLLOWING OFFICERS RESIGNED FROM THEIR RESPECTIVE OFFICE
AND NO LONGER SERVE IN THESE POSITIONS.
JOHN C. SPEAR
Vice President
Born: May 1964
Year of Appointment: 2016
Vice President, USAA ETF Trust (06/17-06/19); Senior Vice President and Chief
Investment Officer, USAA Investments, (03/17-present); Vice President and Chief
Investment Officer, USAA Investments, (11/16-03/17); Vice President, Long Term
Fixed Income (05/12-11/16).
JOHN P. TOOHEY
Vice President
Born: March 1968
Year of Appointment: 2009
Vice President, USAA ETF Trust (06/17-06/19); Head of Equities, Equity
Investments, AMCO (01/12-present).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 87
================================================================================
KRISTEN MILLAN
Secretary
Born: April 1983
Year of Appointment: 2019
Secretary, USAA ETF Trust (04/19-06/19); Assistant Secretary, USAA ETF Trust
(01/19-06/19); Senior Attorney, FASG General Counsel, USAA (09/17-06/19);
Attorney, FASG General Counsel, USAA (06/13-09/17). Ms. Millan also serves as
Assistant Secretary of AMCO, ICORP, and SAS.
STEPHANIE A. HIGBY
Chief Compliance Officer
Born: July 1974
Year of Appointment: 2013
Chief Compliance Officer, USAA ETF Trust (06/17-06/19); Assistant Vice
President, Compliance-Investments, USAA (02/18-present); Assistant Vice
President, Compliance Mutual Funds, USAA (12/16-01/18); Executive Director,
Institutional Asset Management Compliance, USAA (04/13-12/16). Ms. Higby also
serves as the Funds' anti-money laundering compliance officer and as the Chief
Compliance Officer for AMCO and IMCO.
================================================================================
88 | USAA EMERGING MARKETS FUND
================================================================================
AS OF JULY 1, 2019
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
David C. Brown
John C. Walters
--------------------------------------------------------------------------------
ADMINISTRATOR AND Victory Capital Management Inc.
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND Victory Capital Advisers Inc.
DISTRIBUTOR 4900 Tiedeman Road
Brooklyn, Ohio 44144
--------------------------------------------------------------------------------
TRANSFER AGENT Victory Capital Transfer Agency Inc.
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 USAA AMCO'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) 235-8396; (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) 235-8396; (ii) at usaa.com; and (iii) on the SEC's website at
http://www.sec.gov.
================================================================================
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----------------------
MUTUAL FUNDS
--------------------------------------------------------------------------------
May 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA Government Securities Fund
FUND INSTITUTIONAL ADVISER R6
SHARES SHARES SHARES SHARES
USGNX UIGSX UAGNX URGSX
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) 235-8396 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)
235-8396 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.
Victory Capital means Victory Capital Management Inc., the investment manager of
the USAA Mutual Funds. USAA Mutual Funds are distributed by Victory Capital
Advisers, Inc., a broker dealer registered with FINRA and an affiliate of
Victory Capital. Victory Capital and its affiliates are not affiliated with
United Services Automobile Association or its affiliates. USAA and the USAA
logos are registered trademarks and the USAA Mutual Funds and USAA Investments
logos are trademarks of United Services Automobile Association and are being
used by Victory Capital and its affiliates under license.
================================================================================
PRESIDENT'S MESSAGE
"... LONG-TERM INVESTORS SHOULD NEVER MAKE
DECISIONS IN HASTE. THEY SHOULD MAKE [PHOTO OF BROOKS ENGLEHARDT]
THOUGHTFUL DECISIONS BASED ON THEIR LONG-TERM
OBJECTIVES, TIME HORIZON, AND RISK TOLERANCE."
--------------------------------------------------------------------------------
JULY 2019
As previously announced, USAA, the parent company of USAA Asset Management
Company ("AMCO"), the prior investment adviser to the USAA Mutual Funds,
announced that AMCO would be acquired by Victory Capital Holdings, Inc.
(Victory Holdings), a global investment management firm headquartered in
Cleveland, Ohio (the Transaction). In connection with the Transaction, also as
previous announced, shareholders of each USAA Mutual Fund approved a new
investment advisory agreement with Victory Capital Management Inc. ("Victory
Capital"), an indirect wholly-owned subsidiary of Victory Holdings. The closing
of the Transaction occurred on July 1, 2019; and Victory Capital became the
investment adviser to each USAA Mutual Fund. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION ABOUT CHANGES THAT TOOK EFFECT ON JULY 1, 2019.
Softening global economic conditions and escalating trade tensions rattled
investors during the 12-month reporting period ended May 31, 2019. When the
reporting period began in June 2018, the global economy was expanding across
most regions and countries, led by the U.S. In this environment, stocks
generally advanced. In the fixed income market, U.S. Treasury yields rose, as
the U.S. Federal Reserve ("Fed") continued to tighten monetary policy.
Signs of trouble emerged during the summer of 2018. The U.S. economic expansion
continued, but growth in a number of other economies, including some European
countries and China, showed a weakening trend. By the autumn of 2018, investors'
fears of a global economic slowdown, combined with harsh U.S.-China trade
rhetoric and Brexit-related uncertainty in Europe, sparked a surge in market
volatility. Global stocks dropped, with most of the decline occurring in
December 2018. At the same time, intermediate- and longer-term yields fell, as
investors anticipated a change in Fed monetary policy. Indeed, after having
raised short-term interest rates four times during 2018, Fed officials announced
in January 2019 that they would "pause," retreating from their earlier plan to
raise interest rates in 2019. Stocks rallied in response and by April 2019 had
recovered most of the ground they had lost. In May 2019, ongoing trade tensions
between the United States and China, as well as President Trump administration's
threat to impose tariffs on Mexico, drove a renewed decline in stock prices. In
the fixed income market, concerns that trade disputes would seriously undermine
global
================================================================================
================================================================================
economic growth pushed down intermediate- and longer-term yields, which ended
the reporting period lower than they started. The yield on the 10-year U.S.
Treasury note, which began June 2018 at 2.89%, rose to 3.24% on November 8,
2018--its high point of the period--and fell to 2.13% by May 31, 2019.
In the final months of the reporting period, the Treasury yield curve inverted,
which means that shorter-term yields were higher than longer-term yields. A
yield-curve inversion warrants attention because it has been a reliable
recession indicator. Although recessions do not automatically follow
inversions, a downward-sloped yield curve has preceded every U.S. recession
since the 1960s. That said, the lag between an inversion and a recession has
been inconsistent. At USAA Investments, A Victory Capital Investment Franchise,
we have found that during the past six decades, the time between inversion and
recession has ranged between six months and two years, with no clear pattern to
provide useful guidance. And as I write to you, we see no recession on the
horizon. First, the U.S. economy continues to grow, albeit at a slower pace than
in 2018. Second, the Fed has made clear its commitment to pause its interest
rate hikes, and there is a growing belief in the markets that policymakers may
even cut interest rates in 2019. (In early June 2019, after the end of the
reporting period, Fed Chair Jerome Powell stated that the U.S. central bank was
monitoring the escalation in trade tensions and could potentially respond by
cutting interest rates if U.S. economic conditions deteriorate.)
At USAA Investments, our team of portfolio managers will continue to monitor the
financial markets, economic conditions, the global trade regime, Fed policy, the
direction of longer-term interest rates, and other issues that have the
potential to affect your investments. In the meantime, I would advise you to
ignore media "noise" about such matters. Media "noise" is meant to provoke an
emotional reaction, which can lead to hasty decision-making. In my opinion,
long-term investors should never make decisions in haste. They should make
thoughtful decisions based on their long-term objectives, time horizon, and risk
tolerance. Dollar-cost averaging, in which you invest a set amount on a regular
basis, is a strategy that can help you stay on track. Another effective strategy
is diversification, which can potentially insulate a portfolio from market
turbulence or changes in performance leadership.
If you would like to review your portfolio to confirm that it is properly
aligned with your investment plan, please contact one of our financial advisors.
You might want to make that call before the summer gets fully underway. When we
are traveling and spending time with family and friends, it can be tempting to
put off decisions on financial matters.
From all of us at USAA Investments, A Victory Capital Investment Franchise,
thank you for the opportunity to help you with your investment needs.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGERS' COMMENTARY 1
INVESTMENT OVERVIEW 5
SHAREHOLDER VOTING RESULTS 9
FINANCIAL INFORMATION
Distributions to Shareholders 10
Report of Independent Registered
Public Accounting Firm 11
Portfolio of Investments 12
Notes to Portfolio of Investments 21
Financial Statements 24
Notes to Financial Statements 28
Financial Highlights 45
EXPENSE EXAMPLE 49
ADVISORY AGREEMENT(S) 51
TRUSTEES' AND OFFICERS' INFORMATION 69
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) 235-8396.
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.
================================================================================
================================================================================
MANAGERS' COMMENTARY ON THE FUND
--------------------------------------------------------------------------------
[PHOTO OF DONNA J. BAGGERLY] [PHOTO OF R. NEAL GRAVES]
DONNA J. BAGGERLY, CFA R. NEAL GRAVES, CFA, CPA
--------------------------------------------------------------------------------
o WHAT WERE THE MARKET CONDITIONS DURING THE 12-MONTH REPORTING PERIOD ENDED
MAY 31, 2019?
Longer-term U.S. Treasury yields ended the reporting period lower than when
the reporting period began. When the reporting period began in June 2018,
U.S. Treasury yields were increasing overall, as the Fed continued to raise
short-term interest rates. Fed officials implemented an interest rate
increase at their June 2018 meeting and projected two more interest rate
increases during 2018. The Fed then raised interest rates in September 2018,
based on U.S. economic strength, a healthy job market with improving wage
growth and historically low unemployment, and an inflation rate near
policymakers' 2% target. U.S. Treasury yields continued to climb until early
November 2018, but then dropped amid worries about the U.S.-China trade
dispute, softening global economic growth, the results of the U.S. mid-term
elections that resulted in a divided Congress, and a broad flight to quality
into U.S. Treasuries as the stock market sold off. Nevertheless, the Fed
raised short-term interest rates in December 2018. At the same time, Fed
policymakers decreased the number of interest rate increases they planned in
2019 from three to two and stated that future moves would be data dependent.
This signaled to the fixed income market that the Fed might "pause" interest
rate increases in the future. In March 2019, the Fed remained on hold and
said it would maintain a larger balance sheet. (The Fed, which has been
trimming its balance sheet by decreasing the reinvestment of maturing
holdings of U.S. Treasury and government-sponsored mortgage-backed
securities, revealed it would
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
end this "quantitative tightening" by the end of 2019.) In May 2019, ongoing
trade issues, including a new dispute with Mexico, fueled a further decline
in U.S. Treasury yields as investors worried that trade disruptions could
dampen U.S. and global economic growth. At the end of reporting period, the
fixed income market was anticipating four Fed rate cuts by 2020, with some
observers expecting the first to come in September 2019.
As yields fell, bond prices rose. The U.S. Treasury yield curve flattened,
with longer-term yields falling more than shorter- and intermediate-term
yields. The two-year U.S. Treasury yield fell 51 basis points to end the
reporting period at 1.92%, while the 10-year U.S. Treasury yield dropped 73
basis points to finish the period at 2.13%. (A basis point is 1/100(th) of a
percentage point.) In addition, in the closing weeks of the reporting
period, the short end of the U.S. Treasury yield curve inverted, as yields
of one year and less rose above two-year yields. Yield curve inversions have
preceded many, though not all, U.S. recessions.
Residential mortgage interest rates, which have historically been tied to
the 10-year U.S. Treasury yield, fell during the reporting period overall.
The interest rate on a 15-year residential mortgage started the period at
4.06%, rose to a high of 4.36% in November 2018, and declined to end the
period at 3.46%. The interest rate on a 30-year residential mortgage
increased from 4.56% at the beginning of the period to a high of 4.94%
during November 2018 and dropped to 3.99% by the end of the period. As for
the U.S. housing market, demand was strong at the start of the reporting
period, even as residential mortgage rates climbed. Homebuyers were
incentivized to purchase houses before rates climbed further. By the fall,
the market had softened, as higher mortgage interest rates and home-price
appreciation appeared to keep some buyers on the sidelines. The market
remained weak, even as mortgage rates declined, perhaps due to concerns
about the U.S. economic outlook.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
2 | USAA GOVERNMENT SECURITIES FUND
================================================================================
o HOW DID THE USAA GOVERNMENT SECURITIES FUND (THE "FUND") PERFORM DURING THE
REPORTING PERIOD?
The Fund has four share classes: Fund Shares, Institutional Shares, Adviser
Shares, and R6 Shares. For the reporting period ended May 31, 2019, the Fund
Shares, Institutional Shares, Adviser Shares, and R6 Shares had total
returns of 5.56%, 5.65%, 5.37%, and 5.68%, respectively. This compares to a
total return of 5.38% for the Bloomberg Barclays U.S. Aggregate Government
Intermediate & Mortgage-Backed Securities Index (the Index) and 5.62% for
the Lipper Intermediate U.S. Government Funds Index.
Effective July 1, 2019, Victory Capital serves as the Fund's investment
adviser. Prior to July 1, 2019, AMCO served as the Fund's investment
adviser. The investment adviser provides day-to-day discretionary management
for the Fund's assets.
o HOW DID YOU MANAGE THE FUND DURING THE REPORTING PERIOD?
During the reporting period, the Fund benefited from its holdings of
longer-duration commercial mortgage-backed securities (CMBS), as longer-term
securities outperformed shorter-term securities during the reporting period.
For the same reason, investments in longer-duration municipal bonds added to
returns. The Fund also was helped by its underweight position in mortgage
passthrough securities, which underperformed as market volatility increased
and as prepayments increased due to falling mortgage rates. Additionally,
the Fund's allocation to shorter-duration U.S. Treasury securities detracted
from performance, as did its investments in seasoned higher-coupon shorter-
term Ginnie Mae mortgage-backed securities.
During the reporting period, we continued to diversify the Fund, partly
through purchases of floating-rate asset-backed securities. We also invested
in longer-duration CMBS and municipal bonds as we sought to
Refer to page 5 for benchmark definitions.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
decrease the portfolio' exposure to extension risk. (Extension risk is the
risk that mortgage prepayments will decelerate, causing the average life of
a mortgage to lengthen--or, extend--and become more sensitive to upward
interest rate movement.) In addition, we purchased shorter-duration U.S.
Treasuries to improve the Fund's liquidity.
Thank you for allowing us to help you manage your investments.
While the value of the USAA Government Securities Fund Shares, Institutional
Shares, Adviser Shares, and R6 Shares are not guaranteed by the U.S.
government, the Fund endeavors to maintain low-to-moderate fluctuation of
share price.
Shares of the USAA Government Securities Fund are not individually backed by
the full faith and credit of the U.S. government. o Mortgage-backed
securities have prepayment, extension, credit, and interest rate risks.
Generally, when interest rates decline, prepayments accelerate beyond the
initial pricing assumptions and may cause the average life of the securities
to shorten. Also the market value may decline when interest rates rise
because prepayments decrease beyond the initial pricing assumptions and may
cause the average life of the securities to extend. o As interest rates
rise, existing bond prices generally fall; given the historically low
interest rate environment, risks associated with rising interest rates may
be heightened.
Refer to the Portfolio of Investments for complete list of securities.
================================================================================
4 | USAA GOVERNMENT SECURITIES FUND
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/19 o
------------------------------------------------------------------------------------------------------
SINCE INCEPTION
1 YEAR 5 YEAR 10 YEAR INCEPTION* DATE
------------------------------------------------------------------------------------------------------
Fund Shares 5.56% 1.91% 2.65% - -
Institutional Shares 5.65% - - 2.01% 8/07/15
Adviser Shares 5.37% 1.65% - 1.76% 8/01/10
R6 Shares 5.68% - - 2.55% 12/01/16
Lipper Intermediate U.S.
Government Funds Index**
(reflects no deduction
for taxes) 5.62% 1.92% 2.93% - -
Bloomberg Barclays
U.S. Aggregate Government
Intermediate & Mortgage-
Backed Securities Index***
(reflects no deduction
for fees, expenses, or taxes) 5.38% 2.08% 2.70% - -
*Since inception returns are shown when a share class has less than 10 years of
performance. Total returns for periods of less than one year are not annualized.
**The unmanaged Lipper Intermediate U.S. Government Funds Index is considered
representative of intermediate U.S. government funds.
***The unmanaged Bloomberg Barclays U.S. Aggregate Government Intermediate &
Mortgage-Backed Securities Index consists of intermediate U.S. Treasury and
Agency unsecured notes and securities backed by pools of mortgages issued by
U.S. Government Agencies, GNMA, Fannie Mae, or Freddie Mac.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
usaa.com.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on net investment income and
realized capital gain distributions, including reinvested distributions, or
redemptions of shares.
================================================================================
INVESTMENT OVERVIEW | 5
================================================================================
AVERAGE ANNUAL COMPOUNDED RETURNS WITH REINVESTMENT OF DIVIDENDS - PERIODS ENDED
MAY 31, 2019
-----------------------------------------------------------------------------------------------------
TOTAL RETURN = DIVIDEND RETURN + PRICE CHANGE
-----------------------------------------------------------------------------------------------------
10 YEARS 2.65% = 2.78% + -0.13%
5 YEARS 1.91% = 2.27% + -0.36%
1 YEAR 5.56% = 2.52% + 3.04%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
usaa.com.
ANNUAL TOTAL RETURNS AND COMPOUNDED DIVIDEND RETURNS FOR THE 10-YEAR PERIOD
ENDED MAY 31, 2019
CHANGE IN
TOTAL DIVIDEND SHARE
RETURN RETURN PRICE
5/31/2010 6.15% 3.94% 2.21%
5/31/2011 4.93% 3.85% 1.08%
5/31/2012 4.24% 3.27% 0.97%
5/31/2013 -0.36% 2.72% -3.08%
5/31/2014 2.20% 2.80% -0.60%
5/31/2015 2.78% 2.58% 0.20%
5/31/2016 1.80% 2.20% -0.40%
5/31/2017 0.62% 2.02% -1.40%
5/31/2018 -1.09% 2.05% -3.14%
5/31/2019 5.56% 2.52% 3.04%
NOTE THE ROLE THAT DIVIDEND RETURNS PLAY IN THE FUND SHARES' TOTAL RETURN OVER
TIME. SHARE PRICES AND DIVIDEND RATES WILL VARY FROM PERIOD TO PERIOD. HOWEVER,
DIVIDEND RETURNS GENERALLY ARE MORE CONSISTENT AND LESS VOLATILE THAN SHARE
PRICES.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any.
Dividend return is the net investment income dividends received over the period,
assuming reinvestment of all dividends. Share price change is the change in net
asset value over the period adjusted for realized capital gain distributions.
The returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gain distributions), redemptions of shares, or reinvested net investment
income.
================================================================================
6 | USAA GOVERNMENT SECURITIES FUND
================================================================================
o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
BLOOMBERG BARCLAYS
U.S. AGGREGATE
LIPPER INTERMEDIATE GOVERNMENT INTERMEDIATE
U.S. GOVERNMENT & MORTGAGE-BACKED USAA GOVERNMENT
FUNDS INDEX SECURITIES INDEX SECURITIES FUND SHARES
05/31/09 $10,000.00 $10,000.00 $10,000.00
06/30/09 9,919.39 9,994.70 10,004.00
07/31/09 9,965.89 10,059.35 10,099.00
08/31/09 10,211.48 10,125.06 10,170.00
09/30/09 10,265.27 10,195.30 10,222.00
10/31/09 10,350.60 10,245.65 10,285.00
11/30/09 10,444.28 10,374.26 10,391.00
12/31/09 10,258.62 10,207.73 10,282.00
01/31/10 10,426.13 10,342.12 10,391.00
02/28/10 10,445.36 10,372.59 10,411.00
03/31/10 10,449.83 10,344.44 10,422.00
04/30/10 10,570.87 10,412.31 10,489.00
05/31/10 10,679.51 10,532.35 10,615.00
06/30/10 10,854.25 10,661.08 10,711.00
07/31/10 10,949.28 10,746.40 10,809.00
08/31/10 11,116.65 10,814.85 10,810.00
09/30/10 11,137.63 10,809.99 10,781.00
10/31/10 11,171.61 10,881.43 10,888.00
11/30/10 11,099.83 10,838.67 10,878.00
12/31/10 10,928.40 10,733.98 10,839.00
01/31/11 10,933.50 10,752.66 10,848.00
02/28/11 10,934.77 10,752.79 10,882.00
03/31/11 10,940.82 10,764.91 10,894.00
04/30/11 11,067.01 10,876.91 11,015.00
05/31/11 11,220.17 10,998.06 11,133.00
06/30/11 11,191.50 10,999.29 11,145.00
07/31/11 11,365.29 11,121.93 11,231.00
08/31/11 11,593.38 11,281.27 11,361.00
09/30/11 11,701.93 11,305.27 11,362.00
10/31/11 11,660.11 11,294.98 11,379.00
11/30/11 11,691.72 11,324.15 11,420.00
12/31/11 11,797.07 11,393.43 11,485.00
01/31/12 11,878.44 11,446.16 11,501.00
02/29/12 11,836.97 11,425.48 11,497.00
03/31/12 11,767.21 11,401.00 11,514.00
04/30/12 11,911.63 11,490.54 11,575.00
05/31/12 12,046.37 11,548.55 11,606.00
06/30/12 12,028.69 11,546.71 11,613.00
07/31/12 12,144.70 11,626.24 11,697.00
08/31/12 12,157.25 11,635.20 11,706.00
09/30/12 12,159.64 11,645.35 11,730.00
10/31/12 12,145.72 11,626.43 11,701.00
11/30/12 12,185.14 11,640.63 11,707.00
12/31/12 12,148.67 11,636.41 11,709.00
01/31/13 12,076.27 11,585.84 11,665.00
02/28/13 12,134.24 11,629.66 11,703.00
03/31/13 12,139.42 11,643.20 11,707.00
04/30/13 12,218.84 11,699.18 11,745.00
05/31/13 12,025.46 11,553.72 11,566.00
06/30/13 11,855.39 11,452.77 11,464.00
07/31/13 11,849.70 11,455.51 11,422.00
08/31/13 11,785.89 11,412.60 11,405.00
09/30/13 11,892.90 11,530.85 11,510.00
10/31/13 11,952.85 11,589.93 11,572.00
11/30/13 11,925.93 11,554.65 11,565.00
12/31/13 11,831.57 11,482.66 11,511.00
01/31/14 11,987.55 11,615.88 11,655.00
02/28/14 12,020.40 11,647.27 11,706.00
03/31/14 11,986.03 11,605.38 11,661.00
04/30/14 12,054.64 11,677.23 11,734.00
05/31/14 12,146.57 11,783.47 11,820.00
06/30/14 12,147.73 11,789.60 11,834.00
07/31/14 12,119.44 11,741.54 11,788.00
08/31/14 12,201.48 11,830.94 11,886.00
09/30/14 12,161.38 11,800.39 11,864.00
10/31/14 12,240.50 11,897.58 11,940.00
11/30/14 12,315.63 11,965.77 11,999.00
12/31/14 12,314.28 11,957.43 11,989.00
01/31/15 12,545.84 12,107.06 12,109.00
02/28/15 12,418.32 12,041.43 12,087.00
03/31/15 12,484.51 12,096.33 12,147.00
04/30/15 12,461.47 12,092.65 12,136.00
05/31/15 12,438.77 12,094.74 12,148.00
06/30/15 12,348.33 12,027.20 12,088.00
07/31/15 12,427.81 12,087.99 12,113.00
08/31/15 12,421.79 12,096.26 12,110.00
09/30/15 12,509.74 12,177.58 12,181.00
10/31/15 12,482.69 12,160.17 12,156.00
11/30/15 12,446.41 12,130.89 12,128.00
12/31/15 12,413.91 12,116.59 12,102.00
01/31/16 12,624.59 12,292.78 12,244.00
02/29/16 12,699.34 12,346.73 12,314.00
03/31/16 12,740.91 12,376.11 12,336.00
04/30/16 12,738.53 12,383.42 12,358.00
05/31/16 12,729.79 12,381.19 12,366.00
06/30/16 12,935.25 12,522.20 12,486.00
07/31/16 12,960.34 12,536.47 12,506.00
08/31/16 12,909.98 12,512.57 12,489.00
09/30/16 12,935.89 12,539.96 12,524.00
10/31/16 12,852.16 12,492.43 12,469.00
11/30/16 12,582.17 12,280.62 12,278.00
12/31/16 12,563.73 12,278.74 12,251.00
01/31/17 12,593.18 12,289.94 12,270.00
02/28/17 12,642.02 12,336.24 12,304.00
03/31/17 12,644.02 12,341.17 12,301.00
04/30/17 12,721.16 12,413.21 12,371.00
05/31/17 12,789.50 12,475.16 12,443.00
06/30/17 12,757.07 12,434.44 12,403.00
07/31/17 12,795.73 12,481.75 12,449.00
08/31/17 12,896.93 12,564.80 12,520.00
09/30/17 12,810.78 12,512.67 12,453.00
10/31/17 12,799.22 12,502.41 12,449.00
11/30/17 12,767.85 12,473.62 12,406.00
12/31/17 12,785.27 12,494.28 12,416.00
01/31/18 12,638.57 12,362.51 12,296.00
02/28/18 12,565.64 12,305.36 12,240.00
03/31/18 12,637.51 12,376.16 12,301.00
04/30/18 12,556.39 12,309.33 12,232.00
05/31/18 12,644.68 12,391.84 12,307.00
06/30/18 12,648.84 12,393.88 12,304.00
07/31/18 12,619.97 12,374.79 12,288.00
08/31/18 12,697.41 12,448.96 12,365.00
09/30/18 12,603.46 12,379.73 12,296.00
10/31/18 12,563.85 12,345.57 12,257.00
11/30/18 12,663.85 12,442.33 12,350.00
12/31/18 12,878.36 12,645.82 12,545.00
01/31/19 12,951.80 12,721.00 12,623.00
02/28/19 12,931.44 12,710.94 12,635.00
03/31/19 13,136.83 12,879.63 12,806.00
04/30/19 13,121.24 12,879.40 12,806.00
05/31/19 13,355.93 13,057.77 12,993.00
[END CHART]
Data from 5/31/09 through 5/31/19.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Government Securities Fund to the benchmarks listed above (see page 5 for
benchmark definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes, except
that the Lipper Intermediate U.S. Government Funds Index reflects the fees and
expenses of the underlying funds included in the index.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
o ASSET ALLOCATION - 5/31/19 o
[PIE CHART OF ASSET ALLOCATION]
U.S. GOVERNMENT AGENCY ISSUES 66.4%
U.S. TREASURY SECURITIES 25.3%
ASSET-BACKED SECURITIES 4.0%
MUNICIPAL OBLIGATIONS 3.2%
MONEY MARKET INSTRUMENTS 0.8%
[END CHART]
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.
================================================================================
8 | USAA GOVERNMENT SECURITIES FUND
================================================================================
SHAREHOLDER VOTING RESULTS
--------------------------------------------------------------------------------
On April 18, 2019, a special meeting of shareholders was held to vote on two
proposals relating to the series of the USAA Mutual Funds Trust (Trust).
Shareholders of record on February 8, 2019, were entitled to vote on each
proposal shown below. The proposals were approved by the shareholders.
The following proposals and voting results pertain to one or more series within
the Trust. Votes shown for Proposal 1 are for the Fund, a series of the Trust.
Votes shown for Proposal 2 are for all series of the Trust. The effective date
of the Proposals was July 1, 2019.
PROPOSAL 1
To approve a new Investment Advisory Agreement between the Trust, on behalf of
the Fund, and Victory Capital, an independent investment adviser. The new
Investment Advisory Agreement became effective upon the closing of the
Transaction (as defined and discussed in Note 1 to the Financial Statements)
whereby AMCO was acquired by Victory Holdings, the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
----------------------------------------------------------------------------
FOR AGAINST ABSTAIN
----------------------------------------------------------------------------
90,885,060 2,515,090 1,557,725
PROPOSAL 2
Election of two new trustees to the Trust's Board of Trustees to serve upon the
closing of the Transaction: (1) David C. Brown, to serve as an "interested
trustee" as defined in the Investment Company Act of 1940, as amended (1940
Act); and (2) John C. Walters, to serve as a trustee who is not an "interested
person" as is defined under the 1940 Act ("Independent Trustee").
NUMBER OF SHARES VOTING
-------------------------------------------------------------------------------
TRUSTEES FOR VOTES WITHHELD
-------------------------------------------------------------------------------
David C. Brown 8,299,565,565 820,887,736
John C. Walters 8,317,935,885 802,517,416
================================================================================
SHAREHOLDER VOTING RESULTS | 9
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
May 31, 2019, is provided for information purposes only and should not be used
for reporting to federal or state revenue agencies. Federal tax information for
the calendar year will be reported to you on Form 1099-DIV in January 2020.
With respect to distributions paid, the Fund designates the following amounts
(or, if subsequently determined to be different, the maximum amount allowable)
for the fiscal year ended May 31, 2019:
QUALIFIED INTEREST
INCOME
------------------
$23,383,000
------------------
For the fiscal year ended May 31, 2019, the Fund hereby designates the maximum
amount allowable of its net taxable income as qualified dividends taxed at
individual net capital gain rates.
================================================================================
10 | USAA GOVERNMENT SECURITIES FUND
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA GOVERNMENT SECURITIES FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Government Securities Fund (the "Fund") (one of the funds constituting USAA
Mutual Funds Trust (the "Trust")), including the portfolio of investments, as of
May 31, 2019, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended, the financial highlights for each of the five years in the period
then ended and the related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Fund (one of the funds
constituting USAA Mutual Funds Trust) at May 31, 2019, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and its financial highlights for each of
the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
BASIS FOR OPINION
These financial statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on the Fund's financial statements based
on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and are required to
be independent with respect to the Trust in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Trust is not required to have,
nor were we engaged to perform, an audit of the Trust's internal control over
financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the Trust's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of May 31, 2019, by correspondence with the custodian. Our audits also
included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
/s/ Ernst & Young LLP
We have served as the auditor of one or more Victory Capital investment
companies since 1995.
San Antonio, Texas
July 23, 2019
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 11
================================================================================
PORTFOLIO OF INVESTMENTS
May 31, 2019
----------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------
BONDS (98.9%)
ASSET-BACKED SECURITIES (4.0%)
ASSET BACKED SECURITIES (4.0%)
------------------------------
STUDENT LOAN ABS (4.0%)
$ 2,924 Navient Student Loan Trust
(1 mo. LIBOR + 0.51%) 2.94%(a) 6/25/2031 $ 2,886
1,508 Navient Student Loan Trust
(1 mo. LIBOR + 1.05%)(b) 3.48(a) 6/25/2065 1,517
2,664 Navient Student Loan Trust
(1 mo. LIBOR + 0.75%)(b) 3.18(a) 3/25/2066 2,682
4,357 Navient Student Loan Trust
(1 mo. LIBOR + 0.33%)(b) 2.76(a) 12/27/2067 4,360
5,157 Nelnet Student Loan Trust
(1 mo. LIBOR + 0.60%)(b) 3.03(a) 2/27/2051 5,171
3,292 Nelnet Student Loan Trust
(3 mo. LIBOR + 0.25%) 2.85(a) 6/25/2041 3,067
2,979 PHEAA Student Loan Trust
(3 mo. LIBOR + 1.10%)(b) 3.70(a) 6/25/2038 3,004
7,000 SLC Student Loan Trust
(3 mo. LIBOR + 0.15%) 2.76(a) 12/15/2039 6,674
321 SLM Student Loan Trust
(3 mo. LIBOR + 0.11%) 2.69(a) 10/27/2025 320
4,370 SLM Student Loan Trust
(3 mo. LIBOR + 0.14%) 2.72(a) 10/25/2028 4,350
3,780 SLM Student Loan Trust
(1 mo. LIBOR + 0.65%) 3.08(a) 6/25/2055 3,752
4,732 SLM Student Loan Trust
(3 mo. LIBOR + 0.20%) 2.78(a) 1/25/2070 4,431
1,375 SunTrust Student Loan Trust
(3 mo. LIBOR + 0.27%)(b) 2.85(a) 10/28/2037 1,243
----------
Total Asset Backed Securities 43,457
----------
Total Asset-Backed Securities (cost: $43,493) 43,457
----------
MUNICIPAL OBLIGATIONS (3.2%)
CONNECTICUT (0.5%)
------------------
5,000 State 2.92 8/01/2023 5,066
----------
================================================================================
12 | USAA GOVERNMENT SECURITIES FUND
================================================================================
----------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------
KANSAS (0.3%)
-------------
$ 3,000 Dev. Finance Auth. 3.94% 4/15/2026 $ 3,249
----------
NEW YORK (1.3%)
---------------
9,530 City of New York Transitional Finance
Auth. Future Tax Secured Revenue 2.85 8/01/2024 9,713
5,000 Port Authority of New York & New Jersey 2.53 10/15/2020 5,020
----------
14,733
----------
TEXAS (1.1%)
------------
1,530 City of Houston Combined Utility System Revenue 3.72 11/15/2028 1,653
3,000 City of Houston Combined Utility System Revenue 3.82 11/15/2029 3,240
3,000 State 2.83 10/01/2025 3,067
4,000 State 3.01 10/01/2026 4,112
----------
12,072
----------
Total Municipal Obligations (cost: $33,869) 35,120
----------
U.S. GOVERNMENT AGENCY ISSUES (66.4%)(c)
GOVERNMENT (1.7%)
-----------------
SOVEREIGN (1.7%)
18,000 Fannie Mae(+) 2.13 4/24/2026 17,958
----------
MORTGAGE SECURITIES (64.7%)
---------------------------
AGENCY COLLATERAL CMO (1.2%)
3,333 Fannie Mae(+) 1.50 7/25/2027 3,253
1,587 Fannie Mae(+) 1.38 9/25/2027 1,538
1,235 Fannie Mae(+) 1.50 9/25/2027 1,189
1,289 Fannie Mae(+) 1.50 9/25/2027 1,249
1,428 Fannie Mae(+) 1.50 10/25/2027 1,379
1,452 Fannie Mae(+) (1 mo. LIBOR + 0.30%) 2.73(a) 4/25/2035 1,448
1,023 Fannie Mae(+) (1 mo. LIBOR + 0.30%) 2.73(a) 8/25/2037 1,022
1,926 Freddie Mac(+) 2.00 9/15/2026 1,899
----------
12,977
----------
AGENCY COLLATERAL PAC CMO (0.2%)
847 Freddie Mac(+) (1 mo. LIBOR + 0.30%) 2.74(a) 3/15/2036 844
1,316 Freddie Mac(+) (1 mo. LIBOR + 0.55%) 2.99(a) 10/15/2041 1,326
----------
2,170
----------
COMMERCIAL MBS (35.6%)
91 Fannie Mae(+) 1.65 9/25/2019 90
1,479 Fannie Mae(+) 3.22(d) 7/25/2023 1,524
5,000 Fannie Mae(+) 2.16 10/25/2023 4,978
2,356 Fannie Mae(+) 2.71(d) 6/25/2025 2,391
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
----------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------
$ 1,603 Fannie Mae(+) 2.42%(d) 9/25/2026 $ 1,614
4,000 Fannie Mae(+) 3.06(d) 5/25/2027 4,144
6,250 Fannie Mae(+) 3.08(d) 6/25/2027 6,491
2,842 Fannie Mae(+) 3.04(d) 3/25/2028 2,931
8,049 Fannie Mae(+) 3.38(d) 7/25/2028 8,514
2,892 Freddie Mac(+) 4.08(d) 11/25/2020 2,945
4,941 Freddie Mac(+) 2.86 1/25/2021 4,971
2,250 Freddie Mac(+) 2.27 3/25/2022 2,258
2,234 Freddie Mac(+) 1.69 4/25/2022 2,215
4,000 Freddie Mac(+) 2.72 6/25/2022 4,052
3,000 Freddie Mac(+) 2.36 7/25/2022 3,012
10,000 Freddie Mac(+) 2.31 8/25/2022 10,029
5,000 Freddie Mac(+) 2.51 11/25/2022 5,050
5,000 Freddie Mac(+) 2.64 1/25/2023 5,072
3,000 Freddie Mac(+) 3.32 2/25/2023 3,114
3,000 Freddie Mac(+) 2.41 3/25/2023 3,015
5,000 Freddie Mac(+) 3.00 1/25/2024 5,145
10,030 Freddie Mac(+) 3.49 1/25/2024 10,541
3,000 Freddie Mac(+) 3.39 3/25/2024 3,142
20,000 Freddie Mac(+) 2.95 7/25/2024 20,548
3,210 Freddie Mac(+) 2.60 1/25/2025 3,243
3,000 Freddie Mac(+) 3.02 1/25/2025 3,100
5,000 Freddie Mac(+) 3.59 1/25/2025 5,301
10,000 Freddie Mac(+) 3.28(d) 6/25/2025 10,472
4,433 Freddie Mac(+) 2.20 7/25/2025 4,409
4,000 Freddie Mac(+) 3.01 7/25/2025 4,129
30,000 Freddie Mac(+) 3.37 7/25/2025 31,242
15,000 Freddie Mac(+) 3.75 8/25/2025 16,063
20,000 Freddie Mac(+) 3.31 9/25/2025 20,997
5,000 Freddie Mac(+) 3.75 9/25/2025 5,337
7,709 Freddie Mac(+) 2.85 3/25/2026 7,797
5,000 Freddie Mac(+) 2.53 5/25/2026 5,017
17,000 Freddie Mac(+) 2.57 7/25/2026 17,081
5,000 Freddie Mac(+) 2.65 8/25/2026 5,046
2,333 Freddie Mac(+) 3.01 8/25/2026 2,394
4,500 Freddie Mac(+) 3.12(d) 9/25/2026 4,685
4,000 Freddie Mac(+) 3.35(d) 11/25/2026 4,217
3,000 Freddie Mac(+) 3.12 6/25/2027 3,124
9,274 Freddie Mac(+) 3.19 7/25/2027 9,694
2,879 Freddie Mac(+) 3.19(d) 9/25/2027 3,007
5,000 Freddie Mac(+) 3.29 11/25/2027 5,265
7,000 Freddie Mac(+) 3.90 4/25/2028 7,693
30,000 Freddie Mac(+) 3.93(d) 7/25/2028 33,126
================================================================================
14 | USAA GOVERNMENT SECURITIES FUND
================================================================================
----------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------
$ 13,000 Freddie Mac(+) 3.90%(d) 8/25/2028 $ 14,303
5,000 Freddie Mac(+) 3.92(d) 9/25/2028 5,519
10,000 Freddie Mac(+) 3.78(d) 10/25/2028 10,905
9,706 Freddie Mac(+) 4.06(d) 10/25/2028 10,810
12,500 Freddie Mac(+) 3.85 6/25/2051 13,713
----------
385,475
----------
FGLMC COLLATERAL (11.2%)
41 Freddie Mac(+) 5.00 1/01/2021 42
5,526 Freddie Mac(+) 3.00 3/01/2032 5,613
8,103 Freddie Mac(+) 3.00 2/01/2033 8,227
7,075 Freddie Mac(+) 3.00 9/01/2033 7,183
10,066 Freddie Mac(+) 3.00 10/01/2033 10,219
22,606 Freddie Mac(+) 3.50 10/01/2033 23,254
13,308 Freddie Mac(+) 4.00 10/01/2033 13,763
508 Freddie Mac(+) 5.50 12/01/2035 560
1,423 Freddie Mac(+) 4.00 9/01/2040 1,483
5,456 Freddie Mac(+) 3.50 5/01/2042 5,611
4,511 Freddie Mac(+) 3.00 6/01/2042 4,556
18,422 Freddie Mac(+) 4.00 7/01/2048 19,095
9,427 Freddie Mac(+) 3.50 8/01/2048 9,639
4,626 Freddie Mac(+) 4.00 8/01/2048 4,785
7,116 Freddie Mac(+) 4.50 9/01/2048 7,439
----------
121,469
----------
FNMA COLLATERAL (4.7%)
9,417 Fannie Mae(+) 1.58 1/01/2020 9,354
10,000 Fannie Mae(+) 2.63 9/01/2021 10,078
20,420 Fannie Mae(+) 2.42 11/01/2022 20,643
8,265 Fannie Mae(+) 2.50 4/01/2023 8,398
2,114 Fannie Mae(+) 2.54 5/01/2023 2,151
----------
50,624
----------
GNMA COLLATERAL (4.8%)
6 Government National Mortgage Assn. I 8.50 6/15/2021 6
3 Government National Mortgage Assn. I 9.00 7/15/2021 3
210 Government National Mortgage Assn. I 6.00 8/15/2022 215
23 Government National Mortgage Assn. I 8.00 6/15/2023 25
414 Government National Mortgage Assn. I 4.50 5/15/2024 425
462 Government National Mortgage Assn. I 4.50 9/15/2024 475
356 Government National Mortgage Assn. I 4.50 9/15/2024 366
494 Government National Mortgage Assn. I 4.50 10/15/2024 508
427 Government National Mortgage Assn. I 4.50 10/15/2024 439
116 Government National Mortgage Assn. I 7.00 5/15/2027 130
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
----------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------
$ 104 Government National Mortgage Assn. I 8.00% 5/15/2027 $ 110
69 Government National Mortgage Assn. I 7.50 2/15/2028 77
227 Government National Mortgage Assn. I 6.00 4/15/2028 253
82 Government National Mortgage Assn. I 6.50 5/15/2028 90
21 Government National Mortgage Assn. I 6.50 5/15/2028 23
8 Government National Mortgage Assn. I 6.75 5/15/2028 9
49 Government National Mortgage Assn. I 6.50 7/15/2028 55
12 Government National Mortgage Assn. I 7.00 7/15/2028 12
26 Government National Mortgage Assn. I 7.00 8/15/2028 29
44 Government National Mortgage Assn. I 6.50 9/15/2028 49
65 Government National Mortgage Assn. I 7.00 9/15/2028 70
30 Government National Mortgage Assn. I 6.00 11/15/2028 32
123 Government National Mortgage Assn. I 6.50 11/15/2028 134
7 Government National Mortgage Assn. I 6.50 1/15/2029 7
22 Government National Mortgage Assn. I 6.50 1/15/2029 24
127 Government National Mortgage Assn. I 6.00 2/15/2029 138
15 Government National Mortgage Assn. I 7.50 3/15/2029 17
33 Government National Mortgage Assn. I 7.50 4/15/2029 36
291 Government National Mortgage Assn. I 7.00 5/15/2029 322
327 Government National Mortgage Assn. I 7.00 6/15/2029 362
131 Government National Mortgage Assn. I 6.00 7/15/2029 146
86 Government National Mortgage Assn. I 7.50 10/15/2029 97
18 Government National Mortgage Assn. I 7.50 10/15/2029 19
68 Government National Mortgage Assn. I 8.00 7/15/2030 70
22 Government National Mortgage Assn. I 8.00 9/15/2030 25
2 Government National Mortgage Assn. I 7.50 12/15/2030 2
9 Government National Mortgage Assn. I 7.50 1/15/2031 10
110 Government National Mortgage Assn. I 6.50 3/15/2031 120
28 Government National Mortgage Assn. I 7.00 8/15/2031 28
62 Government National Mortgage Assn. I 7.00 9/15/2031 72
205 Government National Mortgage Assn. I 6.50 10/15/2031 225
44 Government National Mortgage Assn. I 7.00 10/15/2031 48
19 Government National Mortgage Assn. I 7.50 11/15/2031 20
150 Government National Mortgage Assn. I 6.50 1/15/2032 164
230 Government National Mortgage Assn. I 6.00 5/15/2032 252
18 Government National Mortgage Assn. I 7.00 6/15/2032 19
86 Government National Mortgage Assn. I 7.00 7/15/2032 94
204 Government National Mortgage Assn. I 6.50 8/15/2032 227
747 Government National Mortgage Assn. I 6.50 9/15/2032 871
725 Government National Mortgage Assn. I 6.00 1/15/2033 820
316 Government National Mortgage Assn. I 6.00 2/15/2033 358
218 Government National Mortgage Assn. I 6.00 7/15/2033 238
220 Government National Mortgage Assn. I 6.00 9/15/2033 244
================================================================================
16 | USAA GOVERNMENT SECURITIES FUND
================================================================================
----------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------
$ 1,928 Government National Mortgage Assn. I 5.50% 10/15/2033 $ 2,133
850 Government National Mortgage Assn. I 5.50 12/15/2033 940
483 Government National Mortgage Assn. I 5.50 7/15/2034 534
1,207 Government National Mortgage Assn. I 5.50 10/15/2035 1,336
252 Government National Mortgage Assn. I 6.00 3/15/2037 281
168 Government National Mortgage Assn. I 6.00 9/15/2037 183
488 Government National Mortgage Assn. I 5.50 3/15/2038 540
1,039 Government National Mortgage Assn. I 5.50 4/15/2038 1,138
308 Government National Mortgage Assn. I 6.00 5/15/2038 338
483 Government National Mortgage Assn. I 6.00 5/15/2038 536
320 Government National Mortgage Assn. I 6.00 9/15/2038 357
355 Government National Mortgage Assn. I 6.00 10/15/2038 394
515 Government National Mortgage Assn. I 6.00 12/15/2038 573
325 Government National Mortgage Assn. I 5.00 2/15/2039 347
1,899 Government National Mortgage Assn. I 5.50 6/15/2039 2,091
3,154 Government National Mortgage Assn. I 4.50 9/15/2039 3,369
2,184 Government National Mortgage Assn. I 4.50 11/15/2039 2,335
3,365 Government National Mortgage Assn. I 4.50 12/15/2039 3,599
9,712 Government National Mortgage Assn. I 4.50 2/15/2040 10,382
2,007 Government National Mortgage Assn. I 4.50 3/15/2040 2,139
1,182 Government National Mortgage Assn. I 4.50 6/15/2040 1,262
709 Government National Mortgage Assn. I 4.00 7/15/2040 744
1,736 Government National Mortgage Assn. I 4.50 7/15/2040 1,851
1,089 Government National Mortgage Assn. I 4.00 8/15/2040 1,143
2,566 Government National Mortgage Assn. I 4.00 9/15/2040 2,693
2,082 Government National Mortgage Assn. I 4.50 1/15/2041 2,220
----------
52,068
----------
GNMA2 COLLATERAL (2.6%)
7 Government National Mortgage Assn. II 8.00 12/20/2022 7
1,085 Government National Mortgage Assn. II 4.50 4/20/2024 1,131
213 Government National Mortgage Assn. II 8.00 8/20/2030 255
237 Government National Mortgage Assn. II 7.00 9/20/2030 276
121 Government National Mortgage Assn. II 6.00 3/20/2031 134
48 Government National Mortgage Assn. II 7.50 4/20/2031 57
76 Government National Mortgage Assn. II 6.50 5/20/2031 89
56 Government National Mortgage Assn. II 6.50 7/20/2031 64
146 Government National Mortgage Assn. II 6.50 8/20/2031 166
212 Government National Mortgage Assn. II 6.50 4/20/2032 248
221 Government National Mortgage Assn. II 6.50 6/20/2032 257
322 Government National Mortgage Assn. II 6.00 8/20/2032 364
289 Government National Mortgage Assn. II 6.00 9/20/2032 329
273 Government National Mortgage Assn. II 5.50 4/20/2033 299
917 Government National Mortgage Assn. II 5.00 5/20/2033 982
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
----------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------
$ 1,107 Government National Mortgage Assn. II 5.00% 7/20/2033 $ 1,185
298 Government National Mortgage Assn. II 6.00 10/20/2033 339
246 Government National Mortgage Assn. II 6.00 12/20/2033 265
968 Government National Mortgage Assn. II 6.00 2/20/2034 1,103
929 Government National Mortgage Assn. II 5.50 3/20/2034 1,019
853 Government National Mortgage Assn. II 6.00 3/20/2034 970
732 Government National Mortgage Assn. II 5.00 6/20/2034 786
670 Government National Mortgage Assn. II 6.50 8/20/2034 782
586 Government National Mortgage Assn. II 6.00 9/20/2034 668
1,612 Government National Mortgage Assn. II 6.00 10/20/2034 1,834
127 Government National Mortgage Assn. II 6.00 11/20/2034 137
3,274 Government National Mortgage Assn. II 5.50 2/20/2035 3,592
2,871 Government National Mortgage Assn. II 5.50 4/20/2035 3,149
1,362 Government National Mortgage Assn. II 5.50 7/20/2035 1,508
1,695 Government National Mortgage Assn. II 5.00 9/20/2035 1,815
558 Government National Mortgage Assn. II 6.00 5/20/2036 631
579 Government National Mortgage Assn. II 5.50 1/20/2037 635
361 Government National Mortgage Assn. II 5.00 2/20/2037 386
2,019 Government National Mortgage Assn. II 4.00 11/20/2040 2,117
----------
27,579
----------
UMBS COLLATERAL (4.4%)(e)
552 Fannie Mae(+) 3.50 5/01/2021 568
3,497 Fannie Mae(+) 3.00 2/01/2027 3,561
2,131 Fannie Mae(+) 3.00 2/01/2027 2,170
760 Fannie Mae(+) 5.00 12/01/2035 816
234 Fannie Mae(+) 5.50 11/01/2037 255
359 Fannie Mae(+) 6.00 5/01/2038 401
1,933 Fannie Mae(+) 4.00 8/01/2039 2,012
3,460 Fannie Mae(+) 3.50 1/01/2042 3,556
5,411 Fannie Mae(+) 3.50 5/01/2042 5,562
4,627 Fannie Mae(+) 3.00 1/01/2048 4,647
9,322 Fannie Mae(+) 3.50 2/01/2048 9,534
9,366 Fannie Mae(+) 4.00 5/01/2048 9,711
4,760 Fannie Mae(+) 3.00 8/01/2048 4,781
----------
47,574
----------
Total Mortgage Securities 699,936
----------
Total U.S. Government Agency Issues (cost: $694,007) 717,894
----------
================================================================================
18 | USAA GOVERNMENT SECURITIES FUND
================================================================================
----------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------------------
U.S. TREASURY SECURITIES (25.3%)
NOTES (25.3%)
$ 6,000 U.S. Treasury Note 1.13% 2/28/2021 $ 5,910
8,500 U.S. Treasury Note 1.38 1/15/2020 8,451
5,000 U.S. Treasury Note 1.38 6/30/2023 4,892
10,000 U.S. Treasury Note 1.50 8/15/2020 9,924
20,000 U.S. Treasury Note 1.63 8/31/2022 19,827
10,000 U.S. Treasury Note 1.88 7/31/2022 9,992
20,000 U.S. Treasury Note 1.88 8/31/2024 19,925
3,000 U.S. Treasury Note 2.00 2/15/2022 3,008
11,000 U.S. Treasury Note 2.00 11/30/2022 11,033
20,000 U.S. Treasury Note 2.00 6/30/2024 20,049
4,000 U.S. Treasury Note 2.00 2/15/2025 4,004
3,000 U.S. Treasury Note 2.13 6/30/2021 3,012
20,000 U.S. Treasury Note 2.13 6/30/2022 20,134
5,000 U.S. Treasury Note 2.13 11/30/2023 5,040
4,000 U.S. Treasury Note 2.13 11/30/2024 4,033
4,500 U.S. Treasury Note 2.13 5/15/2025 4,532
5,000 U.S. Treasury Note 2.25 11/15/2024 5,071
6,000 U.S. Treasury Note 2.38 4/30/2020 6,005
5,000 U.S. Treasury Note 2.63 8/31/2020 5,029
20,000 U.S. Treasury Note 2.63 6/15/2021 20,277
15,000 U.S. Treasury Note 2.63 7/15/2021 15,213
12,000 U.S. Treasury Note 2.75 11/30/2020 12,122
10,000 U.S. Treasury Note 2.75 8/15/2021 10,175
35,000 U.S. Treasury Note 2.75 9/15/2021 35,658
10,000 U.S. Treasury Note 2.88 11/15/2021 10,227
----------
Total U.S. Treasury Securities (cost: $270,958) 273,543
----------
Total Bonds (cost: $1,042,327) 1,070,014
----------
MONEY MARKET INSTRUMENTS (0.8%)
REPURCHASE AGREEMENTS (0.6%)
5,746 Credit Agricole Corp., 2.47%, acquired 5/31/2019 and due on
6/03/2019 at $5,746 (collateralized by $320 of Fannie Mae, 4.00%,
due on 1/01/2049; $5,509 of Freddie Mac, 3.50% - 5.00%, due on
9/01/2033 - 5/01/2049; combined market value $5,861)(c)
(cost: $5,746) 5,746
----------
U.S. TREASURY SECURITIES (0.2%)
BILLS (0.2%)(G)
2,500 U.S. Treasury Bill (cost: $2,496) 2.41% 6/27/2019 2,496
----------
Total Money Market Instruments (cost: $8,242) 8,242
----------
TOTAL INVESTMENTS (COST: $1,050,569) $1,078,256
==========
================================================================================
PORTFOLIO OF INVESTMENTS | 19
================================================================================
----------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
----------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
----------------------------------------------------------------------------------------------------------
Bonds:
Asset-Backed Securities $ - $ 43,457 $- $ 43,457
Municipal Obligations - 35,120 - 35,120
U.S. Government Agency Issues - 717,894 - 717,894
U.S. Treasury Securities 273,543 - - 273,543
Money Market Instruments:
Repurchase Agreements - 5,746 - 5,746
U.S. Treasury Securities - 2,496 - 2,496
----------------------------------------------------------------------------------------------------------
Total $273,543 $804,713 $- $1,078,256
----------------------------------------------------------------------------------------------------------
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 May 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
20 | USAA GOVERNMENT SECURITIES FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 2019
--------------------------------------------------------------------------------
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 CATEGORIES AND DEFINITIONS
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
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
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 21
================================================================================
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.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
LIBOR London Interbank Offered Rate
o SPECIFIC NOTES
(a) Variable-rate security - interest rate is adjusted periodically. The
interest rate disclosed represents the rate at May 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) 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
================================================================================
22 | USAA GOVERNMENT SECURITIES FUND
================================================================================
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.
(d) Stated interest rates may change slightly over time as underlying
mortgages paydown.
(e) Effective June 3, 2019, UMBS Collateral, new BICS industry, replaces
FNMA Collateral, former BICS industry.
(f) Rate represents the money market fund annualized seven-day yield at
May 31, 2019.
(g) Rate represents an annualized yield at time of purchase, not coupon
rate.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 23
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $1,050,569) $1,078,256
Receivables:
Capital shares sold 230
USAA Asset Management Company (Note 7) 7
USAA Transfer Agency Company (Note 7) 84
Interest 3,819
----------
Total assets 1,082,396
----------
LIABILITIES
Payables:
Capital shares redeemed 266
Dividends on capital shares 27
Accrued management fees 113
Accrued transfer agent's fees 8
Other accrued expenses and payables 159
----------
Total liabilities 573
----------
Net assets applicable to capital shares outstanding $1,081,823
==========
NET ASSETS CONSIST OF:
Paid-in capital $1,056,266
Distributable earnings 25,557
----------
Net assets applicable to capital shares outstanding $1,081,823
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $328,123/33,335 capital shares
outstanding, no par value) $ 9.84
==========
Institutional Shares (net assets of $742,233/75,391 capital shares
outstanding, no par value) $ 9.85
==========
Adviser Shares (net assets of $5,042/512 capital shares
outstanding, no par value) $ 9.84
==========
R6 Shares (net assets of $6,425/653 capital shares
outstanding, no par value) $ 9.84
==========
See accompanying notes to financial statements.
================================================================================
24 | USAA GOVERNMENT SECURITIES FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income $ 27,097
--------
EXPENSES
Management fees 1,218
Administration and servicing fees:
Fund Shares 484
Institutional Shares 595
Adviser Shares 7
R6 Shares 3
Transfer agent's fees:
Fund Shares 423
Institutional Shares 595
R6 Shares 1
Distribution and service fees (Note 7):
Adviser Shares 12
Custody and accounting fees:
Fund Shares 72
Institutional Shares 128
Adviser Shares 1
R6 Shares 1
Postage:
Fund Shares 22
Institutional Shares 1
Shareholder reporting fees:
Fund Shares 22
Institutional Shares 1
Trustees' fees 38
Registration fees:
Fund Shares 16
Institutional Shares 65
Adviser Shares 15
R6 Shares 17
================================================================================
FINANCIAL STATEMENTS | 25
================================================================================
Professional fees $ 85
Other 20
--------
Total expenses 3,842
--------
Expenses reimbursed:
Adviser Shares (6)
R6 Shares (10)
--------
Net expenses 3,826
--------
NET INVESTMENT INCOME 23,271
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss (457)
Change in net unrealized appreciation/(depreciation) 35,278
--------
Net realized and unrealized gain 34,821
--------
Increase in net assets resulting from operations $ 58,092
========
See accompanying notes to financial statements.
================================================================================
26 | USAA GOVERNMENT SECURITIES FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
----------------------------------------------------------------------------------------
2019 2018
----------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 23,271 $ 12,550
Net realized loss on investments (457) (137)
Change in net unrealized appreciation/(depreciation)
of investments 35,278 (19,469)
----------------------
Increase (decrease) in net assets resulting from operations 58,092 (7,056)
----------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS
Fund Shares (7,783) (7,636)
Institutional Shares (15,121) (4,719)
Adviser Shares (103) (98)
R6 Shares (158) (131)
----------------------
Distributions to shareholders (23,165) (12,584)
----------------------
NET INCREASE IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 6)
Fund Shares (14,972) (45,928)
Institutional Shares 465,978 125,461
Adviser Shares 89 (1,119)
R6 Shares (110) 1,516
----------------------
Total net increase in net assets from
capital share transactions 450,985 79,930
----------------------
Capital contribution from USAA Transfer
Agency Company (Note 7):
Fund Shares 1 -
Net increase in net assets 485,913 60,290
NET ASSETS
Beginning of year 595,910 535,620
----------------------
End of year $1,081,823 $595,910
======================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 27
================================================================================
NOTES TO FINANCIAL STATEMENTS
May 31, 2019
--------------------------------------------------------------------------------
(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 Government Securities Fund (the Fund) qualifies as a registered
investment company under Accounting Standards Codification Topic 946. The
information presented in this annual report pertains only to the Fund, which is
classified as diversified under the 1940 Act. The Fund's investment objective is
to provide investors a high level of current income consistent with preservation
of principal.
The Fund consists of four classes of shares: Government Securities Fund Shares
(Fund Shares), Government Securities Fund Institutional Shares (Institutional
Shares), Government Securities Fund Adviser Shares (Adviser Shares), and
Government Securities 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
================================================================================
28 | USAA GOVERNMENT SECURITIES FUND
================================================================================
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 Holdings, a global investment management firm
headquartered in Cleveland, Ohio (the Transaction), on July 1, 2019.
A special shareholder meeting was held on April 18, 2019, at which shareholders
of the Fund approved a new investment advisory agreement between the Trust, on
behalf of the Fund, and Victory Capital Management, Inc. (Victory Capital), an
independent investment management company. In addition, shareholders of the Fund
also elected the following two new directors to the Board of the Trust to serve
upon the closing of the Transaction: (1) David C. Brown, to serve as an
Interested Trustee; and (2) John C. Walters, to serve as an Independent Trustee.
PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS
ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
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 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. 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.
3. Repurchase agreements are valued at cost.
4. 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.
================================================================================
30 | USAA GOVERNMENT SECURITIES FUND
================================================================================
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.
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 | 31
================================================================================
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 year ended May 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. 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 May 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.
================================================================================
32 | USAA GOVERNMENT SECURITIES FUND
================================================================================
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. The purchase of securities on a delayed-delivery or
when-issued basis may increase the volatility of the Fund's NAV to the
extent that the Fund makes such purchases while remaining substantially
fully invested.
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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 33
================================================================================
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 year ended May 31, 2019, the Fund paid CAPCO facility fees of $7,000,
which represents 1.1% of the total fees paid to CAPCO by the funds of the
Trusts. The Fund had no borrowings under this agreement during the year ended
May 31, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL
STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
(3) DISTRIBUTIONS
The character of any distributions made during the year from net investment
income or net realized gains is determined in accordance with federal tax
regulations and may differ from those determined in accordance with U.S.
generally accepted accounting principles. Also, due to the timing of
distributions, the fiscal year in which amounts are distributed may differ from
the year that the income or realized gains were recorded by the Fund.
The tax character of distributions paid during the years ended May 31, 2019, and
2018, was as follows:
2019 2018
---------------------------------------
Ordinary income* $23,165,000 $12,584,000
As of May 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 174,000
Accumulated capital and other losses (2,278,000)
Unrealized appreciation of investments 27,688,000
*Includes short-term realized capital gains, if any, which are taxable as
ordinary income.
================================================================================
34 | USAA GOVERNMENT SECURITIES 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 May 31, 2019, the Fund had net capital loss carryforwards of $2,278,000, for
federal income tax purposes as shown in the table below. It is unlikely that the
Board will authorize a distribution of capital gains realized in the future
until the capital loss carryforwards have been used.
CAPITAL LOSS CARRYFORWARDS
--------------------------------------------
TAX CHARACTER
--------------------------------------------
(NO EXPIRATION) BALANCE
--------------- ----------
Short-Term $1,533,000
Long-Term 745,000
----------
Total $2,278,000
==========
TAX BASIS OF INVESTMENTS - At May 31, 2019, the aggregate cost of investments
for federal income tax purposes and net unrealized appreciation/(depreciation)
on investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION /
FUND TAX COST APPRECIATION DEPRECIATION (DEPRECIATION)
--------------------------------------------------------------------------------------
USAA Government
Securities Fund $1,050,569,000 $29,370,000 $(1,682,000) $27,688,000
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended May 31, 2019, were $508,991,000 and
$84,828,000, 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 | 35
================================================================================
including short-term securities, during the year ended May 31, 2019 were as
follows:
PURCHASES SALES NET REALIZED GAIN (LOSS)
------------------------------------------------------------------------------------
$20,004,000 $- $-
(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 May 31, 2019,
the Fund had no securities on loan.
(6) CAPITAL SHARE TRANSACTIONS
At May 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
================================================================================
36 | USAA GOVERNMENT SECURITIES 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:
YEAR ENDED YEAR ENDED
MAY 31, 2019 MAY 31, 2018
--------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------
FUND SHARES:
Shares sold 3,829 $ 36,701 3,616 $ 35,139
Shares issued from reinvested dividends 751 7,207 720 6,989
Shares redeemed (6,159) (58,880) (9,079) (88,056)
--------------------------------------------
Net decrease from capital
share transactions (1,579) $(14,972) (4,743) $(45,928)
============================================
INSTITUTIONAL SHARES:
Shares sold 49,953 $474,117 13,094 $128,756
Shares issued from reinvested dividends 1,582 15,202 488 4,719
Shares redeemed (2,450) (23,341) (829) (8,014)
--------------------------------------------
Net increase from capital
share transactions 49,085 $465,978 12,753 $125,461
============================================
ADVISER SHARES:
Shares sold 11 $ 110 7 $ 69
Shares issued from reinvested dividends -** 3 1 11
Shares redeemed (2) (24) (123)* (1,199)*
--------------------------------------------
Net increase (decrease) from capital
share transactions 9 $ 89 (115) $ (1,119)
============================================
R6 SHARES:
Shares sold 15 $ 147 458 $ 4,422
Shares issued from reinvested dividends 4 35 2 21
Shares redeemed (31) (292) (305) (2,927)
--------------------------------------------
Net increase (decrease) from capital
share transactions (12) $ (110) 155 $ 1,516
============================================
* Net of redemption fees, if any.
** Represents less than 500 shares.
(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,
================================================================================
NOTES TO FINANCIAL STATEMENTS | 37
================================================================================
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 year ended May 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 0.125% 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 Intermediate U.S. Government Funds Index. The Lipper
Intermediate U.S. Government Funds Index measures the total return performance
of funds tracked by Lipper that invest 65% of fund assets in securities issued
or guaranteed by the U.S. government, its agency, or its instrumentalities, with
dollar-weighted average maturities of five to ten years. 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 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.
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).
================================================================================
38 | USAA GOVERNMENT SECURITIES FUND
================================================================================
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 Intermediate U.S. Government Funds Index over that
period, even if the class had overall negative returns during the performance
period.
For the year ended May 31, 2019, the Fund incurred management fees, paid or
payable to the Manager, of $1,218,000, which included a performance adjustment
for the Fund Shares, Institutional Shares, Adviser Shares, and R6 Shares of
$23,000, $35,000, $(1,000) and less than $500, respectively. For the Fund
Shares, Institutional Shares, Adviser Shares, and R6 Share, the performance
adjustments were 0.01%, 0.01%, (0.03)% and less than 0.01%, respectively. PLEASE
REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL
REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
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 year ended May 31, 2019, the Fund Shares, Institutional
Shares, Adviser Shares, and R6 Shares incurred administration and servicing
fees, paid or payable to the Manager, of $484,000, $595,000, $7,000, and $3,000,
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 year ended
May 31, 2019, the Fund reimbursed the Manager $4,000 for these compliance and
legal services. These expenses are included in the professional fees on the
Fund's Statement of Operations. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 39
================================================================================
EXPENSE LIMITATION - The Manager agreed, through September 30, 2019, to limit
the total annual operating expenses of the Adviser Shares and R6 Shares to 0.75%
and 0.35%, 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 September 30, 2019, without approval of the Board, and may be
changed or terminated by the Manager at any time after that date. For the year
ended May 31, 2019, the Fund incurred reimbursable expenses from the Manager for
the Adviser Shares and R6 Shares of $6,000, and $10,000, 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 year
ended May 31, 2019, the Fund Shares, Institutional Shares, Adviser Shares, and
R6 Shares incurred transfer agent's fees, paid or payable to SAS, of $423,000,
$595,000, less than $500, and $1,000, respectively. Additionally, the Fund
Shares, Adviser Shares, and R6 Shares recorded a capital contribution and a
receivable from SAS of $1,000, less than $500, and less than $500, respectively
at May 31, 2019, for adjustments related to corrections to certain shareholder
transactions. Additionally, the Institutional Shares recorded a receivable of
$84,000 for SAS adjustments to income distribution payable. PLEASE REFER TO THE
SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR
ADDITIONAL IMPORTANT INFORMATION.
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
================================================================================
40 | USAA GOVERNMENT SECURITIES FUND
================================================================================
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 year ended
May 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. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE
TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
(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 May 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 3.6
Target Retirement Income 9.6
Target Retirement 2020 13.5
Target Retirement 2030 20.3
Target Retirement 2040 13.2
Target Retirement 2050 6.3
Target Retirement 2060 0.8
The Manager is indirectly wholly owned by USAA, a large, diversified financial
services institution. At May 31, 2019, USAA and its affiliates owned 487,000
Adviser Shares and 510,000 R6 Shares, which represents 95.0% of the Adviser
Shares outstanding, 78.1% of the R6 Shares outstanding, and 0.9% of the Fund's
total outstanding shares.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 41
================================================================================
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. PLEASE REFER TO THE SUBSEQUENT EVENT
NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
(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.
(10) RECENT ACCOUNTING PRONOUNCEMENTS
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
================================================================================
42 | USAA GOVERNMENT SECURITIES FUND
================================================================================
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 FASB issued 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 significant impact on the
financial statements and reporting disclosures of the Fund.
(11) SUBSEQUENT EVENT NOTE
As previously announced, and as discussed in Note 1 to the Financial Statements,
effective July 1, 2019, AMCO, the prior investment adviser to the Fund, and SAS,
the prior transfer agent to the Fund, were acquired by Victory Holdings. PLEASE
SEE THE SUPPLEMENT DATED JULY 1, 2019 TO THE FUND'S PROSPECTUS FOR ADDITIONAL
IMPORTANT INFORMATION.
Effective July 1, 2019, Victory Capital is the new investment adviser and
administrator to the USAA Mutual Funds; SAS was renamed Victory Capital Transfer
Agency, Inc. Victory Capital Advisers, Inc. is the new distributor to the USAA
Mutual Funds; Citi Fund Services of Ohio, Inc. serves as sub-administrator and
sub-fund accountant for the USAA Mutual Funds; and FIS Investor Services LLC
serve as sub-transfer agent and dividend disbursing agent for the USAA Mutual
Funds. Effective August 5, 2019, Citibank, N.A. is the new custodian for the
USAA Mutual Funds.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2019 permitting the
use of a "manager-of-managers" structure for certain funds. Prior to that date,
the Trust relied on a similar exemptive order granted by the SEC to the Trust
and its affiliated persons. Under a manager of managers structure, the
investment adviser may select (with approval of the Board and without
shareholder approval) one or more subadvisers to manage the day-to-day
investment of a fund's assets.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 43
================================================================================
Effective July 1, 2019, under the investment advisory agreement with Victory
Capital, which took effect on July 1, 2019, no performance adjustments will
be made for periods beginning July 1, 2019, through June 30, 2020, and only
performance beginning as of July 1, 2020, and thereafter will be utilized in
calculating performance adjustments through June 30, 2020.
Effective July 1, 2019, the line of credit (as discussed in the Notes to the
Financial Statements in this annual report) among the Trust, with respect to its
Funds, and CAPCO terminated; the Trust, with respect to its Funds, along with
series of Victory Portfolios, Victory Portfolios II and Victory Variable
Insurance Funds, entered into a 364 day committed credit facility and a 364 day
uncommitted, demand credit facility, with Citibank, N.A. (Citibank). Each such
credit facility may be renewed if so agreed by the parties. Under the agreement
with Citibank, the Funds may borrow up to $600 million, of which $300 million is
committed and $300 million is uncommitted. Of this amount, $40 million of the
line of credit is reserved for use by the Victory Floating Rate Fund (a series
of Victory Portfolios), with that Fund paying the related commitment fees for
that amount. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption requests that might otherwise require the untimely
disposition of securities. Citibank receives an annual commitment fee of 0.15%.
Each Fund pays a pro-rata portion of this commitment fee plus any interest on
amounts borrowed.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2017 (the IFL
Order), permitting the establishment and operation of an Interfund Lending
Facility (the Facility). The Facility allows each Fund to directly lend and
borrow money to or from certain other affiliated Funds relying upon the IFL
Order at rates beneficial to both the borrowing and lending funds. Advances
under the Facility are allowed for temporary or emergency purposes, including
the meeting of redemption requests that are subject to each Fund's borrowing
restrictions. The interfund loan rate is determined, as specified in the IFL
Order, by averaging the current repurchase agreement rate and the current bank
loan rate.
================================================================================
44 | USAA GOVERNMENT SECURITIES FUND
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
-----------------------------------------------------------------------
2019 2018 2017 2016 2015
-----------------------------------------------------------------------
Net asset value at
beginning of period $ 9.55 $ 9.86 $ 10.00 $ 10.04 $ 10.02
-----------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .23 .20 .20 .22 .25
Net realized and
unrealized gain (loss) .29 (.31) (.14) (.04) .03
-----------------------------------------------------------------------
Total from investment
operations .52 (.11) .06 .18 .28
-----------------------------------------------------------------------
Less distributions from:
Net investment income (.23) (.20) (.20) (.22) (.26)
-----------------------------------------------------------------------
Net asset value at end
of period $ 9.84 $ 9.55 $ 9.86 $ 10.00 $ 10.04
=======================================================================
Total return (%)* 5.56 (1.09) .62 1.80 2.78
Net assets at end
of period (000) $328,123 $333,464 $390,897 $432,471 $435,421
Ratios to average daily
net assets:**
Expenses (%)(a) .47 .48 .48 .51 .51
Net investment income (%) 2.42 2.09 2.02 2.17 2.52
Portfolio turnover (%) 9 15 18 14 15
* 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 year ended May 31, 2019, average daily net assets were $322,727,000.
(a) Does not include acquired fund fees, if any.
================================================================================
FINANCIAL HIGHLIGHTS | 45
================================================================================
INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each
period is as follows:
PERIOD ENDED
YEAR ENDED MAY 31, MAY 31,
-------------------------------------------------
2019 2018 2017 2016***
-------------------------------------------------
Net asset value at beginning of period $ 9.55 $ 9.86 $ 10.00 $ 9.94
-------------------------------------------------
Income (loss) from investment operations:
Net investment income .24 .21 .21 .18
Net realized and unrealized gain (loss) .30 (.31) (.14) .06
-------------------------------------------------
Total from investment operations .54 (.10) .07 .24
-------------------------------------------------
Less distributions from:
Net investment income (.24) (.21) (.21) (.18)
-------------------------------------------------
Net asset value at end of period $ 9.85 $ 9.55 $ 9.86 $ 10.00
=================================================
Total return (%)* 5.76 (1.01) .71 2.39
Net assets at end of period (000) $742,233 $251,297 $133,607 $106,692
Ratios to average daily net assets:**
Expenses (%)(a) .38 .39 .40 .44(b)
Net investment income (%) 2.55 2.18 2.12 2.16(b)
Portfolio turnover (%) 9 15 18 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 year ended May 31, 2019, average daily net assets were $596,743,000.
*** 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.
================================================================================
46 | USAA GOVERNMENT SECURITIES FUND
================================================================================
ADVISER SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
---------------------------------------------------------------------
2019 2018 2017 2016 2015
---------------------------------------------------------------------
Net asset value at
beginning of period $ 9.54 $ 9.85 $10.00 $10.04 $10.01
---------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .21 .18 .17 .19 .22
Net realized and
unrealized gain (loss) .30 (.31) (.15) (.04) .04
---------------------------------------------------------------------
Total from investment
operations .51 (.13) .02 .15 .26
---------------------------------------------------------------------
Less distributions from:
Net investment income (.21) (.18) (.17) (.19) (.23)
---------------------------------------------------------------------
Redemption fees added to
beneficial interests - .00(a) - - .00(a)
---------------------------------------------------------------------
Net asset value at end
of period $ 9.84 $ 9.54 $ 9.85 $10.00 $10.04
=====================================================================
Total return (%)* 5.37 (1.36) .25 1.55 2.58
Net assets at end
of period (000) $5,042 $4,804 $6,089 $5,088 $5,116
Ratios to average
daily net assets:**
Expenses (%)(b) .75 .75 .75 .75 .80(c)
Expenses, excluding
reimbursements (%)(b) .87 .87 .93 .95 1.05
Net investment income (%) 2.14 1.82 1.76 1.93 2.22
Portfolio turnover (%) 9 15 18 14 15
* 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 year ended May 31, 2019, average daily net assets were $4,837,000.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Prior to October 1, 2014, the Manager voluntarily agreed to reimburse the
Adviser Shares for expenses in excess of 0.90% of their average daily net
assets.
================================================================================
FINANCIAL HIGHLIGHTS | 47
================================================================================
R6 SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
PERIOD ENDED
YEAR ENDED MAY 31, MAY 31,
---------------------------------------------
2019 2018 2017***
---------------------------------------------
Net asset value at beginning of period $ 9.55 $ 9.85 $ 9.80
----------------------------------------
Income (loss) from investment operations:
Net investment income .24 .22 .11
Net realized and unrealized gain (loss) .29 (.30) .05
----------------------------------------
Total from investment operations .53 (.08) .16
----------------------------------------
Less distributions from:
Net investment income (.24) (.22) (.11)
----------------------------------------
Net asset value at end of period $ 9.84 $ 9.55 $ 9.85
========================================
Total return (%)* 5.68 (.87) 1.62
Net assets at end of period (000) $6,425 $6,345 $5,027
Ratios to average daily net assets:**
Expenses (%)(a) .35 .35 .35(b)
Expenses, excluding reimbursements (%)(a) .51 .64 1.12(b)
Net investment income (%) 2.54 2.22 2.22(b)
Portfolio turnover (%) 9 15 18
* 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 year ended May 31, 2019, average daily net assets were $6,242,000.
*** 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.
================================================================================
48 | USAA GOVERNMENT SECURITIES FUND
================================================================================
EXPENSE EXAMPLE
May 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 December 1, 2018, through
May 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 | 49
================================================================================
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 DECEMBER 1, 2018 -
DECEMBER 1, 2018 MAY 31, 2019 MAY 31, 2019
----------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,052.10 $2.40
Hypothetical
(5% return before expenses) 1,000.00 1,022.59 2.37
INSTITUTIONAL SHARES
Actual 1,000.00 1,053.60 2.00
Hypothetical
(5% return before expenses) 1,000.00 1,022.99 1.97
ADVISER SHARES
Actual 1,000.00 1,050.60 3.83
Hypothetical
(5% return before expenses) 1,000.00 1,021.19 3.78
R6 SHARES
Actual 1,000.00 1,052.70 1.79
Hypothetical
(5% return before expenses) 1,000.00 1,023.19 1.77
*Expenses are equal to the annualized expense ratio of 0.47% for Fund Shares,
0.39% for Institutional Shares, 0.75% for Adviser Shares, and 0.35% for R6
Shares, which are net of any reimbursements and expenses paid indirectly,
multiplied by the average account value over the period, multiplied by 182
days/365 days (to reflect the one-half-year period). The Fund's actual ending
account values are based on its actual total returns of 5.21% for Fund Shares,
5.36% for Institutional Shares, 5.06% for Adviser Shares, and 5.27% for R6
Shares, for the six-month period of December 1, 2018, through May 31, 2019.
================================================================================
50 | USAA GOVERNMENT SECURITIES FUND
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the (i) new investment
advisory agreement between the Trust and Victory Capital and (ii) new investment
subadvisory agreements between certain subadvisers and Victory Capital, which
became effective on July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO
THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
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.
================================================================================
ADVISORY AGREEMENT(S) | 51
================================================================================
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 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
================================================================================
52 | USAA GOVERNMENT SECURITIES FUND
================================================================================
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 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 then-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.
================================================================================
ADVISORY AGREEMENT(S) | 53
================================================================================
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.
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).
================================================================================
54 | USAA GOVERNMENT SECURITIES FUND
================================================================================
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.
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.
(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) | 55
================================================================================
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 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.
================================================================================
56 | USAA GOVERNMENT SECURITIES FUND
================================================================================
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 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,
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ADVISORY AGREEMENT(S) | 57
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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.
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.
(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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58 | USAA GOVERNMENT SECURITIES FUND
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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 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
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ADVISORY AGREEMENT(S) | 59
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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 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.
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60 | USAA GOVERNMENT SECURITIES FUND
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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 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.
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ADVISORY AGREEMENT(S) | 61
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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
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.
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62 | USAA GOVERNMENT SECURITIES FUND
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND THE MANAGER)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the continuation of the
(i) investment advisory agreement between the Trust and AMCO and (ii) investment
subadvisory agreements between certain subadvisers and AMCO, which were
effective until July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
At an in-person meeting of the Board of Trustees (the Board) held on April 17,
2019, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to the
Fund.(1)
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and the Manager, and were given
the opportunity to ask questions and request additional information from
management. The information provided to the Board included, among other things:
(i) a separate report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance, expenses, and
fees to comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the Manager's
revenues and costs of providing
(1)At an in-person meeting held on January 15, 2019, the Board, including the
Independent Trustees, approved a new investment advisory agreement between
the Trust, on behalf of the Fund, and Victory Capital Management Inc.
("Victory Capital"). Upon the closing of the transaction, on behalf of the
Fund, Victory Capital Holdings, Inc., the parent company of Victory Capital,
the Advisory Agreement between the Trust and the Manager will terminate and
the new investment advisory agreement between the Trust and Victory Capital
will go into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are included in this
annual report.
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ADVISORY AGREEMENT(S) | 63
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services to the Fund and compensation paid to affiliates of the Manager; and
(iii) information about the Manager's operations and personnel. Prior to voting,
the Independent Trustees reviewed the proposed continuance of the Advisory
Agreement with management and with experienced independent legal counsel
retained by the Independent Trustees (Independent Counsel) and received
materials from such Independent Counsel discussing the legal standards for their
consideration of the proposed continuation of the Advisory Agreement with
respect to the Fund. The Independent Trustees also reviewed the proposed
continuation of the Advisory Agreement with respect to the Fund in private
sessions with Independent Counsel at which no representatives of management were
present.
At each regularly scheduled meeting of the Board and its committees, the Board
receives and reviews, among other things, information concerning the Fund's
performance and related services provided by the Manager. At the meeting at
which the renewal of the Advisory Agreement is considered, particular focus is
given to information concerning Fund performance, fees and total expenses as
compared to comparable investment companies, and the Manager's profitability
with respect to the Fund. However, the Board noted that the evaluation process
with respect to the Manager is an ongoing one. In this regard, the Board's and
its committees' consideration of the Advisory Agreement included certain
information previously received at such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving the
Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent, and
quality of the services provided by the Manager under the Advisory Agreement,
the Board reviewed information provided by the Manager relating to its
operations and personnel. The Board also took into account its knowledge of the
Manager's management and the quality of the performance of the Manager's duties
through Board meetings, discussions, and reports
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64 | USAA GOVERNMENT SECURITIES FUND
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during the preceding year. The Board considered the fees paid to the Manager and
the services provided to the Fund by the Manager under the Advisory Agreement,
as well as other services provided by the Manager and its affiliates under other
agreements, and the personnel who provide these services. In addition to the
investment advisory services provided to the Fund, the Manager and its
affiliates provide administrative services, shareholder services, oversight of
Fund accounting, marketing services, assistance in meeting legal and regulatory
requirements, and other services necessary for the operation of the Fund and the
Trust. The Board also considered the significant risks assumed by the Manager in
connection with the services provided to the Fund, including investment,
operational, enterprise, litigation, regulatory and compliance risks.
The Board considered the Manager's management style and the performance of the
Manager's duties under the Advisory Agreement. The Board considered the level
and depth of experience of the Manager, including the professional experience
and qualifications of its senior and investment personnel, as well as current
staffing levels. The allocation of the Fund's brokerage, including the Manager's
process for monitoring "best execution," also was considered. The Manager's role
in coordinating the activities of the Fund's other service providers also was
considered.
The Board also considered the Manager's risk management processes. The Board
considered the Manager's financial condition and that it had the financial
wherewithal to continue to provide the same scope and high quality of services
under the Advisory Agreement. In reviewing the Advisory Agreement, the Board
focused on the experience, resources, and strengths of the Manager and its
affiliates in managing the Fund, as well as the other funds in the Trust.
The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager and its affiliates, including oversight of the Fund's
day-to-day operations and oversight of Fund accounting.
The Trustees, guided also by information obtained from their experiences as
trustees of the Trust, also focused on the quality of the Manager's compliance
and administrative staff.
EXPENSES AND PERFORMANCE - In connection with its consideration of the Advisory
Agreement, the Board evaluated the Fund's advisory fees and total
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ADVISORY AGREEMENT(S) | 65
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expense ratio as compared to other open-end investment companies deemed to be
comparable to the Fund as determined by the independent third party in its
report. The Fund's expenses were compared to (i) a group of investment companies
chosen by the independent third party to be comparable to the Fund based upon
certain factors, including fund type, comparability of investment objective and
classifications, sales load type (in this case, retail investment companies with
front-end sales loads and no sales loads), asset size, and expense components
(the "expense group") and (ii) a larger group of investment companies that
includes all front-end load and no-load retail open-end investment companies
with the same investment classification/objective as the Fund regardless of
asset size, excluding outliers (the "expense universe"). Among other data, the
Board noted that the Fund's management fee rate - which includes advisory and
administrative services and the effects of any performance adjustment - was
below the median of its expense group and its expense universe. The data
indicated that the Fund's total expenses were below the median of its expense
group and its expense universe. The Board took into account the various services
provided to the Fund by the Manager and its affiliates, including the high
quality of services received by the Fund from the Manager. The Board also noted
the level and method of computing the Fund's management fee, including any
performance adjustment to such fee.
In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total return with its Lipper index and with that of other mutual funds deemed to
be in its peer group by the independent third party in its report (the
"performance universe"). The Fund's performance universe consisted of the Fund
and all retail and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or primary channel
of distribution. This comparison indicated that, among other data, the Fund's
performance was above the average of its performance universe and its Lipper
index for the one- and five-year periods ended December 31, 2018, and was above
the average of its performance universe and below its Lipper index for the
three- and ten-year periods ended December 31, 2018. The Board also
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66 | USAA GOVERNMENT SECURITIES FUND
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noted that the Fund's percentile performance ranking was in the top 15% of its
performance universe for the one-year period ended December 31, 2018, was in the
top 50% of its performance universe for the three- and five-year periods ended
December 31, 2018, and was in the top 25% of its performance universe for the
ten-year period ended December 31, 2018.
COMPENSATION AND PROFITABILITY - The Board took into consideration the level and
method of computing the Fund's management fee. The information considered by the
Board included operating profit margin information for the Manager's business as
a whole. The Board also received and considered profitability information
related to the management revenues from the Fund. This information included a
review of the methodology used in the allocation of certain costs to the Fund.
The Trustees reviewed the profitability of the Manager's relationship with the
Fund before tax expenses. The Board was also provided with an Investment
Management Profitability Analysis prepared by an independent information
service. In reviewing the overall profitability of the management fee to the
Manager, the Board also considered the fact that affiliates provide shareholder
servicing and administrative services to the Fund for which they receive
compensation. The Board also considered the possible direct and indirect
benefits to the Manager from its relationship with the Trust, including that the
Manager may derive reputational and other benefits from its association with the
Fund. The Trustees recognized that the Manager should be entitled to earn a
reasonable level of profits in exchange for the level of services it provides to
the Fund and the entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussions of
the current advisory fee structure. The Board also considered the effect of the
Fund's growth and size on its performance and fees, noting that if the Fund's
assets increase over time, the Fund may realize other economies of scale if
assets increase proportionally more than some expenses. The Board determined
that the current investment management fee structure was reasonable.
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with the Manager, among others: (i) the
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ADVISORY AGREEMENT(S) | 67
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Manager has demonstrated that it possesses the capability and resources to
perform the duties required of it under the Advisory Agreement; (ii) the Manager
maintains an appropriate compliance program; (iii) the performance of the Fund
is reasonable in relation to the performance of funds with a similar investment
strategy and to relevant indices; (iv) the Fund's advisory expenses are
reasonable in relation to those of similar funds and to the services to be
provided by the Manager; and (v) the Manager's and its affiliates' level of
profitability from its relationship with the Fund is reasonable in light of the
nature and high quality of services provided by the Manager and the type of
fund. Based on its conclusions, the Board determined that continuation of the
Advisory Agreement would be in the best interests of the Fund and its
shareholders.
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68 | USAA GOVERNMENT SECURITIES FUND
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TRUSTEES' AND OFFICERS' INFORMATION
TRUSTEES AND OFFICERS OF THE TRUST
--------------------------------------------------------------------------------
As of July 1, 2019, the Board of Trustees (the Board) of the Trust consists of
ten Trustees. These Trustees and the Trust's Officers supervise the business
affairs of the USAA family of funds. The Board is responsible for the general
oversight of the funds' business and for assuring that the funds are managed in
the best interests of each fund's respective shareholders. The Board
periodically reviews the funds' investment performance as well as the quality of
other services provided to the funds and their shareholders by each of the
fund's service providers, including the adviser and its affiliates. Pursuant to
a policy adopted by the Board, the term of office for each Trustee shall be
until the Trustee reaches age 75. The Board may change or grant exceptions from
this policy at any time without shareholder approval. A Trustee may resign or be
removed by a vote of two-thirds of the Trustees before the removal or by the
holders of two-thirds of the outstanding shares of the Trust at any time.
Vacancies on the Board can be filled by the action of a majority of the
Trustees, provided that after filling such vacancy at least two-thirds of the
Trustees have been elected by the shareholders.
Set forth below are the Trustees and Officers of the Trust, their respective
offices and principal occupations during the last five years, length of time
served, and information relating to any other directorships held. As of July 1,
2019, each serves on the Board of the USAA family of funds consisting of one
registered investment company, which offers 47 individual funds. Unless
otherwise indicated, the business address for each is P.O. Box 659430, San
Antonio, TX 78265-9430.
If you would like more information about the funds' Trustees, you may call (800)
235-8396 to request a free copy of the funds' Statement of Additional
Information (SAI).
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TRUSTEES' AND OFFICERS' INFORMATION | 69
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In connection with the Transaction, the Board of the Trust nominated, and
shareholders of each USAA mutual fund approved, two new Trustees to serve on the
Trust's Board, effective upon the closing of the Transaction. Effective July 1,
2019, David C. Brown serves as an Interested Trustee and John C. Walters serves
as an Independent Trustee. Information about the current Trustees of the Trust
is provided below.
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
DANIEL S. McNAMARA(1, 2, 4, 6, +)
Trustee and Chair of the Board of Trustees
Born: June 1966
Year of Election or Appointment: 2012
Trustee, President, and Vice Chairman, USAA ETF Trust (06/17-06/19); President
of Financial Advice & Solutions Group (FASG), USAA (02/13-present); Director of
USAA Asset Management Company (AMCO), (08/11-present); Director of USAA
Investment Management Company (IMCO) (09/09-present); President, IMCO
(09/09-04/14); President and Director of USAA Shareholder Account Services (SAS)
(10/09-present); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director of FPS (12/13-present);
President and Director of USAA Investment Corporation (ICORP) (03/10-present);
Director of USAA Financial Advisors, Inc. (FAI) (12/13-present). Mr. McNamara
brings to the Board extensive experience in the financial services industry,
including experience as an officer of the Trust.
DAVID C. BROWN(2, 4, 6, 10)
Trustee
Born: May 1972
Year of Election or Appointment: 2019
Chairman and Chief Executive Officer (2013-present), Co-Chief Executive Officer,
(2011-2013), Victory Capital Management Inc.; Chairman and Chief Executive
Officer (2013-present), Victory Capital Holdings, Inc. Mr. Brown brings to the
Board extensive business, finance and leadership skills gained
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70 | USAA GOVERNMENT SECURITIES FUND
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and developed through years of experience in the financial services industry,
including his tenure overseeing the strategic direction as CEO of Victory
Capital. These skills, combined with Mr. Brown's extensive knowledge of the
financial services industry and demonstrated success in the development and
distribution of investment strategies and products, enable him to provide
valuable insights to the Board and strategic direction for the Funds. Mr. Brown
serves on the Boards of the Victory Funds family of funds consisting of five
registered investment companies offering approximately 104 mutual funds and 24
ETFs. Mr. Brown is considered an Interested Trustee of the Trust due to his
position with Victory Capital and its affiliated companies.
NON-INTERESTED (INDEPENDENT) TRUSTEES
--------------------------------------------------------------------------------
ROBERT L. MASON, Ph.D.(3, 4, 5, 6, 7)
Trustee
Born: July 1946
Year of Election or Appointment: 1997
Trustee, USAA ETF Trust (06/17-06/19); Adjunct Professor in the Department of
Management Science and Statistics in the College of Business at the University
of Texas at San Antonio (2001-present); Institute Analyst, Southwest Research
Institute (03/02-01/16), which focuses on providing innovative technology,
science, and engineering services to clients around the world and is one of the
oldest independent, nonprofit, applied research and development organizations in
the United States. He was employed at Southwest Research Institute for 40 years.
Dr. Mason brings to the Board particular experience with information technology
matters, statistical analysis, and human resources as well as over 22 years'
experience as a Board member of the USAA family of funds. Dr. Mason holds no
other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
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TRUSTEES' AND OFFICERS' INFORMATION | 71
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JEFFERSON C. BOYCE(3, 4, 5, 6, 7)
Lead Trustee and Vice Chair
Born: September 1957
Year of Election or Appointment: 2013
Trustee, USAA ETF Trust (06/17-06/19); Senior Managing Director, New York Life
Investments, LLC (1992-2012), an investment manager. Mr. Boyce brings to the
Board experience in financial investment management, and, in particular,
institutional and retail mutual funds, variable annuity products, broker
dealers, and retirement programs, including experience in organizational
development, marketing, product development, and money management as well as
five years' experience as a Board member of the USAA family of funds. Mr. Boyce
is a board member of Westhab, Inc.
DAWN M. HAWLEY(3, 4, 5, 6, 7, 9)
Trustee
Born: February 1954
Year of Election or Appointment: 2014
Trustee, USAA ETF Trust (06/17-06/19); Manager of Finance, Menil Foundation,
Inc. (05/07-06/11), which is a private foundation that oversees the assemblage
of sculptures, prints, drawings, photographs, and rare books. Director of
Financial Planning and Analysis and Chief Financial Officer, AIM Management
Group, Inc. (10/87-01/06). Ms. Hawley brings to the Board experience in
financial investment management and, in particular, institutional and retail
mutual funds, variable annuity products, broker dealers, and retirement
programs, including experience in financial planning, budgeting, accounting
practices, and asset/liability management functions including major acquisitions
and mergers, as well as over five years' experience as a Board member of the
USAA family of funds. Ms. Hawley holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
================================================================================
72 | USAA GOVERNMENT SECURITIES FUND
================================================================================
PAUL L. McNAMARA(3, 4, 5, 6, 7)
Trustee
Born: July 1948
Year of Election or Appointment: 2012
Trustee, USAA ETF Trust (06/17-06/19); Director, Cantor Opportunistic
Alternatives Fund, LLC (03/10-02/14), which is a closed-end fund of funds by
Cantor Fitzgerald Investment Advisors, LLC. Mr. McNamara retired from Lord
Abbett & Co. LLC, an independent U.S. investment management firm, as an
Executive Member on 09/30/09, a position he held since 10/02. He had been
employed at Lord Abbett since 1996. Mr. McNamara brings to the Board extensive
experience with the financial services industry and, in particular,
institutional and retail mutual fund markets, including experience with mutual
fund marketing, distribution, and risk management, as well as overall experience
with compliance and corporate governance issues. Mr. McNamara also has
experience serving as a fund director as well as seven years' experience as a
Board member of the USAA family of funds. Paul L. McNamara is of no relation to
Daniel S. McNamara. Mr. McNamara holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
RICHARD Y. NEWTON III(3, 4, 5, 6, 7)
Trustee
Born: January 1956
Year of Election or Appointment: 2017
Trustee, USAA ETF Trust (06/17-06/19); Director, Elta North America
(01/18-present), which is a global leader in the design, manufacture and support
of innovative electronic systems in the ground, maritime, airborne, and security
domains for the nation's warfighters, security personnel, and first responders;
Managing Partner, Pioneer Partnership Development Group (12/15-present);
Executive Director, The Union League Club of New York (06/14-11/15); Executive
Vice President, Air Force Association (08/12-05/14); Lieutenant General, United
States Air Force (01/08-06/12). Lieutenant General Newton (Ret.) served 34 years
of active duty in the United States Air Force. Lt. Gen. Newton retired as the
Assistant Vice Chief of Staff and Director of Air Staff at the Headquarters of
the U.S. Air Force where he was responsible for overseeing the administration
and organization
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 73
================================================================================
of the Air Staff, which develops policies, plans and programs, establishes
requirements, and provides resources to support the Air Force's mission. Lt.
Gen. Newton is a graduate of the United States Air Force Academy, Webster
University, and The National War College. Lt. Gen. Newton brings to the Board
extensive management and military experience, as well as over two years of
experience as a Board member of the USAA family of funds. Lt. Gen. Newton holds
no other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
BARBARA B. OSTDIEK, Ph.D.(3, 4, 5, 6, 7, 8)
Trustee
Born: March 1964
Year of Election or Appointment: 2008
Trustee, USAA ETF Trust (06/17-06/19); Senior Associate Dean of Degree programs
at Jesse H. Jones Graduate School of Business at Rice University
(07/13-present); Associate Professor of Finance at Jesse H. Jones Graduate
School of Business at Rice University (07/01-present); Academic Director, El
Paso Corporation Finance Center at Jesse H. Jones Graduate School of Business at
Rice University (07/02-06/12). Dr. Ostdiek brings to the Board particular
experience with financial investment management, education, and research as well
as over eleven years' experience as a Board member of the USAA family of funds.
Dr. Ostdiek holds no other directorships of any publicly held corporations or
other investment companies outside the USAA family of funds.
MICHAEL F. REIMHERR(3, 4, 5, 6, 7)
Trustee
Born: August 1945
Year of Election or Appointment: 2000
Trustee, USAA ETF Trust (06/17-06/19); President of Reimherr Business Consulting
performing business valuations of medium to large companies; developing business
plans, budgets, and internal financial reporting; and work with mergers and
acquisitions (05/95-12/17). St. Mary's University Investment Committee
overseeing University Endowment (06/14-present). Mr. Reimherr brings to the
Board particular experience with organizational development, budgeting, finance,
capital markets, and mergers and acquisitions, as well as
================================================================================
74 | USAA GOVERNMENT SECURITIES FUND
================================================================================
over 19 years' experience as a Board member of the USAA family of funds. Mr.
Reimherr holds no other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
JOHN C. WALTERS(3, 4, 5, 6, 7)
Trustee
Born: February 1962
Year of Election or Appointment: 2019
Retired. Mr. Walters brings significant Board experience including active
involvement with the board of a Fortune 500 company, and a proven record of
leading large, complex financial organizations. He has a demonstrated record of
success in distribution, manufacturing, investment brokerage, and investment
management in both the retail and institutional investment businesses. He has
substantial experience in the investment management business with a demonstrated
ability to develop and drive strategy while managing operational, financial, and
investment risk. Mr. Walters is a board member of Guardian Variable Products
Trust (16 series), Lead Independent Director; Amerilife Holdings LLC, Director;
Stadion Money Management; Director; and University of North Carolina (Chapel
Hill), Member Board of Governors.
(1) Indicates the Trustee is an employee of AMCO or affiliated companies and
is considered an "interested person" under the Investment Company Act of
1940.
(2) Member of Executive Committee.
(3) Member of Audit and Compliance Committee.
(4) Member of Product Management and Distribution Committee.
(5) Member of Corporate Governance Committee.
(6) Member of Investments Committee.
(7) The address for all non-interested trustees is that of the USAA Funds,
P.O. Box 659430, San Antonio, TX 78265-9430.
(8) Dr. Ostdiek has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(9) Ms. Hawley has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(10) Indicates the Trustee is an employee of Victory Capital or affiliated
companies and is considered an "interested person" under the Investment
Company Act of 1940.
(+) Mr. D. McNamara was elected as Chair of the Board in July 2019.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 75
================================================================================
Effective July 1, 2019, the Board of the Trust appointed certain new officers of
the Trust. The current officers of the Trust are stated below.
OFFICERS
--------------------------------------------------------------------------------
CHRISTOPHER K. DYER
President
Born: February 1962
Year of Appointment: 2019
Director of Mutual Fund Administration, the Victory Capital.
SCOTT A. STAHORSKY
Vice President
Born: July 1969
Year of Appointment: 2019
Manager, Fund Administration, the Adviser (since 2015); Senior Analyst, Fund
Administration, the Victory Capital (prior to 2015).
ALLAN SHAER
Assistant Treasurer
Born: March 1965
Year of Appointment: 2019
Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc.
(since 2016); Vice President, Mutual Fund Administration, JP Morgan Chase
(2011-2016).
================================================================================
76 | USAA GOVERNMENT SECURITIES FUND
================================================================================
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Treasurer, USAA ETF Trust (09/18-06/19); Executive Director, Investment and
Financial Administration, USAA (04/12-present); Assistant Treasurer, USAA ETF
Trust (06/17-09/18); Assistant Treasurer, USAA Mutual Funds Trust (12/13-02/18).
Mr. De Vries also serves as the Funds' Principal Financial Officer.
CAROL D. TREVINO
Assistant Treasurer
Born: October 1965
Year of Appointment: 2018
Assistant Treasurer, USAA ETF Trust (09/18-06/19); Accounting/Financial
Director, USAA (12/13-present); Senior Accounting Analyst, USAA (03/11-12/13).
ERIN G. WAGNER
Secretary
Born: February 1974
Year of Appointment: 2019
Associate General Counsel, the Adviser (since 2013).
CHARLES BOOTH
Anti-Money Laundering Compliance Officer and Identity Theft Officer
Born: April 1960
Year of Appointment: 2019
Director, Regulatory Administration and CCO Support Services, Citi Fund Services
Ohio, Inc. (2007-present).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 77
================================================================================
AMY CAMPOS
Chief Compliance Officer
Born: August 1976
Year of Appointment: 2019
Chief Compliance Officer, USAA Mutual Funds Trust (7/1/19-present); Executive
Director, Deputy Chief Compliance Officer, USAA Mutual Funds Trust and USAA ETF
Trust (7/17-6/19); Compliance Director, USAA Mutual Funds Trust (2014-7/17);
Senior Compliance Advisor, USAA Mutual Funds Trust (2010-2014).
THE FOLLOWING OFFICERS SERVED IN THEIR RESPECTIVE OFFICE UNTIL JULY 1, 2019, AT
WHICH POINT EACH OF THE FOLLOWING OFFICERS RESIGNED FROM THEIR RESPECTIVE OFFICE
AND NO LONGER SERVE IN THESE POSITIONS.
JOHN C. SPEAR
Vice President
Born: May 1964
Year of Appointment: 2016
Vice President, USAA ETF Trust (06/17-06/19); Senior Vice President and Chief
Investment Officer, USAA Investments, (03/17-present); Vice President and Chief
Investment Officer, USAA Investments, (11/16-03/17); Vice President, Long Term
Fixed Income (05/12-11/16).
JOHN P. TOOHEY
Vice President
Born: March 1968
Year of Appointment: 2009
Vice President, USAA ETF Trust (06/17-06/19); Head of Equities, Equity
Investments, AMCO (01/12-present).
================================================================================
78 | USAA GOVERNMENT SECURITIES FUND
================================================================================
KRISTEN MILLAN
Secretary
Born: April 1983
Year of Appointment: 2019
Secretary, USAA ETF Trust (04/19-06/19); Assistant Secretary, USAA ETF Trust
(01/19-06/19); Senior Attorney, FASG General Counsel, USAA (09/17-06/19);
Attorney, FASG General Counsel, USAA (06/13-09/17). Ms. Millan also serves as
Assistant Secretary of AMCO, ICORP, and SAS.
STEPHANIE A. HIGBY
Chief Compliance Officer
Born: July 1974
Year of Appointment: 2013
Chief Compliance Officer, USAA ETF Trust (06/17-06/19); Assistant Vice
President, Compliance-Investments, USAA (02/18-present); Assistant Vice
President, Compliance Mutual Funds, USAA (12/16-01/18); Executive Director,
Institutional Asset Management Compliance, USAA (04/13-12/16). Ms. Higby also
serves as the Funds' anti-money laundering compliance officer and as the Chief
Compliance Officer for AMCO and IMCO.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 79
================================================================================
AS OF JULY 1, 2019
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
David C. Brown
John C. Walters
--------------------------------------------------------------------------------
ADMINISTRATOR AND Victory Capital Management Inc.
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND Victory Capital Advisers Inc.
DISTRIBUTOR 4900 Tiedeman Road
Brooklyn, Ohio 44144
--------------------------------------------------------------------------------
TRANSFER AGENT Victory Capital Transfer Agency Inc.
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 USAA AMCO'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) 235-8396; (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) 235-8396; (ii) at usaa.com; and (iii) on the SEC's website at
http://www.sec.gov.
===============================================================================
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----------------------
MUTUAL FUNDS
--------------------------------------------------------------------------------
May 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA Growth and Tax Strategy Fund
FUND
SHARES
USBLX
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) 235-8396 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)
235-8396 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.
Victory Capital means Victory Capital Management Inc., the investment manager of
the USAA Mutual Funds. USAA Mutual Funds are distributed by Victory Capital
Advisers, Inc., a broker dealer registered with FINRA and an affiliate of
Victory Capital. Victory Capital and its affiliates are not affiliated with
United Services Automobile Association or its affiliates. USAA and the USAA
logos are registered trademarks and the USAA Mutual Funds and USAA Investments
logos are trademarks of United Services Automobile Association and are being
used by Victory Capital and its affiliates under license.
================================================================================
PRESIDENT'S MESSAGE
"... LONG-TERM INVESTORS SHOULD NEVER MAKE
DECISIONS IN HASTE. THEY SHOULD MAKE [PHOTO OF BROOKS ENGLEHARDT]
THOUGHTFUL DECISIONS BASED ON THEIR LONG-TERM
OBJECTIVES, TIME HORIZON, AND RISK TOLERANCE."
--------------------------------------------------------------------------------
JULY 2019
As previously announced, USAA, the parent company of USAA Asset Management
Company ("AMCO"), the prior investment adviser to the USAA Mutual Funds,
announced that AMCO would be acquired by Victory Capital Holdings, Inc.
(Victory Holdings), a global investment management firm headquartered in
Cleveland, Ohio (the Transaction). In connection with the Transaction, also as
previous announced, shareholders of each USAA Mutual Fund approved a new
investment advisory agreement with Victory Capital Management Inc. ("Victory
Capital"), an indirect wholly-owned subsidiary of Victory Holdings. The closing
of the Transaction occurred on July 1, 2019; and Victory Capital became the
investment adviser to each USAA Mutual Fund. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION ABOUT CHANGES THAT TOOK EFFECT ON JULY 1, 2019.
Softening global economic conditions and escalating trade tensions rattled
investors during the 12-month reporting period ended May 31, 2019. When the
reporting period began in June 2018, the global economy was expanding across
most regions and countries, led by the U.S. In this environment, stocks
generally advanced. In the fixed income market, U.S. Treasury yields rose, as
the U.S. Federal Reserve ("Fed") continued to tighten monetary policy.
Signs of trouble emerged during the summer of 2018. The U.S. economic expansion
continued, but growth in a number of other economies, including some European
countries and China, showed a weakening trend. By the autumn of 2018, investors'
fears of a global economic slowdown, combined with harsh U.S.-China trade
rhetoric and Brexit-related uncertainty in Europe, sparked a surge in market
volatility. Global stocks dropped, with most of the decline occurring in
December 2018. At the same time, intermediate- and longer-term yields fell, as
investors anticipated a change in Fed monetary policy. Indeed, after having
raised short-term interest rates four times during 2018, Fed officials announced
in January 2019 that they would "pause," retreating from their earlier plan to
raise interest rates in 2019. Stocks rallied in response and by April 2019 had
recovered most of the ground they had lost. In May 2019, ongoing trade tensions
between the United States and China, as well as President Trump administration's
threat to impose tariffs on Mexico, drove a renewed decline in stock prices. In
the fixed income market, concerns that trade disputes would seriously undermine
global
================================================================================
================================================================================
economic growth pushed down intermediate- and longer-term yields, which ended
the reporting period lower than they started. The yield on the 10-year U.S.
Treasury note, which began June 2018 at 2.89%, rose to 3.24% on November 8,
2018--its high point of the period--and fell to 2.13% by May 31, 2019.
In the final months of the reporting period, the Treasury yield curve inverted,
which means that shorter-term yields were higher than longer-term yields. A
yield-curve inversion warrants attention because it has been a reliable
recession indicator. Although recessions do not automatically follow
inversions, a downward-sloped yield curve has preceded every U.S. recession
since the 1960s. That said, the lag between an inversion and a recession has
been inconsistent. At USAA Investments, A Victory Capital Investment Franchise,
we have found that during the past six decades, the time between inversion and
recession has ranged between six months and two years, with no clear pattern to
provide useful guidance. And as I write to you, we see no recession on the
horizon. First, the U.S. economy continues to grow, albeit at a slower pace than
in 2018. Second, the Fed has made clear its commitment to pause its interest
rate hikes, and there is a growing belief in the markets that policymakers may
even cut interest rates in 2019. (In early June 2019, after the end of the
reporting period, Fed Chair Jerome Powell stated that the U.S. central bank was
monitoring the escalation in trade tensions and could potentially respond by
cutting interest rates if U.S. economic conditions deteriorate.)
At USAA Investments, our team of portfolio managers will continue to monitor the
financial markets, economic conditions, the global trade regime, Fed policy, the
direction of longer-term interest rates, and other issues that have the
potential to affect your investments. In the meantime, I would advise you to
ignore media "noise" about such matters. Media "noise" is meant to provoke an
emotional reaction, which can lead to hasty decision-making. In my opinion,
long-term investors should never make decisions in haste. They should make
thoughtful decisions based on their long-term objectives, time horizon, and risk
tolerance. Dollar-cost averaging, in which you invest a set amount on a regular
basis, is a strategy that can help you stay on track. Another effective strategy
is diversification, which can potentially insulate a portfolio from market
turbulence or changes in performance leadership.
If you would like to review your portfolio to confirm that it is properly
aligned with your investment plan, please contact one of our financial advisors.
You might want to make that call before the summer gets fully underway. When we
are traveling and spending time with family and friends, it can be tempting to
put off decisions on financial matters.
From all of us at USAA Investments, A Victory Capital Investment Franchise,
thank you for the opportunity to help you with your investment needs.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGERS' COMMENTARY 1
INVESTMENT OVERVIEW 5
SHAREHOLDER VOTING RESULTS 9
FINANCIAL INFORMATION
Distributions to Shareholders 10
Report of Independent Registered
Public Accounting Firm 11
Portfolio of Investments 12
Notes to Portfolio of Investments 38
Financial Statements 41
Notes to Financial Statements 44
Financial Highlights 60
EXPENSE EXAMPLE 61
ADVISORY AGREEMENT(S) 63
TRUSTEES' AND OFFICERS' INFORMATION 86
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) 235-8396.
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.
================================================================================
================================================================================
MANAGERS' COMMENTARY ON THE FUND
JOHN C. BONNELL, CFA Northern Trust Investments, Inc.
DALE R. HOFFMANN
*CHRISTOPHER A. FRONK, CFA
JACOB C. WEAVER, CFA
--------------------------------------------------------------------------------
o WHAT WERE THE MARKET CONDITIONS DURING THE 12-MONTH REPORTING PERIOD ENDED
MAY 31, 2019?
Tax-exempt bonds posted gains during the reporting period, due in part to
falling municipal yields. (Bond prices and yields move in opposite
directions.) Municipal yields rose during the first five months of the
reporting period amid continued short-term interest rates increases by the
Fed. In early November 2018, changing expectations about Fed monetary
policy and heightened risk aversion sent municipal yields lower. The
downward trend continued in early 2019, as U.S. economic growth moderated
and the Fed announced it would pause its interest rate increases. In March
2019, as market participants began speculating that the Fed might actually
cut rates in 2019, municipal yields declined significantly, falling to
their lows of the period at the end of May 2019. The yield on a 30-year
AAA general obligation bond fell 55 basis points during the reporting
period, from 2.87% on May 31, 2018, to 2.32% on May 31, 2019. (A basis
point is 1/100th of a percentage point.) Supply-and-demand conditions also
supported tax-exempt bond prices during the reporting period. Supply was
tight, as new issuance remained low in the wake of tax reform. Demand was
intense, with many new deals significantly oversubscribed. The buying was
dominated by U.S. individuals, who broadly favored municipal bonds for
their relative
*Effective May 31, 2019, Mary Lukic will be replacing Christopher A. Fonk as
a portfolio manager of the Fund.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
safety and incremental yield. Some observers suggested that a $10,000 cap
on state and local tax deductions contributed to U.S. individuals' appetite
for tax-advantaged investments.
U.S. stocks recorded positive returns during the reporting period despite
substantial market volatility. When the reporting period began, they
benefited from the ongoing strength of the U.S. economy. A healthy job
market, characterized by rising wage growth and unemployment at multi-year
lows, boosted consumer confidence, which drove an increase in discretionary
spending. The global picture was less rosy, however, with economic growth
slowing in a number of countries during the closing months of 2018.
Concerns about the global economic outlook drove a steep decline in U.S.
stocks, which was amplified by worries that continued Fed interest rate
increases could dampen U.S. economic growth. The U.S.-China trade dispute
also weighed on market sentiment. In early 2019, U.S. stocks rebounded,
rallying on solid U.S. economic data and the Fed's announcement that it was
unlikely to raise interest rates during 2019. Stocks retreated again in
May 2019, as President Trump threatened to impose tariffs on Mexico and
said the United States would not change its stance in trade negotiations
with China. In this environment, seven of the eleven sectors in the S&P
500(R) Index advanced. The real estate, utilities, and consumer staples
sectors produced the strongest positive returns, posting double-digit
gains. The energy sector led decliners, followed by materials and to a
lesser extent, financials and industrials.
o HOW DID THE USAA GROWTH AND TAX STRATEGY FUND (THE "FUND") PERFORM DURING
THE REPORTING PERIOD?
The Fund had a total return of 4.83% for the reporting period ended May 31,
2019. This compares to a total return of 3.78% for the S&P 500(R) Index (the
"Index"), 6.40% for the Bloomberg Barclays Municipal Bond Index, and 4.46%
for the Composite Index.
Refer to page 5 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
2 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
Effective July 1, 2019, Victory Capital serves as the Fund's investment
adviser. Prior to July 1, 2019, AMCO served as the Fund's investment
adviser. As the investment adviser, AMCO employs dedicated resources to
support the research, selection, and monitoring of the Fund's subadviser.
Northern Trust Investments, Inc. (NTI) is a subadviser to the Fund. The
investment adviser and the subadviser each provide day-to-day discretionary
management for a portion of the Fund's assets.
o HOW DID THE MUNICIPAL BOND PORTION OF THE FUND PERFORM?
The municipal bond portion of the Fund continued to benefit from our focus
on income generation. In keeping with our investment approach, we seek to
maximize tax-free income without taking undue risk. Although the municipal
bond portfolio benefited from price appreciation during the reporting
period, its income distribution and the compounding of that income accounts
for most of its total return over the long term. As always, we maintained
our commitment to independent credit research. We sought to identify
attractive investment opportunities using fundamental analysis that
emphasizes an issuer's ability and willingness to repay its debt. Working
with our in-house team of credit analysts, we selected investments on a
bond-by-bond basis. We use credit research as we seek to recognize relative
value and avoid potential pitfalls. The municipal bond portion of the Fund
remains well diversified and we avoid municipal bonds subject to the
federal alternative minimum tax for individuals.
o HOW DID THE EQUITY PORTION OF THE FUND PERFORM?
The equity portion of the Fund produced a positive return close to the
3.78% return of the Index. The relative strength or weakness of certain
sectors in the Index did not have an outsized impact on the equity portion
of the Fund as its sector exposures are similar to those of the Index. In
keeping with our investment approach, we sought to limit both short-term
and long-term capital gains. More specifically, we kept realized
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
capital gains down by limiting the sale of securities that had increased in
value and realizing capital losses on securities that had decreased in
value. In addition, because of market volatility during the reporting
period, we sought to reduce "active risk" (the risk that the equity portion
of the Fund will not perform in line with the Index because of our efforts
to achieve tax efficiency). The equity portion of the Fund also continued
to receive dividend income from its stock holdings. Because of the solid
dividend growth of S&P 500(R) Index-listed companies, it maintained a
dividend yield similar to prior periods.
Thank you for allowing us to help you manage your investments.
As interest rates rise, existing bond prices generally fall; given the
historically low interest rate environment, risks associated with rising
interest rates may be heightened. o Some income may have been subject to
state or local taxes but not the federal alternative minimum tax.
================================================================================
4 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/19 o
----------------------------------------------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
----------------------------------------------------------------------------------------
USAA Growth and Tax Strategy Fund 4.83% 6.24% 9.04%
S&P 500 Index* (reflects no deduction
for fees, expenses, or taxes) 3.78% 9.65% 13.93%
Bloomberg Barclays Municipal Bond
Index** (reflects no deduction for
fees, expenses, or taxes) 6.40% 3.58% 4.58%
Composite Index***
(reflects no deduction for taxes) 4.46% 6.05% 8.73%
*The unmanaged S&P 500 Index represents the weighted average performance of a
group of 500 widely held, publicly traded stocks.
**The unmanaged Bloomberg Barclays Municipal Bond Index is a benchmark of total
return performance for the long-term, investment-grade, tax-exempt bond market.
***The Composite Index is comprised of 51% of the Lipper General Municipal Bond
Funds Index and 49% of the Lipper Large-Cap Core Funds Index. The unmanaged
Lipper General Municipal Bond Funds Index tracks the total return performance of
the funds within this category. This category includes funds that invest at
least 65% of their assets in municipal debt issues in the top four credit
categories. The unmanaged Lipper Large-Cap Core Funds Index tracks the total
return performance of the funds within this category. This category includes
funds that, by portfolio practice, invest at least 75% of their equity assets in
companies with market capitalizations (on a three-year weighted basis) of
greater than 300% of the dollar-weighted median market capitalization of the
middle 1,000 securities of the S&P 500 Index. Large-cap core funds have more
latitude in the companies in which they invest. These funds have an
above-average price-to-earnings ratio, price-to-book ratio, and three-year sales
growth figure, compared to the S&P 500 Index.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
usaa.com.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on net investment income and
realized capital gain distributions, including reinvested distributions, or
redemptions of shares.
================================================================================
INVESTMENT OVERVIEW | 5
================================================================================
o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
BLOOMBERG
USAA BARCLAYS
GROWTH AND TAX COMPOSITE MUNICIPAL
S&P 500 INDEX STRATEGY FUND INDEX BOND INDEX
---------------------------------------------------------------------------------------
05/31/09 $10,000.00 $10,000.00 $10,000.00 $10,000.00
06/30/09 10,019.84 9,975.00 9,957.40 9,906.32
07/31/09 10,777.71 10,406.00 10,387.95 10,072.06
08/31/09 11,166.83 10,681.00 10,654.40 10,244.25
09/30/09 11,583.52 11,223.00 11,043.60 10,611.89
10/31/09 11,368.33 10,955.00 10,823.78 10,389.13
11/30/09 12,050.25 11,279.00 11,165.13 10,474.97
12/31/09 12,283.00 11,443.00 11,282.92 10,510.37
01/31/10 11,841.14 11,275.00 11,132.59 10,565.11
02/28/10 12,207.94 11,499.00 11,347.12 10,667.52
03/31/10 12,944.63 11,817.00 11,640.32 10,641.98
04/30/10 13,149.00 11,967.00 11,800.82 10,771.31
05/31/10 12,099.04 11,517.00 11,425.46 10,852.10
06/30/10 11,465.68 11,225.00 11,160.05 10,858.54
07/31/10 12,269.00 11,650.00 11,588.44 10,993.94
08/31/10 11,715.12 11,565.00 11,498.95 11,245.65
09/30/10 12,760.63 12,030.00 11,950.87 11,228.08
10/31/10 13,246.17 12,211.00 12,137.28 11,196.98
11/30/10 13,247.86 12,030.00 12,004.50 10,973.08
12/31/10 14,133.24 12,258.00 12,237.57 10,760.44
01/31/11 14,468.22 12,297.00 12,318.51 10,681.17
02/28/11 14,963.89 12,613.00 12,616.28 10,851.21
03/31/11 14,969.84 12,585.00 12,595.42 10,815.05
04/30/11 15,413.17 12,884.00 12,887.33 11,008.74
05/31/11 15,238.70 12,961.00 12,942.80 11,196.85
06/30/11 14,984.69 12,891.00 12,870.56 11,235.92
07/31/11 14,679.98 12,853.00 12,825.02 11,350.59
08/31/11 13,882.53 12,610.00 12,632.19 11,544.77
09/30/11 12,906.61 12,367.00 12,304.40 11,664.12
10/31/11 14,317.21 12,934.00 12,884.39 11,620.75
11/30/11 14,285.57 12,953.00 12,913.44 11,689.40
12/31/11 14,431.70 13,163.00 13,108.00 11,911.78
01/31/12 15,078.46 13,665.00 13,539.07 12,187.26
02/29/12 15,730.49 13,961.00 13,809.86 12,199.27
03/31/12 16,248.16 14,130.00 13,965.01 12,120.00
04/30/12 16,146.18 14,180.00 14,014.18 12,259.83
05/31/12 15,175.78 13,882.00 13,699.14 12,361.60
06/30/12 15,801.05 14,131.00 13,945.04 12,348.32
07/31/12 16,020.52 14,340.00 14,153.76 12,544.03
08/31/12 16,381.34 14,510.00 14,306.08 12,558.31
09/30/12 16,804.66 14,706.00 14,519.97 12,634.17
10/31/12 16,494.38 14,626.00 14,421.86 12,669.82
11/30/12 16,590.06 14,796.00 14,590.18 12,878.54
12/31/12 16,741.28 14,746.00 14,550.85 12,719.38
01/31/13 17,608.39 15,150.00 14,923.33 12,772.35
02/28/13 17,847.42 15,282.00 15,039.35 12,811.03
03/31/13 18,516.76 15,531.00 15,257.50 12,755.79
04/30/13 18,873.51 15,755.00 15,481.77 12,895.61
05/31/13 19,315.00 15,836.00 15,540.73 12,738.09
06/30/13 19,055.62 15,469.00 15,204.79 12,377.40
07/31/13 20,025.25 15,806.00 15,479.83 12,269.18
08/31/13 19,445.29 15,449.00 15,156.58 12,094.08
09/30/13 20,055.08 15,869.00 15,549.88 12,354.39
10/31/13 20,976.97 16,270.00 15,939.10 12,451.99
11/30/13 21,616.22 16,496.00 16,139.61 12,426.33
12/31/13 22,163.46 16,687.00 16,300.81 12,394.59
01/31/14 21,397.18 16,594.00 16,221.86 12,636.06
02/28/14 22,375.97 17,039.00 16,660.40 12,784.23
03/31/14 22,564.06 17,138.00 16,738.83 12,805.72
04/30/14 22,730.85 17,304.00 16,905.12 12,959.58
05/31/14 23,264.44 17,565.00 17,203.42 13,126.46
06/30/14 23,745.02 17,746.00 17,371.55 13,137.84
07/31/14 23,417.56 17,641.00 17,280.57 13,160.98
08/31/14 24,354.38 17,997.00 17,706.78 13,320.40
09/30/14 24,012.84 17,901.00 17,604.93 13,333.92
10/31/14 24,599.36 18,144.00 17,864.81 13,425.33
11/30/14 25,260.95 18,376.00 18,098.05 13,448.59
12/31/14 25,197.31 18,436.00 18,127.69 13,516.35
01/31/15 24,440.91 18,373.00 18,059.54 13,755.93
02/28/15 25,845.57 18,701.00 18,424.17 13,614.08
03/31/15 25,436.83 18,604.00 18,322.33 13,653.40
04/30/15 25,680.85 18,594.00 18,348.52 13,581.71
05/31/15 26,011.09 18,647.00 18,426.79 13,544.17
06/30/15 25,507.57 18,444.00 18,257.10 13,531.90
07/31/15 26,041.98 18,702.00 18,501.93 13,629.88
08/31/15 24,470.77 18,228.00 18,019.61 13,656.68
09/30/15 23,865.28 18,080.00 17,890.72 13,755.55
10/31/15 25,878.41 18,773.00 18,609.00 13,810.29
11/30/15 25,955.37 18,870.00 18,674.56 13,865.16
12/31/15 25,546.00 18,843.00 18,614.23 13,962.63
01/31/16 24,278.31 18,527.00 18,320.74 14,129.26
02/29/16 24,245.55 18,516.00 18,325.39 14,151.38
03/31/16 25,890.32 19,142.00 18,916.77 14,196.26
04/30/16 25,990.69 19,274.00 19,026.31 14,300.69
05/31/16 26,457.44 19,504.00 19,208.37 14,339.37
06/30/16 26,525.99 19,778.00 19,398.80 14,567.44
07/31/16 27,503.97 20,086.00 19,727.11 14,576.29
08/31/16 27,542.58 20,120.00 19,754.26 14,596.01
09/30/16 27,547.79 20,044.00 19,701.73 14,523.19
10/31/16 27,045.29 19,711.00 19,426.26 14,370.73
11/30/16 28,046.91 19,545.00 19,351.57 13,834.81
12/31/16 28,601.29 19,852.00 19,648.67 13,997.27
01/31/17 29,143.75 20,064.00 19,887.62 14,089.56
02/28/17 30,300.93 20,510.00 20,318.93 14,187.41
03/31/17 30,336.27 20,549.00 20,353.78 14,218.13
04/30/17 30,647.83 20,717.00 20,529.09 14,321.29
05/31/17 31,079.13 21,042.00 20,838.31 14,548.60
06/30/17 31,273.11 21,090.00 20,855.70 14,496.39
07/31/17 31,916.17 21,360.00 21,141.52 14,613.71
08/31/17 32,013.87 21,473.00 21,259.17 14,724.96
09/30/17 32,674.26 21,664.00 21,397.07 14,650.12
10/31/17 33,436.72 21,925.00 21,650.40 14,685.77
11/30/17 34,462.22 22,266.00 21,885.44 14,607.14
12/31/17 34,845.39 22,527.00 22,120.80 14,759.86
01/31/18 36,840.43 22,994.00 22,547.54 14,586.15
02/28/18 35,482.60 22,504.00 22,136.49 14,542.54
03/31/18 34,580.87 22,294.00 21,928.22 14,596.14
04/30/18 34,713.56 22,271.00 21,923.04 14,544.05
05/31/18 35,549.53 22,685.00 22,298.76 14,710.68
06/30/18 35,768.33 22,750.00 22,371.36 14,723.19
07/31/18 37,099.40 23,165.00 22,835.06 14,758.97
08/31/18 38,308.30 23,558.00 23,155.23 14,796.77
09/30/18 38,526.35 23,533.00 23,152.07 14,701.07
10/31/18 35,893.06 22,616.00 22,198.21 14,610.55
11/30/18 36,624.51 22,941.00 22,535.50 14,772.25
12/31/18 33,317.65 22,088.00 21,673.80 14,949.11
01/31/19 35,987.59 22,943.00 22,564.17 15,062.14
02/28/19 37,143.08 23,341.00 22,972.06 15,142.80
03/31/19 37,864.84 23,792.00 23,329.25 15,382.12
04/30/19 39,397.97 24,322.00 23,867.63 15,439.89
05/31/19 36,894.30 23,780.00 23,292.28 15,652.79
[END CHART]
Data from 5/31/09 through 5/31/19.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Growth and Tax Strategy Fund to the benchmarks listed above (see page 5 for
benchmark definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes, except
that the Composite Index reflects the fees and expenses of the underlying funds
included in the Composite Index.
================================================================================
6 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
o TOP 10 INDUSTRIES - 5/31/19 o
(% of Net Assets)
Internet ................................................................ 4.3%
Software ................................................................ 3.5%
Banks ................................................................... 2.9%
Pharmaceuticals ......................................................... 2.7%
Retail .................................................................. 2.5%
Computers ............................................................... 2.3%
Diversified Financial Services .......................................... 2.0%
Insurance ............................................................... 2.0%
Oil & Gas ............................................................... 1.8%
Healthcare Products ..................................................... 1.8%
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
o TOP 5 TAX-EXEMPT BONDS - 5/31/19 o
(% of Net Assets)
City of Lewisville ...................................................... 0.9%
El Centro Financing Auth. ............................................... 0.8%
Health Care Facilities Auth. ............................................ 0.7%
Port of Port Arthur Navigation District ................................. 0.6%
West Contra Costa Unified School District ............................... 0.6%
o TOP 5 BLUE CHIP STOCKS - 5/31/19 o
(% of Net Assets)
Microsoft Corp. ......................................................... 1.9%
Apple, Inc. ............................................................. 1.6%
Amazon.com, Inc. ........................................................ 1.5%
Facebook, Inc. "A" ...................................................... 0.8%
Berkshire Hathaway, Inc. "B" ............................................ 0.7%
Refer to the Portfolio of Investments for a complete list of securities.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
o ASSET ALLOCATION* - 5/31/19 o
(% of Net Assets)
[PIE CHART OF ASSET ALLOCATION]
MUNICIPAL OBLIGATIONS 52.7%
BLUE CHIP STOCKS 45.6%
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS 0.8%
U.S. TREASURY SECURITIES 0.1%
[END CHART]
*Does not include futures.
Percentages are of the net assets of the Fund and may not equal 100%.
================================================================================
8 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
SHAREHOLDER VOTING RESULTS
--------------------------------------------------------------------------------
On April 18, 2019, a special meeting of shareholders was held to vote on two
proposals relating to the series of the USAA Mutual Funds Trust (Trust).
Shareholders of record on February 8, 2019, were entitled to vote on each
proposal shown below. The proposals were approved by the shareholders.
The following proposals and voting results pertain to one or more series within
the Trust. Votes shown for Proposal 1 are for the Fund, a series of the Trust.
Votes shown for Proposal 2 are for all series of the Trust. The effective date
of the Proposals was July 1, 2019.
PROPOSAL 1
To approve a new Investment Advisory Agreement between the Trust, on behalf of
the Fund, and Victory Capital, an independent investment adviser. The new
Investment Advisory Agreement became effective upon the closing of the
Transaction (as defined and discussed in Note 1 to the Financial Statements)
whereby AMCO was acquired by Victory Holdings, the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
-------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
-------------------------------------------------------------------------------
9,901,373 1,200,979 710,146
PROPOSAL 2
Election of two new trustees to the Trust's Board of Trustees to serve upon the
closing of the Transaction: (1) David C. Brown, to serve as an "interested
trustee" as defined in the Investment Company Act of 1940, as amended (1940
Act); and (2) John C. Walters, to serve as a trustee who is not an "interested
person" as is defined under the 1940 Act ("Independent Trustee").
NUMBER OF SHARES VOTING
-------------------------------------------------------------------------------
TRUSTEES FOR VOTES WITHHELD
-------------------------------------------------------------------------------
David C. Brown 8,299,565,565 820,887,736
John C. Walters 8,317,935,885 802,517,416
================================================================================
SHAREHOLDER VOTING RESULTS | 9
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
May 31, 2019, is provided for information purposes only and should not be used
for reporting to federal or state revenue agencies. Federal tax information for
the calendar year will be reported to you on Form 1099-DIV in January 2020.
With respect to distributions paid, the Fund designates the following amounts
(or, if subsequently determined to be different, the maximum amount allowable)
for the fiscal year ended May 31, 2019:
DIVIDEND RECEIVED
DEDUCTION (CORPORATE TAX-EXEMPT LONG-TERM CAPITAL QUALIFIED INTEREST
SHAREHOLDERS)(1) INCOME(1,2) GAIN DISTRIBUTIONS(3) INCOME
----------------------------------------------------------------------------------------------------
100% 69.95% $981,000 $6,000
----------------------------------------------------------------------------------------------------
(1) Presented as a percentage of net investment income and short-term capital
gain distributions paid, if any.
(2) All or a portion of these amounts may be exempt from taxation at the state
level.
(3) Pursuant to Section 852 of the Internal Revenue Code.
For the fiscal year ended May 31, 2019, the Fund hereby designates the maximum
amount allowable of its net taxable income as qualified dividends taxed at
individual net capital gain rates.
================================================================================
10 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA GROWTH AND TAX STRATEGY FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Growth and Tax Strategy Fund (the "Fund") (one of the funds constituting USAA
Mutual Funds Trust (the "Trust")), including the portfolio of investments, as of
May 31, 2019, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended, the financial highlights for each of the five years in the period
then ended and the related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Fund (one of the funds
constituting USAA Mutual Funds Trust) at May 31, 2019, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and its financial highlights for each of
the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
BASIS FOR OPINION
These financial statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on the Fund's financial statements based
on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and are required to
be independent with respect to the Trust in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Trust is not required to have,
nor were we engaged to perform, an audit of the Trust's internal control over
financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the Trust's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of May 31, 2019, by correspondence with the custodian and brokers or by
other appropriate auditing procedures where replies from brokers were not
received. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the auditor of one or more Victory Capital investment
companies since 1995.
San Antonio, Texas
July 23, 2019
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 11
================================================================================
PORTFOLIO OF INVESTMENTS
May 31, 2019
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
TAX-EXEMPT SECURITIES (52.7%)
MUNICIPAL OBLIGATIONS (52.7%)
ALABAMA (0.3%)
$ 1,000 Lower Alabama Gas District 5.00% 9/01/2046 $ 1,331
--------
ARIZONA (1.0%)
1,300 City of Phoenix IDA 5.00 7/01/2046 1,410
1,000 IDA 5.00 7/01/2047 1,136
500 Maricopa County IDA 5.00 9/01/2042 581
1,000 Pima County IDA(a) 5.00 6/15/2047 1,024
1,000 Student & Academic Services LLC
(INS - Build America Mutual Assurance Co.) 5.00 6/01/2044 1,121
--------
5,272
--------
CALIFORNIA (3.5%)
400 Antioch Unified School District (LIQ - Deutsche
Bank A.G.) (LOC - Deutsche Bank A.G.)(a),(b) 1.47 8/01/2047 400
4,350 El Centro Financing Auth. (LIQ - Deutsche Bank A.G.)
(LOC - Deutsche Bank A.G.)(a),(b) 1.70 7/01/2058 4,350
1,200 Jurupa Public Financing Auth. 5.00 9/01/2042 1,358
2,000 Monterey Peninsula Unified School District (PRE)
(INS - Assured Guaranty Municipal Corp.) 5.50 8/01/2034 2,184
1,000 State 5.00 2/01/2043 1,111
1,000 State 5.00 8/01/2045 1,165
1,000 Statewide Communities Dev. Auth.
(INS - Assured Guaranty Municipal Corp.) 5.00 11/15/2049 1,134
1,000 Sutter Butte Flood Agency
(INS - Build America Mutual Assurance Co.) 5.00 10/01/2040 1,152
1,500 Twin Rivers Unified School District
(INS - Build America Mutual Assurance Co.) 5.00 8/01/2040 1,685
1,000 Val Verde Unified School District
(INS - Build America Mutual Assurance Co.) 5.00 8/01/2044 1,161
4,435 West Contra Costa Unified School District
(INS - National Public Finance Guarantee Corp.)
(Zero Coupon) 0.00 8/01/2034 2,838
--------
18,538
--------
================================================================================
12 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
COLORADO (2.3%)
$ 1,000 Denver Convention Center Hotel Auth. 5.00% 12/01/2040 $ 1,142
1,900 Denver Health & Hospital Auth. 5.00 12/01/2048 2,170
1,000 Educational & Cultural Facilities Auth. 5.00 12/01/2038 1,181
710 Educational & Cultural Facilities Auth. 5.00 4/01/2048 819
1,000 Health Facilities Auth. 5.00 12/01/2042 1,060
1,000 Health Facilities Auth. 5.00 6/01/2045 1,104
250 Park Creek Metropolitan District 5.00 12/01/2041 281
1,000 Park Creek Metropolitan District 5.00 12/01/2045 1,116
1,000 Rampart Range Metropolitan District No. 1
(INS - Assured Guaranty Municipal Corp.) 5.00 12/01/2047 1,169
2,000 Regional Transportation District 5.38 6/01/2031 2,070
--------
12,112
--------
CONNECTICUT (0.6%)
4,766 Mashantucket (Western) Pequot Tribe(c),(d) 2.05(e) 7/01/2031 163
1,500 State 5.00 4/15/2036 1,816
1,000 State 5.00 4/15/2037 1,189
--------
3,168
--------
DISTRICT OF COLUMBIA (0.2%)
1,100 District 5.00 7/01/2042 1,187
--------
FLORIDA (3.2%)
1,000 Atlantic Beach 5.00 11/15/2048 1,115
1,000 City of Jacksonville 5.00 10/01/2029 1,102
1,875 Escambia County Housing Finance Auth. (PRE)
(INS - Assured Guaranty Municipal Corp.) 5.75 6/01/2031 1,875
1,000 Halifax Hospital Medical Center 5.00 6/01/2046 1,092
2,000 Lee County IDA 5.00 11/01/2025 2,099
645 Lee County IDA 5.50 10/01/2047 692
1,450 Lee Memorial Health System 5.00 4/01/2044 1,728
1,300 Miami-Dade County Water & Sewer System (PRE) 5.00 10/01/2034 1,361
1,000 Palm Beach County Health Facilities Auth. 5.00 11/15/2045 1,146
700 Sarasota County Health Facilities Auth. 5.00 5/15/2038 781
1,000 Southeast Overtown Park West Community
Redev. Agency(a) 5.00 3/01/2030 1,119
1,505 Tampa-Hillsborough County Expressway Auth. 5.00 7/01/2037 1,641
1,000 Volusia County Educational Facility Auth. 5.00 10/15/2045 1,117
--------
16,868
--------
GEORGIA (0.3%)
300 Floyd County Dev. Auth.(b) 2.29 9/01/2026 300
1,000 Glynn-Brunswick Memorial Hospital Auth. 5.00 8/01/2047 1,132
400 Monroe County Dev. Auth.(b) 2.29 11/01/2048 400
--------
1,832
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
GUAM (0.4%)
$ 750 Antonio B Won Pat International Airport Auth.
(INS - Assured Guaranty Municipal Corp.) 5.50% 10/01/2033 $ 861
1,000 Waterworks Auth. 5.50 7/01/2043 1,093
--------
1,954
--------
ILLINOIS (4.7%)
1,000 Bureau County Township HSD No. 502
(INS - Build America Mutual Assurance Co.) 5.00 12/01/2037 1,175
1,000 Chicago Midway International Airport 5.00 1/01/2041 1,146
1,000 Chicago O'Hare International Airport
(INS - Assured Guaranty Municipal Corp.) 5.25 1/01/2033 1,110
1,000 Chicago O'Hare International Airport 5.00 1/01/2041 1,167
1,000 City of Chicago Wastewaster Transmission 5.00 1/01/2044 1,081
1,000 City of Chicago Wastewaster Transmission 5.00 1/01/2047 1,116
1,000 City of Chicago Waterworks 5.00 11/01/2044 1,103
1,000 Cook County CCD No. 508 (INS - Build America
Mutual Assurance Co.) 5.00 12/01/2047 1,129
1,000 Cook County Sales Tax 5.00 11/15/2038 1,164
1,000 Educational Facilities Auth. 4.00 11/01/2036 1,074
1,000 Finance Auth. 3.90 3/01/2030 1,066
2,000 Finance Auth. (PRE) 6.00 10/01/2032 2,162
1,000 Finance Auth. 5.00 5/15/2037 1,085
1,275 Finance Auth. 5.00 5/15/2040 1,351
1,000 Finance Auth. 4.00 10/01/2040 1,076
1,000 Finance Auth. 4.00 2/15/2041 1,081
1,000 Finance Auth. 5.00 8/15/2044 1,109
1,000 Finance Auth. 5.00 10/01/2044 1,196
1,000 Finance Auth. 5.00 5/15/2045 1,083
1,000 Northern Illinois Municipal Power Agency 4.00 12/01/2041 1,063
1,235 Sangamon County Water Reclamation District 5.75 1/01/2053 1,433
--------
24,970
--------
INDIANA (1.0%)
500 Ball State University (PRE) 5.00 7/01/2030 519
1,000 Evansville Redev. Auth. (INS - Build America
Mutual Assurance Co.) 4.00 2/01/2039 1,073
1,000 Finance Auth. 5.00 2/01/2040 1,113
1,000 Finance Auth. 5.00 10/01/2044 1,069
1,500 Richmond Hospital Auth. 5.00 1/01/2039 1,661
--------
5,435
--------
KANSAS (1.2%)
1,000 City of Coffeyville Electric System (INS - National
Public Finance Guarantee Corp.)(a) 5.00 6/01/2042 1,120
1,500 City of Lawrence 5.00 7/01/2043 1,751
================================================================================
14 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
$ 1,000 City of Wichita 4.63% 9/01/2033 $ 1,012
1,250 Wyandotte County & Kansas City
Unified Government Utility System 5.00 9/01/2044 1,400
1,000 Wyandotte County & Kansas City
Unified Government Utility System 5.00 9/01/2045 1,139
--------
6,422
--------
KENTUCKY (0.6%)
1,000 City of Ashland 5.00 2/01/2040 1,086
1,000 Economic Dev. Finance Auth.
(INS - Assured Guaranty Municipal Corp.) 5.00 12/01/2045 1,155
1,000 Economic Dev. Finance Auth. 5.00 5/15/2046 1,044
--------
3,285
--------
LOUISIANA (2.6%)
1,000 City of Shreveport Water & Sewer
(INS - Build America Mutual Assurance Co.) 5.00 12/01/2039 1,121
1,000 City of Shreveport Water & Sewer 5.00 12/01/2040 1,129
500 City of Shreveport Water & Sewer
(INS - Assured Guaranty Municipal Corp.) 4.00 12/01/2044 543
1,500 Gasoline & Fuels Tax 5.00 5/01/2045 1,779
1,000 Local Government Environmental
Facilities & Community Dev. Auth.
(INS - Assured Guaranty Municipal Corp.) 5.00 10/01/2039 1,169
1,000 Local Government Environmental
Facilities & Community Dev. Auth.
(INS - Assured Guaranty Municipal Corp.) 5.00 10/01/2043 1,156
1,000 Local Government Environmental
Facilities & Community Dev. Auth.
(INS - Assured Guaranty Municipal Corp.) 4.00 10/01/2046 1,060
1,000 Public Facilities Auth. 5.00 11/01/2045 1,095
1,000 Public Facilities Auth.
(INS - Build America Mutual Assurance Co.) 5.25 6/01/2051 1,132
1,000 Public Facilities Auth. 5.00 7/01/2052 1,138
1,000 Public Facilities Auth. 4.00 1/01/2056 1,047
1,000 Tobacco Settlement Financing Corp. 5.25 5/15/2035 1,092
--------
13,461
--------
MAINE (0.2%)
1,000 Health & Higher Education Facilities Auth. 4.00 7/01/2046 1,025
--------
MASSACHUSETTS (2.0%)
1,000 Dev. Finance Agency 5.00 6/01/2039 1,180
1,000 Dev. Finance Agency 5.00 4/15/2040 1,072
1,000 Dev. Finance Agency 5.25 11/15/2041 1,106
1,000 Dev. Finance Agency 5.75 7/15/2043 1,089
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
$ 1,000 Dev. Finance Agency 5.00% 7/01/2044 $ 1,105
1,600 Dev. Finance Agency 5.00 7/01/2044 1,863
1,000 Dev. Finance Agency 5.50 7/01/2044 1,102
1,000 Dev. Finance Agency 5.00 7/01/2046 1,130
1,000 Dev. Finance Agency(a) 5.00 10/01/2057 1,086
--------
10,733
--------
MICHIGAN (1.7%)
1,000 City of Wyandotte Electric System
(INS - Build America Mutual Assurance Co.) 5.00 10/01/2044 1,126
1,750 Downtown Detroit MI Dev. Auth.
(INS - Assured Guaranty Municipal Corp.) 5.00 7/01/2043 1,929
1,000 Jackson Public Schools (NBGA - Michigan School
Bond Qualification and Loan Program) 5.00 5/01/2042 1,183
1,000 Karegnondi Water Auth. 5.00 11/01/2041 1,152
1,250 Lincoln Consolidated School District
(INS - Assured Guaranty Municipal Corp.) 5.00 5/01/2040 1,443
1,000 Livonia Public Schools School District
(INS - Assured Guaranty Municipal Corp.) 5.00 5/01/2045 1,146
1,000 Wayne County Airport Auth. 5.00 12/01/2044 1,126
--------
9,105
--------
MINNESOTA (0.5%)
1,000 City of St. Paul Housing & Redev. Auth. (PRE) 5.00 11/15/2044 1,206
1,000 City of St. Paul Housing & Redev. Auth. 5.00 11/15/2047 1,163
--------
2,369
--------
MISSOURI (0.5%)
1,270 Health & Educational Facilities Auth. 5.00 8/01/2045 1,363
250 Health & Educational Facilities Auth. 4.00 2/15/2049 271
1,000 St. Louis Municipal Finance Corp.
(INS - Assured Guaranty Municipal Corp.) 5.00 10/01/2038 1,171
--------
2,805
--------
NEBRASKA (0.2%)
1,000 Douglas County Hospital Auth. No. 3 5.00 11/01/2048 1,111
--------
NEVADA (0.9%)
1,000 Carson City 5.00 9/01/2042 1,124
1,555 Las Vegas Convention & Visitors Auth. 4.00 7/01/2041 1,661
1,500 Las Vegas Redev. Agency 5.00 6/15/2045 1,684
--------
4,469
--------
NEW JERSEY (2.8%)
1,000 EDA 5.00 6/15/2029 1,071
1,000 EDA 4.00 7/01/2034 1,051
================================================================================
16 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
$ 500 EDA (INS - Assured Guaranty Municipal Corp.) 5.00% 6/01/2037 $ 582
2,000 EDA 5.00 6/15/2042 2,239
1,000 EDA 5.00 6/15/2043 1,138
1,000 EDA 5.00 6/15/2043 1,138
1,000 EDA 5.00 6/15/2047 1,122
1,000 Educational Facilities Auth. 5.00 9/01/2036 1,122
1,000 Health Care Facilities Financing Auth. 5.00 10/01/2037 1,136
1,250 South Jersey Transportation Auth. LLC 5.00 11/01/2039 1,389
500 Tobacco Settlement Financing Corp. 5.25 6/01/2046 571
1,000 Transportation Trust Fund Auth. 5.00 12/15/2035 1,159
1,000 Transportation Trust Fund Auth. 5.00 6/15/2044 1,085
--------
14,803
--------
NEW MEXICO (0.2%)
1,000 City of Farmington 5.90 6/01/2040 1,038
--------
NEW YORK (1.5%)
2,000 City of New York Trust for Cultural Res. 5.00 12/01/2039 2,033
1,205 Dormitory Auth. (INS - AMBAC Assurance Corp.) 5.50 7/01/2040 1,687
630 Liberty Dev. Corp. 5.25 10/01/2035 830
1,500 Liberty Dev. Corp. 5.50 10/01/2037 2,048
1,000 MTA 5.00 11/15/2042 1,096
--------
7,694
--------
NORTH CAROLINA (0.5%)
1,000 Medical Care Commission 5.00 10/01/2035 1,127
1,500 Medical Care Commission 5.00 1/01/2049 1,673
--------
2,800
--------
NORTH DAKOTA (0.2%)
1,000 Ward County 5.00 6/01/2048 1,111
--------
OHIO (0.2%)
750 Southeastern Ohio Port Auth. 5.00 12/01/2043 781
--------
OKLAHOMA (0.6%)
1,315 Comanche County Hospital Auth. 5.00 7/01/2032 1,377
1,000 Dev. Finance Auth. 5.50 8/15/2057 1,169
750 Tulsa County Industrial Auth. 5.25 11/15/2037 855
--------
3,401
--------
OREGON (0.3%)
1,250 Salem Hospital Facility Auth. 5.00 5/15/2043 1,426
--------
PENNSYLVANIA (5.1%)
1,185 Allegheny County Hospital Dev. Auth. 4.00 7/15/2039 1,297
1,000 Allegheny County Hospital Dev. Auth. 5.00 4/01/2047 1,159
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
$ 1,000 Altoona Area School District
(INS - Build America Mutual Assurance Co.) 5.00% 12/01/2048 $ 1,130
350 Berks County IDA 5.00 5/15/2043 386
1,500 Berks County IDA 5.00 11/01/2050 1,717
1,125 Butler County Hospital Auth. 5.00 7/01/2039 1,260
1,000 Chester County IDA 5.00 10/01/2044 1,075
1,000 Commonwealth 5.00 7/01/2043 1,173
1,000 Commonwealth Financing Auth. 5.00 6/01/2035 1,195
1,625 Indiana County Hospital Auth. 6.00 6/01/2039 1,782
1,000 Lancaster County Hospital Auth. 5.00 11/01/2035 1,116
1,000 Montgomery County IDA 5.25 1/15/2045 1,104
1,000 Northampton County General Purpose Auth. 4.00 8/15/2040 1,053
1,000 Northampton County General Purpose Auth. 5.00 8/15/2043 1,167
1,000 Philadelphia School District 5.00 9/01/2037 1,150
1,000 Philadelphia School District 5.00 9/01/2038 1,179
1,500 Reading School District (INS - Assured Guaranty
Municipal Corp.) 5.00 3/01/2038 1,737
1,000 Turnpike Commission 5.00 12/01/2039 1,182
1,000 Turnpike Commission 5.25 12/01/2044 1,125
1,000 Turnpike Commission 5.00 12/01/2046 1,126
1,000 Turnpike Commission 5.00 12/01/2047 1,173
1,500 Wilkes-Barre Area School District
(INS - Build America Mutual Assurance Co.) 4.00 4/15/2049 1,604
--------
26,890
--------
PUERTO RICO (0.2%)
1,000 Commonwealth (INS - Assured Guaranty
Municipal Corp.) 5.00 7/01/2035 1,043
--------
RHODE ISLAND (0.2%)
40 Housing & Mortgage Finance Corp. 6.85 10/01/2024 40
1,000 Turnpike & Bridge Auth. 5.00 10/01/2040 1,150
--------
1,190
--------
SOUTH CAROLINA (0.4%)
2,000 Piedmont Municipal Power Agency
(INS - Assured Guaranty Municipal Corp.) 5.75 1/01/2034 2,158
--------
TENNESSEE (0.9%)
1,500 Greeneville Health & Educational Facilities Board 5.00 7/01/2037 1,758
1,000 Metropolitan Government of Nashville & Davidson
County Health & Educational Facilities Board 5.00 10/01/2045 1,128
1,000 Metropolitan Government of Nashville & Davidson
County Health & Educational Facilities Board 5.00 7/01/2046 1,140
================================================================================
18 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
$ 500 Metropolitan Government of Nashville & Davidson
County Health & Educational Facilities Board 5.00% 10/01/2048 $ 564
--------
4,590
--------
TEXAS (8.2%)
1,380 Austin Convention Enterprises, Inc. 5.00 1/01/2034 1,559
1,000 Bexar County Health Facilities Dev. Corp. 5.00 7/15/2037 1,122
1,000 Central Texas Regional Mobility Auth. 4.00 1/01/2041 1,055
1,000 Central Texas Regional Mobility Auth. 5.00 1/01/2045 1,122
1,000 Central Texas Turnpike System 5.00 8/15/2042 1,111
1,000 City of Arlington (INS - Assured Guaranty
Municipal Corp.) 5.00 2/15/2048 1,173
1,000 City of Houston 5.00 9/01/2039 1,119
1,000 City of Houston 5.00 9/01/2040 1,118
1,000 City of Laredo Waterworks & Sewer System 4.00 3/01/2041 1,068
4,420 City of Lewisville (INS - ACA Financial Guaranty Corp.) 5.80 9/01/2025 4,658
1,000 Clifton Higher Education Finance Corp.
(NBGA - Texas Permanent School Fund) 5.00 8/15/2039 1,122
1,000 Harris County Cultural Education Facilities
Finance Corp. 5.00 6/01/2038 1,064
1,000 Harris County Hospital District 4.00 2/15/2042 1,047
1,000 Karnes County Hospital District 5.00 2/01/2044 1,063
1,000 Matagorda County Navigation District No. 1 4.00 6/01/2030 1,044
1,000 Mesquite Health Facility Dev. Corp. 5.00 2/15/2035 1,041
225 New Hope Cultural Education Facilities Finance Corp.
(INS - Assured Guaranty Municipal Corp.) 5.00 7/01/2038 259
1,600 New Hope Cultural Education Facilities Finance Corp. 5.00 4/01/2047 1,702
1,000 New Hope Cultural Education Facilities Finance Corp. 5.00 7/01/2047 939
1,500 North Texas Tollway Auth. 5.00 1/01/2031 1,698
1,000 North Texas Tollway Auth. 5.00 1/01/2045 1,130
1,905 Port of Port Arthur Navigation District(b) 2.45 4/01/2040 1,905
800 Port of Port Arthur Navigation District(b) 2.45 4/01/2040 800
3,250 Port of Port Arthur Navigation District(b) 1.55 11/01/2040 3,250
2,520 Port of Port Arthur Navigation District(b) 1.55 11/01/2040 2,520
1,000 Princeton ISD (NBGA - Texas Permanent School Fund) 5.00 2/15/2043 1,197
1,000 Prosper ISD (NBGA - Texas Permanent School Fund) 5.00 2/15/2048 1,199
1,000 Tarrant County Cultural Education
Facilities Finance Corp. 5.00 11/15/2036 1,001
1,000 Tarrant County Cultural Education
Facilities Finance Corp. 5.00 11/15/2045 969
1,000 Tarrant County Cultural Education
Facilities Finance Corp. 5.00 11/15/2046 1,125
1,500 Tarrant County Cultural Education
Facilities Finance Corp. 5.00 7/01/2048 1,769
--------
42,949
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 19
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
VIRGINIA (0.2%)
$ 1,000 Alexandria IDA 5.00% 10/01/2050 $ 1,099
--------
WASHINGTON (1.3%)
3,700 Health Care Facilities Auth. (LIQ - J.P. Morgan
Chase & Co.)(a),(b) 1.77 9/06/2020 3,700
1,000 Health Care Facilities Auth. 4.00 7/01/2042 1,071
1,000 Health Care Facilities Auth. 5.00 1/01/2047 1,144
1,000 Housing Finance Commission 5.00 1/01/2038 1,119
--------
7,034
--------
WEST VIRGINIA (0.3%)
1,500 West Virginia Hospital Finance Auth. 4.00 1/01/2038 1,578
--------
WISCONSIN (1.4%)
1,000 Health & Educational Facilities Auth. (PRE) 5.25 4/15/2035 1,142
1,000 Health & Educational Facilities Auth. 5.00 9/15/2045 1,046
1,000 Public Finance Auth. 5.00 7/01/2038 1,190
600 Public Finance Auth. (INS - Assured Guaranty
Municipal Corp.) 5.00 7/01/2044 695
1,500 Public Finance Auth. 5.25 10/01/2048 1,705
1,500 Public Finance Auth. 4.00 10/01/2049 1,606
--------
7,384
--------
WYOMING (0.3%)
1,250 Laramie County 5.00 5/01/2037 1,318
--------
Total Municipal Obligations (cost: $266,703) 277,739
--------
------------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (45.6%)
BLUE CHIP STOCKS (45.6%)
BASIC MATERIALS (0.9%)
----------------------
CHEMICALS (0.8%)
2,643 Air Products & Chemicals, Inc. 538
1,061 Albemarle Corp. 67
1,336 Celanese Corp. 127
2,306 CF Industries Holdings, Inc. 93
7,085 Dow, Inc.(f) 331
23,594 DowDuPont, Inc. 720
1,398 Eastman Chemical Co. 91
================================================================================
20 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
1,542 FMC Corp. $ 113
1,011 International Flavors & Fragrances, Inc. 137
5,503 Linde plc 993
3,142 LyondellBasell Industries N.V. "A" 233
4,267 Mosaic Co. 92
2,395 PPG Industries, Inc. 251
964 Sherwin-Williams Co. 404
--------
4,190
--------
FOREST PRODUCTS & PAPER (0.0%)
4,728 International Paper Co. 196
--------
IRON/STEEL (0.0%)
2,663 Nucor Corp. 128
--------
MINING (0.1%)
15,028 Freeport-McMoRan, Inc. 146
8,551 Newmont Goldcorp Corp. 283
--------
429
--------
Total Basic Materials 4,943
--------
COMMUNICATIONS (7.0%)
---------------------
ADVERTISING (0.1%)
3,603 Interpublic Group of Companies, Inc. 76
2,152 Omnicom Group, Inc. 167
--------
243
--------
INTERNET (4.3%)
3,133 Alphabet, Inc. "A"(f) 3,467
3,127 Alphabet, Inc. "C"(f) 3,451
4,318 Amazon.com, Inc.(f) 7,665
464 Booking Holdings, Inc.(f) 768
10,566 eBay, Inc. 380
1,162 Expedia Group, Inc. 134
561 F5 Networks, Inc.(f) 74
24,962 Facebook, Inc. "A"(f) 4,430
4,583 Netflix, Inc.(f) 1,573
7,459 Symantec Corp. 140
975 TripAdvisor, Inc.(f) 41
7,622 Twitter, Inc.(f) 278
1,070 VeriSign, Inc.(f) 208
--------
22,609
--------
MEDIA (1.1%)
3,467 CBS Corp. "B" 167
2,057 Charter Communications, Inc. "A"(f) 775
================================================================================
PORTFOLIO OF INVESTMENTS | 21
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
45,562 Comcast Corp. "A" $ 1,868
3,809 Discovery, Inc. "C"(f) 98
1,428 Discovery, Inc. "A"(f) 39
2,685 DISH Network Corp. "A"(f) 97
3,518 Fox Corp. "A"(f) 124
3,584 News Corp. "A" 41
3,276 Viacom, Inc. "B" 95
20,412 Walt Disney Co. 2,695
--------
5,999
--------
TELECOMMUNICATIONS (1.5%)
610 Arista Networks, Inc.(f) 149
76,227 AT&T, Inc.(g) 2,331
11,252 CenturyLink, Inc. 118
44,905 Cisco Systems, Inc. 2,336
9,344 Corning, Inc. 270
3,500 Juniper Networks, Inc. 86
1,577 Motorola Solutions, Inc. 236
44,175 Verizon Communications, Inc. 2,401
--------
7,927
--------
Total Communications 36,778
--------
CONSUMER, CYCLICAL (3.8%)
-------------------------
AIRLINES (0.2%)
4,018 American Airlines Group, Inc. 110
7,308 Delta Air Lines, Inc. 376
5,908 Southwest Airlines Co. 281
2,350 United Continental Holdings, Inc.(f) 183
--------
950
--------
APPAREL (0.3%)
1,806 Capri Holdings Ltd. 59
4,225 Hanesbrands, Inc. 63
542 Kontoor Brands, Inc.(f) 16
14,032 NIKE, Inc. "B" 1,082
868 PVH Corp. 74
517 Ralph Lauren Corp. 54
2,313 Tapestry, Inc. 66
1,669 Under Armour, Inc. "A"(f) 38
1,654 Under Armour, Inc. "C"(f) 34
3,798 VF Corp. 311
--------
1,797
--------
================================================================================
22 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
AUTO MANUFACTURERS (0.2%)
40,021 Ford Motor Co. $ 381
15,325 General Motors Co. 511
3,714 PACCAR, Inc. 244
--------
1,136
--------
AUTO PARTS & EQUIPMENT (0.1%)
3,076 Aptiv plc 197
2,393 BorgWarner, Inc. 85
1 Delphi Technologies plc -
--------
282
--------
DISTRIBUTION/WHOLESALE (0.1%)
2,286 Copart, Inc.(f) 163
5,382 Fastenal Co. 165
3,724 LKQ Corp.(f) 96
478 WW Grainger, Inc. 125
--------
549
--------
HOME BUILDERS (0.1%)
3,224 DR Horton, Inc. 138
3,426 Lennar Corp. "A" 170
1 Lennar Corp. "B" -
2,649 PulteGroup, Inc. 82
--------
390
--------
HOME FURNISHINGS (0.0%)
1,214 Leggett & Platt, Inc. 43
674 Whirlpool Corp. 78
--------
121
--------
HOUSEWARES (0.0%)
2,180 Newell Brands, Inc. 29
--------
LEISURE TIME (0.1%)
3,668 Carnival Corp. 188
1,559 Harley-Davidson, Inc. 51
2,244 Norwegian Cruise Line Holdings Ltd.(f) 123
2,000 Royal Caribbean Cruises Ltd. 243
--------
605
--------
LODGING (0.2%)
3,115 Hilton Worldwide Holdings, Inc. 279
3,316 Marriott International, Inc. "A" 414
6,137 MGM Resorts International 152
962 Wynn Resorts Ltd. 103
--------
948
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 23
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
RETAIL (2.5%)
687 Advance Auto Parts, Inc. $ 106
296 AutoZone, Inc.(f) 304
2,415 Best Buy Co., Inc. 151
1,691 CarMax, Inc.(f) 132
245 Chipotle Mexican Grill, Inc.(f) 162
4,892 Costco Wholesale Corp. 1,172
1,204 Darden Restaurants, Inc. 140
2,615 Dollar General Corp. 333
2,788 Dollar Tree, Inc.(f) 283
1,129 Foot Locker, Inc. 44
2,024 Gap, Inc. 38
1,641 Genuine Parts Co. 162
11,626 Home Depot, Inc. 2,207
1,649 Kohl's Corp. 81
2,674 L Brands, Inc. 60
8,086 Lowe's Cos, Inc. 754
3,071 Macy's, Inc. 63
8,008 McDonald's Corp. 1,588
1,027 Nordstrom, Inc. 32
788 O'Reilly Automotive, Inc.(f) 293
3,683 Ross Stores, Inc. 342
12,390 Starbucks Corp. 942
5,924 Target Corp. 477
1,072 Tiffany & Co. 96
12,486 TJX Companies, Inc. 628
1,196 Tractor Supply Co. 121
551 Ulta Salon Cosmetics & Fragrance, Inc.(f) 184
8,391 Walgreens Boots Alliance, Inc. 414
14,299 Walmart, Inc. 1,451
3,123 Yum! Brands, Inc. 320
--------
13,080
--------
TEXTILES (0.0%)
739 Mohawk Industries, Inc.(f) 100
--------
TOYS/GAMES/HOBBIES (0.0%)
1,004 Hasbro, Inc. 95
2,396 Mattel, Inc.(f) 24
--------
119
--------
Total Consumer, Cyclical 20,106
--------
================================================================================
24 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
CONSUMER, NON-CYCLICAL (10.1%)
------------------------------
AGRICULTURE (0.5%)
19,313 Altria Group, Inc. $ 948
5,283 Archer-Daniels-Midland Co. 202
16,099 Philip Morris International, Inc. 1,242
--------
2,392
--------
BEVERAGES (0.8%)
1,744 Brown-Forman Corp. "B" 87
38,140 Coca-Cola Co. 1,874
1,654 Constellation Brands, Inc. "A" 292
1,743 Molson Coors Brewing Co. "B" 96
4,648 Monster Beverage Corp.(f) 287
14,088 PepsiCo, Inc. 1,803
--------
4,439
--------
BIOTECHNOLOGY (0.9%)
2,201 Alexion Pharmaceuticals, Inc.(f) 250
6,365 Amgen, Inc. 1,061
2,058 Biogen, Inc.(f) 451
7,364 Celgene Corp.(f) 691
14,905 Gilead Sciences, Inc. 928
1,468 Illumina, Inc.(f) 451
1,447 Incyte Corp.(f) 114
620 Regeneron Pharmaceuticals, Inc.(f) 187
2,546 Vertex Pharmaceuticals, Inc.(f) 423
--------
4,556
--------
COMMERCIAL SERVICES (1.0%)
4,365 Automatic Data Processing, Inc. 699
814 Cintas Corp. 181
2,532 Ecolab, Inc. 466
1,407 Equifax, Inc. 170
880 FleetCor Technologies, Inc.(f) 227
1,065 Gartner, Inc.(f) 161
1,852 Global Payments, Inc. 285
1,952 H&R Block, Inc. 51
3,349 IHS Markit Ltd.(f) 192
1,624 Moody's Corp. 297
4,277 Nielsen Holdings plc 97
11,657 PayPal Holdings, Inc.(f) 1,279
1,704 Quanta Services, Inc. 59
1,300 Robert Half International, Inc. 70
1,687 Rollins, Inc. 64
================================================================================
PORTFOLIO OF INVESTMENTS | 25
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
2,912 S&P Global, Inc. $ 623
1,923 Total System Services, Inc. 238
788 United Rentals, Inc.(f) 87
1,865 Verisk Analytics, Inc. 261
--------
5,507
--------
COSMETICS/PERSONAL CARE (0.7%)
8,540 Colgate-Palmolive Co. 594
4,102 Coty, Inc. "A"(g) 51
2,575 Estee Lauder Companies, Inc. "A" 415
26,176 Procter & Gamble Co. 2,694
--------
3,754
--------
FOOD (0.6%)
2,319 Campbell Soup Co. 84
5,746 Conagra Brands, Inc. 154
6,961 General Mills, Inc. 344
1,318 Hershey Co. 174
2,891 Hormel Foods Corp. 114
1,270 JM Smucker Co. 154
2,970 Kellogg Co. 156
7,359 Kraft Heinz Co. 204
9,599 Kroger Co. 219
1,462 Lamb Weston Holdings, Inc. 87
1,216 McCormick & Co., Inc. 190
16,937 Mondelez International, Inc. "A" 861
4,663 Sysco Corp. 321
3,456 Tyson Foods, Inc. "A" 262
--------
3,324
--------
HEALTHCARE PRODUCTS (1.8%)
18,379 Abbott Laboratories(g) 1,399
431 ABIOMED, Inc.(f) 113
822 Align Technology, Inc.(f) 234
4,950 Baxter International, Inc. 364
2,570 Becton, Dickinson & Co. 600
16,157 Boston Scientific Corp.(f) 621
549 Cooper Companies, Inc. 163
6,575 Danaher Corp. 868
2,679 Dentsply Sirona, Inc. 144
2,050 Edwards Lifesciences Corp.(f) 350
1,445 Henry Schein, Inc.(f) 93
2,574 Hologic, Inc.(f) 113
862 IDEXX Laboratories, Inc.(f) 215
1,115 Intuitive Surgical, Inc.(f) 518
================================================================================
26 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
15,494 Medtronic plc $ 1,434
1,423 ResMed, Inc. 162
3,126 Stryker Corp. 573
536 Teleflex, Inc. 155
4,212 Thermo Fisher Scientific, Inc. 1,125
1,048 Varian Medical Systems, Inc.(f) 132
2,069 Zimmer Biomet Holdings, Inc. 236
--------
9,612
--------
HEALTHCARE-SERVICES (0.9%)
2,590 Anthem, Inc. 720
4,649 Centene Corp.(f) 269
1,414 DaVita, Inc.(f) 61
2,781 HCA Healthcare, Inc. 336
1,316 Humana, Inc. 322
1,614 IQVIA Holdings, Inc.(f) 219
995 Laboratory Corp. of America Holdings(f) 162
1,359 Quest Diagnostics, Inc. 130
10,041 UnitedHealth Group, Inc. 2,428
812 Universal Health Services, Inc. "B" 97
567 WellCare Health Plans, Inc.(f) 157
--------
4,901
--------
HOUSEHOLD PRODUCTS/WARES (0.2%)
906 Avery Dennison Corp. 94
2,460 Church & Dwight Co., Inc. 183
1,274 Clorox Co. 190
3,398 Kimberly-Clark Corp. 435
--------
902
--------
PHARMACEUTICALS (2.7%)
15,090 AbbVie, Inc. 1,158
3,092 Allergan plc 377
1,410 AmerisourceBergen Corp. 110
18,063 Bristol-Myers Squibb Co. 819
2,310 Cardinal Health, Inc. 97
3,977 Cigna Corp.(f) 589
12,203 CVS Health Corp. 639
9,133 Eli Lilly & Co. 1,059
27,402 Johnson & Johnson(g) 3,594
2,308 McKesson Corp. 282
27,009 Merck & Co., Inc. 2,139
4,722 Mylan N.V.(f) 79
2,095 Nektar Therapeutics(f) 66
1,463 Perrigo Co. plc 61
================================================================================
PORTFOLIO OF INVESTMENTS | 27
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
56,908 Pfizer, Inc. $ 2,363
5,626 Zoetis, Inc. 568
--------
14,000
--------
Total Consumer, Non-cyclical 53,387
--------
ENERGY (2.2%)
-------------
OIL & GAS (1.8%)
5,912 Anadarko Petroleum Corp. 416
4,518 Apache Corp. 118
4,115 Cabot Oil & Gas Corp. 103
19,811 Chevron Corp. 2,255
1,200 Cimarex Energy Co. 69
1,929 Concho Resources, Inc. 189
11,082 ConocoPhillips 653
4,019 Devon Energy Corp. 101
1,807 Diamondback Energy, Inc. 177
6,370 EOG Resources, Inc. 522
46,039 Exxon Mobil Corp.(g) 3,258
1,218 Helmerich & Payne, Inc. 60
2,905 Hess Corp. 162
8,379 Marathon Oil Corp. 110
6,670 Marathon Petroleum Corp. 307
5,819 Noble Energy, Inc. 125
6,077 Occidental Petroleum Corp. 302
3,864 Phillips 66 312
1,672 Pioneer Natural Resources Co. 237
4,001 Valero Energy Corp. 282
--------
9,758
--------
OIL & GAS SERVICES (0.2%)
2,932 Baker Hughes a GE Co. 63
10,499 Halliburton Co. 224
4,614 National Oilwell Varco, Inc. 96
12,192 Schlumberger Ltd. 423
5,120 TechnipFMC plc 106
--------
912
--------
PIPELINES (0.2%)
20,653 Kinder Morgan, Inc. 412
4,096 ONEOK, Inc. 261
14,133 Williams Companies, Inc. 373
--------
1,046
--------
Total Energy 11,716
--------
================================================================================
28 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
FINANCIAL (8.3%)
----------------
BANKS (2.9%)
90,199 Bank of America Corp. $ 2,399
9,561 Bank of New York Mellon Corp. 408
7,586 BB&T Corp. 355
26,864 Citigroup, Inc. 1,670
4,616 Citizens Financial Group, Inc. 150
1,613 Comerica, Inc. 111
9,109 Fifth Third Bancorp 241
1,912 First Republic Bank 186
3,261 Goldman Sachs Group, Inc. 595
11,994 Huntington Bancshares, Inc. 152
35,496 J.P. Morgan Chase & Co. 3,761
10,027 KeyCorp. 160
1,384 M&T Bank Corp. 221
15,263 Morgan Stanley 621
2,365 Northern Trust Corp.(h) 202
4,630 PNC Financial Services Group, Inc. 589
10,886 Regions Financial Corp. 151
3,779 State Street Corp. 209
3,750 SunTrust Banks, Inc. 225
576 SVB Financial Group(f) 116
15,254 U.S. Bancorp. 766
42,844 Wells Fargo & Co.(g) 1,901
2,072 Zions Bancorp 89
--------
15,278
--------
DIVERSIFIED FINANCIAL SERVICES (2.0%)
617 Affiliated Managers Group, Inc. 52
6,948 American Express Co. 797
1,383 Ameriprise Financial, Inc. 191
1,439 BlackRock, Inc. 598
5,207 Capital One Financial Corp. 447
1,060 Cboe Global Markets, Inc. 115
12,413 Charles Schwab Corp. 517
4,006 CME Group, Inc. 770
3,369 Discover Financial Services 251
2,481 E*TRADE Financial Corp. 111
2,997 Franklin Resources, Inc. 95
5,711 Intercontinental Exchange, Inc. 470
4,817 Invesco Ltd. 94
1,542 Jefferies Financial Group, Inc. 27
9,019 Mastercard, Inc. "A" 2,268
1,159 Nasdaq, Inc. 105
================================================================================
PORTFOLIO OF INVESTMENTS | 29
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
1,452 Raymond James Financial, Inc. $ 120
6,818 Synchrony Financial 229
2,288 T. Rowe Price Group, Inc. 231
17,570 Visa, Inc. "A" 2,835
4,287 Western Union Co. 83
--------
10,406
--------
INSURANCE (2.0%)
7,793 Aflac, Inc. 400
3,329 Allstate Corp. 318
10,289 American International Group, Inc. 525
2,360 Aon plc 425
2,040 Arthur J. Gallagher & Co. 172
20,009 Berkshire Hathaway, Inc. "B"(f) 3,950
5,396 Chubb Ltd. 788
1,525 Cincinnati Financial Corp. 150
476 Everest Re Group Ltd. 118
4,006 Hartford Financial Services Group, Inc. 211
2,493 Lincoln National Corp. 148
3,175 Loews Corp. 163
6,078 Marsh & McLennan Companies, Inc. 581
11,557 MetLife, Inc. 534
2,507 Principal Financial Group, Inc. 129
5,810 Progressive Corp. 461
3,711 Prudential Financial, Inc. 343
995 Torchmark Corp. 85
2,645 Travelers Companies, Inc. 385
2,079 Unum Group 66
1,438 Willis Towers Watson plc 252
--------
10,204
--------
REAL ESTATE (0.0%)
3,167 CBRE Group, Inc. "A"(f) 145
--------
REITS (1.4%)
1,101 Alexandria Real Estate Equities, Inc. 161
4,297 American Tower Corp. 897
1,818 Apartment Investment & Management Co. "A" 91
1,564 AvalonBay Communities, Inc. 318
1,478 Boston Properties, Inc. 193
5,001 Crown Castle International Corp. 650
2,408 Digital Realty Trust, Inc. 283
3,869 Duke Realty Corp. 116
1,002 Equinix, Inc. 487
4,165 Equity Residential 319
================================================================================
30 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
612 Essex Property Trust, Inc. $ 179
1,147 Extra Space Storage, Inc. 123
663 Federal Realty Investment Trust 87
5,381 HCP, Inc. 171
6,924 Host Hotels & Resorts, Inc. 125
2,608 Iron Mountain, Inc. 80
4,841 Kimco Realty Corp. 84
1,273 Mid-America Apartment Communities, Inc. 145
6,287 Prologis, Inc. 463
1,497 Public Storage 356
3,181 Realty Income Corp. 223
1,543 Regency Centers Corp. 102
1,109 SBA Communications Corp.(f) 240
3,655 Simon Property Group, Inc. 592
887 SL Green Realty Corp. 76
2,624 UDR, Inc. 118
3,510 Ventas, Inc. 226
1,602 Vornado Realty Trust 106
3,751 Welltower, Inc. 305
6,727 Weyerhaeuser Co. 153
--------
7,469
--------
SAVINGS & LOANS (0.0%)
4,406 People's United Financial, Inc. 68
--------
Total Financial 43,570
--------
INDUSTRIAL (4.2%)
-----------------
AEROSPACE/DEFENSE (1.2%)
4,490 Arconic, Inc. 98
5,311 Boeing Co. 1,814
3,206 General Dynamics Corp. 516
1,100 Harris Corp. 206
887 L3 Technologies, Inc. 215
2,443 Lockheed Martin Corp. 827
1,969 Northrop Grumman Corp. 597
2,842 Raytheon Co. 496
482 TransDigm Group, Inc.(f) 213
8,948 United Technologies Corp. 1,130
--------
6,112
--------
BUILDING MATERIALS (0.2%)
1,691 Fortune Brands Home & Security, Inc. 81
10,506 Johnson Controls International plc 405
582 Martin Marietta Materials, Inc. 122
================================================================================
PORTFOLIO OF INVESTMENTS | 31
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
2,915 Masco Corp. $ 102
1,496 Vulcan Materials Co. 187
--------
897
--------
ELECTRICAL COMPONENTS & EQUIPMENT (0.1%)
2,658 AMETEK, Inc. 218
7,310 Emerson Electric Co. 440
--------
658
--------
ELECTRONICS (0.6%)
3,184 Agilent Technologies, Inc. 214
880 Allegion plc 85
2,992 Amphenol Corp. "A" 260
1,385 FLIR Systems, Inc. 67
3,063 Fortive Corp. 233
1,028 Garmin Ltd. 79
7,399 Honeywell International, Inc. 1,216
1,866 Keysight Technologies, Inc.(f) 140
250 Mettler-Toledo International, Inc.(f) 181
1,114 PerkinElmer, Inc. 96
3,470 TE Connectivity Ltd. 292
742 Waters Corp.(f) 149
--------
3,012
--------
ENGINEERING & CONSTRUCTION (0.0%)
1,679 Fluor Corp. 47
1,348 Jacobs Engineering Group, Inc. 101
--------
148
--------
ENVIRONMENTAL CONTROL (0.1%)
1,502 Pentair plc 53
2,497 Republic Services, Inc. 211
3,869 Waste Management, Inc. 423
--------
687
--------
HAND/MACHINE TOOLS (0.1%)
528 Snap-on, Inc. 82
1,616 Stanley Black & Decker, Inc. 206
--------
288
--------
MACHINERY-CONSTRUCTION & MINING (0.1%)
5,882 Caterpillar, Inc. 705
--------
MACHINERY-DIVERSIFIED (0.3%)
1,457 Cummins, Inc. 220
3,155 Deere & Co. 442
1,435 Dover Corp. 128
================================================================================
32 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
1,210 Flowserve Corp. $ 56
1,199 Rockwell Automation, Inc. 179
1,119 Roper Technologies, Inc. 385
1,654 Wabtec Corp. 103
1,676 Xylem, Inc. 124
--------
1,637
--------
MISCELLANEOUS MANUFACTURERS (0.6%)
6,025 3M Co.(g) 962
1,344 AO Smith Corp. 54
4,316 Eaton Corp. plc 321
91,090 General Electric Co.(g) 860
3,048 Illinois Tool Works, Inc. 426
2,877 Ingersoll-Rand plc 340
1,448 Parker-Hannifin Corp. 221
2,441 Textron, Inc. 111
--------
3,295
--------
PACKAGING & CONTAINERS (0.1%)
3,726 Ball Corp. 229
1,672 Sealed Air Corp. 70
3,021 WestRock Co. 98
--------
397
--------
SHIPBUILDING (0.0%)
499 Huntington Ingalls Industries, Inc. 102
--------
TRANSPORTATION (0.8%)
1,279 CH Robinson Worldwide, Inc. 102
8,013 CSX Corp. 597
1,997 Expeditors International of Washington, Inc. 139
2,840 FedEx Corp. 438
714 JB Hunt Transport Services, Inc. 61
960 Kansas City Southern 109
2,789 Norfolk Southern Corp. 544
8,199 Union Pacific Corp. 1,367
6,350 United Parcel Service, Inc. "B" 590
--------
3,947
--------
Total Industrial 21,885
--------
TECHNOLOGY (7.5%)
-----------------
COMPUTERS (2.3%)
6,382 Accenture plc "A" 1,136
46,801 Apple, Inc.(g) 8,194
6,760 Cognizant Technology Solutions Corp. "A" 419
================================================================================
PORTFOLIO OF INVESTMENTS | 33
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
3,270 DXC Technology Co. $ 156
1,647 Fortinet, Inc.(f) 119
16,614 Hewlett Packard Enterprise Co. 228
15,968 HP, Inc. 298
9,521 International Business Machines Corp. 1,209
2,488 NetApp, Inc. 147
2,733 Seagate Technology plc 114
2,632 Western Digital Corp. 98
--------
12,118
--------
OFFICE/BUSINESS EQUIPMENT (0.0%)
1,978 Xerox Corp. 60
--------
SEMICONDUCTORS (1.7%)
9,567 Advanced Micro Devices, Inc.(f) 262
4,322 Analog Devices, Inc. 418
11,477 Applied Materials, Inc. 444
4,130 Broadcom, Inc. 1,039
45,533 Intel Corp. 2,005
419 IPG Photonics Corp.(f) 52
1,555 KLA-Tencor Corp. 160
1,595 Lam Research Corp. 278
2,767 Maxim Integrated Products, Inc. 146
2,357 Microchip Technology, Inc. 189
10,689 Micron Technology, Inc.(f) 349
6,341 NVIDIA Corp. 859
1,188 Qorvo, Inc.(f) 73
13,436 QUALCOMM, Inc. 898
1,701 Skyworks Solutions, Inc. 113
9,684 Texas Instruments, Inc. 1,010
2,527 Xilinx, Inc. 259
--------
8,554
--------
SOFTWARE (3.5%)
9,016 Activision Blizzard, Inc. 391
4,880 Adobe, Inc.(f) 1,322
1,627 Akamai Technologies, Inc.(f) 123
796 ANSYS, Inc.(f) 143
2,558 Autodesk, Inc.(f) 412
1,368 Broadridge Financial Solutions, Inc. 171
2,583 Cadence Design Systems, Inc.(f) 164
3,904 Cerner Corp.(f) 273
1,327 Citrix Systems, Inc. 125
2,669 Electronic Arts, Inc.(f) 248
3,275 Fidelity National Information Services, Inc. 394
================================================================================
34 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
3,938 Fiserv, Inc.(f) $ 338
2,547 Intuit, Inc. 624
769 Jack Henry & Associates, Inc. 101
80,282 Microsoft Corp.(g) 9,929
992 MSCI, Inc. 218
26,866 Oracle Corp. 1,359
3,191 Paychex, Inc. 274
1,728 Red Hat, Inc.(f) 318
8,519 salesforce.com, Inc.(f) 1,290
1,398 Synopsys, Inc.(f) 163
1,245 Take-Two Interactive Software, Inc.(f) 135
--------
18,515
--------
Total Technology 39,247
--------
UTILITIES (1.6%)
----------------
ELECTRIC (1.5%)
6,122 AES Corp. 97
2,301 Alliant Energy Corp. 109
2,468 Ameren Corp. 181
4,911 American Electric Power Co., Inc. 423
4,683 CenterPoint Energy, Inc. 133
3,064 CMS Energy Corp. 172
3,864 Consolidated Edison, Inc. 333
8,668 Dominion Energy, Inc. 652
2,031 DTE Energy Co. 255
7,096 Duke Energy Corp. 608
3,254 Edison International 193
1,967 Entergy Corp. 191
3,068 Evergy, Inc. 178
3,443 Eversource Energy 254
11,470 Exelon Corp. 551
5,569 FirstEnergy Corp. 230
4,644 NextEra Energy, Inc. 921
2,789 NRG Energy, Inc. 95
1,308 Pinnacle West Capital Corp. 123
8,675 PPL Corp. 258
4,781 Public Service Enterprise Group, Inc. 281
3,297 Sempra Energy 433
12,049 Southern Co. 645
2,943 WEC Energy Group, Inc. 237
5,211 Xcel Energy, Inc. 299
--------
7,852
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 35
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
GAS (0.1%)
1,369 Atmos Energy Corp. $ 139
4,111 NiSource, Inc. 115
--------
254
--------
WATER (0.0%)
1,992 American Water Works Co., Inc. 225
--------
Total Utilities 8,331
--------
Total Blue Chip Stocks (cost: $126,182) 239,963
--------
GOVERNMENT & U.S. TREASURY MONEY MARKET INSTRUMENTS (0.9%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.8%)
4,370,267 State Street Institutional Treasury Money Market Fund
Premier Class, 2.30%(i) (cost: $4,370) 4,370
--------
------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
------------------------------------------------------------------------------------------------------------------
U.S. TREASURY SECURITIES (0.1%)
BILLS (0.1%)(j)
$ 210 U.S. Treasury Bill(k) (cost: 210) 2.41% 7/18/2019 210
--------
Total Government & U.S. Treasury Money
Market Instruments (cost: $4,580) 4,580
--------
TOTAL INVESTMENTS (COST: $397,465) $522,282
========
------------------------------------------------------------------------------------------------------------------
UNREALIZED
NOTIONAL CONTRACT APPRECIATION/
NUMBER OF EXPIRATION AMOUNT VALUE (DEPRECIATION)
CONTRACTS DESCRIPTION DATE (000) (000) (000)
------------------------------------------------------------------------------------------------------------------
FUTURES (0.8%)
LONG FUTURES
EQUITY CONTRACTS
32 E-mini S&P 500 6/21/2019 USD 4,591 $4,404 $(187)
------ -----
TOTAL LONG FUTURES $4,404 $(187)
------ -----
TOTAL FUTURES $4,404 $(187)
====== =====
================================================================================
36 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
------------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------------------------------------------------------------------------------------------------------------
Tax-Exempt Securities:
Municipal Obligations $ - $277,739 $- $277,739
Equity Securities:
Blue Chip Stocks 239,963 - - 239,963
Government & U.S. Treasury Money
Market Instruments:
Government & U.S. Treasury Money
Market Funds 4,370 - - 4,370
U.S. Treasury Securities - 210 - 210
------------------------------------------------------------------------------------------------------------------
Total $244,333 $277,949 $- $522,282
------------------------------------------------------------------------------------------------------------------
LIABILITIES LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------------------------------------------------------------------------------------------------------------
Futures(1) $ (187) $ - $- $ (187)
------------------------------------------------------------------------------------------------------------------
Total $ (187) $ - $- $ (187)
------------------------------------------------------------------------------------------------------------------
(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 compliance classification.
At May 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
PORTFOLIO OF INVESTMENTS | 37
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 2019
--------------------------------------------------------------------------------
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 PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
CCD Community College District
EDA Economic Development Authority
HSD High School District
IDA Industrial Development Authority/Agency
ISD Independent School District
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.
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.
================================================================================
38 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
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.
LIQ Liquidity enhancement that may, under certain circumstances, provide
for repayment of principal and interest upon demand from the name
listed.
LOC Principal and interest payments are guaranteed by a bank letter of
credit or other bank credit agreement.
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) 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,
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 39
================================================================================
or other specified time interval to reflect current market conditions.
These securities do not indicate a reference rate and spread in their
description.
(c) Security deemed illiquid by USAA Asset Management Company,
under liquidity guidelines approved by USAA Mutual Funds Trust's
Board of Trustees.
(d) 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.
(e) Up to 2.05% of the coupon may be PIK.
(f) Non-income-producing security.
(g) The security, or a portion thereof, is segregated to cover the value of
open futures contracts at May 31, 2019.
(h) Northern Trust Corp. is the parent of Northern Trust Investments,
Inc., which is the subadviser of the Fund.
(i) Rate represents the money market fund annualized seven-day yield at
May 31, 2019.
(j) Rate represents an annualized yield at time of purchase, not coupon
rate.
(k) Securities with a value of $210,000 are segregated as collateral for
initial margin requirements on open futures contracts.
See accompanying notes to financial statements.
================================================================================
40 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $397,465) $522,282
Cash 669
Receivables:
Capital shares sold 474
Dividends and interest 4,023
--------
Total assets 527,448
--------
LIABILITIES
Payables:
Securities purchased 535
Capital shares redeemed 158
Variation margin on futures contracts 187
Accrued management fees 135
Accrued transfer agent's fees 18
Other accrued expenses and payables 95
--------
Total liabilities 1,128
--------
Net assets applicable to capital shares outstanding $526,320
========
NET ASSETS CONSIST OF:
Paid-in capital $403,710
Distributable earnings 122,610
--------
Net assets applicable to capital shares outstanding $526,320
========
Capital shares outstanding, no par value 26,077
========
Net asset value, redemption price, and offering price per share $ 20.18
========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 41
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 4,887
Interest 10,043
-------
Total income 14,930
-------
EXPENSES
Management fees 1,431
Administration and servicing fees 737
Transfer agent's fees 348
Custody and accounting fees 162
Postage 26
Shareholder reporting fees 23
Trustees' fees 37
Registration fees 51
Professional fees 97
Other 14
-------
Total expenses 2,926
-------
NET INVESTMENT INCOME 12,004
-------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FUTURES CONTRACTS
Net realized gain (loss) on:
Investments (3,127)
Futures transactions 81
Change in net unrealized appreciation/(depreciation) of:
Investments 14,115
Futures contracts (194)
-------
Net realized and unrealized gain 10,875
-------
Increase in net assets resulting from operations $22,879
=======
See accompanying notes to financial statements.
================================================================================
42 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
----------------------------------------------------------------------------------------
2019 2018
----------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 12,004 $ 9,891
Net realized gain (loss) on investments (3,127) 882
Net realized gain (loss) on futures transactions 81 (116)
Change in net unrealized appreciation/(depreciation) of:
Investments 14,115 20,394
Futures contracts (194) -
--------------------
Increase in net assets resulting from operations 22,879 31,051
--------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS (12,847) (9,560)
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 135,329 102,700
Reinvested dividends 11,981 8,933
Cost of shares redeemed (90,704) (64,462)
--------------------
Increase in net assets from capital share transactions 56,606 47,171
--------------------
Net increase in net assets 66,638 68,662
NET ASSETS
Beginning of year 459,682 391,020
--------------------
End of year $526,320 $459,682
====================
CHANGE IN SHARES OUTSTANDING
Shares sold 6,806 5,260
Shares issued for dividends reinvested 610 465
Shares redeemed (4,593) (3,312)
--------------------
Increase in shares outstanding 2,823 2,413
====================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 43
================================================================================
NOTES TO FINANCIAL STATEMENTS
May 31, 2019
--------------------------------------------------------------------------------
(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 and Tax Strategy Fund (the Fund) qualifies as a registered
investment company under Accounting Standards Codification Topic 946. The
information presented in this annual 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 a
conservative balance for the investor between income, the majority of which is
exempt from federal income tax, and the potential for long-term growth of
capital to preserve purchasing power.
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 Holdings, a global investment management firm
headquartered in Cleveland, Ohio (the Transaction), on July 1, 2019.
A special shareholder meeting was held on April 18, 2019, at which shareholders
of the Fund approved a new investment advisory agreement between the Trust, on
behalf of the Fund, and Victory Capital, an independent investment management
company. In addition, shareholders of the Fund also elected the following two
new directors to the Board of the Trust to serve upon the closing of the
Transaction: (1) David C. Brown, to serve as an Interested Trustee; and (2) John
C. Walters, to serve as an Independent Trustee. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION.
================================================================================
44 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
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 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. Investments in open-end investment companies, commingled, or
other funds, other than ETFs, are valued at their net asset value
(NAV) at the end of each business day and are categorized in
Level 1 of the fair value hierarchy.
3. 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.
4. 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 45
================================================================================
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.
5. Repurchase agreements are valued at cost.
6. 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.
7. Options are valued by a pricing service at the National Best
Bid/Offer (NBBO) composite price, which is derived from the best
available bid and ask 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.
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,
================================================================================
46 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
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.
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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 47
================================================================================
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 May 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 unfavorable direction, in which
case, the Fund may not achieve the anticipated benefits of the futures
contracts.
FAIR VALUES OF DERIVATIVE INSTRUMENTS AS OF MAY 31, 2019*
(IN THOUSANDS)
LIABILITY DERIVATIVES
----------------------------------------------------------------------------------------------------
STATEMENT OF
DERIVATIVES NOT ASSETS AND FOREIGN
ACCOUNTED FOR AS LIABILITIES INTEREST RATE EQUITY EXCHANGE
HEDGING INSTRUMENTS LOCATION CONTRACTS CONTRACTS CONTRACTS TOTAL
----------------------------------------------------------------------------------------------------
USAA Growth and Distributable
Tax Strategy Fund earnings $- $(187)** $- $(187)
----------------------------------------------------------------------------------------------------
* For open derivative instruments as of May 31, 2019, see the Portfolio of
Investments, which also is indicative of activity for the year ended May
31, 2019.
** 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.
================================================================================
48 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
THE EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF OPERATIONS FOR THE
YEAR ENDED MAY 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 Growth and Net realized gain
Tax Strategy Fund on Futures
transactions $- $81 $- $81
-------------------------------------------------------------------------------------------------------
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 Growth and Change in net
Tax Strategy Fund unrealized
appreciation/
(depreciation)
of Futures
contracts $- $(194) $- $(194)
-------------------------------------------------------------------------------------------------------
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 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 year ended May 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 49
================================================================================
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. 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. The purchase of securities on a delayed-delivery or
when-issued basis may increase the volatility of the Fund's NAV to the
extent that the Fund makes such purchases while remaining substantially
fully invested.
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
================================================================================
50 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
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 year ended May 31, 2019, the Fund paid CAPCO facility fees of $4,000,
which represents 0.6% of the total fees paid to CAPCO by the funds of the
Trusts. The Fund had no borrowings under this agreement during the year ended
May 31, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL
STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
(3) DISTRIBUTIONS
The character of any distributions made during the year from net investment
income or net realized gains is determined in accordance with federal tax
regulations and may differ from those determined in accordance with U.S.
generally accepted accounting principles. Also, due to the timing of
distributions, the fiscal year in which amounts are distributed may differ from
the year that the income or realized gains were recorded by the Fund.
During the current fiscal year, permanent differences between book-basis and
tax-basis accounting for non-REIT return of capital dividend, REIT return of
capital dividend, REIT capital gain dividend, and additional adjustments
resulted in reclassifications to the Statement of Assets and Liabilities to
increase distributable earnings by less than $500 and decrease paid in capital
by less than $500. These reclassifications had no effect on net assets.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 51
================================================================================
The tax character of distributions paid during the years ended May 31, 2019,
and 2018, was as follows:
2019 2018
----------------------------------------
Ordinary income* $ 3,664,000 $2,882,000
Tax-exempt income 8,201,000 6,678,000
Long-term realized capital gains 982,000 -
----------- ----------
Total distributions paid $12,847,000 $9,560,000
=========== ==========
As of May 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 1,361,000
Undistributed tax-exempt income 756,000
Accumulated capital and other losses (4,217,000)
Unrealized appreciation of investments 124,841,000
*Includes short-term realized capital gains, if any, which are taxable as
ordinary income.
The difference between book-basis and tax-basis unrealized appreciation of
investments is attributable to the tax deferral of losses on wash sales,
non-REIT return of capital dividend, and REIT return of capital dividend
adjustments.
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 May 31, 2019, the Fund had no capital loss carryforwards, for federal income
tax purposes. Net capital losses incurred after October 31, and within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. For the year ended May 31, 2019, the Fund deferred to June 1,
2019, post October capital losses of $4,217,000.
TAX BASIS OF INVESTMENTS - At May 31, 2019, the aggregate cost of investments
for federal income tax purposes and net unrealized appreciation/(depreciation)
on investments are disclosed below:
GROSS GROSS NET UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
FUND TAX COST APPRECIATION DEPRECIATION (DEPRECIATION)
----------------------------------------------------------------------------------------------------------
USAA Growth and
Tax Strategy Fund $397,441,000 $129,367,000 $(4,526,000) $124,841,000
================================================================================
52 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended May 31, 2019, were $84,493,000 and
$33,934,000, 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 year ended May 31, 2019 were as
follows:
PURCHASES SALES NET REALIZED GAIN (LOSS)
---------------------------------------------------------------------------------
$9,875,000 $17,210,000 $-
(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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 53
================================================================================
the Fund's Portfolio of Investments and Financial Statements while non-cash
collateral is not included. At May 31, 2019, the Fund had no securities on loan.
(6) 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 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 0.30% of the Fund's average daily net assets.
The performance adjustment is calculated monthly by comparing the Fund's
performance over the performance period to the Composite Index which is
comprised of 51% of the Lipper General Municipal Bond Funds Index, which
measures the total return performance of the largest funds tracked by Lipper
that invest at least 65% of their assets in municipal debt issues in the top
four credit categories, and 49% of the Lipper Large-Cap Core Funds Index, which
measures the total return performance of the funds tracked by Lipper that by
portfolio practice invest at least 75% of their equity assets in companies with
market capitalizations of greater than 300% of the dollar-weighted median market
capitalization of the middle 1,000 securities of the S&P 1500 Index.
================================================================================
54 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
The performance period for the Fund consists of the current month plus the
previous 35 months. The following table is utilized to determine the extent
of the performance adjustment:
OVER/UNDER PERFORMANCE
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.
The annual performance adjustment rate is multiplied by the average daily net
assets of the Fund over the entire performance period, which is then multiplied
by a fraction, the numerator of which is the number of days in the month and the
denominator of which is 365 (366 in leap years). The resulting amount is then
added to (in the case of overperformance) or subtracted from (in the case of
underperformance) the base fee.
Under the performance fee arrangement, the Fund will pay a positive performance
fee adjustment for a performance period whenever the Fund outperforms the
composite index over that period, even if the Fund had overall negative returns
during the performance period.
For the year ended May 31, 2019, the Fund incurred management fees, paid or
payable to the Manager, of $1,431,000, which included a (0.01)% performance
adjustment of $(42,000). PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
SUBADVISORY ARRANGEMENT(s) - The Manager entered into an Investment Subadvisory
Agreement with Northern Trust Investments, Inc. (NTI), under which NTI directs
the investment and reinvestment of the portion of the Fund's assets invested in
blue chip stocks (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 NTI a subadvisory fee equal to the greater of a minimum
annual fee of $100,000 or a fee at an annual amount of 0.25% on the first $40
million of assets and 0.10% on assets over $40 million
================================================================================
NOTES TO FINANCIAL STATEMENTS | 55
================================================================================
of the portion of the Fund's average daily net assets that NTI manages. For the
year ended May 31, 2019, the Manager incurred subadvisory fees with respect to
the Fund, paid or payable to NTI, of $296,000.
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 the Fund's
average daily net assets. For the year ended May 31, 2019, the Fund incurred
administration and servicing fees, paid or payable to the Manager, of $737,000.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and legal
services for the benefit of the Fund. The Board has approved the reimbursement
of a portion of these expenses incurred by the Manager. For the year ended May
31, 2019, the Fund reimbursed the Manager $3,000 for these compliance and legal
services. These expenses are included in the professional fees on the Fund's
Statement of Operations. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
TRANSFER AGENT'S FEES - SAS, an affiliate of the Manager, provides transfer
agent services to the Fund based on an annual charge of $23 per shareholder
account plus out-of-pocket expenses. 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 year ended May 31, 2019, the Fund incurred
transfer agent's fees, paid or payable to SAS, of $348,000. PLEASE REFER TO THE
SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR
ADDITIONAL IMPORTANT INFORMATION.
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. PLEASE
REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL
REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
(7) TRANSACTIONS WITH AFFILIATES
The Manager is indirectly wholly owned by USAA, a large, diversified financial
services institution.
================================================================================
56 | USAA GROWTH AND TAX STRATEGY 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. PLEASE REFER TO THE SUBSEQUENT EVENT
NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
(8) 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.
(9) RECENT ACCOUNTING PRONOUNCEMENTS
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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 57
================================================================================
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 FASB issued 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 significant impact on the
financial statements and reporting disclosures of the Fund.
(10) SUBSEQUENT EVENT NOTE
As previously announced, and as discussed in Note 1 to the Financial Statements,
effective July 1, 2019, AMCO, the prior investment adviser to the Fund, and SAS,
the prior transfer agent to the Fund, were acquired by Victory Holdings. PLEASE
SEE THE SUPPLEMENT DATED JULY 1, 2019 TO THE FUND'S PROSPECTUS FOR ADDITIONAL
IMPORTANT INFORMATION.
Effective July 1, 2019, Victory Capital is the new investment adviser and
administrator to the USAA Mutual Funds; SAS was renamed Victory Capital Transfer
Agency, Inc.; Victory Capital Advisers, Inc. is the new distributor to the USAA
Mutual Funds; Citi Fund Services of Ohio, Inc. serves as sub-administrator and
sub-fund accountant for the USAA Mutual Funds; and FIS Investor Services LLC
serve as sub-transfer agent and dividend disbursing agent for the USAA Mutual
Funds. Effective August 5, 2019, Citibank, N.A. is the new custodian for the
USAA Mutual Funds.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2019 permitting the
use of a "manager-of-managers" structure for certain funds. Prior to that date,
the Trust relied on a similar exemptive order granted by the SEC to the Trust
and its affiliated persons. Under a manager of managers structure, the
investment adviser may select (with approval of the Board and without
shareholder approval) one or more subadvisers to manage the day-to-day
investment of a fund's assets.
================================================================================
58 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
Effective July 1, 2019, under the investment advisory agreement with Victory
Capital, which took effect on July 1, 2019, no performance adjustments will be
made for periods beginning July 1, 2019, through June 30, 2020, and only
performance beginning as of July 1, 2020, and thereafter will be utilized in
calculating performance adjustments through June 30, 2020.
Effective July 1, 2019, the line of credit (as discussed in the Notes to the
Financial Statements in this annual report) among the Trust, with respect to its
Funds, and CAPCO terminated; the Trust, with respect to its Funds, along with
series of Victory Portfolios, Victory Portfolios II and Victory Variable
Insurance Funds, entered into a 364 day committed credit facility and a 364 day
uncommitted, demand credit facility with Citibank, N.A. (Citibank). Each such
credit facility may be renewed if so agreed by the parties. Under the agreement
with Citibank, the Funds may borrow up to $600 million, of which $300 million is
committed and $300 million is uncommitted. Of this amount, $40 million of the
line of credit is reserved for use by the Victory Floating Rate Fund (a series
of Victory Portfolios), with that Fund paying the related commitment fees for
that amount. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption request that might otherwise require the untimely
disposition of securities. Citibank receives an annual commitment fee of 0.15%.
Each Fund pays a pro-rata portion of this commitment fee plus any interest on
amounts borrowed.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2017 (the IFL
Order), permitting the establishment and operation of an Interfund Lending
Facility (the Facility). The Facility allows each Fund to directly lend and
borrow money to or from certain other affiliated Funds relying upon the IFL
Order at rates beneficial to both the borrowing and lending funds. Advances
under the Facility are allowed for temporary or emergency purposes, including
the meeting of redemption requests that are subject to each Fund's borrowing
restrictions. The interfund loan rate is determined, as specified in the IFL
Order, by averaging the current repurchase agreement rate and the current bank
loan rate.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 59
================================================================================
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
--------------------------------------------------------------------
2019 2018 2017 2016 2015
--------------------------------------------------------------------
Net asset value at
beginning of period $ 19.77 $ 18.76 $ 17.79 $ 17.48 $ 16.86
--------------------------------------------------------------------
Income from investment
operations:
Net investment income .47 .44 .42 .43 .44
Net realized and
unrealized gain .47 1.01 .96 .35 .59
--------------------------------------------------------------------
Total from investment
operations .94 1.45 1.38 .78 1.03
--------------------------------------------------------------------
Less distributions from:
Net investment income (.48) (.44) (.41) (.47) (.41)
Realized capital gains (.05) - - - -
--------------------------------------------------------------------
Total distributions (.53) (.44) (.41) (.47) (.41)
--------------------------------------------------------------------
Net asset value at end
of period $ 20.18 $ 19.77 $ 18.76 $ 17.79 $ 17.48
====================================================================
Total return (%)* 4.83 7.81 7.88 4.60 6.16
Net assets at end
of period (000) $526,320 $459,682 $391,020 $327,334 $283,181
Ratios to average
daily net assets:**
Expenses (%)(a) .60 .68 .84 .87 .85
Net investment income (%) 2.44 2.32 2.33 2.53 2.63
Portfolio turnover (%) 7 10 4 10 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 year ended May 31, 2019, average daily net assets were $491,402,000.
(a) Does not include acquired fund fees, if any.
================================================================================
60 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
EXPENSE EXAMPLE
May 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 December 1, 2018, through May
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
================================================================================
EXPENSE EXAMPLE | 61
================================================================================
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 DECEMBER 1, 2018 -
DECEMBER 1, 2018 MAY 31, 2019 MAY 31, 2019
------------------------------------------------------------------
Actual $1,000.00 $1,036.60 $2.94
Hypothetical
(5% return before expenses) 1,000.00 1,022.04 2.92
*Expenses are equal to the Fund's annualized expense ratio of 0.58%, which is
net of any reimbursements and expenses paid indirectly, multiplied by the
average account value over the period, multiplied by 182 days/365 days (to
reflect the one-half-year period). The Fund's actual ending account value is
based on its actual total return of 3.66% for the six-month period of December
1, 2018, through May 31, 2019.
================================================================================
62 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the (i) new investment
advisory agreement between the Trust and Victory Capital and (ii) new investment
subadvisory agreements between certain subadvisers and Victory Capital, which
became effective on July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO
THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
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.
================================================================================
ADVISORY AGREEMENT(S) | 63
================================================================================
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 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
================================================================================
64 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
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 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.
================================================================================
ADVISORY AGREEMENT(S) | 65
================================================================================
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.
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).
================================================================================
66 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
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.
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.
(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) | 67
================================================================================
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 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.
================================================================================
68 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
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 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,
================================================================================
ADVISORY AGREEMENT(S) | 69
================================================================================
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.
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.
(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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70 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
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 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
================================================================================
ADVISORY AGREEMENT(S) | 71
================================================================================
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 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.
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72 | USAA GROWTH AND TAX STRATEGY FUND
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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 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.
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ADVISORY AGREEMENT(S) | 73
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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
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.
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74 | USAA GROWTH AND TAX STRATEGY FUND
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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
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
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ADVISORY AGREEMENT(S) | 75
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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 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.
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76 | USAA GROWTH AND TAX STRATEGY FUND
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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. 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) | 77
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND THE MANAGER)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the continuation of the
(i) investment advisory agreement between the Trust and AMCO and (ii) investment
subadvisory agreements between certain subadvisers and AMCO, which were
effective until July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
At an in-person meeting of the Board of Trustees (the Board) held on April 17,
2019, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to the
Fund and the Subadvisory Agreement between the Manager and Northern Trust
Investments, Inc. (the Subadviser) with respect to the Fund.(1)
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and Subadvisory Agreement and the
Manager and the Subadviser, and were given the opportunity to ask questions and
request additional information from management. The information provided to the
Board included, among other things: (i) a separate report prepared by an
independent third party, which provided a statistical analysis comparing the
Fund's investment performance, expenses, and fees to comparable investment
companies; (ii) information concerning the services rendered to the Fund, as
well as information regarding the Manager's revenues
(1)At an in-person meeting held on January 15, 2019, the Board, including the
Independent Trustees, approved a new investment advisory agreement between
the Trust, on behalf of the Fund, and Victory Capital Management Inc.
("Victory Capital"). Upon the closing of the transaction, on behalf of the
Fund, Victory Capital Holdings, Inc., the parent company of Victory Capital,
the Advisory Agreement between the Trust and the Manager will terminate and
the new investment advisory agreement between the Trust and Victory Capital
will go into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are included in this
annual report.
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78 | USAA GROWTH AND TAX STRATEGY FUND
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and costs of providing services to the Fund and compensation paid to affiliates
of the Manager; and (iii) information about the Manager's and Subadviser's
operations and personnel. Prior to voting, the Independent Trustees reviewed the
proposed continuance of the Advisory Agreement and the Subadvisory Agreement
with management and with experienced independent legal counsel retained by the
Independent Trustees (Independent Counsel) and received materials from such
Independent Counsel discussing the legal standards for their consideration of
the proposed continuation of the Advisory Agreement and the Subadvisory
Agreement with respect to the Fund. The Independent Trustees also reviewed the
proposed continuation of the Advisory Agreement and the Subadvisory Agreement
with respect to the Fund in private sessions with Independent Counsel at which
no representatives of management were present.
The Board considered the Advisory Agreement and the Subadvisory Agreement
separately in the course of its review. In doing so, the Board noted the
respective roles of the Manager and the Subadviser in providing services to the
Fund.
At each regularly scheduled meeting of the Board and its committees, the Board
receives and reviews, among other things, information concerning the Fund's
performance and related services provided by the Manager and by the Subadviser.
At the meeting at which the renewal of the Advisory Agreement and Subadvisory
Agreement is considered, particular focus is given to information concerning
Fund performance, fees and total expenses as compared to comparable investment
companies, and the Manager's profitability with respect to the Fund. However,
the Board noted that the evaluation process with respect to the Manager and the
Subadviser is an ongoing one. In this regard, the Board's and its committees'
consideration of the Advisory Agreement and Subadvisory Agreement included
certain information previously received at such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving the
Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights
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ADVISORY AGREEMENT(S) | 79
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to various factors. Throughout their deliberations, the Independent Trustees
were represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent, and
quality of the services provided by the Manager under the Advisory Agreement,
the Board reviewed information provided by the Manager relating to its
operations and personnel. The Board also took into account its knowledge of the
Manager's management and the quality of the performance of the Manager's duties
through Board meetings, discussions, and reports during the preceding year. The
Board considered the fees paid to the Manager and the services provided to the
Fund by the Manager under the Advisory Agreement, as well as other services
provided by the Manager and its affiliates under other agreements, and the
personnel who provide these services. In addition to the investment advisory
services provided to the Fund, the Manager and its affiliates provide
administrative services, shareholder services, oversight of Fund accounting,
marketing services, assistance in meeting legal and regulatory requirements, and
other services necessary for the operation of the Fund and the Trust. The Board
also considered the significant risks assumed by the Manager in connection with
the services provided to the Fund, including investment, operational,
enterprise, litigation, regulatory and compliance risks.
The Board considered the Manager's management style and the performance of the
Manager's duties under the Advisory Agreement. The Board considered the level
and depth of experience of the Manager, including the professional experience
and qualifications of its senior and investment personnel, as well as current
staffing levels. The Board considered the Manager's process for monitoring the
performance of the Subadviser and its timeliness in responding to performance
issues. The allocation of the Fund's brokerage, including the Manager's process
for monitoring "best execution," also was considered. The Manager's role in
coordinating the activities of the Fund's other service providers also was
considered. The Board also considered the Manager's risk management processes.
The Board considered the Manager's financial condition and that it had the
financial wherewithal to continue to provide the same scope and high quality of
services under the Advisory Agreement. In reviewing the Advisory Agreement, the
Board
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80 | USAA GROWTH AND TAX STRATEGY FUND
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focused on the experience, resources, and strengths of the Manager and its
affiliates in managing the Fund, as well as the other funds in the Trust.
The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager and its affiliates, including oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust,
also focused on the quality of the Manager's compliance and administrative
staff.
EXPENSES AND PERFORMANCE - In connection with its consideration of the Advisory
Agreement, the Board evaluated the Fund's advisory fees and total expense ratio
as compared to other open-end investment companies deemed to be comparable to
the Fund as determined by the independent third party in its report. The Fund's
expenses were compared to (i) a group of investment companies chosen by the
independent third party to be comparable to the Fund based upon certain factors,
including fund type, comparability of investment objective and classification,
sales load type (in this case, retail investment companies with no sales loads),
asset size, and expense components (the "expense group") and (ii) a larger group
of investment companies that includes all no-load retail open-end investment
companies with the same investment classification/objective as the Fund
regardless of asset size, excluding outliers (the "expense universe"). Among
other data, the Board noted that the Fund's management fee rate - which includes
advisory and administrative services and the effects of any performance fee
adjustment - was below the median of its expense group and its expense universe.
The data indicated that the Fund's total expenses were below the median of its
expense group and its expense universe. The Board also noted that the Fund's
management fee was reduced effective October 1, 2017. The Board took into
account the various services provided to the Fund by the Manager and its
affiliates, including the high quality of services received by the Fund from the
Manager. The Board also noted the level and method of computing the Fund's
management fee, including any performance adjustment to such fee. The Board also
took into account that the subadvisory fees under the Subadvisory Agreement are
paid by the Manager. The Board also considered and discussed information about
the Subadviser's fees, including the amount of management fees retained by the
Manager after payment of the subadvisory fee.
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ADVISORY AGREEMENT(S) | 81
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In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total return with its Lipper index and with that of other mutual funds deemed to
be in its peer group by the independent third party in its report (the
"performance universe"). The Fund's performance universe consisted of the Fund
and all retail and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or primary channel
of distribution. This comparison indicated that, among other data, the Fund's
performance was above the average of its performance universe and its Lipper
index for the one-, three-, five-, and ten-year periods ended December 31, 2018.
The Board also noted that the Fund's percentile performance ranking was in the
top 5% of its performance universe for the one- and five-year periods ended
December 31, 2018, and was in the top 20% of its performance universe for the
three- and ten-year periods ended December 31, 2018.
COMPENSATION AND PROFITABILITY - The Board took into consideration the level and
method of computing the Fund's management fee. The information considered by the
Board included operating profit margin information for the Manager's business as
a whole. The Board also received and considered profitability information
related to the management revenues from the Fund. This information included a
review of the methodology used in the allocation of certain costs to the Fund.
In considering the profitability data with respect to the Fund, the Trustees
noted that the Manager pays the Fund's subadvisory fees. The Trustees reviewed
the profitability of the Manager's relationship with the Fund before tax
expenses. The Board was also provided with an Investment Management
Profitability Analysis prepared by an independent information service. In
reviewing the overall profitability of the management fee to the Manager, the
Board also considered the fact that affiliates provide shareholder servicing and
administrative services to the Fund for which they receive compensation. The
Board also considered the possible direct and indirect benefits to the Manager
from its relationship with the Trust, including that the Manager
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82 | USAA GROWTH AND TAX STRATEGY FUND
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may derive reputational and other benefits from its association with the
Fund. The Trustees recognized that the Manager should be entitled to earn a
reasonable level of profits in exchange for the level of services it provides
to the Fund and the entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussions of
the current advisory fee structure. The Board also considered the fact that the
Manager pays the Fund's subadvisory fee. The Board also considered the effect
of the Fund's growth and size on its performance and fees, noting that if the
Fund's assets increase over time, the Fund may realize other economies of scale
if assets increase proportionally more than some expenses.
The Board determined that the current investment management fee structure was
reasonable.
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) the performance of the Fund is
reasonable in relation to the performance of funds with a similar investment
strategy and to relevant indices; (iv) the Fund's advisory expenses are
reasonable in relation to those of similar funds and to the services to be
provided by the Manager; and (v) the Manager and its affiliates' level of
profitability from their relationship with the Fund is reasonable in light of
the nature and high quality of services provided by the Manager and the type of
fund. Based on its conclusions, the Board determined that continuation of the
Advisory Agreement would be in the best interests of the Fund and its
shareholders.
SUBADVISORY AGREEMENT
In approving the Subadvisory Agreement with respect to the Fund, the Board
considered various factors, among them: (i) the nature, extent, and quality of
services provided to the Fund by the Subadviser, including the
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ADVISORY AGREEMENT(S) | 83
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personnel providing services; (ii) the 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 the Subadvisory Agreement. The Board's
analysis of these factors is set forth below. After full consideration of a
variety of factors, the Board, including the Independent Trustees, voted to
approve the Subadvisory Agreement. In approving the Subadvisory Agreement, the
Trustees did not identify any single factor as controlling, and each Trustee may
have attributed different weights to various factors. Throughout their
deliberations, the Independent Trustees were represented and assisted by
Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES PROVIDED; INVESTMENT PERSONNEL - The
Trustees considered information provided to them regarding the services provided
by the Subadviser, including information presented periodically throughout the
previous year. The Board considered the Subadviser's level of knowledge and
investment style. The Board reviewed the experience and credentials of the
investment personnel who are responsible for managing the investment of
portfolio securities with respect to the Fund and the Subadviser's level of
staffing. The Trustees also noted the Subadviser's brokerage practices. The
Board also considered the Subadviser's regulatory and compliance history. The
Board also took into account the Subadviser's risk management processes. The
Board noted that the Manager's monitoring processes of the Subadviser 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 the Subadviser.
SUBADVISER COMPENSATION - The Board also took into consideration the financial
condition of the Subadviser. In considering the cost of services to be provided
by the Subadviser and the profitability to the Subadviser of its relationship
with the Fund, the Trustees noted that the fees under the Subadvisory Agreement
were paid by the Manager. The Trustees also relied on the ability of the Manager
to negotiate the Subadvisory Agreement and the fees thereunder at arm's length.
For the above reasons, the Board
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84 | USAA GROWTH AND TAX STRATEGY FUND
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determined that the profitability of the Subadviser from its relationship with
the Fund was not a material factor in its deliberations with respect to the
consideration of the approval of the Subadvisory Agreement. For similar reasons,
the Board concluded that the potential for economies of scale in the
Subadviser's management of the Fund was not a material factor in considering the
Subadvisory Agreement, although the Board noted that the Subadvisory Agreement
contains breakpoints in its fee schedule.
SUBADVISORY FEES AND FUND PERFORMANCE - The Board compared the subadvisory fees
for the Fund with fees that the Subadviser charges to comparable clients, as
applicable. The Board considered that the Fund pays a management fee to the
Manager and that, in turn, the Manager pays a subadvisory fee to the Subadviser.
As noted above, the Board considered, among other data, the Fund's performance
during the one-, three-, five-, and ten-year periods ended December 31, 2018, as
compared to the Fund's peer group and noted that the Board reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Board also considered the performance of the Subadviser. The Board noted the
Manager's experience and resources in monitoring the performance, investment
style, and risk-adjusted performance of the Subadviser. The Board was mindful of
the Manager's focus on the Subadviser's performance.
CONCLUSIONS - The Board reached the following conclusions regarding the
Subadvisory Agreement, among others: (i) the Subadviser is qualified to manage
the Fund's assets in accordance with its investment objectives and policies;
(ii) the Subadviser maintains an appropriate compliance program; (iii) the
performance of the Fund is reasonable in relation to the performance of funds
with a similar investment strategy and to relevant indices; and (iv) the Fund's
advisory expenses are reasonable in relation to those of similar funds and to
the services to be provided by the Manager and the Subadviser. Based on its
conclusions, the Board determined that approval of the Subadvisory Agreement
with respect to the Fund would be in the best interests of the Fund and its
shareholders.
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ADVISORY AGREEMENT(S) | 85
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TRUSTEES' AND OFFICERS' INFORMATION
TRUSTEES AND OFFICERS OF THE TRUST
--------------------------------------------------------------------------------
As of July 1, 2019, the Board of Trustees (the Board) of the Trust consists of
ten Trustees. These Trustees and the Trust's Officers supervise the business
affairs of the USAA family of funds. The Board is responsible for the general
oversight of the funds' business and for assuring that the funds are managed in
the best interests of each fund's respective shareholders. The Board
periodically reviews the funds' investment performance as well as the quality of
other services provided to the funds and their shareholders by each of the
fund's service providers, including the adviser and its affiliates. Pursuant to
a policy adopted by the Board, the term of office for each Trustee shall be
until the Trustee reaches age 75. The Board may change or grant exceptions from
this policy at any time without shareholder approval. A Trustee may resign or be
removed by a vote of two-thirds of the Trustees before the removal or by the
holders of two-thirds of the outstanding shares of the Trust at any time.
Vacancies on the Board can be filled by the action of a majority of the
Trustees, provided that after filling such vacancy at least two-thirds of the
Trustees have been elected by the shareholders.
Set forth below are the Trustees and Officers of the Trust, their respective
offices and principal occupations during the last five years, length of time
served, and information relating to any other directorships held. As of July 1,
2019, each serves on the Board of the USAA family of funds consisting of one
registered investment company, which offers 47 individual funds. Unless
otherwise indicated, the business address for each is P.O. Box 659430, San
Antonio, TX 78265-9430.
If you would like more information about the funds' Trustees, you may call (800)
235-8396 to request a free copy of the funds' Statement of Additional
Information (SAI).
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86 | USAA GROWTH AND TAX STRATEGY FUND
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In connection with the Transaction, the Board of the Trust nominated, and
shareholders of each USAA mutual fund approved, two new Trustees to serve on the
Trust's Board, effective upon the closing of the Transaction. Effective July 1,
2019, David C. Brown serves as an Interested Trustee and John C. Walters serves
as an Independent Trustee. Information about the current Trustees of the Trust
is provided below.
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
DANIEL S. McNAMARA(1, 2, 4, 6, +)
Trustee and Chair of the Board of Trustees
Born: June 1966
Year of Election or Appointment: 2012
Trustee, President, and Vice Chairman, USAA ETF Trust (06/17-06/19); President
of Financial Advice & Solutions Group (FASG), USAA (02/13-present); Director of
USAA Asset Management Company (AMCO), (08/11-present); Director of USAA
Investment Management Company (IMCO) (09/09-present); President, IMCO
(09/09-04/14); President and Director of USAA Shareholder Account Services (SAS)
(10/09-present); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director of FPS (12/13-present);
President and Director of USAA Investment Corporation (ICORP) (03/10-present);
Director of USAA Financial Advisors, Inc. (FAI) (12/13-present). Mr. McNamara
brings to the Board extensive experience in the financial services industry,
including experience as an officer of the Trust.
DAVID C. BROWN(2, 4, 6, 10)
Trustee
Born: May 1972
Year of Election or Appointment: 2019
Chairman and Chief Executive Officer (2013-present), Co-Chief Executive Officer,
(2011-2013), Victory Capital Management Inc.; Chairman and Chief Executive
Officer (2013-present), Victory Capital Holdings, Inc. Mr. Brown brings to the
Board extensive business, finance and leadership skills gained
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 87
================================================================================
and developed through years of experience in the financial services industry,
including his tenure overseeing the strategic direction as CEO of Victory
Capital. These skills, combined with Mr. Brown's extensive knowledge of the
financial services industry and demonstrated success in the development and
distribution of investment strategies and products, enable him to provide
valuable insights to the Board and strategic direction for the Funds. Mr. Brown
serves on the Boards of the Victory Funds family of funds consisting of five
registered investment companies offering approximately 104 mutual funds and 24
ETFs. Mr. Brown is considered an Interested Trustee of the Trust due to his
position with Victory Capital and its affiliated companies.
NON-INTERESTED (INDEPENDENT) TRUSTEES
--------------------------------------------------------------------------------
ROBERT L. MASON, Ph.D.(3, 4, 5, 6, 7)
Trustee
Born: July 1946
Year of Election or Appointment: 1997
Trustee, USAA ETF Trust (06/17-06/19); Adjunct Professor in the Department of
Management Science and Statistics in the College of Business at the University
of Texas at San Antonio (2001-present); Institute Analyst, Southwest Research
Institute (03/02-01/16), which focuses on providing innovative technology,
science, and engineering services to clients around the world and is one of the
oldest independent, nonprofit, applied research and development organizations in
the United States. He was employed at Southwest Research Institute for 40 years.
Dr. Mason brings to the Board particular experience with information technology
matters, statistical analysis, and human resources as well as over 22 years'
experience as a Board member of the USAA family of funds. Dr. Mason holds no
other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
================================================================================
88 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
JEFFERSON C. BOYCE(3, 4, 5, 6, 7)
Lead Trustee and Vice Chair
Born: September 1957
Year of Election or Appointment: 2013
Trustee, USAA ETF Trust (06/17-06/19); Senior Managing Director, New York Life
Investments, LLC (1992-2012), an investment manager. Mr. Boyce brings to the
Board experience in financial investment management, and, in particular,
institutional and retail mutual funds, variable annuity products, broker
dealers, and retirement programs, including experience in organizational
development, marketing, product development, and money management as well as
five years' experience as a Board member of the USAA family of funds. Mr. Boyce
is a board member of Westhab, Inc.
DAWN M. HAWLEY(3, 4, 5, 6, 7, 9)
Trustee
Born: February 1954
Year of Election or Appointment: 2014
Trustee, USAA ETF Trust (06/17-06/19); Manager of Finance, Menil Foundation,
Inc. (05/07-06/11), which is a private foundation that oversees the assemblage
of sculptures, prints, drawings, photographs, and rare books. Director of
Financial Planning and Analysis and Chief Financial Officer, AIM Management
Group, Inc. (10/87-01/06). Ms. Hawley brings to the Board experience in
financial investment management and, in particular, institutional and retail
mutual funds, variable annuity products, broker dealers, and retirement
programs, including experience in financial planning, budgeting, accounting
practices, and asset/liability management functions including major acquisitions
and mergers, as well as over five years' experience as a Board member of the
USAA family of funds. Ms. Hawley holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 89
================================================================================
PAUL L. McNAMARA(3, 4, 5, 6, 7)
Trustee
Born: July 1948
Year of Election or Appointment: 2012
Trustee, USAA ETF Trust (06/17-06/19); Director, Cantor Opportunistic
Alternatives Fund, LLC (03/10-02/14), which is a closed-end fund of funds by
Cantor Fitzgerald Investment Advisors, LLC. Mr. McNamara retired from Lord
Abbett & Co. LLC, an independent U.S. investment management firm, as an
Executive Member on 09/30/09, a position he held since 10/02. He had been
employed at Lord Abbett since 1996. Mr. McNamara brings to the Board extensive
experience with the financial services industry and, in particular,
institutional and retail mutual fund markets, including experience with mutual
fund marketing, distribution, and risk management, as well as overall experience
with compliance and corporate governance issues. Mr. McNamara also has
experience serving as a fund director as well as seven years' experience as a
Board member of the USAA family of funds. Paul L. McNamara is of no relation to
Daniel S. McNamara. Mr. McNamara holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
RICHARD Y. NEWTON III(3, 4, 5, 6, 7)
Trustee
Born: January 1956
Year of Election or Appointment: 2017
Trustee, USAA ETF Trust (06/17-06/19); Director, Elta North America
(01/18-present), which is a global leader in the design, manufacture and support
of innovative electronic systems in the ground, maritime, airborne, and security
domains for the nation's warfighters, security personnel, and first responders;
Managing Partner, Pioneer Partnership Development Group (12/15-present);
Executive Director, The Union League Club of New York (06/14-11/15); Executive
Vice President, Air Force Association (08/12-05/14); Lieutenant General, United
States Air Force (01/08-06/12). Lieutenant General Newton (Ret.) served 34 years
of active duty in the United States Air Force. Lt. Gen. Newton retired as the
Assistant Vice Chief of Staff and Director of Air Staff at the Headquarters of
the U.S. Air Force where he was responsible for overseeing the administration
and organization
================================================================================
90 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
of the Air Staff, which develops policies, plans and programs, establishes
requirements, and provides resources to support the Air Force's mission. Lt.
Gen. Newton is a graduate of the United States Air Force Academy, Webster
University, and The National War College. Lt. Gen. Newton brings to the Board
extensive management and military experience, as well as over two years of
experience as a Board member of the USAA family of funds. Lt. Gen. Newton holds
no other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
BARBARA B. OSTDIEK, Ph.D.(3, 4, 5, 6, 7, 8)
Trustee
Born: March 1964
Year of Election or Appointment: 2008
Trustee, USAA ETF Trust (06/17-06/19); Senior Associate Dean of Degree programs
at Jesse H. Jones Graduate School of Business at Rice University
(07/13-present); Associate Professor of Finance at Jesse H. Jones Graduate
School of Business at Rice University (07/01-present); Academic Director, El
Paso Corporation Finance Center at Jesse H. Jones Graduate School of Business at
Rice University (07/02-06/12). Dr. Ostdiek brings to the Board particular
experience with financial investment management, education, and research as well
as over eleven years' experience as a Board member of the USAA family of funds.
Dr. Ostdiek holds no other directorships of any publicly held corporations or
other investment companies outside the USAA family of funds.
MICHAEL F. REIMHERR(3, 4, 5, 6, 7)
Trustee
Born: August 1945
Year of Election or Appointment: 2000
Trustee, USAA ETF Trust (06/17-06/19); President of Reimherr Business Consulting
performing business valuations of medium to large companies; developing business
plans, budgets, and internal financial reporting; and work with mergers and
acquisitions (05/95-12/17). St. Mary's University Investment Committee
overseeing University Endowment (06/14-present). Mr. Reimherr brings to the
Board particular experience with organizational development, budgeting, finance,
capital markets, and mergers and acquisitions, as well as
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 91
================================================================================
over 19 years' experience as a Board member of the USAA family of funds. Mr.
Reimherr holds no other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
JOHN C. WALTERS(3, 4, 5, 6, 7)
Trustee
Born: February 1962
Year of Election or Appointment: 2019
Retired. Mr. Walters brings significant Board experience including active
involvement with the board of a Fortune 500 company, and a proven record of
leading large, complex financial organizations. He has a demonstrated record of
success in distribution, manufacturing, investment brokerage, and investment
management in both the retail and institutional investment businesses. He has
substantial experience in the investment management business with a demonstrated
ability to develop and drive strategy while managing operational, financial, and
investment risk. Mr. Walters is a board member of Guardian Variable Products
Trust (16 series), Lead Independent Director; Amerilife Holdings LLC, Director;
Stadion Money Management; Director; and University of North Carolina (Chapel
Hill), Member Board of Governors.
(1) Indicates the Trustee is an employee of AMCO or affiliated companies and
is considered an "interested person" under the Investment Company Act of
1940.
(2) Member of Executive Committee.
(3) Member of Audit and Compliance Committee.
(4) Member of Product Management and Distribution Committee.
(5) Member of Corporate Governance Committee.
(6) Member of Investments Committee.
(7) The address for all non-interested trustees is that of the USAA Funds,
P.O. Box 659430, San Antonio, TX 78265-9430.
(8) Dr. Ostdiek has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(9) Ms. Hawley has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(10) Indicates the Trustee is an employee of Victory Capital or affiliated
companies and is considered an "interested person" under the Investment
Company Act of 1940.
(+) Mr. D. McNamara was elected as Chair of the Board in July 2019.
================================================================================
92 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
Effective July 1, 2019, the Board of the Trust appointed certain new officers of
the Trust. The current officers of the Trust are stated below.
OFFICERS
--------------------------------------------------------------------------------
CHRISTOPHER K. DYER
President
Born: February 1962
Year of Appointment: 2019
Director of Mutual Fund Administration, the Victory Capital.
SCOTT A. STAHORSKY
Vice President
Born: July 1969
Year of Appointment: 2019
Manager, Fund Administration, the Adviser (since 2015); Senior Analyst, Fund
Administration, the Victory Capital (prior to 2015).
ALLAN SHAER
Assistant Treasurer
Born: March 1965
Year of Appointment: 2019
Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc.
(since 2016); Vice President, Mutual Fund Administration, JP Morgan Chase
(2011-2016).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 93
================================================================================
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Treasurer, USAA ETF Trust (09/18-06/19); Executive Director, Investment and
Financial Administration, USAA (04/12-present); Assistant Treasurer, USAA ETF
Trust (06/17-09/18); Assistant Treasurer, USAA Mutual Funds Trust (12/13-02/18).
Mr. De Vries also serves as the Funds' Principal Financial Officer.
CAROL D. TREVINO
Assistant Treasurer
Born: October 1965
Year of Appointment: 2018
Assistant Treasurer, USAA ETF Trust (09/18-06/19); Accounting/Financial
Director, USAA (12/13-present); Senior Accounting Analyst, USAA (03/11-12/13).
ERIN G. WAGNER
Secretary
Born: February 1974
Year of Appointment: 2019
Associate General Counsel, the Adviser (since 2013).
CHARLES BOOTH
Anti-Money Laundering Compliance Officer and Identity Theft Officer
Born: April 1960
Year of Appointment: 2019
Director, Regulatory Administration and CCO Support Services, Citi Fund Services
Ohio, Inc. (2007-present).
================================================================================
94 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
AMY CAMPOS
Chief Compliance Officer
Born: August 1976
Year of Appointment: 2019
Chief Compliance Officer, USAA Mutual Funds Trust (7/1/19-present); Executive
Director, Deputy Chief Compliance Officer, USAA Mutual Funds Trust and USAA ETF
Trust (7/17-6/19); Compliance Director, USAA Mutual Funds Trust (2014-7/17);
Senior Compliance Advisor, USAA Mutual Funds Trust (2010-2014).
THE FOLLOWING OFFICERS SERVED IN THEIR RESPECTIVE OFFICE UNTIL JULY 1, 2019, AT
WHICH POINT EACH OF THE FOLLOWING OFFICERS RESIGNED FROM THEIR RESPECTIVE OFFICE
AND NO LONGER SERVE IN THESE POSITIONS.
JOHN C. SPEAR
Vice President
Born: May 1964
Year of Appointment: 2016
Vice President, USAA ETF Trust (06/17-06/19); Senior Vice President and Chief
Investment Officer, USAA Investments, (03/17-present); Vice President and Chief
Investment Officer, USAA Investments, (11/16-03/17); Vice President, Long Term
Fixed Income (05/12-11/16).
JOHN P. TOOHEY
Vice President
Born: March 1968
Year of Appointment: 2009
Vice President, USAA ETF Trust (06/17-06/19); Head of Equities, Equity
Investments, AMCO (01/12-present).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 95
================================================================================
KRISTEN MILLAN
Secretary
Born: April 1983
Year of Appointment: 2019
Secretary, USAA ETF Trust (04/19-06/19); Assistant Secretary, USAA ETF Trust
(01/19-06/19); Senior Attorney, FASG General Counsel, USAA (09/17-06/19);
Attorney, FASG General Counsel, USAA (06/13-09/17). Ms. Millan also serves as
Assistant Secretary of AMCO, ICORP, and SAS.
STEPHANIE A. HIGBY
Chief Compliance Officer
Born: July 1974
Year of Appointment: 2013
Chief Compliance Officer, USAA ETF Trust (06/17-06/19); Assistant Vice
President, Compliance-Investments, USAA (02/18-present); Assistant Vice
President, Compliance Mutual Funds, USAA (12/16-01/18); Executive Director,
Institutional Asset Management Compliance, USAA (04/13-12/16). Ms. Higby also
serves as the Funds' anti-money laundering compliance officer and as the Chief
Compliance Officer for AMCO and IMCO.
================================================================================
96 | USAA GROWTH AND TAX STRATEGY FUND
================================================================================
AS OF JULY 1, 2019
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
David C. Brown
John C. Walters
--------------------------------------------------------------------------------
ADMINISTRATOR AND Victory Capital Management Inc.
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND Victory Capital Advisers Inc.
DISTRIBUTOR 4900 Tiedeman Road
Brooklyn, Ohio 44144
--------------------------------------------------------------------------------
TRANSFER AGENT Victory Capital Transfer Agency Inc.
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 USAA AMCO'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) 235-8396; (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) 235-8396; (ii) at usaa.com; and (iii) on the SEC's website at
http://www.sec.gov.
===============================================================================
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----------------------
MUTUAL FUNDS
--------------------------------------------------------------------------------
May 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA International Fund
FUND INSTITUTIONAL ADVISER R6
SHARES SHARES SHARES SHARES
USIFX UIIFX UAIFX URITX
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) 235-8396 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)
235-8396 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.
Victory Capital means Victory Capital Management Inc., the investment manager of
the USAA Mutual Funds. USAA Mutual Funds are distributed by Victory Capital
Advisers, Inc., a broker dealer registered with FINRA and an affiliate of
Victory Capital. Victory Capital and its affiliates are not affiliated with
United Services Automobile Association or its affiliates. USAA and the USAA
logos are registered trademarks and the USAA Mutual Funds and USAA Investments
logos are trademarks of United Services Automobile Association and are being
used by Victory Capital and its affiliates under license.
================================================================================
PRESIDENT'S MESSAGE
"... LONG-TERM INVESTORS SHOULD NEVER MAKE
DECISIONS IN HASTE. THEY SHOULD MAKE [PHOTO OF BROOKS ENGLEHARDT]
THOUGHTFUL DECISIONS BASED ON THEIR LONG-TERM
OBJECTIVES, TIME HORIZON, AND RISK TOLERANCE."
--------------------------------------------------------------------------------
JULY 2019
As previously announced, USAA, the parent company of USAA Asset Management
Company ("AMCO"), the prior investment adviser to the USAA Mutual Funds,
announced that AMCO would be acquired by Victory Capital Holdings, Inc.
(Victory Holdings), a global investment management firm headquartered in
Cleveland, Ohio (the Transaction). In connection with the Transaction, also as
previous announced, shareholders of each USAA Mutual Fund approved a new
investment advisory agreement with Victory Capital Management Inc. ("Victory
Capital"), an indirect wholly-owned subsidiary of Victory Holdings. The closing
of the Transaction occurred on July 1, 2019; and Victory Capital became the
investment adviser to each USAA Mutual Fund. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION ABOUT CHANGES THAT TOOK EFFECT ON JULY 1, 2019.
Softening global economic conditions and escalating trade tensions rattled
investors during the 12-month reporting period ended May 31, 2019. When the
reporting period began in June 2018, the global economy was expanding across
most regions and countries, led by the U.S. In this environment, stocks
generally advanced. In the fixed income market, U.S. Treasury yields rose, as
the U.S. Federal Reserve ("Fed") continued to tighten monetary policy.
Signs of trouble emerged during the summer of 2018. The U.S. economic expansion
continued, but growth in a number of other economies, including some European
countries and China, showed a weakening trend. By the autumn of 2018, investors'
fears of a global economic slowdown, combined with harsh U.S.-China trade
rhetoric and Brexit-related uncertainty in Europe, sparked a surge in market
volatility. Global stocks dropped, with most of the decline occurring in
December 2018. At the same time, intermediate- and longer-term yields fell, as
investors anticipated a change in Fed monetary policy. Indeed, after having
raised short-term interest rates four times during 2018, Fed officials announced
in January 2019 that they would "pause," retreating from their earlier plan to
raise interest rates in 2019. Stocks rallied in response and by April 2019 had
recovered most of the ground they had lost. In May 2019, ongoing trade tensions
between the United States and China, as well as President Trump administration's
threat to impose tariffs on Mexico, drove a renewed decline in stock prices. In
the fixed income market, concerns that trade disputes would seriously undermine
global
================================================================================
================================================================================
economic growth pushed down intermediate- and longer-term yields, which ended
the reporting period lower than they started. The yield on the 10-year U.S.
Treasury note, which began June 2018 at 2.89%, rose to 3.24% on November 8,
2018--its high point of the period--and fell to 2.13% by May 31, 2019.
In the final months of the reporting period, the Treasury yield curve inverted,
which means that shorter-term yields were higher than longer-term yields. A
yield- curve inversion warrants attention because it has been a reliable
recession indicator. Although recessions do not automatically follow inversions,
a downward-sloped yield curve has preceded every U.S. recession since the 1960s.
That said, the lag between an inversion and a recession has been inconsistent.
At USAA Investments, A Victory Capital Investment Franchise, we have found that
during the past six decades, the time between inversion and recession has ranged
between six months and two years, with no clear pattern to provide useful
guidance. And as I write to you, we see no recession on the horizon. First, the
U.S. economy continues to grow, albeit at a slower pace than in 2018. Second,
the Fed has made clear its commitment to pause its interest rate hikes, and
there is a growing belief in the markets that policymakers may even cut interest
rates in 2019. (In early June 2019, after the end of the reporting period, Fed
Chair Jerome Powell stated that the U.S. central bank was monitoring the
escalation in trade tensions and could potentially respond by cutting interest
rates if U.S. economic conditions deteriorate.)
At USAA Investments, our team of portfolio managers will continue to monitor the
financial markets, economic conditions, the global trade regime, Fed policy, the
direction of longer-term interest rates, and other issues that have the
potential to affect your investments. In the meantime, I would advise you to
ignore media "noise" about such matters. Media "noise" is meant to provoke an
emotional reaction, which can lead to hasty decision-making. In my opinion,
long-term investors should never make decisions in haste. They should make
thoughtful decisions based on their long-term objectives, time horizon, and risk
tolerance. Dollar-cost averaging, in which you invest a set amount on a regular
basis, is a strategy that can help you stay on track. Another effective strategy
is diversification, which can potentially insulate a portfolio from market
turbulence or changes in performance leadership.
If you would like to review your portfolio to confirm that it is properly
aligned with your investment plan, please contact one of our financial advisors.
You might want to make that call before the summer gets fully underway. When we
are traveling and spending time with family and friends, it can be tempting to
put off decisions on financial matters.
From all of us at USAA Investments, A Victory Capital Investment Franchise,
thank you for the opportunity to help you with your investment needs.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGERS' COMMENTARY 1
INVESTMENT OVERVIEW 6
SHAREHOLDER VOTING RESULTS 10
FINANCIAL INFORMATION
Distributions to Shareholders 11
Report of Independent Registered
Public Accounting Firm 12
Portfolio of Investments 13
Notes to Portfolio of Investments 34
Financial Statements 36
Notes to Financial Statements 40
Financial Highlights 61
EXPENSE EXAMPLE 65
ADVISORY AGREEMENT(S) 67
TRUSTEES' AND OFFICERS' INFORMATION 90
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) 235-8396.
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.
================================================================================
================================================================================
MANAGERS' COMMENTARY ON THE FUND
--------------------------------------------------------------------------------
MFS Investment Management Lazard Asset Management
DANIEL LING PAUL MOGHTADER, CFA
FILIPE BENZINHO TARAS IVANENKO, CFA
CIPRIAN MARIN
Wellington Management Company LLP CRAIG SCHOLL, CFA
SUSANNE WILLUMSEN
JAMES H. SHAKIN, CFA
ANDREW M. CORRY, CFA
--------------------------------------------------------------------------------
o PLEASE REVIEW MARKET CONDITIONS OVER THE 12-MONTH REPORTING PERIOD ENDED
MAY 31, 2019.
Global equity markets saw significant volatility over the reporting period
spurred by higher U.S. interest rates, geopolitical unrest, slowing economic
growth in China, trade wars, and the Brexit saga. Investors became
increasingly risk averse in the latter half of 2018, and the market sold off
sharply in the fourth quarter. Small-cap stocks were especially hard hit by
the growing economic and political uncertainty. Equities recovered entering
2019 as the Fed reversed its previously hawkish stance due to concerns
around a slowdown in growth and a lack of inflationary pressure. The
market's risk-on posture in the first quarter of 2019 also was bolstered by
modest signs of progress in U.S.-China trade negotiations. However,
President Trump's announcement of plans to institute a 25% tariff on $200
billion in goods coming from China and populist party gains in European
Parliament elections dampened the first quarter's optimism and stocks sold
off again in May 2019. For the reporting period, defensive segments of the
market such as utilities, consumer staples, healthcare, and real estate led
performance, while consumer discretionary, materials, financials, and energy
were the biggest laggards.
For the reporting period ended May 31, 2019, developed market international
stocks returned -5.75%, as measured by the MSCI EAFE
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
Index, lagging U.S. stock returns of 3.78%, as gauged by the S&P 500 Index.
o HOW DID THE USAA INTERNATIONAL FUND (THE "FUND") PERFORM DURING THE
REPORTING PERIOD?
The Fund has four share classes: Fund Shares, Institutional Shares, Adviser
Shares, and R6 Shares. For the reporting period ended May 31, 2019, the Fund
Shares, Institutional Shares, and Adviser Shares had a total return of
-5.14%, -5.06%, -5.39%, respectively. This compares to returns of -7.10% for
the Lipper International Funds Index and -5.75% for the MSCI EAFE Index. The
R6 Shares commenced operations on August 17, 2018, and from that time
through May 31, 2019, had a total return of -2.55%.
Effective July 1, 2019, Victory Capital serves as the Fund's investment
adviser. Prior to July 1, 2019, AMCO served as the Fund's investment
adviser. The investment adviser employs dedicated resources to support the
research, selection, and monitoring of the Fund's subadvisers. MFS
Investment Management ("MFS"), Wellington Management, and Lazard are the
subadvisers to the Fund. The subadvisers provide day-to-day discretionary
management for the Fund's assets.
o WHAT WERE THE PRINCIPAL FACTORS IN LAZARD'S PERFORMANCE RELATIVE TO THE
INDEX?
The Lazard strategy focuses on non-U.S. small-capitalization stocks.
Performance for the Lazard portion of the portfolio slightly trailed that
for the overall small-cap segment over the reporting period ended May 31,
2019. Stock selection was the primary detractor despite the portfolio
outperforming in seven of the eleven sectors. Holdings within financials and
consumer discretionary provided the strongest relative returns, while
Refer to page 6 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
Refer to the Portfolio of Investments for a complete list of securities.
================================================================================
2 | USAA INTERNATIONAL FUND
================================================================================
stock selection lagged within industrials, information technology and real
estate. Stock selection was positive within Australia, Norway, and the U.K. but
weighed on performance in Japan, Singapore, and Finland.
With respect to individual names, leading positive contributors included
Australian investment firm Magellan Financial Group Ltd., which reported a 40%
increase in assets under management and continued strong performance in its
flagship fund. U.K. sporting apparel retailer JD Sports Fashion plc reported
solid growth in top-line revenue and acquired the balance of smaller rival
Footasylum, which is expected to add to profits in 2021. U.K. food retailer
Greggs plc has been growing with momentum, driven by the enormous publicity
surrounding the January 2019 launch of its vegan sausage roll. The company has
announced a special dividend, which is being paid 12 months earlier than
expected.
Detractors over the reporting period included Schaeffler AG Preference Shares, a
Germany-based metal fabricating concern, which has reported weaker results on
reduced global auto production driven largely by slowing growth in China. German
semiconductor component manufacturer Siltronic AG sold off sharply in the fourth
quarter of 2018 despite reporting favorable results and improved guidance.
Demand for the company's logic, power, and image sensors is expected to continue
in 2019, but the U.S.-China trade war has put electronics demand growth on
pause. Shares of Eramet* lagged as the French mining concern reported revenue,
which was substantially below expectations. Margin pressures in the company's
manganese business and cost issues in the nickel business have weighed on the
stock and the position was sold.
Lazard expects continued market volatility in view of the many unresolved
political and economic issues, including the trade wars and Brexit. In all
environments, the managers will continue to execute their bottom-up,
fundamentally driven process.
*Eramet was sold out of the Fund prior to May 31, 2019.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
o WHAT WERE THE PRINCIPAL FACTORS IN MFS'S PERFORMANCE RELATIVE TO THE INDEX?
The largest contributors to the strong relative performance in the MFS
portion of the portfolio included stock selection within and an overweight
allocation to the consumer staples sector, as well as security selection in
the information technology, materials, and industrials sectors. Security
selection within and an underweight allocation to the consumer discretionary
sector further benefited relative results. Conversely, security selection in
the communication services sector and an underweight allocation to and
security selection in the utilities sector detracted from relative
performance.
With respect to individual names, positive contributions were led by an
overweight to Swiss packaged foods company Nestle S.A., while a position in
another consumer staples company, the British distiller Diageo plc, also
outperformed notably. Within information technology, overweights to
India-based Tata Consultancy Services Ltd. and Germany-based SAP SE were the
largest contributors, while Experian plc and Canadian National Railway Co.
were the strongest performers within industrials. On the downside, German
pharmaceutical company Bayer AG was the biggest detractor, while within
communication services overweights to Baidu, Inc. ADR (China), WPP plc
(U.K.), and ProSiebenSat.1 Media SE (Germany) weighed on return.
The MFS portfolio remains underexposed to banks, especially in Japan and
Australia, as well as to the energy sector. By contrast, MFS favors the
consumer staples sector with a focus on beverage companies and the health
care sector with a focus on medical equipment companies, based on pricing
power from either strong brands or patent protection. As long-term
investors, MFS is concerned with the impact of rising leverage globally.
Should interest rates rise from current low levels it likely would impact
growth adversely. For this reason, MFS remains cautious about investing in
companies that have significant leverage.
================================================================================
4 | USAA INTERNATIONAL FUND
================================================================================
o WHAT WERE THE PRINCIPAL FACTORS IN WELLINGTON MANAGEMENT'S PERFORMANCE
RELATIVE TO THE INDEX?
The Wellington Management portion of the Fund underperformed the benchmark
MSCI EAFE Index during the reporting period. Underperformance was driven
primarily by stock selection within financials, consumer discretionary, and
industrials. Sector allocation, a residual outcome of Wellington's stock
selection process, also detracted, driven by underweight allocations to
consumer staples and health care. From a regional perspective, stock
selection in Europe and Japan lagged most notably.
Top individual detractors from relative performance included the portfolio's
lack of exposure to both Nestle S.A., a Switzerland-based global food and
beverage producer, and Novartis AG, a Switzerland-based pharmaceutical
manufacturer, as well as an out-of-benchmark position in GAM Holding AG, a
Switzerland-based asset manager. Conversely, off-benchmark positions in
Russia-based natural gas company Gazprom PJSC ADR, Brazil-based utility
company Cia Paranaene de Energia Preference Shares, and U.K.-based metals
and mining company Anglo American Platinum Ltd. were the top individual
contributors to relative performance over the reporting period.
While sector weights are a fallout of the manager's bottom-up stock
selection process, at the end of the reporting period the Wellington
portfolio's leading overweight allocations were to the energy, financials
and communication services sectors. The largest underweights were to
consumer staples, health care, and real estate. On a regional basis, the
largest overweight allocations were to emerging markets and Japan.
Thank you for allowing us to help manage your investments.
Investments in foreign securities are subject to additional and more diverse
risks, including but not limited to currency fluctuations, market
illiquidity, and political and economic instability. Foreign investing may
result in more rapid and extreme changes in value than investments made
exclusively in the securities of U.S. companies. There may be less publicly
available information relating to foreign companies than those in the United
States. Foreign securities also may be subject to foreign taxes. Investments
made in emerging market countries may be particularly volatile. Economies of
emerging market countries generally are less diverse and mature than more
developed countries and may have less stable political systems.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 5
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/19 o
--------------------------------------------------------------------------------------------------------
SINCE INCEPTION
1 YEAR 5 YEAR 10 YEAR INCEPTION* DATE
--------------------------------------------------------------------------------------------------------
Fund Shares -5.14% 7.29% 7.61% - -
Institutional Shares -5.06% 2.70% 7.79% - -
Adviser Shares -5.39% 2.32% - 5.70% 8/01/10
R6 Shares - - - -2.55% 8/17/18
MSCI EAFE Index**
(reflects no deduction
for fees, expenses, or taxes) -5.75% 1.27% 6.23% - -
Lipper International
Funds Index***
(reflects no deduction for
fees, expenses, or taxes)" -7.10% 1.61% 6.41% - -
*Since inception returns are shown when a share class has less than 10 years of
performance. Total returns for periods of less than one year are not annualized.
**The unmanaged MSCI EAFE Index reflects the movements of stock markets in
Europe, Australasia, and the Far East by representing a broad selection of
domestically listed companies within each market.
***The unmanaged Lipper International Funds Index tracks the total return
performance of funds within the Lipper International Funds category.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
usaa.com.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on net investment income and
realized capital gain distributions, including reinvested distributions, or
redemptions of shares.
================================================================================
6 | USAA INTERNATIONAL FUND
================================================================================
o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
USAA INTERNATIONAL LIPPER INTERNATIONAL
FUND SHARES FUNDS INDEX MSCI EAFE INDEX
05/31/09 $10,000.00 $10,000.00 $10,000.00
06/30/09 9,845.00 9,845.39 9,943.12
07/31/09 10,932.00 10,836.54 10,850.94
08/31/09 11,298.00 11,228.55 11,440.78
09/30/09 11,902.00 11,794.63 11,878.83
10/31/09 11,703.00 11,470.67 11,730.40
11/30/09 12,202.00 11,889.48 11,965.26
12/31/09 12,524.00 12,097.53 12,137.59
01/31/10 11,879.00 11,513.20 11,602.84
02/28/10 11,879.00 11,574.17 11,523.30
03/31/10 12,619.00 12,325.54 12,242.62
04/30/10 12,411.00 12,184.65 12,021.09
05/31/10 11,044.00 10,922.48 10,637.93
06/30/10 11,044.00 10,780.23 10,531.84
07/31/10 12,070.00 11,761.31 11,530.56
08/31/10 11,621.00 11,365.74 11,172.56
09/30/10 12,821.00 12,502.33 12,267.32
10/31/10 13,353.00 12,959.58 12,710.51
11/30/10 12,759.00 12,485.26 12,098.57
12/31/10 13,760.00 13,432.23 13,078.26
01/31/11 13,901.00 13,628.27 13,386.87
02/28/11 14,263.00 14,012.21 13,828.26
03/31/11 14,178.00 13,874.28 13,518.34
04/30/11 15,242.00 14,607.75 14,326.39
05/31/11 14,874.00 14,182.63 13,903.12
06/30/11 14,688.00 13,933.91 13,729.03
07/31/11 14,467.00 13,679.05 13,510.71
08/31/11 13,166.00 12,470.94 12,290.83
09/30/11 11,706.00 11,011.65 11,119.67
10/31/11 13,041.00 12,131.97 12,191.84
11/30/11 12,690.00 11,786.98 11,600.38
12/31/11 12,410.00 11,486.88 11,490.41
01/31/12 13,174.00 12,252.53 12,103.37
02/29/12 13,897.00 12,935.77 12,797.83
03/31/12 14,144.00 12,929.61 12,738.36
04/30/12 13,926.00 12,709.83 12,489.03
05/31/12 12,393.00 11,396.18 11,055.13
06/30/12 13,156.00 12,041.19 11,830.22
07/31/12 13,225.00 12,160.64 11,964.38
08/31/12 13,553.00 12,511.01 12,285.70
09/30/12 13,972.00 12,894.13 12,649.13
10/31/12 14,115.00 12,983.65 12,754.40
11/30/12 14,488.00 13,266.08 13,062.61
12/31/12 15,149.00 13,750.27 13,480.20
01/31/13 15,654.00 14,313.72 14,191.25
02/28/13 15,567.00 14,138.12 14,056.64
03/31/13 15,614.00 14,280.07 14,172.06
04/30/13 15,945.00 14,806.00 14,910.51
05/31/13 15,858.00 14,663.63 14,550.45
06/30/13 15,370.00 14,200.39 14,033.50
07/31/13 16,247.00 14,983.18 14,774.04
08/31/13 15,893.00 14,715.43 14,578.61
09/30/13 16,945.00 15,719.39 15,656.37
10/31/13 17,363.00 16,219.61 16,182.80
11/30/13 17,613.00 16,376.75 16,306.73
12/31/13 17,879.00 16,668.83 16,550.72
01/31/14 16,860.00 15,936.79 15,884.30
02/28/14 17,815.00 16,813.28 16,767.34
03/31/14 17,668.00 16,739.60 16,660.47
04/30/14 17,996.00 16,912.70 16,901.31
05/31/14 18,313.00 17,196.28 17,175.80
06/30/14 18,366.00 17,363.60 17,341.41
07/31/14 17,827.00 16,928.72 17,001.14
08/31/14 17,961.00 17,035.10 16,974.99
09/30/14 17,504.00 16,410.95 16,322.46
10/31/14 17,293.00 16,316.40 16,085.47
11/30/14 17,709.00 16,527.91 16,304.26
12/31/14 16,970.00 15,963.00 15,739.46
01/31/15 17,163.00 16,049.69 15,816.40
02/28/15 18,179.00 16,946.36 16,761.92
03/31/15 17,985.00 16,772.14 16,507.28
04/30/15 18,716.00 17,378.44 17,181.26
05/31/15 18,674.00 17,412.87 17,093.31
06/30/15 18,118.00 16,961.10 16,609.00
07/31/15 18,456.00 17,071.81 16,953.86
08/31/15 17,097.00 15,892.70 15,706.68
09/30/15 16,492.00 15,186.99 14,909.16
10/31/15 17,496.00 16,207.74 16,074.61
11/30/15 17,357.00 16,068.76 15,824.53
12/31/15 17,064.00 15,749.48 15,611.31
01/31/16 15,998.00 14,805.15 14,482.40
02/29/16 15,557.00 14,512.40 14,217.07
03/31/16 16,592.00 15,500.15 15,142.14
04/30/16 16,853.00 15,795.44 15,580.52
05/31/16 16,853.00 15,759.85 15,438.98
06/30/16 16,304.00 15,347.32 14,920.73
07/31/16 17,166.00 16,004.85 15,676.93
08/31/16 17,319.00 16,155.31 15,688.06
09/30/16 17,536.00 16,366.05 15,880.78
10/31/16 17,307.00 16,035.49 15,555.94
11/30/16 16,962.00 15,719.19 15,246.13
12/31/16 17,362.00 16,016.83 15,767.46
01/31/17 18,043.00 16,591.92 16,224.84
02/28/17 18,218.00 16,763.95 16,456.84
03/31/17 18,769.00 17,314.02 16,909.88
04/30/17 19,411.00 17,823.90 17,340.15
05/31/17 20,202.00 18,450.08 17,976.60
06/30/17 20,260.00 18,465.30 17,944.81
07/31/17 20,863.00 19,053.85 18,462.44
08/31/17 20,876.00 19,101.04 18,455.48
09/30/17 21,349.00 19,553.07 18,914.66
10/31/17 21,719.00 19,867.88 19,201.88
11/30/17 21,868.00 19,994.01 19,403.29
12/31/17 22,241.00 20,293.70 19,714.74
01/31/18 23,324.00 21,394.72 20,703.62
02/28/18 22,281.00 20,327.78 19,769.14
03/31/18 21,954.00 20,143.15 19,412.83
04/30/18 22,355.00 20,376.31 19,856.07
05/31/18 21,940.00 20,050.18 19,409.75
06/30/18 21,646.00 19,755.17 19,172.62
07/31/18 22,201.00 20,236.17 19,644.56
08/31/18 21,820.00 19,832.59 19,265.17
09/30/18 21,874.00 19,876.56 19,432.37
10/31/18 20,069.00 18,208.05 17,885.70
11/30/18 20,109.00 18,228.06 17,863.17
12/31/18 19,116.00 17,261.10 16,996.02
01/31/19 20,356.00 18,460.55 18,113.00
02/28/19 20,908.00 18,959.87 18,574.73
03/31/19 21,053.00 19,095.03 18,691.85
04/30/19 21,814.00 19,746.25 19,217.38
05/31/19 20,813.00 18,626.52 18,294.45
[END CHART]
Data from 5/31/09 through 5/31/19.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA International Fund to the benchmarks listed above (see page 6 for benchmark
definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged,
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes, except
the Lipper International Funds Index reflects the fees and expenses of the
underlying funds included in the composite.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
o TOP 10 INDUSTRIES - 5/31/19 o
(% of Net Assets)
Banks ..................................................................... 8.0%
Pharmaceuticals ........................................................... 7.1%
Food ...................................................................... 5.2%
Commercial Services ....................................................... 4.5%
Software .................................................................. 4.2%
Insurance ................................................................. 4.2%
Chemicals ................................................................. 4.1%
Oil & Gas ................................................................. 4.1%
Healthcare Products ....................................................... 3.9%
Beverages ................................................................. 3.9%
o TOP 10 EQUITY HOLDINGS - 5/31/19 o
(% of Net Assets)
Nestle S.A. ............................................................... 2.9%
Roche Holding AG. ......................................................... 2.0%
AIA Group Ltd. ............................................................ 1.9%
Hoya Corp. ................................................................ 1.9%
SAP SE .................................................................... 1.8%
Schneider Electric SE ..................................................... 1.7%
Air Liquide S.A. .......................................................... 1.7%
LVMH Moet Hennessy Louis Vuitton SE ....................................... 1.6%
Beiersdorf AG ............................................................. 1.5%
Experian plc .............................................................. 1.5%
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 Fund's compliance classification.
================================================================================
8 | USAA INTERNATIONAL FUND
================================================================================
o COUNTRY ALLOCATION - 5/31/19 o
(% of Net Assets)
[PIE CHART OF COUNTRY ALLOCATION]
JAPAN 19.6%
UNITED KINGDOM 15.4%
FRANCE 13.3%
SWITZERLAND 10.4%
GERMANY 7.6%
NETHERLANDS 3.3%
CANADA 3.0%
OTHER* 31.7%
[END CHART]
*Includes countries with less than 3.0% of portfolio, 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%.
================================================================================
INVESTMENT OVERVIEW | 9
================================================================================
SHAREHOLDER VOTING RESULTS
--------------------------------------------------------------------------------
On April 18, 2019, a special meeting of shareholders was held to vote on two
proposals relating to the series of the USAA Mutual Funds Trust (Trust).
Shareholders of record on February 8, 2019, were entitled to vote on each
proposal shown below. The proposals were approved by the shareholders.
The following proposals and voting results pertain to one or more series within
the Trust. Votes shown for Proposal 1 are for the Fund, a series of the Trust.
Votes shown for Proposal 2 are for all series of the Trust. The effective date
of the Proposals was July 1, 2019.
PROPOSAL 1
To approve a new Investment Advisory Agreement between the Trust, on behalf of
the Fund, and Victory, an independent investment adviser. The new Investment
Advisory Agreement became effective upon the closing of the Transaction (as
defined and discussed in Note 1 to the Financial Statements) whereby AMCO was
acquired by Victory Holdings, the parent company of Victory Capital.
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
--------------------------------------------------------------------------------
97,812,711 3,286,450 2,419,046
PROPOSAL 2
Election of two new trustees to the Trust's Board of Trustees to serve upon the
closing of the Transaction: (1) David C. Brown, to serve as an "interested
trustee" as defined in the Investment Company Act of 1940, as amended (1940
Act); and (2) John C. Walters, to serve as a trustee who is not an "interested
person" as is defined under the 1940 Act ("Independent Trustee").
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
TRUSTEES FOR VOTES WITHHELD
--------------------------------------------------------------------------------
David C. Brown 8,299,565,565 820,887,736
John C. Walters 8,317,935,885 802,517,416
================================================================================
10 | USAA INTERNATIONAL FUND
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
May 31, 2019, is provided for information purposes only and should not be used
for reporting to federal or state revenue agencies. Federal tax information for
the calendar year will be reported to you on Form 1099-DIV in January 2020.
With respect to distributions paid, the Fund designates the following amounts
(or, if subsequently determined to be different, the maximum amount allowable)
for the fiscal year ended May 31, 2019:
DIVIDEND RECEIVED LONG-TERM FOREIGN FOREIGN QUALIFIED
DEDUCTION (CORPORATE CAPITAL GAIN TAXES SOURCE INTEREST
SHAREHOLDERS)(1) DISTRIBUTIONS(2) PAID(3) INCOME INCOME
-------------------------------------------------------------------------------------------------------------
0.27% $193,659,000 $8,407,000 $100,517,000 $618,000
-------------------------------------------------------------------------------------------------------------
(1) Presented as a percentage of net investment income and short-term capital
gain distributions paid, if any.
(2) Pursuant to Section 852 of the Internal Revenue Code.
(3) The Fund has elected under Section 853 of the Internal Revenue Code to pass
through the credit for taxes paid in foreign countries.
For the fiscal year ended May 31, 2019, the Fund hereby designates the maximum
amount allowable of its net taxable income as qualified dividends taxed at
individual net capital gain rates.
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS | 11
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA INTERNATIONAL FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
International Fund (the "Fund") (one of the funds constituting USAA Mutual Funds
Trust (the "Trust")), including the portfolio of investments, as of May 31,
2019, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, the financial highlights for each of the five years in the period then
ended and the related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Fund (one of the funds
constituting USAA Mutual Funds Trust) at May 31, 2019, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and its financial highlights for each of
the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
BASIS FOR OPINION
These financial statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on the Fund's financial statements based
on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and are required to
be independent with respect to the Trust in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Trust is not required to have,
nor were we engaged to perform, an audit of the Trust's internal control over
financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the Trust's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of May 31, 2019, by correspondence with the custodian and brokers or by
other appropriate auditing procedures where replies from brokers were not
received. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the auditor of one or more Victory Capital investment
companies since 1995.
San Antonio, Texas
July 23, 2019
================================================================================
12 | USAA INTERNATIONAL FUND
================================================================================
PORTFOLIO OF INVESTMENTS
May 31, 2019
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (98.4%)
COMMON STOCKS (98.1%)
BASIC MATERIALS (7.2%)
----------------------
CHEMICALS (4.1%)
497,675 Air Liquide S.A.(a),(b) $ 61,887
455,633 Akzo Nobel N.V.(a) 38,380
8,057,900 China BlueChemical Ltd.(a) 2,780
128,200 Daicel Corp.(a) 1,086
156,700 Ishihara Sangyo Kaisha Ltd.(a) 1,451
328,522 JSR Corp.(a) 4,644
193,105 Kemira Oyj(a) 2,646
233,400 Kumiai Chemical Industry Co. Ltd.(a) 1,583
136,216 Linde plc(a) 24,693
33,400 Nippon Carbide Industries Co., Inc.(a) 403
22,800 Nippon Carbon Co. Ltd.(a) 822
124,600 Shin-Etsu Chemical Co. Ltd.(a) 10,322
72,000 Teijin Ltd.(a) 1,171
63,900 Tokuyama Corp.(a) 1,415
----------
153,283
----------
FOREST PRODUCTS & PAPER (0.1%)
447,564 Altri SGPS S.A.(a) 3,021
43,332 Semapa-Sociedade de Investimento e Gestao(a) 601
----------
3,622
----------
IRON/STEEL (0.7%)
131,900 Chubu Steel Plate Co. Ltd.(a) 747
236,200 Daido Metal Co. Ltd.(a) 1,434
305,362 Ferrexpo plc(a) 891
442,763 Hitachi Metals Ltd.(a) 4,379
164,605 Japan Steel Works Ltd.(a) 2,473
191,535 Kyoei Steel Ltd.(a) 3,168
293,890 Nakayama Steel Works Ltd.(a) 1,273
108,416 Salzgitter AG(a) 2,820
98,482 SSAB AB "A"(a) 302
266,841 SSAB AB "B"(a) 734
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
432,665 Tokyo Steel Manufacturing Co. Ltd.(a) $ 3,308
142,300 Yamato Kogyo Co. Ltd.(a) 3,892
----------
25,421
----------
MINING (2.3%)
1,140,461 Acacia Mining plc(a),(c) 2,283
48,688 Anglo American Platinum Ltd.(a) 2,445
282,641 Anglo American plc(a) 6,783
2,281,165 Aurelia Metals Ltd.(a),(c) 985
352,800 Barrick Gold Corp. 4,388
205,066 Cameco Corp. 2,070
618,894 Centerra Gold, Inc.(c) 3,544
14,504,000 CST Group Ltd.(a),(c) 35
252,458 Eldorado Gold Corp.(c) 939
1,172,864 Gold Fields Ltd.(a) 5,227
468,438 Harmony Gold Mining Co. Ltd. ADR(c) 834
246,870 Iluka Resources Ltd.(a) 1,662
710,817 Impala Platinum Holdings Ltd.(a),(c) 2,825
249,065 KAZ Minerals plc(a) 1,609
655,019 Kinross Gold Corp.(c) 2,142
30,500 Mitsui Mining & Smelting Co. Ltd.(a) 637
20,000 Nittetsu Mining Co. Ltd.(a) 785
1,022,938 Norsk Hydro ASA(a) 3,570
150,596 Northern Dynasty Minerals Ltd.(b),(c) 67
74,685 Pacific Metals Co. Ltd.(a) 1,510
2,987,697 Petra Diamonds Ltd.(a),(c) 829
1,492,827 Ramelius Resources Ltd.(a),(c) 979
1,621,318 Resolute Mining Ltd.(a) 1,271
545,878 Rio Tinto plc(a) 31,360
1,006,050 Saracen Mineral Holdings Ltd.(a),(c) 2,253
444,162 SEMAFO, Inc.(c) 1,331
1,540,525 Western Areas Ltd.(a) 2,322
----------
84,685
----------
Total Basic Materials 267,011
----------
COMMUNICATIONS (4.4%)
---------------------
ADVERTISING (0.8%)
64,600 Gendai Agency, Inc.(a) 271
169,300 Relia, Inc.(a) 1,823
61,100 UNITED, Inc.(a) 794
2,225,681 WPP plc(a) 26,530
----------
29,418
----------
================================================================================
14 | USAA INTERNATIONAL FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
INTERNET (1.2%)
524,665 Auto Trader Group plc(a),(d) $ 3,979
108,131 Baidu, Inc. ADR(c) 11,894
25,900 Digital Garage, Inc.(a) 838
131,289 Jumbo Interactive Ltd.(a) 1,638
1,392,665 Just Eat plc(a),(c) 10,566
87,925 Masmovil Ibercom S.A.(a),(c) 1,953
15,501 NHN Entertainment Corp.(a),(c) 940
817,092 Qliro Group AB(a),(c) 993
19,356 Reply S.p.A.(a) 1,244
279,578 Rightmove plc(a) 2,047
2,650,324 Yahoo Japan Corp.(a) 7,618
----------
43,710
----------
MEDIA (0.9%)
99,054 Euskaltel S.A.(a),(d) 835
142,939 Fuji Media Holdings, Inc.(a) 1,942
94,164 Future plc(a) 1,330
28,528 Lagardere SCA(a) 693
171,785 Metropole Television S.A.(a) 3,090
404,128 Nippon Television Holdings, Inc.(a) 5,778
13,170 Nordic Entertainment Group AB "B" 311
767,251 ProSiebenSat.1 Media SE(a),(c) 12,476
386,013 Television Francaise 1(a),(b) 3,686
91,475 TV Asahi Holdings Corp.(a) 1,453
----------
31,594
----------
TELECOMMUNICATIONS (1.5%)
90,571 ADVA Optical Networking SE(a),(c) 691
108,596 AudioCodes Ltd. 1,625
2,301,555 BT Group plc(a) 5,642
627,636 China Mobile Ltd.(a) 5,479
9,162,739 China Telecom Corp. Ltd. "H"(a) 4,598
6,438,535 China Unicom Hong Kong Ltd.(a) 6,778
4,581,000 CITIC Telecom International Holdings Ltd.(a) 1,681
306,905 Hellenic Telecommunications Organization S.A.(a) 4,200
293,500 HKBN Ltd.(a) 467
221,061 KT Corp.(a) 5,181
1,650,631 Magyar Telekom Telecommunications plc(a) 2,358
365,500 MTN Group Ltd.(a) 2,577
1,071,554 Nokia Oyj(a),(b) 5,359
125,614 Orange Belgium S.A.(a) 2,389
1,433,626 Service Stream Ltd.(a) 2,461
133,300 Telefonica Brasil S.A. Preference Shares 1,632
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
123,360 Telekom Austria AG(a),(c) $ 937
28,300 Uniden Holdings Corp.(a),(c) 458
630,948 VEON Ltd. 1,451
306,379 Vocus Group Ltd.(a),(c) 974
----------
56,938
----------
Total Communications 161,660
----------
CONSUMER, CYCLICAL (8.6%)
-------------------------
AIRLINES (0.5%)
187,232 Air France-KLM(a),(c) 1,618
241,810 Air New Zealand Ltd.(a) 411
165,349 Dart Group plc(a) 1,875
188,744 Ryanair Holdings plc ADR(c) 12,310
1,191,640 SAS AB(a),(c) 1,667
----------
17,881
----------
APPAREL (1.9%)
621,803 Geox S.p.A.(a) 821
9,065 Hermes International(a) 6,030
43,600 Look Holdings, Inc.(a) 539
156,578 LVMH Moet Hennessy Louis Vuitton SE(a) 59,325
121,400 Sanyo Shokai Ltd.(a) 1,958
46,200 Shikibo Ltd.(a) 394
----------
69,067
----------
AUTO MANUFACTURERS (0.7%)
5,720,757 Dongfeng Motor Group Co. Ltd. "H"(a) 4,704
423,610 Honda Motor Co. Ltd.(a) 10,441
586,443 Nissan Motor Co. Ltd.(a) 3,968
79,848 Renault S.A.(a),(b) 4,795
----------
23,908
----------
AUTO PARTS & EQUIPMENT (1.0%)
172,960 Aisan Industry Co. Ltd.(a) 1,069
41,052 CIE Automotive S.A.(a) 991
290,100 Denso Corp.(a) 11,171
128,170 Exedy Corp.(a) 2,518
925 Georg Fischer AG(a) 782
230,190 Keihin Corp.(a) 2,984
49,900 NGK Insulators Ltd.(a) 674
43,000 Nihon Plast Co. Ltd.(a) 264
194,853 Nissin Kogyo Co. Ltd.(a) 2,435
247,536 Schaeffler AG Preference Shares(a) 1,816
191,490 Sumitomo Riko Co. Ltd.(a) 1,367
135,600 Tachi-S Co. Ltd.(a) 1,608
================================================================================
16 | USAA INTERNATIONAL FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
204,140 Tokai Rika Co. Ltd.(a) $ 3,113
195,560 Toyoda Gosei Co. Ltd.(a) 3,413
193,680 Unipres Corp.(a) 3,037
----------
37,242
----------
DISTRIBUTION/WHOLESALE (0.3%)
25,241 D'ieteren S.A.(a) 1,091
411,805 Rexel S.A.(a) 4,443
19,600 Ryoyo Electro Corp.(a) 301
993,932 SIG plc(a) 1,630
97,690 Travis Perkins plc(a) 1,523
----------
8,988
----------
ENTERTAINMENT (0.3%)
186,645 Avex, Inc.(a) 2,311
1,004,553 Cineworld Group plc(a) 3,769
59,950 Evolution Gaming Group AB(a),(d) 1,138
86,577 GVC Holdings plc(a) 658
198,643 Kindred Group plc(a) 1,546
----------
9,422
----------
FOOD SERVICE (1.2%)
1,899,893 Compass Group plc(a) 42,989
----------
HOME BUILDERS (0.1%)
7,937 Kaufman & Broad S.A.(a) 284
174,913 Redrow plc(a) 1,206
111,000 Tama Home Co. Ltd.(a) 1,022
----------
2,512
----------
HOME FURNISHINGS (0.1%)
393,291 Howden Joinery Group plc(a) 2,500
153,360 Maxell Holdings Ltd.(a) 2,552
----------
5,052
----------
HOUSEWARES (0.0%)
40,393 IG Design Group plc(a),(b) 303
----------
LEISURE TIME (0.1%)
5,937 CTS Eventim AG & Co. KGaA(a) 266
78,613 Hollywood Bowl Group plc(a) 228
193,498 Technogym S.p.A.(a) 2,216
243,800 Tokyo Dome Corp.(a) 2,390
----------
5,100
----------
LODGING (0.0%)
10,500 Fujita Kanko, Inc.(a) 253
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
RETAIL (2.3%)
6,690,865 361 Degrees International Ltd.(a) $ 1,236
197,203 Card Factory plc(a) 473
76,600 Cawachi Ltd.(a) 1,298
455,500 CECONOMY AG(a),(c) 2,574
8,888 Cewe Stiftung & Co. KGAA(a) 820
768,303 Citizen Watch Co. Ltd.(a) 3,502
8,730,535 Daphne International Holdings Ltd.(a),(c) 248
104,100 DCM Holdings Co. Ltd.(a) 1,036
30,000 Doutor Nichires Holdings Co. Ltd.(a) 576
530,393 Dunelm Group plc(a) 5,958
18,008 Fielmann AG(a) 1,264
299,922 Grafton Group plc(a) 3,229
760,870 Halfords Group plc(a) 2,168
56,280 Honeys Holdings Co. Ltd.(a) 506
96,500 Isetan Mitsukoshi Holdings Ltd.(a) 798
471,318 JD Sports Fashion plc(a) 3,681
1,660,107 Kingfisher plc(a) 4,479
335,800 Kojima Co. Ltd.(a),(c) 1,496
55,100 Komeri Co. Ltd.(a) 1,080
1,120,939 Marks & Spencer Group plc(a) 3,174
18,000 McDonald's Holdings Co. (Japan) Ltd.(a) 818
9,300 Nihon Chouzai Co. Ltd.(a) 303
158,375 Nishimatsuya Chain Co. Ltd.(a) 1,268
29,100 Nojima Corp.(a) 490
5,205 PAL GROUP Holdings Co. Ltd.(a) 158
984,555 Pets at Home Group plc(a) 2,288
46,043 Shimamura Co. Ltd.(a) 3,507
129,400 Transaction Co. Ltd.(a) 957
30,414 Unieuro S.p.A.(a) 481
32,200 United Arrows Ltd.(a) 1,069
232,000 Xebio Holdings Co. Ltd.(a) 2,577
818,494 Yum China Holdings, Inc. 32,748
----------
86,260
----------
STORAGE/WAREHOUSING (0.0%)
89,000 Mitsui-Soko Holdings Co. Ltd.(a) 1,317
----------
TOYS/GAMES/HOBBIES (0.1%)
88,363 Games Workshop Group plc(a) 4,993
----------
Total Consumer, Cyclical 315,287
----------
CONSUMER, NON-CYCLICAL (29.6%)
------------------------------
AGRICULTURE (0.9%)
477,300 Feed One Co. Ltd.(a) 781
89,900 Hokuto Corp.(a) 1,479
================================================================================
18 | USAA INTERNATIONAL FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
718,198 Inghams Group Ltd.(a),(b) $ 2,088
1,237,200 Japan Tobacco, Inc.(a) 28,376
2,604,800 Perusahaan Perkebunan London Sumatra Indonesia Tbk PT(a) 209
----------
32,933
----------
BEVERAGES (3.9%)
3,320,820 Ambev S.A. ADR 14,844
476,480 Anadolu Efes Biracilik Ve Malt Sanayii A/S(a) 1,574
109,342 Britvic plc(a) 1,230
514,014 C&C Group plc(a) 2,091
151,565 Carlsberg A/S "B"(a) 19,892
1,196,087 Diageo plc(a) 50,279
308,160 Marston's plc(a) 418
291,855 Pernod Ricard S.A.(a) 51,340
17,867 Royal Unibrew A/S(a) 1,269
----------
142,937
----------
BIOTECHNOLOGY (0.1%)
14,423 Eckert & Ziegler AG(a) 1,544
57,981 Swedish Orphan Biovitrum AB(a),(c) 1,031
10,796 Vilmorin & Cie S.A.(a) 603
93,816 Vitrolife AB(a) 2,000
----------
5,178
----------
COMMERCIAL SERVICES (4.5%)
143,412 Adecco Group AG(a) 7,709
9,506 Amadeus Fire AG(a) 1,220
3,592,000 AMVIG Holdings Ltd.(a) 858
69,967 ASTM S.p.A.(a) 1,899
424,187 BCA Marketplace plc(a) 972
66,546 Benesse Holdings, Inc.(a) 1,544
149,642 Bravida Holding AB(a) 1,223
565,404 CTT-Correios de Portugal S.A.(a) 1,463
130,000 Duskin Co. Ltd.(a) 3,396
1,819,246 Experian plc(a) 54,987
42,427 Gruppo MutuiOnline S.p.A.(a) 813
76,107 Hamburger Hafen und Logistik AG(a) 1,807
1,180,614 Hays plc(a) 2,213
43,635 Loomis AB "B"(a) 1,412
33,800 Mamezou Holdings Co. Ltd.(a) 390
376,379 Pagegroup plc(a) 2,425
52,400 Pasona Group, Inc.(a) 802
200,372 QinetiQ Group plc(a) 739
245,027 Ramirent Oyj(a) 1,418
================================================================================
PORTFOLIO OF INVESTMENTS | 19
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
474,569 Randstad N.V.(a) $ 24,408
631,600 RELX plc(a) 14,749
1,350,113 RELX plc(a) 31,383
386,100 Riso Kyoiku Co. Ltd.(a) 1,547
139,500 Shin Nippon Biomedical Laboratories Ltd.(a) 927
346,141 SThree plc(a) 1,330
272,165 Toppan Forms Co. Ltd.(a) 2,188
----------
163,822
----------
COSMETICS/PERSONAL CARE (2.9%)
487,158 Beiersdorf AG(a) 56,081
761,478 Essity AB "B"(a) 22,353
108,644 L'Oreal S.A.(a) 29,157
----------
107,591
----------
FOOD (5.2%)
103,600 Arcs Co. Ltd.(a) 2,004
56,596 Axfood AB(a) 1,089
462,336 Danone S.A.(a),(b) 36,900
144,176 Greggs plc(a) 3,966
1,453,935 J Sainsbury plc(a) 3,668
82,800 Kewpie Corp.(a) 1,854
29,100 Kyokuyo Co. Ltd.(a) 725
19,800 Life Corp.(a) 419
215,197 Metcash Ltd.(a) 439
267,447 METRO AG(a) 4,213
31,500 Mitsubishi Shokuhin Co. Ltd.(a) 824
1,070,788 Nestle S.A.(a) 106,348
28,300 Nisshin Oillio Group Ltd.(a) 822
35,161 Salmar ASA(a) 1,607
1,673,198 Sonae SGPS S.A.(a) 1,663
175,906 SSP Group plc(a) 1,491
460,089 Tate & Lyle plc(a) 4,204
6,777,054 Tesco plc(a) 19,377
65,300 Yokohama Reito Co. Ltd.(a) 568
----------
192,181
----------
HEALTHCARE PRODUCTS (3.9%)
108,828 Alcon, Inc.(c) 6,329
132,146 Biotage AB(a) 1,562
23,285 Cellavision AB(a) 719
81,243 Elekta AB "B"(a) 1,056
229,618 EssilorLuxottica S.A.(a),(b) 26,337
12,972 Lifco AB "B"(a) 630
================================================================================
20 | USAA INTERNATIONAL FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
3,667,800 Olympus Corp.(a) $ 43,220
492,398 QIAGEN N.V.(a),(c) 18,788
1,631,700 Terumo Corp.(a) 46,126
----------
144,767
----------
HEALTHCARE-SERVICES (0.2%)
54,180 CMIC Holdings Co. Ltd.(a) 997
18,062 Evotec SE(a),(c) 436
90,274 Korian S.A.(a) 3,596
1,086,345 Oceania Healthcare Ltd.(a),(b) 745
----------
5,774
----------
HOUSEHOLD PRODUCTS/WARES (0.9%)
429,023 Reckitt Benckiser Group plc(a) 34,460
----------
PHARMACEUTICALS (7.1%)
59,700 Alfresa Holdings Corp.(a) 1,503
46,153 AstraZeneca plc(a) 3,406
713,297 Bayer AG(a) 42,073
36,000 Daito Pharmaceutical Co. Ltd.(a) 1,114
20,886 Dermapharm Holding SE(a),(c) 730
34,464 Eisai Co. Ltd.(a) 2,021
361,558 Faes Farma S.A.(a) 1,575
14,533 Galapagos N.V.(a),(c) 1,652
25,253 Hikma Pharmaceuticals plc(a) 504
264,648 Merck KGaA(a) 25,560
5,800 Nippon Shinyaku Co. Ltd.(a) 399
544,138 Novartis AG(a) 46,732
891,940 Novo Nordisk A/S "B"(a) 42,040
105,650 Orexo AB(a),(c) 846
45,104 Recipharm AB "B"(a) 562
278,278 Roche Holding AG(a) 73,026
43,900 Seikagaku Corp.(a) 500
30,700 Suzuken Co. Ltd.(a) 1,884
238,944 Takeda Pharmaceutical Co. Ltd.(a) 8,055
66,200 Toho Holdings Co. Ltd.(a) 1,480
19,900 Torii Pharmaceutical Co. Ltd.(a) 432
79,800 Towa Pharmaceutical Co. Ltd.(a) 1,910
23,800 Tsumura & Co.(a) 663
136,100 Vital KSK Holdings, Inc.(a) 1,301
----------
259,968
----------
Total Consumer, Non-cyclical 1,089,611
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 21
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
ENERGY (4.4%)
-------------
COAL (0.0%)
271,254 Whitehaven Coal Ltd.(a) $ 735
----------
ENERGY-ALTERNATE SOURCES (0.1%)
383,457 Falck Renewables S.p.A.(a) 1,577
482,535 NEL ASA(a),(c) 439
----------
2,016
----------
OIL & GAS (4.1%)
997,103 Advantage Oil & Gas Ltd.(c) 1,291
275,377 ARC Resources Ltd. 1,499
920,667 Beach Energy Ltd.(a) 1,149
1,795,266 BP plc(a) 12,176
49,000 Cosmo Energy Holdings Co. Ltd.(a) 957
140,535 DNO ASA(a) 244
17,999 Drilling Co. of 1972 A/S(b),(c) 1,150
2,226,723 Eni S.p.A.(a) 33,592
1,115,812 Gazprom PJSC ADR 7,253
166,137 Genel Energy plc(a) 371
530,367 Inpex Corp.(a) 4,260
10,294 Israel Corp. Ltd.(a) 2,266
176,070 Japan Petroleum Exploration Co. Ltd.(a) 3,661
38,967 LUKOIL PJSC ADR 3,107
688,739 Painted Pony Energy Ltd.(b),(c) 586
691,820 Premier Oil plc(a),(c) 687
546,185 Royal Dutch Shell plc "B"(a) 17,031
1,187,357 Suncor Energy, Inc. 36,589
700,600 Surgutneftegas PJSC ADR(a) 2,626
337,525 Surgutneftegas PJSC ADR 1,272
304,635 TOTAL S.A.(a),(b) 15,758
123,348 Tourmaline Oil Corp. 1,570
186,707 YPF S.A. ADR 2,769
----------
151,864
----------
OIL & GAS SERVICES (0.2%)
188,227 Fugro N.V.(a),(b),(c) 1,549
380,028 Maire Tecnimont S.p.A.(a) 1,091
771,446 Saipem S.p.A.(a),(c) 3,286
921,794 Trican Well Service Ltd.(c) 866
----------
6,792
----------
Total Energy 161,407
----------
================================================================================
22 | USAA INTERNATIONAL FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
FINANCIAL (17.3%)
-----------------
BANKS (8.0%)
90,500 77 Bank Ltd.(a) $ 1,357
14,400 Aichi Bank Ltd.(a) 474
999,687 Allahabad Bank(a),(c) 645
813,952 Bank of Ireland Group plc(a) 4,337
7,346,455 Barclays plc(a) 13,886
59,031 BAWAG Group AG(a),(c),(d) 2,498
185,572 BNP Paribas S.A.(a),(b) 8,458
976,039 BPER Banca(a) 3,680
1,401,494 CaixaBank S.A.(a) 4,305
776,705 Canara Bank(a),(c) 2,967
965,871 Corp. Bank(a),(c) 348
262,265 Dah Sing Financial Holdings Ltd.(a) 1,224
1,653,200 DBS Group Holdings Ltd.(a) 29,206
45,870 Deutsche Pfandbriefbank AG(a),(d) 632
22,297 doBank S.p.A.(a),(d) 271
51,000 Hokuhoku Financial Group, Inc.(a) 543
1,719,122 HSBC Holdings plc(a) 14,025
26,300 Hyakujushi Bank Ltd.(a) 536
2,996,672 ING Groep N.V.(a) 32,351
10,509,677 Intesa Sanpaolo S.p.A.(a),(b) 21,514
1,357,996 Israel Discount Bank Ltd. "A"(a) 5,171
70,800 Juroku Bank Ltd.(a) 1,472
518,354 KBC Group N.V.(a) 34,047
247,261 Link Administration Holdings Ltd.(a) 1,022
2,150,825 Mitsubishi UFJ Financial Group, Inc.(a) 9,924
3,935,240 Mizuho Financial Group, Inc.(a) 5,552
24,600 Nanto Bank Ltd.(a) 490
1,104,188 Resona Holdings, Inc.(a) 4,654
189,400 Sberbank of Russia PJSC ADR 2,727
224,836 Societe Generale S.A.(a),(b) 5,629
32,433 SpareBank 1 SMN(a) 348
829,002 Standard Chartered plc(a) 7,212
258,470 Sumitomo Mitsui Financial Group, Inc.(a) 8,987
143,120 Sumitomo Mitsui Trust Holdings, Inc.(a) 5,224
423,300 TOMONY Holdings, Inc.(a) 1,339
4,230,095 UBS Group AG(a),(c) 48,664
2,912,169 Unicaja Banco S.A.(a),(d) 2,838
676,813 UniCredit S.p.A.(a) 7,680
3,884 VP Bank AG(a) 609
----------
296,846
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 23
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (3.0%)
118,000 Aizawa Securities Co. Ltd.(a) $ 750
137,291 Banca Farmafactoring S.p.A.(a),(d) 729
19,701 Burford Capital Ltd.(a) 413
351,282 Charter Court Financial Services Group plc(a) 1,461
128,081 Deutsche Boerse AG(a) 17,705
299,015 DGB Financial Group, Inc.(a) 2,027
45,349 Euronext N.V.(a),(d) 3,224
435,993 FlexiGroup Ltd.(a) 547
43,301 Flow Traders(a),(b) 1,220
361,129 GAM Holding AG(a),(c) 1,487
65,866,025 G-Resources Group Ltd.(a),(c) 503
24,500 Hitachi Capital Corp.(a) 518
867,882 Housing Development Finance Corp. Ltd.(a) 27,203
193,005 Ichiyoshi Securities Co. Ltd.(a) 1,372
38,772 Intertrust N.V.(a) 735
59,400 IwaiCosmo Holdings, Inc.(a) 616
289,700 Japan Securities Finance Co. Ltd.(a) 1,475
546,077 Julius Baer Group Ltd.(a),(c) 21,575
133,043 KB Financial Group, Inc.(a) 4,904
189,027 Magellan Financial Group Ltd.(a) 5,664
83,990 McMillan Shakespeare Ltd.(a) 751
1,345,131 Nomura Holdings, Inc.(a) 4,220
79,232 OneSavings Bank plc(a) 403
753,194 Platinum Asset Management Ltd.(a) 2,387
160,664 Resurs Holding AB(a),(d) 936
22,900 Ricoh Leasing Co. Ltd.(a) 705
126,474 Shinhan Financial Group Co. Ltd.(a) 4,721
579,000 Sun Hung Kai & Co. Ltd.(a) 277
534,915 Tochigi Bank Ltd.(a) 881
----------
109,409
----------
INSURANCE (4.2%)
120,521 Ageas(a) 5,877
7,586,800 AIA Group Ltd.(a) 71,076
28,245 ASR Nederland N.V.(a) 1,069
328,455 Assicurazioni Generali S.p.A.(a) 5,764
252,111 Coface S.A.(a),(c) 2,462
330,844 Dai-ichi Life Holdings, Inc.(a) 4,758
31,513 Grupo Catalana Occidente S.A.(a) 1,096
41,106 Helvetia Holding AG(a) 5,038
762,193 Just Group plc(a) 460
140,019 Phoenix Group Holdings plc(a) 1,189
================================================================================
24 | USAA INTERNATIONAL FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
605,713 Prudential plc(a) $ 12,070
7,322,604 Shin Kong Financial Holding Co. Ltd.(a),(c) 2,031
155,127 Societa Cattolica di Assicurazioni(a) 1,254
698,201 T&D Holdings, Inc.(a) 7,244
367,273 Tongyang Life Insurance Co. Ltd.(a) 1,225
20,682 Vienna Insurance Group AG Wiener Versicherung Gruppe(a) 505
96,160 Zurich Insurance Group AG(a) 31,157
----------
154,275
----------
INVESTMENT COMPANIES (0.1%)
103,338 Industrivarden AB "C"(a) 2,085
482,100 Uranium Participation Corp.(c) 1,552
----------
3,637
----------
PRIVATE EQUITY (0.1%)
26,545 AURELIUS Equity Opportunities SE & Co. KGaA(a) 1,195
71,782 Intermediate Capital Group plc(a) 1,195
----------
2,390
----------
REAL ESTATE (1.0%)
67,483 ADO Properties S.A.(a) 3,635
1,675,700 APAC Realty Ltd.(a) 610
75,151 CA Immobilien Anlagen AG(a) 2,791
53,379 DIC Asset AG(a) 559
171,693 Dios Fastigheter AB(a) 1,236
100,900 FJ Next Co. Ltd.(a) 889
163,000 Great Eagle Holdings Ltd.(a) 724
370,171 Hemfosa Fastigheter AB(a) 3,416
1,034,000 K Wah International Holdings Ltd.(a) 597
1,282,422 Klovern AB "B"(a) 1,929
78,860 Kungsleden AB(a) 611
248,901 Mitsubishi Estate Co. Ltd.(a) 4,565
11,860 Nexity S.A.(a),(b) 523
310,629 Nyfosa AB(a),(c) 1,961
42,983 S IMMO AG(a) 980
61,787 Sagax AB(a),(b) 228
24,700 SAMTY Co. Ltd.(a) 322
815,847 Sirius Real Estate Ltd.(a) 658
198,396 Summerset Group Holdings Ltd.(a) 718
139,215 TAG Immobilien AG(a),(c) 3,266
31,100 Tosei Corp.(a) 254
162,800 Unizo Holdings Co. Ltd.(a) 2,785
282,827 Watkin Jones plc(a) 771
283,969 Wihlborgs Fastigheter AB(a) 4,131
----------
38,159
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 25
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
REITS (0.9%)
390 AEON REIT Investment Corp.(a) $ 489
26,511 Befimmo S.A.(a) 1,487
96,346 Big Yellow Group plc(a) 1,238
372,860 British Land Co. plc(a) 2,518
3,812,000 Champion REIT(a) 3,099
4,209 Covivio(a) 436
207 Daiwa Office Investment Corp.(a) 1,434
592,890 GDI Property Group(a) 544
137,251 Great Portland Estates plc(a) 1,248
187,001 Immobiliare Grande Distribuzione SIIQ S.p.A.(a) 1,284
34,167 Intervest Offices & Warehouses N.V.(a) 945
33,096 Invesco Office J-Reit, Inc.(a) 5,357
272,695 Irish Residential Properties REIT plc(a) 486
1,191 Japan Excellent, Inc.(a) 1,771
112 Kenedix Office Investment Corp.(a) 773
252,018 Land Securities Group plc(a) 2,641
136,447 Mercialys S.A.(a),(b) 1,686
1,332 Mirai Corp.(a) 608
1,408 One REIT, Inc.(a) 3,664
709,372 Regional REIT Ltd.(a),(d) 979
949 Sekisui House Reit, Inc.(a) 709
----------
33,396
----------
Total Financial 638,112
----------
INDUSTRIAL (16.6%)
------------------
AEROSPACE/DEFENSE (1.0%)
39,229 Avon Rubber plc(a) 658
39,552 FACC AG(a),(b) 557
65,383 MTU Aero Engines AG(a) 14,137
2,089,644 Rolls-Royce Holdings plc(a),(c) 22,753
----------
38,105
----------
BUILDING MATERIALS (2.3%)
247,520 Cie de Saint-Gobain(a) 8,977
333,800 Daikin Industries Ltd.(a) 40,441
43,931 Imerys S.A.(a) 1,911
141,186 LafargeHolcim Ltd.(a),(c) 6,756
245,400 Nippon Sheet Glass Co. Ltd.(a) 1,593
134,164 Sika AG(a) 19,915
73,800 Taiheiyo Cement Corp.(a) 2,171
55,780 Vicat S.A.(a) 2,780
----------
84,544
----------
================================================================================
26 | USAA INTERNATIONAL FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
ELECTRICAL COMPONENTS & EQUIPMENT (2.5%)
308,140 Funai Electric Co. Ltd.(a),(c) $ 1,978
631,000 Johnson Electric Holdings Ltd.(a) 1,197
326,500 Legrand S.A.(a) 21,962
801,058 Schneider Electric SE(a) 63,183
115,500 SWCC Showa Holdings Co. Ltd.(a) 788
255,035 Ushio, Inc.(a) 3,189
223,227 Zumtobel Group AG(a),(b),(c) 1,479
----------
93,776
----------
ELECTRONICS (3.4%)
203,000 A&D Co. Ltd.(a) 1,408
45,377 AT&S Austria Technologie & Systemtechnik AG(a) 773
34,100 Camtek Ltd. 275
20,200 Cosel Co. Ltd.(a) 192
3,870 dormakaba Holding AG(a),(c) 2,675
250,300 Furuno Electric Co. Ltd.(a) 2,122
396,400 Hi-P International Ltd.(a) 336
98,490 Hosiden Corp.(a) 988
971,000 Hoya Corp.(a) 67,200
164,180 Ibiden Co., Ltd.(a) 2,538
585,500 Kyocera Corp.(a) 35,679
109,144 Mycronic AB(a),(b) 1,319
365,828 Nichicon Corp.(a) 2,673
290,735 NOK Corp.(a) 3,730
24,800 Shibaura Mechatronics Corp.(a) 586
4,176,000 Time Interconnect Technology Ltd.(a) 308
92,745 Tokyo Seimitsu Co. Ltd.(a) 2,119
----------
124,921
----------
ENGINEERING & CONSTRUCTION (1.0%)
44,992 AF Poyry AB(a) 943
24,437 Akka Technologies(a) 1,581
14,399 Bauer AG(a) 371
4,360,265 China Machinery Engineering Corp. "H"(a) 1,916
295,619 Chiyoda Corp.(a),(c) 783
38,700 Daiho Corp.(a) 980
218,162 Downer EDI Ltd.(a) 1,077
22,500 Fudo Tetra Corp.(a) 274
54,916 Gaztransport Et Technigaz S.A.(a) 4,990
119,043 Grupo Empresarial San Jose S.A.(a),(c) 961
37,762 Implenia AG(a) 1,103
273,383 JGC Corp.(a) 3,617
16,700 Kumagai Gumi Co. Ltd.(a) 442
================================================================================
PORTFOLIO OF INVESTMENTS | 27
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
332,600 Maeda Corp.(a) $ 2,693
130,400 Meisei Industrial Co. Ltd.(a) 786
59,200 Miyaji Engineering Group, Inc.(a) 914
43,810 Morgan Sindall Group plc(a) 712
47,700 Nishimatsu Construction Co. Ltd.(a) 908
33,300 Okumura Corp.(a) 1,020
646,100 OSJB Holdings Corp.(a) 1,643
15,663 Per Aarsleff Holding A/S(a) 562
24,162 Porr AG(a),(b) 563
985,315 Raubex Group Ltd.(a) 1,329
220,000 Sanki Engineering Co. Ltd.(a) 2,460
100,000 Sumitomo Mitsui Construction Co. Ltd.(a) 565
99,600 Toa Corp.(a) 1,353
37,900 Tokyu Construction Co. Ltd.(a) 266
221,700 Toyo Construction Co. Ltd.(a) 813
220,195 Toyo Engineering Corp.(a),(c) 893
31,100 Wakachiku Construction Co. Ltd.(a) 379
----------
36,897
----------
ENVIRONMENTAL CONTROL (0.0%)
18,400 Daiseki Co. Ltd.(a) 457
54,700 Oyo Corp.(a) 530
----------
987
----------
HAND/MACHINE TOOLS (0.1%)
28,704 Rhi Magnesita N.V.(a) 1,735
----------
MACHINERY-CONSTRUCTION & MINING (0.9%)
702,900 Hitachi Ltd.(a) 23,683
59,500 Kato Works Co. Ltd.(a) 1,049
118,704 Mitsubishi Heavy Industries Ltd.(a) 5,190
19,234 Palfinger AG(a) 557
91,100 Tadano Ltd.(a) 873
----------
31,352
----------
MACHINERY-DIVERSIFIED (1.5%)
94,900 FANUC Corp.(a) 15,998
19,300 Hisaka Works Ltd.(a) 160
2,166,100 Kubota Corp.(a) 32,889
99,400 Nikkiso Co. Ltd.(a) 1,274
204,726 Talgo S.A.(a),(c),(d) 1,284
74,841 THK Co. Ltd.(a) 1,512
85,951 Toshiba Machine Co. Ltd.(a) 1,790
----------
54,907
----------
================================================================================
28 | USAA INTERNATIONAL FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
METAL FABRICATION/HARDWARE (0.1%)
70,500 Ahresty Corp.(a) $ 337
123,351 Bodycote plc(a) 1,211
117,351 Lindab International AB(a) 1,206
119,680 Neturen Co. Ltd.(a) 897
15,100 Shinsho Corp.(a) 315
13,300 Toho Zinc Co. Ltd.(a) 284
----------
4,250
----------
MISCELLANEOUS MANUFACTURERS (0.8%)
621,658 AGFA-Gevaert N.V.(a),(c) 2,524
89,910 Alstom S.A.(a) 4,092
37,182 Ansell Ltd.(a) 650
664,300 China Sunsine Chemical Holdings Ltd.(a) 556
185,957 Elkem ASA(a),(d) 567
58,880 Enplas Corp.(a) 1,636
167,190 Nikon Corp.(a) 2,283
844,503 Smiths Group plc(a) 15,404
100,700 Tamron Co. Ltd.(a) 2,023
224,664 Vesuvius plc(a) 1,421
----------
31,156
----------
PACKAGING & CONTAINERS (0.5%)
1,063,290 Amcor Ltd.(a) 12,143
114,545 Huhtamaki Oyj(a) 4,350
3,122,283 Nampak Ltd.(a),(c) 2,271
----------
18,764
----------
SHIPBUILDING (0.2%)
215,962 Austal Ltd.(a) 437
1,878,142 Fincantieri S.p.A.(a),(c) 1,928
4,830,200 Yangzijiang Shipbuilding Holdings Ltd.(a) 4,817
----------
7,182
----------
TRANSPORTATION (2.2%)
5,071 AP Moller - Maersk A/S "B"(a) 5,367
254,141 bpost S.A.(a) 2,498
133,287 BW Offshore Ltd.(a),(c) 845
597,239 Canadian National Railway Co. 52,909
62,368 Cia de Distribucion Integral Logista Holdings S.A.(a) 1,379
180,618 D/S Norden A/S(a) 2,496
1,426,676 Firstgroup plc(a),(c) 2,080
122,633 Go-Ahead Group plc(a) 2,899
31,400 Kamigumi Co. Ltd.(a) 738
36,800 Kintetsu World Express, Inc.(a) 479
================================================================================
PORTFOLIO OF INVESTMENTS | 29
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
18,200 Kyushu Railway Co.(a) $ 542
52,300 Nankai Electric Railway Co. Ltd.(a) 1,362
591,425 National Express Group plc(a) 2,972
13,775,145 Pacific Basin Shipping Ltd.(a),(b) 2,402
1,328,454 PostNL N.V.(a),(b) 2,369
----------
81,337
----------
TRUCKING & LEASING (0.1%)
126,700 Fly Leasing Ltd. ADR(c) 2,058
----------
Total Industrial 611,971
----------
TECHNOLOGY (8.5%)
-----------------
COMPUTERS (3.0%)
5,048,745 Acer, Inc.(a) 3,032
116,059 Appen Ltd.(a) 2,077
61,800 Bell System24 Holdings, Inc.(a) 887
104,000 CAC Holdings Corp.(a) 1,613
248,624 Check Point Software Technologies Ltd.(c) 27,418
1,506,434 Compal Electronics, Inc. GDR(e) 4,682
27,700 Compal Electronics, Inc. GDR(f) 86
2,600 CyberArk Software Ltd.(c) 343
378,645 Eurotech S.p.A.(a),(b),(c) 1,617
110,500 Ferrotec Holdings Corp.(a) 852
1,495,360 Foxconn Technology Co. Ltd.(a) 2,890
63,272 Fujitsu Ltd.(a) 4,281
7,200 Globant S.A.(c) 668
113,000 Ines Corp.(a) 1,226
14,542 Ingenico Group S.A.(a) 1,165
11,639,134 Innolux Corp.(a) 2,745
83,600 Japan Cash Machine Co. Ltd.(a) 833
25,805 Melco Holdings, Inc.(a) 723
22,000 Roland DG Corp.(a) 490
99,200 Scala, Inc.(a) 755
1,305,081 Serco Group plc(a),(c) 2,193
226,341 Softcat plc(a) 2,607
107,488 Solutions 30 S.E.(a),(b),(c) 1,064
6,300 Sopra Steria Group(a) 715
1,438,145 Tata Consultancy Services Ltd.(a) 45,391
----------
110,353
----------
OFFICE/BUSINESS EQUIPMENT (0.2%)
166,142 Canon, Inc.(a) 4,680
132,419 Neopost S.A.(a) 2,897
----------
7,577
----------
================================================================================
30 | USAA INTERNATIONAL FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
SEMICONDUCTORS (1.1%)
15,499 Ams AG(a) $ 512
14,091 Elmos Semiconductor AG(a) 336
283,592 MediaTek, Inc.(a) 2,776
60,100 Micronics Japan Co. Ltd.(a) 496
66,200 Miraial Co. Ltd.(a) 638
13,117 Siltronic AG(a) 900
10,238 SOITEC(a),(c) 861
862,419 Taiwan Semiconductor Manufacturing Co. Ltd. ADR 33,074
9,200 V Technology Co. Ltd.(a) 384
----------
39,977
----------
SOFTWARE (4.2%)
7,400 Akatsuki, Inc.(a) 399
641,138 Amadeus IT Group S.A.(a) 48,858
914,132 Bravura Solutions Ltd.(a) 3,575
98,000 Capcom Co. Ltd.(a) 2,003
33,463 CompuGroup Medical SE(a) 2,250
94,828 Dassault Systemes SE(a),(b) 14,054
164,384 DeNA Co. Ltd.(a) 3,334
55,261 EMIS Group plc(a) 832
44,100 Focus Systems Corp.(a) 342
809,678 Gree, Inc.(a) 3,625
2,255,000 Leyou Technologies Holdings Ltd.(a),(c) 681
14,274 Nemetschek SE(a) 2,189
34,200 NSD Co. Ltd.(a) 949
11,500 PCA Corp.(a) 377
543,346 SAP SE(a) 67,143
18,058 SimCorp A/S(a) 1,751
142,793 Tinexta S.p.A.(a),(c) 2,082
----------
154,444
----------
Total Technology 312,351
----------
UTILITIES (1.5%)
----------------
ELECTRIC (1.4%)
22,228 Albioma S.A.(a) 532
259,300 Cia Paranaense de Energia Preference Shares 3,172
282,535 E.ON SE(a) 2,951
2,211,034 Engie S.A.(a),(b) 30,829
815,197 Hera S.p.A.(a) 2,963
412,800 Hokkaido Electric Power Co., Inc.(a) 2,228
1,405,877 Iren S.p.A.(a) 3,484
================================================================================
PORTFOLIO OF INVESTMENTS | 31
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
291,978 NTPC Ltd.(a) $ 557
157,937 RWE AG(a) 3,945
----------
50,661
----------
GAS (0.1%)
2,979,890 Centrica plc(a) 3,517
----------
Total Utilities 54,178
----------
Total Common Stocks (cost: $2,887,469) 3,611,588
----------
EXCHANGE-TRADED FUNDS (0.3%)
147,072 iShares Core MSCI EAFE ETF (cost: $8,696) 8,735
----------
INVESTMENT COMPANIES (0.0%)
6,647 HBM Healthcare Investments AG "A"(a),(c) (cost: $770) 1,206
----------
PREFERRED STOCKS (0.0%)
INDUSTRIAL (0.0%)
-----------------
AEROSPACE/DEFENSE (0.0%)
153,057,469 Rolls-Royce Holdings plc (c),(e),(f) (cost: $197) 193
----------
Total Equity Securities (cost: $2,897,132) 3,621,722
----------
MONEY MARKET INSTRUMENTS (1.0%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (1.0%)
37,621,720 State Street Institutional Treasury Money Market Fund
Premier Class, 2.30%(g) (cost: $37,621) 37,621
----------
SHORT-TERM INVESTMENTS PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (5.0%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (5.0%)
59,665 Federated Government Obligations Fund Institutional Class, 2.27%(g) 60
79,661,219 Goldman Sachs Financial Square Government Fund
Institutional Class, 2.30%(g) 79,661
30,174,903 HSBC U.S. Government Money Market Fund Class I, 2.33%(g) 30,175
75,000,000 State Street Institutional U.S. Government Money Market Fund, 2.32%(g) 75,000
----------
Total Short-Term Investments Purchased with Cash
Collateral from Securities Loaned (cost: $184,896) 184,896
----------
TOTAL INVESTMENTS (COST: $3,119,649) $3,844,239
==========
================================================================================
32 | USAA INTERNATIONAL FUND
================================================================================
--------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
--------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $280,693 $3,330,895 $- $3,611,588
Exchange-Traded Funds 8,735 - - 8,735
Investment Companies - 1,206 - 1,206
Preferred Stocks - 193 - 193
Money Market Instruments:
Government & U.S. Treasury
Money Market Funds 37,621 - - 37,621
Short-Term Investments Purchased with
Cash Collateral from Securities Loaned:
Government & U.S. Treasury
Money Market Funds 184,896 - - 184,896
--------------------------------------------------------------------------------------------------------
Total $511,945 $3,332,294 $- $3,844,239
--------------------------------------------------------------------------------------------------------
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 May 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
PORTFOLIO OF INVESTMENTS | 33
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 2019
--------------------------------------------------------------------------------
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.
The Fund may rely on certain Securities and Exchange Commission (SEC)
exemptive orders or rules that permit funds meeting various conditions to
invest in an exchange-traded fund (ETF) in amounts exceeding limits set
forth in the Investment Company Act of 1940, as amended, that would
otherwise be applicable.
o PORTFOLIO 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.
GDR Global depositary receipts are receipts issued by a U.S. or foreign
bank evidencing ownership of foreign shares. Dividends are paid in
U.S. dollars.
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
================================================================================
34 | USAA INTERNATIONAL FUND
================================================================================
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 $3,327,419,000, which represented 90.4% of
the Fund's net assets, were classified as Level 2 as of May 31, 2019,
due to the prices being adjusted to take into account significant market
movements following the close of local trading.
(b) The security, or a portion thereof, was out on loan as of May 31, 2019.
(c) Non-income-producing security.
(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 May 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 $4,875,000, which represented 0.1% 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) Rate represents the money market fund annualized seven-day yield at
May 31, 2019.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 35
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (including securities
on loan of $193,556) (cost of $3,119,649) $3,844,239
Cash denominated in foreign currencies (identified cost of $2,482) 2,490
Receivables:
Capital shares sold 1,191
USAA Asset Management Company (Note 7) 7
Dividends and interest 26,451
Securities sold 5,697
Other 287
Unrealized appreciation on foreign currency contracts held, at value 22
----------
Total assets 3,880,384
----------
LIABILITIES
Payables:
Upon return of securities loaned 184,896
Securities purchased 5,566
Capital shares redeemed 1,480
Accrued management fees 2,533
Accrued transfer agent's fees 65
Other accrued expenses and payables 3,112
----------
Total liabilities 197,652
----------
Net assets applicable to capital shares outstanding $3,682,732
==========
NET ASSETS CONSIST OF:
Paid-in capital $2,918,410
Distributable earnings 764,322
----------
Net assets applicable to capital shares outstanding $3,682,732
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $1,690,782/58,914 capital shares
outstanding, no par value) $ 28.70
==========
Institutional Shares (net assets of $1,979,758/69,194 capital shares
outstanding, no par value) $ 28.61
==========
Adviser Shares (net assets of $7,715/270 capital shares
outstanding, no par value) $ 28.58
==========
R6 Shares (net assets of $4,477/156 capital shares
outstanding, no par value) $ 28.66
==========
See accompanying notes to financial statements.
================================================================================
36 | USAA INTERNATIONAL FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $11,037) $ 107,692
Interest 913
Securities lending (net) 1,263
---------
Total income 109,868
---------
EXPENSES
Management fees 29,731
Administration and servicing fees:
Fund Shares 2,628
Institutional Shares 2,124
Adviser Shares 11
R6 Shares* 2
Transfer agent's fees:
Fund Shares 2,172
Institutional Shares 2,124
Adviser Shares 1
Distribution and service fees (Note 7):
Adviser Shares 19
Custody and accounting fees:
Fund Shares 461
Institutional Shares 549
Adviser Shares 2
R6 Shares* 1
Postage:
Fund Shares 119
Institutional Shares 51
Shareholder reporting fees:
Fund Shares 57
Institutional Shares 7
Trustees' fees 37
Registration fees:
Fund Shares 43
Institutional Shares 30
Adviser Shares 15
R6 Shares* 42
Professional fees 154
Other 54
---------
Total expenses 40,434
---------
================================================================================
FINANCIAL STATEMENTS | 37
================================================================================
Expenses reimbursed:
Adviser Shares $ (4)
R6 Shares* (43)
---------
Net expenses 40,387
---------
NET INVESTMENT INCOME 69,481
---------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain (loss) on:
Unaffiliated transactions 71,635
Affiliated transactions (Note 4) 1,150
Foreign currency transactions (750)
Change in net unrealized appreciation/(depreciation) of:
Investments (362,699)
Foreign capital gains tax 1,189
Foreign currency translations 159
---------
Net realized and unrealized loss (289,316)
---------
Decrease in net assets resulting from operations $(219,835)
---------
*R6 Shares commenced operations on August 17, 2018.
See accompanying notes to financial statements.
================================================================================
38 | USAA INTERNATIONAL FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
----------------------------------------------------------------------------------------------
2019 2018
----------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 69,481 $ 68,402
Net realized gain on investments 72,785 254,122
Net realized loss on foreign currency transactions (750) (278)
Change in net unrealized appreciation/(depreciation) of:
Investments (362,699) 29,496
Foreign capital gains tax 1,189 (3,453)
Foreign currency translations 159 (337)
-----------------------------
Increase (decrease) in net assets resulting
from operations (219,835) 347,952
-----------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (127,420) (56,643)
Institutional Shares (153,261) (76,632)
Adviser Shares (536) (230)
R6 Shares* (364) -
-----------------------------
Distributions to shareholders (281,581) (133,505)
-----------------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 6)
Fund Shares 39,970 90,583
Institutional Shares (94,856) (84,177)
Adviser Shares 632 167
R6 Shares* 5,000 -
-----------------------------
Total net increase (decrease) in net assets from
capital share transactions (49,254) 6,573
-----------------------------
Net increase (decrease) in net assets (550,670) 221,020
NET ASSETS
Beginning of year 4,233,402 4,012,382
-----------------------------
End of year $3,682,732 $4,233,402
=============================
*R6 Shares commenced operations on August 17, 2018.
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 39
================================================================================
NOTES TO FINANCIAL STATEMENTS
May 31, 2019
--------------------------------------------------------------------------------
(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 International Fund (the Fund) qualifies as a registered investment company
under Accounting Standards Codification Topic 946. The information presented in
this annual 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 four classes of shares: International Fund Shares (Fund
Shares), International Fund Institutional Shares (Institutional Shares),
International Fund Adviser Shares (Adviser Shares), and effective August 17,
2018, a new share class designated International 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,
================================================================================
40 | USAA INTERNATIONAL FUND
================================================================================
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 Holdings, a global investment management firm
headquartered in Cleveland, Ohio (the Transaction), on July 1, 2019.
A special shareholder meeting was held on April 18, 2019, at which shareholders
of the Fund approved a new investment advisory agreement between the Trust, on
behalf of the Fund, and Victory Capital, an independent investment management
company. In addition, shareholders of the Fund also elected the following two
new directors to the Board of the Trust to serve upon the closing of the
Transaction: (1) David C. Brown, to serve as an Interested Trustee; and (2) John
C. Walters, to serve as an Independent Trustee. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION.
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 | 41
================================================================================
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
================================================================================
42 | USAA INTERNATIONAL FUND
================================================================================
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. 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.
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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 43
================================================================================
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.
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
================================================================================
44 | USAA INTERNATIONAL FUND
================================================================================
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 year ended May 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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 45
================================================================================
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 year ended May 31,
2019, brokerage commission recapture credits reduced the expenses of the
Fund Shares, Institutional Shares, Adviser Shares and R6 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
================================================================================
46 | USAA INTERNATIONAL FUND
================================================================================
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.
For the year ended May 31, 2019, the Fund paid CAPCO facility fees of $32,000,
which represents 4.8% of the total fees paid to CAPCO by the funds of the
Trusts. The Fund had no borrowings under this agreement during the
================================================================================
NOTES TO FINANCIAL STATEMENTS | 47
================================================================================
year ended May 31, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
(3) DISTRIBUTIONS
The character of any distributions made during the year from net investment
income or net realized gains is determined in accordance with federal tax
regulations and may differ from those determined in accordance with U.S.
generally accepted accounting principles. Also, due to the timing of
distributions, the fiscal year in which amounts are distributed may differ from
the year that the income or realized gains were recorded by the Fund.
During the current fiscal year, permanent differences between book-basis and
tax-basis accounting for foreign currency and passive foreign investment company
adjustments resulted in reclassifications to the Statement of Assets and
Liabilities to increase distributable earnings by less than $500 and decrease in
paid in capital by less than $500. These reclassifications had no effect on net
assets.
The tax character of distributions paid during the years ended May 31, 2019, and
2018, was as follows:
2019 2018
----------------------------------
Ordinary income* $ 87,922,000 $112,047,000
Long-term realized capital gains 193,659,000 21,458,000
------------ ------------
Total distributions paid $281,581,000 $133,505,000
============ ============
As of May 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 59,228,000
Undistributed long-term capital gains 17,759,000
Unrealized appreciation of investments 687,335,000
*Includes short-term realized capital gains, if any, which are taxable as
ordinary income.
The difference between book-basis and tax-basis unrealized appreciation of
investments is attributable to the tax deferral of losses on wash sales and
passive foreign investment company adjustments.
================================================================================
48 | USAA INTERNATIONAL FUND
================================================================================
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 May 31, 2019, the Fund had no capital loss carryforwards, for federal income
tax purposes.
TAX BASIS OF INVESTMENTS - At May 31, 2019, the aggregate cost of investments
for federal income tax purposes and net unrealized appreciation/(depreciation)
on investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
FUND TAX COST APPRECIATION DEPRECIATION (DEPRECIATION)
------------------------------------------------------------------------------------
USAA
International
Fund $3,153,975,000 $963,438,000 $(273,185,000) $690,253,000
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended May 31, 2019, were $1,139,079,000 and
$1,382,779,000, 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 year ended May 31, 2019 were as
follows:
PURCHASES SALES NET REALIZED GAIN (LOSS)
--------------------------------------------------------------------------------
$1,997,000 $4,220,000 $1,150,000
(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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 49
================================================================================
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 May 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
--------------------------------------------------------------------------------
$193,556,000 $20,324,000 $184,896,000
(6) CAPITAL SHARE TRANSACTIONS
At May 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
================================================================================
50 | USAA INTERNATIONAL 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:
YEAR ENDED YEAR ENDED
MAY 31, 2019 MAY 31, 2018
---------------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------
FUND SHARES:
Shares sold 6,664 $ 201,762 8,359 $ 276,668
Shares issued from reinvested
dividends 4,674 125,125 1,684 55,642
Shares redeemed (9,590) (286,917) (7,313) (241,727)
--------------------------------------------------------
Net increase from capital
share transactions 1,748 $ 39,970 2,730 $ 90,583
========================================================
INSTITUTIONAL SHARES:
Shares sold 7,022 $ 212,013 7,053 $ 231,611
Shares issued from reinvested
dividends 5,739 153,184 2,325 76,603
Shares redeemed (15,361) (460,053) (11,873) (392,391)
--------------------------------------------------------
Net decrease from capital share
transactions (2,600) $ (94,856) (2,495) $ (84,177)
========================================================
ADVISER SHARES:
Shares sold 25 $ 740 5 $ 175
Shares issued from reinvested
dividends -** 6 - 2
Shares redeemed (3) (114) - (10)
--------------------------------------------------------
Net increase from capital
share transactions 22 $ 632 5 $ 167
========================================================
R6 SHARES*:
Shares sold 156 $ 5,000 - $ -
Shares issued from
reinvested dividends - - - -
Shares redeemed - - - -
--------------------------------------------------------
Net increase from capital
share transactions 156 $ 5,000 - $ -
========================================================
* R6 Shares commenced operations on August 17, 2018.
** Represents less than 500 shares.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 51
================================================================================
(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.
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 International Funds Index. The Lipper International Funds
Index tracks the total return performance of funds within the Lipper
International Funds category.
The performance period for each share class consists of the current month plus
the previous 35 months. The performance period for the R6 Shares commenced on
August 17, 2018, and includes the performance of the Fund
================================================================================
52 | USAA INTERNATIONAL FUND
================================================================================
Shares for periods prior to August 17, 2018. 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 International Funds Index over that period, even if the
class had overall negative returns during the performance period.
For the year ended May 31, 2019 (and for the period from August 17, 2018 to May
31, 2019, for the R6 Shares), the Fund incurred management fees, paid or payable
to the Manager, of $29,731,000, which included a performance adjustment for the
Fund Shares, Institutional Shares, Adviser Shares, and R6 Shares of $221,000,
$357,000, less than $500, and less than $500, respectively. For the Fund Shares,
Institutional Shares, Adviser Shares, and R6 Shares the performance adjustments
were 0.01%, 0.02%, less than 0.01%, and less than 0.01%, respectively. PLEASE
REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL
REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
SUBADVISORY ARRANGEMENT(s) - The Manager entered into Investment Subadvisory
Agreements with Lazard Asset Management LLC (Lazard),
================================================================================
NOTES TO FINANCIAL STATEMENTS | 53
================================================================================
MFS Investment Management (MFS), and Wellington Management Company LLP
(Wellington Management) under which Lazard, MFS, 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 Lazard a subadvisory fee in the annual amount of
0.48% for assets up to $100 million, 0.45% for assets over $100 million up to
$250 million, 0.37% for assets over $250 million up to $600 million, and 0.34%
for assets over $600 million on the portion of the Fund's average daily net
assets that Lazard manages. Prior to October 1, 2018, the Manager (not the Fund)
paid Lazard a subadvisory fee in the annual amount of 0.50% for assets up to
$100 million, 0.45% for assets over $100 million up to $250 million, 0.40% for
assets over $250 million up to $600 million, and 0.375% for assets over $600
million on the portion of the Fund's average daily net assets that Lazard
managed. For the year ended May 31, 2019, the Manager incurred subadvisory fees
with respect to the Fund, paid or payable to Lazard, of $2,358,000.
The Manager (not the Fund) pays MFS a subadvisory fee based on the aggregate
average daily net assets in the USAA International Fund and the USAA World
Growth Fund combined, in an annual amount of 0.33% on the first $2 billion of
assets, 0.30% on assets over $2 billion and up to $3 billion, 0.25% on assets
over $3 billion and up to $4 billion, and 0.225% on assets over $4 billion on
the portion of the Fund's average daily net assets that MFS manages. Prior to
October 1, 2018, the Manager (not the Fund) paid MFS a subadvisory fee based on
the aggregate average daily net assets in the USAA International Fund and the
USAA World Growth Fund combined, in an annual amount of 0.33% on the first $2
billion of assets, 0.30% on assets over $2 billion up to $3 billion, and 0.25%
on assets over $3 billion on the portion of the Fund's average daily net assets
that MFS managed. For the year ended May 31, 2019, the Manager incurred
subadvisory fees with respect to the Fund, paid or payable to MFS, of
$7,761,000.
The Manager (not the Fund) pays Wellington Management a subadvisory fee in the
annual amount of 0.45% on the first $700 million and 0.425% on
================================================================================
54 | USAA INTERNATIONAL FUND
================================================================================
assets over $700 million of the portion of the Fund's average daily net assets
that Wellington Management manages. For the year ended May 31, 2019, the Manager
incurred subadvisory fees with respect to the Fund, paid or payable to
Wellington Management, of $3,450,000.
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, 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 year ended May 31, 2019, (and for the period from August
17, 2018, to May 31, 2019, for the R6 Shares) the Fund Shares, Institutional
Shares, Adviser Shares, and R6 Shares incurred administration and servicing
fees, paid or payable to the Manager, of $2,628,000, $2,124,000, $11,000, and
$2,000, 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 year ended May
31, 2019, the Fund reimbursed the Manager $26,000 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 September 30, 2019, to limit
the total annual operating expenses of the Adviser Shares and R6 Shares to 1.35%
and 0.85%, respectively, of its 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
that amount. This expense limitation arrangement may not be changed or
terminated through September 30, 2019, without approval of the Board, and may be
changed or terminated by the Manager at any time after that date. For the year
ended May 31, 2019, (and for the period from August 17, 2018, to May 31, 2019,
for the R6 Shares), the Fund incurred reimbursable expenses from the Manager for
the Adviser Shares and R6 Shares of $4,000, and $43,000, respectively, of which
$7,000 was receivable from the Manager.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 55
================================================================================
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 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 year
ended May 31, 2019, (and for the period from August 17, 2018, to May 31, 2019,
for the R6 Shares), the Fund Shares, Institutional Shares, Adviser Shares, and
R6 Shares incurred transfer agent's fees, paid or payable to SAS, of $2,172,000,
$2,124,000, $1,000, and less than $500, respectively. PLEASE REFER TO THE
SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR
ADDITIONAL IMPORTANT INFORMATION.
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 year ended May 31, 2019, the Adviser
Shares incurred distribution and service (12b-1) fees of $19,000.
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. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE
TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
(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
================================================================================
56 | USAA INTERNATIONAL FUND
================================================================================
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 on usaa.com. As of May
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 0.8
Target Retirement Income 0.3
Target Retirement 2020 0.8
Target Retirement 2030 2.5
Target Retirement 2040 3.5
Target Retirement 2050 2.1
Target Retirement 2060 0.3
The Manager is indirectly wholly owned by United Services Automobile Association
(USAA), a large, diversified financial services institution. At May 31, 2019,
USAA and its affiliates owned 240,000 Adviser Shares and 156,000 R6 Shares,
which represents 88.9% of the Adviser Shares outstanding, 100.0% 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. PLEASE REFER TO THE SUBSEQUENT EVENT
NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
(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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 57
================================================================================
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) RECENT ACCOUNTING PRONOUNCEMENTS
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.
(11) SUBSEQUENT EVENT NOTE
As previously announced, and as discussed in Note 1 to the Financial Statements,
effective July 1, 2019, AMCO, the prior investment adviser to the Fund, and SAS,
the prior transfer agent to the Fund, were acquired by Victory Holdings. PLEASE
SEE THE SUPPLEMENT DATED JULY 1, 2019 TO THE FUND'S PROSPECTUS FOR ADDITIONAL
IMPORTANT INFORMATION.
Effective July 1, 2019, Victory Capital is the new investment adviser and
administrator to the USAA Mutual Funds; SAS was renamed Victory Capital Transfer
Agency, Inc.; Victory Capital Advisers, Inc. is the new distributor to the USAA
Mutual Funds; Citi Fund Services of Ohio, Inc.
================================================================================
58 | USAA INTERNATIONAL FUND
================================================================================
serves as sub-administrator and sub-fund accountant for the USAA Mutual Funds;
and FIS Investor Services LLC serve as sub-transfer agent and dividend
disbursing agent for the USAA Mutual Funds. Effective August 5, 2019, Citibank,
N.A. is the new custodian for the USAA Mutual Funds.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2019 permitting the
use of a "manager-of-managers" structure for certain funds. Prior to that date,
the Trust relied on a similar exemptive order granted by the SEC to the Trust
and its affiliated persons. Under a manager of managers structure, the
investment adviser may select (with approval of the Board and without
shareholder approval) one or more subadvisers to manage the day-to-day
investment of a fund's assets.
Effective July 1, 2019, Victory Capital added new portfolio managers from one or
more investment teams employed by Victory Capital to serve as additional
portfolio managers, or replace current portfolio managers, to manage all or a
portion of the Fund according to each team's own investment process.
Effective July 1, 2019, members of Victory Capital's investment franchise, RS
Investments, were also named as portfolio managers of the Fund to manage all or
a portion of the Fund.
Effective July 1, 2019, under the investment advisory agreement with Victory
Capital, which took effect on July 1, 2019, no performance adjustments will be
made for periods beginning July 1, 2019, through June 30, 2020, and only
performance beginning as of July 1, 2020, and thereafter will be utilized in
calculating performance adjustments through June 30, 2020.
Effective July 1, 2019, the line of credit (as discussed in the Notes to the
Financial Statements in this annual report) among the Trust, with respect to its
Funds, and CAPCO terminated; the Trust, with respect to its Funds, along with
series of Victory Portfolios, Victory Portfolios II and Victory Variable
Insurance Funds, entered into a 364 day committed credit facility and a 364 day
uncommitted, demand credit facility with Citibank, N.A. (Citibank). Each such
credit facility may be renewed if so agreed by the parties. Under the agreement
with Citibank, the Funds may borrow up to $600 million, of which $300 million is
committed and $300 million is
================================================================================
NOTES TO FINANCIAL STATEMENTS | 59
================================================================================
uncommitted. Of this amount, $40 million of the line of credit is reserved for
use by the Victory Floating Rate Fund (a series of Victory Portfolios), with
that Fund paying the related commitment fees for that amount. The purpose of the
agreement is to meet temporary or emergency cash needs, including redemption
request that might otherwise require the untimely disposition of securities.
Citibank receives an annual commitment fee of 0.15%. Each Fund pays a pro-rata
portion of this commitment fee plus any interest on amounts borrowed.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2017 (the IFL
Order), permitting the establishment and operation of an Interfund Lending
Facility (the Facility). The Facility allows each Fund to directly lend and
borrow money to or from certain other affiliated Funds relying upon the IFL
Order at rates beneficial to both the borrowing and lending funds. Advances
under the Facility are allowed for temporary or emergency purposes, including
the meeting of redemption requests that are subject to each Fund's borrowing
restrictions. The interfund loan rate is determined, as specified in the IFL
Order, by averaging the current repurchase agreement rate and the current bank
loan rate.
================================================================================
60 | USAA INTERNATIONAL FUND
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
--------------------------------------------------------------------------
2019 2018 2017 2016 2015
--------------------------------------------------------------------------
Net asset value at
beginning of period $ 32.82 $ 31.16 $ 26.40 $ 30.90 $ 31.25
--------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .53 .60 .42 .35(a) .38
Net realized and
unrealized gain (loss) (2.41) 2.08 4.76 (3.34)(a) .16
--------------------------------------------------------------------------
Total from investment
operations (1.88) 2.68 5.18 (2.99)(a) .54
--------------------------------------------------------------------------
Less distributions from:
Net investment income (.44) (.63) (.42) (.37) (.50)
Realized capital gains (1.80) (.39) - (1.14) (.39)
--------------------------------------------------------------------------
Total distributions (2.24) (1.02) (.42) (1.51) (.89)
--------------------------------------------------------------------------
Net asset value at
end of period $ 28.70 $ 32.82 $ 31.16 $ 26.40 $ 30.90
==========================================================================
Total return (%)* (5.14) 8.61 19.87 (9.75) 1.97
Net assets at
end of period (000) $1,690,782 $1,876,020 $1,696,372 $1,430,667 $1,958,773
Ratios to average daily
net assets:**
Expenses (%)(b) 1.08(c) 1.08(c) 1.11(c) 1.13(c) 1.12
Net investment income (%) 1.76 1.58 1.33 1.27 1.42
Portfolio turnover (%) 30 36 40 62(d) 17
* 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 year ended May 31, 2019, average daily net assets were
$1,751,929,000.
(a) Calculated using average shares.
(b) Does not include acquired fund fees, if any.
(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 increased trading activity due to changes in subadviser(s).
================================================================================
FINANCIAL HIGHLIGHTS | 61
================================================================================
INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
--------------------------------------------------------------------------
2019 2018 2017 2016 2015
--------------------------------------------------------------------------
Net asset value at
beginning of period $ 32.72 $ 31.07 $ 26.34 $ 30.82 $ 31.17
--------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .56 .64 45 .47(a) .46
Net realized and
unrealized gain (loss) (2.41) 2.06 4.74 (3.42)(a) .12
--------------------------------------------------------------------------
Total from investment
operations (1.85) 2.70 5.19 (2.95)(a) .58
--------------------------------------------------------------------------
Less distributions from:
Net investment income (.46) (.66) (.46) (.39) (.54)
Realized capital gains (1.80) (.39) - (1.14) (.39)
--------------------------------------------------------------------------
Total distributions (2.26) (1.05) (.46) (1.53) (.93)
--------------------------------------------------------------------------
Net asset value at
end of period $ 28.61 $ 32.72 $ 31.07 $ 26.34 $ 30.82
==========================================================================
Total return (%)* (5.06) 8.68 19.97 (9.61) 2.11
Net assets at
end of period (000) $1,979,758 $2,349,281 $2,308,470 $1,996,349 $1,735,756
Ratios to average
daily net assets:**
Expenses (%)(b) 1.00(c) 1.00(c) 1.00(c) 1.00(c) .99
Net investment income (%) 1.81 1.62 1.43 1.74 1.53
Portfolio turnover (%) 30 36 40 62(d) 17
* 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 year ended May 31, 2019, average daily net assets were
$2,123,313,000.
(a) Calculated using average shares.
(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) Reflects increased trading activity due to changes in subadviser(s).
================================================================================
62 | USAA INTERNATIONAL FUND
================================================================================
ADVISER SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
----------------------------------------------------------------------
2019 2018 2017 2016 2015
----------------------------------------------------------------------
Net asset value at
beginning of period $32.67 $31.04 $26.31 $30.77 $31.13
----------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .47 .53 .35 .31 .32
Net realized and
unrealized gain (loss) (2.41) 2.04 4.74 (3.35) .12
----------------------------------------------------------------------
Total from investment
operations (1.94) 2.57 5.09 (3.04) .44
----------------------------------------------------------------------
Less distributions from:
Net investment income (.35) (.55) (.36) (.28) (.41)
Realized capital gains (1.80) (.39) - (1.14) (.39)
----------------------------------------------------------------------
Total distributions (2.15) (.94) (.36) (1.42) (.80)
----------------------------------------------------------------------
Redemption fees added
to beneficial interests - - - .00(a) -
----------------------------------------------------------------------
Net asset value at
end of period $28.58 $32.67 $31.04 $26.31 $30.77
======================================================================
Total return (%)* (5.39) 8.29 19.58 (9.94) 1.62
Net assets at end
of period (000) $7,715 $8,101 $7,540 $6,362 $7,481
Ratios to average
daily net assets:**
Expenses (%)(b) 1.35(c) 1.35(c) 1.35(c) 1.37(c),(d) 1.44(e)
Expenses, excluding
reimbursements (%)(b) 1.41(c) 1.42(c) 1.51(c) 1.46(c) 1.51
Net investment income (%) 1.52 1.29 1.08 1.14 1.07
Portfolio turnover (%) 30 36 40 62(f) 17
* 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 year ended May 31, 2019, average daily net assets were $7,622,000.
(a) Represents less than $0.01 per share.
(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) Prior to October 1, 2015, the Manager had voluntarily agreed to limit the
annual expenses of the Adviser Shares to 1.40% of the Adviser Shares'
average daily net assets.
(e) Prior to October 1, 2014, the Manager had voluntarily agreed to limit the
annual expenses of the Adviser Shares to 1.55% of the Adviser Shares'
average daily net assets.
(f) Reflects increased trading activity due to changes in subadviser(s).
================================================================================
FINANCIAL HIGHLIGHTS | 63
================================================================================
R6 SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout the period is
as follows:
PERIOD ENDED
MAY 31,
------------
2019***
------------
Net asset value at beginning of period $32.01
------
Income (loss) from investment operations:
Net investment income .52
Net realized and unrealized loss (1.54)
------
Total from investment operations (1.02)
------
Less distributions from:
Net investment income (.53)
Realized capital gains (1.80)
------
Total distributions (2.33)
------
Net asset value at end of period $28.66
======
Total return (%)* (2.55)
Net assets at end of period (000) $4,477
Ratios to average daily net assets:**
Expenses (%)(a) .85(b),(c)
Expenses, excluding reimbursements (%)(a) 2.03(b),(c)
Net investment income (%) 2.19(b)
Portfolio turnover (%) 30
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the period ended May 31, 2019, average daily net assets were $4,607,000.
*** R6 Shares commenced operations on August 17, 2018.
(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 R6 Shares before reductions
of any expenses paid indirectly. The R6 Shares' expenses paid indirectly
decreased the expense ratios by 0.01%
================================================================================
64 | USAA INTERNATIONAL FUND
================================================================================
EXPENSE EXAMPLE
May 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 December 1, 2018, through May
31, 2019, for Fund Shares, Institutional Shares, and Adviser Shares and the
period of August 17, 2018, through November 30, 2018, for R6 Shares.
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
================================================================================
EXPENSE EXAMPLE | 65
================================================================================
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 DECEMBER 1, 2018 -
DECEMBER 1, 2018 MAY 31, 2019 MAY 31, 2019
----------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,035.00 $5.58
Hypothetical
(5% return before expenses) 1,000.00 1,019.45 5.54
INSTITUTIONAL SHARES
Actual 1,000.00 1,035.50 5.13
Hypothetical
(5% return before expenses) 1,000.00 1,019.90 5.09
ADVISER SHARES
Actual 1,000.00 1,033.70 6.84
Hypothetical
(5% return before expenses) 1,000.00 1,018.20 6.79
R6 SHARES
Actual 1,000.00 1,036.30 4.32
Hypothetical
(5% return before expenses) 1,000.00 1,020.69 4.28
*Expenses are equal to the annualized expense ratio of 1.10% for Fund Shares,
1.01% for Institutional Shares, 1.35% for Adviser Shares, and 0.85% for R6
Shares, which are net of any reimbursements and expenses paid indirectly,
multiplied by the average account value over the period, multiplied by 182
days/365 days (to reflect the one-half-year period). The Fund's actual ending
account values are based on its actual total returns of 3.50% for Fund Shares,
3.55% for Institutional Shares, 3.37% for Adviser Shares, and 3.63% for R6
Shares, for the six-month period of December 1, 2018, through May 31, 2019.
================================================================================
66 | USAA INTERNATIONAL FUND
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the (i) new investment
advisory agreement between the Trust and Victory Capital and (ii) new investment
subadvisory agreements between certain subadvisers and Victory Capital, which
became effective on July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO
THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
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.
================================================================================
ADVISORY AGREEMENT(S) | 67
================================================================================
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 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
================================================================================
68 | USAA INTERNATIONAL FUND
================================================================================
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 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.
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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.
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).
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70 | USAA INTERNATIONAL FUND
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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.
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.
(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) | 71
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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 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.
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72 | USAA INTERNATIONAL FUND
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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 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,
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ADVISORY AGREEMENT(S) | 73
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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.
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.
(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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74 | USAA INTERNATIONAL FUND
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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 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
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ADVISORY AGREEMENT(S) | 75
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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 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.
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76 | USAA INTERNATIONAL FUND
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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 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.
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ADVISORY AGREEMENT(S) | 77
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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
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.
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78 | USAA INTERNATIONAL FUND
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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
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
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ADVISORY AGREEMENT(S) | 79
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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 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.
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80 | USAA INTERNATIONAL FUND
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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. 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) | 81
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND THE MANAGER)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the continuation of the (i)
investment advisory agreement between the Trust and AMCO and (ii) investment
subadvisory agreements between certain subadvisers and AMCO, which were
effective until July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
At an in-person meeting of the Board of Trustees (the Board) held on April 17,
2019, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to the
Fund and the Subadvisory Agreements (each a Subadvisory Agreement and together,
the Subadvisory Agreements) between the Manager and MFS Investment Management,
Wellington Management Company LLP, and Lazard Asset Management LLC (each a
Subadviser and together, the Subadvisers) with respect to the Fund.(1)
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and Subadvisory Agreements and
the Manager and the Subadvisers, and were given the opportunity to ask questions
and request additional information from management. The information provided to
the Board included, among other things: (i) a separate report prepared by an
independent third party, which provided a statistical
(1)At an in-person meeting held on January 15, 2019, the Board, including the
Independent Trustees, approved a new investment advisory agreement between
the Trust, on behalf of the Fund, and Victory Capital Management Inc.
("Victory Capital"). Upon the closing of the transaction, on behalf of the
Fund, Victory Capital Holdings, Inc., the parent company of Victory Capital,
the Advisory Agreement between the Trust and the Manager will terminate and
the new investment advisory agreement between the Trust and Victory Capital
will go into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are included in this
annual report.
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82 | USAA INTERNATIONAL FUND
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analysis comparing the Fund's investment performance, expenses, and fees to
comparable investment companies; (ii) information concerning the services
rendered to the Fund, as well as information regarding the Manager's revenues
and costs of providing services to the Fund and compensation paid to affiliates
of the Manager; and (iii) information about the Manager's and Subadvisers'
operations and personnel. Prior to voting, the Independent Trustees reviewed the
proposed continuance of the Advisory Agreement and the Subadvisory Agreements
with management and with experienced independent legal counsel retained by the
Independent Trustees (Independent Counsel) and received materials from such
Independent Counsel discussing the legal standards for their consideration of
the proposed continuation of the Advisory Agreement and the Subadvisory
Agreements with respect to the Fund. The Independent Trustees also reviewed the
proposed continuation of the Advisory Agreement and the Subadvisory Agreements
with respect to the Fund in private sessions with Independent Counsel at which
no representatives of management were present. The Board considered the Advisory
Agreement and the Subadvisory Agreements separately in the course of its review.
In doing so, the Board noted the respective roles of the Manager and the
Subadvisers in providing services to the Fund.
At each regularly scheduled meeting of the Board and its committees, the Board
receives and reviews, among other things, information concerning the Fund's
performance and related services provided by the Manager and by the Subadvisers.
At the meeting at which the renewal of the Advisory Agreement and Subadvisory
Agreements is considered, particular focus is given to information concerning
Fund performance, fees and total expenses as compared to comparable investment
companies, and the Manager's profitability with respect to the Fund. However,
the Board noted that the evaluation process with respect to the Manager and the
Subadvisers is an ongoing one. In this regard, the Board's and its committees'
consideration of the Advisory Agreement and Subadvisory Agreements included
certain information previously received at such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving
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ADVISORY AGREEMENT(S) | 83
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the Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent, and
quality of the services provided by the Manager under the Advisory Agreement,
the Board reviewed information provided by the Manager relating to its
operations and personnel. The Board also took into account its knowledge of the
Manager's management and the quality of the performance of the Manager's duties
through Board meetings, discussions, and reports during the preceding year. The
Board considered the fees paid to the Manager and the services provided to the
Fund by the Manager under the Advisory Agreement, as well as other services
provided by the Manager and its affiliates under other agreements, and the
personnel who provide these services. In addition to the investment advisory
services provided to the Fund, the Manager and its affiliates provide
administrative services, shareholder services, oversight of Fund accounting,
marketing services, assistance in meeting legal and regulatory requirements, and
other services necessary for the operation of the Fund and the Trust. The Board
also considered the significant risks assumed by the Manager in connection with
the services provided to the Fund, including investment, operational,
enterprise, litigation, regulatory and compliance risks.
The Board considered the level and depth of experience of the Manager, including
the professional experience and qualifications of its senior and investment
personnel, as well as current staffing levels. The Board considered the
Manager's process for monitoring the performance of the Subadviser and its
timeliness in responding to performance issues. The allocation of the Fund's
brokerage, including the Manager's process for monitoring "best execution," also
was considered. The Manager's role in coordinating the activities of the Fund's
other service providers also was considered. The Board also considered the
Manager's risk management processes. The Board considered the Manager's
financial condition and that it had the financial wherewithal to continue to
provide the same scope and high quality of services under the Advisory
Agreement. In reviewing the Advisory Agreement, the Board focused on the
experience, resources, and strengths of the Manager and its affiliates in
managing the Fund, as well as the other funds in the Trust.
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84 | USAA INTERNATIONAL FUND
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The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager and its affiliates, including oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust,
also focused on the quality of the Manager's compliance and administrative
staff.
EXPENSES AND PERFORMANCE - In connection with its consideration of the Advisory
Agreement, the Board evaluated the advisory fees and total expense ratio of the
Fund as compared to other open-end investment companies deemed to be comparable
to the Fund as determined by the independent third party in its report. The
Fund's expenses were compared to (i) a group of investment companies chosen by
the independent third party to be comparable to the Fund based upon certain
factors, including fund type, comparability of investment objective and
classification, sales load type (in this case, retail investment companies with
no sales loads), asset size, and expense components (the "expense group") and
(ii) a larger group of investment companies that includes all no-load retail
open-end investment companies with the same investment classification/objective
as the Fund regardless of asset size, excluding outliers (the "expense
universe"). Among other data, the Board noted that the Fund's management fee
rate - which includes advisory and administrative services and the effects of
any performance adjustment - was above the median of its expense group and its
expense universe. The data indicated that the Fund's total expenses were above
the median of its expense group and below the median of its expense universe.
The Board took into account management's discussion of the Fund's expenses. The
Board took into account the various services provided to the Fund by the Manager
and its affiliates, including the high quality of services received by the Fund
from the Manager. The Board also noted the level and method of computing the
Fund's management fee, including the performance adjustment to such fee. The
Board also took into account that the subadvisory fees under the Subadvisory
Agreement relating to the Fund are paid by the Manager. The Board also
considered and discussed information about the Subadvisers' fees, including the
amount of the management fees retained by the Manager after payment of the
subadvisory fees.
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ADVISORY AGREEMENT(S) | 85
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In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total return with its Lipper index and with that of other mutual funds deemed to
be in its peer group by the independent third party in its report (the
"performance universe"). The Fund's performance universe consisted of the Fund
and all retail and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or primary channel
of distribution. This comparison indicated that, among other data, the Fund's
performance was above the average of its performance universe and Lipper index
for the one-, three- and five-year periods ended December 31, 2018, and was
above the average of its performance universe and lower than its Lipper index
for the ten-year period ended December 31, 2018. The Board also noted that the
Fund's percentile performance ranking was in the top 35% of its performance
universe for the one-, three-, five- and ten-year periods ended December 31,
2018.
COMPENSATION AND PROFITABILITY - The Board took into consideration the level and
method of computing the Fund's management fee. The information considered by the
Board included operating profit margin information for the Manager's business as
a whole. The Board also received and considered profitability information
related to the management revenues from the Fund. This information included a
review of the methodology used in the allocation of certain costs to the Fund.
In considering the profitability data with respect to the Fund, the Trustees
noted that the Manager pays the Fund's subadvisory fees. The Trustees reviewed
the profitability of the Manager's relationship with the Fund before tax
expenses. The Board was also provided with an Investment Management
Profitability Analysis prepared by an independent information service. In
reviewing the overall profitability of the management fee to the Manager, the
Board also considered the fact that affiliates provide shareholder servicing and
administrative services to the Fund for which they receive compensation. The
Board also considered the possible direct and indirect benefits to the Manager
from its relationship with the Trust, including that the Manager may derive
reputational and other benefits from
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86 | USAA INTERNATIONAL FUND
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its association with the Fund. The Trustees recognized that the Manager should
be entitled to earn a reasonable level of profits in exchange for the level of
services it provides to the Fund and the entrepreneurial risk that it assumes as
Manager.
ECONOMIES OF SCALE - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussions of
the current advisory fee structure. The Board considered the fact that the
Manager pays the Fund's subadvisory fees. The Board also considered the effect
of the Fund's growth and size on its performance and fees, noting that if the
Fund's assets increase over time, the Fund may realize other economies of scale
if assets increase proportionally more than some expenses. The Board determined
that the current investment management fee structure was reasonable.
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) the performance of the Fund is
reasonable in relation to the performance of funds with a similar investment
objective and to relevant indices; (iv) the Fund's advisory expenses are
reasonable in relation to those of similar funds and to the services to be
provided by the Manager; and (v) the Manager and its affiliates' level of
profitability from their relationship with the Fund is reasonable in light of
the nature and high quality of services provided by the Manager and the type of
fund. Based on its conclusions, the Board determined that continuation of the
Advisory Agreement would be in the best interests of the Fund and its
shareholders.
SUBADVISORY AGREEMENTS
In approving the Fund's Subadvisory Agreements, the Board considered various
factors, among them: (i) the nature, extent, and quality of services provided to
the Fund, including the personnel providing services; (ii) each Subadviser's
compensation and any other benefits derived from the subadvisory relationship;
(iii) comparisons, to the extent applicable, of
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ADVISORY AGREEMENT(S) | 87
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subadvisory fees and performance to comparable investment companies; and (iv)
the terms of the Subadvisory Agreements. The Board's analysis of these factors
is set forth below. After full consideration of a variety of factors, the Board,
including the Independent Trustees, voted to approve the Subadvisory Agreements.
In approving the Subadvisory Agreements, the Trustees did not identify any
single factor as controlling, and each Trustee may have attributed different
weights to various factors. Throughout their deliberations, the Independent
Trustees were represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES PROVIDED; INVESTMENT PERSONNEL - The
Trustees considered information provided to them regarding the services provided
by the Subadvisers, including information presented periodically throughout the
previous year. The Board considered each Subadviser's level of knowledge and
investment style. The Board reviewed the experience and credentials of the
investment personnel who are responsible for managing the investment of
portfolio securities with respect to the Fund and each Subadviser's level of
staffing. The Trustees also noted each Subadviser's brokerage practices. The
Board also considered each Subadviser's regulatory and compliance history. The
Board also took into account each Subadviser's risk management processes. The
Board noted that the Manager's monitoring processes of the Subadvisers 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 the Subadvisers.
SUBADVISER COMPENSATION - The Board also took into consideration the financial
condition of the Subadvisers. In considering the cost of services to be provided
by the Subadvisers and the profitability to the Subadvisers of their
relationship with the Fund, the Trustees noted that the fees under the
Subadvisory Agreements were paid by the Manager. The Trustees also relied on the
ability of the Manager to negotiate the Subadvisory Agreements and the fees
thereunder at arm's length. For the above reasons, the Board determined that the
profitability of the Subadvisers from their relationship with the Fund was not a
material factor in its deliberations with respect to the consideration of the
approval of the Subadvisory Agreements, although the Trustees noted that certain
Subadvisers' subadvisory fees were reduced
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88 | USAA INTERNATIONAL FUND
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effective October 2018. For similar reasons, the Board concluded that the
potential for economies of scale in each Subadviser's management of the Fund was
not a material factor in considering the Subadvisory Agreements, although the
Board noted that the Subadvisory Agreements contains breakpoints in their fee
schedules.
SUBADVISORY FEES AND FUND PERFORMANCE - The Board compared the subadvisory fees
for the Fund with the fees that the Subadvisers charges to comparable clients,
as applicable. The Board considered that the Fund pays a management fee to the
Manager and that, in turn, the Manager pays a subadvisory fee to the
Subadvisers. As noted above, the Board considered, among other data, the Fund's
performance during the one-, three-, five-, and ten-year periods ended December
31, 2018, as compared to the Fund's respective peer group and noted that the
Board reviews at its regularly scheduled meetings information about the Fund's
performance results. The Board noted the Manager's experience and resources in
monitoring the performance, investment style, and risk-adjusted performance of
the Subadviser. The Board was mindful of the Manager's focus on each
Subadviser's performance. The Board also noted each Subadviser's performance
record for similar accounts, as applicable.
CONCLUSIONS - The Board reached the following conclusions regarding the
Subadvisory Agreements, among others: (i) the Subadvisers are qualified to
manage the Fund's assets in accordance with its investment objectives and
policies; (ii) the Subadvisers maintain appropriate compliance programs; (iii)
the performance of the Fund is reasonable in relation to the performance of
funds with a similar investment objective and to relevant indices; and (iv) the
Fund's advisory expenses are reasonable in relation to those of similar funds
and to the services to be provided by the Manager and the Subadvisers. Based on
its conclusions, the Board determined that approval of the Subadvisory
Agreements with respect to the 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' AND OFFICERS' INFORMATION
TRUSTEES AND OFFICERS OF THE TRUST
--------------------------------------------------------------------------------
As of July 1, 2019, the Board of Trustees (the Board) of the Trust consists of
ten Trustees. These Trustees and the Trust's Officers supervise the business
affairs of the USAA family of funds. The Board is responsible for the general
oversight of the funds' business and for assuring that the funds are managed in
the best interests of each fund's respective shareholders. The Board
periodically reviews the funds' investment performance as well as the quality of
other services provided to the funds and their shareholders by each of the
fund's service providers, including the adviser and its affiliates. Pursuant to
a policy adopted by the Board, the term of office for each Trustee shall be
until the Trustee reaches age 75. The Board may change or grant exceptions from
this policy at any time without shareholder approval. A Trustee may resign or be
removed by a vote of two-thirds of the Trustees before the removal or by the
holders of two-thirds of the outstanding shares of the Trust at any time.
Vacancies on the Board can be filled by the action of a majority of the
Trustees, provided that after filling such vacancy at least two-thirds of the
Trustees have been elected by the shareholders.
Set forth below are the Trustees and Officers of the Trust, their respective
offices and principal occupations during the last five years, length of time
served, and information relating to any other directorships held. As of July 1,
2019, each serves on the Board of the USAA family of funds consisting of one
registered investment company, which offers 47 individual funds. Unless
otherwise indicated, the business address for each is P.O. Box 659430, San
Antonio, TX 78265-9430.
If you would like more information about the funds' Trustees, you may call (800)
235-8396 to request a free copy of the funds' Statement of Additional
Information (SAI).
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90 | USAA INTERNATIONAL FUND
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In connection with the Transaction, the Board of the Trust nominated, and
shareholders of each USAA mutual fund approved, two new Trustees to serve on the
Trust's Board, effective upon the closing of the Transaction. Effective July 1,
2019, David C. Brown serves as an Interested Trustee and John C. Walters serves
as an Independent Trustee. Information about the current Trustees of the Trust
is provided below.
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
DANIEL S. McNAMARA(1, 2, 4, 6, +)
Trustee and Chair of the Board of Trustees
Born: June 1966
Year of Election or Appointment: 2012
Trustee, President, and Vice Chairman, USAA ETF Trust (06/17-06/19); President
of Financial Advice & Solutions Group (FASG), USAA (02/13-present); Director of
USAA Asset Management Company (AMCO), (08/11-present); Director of USAA
Investment Management Company (IMCO) (09/09-present); President, IMCO
(09/09-04/14); President and Director of USAA Shareholder Account Services (SAS)
(10/09-present); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director of FPS (12/13-present);
President and Director of USAA Investment Corporation (ICORP) (03/10-present);
Director of USAA Financial Advisors, Inc. (FAI) (12/13-present). Mr. McNamara
brings to the Board extensive experience in the financial services industry,
including experience as an officer of the Trust.
DAVID C. BROWN(2, 4, 6, 10)
Trustee
Born: May 1972
Year of Election or Appointment: 2019
Chairman and Chief Executive Officer (2013-present), Co-Chief Executive Officer,
(2011-2013), Victory Capital Management Inc.; Chairman and Chief Executive
Officer (2013-present), Victory Capital Holdings, Inc. Mr. Brown brings to the
Board extensive business, finance and leadership skills gained
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TRUSTEES' AND OFFICERS' INFORMATION | 91
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and developed through years of experience in the financial services industry,
including his tenure overseeing the strategic direction as CEO of Victory
Capital. These skills, combined with Mr. Brown's extensive knowledge of the
financial services industry and demonstrated success in the development and
distribution of investment strategies and products, enable him to provide
valuable insights to the Board and strategic direction for the Funds. Mr. Brown
serves on the Boards of the Victory Funds family of funds consisting of five
registered investment companies offering approximately 104 mutual funds and 24
ETFs. Mr. Brown is considered an Interested Trustee of the Trust due to his
position with Victory Capital and its affiliated companies.
NON-INTERESTED (INDEPENDENT) TRUSTEES
--------------------------------------------------------------------------------
ROBERT L. MASON, Ph.D.(3, 4, 5, 6, 7)
Trustee
Born: July 1946
Year of Election or Appointment: 1997
Trustee, USAA ETF Trust (06/17-06/19); Adjunct Professor in the Department of
Management Science and Statistics in the College of Business at the University
of Texas at San Antonio (2001-present); Institute Analyst, Southwest Research
Institute (03/02-01/16), which focuses on providing innovative technology,
science, and engineering services to clients around the world and is one of the
oldest independent, nonprofit, applied research and development organizations in
the United States. He was employed at Southwest Research Institute for 40 years.
Dr. Mason brings to the Board particular experience with information technology
matters, statistical analysis, and human resources as well as over 22 years'
experience as a Board member of the USAA family of funds. Dr. Mason holds no
other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
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92 | USAA INTERNATIONAL FUND
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JEFFERSON C. BOYCE(3, 4, 5, 6, 7)
Lead Trustee and Vice Chair
Born: September 1957
Year of Election or Appointment: 2013
Trustee, USAA ETF Trust (06/17-06/19); Senior Managing Director, New York Life
Investments, LLC (1992-2012), an investment manager. Mr. Boyce brings to the
Board experience in financial investment management, and, in particular,
institutional and retail mutual funds, variable annuity products, broker
dealers, and retirement programs, including experience in organizational
development, marketing, product development, and money management as well as
five years' experience as a Board member of the USAA family of funds. Mr. Boyce
is a board member of Westhab, Inc.
DAWN M. HAWLEY(3, 4, 5, 6, 7, 9)
Trustee
Born: February 1954
Year of Election or Appointment: 2014
Trustee, USAA ETF Trust (06/17-06/19); Manager of Finance, Menil Foundation,
Inc. (05/07-06/11), which is a private foundation that oversees the assemblage
of sculptures, prints, drawings, photographs, and rare books. Director of
Financial Planning and Analysis and Chief Financial Officer, AIM Management
Group, Inc. (10/87-01/06). Ms. Hawley brings to the Board experience in
financial investment management and, in particular, institutional and retail
mutual funds, variable annuity products, broker dealers, and retirement
programs, including experience in financial planning, budgeting, accounting
practices, and asset/liability management functions including major acquisitions
and mergers, as well as over five years' experience as a Board member of the
USAA family of funds. Ms. Hawley holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
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TRUSTEES' AND OFFICERS' INFORMATION | 93
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PAUL L. McNAMARA(3, 4, 5, 6, 7)
Trustee
Born: July 1948
Year of Election or Appointment: 2012
Trustee, USAA ETF Trust (06/17-06/19); Director, Cantor Opportunistic
Alternatives Fund, LLC (03/10-02/14), which is a closed-end fund of funds by
Cantor Fitzgerald Investment Advisors, LLC. Mr. McNamara retired from Lord
Abbett & Co. LLC, an independent U.S. investment management firm, as an
Executive Member on 09/30/09, a position he held since 10/02. He had been
employed at Lord Abbett since 1996. Mr. McNamara brings to the Board extensive
experience with the financial services industry and, in particular,
institutional and retail mutual fund markets, including experience with mutual
fund marketing, distribution, and risk management, as well as overall experience
with compliance and corporate governance issues. Mr. McNamara also has
experience serving as a fund director as well as seven years' experience as a
Board member of the USAA family of funds. Paul L. McNamara is of no relation to
Daniel S. McNamara. Mr. McNamara holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
RICHARD Y. NEWTON III(3, 4, 5, 6, 7)
Trustee
Born: January 1956
Year of Election or Appointment: 2017
Trustee, USAA ETF Trust (06/17-06/19); Director, Elta North America
(01/18-present), which is a global leader in the design, manufacture and support
of innovative electronic systems in the ground, maritime, airborne, and security
domains for the nation's warfighters, security personnel, and first responders;
Managing Partner, Pioneer Partnership Development Group (12/15-present);
Executive Director, The Union League Club of New York (06/14-11/15); Executive
Vice President, Air Force Association (08/12-05/14); Lieutenant General, United
States Air Force (01/08-06/12). Lieutenant General Newton (Ret.) served 34 years
of active duty in the United States Air Force. Lt. Gen. Newton retired as the
Assistant Vice Chief of Staff and Director of Air Staff at the Headquarters of
the U.S. Air Force where he was responsible for overseeing the administration
and organization
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94 | USAA INTERNATIONAL FUND
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of the Air Staff, which develops policies, plans and programs, establishes
requirements, and provides resources to support the Air Force's mission. Lt.
Gen. Newton is a graduate of the United States Air Force Academy, Webster
University, and The National War College. Lt. Gen. Newton brings to the Board
extensive management and military experience, as well as over two years of
experience as a Board member of the USAA family of funds. Lt. Gen. Newton holds
no other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
BARBARA B. OSTDIEK, Ph.D.(3, 4, 5, 6, 7, 8)
Trustee
Born: March 1964
Year of Election or Appointment: 2008
Trustee, USAA ETF Trust (06/17-06/19); Senior Associate Dean of Degree programs
at Jesse H. Jones Graduate School of Business at Rice University
(07/13-present); Associate Professor of Finance at Jesse H. Jones Graduate
School of Business at Rice University (07/01-present); Academic Director, El
Paso Corporation Finance Center at Jesse H. Jones Graduate School of Business at
Rice University (07/02-06/12). Dr. Ostdiek brings to the Board particular
experience with financial investment management, education, and research as well
as over eleven years' experience as a Board member of the USAA family of funds.
Dr. Ostdiek holds no other directorships of any publicly held corporations or
other investment companies outside the USAA family of funds.
MICHAEL F. REIMHERR(3, 4, 5, 6, 7)
Trustee
Born: August 1945
Year of Election or Appointment: 2000
Trustee, USAA ETF Trust (06/17-06/19); President of Reimherr Business Consulting
performing business valuations of medium to large companies; developing business
plans, budgets, and internal financial reporting; and work with mergers and
acquisitions (05/95-12/17). St. Mary's University Investment Committee
overseeing University Endowment (06/14-present). Mr. Reimherr brings to the
Board particular experience with organizational development, budgeting, finance,
capital markets, and mergers and acquisitions, as well as
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 95
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over 19 years' experience as a Board member of the USAA family of funds. Mr.
Reimherr holds no other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
JOHN C. WALTERS(3, 4, 5, 6, 7)
Trustee
Born: February 1962
Year of Election or Appointment: 2019
Retired. Mr. Walters brings significant Board experience including active
involvement with the board of a Fortune 500 company, and a proven record of
leading large, complex financial organizations. He has a demonstrated record of
success in distribution, manufacturing, investment brokerage, and investment
management in both the retail and institutional investment businesses. He has
substantial experience in the investment management business with a demonstrated
ability to develop and drive strategy while managing operational, financial, and
investment risk. Mr. Walters is a board member of Guardian Variable Products
Trust (16 series), Lead Independent Director; Amerilife Holdings LLC, Director;
Stadion Money Management; Director; and University of North Carolina (Chapel
Hill), Member Board of Governors.
(1) Indicates the Trustee is an employee of AMCO or affiliated companies and
is considered an "interested person" under the Investment Company Act of
1940.
(2) Member of Executive Committee.
(3) Member of Audit and Compliance Committee.
(4) Member of Product Management and Distribution Committee.
(5) Member of Corporate Governance Committee.
(6) Member of Investments Committee.
(7) The address for all non-interested trustees is that of the USAA Funds,
P.O. Box 659430, San Antonio, TX 78265-9430.
(8) Dr. Ostdiek has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(9) Ms. Hawley has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(10) Indicates the Trustee is an employee of Victory Capital or affiliated
companies and is considered an "interested person" under the Investment
Company Act of 1940.
(+) Mr. D. McNamara was elected as Chair of the Board in July 2019.
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96 | USAA INTERNATIONAL FUND
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Effective July 1, 2019, the Board of the Trust appointed certain new officers of
the Trust. The current officers of the Trust are stated below.
OFFICERS
--------------------------------------------------------------------------------
CHRISTOPHER K. DYER
President
Born: February 1962
Year of Appointment: 2019
Director of Mutual Fund Administration, the Victory Capital.
SCOTT A. STAHORSKY
Vice President
Born: July 1969
Year of Appointment: 2019
Manager, Fund Administration, the Adviser (since 2015); Senior Analyst, Fund
Administration, the Victory Capital (prior to 2015).
ALLAN SHAER
Assistant Treasurer
Born: March 1965
Year of Appointment: 2019
Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc.
(since 2016); Vice President, Mutual Fund Administration, JP Morgan Chase
(2011-2016).
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TRUSTEES' AND OFFICERS' INFORMATION | 97
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JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Treasurer, USAA ETF Trust (09/18-06/19); Executive Director, Investment and
Financial Administration, USAA (04/12-present); Assistant Treasurer, USAA ETF
Trust (06/17-09/18); Assistant Treasurer, USAA Mutual Funds Trust (12/13-02/18).
Mr. De Vries also serves as the Funds' Principal Financial Officer.
CAROL D. TREVINO
Assistant Treasurer
Born: October 1965
Year of Appointment: 2018
Assistant Treasurer, USAA ETF Trust (09/18-06/19); Accounting/Financial
Director, USAA (12/13-present); Senior Accounting Analyst, USAA (03/11-12/13).
ERIN G. WAGNER
Secretary
Born: February 1974
Year of Appointment: 2019
Associate General Counsel, the Adviser (since 2013).
CHARLES BOOTH
Anti-Money Laundering Compliance Officer and Identity Theft Officer
Born: April 1960
Year of Appointment: 2019
Director, Regulatory Administration and CCO Support Services, Citi Fund Services
Ohio, Inc. (2007-present).
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98 | USAA INTERNATIONAL FUND
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AMY CAMPOS
Chief Compliance Officer
Born: August 1976
Year of Appointment: 2019
Chief Compliance Officer, USAA Mutual Funds Trust (7/1/19-present); Executive
Director, Deputy Chief Compliance Officer, USAA Mutual Funds Trust and USAA ETF
Trust (7/17-6/19); Compliance Director, USAA Mutual Funds Trust (2014-7/17);
Senior Compliance Advisor, USAA Mutual Funds Trust (2010-2014).
THE FOLLOWING OFFICERS SERVED IN THEIR RESPECTIVE OFFICE UNTIL JULY 1, 2019, AT
WHICH POINT EACH OF THE FOLLOWING OFFICERS RESIGNED FROM THEIR RESPECTIVE OFFICE
AND NO LONGER SERVE IN THESE POSITIONS.
JOHN C. SPEAR
Vice President
Born: May 1964
Year of Appointment: 2016
Vice President, USAA ETF Trust (06/17-06/19); Senior Vice President and Chief
Investment Officer, USAA Investments, (03/17-present); Vice President and Chief
Investment Officer, USAA Investments, (11/16-03/17); Vice President, Long Term
Fixed Income (05/12-11/16).
JOHN P. TOOHEY
Vice President
Born: March 1968
Year of Appointment: 2009
Vice President, USAA ETF Trust (06/17-06/19); Head of Equities, Equity
Investments, AMCO (01/12-present).
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TRUSTEES' AND OFFICERS' INFORMATION | 99
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KRISTEN MILLAN
Secretary
Born: April 1983
Year of Appointment: 2019
Secretary, USAA ETF Trust (04/19-06/19); Assistant Secretary, USAA ETF Trust
(01/19-06/19); Senior Attorney, FASG General Counsel, USAA (09/17-06/19);
Attorney, FASG General Counsel, USAA (06/13-09/17). Ms. Millan also serves as
Assistant Secretary of AMCO, ICORP, and SAS.
STEPHANIE A. HIGBY
Chief Compliance Officer
Born: July 1974
Year of Appointment: 2013
Chief Compliance Officer, USAA ETF Trust (06/17-06/19); Assistant Vice
President, Compliance-Investments, USAA (02/18-present); Assistant Vice
President, Compliance Mutual Funds, USAA (12/16-01/18); Executive Director,
Institutional Asset Management Compliance, USAA (04/13-12/16). Ms. Higby also
serves as the Funds' anti-money laundering compliance officer and as the Chief
Compliance Officer for AMCO and IMCO.
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100 | USAA INTERNATIONAL FUND
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AS OF JULY 1, 2019
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
David C. Brown
John C. Walters
--------------------------------------------------------------------------------
ADMINISTRATOR AND Victory Capital Management Inc.
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
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UNDERWRITER AND Victory Capital Advisers Inc.
DISTRIBUTOR 4900 Tiedeman Road
Brooklyn, Ohio 44144
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TRANSFER AGENT Victory Capital Transfer Agency Inc.
9800 Fredericksburg Road
San Antonio, Texas 78288
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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 USAA AMCO'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) 235-8396; (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) 235-8396; (ii) at usaa.com; and (iii) on the SEC's website at
http://www.sec.gov.
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----------------------
MUTUAL FUNDS
--------------------------------------------------------------------------------
May 31, 2019
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ANNUAL REPORT
USAA Managed Allocation Fund
FUND
SHARES
UMAFX
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) 235-8396 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)
235-8396 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.
Victory Capital means Victory Capital Management Inc., the investment manager of
the USAA Mutual Funds. USAA Mutual Funds are distributed by Victory Capital
Advisers, Inc., a broker dealer registered with FINRA and an affiliate of
Victory Capital. Victory Capital and its affiliates are not affiliated with
United Services Automobile Association or its affiliates. USAA and the USAA
logos are registered trademarks and the USAA Mutual Funds and USAA Investments
logos are trademarks of United Services Automobile Association and are being
used by Victory Capital and its affiliates under license.
================================================================================
PRESIDENT'S MESSAGE
"... LONG-TERM INVESTORS SHOULD NEVER MAKE
DECISIONS IN HASTE. THEY SHOULD MAKE [PHOTO OF BROOKS ENGLEHARDT]
THOUGHTFUL DECISIONS BASED ON THEIR LONG-TERM
OBJECTIVES, TIME HORIZON, AND RISK TOLERANCE."
--------------------------------------------------------------------------------
JULY 2019
As previously announced, USAA, the parent company of USAA Asset Management
Company ("AMCO"), the prior investment adviser to the USAA Mutual Funds,
announced that AMCO would be acquired by Victory Capital Holdings, Inc.
(Victory Holdings), a global investment management firm headquartered in
Cleveland, Ohio (the Transaction). In connection with the Transaction, also as
previous announced, shareholders of each USAA Mutual Fund approved a new
investment advisory agreement with Victory Capital Management Inc. ("Victory
Capital"), an indirect wholly-owned subsidiary of Victory Holdings. The closing
of the Transaction occurred on July 1, 2019; and Victory Capital became the
investment adviser to each USAA Mutual Fund. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION ABOUT CHANGES THAT TOOK EFFECT ON JULY 1, 2019.
Softening global economic conditions and escalating trade tensions rattled
investors during the 12-month reporting period ended May 31, 2019. When the
reporting period began in June 2018, the global economy was expanding across
most regions and countries, led by the U.S. In this environment, stocks
generally advanced. In the fixed income market, U.S. Treasury yields rose, as
the U.S. Federal Reserve ("Fed") continued to tighten monetary policy.
Signs of trouble emerged during the summer of 2018. The U.S. economic expansion
continued, but growth in a number of other economies, including some European
countries and China, showed a weakening trend. By the autumn of 2018, investors'
fears of a global economic slowdown, combined with harsh U.S.-China trade
rhetoric and Brexit-related uncertainty in Europe, sparked a surge in market
volatility. Global stocks dropped, with most of the decline occurring in
December 2018. At the same time, intermediate- and longer-term yields fell, as
investors anticipated a change in Fed monetary policy. Indeed, after having
raised short-term interest rates four times during 2018, Fed officials announced
in January 2019 that they would "pause," retreating from their earlier plan to
raise interest rates in 2019. Stocks rallied in response and by April 2019 had
recovered most of the ground they had lost. In May 2019, ongoing trade tensions
between the United States and China, as well as President Trump administration's
threat to impose tariffs on Mexico, drove a renewed decline in stock prices. In
the fixed income market, concerns that trade disputes would seriously undermine
global
================================================================================
================================================================================
economic growth pushed down intermediate- and longer-term yields, which ended
the reporting period lower than they started. The yield on the 10-year U.S.
Treasury note, which began June 2018 at 2.89%, rose to 3.24% on November 8,
2018--its high point of the period--and fell to 2.13% by May 31, 2019.
In the final months of the reporting period, the Treasury yield curve inverted,
which means that shorter-term yields were higher than longer-term yields. A
yield-curve inversion warrants attention because it has been a reliable
recession indicator. Although recessions do not automatically follow
inversions, a downward-sloped yield curve has preceded every U.S. recession
since the 1960s. That said, the lag between an inversion and a recession has
been inconsistent. At USAA Investments, A Victory Capital Investment Franchise,
we have found that during the past six decades, the time between inversion and
recession has ranged between six months and two years, with no clear pattern to
provide useful guidance. And as I write to you, we see no recession on the
horizon. First, the U.S. economy continues to grow, albeit at a slower pace than
in 2018. Second, the Fed has made clear its commitment to pause its interest
rate hikes, and there is a growing belief in the markets that policymakers may
even cut interest rates in 2019. (In early June 2019, after the end of the
reporting period, Fed Chair Jerome Powell stated that the U.S. central bank was
monitoring the escalation in trade tensions and could potentially respond by
cutting interest rates if U.S. economic conditions deteriorate.)
At USAA Investments, our team of portfolio managers will continue to monitor the
financial markets, economic conditions, the global trade regime, Fed policy, the
direction of longer-term interest rates, and other issues that have the
potential to affect your investments. In the meantime, I would advise you to
ignore media "noise" about such matters. Media "noise" is meant to provoke an
emotional reaction, which can lead to hasty decision-making. In my opinion,
long-term investors should never make decisions in haste. They should make
thoughtful decisions based on their long-term objectives, time horizon, and risk
tolerance. Dollar-cost averaging, in which you invest a set amount on a regular
basis, is a strategy that can help you stay on track. Another effective strategy
is diversification, which can potentially insulate a portfolio from market
turbulence or changes in performance leadership.
If you would like to review your portfolio to confirm that it is properly
aligned with your investment plan, please contact one of our financial advisors.
You might want to make that call before the summer gets fully underway. When we
are traveling and spending time with family and friends, it can be tempting to
put off decisions on financial matters.
From all of us at USAA Investments, A Victory Capital Investment Franchise,
thank you for the opportunity to help you with your investment needs.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGER'S COMMENTARY 1
INVESTMENT OVERVIEW 5
SHAREHOLDER VOTING RESULTS 8
FINANCIAL INFORMATION
Distributions to Shareholders 9
Report of Independent Registered
Public Accounting Firm 10
Portfolio of Investments 11
Notes to Portfolio of Investments 13
Financial Statements 14
Notes to Financial Statements 17
Financial Highlights 29
EXPENSE EXAMPLE 30
ADVISORY AGREEMENT(S) 32
TRUSTEES' AND OFFICERS' INFORMATION 50
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) 235-8396.
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.
================================================================================
================================================================================
MANAGERS' COMMENTARY ON THE FUND
--------------------------------------------------------------------------------
[PHOTO OF WASIF A. LATIF] [PHOTO OF LANCE HUMPHREY]
WASIF A. LATIF LANCE HUMPHREY, CFA
--------------------------------------------------------------------------------
o HOW DID THE GLOBAL FINANCIAL MARKETS PERFORM DURING THE 12-MONTH REPORTING
PERIOD ENDED MAY 31, 2019?
The world financial markets produced mixed results, reflecting investors'
struggle to assess the shifting outlook for economic growth.
Large-cap U.S. equities were the best performer among the major asset
classes. Domestic stocks performed well in the first half of the period,
during which both economic data and corporate earnings came in above
expectations. However, the market sold off sharply in late 2018 due to the
combination of worries about U.S. Federal Reserve ("Fed") policy, the trade
dispute between the United States and China, and signs of slowing economic
growth overseas. Stocks quickly recovered from the downturn, and the main
U.S. equity indexes went on to post their best quarter in nearly 10 years
during the first three months of 2019. A rapid shift in Fed policy was
likely the key catalyst for the rebound. Whereas the markets generally were
expecting that the Fed would raise interest rates three to four times in
2019 as late as October, a series of statements from key officials indicated
the Fed likely was finished raising interest rates for the foreseeable
future. The reporting period ended on a down note with a weak showing in May
2019, as stocks gave back some of their previous gains due to renewed
worries about slowing growth and the failure of the United States and China
to resolve their trade impasse.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
The net effect of these sentiment swings was a narrow advance for large-cap
U.S. stocks.
Developed-market international equities posted a loss over the 12-month
period, largely as a result of the unexpectedly slow growth outside of the
United States. Emerging-market stocks also closed in negative territory.
Concerns about the global trade outlook and the prospect of slowing growth
in the developed world contributed to the underperformance for the asset
class.
Investment-grade bonds, after producing sluggish performance in the first
half of the reporting period, staged a strong rally from early November 2018
onward thanks to the Fed's shift toward a more accommodative policy. The
gains propelled the Bloomberg Barclays U.S. Aggregate Bond Index to a
return of 6.40% for the full 12 months. High-yield bonds also performed
reasonably well. Although high-yield issues fell sharply in late 2018 amid
the evaporation of investor risk appetites, the category surged back into
positive territory in early 2019.
o HOW DID THE USAA MANAGED ALLOCATION FUND (THE "FUND") PERFORM DURING THE
REPORTING PERIOD?
For the reporting period ended May 31, 2019, the Fund had a total return of
-5.92%. This compares to returns of 3.78% for the S&P 500(R) Index and 6.40%
for the Bloomberg Barclays U.S. Aggregate Bond Index.
Effective July 1, 2019, Victory Capital serves as the Fund's investment
adviser. Prior to July 1, 2019, AMCO served as the Fund's investment
adviser. The investment adviser provides day-to-day discretionary management
for the Fund's assets.
Refer to page 5 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
2 | USAA MANAGED ALLOCATION FUND
================================================================================
o PLEASE DISCUSS THE FACTORS THAT HELPED AND HURT PERFORMANCE.
This Fund is designed to provide us with the flexibility to implement
tactical asset allocation shifts within the USAA Managed Portfolios. By
using the Fund in this manner, we can make allocation changes to the Managed
Portfolios quicker and with less disruption than we would by shifting their
existing holdings. The Fund primarily uses exchange-traded funds, or ETFs,
to implement our asset allocation views since ETFs are highly liquid
vehicles that allow us to apply our tactical allocation decisions
efficiently. The Fund's allocations reflect the need to round out the
Managed Portfolios, rather than representing an active strategy.
With this in mind, the Fund's negative reporting period return mainly
reflected the timing of our shifts in the equity portfolio. On the domestic
side, we held a position in large-cap U.S. stocks in the latter half of 2018
and again in the final two months of the reporting period. As a result, the
Fund was adversely affected by the market downturn while largely missing the
benefit of the recovery in the first quarter of 2019. The Fund also had an
allocation to small-cap stocks throughout the reporting period, which
detracted given that smaller companies lagged their large-cap peers.
Our positioning in developed-market international stocks further hurt
results, primarily due to a weighting in iShares Core MSCI EAFE ETF* during
the last five months of 2018. A position in the emerging markets in the
early part of the reporting period was an additional detractor.
The shortfall from these aspects of the Fund's positioning were offset to
some extent by its holdings in bonds. We held a position in SPDR Portfolio
Short Term Corporate Bond ETF* throughout most of the year, which helped the
Fund capitalize on both the relative strength of credit-oriented
fixed-income investments and the decline in interest rates from November
onward. We also held iShares 7-10 Year Treasury Bond ETF "B" in the latter
half of the reporting period, which provided
*iShares Core MSCI EAFE ETF and SPDR Portfolio Short Term Corporate Bond ETF
were sold out of the Fund prior to May 31, 2019.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
further exposure to the strong rally in bonds. Finally, our decision to add
an allocation to high-yield bonds following the category's sell-off in late
2018 aided performance by allowing the Fund to take advantage of the
subsequent recovery.
Thank you for allowing us to help you manage your investments.
Foreign investing is subject to additional risks, such as currency
fluctuations, market illiquidity, and political instability. Emerging market
countries are less diverse and mature than other countries and tend to be
politically less stable. o As interest rates rise, bond prices generally
fall; given the historically low interest rate environment, risks associated
with rising interest rates may be heightened. o Exchange-traded funds
(ETFs) are subject to risks similar to those of stocks. Investment returns
may fluctuate and are subject to market volatility, so that an investor's
shares, when redeemed or sold, may be worth more or less than their original
cost. o Non-investment grade securities are considered speculative and are
subject to significant credit risk. They are sometimes referred to as "junk"
bonds since they represent a greater risk of default than more credit worthy
investment-grade securities. o Diversification is a technique intended to
help reduce risk and does not guarantee a profit or prevent a loss.
================================================================================
4 | USAA MANAGED ALLOCATION FUND
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/19 o
--------------------------------------------------------------------------------------------------------
SINCE INCEPTION
1 YEAR 5 YEAR 10 YEAR INCEPTION* DATE
--------------------------------------------------------------------------------------------------------
USAA Managed Allocation
Fund -5.92% 0.77% - 4.32% 2/01/10
S&P 500 Index** (reflects no
deduction for fees, expenses,
or taxes) 3.78% 9.65% 13.93% - -
Bloomberg Barclays U.S.
Aggregate Bond Index***
(reflects no deduction for
fees, expenses, or taxes) 6.40% 2.70% 3.82% - -
*Since inception returns are shown when a share class has less than 10 years of
performance. Total returns for periods of less than one year are not annualized.
**The unmanaged S&P 500 Index represents the weighted average performance of a
group of 500 widely held, publicly traded stocks.
***The Bloomberg Barclays U.S. Aggregate Bond Index covers the U.S.
investment-grade fixed-rate bond market, including government and credit
securities, agency mortgage pass-through securities, asset-backed securities,
and commercial mortgage-backed securities that have remaining maturities of more
than one year.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
usaa.com.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on net investment income and
realized capital gain distributions, including reinvested distributions, or
redemptions of shares.
================================================================================
INVESTMENT OVERVIEW | 5
================================================================================
o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
BLOOMBERG BARCLAYS
USAA MANAGED U.S. AGGREGATE
S&P 500 INDEX ALLOCATION FUND BOND INDEX
01/31/10 $10,000.00 $10,000.00 $10,000.00
02/28/10 10,309.77 10,200.00 10,037.34
03/31/10 10,931.91 10,420.00 10,025.00
04/30/10 11,104.50 10,490.00 10,129.36
05/31/10 10,217.80 10,140.00 10,214.60
06/30/10 9,682.92 9,980.00 10,374.78
07/31/10 10,361.33 10,600.00 10,485.46
08/31/10 9,893.58 10,230.00 10,620.38
09/30/10 10,776.53 11,100.00 10,631.70
10/31/10 11,186.57 11,250.00 10,669.56
11/30/10 11,188.00 11,030.00 10,608.23
12/31/10 11,935.71 11,258.00 10,493.84
01/31/11 12,218.61 11,227.00 10,506.05
02/28/11 12,637.20 11,373.00 10,532.33
03/31/11 12,642.23 11,508.00 10,538.15
04/30/11 13,016.63 11,780.00 10,671.92
05/31/11 12,869.29 11,832.00 10,811.19
06/30/11 12,654.77 11,759.00 10,779.54
07/31/11 12,397.44 11,916.00 10,950.59
08/31/11 11,723.99 12,031.00 11,110.58
09/30/11 10,899.81 11,592.00 11,191.40
10/31/11 12,091.08 12,240.00 11,203.42
11/30/11 12,064.36 11,989.00 11,193.70
12/31/11 12,187.77 12,052.00 11,316.73
01/31/12 12,733.97 12,535.00 11,416.10
02/29/12 13,284.61 12,771.00 11,413.48
03/31/12 13,721.79 12,580.00 11,350.94
04/30/12 13,635.66 12,647.00 11,476.78
05/31/12 12,816.15 11,984.00 11,580.63
06/30/12 13,344.20 12,377.00 11,585.17
07/31/12 13,529.54 12,523.00 11,744.96
08/31/12 13,834.27 12,703.00 11,752.64
09/30/12 14,191.77 12,928.00 11,768.82
10/31/12 13,929.72 12,917.00 11,791.96
11/30/12 14,010.53 12,961.00 11,810.57
12/31/12 14,138.23 13,243.00 11,793.75
01/31/13 14,870.52 13,383.00 11,711.27
02/28/13 15,072.39 13,278.00 11,769.97
03/31/13 15,637.65 13,360.00 11,779.37
04/30/13 15,938.94 13,524.00 11,898.56
05/31/13 16,311.78 13,266.00 11,686.26
06/30/13 16,092.73 12,832.00 11,505.49
07/31/13 16,911.60 13,161.00 11,521.22
08/31/13 16,421.81 12,856.00 11,462.33
09/30/13 16,936.79 13,231.00 11,570.84
10/31/13 17,715.34 13,594.00 11,664.39
11/30/13 18,255.19 13,676.00 11,620.72
12/31/13 18,717.34 13,780.00 11,555.05
01/31/14 18,070.21 13,423.00 11,725.78
02/28/14 18,896.81 13,875.00 11,788.13
03/31/14 19,055.65 13,995.00 11,768.05
04/30/14 19,196.51 14,090.00 11,867.35
05/31/14 19,647.13 14,280.00 12,002.47
06/30/14 20,052.99 14,447.00 12,008.67
07/31/14 19,776.45 14,197.00 11,978.55
08/31/14 20,567.60 14,483.00 12,110.79
09/30/14 20,279.17 14,006.00 12,028.56
10/31/14 20,774.49 14,137.00 12,146.79
11/30/14 21,333.22 14,197.00 12,232.96
12/31/14 21,279.48 13,968.00 12,244.43
01/31/15 20,640.69 13,968.00 12,501.17
02/28/15 21,826.94 14,466.00 12,383.64
03/31/15 21,481.76 14,320.00 12,441.12
04/30/15 21,687.83 14,539.00 12,396.49
05/31/15 21,966.72 14,563.00 12,366.63
06/30/15 21,541.49 14,247.00 12,231.77
07/31/15 21,992.81 14,381.00 12,316.82
08/31/15 20,665.90 13,688.00 12,299.10
09/30/15 20,154.55 13,360.00 12,382.29
10/31/15 21,854.67 13,992.00 12,384.41
11/30/15 21,919.67 13,931.00 12,351.67
12/31/15 21,573.95 13,645.00 12,311.76
01/31/16 20,503.37 13,194.00 12,481.15
02/29/16 20,475.70 13,068.00 12,569.71
03/31/16 21,864.73 13,557.00 12,685.01
04/30/16 21,949.50 13,708.00 12,733.73
05/31/16 22,343.67 13,670.00 12,736.99
06/30/16 22,401.55 14,172.00 12,965.85
07/31/16 23,227.47 14,435.00 13,047.82
08/31/16 23,260.08 14,523.00 13,032.92
09/30/16 23,264.48 14,586.00 13,025.25
10/31/16 22,840.11 14,398.00 12,925.63
11/30/16 23,685.99 13,858.00 12,619.91
12/31/16 24,154.17 13,866.00 12,637.69
01/31/17 24,612.29 14,110.00 12,662.50
02/28/17 25,589.54 14,443.00 12,747.61
03/31/17 25,619.39 14,533.00 12,740.89
04/30/17 25,882.50 14,764.00 12,839.24
05/31/17 26,246.74 14,892.00 12,938.03
06/30/17 26,410.56 15,059.00 12,925.05
07/31/17 26,953.63 15,329.00 12,980.68
08/31/17 27,036.14 15,290.00 13,097.06
09/30/17 27,593.85 15,380.00 13,034.72
10/31/17 28,237.76 15,688.00 13,042.26
11/30/17 29,103.81 15,726.00 13,025.51
12/31/17 29,427.40 16,114.00 13,085.29
01/31/18 31,112.24 17,191.00 12,934.58
02/28/18 29,965.53 16,311.00 12,812.00
03/31/18 29,204.01 16,245.00 12,894.17
04/30/18 29,316.07 16,022.00 12,798.25
05/31/18 30,022.05 15,772.00 12,889.56
06/30/18 30,206.84 15,418.00 12,873.70
07/31/18 31,330.94 15,759.00 12,876.77
08/31/18 32,351.87 15,851.00 12,959.64
09/30/18 32,536.02 15,799.00 12,876.20
10/31/18 30,312.17 14,761.00 12,774.46
11/30/18 30,929.89 14,893.00 12,850.68
12/31/18 28,137.20 13,944.00 13,086.79
01/31/19 30,392.00 14,813.00 13,225.76
02/28/19 31,367.83 15,053.00 13,218.11
03/31/19 31,977.36 15,134.00 13,471.91
04/30/19 33,272.12 15,348.00 13,475.35
05/31/19 31,157.73 14,840.00 13,714.57
[END CHART]
Data from 1/31/10 through 5/31/19.*
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Managed Allocation Fund to the benchmarks listed above (see page 5 for
benchmark definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes.
*The performance of the S&P 500 Index and the Bloomberg Barclays U.S. Aggregate
Bond Index are calculated from the end of the month, January 31, 2010, while the
inception date of the Fund is February 1, 2010. There may be a slight variation
of performance numbers because of this difference.
================================================================================
6 | USAA MANAGED ALLOCATION FUND
================================================================================
o ASSET ALLOCATION* - 5/31/19 o
(% of Net Assets)
[PIE CHART OF ASSET ALLOCATION]
FIXED-INCOME EXCHANGE-TRADED FUNDS 51.8%
DOMESTIC EXCHANGE-TRADED FUNDS 48.2%
[END CHART]
*Does not include short-term investments purchased with cash collateral from
securities loaned.
Percentages are of net assets of the Fund and may not equal 100%.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
SHAREHOLDER VOTING RESULTS
--------------------------------------------------------------------------------
On April 18, 2019, a special meeting of shareholders was held to vote on two
proposals relating to the series of the USAA Mutual Funds Trust (Trust).
Shareholders of record on February 8, 2019, were entitled to vote on each
proposal shown below. The proposals were approved by the shareholders.
The following proposals and voting results pertain to one or more series within
the Trust. Votes shown for Proposal 1 are for the Fund, a series of the Trust.
Votes shown for Proposal 2 are for all series of the Trust. The effective date
of the Proposals was July 1, 2019.
PROPOSAL 1
To approve a new Investment Advisory Agreement between the Trust, on behalf of
the Fund, and Victory Capital, an independent investment adviser. The new
Investment Advisory Agreement became effective upon the closing of the
Transaction (as defined and discussed in Note 1 to the Financial Statements)
whereby AMCO was acquired by Victory Holdings, the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
-------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
-------------------------------------------------------------------------------
65,630,143 7,344 10,642
PROPOSAL 2
Election of two new trustees to the Trust's Board of Trustees to serve upon the
closing of the Transaction: (1) David C. Brown, to serve as an "interested
trustee" as defined in the Investment Company Act of 1940, as amended (1940
Act); and (2) John C. Walters, to serve as a trustee who is not an "interested
person" as is defined under the 1940 Act ("Independent Trustee").
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
TRUSTEES FOR VOTES WITHHELD
--------------------------------------------------------------------------------
David C. Brown 8,299,565,565 820,887,736
John C. Walters 8,317,935,885 802,517,416
================================================================================
8 | USAA MANAGED ALLOCATION FUND
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
May 31, 2019, is provided for information purposes only and should not be used
for reporting to federal or state revenue agencies. Federal tax information for
the calendar year will be reported to you on Form 1099-DIV in January 2020.
With respect to distributions paid, the Fund designates the following amounts
(or, if subsequently determined to be different, the maximum amount allowable)
for the fiscal year ended May 31, 2019:
DIVIDEND RECEIVED LONG-TERM
DEDUCTION (CORPORATE CAPITAL GAIN QUALIFIED INTEREST
SHAREHOLDERS)(1) DISTRIBUTIONS(2) INCOME
---------------------------------------------------------------------------
26.86% $5,086,000 $38,000
---------------------------------------------------------------------------
(1) Presented as a percentage of net investment income and short-term capital
gain distributions paid, if any.
(2) Pursuant to Section 852 of the Internal Revenue Code.
For the fiscal year ended May 31, 2019, the Fund hereby designates the maximum
amount allowable of its net taxable income as qualified dividends taxed at
individual net capital gain rates.
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS | 9
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA MANAGED ALLOCATION FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Managed Allocation Fund (the "Fund") (one of the funds constituting USAA Mutual
Funds Trust (the "Trust")), including the portfolio of investments, as of May
31, 2019, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, the financial highlights for each of the five years in the period then
ended and the related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Fund (one of the funds
constituting USAA Mutual Funds Trust) at May 31, 2019, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and its financial highlights for each of
the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
BASIS FOR OPINION
These financial statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on the Fund's financial statements based
on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and are required to
be independent with respect to the Trust in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Trust is not required to have,
nor were we engaged to perform, an audit of the Trust's internal control over
financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the Trust's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of May 31, 2019, by correspondence with the custodian. Our audits also
included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
/s/ Ernst & Young LLP
We have served as the auditor of one or more Victory Capital investment
companies since 1995.
San Antonio, Texas
July 23, 2019
================================================================================
10 | USAA MANAGED ALLOCATION FUND
================================================================================
PORTFOLIO OF INVESTMENTS
May 31, 2019
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (100.0%)
EXCHANGE-TRADED FUNDS (100.0%)
DOMESTIC EXCHANGE-TRADED FUNDS (48.2%)
637,000 iShares Core S&P 500 ETF $176,640
1,184,360 iShares Russell 2000 ETF(a) 172,751
--------
349,391
--------
FIXED-INCOME EXCHANGE-TRADED FUNDS (51.8%)
1,767,270 iShares 7-10 Year Treasury Bond ETF "B" 192,473
1,077,140 iShares iBoxx $ High Yield Corporate Bond ETF(a) 91,449
862,466 SPDR Bloomberg Barclays High Yield Bond ETF(a) 91,551
--------
375,473
--------
Total Exchange-Traded Funds (cost: $742,256) 724,864
--------
Total Equity Securities (cost: $742,256) 724,864
--------
MONEY MARKET INSTRUMENTS (0.0%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.0%)
351,407 State Street Institutional Treasury Money Market Fund
Premier Class , 2.30%(b) (cost: $352) 352
--------
SHORT-TERM INVESTMENTS PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (26.3%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (26.3%)
35,143,100 Federated Government Obligations Fund Institutional Class, 2.27%(b) 35,143
36,000,000 Fidelity Government Portfolio Class I, 2.27%(b) 36,000
15,304,021 Goldman Sachs Financial Square Government Fund
Institutional Class, 2.30%(b) 15,304
31,686,683 HSBC U.S. Government Money Market Fund Class I, 2.33%(b) 31,687
36,071,204 Morgan Stanley Institutional Liquidity Funds
Government Portfolio Institutional Class, 2.29%(b) 36,071
36,000,000 Western Asset Institutional Government Reserves Institutional Class, 2.28%(b) 36,000
--------
Total Short-Term Investments Purchased with Cash Collateral from
Securities Loaned (cost: $190,205) 190,205
--------
TOTAL INVESTMENTS (COST: $932,813) $915,421
========
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
--------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
--------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------------------------------------------------------------
Equity Securities:
Exchange-Traded Funds $724,864 $- $- $724,864
Money Market Instruments:
Government & U.S. Treasury
Money Market Funds 352 - - 352
Short-Term Investments Purchased with
Cash Collateral from Securities Loaned:
Government & U.S. Treasury Money
Market Funds 190,205 - - 190,205
--------------------------------------------------------------------------------------------------------
Total $915,421 $- $- $915,421
--------------------------------------------------------------------------------------------------------
At May 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
12 | USAA MANAGED ALLOCATION FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 2019
--------------------------------------------------------------------------------
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.
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 SPECIFIC NOTES
(a) The security, or a portion thereof, was out on loan as of May 31, 2019.
(b) Rate represents the money market fund annualized seven-day yield at
May 31, 2019.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 13
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (including securities on
loan of $184,159) (cost of $932,813) $915,421
Receivables:
Capital shares sold 55
Interest 1
Other 21
--------
Total assets 915,498
--------
LIABILITIES
Payables:
Upon return of securities loaned 190,205
Capital shares redeemed 294
Accrued management fees 378
Other accrued expenses and payables 102
--------
Total liabilities 190,979
--------
Net assets applicable to capital shares outstanding $724,519
========
NET ASSETS CONSIST OF:
Paid-in capital $760,748
Accumulated loss (36,229)
--------
Net assets applicable to capital shares outstanding $724,519
========
Capital shares outstanding, no par value 65,265
========
Net asset value, redemption price, and offering price per share $ 11.10
========
See accompanying notes to financial statements.
================================================================================
14 | USAA MANAGED ALLOCATION FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 18,515
Interest 54
Securities lending (net) 314
--------
Total income 18,883
--------
EXPENSES
Management fees 4,591
Administration and servicing fees 383
Transfer agent's fees 383
Custody and accounting fees 105
Postage 126
Shareholder reporting fees 14
Trustees' fees 37
Registration fees 21
Professional fees 71
Other 15
--------
Total expenses 5,746
--------
NET INVESTMENT INCOME 13,137
--------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss (17,330)
Change in net unrealized appreciation/(depreciation) (43,917)
--------
Net realized and unrealized loss (61,247)
--------
Decrease in net assets resulting from operations $(48,110)
========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 15
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
--------------------------------------------------------------------------------
2019 2018
--------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 13,137 $ 14,905
Net realized gain (loss) on investments (17,330) 55,445
Change in net unrealized
appreciation/(depreciation) of investments. (43,917) (24,697)
-----------------------
Increase (decrease) in net assets resulting
from operations (48,110) 45,653
-----------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS (12,583) (19,156)
-----------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 74,923 87,769
Reinvested dividends 12,583 19,156
Cost of shares redeemed (110,803) (90,792)
-----------------------
Increase (decrease) in net assets from capital
share transactions (23,297) 16,133
-----------------------
Net increase (decrease) in net assets (83,990) 42,630
NET ASSETS
Beginning of year 808,509 765,879
-----------------------
End of year $ 724,519 $808,509
=======================
CHANGE IN SHARES OUTSTANDING
Shares sold 6,501 7,181
Shares issued for dividends reinvested 1,192 1,570
Shares redeemed (9,730) (7,429)
-----------------------
Increase (decrease) in shares outstanding (2,037) 1,322
=======================
See accompanying notes to financial statements.
================================================================================
16 | USAA MANAGED ALLOCATION FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
May 31, 2019
--------------------------------------------------------------------------------
(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 Managed Allocation Fund (the Fund) qualifies as a registered investment
company under Accounting Standards Codification Topic 946. The information
presented in this annual 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 to maximize total return,
consisting primarily of capital appreciation. The Fund is not offered for sale
directly to the general public and is currently available for investment through
a USAA discretionary managed account program or other persons or legal entities
that the Fund may approve from time to time.
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 Holdings, a global investment management firm
headquartered in Cleveland, Ohio (the Transaction), on July 1, 2019.
A special shareholder meeting was held on April 18, 2019, at which shareholders
of the Fund approved a new investment advisory agreement between the Trust, on
behalf of the Fund, and Victory Capital, an independent investment management
company. In addition, shareholders of the Fund also elected the following two
new directors to the Board of the Trust to serve upon the closing of the
Transaction: (1) David C. Brown, to
================================================================================
NOTES TO FINANCIAL STATEMENTS | 17
================================================================================
serve as an Interested Trustee; and (2) John C. Walters, to serve as an
Independent Trustee. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL
STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
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 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
================================================================================
18 | USAA MANAGED ALLOCATION FUND
================================================================================
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.
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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 19
================================================================================
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.
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
================================================================================
20 | USAA MANAGED ALLOCATION FUND
================================================================================
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 year ended May 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. 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.
F. 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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 21
================================================================================
(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 year ended May 31, 2019, the Fund paid CAPCO facility fees of $6,000,
which represents 0.9% of the total fees paid to CAPCO by the funds of the
Trusts. The Fund had no borrowings under this agreement during the year ended
May 31, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL
STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
(3) DISTRIBUTIONS
The character of any distributions made during the year from net investment
income or net realized gains is determined in accordance with federal tax
regulations and may differ from those determined in accordance with U.S.
generally accepted accounting principles. Also, due to the timing of
distributions, the fiscal year in which amounts are distributed may differ from
the year that the income or realized gains were recorded by the Fund.
================================================================================
22 | USAA MANAGED ALLOCATION FUND
================================================================================
The tax character of distributions paid during the years ended May 31, 2019, and
2018, was as follows:
2019 2018
-------------------------------------
Ordinary income* $ 7,497,000 $19,156,000
Long-term realized capital gains 5,086,000 -
----------- -----------
Total distributions paid $12,583,000 $19,156,000
=========== ===========
As of May 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 4,477,000
Accumulated capital and other losses (22,756,000)
Unrealized depreciation of investments (17,950,000)
*Includes short-term realized capital gains, if any, which are taxable as
ordinary income.
The difference between book-basis and tax-basis unrealized depreciation of
investments is attributable to the tax deferral of losses on wash sales
adjustments.
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.
For the year ended May 31, 2019, the Fund utilized capital loss carryforwards of
$898,000, to offset capital gains. At May 31, 2019, the Fund had no capital loss
carryforwards, for federal income tax purposes. For the year ended May 31, 2019,
the Fund deferred to June 1, 2019, post October capital losses of $22,756,000.
TAX BASIS OF INVESTMENTS - At May 31, 2019, the aggregate cost of investments
for federal income tax purposes and net unrealized appreciation/(depreciation)
on investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
FUND TAX COST APPRECIATION DEPRECIATION (DEPRECIATION)
-------------------------------------------------------------------------------------------------------
USAA Managed
Allocation Fund $933,370,000 $10,347,000 $(28,297,000) $(17,950,000)
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended May 31, 2019, were $1,190,933,000 and
$1,213,218,000, 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 May 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
--------------------------------------------------------------------------------
$184,159,000 $- $190,205,000
================================================================================
24 | USAA MANAGED ALLOCATION FUND
================================================================================
(6) 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 year ended May 31, 2019, the Fund had no subadviser(s).
The Fund's management fee is accrued daily and paid monthly at an annualized
rate of 0.60% of the Fund's average daily net assets. For the year ended May 31,
2019, the Fund incurred management fees, paid or payable to the Manager, of
$4,591,000. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL
STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
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 0.05% of the Fund's
average daily net assets for the fiscal year. For the year ended May 31, 2019,
the Fund incurred administration and servicing fees, paid or payable to the
Manager, of $383,000.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and legal
services for the benefit of the Fund. The Board has approved the reimbursement
of a portion of these expenses incurred by the Manager. For the year ended
May 31, 2019, the Fund reimbursed the Manager $5,000 for these compliance and
legal services. These expenses are included in the professional fees on the
Fund's Statement of Operations. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
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 0.05% of the Fund's average daily
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
net assets for the fiscal year. For the year ended May 31, 2019, the Fund
incurred transfer agent's fees, paid or payable to SAS, of $383,000. PLEASE
REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL
REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
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. PLEASE REFER
TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT
FOR ADDITIONAL IMPORTANT INFORMATION.
(7) 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. PLEASE REFER TO THE SUBSEQUENT EVENT
NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
(8) 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.
(9) RECENT ACCOUNTING PRONOUNCEMENTS
In August 2018, the SEC adopted amendments to Regulation S-X for investment
companies governing the form and content of financial
================================================================================
26 | USAA MANAGED ALLOCATION FUND
================================================================================
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.
(10) SUBSEQUENT EVENT NOTE
As previously announced, and as discussed in Note 1 to the Financial Statements,
effective July 1, 2019, AMCO, the prior investment adviser to the Fund, and SAS,
the prior transfer agent to the Fund, were acquired by Victory Holdings. PLEASE
SEE THE SUPPLEMENT DATED JULY 1, 2019 TO THE FUND'S PROSPECTUS FOR ADDITIONAL
IMPORTANT INFORMATION.
Effective July 1, 2019, Victory Capital is the new investment adviser and
administrator to the USAA Mutual Funds; SAS was renamed Victory Capital Transfer
Agency, Inc.; Victory Capital Advisers, Inc. is the new distributor to the USAA
Mutual Funds; Citi Fund Services of Ohio, Inc. serves as sub-administrator and
sub-fund accountant for the USAA Mutual Funds; and FIS Investor Services LLC
serve as sub-transfer agent and dividend disbursing agent for the USAA Mutual
Funds. Effective August 5, 2019, Citibank, N.A. is the new custodian for the
USAA Mutual Funds.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2019 permitting the
use of a "manager-of-managers" structure for certain funds. Prior to that date,
the Trust relied on a similar exemptive order granted by the SEC to the Trust
and its affiliated persons. Under a manager of managers structure, the
investment adviser may select (with approval of the Board and without
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
================================================================================
shareholder approval) one or more subadvisers to manage the day-to-day
investment of a fund's assets.
Effective July 1, 2019, under the investment advisory agreement with Victory
Capital, which took effect on July 1, 2019, no performance adjustments will be
made for periods beginning July 1, 2019, through June 30, 2020, and only
performance beginning as of July 1, 2020, and thereafter will be utilized in
calculating performance adjustments through June 30, 2020.
Effective July 1, 2019, the line of credit (as discussed in the Notes to the
Financial Statements in this annual report) among the Trust, with respect to its
Funds, and CAPCO terminated; the Trust, with respect to its Funds, along with
series of Victory Portfolios, Victory Portfolios II and Victory Variable
Insurance Funds, entered into a 364 day committed credit facility and a 364 day
uncommitted, demand credit facility with Citibank, N.A. (Citibank). Each such
credit facility may be renewed if so agreed by the parties. Under the agreement
with Citibank, the Funds may borrow up to $600 million, of which $300 million is
committed and $300 million is uncommitted. Of this amount, $40 million of the
line of credit is reserved for use by the Victory Floating Rate Fund (a series
of Victory Portfolios), with that Fund paying the related commitment fees for
that amount. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption request that might otherwise require the untimely
disposition of securities. Citibank receives an annual commitment fee of 0.15%.
Each Fund pays a pro-rata portion of this commitment fee plus any interest on
amounts borrowed.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2017 (the IFL
Order), permitting the establishment and operation of an Interfund Lending
Facility (the Facility). The Facility allows each Fund to directly lend and
borrow money to or from certain other affiliated Funds relying upon the IFL
Order at rates beneficial to both the borrowing and lending funds. Advances
under the Facility are allowed for temporary or emergency purposes, including
the meeting of redemption requests that are subject to each Fund's borrowing
restrictions. The interfund loan rate is determined, as specified in the IFL
Order, by averaging the current repurchase agreement rate and the current bank
loan rate.
================================================================================
28 | USAA MANAGED ALLOCATION FUND
================================================================================
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
------------------------------------------------------------------------
2019 2018 2017 2016 2015
------------------------------------------------------------------------
Net asset value at
beginning of period $ 12.01 $ 11.61 $ 10.90 $ 11.99 $ 11.99
------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .20 .23 .24 .24(a) .23
Net realized and
unrealized gain (loss) (.92) .46 72 (.97)(a) .00(b)
------------------------------------------------------------------------
Total from investment
operations (.72) .69 .96 (.73)(a) .23
------------------------------------------------------------------------
Less distributions from:
Net investment income (.11) (.29) (.25) (.21) (.23)
Realized capital gains (.08) - - (.15) -
------------------------------------------------------------------------
Total distributions (.19) (.29) (.25) (.36) (.23)
------------------------------------------------------------------------
Net asset value at end
of period $ 11.10 $ 12.01 $ 11.61 $ 10.90 $ 11.99
========================================================================
Total return (%)* (5.92) 5.91 8.94 (6.13) 1.98
Net assets at end
of period (000) $724,519 $808,509 $765,879 $708,592 $1,398,614
Ratios to average
daily net assets:**
Expenses (%)(c) .75 .74 .76 .75 .74
Net investment income (%) 1.72 1.83 2.13 2.09 2.04
Portfolio turnover (%) 156(e) 97(d) 194(e) 90(f) 35(g)
* 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 year ended May 31, 2019, average daily net assets were $764,927,000.
(a) Calculated using average shares.
(b) Represents less than $0.01 per share.
(c) Does not include acquired fund fees, if any.
(d) Reflects a return to normal trading levels after a prior year transition or
allocation shift.
(e) Reflects an increase in trading activity due to asset allocation shifts.
(f) Reflects increased trading activity due to large shareholder redemptions.
(g) Reflects overall decrease in purchases and sales of securities.
================================================================================
FINANCIAL HIGHLIGHTS | 29
================================================================================
EXPENSE EXAMPLE
May 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 December 1, 2018, through
May 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
================================================================================
30 | USAA MANAGED ALLOCATION 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 DECEMBER 1, 2018 -
DECEMBER 1, 2018 MAY 31, 2019 MAY 31, 2019
-----------------------------------------------------------------
Actual $1,000.00 $ 996.40 $3.78
Hypothetical
(5% return before expenses) 1,000.00 1,021.14 3.83
*Expenses are equal to the Fund's annualized expense ratio of 0.76%, which is
net of any reimbursements and expenses paid indirectly, multiplied by the
average account value over the period, multiplied by 182 days/365 days (to
reflect the one-half-year period). The Fund's actual ending account value is
based on its actual total return of (0.36)% for the six-month period of
December 1, 2018, through May 31, 2019.
================================================================================
EXPENSE EXAMPLE | 31
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the (i) new investment
advisory agreement between the Trust and Victory Capital and (ii) new investment
subadvisory agreements between certain subadvisers and Victory Capital, which
became effective on July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO
THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
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.
================================================================================
32 | USAA MANAGED ALLOCATION FUND
================================================================================
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 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
================================================================================
ADVISORY AGREEMENT(S) | 33
================================================================================
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 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.
================================================================================
34 | USAA MANAGED ALLOCATION FUND
================================================================================
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.
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).
================================================================================
ADVISORY AGREEMENT(S) | 35
================================================================================
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.
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.
(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.
================================================================================
36 | USAA MANAGED ALLOCATION FUND
================================================================================
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 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.
================================================================================
ADVISORY AGREEMENT(S) | 37
================================================================================
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 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,
================================================================================
38 | USAA MANAGED ALLOCATION FUND
================================================================================
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.
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.
(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
================================================================================
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 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
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40 | USAA MANAGED ALLOCATION FUND
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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 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.
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ADVISORY AGREEMENT(S) | 41
================================================================================
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 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.
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42 | USAA MANAGED ALLOCATION FUND
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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
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.
================================================================================
ADVISORY AGREEMENT(S) | 43
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND THE MANAGER)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the continuation of the
(i) investment advisory agreement between the Trust and AMCO and (ii) investment
subadvisory agreements between certain subadvisers and AMCO, which were
effective until July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
At an in-person meeting of the Board of Trustees (the Board) held on April 17,
2019, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to the
Fund.(1)
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and the Manager, and were given
the opportunity to ask questions and request additional information from
management. The information provided to the Board included, among other things:
(i) a separate report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance, expenses, and
fees to comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the Manager's
revenues and costs of providing
(1)At an in-person meeting held on January 15, 2019, the Board, including the
Independent Trustees, approved a new investment advisory agreement between
the Trust, on behalf of the Fund, and Victory Capital Management Inc.
("Victory Capital"). Upon the closing of the transaction, on behalf of the
Fund, Victory Capital Holdings, Inc., the parent company of Victory Capital,
the Advisory Agreement between the Trust and the Manager will terminate and
the new investment advisory agreement between the Trust and Victory Capital
will go into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are included in this
annual report.
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44 | USAA MANAGED ALLOCATION FUND
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services to the Fund and compensation paid to affiliates of the Manager; and
(iii) information about the Manager's operations and personnel. Prior to voting,
the Independent Trustees reviewed the proposed continuance of the Advisory
Agreement with management and with experienced independent legal counsel
retained by the Independent Trustees (Independent Counsel) and received
materials from such Independent Counsel discussing the legal standards for their
consideration of the proposed continuation of the Advisory Agreement with
respect to the Fund. The Independent Trustees also reviewed the proposed
continuation of the Advisory Agreement with respect to the Fund in private
sessions with Independent Counsel at which no representatives of management were
present.
At each regularly scheduled meeting of the Board and its committees, the Board
receives and reviews, among other things, information concerning the Fund's
performance and related services provided by the Manager. At the meeting at
which the renewal of the Advisory Agreement is considered, particular focus is
given to information concerning Fund performance, fees and total expenses as
compared to comparable investment companies, and the Manager's profitability
with respect to the Fund. However, the Board noted that the evaluation process
with respect to the Manager is an ongoing one. In this regard, the Board's and
its committees' consideration of the Advisory Agreement included certain
information previously received at such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving the
Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent, and
quality of the services provided by the Manager under the Advisory Agreement,
the Board reviewed information provided by the Manager relating to its
operations and personnel. The Board also took into account its
================================================================================
ADVISORY AGREEMENT(S) | 45
================================================================================
knowledge of the Manager's management and the quality of the performance of the
Manager's duties through Board meetings, discussions, and reports during the
preceding year. The Board considered the fees paid to the Manager and the
services provided to the Fund by the Manager under the Advisory Agreement, as
well as other services provided by the Manager and its affiliates under other
agreements, and the personnel who provide these services. In addition to the
investment advisory services provided to the Fund, the Manager and its
affiliates provide administrative services, shareholder services, oversight of
Fund accounting, marketing services, assistance in meeting legal and regulatory
requirements, and other services necessary for the operation of the Fund and the
Trust. The Board also considered the significant risks assumed by the Manager in
connection with the services provided to the Fund, including investment,
operational, enterprise, litigation, regulatory and compliance risks.
The Board considered the Manager's management style and the performance of the
Manager's duties under the Advisory Agreement. The Board considered the level
and depth of experience of the Manager, including the professional experience
and qualifications of its senior and investment personnel, as well as current
staffing levels. The allocation of the Fund's brokerage, including the Manager's
process for monitoring "best execution," also was considered. The Manager's role
in coordinating the activities of the Fund's other service providers also was
considered. The Board also considered the Manager's risk management processes.
The Board considered the Manager's financial condition and that it had the
financial wherewithal to continue to provide the same scope and high quality of
services under the Advisory Agreement. In reviewing the Advisory Agreement, the
Board focused on the experience, resources, and strengths of the Manager and its
affiliates in managing the Fund, as well as the other funds in the Trust.
The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager and its affiliates, including oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust,
also focused on the quality of the Manager's compliance and administrative
staff.
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46 | USAA MANAGED ALLOCATION FUND
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EXPENSES AND PERFORMANCE - In connection with its consideration of the Advisory
Agreement, the Board evaluated the Fund's advisory fees and total expense ratio
as compared to other open-end investment companies deemed to be comparable to
the Fund as determined by the independent third party in its report. The Fund's
expenses were compared to (i) a group of investment companies chosen by the
independent third party to be comparable to the Fund based upon certain factors,
including fund type (in this case, other funds-of-funds that invest in
unaffiliated exchange-traded funds with front-end sales loads and no sales
loads), comparability of investment objective and classifications, sales load
type, asset size, and expense components (the "expense group") and (ii) a larger
group of investment companies that includes all funds-of-funds with front-end
loads and no loada that invest in unaffiliated exchange traded funds with the
same investment classification/objective as the Fund regardless of asset size,
excluding outliers (the "expense universe"). Among other data, the Board noted
that the Fund's management fee rate - which includes advisory and administrative
services - was below the median of its expense group and its expense universe.
The data indicated that the Fund's total expenses, including underlying fund
expenses, were below the median of its expense group and its expense universe.
The Board took into account the various services provided to the Fund by the
Manager and its affiliates, including the high quality of services received by
the Fund from the Manager. The Board also noted the level and method of
computing the management fee.
In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total return with its Lipper index and with that of other mutual funds deemed to
be in its peer group by the independent third party in its report (the
"performance universe"). The Fund's performance universe consisted of the Fund
and all retail and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or primary channel
of distribution. This comparison indicated that, among other data, the Fund's
performance was lower than
================================================================================
ADVISORY AGREEMENT(S) | 47
================================================================================
the average of its performance universe and its Lipper index for the one-,
three- and five- year periods ended December 31, 2018. The Board also noted that
the Fund's percentile performance ranking was in the bottom 50% of its
performance universe for the one-, three- and five-year periods ended December
31, 2018. The Board took into account management's discussion of the Fund's
performance.
COMPENSATION AND PROFITABILITY - The Board took into consideration the level and
method of computing the Fund's management fee. The information considered by the
Board included operating profit margin information for the Manager's business as
a whole. The Board also received and considered profitability information
related to the management revenues from the Fund. This information included a
review of the methodology used in the allocation of certain costs to the Fund.
The Trustees reviewed the profitability of the Manager's relationship with the
Fund before tax expenses. The Board was also provided with an Investment
Management Profitability Analysis prepared by an independent information
service. In reviewing the overall profitability of the management fee to the
Manager, the Board also considered the fact that affiliates provide shareholder
servicing and administrative services to the Fund for which they receive
compensation. The Board also considered the possible direct and indirect
benefits to the Manager from its relationship with the Trust, including that the
Manager may derive reputational and other benefits from its association with the
Fund. The Trustees recognized that the Manager should be entitled to earn a
reasonable level of profits in exchange for the level of services it provides to
the Fund and the entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussions of
the current advisory fee structure. The Board also considered the effect of the
Fund's growth and size on its performance and fees, noting that if the Fund's
assets increase over time, the Fund may realize other economies of scale if
assets increase proportionally more than some expenses. The Board determined
that the current investment management fee structure was reasonable.
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48 | USAA MANAGED ALLOCATION FUND
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CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) management is appropriately monitoring
the Fund's performance; (iv) the Fund's advisory expenses are reasonable in
relation to those of similar funds and to the services to be provided by the
Manager; and (v) the Manager's and its affiliates' level of profitability from
its relationship with the Fund is reasonable in light of the nature and high
quality of services provided by the Manager and the type of fund. Based on its
conclusions, the Board determined that continuation of the Advisory Agreement
would be in the best interests of the Fund and its shareholders.
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ADVISORY AGREEMENT(S) | 49
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION
TRUSTEES AND OFFICERS OF THE TRUST
--------------------------------------------------------------------------------
As of July 1, 2019, the Board of Trustees (the Board) of the Trust consists of
ten Trustees. These Trustees and the Trust's Officers supervise the business
affairs of the USAA family of funds. The Board is responsible for the general
oversight of the funds' business and for assuring that the funds are managed in
the best interests of each fund's respective shareholders. The Board
periodically reviews the funds' investment performance as well as the quality of
other services provided to the funds and their shareholders by each of the
fund's service providers, including the adviser and its affiliates. Pursuant to
a policy adopted by the Board, the term of office for each Trustee shall be
until the Trustee reaches age 75. The Board may change or grant exceptions from
this policy at any time without shareholder approval. A Trustee may resign or be
removed by a vote of two-thirds of the Trustees before the removal or by the
holders of two-thirds of the outstanding shares of the Trust at any time.
Vacancies on the Board can be filled by the action of a majority of the
Trustees, provided that after filling such vacancy at least two-thirds of the
Trustees have been elected by the shareholders.
Set forth below are the Trustees and Officers of the Trust, their respective
offices and principal occupations during the last five years, length of time
served, and information relating to any other directorships held. As of July 1,
2019, each serves on the Board of the USAA family of funds consisting of one
registered investment company, which offers 47 individual funds. Unless
otherwise indicated, the business address for each is P.O. Box 659430, San
Antonio, TX 78265-9430.
If you would like more information about the funds' Trustees, you may call (800)
235-8396 to request a free copy of the funds' Statement of Additional
Information (SAI).
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50 | USAA MANAGED ALLOCATION FUND
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In connection with the Transaction, the Board of the Trust nominated, and
shareholders of each USAA mutual fund approved, two new Trustees to serve on the
Trust's Board, effective upon the closing of the Transaction. Effective July 1,
2019, David C. Brown serves as an Interested Trustee and John C. Walters serves
as an Independent Trustee. Information about the current Trustees of the Trust
is provided below.
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
DANIEL S. McNAMARA(1, 2, 4, 6, +)
Trustee and Chair of the Board of Trustees
Born: June 1966
Year of Election or Appointment: 2012
Trustee, President, and Vice Chairman, USAA ETF Trust (06/17-06/19); President
of Financial Advice & Solutions Group (FASG), USAA (02/13-present); Director of
USAA Asset Management Company (AMCO), (08/11-present); Director of USAA
Investment Management Company (IMCO) (09/09-present); President, IMCO
(09/09-04/14); President and Director of USAA Shareholder Account Services (SAS)
(10/09-present); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director of FPS (12/13-present);
President and Director of USAA Investment Corporation (ICORP) (03/10-present);
Director of USAA Financial Advisors, Inc. (FAI) (12/13-present). Mr. McNamara
brings to the Board extensive experience in the financial services industry,
including experience as an officer of the Trust.
DAVID C. BROWN(2, 4, 6, 10)
Trustee
Born: May 1972
Year of Election or Appointment: 2019
Chairman and Chief Executive Officer (2013-present), Co-Chief Executive Officer,
(2011-2013), Victory Capital Management Inc.; Chairman and Chief Executive
Officer (2013-present), Victory Capital Holdings, Inc. Mr. Brown brings to the
Board extensive business, finance and leadership skills gained
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 51
================================================================================
and developed through years of experience in the financial services industry,
including his tenure overseeing the strategic direction as CEO of Victory
Capital. These skills, combined with Mr. Brown's extensive knowledge of the
financial services industry and demonstrated success in the development and
distribution of investment strategies and products, enable him to provide
valuable insights to the Board and strategic direction for the Funds. Mr. Brown
serves on the Boards of the Victory Funds family of funds consisting of five
registered investment companies offering approximately 104 mutual funds and 24
ETFs. Mr. Brown is considered an Interested Trustee of the Trust due to his
position with Victory Capital and its affiliated companies.
NON-INTERESTED (INDEPENDENT) TRUSTEES
--------------------------------------------------------------------------------
ROBERT L. MASON, Ph.D.(3, 4, 5, 6, 7)
Trustee
Born: July 1946
Year of Election or Appointment: 1997
Trustee, USAA ETF Trust (06/17-06/19); Adjunct Professor in the Department of
Management Science and Statistics in the College of Business at the University
of Texas at San Antonio (2001-present); Institute Analyst, Southwest Research
Institute (03/02-01/16), which focuses on providing innovative technology,
science, and engineering services to clients around the world and is one of the
oldest independent, nonprofit, applied research and development organizations in
the United States. He was employed at Southwest Research Institute for 40 years.
Dr. Mason brings to the Board particular experience with information technology
matters, statistical analysis, and human resources as well as over 22 years'
experience as a Board member of the USAA family of funds. Dr. Mason holds no
other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
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52 | USAA MANAGED ALLOCATION FUND
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JEFFERSON C. BOYCE(3, 4, 5, 6, 7)
Lead Trustee and Vice Chair
Born: September 1957
Year of Election or Appointment: 2013
Trustee, USAA ETF Trust (06/17-06/19); Senior Managing Director, New York Life
Investments, LLC (1992-2012), an investment manager. Mr. Boyce brings to the
Board experience in financial investment management, and, in particular,
institutional and retail mutual funds, variable annuity products, broker
dealers, and retirement programs, including experience in organizational
development, marketing, product development, and money management as well as
five years' experience as a Board member of the USAA family of funds. Mr. Boyce
is a board member of Westhab, Inc.
DAWN M. HAWLEY(3, 4, 5, 6, 7, 9)
Trustee
Born: February 1954
Year of Election or Appointment: 2014
Trustee, USAA ETF Trust (06/17-06/19); Manager of Finance, Menil Foundation,
Inc. (05/07-06/11), which is a private foundation that oversees the assemblage
of sculptures, prints, drawings, photographs, and rare books. Director of
Financial Planning and Analysis and Chief Financial Officer, AIM Management
Group, Inc. (10/87-01/06). Ms. Hawley brings to the Board experience in
financial investment management and, in particular, institutional and retail
mutual funds, variable annuity products, broker dealers, and retirement
programs, including experience in financial planning, budgeting, accounting
practices, and asset/liability management functions including major acquisitions
and mergers, as well as over five years' experience as a Board member of the
USAA family of funds. Ms. Hawley holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
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TRUSTEES' AND OFFICERS' INFORMATION | 53
================================================================================
PAUL L. McNAMARA(3, 4, 5, 6, 7)
Trustee
Born: July 1948
Year of Election or Appointment: 2012
Trustee, USAA ETF Trust (06/17-06/19); Director, Cantor Opportunistic
Alternatives Fund, LLC (03/10-02/14), which is a closed-end fund of funds by
Cantor Fitzgerald Investment Advisors, LLC. Mr. McNamara retired from Lord
Abbett & Co. LLC, an independent U.S. investment management firm, as an
Executive Member on 09/30/09, a position he held since 10/02. He had been
employed at Lord Abbett since 1996. Mr. McNamara brings to the Board extensive
experience with the financial services industry and, in particular,
institutional and retail mutual fund markets, including experience with mutual
fund marketing, distribution, and risk management, as well as overall experience
with compliance and corporate governance issues. Mr. McNamara also has
experience serving as a fund director as well as seven years' experience as a
Board member of the USAA family of funds. Paul L. McNamara is of no relation to
Daniel S. McNamara. Mr. McNamara holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
RICHARD Y. NEWTON III(3, 4, 5, 6, 7)
Trustee
Born: January 1956
Year of Election or Appointment: 2017
Trustee, USAA ETF Trust (06/17-06/19); Director, Elta North America
(01/18-present), which is a global leader in the design, manufacture and support
of innovative electronic systems in the ground, maritime, airborne, and security
domains for the nation's warfighters, security personnel, and first responders;
Managing Partner, Pioneer Partnership Development Group (12/15-present);
Executive Director, The Union League Club of New York (06/14-11/15); Executive
Vice President, Air Force Association (08/12-05/14); Lieutenant General, United
States Air Force (01/08-06/12). Lieutenant General Newton (Ret.) served 34 years
of active duty in the United States Air Force. Lt. Gen. Newton retired as the
Assistant Vice Chief of Staff and Director of Air Staff at the Headquarters of
the U.S. Air Force where he was responsible for overseeing the administration
and organization
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54 | USAA MANAGED ALLOCATION FUND
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of the Air Staff, which develops policies, plans and programs, establishes
requirements, and provides resources to support the Air Force's mission. Lt.
Gen. Newton is a graduate of the United States Air Force Academy, Webster
University, and The National War College. Lt. Gen. Newton brings to the Board
extensive management and military experience, as well as over two years of
experience as a Board member of the USAA family of funds. Lt. Gen. Newton holds
no other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
BARBARA B. OSTDIEK, Ph.D.(3, 4, 5, 6, 7, 8)
Trustee
Born: March 1964
Year of Election or Appointment: 2008
Trustee, USAA ETF Trust (06/17-06/19); Senior Associate Dean of Degree programs
at Jesse H. Jones Graduate School of Business at Rice University
(07/13-present); Associate Professor of Finance at Jesse H. Jones Graduate
School of Business at Rice University (07/01-present); Academic Director, El
Paso Corporation Finance Center at Jesse H. Jones Graduate School of Business at
Rice University (07/02-06/12). Dr. Ostdiek brings to the Board particular
experience with financial investment management, education, and research as well
as over eleven years' experience as a Board member of the USAA family of funds.
Dr. Ostdiek holds no other directorships of any publicly held corporations or
other investment companies outside the USAA family of funds.
MICHAEL F. REIMHERR(3, 4, 5, 6, 7)
Trustee
Born: August 1945
Year of Election or Appointment: 2000
Trustee, USAA ETF Trust (06/17-06/19); President of Reimherr Business Consulting
performing business valuations of medium to large companies; developing business
plans, budgets, and internal financial reporting; and work with mergers and
acquisitions (05/95-12/17). St. Mary's University Investment Committee
overseeing University Endowment (06/14-present). Mr. Reimherr brings to the
Board particular experience with organizational development, budgeting, finance,
capital markets, and mergers and acquisitions, as well as
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 55
================================================================================
over 19 years' experience as a Board member of the USAA family of funds. Mr.
Reimherr holds no other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
JOHN C. WALTERS(3, 4, 5, 6, 7)
Trustee
Born: February 1962
Year of Election or Appointment: 2019
Retired. Mr. Walters brings significant Board experience including active
involvement with the board of a Fortune 500 company, and a proven record of
leading large, complex financial organizations. He has a demonstrated record of
success in distribution, manufacturing, investment brokerage, and investment
management in both the retail and institutional investment businesses. He has
substantial experience in the investment management business with a demonstrated
ability to develop and drive strategy while managing operational, financial, and
investment risk. Mr. Walters is a board member of Guardian Variable Products
Trust (16 series), Lead Independent Director; Amerilife Holdings LLC, Director;
Stadion Money Management; Director; and University of North Carolina (Chapel
Hill), Member Board of Governors.
(1) Indicates the Trustee is an employee of AMCO or affiliated companies and
is considered an "interested person" under the Investment Company Act of
1940.
(2) Member of Executive Committee.
(3) Member of Audit and Compliance Committee.
(4) Member of Product Management and Distribution Committee.
(5) Member of Corporate Governance Committee.
(6) Member of Investments Committee.
(7) The address for all non-interested trustees is that of the USAA Funds,
P.O. Box 659430, San Antonio, TX 78265-9430.
(8) Dr. Ostdiek has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(9) Ms. Hawley has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(10) Indicates the Trustee is an employee of Victory Capital or affiliated
companies and is considered an "interested person" under the Investment
Company Act of 1940.
(+) Mr. D. McNamara was elected as Chair of the Board in July 2019.
================================================================================
56 | USAA MANAGED ALLOCATION FUND
================================================================================
Effective July 1, 2019, the Board of the Trust appointed certain new officers of
the Trust. The current officers of the Trust are stated below.
OFFICERS
--------------------------------------------------------------------------------
CHRISTOPHER K. DYER
President
Born: February 1962
Year of Appointment: 2019
Director of Mutual Fund Administration, the Victory Capital.
SCOTT A. STAHORSKY
Vice President
Born: July 1969
Year of Appointment: 2019
Manager, Fund Administration, the Adviser (since 2015); Senior Analyst, Fund
Administration, the Victory Capital (prior to 2015).
ALLAN SHAER
Assistant Treasurer
Born: March 1965
Year of Appointment: 2019
Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc.
(since 2016); Vice President, Mutual Fund Administration, JP Morgan Chase
(2011-2016).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 57
================================================================================
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Treasurer, USAA ETF Trust (09/18-06/19); Executive Director, Investment and
Financial Administration, USAA (04/12-present); Assistant Treasurer, USAA ETF
Trust (06/17-09/18); Assistant Treasurer, USAA Mutual Funds Trust (12/13-02/18).
Mr. De Vries also serves as the Funds' Principal Financial Officer.
CAROL D. TREVINO
Assistant Treasurer
Born: October 1965
Year of Appointment: 2018
Assistant Treasurer, USAA ETF Trust (09/18-06/19); Accounting/Financial
Director, USAA (12/13-present); Senior Accounting Analyst, USAA (03/11-12/13).
ERIN G. WAGNER
Secretary
Born: February 1974
Year of Appointment: 2019
Associate General Counsel, the Adviser (since 2013).
CHARLES BOOTH
Anti-Money Laundering Compliance Officer and Identity Theft Officer
Born: April 1960
Year of Appointment: 2019
Director, Regulatory Administration and CCO Support Services, Citi Fund Services
Ohio, Inc. (2007-present).
================================================================================
58 | USAA MANAGED ALLOCATION FUND
================================================================================
AMY CAMPOS
Chief Compliance Officer
Born: August 1976
Year of Appointment: 2019
Chief Compliance Officer, USAA Mutual Funds Trust (7/1/19-present); Executive
Director, Deputy Chief Compliance Officer, USAA Mutual Funds Trust and USAA ETF
Trust (7/17-6/19); Compliance Director, USAA Mutual Funds Trust (2014-7/17);
Senior Compliance Advisor, USAA Mutual Funds Trust (2010-2014).
THE FOLLOWING OFFICERS SERVED IN THEIR RESPECTIVE OFFICE UNTIL JULY 1, 2019, AT
WHICH POINT EACH OF THE FOLLOWING OFFICERS RESIGNED FROM THEIR RESPECTIVE OFFICE
AND NO LONGER SERVE IN THESE POSITIONS.
JOHN C. SPEAR
Vice President
Born: May 1964
Year of Appointment: 2016
Vice President, USAA ETF Trust (06/17-06/19); Senior Vice President and Chief
Investment Officer, USAA Investments, (03/17-present); Vice President and Chief
Investment Officer, USAA Investments, (11/16-03/17); Vice President, Long Term
Fixed Income (05/12-11/16).
JOHN P. TOOHEY
Vice President
Born: March 1968
Year of Appointment: 2009
Vice President, USAA ETF Trust (06/17-06/19); Head of Equities, Equity
Investments, AMCO (01/12-present).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 59
================================================================================
KRISTEN MILLAN
Secretary
Born: April 1983
Year of Appointment: 2019
Secretary, USAA ETF Trust (04/19-06/19); Assistant Secretary, USAA ETF Trust
(01/19-06/19); Senior Attorney, FASG General Counsel, USAA (09/17-06/19);
Attorney, FASG General Counsel, USAA (06/13-09/17). Ms. Millan also serves as
Assistant Secretary of AMCO, ICORP, and SAS.
STEPHANIE A. HIGBY
Chief Compliance Officer
Born: July 1974
Year of Appointment: 2013
Chief Compliance Officer, USAA ETF Trust (06/17-06/19); Assistant Vice
President, Compliance-Investments, USAA (02/18-present); Assistant Vice
President, Compliance Mutual Funds, USAA (12/16-01/18); Executive Director,
Institutional Asset Management Compliance, USAA (04/13-12/16). Ms. Higby also
serves as the Funds' anti-money laundering compliance officer and as the Chief
Compliance Officer for AMCO and IMCO.
================================================================================
60 | USAA MANAGED ALLOCATION FUND
================================================================================
AS OF JULY 1, 2019
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
David C. Brown
John C. Walters
--------------------------------------------------------------------------------
ADMINISTRATOR AND Victory Capital Management Inc.
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND Victory Capital Advisers Inc.
DISTRIBUTOR 4900 Tiedeman Road
Brooklyn, Ohio 44144
--------------------------------------------------------------------------------
TRANSFER AGENT Victory Capital Transfer Agency Inc.
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 USAA AMCO'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) 235-8396; (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) 235-8396; (ii) at usaa.com; and (iii) on the SEC's website at
http://www.sec.gov.
===============================================================================
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----------------------
MUTUAL FUNDS
--------------------------------------------------------------------------------
May 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA Precious Metals and Minerals Fund
FUND INSTITUTIONAL ADVISER
SHARES SHARES SHARES
USAGX UIPMX UPMMX
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) 235-8396 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)
235-8396 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.
Victory Capital means Victory Capital Management Inc., the investment manager of
the USAA Mutual Funds. USAA Mutual Funds are distributed by Victory Capital
Advisers, Inc., a broker dealer registered with FINRA and an affiliate of
Victory Capital. Victory Capital and its affiliates are not affiliated with
United Services Automobile Association or its affiliates. USAA and the USAA
logos are registered trademarks and the USAA Mutual Funds and USAA Investments
logos are trademarks of United Services Automobile Association and are being
used by Victory Capital and its affiliates under license.
================================================================================
PRESIDENT'S MESSAGE
"... LONG-TERM INVESTORS SHOULD NEVER MAKE
DECISIONS IN HASTE. THEY SHOULD MAKE [PHOTO OF BROOKS ENGLEHARDT]
THOUGHTFUL DECISIONS BASED ON THEIR LONG-TERM
OBJECTIVES, TIME HORIZON, AND RISK TOLERANCE."
--------------------------------------------------------------------------------
JULY 2019
As previously announced, USAA, the parent company of USAA Asset Management
Company ("AMCO"), the prior investment adviser to the USAA Mutual Funds,
announced that AMCO would be acquired by Victory Capital Holdings, Inc.
(Victory Holdings), a global investment management firm headquartered in
Cleveland, Ohio (the Transaction). In connection with the Transaction, also as
previous announced, shareholders of each USAA Mutual Fund approved a new
investment advisory agreement with Victory Capital Management Inc. ("Victory
Capital"), an indirect wholly-owned subsidiary of Victory Holdings. The closing
of the Transaction occurred on July 1, 2019; and Victory Capital became the
investment adviser to each USAA Mutual Fund. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION ABOUT CHANGES THAT TOOK EFFECT ON JULY 1, 2019.
Softening global economic conditions and escalating trade tensions rattled
investors during the 12-month reporting period ended May 31, 2019. When the
reporting period began in June 2018, the global economy was expanding across
most regions and countries, led by the U.S. In this environment, stocks
generally advanced. In the fixed income market, U.S. Treasury yields rose, as
the U.S. Federal Reserve ("Fed") continued to tighten monetary policy.
Signs of trouble emerged during the summer of 2018. The U.S. economic expansion
continued, but growth in a number of other economies, including some European
countries and China, showed a weakening trend. By the autumn of 2018, investors'
fears of a global economic slowdown, combined with harsh U.S.-China trade
rhetoric and Brexit-related uncertainty in Europe, sparked a surge in market
volatility. Global stocks dropped, with most of the decline occurring in
December 2018. At the same time, intermediate- and longer-term yields fell, as
investors anticipated a change in Fed monetary policy. Indeed, after having
raised short-term interest rates four times during 2018, Fed officials announced
in January 2019 that they would "pause," retreating from their earlier plan to
raise interest rates in 2019. Stocks rallied in response and by April 2019 had
recovered most of the ground they had lost. In May 2019, ongoing trade tensions
between the United States and China, as well as President Trump administration's
threat to impose tariffs on Mexico, drove a renewed decline in stock prices. In
the fixed income market, concerns that trade disputes would seriously undermine
global
================================================================================
================================================================================
economic growth pushed down intermediate- and longer-term yields, which ended
the reporting period lower than they started. The yield on the 10-year U.S.
Treasury note, which began June 2018 at 2.89%, rose to 3.24% on November 8,
2018--its high point of the period--and fell to 2.13% by May 31, 2019.
In the final months of the reporting period, the Treasury yield curve inverted,
which means that shorter-term yields were higher than longer-term yields. A
yield- curve inversion warrants attention because it has been a reliable
recession indicator. Although recessions do not automatically follow
inversions, a downward-sloped yield curve has preceded every U.S. recession
since the 1960s. That said, the lag between an inversion and a recession has
been inconsistent. At USAA Investments, A Victory Capital Investment Franchise,
we have found that during the past six decades, the time between inversion and
recession has ranged between six months and two years, with no clear pattern to
provide useful guidance. And as I write to you, we see no recession on the
horizon. First, the U.S. economy continues to grow, albeit at a slower pace than
in 2018. Second, the Fed has made clear its commitment to pause its interest
rate hikes, and there is a growing belief in the markets that policymakers may
even cut interest rates in 2019. (In early June 2019, after the end of the
reporting period, Fed Chair Jerome Powell stated that the U.S. central bank was
monitoring the escalation in trade tensions and could potentially respond by
cutting interest rates if U.S. economic conditions deteriorate.)
At USAA Investments, our team of portfolio managers will continue to monitor the
financial markets, economic conditions, the global trade regime, Fed policy, the
direction of longer-term interest rates, and other issues that have the
potential to affect your investments. In the meantime, I would advise you to
ignore media "noise" about such matters. Media "noise" is meant to provoke an
emotional reaction, which can lead to hasty decision-making. In my opinion,
long-term investors should never make decisions in haste. They should make
thoughtful decisions based on their long-term objectives, time horizon, and risk
tolerance. Dollar-cost averaging, in which you invest a set amount on a regular
basis, is a strategy that can help you stay on track. Another effective strategy
is diversification, which can potentially insulate a portfolio from market
turbulence or changes in performance leadership.
If you would like to review your portfolio to confirm that it is properly
aligned with your investment plan, please contact one of our financial advisors.
You might want to make that call before the summer gets fully underway. When we
are traveling and spending time with family and friends, it can be tempting to
put off decisions on financial matters.
From all of us at USAA Investments, A Victory Capital Investment Franchise,
thank you for the opportunity to help you with your investment needs.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGERS' COMMENTARY 1
INVESTMENT OVERVIEW 5
SHAREHOLDER VOTING RESULTS 8
FINANCIAL INFORMATION
Report of Independent Registered
Public Accounting Firm 9
Portfolio of Investments 10
Notes to Portfolio of Investments 14
Financial Statements 16
Notes to Financial Statements 20
Financial Highlights 38
EXPENSE EXAMPLE 41
ADVISORY AGREEMENT(S) 43
TRUSTEES' AND OFFICERS' INFORMATION 61
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) 235-8396.
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.
================================================================================
================================================================================
MANAGERS' COMMENTARY ON THE FUND
--------------------------------------------------------------------------------
[PHOTO OF DAN DENBOW] [PHOTO OF JOHN P. TOOHEY]
DAN DENBOW, CFA JOHN P. TOOHEY, CFA
--------------------------------------------------------------------------------
o PLEASE REVIEW THE PERFORMANCE OF GOLD AND GOLD STOCKS OVER THE 12-MONTH
REPORTING PERIOD ENDED MAY 31, 2019.
The price of gold finished the reporting period essentially unchanged,
although it experienced significant volatility along the way. As has been
the case for most of the last several years, movements in gold were
primarily driven by shifting expectations with respect to the Fed's interest
rate increases trajectory. An outlook for rising U.S. interest rates
generally implies a strengthening dollar and reduced investor interest in
gold, and vice versa. Gold opened the reporting period at $1,299 an ounce
and drifted as low as $1,174 on August 16, 2018, as the Fed indicated a
steady course of interest rate increases. From there it would proceed to
climb as high as $1,341 on February 19, 2019, as the Fed signaled a pause in
its efforts to normalize rates following a sharp decline in investor risk
sentiment over the fourth quarter of 2018. The price of the metal drifted
lower over April and May 2019, before bumping up near the end of the May
2019 as the 10-year Treasury yield dipped on a resurgence of trade tensions
and concerns around the global growth backdrop. As of May 31, 2019, gold was
at $1,306 an ounce, or 0.5% above where it began the reporting period.
Silver prices declined 11.3% over the same period on a weakening industrial
outlook, while platinum prices declined 12.4%.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
Shares of senior mining stocks finished the period modestly lower, notably
outperforming their junior counterparts, which suffered from a lack of
funding for exploration & development given the tepid pricing environment
for gold seen over much of the recent past.
o HOW DID THE USAA PRECIOUS METALS AND MINERALS FUND (THE "FUND") PERFORM
DURING THE REPORTING PERIOD?
The Fund has three share classes: Fund Shares, Institutional Shares, and
Adviser Shares. For the reporting period ended May 31, 2019, the Fund
Shares, Institutional Shares, and Adviser Shares had a total return of
-5.52%, -5.05%, and -5.49%, respectively. This compares to a total return of
3.78% for the S&P 500(R) Index, -2.32% for the NYSE Arca Gold Miners ("GDM")
Index, and -5.41% for the Lipper Precious Metals Equity Funds Index.
Effective July 1, 2019, Victory Capital serves as the Fund's investment
adviser. Prior to July 1, 2019, AMCO served as the Fund's investment
adviser. The investment adviser provides day-to-day discretionary management
for the Fund's assets.
o PLEASE DISCUSS THE PRINCIPAL FACTORS IN THE FUND'S PERFORMANCE FOR THE
REPORTING PERIOD.
At the end of May 2019, the Fund held approximately 85.7% of assets in gold
stocks. The Fund's moderate exposure to junior miners weighed on return
relative to the GDM benchmark as the segment underperformed for the
reporting period. In terms of specific company weightings, the leading
detractor from performance was an underweighting of some of the largest
companies in the GDM benchmark, as the shares of Barrick Gold Corp.,
Randgold Resources Ltd. ADR*, and Newmont Mining Corp. (Newmont) all
outperformed over the reporting period in connection
Refer to page 5 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
*Randgold Resources Ltd. ADR was sold out of the Fund prior to May 31, 2019.
================================================================================
2 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
with merger & acquisition activity. While all three miners were among the
Fund's largest positions, we typically have maintained strategic
underweights to these stocks for risk management purposes given their heavy
weighting in the benchmark. A position in Pan America Silver Corp.
underperformed on political uncertainties around a Guatemalan mine operated
by the recently acquired Tahoe Resources, Inc. ("Tahoe"). We expect the
Tahoe acquisition to be a positive longer-term investment for Pan America
Silver Corp. and have maintained the position.
On the positive side, our patience with respect to a position in Alacer Gold
Corp. added to performance, as the junior miner began to see production from
a new sulphide ore processing plant. An underweight to Goldcorp, Inc.
("Goldcorp"), one of the world's largest miners, also added to performance.
The company saw its shares decline sharply early in the reporting period on
concerns over the impact of a stagnant gold price on its ability to generate
cash flow; subsequently, Goldcorp was acquired by Newmont late in the
reporting period. Finally, an overweight to Australian miners contributed
positively to performance. These companies generally have displayed
sustainable operating advantages relative to most of their North American
counterparts, while also benefiting from a production cost perspective from
weakness in the Australian dollar.
The Fund typically will have modest exposure to silver and platinum stocks.
Over the reporting period, the Fund's silver position declined slightly from
approximately 13.5% to 12.2%. While silver has been trading at historically
cheap levels relative to gold, silver is more sensitive to the economic
cycle than gold and a slowing global economy has pressured the metal. At the
end of the reporting period, the Fund had no direct exposure to platinum
miners. We have maintained nominal-to-zero exposure to platinum mining
stocks for some time, based on the challenging labor environment in South
Africa and reduced demand for platinum driven by the growth in electric
automobile production and a decline in diesel auto sales in Europe.
Gold prices continue to be impacted by expectations around the pace of the
Fed's interest rate increases, with episodes of geopolitical stress
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
playing a lesser role relative to much of past history. To the extent the
Fed shifts into an interest rate cutting mode as a preventive measure
against a trade war-driven recession, we believe there is the potential for
the price of the metal to benefit.
As always, the primary purpose of maintaining exposure to gold should be to
help diversify investor portfolios. Thank you for your continued confidence
and investment in the Fund.
The USAA Precious Metals and Minerals Fund may be subject to stock market
risk and is non-diversified, which means that it may invest a greater
percentage of its assets in a single issuer. Individual stocks will
fluctuate in response to the activities of individual companies, general
market, and economic conditions domestically and abroad. When redeemed or
sold, they may be worth more or less than the original cost. o The USAA
Precious Metals and Minerals Fund is subject to additional risks, such as
currency fluctuation, market illiquidity, political instability, and
increased price volatility. It may be more volatile than a fund that
diversifies across many industries and companies.
================================================================================
4 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/19 o
------------------------------------------------------------------------------------------------------
SINCE INCEPTION
1 YEAR 5 YEAR 10 YEAR INCEPTION* DATE
------------------------------------------------------------------------------------------------------
Fund Shares -5.52% -1.80% -5.63% - -
Institutional Shares -5.05% -1.43% -5.35% - -
Adviser Shares -5.49% -1.85% - -8.88% 8/01/10
S&P 500 Index** (reflects
no deduction for fees,
expenses, or taxes) 3.78% 9.65% 13.93% - -
NYSE Arca Gold Miners
(GDM) Index***
(reflects no deduction for
fees, expenses, or taxes) -2.32% 0.45% -5.76% - -
Lipper Precious Metals
Equity Funds Index****
(reflects no deduction
for taxes) -5.41% -1.39% -4.20% - -
*Since inception returns are shown when a share class has less than 10 years of
performance. Total returns for periods of less than one year are not annualized.
**The unmanaged S&P 500 Index represents the weighted average performance of a
group of 500 widely held, publicly traded stocks.
***The NYSE Arca Gold Miners (GDM) Index is a modified market capitalization
weighted index comprised of publicly traded companies involved primarily in the
mining for gold and silver.
****The unmanaged Lipper Precious Metals Equity Funds Index tracks the total
return performance of the 10 largest funds within the Lipper Precious Metals
Equity Funds category.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
usaa.com.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on net investment income and
realized capital gain distributions, including reinvested distributions, or
redemptions of shares.
================================================================================
INVESTMENT OVERVIEW | 5
================================================================================
o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
NYSE ARCA LIPPER PRECIOUS USAA PRECIOUS
GOLD MINERS METALS EQUITY METALS AND MINERALS
S&P 500 INDEX (GDM) INDEX FUNDS INDEX FUND SHARES
05/31/09 $10,000.00 $10,000.00 $10,000.00 $10,000.00
06/30/09 10,019.84 8,552.00 8,877.51 8,688.00
07/31/09 10,777.71 9,001.56 9,490.90 9,339.00
08/31/09 11,166.83 8,938.77 9,575.59 9,407.00
09/30/09 11,583.52 10,243.02 10,764.64 10,604.00
10/31/09 11,368.33 9,612.21 10,414.83 10,237.00
11/30/09 12,050.25 11,554.84 12,343.16 12,204.00
12/31/09 12,283.00 10,488.94 11,655.58 11,714.00
01/31/10 11,841.14 9,254.08 10,550.70 10,546.00
02/28/10 12,207.94 9,991.13 11,287.61 11,283.00
03/31/10 12,944.63 10,083.69 11,755.78 11,597.00
04/30/10 13,149.00 11,521.72 13,024.22 13,051.00
05/31/10 12,099.04 11,322.60 12,584.38 12,703.00
06/30/10 11,465.68 11,851.66 12,900.04 12,985.00
07/31/10 12,269.00 11,014.81 12,629.83 12,589.00
08/31/10 11,715.12 12,221.44 13,815.75 13,864.00
09/30/10 12,760.63 12,789.64 14,921.86 14,890.00
10/31/10 13,246.17 13,068.57 15,499.21 15,042.00
11/30/10 13,247.86 13,593.98 16,076.87 15,614.00
12/31/10 14,133.24 14,133.87 16,913.86 16,391.00
01/31/11 14,468.22 12,410.10 15,031.36 14,300.00
02/28/11 14,963.89 13,773.14 16,426.16 15,485.00
03/31/11 14,969.84 13,856.10 16,591.27 15,642.00
04/30/11 15,413.17 14,335.45 17,321.35 16,551.00
05/31/11 15,238.70 13,392.55 16,304.63 15,496.00
06/30/11 14,984.69 12,600.54 15,458.12 14,916.00
07/31/11 14,679.98 13,129.77 16,219.72 15,619.00
08/31/11 13,882.53 14,490.53 17,204.56 16,888.00
09/30/11 12,906.61 12,733.99 14,465.98 14,560.00
10/31/11 14,317.21 13,587.27 15,653.02 15,355.00
11/30/11 14,285.57 13,950.63 15,723.61 15,382.00
12/31/11 14,431.70 11,946.90 13,649.60 13,192.00
01/31/12 15,078.46 13,108.14 15,263.60 14,696.00
02/29/12 15,730.49 12,859.59 15,002.30 14,309.00
03/31/12 16,248.16 11,515.37 13,399.86 12,885.00
04/30/12 16,146.18 10,777.62 12,728.27 12,263.00
05/31/12 15,175.78 10,184.16 11,417.98 10,997.00
06/30/12 15,801.05 10,428.62 11,602.49 11,184.00
07/31/12 16,020.52 9,985.83 11,390.69 10,796.00
08/31/12 16,381.34 11,178.35 12,506.10 11,913.00
09/30/12 16,804.66 12,521.04 14,096.81 13,546.00
10/31/12 16,494.38 12,341.18 13,775.86 13,234.00
11/30/12 16,590.06 11,107.82 12,617.26 11,947.00
12/31/12 16,741.28 10,935.54 12,298.61 11,627.00
01/31/13 17,608.39 9,816.61 11,396.73 10,604.00
02/28/13 17,847.42 8,839.59 10,201.74 9,395.00
03/31/13 18,516.76 8,957.72 10,185.68 9,486.00
04/30/13 18,873.51 7,178.62 8,466.91 7,714.00
05/31/13 19,315.00 6,991.21 8,129.78 7,233.00
06/30/13 19,055.62 5,798.86 6,739.11 6,024.00
07/31/13 20,025.25 6,390.51 7,491.38 6,786.00
08/31/13 19,445.29 6,664.86 8,054.14 7,354.00
09/30/13 20,055.08 5,953.05 7,394.24 6,678.00
10/31/13 20,976.97 5,968.08 7,399.35 6,695.00
11/30/13 21,616.22 5,278.17 6,592.73 5,898.00
12/31/13 22,163.46 5,073.56 6,414.66 5,660.00
01/31/14 21,397.18 5,621.18 7,002.72 6,220.00
02/28/14 22,375.97 6,209.93 7,813.10 7,054.00
03/31/14 22,564.06 5,674.80 7,202.39 6,468.00
04/30/14 22,730.85 5,806.97 7,393.68 6,650.00
05/31/14 23,264.44 5,399.90 6,980.61 6,129.00
06/30/14 23,745.02 6,357.28 8,187.13 7,353.00
07/31/14 23,417.56 6,249.96 8,007.28 7,158.00
08/31/14 24,354.38 6,432.55 8,144.12 7,406.00
09/30/14 24,012.84 5,160.55 6,670.56 5,969.00
10/31/14 24,599.36 4,213.27 5,577.99 4,918.00
11/30/14 25,260.95 4,462.89 5,846.12 5,170.00
12/31/14 25,197.31 4,479.98 5,876.55 5,192.00
01/31/15 24,440.91 5,391.90 6,610.32 5,962.00
02/28/15 25,845.57 5,166.51 6,411.03 5,703.00
03/31/15 25,436.83 4,454.77 5,646.51 4,981.00
04/30/15 25,680.85 4,912.35 6,159.83 5,500.00
05/31/15 26,011.09 4,771.96 6,080.04 5,395.00
06/30/15 25,507.57 4,325.80 5,634.14 4,972.00
07/31/15 26,041.98 3,357.84 4,606.91 3,903.00
08/31/15 24,470.77 3,427.96 4,723.17 4,035.00
09/30/15 23,865.28 3,350.40 4,558.59 3,894.00
10/31/15 25,878.41 3,659.72 4,883.48 4,202.00
11/30/15 25,955.37 3,349.19 4,476.09 3,815.00
12/31/15 25,546.00 3,380.04 4,492.35 3,815.00
01/31/16 24,278.31 3,493.26 4,536.13 3,815.00
02/29/16 24,245.55 4,754.81 5,829.99 5,016.00
03/31/16 25,890.32 4,945.71 6,205.33 5,351.00
04/30/16 25,990.69 6,334.41 7,863.05 6,851.00
05/31/16 26,457.44 5,578.89 7,016.45 6,116.00
06/30/16 26,525.99 6,849.38 8,532.32 7,410.00
07/31/16 27,503.97 7,538.47 9,344.97 8,052.00
08/31/16 27,542.58 6,314.30 8,028.31 6,834.00
09/30/16 27,547.79 6,553.83 8,389.13 7,172.00
10/31/16 27,045.29 6,075.70 7,773.57 6,574.00
11/30/16 28,046.91 5,170.07 6,630.39 5,601.00
12/31/16 28,601.29 5,227.62 6,646.20 5,580.00
01/31/17 29,143.75 5,943.54 7,608.44 6,445.00
02/28/17 30,300.93 5,710.69 7,342.69 6,137.00
03/31/17 30,336.27 5,675.49 7,340.74 6,169.00
04/30/17 30,647.83 5,565.31 7,094.92 5,943.00
05/31/17 31,079.13 5,671.22 7,138.87 5,943.00
06/30/17 31,273.11 5,614.17 7,124.72 5,879.00
07/31/17 31,916.17 5,757.22 7,261.57 5,957.00
08/31/17 32,013.87 6,367.71 7,703.02 6,358.00
09/30/17 32,674.26 6,583.45 7,228.30 6,036.00
10/31/17 33,436.72 6,665.61 6,964.52 5,796.00
11/30/17 34,462.22 6,732.73 6,907.38 5,773.00
12/31/17 34,845.39 7,111.65 7,305.80 6,118.00
01/31/18 36,840.43 7,659.04 7,334.43 6,137.00
02/28/18 35,482.60 7,431.03 6,682.31 5,635.00
03/31/18 34,580.87 7,417.50 6,771.61 5,768.00
04/30/18 34,713.56 7,529.58 6,874.45 5,879.00
05/31/18 35,549.53 7,655.70 6,881.18 5,925.00
06/30/18 35,768.33 7,637.12 6,830.66 5,907.00
07/31/18 37,099.40 7,300.55 6,576.58 5,727.00
08/31/18 38,308.30 6,387.39 5,801.36 4,986.00
09/30/18 38,526.35 6,371.07 5,785.28 4,917.00
10/31/18 35,893.06 6,494.00 5,717.13 4,875.00
11/30/18 36,624.51 6,574.41 5,663.71 4,774.00
12/31/18 33,317.65 7,285.39 6,278.47 5,368.00
01/31/19 35,987.59 7,830.48 6,801.12 5,861.00
02/28/19 37,143.08 7,706.62 6,774.80 5,838.00
03/31/19 37,864.84 7,767.66 6,744.36 5,874.00
04/30/19 39,397.97 7,252.41 6,322.25 5,511.00
05/31/19 36,894.30 7,477.25 6,508.93 5,598.00
[END CHART]
Data from 5/31/09 through 5/31/19.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Precious Metals and Minerals Fund to the benchmarks listed above (see page
5 for benchmark definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes, except
that the Lipper Precious Metals Equity Funds Index reflects the fees and
expenses of the underlying funds included in the index.
================================================================================
6 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
o TOP 10 EQUITY HOLDINGS - 5/31/19 o
(% of Net Assets)
Newmont Mining Corp. ....................................................... 5.7%
Agnico Eagle Mines Ltd. .................................................... 5.6%
Barrick Gold Corp. ......................................................... 5.6%
Wheaton Precious Metals Corp. .............................................. 5.2%
Alacer Gold Corp. .......................................................... 3.9%
Northern Star Resources Ltd. ............................................... 3.8%
Kirkland Lake Gold Ltd. .................................................... 3.7%
Newcrest Mining Ltd. ....................................................... 3.6%
OceanaGold Corp. ........................................................... 3.4%
Pan American Silver Corp. .................................................. 3.2%
o PORTFOLIO COMPOSITION* - 5/31/19 o
(% of Net Assets)
[PIE CHART OF PORTFOLIO COMPOSITION]
GOLD 85.7%
SILVER 12.2%
DIVERSIFIED METALS & MINING 1.0%
[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.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
SHAREHOLDER VOTING RESULTS
--------------------------------------------------------------------------------
On April 18, 2019, a special meeting of shareholders was held to vote on two
proposals relating to the series of the USAA Mutual Funds Trust (Trust).
Shareholders of record on February 8, 2019, were entitled to vote on each
proposal shown below. The proposals were approved by the shareholders.
The following proposals and voting results pertain to one or more series within
the Trust. Votes shown for Proposal 1 are for the Fund, a series of the Trust.
Votes shown for Proposal 2 are for all series of the Trust. The effective date
of the Proposals was July 1, 2019.
PROPOSAL 1
To approve a new Investment Advisory Agreement between the Trust, on behalf of
the Fund, and Victory Capital, an independent investment adviser. The new
Investment Advisory Agreement became effective upon the closing of the
Transaction (as defined and discussed in Note 1 to the Financial Statements)
whereby AMCO was acquired by Victory Holdings, the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
--------------------------------------------------------------------------------
18,834,295 2,272,223 1,588,553
PROPOSAL 2
Election of two new trustees to the Trust's Board of Trustees to serve upon the
closing of the Transaction: (1) David C. Brown, to serve as an "interested
trustee" as defined in the Investment Company Act of 1940, as amended (1940
Act); and (2) John C. Walters, to serve as a trustee who is not an "interested
person" as is defined under the 1940 Act ("Independent Trustee").
NUMBER OF SHARES VOTING
---------------------------------------------------------------------------------
TRUSTEES FOR VOTES WITHHELD
---------------------------------------------------------------------------------
David C. Brown 8,299,565,565 820,887,736
John C. Walters 8,317,935,885 802,517,416
================================================================================
8 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA PRECIOUS METALS AND MINERALS
FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Precious Metals and Minerals Fund (the "Fund") (one of the funds constituting
USAA Mutual Funds Trust (the "Trust")), including the portfolio of investments,
as of May 31, 2019, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, the financial highlights for each of the five years in the
period then ended and the related notes (collectively referred to as the
"financial statements"). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Fund (one of the
funds constituting USAA Mutual Funds Trust) at May 31, 2019, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and its financial highlights for each of
the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
BASIS FOR OPINION
These financial statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on the Fund's financial statements based
on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and are required to
be independent with respect to the Trust in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Trust is not required to have,
nor were we engaged to perform, an audit of the Trust's internal control over
financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the Trust's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of May 31, 2019, by correspondence with the custodian. Our audits also
included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
/s/ Ernst & Young LLP
We have served as the auditor of one or more Victory Capital investment
companies since 1995.
San Antonio, Texas
July 23, 2019
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 9
================================================================================
PORTFOLIO OF INVESTMENTS
May 31, 2019
-----------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------
EQUITY SECURITIES (98.9%)
COMMON STOCKS (98.7%)
BASIC MATERIALS (98.7%)
-----------------------
MINING (98.7%)
650,000 Agnico Eagle Mines Ltd.(a) $ 28,334
6,500,000 Alacer Gold Corp.(b) 19,573
2,800,000 Alamos Gold, Inc. "A" 13,673
40,000 AXMIN, Inc., acquired 6/03/2008; cost $159(b),(c),(d) 15
200,000 AXMIN, Inc.(b),(c) 75
4,900,000 B2Gold Corp.(b) 13,377
2,280,000 Barrick Gold Corp. 28,318
6,500,000 Centamin plc 7,406
2,650,000 Centerra Gold, Inc.(b) 15,175
900,000 Cia de Minas Buenaventura S.A. ADR 13,653
1,750,000 Continental Gold, Inc.(a),(b) 3,302
2,350,000 Dacian Gold Ltd.(a),(b),(e) 2,597
810,000 Detour Gold Corp.(b) 7,641
4,800,000 Dundee Precious Metals, Inc.(b) 13,282
1,400,000 Eldorado Gold Corp.(a),(b) 5,208
1,050,000 Endeavour Mining Corp.(b) 15,677
120,000 Franco-Nevada Corp.(a) 9,263
600,000 Fresnillo plc 5,826
2,700,000 Gold Fields Ltd. ADR 12,042
1,920,000 Golden Star Resources Ltd.(a),(b) 6,586
8,566,400 Great Basin Gold Ltd.(b),(c),(f),(g) -
6,500,000 Great Basin Gold Ltd.(b),(c),(f),(g) -
1,700,000 Guyana Goldfields, Inc.(a),(b) 1,132
1,800,000 IAMGOLD Corp.(b) 4,518
1,081,500 Ivanhoe Mines Ltd. "A"(a),(b) 2,609
7,063,636 Kingsgate Consolidated Ltd.(b),(e) 1,250
3,900,000 Kinross Gold Corp.(b) 12,753
550,000 Kirkland Lake Gold Ltd. 19,024
750,000 MAG Silver Corp.(a),(b) 7,336
5,757,622 Nautilus Minerals, Inc., acquired 2/02/2007-4/06/2016;
cost $4,261(a),(b),(c),(d),(f),(g) -
================================================================================
10 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
-----------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------
950,000 Newcrest Mining Ltd.(e) $ 18,036
880,000 Newmont Goldcorp Corp. 29,119
375,000 Northern Star Mining Ltd.(b),(c),(f),(g) -
2,800,000 Northern Star Resources Ltd.(e) 19,031
6,200,000 OceanaGold Corp. 17,110
535,700 Osisko Gold Royalties Ltd.(a) 5,581
463,012 Pan American Silver Corp. 5,025
1,510,000 Pan American Silver Corp. 16,414
18,000,000 Pantoro Ltd.(b),(e) 2,496
11,800,000 Perseus Mining Ltd.(b) 3,841
10,450,000 Perseus Mining Ltd.(b) 3,402
600,000 Pretium Resources, Inc.(a),(b) 5,118
8,598,241 Ramelius Resources Ltd.(a),(b),(e) 5,639
3,500,000 Roxgold, Inc.(b) 2,874
85,000 Royal Gold, Inc. 7,479
4,000,000 Saracen Mineral Holdings Ltd.(b),(e) 8,958
4,300,000 SEMAFO, Inc.(b) 12,885
8,939,040 Silver Lake Resources Ltd.(b),(e) 4,994
1,000,000 SSR Mining, Inc.(b) 11,680
5,193,817 St. Barbara Ltd.(e) 9,244
800,000 Torex Gold Resources, Inc.(b) 7,339
800,000 Westgold Resources Ltd.(a),(b),(e) 973
1,200,000 Wheaton Precious Metals Corp. 26,520
3,700,000 Yamana Gold, Inc. 7,363
--------
Total Basic Materials 500,766
--------
Total Common Stocks (cost: $665,527) 500,766
--------
RIGHTS (0.2%)
BASIC MATERIALS (0.2%)
----------------------
MINING (0.2%)
2,400,000 Pan American Silver Corp.(c),(f),(g) (cost: $1,501) 971
--------
WARRANTS (0.0%)
BASIC MATERIALS (0.0%)
----------------------
MINING (0.0%)
779,738 Westgold Resources Ltd.(a),(b) (cost: $0) 8
--------
Total Equity Securities (cost: $667,028) 501,745
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
-----------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (1.2%)
COMMERCIAL PAPER (1.2%)
$ 871 Amphenol Corp.(h) 2.58% 06/05/2019 $ 871
3,834 Centerpoint Energy, Inc.(h) 2.56 06/03/2019 3,834
1,492 Duke Energy Corp.(h) 2.52 06/05/2019 1,491
--------
Total Commercial Paper (cost: $6,196) 6,196
--------
-----------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
-----------------------------------------------------------------------------------------------------
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.0%)
1,601 State Street Institutional Treasury Money
Market Fund Premier Class 2.30%(i) (cost: $2) 2
--------
Total Money Market Instruments (cost: $6,198) 6,198
--------
SHORT-TERM INVESTMENTS PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (2.0%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (2.0%)
6,714,427 Goldman Sachs Financial Square Government
Fund Institutional Class, 2.30%(i) 6,714
3,263,545 HSBC U.S. Government Money Market Fund Class I, 2.33%(i) 3,264
--------
Total Short-Term Investments Purchased with Cash Collateral from
Securities Loaned (cost: $9,978) 9,978
--------
TOTAL INVESTMENTS (COST: $683,204) $517,921
========
================================================================================
12 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
---------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
---------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
---------------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $427,548 $73,218 $ - $500,766
Rights - - 971 971
Warrants 8 - - 8
Money Market Instruments:
Commercial Paper - 6,196 - 6,196
Government & U.S. Treasury
Money Market Funds 2 - - 2
Short-Term Investments Purchased with
Cash Collateral from Securities Loaned:
Government & U.S. Treasury
Money Market Funds 9,978 - - 9,978
---------------------------------------------------------------------------------------------------------------
Total $437,536 $79,414 $971 $517,921
---------------------------------------------------------------------------------------------------------------
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 May 31, 2019, the Fund had transfers into/out of Level 3 that were under
0.50% of net assets.
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 2019
--------------------------------------------------------------------------------
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 86.5% of net assets at May 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.
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.
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.
================================================================================
14 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
o SPECIFIC NOTES
(a) The security, or a portion thereof, was out on loan as of May 31, 2019.
(b) Non-income-producing security.
(c) Security deemed illiquid by USAA Asset Management Company, under
liquidity guidelines approved by USAA Mutual Funds Trust's Board of
Trustees.
(d) Restricted security that is not registered under the Securities Act of
1933. The aggregate market value of these securities at May 31, 2019,
was $15,000, which represented less than 0.01% of the Fund's net assets.
(e) Securities with a value of $73,218,000, which represented 14.4% of the
Fund's net assets, were classified as Level 2 at May 31, 2019, due to
the prices being adjusted to take into account significant market
movements following the close of local trading.
(f) Security was fair valued at May 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 $971,000, which represented 0.2% of the Fund's net assets.
(g) Security was classified as Level 3.
(h) 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.
(i) Rate represents the money market fund annualized seven-day yield at
May 31, 2019.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 15
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (including
securities on loan of $20,082) (cost of $683,204) $ 517,921
Cash denominated in foreign currencies (identified cost of $118) 117
Receivables:
Capital shares sold 311
USAA Asset Management Company (Note 7) 7
Dividends and interest 317
Other 32
----------
Total assets 518,705
----------
LIABILITIES
Payables:
Upon return of securities loaned 9,978
Capital shares redeemed 268
Accrued management fees 313
Accrued transfer agent's fees 40
Other accrued expenses and payables 827
----------
Total liabilities 11,426
----------
Net assets applicable to capital shares outstanding $ 507,279
==========
NET ASSETS CONSIST OF:
Paid-in capital $1,387,147
Accumulated loss (879,868)
----------
Net assets applicable to capital shares outstanding $ 507,279
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $468,208/38,493 capital shares
outstanding, no par value) $ 12.16
==========
Institutional Shares (net assets of $21,327/1,720 capital shares
outstanding, no par value) $ 12.40
==========
Adviser Shares (net assets of $17,744/1,474 capital shares
outstanding, no par value) $ 12.04
==========
See accompanying notes to financial statements.
================================================================================
16 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $274) $ 4,979
Interest 125
Securities lending (net) 379
--------
Total income 5,483
--------
EXPENSES
Management fees 3,772
Administration and servicing fees:
Fund Shares 706
Institutional Shares 13
Adviser Shares 24
Transfer agent's fees:
Fund Shares 1,498
Institutional Shares 13
Adviser Shares 4
Distribution and service fees (Note 7):
Adviser Shares 40
Custody and accounting fees:
Fund Shares 131
Institutional Shares 4
Adviser Shares 4
Postage:
Fund Shares 80
Adviser Shares 6
Shareholder reporting fees:
Fund Shares 41
Trustees' fees 37
Registration fees:
Fund Shares 18
Institutional Shares 24
Adviser Shares 18
Professional fees 97
Other 20
--------
Total expenses 6,550
--------
================================================================================
FINANCIAL STATEMENTS | 17
================================================================================
Expenses reimbursed:
Institutional Shares $ (25)
--------
Net expenses 6,525
--------
NET INVESTMENT LOSS (1,042)
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
Net realized (loss) on:
Investments (12,261)
Foreign currency transactions (161)
Change in net unrealized appreciation/(depreciation) of:
Investments (17,975)
Foreign capital gains tax 251
Foreign currency translations 64
--------
Net realized and unrealized loss (30,082)
--------
Decrease in net assets resulting from operations $(31,124)
========
See accompanying notes to financial statements.
================================================================================
18 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
-------------------------------------------------------------------------------------------
2019 2018
-------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment loss $ (1,042) $ (2,121)
Net realized loss on investments (12,261) (45,754)
Net realized gain (loss) on foreign currency transactions (161) 35
Change in net unrealized appreciation/(depreciation) of:
Investments (17,975) 45,231
Foreign capital gains tax 251 330
Foreign currency translations 64 (78)
-----------------------
Decrease in net assets resulting from operations (31,124) (2,357)
-----------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares - -
Institutional Shares - -
Adviser Shares - -
-----------------------
Distributions to shareholders - -
-----------------------
NET DECREASE IN NET ASSETS FROM CAPITAL SHARE
TRANSACTIONS (NOTE 6)
Fund Shares (43,682) (42,328)
Institutional Shares 19,072 794
Adviser Shares 1,548 (1,361)
-----------------------
Total net decrease in net assets from capital share
transactions (23,062) (42,895)
-----------------------
Net decrease in net assets (54,186) (45,252)
NET ASSETS
Beginning of year 561,465 606,717
-----------------------
End of year $ 507,279 $561,465
=======================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 19
================================================================================
NOTES TO FINANCIAL STATEMENTS
May 31, 2019
--------------------------------------------------------------------------------
(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 Precious Metals and Minerals Fund (the Fund) qualifies as a registered
investment company under Accounting Standards Codification Topic 946. The
information presented in this annual report pertains only to the Fund, which is
classified as nondiversified under the 1940 Act. The Fund's investment objective
is to seek long-term capital appreciation and to protect the purchasing power of
shareholders' capital against inflation.
The Fund concentrates its investments in equity securities of domestic and
foreign companies engaged in the exploration, mining, or processing of gold and
other precious metals and minerals, such as platinum, silver, and diamonds. As
such, the Fund may be exposed to more risk than portfolios with a broader
industry diversification. As a nondiversified fund, the Fund may invest a
greater percentage of its assets in a single issuer. Because a relatively high
percentage of the Fund's total assets may be invested in the securities of a
single issuer or a limited number of issuers, the securities of the Fund may be
more sensitive to changes in the market value of a single issuer, a limited
number of issuers, or large companies generally. Such a focused investment
strategy may increase the volatility of the Fund's investment results because
this Fund may be more susceptible to risk associated with a single economic,
political, or regulatory event than a diversified fund.
The Fund consists of three classes of shares: Precious Metals and Minerals Fund
Shares (Fund Shares), Precious Metals and Minerals Fund Institutional Shares
(Institutional Shares), and Precious Metals and Minerals Fund Adviser
================================================================================
20 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
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 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 Holdings, a global investment management firm
headquartered in Cleveland, Ohio (the Transaction), on July 1, 2019.
A special shareholder meeting was held on April 18, 2019, at which shareholders
of the Fund approved a new investment advisory agreement between the Trust, on
behalf of the Fund, and Victory Capital, an independent investment management
company. In addition, shareholders of the Fund also elected the following two
new directors to the Board of the Trust to serve upon the closing of the
Transaction: (1) David C. Brown, to serve as an Interested
================================================================================
NOTES TO FINANCIAL STATEMENTS | 21
================================================================================
Trustee; and (2) John C. Walters, to serve as an Independent Trustee. PLEASE
REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL
REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
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 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
================================================================================
22 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
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.
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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
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. 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.
================================================================================
24 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
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 year ended May 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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
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. 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.
================================================================================
26 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
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 year ended May 31, 2019, the Fund paid CAPCO facility fees of $4,000,
which represents 0.6% of the total fees paid to CAPCO by the funds of the
Trusts. The Fund had no borrowings under this agreement during the year ended
May 31, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL
STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
(3) DISTRIBUTIONS
The character of any distributions made during the year from net investment
income or net realized gains is determined in accordance with federal tax
regulations and may differ from those determined in accordance with U.S.
generally accepted accounting principles. Also, due to the timing of
distributions, the fiscal year in which amounts are distributed may differ from
the year that the income or realized gains were recorded by the Fund.
During the current fiscal year, permanent differences between book-basis and
tax-basis accounting for net operating losses, foreign currency, and passive
foreign investment company adjustments resulted in reclassifications to the
Statement of Assets and Liabilities to decrease accumulated loss by $4,551,000
and decrease in paid in capital by $4,551,000. These reclassifications had no
effect on net assets.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
================================================================================
As of May 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Accumulated capital and other losses $(684,826,000)
Unrealized depreciation of investments (195,041,000)
The difference between book-basis and tax-basis unrealized depreciation of
investments is attributable to the tax deferral of losses on passive foreign
investment company, wash sales and mark-to-market adjustments.
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 May 31, 2019, the Fund had net capital loss carryforwards of $684,826,000,
for federal income tax purposes as shown in the table below. It is unlikely that
the Board will authorize a distribution of capital gains realized in the future
until the capital loss carryforwards have been used.
CAPITAL LOSS CARRYFORWARDS
--------------------------------------------
TAX CHARACTER
--------------------------------------------
(NO EXPIRATION) BALANCE
--------------- ------------
Short-Term $ 14,983,000
Long-Term 669,843,000
------------
Total $684,826,000
============
TAX BASIS OF INVESTMENTS - At May 31, 2019, the aggregate cost of investments
for federal income tax purposes and net unrealized appreciation/(depreciation)
on investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
FUND TAX COST APPRECIATION DEPRECIATION (DEPRECIATION)
-------------------------------------------------------------------------------------------
USAA Precious
Metals And
Minerals Fund $712,252,000 $100,312,000 $(294,643,000) $(194,331,000)
================================================================================
28 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended May 31, 2019, were $37,379,000 and
$64,338,000, 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 May 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
-------------------------------------------------------------------------------------
$20,082,000 $10,934,000 $9,978,000
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
(6) CAPITAL SHARE TRANSACTIONS
At May 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:
YEAR ENDED YEAR ENDED
MAY 31, 2019 MAY 31, 2018
-----------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------
FUND SHARES:
Shares sold 4,375 $ 50,928 4,942 $ 63,796
Shares issued from
reinvested dividends - - - -
Shares redeemed (7,930) (94,610) (8,177) (106,124)
---------------------------------------------
Net decrease from capital
share transactions (3,555) $(43,682) (3,235) $ (42,328)
=============================================
INSTITUTIONAL SHARES:
Shares sold 2,582 $ 31,991 540 $ 7,202
Shares issued from
reinvested dividends - - - -
Shares redeemed (1,140) (12,919) (483) (6,408)
---------------------------------------------
Net increase from
capital share transactions 1,442 $ 19,072 57 $ 794
=============================================
ADVISER SHARES:
Shares sold 531 $ 6,048 397 $ 5,038
Shares issued from reinvested
dividends - - - -
Shares redeemed* (382) (4,500) (501) (6,399)
---------------------------------------------
Net increase (decrease) from
capital share transactions 149 $ 1,548 (104) $ (1,361)
=============================================
*Net of redemption fees, if any.
(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
================================================================================
30 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
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 year ended May 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 0.75% 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 Precious Metals Equity Funds Index.
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 Precious Metals Equity Funds Index over that period, even
if the class had overall negative returns during the performance period.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 31
================================================================================
For the year ended May 31, 2019, the Fund incurred management fees, paid or
payable to the Manager, of $3,772,000, which included a performance adjustment
for the Fund Shares and Institutional Shares of $20,000 and $1,000,
respectively. For the Fund Shares and Institutional Shares, the performance
adjustments were less than 0.01% and 0.01%, respectively. The Adviser Shares did
not incur any performance adjustment. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE
TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
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 year ended May 31, 2019,
the Fund Shares, Institutional Shares, and Adviser Shares incurred
administration and servicing fees, paid or payable to the Manager, of $706,000,
$13,000, and $24,000, 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 year ended May
31, 2019, the Fund reimbursed the Manager $3,000 for these compliance and legal
services. These expenses are included in the professional fees on the Fund's
Statement of Operations. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
EXPENSE LIMITATION - Effective June 6, 2018, the Manager agreed, through
September 30, 2019, to limit the total annual operating expenses of the
Institutional Shares to 1.00% 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 September 30, 2019 without approval of the Board, and may be changed or
terminated by the Manager at any time after that date. For
================================================================================
32 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
the year ended May 31, 2019, the Institutional Shares incurred reimbursable
expenses of $25,000, 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 $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 year ended May 31, 2019, the Fund Shares,
Institutional Shares, and Adviser Shares incurred transfer agent's fees, paid or
payable to SAS, of $1,498,000, $13,000, and $4,000, respectively. PLEASE REFER
TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT
FOR ADDITIONAL IMPORTANT INFORMATION.
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 year ended May 31, 2019, the Adviser
Shares incurred distribution and service (12b-1) fees of $40,000.
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. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE
TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 33
================================================================================
(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 May 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 0.2
Target Retirement Income 0.2
Target Retirement 2020 0.3
Target Retirement 2030 0.6
Target Retirement 2040 0.7
Target Retirement 2050 0.4
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 May 31, 2019, USAA and its affiliates owned 130,000
Adviser Shares, which represents 8.8% of the Adviser 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. PLEASE REFER TO THE SUBSEQUENT EVENT
NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
(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
================================================================================
34 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
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.
(10) RECENT ACCOUNTING PRONOUNCEMENTS
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.
(11) SUBSEQUENT EVENT NOTE
As previously announced, and as discussed in Note 1 to the Financial Statements,
effective July 1, 2019, AMCO, the prior investment adviser to the Fund, and SAS,
the prior transfer agent to the Fund, were acquired by Victory Holdings. PLEASE
SEE THE SUPPLEMENT DATED JULY 1, 2019 TO THE FUND'S PROSPECTUS FOR ADDITIONAL
IMPORTANT INFORMATION.
Effective July 1, 2019, Victory Capital is the new investment adviser and
administrator to the USAA Mutual Funds; SAS was renamed Victory Capital Transfer
Agency, Inc.; Victory Capital Advisers, Inc. is the new
================================================================================
NOTES TO FINANCIAL STATEMENTS | 35
================================================================================
distributor to the USAA Mutual Funds; Citi Fund Services of Ohio, Inc. serves
as sub-administrator and sub-fund accountant for the USAA Mutual Funds; and FIS
Investor Services LLC serve as sub-transfer agent and dividend disbursing agent
for the USAA Mutual Funds. Effective August 5, 2019, Citibank, N.A. is the new
custodian for the USAA Mutual Funds.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2019 permitting the
use of a "manager-of-managers" structure for certain funds. Prior to that date,
the Trust relied on a similar exemptive order granted by the SEC to the Trust
and its affiliated persons. Under a manager of managers structure, the
investment adviser may select (with approval of the Board and without
shareholder approval) one or more subadvisers to manage the day-to-day
investment of a fund's assets.
Effective July 1, 2019, under the investment advisory agreement with Victory
Capital, which took effect on July 1, 2019, no performance adjustments will be
made for periods beginning July 1, 2019, through June 30, 2020, and only
performance beginning as of July 1, 2020, and thereafter will be utilized in
calculating performance adjustments through June 30, 2020.
Effective July 1, 2019, the line of credit (as discussed in the Notes to the
Financial Statements in this annual report) among the Trust, with respect to its
Funds, and CAPCO terminated; the Trust, with respect to its Funds, along with
series of Victory Portfolios, Victory Portfolios II and Victory Variable
Insurance Funds, entered into a 364 day committed credit facility and a 364 day
uncommitted, demand credit facility with Citibank, N.A. (Citibank). Each such
credit facility may be renewed if so agreed by the parties. Under the agreement
with Citibank, the Funds may borrow up to $600 million, of which $300 million is
committed and $300 million is uncommitted. Of this amount, $40 million of the
line of credit is reserved for use by the Victory Floating Rate Fund (a series
of Victory Portfolios), with that Fund paying the related commitment fees for
that amount. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption request that might otherwise require the untimely
disposition of securities. Citibank receives an annual commitment fee of 0.15%.
Each Fund pays a pro-rata portion of this commitment fee plus any interest on
amounts borrowed.
================================================================================
36 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2017 (the IFL
Order), permitting the establishment and operation of an Interfund Lending
Facility (the Facility). The Facility allows each Fund to directly lend and
borrow money to or from certain other affiliated Funds relying upon the IFL
Order at rates beneficial to both the borrowing and lending funds. Advances
under the Facility are allowed for temporary or emergency purposes, including
the meeting of redemption requests that are subject to each Fund's borrowing
restrictions. The interfund loan rate is determined, as specified in the IFL
Order, by averaging the current repurchase agreement rate and the current bank
loan rate.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 37
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
----------------------------------------------------------------------------
2019 2018 2017 2016 2015
----------------------------------------------------------------------------
Net asset value at
beginning of period $ 12.87 $ 12.93 $ 13.90 $ 12.29 $ 14.12
----------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment
income (loss) (.03)(a) (.05)(a) .14 .08 (.06)(a)
Net realized and
unrealized gain (loss) (.68)(a) (.01)(a) (.60) 1.53(b) (1.61)(a)
----------------------------------------------------------------------------
Total from investment
operations (.71)(a) (.06)(a) (.46) 1.61 (1.67)(a)
----------------------------------------------------------------------------
Less distributions from:
Net investment income - - (.51) - (.16)
----------------------------------------------------------------------------
Net asset value at end
of period $ 12.16 $ 12.87 $ 12.93 $ 13.90 $ 12.29
============================================================================
Total return (%)* (5.52) (.46) (2.68) 13.10(b) (11.77)
Net assets at end
of period (000) $468,208 $540,952 $585,515 $647,140 $573,456
Ratios to average
daily net assets:**
Expenses (%)(c) 1.31 1.23 1.22 1.33 1.25
Net investment
income (loss) (%) (.22) (.36) .02 (.31) (.46)
Portfolio turnover (%) 7 13 14 17 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 year ended May 31, 2019, average daily net assets were $470,901,000.
(a) Calculated using average shares. For the year ended May 31, 2019, average
shares were 39,926,000.
(b) During the year ended May 31, 2016, the Manager reimbursed the Fund Shares
$50,000 for a loss incurred from the sale of a security that exceeded the
amount allowed to be held of that type of security under the Fund's
investment restrictions. The effect of this reimbursement on the Fund
Shares' net realized loss and total return was less than $0.01/0.01% per
share.
(c) Does not include acquired fund fees, if any.
================================================================================
38 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
---------------------------------------------------------------------------
2019 2018 2017 2016 2015
---------------------------------------------------------------------------
Net asset value at
beginning of period $ 13.06 $13.07 $13.98 $ 12.34 $ 14.17
---------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment
income (loss)(a) .01 (.01) .07 .01 (.03)
Net realized and
unrealized gain (loss)(a) (.67) 0.00(b) (.47) 1.63(c) (1.60)
---------------------------------------------------------------------------
Total from investment
operations(a) (.66) (.01) (.40) 1.64 (1.63)
---------------------------------------------------------------------------
Less distributions from:
Net investment income - - (.51) - (.20)
---------------------------------------------------------------------------
Net asset value at end
of period $ 12.40 $13.06 $13.07 $ 13.98 $ 12.34
===========================================================================
Total return (%)* (5.05) (.08) (2.23) 13.29(c) (11.46)
Net assets at end
of period (000) $21,327 $3,632 $2,893 $14,050 $161,591
Ratios to average daily
net assets:**
Expenses (%)(d) 1.00(e) .89 .76 .99 .99
Expenses, excluding
reimbursements (%)(d) 1.19 - - - -
Net investment
income (loss) (%) .12 (.07) .46 .13 (.20)
Portfolio turnover (%) 7 13 14 17 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 year ended May 31, 2019, average daily net assets were $13,211,000.
(a) Calculated using average shares. For the year ended May 31, 2019, average
shares were 1,091,000.
(b) Represents less than $0.01 per share.
(c) During the year ended May 31, 2016, the Manager reimbursed the Institutional
Shares $1,000 for a loss incurred from the sale of a security that exceeded
the amount allowed to be held of that type of security under the Fund's
investment restrictions. The effect of this reimbursement on the
Institutional Shares' net realized loss and total return was less than
$0.01/0.01% per share.
(d) Does not include acquired fund fees, if any.
(e) Effective June 6, 2018, the Manager has voluntarily agreed to limit the
annual expenses of the Institutional Shares to 1.00% of the Institutional
Shares' average daily net assets.
================================================================================
FINANCIAL HIGHLIGHTS | 39
================================================================================
ADVISER SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
---------------------------------------------------------------------------
2019 2018 2017 2016 2015
---------------------------------------------------------------------------
Net asset value at
beginning of period $ 12.74 $ 12.82 $ 13.79 $ 12.20 $ 14.01
---------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment
income (loss) (.03)(a) .16 .04 (.04)(a) (.08)(a)
Net realized and
unrealized gain (loss) (.67)(a) (.24) (.50) 1.63(a),(b) (1.58)(a)
---------------------------------------------------------------------------
Total from investment
operations (.70)(a) (.08) (.46) 1.59(a) (1.66)(a)
---------------------------------------------------------------------------
Less distributions from:
Net investment income - - (.51) - (.15)
---------------------------------------------------------------------------
Redemption fees added to
beneficial interests - .00(c) .00(c) .00(c) .00(c)
---------------------------------------------------------------------------
Net asset value at end
of period $ 12.04 $ 12.74 $ 12.82 $ 13.79 $ 12.20
===========================================================================
Total return (%)* (5.49) (.62) (2.68) 13.03(b) (11.83)
Net assets at end
of period (000) $17,744 $16,881 $18,309 $16,873 $12,357
Ratios to average daily
net assets:**
Expenses (%)(d) 1.38 1.30 1.30 1.37 1.39(e)
Expenses, excluding
reimbursements (%)(d) 1.38 1.30 1.30 1.37 1.39
Net investment income (%) (.27) (.43) (.04) (.36) (.60)
Portfolio turnover (%) 7 13 14 17 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 year ended May 31, 2019, average daily net assets were $16,186,000.
(a) Calculated using average shares. For the year ended May 31, 2019, average
shares were 1,388,000.
(b) During the year ended May 31, 2016, the Manager reimbursed the Adviser
Shares $1,000 for a loss incurred from the sale of a security that exceeded
the amount allowed to be held of that type of security under the Fund's
investment restrictions. The effect of this reimbursement on the Adviser
Shares' net realized loss and total return was less than $0.01/0.01% per
share.
(c) Represents less than $0.01 per share.
(d) Does not include acquired fund fees, if any.
(e) Prior to October 1, 2014, the Manager voluntarily agreed to limit the annual
expenses of the Adviser Shares to 1.45% of the Adviser Shares' average daily
net assets.
================================================================================
40 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
EXPENSE EXAMPLE
May 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 December 1, 2018, through May
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 | 41
================================================================================
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 DECEMBER 1, 2018-
DECEMBER 1, 2018 MAY 31, 2019 MAY 31, 2019
------------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,172.60 $6.99
Hypothetical
(5% return before expenses) 1,000.00 1,018.50 6.49
INSTITUTIONAL SHARES
Actual 1,000.00 1,174.20 5.47
Hypothetical
(5% return before expenses) 1,000.00 1,019.90 5.09
ADVISER SHARES
Actual 1,000.00 1,172.30 7.58
Hypothetical
(5% return before expenses) 1,000.00 1,017.95 7.04
*Expenses are equal to the annualized expense ratio of 1.29% for Fund Shares,
1.01% for Institutional Shares, and 1.40% for Adviser Shares, which are net of
any reimbursements and expenses paid indirectly, multiplied by the average
account value over the period, multiplied by 182 days/365 days (to reflect the
one-half-year period). The Fund's actual ending account values are based on its
actual total returns of 17.26% for Fund Shares, 17.42% for Institutional
Shares, and 17.23% for Adviser Shares for the six-month period of December 1,
2018, through May 31, 2019.
================================================================================
42 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the (i) new investment
advisory agreement between the Trust and Victory Capital and (ii) new investment
subadvisory agreements between certain subadvisers and Victory Capital, which
became effective on July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO
THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
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.
================================================================================
ADVISORY AGREEMENT(S) | 43
================================================================================
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 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
================================================================================
44 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
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 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.
================================================================================
ADVISORY AGREEMENT(S) | 45
================================================================================
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.
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).
================================================================================
46 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
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.
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.
(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) | 47
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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 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.
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48 | USAA PRECIOUS METALS AND MINERALS FUND
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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 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,
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ADVISORY AGREEMENT(S) | 49
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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.
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.
(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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50 | USAA PRECIOUS METALS AND MINERALS FUND
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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 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
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ADVISORY AGREEMENT(S) | 51
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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 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.
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52 | USAA PRECIOUS METALS AND MINERALS FUND
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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 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.
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ADVISORY AGREEMENT(S) | 53
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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
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.
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54 | USAA PRECIOUS METALS AND MINERALS FUND
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND THE MANAGER)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the continuation of the (i)
investment advisory agreement between the Trust and AMCO and (ii) investment
subadvisory agreements between certain subadvisers and AMCO, which were
effective until July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
At an in-person meeting of the Board of Trustees (the Board) held on April 17,
2019, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to the
Fund.(1)
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and the Manager, and were given
the opportunity to ask questions and request additional information from
management. The information provided to the Board included, among other things:
(i) a separate report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance, expenses, and
fees to comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the Manager's
revenues and costs of providing services to the Fund and compensation paid to
affiliates of the Manager;
(1)At an in-person meeting held on January 15, 2019, the Board, including the
Independent Trustees, approved a new investment advisory agreement between
the Trust, on behalf of the Fund, and Victory Capital Management Inc.
("Victory Capital"). Upon the closing of the transaction, on behalf of the
Fund, Victory Capital Holdings, Inc., the parent company of Victory Capital,
the Advisory Agreement between the Trust and the Manager will terminate and
the new investment advisory agreement between the Trust and Victory Capital
will go into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are included in this
annual report.
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ADVISORY AGREEMENT(S) | 55
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and (iii) information about the Manager's operations and personnel. Prior to
voting, the Independent Trustees reviewed the proposed continuance of the
Advisory Agreement with management and with experienced independent legal
counsel retained by the Independent Trustees (Independent Counsel) and received
materials from such Independent Counsel discussing the legal standards for their
consideration of the proposed continuation of the Advisory Agreement with
respect to the Fund. The Independent Trustees also reviewed the proposed
continuation of the Advisory Agreement with respect to the Fund in private
sessions with Independent Counsel at which no representatives of management were
present.
At each regularly scheduled meeting of the Board and its committees, the Board
receives and reviews, among other things, information concerning the Fund's
performance and related services provided by the Manager. At the meeting at
which the renewal of the Advisory Agreement is considered, particular focus is
given to information concerning Fund performance, fees and total expenses as
compared to comparable investment companies, and the Manager's profitability
with respect to the Fund. However, the Board noted that the evaluation process
with respect to the Manager is an ongoing one. In this regard, the Board's and
its committees' consideration of the Advisory Agreement included certain
information previously received at such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving the
Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent, and
quality of the services provided by the Manager under the Advisory Agreement,
the Board reviewed information provided by the Manager relating to its
operations and personnel. The Board also took into account its knowledge of the
Manager's management and the quality of the performance of the Manager's duties
through Board meetings, discussions,
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56 | USAA PRECIOUS METALS AND MINERALS FUND
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and reports during the preceding year. The Board considered the fees paid to the
Manager and the services provided to the Fund by the Manager under the Advisory
Agreement, as well as other services provided by the Manager and its affiliates
under other agreements, and the personnel who provide these services. In
addition to the investment advisory services provided to the Fund, the Manager
and its affiliates provide administrative services, shareholder services,
oversight of Fund accounting, marketing services, assistance in meeting legal
and regulatory requirements, and other services necessary for the operation of
the Fund and the Trust. The Board also considered the significant risks assumed
by the Manager in connection with the services provided to the Fund, including
investment, operational, enterprise, litigation, regulatory and compliance
risks.
The Board considered the Manager's management style and the performance of the
Manager's duties under the Advisory Agreement. The Board considered the level
and depth of experience of the Manager, including the professional experience
and qualifications of its senior and investment personnel, as well as current
staffing levels. The allocation of the Fund's brokerage, including the Manager's
process for monitoring "best execution," also was considered. The Manager's role
in coordinating the activities of the Fund's other service providers also was
considered. The Board also considered the Manager's risk management processes.
The Board considered the Manager's financial condition and that it had the
financial where withal to continue to provide the same scope and high quality of
services under the Advisory Agreement. In reviewing the Advisory Agreement, the
Board focused on the experience, resources, and strengths of the Manager and its
affiliates in managing the Fund, as well as the other funds in the Trust.
The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager and its affiliates, including oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Manager and its
affiliates provide compliance and administrative services to the Fund. The
Trustees, guided also by information obtained from their experiences as trustees
of the Trust, also focused on the quality of the Manager's compliance and
administrative staff.
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ADVISORY AGREEMENT(S) | 57
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EXPENSES AND PERFORMANCE - In connection with its consideration of the Advisory
Agreement, the Board evaluated the advisory fees and total expense ratio of the
Fund as compared to other open-end investment companies deemed to be comparable
to the Fund as determined by the independent third party in its report. The
expenses of the Fund were compared to (i) a group of investment companies chosen
by the independent third party to be comparable to the Fund based upon certain
factors, including fund type, comparability of investment objective and
classification, sales load type (in this case, retail investment companies with
no sales loads), asset size, and expense components (the "expense group") and
(ii) a larger group of investment companies that includes all no load retail
open-end investment companies with the same investment classification/objective
as the Fund regardless of asset size, excluding outliers (the "expense
universe"). Among other data, the Board noted that the Fund's management fee
rate - which includes advisory and administrative services and the effects of
any performance adjustment - was below the median of its expense group and its
expense universe. The data indicated that the Fund's total expenses were below
the median of its expense group and its expense universe. The Board took into
account the various services provided to the Fund by the Manager and its
affiliates, including the high quality of services received by the Fund from the
Manager. The Board also noted the level and method of computing the Fund's
management fee, including any performance adjustment to such fee.
In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total return with its Lipper index and with that of other mutual funds deemed to
be in its peer group by the independent third party in its report (the
"performance universe"). The Fund's performance universe consisted of the Fund
and all retail and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or primary channel
of distribution. This comparison indicated that, among other data, the Fund's
performance was above the average of its performance universe and its Lipper
index for the one-year period ended
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58 | USAA PRECIOUS METALS AND MINERALS FUND
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December 31, 2018, was lower than the average of its performance universe and
above its Lipper index for the three-year period ended December 31, 2018, and
was lower than its performance universe and its Lipper index for the five- and
ten-year periods ended December 31, 2018. The Board also noted that the Fund's
percentile performance ranking was in the top 25% of its performance universe
for the one-year period ended December 31, 2018, and was in the bottom 50% of
its performance universe for the three-, five- and ten-year periods ended
December 31, 2018. The Board took into account management's discussion of the
Fund's performance, noting certain differences in the Fund's investment strategy
with the investment strategies of the funds in the performance universe.
COMPENSATION AND PROFITABILITY - The Board took into consideration the level and
method of computing the management fee. The information considered by the Board
included operating profit margin information for the Manager's business as a
whole. The Board also received and considered profitability information related
to the management revenues from the Fund. This information included a review of
the methodology used in the allocation of certain costs to the Fund. The
Trustees reviewed the profitability of the Manager's relationship with the Fund
before tax expenses. The Board was also provided with an Investment Management
Profitability Analysis prepared by an independent information service. In
reviewing the overall profitability of the management fee to the Manager, the
Board also considered the fact that affiliates provide shareholder servicing and
administrative services to the Fund for which they receive compensation. The
Board also considered the possible direct and indirect benefits to the Manager
from its relationship with the Trust, including that the Manager may derive
reputational and other benefits from its association with the Fund. The Trustees
recognized that the Manager should be entitled to earn a reasonable level of
profits in exchange for the level of services it provides to the Fund and the
entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussions of
the current advisory fee structure. The Board
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ADVISORY AGREEMENT(S) | 59
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also considered the effect of the Fund's growth and size on its performance and
fees, noting that if the Fund's assets increase over time, the Fund may realize
other economies of scale if assets increase proportionally more than some
expenses. The Board determined that the current investment management fee
structure was reasonable.
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) the overall performance of the Fund is
reasonable in relation to the performance of funds with similar investment
objectives and to relevant indices; (iv) the Fund's advisory expenses are
reasonable in relation to those of similar funds and to the services to be
provided by the Manager; and (v) the Manager and its affiliates' level of
profitability from their relationship with the Fund is reasonable in light of
the nature and high quality of services provided by the Manager and the type of
fund. Based on its conclusions, the Board determined that continuation of the
Advisory Agreement would be in the best interests of the Fund and its
shareholders.
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60 | USAA PRECIOUS METALS AND MINERALS FUND
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TRUSTEES' AND OFFICERS' INFORMATION
TRUSTEES AND OFFICERS OF THE TRUST
--------------------------------------------------------------------------------
As of July 1, 2019, the Board of Trustees (the Board) of the Trust consists of
ten Trustees. These Trustees and the Trust's Officers supervise the business
affairs of the USAA family of funds. The Board is responsible for the general
oversight of the funds' business and for assuring that the funds are managed in
the best interests of each fund's respective shareholders. The Board
periodically reviews the funds' investment performance as well as the quality of
other services provided to the funds and their shareholders by each of the
fund's service providers, including the adviser and its affiliates. Pursuant to
a policy adopted by the Board, the term of office for each Trustee shall be
until the Trustee reaches age 75. The Board may change or grant exceptions from
this policy at any time without shareholder approval. A Trustee may resign or be
removed by a vote of two-thirds of the Trustees before the removal or by the
holders of two-thirds of the outstanding shares of the Trust at any time.
Vacancies on the Board can be filled by the action of a majority of the
Trustees, provided that after filling such vacancy at least two-thirds of the
Trustees have been elected by the shareholders.
Set forth below are the Trustees and Officers of the Trust, their respective
offices and principal occupations during the last five years, length of time
served, and information relating to any other directorships held. As of July 1,
2019, each serves on the Board of the USAA family of funds consisting of one
registered investment company, which offers 47 individual funds. Unless
otherwise indicated, the business address for each is P.O. Box 659430, San
Antonio, TX 78265-9430.
If you would like more information about the funds' Trustees, you may call (800)
235-8396 to request a free copy of the funds' Statement of Additional
Information (SAI).
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TRUSTEES' AND OFFICERS' INFORMATION | 61
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In connection with the Transaction, the Board of the Trust nominated, and
shareholders of each USAA mutual fund approved, two new Trustees to serve on the
Trust's Board, effective upon the closing of the Transaction. Effective July 1,
2019, David C. Brown serves as an Interested Trustee and John C. Walters serves
as an Independent Trustee. Information about the current Trustees of the Trust
is provided below.
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
DANIEL S. McNAMARA(1, 2, 4, 6, +)
Trustee and Chair of the Board of Trustees
Born: June 1966
Year of Election or Appointment: 2012
Trustee, President, and Vice Chairman, USAA ETF Trust (06/17-06/19); President
of Financial Advice & Solutions Group (FASG), USAA (02/13-present); Director of
USAA Asset Management Company (AMCO), (08/11-present); Director of USAA
Investment Management Company (IMCO) (09/09-present); President, IMCO
(09/09-04/14); President and Director of USAA Shareholder Account Services (SAS)
(10/09-present); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director of FPS (12/13-present);
President and Director of USAA Investment Corporation (ICORP) (03/10-present);
Director of USAA Financial Advisors, Inc. (FAI) (12/13-present). Mr. McNamara
brings to the Board extensive experience in the financial services industry,
including experience as an officer of the Trust.
DAVID C. BROWN(2, 4, 6, 10)
Trustee
Born: May 1972
Year of Election or Appointment: 2019
Chairman and Chief Executive Officer (2013-present), Co-Chief Executive Officer,
(2011-2013), Victory Capital Management Inc.; Chairman and Chief Executive
Officer (2013-present), Victory Capital Holdings, Inc. Mr. Brown brings to the
Board extensive business, finance and leadership skills gained
================================================================================
62 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
and developed through years of experience in the financial services industry,
including his tenure overseeing the strategic direction as CEO of Victory
Capital. These skills, combined with Mr. Brown's extensive knowledge of the
financial services industry and demonstrated success in the development and
distribution of investment strategies and products, enable him to provide
valuable insights to the Board and strategic direction for the Funds. Mr. Brown
serves on the Boards of the Victory Funds family of funds consisting of five
registered investment companies offering approximately 104 mutual funds and 24
ETFs. Mr. Brown is considered an Interested Trustee of the Trust due to his
position with Victory Capital and its affiliated companies.
NON-INTERESTED (INDEPENDENT) TRUSTEES
--------------------------------------------------------------------------------
ROBERT L. MASON, Ph.D.(3, 4, 5, 6, 7)
Trustee
Born: July 1946
Year of Election or Appointment: 1997
Trustee, USAA ETF Trust (06/17-06/19); Adjunct Professor in the Department of
Management Science and Statistics in the College of Business at the University
of Texas at San Antonio (2001-present); Institute Analyst, Southwest Research
Institute (03/02-01/16), which focuses on providing innovative technology,
science, and engineering services to clients around the world and is one of the
oldest independent, nonprofit, applied research and development organizations in
the United States. He was employed at Southwest Research Institute for 40 years.
Dr. Mason brings to the Board particular experience with information technology
matters, statistical analysis, and human resources as well as over 22 years'
experience as a Board member of the USAA family of funds. Dr. Mason holds no
other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 63
================================================================================
JEFFERSON C. BOYCE(3, 4, 5, 6, 7)
Lead Trustee and Vice Chair
Born: September 1957
Year of Election or Appointment: 2013
Trustee, USAA ETF Trust (06/17-06/19); Senior Managing Director, New York Life
Investments, LLC (1992-2012), an investment manager. Mr. Boyce brings to the
Board experience in financial investment management, and, in particular,
institutional and retail mutual funds, variable annuity products, broker
dealers, and retirement programs, including experience in organizational
development, marketing, product development, and money management as well as
five years' experience as a Board member of the USAA family of funds. Mr. Boyce
is a board member of Westhab, Inc.
DAWN M. HAWLEY(3, 4, 5, 6, 7, 9)
Trustee
Born: February 1954
Year of Election or Appointment: 2014
Trustee, USAA ETF Trust (06/17-06/19); Manager of Finance, Menil Foundation,
Inc. (05/07-06/11), which is a private foundation that oversees the assemblage
of sculptures, prints, drawings, photographs, and rare books. Director of
Financial Planning and Analysis and Chief Financial Officer, AIM Management
Group, Inc. (10/87-01/06). Ms. Hawley brings to the Board experience in
financial investment management and, in particular, institutional and retail
mutual funds, variable annuity products, broker dealers, and retirement
programs, including experience in financial planning, budgeting, accounting
practices, and asset/liability management functions including major acquisitions
and mergers, as well as over five years' experience as a Board member of the
USAA family of funds. Ms. Hawley holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
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64 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
PAUL L. McNAMARA(3, 4, 5, 6, 7)
Trustee
Born: July 1948
Year of Election or Appointment: 2012
Trustee, USAA ETF Trust (06/17-06/19); Director, Cantor Opportunistic
Alternatives Fund, LLC (03/10-02/14), which is a closed-end fund of funds by
Cantor Fitzgerald Investment Advisors, LLC. Mr. McNamara retired from Lord
Abbett & Co. LLC, an independent U.S. investment management firm, as an
Executive Member on 09/30/09, a position he held since 10/02. He had been
employed at Lord Abbett since 1996. Mr. McNamara brings to the Board extensive
experience with the financial services industry and, in particular,
institutional and retail mutual fund markets, including experience with mutual
fund marketing, distribution, and risk management, as well as overall experience
with compliance and corporate governance issues. Mr. McNamara also has
experience serving as a fund director as well as seven years' experience as a
Board member of the USAA family of funds. Paul L. McNamara is of no relation to
Daniel S. McNamara. Mr. McNamara holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
RICHARD Y. NEWTON III(3, 4, 5, 6, 7)
Trustee
Born: January 1956
Year of Election or Appointment: 2017
Trustee, USAA ETF Trust (06/17-06/19); Director, Elta North America
(01/18-present), which is a global leader in the design, manufacture and support
of innovative electronic systems in the ground, maritime, airborne, and security
domains for the nation's warfighters, security personnel, and first responders;
Managing Partner, Pioneer Partnership Development Group (12/15-present);
Executive Director, The Union League Club of New York (06/14-11/15); Executive
Vice President, Air Force Association (08/12-05/14); Lieutenant General, United
States Air Force (01/08-06/12). Lieutenant General Newton (Ret.) served 34 years
of active duty in the United States Air Force. Lt. Gen. Newton retired as the
Assistant Vice Chief of Staff and Director of Air Staff at the Headquarters of
the U.S. Air Force where he was responsible for overseeing the administration
and organization
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 65
================================================================================
of the Air Staff, which develops policies, plans and programs, establishes
requirements, and provides resources to support the Air Force's mission. Lt.
Gen. Newton is a graduate of the United States Air Force Academy, Webster
University, and The National War College. Lt. Gen. Newton brings to the Board
extensive management and military experience, as well as over two years of
experience as a Board member of the USAA family of funds. Lt. Gen. Newton holds
no other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
BARBARA B. OSTDIEK, Ph.D.(3, 4, 5, 6, 7, 8)
Trustee
Born: March 1964
Year of Election or Appointment: 2008
Trustee, USAA ETF Trust (06/17-06/19); Senior Associate Dean of Degree programs
at Jesse H. Jones Graduate School of Business at Rice University
(07/13-present); Associate Professor of Finance at Jesse H. Jones Graduate
School of Business at Rice University (07/01-present); Academic Director, El
Paso Corporation Finance Center at Jesse H. Jones Graduate School of Business at
Rice University (07/02-06/12). Dr. Ostdiek brings to the Board particular
experience with financial investment management, education, and research as well
as over eleven years' experience as a Board member of the USAA family of funds.
Dr. Ostdiek holds no other directorships of any publicly held corporations or
other investment companies outside the USAA family of funds.
MICHAEL F. REIMHERR(3, 4, 5, 6, 7)
Trustee
Born: August 1945
Year of Election or Appointment: 2000
Trustee, USAA ETF Trust (06/17-06/19); President of Reimherr Business Consulting
performing business valuations of medium to large companies; developing business
plans, budgets, and internal financial reporting; and work with mergers and
acquisitions (05/95-12/17). St. Mary's University Investment Committee
overseeing University Endowment (06/14-present). Mr. Reimherr brings to the
Board particular experience with organizational development, budgeting, finance,
capital markets, and mergers and acquisitions, as well as
================================================================================
66 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
over 19 years' experience as a Board member of the USAA family of funds. Mr.
Reimherr holds no other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
JOHN C. WALTERS(3, 4, 5, 6, 7)
Trustee
Born: February 1962
Year of Election or Appointment: 2019
Retired. Mr. Walters brings significant Board experience including active
involvement with the board of a Fortune 500 company, and a proven record of
leading large, complex financial organizations. He has a demonstrated record of
success in distribution, manufacturing, investment brokerage, and investment
management in both the retail and institutional investment businesses. He has
substantial experience in the investment management business with a demonstrated
ability to develop and drive strategy while managing operational, financial, and
investment risk. Mr. Walters is a board member of Guardian Variable Products
Trust (16 series), Lead Independent Director; Amerilife Holdings LLC, Director;
Stadion Money Management; Director; and University of North Carolina (Chapel
Hill), Member Board of Governors.
(1) Indicates the Trustee is an employee of AMCO or affiliated companies and
is considered an "interested person" under the Investment Company Act of
1940.
(2) Member of Executive Committee.
(3) Member of Audit and Compliance Committee.
(4) Member of Product Management and Distribution Committee.
(5) Member of Corporate Governance Committee.
(6) Member of Investments Committee.
(7) The address for all non-interested trustees is that of the USAA Funds,
P.O. Box 659430, San Antonio, TX 78265-9430.
(8) Dr. Ostdiek has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(9) Ms. Hawley has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(10) Indicates the Trustee is an employee of Victory Capital or affiliated
companies and is considered an "interested person" under the Investment
Company Act of 1940.
(+) Mr. D. McNamara was elected as Chair of the Board in July 2019.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 67
================================================================================
Effective July 1, 2019, the Board of the Trust appointed certain new officers of
the Trust. The current officers of the Trust are stated below.
OFFICERS
--------------------------------------------------------------------------------
CHRISTOPHER K. DYER
President
Born: February 1962
Year of Appointment: 2019
Director of Mutual Fund Administration, the Victory Capital.
SCOTT A. STAHORSKY
Vice President
Born: July 1969
Year of Appointment: 2019
Manager, Fund Administration, the Adviser (since 2015); Senior Analyst, Fund
Administration, the Victory Capital (prior to 2015).
ALLAN SHAER
Assistant Treasurer
Born: March 1965
Year of Appointment: 2019
Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc.
(since 2016); Vice President, Mutual Fund Administration, JP Morgan Chase
(2011-2016).
================================================================================
68 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Treasurer, USAA ETF Trust (09/18-06/19); Executive Director, Investment and
Financial Administration, USAA (04/12-present); Assistant Treasurer, USAA ETF
Trust (06/17-09/18); Assistant Treasurer, USAA Mutual Funds Trust (12/13-02/18).
Mr. De Vries also serves as the Funds' Principal Financial Officer.
CAROL D. TREVINO
Assistant Treasurer
Born: October 1965
Year of Appointment: 2018
Assistant Treasurer, USAA ETF Trust (09/18-06/19); Accounting/Financial
Director, USAA (12/13-present); Senior Accounting Analyst, USAA (03/11-12/13).
ERIN G. WAGNER
Secretary
Born: February 1974
Year of Appointment: 2019
Associate General Counsel, the Adviser (since 2013).
CHARLES BOOTH
Anti-Money Laundering Compliance Officer and Identity Theft Officer
Born: April 1960
Year of Appointment: 2019
Director, Regulatory Administration and CCO Support Services, Citi Fund Services
Ohio, Inc. (2007-present).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 69
================================================================================
AMY CAMPOS
Chief Compliance Officer
Born: August 1976
Year of Appointment: 2019
Chief Compliance Officer, USAA Mutual Funds Trust (7/1/19-present); Executive
Director, Deputy Chief Compliance Officer, USAA Mutual Funds Trust and USAA ETF
Trust (7/17-6/19); Compliance Director, USAA Mutual Funds Trust (2014-7/17);
Senior Compliance Advisor, USAA Mutual Funds Trust (2010-2014).
THE FOLLOWING OFFICERS SERVED IN THEIR RESPECTIVE OFFICE UNTIL JULY 1, 2019, AT
WHICH POINT EACH OF THE FOLLOWING OFFICERS RESIGNED FROM THEIR RESPECTIVE OFFICE
AND NO LONGER SERVE IN THESE POSITIONS.
JOHN C. SPEAR
Vice President
Born: May 1964
Year of Appointment: 2016
Vice President, USAA ETF Trust (06/17-06/19); Senior Vice President and Chief
Investment Officer, USAA Investments, (03/17-present); Vice President and Chief
Investment Officer, USAA Investments, (11/16-03/17); Vice President, Long Term
Fixed Income (05/12-11/16).
JOHN P. TOOHEY
Vice President
Born: March 1968
Year of Appointment: 2009
Vice President, USAA ETF Trust (06/17-06/19); Head of Equities, Equity
Investments, AMCO (01/12-present).
================================================================================
70 | USAA PRECIOUS METALS AND MINERALS FUND
================================================================================
KRISTEN MILLAN
Secretary
Born: April 1983
Year of Appointment: 2019
Secretary, USAA ETF Trust (04/19-06/19); Assistant Secretary, USAA ETF Trust
(01/19-06/19); Senior Attorney, FASG General Counsel, USAA (09/17-06/19);
Attorney, FASG General Counsel, USAA (06/13-09/17). Ms. Millan also serves as
Assistant Secretary of AMCO, ICORP, and SAS.
STEPHANIE A. HIGBY
Chief Compliance Officer
Born: July 1974
Year of Appointment: 2013
Chief Compliance Officer, USAA ETF Trust (06/17-06/19); Assistant Vice
President, Compliance-Investments, USAA (02/18-present); Assistant Vice
President, Compliance Mutual Funds, USAA (12/16-01/18); Executive Director,
Institutional Asset Management Compliance, USAA (04/13-12/16). Ms. Higby also
serves as the Funds' anti-money laundering compliance officer and as the Chief
Compliance Officer for AMCO and IMCO.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 71
================================================================================
AS OF JULY 1, 2019
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
David C. Brown
John C. Walters
--------------------------------------------------------------------------------
ADMINISTRATOR AND Victory Capital Management Inc.
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND Victory Capital Advisers Inc.
DISTRIBUTOR 4900 Tiedeman Road
Brooklyn, Ohio 44144
--------------------------------------------------------------------------------
TRANSFER AGENT Victory Capital Transfer Agency Inc.
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 USAA AMCO'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) 235-8396; (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) 235-8396; (ii) at usaa.com; and (iii) on the SEC's website at
http://www.sec.gov.
================================================================================
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23407-0719
[LOGO OF USAA USAA(R)]
----------------------
MUTUAL FUNDS
--------------------------------------------------------------------------------
May 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA Treasury Money Market Trust(R)
FUND
SHARES
UATXX
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) 235-8396 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)
235-8396 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.
Victory Capital means Victory Capital Management Inc., the investment manager of
the USAA Mutual Funds. USAA Mutual Funds are distributed by Victory Capital
Advisers, Inc., a broker dealer registered with FINRA and an affiliate of
Victory Capital. Victory Capital and its affiliates are not affiliated with
United Services Automobile Association or its affiliates. USAA and the USAA
logos are registered trademarks and the USAA Mutual Funds and USAA Investments
logos are trademarks of United Services Automobile Association and are being
used by Victory Capital and its affiliates under license.
================================================================================
PRESIDENT'S MESSAGE
"... LONG-TERM INVESTORS SHOULD NEVER MAKE
DECISIONS IN HASTE. THEY SHOULD MAKE [PHOTO OF BROOKS ENGLEHARDT]
THOUGHTFUL DECISIONS BASED ON THEIR LONG-TERM
OBJECTIVES, TIME HORIZON, AND RISK TOLERANCE."
--------------------------------------------------------------------------------
JULY 2019
As previously announced, USAA, the parent company of USAA Asset Management
Company ("AMCO"), the prior investment adviser to the USAA Mutual Funds,
announced that AMCO would be acquired by Victory Capital Holdings, Inc.
(Victory Holdings), a global investment management firm headquartered in
Cleveland, Ohio (the Transaction). In connection with the Transaction, also as
previous announced, shareholders of each USAA Mutual Fund approved a new
investment advisory agreement with Victory Capital Management Inc. ("Victory
Capital"), an indirect wholly-owned subsidiary of Victory Holdings. The closing
of the Transaction occurred on July 1, 2019; and Victory Capital became the
investment adviser to each USAA Mutual Fund. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION ABOUT CHANGES THAT TOOK EFFECT ON JULY 1, 2019.
Softening global economic conditions and escalating trade tensions rattled
investors during the 12-month reporting period ended May 31, 2019. When the
reporting period began in June 2018, the global economy was expanding across
most regions and countries, led by the U.S. In this environment, stocks
generally advanced. In the fixed income market, U.S. Treasury yields rose, as
the U.S. Federal Reserve ("Fed") continued to tighten monetary policy.
Signs of trouble emerged during the summer of 2018. The U.S. economic expansion
continued, but growth in a number of other economies, including some European
countries and China, showed a weakening trend. By the autumn of 2018, investors'
fears of a global economic slowdown, combined with harsh U.S.-China trade
rhetoric and Brexit-related uncertainty in Europe, sparked a surge in market
volatility. Global stocks dropped, with most of the decline occurring in
December 2018. At the same time, intermediate- and longer-term yields fell, as
investors anticipated a change in Fed monetary policy. Indeed, after having
raised short-term interest rates four times during 2018, Fed officials announced
in January 2019 that they would "pause," retreating from their earlier plan to
raise interest rates in 2019. Stocks rallied in response and by April 2019 had
recovered most of the ground they had lost. In May 2019, ongoing trade tensions
between the United States and China, as well as President Trump administration's
threat to impose tariffs on Mexico, drove a renewed decline in stock prices. In
the fixed income market, concerns that trade disputes would seriously undermine
global
================================================================================
================================================================================
economic growth pushed down intermediate- and longer-term yields, which ended
the reporting period lower than they started. The yield on the 10-year U.S.
Treasury note, which began June 2018 at 2.89%, rose to 3.24% on November 8,
2018--its high point of the period--and fell to 2.13% by May 31, 2019.
In the final months of the reporting period, the Treasury yield curve inverted,
which means that shorter-term yields were higher than longer-term yields. A
yield-curve inversion warrants attention because it has been a reliable
recession indicator. Although recessions do not automatically follow
inversions, a downward-sloped yield curve has preceded every U.S. recession
since the 1960s. That said, the lag between an inversion and a recession has
been inconsistent. At USAA Investments, A Victory Capital Investment Franchise,
we have found that during the past six decades, the time between inversion and
recession has ranged between six months and two years, with no clear pattern to
provide useful guidance. And as I write to you, we see no recession on the
horizon. First, the U.S. economy continues to grow, albeit at a slower pace than
in 2018. Second, the Fed has made clear its commitment to pause its interest
rate hikes, and there is a growing belief in the markets that policymakers may
even cut interest rates in 2019. (In early June 2019, after the end of the
reporting period, Fed Chair Jerome Powell stated that the U.S. central bank was
monitoring the escalation in trade tensions and could potentially respond by
cutting interest rates if U.S. economic conditions deteriorate.)
At USAA Investments, our team of portfolio managers will continue to monitor the
financial markets, economic conditions, the global trade regime, Fed policy, the
direction of longer-term interest rates, and other issues that have the
potential to affect your investments. In the meantime, I would advise you to
ignore media "noise" about such matters. Media "noise" is meant to provoke an
emotional reaction, which can lead to hasty decision-making. In my opinion,
long-term investors should never make decisions in haste. They should make
thoughtful decisions based on their long-term objectives, time horizon, and risk
tolerance. Dollar-cost averaging, in which you invest a set amount on a regular
basis, is a strategy that can help you stay on track. Another effective strategy
is diversification, which can potentially insulate a portfolio from market
turbulence or changes in performance leadership.
If you would like to review your portfolio to confirm that it is properly
aligned with your investment plan, please contact one of our financial advisors.
You might want to make that call before the summer gets fully underway. When we
are traveling and spending time with family and friends, it can be tempting to
put off decisions on financial matters.
From all of us at USAA Investments, A Victory Capital Investment Franchise,
thank you for the opportunity to help you with your investment needs.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGER'S COMMENTARY 1
INVESTMENT OVERVIEW 3
SHAREHOLDER VOTING RESULTS 7
FINANCIAL INFORMATION
Distributions to Shareholders 8
Report of Independent Registered
Public Accounting Firm 9
Portfolio of Investments 10
Notes to Portfolio of Investments 15
Financial Statements 16
Notes to Financial Statements 19
Financial Highlights 29
EXPENSE EXAMPLE 30
ADVISORY AGREEMENT(S) 32
TRUSTEES' AND OFFICERS' INFORMATION 50
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) 235-8396.
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.
================================================================================
================================================================================
MANAGERS' COMMENTARY ON THE FUND
--------------------------------------------------------------------------------
[PHOTO OF ANTHONY M. ERA] [PHOTO OF CODY PERKINS]
ANTHONY M. ERA, Jr. CODY PERKINS, CFA*
--------------------------------------------------------------------------------
o WHAT WERE THE MARKET CONDITIONS DURING THE 12-MONTH REPORTING PERIOD ENDED
MAY 31, 2019?
The Fed started the reporting period with a short-term interest rate hike
and ended it on pause, with the future direction uncertain. In June 2018,
when the reporting period began, Fed officials raised the federal funds rate
(fed funds) by 0.25% to a target range between 1.75% and 2.00%. At the same
time, they indicated that two more interest rate increases likely were on
tap in 2018. Indeed, at both their September 2018 and December 2018
meetings, Fed policymakers lifted the fed funds rate, by 0.25% on each
occasion, to a target range between 2.25% and 2.50% by year end.
Policymakers also reduced the number of their projected 2019 interest rate
hikes--from the three forecasted at their September 2018 meeting to two at
their December 2018 meeting. In January 2019, Fed officials decided to leave
the fed funds rate unchanged, eliminated language about future increases,
and said they would be "patient" about further interest rate hikes. In March
2019, the Fed remained on hold, with policymakers agreeing to pause their
monetary policy tightening. Fed officials maintained their pause through
the end of the reporting period, saying at their April 30-May 1, 2019,
meeting that they were less likely to raise interest rates in 2019 than
previously anticipated.
As a result of the Fed's interest rate hikes during 2018, short-term
interest rates moved higher. This resulted, in turn, in an increase in
yields on U.S. Treasury bills and short-term notes during the reporting
period.
*Cody Perkins began co-managing the Fund in October 2018.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
o HOW DID THE USAA TREASURY MONEY MARKET TRUST (THE "FUND") PERFORM DURING
THE REPORTING PERIOD?
For the reporting period ended May 31, 2019, the seven-day yield on the Fund
was 1.85%. The total return for the same period was 1.88% compared to an
average of 1.62% for all retail money market funds that hold U.S.
Treasuries and repurchase agreements backed by the U.S. Treasury ranked by
iMoneyNet, Inc.
Effective July 1, 2019, Victory Capital serves as the Fund's investment
adviser. Prior to July 1, 2019, AMCO served as the Fund's investment
adviser. The investment adviser provides day-to-day discretionary management
for the Fund's assets.
o HOW DID YOU MANAGE THE FUND DURING THE REPORTING PERIOD?
In keeping with our investment approach, we continued to invest the Fund in
maturities of 397 days or less that are backed by the full faith and credit
of the U.S. government. During the reporting period, the Fund extended its
weighted average maturity in expectation of a less accommodative monetary
stance by the Fed. The Fund also maintained or slightly increased its
weighting in U.S. Treasury floating-rate notes in anticipation that
short-term interest rates would continue to move upward over the near term.
Thank you for allowing us to help you manage your investments.
Refer to page 3 for the iMoneyNet, Inc. definition.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
2 | USAA TREASURY MONEY MARKET TRUST
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/19 o
-------------------------------------------------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
-------------------------------------------------------------------------------------------
USAA Treasury Money Market Trust 1.88% 0.58% 0.29%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
usaa.com.
You could lose money by investing in the Fund. Although the Fund seeks to
preserve the value of your investment at $1 per share, it cannot guarantee it
will do so. The Fund may impose a fee upon the sale of your shares or may
temporarily suspend your ability to sell shares if the Fund's liquidity falls
below required minimums because of market conditions or other factors. An
investment in the Fund is not a deposit in USAA Federal Savings Bank, or any
other bank, and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. The Fund's sponsor has no legal
obligation to provide financial support to the Fund, and you should not expect
that the sponsor will provide financial support to the Fund at any time.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on net investment income and
realized capital gain distributions, including reinvested distributions, or
redemptions of shares.
================================================================================
INVESTMENT OVERVIEW | 3
================================================================================
o 7-DAY YIELD COMPARISON O
[CHART OF 7-DAY YIELD COMPARISON]
USAA TREASURY
MONEY MARKET iMONEYNET, INC.
TRUST AVERAGE
5/29/2018 1.170 1.080
6/26/2018 1.250 1.200
7/31/2018 1.330 1.260
8/28/2018 1.390 1.300
9/25/2018 1.450 1.320
10/30/2018 1.570 1.540
11/27/2018 1.620 1.570
12/24/2018 1.790 1.810
1/29/2019 1.850 1.750
2/26/2019 1.860 1.760
3/26/2019 1.880 1.790
4/30/2019 1.840 1.820
5/28/2019 1.850 1.750
[END CHART]
Data represents the last Tuesday of each month. Ending date 5/28/19.
The graph tracks the Fund's seven-day yield against the iMoneyNet, Inc. average
for all retail money market funds that hold U.S. Treasuries and repurchase
agreements backed by the U.S. Treasury and all retail money funds that hold 100%
in U.S. Treasuries. iMoneyNet, Inc. is an organization that tracks the
performance of money market funds.
================================================================================
4 | USAA TREASURY MONEY MARKET TRUST
================================================================================
o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
USAA TREASURY
MONEY MARKET
TRUST
05/31/09 $10,000.00
06/30/09 10,000.00
07/31/09 10,000.00
08/31/09 10,000.00
09/30/09 10,000.00
10/31/09 10,000.00
11/30/09 10,000.00
12/31/09 10,000.00
01/31/10 10,000.00
02/28/10 10,000.00
03/31/10 10,000.00
04/30/10 10,000.00
05/31/10 10,000.00
06/30/10 10,000.00
07/31/10 10,000.00
08/31/10 10,000.00
09/30/10 10,000.00
10/31/10 10,000.00
11/30/10 10,000.00
12/31/10 10,000.00
01/31/11 10,000.00
02/28/11 10,000.00
03/31/11 10,000.00
04/30/11 10,000.00
05/31/11 10,000.00
06/30/11 10,000.00
07/31/11 10,000.00
08/31/11 10,000.00
09/30/11 10,000.00
10/31/11 10,000.00
11/30/11 10,000.00
12/31/11 10,000.00
01/31/12 10,000.00
02/29/12 10,000.00
03/31/12 10,000.00
04/30/12 10,000.00
05/31/12 10,000.00
06/30/12 10,000.00
07/31/12 10,000.00
08/31/12 10,000.00
09/30/12 10,000.00
10/31/12 10,000.00
11/30/12 10,000.00
12/31/12 10,000.00
01/31/13 10,000.00
02/28/13 10,000.00
03/31/13 10,000.00
04/30/13 10,000.00
05/31/13 10,000.00
06/30/13 10,000.00
07/31/13 10,000.00
08/31/13 10,000.00
09/30/13 10,000.00
10/31/13 10,000.00
11/30/13 10,000.00
12/31/13 10,000.00
01/31/14 10,000.00
02/28/14 10,000.00
03/31/14 10,000.00
04/30/14 10,000.00
05/31/14 10,000.00
06/30/14 10,000.00
07/31/14 10,000.00
08/31/14 10,000.00
09/30/14 10,000.00
10/31/14 10,000.00
11/30/14 10,000.00
12/31/14 10,000.00
01/31/15 10,000.00
02/28/15 10,000.00
03/31/15 10,000.00
04/30/15 10,000.00
05/31/15 10,000.00
06/30/15 10,000.00
07/31/15 10,001.00
08/31/15 10,001.00
09/30/15 10,001.00
10/31/15 10,001.00
11/30/15 10,001.00
12/31/15 10,001.00
01/31/16 10,001.00
02/29/16 10,001.00
03/31/16 10,001.00
04/30/16 10,001.00
05/31/16 10,001.00
06/30/16 10,001.00
07/31/16 10,001.00
08/31/16 10,001.00
09/30/16 10,001.00
10/31/16 10,001.00
11/30/16 10,001.00
12/31/16 10,001.00
01/31/17 10,001.00
02/28/17 10,002.00
03/31/17 10,004.00
04/30/17 10,006.00
05/31/17 10,009.00
06/30/17 10,014.00
07/31/17 10,019.00
08/31/17 10,024.00
09/30/17 10,030.00
10/31/17 10,035.00
11/30/17 10,042.00
12/31/17 10,049.00
01/31/18 10,057.00
02/28/18 10,065.00
03/31/18 10,075.00
04/30/18 10,086.00
05/31/18 10,098.00
06/30/18 10,110.00
07/31/18 10,123.00
08/31/18 10,139.00
09/30/18 10,152.00
10/31/18 10,167.00
11/30/18 10,184.00
12/31/18 10,201.00
01/31/19 10,218.00
02/28/19 10,234.00
03/31/19 10,252.00
04/30/19 10,270.00
05/31/19 10,289.00
[END CHART]
Data from 5/31/09 through 5/31/19.
The graph illustrates the performance of a hypothetical $10,000 investment in
the USAA Treasury Money Market Trust.
Past performance is no guarantee of future results. The cumulative performance
quoted does not reflect the deduction of taxes that a shareholder would pay on
distributions or the redemption of shares. Income may be subject to federal,
state, or local taxes, or to the federal alternative minimum tax. For seven-day
yield information, please refer to the Fund's Investment Overview page.
================================================================================
INVESTMENT OVERVIEW | 5
================================================================================
o PORTFOLIO MIX - 5/31/19 o
(% of Net Assets)
[PIE CHART OF PORTFOLIO MIX]
U.S. TREASURY BILLS 49.5%
REPURCHASE AGREEMENTS 27.0%
U.S. TREASURY NOTES 23.4%
[END CHART]
Percentages are of the net assets of the Fund and may not equal 100%.
================================================================================
6 | USAA TREASURY MONEY MARKET TRUST
================================================================================
SHAREHOLDER VOTING RESULTS
--------------------------------------------------------------------------------
On April 18, 2019, and on May 8, 2019, special meetings of shareholders were
held to vote on two proposals relating to the series of the USAA Mutual Funds
Trust (Trust). Shareholders of record on February 8, 2019, were entitled to vote
on each proposal shown below. The proposals were approved by the shareholders.
The following proposals and voting results pertain to one or more series within
the Trust. Votes shown for Proposal 1 are for the Fund, a series of the Trust.
Votes shown for Proposal 2 are for all series of the Trust. The effective date
of the Proposals was July 1, 2019.
PROPOSAL 1
On May 8, 2019, a special meeting was held to approve a new Investment Advisory
Agreement between the Trust, on behalf of the Fund, and Victory Capital, an
independent investment adviser. The new Investment Advisory Agreement became
effective upon the closing of the Transaction (as defined and discussed in Note
1 to the Financial Statements) whereby AMCO was acquired by Victory Holdings,
the parent company of Victory Capital.
NUMBER OF SHARES VOTING
---------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
---------------------------------------------------------------------------------
1,985,584,614 201,164,200 154,488,415
PROPOSAL 2
On April 18, 2019, a special meeting was held to elect two new trustees to the
Trust's Board of Trustees to serve upon the closing of the Transaction: (1)
David C. Brown, to serve as an "interested trustee" as defined in the Investment
Company Act of 1940, as amended (1940 Act); and (2) John C. Walters, to serve
as a trustee who is not an "interested person" as is defined under the 1940 Act
("Independent Trustee").
NUMBER OF SHARES VOTING
------------------------------------------------------------------------------------
TRUSTEES FOR VOTES WITHHELD
------------------------------------------------------------------------------------
David C. Brown 8,299,565,565 820,887,736
John C. Walters 8,317,935,885 802,517,416
================================================================================
SHAREHOLDER VOTING RESULTS | 7
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
May 31, 2019, is provided for information purposes only and should not be used
for reporting to federal or state revenue agencies. Federal tax information for
the calendar year will be reported to you on Form 1099-DIV in January 2020.
With respect to distributions paid, the Fund designates the following amounts
(or, if subsequently determined to be different, the maximum amount allowable)
for the fiscal year ended May 31, 2019:
QUALIFIED INTEREST
INCOME
------------------
$82,178,000
------------------
For the fiscal year ended May 31, 2019, the Fund hereby designates the maximum
amount allowable of its net taxable income as qualified dividends taxed at
individual net capital gain rates.
================================================================================
8 | USAA TREASURY MONEY MARKET TRUST
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA TREASURY MONEY MARKET TRUST:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Treasury Money Market Trust (the "Fund") (one of the funds constituting USAA
Mutual Funds Trust (the "Trust")), including the portfolio of investments, as of
May 31, 2019, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended, the financial highlights for each of the five years in the period
then ended and the related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Fund (one of the funds
constituting USAA Mutual Funds Trust) at May 31, 2019, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and its financial highlights for each of
the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
BASIS FOR OPINION
These financial statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on the Fund's financial statements based
on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and are required to
be independent with respect to the Trust in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Trust is not required to have,
nor were we engaged to perform, an audit of the Trust's internal control over
financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the Trust's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of May 31, 2019, by correspondence with the custodian. Our audits also
included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
/s/ Ernst & Young LLP
We have served as the auditor of one or more Victory Capital investment
companies since 1995.
San Antonio, Texas
July 23, 2019
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 9
================================================================================
PORTFOLIO OF INVESTMENTS
May 31, 2019
------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
U.S. TREASURY SECURITIES (72.9%)
BILLS (49.5%)(a)
$ 900 U.S. Treasury Bill 2.22% 12/05/2019 $ 890
1,100 U.S. Treasury Bill 2.24 12/05/2019 1,087
1,500 U.S. Treasury Bill 2.24 12/05/2019 1,483
12,800 U.S. Treasury Bill 2.26 12/05/2019 12,650
4,100 U.S. Treasury Bill 2.27 10/10/2019 4,066
25,000 U.S. Treasury Bill 2.28 8/08/2019 24,892
1,100 U.S. Treasury Bill 2.28 8/15/2019 1,095
80,000 U.S. Treasury Bill 2.29 7/05/2019 79,827
40,000 U.S. Treasury Bill 2.29 8/01/2019 39,845
10,200 U.S. Treasury Bill 2.29 8/15/2019 10,151
50,000 U.S. Treasury Bill 2.30 8/22/2019 49,739
16,000 U.S. Treasury Bill 2.30 8/29/2019 15,909
3,600 U.S. Treasury Bill 2.30 10/10/2019 3,570
65,000 U.S. Treasury Bill 2.30 10/17/2019 64,428
7,000 U.S. Treasury Bill 2.30 12/05/2019 6,917
50,000 U.S. Treasury Bill 2.30 12/05/2019 49,402
1,700 U.S. Treasury Bill 2.31 8/29/2019 1,690
1,200 U.S. Treasury Bill 2.31 10/10/2019 1,190
2,900 U.S. Treasury Bill 2.31 11/07/2019 2,870
2,300 U.S. Treasury Bill 2.31 11/14/2019 2,276
3,800 U.S. Treasury Bill 2.31 12/05/2019 3,754
3,000 U.S. Treasury Bill 2.32 10/10/2019 2,975
2,100 U.S. Treasury Bill 2.32 11/07/2019 2,079
1,800 U.S. Treasury Bill 2.32 11/07/2019 1,782
4,900 U.S. Treasury Bill 2.32 11/07/2019 4,850
1,800 U.S. Treasury Bill 2.32 12/05/2019 1,778
1,800 U.S. Treasury Bill 2.32 12/05/2019 1,778
4,500 U.S. Treasury Bill 2.33 10/10/2019 4,462
1,800 U.S. Treasury Bill 2.33 10/24/2019 1,783
1,900 U.S. Treasury Bill 2.33 11/07/2019 1,881
50,000 U.S. Treasury Bill 2.33 11/07/2019 49,485
27,000 U.S. Treasury Bill 2.34 7/25/2019 26,905
1,300 U.S. Treasury Bill 2.34 8/01/2019 1,295
20,000 U.S. Treasury Bill 2.34 10/24/2019 19,811
50,000 U.S. Treasury Bill 2.34 10/24/2019 49,528
================================================================================
10 | USAA TREASURY MONEY MARKET TRUST
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
$ 1,000 U.S. Treasury Bill 2.34% 11/07/2019 $ 990
32,000 U.S. Treasury Bill 2.34 11/07/2019 31,669
20,000 U.S. Treasury Bill 2.35 6/13/2019 19,984
52,000 U.S. Treasury Bill 2.35 7/11/2019 51,864
45,000 U.S. Treasury Bill 2.35 7/18/2019 44,862
3,300 U.S. Treasury Bill 2.35 10/10/2019 3,272
1,000 U.S. Treasury Bill 2.35 10/17/2019 991
20,000 U.S. Treasury Bill 2.35 10/17/2019 19,820
4,000 U.S. Treasury Bill 2.35 10/24/2019 3,962
2,200 U.S. Treasury Bill 2.35 10/24/2019 2,179
1,000 U.S. Treasury Bill 2.35 11/07/2019 990
1,400 U.S. Treasury Bill 2.35 11/07/2019 1,386
5,100 U.S. Treasury Bill 2.36 6/06/2019 5,098
60,000 U.S. Treasury Bill 2.36 6/06/2019 59,980
23,000 U.S. Treasury Bill 2.36 6/13/2019 22,982
100,000 U.S. Treasury Bill 2.36 7/05/2019 99,778
2,100 U.S. Treasury Bill 2.36 7/11/2019 2,095
5,900 U.S. Treasury Bill 2.36 8/22/2019 5,868
75,000 U.S. Treasury Bill 2.36 9/19/2019 74,459
7,000 U.S. Treasury Bill 2.36 10/10/2019 6,940
22,000 U.S. Treasury Bill 2.36 10/17/2019 21,801
1,200 U.S. Treasury Bill 2.36 10/17/2019 1,189
25,000 U.S. Treasury Bill 2.37 6/13/2019 24,980
53,000 U.S. Treasury Bill 2.37 6/27/2019 52,909
25,000 U.S. Treasury Bill 2.37 7/18/2019 24,923
30,000 U.S. Treasury Bill 2.37 8/15/2019 29,852
2,700 U.S. Treasury Bill 2.37 10/10/2019 2,677
75,000 U.S. Treasury Bill 2.37 10/10/2019 74,355
2,500 U.S. Treasury Bill 2.37 10/10/2019 2,478
30,000 U.S. Treasury Bill 2.38 6/06/2019 29,990
25,000 U.S. Treasury Bill 2.38 6/06/2019 24,992
5,000 U.S. Treasury Bill 2.38 6/06/2019 4,998
25,000 U.S. Treasury Bill 2.38 6/20/2019 24,969
35,000 U.S. Treasury Bill 2.38 6/20/2019 34,956
8,000 U.S. Treasury Bill 2.38 6/27/2019 7,986
30,000 U.S. Treasury Bill 2.38 6/27/2019 29,948
1,900 U.S. Treasury Bill 2.38 7/11/2019 1,895
7,600 U.S. Treasury Bill 2.38 10/03/2019 7,538
20,000 U.S. Treasury Bill 2.38 10/10/2019 19,827
2,200 U.S. Treasury Bill 2.38 10/17/2019 2,180
8,600 U.S. Treasury Bill 2.39 6/06/2019 8,597
60,000 U.S. Treasury Bill 2.39 6/13/2019 59,952
50,000 U.S. Treasury Bill 2.39 7/11/2019 49,867
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
$ 10,000 U.S. Treasury Bill 2.39% 7/11/2019 $ 9,974
25,000 U.S. Treasury Bill 2.39 7/11/2019 24,934
8,000 U.S. Treasury Bill 2.39 7/11/2019 7,979
10,000 U.S. Treasury Bill 2.39 7/11/2019 9,973
1,000 U.S. Treasury Bill 2.39 7/18/2019 997
20,000 U.S. Treasury Bill 2.39 7/18/2019 19,938
2,500 U.S. Treasury Bill 2.39 7/18/2019 2,492
2,400 U.S. Treasury Bill 2.39 7/18/2019 2,393
15,000 U.S. Treasury Bill 2.39 7/25/2019 14,946
50,000 U.S. Treasury Bill 2.39 7/25/2019 49,821
4,000 U.S. Treasury Bill 2.39 10/03/2019 3,967
3,200 U.S. Treasury Bill 2.39 10/10/2019 3,172
3,400 U.S. Treasury Bill 2.40 6/20/2019 3,396
3,500 U.S. Treasury Bill 2.40 6/20/2019 3,496
2,000 U.S. Treasury Bill 2.40 6/20/2019 1,997
4,600 U.S. Treasury Bill 2.40 6/27/2019 4,592
2,900 U.S. Treasury Bill 2.40 6/27/2019 2,895
3,400 U.S. Treasury Bill 2.40 6/27/2019 3,394
40,000 U.S. Treasury Bill 2.40 7/18/2019 39,875
2,800 U.S. Treasury Bill 2.40 7/18/2019 2,791
5,300 U.S. Treasury Bill 2.40 7/18/2019 5,283
1,500 U.S. Treasury Bill 2.40 7/18/2019 1,495
25,000 U.S. Treasury Bill 2.40 7/25/2019 24,910
2,100 U.S. Treasury Bill 2.40 7/25/2019 2,092
2,400 U.S. Treasury Bill 2.40 7/25/2019 2,391
1,200 U.S. Treasury Bill 2.40 8/08/2019 1,195
20,000 U.S. Treasury Bill 2.40 8/15/2019 19,900
1,900 U.S. Treasury Bill 2.40 8/15/2019 1,891
23,000 U.S. Treasury Bill 2.40 8/22/2019 22,874
35,000 U.S. Treasury Bill 2.40 9/12/2019 34,760
6,000 U.S. Treasury Bill 2.41 6/06/2019 5,998
2,000 U.S. Treasury Bill 2.41 6/13/2019 1,998
7,400 U.S. Treasury Bill 2.41 6/13/2019 7,394
4,900 U.S. Treasury Bill 2.41 6/13/2019 4,896
2,100 U.S. Treasury Bill 2.41 6/13/2019 2,098
65,000 U.S. Treasury Bill 2.41 6/20/2019 64,918
7,400 U.S. Treasury Bill 2.41 6/20/2019 7,391
1,700 U.S. Treasury Bill 2.41 7/11/2019 1,695
32,800 U.S. Treasury Bill 2.41 7/18/2019 32,697
4,200 U.S. Treasury Bill 2.41 7/18/2019 4,187
45,000 U.S. Treasury Bill 2.41 7/25/2019 44,837
30,000 U.S. Treasury Bill 2.41 8/08/2019 29,864
10,000 U.S. Treasury Bill 2.41 8/08/2019 9,954
50,000 U.S. Treasury Bill 2.41 8/15/2019 49,749
================================================================================
12 | USAA TREASURY MONEY MARKET TRUST
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
$ 3,200 U.S. Treasury Bill 2.41% 10/10/2019 $ 3,172
9,000 U.S. Treasury Bill 2.41 10/10/2019 8,921
28,000 U.S. Treasury Bill 2.42 7/11/2019 27,925
2,100 U.S. Treasury Bill 2.42 7/18/2019 2,093
4,500 U.S. Treasury Bill 2.42 8/01/2019 4,482
3,700 U.S. Treasury Bill 2.42 8/01/2019 3,685
3,400 U.S. Treasury Bill 2.42 8/08/2019 3,384
15,300 U.S. Treasury Bill 2.42 8/08/2019 15,230
35,000 U.S. Treasury Bill 2.42 8/08/2019 34,840
25,000 U.S. Treasury Bill 2.42 8/08/2019 24,886
17,900 U.S. Treasury Bill 2.42 8/08/2019 17,818
1,900 U.S. Treasury Bill 2.42 8/08/2019 1,891
7,900 U.S. Treasury Bill 2.42 8/15/2019 7,860
2,700 U.S. Treasury Bill 2.43 7/18/2019 2,691
5,400 U.S. Treasury Bill 2.43 8/08/2019 5,375
2,000 U.S. Treasury Bill 2.43 8/15/2019 1,990
1,300 U.S. Treasury Bill 2.43 8/22/2019 1,293
3,900 U.S. Treasury Bill 2.43 8/22/2019 3,878
5,500 U.S. Treasury Bill 2.43 8/22/2019 5,470
3,900 U.S. Treasury Bill 2.43 8/22/2019 3,878
11,000 U.S. Treasury Bill 2.43 9/05/2019 10,929
20,000 U.S. Treasury Bill 2.43 9/12/2019 19,861
2,400 U.S. Treasury Bill 2.44 8/15/2019 2,388
37,000 U.S. Treasury Bill 2.44 8/15/2019 36,812
2,200 U.S. Treasury Bill 2.44 8/22/2019 2,188
4,200 U.S. Treasury Bill 2.45 7/18/2019 4,187
----------
2,404,767
----------
NOTES (23.4%)
56,000 U.S. Treasury Note 1.00 10/15/2019 55,717
165,000 U.S. Treasury Note (3 mo. USTMMR + 0.00%)(b) 2.32 1/31/2020 164,976
150,000 U.S. Treasury Note (3 mo. USTMMR + 0.03%)(b) 2.36 4/30/2020 150,004
354,000 U.S. Treasury Note (3 mo. USTMMR + 0.05%)(b) 2.37 10/31/2019 354,093
412,000 U.S. Treasury Note (3 mo. USTMMR + 0.06%)(b) 2.38 7/31/2019 412,051
----------
1,136,841
----------
Total U.S. Treasury Securities (cost: $3,541,608) 3,541,608
----------
REPURCHASE AGREEMENTS (27.0%)
665,000 Fixed Income Clearing Corp., 2.47%, acquired 5/31/2019 and due on
6/03/2019 at $665,000 (collateralized by $665,000 of U.S. Treasury,
3.63%, due 2/15/2044; market value $678,300)(c) 665,000
107,000 Bank of America Corp., 2.48%, acquired 5/31/2019 and due on 6/03/2019 at
$107,000 (collateralized by $108,283 of U.S. Treasury, 1.88% - 2.75%,
due 11/30/2020 - 4/30/2022; market value $109,140)(c) 107,000
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(000) SECURITY (000)
------------------------------------------------------------------------------------------------------------------
$ 130,000 Credit Agricole Corp., 2.47%, acquired 5/31/2019 and due on 6/03/2019 at
$130,000 (collateralized by $110,036 of U.S. Treasury, 1.88%, due
7/15/2019; market value $132,600)(d) $ 130,000
150,000 Mitsubishi Securities International plc, 2.47%, acquired 5/31/2019 and due
on 6/03/2019 at $150,000 (collateralized by $55,530 of U.S. Treasury,
0.13% - 1.13%, due 1/15/2021 - 4/15/2022; $91,749 of U.S. Treasury,
1.75% - 3.63%, due 12/31/2020 - 2/15/2044; combined market
value $153,032)(c),(d) 150,000
25,000 HSBC Bank USA, Inc., 2.48%, acquired 5/31/2019 and due
on 6/03/2019 at $25,000 (collateralized by $30,962 of
U.S. Treasury, 1.96% - 2.61%, due 6/20/2019 - 8/15/2042;
market value $25,505)(c) 25,000
200,000 Natixis Securities Americas, LLC, 2.48%, acquired 5/31/2019 and due
on 6/03/2019 at $200,000 (collateralized by $2 of U.S. Treasury,
2.31%, due 5/21/2020; $199,718 of U.S. Treasury, 1.63% - 3.63%,
due 8/15/2019 - 9/30/2025; combined market value $204,042)(a),(c) 200,000
35,000 TD Securities USA, LLC, 2.47%, acquired 5/31/2019 and due on
6/03/2019 at $35,000 (collateralized by $35,811 of U.S. Treasury,
1.75%, due 3/31/2022; market value $35,707)(c) 35,000
----------
Total Repurchase Agreements (cost: $1,312,000) 1,312,000
----------
TOTAL INVESTMENTS (COST: $4,853,608) $4,853,608
==========
------------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
------------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities:
Bills $- $2,404,767 $- $2,404,767
Notes - 1,136,841 - 1,136,841
Repurchase Agreements - 1,312,000 - 1,312,000
------------------------------------------------------------------------------------------------------------------
Total $- $4,853,608 $- $4,853,608
------------------------------------------------------------------------------------------------------------------
================================================================================
14 | USAA TREASURY MONEY MARKET TRUST
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 2019
--------------------------------------------------------------------------------
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 PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
USTMMR Quarterly US Treasury Money Market Rate
o SPECIFIC NOTES
(a) Rate represents an annualized yield at time of purchase, not coupon
rate.
(b) 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.
(c) Rates for U.S. Treasury notes or bonds represent the stated coupon
payment rate at time of issuance.
(d) U.S. Treasury inflation-indexed notes - designed to provide a real
rate of return after being adjusted over time to reflect the impact
of inflation. Their principal value periodically adjusts to the rate
of inflation. They trade at the prevailing real, or after inflation,
interest rates. The U.S. Treasury guarantees repayment of these
securities of at least their face value in the event of sustained
deflation or a drop in prices.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 15
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities (amortized cost approximates market value) $3,541,608
Investments in repurchase agreements (cost approximates market value) 1,312,000
Cash 726
Receivables:
Capital shares sold 41,213
Interest 2,484
----------
Total assets 4,898,031
----------
LIABILITIES
Payables:
Capital shares redeemed 38,193
Dividends on capital shares 6
Accrued management fees 515
Other accrued expenses and payables 319
----------
Total liabilities 39,033
----------
Net assets applicable to capital shares outstanding $4,858,998
==========
NET ASSETS CONSIST OF:
Paid-in capital $4,858,998
==========
Capital shares outstanding, no par value 4,858,998
==========
Net asset value, redemption price, and offering price per share $ 1.00
==========
See accompanying notes to financial statements.
================================================================================
16 | USAA TREASURY MONEY MARKET TRUST
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income $97,505
-------
EXPENSES
Management fees 5,449
Administration and servicing fees 4,359
Transfer agent's fees 4,359
Custody and accounting fees 302
Postage 479
Shareholder reporting fees 27
Trustees' fees 37
Registration fees 161
Professional fees 105
Other 49
-------
Total expenses 15,327
-------
NET INVESTMENT INCOME $82,178
=======
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 17
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
------------------------------------------------------------------------------------------------------------------
2019 2018
------------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 82,178 $ 29,773
--------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS (82,178) (29,773)
--------------------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 12,721,521 12,083,156
Reinvested dividends 82,115 29,749
Cost of shares redeemed (11,676,997) (11,006,596)
--------------------------------------
Increase in net assets from capital share transactions 1,126,639 1,106,309
--------------------------------------
Net increase in net assets 1,126,639 1,106,309
NET ASSETS
Beginning of year 3,732,359 2,626,050
--------------------------------------
End of year $ 4,858,998 $ 3,732,359
======================================
CHANGE IN SHARES OUTSTANDING
Shares sold 12,721,521 12,083,156
Shares issued for dividends reinvested 82,115 29,749
Shares redeemed (11,676,997) (11,006,596)
--------------------------------------
Increase in shares outstanding 1,126,639 1,106,309
======================================
See accompanying notes to financial statements.
================================================================================
18 | USAA TREASURY MONEY MARKET TRUST
================================================================================
NOTES TO FINANCIAL STATEMENTS
May 31, 2019
--------------------------------------------------------------------------------
(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 Treasury Money Market Trust (the Fund) qualifies as a registered investment
company under Accounting Standards Codification Topic 946. The information
presented in this annual 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 seeks to provide investors maximum current income while
maintaining the highest degree of safety and liquidity.
The Fund operates as a government money market fund in compliance with the
requirements of Rule 2a-7 under the 1940 Act; and as a government 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 Holdings, a global investment management firm
headquartered in Cleveland, Ohio (the Transaction), on July 1, 2019.
A special shareholder meeting was held on April 18, 2019, at which shareholders
of the Fund approved a new investment advisory agreement between the Trust,
================================================================================
NOTES TO FINANCIAL STATEMENTS | 19
================================================================================
on behalf of the Fund, and Victory Capital Management, Inc. (Victory Capital),
an independent investment management company. In addition, shareholders of the
Fund also elected the following two new directors to the Board of the Trust to
serve upon the closing of the Transaction: (1) David C. Brown, to serve as an
Interested Trustee; and (2) John C. Walters, to serve as an Independent Trustee.
PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS
ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
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
================================================================================
20 | USAA TREASURY MONEY MARKET TRUST
================================================================================
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.
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 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 year ended May 31, 2019, the Fund did not incur any income tax,
interest, or penalties, and has recorded no liability for net unrecognized
================================================================================
NOTES TO FINANCIAL STATEMENTS | 21
================================================================================
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. 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 May 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
================================================================================
22 | USAA TREASURY MONEY MARKET TRUST
================================================================================
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
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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
loan agreement, the assessed facility fee on the amount of the additional
commitment will be 15.0 basis points.
For the year ended May 31, 2019, the Fund paid CAPCO facility fees of $35,000,
which represents 5.2% of the total fees paid to CAPCO by the funds of the
Trusts. The Fund had no borrowings under this agreement during the year ended
May 31, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL
STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
(3) DISTRIBUTIONS
The character of any distributions made during the year from net investment
income or net realized gains is determined in accordance with federal tax
regulations and may differ from those determined in accordance with U.S.
generally accepted accounting principles. Also, due to the timing of
distributions, the fiscal year in which amounts are distributed may differ from
the year that the income or realized gains were recorded by the Fund.
The tax character of distributions paid during the years ended May 31, 2019, and
2018, was as follows:
2019 2018
----------------------------------------
Ordinary income* $82,178,000 $29,773,000
*Includes short-term realized capital gains, if any, which are taxable as
ordinary income.
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 May 31, 2019, the Fund had no capital loss carryforwards, for federal income
tax purposes.
The cost of securities at May 31, 2019, for federal income tax purposes, was
$4,853,608,000.
(4) 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 TREASURY MONEY MARKET TRUST
================================================================================
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 0.125% of the Fund's average daily net assets. For the year
ended May 31, 2019, the Fund incurred management fees, paid or payable to the
Manager, of $5,449,000. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
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 year ended May 31, 2019, the Fund incurred
administration and servicing fees, paid or payable to the Manager, of
$4,359,000.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and legal
services for the benefit of the Fund. The Board has approved the reimbursement
of a portion of these expenses incurred by the Manager. For the year ended May
31, 2019, the Fund reimbursed the Manager $26,000 for these compliance and legal
services. These expenses are included in the professional fees on the Fund's
Statement of Operations. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
TRANSFER AGENT'S - 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 0.10% 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 year ended May 31, 2019, the Fund incurred
transfer agent's fees, paid or payable to SAS, of $4,359,000. PLEASE REFER TO
THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR
ADDITIONAL IMPORTANT INFORMATION.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
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. PLEASE REFER
TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT
FOR ADDITIONAL IMPORTANT INFORMATION.
(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. PLEASE REFER TO THE SUBSEQUENT EVENT
NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
(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 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.
(7) RECENT ACCOUNTING PRONOUNCEMENTS
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.
================================================================================
26 | USAA TREASURY MONEY MARKET TRUST
================================================================================
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.
(8) SUBSEQUENT EVENT NOTE
As previously announced, and as discussed in Note 1 to the Financial Statements,
effective July 1, 2019, AMCO, the prior investment adviser to the Fund, and SAS,
the prior transfer agent to the Fund, were acquired by Victory Holdings. Please
see the supplement dated July 1, 2019 to the Fund's prospectus for additional
important information.
Effective July 1, 2019, Victory Capital is the new investment adviser and
administrator to the USAA Mutual Funds; SAS was renamed Victory Capital Transfer
Agency, Inc.; Victory Capital Advisers, Inc. is the new distributor to the USAA
Mutual Funds; Citi Fund Services of Ohio, Inc. serves as sub-administrator and
sub-fund accountant for the USAA Mutual Funds; and FIS Investor Services LLC
serve as sub-transfer agent and dividend disbursing agent for the USAA Mutual
Funds. Effective August 5, 2019, Citibank, N.A. is the new custodian for the
USAA Mutual Funds.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2019 permitting the
use of a "manager-of-managers" structure for certain funds. Prior to that date,
the Trust relied on a similar exemptive order granted by the SEC to the Trust
and its affiliated persons. Under a manager of managers structure, the
investment adviser may select (with approval of the Board and without
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
================================================================================
shareholder approval) one or more subadvisers to manage the day-to-day
investment of a fund's assets.
Effective July 1, 2019, under the investment advisory agreement with Victory
Capital, which took effect on July 1, 2019, no performance adjustments will be
made for periods beginning July 1, 2019, through June 30, 2020, and only
performance beginning as of July 1, 2020, and thereafter will be utilized in
calculating performance adjustments through June 30, 2020.
Effective July 1, 2019, the line of credit (as discussed in the Notes to the
Financial Statements in this annual report) among the Trust, with respect to its
Funds, and CAPCO terminated; the Trust, with respect to its Funds, along with
series of Victory Portfolios, Victory Portfolios II and Victory Variable
Insurance Funds, entered into a 364 day committed credit facility and a 364 day
uncommitted, demand credit facility with Citibank, N.A. (Citibank). Each such
credit facility may be renewed if so agreed by the parties. Under the agreement
with Citibank, the Funds may borrow up to $600 million, of which $300 million is
committed and $300 million is uncommitted. Of this amount, $40 million of the
line of credit is reserved for use by the Victory Floating Rate Fund (a series
of Victory Portfolios), with that Fund paying the related commitment fees for
that amount. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption request that might otherwise require the untimely
disposition of securities. Citibank receives an annual commitment fee of 0.15%.
Each Fund pays a pro-rata portion of this commitment fee plus any interest on
amounts borrowed.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2017 (the IFL
Order), permitting the establishment and operation of an Interfund Lending
Facility (the Facility). The Facility allows each Fund to directly lend and
borrow money to or from certain other affiliated Funds relying upon the IFL
Order at rates beneficial to both the borrowing and lending funds. Advances
under the Facility are allowed for temporary or emergency purposes, including
the meeting of redemption requests that are subject to each Fund's borrowing
restrictions. The interfund loan rate is determined, as specified in the IFL
Order, by averaging the current repurchase agreement rate and the current bank
loan rate.
================================================================================
28 | USAA TREASURY MONEY MARKET TRUST
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
----------------------------------------------------------------------------------
2019 2018 2017 2016 2015
----------------------------------------------------------------------------------
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .02 .01 .00(a) .00(a) .00(a)
----------------------------------------------------------------------------------
Less distributions from:
Net investment income (.02) (.01) (.00)(a) (.00)(a) (.00)(a)
----------------------------------------------------------------------------------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
==================================================================================
Total return (%)* 1.88 .89(b) .08 .00(c) .00(c)
Net assets at end of
period (000) $4,858,998 $3,732,359 $2,626,050 $188,863 $119,654
Ratios to average
daily net assets:**
Expenses (%)(d) .35 35(b) .35 .17 .06
Expenses, excluding
reimbursements (%)(d) .35 .35 .39 .49 .52
Net investment
income (%) 1.88 .91 .12 .00(c) .00(c)
* 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 year ended May 31, 2019, average daily net assets were
$4,362,371,000.
(a) Represents less than $0.01 per share.
(b) Prior to August 1, 2017, 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) Represents less than 0.01%.
(d) Does not include acquired fund fees, if any.
================================================================================
FINANCIAL HIGHLIGHTS | 29
================================================================================
EXPENSE EXAMPLE
May 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 December 1, 2018,
through May 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
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30 | USAA TREASURY MONEY MARKET TRUST
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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 DECEMBER 1, 2018 -
DECEMBER 1, 2018 MAY 31, 2019 MAY 31, 2019
----------------------------------------------------------------
Actual $1,000.00 $1,010.30 $1.75
Hypothetical
(5% return before expenses) 1,000.00 1,023.19 1.77
*Expenses are equal to the Fund's annualized expense ratio of 0.35%, which
is net of any reimbursements and expenses paid indirectly, multiplied by the
average account value over the period, multiplied by 182 days/365 days (to
reflect the one-half-year period). The Fund's actual ending account value is
based on its actual total return of 1.03% for the six-month period of
December 1, 2018, through May 31, 2019.
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EXPENSE EXAMPLE | 31
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the (i) new investment
advisory agreement between the Trust and Victory Capital and (ii) new
investment subadvisory agreements between certain subadvisers and Victory
Capital, which became effective on July 1, 2019. PLEASE REFER TO THE
SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR
ADDITIONAL IMPORTANT INFORMATION.
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.
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32 | USAA TREASURY MONEY MARKET TRUST
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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 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
================================================================================
ADVISORY AGREEMENT(S) | 33
================================================================================
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
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.
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34 | USAA TREASURY MONEY MARKET TRUST
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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.
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).
================================================================================
ADVISORY AGREEMENT(S) | 35
================================================================================
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.
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.
(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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36 | USAA TREASURY MONEY MARKET TRUST
================================================================================
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 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.
================================================================================
ADVISORY AGREEMENT(S) | 37
================================================================================
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 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,
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38 | USAA TREASURY MONEY MARKET TRUST
================================================================================
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.
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.
(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
================================================================================
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 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
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40 | USAA TREASURY MONEY MARKET TRUST
================================================================================
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 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.
================================================================================
ADVISORY AGREEMENT(S) | 41
================================================================================
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 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.
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42 | USAA TREASURY MONEY MARKET TRUST
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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
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.
================================================================================
ADVISORY AGREEMENT(S) | 43
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND THE MANAGER)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the continuation of the (i)
investment advisory agreement between the Trust and AMCO and (ii) investment
subadvisory agreements between certain subadvisers and AMCO, which were
effective until July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
At an in-person meeting of the Board of Trustees (the Board) held on April 17,
2019, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to the
Fund.(1)
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and the Manager, and were given
the opportunity to ask questions and request additional information from
management. The information provided to the Board included, among other things:
(i) a separate report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance, expenses, and
fees to comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the Manager's
revenues and costs of providing
(1)At an in-person meeting held on January 15, 2019, the Board, including the
Independent Trustees, approved a new investment advisory agreement between
the Trust, on behalf of the Fund, and Victory Capital Management Inc.
("Victory Capital"). Upon the closing of the transaction, on behalf of the
Fund, Victory Capital Holdings, Inc., the parent company of Victory Capital,
the Advisory Agreement between the Trust and the Manager will terminate and
the new investment advisory agreement between the Trust and Victory Capital
will go into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are included in this
annual report.
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44 | USAA TREASURY MONEY MARKET TRUST
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services to the Fund and compensation paid to affiliates of the Manager; and
(iii) information about the Manager's operations and personnel. Prior to
voting, the Independent Trustees reviewed the proposed continuance of the
Advisory Agreement with management and with experienced independent legal
counsel retained by the Independent Trustees (Independent Counsel) and received
materials from such Independent Counsel discussing the legal standards for
their consideration of the proposed continuation of the Advisory Agreement with
respect to the Fund. The Independent Trustees also reviewed the proposed
continuation of the Advisory Agreement with respect to the Fund in private
sessions with Independent Counsel at which no representatives of management
were present.
At each regularly scheduled meeting of the Board and its committees, the Board
receives and reviews, among other things, information concerning the Fund's
performance and related services provided by the Manager. At the meeting at
which the renewal of the Advisory Agreement is considered, particular focus is
given to information concerning Fund performance, fees and total expenses as
compared to comparable investment companies, and the Manager's profitability
with respect to the Fund. However, the Board noted that the evaluation process
with respect to the Manager is an ongoing one. In this regard, the Board's and
its committees' consideration of the Advisory Agreement included certain
information previously received at such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving the
Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent,
and quality of the services provided by the Manager under the Advisory
Agreement, the Board reviewed information provided by the Manager relating to
its operations and personnel. The Board also took into account its
================================================================================
ADVISORY AGREEMENT(S) | 45
================================================================================
knowledge of the Manager's management and the quality of the performance of the
Manager's duties through Board meetings, discussions, and reports during the
preceding year. The Board considered the fees paid to the Manager and the
services provided to the Fund by the Manager under the Advisory Agreement, as
well as other services provided by the Manager and its affiliates under other
agreements, and the personnel who provide these services. In addition to the
investment advisory services provided to the Fund, the Manager and its
affiliates provide administrative services, shareholder services, oversight of
Fund accounting, marketing services, assistance in meeting legal and regulatory
requirements, and other services necessary for the operation of the Fund and
the Trust. The Board also considered the significant risks assumed by the
Manager in connection with the services provided to the Fund, including
investment, operational, enterprise, litigation, regulatory and compliance
risks.
The Board considered the Manager's management style and the performance of the
Manager's duties under the Advisory Agreement. The Board considered the level
and depth of experience of the Manager, including the professional experience
and qualifications of its senior and investment personnel, as well as current
staffing levels. The allocation of the Fund's brokerage, including the
Manager's process for monitoring "best execution," was also considered. The
Manager's role in coordinating the activities of the Fund's other service
providers also was considered. The Board also considered the Manager's risk
management processes. The Board considered the Manager's financial condition
and that it had the financial wherewithal to continue to provide the same scope
and high quality of services under the Advisory Agreement. In reviewing the
Advisory Agreement, the Board focused on the experience, resources, and
strengths of the Manager and its affiliates in managing investment companies,
including the Fund.
The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager and its affiliates, including oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust,
also focused on the quality of the Manager's compliance and administrative
staff.
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46 | USAA TREASURY MONEY MARKET TRUST
================================================================================
EXPENSES AND PERFORMANCE - In connection with its consideration of the Advisory
Agreement, the Board evaluated the Fund's advisory fees and total expense ratio
as compared to other open-end investment companies deemed to be comparable to
the Fund as determined by the independent third party in its report. The Fund's
expenses were compared to (i) a group of investment companies chosen by the
independent third party to be comparable to the Fund based upon certain
factors, including fund type, comparability of investment objective and
classification, sales load type (in this case, retail investment companies with
no sales loads), asset size, and expense components (the "expense group") and
(ii) a larger group of investment companies that includes all no-load retail
open-end investment companies with the same investment classification/objective
as the Fund regardless of asset size, excluding outliers (the "expense
universe"). Among other data, the Board noted that the Fund's management fee
rate - which includes advisory and administrative services - was below the
median of its expense group and expense universe. The data indicated that the
Fund's total expenses were below the median of its expense group and its
expense universe. The Board took into account the various services provided to
the Fund by the Manager and its affiliates, including the high quality of
services received by the Fund from the Manager. The Board also noted the level
and method of computing the Fund's management fee.
In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total return with its Lipper index and with that of other mutual funds deemed
to be in its peer group by the independent third party in its report (the
"performance universe"). The Fund's performance universe consisted of the Fund
and all retail and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or primary
channel of distribution. This comparison indicated that, among other data, the
Fund's performance was above the average of its performance universe and its
Lipper index for the one-, three- and five-year periods ended December 31,
2018, and was above the average
================================================================================
ADVISORY AGREEMENT(S) | 47
================================================================================
of its performance universe and lower than its Lipper index for the ten-year
period ended December 31, 2018. The Board also noted that the Fund's percentile
performance ranking was in the top 25% of its performance universe for the
one-, three- and five-year periods ended December 31, 2018, and was in the top
30% of its performance universe for the ten-year period ended December 31, 2018.
COMPENSATION AND PROFITABILITY - The Board took into consideration the level
and method of computing the Fund's management fee. The information considered
by the Board included operating profit margin information for the Manager's
business as a whole. The Board also received and considered profitability
information related to the management revenues from the Fund. This information
included a review of the methodology used in the allocation of certain costs to
the Fund. The Trustees reviewed the profitability of the Manager's relationship
with the Fund before tax expenses. The Board was also provided with an
Investment Management Profitability Analysis prepared by an independent
information service. In reviewing the overall profitability of the management
fee to the Manager, the Board also considered the fact that affiliates provide
shareholder servicing and administrative services to the Fund for which they
receive compensation. The Board also considered the possible direct and
indirect benefits to the Manager from its relationship with the Trust,
including that the Manager may derive reputational and other benefits from its
association with the Fund. The Trustees recognized that the Manager should be
entitled to earn a reasonable level of profits in exchange for the level of
services it provides to the Fund and the entrepreneurial risk that it assumes
as Manager.
ECONOMIES OF SCALE - The Board considered whether there should be changes in
the management fee rate or structure in order to enable the Fund to participate
in any economies of scale. The Board took into account management's discussions
of the current advisory fee structure. The Board also considered the effect of
the Fund's growth and size on its performance and fees, noting that if the
Fund's assets increase over time, the Fund may realize other economies of scale
if assets increase proportionally more than some expenses. The Board determined
that the current investment management fee structure was reasonable.
================================================================================
48 | USAA TREASURY MONEY MARKET TRUST
================================================================================
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) the overall performance of the Fund is
reasonable in relation to the performance of funds with a similar investment
objective and to relevant indices; (iv) the Fund's advisory expenses are
reasonable in relation to those of similar funds and to the services to be
provided by the Manager; and (v) the Manager and its affiliates' level of
profitability from their relationship with the Fund is reasonable in light of
the nature and high quality of services provided by the Manager and the type of
fund. Based on its conclusions, the Board determined that continuation of the
Advisory Agreement would be in the best interests of the Fund and its
shareholders.
================================================================================
ADVISORY AGREEMENT(S) | 49
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION
TRUSTEES AND OFFICERS OF THE TRUST
--------------------------------------------------------------------------------
As of July 1, 2019, the Board of Trustees (the Board) of the Trust consists of
ten Trustees. These Trustees and the Trust's Officers supervise the business
affairs of the USAA family of funds. The Board is responsible for the general
oversight of the funds' business and for assuring that the funds are managed in
the best interests of each fund's respective shareholders. The Board
periodically reviews the funds' investment performance as well as the quality of
other services provided to the funds and their shareholders by each of the
fund's service providers, including the adviser and its affiliates. Pursuant to
a policy adopted by the Board, the term of office for each Trustee shall be
until the Trustee reaches age 75. The Board may change or grant exceptions from
this policy at any time without shareholder approval. A Trustee may resign or be
removed by a vote of two-thirds of the Trustees before the removal or by the
holders of two-thirds of the outstanding shares of the Trust at any time.
Vacancies on the Board can be filled by the action of a majority of the
Trustees, provided that after filling such vacancy at least two-thirds of the
Trustees have been elected by the shareholders.
Set forth below are the Trustees and Officers of the Trust, their respective
offices and principal occupations during the last five years, length of time
served, and information relating to any other directorships held. As of July 1,
2019, each serves on the Board of the USAA family of funds consisting of one
registered investment company, which offers 47 individual funds. Unless
otherwise indicated, the business address for each is P.O. Box 659430, San
Antonio, TX 78265-9430.
If you would like more information about the funds' Trustees, you may call (800)
235-8396 to request a free copy of the funds' Statement of Additional
Information (SAI).
================================================================================
50 | USAA TREASURY MONEY MARKET TRUST
================================================================================
In connection with the Transaction, the Board of the Trust nominated, and
shareholders of each USAA mutual fund approved, two new Trustees to serve on the
Trust's Board, effective upon the closing of the Transaction. Effective July 1,
2019, David C. Brown serves as an Interested Trustee and John C. Walters serves
as an Independent Trustee. Information about the current Trustees of the Trust
is provided below.
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
DANIEL S. McNAMARA(1, 2, 4, 6, +)
Trustee and Chair of the Board of Trustees
Born: June 1966
Year of Election or Appointment: 2012
Trustee, President, and Vice Chairman, USAA ETF Trust (06/17-06/19); President
of Financial Advice & Solutions Group (FASG), USAA (02/13-present); Director of
USAA Asset Management Company (AMCO), (08/11-present); Director of USAA
Investment Management Company (IMCO) (09/09-present); President, IMCO
(09/09-04/14); President and Director of USAA Shareholder Account Services (SAS)
(10/09-present); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director of FPS (12/13-present);
President and Director of USAA Investment Corporation (ICORP) (03/10-present);
Director of USAA Financial Advisors, Inc. (FAI) (12/13-present). Mr. McNamara
brings to the Board extensive experience in the financial services industry,
including experience as an officer of the Trust.
DAVID C. BROWN(2, 4, 6, 10)
Trustee
Born: May 1972
Year of Election or Appointment: 2019
Chairman and Chief Executive Officer (2013-present), Co-Chief Executive Officer,
(2011-2013), Victory Capital Management Inc.; Chairman and Chief Executive
Officer (2013-present), Victory Capital Holdings, Inc. Mr. Brown brings to the
Board extensive business, finance and leadership skills gained
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 51
================================================================================
and developed through years of experience in the financial services industry,
including his tenure overseeing the strategic direction as CEO of Victory
Capital. These skills, combined with Mr. Brown's extensive knowledge of the
financial services industry and demonstrated success in the development and
distribution of investment strategies and products, enable him to provide
valuable insights to the Board and strategic direction for the Funds. Mr. Brown
serves on the Boards of the Victory Funds family of funds consisting of five
registered investment companies offering approximately 104 mutual funds and 24
ETFs. Mr. Brown is considered an Interested Trustee of the Trust due to his
position with Victory Capital and its affiliated companies.
NON-INTERESTED (INDEPENDENT) TRUSTEES
--------------------------------------------------------------------------------
ROBERT L. MASON, Ph.D.(3, 4, 5, 6, 7)
Trustee
Born: July 1946
Year of Election or Appointment: 1997
Trustee, USAA ETF Trust (06/17-06/19); Adjunct Professor in the Department of
Management Science and Statistics in the College of Business at the University
of Texas at San Antonio (2001-present); Institute Analyst, Southwest Research
Institute (03/02-01/16), which focuses on providing innovative technology,
science, and engineering services to clients around the world and is one of the
oldest independent, nonprofit, applied research and development organizations in
the United States. He was employed at Southwest Research Institute for 40 years.
Dr. Mason brings to the Board particular experience with information technology
matters, statistical analysis, and human resources as well as over 22 years'
experience as a Board member of the USAA family of funds. Dr. Mason holds no
other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
================================================================================
52 | USAA TREASURY MONEY MARKET TRUST
================================================================================
JEFFERSON C. BOYCE(3, 4, 5, 6, 7)
Lead Trustee and Vice Chair
Born: September 1957
Year of Election or Appointment: 2013
Trustee, USAA ETF Trust (06/17-06/19); Senior Managing Director, New York Life
Investments, LLC (1992-2012), an investment manager. Mr. Boyce brings to the
Board experience in financial investment management, and, in particular,
institutional and retail mutual funds, variable annuity products, broker
dealers, and retirement programs, including experience in organizational
development, marketing, product development, and money management as well as
five years' experience as a Board member of the USAA family of funds. Mr. Boyce
is a board member of Westhab, Inc.
DAWN M. HAWLEY(3, 4, 5, 6, 7, 9)
Trustee
Born: February 1954
Year of Election or Appointment: 2014
Trustee, USAA ETF Trust (06/17-06/19); Manager of Finance, Menil Foundation,
Inc. (05/07-06/11), which is a private foundation that oversees the assemblage
of sculptures, prints, drawings, photographs, and rare books. Director of
Financial Planning and Analysis and Chief Financial Officer, AIM Management
Group, Inc. (10/87-01/06). Ms. Hawley brings to the Board experience in
financial investment management and, in particular, institutional and retail
mutual funds, variable annuity products, broker dealers, and retirement
programs, including experience in financial planning, budgeting, accounting
practices, and asset/liability management functions including major acquisitions
and mergers, as well as over five years' experience as a Board member of the
USAA family of funds. Ms. Hawley holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 53
================================================================================
PAUL L. McNAMARA(3, 4, 5, 6, 7)
Trustee
Born: July 1948
Year of Election or Appointment: 2012
Trustee, USAA ETF Trust (06/17-06/19); Director, Cantor Opportunistic
Alternatives Fund, LLC (03/10-02/14), which is a closed-end fund of funds by
Cantor Fitzgerald Investment Advisors, LLC. Mr. McNamara retired from Lord
Abbett & Co. LLC, an independent U.S. investment management firm, as an
Executive Member on 09/30/09, a position he held since 10/02. He had been
employed at Lord Abbett since 1996. Mr. McNamara brings to the Board extensive
experience with the financial services industry and, in particular,
institutional and retail mutual fund markets, including experience with mutual
fund marketing, distribution, and risk management, as well as overall experience
with compliance and corporate governance issues. Mr. McNamara also has
experience serving as a fund director as well as seven years' experience as a
Board member of the USAA family of funds. Paul L. McNamara is of no relation to
Daniel S. McNamara. Mr. McNamara holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
RICHARD Y. NEWTON III(3, 4, 5, 6, 7)
Trustee
Born: January 1956
Year of Election or Appointment: 2017
Trustee, USAA ETF Trust (06/17-06/19); Director, Elta North America
(01/18-present), which is a global leader in the design, manufacture and support
of innovative electronic systems in the ground, maritime, airborne, and security
domains for the nation's warfighters, security personnel, and first responders;
Managing Partner, Pioneer Partnership Development Group (12/15-present);
Executive Director, The Union League Club of New York (06/14-11/15); Executive
Vice President, Air Force Association (08/12-05/14); Lieutenant General, United
States Air Force (01/08-06/12). Lieutenant General Newton (Ret.) served 34 years
of active duty in the United States Air Force. Lt. Gen. Newton retired as the
Assistant Vice Chief of Staff and Director of Air Staff at the Headquarters of
the U.S. Air Force where he was responsible for overseeing the administration
and organization
================================================================================
54 | USAA TREASURY MONEY MARKET TRUST
================================================================================
of the Air Staff, which develops policies, plans and programs, establishes
requirements, and provides resources to support the Air Force's mission. Lt.
Gen. Newton is a graduate of the United States Air Force Academy, Webster
University, and The National War College. Lt. Gen. Newton brings to the Board
extensive management and military experience, as well as over two years of
experience as a Board member of the USAA family of funds. Lt. Gen. Newton holds
no other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
BARBARA B. OSTDIEK, Ph.D.(3, 4, 5, 6, 7, 8)
Trustee
Born: March 1964
Year of Election or Appointment: 2008
Trustee, USAA ETF Trust (06/17-06/19); Senior Associate Dean of Degree programs
at Jesse H. Jones Graduate School of Business at Rice University
(07/13-present); Associate Professor of Finance at Jesse H. Jones Graduate
School of Business at Rice University (07/01-present); Academic Director, El
Paso Corporation Finance Center at Jesse H. Jones Graduate School of Business at
Rice University (07/02-06/12). Dr. Ostdiek brings to the Board particular
experience with financial investment management, education, and research as well
as over eleven years' experience as a Board member of the USAA family of funds.
Dr. Ostdiek holds no other directorships of any publicly held corporations or
other investment companies outside the USAA family of funds.
MICHAEL F. REIMHERR(3, 4, 5, 6, 7)
Trustee
Born: August 1945
Year of Election or Appointment: 2000
Trustee, USAA ETF Trust (06/17-06/19); President of Reimherr Business Consulting
performing business valuations of medium to large companies; developing business
plans, budgets, and internal financial reporting; and work with mergers and
acquisitions (05/95-12/17). St. Mary's University Investment Committee
overseeing University Endowment (06/14-present). Mr. Reimherr brings to the
Board particular experience with organizational development, budgeting, finance,
capital markets, and mergers and acquisitions, as well as
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 55
================================================================================
over 19 years' experience as a Board member of the USAA family of funds. Mr.
Reimherr holds no other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
JOHN C. WALTERS(3, 4, 5, 6, 7)
Trustee
Born: February 1962
Year of Election or Appointment: 2019
Retired. Mr. Walters brings significant Board experience including active
involvement with the board of a Fortune 500 company, and a proven record of
leading large, complex financial organizations. He has a demonstrated record of
success in distribution, manufacturing, investment brokerage, and investment
management in both the retail and institutional investment businesses. He has
substantial experience in the investment management business with a demonstrated
ability to develop and drive strategy while managing operational, financial, and
investment risk. Mr. Walters is a board member of Guardian Variable Products
Trust (16 series), Lead Independent Director; Amerilife Holdings LLC, Director;
Stadion Money Management; Director; and University of North Carolina (Chapel
Hill), Member Board of Governors.
(1) Indicates the Trustee is an employee of AMCO or affiliated companies and
is considered an "interested person" under the Investment Company Act of
1940.
(2) Member of Executive Committee.
(3) Member of Audit and Compliance Committee.
(4) Member of Product Management and Distribution Committee.
(5) Member of Corporate Governance Committee.
(6) Member of Investments Committee.
(7) The address for all non-interested trustees is that of the USAA Funds,
P.O. Box 659430, San Antonio, TX 78265-9430.
(8) Dr. Ostdiek has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(9) Ms. Hawley has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(10) Indicates the Trustee is an employee of Victory Capital or affiliated
companies and is considered an "interested person" under the Investment
Company Act of 1940.
(+) Mr. D. McNamara was elected as Chair of the Board in July 2019.
================================================================================
56 | USAA TREASURY MONEY MARKET TRUST
================================================================================
Effective July 1, 2019, the Board of the Trust appointed certain new officers of
the Trust. The current officers of the Trust are stated below.
OFFICERS
--------------------------------------------------------------------------------
CHRISTOPHER K. DYER
President
Born: February 1962
Year of Appointment: 2019
Director of Mutual Fund Administration, the Victory Capital.
SCOTT A. STAHORSKY
Vice President
Born: July 1969
Year of Appointment: 2019
Manager, Fund Administration, the Adviser (since 2015); Senior Analyst, Fund
Administration, the Victory Capital (prior to 2015).
ALLAN SHAER
Assistant Treasurer
Born: March 1965
Year of Appointment: 2019
Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc.
(since 2016); Vice President, Mutual Fund Administration, JP Morgan Chase
(2011-2016).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 57
================================================================================
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Treasurer, USAA ETF Trust (09/18-06/19); Executive Director, Investment and
Financial Administration, USAA (04/12-present); Assistant Treasurer, USAA ETF
Trust (06/17-09/18); Assistant Treasurer, USAA Mutual Funds Trust (12/13-02/18).
Mr. De Vries also serves as the Funds' Principal Financial Officer.
CAROL D. TREVINO
Assistant Treasurer
Born: October 1965
Year of Appointment: 2018
Assistant Treasurer, USAA ETF Trust (09/18-06/19); Accounting/Financial
Director, USAA (12/13-present); Senior Accounting Analyst, USAA (03/11-12/13).
ERIN G. WAGNER
Secretary
Born: February 1974
Year of Appointment: 2019
Associate General Counsel, the Adviser (since 2013).
CHARLES BOOTH
Anti-Money Laundering Compliance Officer and Identity Theft Officer
Born: April 1960
Year of Appointment: 2019
Director, Regulatory Administration and CCO Support Services, Citi Fund Services
Ohio, Inc. (2007-present).
================================================================================
58 | USAA TREASURY MONEY MARKET TRUST
================================================================================
AMY CAMPOS
Chief Compliance Officer
Born: August 1976
Year of Appointment: 2019
Chief Compliance Officer, USAA Mutual Funds Trust (7/1/19-present); Executive
Director, Deputy Chief Compliance Officer, USAA Mutual Funds Trust and USAA ETF
Trust (7/17-6/19); Compliance Director, USAA Mutual Funds Trust (2014-7/17);
Senior Compliance Advisor, USAA Mutual Funds Trust (2010-2014).
THE FOLLOWING OFFICERS SERVED IN THEIR RESPECTIVE OFFICE UNTIL JULY 1, 2019, AT
WHICH POINT EACH OF THE FOLLOWING OFFICERS RESIGNED FROM THEIR RESPECTIVE OFFICE
AND NO LONGER SERVE IN THESE POSITIONS.
JOHN C. SPEAR
Vice President
Born: May 1964
Year of Appointment: 2016
Vice President, USAA ETF Trust (06/17-06/19); Senior Vice President and Chief
Investment Officer, USAA Investments, (03/17-present); Vice President and Chief
Investment Officer, USAA Investments, (11/16-03/17); Vice President, Long Term
Fixed Income (05/12-11/16).
JOHN P. TOOHEY
Vice President
Born: March 1968
Year of Appointment: 2009
Vice President, USAA ETF Trust (06/17-06/19); Head of Equities, Equity
Investments, AMCO (01/12-present).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 59
================================================================================
KRISTEN MILLAN
Secretary
Born: April 1983
Year of Appointment: 2019
Secretary, USAA ETF Trust (04/19-06/19); Assistant Secretary, USAA ETF Trust
(01/19-06/19); Senior Attorney, FASG General Counsel, USAA (09/17-06/19);
Attorney, FASG General Counsel, USAA (06/13-09/17). Ms. Millan also serves as
Assistant Secretary of AMCO, ICORP, and SAS.
STEPHANIE A. HIGBY
Chief Compliance Officer
Born: July 1974
Year of Appointment: 2013
Chief Compliance Officer, USAA ETF Trust (06/17-06/19); Assistant Vice
President, Compliance-Investments, USAA (02/18-present); Assistant Vice
President, Compliance Mutual Funds, USAA (12/16-01/18); Executive Director,
Institutional Asset Management Compliance, USAA (04/13-12/16). Ms. Higby also
serves as the Funds' anti-money laundering compliance officer and as the Chief
Compliance Officer for AMCO and IMCO.
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60 | USAA TREASURY MONEY MARKET TRUST
================================================================================
AS OF JULY 1, 2019
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
David C. Brown
John C. Walters
--------------------------------------------------------------------------------
ADMINISTRATOR AND Victory Capital Management Inc.
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND Victory Capital Advisers Inc.
DISTRIBUTOR 4900 Tiedeman Road
Brooklyn, Ohio 44144
--------------------------------------------------------------------------------
TRANSFER AGENT Victory Capital Transfer Agency Inc.
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 USAA AMCO'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) 235-8396; (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) 235-8396; (ii) at usaa.com; and (iii) on the SEC's website at
http://www.sec.gov.
================================================================================
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----------------------
MUTUAL FUNDS
--------------------------------------------------------------------------------
May 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA World Growth Fund
FUND INSTITUTIONAL ADVISER
SHARES SHARES SHARES
USAWX UIWGX USWGX
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) 235-8396 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)
235-8396 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.
Victory Capital means Victory Capital Management Inc., the investment manager of
the USAA Mutual Funds. USAA Mutual Funds are distributed by Victory Capital
Advisers, Inc., a broker dealer registered with FINRA and an affiliate of
Victory Capital. Victory Capital and its affiliates are not affiliated with
United Services Automobile Association or its affiliates. USAA and the USAA
logos are registered trademarks and the USAA Mutual Funds and USAA Investments
logos are trademarks of United Services Automobile Association and are being
used by Victory Capital and its affiliates under license.
================================================================================
PRESIDENT'S MESSAGE
"... LONG-TERM INVESTORS SHOULD NEVER MAKE
DECISIONS IN HASTE. THEY SHOULD MAKE [PHOTO OF BROOKS ENGLEHARDT]
THOUGHTFUL DECISIONS BASED ON THEIR LONG-TERM
OBJECTIVES, TIME HORIZON, AND RISK TOLERANCE."
--------------------------------------------------------------------------------
JULY 2019
As previously announced, USAA, the parent company of USAA Asset Management
Company ("AMCO"), the prior investment adviser to the USAA Mutual Funds,
announced that AMCO would be acquired by Victory Capital Holdings, Inc.
(Victory Holdings), a global investment management firm headquartered in
Cleveland, Ohio (the Transaction). In connection with the Transaction, also as
previous announced, shareholders of each USAA Mutual Fund approved a new
investment advisory agreement with Victory Capital Management Inc. ("Victory
Capital"), an indirect wholly-owned subsidiary of Victory Holdings. The closing
of the Transaction occurred on July 1, 2019; and Victory Capital became
the investment adviser to each USAA Mutual Fund. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION ABOUT CHANGES THAT TOOK EFFECT ON JULY 1, 2019.
Softening global economic conditions and escalating trade tensions rattled
investors during the 12-month reporting period ended May 31, 2019. When the
reporting period began in June 2018, the global economy was expanding across
most regions and countries, led by the U.S. In this environment, stocks
generally advanced. In the fixed income market, U.S. Treasury yields rose, as
the U.S. Federal Reserve ("Fed") continued to tighten monetary policy.
Signs of trouble emerged during the summer of 2018. The U.S. economic expansion
continued, but growth in a number of other economies, including some European
countries and China, showed a weakening trend. By the autumn of 2018, investors'
fears of a global economic slowdown, combined with harsh U.S.-China trade
rhetoric and Brexit-related uncertainty in Europe, sparked a surge in market
volatility. Global stocks dropped, with most of the decline occurring in
December 2018. At the same time, intermediate- and longer-term yields fell, as
investors anticipated a change in Fed monetary policy. Indeed, after having
raised short-term interest rates four times during 2018, Fed officials announced
in January 2019 that they would "pause," retreating from their earlier plan to
raise interest rates in 2019. Stocks rallied in response and by April 2019 had
recovered most of the ground they had lost. In May 2019, ongoing trade tensions
between the United States and China, as well as President Trump administration's
threat to impose tariffs on Mexico, drove a renewed decline in stock prices. In
the fixed income market, concerns that trade disputes would seriously undermine
global
================================================================================
================================================================================
economic growth pushed down intermediate- and longer-term yields, which ended
the reporting period lower than they started. The yield on the 10-year U.S.
Treasury note, which began June 2018 at 2.89%, rose to 3.24% on November 8,
2018--its high point of the period--and fell to 2.13% by May 31, 2019.
In the final months of the reporting period, the Treasury yield curve inverted,
which means that shorter-term yields were higher than longer-term yields. A
yield-curve inversion warrants attention because it has been a reliable
recession indicator. Although recessions do not automatically follow
inversions, a downward-sloped yield curve has preceded every U.S. recession
since the 1960s. That said, the lag between an inversion and a recession has
been inconsistent. At USAA Investments, A Victory Capital Investment Franchise,
we have found that during the past six decades, the time between inversion and
recession has ranged between six months and two years, with no clear pattern to
provide useful guidance. And as I write to you, we see no recession on the
horizon. First, the U.S. economy continues to grow, albeit at a slower pace than
in 2018. Second, the Fed has made clear its commitment to pause its interest
rate hikes, and there is a growing belief in the markets that policymakers may
even cut interest rates in 2019. (In early June 2019, after the end of the
reporting period, Fed Chair Jerome Powell stated that the U.S. central bank was
monitoring the escalation in trade tensions and could potentially respond by
cutting interest rates if U.S. economic conditions deteriorate.)
At USAA Investments, our team of portfolio managers will continue to monitor the
financial markets, economic conditions, the global trade regime, Fed policy, the
direction of longer-term interest rates, and other issues that have the
potential to affect your investments. In the meantime, I would advise you to
ignore media "noise" about such matters. Media "noise" is meant to provoke an
emotional reaction, which can lead to hasty decision-making. In my opinion,
long-term investors should never make decisions in haste. They should make
thoughtful decisions based on their long-term objectives, time horizon, and risk
tolerance. Dollar-cost averaging, in which you invest a set amount on a regular
basis, is a strategy that can help you stay on track. Another effective strategy
is diversification, which can potentially insulate a portfolio from market
turbulence or changes in performance leadership.
If you would like to review your portfolio to confirm that it is properly
aligned with your investment plan, please contact one of our financial advisors.
You might want to make that call before the summer gets fully underway. When we
are traveling and spending time with family and friends, it can be tempting to
put off decisions on financial matters.
From all of us at USAA Investments, A Victory Capital Investment Franchise,
thank you for the opportunity to help you with your investment needs.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGERS' COMMENTARY 1
INVESTMENT OVERVIEW 4
SHAREHOLDER VOTING RESULTS 8
FINANCIAL INFORMATION
Distributions to Shareholders 9
Report of Independent Registered
Public Accounting Firm 10
Portfolio of Investments 11
Notes to Portfolio of Investments 17
Financial Statements 18
Notes to Financial Statements 22
Financial Highlights 40
EXPENSE EXAMPLE 43
ADVISORY AGREEMENT(S) 45
TRUSTEES' AND OFFICERS' INFORMATION 68
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) 235-8396.
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.
================================================================================
================================================================================
MANAGERS' COMMENTARY ON THE FUND
--------------------------------------------------------------------------------
[PHOTO OF RYAN P. McALLISTER] [PHOTO OF ROGER MORLEY]
RYAN P. McALLISTER ROGER MORLEY
MFS Investment Management MFS Investment Management
--------------------------------------------------------------------------------
o PLEASE REVIEW THE MARKET CONDITIONS OVER THE 12-MONTH REPORTING PERIOD ENDED
MAY 31, 2019.
Global equity markets saw significant volatility over the reporting period
spurred by higher U.S. interest rates, geopolitical unrest, slowing economic
growth in China, trade wars, and the Brexit saga. Investors became
increasingly risk averse in the latter half of 2018, and the market sold off
sharply in the fourth quarter. Equities recovered entering 2019 as the Fed
reversed its previously hawkish stance due to concerns around a slowdown in
growth and a lack of inflationary pressure. The market's risk-on posture in
the first quarter of 2019 also was bolstered by modest signs of progress in
U.S.-China trade negotiations. However, President Trump's announcement of
plans to institute a 25% tariff on $200 billion in goods coming from China
and populist party gains in European Parliament elections dampened the first
quarter optimism and stocks sold off again in May 2019. For the reporting
period ended May 31, 2019, defensive segments of the market such as consumer
staples, real estate, and utilities led performance, while energy,
materials, and financials were the biggest laggards.
For the reporting period ended May 31, 2019, global stock returns were
essentially flat at -0.29%, as gauged by the MSCI World Index. U.S. stocks
were in modest positive territory at 3.78%, as reflected by the S&P 500
Index, while developed market international stocks returned -5.75%, as
measured by the MSCI EAFE Index. The MSCI Emerging Markets Index experienced
a return of -8.70% for the full reporting period.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
o HOW DID THE USAA WORLD GROWTH FUND (THE "FUND") PERFORM DURING THE REPORTING
PERIOD?
The Fund has three share classes: Fund Shares, Institutional Shares, and
Adviser Shares. For the reporting period ended May 31, 2019, the Fund
Shares, Institutional Shares, and Adviser Shares had a total return of
3.23%, 3.29%, and 2.98%, respectively. This compares to returns of -3.09%
for the Lipper Global Funds Index and -0.29% for the MSCI World Index
("Index").
Effective July 1, 2019, Victory Capital serves as the Fund's investment
adviser. Prior to July 1, 2019, AMCO served as the Fund's investment
adviser. The investment adviser employs dedicated resources to support the
research, selection, and monitoring of the Fund's subadvisers. MFS
Investment Management ("MFS") is the subadviser to the Fund. The subadviser
provides day-to-day discretionary management for the Fund's assets.
o WHAT FACTORS DROVE THE FUND'S PERFORMANCE RELATIVE TO THE INDEX?
During the reporting period, the most significant drivers of the Fund's
outperformance included a combination of an overweight position and stock
selection in the consumer staples sector. Additionally, stock selection in
both the materials and communication services sectors bolstered relative
return. Conversely, not owning stocks within both the utilities and real
estate sectors hindered relative performance, along with stock selection
within the financials sector.
With respect to individual names, positive contributions were led by an
overweight to U.S.-based biotechnology company Thermo Fischer Scientific,
Inc. within the healthcare sector. Within consumer staples,
Refer to page 4 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
Refer to the Portfolio of Investments for complete list of securities.
================================================================================
2 | USAA WORLD GROWTH FUND
================================================================================
overweights to Swiss packaged food company Nestle S.A., Swedish hygiene
products company Essity AB, and British distiller Diageo plc were all among
the leading contributors to performance. Within communication services,
broadband provider Comcast Corp. and media and entertainment conglomerate
Walt Disney Co. outperformed notably. On the downside, an overweight to
German pharmaceutical company Bayer AG was the leading detractor. Within
financials, overweights to money center banks including State Street Corp.,
Bank of New York Mellon Corp., and UBS Group AG constrained performance as
the segment declined sharply.
While headlines may drive short-term market performance, MFS continues to
assess the stock valuations and long-term business prospects of companies on
an individual basis. Despite market anxiety around the U.S.-China trade war,
the impact on individual companies has varied and MFS remains confident in
the long-term growth prospects of its portfolio holdings. While there have
been signs of slower economic growth and pressure on profit margins, MFS
does not take a view on the likely timing of any market correction. MFS
believes the portfolio is well-positioned to add value across the full
market cycle.
Thank you for allowing us to help manage your investments.
Investments in foreign securities are subject to additional and more diverse
risks, including but not limited to currency fluctuations, market
illiquidity, and political and economic instability. Foreign investing may
result in more rapid and extreme changes in value than investments made
exclusively in the securities of U.S. companies. There may be less publicly
available information relating to foreign companies than those in the United
States. Foreign securities also may be subject to foreign taxes.
Investments made in emerging market countries may be particularly volatile.
Economies of emerging market countries generally are less diverse and mature
than more developed countries and may have less stable political systems.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/19 o
------------------------------------------------------------------------------------------
SINCE INCEPTION
1 YEAR 5 YEAR 10 YEAR INCEPTION* DATE
------------------------------------------------------------------------------------------
Fund Shares 3.23% 5.86% 11.33% - -
Institutional Shares 3.29% - - 6.28% 8/07/15
Adviser Shares 2.98% 5.59% - 9.75% 8/01/10
MSCI World Index**
(reflects no deduction for
fees, expenses, or taxes) -0.29% 5.62% 9.96% - -
Lipper Global Funds
Index*** (reflects no
deduction for taxes) -3.09% 4.69% 9.03% - -
*Since inception returns are shown when a share class has less than 10 years of
performance. Total returns for periods of less than one year are not annualized.
**The unmanaged MSCI World Index reflects the movements of world stock markets
by representing a broad selection of domestically listed companies within each
market.
***The unmanaged Lipper Global Funds Index tracks the total return performance
of funds within the Lipper Global Funds category.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
usaa.com.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on net investment income and
realized capital gain distributions, including reinvested distributions, or
redemptions of shares.
================================================================================
4 | USAA WORLD GROWTH FUND
================================================================================
o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF INVESTMENT]
USAA WORLD GROWTH MSCI WORLD LIPPER GLOBAL
FUND SHARES INDEX FUNDS INDEX
05/31/09 $10,000.00 $10,000.00 $10,000.00
06/30/09 10,030.00 9,954.88 9,980.24
07/31/09 11,011.00 10,798.03 10,813.62
08/31/09 11,353.00 11,243.50 11,243.49
09/30/09 11,896.00 11,691.65 11,653.94
10/31/09 11,673.00 11,483.64 11,414.04
11/30/09 12,260.00 11,952.90 11,858.16
12/31/09 12,560.00 12,167.54 12,172.06
01/31/10 12,030.00 11,664.64 11,710.11
02/28/10 12,187.00 11,829.07 11,873.30
03/31/10 12,936.00 12,561.65 12,566.57
04/30/10 12,906.00 12,563.42 12,615.10
05/31/10 11,595.00 11,359.99 11,445.61
06/30/10 11,318.00 10,970.50 11,103.53
07/31/10 12,269.00 11,859.91 11,982.98
08/31/10 11,723.00 11,417.12 11,523.40
09/30/10 12,906.00 12,481.72 12,652.36
10/31/10 13,460.00 12,946.98 13,158.73
11/30/10 13,146.00 12,667.46 12,893.01
12/31/10 14,091.00 13,598.84 13,801.78
01/31/11 14,189.00 13,906.06 13,997.34
02/28/11 14,633.00 14,392.95 14,445.38
03/31/11 14,573.00 14,251.02 14,474.66
04/30/11 15,500.00 14,856.43 15,016.46
05/31/11 15,379.00 14,548.23 14,693.12
06/30/11 15,176.00 14,318.08 14,413.95
07/31/11 14,844.00 14,058.46 14,088.11
08/31/11 13,729.00 13,067.95 12,955.88
09/30/11 12,440.00 11,939.26 11,625.22
10/31/11 13,887.00 13,174.22 12,836.32
11/30/11 13,676.00 12,852.56 12,606.52
12/31/11 13,478.00 12,845.42 12,427.29
01/31/12 14,223.00 13,490.04 13,220.19
02/29/12 14,976.00 14,149.02 13,876.20
03/31/12 15,410.00 14,330.92 13,966.59
04/30/12 15,288.00 14,168.18 13,720.63
05/31/12 14,003.00 12,945.13 12,495.09
06/30/12 14,596.00 13,604.75 13,051.30
07/31/12 14,824.00 13,779.65 13,233.13
08/31/12 15,296.00 14,128.98 13,464.86
09/30/12 15,676.00 14,517.16 13,810.03
10/31/12 15,699.00 14,419.06 13,798.73
11/30/12 16,178.00 14,603.69 13,954.44
12/31/12 16,633.00 14,878.33 14,404.48
01/31/13 17,577.00 15,636.23 15,118.97
02/28/13 17,731.00 15,662.04 15,087.37
03/31/13 18,107.00 16,028.90 15,430.84
04/30/13 18,368.00 16,533.67 15,869.99
05/31/13 18,614.00 16,539.91 15,972.41
06/30/13 18,169.00 16,132.36 15,620.58
07/31/13 19,213.00 16,981.66 16,410.04
08/31/13 18,653.00 16,620.21 16,066.51
09/30/13 19,674.00 17,451.43 16,872.39
10/31/13 20,288.00 18,134.54 17,461.88
11/30/13 20,711.00 18,456.82 17,787.83
12/31/13 21,247.00 18,847.36 18,109.60
01/31/14 20,225.00 18,149.28 17,497.19
02/28/14 21,443.00 19,057.85 18,351.97
03/31/14 21,365.00 19,085.44 18,425.67
04/30/14 21,498.00 19,281.00 18,514.63
05/31/14 22,009.00 19,660.35 18,888.42
06/30/14 22,221.00 20,012.06 19,216.17
07/31/14 21,577.00 19,692.68 18,805.57
08/31/14 21,954.00 20,126.61 19,235.73
09/30/14 21,365.00 19,580.36 18,648.43
10/31/14 21,624.00 19,707.02 18,773.37
11/30/14 22,379.00 20,101.97 19,138.73
12/31/14 22,036.00 19,777.82 18,808.68
01/31/15 21,689.00 19,419.45 18,571.00
02/28/15 22,915.00 20,557.21 19,595.96
03/31/15 22,705.00 20,235.42 19,383.73
04/30/15 22,995.00 20,709.99 19,781.45
05/31/15 23,132.00 20,781.33 19,893.35
06/30/15 22,649.00 20,298.12 19,482.86
07/31/15 23,173.00 20,662.47 19,686.54
08/31/15 21,496.00 19,295.14 18,408.11
09/30/15 20,899.00 18,583.45 17,726.52
10/31/15 22,495.00 20,056.08 18,994.32
11/30/15 22,310.00 19,956.29 18,993.46
12/31/15 21,678.00 19,605.51 18,591.42
01/31/16 20,765.00 18,432.62 17,413.78
02/29/16 20,666.00 18,295.44 17,168.01
03/31/16 22,117.00 19,536.95 18,404.04
04/30/16 22,590.00 19,846.09 18,695.73
05/31/16 22,557.00 19,957.56 18,820.56
06/30/16 22,242.00 19,733.93 18,530.76
07/31/16 23,187.00 20,567.65 19,345.48
08/31/16 23,411.00 20,584.75 19,463.93
09/30/16 23,353.00 20,694.09 19,613.63
10/31/16 22,764.00 20,293.60 19,311.00
11/30/16 22,731.00 20,585.41 19,615.64
12/31/16 23,214.00 21,077.98 20,012.48
01/31/17 23,973.00 21,586.70 20,536.22
02/28/17 24,579.00 22,185.59 21,062.23
03/31/17 25,057.00 22,421.91 21,404.13
04/30/17 25,747.00 22,753.91 21,781.92
05/31/17 26,583.00 23,235.25 22,290.22
06/30/17 26,848.00 23,324.65 22,397.82
07/31/17 27,146.00 23,882.87 22,924.92
08/31/17 27,069.00 23,916.50 22,904.23
09/30/17 27,572.00 24,453.28 23,421.26
10/31/17 27,914.00 24,915.41 23,790.73
11/30/17 28,349.00 25,455.27 24,233.79
12/31/17 28,768.00 25,799.52 24,550.49
01/31/18 30,238.00 27,161.73 25,845.84
02/28/18 28,803.00 26,036.49 24,722.01
03/31/18 28,180.00 25,468.99 24,298.43
04/30/18 28,358.00 25,761.66 24,523.49
05/31/18 28,349.00 25,923.09 24,515.50
06/30/18 28,180.00 25,910.73 24,386.27
07/31/18 29,400.00 26,720.01 25,181.68
08/31/18 29,445.00 27,050.61 25,161.60
09/30/18 29,543.00 27,201.23 25,209.40
10/31/18 27,378.00 25,203.91 23,341.85
11/30/18 27,984.00 25,490.22 23,605.51
12/31/18 25,958.00 23,551.99 21,915.07
01/31/19 27,930.00 25,384.48 23,622.66
02/28/19 29,160.00 26,147.78 24,211.03
03/31/19 29,751.00 26,491.22 24,436.91
04/30/19 30,742.00 27,430.58 25,226.38
05/31/19 29,265.00 25,847.81 23,758.47
[END CHART]
Data from 5/31/09 through 5/31/19.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA World Growth Fund to the benchmarks listed above (see page 4 for benchmark
definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes, except
that the Lipper Global Funds Index reflects the fees and expenses of the
underlying funds included in the index.
================================================================================
INVESTMENT OVERVIEW | 5
================================================================================
o TOP 10 INDUSTRIES - 5/31/19 o
(% of Net Assets)
Healthcare Products ...................................................... 13.8%
Beverages ................................................................ 6.2%
Chemicals ................................................................ 5.9%
Diversified Financial Services ........................................... 5.4%
Food ..................................................................... 5.4%
Media .................................................................... 5.3%
Banks .................................................................... 5.2%
Transportation ........................................................... 5.2%
Computers ................................................................ 4.9%
Electronics .............................................................. 4.7%
o TOP 10 EQUITY HOLDINGS - 5/31/19 o
(% of Net Assets)
Thermo Fisher Scientific, Inc. ........................................... 3.2%
Visa, Inc. "A" ........................................................... 3.2%
Comcast Corp. "A" ........................................................ 3.0%
Medtronic plc ............................................................ 3.0%
Nestle S.A. .............................................................. 2.8%
Accenture plc "A" ........................................................ 2.7%
Honeywell International, Inc. ............................................ 2.5%
LVMH Moet Hennessy Louis Vuitton SE ...................................... 2.5%
Essity AB "B" ............................................................ 2.4%
Diageo plc ............................................................... 2.3%
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 Fund's compliance classification.
================================================================================
6 | USAA WORLD GROWTH FUND
================================================================================
o COUNTRY ALLOCATION* - 5/31/19 o
(% of Net Assets)
[PIE CHART OF COUNTRY ALLOCATION]
UNITED STATES 52.1%
FRANCE 10.6%
UNITED KINGDOM 9.8%
SWITZERLAND 7.5%
GERMANY 3.8%
JAPAN 3.0%
OTHER* 14.1%
[END CHART]
*Includes countries with less than 3.0% of portfolio, 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%.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
SHAREHOLDER VOTING RESULTS
--------------------------------------------------------------------------------
On April 18, 2019, a special meeting of shareholders was held to vote on two
proposals relating to the series of the USAA Mutual Funds Trust (Trust).
Shareholders of record on February 8, 2019, were entitled to vote on each
proposal shown below. The proposals were approved by the shareholders.
The following proposals and voting results pertain to one or more series within
the Trust. Votes shown for Proposal 1 are for the Fund, a series of the Trust.
Votes shown for Proposal 2 are for all series of the Trust. The effective date
of the Proposals was July 1, 2019.
PROPOSAL 1
To approve a new Investment Advisory Agreement between the Trust, on behalf of
the Fund, and Victory Capital, an independent investment adviser. The new
Investment Advisory Agreement became effective upon the closing of the
Transaction (as defined and discussed in Note 1 to the Financial Statements)
whereby AMCO was acquired by Victory Holdings, the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
--------------------------------------------------------------------------------
20,877,750 2,623,009 1,752,202
PROPOSAL 2
Election of two new trustees to the Trust's Board of Trustees to serve upon the
closing of the Transaction: (1) David C. Brown, to serve as an "interested
trustee" as defined in the Investment Company Act of 1940, as amended (1940
Act); and (2) John C. Walters, to serve as a trustee who is not an "interested
person" as is defined under the 1940 Act ("Independent Trustee").
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
TRUSTEES FOR VOTES WITHHELD
--------------------------------------------------------------------------------
David C. Brown 8,299,565,565 820,887,736
John C. Walters 8,317,935,885 802,517,416
================================================================================
8 | USAA WORLD GROWTH FUND
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
May 31, 2019, is provided for information purposes only and should not be used
for reporting to federal or state revenue agencies. Federal tax information for
the calendar year will be reported to you on Form 1099-DIV in January 2020.
With respect to distributions paid, the Fund designates the following amounts
(or, if subsequently determined to be different, the maximum amount allowable)
for the fiscal year ended May 31, 2019:
DIVIDEND RECEIVED LONG-TERM FOREIGN FOREIGN QUALIFIED
DEDUCTION (CORPORATE CAPITAL GAIN TAXES SOURCE INTEREST
SHAREHOLDERS)(1) DISTRIBUTIONS(2) PAID(3) INCOME INCOME
------------------------------------------------------------------------------
65.14% $67,238,000 $1,201,000 $17,519,000 $64,000
------------------------------------------------------------------------------
(1)Presented as a percentage of net investment income and short-term capital
gain distributions paid, if any.
(2)Pursuant to Section 852 of the Internal Revenue Code.
(3)The Fund has elected under Section 853 of the Internal Revenue Code to pass
through the credit for taxes paid in foreign countries.
For the fiscal year ended May 31, 2019, the Fund hereby designates the maximum
amount allowable of its net taxable income as qualified dividends taxed at
individual net capital gain rates.
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS | 9
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA WORLD GROWTH FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
World Growth Fund (the "Fund") (one of the funds constituting USAA Mutual Funds
Trust (the "Trust")), including the portfolio of investments, as of May 31,
2019, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, the financial highlights for each of the five years in the period then
ended and the related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Fund (one of the funds
constituting USAA Mutual Funds Trust) at May 31, 2019, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and its financial highlights for each of
the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
BASIS FOR OPINION
These financial statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on the Fund's financial statements based
on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and are required to
be independent with respect to the Trust in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Trust is not required to have,
nor were we engaged to perform, an audit of the Trust's internal control over
financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the Trust's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of May 31, 2019, by correspondence with the custodian and brokers or by
other appropriate auditing procedures where replies from brokers were not
received. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the auditor of one or more Victory Capital investment
companies since 1995.
San Antonio, Texas
July 23, 2019
================================================================================
10 | USAA WORLD GROWTH FUND
================================================================================
PORTFOLIO OF INVESTMENTS
May 31, 2019
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (98.6%)
COMMON STOCKS (98.6%)
BASIC MATERIALS (5.9%)
----------------------
CHEMICALS (5.9%)
101,571 Air Liquide S.A.(a),(b) $ 12,631
196,200 Akzo Nobel N.V.(a) 16,527
129,823 Brenntag AG(a) 6,032
34,099 Linde plc 6,156
116,427 Linde plc(a) 21,106
142,398 PPG Industries, Inc. 14,902
----------
Total Basic Materials 77,354
----------
COMMUNICATIONS (8.7%)
---------------------
ADVERTISING (1.5%)
83,227 Omnicom Group, Inc. 6,439
1,154,127 WPP plc(a) 13,757
----------
20,196
----------
INTERNET (0.9%)
311,989 eBay, Inc. 11,210
----------
MEDIA (5.3%)
961,151 Comcast Corp. "A" 39,407
224,864 Walt Disney Co. 29,691
----------
69,098
----------
TELECOMMUNICATIONS (1.0%)
242,277 Cisco Systems, Inc. 12,605
----------
Total Communications 113,109
----------
CONSUMER, CYCLICAL (7.8%)
-------------------------
APPAREL (3.2%)
284,177 Burberry Group plc(a) 6,100
4,463 Hermes International(a) 2,969
87,237 LVMH Moet Hennessy Louis Vuitton SE(a) 33,053
----------
42,122
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
AUTO PARTS & EQUIPMENT (0.4%)
81,672 Aptiv plc $ 5,230
----------
FOOD SERVICE (1.1%)
623,172 Compass Group plc(a) 14,101
----------
LEISURE TIME (0.3%)
109,514 Harley-Davidson, Inc. 3,583
----------
LODGING (1.5%)
53,008 Marriott International, Inc. "A" 6,618
508,000 Sands China Ltd.(a) 2,294
135,412 Whitbread plc(a) 7,933
20,483 Wynn Resorts Ltd. 2,198
----------
19,043
----------
RETAIL (1.3%)
1,867 AutoZone, Inc.(c) 1,918
168,138 Cie Financiere Richemont S.A.(a) 12,345
175,249 Sally Beauty Holdings, Inc.(c) 2,660
----------
16,923
----------
Total Consumer, Cyclical 101,002
----------
CONSUMER, NON-CYCLICAL (37.5%)
------------------------------
BEVERAGES (6.2%)
983,229 Ambev S.A. 4,398
74,065 Carlsberg A/S "B"(a) 9,720
712,915 Diageo plc(a) 29,968
120,580 Heineken N.V.(a) 12,649
135,584 Pernod Ricard S.A.(a) 23,851
----------
80,586
----------
COMMERCIAL SERVICES (2.1%)
117,310 Adecco Group AG(a) 6,306
95,189 Equifax, Inc. 11,508
90,628 PayPal Holdings, Inc.(c) 9,946
----------
27,760
----------
COSMETICS/PERSONAL CARE (3.5%)
220,867 Colgate-Palmolive Co. 15,377
1,051,472 Essity AB "B"(a) 30,866
----------
46,243
----------
FOOD (5.4%)
293,395 Danone S.A.(a),(b) 23,417
186,099 Kellogg Co. 9,781
370,279 Nestle S.A.(a) 36,775
----------
69,973
----------
================================================================================
12 | USAA WORLD GROWTH FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
HEALTHCARE PRODUCTS (13.8%)
260,573 Abbott Laboratories $ 19,837
55,044 Cooper Companies, Inc. 16,392
5,519 EssilorLuxottica S.A.(a) 636
418,911 Medtronic plc 38,783
1,106,600 Olympus Corp.(a) 13,040
17,159 Sonova Holding AG(a) 3,816
131,913 Stryker Corp. 24,172
154,849 Thermo Fisher Scientific, Inc. 41,342
188,673 Zimmer Biomet Holdings, Inc. 21,495
----------
179,513
----------
HOUSEHOLD PRODUCTS/WARES (2.2%)
350,037 Reckitt Benckiser Group plc(a) 28,116
----------
PHARMACEUTICALS (4.3%)
341,870 Bayer AG(a) 20,165
38,124 Johnson & Johnson 5,000
93,029 Merck KGaA(a) 8,985
82,102 Roche Holding AG(a) 21,545
----------
55,695
----------
Total Consumer, Non-cyclical 487,886
----------
ENERGY (0.6%)
-------------
OIL & GAS SERVICES (0.6%)
95,754 National Oilwell Varco, Inc. 1,996
55,988 NOW, Inc.(c) 730
138,399 Schlumberger Ltd. 4,801
----------
Total Energy 7,527
----------
FINANCIAL (11.8%)
-----------------
BANKS (5.2%)
399,204 Bank of New York Mellon Corp. 17,042
127,589 Erste Group Bank AG(a),(c) 4,522
70,735 Goldman Sachs Group, Inc. 12,908
655,075 Grupo Financiero Banorte S.A.B. de C.V. 3,570
456,200 Kasikornbank PCL(a) 2,702
284,616 State Street Corp. 15,725
985,922 UBS Group AG(a),(c) 11,342
----------
67,811
----------
DIVERSIFIED FINANCIAL SERVICES (5.4%)
155,578 American Express Co. 17,846
40,797 Deutsche Boerse AG(a) 5,640
126,759 Julius Baer Group Ltd.(a),(c) 5,008
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
17,460 TD Ameritrade Holding Corp. $ 869
255,657 Visa, Inc. "A" 41,245
----------
70,608
----------
INSURANCE (1.2%)
86,838 Aon plc 15,637
----------
Total Financial 154,056
----------
INDUSTRIAL (18.8%)
------------------
AEROSPACE/DEFENSE (1.7%)
41,344 MTU Aero Engines AG(a) 8,940
106,591 United Technologies Corp. 13,462
----------
22,402
----------
ELECTRICAL COMPONENTS & EQUIPMENT (3.2%)
196,544 Legrand S.A.(a),(b) 13,221
353,433 Schneider Electric SE(a) 27,877
----------
41,098
----------
ELECTRONICS (4.7%)
77,543 Amphenol Corp. "A" 6,746
201,556 Honeywell International, Inc. 33,118
136,700 Hoya Corp.(a) 9,461
34,358 Resideo Technologies, Inc.(c) 676
58,295 Waters Corp.(c) 11,700
----------
61,701
----------
ENGINEERING & CONSTRUCTION (1.3%)
88,901 Aena SME S.A.(a) 16,350
----------
MACHINERY-DIVERSIFIED (1.3%)
1,102,300 Kubota Corp.(a) 16,737
----------
MISCELLANEOUS MANUFACTURERS (1.4%)
112,771 3M Co. 18,015
----------
TRANSPORTATION (5.2%)
283,054 Canadian National Railway Co. 25,076
218,945 Kansas City Southern 24,802
192,752 United Parcel Service, Inc. "B" 17,910
----------
67,788
----------
Total Industrial 244,091
----------
TECHNOLOGY (7.5%)
-----------------
COMPUTERS (4.9%)
197,425 Accenture plc "A" 35,155
142,817 Check Point Software Technologies Ltd.(c) 15,750
================================================================================
14 | USAA WORLD GROWTH FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
221,581 Cognizant Technology Solutions Corp. "A" $ 13,723
----------
64,628
----------
SEMICONDUCTORS (1.1%)
63,946 Microchip Technology, Inc. 5,118
263,892 Samsung Electronics Co. Ltd.(a) 9,367
----------
14,485
----------
SOFTWARE (1.5%)
378,033 Oracle Corp. 19,128
----------
Total Technology 98,241
----------
Total Common Stocks (cost: $756,143) 1,283,266
----------
Total Equity Securities (cost: $756,143) 1,283,266
----------
MONEY MARKET INSTRUMENTS (0.3%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.3%)
3,743,214 State Street Institutional Treasury Money Market Fund
Premier Class, 2.30%(d) (cost: $3,743) 3,743
----------
SHORT-TERM INVESTMENTS PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (2.0%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (2.0%)
12,483,230 Fidelity Government Portfolio Class I, 2.27%(d) 12,483
13,540,372 Goldman Sachs Financial Square Government Fund
Institutional Class, 2.30%(d) 13,541
----------
Total Short-Term Investments Purchased with Cash Collateral from
Securities Loaned (cost: $26,024) 26,024
----------
TOTAL INVESTMENTS (COST: $785,910) $1,313,033
==========
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------------------------------------------------------------------------------
Equity Securities:
Common Stocks
$733,396 $549,870 $- $1,283,266
Money Market Instruments:
Government & U.S. Treasury
Money Market Funds
3,743 - - 3,743
Short-Term Investments Purchased
with Cash Collateral from
Securities Loaned:
Government & U.S. Treasury
Money Market Funds 26,024 - - 26,024
------------------------------------------------------------------------------------
Total $763,163 $549,870 $- $1,313,033
------------------------------------------------------------------------------------
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 May 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
16 | USAA WORLD GROWTH FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 2019
--------------------------------------------------------------------------------
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 46.5% of net assets at May 31, 2019.
o SPECIFIC NOTES
(a) Securities with a value of $549,870,000, which represented 42.3% of the
Fund's net assets, were classified as Level 2 at May 31, 2019, due to
the prices being adjusted to take into account significant market
movements following the close of local trading.
(b) The security, or a portion thereof, was out on loan as of May 31, 2019.
(c) Non-income-producing security.
(d) Rate represents the money market fund annualized seven-day yield at
May 31, 2019.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 17
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (including securities on
loan of $47,919) (cost of $785,910) $1,313,033
Cash denominated in foreign currencies (identified cost of $426) 426
Receivables:
Capital shares sold 527
USAA Asset Management Company (Note 7) 8
Dividends and interest 3,910
Securities sold 14,955
Other 39
----------
Total assets 1,332,898
----------
LIABILITIES
Payables:
Upon return of securities loaned 26,024
Securities purchased 3,783
Capital shares redeemed 663
Unrealized depreciation on foreign currency contracts held, at value 1
Accrued management fees 853
Accrued transfer agent's fees 52
Other accrued expenses and payables 161
----------
Total liabilities 31,537
----------
Net assets applicable to capital shares outstanding $1,301,361
==========
NET ASSETS CONSIST OF:
Paid-in capital $ 757,345
Distributable earnings 544,016
----------
Net assets applicable to capital shares outstanding $1,301,361
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $1,280,661/41,698 capital shares
outstanding, no par value) $ 30.71
==========
Institutional Shares (net assets of $12,567/409 capital
shares outstanding, no par value) $ 30.74
==========
Adviser Shares (net assets of $8,133/264 capital
shares outstanding, no par value) $ 30.77
==========
See accompanying notes to financial statements.
================================================================================
18 | USAA WORLD GROWTH FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $1,721) $ 28,638
Interest 134
Securities lending (net) 138
--------
Total income 28,910
--------
EXPENSES
Management fees 9,964
Administration and servicing fees:
Fund Shares 1,958
Institutional Shares 13
Adviser Shares 14
Transfer agent's fees:
Fund Shares 1,874
Institutional Shares 13
Adviser Shares 10
Distribution and service fees (Note 7):
Adviser Shares 24
Custody and accounting fees:
Fund Shares 250
Institutional Shares 2
Adviser Shares 2
Postage:
Fund Shares 80
Institutional Shares 1
Adviser Shares 1
Shareholder reporting fees:
Fund Shares 48
Trustees' fees 37
Registration fees:
Fund Shares 10
Institutional Shares 15
Adviser Shares 15
Professional fees 97
Other 27
--------
Total expenses 14,455
--------
================================================================================
FINANCIAL STATEMENTS | 19
================================================================================
Expenses reimbursed:
Institutional Shares $ (8)
Adviser Shares (11)
--------
Net expenses 14,436
--------
NET INVESTMENT INCOME 14,474
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
Net realized gain (loss) on:
Unaffiliated transactions 45,381
Affiliated transactions (Note 4) (49)
Foreign currency transactions (108)
Change in net unrealized appreciation/(depreciation) of:
Investments (18,732)
Foreign capital gains tax 21
Foreign currency translations (17)
--------
Net realized and unrealized gain 26,496
--------
Increase in net assets resulting from operations $ 40,970
========
See accompanying notes to financial statements.
================================================================================
20 | USAA WORLD GROWTH FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
--------------------------------------------------------------------------------------------------------
2019 2018
--------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 14,474 $ 13,749
Net realized gain on investments 45,332 58,464
Net realized loss on foreign currency transactions (108) (23)
Change in net unrealized appreciation/(depreciation) of:
Investments (18,732) 17,949
Foreign capital gains tax 21 (21)
Foreign currency translations (17) (43)
------------------------
Increase in net assets resulting from operations 40,970 90,075
------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (79,970) (59,788)
Institutional Shares (695) (1,215)
Adviser Shares (564) (372)
------------------------
Distributions to shareholders (81,229) (61,375)
------------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 6)
Fund Shares (33,770) 6,339
Institutional Shares (17,035) 23,424
Adviser Shares (1,696) (10,300)
------------------------
Total net increase (decrease) in net assets from capital
share transactions (52,501) 19,463
------------------------
Capital contribution from USAA Transfer Agency Company - 2
------------------------
Net increase (decrease) in net assets (92,760) 48,165
NET ASSETS
Beginning of year 1,394,121 1,345,956
------------------------
End of year $1,301,361 $1,394,121
========================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 21
================================================================================
NOTES TO FINANCIAL STATEMENTS
May 31, 2019
--------------------------------------------------------------------------------
(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 World Growth Fund (the Fund) qualifies as a registered investment
company under Accounting Standards Codification Topic 946. The information
presented in this annual 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 three classes of shares: World Growth Fund Shares (Fund
Shares), World Growth Fund Institutional Shares (Institutional Shares), and
World Growth 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 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).
================================================================================
22 | USAA WORLD GROWTH FUND
================================================================================
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 Holdings, a global investment management firm
headquartered in Cleveland, Ohio (the Transaction), on July 1, 2019.
A special shareholder meeting was held on April 18, 2019, at which shareholders
of the Fund approved a new investment advisory agreement between the Trust, on
behalf of the Fund, and Victory Capital, an independent investment management
company. In addition, shareholders of the Fund also elected the following two
new directors to the Board of the Trust to serve upon the closing of the
Transaction: (1) David C. Brown, to serve as an Interested Trustee; and (2) John
C. Walters, to serve as an Independent Trustee. PLEASE REFER TO THE SUBSEQUENT
EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL
IMPORTANT INFORMATION.
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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
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
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)
================================================================================
24 | USAA WORLD GROWTH FUND
================================================================================
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. 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
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 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 year ended May 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
================================================================================
26 | USAA WORLD GROWTH FUND
================================================================================
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. 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 | 27
================================================================================
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
================================================================================
28 | USAA WORLD GROWTH FUND
================================================================================
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 year ended May 31, 2019, the Fund paid CAPCO facility fees of $11,000,
which represents 1.6% of the total fees paid to CAPCO by the funds of the
Trusts. The Fund had no borrowings under this agreement during the year ended
May 31, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL
STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
(3) DISTRIBUTIONS
The character of any distributions made during the year from net investment
income or net realized gains is determined in accordance with federal tax
regulations and may differ from those determined in accordance with U.S.
generally accepted accounting principles. Also, due to the timing of
distributions, the fiscal year in which amounts are distributed may differ from
the year that the income or realized gains were recorded by the Fund.
The tax character of distributions paid during the years ended May 31, 2019, and
2018, was as follows:
2019 2018
---------------------------------
Ordinary income* $13,991,000 $13,378,000
Long-term realized capital gains 67,238,000 47,997,000
----------- -----------
Total distributions paid $81,229,000 $61,375,000
=========== ===========
As of May 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 10,765,000
Undistributed long-term capital gains 8,956,000
Unrealized appreciation of investments 524,295,000
*Includes short-term realized capital gains, if any, which are taxable as
ordinary income.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
The difference between book-basis and tax-basis unrealized appreciation of
investments is attributable to the tax deferral of losses on wash sales and
non-REIT return of capital dividend adjustments.
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 May 31, 2019, the Fund had no capital loss carryforwards, for federal income
tax purposes.
TAX BASIS OF INVESTMENTS - At May 31, 2019, the aggregate cost of investments
for federal income tax purposes and net unrealized appreciation/(depreciation)
on investments are disclosed below:
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION/
FUND TAX COST APPRECIATION DEPRECIATION (DEPRECIATION)
----------------------------------------------------------------------------------------
USAA World
Growth Fund $788,664,000 $554,667,000 $(30,299,000) $524,368,000
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended May 31, 2019, were $108,146,000 and
$227,504,000, 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 year ended May 31, 2019 were as
follows:
PURCHASES SALES NET REALIZED GAIN (LOSS)
--------------------------------------------------------------------------------
$137,000 $786,000 $(49,000)
================================================================================
30 | USAA WORLD 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 May 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
--------------------------------------------------------------------------------
$47,919,000 $24,622,000 $26,024,000
(6) CAPITAL SHARE TRANSACTIONS
At May 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 | 31
================================================================================
persons or legal entities that the Fund may approve from time to time. Capital
share transactions for all classes were as follows, in thousands:
YEAR ENDED YEAR ENDED
MAY 31, 2019 MAY 31, 2018
------------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------
FUND SHARES:
Shares sold 2,120 $ 65,889 3,664 $ 118,239
Shares issued from reinvested dividends 2,792 78,879 1,846 59,037
Shares redeemed (5,761) (178,538) (5,300) (170,937)
---------------------------------------------------
Net increase (decrease) from capital
share transactions (849) $ (33,770) 210 $ 6,339
===================================================
INSTITUTIONAL SHARES:
Shares sold 85 $ 2,667 739 $ 23,785
Shares issued from reinvested dividends 13 363 30 958
Shares redeemed (638) (20,065) (41) (1,319)
---------------------------------------------------
Net increase (decrease) from capital
share transactions (540) $ (17,035) 728 $ 23,424
===================================================
ADVISER SHARES:
Shares sold 17 $ 523 45 $ 1,434
Shares issued from reinvested dividends 6 175 3 109
Shares redeemed (76) (2,394) (366)* (11,843)*
---------------------------------------------------
Net decrease from capital share
transactions (53) $ (1,696) (318) $ (10,300)
===================================================
* Net of redemption fees, if any.
(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.
================================================================================
32 | USAA WORLD GROWTH FUND
================================================================================
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 Global Funds Index.
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.
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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 33
================================================================================
For the year ended May 31, 2019, the Fund incurred management fees, paid or
payable to the Manager, of $9,964,000, which included a performance adjustment
for the Institutional Shares of less than $500. For the Institutional Shares,
the performance adjustments was less than 0.01%. Fund Shares and Adviser Shares
did not incur any performance adjustment. PLEASE REFER TO THE SUBSEQUENT EVENT
NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
SUBADVISORY ARRANGEMENT(s) - The Manager entered into an Investment Subadvisory
Agreement with MFS Investment Management (MFS), under which MFS 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 MFS a subadvisory fee based on the aggregate
average daily net assets in the USAA World Growth Fund and the USAA
International Fund combined, in an annual amount of 0.33% on the first $2
billion of assets, 0.30% on assets over $2 billion and up to $3 billion, 0.25%
on assets over $3 billion and up to $4 billion, and 0.225% on assets over $4
billion that MFS manages. Prior to October 1, 2018, the Manager (not the Fund)
paid MFS a subadvisory fee based on the aggregate average daily net assets in
the USAA World Growth Fund and the USAA International Fund combined, in an
annual amount of 0.33% on the first $2 billion of assets, 0.30% on assets over
$2 billion and up to $3 billion, and 0.25% on assets over $3 billion that MFS
managed. For the year ended May 31, 2019, the Manager incurred subadvisory fees
with respect to the Fund, paid or payable to MFS, of $4,041,000.
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 year ended May 31, 2019,
the Fund Shares, Institutional Shares, and Adviser Shares, incurred
administration and servicing fees, paid or payable to the Manager, of
$1,958,000, $13,000, and $14,000, respectively.
================================================================================
34 | USAA WORLD GROWTH 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 year ended May
31, 2019, the Fund reimbursed the Manager $9,000 for these compliance and legal
services. These expenses are included in the professional fees on the Fund's
Statement of Operations. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
EXPENSE LIMITATION - The Manager agreed, through September 30, 2019, to limit
the total annual operating expenses of the Institutional Shares and Adviser
Shares to 1.00% and 1.35%, respectively, of their average daily net assets,
excluding extraordinary expenses and before reductions of any expenses paid
indirectly, and to reimburse the Institutional Shares and the Adviser Shares for
all expenses in excess of that amount. This expense limitation arrangement may
not be changed or terminated through September 30, 2019, without approval of the
Board, and may be changed or terminated by the Manager at any time after that
date. Prior to October 1, 2018, the Institutional Shares expense limitation was
1.10% of average daily net assets. For the year ended May 31, 2019 the
Institutional Shares and Adviser Shares incurred reimbursable expenses of $8,000
and $11,000, respectively, of which $8,000 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 $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 year ended May 31, 2019, the Fund Shares,
Institutional Shares, and Adviser Shares incurred transfer agent's fees, paid or
payable to SAS, of $1,874,000, $13,000, and $10,000, respectively. PLEASE REFER
TO THE SUBSEQUENT EVENT NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT
FOR ADDITIONAL IMPORTANT INFORMATION.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 35
================================================================================
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 year ended May 31, 2019, the Adviser
Shares incurred distribution and service (12b-1) fees of $24,000.
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. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE
TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
(8) TRANSACTIONS WITH AFFILIATES
The Manager is indirectly wholly owned by USAA, a large, diversified financial
services institution. At May 31, 2019, USAA and its affiliates owned 173,000
Institutional Shares and 162,000 Adviser Shares, which represents 42.4% of the
Institutional Shares outstanding, 61.3% of the Adviser Shares outstanding, and
0.8% 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. PLEASE REFER TO THE SUBSEQUENT EVENT
NOTE TO THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
(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
================================================================================
36 | USAA WORLD GROWTH FUND
================================================================================
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.
(10) RECENT ACCOUNTING PRONOUNCEMENTS
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.
(11) SUBSEQUENT EVENT NOTE
As previously announced, and as discussed in Note 1 to the Financial Statements,
effective July 1, 2019, AMCO, the prior investment adviser to the Fund, and SAS,
the prior transfer agent to the Fund, were acquired by Victory Holdings. PLEASE
SEE THE SUPPLEMENT DATED JULY 1, 2019 TO THE FUND'S PROSPECTUS FOR ADDITIONAL
IMPORTANT INFORMATION.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 37
================================================================================
Effective July 1, 2019, Victory Capital is the new investment adviser and
administrator to the USAA Mutual Funds; SAS was renamed Victory Capital Transfer
Agency, Inc.; Victory Capital Advisers, Inc. is the new distributor to the USAA
Mutual Funds; Citi Fund Services of Ohio, Inc. serves as sub-administrator and
sub-fund accountant for the USAA Mutual Funds; and FIS Investor Services LLC
serve as sub-transfer agent and dividend disbursing agent for the USAA Mutual
Funds. Effective August 5, 2019, Citibank, N.A. is the new custodian for the
USAA Mutual Funds.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2019 permitting the
use of a "manager-of-managers" structure for certain funds. Prior to that date,
the Trust relied on a similar exemptive order granted by the SEC to the Trust
and its affiliated persons. Under a manager of managers structure, the
investment adviser may select (with approval of the Board and without
shareholder approval) one or more subadvisers to manage the day-to-day
investment of a fund's assets.
Effective July 1, 2019, Victory Capital added new portfolio managers from one or
more investment teams employed by Victory Capital to serve as additional
portfolio managers, or replace current portfolio managers, to manage all or a
portion of the Fund according to each team's own investment process.
Effective July 1, 2019, members of Victory Capital's investment franchise, RS
Investments, were also named as portfolio managers of the Fund to manage all or
a position of the Fund.
Effective July 1, 2019, under the investment advisory agreement with Victory
Capital, which took effect on July 1, 2019, no performance adjustments will be
made for periods beginning July 1, 2019, through June 30, 2020, and only
performance beginning as of July 1, 2020, and thereafter will be utilized in
calculating performance adjustments through June 30, 2020.
Effective July 1, 2019, the line of credit (as discussed in the Notes to the
Financial Statements in this annual report) among the Trust, with respect to its
Funds, and CAPCO terminated; the Trust, with respect to its Funds, along with
series of Victory Portfolios, Victory Portfolios II and Victory
================================================================================
38 | USAA WORLD GROWTH FUND
================================================================================
Variable Insurance Funds, entered into a 364 day committed credit facility and a
364 day uncommitted, demand credit facility, with Citibank, N.A. (Citibank).
Each such credit facility may be renewed if so agreed by the parties. Under the
agreement with Citibank, the Funds may borrow up to $600 million, of which $300
million is committed and $300 million is uncommitted. Of this amount, $40
million of the line of credit is reserved for use by the Victory Floating Rate
Fund (a series of Victory Portfolios), with that Fund paying the related
commitment fees for that amount. The purpose of the agreement is to meet
temporary or emergency cash needs, including redemption requests that might
otherwise require the untimely disposition of securities. Citibank receives an
annual commitment fee of 0.15%. Each Fund pays a pro-rata portion of this
commitment fee plus any interest on amounts borrowed.
Effective July 1, 2019, the Trust will rely on an exemptive order granted to
Victory Capital and its affiliated funds by the SEC in March 2017 (the IFL
Order), permitting the establishment and operation of an Interfund Lending
Facility (the Facility). The Facility allows each Fund to directly lend and
borrow money to or from certain other affiliated Funds relying upon the IFL
Order at rates beneficial to both the borrowing and lending funds. Advances
under the Facility are allowed for temporary or emergency purposes, including
the meeting of redemption requests that are subject to each Fund's borrowing
restrictions. The interfund loan rate is determined, as specified in the IFL
Order, by averaging the current repurchase agreement rate and the current bank
loan rate.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 39
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
-----------------------------------------------------------------------
2019 2018 2017 2016 2015
-----------------------------------------------------------------------
Net asset value at beginning
of period $ 31.82 $ 31.16 $ 27.20 $ 28.69 $ 28.00
-----------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .33 .30 .19 .21 .24
Net realized and
unrealized gain (loss) .51 1.78 4.55 (.95) 1.16
-----------------------------------------------------------------------
Total from investment
operations .84 2.08 4.74 (.74) 1.40
-----------------------------------------------------------------------
Less distributions from:
Net investment income (.28) (.23) (.21) (.19) (.28)
Realized capital gains (1.67) (1.19) (.57) (.56) (.43)
-----------------------------------------------------------------------
Total distributions (1.95) (1.42) (.78) (.75) (.71)
-----------------------------------------------------------------------
Net asset value at end
of period $ 30.71 $ 31.82 $ 31.16 $ 27.20 $ 28.69
=======================================================================
Total return (%)* 3.23 6.68 17.81 (2.49) 5.10
Net assets at end of
period (000) $1,280,661 $1,353,880 $1,319,357 $1,157,148 $1,208,909
Ratios to average
daily net assets:**
Expenses (%)(a) 1.09 1.10 1.13 1.17 1.17
Net investment income (%) 1.09 .98 .72 .81 .91
Portfolio turnover (%) 8 10 12 10 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 year ended May 31, 2019, average daily net assets were
$1,305,822,000.
(a) Does not include acquired fund fees, if any.
================================================================================
40 | USAA WORLD GROWTH FUND
================================================================================
INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
PERIOD ENDED
YEAR ENDED MAY 31, MAY 31,
----------------------------------------------------------
2019 2018 2017 2016***
----------------------------------------------------------
Net asset value at beginning
of period $ 31.75 $ 31.14 $27.14 $28.83
-------------------------------------------------------
Income (loss) from investment
operations:
Net investment income .38 .29 .20 .24
Net realized and unrealized
gain (loss) .48 1.80 4.55 (1.11)
-------------------------------------------------------
Total from investment operations .86 2.09 4.75 (.87)
-------------------------------------------------------
Less distributions from:
Net investment income (.20) (.29) (.18) (.26)
Realized capital gains (1.67) (1.19) (.57) (.56)
-------------------------------------------------------
Total distributions (1.87) (1.48) (.75) (.82)
-------------------------------------------------------
Net asset value at end of period $ 30.74 $ 31.75 $31.14 $27.14
=======================================================
Total return (%)* 3.29 6.70 17.89 (2.92)
Net assets at end of period (000) $12,567 $30,127 $6,877 $5,228
Ratios to average daily net assets:**
Expenses (%)(a) 1.05(b) 1.10 1.09 1.10(c)
Expenses, excluding
reimbursements (%)(a) 1.11 1.10 1.37 1.54(c)
Net investment income (%) 1.13 1.19 .78 1.11(c)
Portfolio turnover (%) 8 10 12 10
* 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 year ended May 31, 2019, average daily net assets were $13,382,000.
*** Institutional Shares commenced operations on August 7, 2015.
(a) Does not include acquired fund fees, if any.
(b) Effective October 1, 2018, the Manager had voluntarily agreed to limit the
annual expenses of the Institutional Shares to 1.00% of the Institutional
Shares' average daily net assets.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
FINANCIAL HIGHLIGHTS | 41
================================================================================
ADVISER SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
-------------------------------------------------------------------
2019 2018 2017 2016 2015
-------------------------------------------------------------------
Net asset value at beginning
of period $31.86 $ 31.07 $ 27.13 $ 28.55 $ 27.90
-------------------------------------------------------------------
Income (loss) from investment
operations:
Net investment income .24(a) .18(b) .12 .14 .19
Net realized and unrealized
gain (loss) .53(a) 1.80(b) 4.53 (.93) 1.13
-------------------------------------------------------------------
Total from investment
operations .77(a) 1.98(b) 4.65 (.79) 1.32
-------------------------------------------------------------------
Less distributions from:
Net investment income (.19) (.00)(c) (.14) (.07) (.24)
Realized capital gains (1.67) (1.19) (.57) (.56) (.43)
-------------------------------------------------------------------
Total distributions (1.86) (1.19) (.71) (.63) (.67)
-------------------------------------------------------------------
Redemption fees added to
beneficial interests - .00(c) .00(c) .00(c) .00(c)
-------------------------------------------------------------------
Net asset value at end of period $30.77 $ 31.86 $ 31.07 $ 27.13 $ 28.55
===================================================================
Total return (%)* 2.98 6.36 17.50 (2.72) 4.84
Net assets at end of
period (000) $8,133 $10,114 $19,722 $16,580 $26,797
Ratios to average daily
net assets:**
Expenses (%)(d) 1.35 1.39(e) 1.42 1.42 1.38(f)
Expenses, excluding
reimbursements (%)(d) 1.46 1.43 1.42 1.42 1.38
Net investment income (%) .76 .57 .45 .49 .72
Portfolio turnover (%) 8 10 12 10 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 year ended May 31, 2019, average daily net assets were $9,436,000.
(a) Calculated using average shares. For the year ended May 31, 2019, average
shares were 303,000.
(b) Calculated using average shares.
(c) Represents less than $0.01 per share.
(d) Does not include acquired fund fees, if any.
(e) Effective October 1, 2017, the Manager had 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 October 1, 2014, the Manager had voluntarily agreed to limit the
annual expenses of the Adviser Shares to 1.60% of the Adviser Shares'
average daily net assets.
================================================================================
42 | USAA WORLD GROWTH FUND
================================================================================
EXPENSE EXAMPLE
May 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 December 1, 2018, through May
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 | 43
================================================================================
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 DECEMBER 1, 2018 -
DECEMBER 1, 2018 MAY 31, 2019 MAY 31, 2019
--------------------------------------------------------
FUND SHARES
Actual
$1,000.00 $1,045.80 $5.51
Hypothetical
(5% return before expenses) 1,000.00 1,019.55 5.44
INSTITUTIONAL SHARES
Actual 1,000.00 1,046.40 5.10
Hypothetical
(5% return before expenses) 1,000.00 1,019.95 5.04
ADVISER SHARES
Actual 1,000.00 1,044.60 6.88
Hypothetical
(5% return before expenses) 1,000.00 1,018.20 6.79
*Expenses are equal to the annualized expense ratio of 1.08% for Fund Shares,
1.00% for Institutional Shares, and 1.35% for Adviser Shares, which are net of
any reimbursements and expenses paid indirectly, multiplied by the average
account value over the period, multiplied by 182 days/365 days (to reflect the
one-half-year period). The Fund's actual ending account values are based on its
actual total returns of 4.58% for Fund Shares, 4.64% for Institutional Shares,
and 4.46% for Adviser Shares for the six-month period of December 1, 2018,
through May 31, 2019.
================================================================================
44 | USAA WORLD GROWTH FUND
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the (i) new investment
advisory agreement between the Trust and Victory Capital and (ii) new investment
subadvisory agreements between certain subadvisers and Victory Capital, which
became effective on July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO
THE FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT
INFORMATION.
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.
================================================================================
ADVISORY AGREEMENT(S) | 45
================================================================================
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 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
================================================================================
46 | USAA WORLD GROWTH FUND
================================================================================
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 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 then-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.
================================================================================
ADVISORY AGREEMENT(S) | 47
================================================================================
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.
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).
================================================================================
48 | USAA WORLD GROWTH FUND
================================================================================
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.
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.
(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) | 49
================================================================================
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 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.
================================================================================
50 | USAA WORLD GROWTH FUND
================================================================================
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 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,
================================================================================
ADVISORY AGREEMENT(S) | 51
================================================================================
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.
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.
(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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52 | USAA WORLD GROWTH FUND
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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 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
================================================================================
ADVISORY AGREEMENT(S) | 53
================================================================================
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 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.
================================================================================
54 | USAA WORLD GROWTH FUND
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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 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.
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ADVISORY AGREEMENT(S) | 55
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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
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.
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56 | USAA WORLD GROWTH FUND
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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
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
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ADVISORY AGREEMENT(S) | 57
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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 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.
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58 | USAA WORLD GROWTH FUND
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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. 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) | 59
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND THE MANAGER)
May 31, 2019
--------------------------------------------------------------------------------
The following disclosure relates to the approval of the continuation of the (i)
investment advisory agreement between the Trust and AMCO and (ii) investment
subadvisory agreements between certain subadvisers and AMCO, which were
effective until July 1, 2019. PLEASE REFER TO THE SUBSEQUENT EVENT NOTE TO THE
FINANCIAL STATEMENTS IN THIS ANNUAL REPORT FOR ADDITIONAL IMPORTANT INFORMATION.
At an in-person meeting of the Board of Trustees (the Board) held on April 17,
2019, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to the
Fund and the Subadvisory Agreement between the Manager and MFS Investment
Management (the Subadviser) with respect to the Fund.(1)
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and Subadvisory Agreement and the
Manager and the Subadviser, and were given the opportunity to ask questions and
request additional information from management. The information provided to the
Board included, among other things: (i) a separate report prepared by an
independent third party, which provided a statistical analysis comparing the
Fund's investment performance, expenses, and fees to comparable investment
companies; (ii) information concerning
(1)At an in-person meeting held on January 15, 2019, the Board, including the
Independent Trustees, approved a new investment advisory agreement between
the Trust, on behalf of the Fund, and Victory Capital Management Inc.
("Victory Capital"). Upon the closing of the transaction, on behalf of the
Fund, Victory Capital Holdings, Inc., the parent company of Victory Capital,
the Advisory Agreement between the Trust and the Manager will terminate and
the new investment advisory agreement between the Trust and Victory Capital
will go into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are included in this
annual report.
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60 | USAA WORLD GROWTH FUND
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the services rendered to the Fund, as well as information regarding the
Manager's revenues and costs of providing services to the Fund and compensation
paid to affiliates of the Manager; and (iii) information about the Manager's and
Subadviser's operations and personnel. Prior to voting, the Independent Trustees
reviewed the proposed continuance of the Advisory Agreement and the Subadvisory
Agreement with management and with experienced independent legal counsel
retained by the Independent Trustees (Independent Counsel) and received
materials from such Independent Counsel discussing the legal standards for their
consideration of the proposed continuation of the Advisory Agreement and the
Subadvisory Agreement with respect to the Fund. The Independent Trustees also
reviewed the proposed continuation of the Advisory Agreement and the Subadvisory
Agreement with respect to the Fund in private sessions with Independent Counsel
at which no representatives of management were present.
The Board considered the Advisory Agreement and the Subadvisory Agreement
separately in the course of its review. In doing so, the Board noted the
respective roles of the Manager and the Subadviser in providing services to the
Fund.
At each regularly scheduled meeting of the Board and its committees, the Board
receives and reviews, among other things, information concerning the Fund's
performance and related services provided by the Manager and by the Subadviser.
At the meeting at which the renewal of the Advisory Agreement and Subadvisory
Agreement is considered, particular focus is given to information concerning
Fund performance, fees and total expenses as compared to comparable investment
companies, and the Manager's profitability with respect to the Fund. However,
the Board noted that the evaluation process with respect to the Manager and the
Subadviser is an ongoing one. In this regard, the Board's and its committees'
consideration of the Advisory Agreement and Subadvisory Agreement included
certain information previously received at such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In
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ADVISORY AGREEMENT(S) | 61
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approving the Advisory Agreement, the Trustees did not identify any single
factor as controlling, and each Trustee may have attributed different weights to
various factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent, and
quality of the services provided by the Manager under the Advisory Agreement,
the Board reviewed information provided by the Manager relating to its
operations and personnel. The Board also took into account its knowledge of the
Manager's management and the quality of the performance of the Manager's duties
through Board meetings, discussions, and reports during the preceding year. The
Board considered the fees paid to the Manager and the services provided to the
Fund by the Manager under the Advisory Agreement, as well as other services
provided by the Manager and its affiliates under other agreements, and the
personnel who provide these services. In addition to the investment advisory
services provided to the Fund, the Manager and its affiliates provide
administrative services, shareholder services, oversight of Fund accounting,
marketing services, assistance in meeting legal and regulatory requirements, and
other services necessary for the operation of the Fund and the Trust. The Board
also considered the significant risks assumed by the Manager in connection with
the services provided to the Fund, including investment, operational,
enterprise, litigation, regulatory and compliance risks.
The Board considered the level and depth of experience of the Manager, including
the professional experience and qualifications of its senior and investment
personnel, as well as current staffing levels. The Board discussed the Manager's
effectiveness in monitoring the performance of the Subadviser and its timeliness
in responding to performance issues. The allocation of the Fund's brokerage,
including the Manager's process for monitoring "best execution," also was
considered. The Manager's role in coordinating the activities of the Fund's
other service providers also was considered. The Board also considered the
Manager's risk management processes. The Board considered the Manager's
financial condition and that it had the financial wherewithal to continue to
provide the same scope and high quality of services under the Advisory
Agreement. In reviewing the Advisory Agreement, the Board focused on the
experience, resources, and strengths of the Manager and its affiliates in
managing the Fund, as well as the other funds in the Trust.
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62 | USAA WORLD GROWTH FUND
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The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager and its affiliates, including oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust,
also focused on the quality of the Manager's compliance and administrative
staff.
EXPENSES AND PERFORMANCE - In connection with its consideration of the Advisory
Agreement, the Board evaluated the Fund's advisory fees and total expense ratio
as compared to other open-end investment companies deemed to be comparable to
the Fund as determined by the independent third party in its report. The Fund's
expenses were compared to (i) a group of investment companies chosen by the
independent third party to be comparable to the Fund based upon certain factors,
including fund type, comparability of investment objective and classification,
sales load type (in this case, retail investment companies with front-end loads
and no sales loads), asset size, and expense components (the "expense group"),
and (ii) a larger group of investment companies that includes all front-end load
and no-load retail open end investment companies with similar investment
classifications/objective as the Fund regardless of asset size, excluding
outliers (the "expense universe"). Among other data, the Board noted that the
Fund's management fee rate - which includes advisory and administrative services
and the effects of any performance adjustment - was above the median of its
expense group and its expense universe. The data indicated that the Fund's total
expenses were below the median of its expense group and its expense universe.
The Board took into account the various services provided to the Fund by the
Manager and its affiliates, including the high quality of services received by
the Fund from the Manager. The Board also noted the level and method of
computing the Fund's management fee, including the performance adjustment to
such fee. The Board also took into account that the subadvisory fees under the
Subadvisory Agreement relating to the Fund are paid by the Manager.
The Board also considered and discussed information about the Subadviser's fees,
including the amount of management fees retained by the Manager after payment of
the subadvisory fee.
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ADVISORY AGREEMENT(S) | 63
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In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total return with its Lipper index and with that of other mutual funds deemed to
be in its peer group by the independent third party in its report (the
"performance universe"). The Fund's performance universe consisted of the Fund
and all retail and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or primary channel
of distribution. This comparison indicated that, among other data, the Fund's
performance was above the average of its performance universe and its Lipper
index for the one-, three-, five-, and ten-year periods ended December 31, 2018.
The Board also noted that the Fund's percentile performance ranking was in the
top 45% its performance universe for the one-year period ended December 31,
2018, was in the top 35% of its performance universe for the three-year period
ended December 31, 2018, was in the top 30% of its performance universe for the
five-year period ended December 31, 2018, and was in the top 15% of its
performance universe for the ten-year period ended December 31, 2018.
COMPENSATION AND PROFITABILITY - The Board took into consideration the level and
method of computing the Fund's management fee. The information considered by the
Board included operating profit margin information for the Manager's business as
a whole. The Board also received and considered profitability information
related to the management revenues from the Fund. This information included a
review of the methodology used in the allocation of certain costs to the Fund.
In considering the profitability data with respect to the Fund, the Trustees
noted that the Manager pays the Fund's subadvisory fees. The Trustees reviewed
the profitability of the Manager's relationship with the Fund before tax
expenses. The Board was also provided with an Investment Management
Profitability Analysis prepared by an independent information service. In
reviewing the overall profitability of the management fee to the Manager, the
Board also considered the fact that affiliates provide shareholder servicing and
administrative services to the Fund for which they receive compensation. The
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64 | USAA WORLD GROWTH FUND
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Board also considered the possible direct and indirect benefits to the Manager
from its relationship with the Trust, including that the Manager may derive
reputational and other benefits from its association with the Fund. The Trustees
recognized that the Manager should be entitled to earn a reasonable level of
profits in exchange for the level of services it provides to the Fund and the
entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussions of
the current advisory fee structure. The Board considered the fact that the
Manager pays the Fund's subadvisory fees. The Board also considered the effect
of the Fund's growth and size on its performance and fees, noting that if the
Fund's assets increase over time, the Fund may realize other economies of scale
if assets increase proportionally more than some expenses. The Board determined
that the current investment management fee structure was reasonable.
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) the performance of the Fund is
reasonable in relation to the performance of funds with a similar investment
objective and to relevant indices; (iv) the Fund's advisory expenses are
reasonable in relation to those of similar funds and to the services to be
provided by the Manager; and (v) the Manager and its affiliates' level of
profitability from their relationship with the Fund is reasonable in light of
the nature and high quality of services provided by the Manager and the type of
fund. Based on their conclusions, the Board determined that continuation of the
Advisory Agreement would be in the best interests of the Fund and its
shareholders.
SUBADVISORY AGREEMENT
In approving the Fund's Subadvisory Agreement, the Board considered various
factors, among them: (i) the nature, extent, and quality of services
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ADVISORY AGREEMENT(S) | 65
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provided to the Fund by the Subadviser, including the personnel providing
services; (ii) the 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 the Subadvisory Agreement. 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 the
Subadvisory Agreement. In approving the Subadvisory Agreement, the Trustees did
not identify any single factor as controlling, and each Trustee may have
attributed different weights to various factors. Throughout their deliberations,
the Independent Trustees were represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES PROVIDED; INVESTMENT PERSONNEL - The
Trustees considered information provided to them regarding the services provided
by the Subadviser, including information presented periodically throughout the
previous year. The Board considered the Subadviser's level of knowledge and
investment style. The Board reviewed the experience and credentials of the
investment personnel who are responsible for managing the investment of
portfolio securities with respect to the Fund and the Subadviser's level of
staffing. The Trustees also noted the Subadviser's brokerage practices. The
Board also considered the Subadviser's regulatory and compliance history. The
Board also took into account the Subadviser's risk management processes. The
Board noted that the Manager's monitoring processes of the Subadviser 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 the Subadviser.
SUBADVISER COMPENSATION - The Board also took into consideration the financial
condition of the Subadviser. In considering the cost of services to be provided
by the Subadviser and the profitability to the Subadviser of its relationship
with the Fund, the Trustees noted that the fees under the Subadvisory Agreement
were paid by the Manager. The Trustees also relied on the ability of the Manager
to negotiate the Subadvisory Agreement and the fees thereunder at arm's length.
For the above reasons, the Board
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66 | USAA WORLD GROWTH FUND
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determined that the profitability of the Subadviser from its relationship with
the Fund was not a material factor in its deliberations with respect to the
consideration of the approval of the Subadvisory Agreement, although the
Trustees noted that the Subadviser's subadvisory fees were reduced effective
October 1, 2018. For similar reasons, the Board concluded that the potential for
economies of scale in the Subadviser's management of the Fund was not a material
factor in considering the Subadvisory Agreement, although the Board noted that
the Subadvisory Agreement contains breakpoints in its fee schedule.
SUBADVISORY FEES AND FUND PERFORMANCE - The Board compared the subadvisory fees
for the Fund with the fees that the Subadviser charges to comparable clients, as
applicable. The Board considered that the Fund pays a management fee to the
Manager and that, in turn, the Manager pays a subadvisory fee to the Subadviser.
As noted above, the Board considered, among other data, the Fund's performance
during the one-, three-, five-, and ten-year periods ended December 31, 2018, as
compared to the Fund's peer group and noted that the Board reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Board noted the Manager's experience and resources in monitoring the
performance, investment style, and risk-adjusted performance of the Subadviser.
The Board was mindful of the Manager's focus on the Subadviser's performance.
The Board also noted the Subadviser's long-term performance record for similar
accounts, as applicable.
CONCLUSIONS - The Board reached the following conclusions regarding the
Subadvisory Agreement, among others: (i) the Subadviser is qualified to manage
the Fund's assets in accordance with its investment objective and policies; (ii)
the Subadviser maintains an appropriate compliance program; (iii) the
performance of the Fund is reasonable in relation to the performance of funds
with a similar investment objective and to relevant indices; and (iv) the Fund's
advisory expenses are reasonable in relation to those of similar funds and to
the services to be provided by the Manager and the Subadviser. Based on its
conclusions, the Board determined that approval of the Subadvisory Agreement
with respect to the Fund would be in the best interests of the Fund and its
shareholders.
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ADVISORY AGREEMENT(S) | 67
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TRUSTEES' AND OFFICERS' INFORMATION
TRUSTEES AND OFFICERS OF THE TRUST
--------------------------------------------------------------------------------
As of July 1, 2019, the Board of Trustees (the Board) of the Trust consists of
ten Trustees. These Trustees and the Trust's Officers supervise the business
affairs of the USAA family of funds. The Board is responsible for the general
oversight of the funds' business and for assuring that the funds are managed in
the best interests of each fund's respective shareholders. The Board
periodically reviews the funds' investment performance as well as the quality of
other services provided to the funds and their shareholders by each of the
fund's service providers, including the adviser and its affiliates. Pursuant to
a policy adopted by the Board, the term of office for each Trustee shall be
until the Trustee reaches age 75. The Board may change or grant exceptions from
this policy at any time without shareholder approval. A Trustee may resign or be
removed by a vote of two-thirds of the Trustees before the removal or by the
holders of two-thirds of the outstanding shares of the Trust at any time.
Vacancies on the Board can be filled by the action of a majority of the
Trustees, provided that after filling such vacancy at least two-thirds of the
Trustees have been elected by the shareholders.
Set forth below are the Trustees and Officers of the Trust, their respective
offices and principal occupations during the last five years, length of time
served, and information relating to any other directorships held. As of July 1,
2019, each serves on the Board of the USAA family of funds consisting of one
registered investment company, which offers 47 individual funds. Unless
otherwise indicated, the business address for each is P.O. Box 659430, San
Antonio, TX 78265-9430.
If you would like more information about the funds' Trustees, you may call (800)
235-8396 to request a free copy of the funds' Statement of Additional
Information (SAI).
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68 | USAA WORLD GROWTH FUND
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In connection with the Transaction, the Board of the Trust nominated, and
shareholders of each USAA mutual fund approved, two new Trustees to serve on the
Trust's Board, effective upon the closing of the Transaction. Effective July 1,
2019, David C. Brown serves as an Interested Trustee and John C. Walters serves
as an Independent Trustee. Information about the current Trustees of the Trust
is provided below.
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
DANIEL S. McNAMARA(1, 2, 4, 6, +)
Trustee and Chair of the Board of Trustees
Born: June 1966
Year of Election or Appointment: 2012
Trustee, President, and Vice Chairman, USAA ETF Trust (06/17-06/19); President
of Financial Advice & Solutions Group (FASG), USAA (02/13-present); Director of
USAA Asset Management Company (AMCO), (08/11-present); Director of USAA
Investment Management Company (IMCO) (09/09-present); President, IMCO
(09/09-04/14); President and Director of USAA Shareholder Account Services (SAS)
(10/09-present); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director of FPS (12/13-present);
President and Director of USAA Investment Corporation (ICORP) (03/10-present);
Director of USAA Financial Advisors, Inc. (FAI) (12/13-present). Mr. McNamara
brings to the Board extensive experience in the financial services industry,
including experience as an officer of the Trust.
DAVID C. BROWN(2, 4, 6, 10)
Trustee
Born: May 1972
Year of Election or Appointment: 2019
Chairman and Chief Executive Officer (2013-present), Co-Chief Executive Officer,
(2011-2013), Victory Capital Management Inc.; Chairman and Chief Executive
Officer (2013-present), Victory Capital Holdings, Inc. Mr. Brown brings to the
Board extensive business, finance and leadership skills gained
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TRUSTEES' AND OFFICERS' INFORMATION | 69
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and developed through years of experience in the financial services industry,
including his tenure overseeing the strategic direction as CEO of Victory
Capital. These skills, combined with Mr. Brown's extensive knowledge of the
financial services industry and demonstrated success in the development and
distribution of investment strategies and products, enable him to provide
valuable insights to the Board and strategic direction for the Funds. Mr. Brown
serves on the Boards of the Victory Funds family of funds consisting of five
registered investment companies offering approximately 104 mutual funds and 24
ETFs. Mr. Brown is considered an Interested Trustee of the Trust due to his
position with Victory Capital and its affiliated companies.
NON-INTERESTED (INDEPENDENT) TRUSTEES
--------------------------------------------------------------------------------
ROBERT L. MASON, Ph.D.(3, 4, 5, 6, 7)
Trustee
Born: July 1946
Year of Election or Appointment: 1997
Trustee, USAA ETF Trust (06/17-06/19); Adjunct Professor in the Department of
Management Science and Statistics in the College of Business at the University
of Texas at San Antonio (2001-present); Institute Analyst, Southwest Research
Institute (03/02-01/16), which focuses on providing innovative technology,
science, and engineering services to clients around the world and is one of the
oldest independent, nonprofit, applied research and development organizations in
the United States. He was employed at Southwest Research Institute for 40 years.
Dr. Mason brings to the Board particular experience with information technology
matters, statistical analysis, and human resources as well as over 22 years'
experience as a Board member of the USAA family of funds. Dr. Mason holds no
other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
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70 | USAA WORLD GROWTH FUND
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JEFFERSON C. BOYCE(3, 4, 5, 6, 7)
Lead Trustee and Vice Chair
Born: September 1957
Year of Election or Appointment: 2013
Trustee, USAA ETF Trust (06/17-06/19); Senior Managing Director, New York Life
Investments, LLC (1992-2012), an investment manager. Mr. Boyce brings to the
Board experience in financial investment management, and, in particular,
institutional and retail mutual funds, variable annuity products, broker
dealers, and retirement programs, including experience in organizational
development, marketing, product development, and money management as well as
five years' experience as a Board member of the USAA family of funds. Mr. Boyce
is a board member of Westhab, Inc.
DAWN M. HAWLEY(3, 4, 5, 6, 7, 9)
Trustee
Born: February 1954
Year of Election or Appointment: 2014
Trustee, USAA ETF Trust (06/17-06/19); Manager of Finance, Menil Foundation,
Inc. (05/07-06/11), which is a private foundation that oversees the assemblage
of sculptures, prints, drawings, photographs, and rare books. Director of
Financial Planning and Analysis and Chief Financial Officer, AIM Management
Group, Inc. (10/87-01/06). Ms. Hawley brings to the Board experience in
financial investment management and, in particular, institutional and retail
mutual funds, variable annuity products, broker dealers, and retirement
programs, including experience in financial planning, budgeting, accounting
practices, and asset/liability management functions including major acquisitions
and mergers, as well as over five years' experience as a Board member of the
USAA family of funds. Ms. Hawley holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
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TRUSTEES' AND OFFICERS' INFORMATION | 71
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PAUL L. McNAMARA(3, 4, 5, 6, 7)
Trustee
Born: July 1948
Year of Election or Appointment: 2012
Trustee, USAA ETF Trust (06/17-06/19); Director, Cantor Opportunistic
Alternatives Fund, LLC (03/10-02/14), which is a closed-end fund of funds by
Cantor Fitzgerald Investment Advisors, LLC. Mr. McNamara retired from Lord
Abbett & Co. LLC, an independent U.S. investment management firm, as an
Executive Member on 09/30/09, a position he held since 10/02. He had been
employed at Lord Abbett since 1996. Mr. McNamara brings to the Board extensive
experience with the financial services industry and, in particular,
institutional and retail mutual fund markets, including experience with mutual
fund marketing, distribution, and risk management, as well as overall experience
with compliance and corporate governance issues. Mr. McNamara also has
experience serving as a fund director as well as seven years' experience as a
Board member of the USAA family of funds. Paul L. McNamara is of no relation to
Daniel S. McNamara. Mr. McNamara holds no other directorships of any publicly
held corporations or other investment companies outside the USAA family of
funds.
RICHARD Y. NEWTON III(3, 4, 5, 6, 7)
Trustee
Born: January 1956
Year of Election or Appointment: 2017
Trustee, USAA ETF Trust (06/17-06/19); Director, Elta North America
(01/18-present), which is a global leader in the design, manufacture and support
of innovative electronic systems in the ground, maritime, airborne, and security
domains for the nation's warfighters, security personnel, and first responders;
Managing Partner, Pioneer Partnership Development Group (12/15-present);
Executive Director, The Union League Club of New York (06/14-11/15); Executive
Vice President, Air Force Association (08/12-05/14); Lieutenant General, United
States Air Force (01/08-06/12). Lieutenant General Newton (Ret.) served 34 years
of active duty in the United States Air Force. Lt. Gen. Newton retired as the
Assistant Vice Chief of Staff and Director of Air Staff at the Headquarters of
the U.S. Air Force where he was responsible for overseeing the administration
and organization
================================================================================
72 | USAA WORLD GROWTH FUND
================================================================================
of the Air Staff, which develops policies, plans and programs, establishes
requirements, and provides resources to support the Air Force's mission. Lt.
Gen. Newton is a graduate of the United States Air Force Academy, Webster
University, and The National War College. Lt. Gen. Newton brings to the Board
extensive management and military experience, as well as over two years of
experience as a Board member of the USAA family of funds. Lt. Gen. Newton holds
no other directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
BARBARA B. OSTDIEK, Ph.D.(3, 4, 5, 6, 7, 8)
Trustee
Born: March 1964
Year of Election or Appointment: 2008
Trustee, USAA ETF Trust (06/17-06/19); Senior Associate Dean of Degree programs
at Jesse H. Jones Graduate School of Business at Rice University
(07/13-present); Associate Professor of Finance at Jesse H. Jones Graduate
School of Business at Rice University (07/01-present); Academic Director, El
Paso Corporation Finance Center at Jesse H. Jones Graduate School of Business at
Rice University (07/02-06/12). Dr. Ostdiek brings to the Board particular
experience with financial investment management, education, and research as well
as over eleven years' experience as a Board member of the USAA family of funds.
Dr. Ostdiek holds no other directorships of any publicly held corporations or
other investment companies outside the USAA family of funds.
MICHAEL F. REIMHERR(3, 4, 5, 6, 7)
Trustee
Born: August 1945
Year of Election or Appointment: 2000
Trustee, USAA ETF Trust (06/17-06/19); President of Reimherr Business Consulting
performing business valuations of medium to large companies; developing business
plans, budgets, and internal financial reporting; and work with mergers and
acquisitions (05/95-12/17). St. Mary's University Investment Committee
overseeing University Endowment (06/14-present). Mr. Reimherr brings to the
Board particular experience with organizational development, budgeting, finance,
capital markets, and mergers and acquisitions, as well as
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 73
================================================================================
over 19 years' experience as a Board member of the USAA family of funds. Mr.
Reimherr holds no other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
JOHN C. WALTERS(3, 4, 5, 6, 7)
Trustee
Born: February 1962
Year of Election or Appointment: 2019
Retired. Mr. Walters brings significant Board experience including active
involvement with the board of a Fortune 500 company, and a proven record of
leading large, complex financial organizations. He has a demonstrated record of
success in distribution, manufacturing, investment brokerage, and investment
management in both the retail and institutional investment businesses. He has
substantial experience in the investment management business with a demonstrated
ability to develop and drive strategy while managing operational, financial, and
investment risk. Mr. Walters is a board member of Guardian Variable Products
Trust (16 series), Lead Independent Director; Amerilife Holdings LLC, Director;
Stadion Money Management; Director; and University of North Carolina (Chapel
Hill), Member Board of Governors.
(1) Indicates the Trustee is an employee of AMCO or affiliated companies and
is considered an "interested person" under the Investment Company Act of
1940.
(2) Member of Executive Committee.
(3) Member of Audit and Compliance Committee.
(4) Member of Product Management and Distribution Committee.
(5) Member of Corporate Governance Committee.
(6) Member of Investments Committee.
(7) The address for all non-interested trustees is that of the USAA Funds,
P.O. Box 659430, San Antonio, TX 78265-9430.
(8) Dr. Ostdiek has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(9) Ms. Hawley has been designated as an Audit and Compliance Committee
Financial Expert by the Funds' Board.
(10) Indicates the Trustee is an employee of Victory Capital or affiliated
companies and is considered an "interested person" under the Investment
Company Act of 1940.
(+) Mr. D. McNamara was elected as Chair of the Board in July 2019.
================================================================================
74 | USAA WORLD GROWTH FUND
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Effective July 1, 2019, the Board of the Trust appointed certain new officers of
the Trust. The current officers of the Trust are stated below.
OFFICERS
--------------------------------------------------------------------------------
CHRISTOPHER K. DYER
President
Born: February 1962
Year of Appointment: 2019
Director of Mutual Fund Administration, the Victory Capital.
SCOTT A. STAHORSKY
Vice President
Born: July 1969
Year of Appointment: 2019
Manager, Fund Administration, the Adviser (since 2015); Senior Analyst, Fund
Administration, the Victory Capital (prior to 2015).
ALLAN SHAER
Assistant Treasurer
Born: March 1965
Year of Appointment: 2019
Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc.
(since 2016); Vice President, Mutual Fund Administration, JP Morgan Chase
(2011-2016).
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TRUSTEES' AND OFFICERS' INFORMATION | 75
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JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Treasurer, USAA ETF Trust (09/18-06/19); Executive Director, Investment and
Financial Administration, USAA (04/12-present); Assistant Treasurer, USAA ETF
Trust (06/17-09/18); Assistant Treasurer, USAA Mutual Funds Trust (12/13-02/18).
Mr. De Vries also serves as the Funds' Principal Financial Officer.
CAROL D. TREVINO
Assistant Treasurer
Born: October 1965
Year of Appointment: 2018
Assistant Treasurer, USAA ETF Trust (09/18-06/19); Accounting/Financial
Director, USAA (12/13-present); Senior Accounting Analyst, USAA (03/11-12/13).
ERIN G. WAGNER
Secretary
Born: February 1974
Year of Appointment: 2019
Associate General Counsel, the Adviser (since 2013).
CHARLES BOOTH
Anti-Money Laundering Compliance Officer and Identity Theft Officer
Born: April 1960
Year of Appointment: 2019
Director, Regulatory Administration and CCO Support Services, Citi Fund Services
Ohio, Inc. (2007-present).
================================================================================
76 | USAA WORLD GROWTH FUND
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AMY CAMPOS
Chief Compliance Officer
Born: August 1976
Year of Appointment: 2019
Chief Compliance Officer, USAA Mutual Funds Trust (7/1/19-present); Executive
Director, Deputy Chief Compliance Officer, USAA Mutual Funds Trust and USAA ETF
Trust (7/17-6/19); Compliance Director, USAA Mutual Funds Trust (2014-7/17);
Senior Compliance Advisor, USAA Mutual Funds Trust (2010-2014).
THE FOLLOWING OFFICERS SERVED IN THEIR RESPECTIVE OFFICE UNTIL JULY 1, 2019, AT
WHICH POINT EACH OF THE FOLLOWING OFFICERS RESIGNED FROM THEIR RESPECTIVE OFFICE
AND NO LONGER SERVE IN THESE POSITIONS.
JOHN C. SPEAR
Vice President
Born: May 1964
Year of Appointment: 2016
Vice President, USAA ETF Trust (06/17-06/19); Senior Vice President and Chief
Investment Officer, USAA Investments, (03/17-present); Vice President and Chief
Investment Officer, USAA Investments, (11/16-03/17); Vice President, Long Term
Fixed Income (05/12-11/16).
JOHN P. TOOHEY
Vice President
Born: March 1968
Year of Appointment: 2009
Vice President, USAA ETF Trust (06/17-06/19); Head of Equities, Equity
Investments, AMCO (01/12-present).
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TRUSTEES' AND OFFICERS' INFORMATION | 77
================================================================================
KRISTEN MILLAN
Secretary
Born: April 1983
Year of Appointment: 2019
Secretary, USAA ETF Trust (04/19-06/19); Assistant Secretary, USAA ETF Trust
(01/19-06/19); Senior Attorney, FASG General Counsel, USAA (09/17-06/19);
Attorney, FASG General Counsel, USAA (06/13-09/17). Ms. Millan also serves as
Assistant Secretary of AMCO, ICORP, and SAS.
STEPHANIE A. HIGBY
Chief Compliance Officer
Born: July 1974
Year of Appointment: 2013
Chief Compliance Officer, USAA ETF Trust (06/17-06/19); Assistant Vice
President, Compliance-Investments, USAA (02/18-present); Assistant Vice
President, Compliance Mutual Funds, USAA (12/16-01/18); Executive Director,
Institutional Asset Management Compliance, USAA (04/13-12/16). Ms. Higby also
serves as the Funds' anti-money laundering compliance officer and as the Chief
Compliance Officer for AMCO and IMCO.
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78 | USAA WORLD GROWTH FUND
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AS OF JULY 1, 2019
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
David C. Brown
John C. Walters
--------------------------------------------------------------------------------
ADMINISTRATOR AND Victory Capital Management Inc.
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND Victory Capital Advisers Inc.
DISTRIBUTOR 4900 Tiedeman Road
Brooklyn, Ohio 44144
--------------------------------------------------------------------------------
TRANSFER AGENT Victory Capital Transfer Agency Inc.
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 USAA AMCO'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) 235-8396; (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) 235-8396; (ii) at usaa.com; and (iii) on the SEC's website at
http://www.sec.gov.
================================================================================
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23411-0719
ITEM 2. CODE OF ETHICS.
On July 1, 2019, the Board of Trustees of USAA Mutual Funds Trust approved
a Code of Ethics ("Sarbanes Code") applicable solely to its senior financial
officers, including its principal executive officer (President), as defined
under the Sarbanes-Oxley Act of 2002 and implementing regulations of the
Securities and Exchange Commission. A copy of the Sarbanes Code is attached as
an Exhibit to this Form N-CSR.
No waivers (explicit or implicit) have been granted from a provision of the
Sarbanes Code.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
On November 18, 2008, and September 24, 2014, respectively, the Board of
Trustees of USAA Mutual Funds Trust designated Dr. Barbara B. Ostdiek, Ph.D.
and Dawn M. Hawley as the Board's audit committee financial experts. Dr.
Ostdiek has served as an Associate Professor of Management at Rice University
since 2001. Dr. Ostdiek also has served as an Academic Director at El Paso
Corporation Finance Center since 2002. Ms. Hawley was Chief Financial Officer,
Director of Financial Planning and Analysis for AIM Management Group Inc. from
October 1987 through January 2006 and was Manager of Finance at Menil
Foundation, Inc. from May 2007 through June 2011. Each of Dr. Ostdiek and Ms.
Hawley is an independent trustee who serves as a member of the Audit Committee,
Pricing and Investment Committee, and the Corporate Governance Committee of the
Board of Trustees of USAA Mutual Funds Trust.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(a) AUDIT FEES. The Registrant, USAA Mutual Funds Trust, consists of 47 funds in
all. Only 14 funds of the Registrant have a fiscal year end of May 31 and
are included within this report (the "Funds"). The aggregate fees accrued or
billed by the Registrant's independent auditor, Ernst & Young LLP, for
professional services rendered for the audit of the Registrant's annual
financial statements and services provided in connection with statutory and
regulatory filings by the Registrant for the Funds for fiscal years ended
May 31, 2019, and 2018 were $454,300 and $445,300, respectively.
(b) AUDIT RELATED FEE. All services are required to be pre-approved. The
aggregate fees accrued or paid to Ernst & Young, LLP by USAA Shareholder
Account Services (SAS) for professional services rendered for audit related
Services related to the annual study of internal controls of the transfer agent
for fiscal years ended May 31, 2019, and 2018 were $74,305 and $73,563,
respectively. All services were preapproved by the Audit Committee.
(c) TAX FEES. The aggregate fees billed by Ernst & Young LLP to the Registrant
for assistance with PFIC Analyzer Service for fiscal years ended May 31,
2019, and 2018 were $66,900 and $56,253, respectively.
(d) ALL OTHER FEES. No other fees were billed by Ernst & Young LLP for fiscal
years ended May 31, 2019, and 2018.
(e)(1) AUDIT COMMITTEE PRE-APPROVAL POLICY. All audit and non-audit services to
be performed for the Registrant by Ernst & Young LLP must be pre-approved by the
Audit Committee. The Audit Committee Charter also permits the Chair of the Audit
Committee to pre-approve any permissible non-audit service that must be
commenced prior to a scheduled meeting of the Audit Committee. All non-audit
services were pre-approved by the Audit Committee or its Chair, consistent with
the Audit Committee's preapproval procedures.
(2) Not applicable.
(f) Not applicable.
(g) The aggregate non-audit fees billed by Ernst & Young LLP for services
rendered to the Registrant; the investment adviser, USAA Asset Management
Company (AMCO) and its affiliate, USAA Investment Management Company (IMCO);
and the Funds' transfer agent, SAS, for May 31, 2019, and 2018 were
$218,635 and $205,726, respectively. Effective July 1, 2019, AMCO, the prior
investment adviser to the Funds, and SAS, the prior transfer agent to the Funds,
were acquired by Victory Capital Holdings, Inc. Effective July 1, 2019, Victory
Capital Management Inc. is the new investment adviser and administrator to the
Funds; SAS was renamed Victory Capital Transfer Agency, Inc. and is the new
transfer agent to the Funds.
(h) Ernst & Young LLP provided non-audit services to AMCO and IMCO in 2019 and
2018 that were not required to be pre-approved by the Registrant's Audit
Committee because the services were not directly related to the operations of
the Registrant's Funds. The Board of Trustees will consider Ernst & Young LLP's
independence and will consider whether the provision of these non-audit
services to AMCO is compatible with maintaining Ernst & Young LLP's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not Applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
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 the Adviser 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 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). Code of Ethics pursuant to Item 2 of Form N-CSR is filed and attached
hereto.
(a)(2). Certification pursuant to Rule 30a-2(a) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit
99.CERT.
(a)(3). Not Applicable.
(b). Certification pursuant to Rule 30a-2(b) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(b))is filed and attached hereto as Exhibit
99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to
Be signed on its behalf by the undersigned, thereunto duly authorized.
Registrant: USAA MUTUAL FUNDS TRUST, Period Ended May 31, 2019
By:* /s/ Christopher K. Dyer
--------------------------------------------------------------
Signature and Title: Christopher K. Dyer, President
Date:
------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:* /s/ Christopher K. Dyer
-----------------------------------------------------
Signature and Title: Christopher K. Dyer, President
Date:
------------------------------
By:* /s/ James K. De Vries
-----------------------------------------------------
Signature and Title: James K. De Vries, Treasurer
Date:
-----------------------------
*Print the name and title of each signing officer under his or her signature.