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: JULY 31
Date of reporting period: JULY 31, 2019
ITEM 1. REPORTS TO STOCKHOLDERS.
USAA MUTUAL FUNDS TRUST - ANNUAL REPORTS FOR PERIOD ENDING JULY 31, 2019
[LOGO OF USAA USAA(R)]
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MUTUAL FUNDS
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July 31, 2019
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ANNUAL REPORT
USAA Aggressive Growth Fund
FUND INSTITUTIONAL
SHARES SHARES
USAUX UIAGX
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
". . . NOW MAY BE AN OPPORTUNE TIME FOR
INVESTORS TO ENSURE THAT THEIR PORTFOLIOS ARE WELL [PHOTO OF BROOKS ENGLEHARDT]
DIVERSIFIED AND THAT THEIR OVERALL ALLOCATION IS
APPROPRIATE FOR THEIR PARTICULAR RISK APPETITE."
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SEPTEMBER 2019
Although the bull market in equities has continued running, it was not without a
few missteps. Trade turmoil, questions surrounding global economic growth,
changing monetary policy, and geopolitical disputes have all led to increased
volatility. But through it all, domestic stocks, as measured by the S&P 500(R)
Index, still managed an annual return of approximately 8% for the 12-month
period ended July 31, 2019.
Given the sometimes dire news flow and ample cross-currents, it's no surprise
that volatility returned to the market. On one hand, the U.S. economy continues
to look good. The unprecedented streak of job creation has continued
uninterrupted, and unemployment is bouncing along historic lows at 3.7%. The
consumer remains resilient and inflation is tepid. On the flip side, however,
U.S. trade policy seems to be evolving, with new tariffs threatened and
implemented. The markets generally dislike this type of trade turmoil and
uncertainty, and the ongoing tensions between the United States and China (and
other trading partners) threaten to upend global supply chains and hinder
economic growth.
It's not just the stock market that has been dealing with volatility. The bond
market also has experienced volatility, due largely to the U.S. Federal
Reserve's (the "Fed") famous "pivot" in late 2018. Against the backdrop of
rapidly falling equities in the fourth quarter of 2018, the Fed signaled that
its next policy move would be to lower--not increase--short-term interest rates.
This immediately altered the yield environment.
Meanwhile, the U.S. Treasury yield curve continued to flatten and, in fact,
inverted--whereby shorter-term yields became higher than longer-term
================================================================================
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yields. Such a yield-curve inversion is a worrying sign as it sometimes, but not
always, portends to a recession.
Although we are not predicting a recession, we must acknowledge that risks have
increased for an economic slowdown. Given that the current run in stocks is more
than a decade old, it's important for investors to keep perspective that the
bull market cannot continue forever. Therefore, now may be an opportune time for
investors to ensure that their portfolios are well diversified and that their
overall allocation is appropriate for their particular risk appetite.
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,
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. On the following pages, you will find information
relating to your USAA Investments, which is now a Victory Capital Investment
Franchise. If you have any questions about your investments, we encourage you to
engage your financial advisor or else contact us directly at 800-235-8396 or
visit usaa.com.
My colleagues and I sincerely appreciate the confidence you have placed in us,
and we value the opportunity to help you meet your investment goals.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
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TABLE OF CONTENTS
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MANAGERS' COMMENTARY ON THE FUND 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 14
Financial Statements 15
Notes to Financial Statements 19
Financial Highlights 35
EXPENSE EXAMPLE 37
ADVISORY AGREEMENT(S) 39
TRUSTEES' AND OFFICERS' INFORMATION 57
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
VICTORY CAPITAL MANAGEMENT INC. 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
NewBridge Asset Management RS Investments Growth
ERIC F. MARONAK SCOTT TRACY, CFA
JASON E. DAHL, CFA STEPHAN J. BISHOP
SCOTT R. KEFER, CFA MELISSA CHADWICK-DUNN
MICHAEL B. KOSKUBA CHRISTOPHER CLARK, CFA
PAUL LEUNG, CFA
VictoryShares and Solutions
MANNIK S. DHILLON, CFA, CAIA
WASIF A. LATIF
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o HOW DID THE OVERALL MARKET PERFORM DURING THE 12-MONTH REPORTING PERIOD
ENDED JULY 31, 2019?
While U.S. stocks ended the 12-month reporting period in positive territory,
there was significant volatility along the way. Against a backdrop of
slowing global growth, for much of the period, markets responded primarily
to headlines surrounding U.S. monetary and trade policies. Entering the
period, the U.S. Federal Reserve (the "Fed") was on a credit tightening
trajectory, which market participants interpreted as confirming a relatively
favorable outlook for the U.S. economy. The fourth quarter of 2018 saw a
sharp reversal in investor risk appetite, however, as softening economic
data from Europe and China raised concerns that the Fed would increase
interest rates too quickly even as a global recession possibly loomed.
Uncertainty regarding U.S. trade policy and corporate earnings also weighed
on sentiment toward the end of 2018. While the Fed followed through on its
previously signaled December interest rate increase, it pivoted to a much
more dovish stance entering 2019, leading to a rebound in risk asset
valuations.
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MANAGERS' COMMENTARY ON THE FUND | 1
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Escalating rhetoric between the United States and China regarding trade and
tariffs generated concerns throughout the 12-month reporting period. May
2019 saw markets decline as President Trump announced plans to impose 25%
tariffs on $200 billion in Chinese imports. However, the market subsequently
recovered its lost ground as the Fed indicated that it was prepared to cut
its benchmark interest rate, if needed, to help offset any drag on economic
growth stemming from trade frictions. Corporate earnings reports that
generally were in line with expectations also served to bolster sentiment.
Most major equity indices ended July 2019 near their all-time highs.
For the 12-month reporting period, the growth style outpaced value by a
notable margin, as investors favored companies viewed as having the ability
to maintain profit growth against the backdrop of a slowing global economy.
The Russell 1000(R) Growth Index returned 10.82% for the period, compared to
5.20% for the Russell 1000 Value Index.
o HOW DID THE USAA AGGRESSIVE GROWTH FUND (THE "FUND") PERFORM DURING THE
REPORTING PERIOD?
The Fund has two share classes: Fund Shares and Institutional Shares. For
the reporting period ended July 31, 2019, the Fund Shares and Institutional
Shares had total returns of 5.53% and 5.56%, respectively. This compares to
returns of 10.82% for the Russell 1000 Growth Index (the "Index") and 10.17%
for the Lipper Large-Cap Growth Funds Index.
Victory Capital Management Inc. (the "Manager" or "Victory Capital") is the
Fund's investment adviser. The investment adviser provides day-to-day
discretionary management for the Fund's assets.
Refer to page 4 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
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2 | USAA AGGRESSIVE GROWTH FUND
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o WHAT WERE YOUR STRATEGIES IN THIS ENVIRONMENT?
For the 12-month reporting period, the Fund's sector allocation and stock
selection detracted from performance versus the Index. In terms of
allocation, an overweight to the energy sector detracted most during the
period, while an underweight to the information technology sector and an
overweight to the healthcare sector also weighed on relative return. An
underweight to the communication services sector benefited performance.
Stock selection within the consumer discretionary, energy, and consumer
staples sectors subtracted from returns, while selection within healthcare
and industrials sectors contributed to relative performance.
Thank you for allowing us to help you with your investment needs.
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.
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MANAGERS' COMMENTARY ON THE FUND | 3
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INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 7/31/19 o
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1 YEAR 5 YEAR 10 YEAR
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Fund Shares 5.53% 12.16% 13.57%
Institutional Shares 5.56% 12.25% 13.83%
Russell 1000(R) Growth Index*
(reflects no deduction for fees,
expenses, or taxes) 10.82% 14.24% 15.73%
Lipper Large-Cap Growth Funds
Index** (reflects no deduction
for taxes) 10.17% 13.00% 14.34%
*The unmanaged Russell 1000 Growth Index measures the performance of those
Russell 1000 companies with higher price-to-book ratios and higher forecasted
growth values.
**The unmanaged Lipper Large-Cap Growth Funds Index tracks the total return
performance of funds within the Lipper Large-Cap Growth 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.
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4 | USAA AGGRESSIVE GROWTH FUND
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o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
RUSSELL 1000 LIPPER LARGE-CAP USAA AGGRESSIVE
GROWTH INDEX GROWTH FUNDS INDEX GROWTH FUND SHARES
7/31/2009 $10,000.00 $10,000.00 $10,000.00
8/31/2009 10,207.39 10,197.28 10,282.00
9/30/2009 10,641.57 10,686.98 10,729.00
10/31/2009 10,497.43 10,475.54 10,536.00
11/30/2009 11,142.31 11,107.40 11,317.00
12/31/2009 11,486.70 11,465.20 11,379.00
1/31/2010 10,985.47 10,864.52 10,881.00
2/28/2010 11,363.00 11,249.93 11,193.00
3/31/2010 12,020.27 11,956.55 11,982.00
4/30/2010 12,154.58 12,079.53 12,160.00
5/31/2010 11,226.68 11,109.13 11,278.00
6/30/2010 10,608.48 10,469.77 10,509.00
7/31/2010 11,365.20 11,179.89 11,148.00
8/31/2010 10,834.56 10,631.05 10,574.00
9/30/2010 11,987.91 11,770.62 11,856.00
10/31/2010 12,560.45 12,388.77 12,419.00
11/30/2010 12,706.32 12,512.75 12,568.00
12/31/2010 13,406.20 13,199.33 13,349.00
1/31/2011 13,747.37 13,459.78 13,648.00
2/28/2011 14,197.28 13,823.97 14,093.00
3/31/2011 14,214.62 13,830.93 14,186.00
4/30/2011 14,690.65 14,250.32 14,640.00
5/31/2011 14,530.72 14,076.89 14,397.00
6/30/2011 14,322.31 13,890.53 14,178.00
7/31/2011 14,178.75 13,816.21 13,988.00
8/31/2011 13,430.47 12,887.30 13,029.00
9/30/2011 12,440.86 11,762.64 11,896.00
10/31/2011 13,806.11 13,174.42 13,450.00
11/30/2011 13,804.78 13,012.29 13,264.00
12/31/2011 13,760.39 12,815.96 13,017.00
1/31/2012 14,581.77 13,694.45 13,984.00
2/29/2012 15,279.14 14,500.98 14,704.00
3/31/2012 15,781.70 15,013.39 15,267.00
4/30/2012 15,757.32 14,903.03 15,056.00
5/31/2012 14,746.55 13,760.41 13,802.00
6/30/2012 15,146.96 14,065.19 14,178.00
7/31/2012 15,350.00 14,086.94 14,198.00
8/31/2012 15,762.98 14,615.99 14,704.00
9/30/2012 16,072.11 14,974.88 15,004.00
10/31/2012 15,603.03 14,454.26 14,336.00
11/30/2012 15,864.30 14,775.87 14,692.00
12/31/2012 15,859.92 14,856.01 14,660.00
1/31/2013 16,539.67 15,497.25 15,323.00
2/28/2013 16,745.48 15,580.05 15,427.00
3/31/2013 17,373.66 16,069.95 15,964.00
4/30/2013 17,742.44 16,278.24 16,157.00
5/31/2013 18,072.05 16,707.23 16,659.00
6/30/2013 17,731.97 16,368.72 16,368.00
7/31/2013 18,672.15 17,392.16 17,228.00
8/31/2013 18,352.13 17,183.09 16,910.00
9/30/2013 19,169.97 18,165.50 17,815.00
10/31/2013 20,017.96 18,927.35 18,555.00
11/30/2013 20,582.65 19,493.07 19,138.00
12/31/2013 21,170.59 20,116.59 19,707.00
1/31/2014 20,567.06 19,636.38 19,245.00
2/28/2014 21,625.70 20,762.64 20,248.00
3/31/2014 21,407.60 20,094.20 19,643.00
4/30/2014 21,408.47 19,744.78 19,215.00
5/31/2014 22,075.66 20,461.64 19,978.00
6/30/2014 22,505.88 20,962.83 20,376.00
7/31/2014 22,161.37 20,745.69 20,125.00
8/31/2014 23,176.76 21,606.66 20,991.00
9/30/2014 22,840.55 21,229.86 20,740.00
10/31/2014 23,442.43 21,850.51 21,365.00
11/30/2014 24,185.28 22,400.90 22,079.00
12/31/2014 23,933.32 22,196.03 21,818.00
1/31/2015 23,566.83 21,834.77 21,392.00
2/28/2015 25,137.69 23,211.84 22,786.00
3/31/2015 24,851.80 22,960.47 22,388.00
4/30/2015 24,976.26 22,955.32 22,322.00
5/31/2015 25,327.82 23,395.44 22,842.00
6/30/2015 24,881.63 23,176.70 22,582.00
7/31/2015 25,725.39 23,999.69 23,539.00
8/31/2015 24,163.12 22,422.08 22,062.00
9/30/2015 23,565.38 21,658.12 21,392.00
10/31/2015 25,594.49 23,546.10 23,306.00
11/30/2015 25,666.33 23,674.55 23,373.00
12/31/2015 25,289.68 23,441.61 23,127.00
1/31/2016 23,877.82 21,577.27 21,598.00
2/29/2016 23,867.64 21,234.17 21,214.00
3/31/2016 25,477.30 22,446.94 22,413.00
4/30/2016 25,244.65 22,427.39 22,241.00
5/31/2016 25,734.89 22,973.87 22,666.00
6/30/2016 25,633.81 22,520.69 22,566.00
7/31/2016 26,843.78 23,811.99 23,623.00
8/31/2016 26,710.41 23,785.72 23,499.00
9/30/2016 26,808.12 24,032.75 23,652.00
10/31/2016 26,178.58 23,480.99 23,074.00
11/30/2016 26,748.18 23,561.15 23,186.00
12/31/2016 27,079.30 23,568.46 23,294.00
1/31/2017 27,991.84 24,677.15 24,308.00
2/28/2017 29,154.49 25,610.13 25,297.00
3/31/2017 29,491.71 25,987.61 25,544.00
4/30/2017 30,166.19 26,740.37 26,222.00
5/31/2017 30,950.59 27,661.85 27,014.00
6/30/2017 30,869.05 27,627.21 26,976.00
7/31/2017 31,689.52 28,486.77 27,857.00
8/31/2017 32,270.44 28,916.28 28,307.00
9/30/2017 32,690.01 29,184.88 28,541.00
10/31/2017 33,956.66 30,209.57 29,523.00
11/30/2017 34,988.25 30,924.93 30,163.00
12/31/2017 35,260.64 31,074.71 30,294.00
1/31/2018 37,758.02 33,651.35 32,634.00
2/28/2018 36,767.97 32,839.41 31,762.00
3/31/2018 35,759.68 32,000.48 30,945.00
4/30/2018 35,884.61 32,275.68 31,277.00
5/31/2018 37,457.48 33,531.26 32,524.00
6/30/2018 37,818.13 33,902.20 33,036.00
7/31/2018 38,928.34 34,701.59 33,867.00
8/31/2018 41,056.80 36,277.79 35,355.00
9/30/2018 41,286.27 36,466.70 35,542.00
10/31/2018 37,594.17 33,144.88 32,406.00
11/30/2018 37,993.48 33,626.94 33,257.00
12/31/2018 34,726.89 30,927.44 30,041.00
1/31/2019 37,848.36 33,812.09 33,077.00
2/28/2019 39,202.57 35,067.86 33,964.00
3/31/2019 40,318.39 35,939.27 34,419.00
4/30/2019 42,139.97 37,511.86 36,153.00
5/31/2019 39,477.84 35,230.87 33,370.00
6/30/2019 42,189.05 37,632.09 36,055.00
7/31/2019 43,141.72 38,231.16 35,738.00
[END CHART]
Data from 7/31/09 through 7/31/19.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Aggressive Growth Fund Shares 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 Large-Cap Growth Funds Index reflects the fees and expenses of
the underlying funds included in the index.
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INVESTMENT OVERVIEW | 5
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o TOP 10 HOLDINGS* - 7/31/19 o
(% of Net Assets)
Amazon.com, Inc. ......................................................... 6.6%
Visa, Inc. "A" ........................................................... 5.8%
Facebook, Inc. "A" ....................................................... 4.5%
Alphabet, Inc. "C" ....................................................... 4.2%
ServiceNow, Inc. ......................................................... 3.9%
UnitedHealth Group, Inc. ................................................. 3.0%
Netflix, Inc. ............................................................ 2.9%
Workday, Inc. "A" ........................................................ 2.8%
PayPal Holdings, Inc. .................................................... 2.8%
salesforce.com, Inc. ..................................................... 2.7%
o SECTOR ALLOCATION* - 7/31/19 o
(% of Net Assets)
[PIE CHART OF SECTOR ALLOCATION]
CONSUMER, NON-CYCLICAL 25.3%
TECHNOLOGY 24.0%
COMMUNICATIONS 22.0%
CONSUMER, CYCLICAL 9.6%
FINANCIAL 8.2%
INDUSTRIAL 7.8%
ENERGY 0.4%
[END CHART]
*Does not include money market instruments.
Percentages are of the net assets of the Fund and may not equal 100%.
Refer to the Portfolio of Investments for a complete list of securities.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
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6 | USAA AGGRESSIVE GROWTH FUND
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SHAREHOLDER VOTING RESULTS
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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 Management Inc. ("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 USAA Asset Management Company ("AMCO")
was acquired by Victory Capital Holdings, Inc., the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
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22,255,676 2,398,330 1,392,593
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
person" as defined in the Investment Company Act of 1940, as amended (1940 Act)
("Interested Trustee"); 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
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TRUSTEES FOR VOTES WITHHELD
--------------------------------------------------------------------------------
David C. Brown 8,299,565,565 820,887,736
John C. Walters 8,317,935,885 802,517,416
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SHAREHOLDER VOTING RESULTS | 7
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DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
July 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 July 31, 2019:
DIVIDEND RECEIVED LONG-TERM
DEDUCTION (CORPORATE CAPITAL GAIN QUALIFIED INTEREST
SHAREHOLDERS)(1) DISTRIBUTIONS(2) INCOME
--------------------------------------------------------------------------------
67.60% $205,128,000 $135,000
--------------------------------------------------------------------------------
(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 July 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 AGGRESSIVE GROWTH FUND
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA AGGRESSIVE GROWTH FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Aggressive Growth Fund (the "Fund") (one of the funds constituting the USAA
Mutual Funds Trust (the "Trust")), including the portfolio of investments, as of
July 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 the USAA Mutual Funds Trust) at July 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 July 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
September 20, 2019
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 9
================================================================================
PORTFOLIO OF INVESTMENTS
July 31, 2019
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
EQUITY SECURITIES (97.3%)
COMMON STOCKS (97.3%)
COMMUNICATIONS (22.0%)
----------------------
INTERNET (21.3%)
190,775 Alibaba Group Holding Ltd. ADR(a) $ 33,025
56,525 Alphabet, Inc. "C"(a) 68,773
57,837 Amazon.com, Inc.(a) 107,969
377,620 Facebook, Inc. "A"(a) 73,345
76,400 IAC/InterActiveCorp.(a) 18,264
144,584 Netflix, Inc.(a) 46,699
----------
348,075
----------
MEDIA (0.7%)
87,900 Walt Disney Co. 12,570
----------
Total Communications 360,645
----------
CONSUMER, CYCLICAL (9.6%)
-------------------------
AUTO MANUFACTURERS (0.5%)
49,765 Ferrari N.V. 8,016
----------
ENTERTAINMENT (0.7%)
44,400 Vail Resorts, Inc. 10,945
----------
LODGING (0.5%)
82,100 Hilton Worldwide Holdings, Inc. 7,927
----------
RETAIL (7.9%)
131,609 Burlington Stores, Inc.(a) 23,788
33,123 Domino's Pizza, Inc. 8,100
89,500 Home Depot, Inc. 19,125
145,210 Lululemon Athletica, Inc.(a) 27,748
378,053 TJX Companies, Inc. 20,627
88,200 Ulta Salon Cosmetics & Fragrance, Inc.(a) 30,804
----------
130,192
----------
Total Consumer, Cyclical 157,080
----------
================================================================================
10 | USAA AGGRESSIVE GROWTH FUND
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
CONSUMER, NON-CYCLICAL (25.3%)
------------------------------
BEVERAGES (0.9%)
526,925 Keurig Dr Pepper, Inc. $ 14,828
----------
BIOTECHNOLOGY (5.4%)
238,600 Alexion Pharmaceuticals, Inc.(a) 27,031
41,400 BeiGene Ltd. ADR(a) 5,686
71,400 Bluebird Bio, Inc.(a) 9,370
103,900 Exact Sciences Corp.(a) 11,960
92,285 Illumina, Inc.(a) 27,628
46,100 Sage Therapeutics, Inc.(a) 7,392
----------
89,067
----------
COMMERCIAL SERVICES (5.0%)
43,550 CoStar Group, Inc.(a) 26,801
164,100 IHS Markit Ltd.(a) 10,571
408,600 PayPal Holdings, Inc.(a) 45,109
----------
82,481
----------
FOOD (0.7%)
137,300 Tyson Foods, Inc. "A" 10,915
----------
HEALTHCARE PRODUCTS (5.0%)
71,500 ABIOMED, Inc.(a) 19,917
85,600 Align Technology, Inc.(a) 17,897
33,300 Cooper Companies, Inc. 11,235
97,255 Edwards Lifesciences Corp.(a) 20,701
23,400 Intuitive Surgical, Inc.(a) 12,157
----------
81,907
----------
HEALTHCARE-SERVICES (4.0%)
103,500 IQVIA Holdings, Inc.(a) 16,474
197,930 UnitedHealth Group, Inc. 49,287
----------
65,761
----------
PHARMACEUTICALS (4.3%)
312,300 Canopy Growth Corp.(a) 10,193
239,169 Merck & Co., Inc. 19,849
83,800 Neurocrine Biosciences, Inc.(a) 8,078
274,100 Zoetis, Inc. 31,491
----------
69,611
----------
Total Consumer, Non-cyclical 414,570
----------
ENERGY (0.4%)
-------------
OIL & GAS (0.4%)
75,900 EOG Resources, Inc. 6,516
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
FINANCIAL (8.2%)
----------------
DIVERSIFIED FINANCIAL SERVICES (7.0%)
99,000 CME Group, Inc. $ 19,248
535,900 Visa, Inc. "A" 95,390
----------
114,638
----------
INSURANCE (1.2%)
233,900 Progressive Corp. 18,941
----------
Total Financial 133,579
----------
INDUSTRIAL (7.8%)
-----------------
ELECTRICAL COMPONENTS & EQUIPMENT (0.9%)
162,100 AMETEK, Inc. 14,526
----------
ELECTRONICS (2.3%)
105,800 Amphenol Corp. "A" 9,873
198,500 Keysight Technologies, Inc.(a) 17,770
89,900 Woodward, Inc. 10,072
----------
37,715
----------
MACHINERY-DIVERSIFIED (1.1%)
49,800 Roper Technologies, Inc. 18,110
----------
MISCELLANEOUS MANUFACTURERS (2.0%)
258,200 Ingersoll-Rand plc 31,929
----------
TRANSPORTATION (1.5%)
137,100 Union Pacific Corp. 24,671
----------
Total Industrial 126,951
----------
TECHNOLOGY (24.0%)
------------------
COMPUTERS (3.7%)
179,644 Apple, Inc. 38,271
117,961 EPAM Systems, Inc.(a) 22,860
----------
61,131
----------
SEMICONDUCTORS (5.1%)
52,120 Broadcom, Inc. 15,114
77,300 KLA Corp. 10,538
57,200 Lam Research Corp. 11,933
458,200 Marvell Technology Group Ltd. 12,032
90,700 Microchip Technology, Inc. 8,564
150,400 NVIDIA Corp. 25,375
----------
83,556
----------
================================================================================
12 | USAA AGGRESSIVE GROWTH FUND
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
SOFTWARE (15.2%)
277,345 Black Knight, Inc.(a) $ 17,562
39,100 Fair Isaac Corp.(a) 13,584
207,100 PTC, Inc.(a) 14,037
285,200 salesforce.com, Inc.(a) 44,063
233,309 ServiceNow, Inc.(a) 64,718
160,600 Twilio, Inc. "A"(a) 22,341
158,400 Veeva Systems, Inc. "A"(a) 26,279
228,545 Workday, Inc. "A"(a) 45,704
----------
248,288
----------
Total Technology 392,975
----------
Total Common Stocks (cost: $1,299,891) 1,592,316
----------
Total Equity Securities (cost: $1,299,891) 1,592,316
----------
MONEY MARKET INSTRUMENTS (2.8%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (2.8%)
46,177,039 State Street Institutional Treasury Money Market
Fund Premier Class, 2.09%(b) (cost: $46,177) 46,177
----------
TOTAL INVESTMENTS (COST: $1,346,068) $1,638,493
==========
---------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
---------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
---------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $1,592,316 $- $- $1,592,316
Money Market Instruments:
Government & U.S. Treasury
Money Market Funds 46,177 - - 46,177
---------------------------------------------------------------------------------------------------
Total $1,638,493 $- $- $1,638,493
---------------------------------------------------------------------------------------------------
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 July 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
July 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
ADR American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S.
dollars.
o SPECIFIC NOTES
(a) Non-income-producing security.
(b) Rate represents the money market fund annualized seven-day yield
at July 31, 2019.
See accompanying notes to financial statements.
================================================================================
14 | USAA AGGRESSIVE GROWTH FUND
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
July 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $1,346,068) $1,638,493
Cash 2,202
Receivables:
Capital shares sold 845
Victory Capital (Note 8) 3
Dividends and interest 167
Securities sold 1,506
----------
Total assets 1,643,216
----------
LIABILITIES
Payables:
Securities purchased 5,405
Capital shares redeemed 559
Accrued administration and servicing fees 213
Accrued management fees 623
Accrued transfer agent's fees 147
Other accrued expenses and payables 109
----------
Total liabilities 7,056
----------
Net assets applicable to capital shares outstanding $1,636,160
==========
NET ASSETS CONSIST OF:
Paid-in capital $1,069,836
Distributable earnings 566,324
----------
Net assets applicable to capital shares outstanding $1,636,160
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $1,624,319/36,992
capital shares outstanding, no par value) $ 43.91
==========
Institutional Shares (net assets of $11,841/266
capital shares outstanding, no par value) $ 44.54
==========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 15
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended July 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $92) $ 15,500
Interest 467
Securities lending (net) 266
---------
Total income 16,233
---------
EXPENSES
Management fees 6,810
Administration and servicing fees:
Fund Shares 2,369
Institutional Shares 12
Transfer agent's fees:
Fund Shares 1,770
Institutional Shares 12
Custody and accounting fees:
Fund Shares 191
Institutional Shares 1
Postage:
Fund Shares 96
Shareholder reporting fees:
Fund Shares 51
Trustees' fees 37
Registration fees:
Fund Shares 45
Institutional Shares 25
Professional fees 86
Other 27
---------
Total expenses 11,532
Expenses reimbursed:
Institutional Shares (15)
---------
Net expenses 11,517
---------
NET INVESTMENT INCOME 4,716
---------
================================================================================
16 | USAA AGGRESSIVE GROWTH FUND
================================================================================
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain on:
Investments $ 294,542
Foreign currency transactions 1
Change in net unrealized appreciation/(depreciation) (213,886)
---------
Net realized and unrealized gain 80,657
---------
Increase in net assets resulting from operations $ 85,373
=========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 17
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended July 31,
-----------------------------------------------------------------------------------------
2019 2018
-----------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 4,716 $ 4,701
Net realized gain on investments 294,542 233,389
Net realized gain on foreign currency transactions 1 2
Change in net unrealized appreciation/(depreciation)
of investments (213,886) 47,989
---------------------------
Increase in net assets resulting from operations 85,373 286,081
---------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (223,656) (121,917)
Institutional Shares (1,695) (648)
---------------------------
Distributions to shareholders (225,351) (122,565)
---------------------------
NET INCREASE IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 7)
Fund Shares 170,212 89,689
Institutional Shares 1,603 5,146
---------------------------
Total net increase in net assets from capital
share transactions 171,815 94,835
---------------------------
Net increase in net assets 31,837 258,351
NET ASSETS
Beginning of year 1,604,323 1,345,972
---------------------------
End of year $1,636,160 $1,604,323
===========================
See accompanying notes to financial statements.
================================================================================
18 | USAA AGGRESSIVE GROWTH FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
July 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 Aggressive 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 two classes of shares: Aggressive Growth Fund Shares (Fund
Shares) and Aggressive Growth Fund Institutional Shares (Institutional Shares).
Each class of shares has equal rights to assets and earnings, except that each
class bears certain class-related expenses specific to the particular class.
These expenses include administration and servicing fees, transfer agent fees,
postage, shareholder reporting fees, and certain registration and custodian
fees. Expenses not attributable to a specific class, income, and realized gains
or losses on investments are allocated to each class of shares based on each
class' relative net assets. Each class has exclusive voting rights on matters
related solely to that class and separate voting rights on matters that relate
to all classes. The Institutional Shares are available for investment through a
USAA discretionary managed account program, and certain advisory programs
sponsored by financial intermediaries, such as brokerage firms, investment
advisors, financial planners, third-party administrators, and insurance
companies. Institutional Shares also are available to institutional investors,
which include retirement plans, endowments, foundations, and bank trusts, as
well as other persons or legal entities that the Fund may approve from time to
time, or for purchase by an affiliate fund participating in a fund-of-funds
investment strategy (affiliated funds).
================================================================================
NOTES TO FINANCIAL STATEMENTS | 19
================================================================================
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of USAA Asset Management Company (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 Capital Holdings, Inc., a global investment management firm
headquartered in Cleveland, Ohio (the Transaction) on July 1, 2019. Effective
August 5, 2019, Citibank, N.A. is the new custodian for the USAA Mutual Funds. 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. 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.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Pricing 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 closing bid
price
================================================================================
20 | USAA AGGRESSIVE GROWTH FUND
================================================================================
generally is used for U.S. listed equities and the average of the bid
and asked prices is used for foreign listed equities. 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 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 generally are priced but may be valued at amortized
================================================================================
NOTES TO FINANCIAL STATEMENTS | 21
================================================================================
cost, provided that amortized cost represents the fair value of such
securities.
5. Repurchase agreements are valued at cost.
6. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has been recognized in relation to a security or class of securities,
the securities are valued in good faith by the Committee in accordance
with valuation procedures approved by the Board. The effect of fair
value pricing is that securities may not be priced on the basis of
quotations from the primary market in which they are traded and the
actual price realized from the sale of a security may differ materially
from the fair value price. Valuing these securities at fair value is
intended to cause the Fund's NAV to be more reliable than it otherwise
would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
broker-dealers, other pricing services, or widely used quotation
systems. General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and duration
of any restrictions on disposition of the securities, evaluation of
credit quality, and an evaluation of the forces that influenced the
market in which the securities are purchased and sold.
B. FAIR VALUE MEASUREMENTS - Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the Portfolio of Investments
is based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted)
in active markets for identical securities.
Level 2 - inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
================================================================================
22 | USAA AGGRESSIVE GROWTH FUND
================================================================================
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 July 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
to such income and realized gains. The Fund records a liability based on
unrealized gains to provide for potential foreign taxes payable upon the
sale of these securities. Foreign taxes have been provided for in
accordance with the Fund's understanding of the applicable countries'
prevailing tax rules and rates.
F. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in
the securities of foreign issuers and may be traded in foreign currency.
Since the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the exchange
rate obtained from an independent pricing service on the respective
dates of such transactions.
2. Market value of securities, other assets, and liabilities at the
exchange rate obtained from an independent pricing service on a daily
basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the amounts received.
At the end of the Fund's fiscal year, net realized foreign currency
gains/losses are reclassified from accumulated net realized gains/losses to
accumulated undistributed net investment income on the Statement of Assets
and Liabilities, as such amounts are treated as ordinary income/loss for
federal income tax purposes. Net unrealized foreign currency exchange
gains/losses arise from changes in the value of assets and liabilities,
other than investments in securities, resulting from changes in the
exchange rate.
================================================================================
24 | USAA AGGRESSIVE GROWTH FUND
================================================================================
G. EXPENSES PAID INDIRECTLY - A portion of the brokerage commissions that
the Fund pays may be recaptured as a credit that is tracked and used by the
custodian to directly reduce expenses paid by the Fund. Effective September
30, 2018, the commission recapture program ended. For the year ended July
31, 2018, the Fund did not receive any brokerage commission recapture
credits.
H. INDEMNIFICATIONS - Under the Trust's organizational documents, its
officers and trustees are indemnified against certain liabilities arising
out of the performance of their duties to the Trust. In addition, in the
normal course of business, the Trust enters into contracts that contain a
variety of representations and warranties that provide general
indemnifications. The Trust's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the
Trust that have not yet occurred. However, the Trust expects the risk of
loss to be remote.
I. USE OF ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINE OF CREDIT
The Fund participates, along with other funds of the Trust and 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. 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 | 25
================================================================================
For the period July 1, 2019 to July 31, 2019, the Fund paid Citibank facility
fees of less than $500, which represents 1.1% of the total fees paid to Citibank
by the funds of the Trusts. The Fund had no borrowings under this agreement
during the period July 1, 2019 to July 31, 2019. Effective July 1, 2019, the
line of credit among the Trust, with respect to its funds, and USAA Capital
Corporation (CAPCO) terminated. For the period from August 1, 2018 to June 30,
2019, the Fund paid CAPCO facility fees of $13,000, which represents 1.9% of the
total fees paid to CAPCO by the funds of the Trusts. The Fund had no borrowings
under this agreement during the period from August 1, 2018 to June 30, 2019.
(3) INTERFUND LENDING
Effective July 1, 2019, the Trust relies on an exemptive order granted to
Victory Capital and its affiliated funds by the U.S. Securities and Exchange
Commission (SEC) in March 2017 (the 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 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 Order, by averaging the current repurchase
agreement rate and the current bank loan rate. For the period July 1, 2019 to
July 31, 2019, the Fund did not lend.
(4) 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 equalization adjustments resulted
in reclassifications to the Statement of Assets and Liabilities to
================================================================================
26 | USAA AGGRESSIVE GROWTH FUND
================================================================================
decrease distributable earnings by $2,921,000, and increase paid in capital by
$2,921,000. These reclassifications had no effect on net assets.
The tax character of distributions paid during the years ended July 31, 2019,
and 2018, was as follows:
2019 2018
----------------------------------------
Ordinary income* $ 23,144,000 $ 17,576,000
Long-term realized capital gains 202,207,000 104,989,000
------------ ------------
Total distributions paid $225,351,000 $122,565,000
============ ============
As of July 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 9,586,000
Undistributed long-term capital gains 266,385,000
Unrealized appreciation of investments 290,352,000
* 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 July 31, 2019, the Fund had no capital loss carryforwards, for federal income
tax purposes.
TAX BASIS OF INVESTMENTS - At July 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 Aggressive
Growth Fund $1,348,141,000 $317,350,000 $(26,998,000) $290,352,000
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
================================================================================
(5) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended July 31, 2019, were $1,227,372,000 and
$1,288,168,000, respectively.
(6) 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 July 31,
2019, the Fund had no securities on loan.
(7) CAPITAL SHARE TRANSACTIONS
At July 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 fund-of-funds as well as other persons or legal
entities
================================================================================
28 | USAA AGGRESSIVE GROWTH FUND
================================================================================
that the Fund may approve from time to time. Capital share transactions
for all classes were as follows, in thousands:
YEAR ENDED YEAR ENDED
JULY 31, 2019 JULY 31, 2018
---------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------
FUND SHARES:
Shares sold 3,315 $ 147,097 3,273 $ 150,920
Shares issued from reinvested
dividends 5,648 220,904 2,757 120,367
Shares redeemed (4,535) (197,789) (3,957) (181,598)
----------------------------------------------------
Net increase from capital
share transactions 4,428 $ 170,212 2,073 $ 89,689
====================================================
INSTITUTIONAL SHARES:
Shares sold 224 $ 10,190 528 $ 24,698
Shares issued from reinvested
dividends 42 1,661 15 648
Shares redeemed (230) (10,248) (439) (20,200)
----------------------------------------------------
Net increase from capital
share transactions 36 $ 1,603 104 $ 5,146
====================================================
(8) TRANSACTIONS WITH MANAGER
MANAGEMENT FEES - The Manager provides investment management services to the
Fund pursuant to an Advisory Agreement. Effective July 1, 2019, the Trust relies
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. For the year ended July 31, 2019, the
Fund had no subadviser(s).
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee, which is accrued daily and paid
monthly, is computed as a percentage of the Fund's average daily net assets at
annualized rates of 0.50% of the first $750 million of average
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
daily net assets, 0.40% of that portion of average daily net assets over $750
million but not over $1.5 billion, and 0.33% of that portion of average daily
net assets over $1.5 billion. For the year ended July 31, 2019, the Fund's
effective annualized base fee was 0.45% of the Fund's average daily net assets
for the same period.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Large-Cap Growth Funds Index. The Lipper Large-Cap Growth
Funds Index tracks the total return performance of funds within the Lipper
Large-Cap Growth Funds category.
The performance period for each share class consists of the current month
plus the previous 35 months. The following table is utilized to determine
the extent of the performance adjustment:
OVER/UNDER PERFORMANCE
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS) (IN BASIS POINTS)(1)
-------------------------------------------------------------
+/- 100 to 400 +/- 4
+/- 401 to 700 +/- 5
+/- 701 and greater +/- 6
(1)Based on the difference between average annual performance of the
relevant share class of the Fund and its relevant Lipper index, rounded to
the nearest basis point. Average daily net assets of the share class are
calculated over a rolling 36-month period.
Each class' annual performance adjustment rate is multiplied by the average
daily net assets of each respective class over the entire performance period,
which is then multiplied by a fraction, the numerator of which is the number of
days in the month and the denominator of which is 365 (366 in leap years). The
resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper Large-Cap Growth Funds Index over that period, even if
the class had overall negative returns during the performance period.
================================================================================
30 | USAA AGGRESSIVE GROWTH FUND
================================================================================
Under the investment advisory agreement with the Manager that took effect on
July 1, 2019, no performance adjustments will be made for the period beginning
July 1, 2019, through June 30, 2020. Only performance beginning as of July 1,
2019, and thereafter will be utilized in calculating future performance
adjustments.
For the period from August 1, 2018 to June 30, 2019, the Fund incurred
management fees, paid or payable to AMCO, of $6,187,000 which included a
performance adjustment for the Fund Shares and Institutional Shares of
$(228,000) and $(6,000), respectively. For the Fund Shares and Institutional
Shares, the performance adjustments were (0.01)% and (0.05)%, respectively. For
the period July 1, 2019 to July 31, 2019, the Fund incurred management fees,
paid or payable to Victory Capital of $623,000, which included no performance
adjustments.
ADMINISTRATION AND SERVICING FEES - Effective July 1, 2019, Victory Capital is
obligated on a continuous basis to provide administrative services to the Fund.
The Manager provides certain administration and servicing functions for the
Fund. For such services, the Manager receives a fee accrued daily and paid
monthly at an annualized rate of 0.15% and 0.10% of average daily net assets of
the Fund Shares and Institutional Shares, respectively. For the period from
August 1, 2018 to June 30, 2019, the Fund Shares and Institutional Shares
incurred administration and servicing fees, paid or payable to AMCO, of
$2,157,000 and $11,000 respectively. For the period July 1, 2019 to July 31,
2019 the Fund Shares and Institutional Shares incurred administration and
servicing fees, paid or payable to Victory Capital of $212,000 and $1,000
respectively.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, AMCO also provided certain compliance and legal
services for the benefit of the Fund. The Board approved the reimbursement of a
portion of these expenses incurred by AMCO.
Effective July 1, 2019, these services are covered under a Compliance Services
Agreement between the Trust and Victory Capital. For the period from August 1,
2018 to June 30, 2019, the Fund reimbursed AMCO $5,000 for these compliance and
legal services. For the period July 1, 2019 to July 31, 2019, the Fund's portion
of fees paid to Victory Capital under the
================================================================================
NOTES TO FINANCIAL STATEMENTS | 31
================================================================================
Compliance Service Agreement was $1,000. These expenses are included in the
professional fees on the Fund's Statement of Operations.
EXPENSE LIMITATION - Effective July 1, 2019, the Manager has contractually
agreed to waive its management fee and/or reimburse expenses so that the total
annual operating expenses (excluding certain items such as interest, taxes and
brokerage commissions) do not exceed 0.75% of the Fund Shares and 0.70% of the
Institutional Shares through at least June 30, 2021. The Manager is permitted 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 limits in effect at the time of: (a) the
original waiver or expense reimbursement; or (b) the recoupment, after giving
effect to the recoupment amount. The amount of any waivers or reimbursements and
the amount of any recoupment is calculated without regard to the impact of any
performance adjustment to the Fund's management fee. This waiver agreement may
only be terminated by the Fund's Board of Trustees. Prior to December 1, 2018,
AMCO agreed to limit the total annual operating expenses of the Institutional
Shares to 0.70% of its average daily net assets, excluding extraordinary
expenses and before reductions of any expenses paid indirectly, and to reimburse
the Institutional Shares for all expenses in excess of that amount. For the
period from August 1, 2018 to June 30, 2019, the Institutional Shares incurred
reimbursable expenses from AMCO of $12,000. For the period July 1, 2019 to July
31, 2019, the Institutional Shares incurred reimbursable expenses of $3,000, all
of which was receivable from the Manager.
TRANSFER AGENT'S FEES - Victory Capital Transfer Agency, Inc. (VCTA), (formerly,
USAA Shareholder Account Services (SAS)) provides transfer agency services to
the Fund. VCTA, an affiliate of the Manager, provides transfer agent services to
the Fund Shares based on an annual charge of $23 per shareholder account plus
out-of-pocket expenses. VCTA 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 July 31, 2019, the Fund Shares and Institutional Shares incurred
transfer
================================================================================
32 | USAA AGGRESSIVE GROWTH FUND
================================================================================
agent's fees, paid or payable to VCTA, of $1,770,000, and $12,000, respectively.
UNDERWRITING SERVICES - Effective July 1, 2019, the Trust has an agreement with
Victory Capital Advisers, Inc. (VCA), an affiliate of the Manager for exclusive
underwriting and distribution of the Fund's shares on a continuing best effort
basis. This agreement provides that VCA receive no fee or other compensation for
such distribution services. Prior to July 1, 2019, USAA Investment Management
Company (IMCO) provided exclusive underwriting and distribution of the Fund's
shares on a continuing best-efforts basis and received no fee or other
compensation for these services.
(9) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other affiliated
funds in which the affiliated fund-of-funds invest. The fund-of-funds do not
invest in the underlying affiliated 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 July 31, 2019, the fund-of-funds owned
the following percentages of the total outstanding shares of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
--------------------------------------------------------------------------------
Cornerstone Conservative 0.1
Cornerstone Equity 0.6
Effective July 1, 2019, Victory Capital replaced AMCO as the Fund's investment
adviser and began managing the Fund. Prior to July 1, 2019, AMCO was 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.
(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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 33
================================================================================
to establish a liquidity risk management program and enhances disclosures
regarding funds' liquidity. The requirements to implement a liquidity risk
management program and establish a 15% illiquid investment limit became
effective December 1, 2018. However, in February 2018, the SEC issued Release
No. IC-33010, INVESTMENT COMPANY LIQUIDITY RISK MANAGEMENT PROGRAMS; COMMISSION
GUIDANCE FOR IN-KIND ETFs, which delayed certain requirements related to
liquidity classification, highly liquid investment minimums, and board approval
of the liquidity risk management programs to June 1, 2019. The Manager has
determined there is no significant impact on the Fund's financial statements and
various filings.
(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.
================================================================================
34 | USAA AGGRESSIVE GROWTH FUND
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 31,
----------------------------------------------------------------------
2019 2018 2017 2016 2015
----------------------------------------------------------------------
Net asset value at
beginning of period $ 48.92 $ 43.96 $ 40.02 $ 42.55 $ 40.90
----------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .13 .19 .36 .33 .79
Net realized and
unrealized gain (loss) 1.72 8.79 6.30 (.20) 5.75
----------------------------------------------------------------------
Total from investment
operations 1.85 8.98 6.66 .13 6.54
----------------------------------------------------------------------
Less distributions from:
Net investment income (.08) (.19) (.33) (.33) (.79)
Realized capital gains (6.78) (3.83) (2.39) (2.33) (4.10)
----------------------------------------------------------------------
Total distributions (6.86) (4.02) (2.72) (2.66) (4.89)
----------------------------------------------------------------------
Net asset value at
end of period $ 43.91 $ 48.92 $ 43.96 $ 40.02 $ 42.55
======================================================================
Total return (%)* 5.53 21.57 17.92 .36 16.96
Net assets at end
of period (000) $1,624,319 $1,592,944 $1,340,385 $1,208,124 $1,247,753
Ratios to average
daily net assets:**
Expenses (%)(a) .72(c) .75(b) .81(b) .85(b) .88(b)
Expenses, excluding
reimbursements (%)(a) .72 .75(b) .81(b) .85(b) .88(b)
Net investment income (%) .30 .32 .57 .30 .30
Portfolio turnover (%) 78 57 51 70 55
* 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 July 31, 2019, average daily net assets were
$1,579,085,000.
(a) Does not include acquired fund fees, if any.
(b) Reflects total annual operating expenses of the Fund Shares before
reductions of any expenses paid indirectly. The Fund Shares' expenses paid
indirectly decreased the expense ratio by less than 0.01%.
(c) Effective July, 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Fund Shares to 0.75% of the Fund Shares' average
daily net assets.
================================================================================
FINANCIAL HIGHLIGHTS | 35
================================================================================
INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each
period is as follows:
YEAR ENDED JULY 31,
----------------------------------------------------------------------
2019 2018 2017 2016 2015
----------------------------------------------------------------------
Net asset value at
beginning of period $ 49.55 $ 44.36 $40.39 $ 42.92 $ 41.22
----------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .14(a) .14(a) .21(a) .44 .21(a)
Net realized and
unrealized gain (loss) 1.75(a) 8.93(a) 6.52(a) (.24) 6.47(a)
----------------------------------------------------------------------
Total from investment
operations 1.89(a) 9.07(a) 6.73(a) .20 6.68(a)
----------------------------------------------------------------------
Less distributions from:
Net investment income (.12) (.05) (.37) (.40) (.88)
Realized capital gains (6.78) (3.83) (2.39) (2.33) (4.10)
----------------------------------------------------------------------
Total distributions (6.90) (3.88) (2.76) (2.73) (4.98)
----------------------------------------------------------------------
Net asset value at
end of period $ 44.54 $ 49.55 $44.36 $ 40.39 $ 42.92
======================================================================
Total return (%)* 5.56 21.54 17.94 .51 17.21
Net assets at end
of period (000) $11,841 $11,379 $5,587 $136,361 $163,115
Ratios to average
daily net assets:**
Expenses (%)(b),(c) .70(e) .75(c),(d) .73(c) .70(c) .68(c)
Expenses, excluding
reimbursements (%)(b),(c) .83 .94(c) .73(c) .70(c) .68(c)
Net investment income (%) .32 .30 .54 .45 .50
Portfolio turnover (%) 78 57 51 70 55
* 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 July 31, 2019, average daily net assets were $11,606,000.
(a) Calculated using average shares. For the years ended July 31, 2019, average
shares were 259,000.
(b) Does not include acquired fund fees, if any.
(c) Reflects total annual operating expenses of the Institutional Shares before
reductions of any expenses paid indirectly. The Institutional Shares'
expenses paid indirectly decreased the expense ratios by less than 0.01%.
(d) Prior to December, 1, 2017, AMCO had voluntarily agreed to limit the annual
expenses of the Institutional Shares to 0.70% of the Institutional Shares'
average daily net assets.
(e) Effective July, 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Adviser Shares to 0.70% of the Institutional Shares'
average daily net assets.
================================================================================
36 | USAA AGGRESSIVE GROWTH FUND
================================================================================
EXPENSE EXAMPLE
July 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 February 1, 2019, through
July 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 | 37
================================================================================
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 FEBRUARY 1, 2019 -
FEBRUARY 1, 2019 JULY 31, 2019 JULY 31, 2019
------------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,080.50 $3.66
Hypothetical
(5% return before expenses) 1,000.00 1,021.27 3.56
INSTITUTIONAL SHARES
Actual 1,000.00 1,080.50 3.61
Hypothetical
(5% return before expenses) 1,000.00 1,021.32 3.51
*Expenses are equal to the annualized expense ratio of 0.71% for Fund Shares
and 0.70% for Institutional Shares, which are net of any reimbursements and
expenses paid indirectly, multiplied by the average account value over the
period, multiplied by 181 days/365 days (to reflect the one-half-year period).
The Fund's actual ending account values are based on its actual total returns
of 8.05% for Fund Shares and 8.05% for Institutional Shares for the six-month
period of February 1, 2019, through July 31, 2019.
================================================================================
38 | USAA AGGRESSIVE GROWTH FUND
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
July 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.
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with
================================================================================
ADVISORY AGREEMENT(S) | 39
================================================================================
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 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
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40 | USAA AGGRESSIVE GROWTH FUND
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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.
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
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ADVISORY AGREEMENT(S) | 41
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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).
For at least two years after the Transaction closes, Victory Capital
has agreed to waive fees and/or reimburse expenses so that each Fund's
annual expense ratio (excluding certain customary items) does not
exceed the levels reflected in each Fund's most recent audited
financial statements at the time the Transaction closes (or the levels
of AMCO's then-current expense caps, if applicable), excluding the
impact of any performance adjustment to the Fund's advisory fee.
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42 | USAA AGGRESSIVE GROWTH FUND
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o The portfolio managers at AMCO that manage the Fixed Income Funds(1)
as well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be
advised by Victory Capital through its Victory Solutions platform,
Victory Capital proposes that the same subadvisers be retained
Post-Transaction, although Victory Capital may change the allocation to
a particular subadviser Post-Transaction. No changes are expected to
the portfolio managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's businesses to
Victory Capital. Victory Capital and USAA expect to
(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) | 43
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enter into a transition services agreement under which USAA will
continue to provide Victory Capital with certain services that are
currently provided by USAA to AMCO and the USAA Transfer Agent for a
specified period of time after the closing of the Transaction to assist
Victory Capital in transitioning the USAA member distribution channel
and member support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital is capable of providing
the same level of investment management services
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44 | USAA AGGRESSIVE GROWTH FUND
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currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund,
Growth & Income Fund, Income Stock Fund, Global Equity Income Fund, and
Precious Metals and Minerals Fund.
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ADVISORY AGREEMENT(S) | 45
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The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored
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46 | USAA AGGRESSIVE GROWTH FUND
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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 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
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ADVISORY AGREEMENT(S) | 47
================================================================================
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.
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
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48 | USAA AGGRESSIVE GROWTH FUND
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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.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
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ADVISORY AGREEMENT(S) | 49
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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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50 | USAA AGGRESSIVE GROWTH FUND
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND AMCO)
July 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.
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 AMCO 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 AMCO, 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 AMCO's revenues
and costs of providing services to the Fund and
(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"). Effective July 1, 2019, upon the closing of the
transaction whereby AMCO acquired by Victory Capital Holdings, Inc., the
parent company of Victory Capital, the Advisory Agreement between the Trust
and AMCO and the Sub-advisory Agreement with the Subadviser terminated and
the new investment advisory agreement between the Trust and Victory Capital
went into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are discussed above.
Effective June 30, 2019, the Subadviser no longer manages any portion of the
Fund.
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ADVISORY AGREEMENT(S) | 51
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compensation paid to affiliates of AMCO; and (iii) information about AMCO's
operations and personnel. Prior to voting, the Independent Trustees reviewed the
proposed continuance of the Advisory Agreement with management and with
experienced 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 AMCO. 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 AMCO's profitability with respect to the
Fund. However, the Board noted that the evaluation process with respect to AMCO
is an ongoing one. In this regard, the Board's and its committees' consideration
of the Advisory Agreement included 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 AMCO under the Advisory Agreement, the Board
reviewed information provided by AMCO relating to its operations and personnel.
The Board also took into account its knowledge of AMCO's management and the
quality of the performance of AMCO's duties through Board meetings, discussions,
and reports during the preceding year. The
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52 | USAA AGGRESSIVE GROWTH FUND
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Board considered the fees paid to AMCO and the services provided to the Fund by
AMCO under the Advisory Agreement, as well as other services provided by AMCO
and its affiliates under other agreements, and the personnel who provide these
services. In addition to the investment advisory services provided to the Fund,
AMCO 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 AMCO in connection with the services provided to the Fund, including
investment, operational, enterprise, litigation, regulatory and compliance
risks.
The Board considered AMCO's management style and the performance of AMCO's
duties under the Advisory Agreement. The Board considered the level and depth of
experience of AMCO, including the professional experience and qualifications of
its senior and investment personnel, as well as current staffing levels. The
Board considered AMCO's timeliness in responding to performance issues. The
allocation of the Fund's brokerage, including AMCO's process for monitoring
"best execution" and the utilization of "soft dollars," also was considered.
AMCO's role in coordinating the activities of the Fund's other service providers
also was considered. The Board also considered AMCO's risk management processes.
The Board considered AMCO'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 AMCO and its affiliates
in managing the Fund, as well as other funds in the Trust.
The Board also reviewed the compliance and administrative services provided to
the Fund by AMCO and its affiliates, including AMCO's oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust,
also focused on the quality of AMCO'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) | 53
================================================================================
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
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 expense universe. The Board took into account the various
services provided to the Fund by AMCO and its affiliates, including the high
quality of services received by the Fund from AMCO. The Board also noted the
level and method of computing the management fee, including any performance
adjustment to such fee.
In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total return with its Lipper index and with that of other mutual funds deemed to
be in its peer group by the independent third party in its report (the
performance universe). The Fund's performance universe consisted of the Fund and
all retail and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or primary channel
of distribution. This comparison indicated that, among other data, the Fund's
performance was 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 top 50% of
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54 | USAA AGGRESSIVE GROWTH FUND
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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 that the
Fund's subadvisers were terminated in 2017 and that the Fund is now being
managed by a new portfolio management team and that the Fund's longer term
performance in part reflects that of the previous subadvisers. The Board took
into account management's discussion of the Fund's performance and 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 AMCO'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 AMCO'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 AMCO, the Board
also considered the fact that AMCO 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 AMCO from its relationship with the Trust, including that AMCO may
derive reputational and other benefits from its association with the Fund. The
Trustees recognized that AMCO 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 - The Board noted that the Fund has advisory fee breakpoints
that allow the Fund to participate in economies of scale and that such economies
of scale were currently reflected in the advisory fee. The Board also considered
the effect of the Fund's growth and size on its performance and fees, noting
that the Fund may realize additional economies of scale if assets increase
proportionally more than some expenses. The Board determined that the current
investment management fee structure was reasonable.
================================================================================
ADVISORY AGREEMENT(S) | 55
================================================================================
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with AMCO, among others: (i) AMCO has demonstrated that it
possesses the capability and resources to perform the duties required of it
under the Advisory Agreement; (ii) AMCO maintains an appropriate compliance
program; (iii) the performance of the Fund is being appropriately monitored;
(iv) the Fund's advisory expenses are reasonable in relation to those of similar
funds and to the services to be provided by AMCO; and (v) AMCO's 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 AMCO
and the type of fund. Based on its conclusions, the Board determined that the
continuation of the Advisory Agreement would be in the best interests of the
Fund and its shareholders.
================================================================================
56 | USAA AGGRESSIVE GROWTH FUND
================================================================================
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").
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 57
================================================================================
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 of 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), (08/11-06/19); Director of USAA Investment
Management Company (IMCO) (09/09-present); Chairman of Board of IMCO
(4/13-present); President and Director of USAA Shareholder Account Services
(SAS) (10/09-06/19); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director and Vice Chairman of FPS
(12/13-present); President and Director of USAA Investment Corporation (ICORP)
(03/10-present); Chairman of Board of ICORP (12/31-present); Director of USAA
Financial Advisors, Inc. (FAI) (12/13-present); Chairman of Board of FAI
(3/15-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
================================================================================
58 | USAA AGGRESSIVE GROWTH 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
--------------------------------------------------------------------------------
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
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 59
================================================================================
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.
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.
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
================================================================================
60 | USAA AGGRESSIVE GROWTH FUND
================================================================================
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 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.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 61
================================================================================
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 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.
================================================================================
62 | USAA AGGRESSIVE GROWTH FUND
================================================================================
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 was 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 | 63
================================================================================
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).
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Executive Director, Victory Capital Management Inc. (7/1/19-present); Treasurer,
USAA ETF Trust (09/18-06/19); Executive Director, Investment and Financial
Administration, USAA (04/12-06/30/19); Assistant Treasurer,
================================================================================
64 | USAA AGGRESSIVE GROWTH FUND
================================================================================
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
Director, Accounting and Finance, Victory Capital Management Inc.
(7/1/19-present); Assistant Treasurer, USAA ETF Trust (09/18-06/19);
Accounting/Financial Director, USAA (12/13-06/30/19).
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).
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).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 65
================================================================================
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 111 West Houston St., Suite 1901
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
Copies of the Victory Capital Management Inc.'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
--------------------------------------------------------------------------------
July 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA Capital Growth Fund
FUND INSTITUTIONAL
SHARES SHARES
USCGX UICGX
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
". . . NOW MAY BE AN OPPORTUNE TIME FOR
INVESTORS TO ENSURE THAT THEIR PORTFOLIOS ARE WELL [PHOTO OF BROOKS ENGLEHARDT]
DIVERSIFIED AND THAT THEIR OVERALL ALLOCATION IS
APPROPRIATE FOR THEIR PARTICULAR RISK APPETITE."
--------------------------------------------------------------------------------
SEPTEMBER 2019
Although the bull market in equities has continued running, it was not without a
few missteps. Trade turmoil, questions surrounding global economic growth,
changing monetary policy, and geopolitical disputes have all led to increased
volatility. But through it all, domestic stocks, as measured by the S&P 500(R)
Index, still managed an annual return of approximately 8% for the 12-month
period ended July 31, 2019.
Given the sometimes dire news flow and ample cross-currents, it's no surprise
that volatility returned to the market. On one hand, the U.S. economy continues
to look good. The unprecedented streak of job creation has continued
uninterrupted, and unemployment is bouncing along historic lows at 3.7%. The
consumer remains resilient and inflation is tepid. On the flip side, however,
U.S. trade policy seems to be evolving, with new tariffs threatened and
implemented. The markets generally dislike this type of trade turmoil and
uncertainty, and the ongoing tensions between the United States and China (and
other trading partners) threaten to upend global supply chains and hinder
economic growth.
It's not just the stock market that has been dealing with volatility. The bond
market also has experienced volatility, due largely to the U.S. Federal
Reserve's (the "Fed") famous "pivot" in late 2018. Against the backdrop of
rapidly falling equities in the fourth quarter of 2018, the Fed signaled that
its next policy move would be to lower--not increase--short-term interest rates.
This immediately altered the yield environment.
Meanwhile, the U.S. Treasury yield curve continued to flatten and, in fact,
inverted--whereby shorter-term yields became higher than longer-term
================================================================================
================================================================================
yields. Such a yield-curve inversion is a worrying sign as it sometimes, but not
always, portends to a recession.
Although we are not predicting a recession, we must acknowledge that risks have
increased for an economic slowdown. Given that the current run in stocks is more
than a decade old, it's important for investors to keep perspective that the
bull market cannot continue forever. Therefore, now may be an opportune time for
investors to ensure that their portfolios are well diversified and that their
overall allocation is appropriate for their particular risk appetite.
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,
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. On the following pages, you will find information
relating to your USAA Investments, which is now a Victory Capital Investment
Franchise. If you have any questions about your investments, we encourage you to
engage your financial advisor or else contact us directly at 800-235-8396 or
visit usaa.com.
My colleagues and I sincerely appreciate the confidence you have placed in us,
and we value the opportunity to help you meet your investment goals.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGERS' COMMENTARY ON THE FUND 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 18
Financial Statements 19
Notes to Financial Statements 23
Financial Highlights 40
EXPENSE EXAMPLE 42
ADVISORY AGREEMENT(S) 44
TRUSTEES' AND OFFICERS' INFORMATION 64
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
VICTORY CAPITAL MANAGEMENT INC. 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
RS Investments Developed Markets Trivalent Investments
U-WEN KOK, CFA PETER S. CARPENTER, CFA
ADAM MEZAN, CFA JEFFREY R. SULLIVAN, CFA
Sophus Capital VictoryShares and Solutions
MICHAEL REYNAL MANNIK S. DHILLON, CFA, CAIA
MICHAEL ADE, CFA WASIF A. LATIF
MARIA FREUND, CFA
--------------------------------------------------------------------------------
o PLEASE CHARACTERIZE THE PERFORMANCE OF GLOBAL STOCKS DURING THE 12-MONTH
REPORTING PERIOD ENDED JULY 31, 2019.
While U.S. stocks ended the 12-month reporting period in positive territory,
there was significant volatility along the way. Against a backdrop of
slowing global growth, for much of the period, markets responded primarily
to headlines surrounding U.S. monetary and trade policies. Entering the
reporting period, the U.S. Federal Reserve (the "Fed") was on a credit
tightening trajectory, which the markets interpreted as confirming a
relatively favorable outlook for the U.S. economy. The fourth quarter of
2018 saw a sharp reversal in investor risk appetite, however, as softening
economic data from Europe and China raised concerns that the Fed would
increase interest rate too quickly even as a global recession possibly
loomed. Uncertainty regarding U.S. trade policy and corporate earnings also
weighed on sentiment toward the end of 2018. While the Fed followed through
on its previously signaled December 2018 interest rate increase, it pivoted
to a much more dovish stance entering 2019, leading to a rebound in risk
asset valuations.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
Escalating rhetoric between the United States and China regarding trade and
tariffs generated concerns throughout the 12-month reporting period. May
2019 saw markets decline as President Trump announced plans to impose 25%
tariffs on $200 billion in Chinese imports. However, the market subsequently
recovered its lost ground as the Fed indicated that it was prepared to cut
its benchmark interest rate, if needed, to help offset any drag on economic
growth stemming from trade frictions. Corporate earnings reports that
generally were in line with expectations also served to bolster sentiment.
o HOW DID THE USAA CAPITAL GROWTH FUND (THE "FUND") PERFORM DURING THE
REPORTING PERIOD?
The Fund has two share classes: Fund Shares and Institutional Shares. For
the reporting period ended July 31, 2019, the Fund Shares and Institutional
Shares had total returns of -1.82% and -1.77%, respectively. This compares
to returns of 3.62% for the MSCI World Index, 2.95% for the MSCI All-Country
World Index (the "Index") and -0.07% for the Lipper Global Funds Index.
Victory Capital Management Inc. (the "Manager" or "Victory Capital") is the
Fund's investment adviser. The investment adviser provides day-to- day
discretionary management for the Fund's assets.
o WHAT WERE YOUR STRATEGIES IN THIS ENVIRONMENT?
For the 12-month reporting period, stock selection was the principal
detractor from the Fund's performance relative to the Index, while sector
allocation had a slightly negative effect overall. Stock selection within
information technology was by far the largest detractor by sector, while
selection within materials and consumer discretionary also detracted. In
Refer to page 4 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
2 | USAA CAPITAL GROWTH FUND
================================================================================
terms of allocation, an overweight to the energy sector and an underweight
in utilities weighed on performance, while an overweight to information
technology and an underweight to healthcare contributed to returns.
Thank you for allowing us to help you with your investment needs.
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 7/31/19 o
--------------------------------------------------------------------------------------------------------
SINCE INCEPTION
1 YEAR 5 YEAR 10 YEAR INCEPTION* DATE
--------------------------------------------------------------------------------------------------------
Fund Shares -1.82% 7.45% 9.97% - -
Institutional Shares -1.77% - - 6.66% 8/07/15
MSCI All-Country
World Index** (reflects
no deduction for fees,
expenses, or taxes) 2.95% 6.48% 9.25% - -
MSCI World Index***
(reflects no deduction
for fees, expenses, or taxes) 3.62% 7.05% 9.87% - -
Lipper Global Funds Index
(reflects no deduction
for taxes)**** -0.07% 5.99% 8.81% - -
*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.
**As of July 1, 2019, the MSCI All-Country World Index replaced the MSCI World
Index because the MSCI All-Country World Index is more representative of the
Fund's investment universe. 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 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. This category includes funds
that invest at least 25% of their portfolio in securities traded outside of the
United States and that may own U.S. securities as well.
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 CAPITAL GROWTH FUND
================================================================================
o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
USAA CAPITAL
GROWTH FUND MSCI WORLD MSCI ALL-COUNTRY LIPPER GLOBAL
SHARES INDEX WORLD INDEX FUNDS INDEX
7/31/2009 $10,000.00 $10,000.00 $10,000.00 $10,000.00
8/31/2009 10,293.00 10,412.55 10,357.65 10,397.53
9/30/2009 10,695.00 10,827.58 10,832.83 10,777.10
10/31/2009 10,475.00 10,634.94 10,665.42 10,555.25
11/30/2009 10,932.00 11,069.52 11,104.07 10,965.95
12/31/2009 11,190.00 11,268.29 11,334.02 11,256.24
1/31/2010 10,654.00 10,802.56 10,844.20 10,829.04
2/28/2010 10,838.00 10,954.84 10,982.34 10,979.95
3/31/2010 11,652.00 11,633.28 11,688.87 11,621.06
4/30/2010 11,560.00 11,634.91 11,708.53 11,665.94
5/31/2010 10,450.00 10,520.43 10,598.50 10,584.44
6/30/2010 10,025.00 10,159.72 10,271.99 10,268.09
7/31/2010 10,912.00 10,983.40 11,107.80 11,081.38
8/31/2010 10,450.00 10,573.33 10,719.49 10,656.37
9/30/2010 11,504.00 11,559.25 11,744.98 11,700.40
10/31/2010 12,041.00 11,990.13 12,169.46 12,168.66
11/30/2010 11,782.00 11,731.27 11,898.68 11,922.94
12/31/2010 12,547.00 12,593.81 12,770.01 12,763.33
1/31/2011 12,715.00 12,878.33 12,970.41 12,944.17
2/28/2011 13,107.00 13,329.24 13,348.09 13,358.50
3/31/2011 13,126.00 13,197.79 13,334.76 13,385.59
4/30/2011 13,630.00 13,758.46 13,880.32 13,886.62
5/31/2011 13,312.00 13,473.04 13,581.95 13,587.61
6/30/2011 13,144.00 13,259.90 13,367.95 13,329.44
7/31/2011 12,902.00 13,019.47 13,150.30 13,028.12
8/31/2011 11,781.00 12,102.15 12,189.68 11,981.08
9/30/2011 10,624.00 11,056.88 11,038.82 10,750.54
10/31/2011 11,763.00 12,200.57 12,221.56 11,870.51
11/30/2011 11,669.00 11,902.69 11,855.71 11,658.01
12/31/2011 11,555.00 11,896.08 11,831.76 11,492.26
1/31/2012 12,236.00 12,493.06 12,519.74 12,225.50
2/29/2012 12,729.00 13,103.33 13,149.65 12,832.16
3/31/2012 12,805.00 13,271.79 13,236.95 12,915.74
4/30/2012 12,672.00 13,121.08 13,085.61 12,688.29
5/31/2012 11,498.00 11,988.41 11,912.38 11,554.96
6/30/2012 12,066.00 12,599.29 12,500.72 12,069.32
7/31/2012 12,199.00 12,761.26 12,671.86 12,237.46
8/31/2012 12,502.00 13,084.78 12,947.38 12,451.76
9/30/2012 12,824.00 13,444.26 13,355.18 12,770.96
10/31/2012 12,691.00 13,353.41 13,266.16 12,760.51
11/30/2012 12,899.00 13,524.40 13,435.80 12,904.51
12/31/2012 13,199.00 13,778.74 13,740.13 13,320.68
1/31/2013 13,891.00 14,480.63 14,373.12 13,981.41
2/28/2013 14,006.00 14,504.54 14,370.88 13,952.19
3/31/2013 14,313.00 14,844.28 14,633.64 14,269.82
4/30/2013 14,832.00 15,311.74 15,051.68 14,675.93
5/31/2013 14,832.00 15,317.52 15,010.39 14,770.64
6/30/2013 14,525.00 14,940.09 14,571.65 14,445.28
7/31/2013 15,370.00 15,726.63 15,269.24 15,175.34
8/31/2013 14,851.00 15,391.88 14,951.11 14,857.66
9/30/2013 15,696.00 16,161.68 15,723.35 15,602.90
10/31/2013 16,484.00 16,794.30 16,355.32 16,148.05
11/30/2013 16,868.00 17,092.76 16,586.94 16,449.47
12/31/2013 17,039.00 17,454.44 16,873.10 16,747.03
1/31/2014 16,612.00 16,807.95 16,198.16 16,180.70
2/28/2014 17,388.00 17,649.38 16,980.66 16,971.16
3/31/2014 17,388.00 17,674.92 17,056.16 17,039.31
4/30/2014 17,388.00 17,856.03 17,218.53 17,121.59
5/31/2014 17,738.00 18,207.35 17,584.75 17,467.25
6/30/2014 18,126.00 18,533.06 17,915.83 17,770.34
7/31/2014 18,067.00 18,237.29 17,698.55 17,390.63
8/31/2014 18,553.00 18,639.15 18,089.52 17,788.43
9/30/2014 18,184.00 18,133.26 17,502.91 17,245.31
10/31/2014 18,378.00 18,250.57 17,626.14 17,360.86
11/30/2014 18,941.00 18,616.32 17,920.96 17,698.73
12/31/2014 18,814.00 18,316.13 17,575.15 17,393.51
1/31/2015 18,696.00 17,984.25 17,300.37 17,173.72
2/28/2015 19,760.00 19,037.92 18,263.50 18,121.56
3/31/2015 19,563.00 18,739.91 17,980.52 17,925.30
4/30/2015 19,937.00 19,179.41 18,502.21 18,293.09
5/31/2015 20,174.00 19,245.48 18,478.07 18,396.57
6/30/2015 19,740.00 18,797.98 18,043.06 18,016.96
7/31/2015 20,016.00 19,135.40 18,199.75 18,205.32
8/31/2015 18,755.00 17,869.13 16,952.14 17,023.08
9/30/2015 18,223.00 17,210.03 16,337.98 16,392.77
10/31/2015 19,622.00 18,573.83 17,620.26 17,565.18
11/30/2015 19,662.00 18,481.41 17,474.76 17,564.39
12/31/2015 19,387.00 18,156.56 17,159.62 17,192.60
1/31/2016 18,151.00 17,070.35 16,124.71 16,103.56
2/29/2016 17,932.00 16,943.31 16,013.80 15,876.29
3/31/2016 19,088.00 18,093.06 17,200.54 17,019.31
4/30/2016 19,108.00 18,379.36 17,454.44 17,289.06
5/31/2016 19,307.00 18,482.59 17,476.44 17,404.50
6/30/2016 18,928.00 18,275.49 17,370.65 17,136.50
7/31/2016 19,865.00 19,047.60 18,119.22 17,889.93
8/31/2016 19,984.00 19,063.43 18,180.17 17,999.46
9/30/2016 20,024.00 19,164.69 18,291.56 18,137.90
10/31/2016 19,845.00 18,793.80 17,981.08 17,858.04
11/30/2016 20,502.00 19,064.03 18,117.72 18,139.75
12/31/2016 20,880.00 19,520.20 18,509.11 18,506.74
1/31/2017 21,244.00 19,991.33 19,015.24 18,991.07
2/28/2017 21,850.00 20,545.96 19,548.68 19,477.50
3/31/2017 22,012.00 20,764.81 19,787.76 19,793.68
4/30/2017 22,315.00 21,072.27 20,096.19 20,143.05
5/31/2017 22,356.00 21,518.04 20,539.96 20,613.10
6/30/2017 22,639.00 21,600.84 20,633.36 20,712.60
7/31/2017 23,589.00 22,117.80 21,209.95 21,200.04
8/31/2017 23,690.00 22,148.94 21,291.23 21,180.91
9/30/2017 24,296.00 22,646.06 21,702.57 21,659.04
10/31/2017 24,983.00 23,074.03 22,153.24 22,000.71
11/30/2017 25,529.00 23,573.99 22,582.09 22,410.43
12/31/2017 25,863.00 23,892.80 22,946.17 22,703.30
1/31/2018 27,386.00 25,154.34 24,240.67 23,901.19
2/28/2018 26,259.00 24,112.26 23,222.63 22,861.92
3/31/2018 25,654.00 23,586.70 22,725.54 22,470.22
4/30/2018 25,842.00 23,857.73 22,942.54 22,678.34
5/31/2018 25,967.00 24,007.24 22,971.15 22,670.95
6/30/2018 25,675.00 23,995.78 22,846.81 22,551.44
7/31/2018 26,364.00 24,745.26 23,535.82 23,287.00
8/31/2018 26,802.00 25,051.43 23,720.65 23,268.43
9/30/2018 27,032.00 25,190.92 23,823.93 23,312.64
10/31/2018 24,986.00 23,341.20 22,038.59 21,585.60
11/30/2018 24,819.00 23,606.36 22,360.91 21,829.43
12/31/2018 22,899.00 21,811.38 20,785.92 20,266.17
1/31/2019 25,109.00 23,508.43 22,427.18 21,845.29
2/28/2019 25,588.00 24,215.32 23,027.08 22,389.39
3/31/2019 25,565.00 24,533.38 23,316.59 22,598.27
4/30/2019 26,226.00 25,403.32 24,103.93 23,328.34
5/31/2019 24,221.00 23,937.52 22,674.09 21,970.88
6/30/2019 25,793.00 25,514.88 24,158.83 23,305.78
7/31/2019 25,884.00 25,641.26 24,229.58 23,269.91
[END CHART]
Data from 7/31/09 through 7/31/19
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Capital Growth Fund Shares 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 index
does not reflect the deduction of any fees, expenses, or taxes, except the
Lipper Global Funds Index reflects the fees and expenses of the underlying funds
included in the index.
================================================================================
INVESTMENT OVERVIEW | 5
================================================================================
o TOP 10 HOLDINGS* - 7/31/19 o
(% of Net Assets)
Apple, Inc. .............................................................. 3.2%
Amazon.com, Inc. ......................................................... 1.8%
Microsoft Corp. .......................................................... 1.6%
Home Depot, Inc. ......................................................... 1.4%
Merck & Co., Inc. ........................................................ 1.2%
Air Canada ............................................................... 1.2%
Boeing Co. ............................................................... 1.1%
Bank of America Corp. .................................................... 1.1%
Baxter International, Inc. ............................................... 1.1%
Amgen, Inc. .............................................................. 1.0%
o SECTOR ALLOCATION* - 7/31/19 o
(% of Net Assets)
[PIE CHART OF SECTOR ALLOCATION]
CONSUMER, NON-CYCLICAL 20.5%
FINANCIAL 19.1%
TECHNOLOGY 14.7%
COMMUNICATIONS 12.8%
CONSUMER, CYCLICAL 12.6%
INDUSTRIAL 7.1%
ENERGY 6.2%
BASIC MATERIALS 3.7%
UTILITIES 2.9%
[END CHART]
*Does not include money market instruments and short-term investments purchased
with cash collateral from securities loaned.
Percentages are of the net assets of the Fund and may not equal 100%.
Refer to the Portfolio of Investments for a complete list of securities.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
================================================================================
6 | USAA CAPITAL GROWTH FUND
================================================================================
o COUNTRY ALLOCATION* - 7/31/19 o
[PIE CHART OF COUNTRY ALLOCATION]
UNITED STATES 61.7%
JAPAN 7.8%
UNITED KINGDOM 7.3%
NETHERLANDS 4.6%
CANADA 4.4%
OTHER* 13.8%
[END CHART]
* Includes countries with less than 3% of portfolio.
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 Management Inc. ("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 USAA Asset Management Company ("AMCO")
was acquired by Victory Capital Holdings, Inc., the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
--------------------------------------------------------------------------------
50,285,436 4,674,370 3,796,047
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
person" as defined in the Investment Company Act of 1940, as amended (1940 Act)
("Interested Trustee"); 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 CAPITAL GROWTH FUND
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
July 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 July 31, 2019:
DIVIDEND RECEIVED LONG-TERM
DEDUCTION (CORPORATE CAPITAL GAIN QUALIFIED INTEREST
SHAREHOLDERS)(1) DISTRIBUTIONS(2) INCOME
-----------------------------------------------------------------------
49.73% $47,634,000 $54,000
-----------------------------------------------------------------------
(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 July 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 CAPITAL GROWTH FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Capital Growth Fund (the "Fund") (one of the funds constituting the USAA Mutual
Funds Trust (the "Trust")), including the portfolio of investments, as of July
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 the USAA Mutual Funds Trust) at July 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 July 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
September 20, 2019
================================================================================
10 | USAA CAPITAL GROWTH FUND
================================================================================
PORTFOLIO OF INVESTMENTS
July 31, 2019
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (99.6%)
COMMON STOCKS (99.6%)
BASIC MATERIALS (3.7%)
----------------------
CHEMICALS (2.7%)
90,373 Covestro AG(a),(b) $ 4,076
85,100 Eastman Chemical Co. 6,412
294,542 Huntsman Corp. 6,053
55,000 LyondellBasell Industries N.V. "A" 4,603
106,000 Methanex Corp. 4,172
--------
25,316
--------
MINING (1.0%)
1,300,000 Glencore plc(b),(c) 4,169
2,298,518 South32 Ltd.(b) 4,891
--------
9,060
--------
Total Basic Materials 34,376
--------
COMMUNICATIONS (12.8%)
----------------------
ADVERTISING (0.5%)
58,000 Omnicom Group, Inc. 4,653
--------
INTERNET (5.7%)
7,331 Alphabet, Inc. "A"(c) 8,931
9,011 Amazon.com, Inc.(c) 16,822
874,167 Auto Trader Group plc(b) 5,739
3,394 Booking Holdings, Inc.(c) 6,403
49,205 F5 Networks, Inc.(c) 7,219
574,597 Rightmove plc(b) 3,675
107,985 TripAdvisor, Inc.(c) 4,767
--------
53,556
--------
MEDIA (1.3%)
123,822 CBS Corp. "B" 6,378
185,117 Viacom, Inc. "B" 5,618
--------
11,996
--------
TELECOMMUNICATIONS (5.3%)
10,800,000 China Telecom Corp. Ltd. "H"(b) 4,817
130,557 Cisco Systems, Inc. 7,233
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
209,594 Juniper Networks, Inc. $ 5,663
147,600 Nippon Telegraph & Telephone Corp.(b) 6,661
284,000 NTT DOCOMO, Inc.(b) 6,809
401,821 Telefonaktiebolaget LM Ericsson "B"(b) 3,516
105,928 T-Mobile US, Inc.(c) 8,446
3,599,511 Vodafone Group plc(b) 6,551
--------
49,696
--------
Total Communications 119,901
--------
CONSUMER, CYCLICAL (12.6%)
--------------------------
AIRLINES (1.8%)
327,000 Air Canada(c) 11,251
117,241 Southwest Airlines Co. 6,041
--------
17,292
--------
APPAREL (1.9%)
228,620 Burberry Group plc(b) 6,304
83,303 NIKE, Inc. "B" 7,166
41,137 Ralph Lauren Corp. 4,288
--------
17,758
--------
AUTO MANUFACTURERS (0.3%)
117,300 Honda Motor Co. Ltd.(b) 2,919
--------
AUTO PARTS & EQUIPMENT (1.5%)
34,641 Lear Corp. 4,392
74,800 Magna International, Inc. 3,772
177,000 NGK Spark Plug Co. Ltd.(b) 3,380
258,400 Sumitomo Rubber Industries Ltd.(b) 2,820
--------
14,364
--------
DISTRIBUTION/WHOLESALE (2.2%)
110,041 HD Supply Holdings, Inc.(c) 4,458
875,100 Marubeni Corp.(b) 5,673
205,000 Mitsubishi Corp.(b) 5,505
15,941 WW Grainger, Inc. 4,639
--------
20,275
--------
HOME BUILDERS (0.5%)
117,446 Bellway plc(b) 4,233
--------
RETAIL (4.4%)
36,300 Advance Auto Parts, Inc. 5,468
59,546 Home Depot, Inc. 12,725
95,130 Lowe's Companies, Inc. 9,646
37,102 Ross Stores, Inc. 3,934
================================================================================
12 | USAA CAPITAL GROWTH FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
63,000 Target Corp. $ 5,443
67,829 Walgreens Boots Alliance, Inc. 3,696
--------
40,912
--------
Total Consumer, Cyclical 117,753
--------
CONSUMER, NON-CYCLICAL (20.5%)
------------------------------
AGRICULTURE (1.2%)
143,979 Archer-Daniels-Midland Co. 5,914
211,137 Imperial Brands plc(b) 5,359
--------
11,273
--------
BEVERAGES (2.1%)
102,843 Coca-Cola European Partners plc 5,685
198,833 Diageo plc(b) 8,292
250,000 Kirin Holdings Co. Ltd.(b) 5,422
--------
19,399
--------
BIOTECHNOLOGY (2.2%)
51,936 Amgen, Inc. 9,690
24,731 Biogen, Inc.(c) 5,882
14,900 Regeneron Pharmaceuticals, Inc.(c) 4,541
--------
20,113
--------
COMMERCIAL SERVICES (0.6%)
87,416 Robert Half International, Inc. 5,281
--------
COSMETICS/PERSONAL CARE (0.6%)
50,000 Procter & Gamble Co. 5,902
--------
FOOD (3.7%)
339,400 Ajinomoto Co., Inc.(b) 6,082
147,000 Calbee, Inc.(b) 4,147
65,000 Colruyt S.A.(b) 3,387
56,628 GS Holdings Corp.(b) 2,399
262,249 Koninklijke Ahold Delhaize N.V.(b) 5,956
227,000 Kroger Co. 4,803
104,642 Tyson Foods, Inc."A'' 8,319
--------
35,093
--------
HEALTHCARE PRODUCTS (2.7%)
117,400 Baxter International, Inc. 9,858
24,682 IDEXX Laboratories, Inc.(c) 6,962
56,358 Masimo Corp.(c) 8,896
--------
25,716
--------
HEALTHCARE-SERVICES (2.1%)
35,000 Amedisys, Inc.(c) 4,826
27,351 Humana, Inc. 8,117
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
25,137 UnitedHealth Group, Inc. $ 6,259
--------
19,202
--------
PHARMACEUTICALS (5.3%)
159,406 Bristol-Myers Squibb Co. 7,079
111,000 Cardinal Health, Inc. 5,076
71,100 Herbalife Nutrition Ltd.(c) 2,917
60,000 McKesson Corp. 8,337
136,164 Merck & Co., Inc. 11,300
36,000 Roche Holding AG(b) 9,636
99,000 Shionogi & Co. Ltd.(b) 5,481
--------
49,826
--------
Total Consumer, Non-cyclical 191,805
--------
ENERGY (6.2%)
-------------
OIL & GAS (5.6%)
5,268,000 China Petroleum & Chemical Corp. "H"(b) 3,382
366,036 Eni SpA(b) 5,718
38,007 Exxon Mobil Corp. 2,826
250,100 Imperial Oil Ltd. 6,849
172,744 Neste Oyj(b) 5,717
77,852 Phillips 66 7,985
466,892 Repsol S.A.(b) 7,405
210,828 Royal Dutch Shell plc "A"(b) 6,640
71,579 Valero Energy Corp. 6,102
--------
52,624
--------
OIL & GAS SERVICES (0.6%)
268,195 SBM Offshore N.V.(b) 5,307
--------
Total Energy 57,931
--------
FINANCIAL (19.1%)
-----------------
BANKS (7.1%)
323,853 Bank of America Corp. 9,936
45,500 Canadian Imperial Bank of Commerce 3,579
4,041,000 China Construction Bank Corp. "H"(b) 3,102
134,678 Citigroup, Inc. 9,584
178,376 Citizens Financial Group, Inc. 6,646
254,285 Danske Bank A/S(b) 3,774
354,809 ING Groep N.V.(b) 3,937
56,223 J.P. Morgan Chase & Co. 6,522
9,770,100 Lloyds Banking Group plc(b) 6,320
463,702 Skandinaviska Enskilda Banken AB "A"(b) 4,360
================================================================================
14 | USAA CAPITAL GROWTH FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
179,975 Wells Fargo & Co. $ 8,713
--------
66,473
--------
DIVERSIFIED FINANCIAL SERVICES (1.1%)
20,980 Alliance Data Systems Corp. 3,292
75,693 Capital One Financial Corp. 6,996
--------
10,288
--------
INSURANCE (8.2%)
1,280,312 Aegon N.V.(b) 6,309
37,332 Allianz SE(b) 8,661
70,447 Allstate Corp. 7,566
1,203,265 Aviva plc(b) 5,908
257,108 AXA S.A.(b) 6,476
271,880 CNO Financial Group, Inc. 4,598
130,146 Essent Group Ltd.(c) 6,008
87,532 Lincoln National Corp. 5,719
375,400 Manulife Financial Corp. 6,798
174,833 MetLife, Inc. 8,640
22,342 Muenchener Rueckversicherungs-Gesellschaft AG in Muenchen(b) 5,324
126,300 Sun Life Financial, Inc. 5,248
--------
77,255
--------
REAL ESTATE (2.7%)
1,234,000 China Vanke Co. Ltd. "H"(b) 4,635
33,000 Daito Trust Construction Co. Ltd.(b) 4,255
1,100,000 Kerry Properties Ltd.(b) 4,131
1,658,000 Shimao Property Holdings Ltd.(b) 4,579
87,416 Vonovia SE(b) 4,268
550,000 Wharf Real Estate Investment Co. Ltd.(b) 3,470
--------
25,338
--------
Total Financial 179,354
--------
INDUSTRIAL (7.1%)
-----------------
AEROSPACE/DEFENSE (1.6%)
30,356 Boeing Co. 10,357
63,763 Spirit AeroSystems Holdings, Inc. "A'' 4,900
--------
15,257
--------
ELECTRONICS (0.8%)
231,101 Jabil, Inc. 7,136
--------
MACHINERY-CONSTRUCTION & MINING (1.4%)
148,000 Mitsubishi Heavy Industries Ltd.(b) 6,105
79,000 Oshkosh Corp. 6,602
--------
12,707
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
MACHINERY-DIVERSIFIED (2.2%)
539,927 CNH Industrial N.V.(b) $ 5,467
54,828 Cummins, Inc. 8,992
39,080 Rockwell Automation, Inc. 6,283
--------
20,742
--------
MISCELLANEOUS MANUFACTURERS (0.4%)
23,883 Parker-Hannifin Corp. 4,182
--------
TRANSPORTATION (0.7%)
41,137 FedEx Corp. 7,015
--------
Total Industrial 67,039
--------
TECHNOLOGY (14.7%)
------------------
COMPUTERS (5.5%)
143,000 Apple, Inc. 30,465
42,166 Check Point Software Technologies Ltd.(c) 4,721
53,000 Fortinet, Inc.(c) 4,256
308,529 HP, Inc. 6,492
92,382 NetApp, Inc. 5,403
--------
51,337
--------
SEMICONDUCTORS (4.4%)
162,492 Applied Materials, Inc. 8,022
33,938 ASML Holding N.V.(b) 7,562
72,000 NXP Semiconductors N.V. 7,444
212,062 Samsung Electronics Co. Ltd.(b) 8,032
35,210 Texas Instruments, Inc. 4,402
51,100 Xilinx, Inc. 5,836
--------
41,298
--------
SOFTWARE (4.8%)
83,303 Akamai Technologies, Inc.(c) 7,341
45,765 Citrix Systems, Inc. 4,313
94,600 Konami Holdings Corp.(b) 4,014
111,124 Microsoft Corp. 15,143
102,843 Oracle Corp. 5,790
53,478 Veeva Systems, Inc. "A"(c) 8,872
--------
45,473
--------
Total Technology 138,108
--------
UTILITIES (2.9%)
----------------
ELECTRIC (2.4%)
270,000 AES Corp. 4,533
78,160 Edison International 5,826
================================================================================
16 | USAA CAPITAL GROWTH FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
187,352 Fortum Oyj(b) $ 4,298
115,000 NRG Energy, Inc. 3,926
370,000 Tohoku Electric Power Co., Inc.(b) 3,702
--------
22,285
--------
WATER (0.5%)
470,000 United Utilities Group plc(b) 4,492
--------
Total Utilities 26,777
--------
Total Common Stocks (cost: $811,264) 933,044
--------
Total Equity Securities (cost: $811,264) 933,044
--------
TOTAL INVESTMENTS (COST: $811,264) $933,044
========
--------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
--------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $637,795 $295,249 $- $933,044
--------------------------------------------------------------------------------------------------------
Total $637,795 $295,249 $- $933,044
--------------------------------------------------------------------------------------------------------
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 July 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
July 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 37.9% of net assets at July 31, 2019.
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 Victory Capital under
liquidity guidelines approved by USAA Mutual Funds Trust's Board of
Trustees, unless otherwise noted as illiquid.
(b) Securities with a value of $295,249,000, which represented 31.5% of the
Fund's net assets, were classified as Level 2 as of July 31, 2019, due
to the prices being adjusted to take into account significant market
movements following the close of local trading.
(c) Non-income-producing security.
See accompanying notes to financial statements.
================================================================================
18 | USAA CAPITAL GROWTH FUND
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
July 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value
(cost of $811,264) $933,044
Cash denominated in foreign currencies (identified cost of $541) 540
Receivables:
Capital shares sold 44
Dividends and interest 1,705
Securities sold 2,889
--------
Total assets 938,222
--------
LIABILITIES
Payables:
Capital shares redeemed 241
Bank overdraft 276
Accrued administration and servicing fees 116
Accrued management fees 603
Accrued transfer agent's fees 122
Other accrued expenses and payables 109
--------
Total liabilities 1,467
--------
Net assets applicable to capital shares outstanding $936,755
========
NET ASSETS CONSIST OF:
Paid-in capital $764,730
Distributable earnings 172,025
--------
Net assets applicable to capital shares outstanding $936,755
========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $826,325/72,712
capital shares outstanding, no par value) $ 11.36
========
Institutional Shares (net assets of $110,430/9,692
capital shares outstanding, no par value) $ 11.39
========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 19
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended July 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $1,300) $ 23,039
Interest 99
Securities lending (net) 122
--------
Total income 23,260
--------
EXPENSES
Management fees 6,811
Administration and servicing fees:
Fund Shares 1,261
Institutional Shares 56
Transfer agent's fees:
Fund Shares 1,412
Institutional Shares 57
Custody and accounting fees:
Fund Shares 174
Institutional Shares 11
Postage:
Fund Shares 66
Shareholder reporting fees:
Fund Shares 40
Trustees' fees 37
Registration fees:
Fund Shares 30
Institutional Shares 18
Professional fees 102
Other 23
--------
Total expenses 10,098
--------
NET INVESTMENT INCOME 13,162
--------
================================================================================
20 | USAA CAPITAL GROWTH FUND
================================================================================
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments $ 62,806
Foreign currency transactions (22)
Change in net unrealized appreciation/(depreciation) of:
Investments (90,222)
Foreign currency translations (34)
--------
Net realized and unrealized loss (27,472)
--------
Decrease in net assets resulting from operations $(14,310)
========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 21
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended July 31,
--------------------------------------------------------------------------------------------------------
2019 2018
--------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 13,162 $ 11,305
Net realized gain on investments 62,806 51,516
Net realized gain (loss) on foreign currency transactions (22) 50
Change in net unrealized appreciation/(depreciation) of:
Investments (90,222) 35,234
Foreign currency translations (34) (60)
--------------------
Increase (decrease) in net assets resulting from operations (14,310) 98,045
--------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (66,864) (28,573)
Institutional Shares (620) (220)
--------------------
Distributions to shareholders (67,484) (28,793)
--------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 7)
Fund Shares 7,803 (2,598)
Institutional Shares 100,115 1,700
--------------------
Total net increase (decrease) in net assets from capital
share transactions 107,918 (898)
--------------------
Net increase in net assets 26,124 68,354
NET ASSETS
Beginning of year 910,631 842,277
--------------------
End of year $936,755 $910,631
====================
See accompanying notes to financial statements.
================================================================================
22 | USAA CAPITAL GROWTH FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
July 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 Capital 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 two classes of shares: Capital Growth Fund Shares (Fund
Shares) and Capital Growth Fund Institutional Shares (Institutional Shares).
Each class of shares has equal rights to assets and earnings, except that each
class bears certain class-related expenses specific to the particular class.
These expenses include administration and servicing fees, transfer agent fees,
postage, shareholder reporting fees, and certain registration and custodian
fees. Expenses not attributable to a specific class, income, and realized gains
or losses on investments are allocated to each class of shares based on each
class' relative net assets. Each class has exclusive voting rights on matters
related solely to that class and separate voting rights on matters that relate
to all classes. The Institutional Shares are available for investment through a
USAA discretionary managed account program, and certain advisory programs
sponsored by financial intermediaries, such as brokerage firms, investment
advisors, financial planners, third-party administrators, and insurance
companies. Institutional Shares also are available to institutional investors,
which include retirement plans, endowments, foundations, and bank trusts, as
well as other persons or legal entities that the Fund may approve from time to
time, or for purchase by an affiliate fund participating in a fund-of-funds
investment strategy (affiliated funds).
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of USAA Asset Management Company (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 Capital Holdings, Inc., a global investment management firm
headquartered in Cleveland, Ohio (the Transaction) on July 1, 2019. Effective
August 5, 2019, Citibank, N.A. is the new custodian for the USAA Mutual Funds. 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. 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.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Pricing 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 closing bid
price generally is used for U.S. listed equities and the average of
================================================================================
24 | USAA CAPITAL GROWTH FUND
================================================================================
the bid and asked prices is used for foreign listed equities. Actively
traded equity securities listed on a domestic exchange generally are
categorized in Level 1 of the fair value hierarchy. Certain preferred
and equity securities traded in inactive markets generally are
categorized in Level 2 of the fair value hierarchy.
2. Equity securities trading in various foreign markets may take place on
days when the NYSE is closed. Further, when the NYSE is open, the
foreign markets may be closed. Therefore, the calculation of the Fund's
net asset value (NAV) may not take place at the same time the prices of
certain foreign securities held by the Fund are determined. In many
cases, events affecting the values of foreign securities that occur
between the time of their last quoted sale or official closing price and
the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not need to be reflected in the value of the Fund's
foreign securities. However, the Manager and the Fund's subadviser(s)
will monitor for events that would materially affect the value of the
Fund's foreign securities. The Fund's subadviser(s) have agreed to
notify the Manager of significant events they identify that would
materially affect the value of the Fund's foreign securities. If the
Manager determines that a particular event would materially affect the
value of the Fund's foreign securities, then the Committee will consider
such available information that it deems relevant and will determine a
fair value for the affected foreign securities in accordance with
valuation procedures. In addition, information from an external vendor
or other sources may be used to adjust the foreign market closing prices
of foreign equity securities to reflect what the Committee believes to
be the fair value of the securities as of the close of the NYSE. Fair
valuation of affected foreign equity securities may occur frequently
based on an assessment that events which occur on a fairly regular basis
(such as U.S. market movements) are significant. Such securities are
categorized in Level 2 of the fair value hierarchy.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
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 generally are priced but may be valued at amortized cost,
provided that amortized cost represents the fair value of such
securities.
5. Repurchase agreements are valued at cost.
6. Forward foreign currency contracts are valued on a daily basis using
forward foreign currency exchange rates obtained from an independent
pricing service and are categorized in Level 2 of the fair value
hierarchy.
7. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has been recognized in relation to a security or class of securities,
the securities are valued in good faith by the Committee in accordance
with valuation procedures approved by the Board. The effect of fair
value pricing is that securities may not be priced on the basis of
quotations from the primary market in which they are traded and the
actual price realized from the sale of a security may differ materially
from the fair value price. Valuing these securities at fair value is
intended to cause the Fund's NAV to be more reliable than it otherwise
would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
broker-dealers, other pricing services, or widely used quotation
systems. General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and duration
of any restrictions on disposition of the securities, evaluation of
credit quality, and an evaluation of the forces that influenced the
market in which the securities are purchased and sold. 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.
================================================================================
26 | USAA CAPITAL GROWTH FUND
================================================================================
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.
D. FEDERAL TAXES - The Fund's policy is to comply with the requirements of the
Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its taxable
income and net capital gains, if any, to its shareholders. Therefore, no
federal income tax provision is required.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
================================================================================
For the year ended July 31, 2019, the Fund did not incur any income tax,
interest, or penalties, and has recorded no liability for net unrecognized
tax benefits relating to uncertain income tax positions. On an ongoing
basis, the Manager will monitor the Fund's tax basis to determine if
adjustments to this conclusion are necessary. The statute of limitations on
the Fund's tax return filings generally remain open for the three preceding
fiscal reporting year ends and remain subject to examination by the Internal
Revenue Service and state taxing authorities.
E. FOREIGN TAXATION - Foreign income and capital gains on some foreign
securities may be subject to foreign taxes, which are reflected as a
reduction to such income and realized gains. The Fund records a liability
based on unrealized gains to provide for potential foreign taxes payable
upon the sale of these securities. Foreign taxes have been provided for in
accordance with the Fund's understanding of the applicable countries'
prevailing tax rules and rates.
F. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the exchange
rate obtained from an independent pricing service on the respective
dates of such transactions.
2. Market value of securities, other assets, and liabilities at the
exchange rate obtained from an independent pricing service on a daily
basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes
================================================================================
28 | USAA CAPITAL GROWTH FUND
================================================================================
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 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. Citibank receives an annual
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
commitment fee of 0.15%. Each fund pays a pro-rata portion of this commitment
fee plus any interest on amounts borrowed.
For the period July 1, 2019 to July 31, 2019, the Fund paid Citibank facility
fees of less than $500, which represents 0.7% of the total fees paid to Citibank
by the funds of the Trusts. The Fund had no borrowings under this agreement
during the period July 1, 2019 to July 31, 2019. Effective July 1, 2019, the
line of credit among the Trust, with respect to its funds, and USAA Capital
Corporation (CAPCO) terminated. For the period from August 1, 2018 to June 30,
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 period August 1, 2018 to June 30, 2019.
(3) INTERFUND LENDING
Effective July 1, 2019, the Trust relies on an exemptive order granted to
Victory Capital and its affiliated funds by the U.S. Securities and Exchange
Commission (SEC) in March 2017 (the 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 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 Order, by averaging the current repurchase
agreement rate and the current bank loan rate. For the period July 1, 2019 to
July 31, 2019, the Fund did not lend.
(4) 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.
================================================================================
30 | USAA CAPITAL GROWTH FUND
================================================================================
The tax character of distributions paid during the years ended July 31, 2019,
and 2018, was as follows:
2019 2018
--------------------------------
Ordinary income* $19,850,000 $ 8,476,000
Long-term realized capital gains 47,634,000 20,317,000
----------- -----------
Total distributions paid $67,484,000 $28,793,000
=========== ===========
As of July 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 8,646,000
Undistributed long-term capital gains 41,630,000
Unrealized appreciation of investments 121,749,000
*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 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 July 31, 2019, the Fund had no capital loss carryforwards, for federal income
tax purposes.
TAX BASIS OF INVESTMENTS - At July 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 Capital
Growth Fund $811,257,000 $172,762,000 $(50,975,000) $121,787,000
(5) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended July 31, 2019, were $544,579,000 and
$485,346,000, respectively.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 31
================================================================================
(6) 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 July 31,
2019, the Fund had no securities on loan.
(7) CAPITAL SHARE TRANSACTIONS
At July 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 fund-of-funds as well as other persons or
================================================================================
32 | USAA CAPITAL GROWTH FUND
================================================================================
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
JULY 31, 2019 JULY 31, 2018
--------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------
FUND SHARES:
Shares sold 3,952 $ 45,444 6,263 $ 77,857
Shares issued from
reinvested dividends 6,365 66,499 2,311 28,402
Shares redeemed (9,094) (104,140) (8,773) (108,857)
-------------------------------------------------
Net increase (decrease) from
capital share transactions 1,223 $ 7,803 (199) $ (2,598)
=================================================
INSTITUTIONAL SHARES:
Shares sold 9,136 $ 100,957 147 $ 1,831
Shares issued from
reinvested dividends 14 148 2 18
Shares redeemed (87) (990) (12) (149)
-------------------------------------------------
Net increase from
capital share transactions 9,063 $ 100,115 137 $ 1,700
=================================================
(8) TRANSACTIONS WITH MANAGER
MANAGEMENT FEES - The Manager provides investment management services to the
Fund pursuant to an Advisory Agreement. Effective July 1, 2019, the Trust relies
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.
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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 33
================================================================================
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. The Lipper Global Funds Index tracks
the total return performance of funds within the Lipper Global Funds category.
For the Fund Shares and Institutional Shares, the performance period consists of
the current month plus the previous 35 months. The following table is utilized
to determine the extent of the performance adjustment:
OVER/UNDER PERFORMANCE
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
--------------------------------------------------------------------------
+/- 100 to 400 +/- 4
+/- 401 to 700 +/- 5
+/- 701 and greater +/- 6
(1)Based on the difference between average annual performance of the
relevant share class of the Fund and its relevant Lipper index, rounded
to the nearest basis point. Average daily net assets of the share class
are calculated over a rolling 36-month period.
Each class' annual performance adjustment rate is multiplied by the average
daily net assets of each respective class over the entire performance period,
which is then multiplied by a fraction, the numerator of which is the number of
days in the month and the denominator of which is 365 (366 in leap years). The
resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
================================================================================
34 | USAA CAPITAL GROWTH FUND
================================================================================
outperforms the Lipper Global Funds Index over that period, even if the class
had overall negative returns during the performance period.
Under the investment advisory agreement with the Manager that took effect on
July 1, 2019, no performance adjustments will be made for the period beginning
July 1, 2019, through June 30, 2020. Only performance beginning as of July 1,
2019, and thereafter will be utilized in calculating future performance
adjustments.
For the period from August 1, 2018 to June 30, 2019, the Fund incurred
management fees, paid or payable to AMCO, of $6,208,000, which included a
performance adjustment for the Fund Shares and Institutional Shares of $80,000
and $1,000, respectively. For the Fund Shares and Institutional Shares, the
performance adjustments were 0.01% and less than 0.01%, respectively. For the
period July 1, 2019 to July 31, 2019 the Fund incurred management fees, paid or
payable to Victory Capital of $603,000, which included no performance
adjustments.
SUBADVISORY ARRANGEMENT(S) - Effective July 1, 2019, Victory Capital terminated
an Investment Subadvisory Agreement with QS Investors, LLC (QS Investors).
Prior to July 1, 2019, AMCO entered into an Investment Subadvisory Agreement
with QS Investors, under which QS Investors directed the investment and
reinvestment of the Fund's assets (as allocated from time to time by the
Manager). This arrangement provides monthly fees that are paid by AMCO.
AMCO (not the Fund) pays QS Investors a subadvisory fee in the annual amount of
0.25% of the first $250 million of assets, 0.21% on assets over $250 million and
up to $500 million, and 0.17% on assets over $500 million of the Fund's average
daily net assets that QS Investors manages. For the period from August 1, 2018
to June 30, 2019, AMCO incurred subadvisory fees with respect to the Fund, paid
or payable to QS Investors, of $1,663,000.
ADMINISTRATION AND SERVICING FEES - Effective July 1, 2019, Victory Capital is
obligated on a continuous basis to provide administrative services to the Fund.
The Manager provides certain administration and servicing functions
================================================================================
NOTES TO FINANCIAL STATEMENTS | 35
================================================================================
for the Fund. For such services, the Manager receives a fee accrued daily and
paid monthly at an annualized rate of 0.15% and 0.10% of average daily net
assets of the Fund Shares and Institutional Shares, respectively. For the period
from August 1, 2018 to June 30, 2019, the Fund Shares and Institutional Shares
incurred administration and servicing fees by AMCO, paid or payable to AMCO, of
$1,154,000 and $47,000 respectively. For the period July 1, 2019 to July 31,
2019 the Fund Shares and Institutional Shares incurred administration and
servicing fees by Victory Capital, paid or payable to Victory Capital of
$107,000 and $9,000 respectively.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, AMCO also provided certain compliance and legal
services for the benefit of the Fund. The Board approved the reimbursement of a
portion of these expenses incurred by AMCO.
Effective July 1, 2019, these services are covered under a Compliance Services
Agreement between the Trust and Victory Capital. For the period from August 1,
2018 to June 30, 2019, the Fund reimbursed AMCO $3,000 for these compliance and
legal services. For the period from July 1, 2019 to July 31, 2019, the Fund's
portion of fees paid to Victory Capital under the Compliance Service Agreement
was less than $500. These expenses are included in the professional fees on the
Fund's Statement of Operations.
EXPENSE LIMITATION - Effective July 1, 2019, the Manager has contractually
agreed to waive its management fee and/or reimburse expenses so that the total
annual operating expenses (excluding certain items such as interest, taxes and
brokerage commissions) do not exceed 1.12% of the Fund Shares and 1.10% of the
Institutional Shares. The Manager is permitted 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 limits in effect at the time of: (a) the original waiver or expense
reimbursement; or (b) the recoupment, after giving effect to the recoupment
amount. The amount of any waivers or reimbursements and the amount of any
recoupment is calculated without regard to the impact of any performance
adjustment to the Fund's management fee. This waiver agreement may only be
terminated by the Fund's Board of Trustees.
================================================================================
36 | USAA CAPITAL GROWTH FUND
================================================================================
Prior to July 1, 2019, AMCO agreed to limit the total annual operating expenses
of the Institutional Shares to 1.10% of its average daily net assets, excluding
extraordinary expenses and before reductions of any expenses paid indirectly,
and to reimburse the Institutional Shares for all expenses in excess of that
amount.
TRANSFER AGENT'S FEES - Victory Capital Transfer Agency, Inc. (VCTA), (formerly,
USAA Shareholder Account Services (SAS)) provides transfer agency services to
the Fund. VCTA, an affiliate of the Manager, provides transfer agent services to
the Fund Shares based on an annual charge of $23 per shareholder account plus
out-of-pocket expenses. VCTA 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 July 31, 2019, the Fund Shares and Institutional Shares incurred
transfer agent's fees, paid or payable to VCTA, of $1,412,000 and $57,000,
respectively.
UNDERWRITING SERVICES - Effective July 1, 2019, the Trust has an agreement with
Victory Capital Advisers, Inc. (VCA), an affiliate of the Manager for exclusive
underwriting and distribution of the Fund's shares on a continuing best effort
basis. This agreement provides that VCA receive no fee or other compensation for
such distribution services. Prior to July 1, 2019, USAA Investment Management
Company (IMCO) provided exclusive underwriting and distribution of the Fund's
shares on a continuing best-efforts basis and received no fee or other
compensation for these services.
(9) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other affiliated
funds in which the affiliated fund-of-funds invest. The fund-of-funds do not
invest in the underlying affiliated 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 July 31, 2019, the
================================================================================
NOTES TO FINANCIAL STATEMENTS | 37
================================================================================
fund-of-funds owned the following percentages of the total outstanding shares of
the Fund:
AFFILIATED USAA FUND OWNERSHIP %
--------------------------------------------------------------------------------
Cornerstone Conservative 0.2
Cornerstone Equity 0.7
Target Retirement Income 0.3
Target Retirement 2020 0.9
Target Retirement 2030 2.7
Target Retirement 2040 3.7
Target Retirement 2050 2.2
Target Retirement 2060 0.3
Effective July 1, 2019, Victory Capital replaced AMCO as the Fund's investment
adviser and began managing the Fund. Prior to July 1, 2019, AMCO was 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.
(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. The Manager has determined there is no significant
impact on the Fund's financial statements and various filings.
================================================================================
38 | USAA CAPITAL GROWTH FUND
================================================================================
(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.
================================================================================
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 JULY 31,
--------------------------------------------------------------------
2019 2018 2017 2016 2015
--------------------------------------------------------------------
Net asset value at
beginning of period $ 12.63 $ 11.67 $ 9.97 $ 10.16 $ 9.31
--------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .16 .15 .14 .13 .12
Net realized and
unrealized gain (loss) (.48) 1.21 1.71 (.21) .88
--------------------------------------------------------------------
Total from investment
operations (.32) 1.36 1.85 (.08) 1.00
--------------------------------------------------------------------
Less distributions from:
Net investment income (.17) (.12) (.15) (.11) (.15)
Realized capital gains (.78) (.28) - - -
--------------------------------------------------------------------
Total distributions (.95) (.40) (.15) (.11) (.15)
--------------------------------------------------------------------
Net asset value at
end of period $ 11.36 $ 12.63 $ 11.67 $ 9.97 $ 10.16
====================================================================
Total return (%)* (1.82) 11.76 18.75 (.76) 10.79
Net assets at
end of period (000) $826,325 $902,670 $836,515 $721,357 $760,764
Ratios to average daily
net assets:**
Expenses (%)(a) 1.13(e) 1.15 1.21 1.24 1.23(b)
Expenses, excluding
reimbursements (%)(a) 1.13 1.15 1.21 1.24 1.23
Net investment income (%) 1.43 1.25 1.27 1.39 .95
Portfolio turnover (%) 54(d) 22(c) 55(d) 24 38
* 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 July 31, 2019, average daily net assets were
$840,514,000.
(a) Does not include acquired fund fees, if any.
(b) Prior to December 1, 2014, AMCO had voluntarily agreed to limit the annual
expenses of the Fund Shares to 1.30% of the Fund average daily net assets.
(c) Reflects overall decrease in purchases and sales of securities.
(d) Reflects overall increase in purchases and sales of securities.
(e) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Fund Shares to 1.12% of the Fund Shares' average
daily net assets.
================================================================================
40 | USAA CAPITAL GROWTH FUND
================================================================================
INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
PERIOD ENDED
YEAR ENDED JULY 31, JULY 31,
-----------------------------------------------------------------
2019 2018 2017 2016***
-----------------------------------------------------------------
Net asset value at
beginning of period $ 12.66 $11.70 $ 9.98 $10.20
--------------------------------------------------------------
Income (loss) from investment
operations:
Net investment income .23(a) .17 .15 .14
Net realized and unrealized
gain (loss) (.55)(a) 1.20 1.71 (.24)
--------------------------------------------------------------
Total from investment operations (.32)(a) 1.37 1.86 (.10)
--------------------------------------------------------------
Less distributions from:
Net investment income (.17) (.13) (.14) (.12)
Realized capital gains (.78) (.28) - -
--------------------------------------------------------------
Total distributions (.95) (.41) (.14) (.12)
--------------------------------------------------------------
Net asset value at end of
period $ 11.39 $12.66 $11.70 $ 9.98
==============================================================
Total return (%)* (1.77) 11.84 18.79 (.99)
Net assets at end of
period (000) $110,430 $7,961 $5,762 $4,891
Ratios to average
daily net assets:**
Expenses (%)(b) 1.03(f) 1.10 1.10 1.10(c)
Expenses, excluding
reimbursements (%)(b) 1.03 1.21 1.47 1.48(c)
Net investment income (%) 2.04 1.38 1.38 1.57(c)
Portfolio turnover (%) 54(e) 22(d) 55(e) 24
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the year ended July 31, 2019, average daily net assets were $57,007,000.
*** Institutional Shares commenced operations on August 7, 2015.
(a) Calculated using average shares. For the years ended July 31, 2019, average
shares were 5,036,000.
(b) Does not include acquired fund fees, if any.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) Reflects overall decrease in purchases and sales of securities.
(e) Reflects overall increase in purchases and sales of securities.
(f) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Institutional Shares to 1.10% of the Institutional
Shares' average daily net assets.
================================================================================
FINANCIAL HIGHLIGHTS | 41
================================================================================
EXPENSE EXAMPLE
July 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 February 1, 2019, through
July 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
================================================================================
42 | USAA CAPITAL GROWTH FUND
================================================================================
period. You may use this information to compare the ongoing costs of investing
in the Fund and other funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of other
funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled "hypothetical"
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if these direct
costs were included, your costs would have been higher.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE FEBRUARY 1, 2019 -
FEBRUARY 1, 2019 JULY 31, 2019 JULY 31, 2019
--------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,030.90 $5.64
Hypothetical
(5% return before expenses) 1,000.00 1,019.24 5.61
INSTITUTIONAL SHARES
Actual 1,000.00 1,031.70 5.14
Hypothetical
(5% return before expenses) 1,000.00 1,019.74 5.11
*Expenses are equal to the annualized expense ratio of 1.12% for Fund Shares
and 1.02% for Institutional Shares, which are net of any reimbursements and
expenses paid indirectly, multiplied by the average account value over the
period, multiplied by 181 days/365 days (to reflect the one-half-year period).
The Fund's actual ending account values are based on its actual total returns
of 3.09% for Fund Shares and 3.17% for Institutional Shares for the six-month
period of February 1, 2019, through July 31, 2019.
================================================================================
EXPENSE EXAMPLE | 43
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
July 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.
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with
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44 | USAA CAPITAL GROWTH FUND
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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 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
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ADVISORY AGREEMENT(S) | 45
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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.
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
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46 | USAA CAPITAL GROWTH FUND
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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). For at
least two years after the Transaction closes, Victory Capital has agreed
to waive fees and/or reimburse expenses so that each Fund's annual
expense ratio (excluding certain customary items) does not exceed the
levels reflected in each Fund's most recent audited financial statements
at the time the Transaction closes (or the levels of AMCO's then-current
expense caps, if applicable), excluding the impact of any performance
adjustment to the Fund's advisory fee.
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ADVISORY AGREEMENT(S) | 47
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o The portfolio managers at AMCO that manage the Fixed Income Funds(1) as
well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended Market
Index Fund, and USAA Nasdaq-100 Index Fund, which will be advised by
Victory Capital through its Victory Solutions platform, Victory Capital
proposes that the same subadvisers be retained Post-Transaction,
although Victory Capital may change the allocation to a particular
subadviser Post-Transaction. No changes are expected to the portfolio
managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's businesses to
Victory Capital. Victory Capital and USAA expect to
(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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48 | USAA CAPITAL GROWTH FUND
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enter into a transition services agreement under which USAA will
continue to provide Victory Capital with certain services that are
currently provided by USAA to AMCO and the USAA Transfer Agent for a
specified period of time after the closing of the Transaction to assist
Victory Capital in transitioning the USAA member distribution channel
and member support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO for
the Transaction and AMCO's recommendation that the Board approve the New
Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital is capable of providing
the same level of investment management services
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ADVISORY AGREEMENT(S) | 49
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currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund, Growth
& Income Fund, Income Stock Fund, Global Equity Income Fund, and Precious
Metals and Minerals Fund.
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50 | USAA CAPITAL GROWTH FUND
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The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored
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ADVISORY AGREEMENT(S) | 51
================================================================================
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 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
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52 | USAA CAPITAL GROWTH FUND
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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.
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
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ADVISORY AGREEMENT(S) | 53
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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.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
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54 | USAA CAPITAL GROWTH FUND
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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) | 55
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND AMCO)
July 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.
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 AMCO and the
Subadvisory Agreement between AMCO and QS Investors LLC (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
AMCO 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 AMCO's
(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"). Effective July 1, 2019, upon the closing of the
transaction whereby AMCO acquired by Victory Capital Holdings, Inc., the
parent company of Victory Capital, the Advisory Agreement between the Trust
and AMCO and the Sub-advisory Agreement with the Subadviser terminated and
the new investment advisory agreement between the Trust and Victory Capital
went into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are discussed above.
Effective June 30, 2019, the Subadviser no longer manages any portion of the
Fund.
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56 | USAA CAPITAL GROWTH FUND
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revenues and costs of providing services to the Fund and compensation paid to
affiliates of AMCO; and (iii) information about AMCO'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 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 AMCO 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 AMCO 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 AMCO's profitability with respect to the Fund. However, the Board
noted that the evaluation process with respect to AMCO 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 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.
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ADVISORY AGREEMENT(S) | 57
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NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent, and
quality of the services provided by AMCO under the Advisory Agreement, the Board
reviewed information provided by AMCO relating to its operations and personnel.
The Board also took into account its knowledge of AMCO's management and the
quality of the performance of AMCO's duties through Board meetings, discussions,
and reports during the preceding year. The Board considered the fees paid to
AMCO and the services provided to the Fund by AMCO under the Advisory Agreement,
as well as other services provided by AMCO and its affiliates under other
agreements, and the personnel who provide these services. In addition to the
investment advisory services provided to the Fund, AMCO 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 AMCO 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 AMCO, including the professional experience
and qualifications of its senior and investment personnel, as well as current
staffing levels. The Board considered AMCO's process for monitoring the
performance of the Subadviser and AMCO's timeliness in responding to performance
issues. The allocation of the Fund's brokerage, including AMCO's process for
monitoring "best execution" and the utilization of "soft dollars," also was
considered. AMCO's role in coordinating the activities of the Fund's other
service providers also was considered. The Board also considered AMCO's risk
management processes. The Board considered AMCO'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 AMCO
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 AMCO and its affiliates, including AMCO's oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees,
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58 | USAA CAPITAL GROWTH FUND
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guided also by information obtained from their experiences as trustees of the
Trust, also focused on the quality of AMCO'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 classifications/objectives 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 equal to the median of
its expense group and above 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 AMCO and its affiliates,
including the high quality of services received by the Fund from AMCO. The Board
also noted the level and method of computing the management fee, including any
performance adjustment to such fee. The Trustees also took into account that
the subadvisory fees under the Subadvisory Agreement are paid by AMCO. The Board
also considered and discussed information about the Subadviser's fees, including
the amount of the management fees retained by AMCO after payment of the
subadvisory fees.
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
================================================================================
ADVISORY AGREEMENT(S) | 59
================================================================================
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 50% of 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 10% of its performance
universe for the five-year period 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 management fee. The information considered by the Board
included operating profit margin information for AMCO'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 AMCO
pays the Fund's subadvisory fees. The Trustees reviewed the profitability of
AMCO'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 AMCO, 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 AMCO from its relationship with the Trust, including that
AMCO may derive reputational and other benefits from its association with the
Fund. The Trustees recognized that AMCO 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.
================================================================================
60 | USAA CAPITAL GROWTH FUND
================================================================================
ECONOMIES OF SCALE - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussion of
the current advisory fee structure. The Board also considered the fact that AMCO
pays the 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 AMCO, among others: (i) AMCO has demonstrated that it
possesses the capability and resources to perform the duties required of it
under the Advisory Agreement; (ii) AMCO maintains an appropriate compliance
program; (iii) the performance of the Fund is reasonable in relation to the
performance of funds with similar investment objectives and to relevant indices;
(iv) the Fund's advisory expenses are reasonable in relation to those of similar
funds and to the services to be provided by AMCO; and (v) AMCOs 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 AMCO
and the type of fund. Based on its conclusions, the Board determined that the
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 provided to
the Fund, 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. 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
================================================================================
ADVISORY AGREEMENT(S) | 61
================================================================================
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 AMCOs monitoring processes of the Subadviser include: (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 AMCO. The Trustees also relied on the ability of AMCO to negotiate
the Subadvisory Agreement and the fees thereunder at arm's length. For the above
reasons, the Board 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 PERFORMANCE - The Board compared the subadvisory fees for
the Fund with the fees that the Subadviser charges to comparable
================================================================================
62 | USAA CAPITAL GROWTH FUND
================================================================================
clients, as applicable. The Board considered that the Fund pays a management fee
to AMCO and that, in turn, AMCO 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 AMCO's experience and resources in monitoring the performance,
investment style, and risk-adjusted performance of the Subadviser. The Board was
mindful of AMCO's focus on the Subadviser's performance. The Board also noted
the Subadviser's 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 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 similar investment objectives 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 AMCO and the Subadviser. Based on the Board's
conclusions, it determined that approval of the Subadvisory Agreement with
respect to the Fund would be in the best interests of the Fund and its
shareholders.
================================================================================
ADVISORY AGREEMENT(S) | 63
================================================================================
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").
================================================================================
64 | USAA CAPITAL GROWTH 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 of 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), (08/11-06/19); Director of USAA Investment
Management Company (IMCO) (09/09-present); Chairman of Board of IMCO
(4/13-present); President and Director of USAA Shareholder Account Services
(SAS) (10/09-06/19); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director and Vice Chairman of FPS
(12/13-present); President and Director of USAA Investment Corporation (ICORP)
(03/10-present); Chairman of Board of ICORP (12/31-present); Director of USAA
Financial Advisors, Inc. (FAI) (12/13-present); Chairman of Board of FAI
(3/15-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 | 65
================================================================================
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
--------------------------------------------------------------------------------
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
================================================================================
66 | USAA CAPITAL GROWTH FUND
================================================================================
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.
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.
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
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 67
================================================================================
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 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.
================================================================================
68 | USAA CAPITAL GROWTH FUND
================================================================================
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 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.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 69
================================================================================
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 was 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.
================================================================================
70 | USAA CAPITAL GROWTH 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).
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Executive Director, Victory Capital Management Inc. (7/1/19-present); Treasurer,
USAA ETF Trust (09/18-06/19); Executive Director, Investment and Financial
Administration, USAA (04/12-06/30/19); Assistant Treasurer,
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 71
================================================================================
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
Director, Accounting and Finance, Victory Capital Management Inc.
(7/1/19-present); Assistant Treasurer, USAA ETF Trust (09/18-06/19);
Accounting/Financial Director, USAA (12/13-06/30/19).
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).
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).
================================================================================
72 | USAA CAPITAL GROWTH FUND
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Richard Y. Newton III
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
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 111 West Houston St., Suite 1901
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
Copies of the Victory Capital Management Inc.'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
--------------------------------------------------------------------------------
July 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA Growth Fund
FUND INSTITUTIONAL
SHARES SHARES
USAAX UIGRX
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
". . . NOW MAY BE AN OPPORTUNE TIME FOR
INVESTORS TO ENSURE THAT THEIR PORTFOLIOS ARE WELL [PHOTO OF BROOKS ENGLEHARDT]
DIVERSIFIED AND THAT THEIR OVERALL ALLOCATION IS
APPROPRIATE FOR THEIR PARTICULAR RISK APPETITE."
--------------------------------------------------------------------------------
SEPTEMBER 2019
Although the bull market in equities has continued running, it was not without a
few missteps. Trade turmoil, questions surrounding global economic growth,
changing monetary policy, and geopolitical disputes have all led to increased
volatility. But through it all, domestic stocks, as measured by the S&P 500(R)
Index, still managed an annual return of approximately 8% for the 12-month
period ended July 31, 2019.
Given the sometimes dire news flow and ample cross-currents, it's no surprise
that volatility returned to the market. On one hand, the U.S. economy continues
to look good. The unprecedented streak of job creation has continued
uninterrupted, and unemployment is bouncing along historic lows at 3.7%. The
consumer remains resilient and inflation is tepid. On the flip side, however,
U.S. trade policy seems to be evolving, with new tariffs threatened and
implemented. The markets generally dislike this type of trade turmoil and
uncertainty, and the ongoing tensions between the United States and China (and
other trading partners) threaten to upend global supply chains and hinder
economic growth.
It's not just the stock market that has been dealing with volatility. The bond
market also has experienced volatility, due largely to the U.S. Federal
Reserve's (the "Fed") famous "pivot" in late 2018. Against the backdrop of
rapidly falling equities in the fourth quarter of 2018, the Fed signaled that
its next policy move would be to lower--not increase--short-term interest rates.
This immediately altered the yield environment.
Meanwhile, the U.S. Treasury yield curve continued to flatten and, in fact,
inverted--whereby shorter-term yields became higher than longer-term
================================================================================
================================================================================
yields. Such a yield-curve inversion is a worrying sign as it sometimes, but not
always, portends to a recession.
Although we are not predicting a recession, we must acknowledge that risks have
increased for an economic slowdown. Given that the current run in stocks is more
than a decade old, it's important for investors to keep perspective that the
bull market cannot continue forever. Therefore, now may be an opportune time for
investors to ensure that their portfolios are well diversified and that their
overall allocation is appropriate for their particular risk appetite.
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,
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. On the following pages, you will find information
relating to your USAA Investments, which is now a Victory Capital Investment
Franchise. If you have any questions about your investments, we encourage you to
engage your financial advisor or else contact us directly at 800-235-8396 or
visit usaa.com.
My colleagues and I sincerely appreciate the confidence you have placed in us,
and we value the opportunity to help you meet your investment goals.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGERS' COMMENTARY ON THE FUND 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 16
Financial Statements 17
Notes to Financial Statements 20
Financial Highlights 37
EXPENSE EXAMPLE 39
ADVISORY AGREEMENT(S) 41
TRUSTEES' AND OFFICERS' INFORMATION 62
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
VICTORY CAPITAL MANAGEMENT INC. 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
NewBridge Asset Management RS Investments Growth
ERIC F. MARONAK SCOTT TRACY, CFA
JASON E. DAHL, CFA STEPHEN J. BISHOP
SCOTT R. KEFER, CFA MELISSA CHADWICK-DUNN
MICHAEL B. KOSKUBA CHRISTOPHER CLARK, CFA
PAUL LEUNG, CFA
VictoryShares and Solutions Renaissance Investment Management
MANNIK S. DHILLON, CFA, CAIA MICHAEL E. SCHROER, CFA
WASIF A. LATIF ANDY ENG, CFA
Loomis, Sayles & Company, L.P.
AZIZ V. HAMZAOGULLARI, CFA
--------------------------------------------------------------------------------
o PLEASE DISCUSS THE MARKET CONDITIONS DURING THE 12-MONTH REPORTING PERIOD
ENDED JULY 31, 2019.
While U.S. stocks ended the 12-month reporting period in positive territory,
there was significant volatility along the way. Against a backdrop of
slowing global growth, for much of the period, markets responded primarily
to headlines surrounding U.S. monetary and trade policies. Entering the
period, the U.S. Federal Reserve (the "Fed") was on a credit tightening
trajectory, which the markets interpreted as confirming a relatively
favorable outlook for the U.S. economy. The fourth quarter of 2018 saw a
sharp reversal in investor risk appetite, however, as softening economic
data from Europe and China raised concerns that the Fed would increase
interest rates too quickly even as a global recession possibly loomed.
Uncertainty regarding U.S. trade policy and corporate earnings also weighed
on sentiment toward the end of 2018. While the Fed followed through on its
previously signaled
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
December 2018 interest rate increase, it pivoted to a much more dovish
stance entering 2019, leading to a rebound in risk asset valuations.
Escalating rhetoric between the United States and China regarding trade and
tariffs generated market jitters throughout the 12-month reporting period.
May 2019 saw markets retreat as President Trump announced plans to impose
25% tariffs on $200 billion in Chinese imports. However, the market
subsequently recovered its lost ground as the Fed indicated that it was
prepared to cut its benchmark rate, if needed, to help offset any drag on
growth stemming from trade frictions. Corporate earnings reports that were
more or less in line with expectations also served to bolster sentiment.
Most major equity indices ended July 2019 near their all-time highs.
For the 12-month reporting period, the growth stocks outpaced value stocks
by a notable margin, as investors favored companies viewed as having the
ability to maintain profit growth against the backdrop of a slowing global
economy. The Russell 1000(R) Growth Index returned 10.82% for the period,
compared to 5.20% for the Russell 1000 Value Index.
o HOW DID THE USAA GROWTH FUND (THE "FUND") PERFORM DURING THE REPORTING
PERIOD?
The Fund has two share classes: Fund Shares and Institutional Shares. For
the reporting period ended July 31, 2019, the Fund Shares and Institutional
Shares had total returns of 10.90% and 10.94%, respectively. This compares
to returns of 10.82% for the Russell 1000 Growth Index (the "Index") and
10.17% for the Lipper Large-Cap Growth Funds Index.
Victory Capital Management Inc. (the "Manager") is the Fund's investment
adviser. As the investment adviser, the Manager employs dedicated resources
to support the research, selection, and monitoring of the Fund's
subadvisers. Loomis, Sayles & Company, L.P. ("Loomis Sayles") and
Renaissance Investment Management ("Renaissance") are
Refer to page 5 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
2 | USAA GROWTH FUND
================================================================================
subadvisers to the Fund. The subadvisers each provide day-to-day
discretionary management for a portion of the Fund's assets.
o WHAT WERE YOUR STRATEGIES IN THIS ENVIRONMENT?
For the Fund as a whole, overall stock selection had the largest positive
effect on performance, while sector allocation detracted to a lesser
degree. Stock selection within the information technology and consumer
discretionary sectors provided the biggest boost to Fund performance, while
selection within consumer staples also contributed. Issue selection within
energy stocks detracted from returns. Regarding the Fund's sector
allocation, an underweight to information technology and an overweight in
energy detracted, while underweights to industrials and communication
services contributed to returns.
The Loomis Sayles portion of the Fund outperformed during the reporting
period. Stock selection in the consumer discretionary, consumer staples,
healthcare, and communication services sectors, as well as its allocation
to the industrials sector, contributed positively to relative performance.
At the individual security level, top contributors included coffee retailer
Starbucks Corp. ("Starbucks"), global payments processor Visa, Inc. "A",
and consumer products manufacturer Procter & Gamble Co. Starbucks reported
revenue and operating profits that generally were ahead of analysts'
expectations, driven by improving same-store sales growth in the United
States and China, its two largest markets. Loomis Sayles believes that
Starbucks is one of the best-positioned companies in the specialty coffee
industry, and that its growth will be supported by growing away-from-home
coffee consumption, pricing power, and targeted marketing through its
loyalty program. Stock selection in the information technology and energy
sectors, as well as allocations to the energy and consumer discretionary
sectors, detracted most from relative return. The largest detractors among
individual names were the energy services leader Schlumberger Ltd.
("Schlumberger"), biotechnology company Regeneron Pharmaceuticals, Inc.,
and China e-commerce provider Alibaba Group Holding Ltd. ADR. Schlumberger
generated free cash flow of $2.5 billion during the period, a 54% increase
over the prior
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
12 months. However, stocks in the oil services sector came under pressure
on concerns regarding slowing activity in North America, where record-
setting production, coupled with insufficient takeaway capacity in the
Permian basin, has led operators to delay well completions. Thanks to its
superior products and services and its competitive advantages, Loomis
Sayles believes that Schlumberger is well positioned to weather the current
environment and capitalize on the growth in oilfield services as market
supply/demand normalizes.
Renaissance's portion of the portfolio outperformed over the period, driven
primarily by positive stock selection within the information technology and
consumer discretionary sectors. Sector allocation also contributed, as
underweights in communication services and energy added to overall returns.
Individual stock performance within information technology led positive
contributions within the Renaissance strategy, while selection within the
healthcare sector detracted most. Holdings in the American technology firm
Xilinx, Inc. ("Xilinx")* were up strongly, driven by the initial rollout of
5th-generation wireless networks in both South Korea and China. Xilinx
makes semiconductor chips that are integral to the wireless communications
industry. Conversely, a position in Gilead Sciences, Inc., underperformed
along with other pharmaceutical and biotechnology companies, as the drug
industry is under pressure from Congress to lower drug prices.
Thank you for allowing us to help you with your investment needs.
*Xilinx was sold out of the Fund prior to July 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 GROWTH FUND
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 7/31/19 o
--------------------------------------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
--------------------------------------------------------------------------------
Fund Shares 10.90% 13.22% 14.91%
Institutional Shares 10.94% 13.30% 14.99%
Russell 1000(R) Growth Index*
(reflects no deduction for fees,
expenses, or taxes) 10.82% 14.24% 15.73%
Lipper Large-Cap Growth Funds
Index** (reflects no deduction for
fees, expenses, or taxes) 10.17% 13.00% 14.34%
*The unmanaged Russell 1000 Growth Index measures the performance of those
Russell 1000 companies with higher price-to-book ratios and higher forecasted
growth values.
**The unmanaged Lipper Large-Cap Growth Funds Index tracks the total return
performance of funds within the Lipper Large-Cap Growth 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]
RUSSELL 1000 USAA GROWTH LIPPER LARGE-CAP
GROWTH INDEX FUND SHARES GROWTH FUNDS INDEX
7/31/2009 $10,000.00 $10,000.00 $10,000.00
8/31/2009 10,207.39 10,171.00 10,197.28
9/30/2009 10,641.57 10,647.00 10,686.98
10/31/2009 10,497.43 10,396.00 10,475.54
11/30/2009 11,142.31 10,998.00 11,107.40
12/31/2009 11,486.70 11,396.00 11,465.20
1/31/2010 10,985.47 10,702.00 10,864.52
2/28/2010 11,363.00 11,216.00 11,249.93
3/31/2010 12,020.27 11,927.00 11,956.55
4/30/2010 12,154.58 12,035.00 12,079.53
5/31/2010 11,226.68 11,135.00 11,109.13
6/30/2010 10,608.48 10,513.00 10,469.77
7/31/2010 11,365.20 11,270.00 11,179.89
8/31/2010 10,834.56 10,558.00 10,631.05
9/30/2010 11,987.91 11,873.00 11,770.62
10/31/2010 12,560.45 12,476.00 12,388.77
11/30/2010 12,706.32 12,620.00 12,512.75
12/31/2010 13,406.20 13,248.00 13,199.33
1/31/2011 13,747.37 13,374.00 13,459.78
2/28/2011 14,197.28 13,644.00 13,823.97
3/31/2011 14,214.62 13,752.00 13,830.93
4/30/2011 14,690.65 14,275.00 14,250.32
5/31/2011 14,530.72 14,140.00 14,076.89
6/30/2011 14,322.31 13,905.00 13,890.53
7/31/2011 14,178.75 13,599.00 13,816.21
8/31/2011 13,430.47 12,717.00 12,887.30
9/30/2011 12,440.86 11,807.00 11,762.64
10/31/2011 13,806.11 13,266.00 13,174.42
11/30/2011 13,804.78 13,104.00 13,012.29
12/31/2011 13,760.39 12,983.00 12,815.96
1/31/2012 14,581.77 13,805.00 13,694.45
2/29/2012 15,279.14 14,338.00 14,500.98
3/31/2012 15,781.70 14,799.00 15,013.39
4/30/2012 15,757.32 14,681.00 14,903.03
5/31/2012 14,746.55 13,615.00 13,760.41
6/30/2012 15,146.96 14,040.00 14,065.19
7/31/2012 15,350.00 14,194.00 14,086.94
8/31/2012 15,762.98 14,690.00 14,615.99
9/30/2012 16,072.11 15,043.00 14,974.88
10/31/2012 15,603.03 14,672.00 14,454.26
11/30/2012 15,864.30 15,178.00 14,775.87
12/31/2012 15,859.92 15,310.00 14,856.01
1/31/2013 16,539.67 16,263.00 15,497.25
2/28/2013 16,745.48 16,417.00 15,580.05
3/31/2013 17,373.66 16,798.00 16,069.95
4/30/2013 17,742.44 17,016.00 16,278.24
5/31/2013 18,072.05 17,569.00 16,707.23
6/30/2013 17,731.97 17,288.00 16,368.72
7/31/2013 18,672.15 18,186.00 17,392.16
8/31/2013 18,352.13 17,777.00 17,183.09
9/30/2013 19,169.97 18,630.00 18,165.50
10/31/2013 20,017.96 19,419.00 18,927.35
11/30/2013 20,582.65 20,000.00 19,493.07
12/31/2013 21,170.59 20,765.00 20,116.59
1/31/2014 20,567.06 20,226.00 19,636.38
2/28/2014 21,625.70 21,222.00 20,762.64
3/31/2014 21,407.60 21,076.00 20,094.20
4/30/2014 21,408.47 20,903.00 19,744.78
5/31/2014 22,075.66 21,579.00 20,461.64
6/30/2014 22,505.88 22,008.00 20,962.83
7/31/2014 22,161.37 21,588.00 20,745.69
8/31/2014 23,176.76 22,557.00 21,606.66
9/30/2014 22,840.55 22,264.00 21,229.86
10/31/2014 23,442.43 22,877.00 21,850.51
11/30/2014 24,185.28 23,955.00 22,400.90
12/31/2014 23,933.32 23,839.00 22,196.03
1/31/2015 23,566.83 23,311.00 21,834.77
2/28/2015 25,137.69 24,828.00 23,211.84
3/31/2015 24,851.80 24,495.00 22,960.47
4/30/2015 24,976.26 24,505.00 22,955.32
5/31/2015 25,327.82 24,897.00 23,395.44
6/30/2015 24,881.63 24,348.00 23,176.70
7/31/2015 25,725.39 25,367.00 23,999.69
8/31/2015 24,163.12 23,781.00 22,422.08
9/30/2015 23,565.38 23,281.00 21,658.12
10/31/2015 25,594.49 25,357.00 23,546.10
11/30/2015 25,666.33 25,504.00 23,674.55
12/31/2015 25,289.68 25,181.00 23,441.61
1/31/2016 23,877.82 23,623.00 21,577.27
2/29/2016 23,867.64 23,466.00 21,234.17
3/31/2016 25,477.30 25,056.00 22,446.94
4/30/2016 25,244.65 25,024.00 22,427.39
5/31/2016 25,734.89 25,641.00 22,973.87
6/30/2016 25,633.81 25,296.00 22,520.69
7/31/2016 26,843.78 26,697.00 23,811.99
8/31/2016 26,710.41 26,875.00 23,785.72
9/30/2016 26,808.12 27,053.00 24,032.75
10/31/2016 26,178.58 26,384.00 23,480.99
11/30/2016 26,748.18 26,760.00 23,561.15
12/31/2016 27,079.30 26,794.00 23,568.46
1/31/2017 27,991.84 27,619.00 24,677.15
2/28/2017 29,154.49 28,664.00 25,610.13
3/31/2017 29,491.71 29,016.00 25,987.61
4/30/2017 30,166.19 29,621.00 26,740.37
5/31/2017 30,950.59 30,501.00 27,661.85
6/30/2017 30,869.05 30,688.00 27,627.21
7/31/2017 31,689.52 31,513.00 28,486.77
8/31/2017 32,270.44 31,865.00 28,916.28
9/30/2017 32,690.01 32,327.00 29,184.88
10/31/2017 33,956.66 33,229.00 30,209.57
11/30/2017 34,988.25 34,263.00 30,924.93
12/31/2017 35,260.64 34,409.00 31,074.71
1/31/2018 37,758.02 36,968.00 33,651.35
2/28/2018 36,767.97 35,514.00 32,839.41
3/31/2018 35,759.68 34,375.00 32,000.48
4/30/2018 35,884.61 34,150.00 32,275.68
5/31/2018 37,457.48 35,119.00 33,531.26
6/30/2018 37,818.13 35,074.00 33,902.20
7/31/2018 38,928.34 36,235.00 34,701.59
8/31/2018 41,056.80 37,531.00 36,277.79
9/30/2018 41,286.27 37,588.00 36,466.70
10/31/2018 37,594.17 34,556.00 33,144.88
11/30/2018 37,993.48 35,863.00 33,626.94
12/31/2018 34,726.89 32,897.00 30,927.44
1/31/2019 37,848.36 35,955.00 33,812.09
2/28/2019 39,202.57 37,382.00 35,067.86
3/31/2019 40,318.39 38,070.00 35,939.27
4/30/2019 42,139.97 40,159.00 37,511.86
5/31/2019 39,477.84 37,394.00 35,230.87
6/30/2019 42,189.05 40,134.00 37,632.09
7/31/2019 43,141.72 40,185.00 38,231.16
[END CHART]
Data from 7/31/09 through 7/31/19.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Growth Fund Shares 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 index
does not reflect the deduction of any fees, expenses, or taxes, except that the
Lipper Large-Cap Growth Funds Index reflects the fees and expenses of the
underlying funds included in the index.
================================================================================
6 | USAA GROWTH FUND
================================================================================
o TOP 10 HOLDINGS* - 7/31/19 o
(% of Net Assets)
Amazon.com, Inc. ......................................................... 6.5%
Visa, Inc. "A" .......................................................... 6.1%
Facebook, Inc. "A" ....................................................... 4.9%
Alphabet, Inc. "C" ....................................................... 3.8%
Alibaba Group Holding Ltd. ADR ........................................... 2.8%
ServiceNow, Inc. ......................................................... 2.7%
UnitedHealth Group, Inc. ................................................. 2.0%
Netflix, Inc. ........................................................... 2.0%
Workday, Inc. "A" ........................................................ 1.9%
Apple, Inc. .............................................................. 1.9%
o SECTOR ALLOCATION* - 7/31/19 o
(% of Net Assets)
[PIE CHART OF SECTOR ALLOCATION]
CONSUMER, NON-CYCLICAL 25.2%
COMMUNICATIONS 23.9%
TECHNOLOGY 23.1%
CONSUMER, CYCLICAL 8.8%
FINANCIAL 8.7%
INDUSTRIAL 7.3%
ENERGY 0.7%
[END CHART]
*Does not include money market instruments.
Percentages are of the net assets of the Fund and may not equal 100%.
Refer to the Portfolio of Investments for a complete list of securities.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
================================================================================
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 Management Inc. ("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 USAA Asset Management Company ("AMCO")
was acquired by Victory Capital Holdings, Inc., the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
--------------------------------------------------------------------------------
66,426,721 3,354,111 1,813,804
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
person" as defined in the Investment Company Act of 1940, as amended (1940 Act)
("Interested Trustee"); 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 GROWTH FUND
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
July 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 July 31, 2019:
DIVIDEND RECEIVED LONG-TERM
DEDUCTION (CORPORATE CAPITAL GAIN QUALIFIED INTEREST
SHAREHOLDERS)(1) DISTRIBUTIONS(2) INCOME
--------------------------------------------------------------------------------
88.32% $298,032,000 $205,000
--------------------------------------------------------------------------------
(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 July 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 GROWTH FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Growth Fund (the "Fund") (one of the funds constituting the USAA Mutual Funds
Trust (the "Trust")), including the portfolio of investments, as of July 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 the USAA Mutual Funds Trust) at July 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 July 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
September 20, 2019
================================================================================
10 | USAA GROWTH FUND
================================================================================
PORTFOLIO OF INVESTMENTS
July 31, 2019
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
EQUITY SECURITIES (97.7%)
COMMON STOCKS (97.7%)
COMMUNICATIONS (23.9%)
----------------------
INTERNET (21.8%)
443,971 Alibaba Group Holding Ltd. ADR(a) $ 76,856
19,583 Alphabet, Inc. "A"(a) 23,856
85,435 Alphabet, Inc. "C"(a) 103,947
97,132 Amazon.com, Inc.(a) 181,324
700,531 Facebook, Inc. "A"(a) 136,064
102,600 IAC/InterActiveCorp.(a) 24,526
168,676 Netflix, Inc.(a) 54,481
----------
601,054
----------
MEDIA (1.2%)
55,991 FactSet Research Systems, Inc. 15,527
118,000 Walt Disney Co. 16,875
----------
32,402
----------
TELECOMMUNICATIONS (0.9%)
465,182 Cisco Systems, Inc. 25,771
----------
Total Communications 659,227
----------
CONSUMER, CYCLICAL (8.8%)
-------------------------
AUTO MANUFACTURERS (0.4%)
67,003 Ferrari N.V. 10,793
----------
ENTERTAINMENT (0.5%)
59,600 Vail Resorts, Inc. 14,692
----------
LODGING (0.4%)
110,200 Hilton Worldwide Holdings, Inc. 10,640
----------
RETAIL (7.5%)
132,450 Burlington Stores, Inc.(a) 23,940
44,606 Domino's Pizza, Inc. 10,908
120,100 Home Depot, Inc. 25,664
146,300 Lululemon Athletica, Inc.(a) 27,956
334,370 Starbucks Corp. 31,661
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
509,000 TJX Companies, Inc. $ 27,771
88,600 Ulta Salon Cosmetics & Fragrance, Inc.(a) 30,944
244,987 Yum China Holdings, Inc. 11,147
147,377 Yum! Brands, Inc. 16,583
----------
206,574
----------
Total Consumer, Cyclical 242,699
----------
CONSUMER, NON-CYCLICAL (25.2%)
------------------------------
BEVERAGES (2.6%)
401,230 Coca-Cola Co. 21,117
709,438 Keurig Dr Pepper, Inc. 19,964
450,511 Monster Beverage Corp.(a) 29,044
----------
70,125
----------
BIOTECHNOLOGY (5.0%)
237,500 Alexion Pharmaceuticals, Inc.(a) 26,907
69,352 Amgen, Inc. 12,940
55,600 BeiGene Ltd. ADR(a) 7,636
95,800 Bluebird Bio, Inc.(a) 12,572
139,400 Exact Sciences Corp.(a) 16,046
103,505 Illumina, Inc.(a) 30,987
70,834 Regeneron Pharmaceuticals, Inc.(a) 21,587
61,800 Sage Therapeutics, Inc.(a) 9,909
----------
138,584
----------
COMMERCIAL SERVICES (3.6%)
50,307 Automatic Data Processing, Inc. 8,377
43,925 CoStar Group, Inc.(a) 27,032
220,200 IHS Markit Ltd.(a) 14,185
457,800 PayPal Holdings, Inc.(a) 50,541
----------
100,135
----------
COSMETICS/PERSONAL CARE (1.5%)
219,377 Colgate-Palmolive Co. 15,738
222,344 Procter & Gamble Co. 26,246
----------
41,984
----------
FOOD (1.4%)
1,367,481 Danone S.A. ADR 23,548
184,300 Tyson Foods, Inc. "A" 14,652
----------
38,200
----------
HEALTHCARE PRODUCTS (3.8%)
72,800 ABIOMED, Inc.(a) 20,279
29,482 Alcon, Inc.(a) 1,732
================================================================================
12 | USAA GROWTH FUND
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
85,800 Align Technology, Inc.(a) $ 17,939
44,700 Cooper Companies, Inc. 15,082
99,200 Edwards Lifesciences Corp.(a) 21,115
31,400 Intuitive Surgical, Inc.(a) 16,313
109,520 Varian Medical Systems, Inc.(a) 12,854
----------
105,314
----------
HEALTHCARE-SERVICES (2.8%)
138,900 IQVIA Holdings, Inc.(a) 22,109
224,363 UnitedHealth Group, Inc. 55,868
----------
77,977
----------
PHARMACEUTICALS (4.5%)
314,500 Canopy Growth Corp.(a) 10,265
440,839 Merck & Co., Inc. 36,585
112,400 Neurocrine Biosciences, Inc.(a) 10,834
147,385 Novartis AG ADR 13,498
431,373 Novo Nordisk A/S ADR 20,671
275,000 Zoetis, Inc. 31,595
----------
123,448
----------
Total Consumer, Non-cyclical 695,767
----------
ENERGY (0.7%)
-------------
OIL & GAS (0.3%)
101,900 EOG Resources, Inc. 8,748
----------
OIL & GAS SERVICES (0.4%)
307,819 Schlumberger Ltd. 12,304
----------
Total Energy 21,052
----------
FINANCIAL (8.7%)
----------------
DIVERSIFIED FINANCIAL SERVICES (7.8%)
81,721 American Express Co. 10,164
98,825 CME Group, Inc. 19,214
313,416 SEI Investments Co. 18,676
943,153 Visa, Inc. "A" 167,881
----------
215,935
----------
INSURANCE (0.9%)
313,900 Progressive Corp. 25,419
----------
Total Financial 241,354
----------
INDUSTRIAL (7.3%)
-----------------
ELECTRICAL COMPONENTS & EQUIPMENT (0.7%)
217,500 AMETEK, Inc. 19,490
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
ELECTRONICS (1.6%)
141,900 Amphenol Corp. "A" $ 13,242
199,700 Keysight Technologies, Inc.(a) 17,878
120,600 Woodward, Inc. 13,512
----------
44,632
----------
MACHINERY-DIVERSIFIED (1.7%)
129,892 Deere & Co. 21,517
66,900 Roper Technologies, Inc. 24,328
----------
45,845
----------
MISCELLANEOUS MANUFACTURERS (1.6%)
346,500 Ingersoll-Rand plc 42,848
----------
TRANSPORTATION (1.7%)
302,189 Expeditors International of Washington, Inc. 23,072
138,200 Union Pacific Corp. 24,869
----------
47,941
----------
Total Industrial 200,756
----------
TECHNOLOGY (23.1%)
------------------
COMPUTERS (2.7%)
241,868 Apple, Inc. 51,527
119,454 EPAM Systems, Inc.(a) 23,149
----------
74,676
----------
SEMICONDUCTORS (5.4%)
70,173 Broadcom, Inc. 20,350
103,800 KLA Corp. 14,150
76,700 Lam Research Corp. 16,001
614,900 Marvell Technology Group Ltd. 16,147
121,800 Microchip Technology, Inc. 11,500
263,231 NVIDIA Corp. 44,412
340,628 QUALCOMM, Inc. 24,920
----------
147,480
----------
SOFTWARE (15.0%)
215,497 Autodesk, Inc.(a) 33,654
381,215 Black Knight, Inc.(a) 24,138
254,930 Cerner Corp. 18,266
52,500 Fair Isaac Corp.(a) 18,240
229,991 Microsoft Corp. 31,341
741,767 Oracle Corp. 41,761
205,600 PTC, Inc.(a) 13,936
322,050 salesforce.com, Inc.(a) 49,757
269,800 ServiceNow, Inc.(a) 74,840
================================================================================
14 | USAA GROWTH FUND
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
215,500 Twilio, Inc. "A"(a) $ 29,978
159,615 Veeva Systems, Inc. "A"(a) 26,480
261,000 Workday, Inc. "A"(a) 52,195
----------
414,586
----------
Total Technology 636,742
----------
Total Common Stocks (cost: $1,921,107) 2,697,597
----------
Total Equity Securities (cost: $1,921,107) 2,697,597
----------
MONEY MARKET INSTRUMENTS (2.4%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (2.4%)
65,223,567 State Street Institutional Treasury Money Market Fund Premier
Class, 2.09%(b) (cost: $65,224) 65,224
----------
TOTAL INVESTMENTS (COST: $1,986,331) $2,762,821
==========
---------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
---------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
---------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $2,697,597 $- $- $2,697,597
Money Market Instruments:
Government & U.S. Treasury
Money Market Funds 65,224 - - 65,224
---------------------------------------------------------------------------------------------------
Total $2,762,821 $- $- $2,762,821
---------------------------------------------------------------------------------------------------
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 July 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
July 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 6.4% of net assets at July
31, 2019.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
ADR American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in
U.S. dollars.
o SPECIFIC NOTES
(a) Non-income-producing security.
(b) Rate represents the money market fund annualized seven-day yield at
July 31, 2019.
See accompanying notes to financial statements.
================================================================================
16 | USAA GROWTH FUND
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
July 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $1,986,331) $2,762,821
Receivables:
Capital shares sold 567
Dividends and interest 1,827
----------
Total assets 2,765,215
----------
LIABILITIES
Payables:
Securities purchased 1,660
Capital shares redeemed 1,016
Accrued administration and servicing fees 317
Accrued management fees 1,586
Accrued transfer agent's fees 223
Other accrued expenses and payables 144
----------
Total liabilities 4,946
----------
Net assets applicable to capital shares outstanding $2,760,269
==========
NET ASSETS CONSIST OF:
Paid-in capital $1,394,620
Distributable earnings 1,365,649
----------
Net assets applicable to capital shares outstanding $2,760,269
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $1,676,470/53,159
capital shares outstanding, no par value) $ 31.54
==========
Institutional Shares (net assets of $1,083,799/34,439
capital shares outstanding, no par value) $ 31.47
==========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 17
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended July 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $519) $ 35,251
Interest 630
---------
Total income 35,881
---------
EXPENSES
Management fees 17,119
Administration and servicing fees:
Fund Shares 2,373
Institutional Shares 1,156
Transfer agent's fees:
Fund Shares 1,510
Institutional Shares 1,156
Custody and accounting fees:
Fund Shares 183
Institutional Shares 129
Postage:
Fund Shares 82
Institutional Shares 45
Shareholder reporting fees:
Fund Shares 41
Institutional Shares 5
Trustees' fees 37
Registration fees:
Fund Shares 40
Institutional Shares 30
Professional fees 92
Other 39
---------
Total expenses 24,037
---------
NET INVESTMENT INCOME 11,844
---------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain 697,328
Change in net unrealized appreciation/(depreciation) (420,992)
---------
Net realized and unrealized gain 276,336
---------
Increase in net assets resulting from operations $ 288,180
=========
See accompanying notes to financial statements.
================================================================================
18 | USAA GROWTH FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended July 31,
-----------------------------------------------------------------------------------------
2019 2018
-----------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 11,844 $ 10,480
Net realized gain on investments 697,328 213,204
Change in net unrealized appreciation/(depreciation)
of investments (420,992) 177,416
---------------------------
Increase in net assets resulting from operations 288,180 401,100
---------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (172,418) (36,307)
Institutional Shares (126,833) (35,406)
---------------------------
Distributions to shareholders (299,251) (71,713)
---------------------------
NET DECREASE IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 7)
Fund Shares 102,732 36,565
Institutional Shares (237,139) (135,261)
---------------------------
Total net decrease in net assets from
capital share transactions (134,407) (98,696)
---------------------------
Net increase (decrease) in net assets (145,478) 230,691
NET ASSETS
Beginning of year 2,905,747 2,675,056
---------------------------
End of year $2,760,269 $2,905,747
===========================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 19
================================================================================
NOTES TO FINANCIAL STATEMENTS
July 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 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 long-term growth
of capital.
The Fund consists of two classes of shares: Growth Fund Shares (Fund Shares) and
Growth Fund Institutional Shares (Institutional Shares). Each class of shares
has equal rights to assets and earnings, except that each class bears certain
class-related expenses specific to the particular class. These expenses include
administration and servicing fees, transfer agent fees, postage, shareholder
reporting fees, and certain registration and custodian fees. Expenses not
attributable to a specific class, income, and realized gains or losses on
investments are allocated to each class of shares based on each class' relative
net assets. Each class has exclusive voting rights on matters related solely to
that class and separate voting rights on matters that relate to all classes. The
Institutional Shares are available for investment through a USAA discretionary
managed account program, and certain advisory programs sponsored by financial
intermediaries, such as brokerage firms, investment advisors, financial
planners, third-party administrators, and insurance companies. Institutional
Shares also are available to institutional investors, which include retirement
plans, endowments, foundations, and bank trusts, as well as other persons or
legal entities that the Fund may approve from time to time, or for purchase by
an affiliate fund participating in a fund-of-funds investment strategy
(affiliated funds).
================================================================================
20 | USAA GROWTH FUND
================================================================================
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of USAA Asset Management Company (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 Capital Holdings, Inc., a global investment management firm
headquartered in Cleveland, Ohio (the Transaction) on July 1, 2019. Effective
August 5, 2019, Citibank, N.A. is the new custodian for the USAA Mutual Funds. 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. 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.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Pricing 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 closing bid
price generally is used for
================================================================================
NOTES TO FINANCIAL STATEMENTS | 21
================================================================================
U.S. listed equities and the average of the bid and asked prices is
used for foreign listed equities. Actively traded equity securities
listed on a domestic exchange generally are categorized in Level 1 of
the fair value hierarchy. Certain preferred and equity securities
traded in inactive markets generally are categorized in Level 2 of the
fair value hierarchy.
2. Equity securities trading in various foreign markets may take place
on days when the NYSE is closed. Further, when the NYSE is open, the
foreign markets may be closed. Therefore, the calculation of the Fund's
net asset value (NAV) may not take place at the same time the prices of
certain foreign securities held by the Fund are determined. In many
cases, events affecting the values of foreign securities that occur
between the time of their last quoted sale or official closing price
and the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not need to be reflected in the value of the Fund's
foreign securities. However, the Manager and the Fund's subadviser(s)
will monitor for events that would materially affect the value of the
Fund's foreign securities. The Fund's subadviser(s) have agreed to
notify the Manager of significant events they identify that would
materially affect the value of the Fund's foreign securities. If the
Manager determines that a particular event would materially affect the
value of the Fund's foreign securities, then the Committee will
consider such available information that it deems relevant and will
determine a fair value for the affected foreign securities in
accordance with valuation procedures. In addition, information from an
external vendor or other sources may be used to adjust the foreign
market closing prices of foreign equity securities to reflect what the
Committee believes to be the fair value of the securities as of the
close of the NYSE. Fair valuation of affected foreign equity securities
may occur frequently based on an assessment that events which occur on
a fairly regular basis (such as U.S. market movements) are significant.
Such securities are categorized in Level 2 of the fair value hierarchy.
3. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value hierarchy.
================================================================================
22 | USAA GROWTH FUND
================================================================================
4. Short-term debt securities with original or remaining maturities of
60 days or less generally are priced but may be valued at amortized
cost, provided that amortized cost represents the fair value of such
securities.
5. Repurchase agreements are valued at cost.
6. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has been recognized in relation to a security or class of securities,
the securities are valued in good faith by the Committee in accordance
with valuation procedures approved by the Board. The effect of fair
value pricing is that securities may not be priced on the basis of
quotations from the primary market in which they are traded and the
actual price realized from the sale of a security may differ materially
from the fair value price. Valuing these securities at fair value is
intended to cause the Fund's NAV to be more reliable than it otherwise
would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
broker-dealers, other pricing services, or widely used quotation
systems. General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and duration
of any restrictions on disposition of the securities, evaluation of
credit quality, and an evaluation of the forces that influenced the
market in which the securities are purchased and sold.
B. FAIR VALUE MEASUREMENTS - Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the Portfolio of Investments
is based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted)
in active markets for identical securities.
Level 2 - inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
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 July 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
================================================================================
24 | USAA GROWTH FUND
================================================================================
reduction to such income and realized gains. The Fund records a liability
based on unrealized gains to provide for potential foreign taxes payable
upon the sale of these securities. Foreign taxes have been provided for in
accordance with the Fund's understanding of the applicable countries'
prevailing tax rules and rates.
F. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in
the securities of foreign issuers and may be traded in foreign currency.
Since the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the exchange
rate obtained from an independent pricing service on the respective
dates of such transactions.
2. Market value of securities, other assets, and liabilities at the exchange
rate obtained from an independent pricing service on a daily basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held.
Such fluctuations are included with the net realized and unrealized gain or
loss from investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the amounts received. At
the end of the Fund's fiscal year, net realized foreign currency
gains/losses are reclassified from accumulated net realized gains/losses to
accumulated undistributed net investment income on the Statement of Assets
and Liabilities, as such amounts are treated as ordinary income/loss for
federal income tax purposes. Net unrealized foreign currency exchange
gains/losses arise from changes in the value of assets and liabilities,
other than investments in securities, resulting from changes in the
exchange rate.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
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.
H. INDEMNIFICATIONS - Under the Trust's organizational documents, its
officers and trustees are indemnified against certain liabilities arising
out of the performance of their duties to the Trust. In addition, in the
normal course of business, the Trust enters into contracts that contain a
variety of representations and warranties that provide general
indemnifications. The Trust's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the
Trust that have not yet occurred. However, the Trust expects the risk of
loss to be remote.
I. USE OF ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINE OF CREDIT
The Fund participates, along with other funds of the Trust and 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. 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.
For the period July 1, 2019 to July 31, 2019, the Fund paid Citibank facility
fees of 1,000, which represents 1.9% of the total fees paid to Citibank by the
funds of the Trusts. The Fund had no borrowings under this agreement
================================================================================
26 | USAA GROWTH FUND
================================================================================
during the period July 1, 2019 to July 31, 2019. Effective July 1, 2019, the
line of credit among the Trust, with respect to its funds, and USAA Capital
Corporation (CAPCO) terminated. For the period from August 1, 2018 to June 30,
2019, the Fund paid CAPCO facility fees of $22,000, which represents 3.3% of the
total fees paid to CAPCO by the funds of the Trusts. The Fund had no borrowings
under this agreement during the period August 1, 2018 to June 30, 2019.
(3) INTERFUND LENDING
Effective July 1, 2019, the Trust relies on an exemptive order granted to
Victory Capital and its affiliated funds by the U.S. Securities and Exchange
Commission (SEC) in March 2017 (the 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 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 Order, by averaging the current repurchase
agreement rate and the current bank loan rate. For the period July 1, 2019 to
July 31, 2019, the Fund did not lend.
(4) 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 equalization and additional adjustments resulted in
reclassifications to the Statement of Assets and Liabilities to decrease
distributable earnings by $20,585,000, and increase paid in capital by
$20,585,000. These reclassifications had no effect on net assets.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
================================================================================
The tax character of distributions paid during the years ended July 31, 2019,
and 2018, was as follows:
2019 2018
---------------------------------------
Ordinary income* $ 21,804,000 $14,656,000
Long-term realized capital gains 277,447,000 57,057,000
------------ -----------
Total distributions paid $299,251,000 $71,713,000
============ ===========
As of July 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 35,629,000
Undistributed long-term capital gains 556,052,000
Unrealized appreciation of investments 773,968,000
*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
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 July 31, 2019, the Fund had no capital loss carryforwards, for federal income
tax purposes.
TAX BASIS OF INVESTMENTS - At July 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 Growth Fund $1,988,853,000 $834,149,000 $(60,181,000) $773,968,000
================================================================================
28 | USAA GROWTH FUND
================================================================================
(5) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended July 31, 2019, were $1,886,958,000 and
$2,340,568,000, respectively.
(6) 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 July 31,
2019, the Fund had no securities on loan.
(7) CAPITAL SHARE TRANSACTIONS
At July 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 fund-of-funds as well as other persons or
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
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
JULY 31, 2019 JULY 31, 2018
---------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------
FUND SHARES:
Shares sold 5,086 $ 154,373 6,474 $ 199,601
Shares issued from reinvested
dividends 6,270 170,170 1,172 35,810
Shares redeemed (7,389) (221,811) (6,457) (198,846)
----------------------------------------------------
Net increase from capital share
transactions 3,967 $ 102,732 1,189 $ 36,565
====================================================
INSTITUTIONAL SHARES:
Shares sold 2,430 $ 73,455 4,466 $ 135,726
Shares issued from reinvested
dividends 4,682 126,793 1,161 35,400
Shares redeemed (13,944) (437,387) (9,812) (306,387)
----------------------------------------------------
Net decrease from capital
share transactions (6,832) $(237,139) (4,185) $(135,261)
====================================================
(8) TRANSACTIONS WITH MANAGER
MANAGEMENT FEES - The Manager provides investment management services to the
Fund pursuant to an Advisory Agreement. Effective July 1, 2019, the Trust relies
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.
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
================================================================================
30 | USAA GROWTH FUND
================================================================================
100% of the Fund's assets, and the Manager could change the allocations without
shareholder approval.
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee is accrued daily and paid monthly at
an annualized rate of 0.65% of the Fund's average daily net assets.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Large-Cap Growth Funds Index. The Lipper Large-Cap Growth
Funds Index tracks the total return performance of funds within the Lipper
Large-Cap Growth Funds category.
For the Fund Shares and Institutional Shares, the performance period consists of
the current month plus the previous 35 months. The following table is utilized
to determine the extent of the performance adjustment:
OVER/UNDER PERFORMANCE
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
------------------------------------------------------------------------
+/- 100 to 400 +/- 4
+/- 401 to 700 +/- 5
+/- 701 and greater +/- 6
(1)Based on the difference between average annual performance of the relevant
share class of the Fund and its relevant Lipper index, rounded to the nearest
basis point. Average daily net assets of the share class are calculated over
a rolling 36-month period.
Each class' annual performance adjustment rate is multiplied by the average
daily net assets of each respective class over the entire performance period,
which is then multiplied by a fraction, the numerator of which is the number of
days in the month and the denominator of which is 365 (366 in leap years). The
resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper Large-Cap Growth Funds Index over that period, even if
the class had overall negative returns during the performance period.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 31
================================================================================
Under the investment advisory agreement with the Manager that took effect on
July 1, 2019, no performance adjustments will be made for the period beginning
July 1, 2019, through June 30, 2020. Only performance beginning as of July 1,
2019, and thereafter will be utilized in calculating future performance
adjustments.
For the period from August 1, 2018 to June 30, 2019, the Fund incurred
management fees, paid or payable to AMCO, of $15,533,000, which included a
performance adjustment for the Fund Shares and Institutional Shares of
$(362,000) and $(316,000), respectively. For the Fund Shares and Institutional
Shares, the performance adjustments were (0.02)% and (0.03)%, respectively. For
the period July 1, 2019 to July 31, 2019 the Fund incurred management fees, paid
or payable to Victory Capital of $1,586,000, which included no performance
adjustments.
SUBADVISORY ARRANGEMENT(S) - Effective July 1, 2019, Victory Capital entered
into a Subadvisory Agreement with Loomis, Sayles & Company, L.P. (Loomis
Sayles) and Renaissance Investment Management (Renaissance), under which Loomis
Sayles and Renaissance each direct the investment and reinvestment of a portion
of the Fund's assets (as allocated from time to time by the Manager). These
arrangements provide for monthly fees that are paid by the Manager. The Manager
(not the Fund) pays the subadviser fees. For the period July 1, 2019 to July 31,
2019, Victory Capital incurred subadvisory fees with respect to the Fund, paid
or payable to the applicable subadvisers of $144,000.
Prior to July 1, 2019, AMCO had entered into an Investment Subadvisory Agreement
with Loomis Sayles and Renaissance, under which Loomis Sayles and Renaissance
each directed the investment and reinvestment of a portion of the Fund's assets
(as allocated from time to time by the Manager). These arrangements provided for
monthly fees that are paid by AMCO.
AMCO (not the Fund) pays Loomis Sayles a subadvisory fee in the annual amount of
0.20% of the portion of the Fund's average daily net assets that Loomis Sayles
manages. For the period from August 1, 2018 to June 30, 2019, AMCO incurred
subadvisory fees with respect to the Fund, paid or payable to Loomis Sayles, of
$3,239,000.
================================================================================
32 | USAA GROWTH FUND
================================================================================
AMCO (not the Fund) pays Renaissance a subadvisory fee in the annual amount of
0.20% of the portion of the Fund's average daily net assets that Renaissance
manages. For the period from August 1, 2018 to June 30, 2019, AMCO incurred
subadvisory fees with respect to the Fund, paid or payable to Renaissance, of
$1,748,000.
ADMINISTRATION AND SERVICING FEES - Effective July 1, 2019, Victory Capital is
obligated on a continuous basis to provide administrative services to the Fund.
The Manager provides certain administration and servicing functions for the
Fund. For such services, the Manager receives a fee accrued daily and paid
monthly at an annualized rate of 0.15% and 0.10% of average daily net assets of
the Fund Shares and Institutional Shares, respectively. For the period from
August 1, 2018 to June 30, 2019, the Fund Shares and Institutional Shares
incurred administration and servicing fees, paid or payable to AMCO, of
$2,155,000 and $1,057,000 respectively. For the period July 1, 2019 to July 31,
2019 the Fund Shares and Institutional Shares incurred administration and
servicing fees, paid or payable to Victory Capital of $218,000 and $99,000
respectively.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, AMCO also provided certain compliance and legal
services for the benefit of the Fund. The Board approved the reimbursement of a
portion of these expenses incurred by AMCO.
Effective July 1, 2019, these services are covered under a Compliance Services
Agreement between the Trust and Victory Capital. For the period from August 1,
2018 to June 30, 2019, the Fund reimbursed AMCO $9,000 for these compliance and
legal services. For the period July 1, 2019 to July 31, 2019, the Fund's portion
of fees paid to Victory Capital under the Compliance Service Agreement was
$1,000. These expenses are included in the professional fees on the Fund's
Statement of Operations.
EXPENSE LIMITATION - Effective July 1, 2019, the Manager has contractually
agreed to waive its management fee and/or reimburse expenses so that the total
annual operating expenses (excluding certain items such as interest, taxes and
brokerage commissions) do not exceed 0.92% of the Fund Shares and 0.88% of the
Institutional Shares through at least June 30, 2021. The Manager is
================================================================================
NOTES TO FINANCIAL STATEMENTS | 33
================================================================================
permitted 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 limits in effect at the time of:
(a) the original waiver or expense reimbursement; or (b) the recoupment, after
giving effect to the recoupment amount. The amount of any waivers or
reimbursements and the amount of any recoupment is calculated without regard to
the impact of any performance adjustment to the Fund's management fee. This
waiver agreement may only be terminated by the Fund's Board of Trustees.
TRANSFER AGENT'S FEES - Victory Capital Transfer Agency, Inc. (VCTA), (formerly,
USAA Shareholder Account Services (SAS)) provides transfer agency services to
the Fund. VCTA, an affiliate of the Manager, provides transfer agent services to
the Fund Shares based on an annual charge of $23 per shareholder account plus
out-of-pocket expenses. VCTA 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 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 July 31, 2019, the Fund Shares and Institutional Shares incurred
transfer agent's fees, paid or payable to VCTA, of $1,510,000 and $1,156,000,
respectively.
UNDERWRITING SERVICES - Effective July 1, 2019, the Trust has an agreement with
Victory Capital Advisers, Inc. (VCA), an affiliate of the Manager for exclusive
underwriting and distribution of the Fund's shares on a continuing best effort
basis. This agreement provides that VCA receive no fee or other compensation for
such distribution services. Prior to July 1, 2019, USAA Investment Management
Company (IMCO) provided exclusive underwriting and distribution of the Fund's
shares on a continuing best-efforts basis and received no fee or other
compensation for these services.
(9) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other affiliated
funds in which the affiliated fund-of-funds invest. The fund-of-funds do not
invest in the underlying affiliated funds for the purpose of exercising
================================================================================
34 | USAA GROWTH FUND
================================================================================
management or control, and the affiliated fund-of-funds' annual or semiannual
reports may be viewed on usaa.com. As of July 31, 2019, the fund-of-funds owned
the following percentages of the total outstanding shares of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
--------------------------------------------------------------------------------
Cornerstone Conservative 0.1
Cornerstone Equity 0.4
Target Retirement Income 0.1
Target Retirement 2020 0.5
Target Retirement 2030 1.6
Target Retirement 2040 2.1
Target Retirement 2050 1.3
Target Retirement 2060 0.2
Effective July 1, 2019, Victory Capital replaced AMCO as the Fund's investment
adviser and began managing the Fund. Prior to July 1, 2019, AMCO was 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.
(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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 35
================================================================================
related to liquidity classification, highly liquid investment minimums, and
board approval of the liquidity risk management programs to June 1, 2019. The
Manager has determined there is no significant impact on the Fund's financial
statements and various filings.
(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.
================================================================================
36 | USAA GROWTH FUND
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each
period is as follows:
YEAR ENDED JULY 31,
----------------------------------------------------------------------
2019 2018 2017 2016 2015
----------------------------------------------------------------------
Net asset value at
beginning of period $ 32.15 $ 28.65 $ 25.53 $ 25.91 $ 23.62
----------------------------------------------------------------------
Income from investment
operations:
Net investment income .12 .07 .09 .10 .28
Net realized and unrealized gain 2.80 4.18 4.31 1.19 3.73
----------------------------------------------------------------------
Total from investment operations 2.92 4.25 4.40 1.29 4.01
----------------------------------------------------------------------
Less distributions from:
Net investment income (.09) (.05) (.05) (.11) (.28)
Realized capital gains (3.44) (.70) (1.23) (1.56) (1.44)
----------------------------------------------------------------------
Total distributions (3.53) (.75) (1.28) (1.67) (1.72)
----------------------------------------------------------------------
Net asset value at end of period $ 31.54 $ 32.15 $ 28.65 $ 25.53 $ 25.91
======================================================================
Total return (%)* 10.90 14.99 18.04 5.25 17.50
Net assets at end of period (000) $1,676,470 $1,581,693 $1,375,305 $1,143,344 $1,262,075
Ratios to average daily net assets:**
Expenses (%)(a),(b) .90(e) .97 1.09 1.11 1.08(c)
Expenses, excluding
reimbursements (%)(a),(b) .90 .97 1.09 1.11 1.11
Net investment income (%) .41 .33 .36 .36 .25
Portfolio turnover (%) 70(d) 19 17 18 31
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the year ended July 31, 2019, average daily net assets were
$1,582,660,000.
(a) Does not include acquired fund fees, if any.
(b) Reflects total annual operating expenses of the Fund Shares before
reductions of any expenses paid indirectly. The Fund Shares' expenses paid
indirectly decreased the expense ratio by less than 0.01%.
(c) Prior to December 1, 2014, AMCO had voluntarily agreed to limit the annual
expenses of the Fund Shares to 1.00% of the Fund Shares' average daily net
assets.
(d) Reflects increased trading activity due to current year transition or asset
allocation shift.
(e) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Fund Shares to 0.92% of the Fund Shares' average
daily net assets.
================================================================================
FINANCIAL HIGHLIGHTS | 37
================================================================================
INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each
period is as follows:
YEAR ENDED JULY 31,
--------------------------------------------------------------------
2019 2018 2017 2016 2015
--------------------------------------------------------------------
Net asset value at
beginning of period $ 32.08 $ 28.59 $ 25.48 $ 25.86 $ 23.57
--------------------------------------------------------------------
Income from investment
operations:
Net investment income .15 .09 .12 .15 .30
Net realized and
unrealized gain 2.78 4.18 4.30 1.16 3.72
--------------------------------------------------------------------
Total from investment
operations 2.93 4.27 4.42 1.31 4.02
--------------------------------------------------------------------
Less distributions from:
Net investment income (.10) (.08) (.08) (.13) (.29)
Realized capital gains (3.44) (.70) (1.23) (1.56) (1.44)
--------------------------------------------------------------------
Total distributions (3.54) (.78) (1.31) (1.69) (1.73)
--------------------------------------------------------------------
Net asset value at end of period $ 31.47 $ 32.08 $ 28.59 $ 25.48 $ 25.86
====================================================================
Total return (%)* 10.94 15.07 18.14 5.34 17.57
Net assets at end of
period (000) $1,083,799 $1,324,054 $1,299,751 $1,012,360 $865,996
Ratios to average daily
net assets:**
Expenses (%)(a),(b) .85(d) .92 1.01 1.02 1.01
Expenses, excluding
reimbursements (%)(a),(b) .85 .92 1.01 1.02 1.01
Net investment income (%) .47 .39 .43 .47 .31
Portfolio turnover (%) 70(c) 19 17 18 31
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the year ended July 31, 2019, average daily net assets were
$1,154,252,000.
(a) Does not include acquired fund fees, if any.
(b) Reflects total annual operating expenses of the Institutional Shares before
reductions of any expenses paid indirectly. The Institutional Shares'
expenses paid indirectly decreased the expense ratios by less than 0.01%.
(c) Reflects increased trading activity due to current year transition or asset
allocation shift.
(d) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Institutional Shares to 0.88% of the Institutional
Shares' average daily net assets.
================================================================================
38 | USAA GROWTH FUND
================================================================================
EXPENSE EXAMPLE
July 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 February 1, 2019, through
July 31, 2019.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table provides
information about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested at the beginning
of the period, to estimate the expenses that you paid over the period. Simply
divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number for your share
class in the "actual" line under the heading "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class and an assumed rate of return of
5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
================================================================================
EXPENSE EXAMPLE | 39
================================================================================
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 FEBRUARY 1, 2019 -
FEBRUARY 1, 2019 JULY 31, 2019 JULY 31, 2019
------------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,117.60 $4.67
Hypothetical
(5% return before expenses) 1,000.00 1,020.38 4.46
INSTITUTIONAL SHARES
Actual 1,000.00 1,117.90 4.41
Hypothetical
(5% return before expenses) 1,000.00 1,020.63 4.21
*Expenses are equal to the annualized expense ratio of 0.89% for Fund Shares
and 0.84% for Institutional Shares, which are net of any reimbursements and
expenses paid indirectly, multiplied by the average account value over the
period, multiplied by 181 days/365 days (to reflect the one-half-year
period). The Fund's actual ending account values are based on its actual
total returns of 11.76% for Fund Shares and 11.79% for Institutional Shares
for the six-month period of February 1, 2019, through July 31, 2019.
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40 | USAA GROWTH FUND
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
July 31, 2019
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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.
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with
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ADVISORY AGREEMENT(S) | 41
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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 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
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42 | USAA GROWTH FUND
================================================================================
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.
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
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ADVISORY AGREEMENT(S) | 43
================================================================================
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). For at
least two years after the Transaction closes, Victory Capital has agreed
to waive fees and/or reimburse expenses so that each Fund's annual
expense ratio (excluding certain customary items) does not exceed the
levels reflected in each Fund's most recent audited financial statements
at the time the Transaction closes (or the levels of AMCO's then-current
expense caps, if applicable), excluding the impact of any performance
adjustment to the Fund's advisory fee.
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44 | USAA GROWTH FUND
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o The portfolio managers at AMCO that manage the Fixed Income Funds(1) as
well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended Market
Index Fund, and USAA Nasdaq-100 Index Fund, which will be advised by
Victory Capital through its Victory Solutions platform, Victory Capital
proposes that the same subadvisers be retained Post-Transaction,
although Victory Capital may change the allocation to a particular
subadviser Post-Transaction. No changes are expected to the portfolio
managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's businesses to
Victory Capital. Victory Capital and USAA expect to
(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) | 45
================================================================================
enter into a transition services agreement under which USAA will continue
to provide Victory Capital with certain services that are currently
provided by USAA to AMCO and the USAA Transfer Agent for a specified
period of time after the closing of the Transaction to assist Victory
Capital in transitioning the USAA member distribution channel and member
support services.
o Pursuant to a transitional trademark license agreement with USAA, Victory
Capital and the Funds will have a non-exclusive license, subject to
certain restrictions and limitations, to continue using certain licensed
marks including "USAA," "United Services Automobile Association," and the
USAA Logo in connection with their asset management and transfer agency
businesses for a period of three years following the closing of the
Transaction, which agreement may thereafter be extended for an additional
year.
o The support expressed by the current senior management team at AMCO for
the Transaction and AMCO's recommendation that the Board approve the New
Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital is capable of providing
the same level of investment management services
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46 | USAA GROWTH FUND
================================================================================
currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund, Growth
& Income Fund, Income Stock Fund, Global Equity Income Fund, and Precious
Metals and Minerals Fund.
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ADVISORY AGREEMENT(S) | 47
================================================================================
The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored
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48 | USAA GROWTH FUND
================================================================================
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 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
================================================================================
ADVISORY AGREEMENT(S) | 49
================================================================================
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.
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
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50 | USAA GROWTH FUND
================================================================================
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.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
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ADVISORY AGREEMENT(S) | 51
================================================================================
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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52 | USAA GROWTH FUND
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND AMCO)
July 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.
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 AMCO and the
Subadvisory Agreements between AMCO and each of Loomis, Sayles & Company, LP and
Renaissance Investment Management (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
AMCO 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 report prepared by an
independent third party, which provided a
(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"). Effective July 1, 2019, upon the closing of the
transaction whereby AMCO acquired by Victory Capital Holdings, Inc., the
parent company of Victory Capital, the Advisory Agreement between the Trust
and AMCO and the Sub-advisory Agreement with the Subadviser terminated and
the new investment advisory agreement between the Trust and Victory Capital
went into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are discussed above.
Effective June 30, 2019, the Subadviser no longer manages any portion of the
Fund.
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ADVISORY AGREEMENT(S) | 53
================================================================================
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 AMCO's revenues
and costs of providing services to the Fund and compensation paid to affiliates
of AMCO; and (iii) information about AMCO's and each Subadviser's 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 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 AMCO 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 AMCO 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 AMCO's profitability with respect to the Fund. However, the Board
noted that the evaluation process with respect to AMCO 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 information
previously received at such meetings.
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54 | USAA GROWTH FUND
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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 AMCO under the Advisory Agreement, the Board
reviewed information provided by AMCO relating to its operations and personnel.
The Board also took into account its knowledge of AMCO's management and the
quality of the performance of AMCO's duties through Board meetings, discussions,
and reports during the preceding year. The Board considered the fees paid to
AMCO and the services provided to the Fund by AMCO under the Advisory Agreement,
as well as other services provided by AMCO and its affiliates under other
agreements, and the personnel who provide these services. In addition to the
investment advisory services provided to the Fund, AMCO 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 AMCO in connection
with the services provided to the Fund, including investment, operational,
enterprise, litigation, regulatory and compliance risks. The Board considered
AMCO's management style and the performance of AMCO's duties under the Advisory
Agreement. The Board considered the level and depth of experience of AMCO,
including the professional experience and qualifications of its senior and
investment personnel, as well as current staffing levels. The Board considered
AMCO's process for monitoring the performance of the Subadvisers and AMCO's
timeliness in responding to performance issues. The allocation of the Fund's
brokerage, including AMCO's process for monitoring "best execution" and the
utilization of "soft dollars," also was considered. AMCO's role in coordinating
the activities of
================================================================================
ADVISORY AGREEMENT(S) | 55
================================================================================
the Fund's other service providers also was considered. The Board also
considered AMCO's risk management processes. The Board considered AMCO'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 AMCO and its affiliates in managing the
Fund, as well as other funds in the Trust.
The Board also reviewed the compliance and administrative services provided to
the Fund by AMCO and its affiliates, including AMCO's oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust,
also focused on the quality of AMCO'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
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 also took into account that the
Fund's management fee rate was reduced effective December 1, 2017. The Board
took into account the various services provided to the Fund by AMCO and its
affiliates, including the high quality of services received by the Fund from
AMCO. The
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56 | USAA GROWTH FUND
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Board also noted the level and method of computing the management fee, including
any performance adjustment to such fee. The Board also took into account that
the subadvisory fees under the Subadvisory Agreements are paid by AMCO. The
Board also considered and discussed information about the Subadvisers' fees,
including the amount of management fees retained by AMCO after payment of the
subadvisory fees.
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- and ten-year periods ended December 31, 2018 and was
above the average of its performance universe and 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 bottom 50% of its performance universe
for the one-, three- and ten-year periods ended December 31, 2018, and was in
the top 35% of its performance universe for the five-year period ended December
31, 2018. The Board took into account management's discussion of the reasons for
the Fund's recent underperformance and noted the Fund's strong performance over
the five-year period ended December 31, 2018.
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 AMCO'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
================================================================================
ADVISORY AGREEMENT(S) | 57
================================================================================
the Fund, the Trustees noted that AMCO pays the subadvisory fees. The Trustees
reviewed the profitability of AMCO'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 AMCO, the Board
also considered the fact that AMCO 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 AMCO from its relationship with the Trust, including that AMCO may
derive reputational and other benefits from its association with the Fund. The
Trustees recognized that AMCO 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 - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussion of
the current advisory fee structure. The Board also considered the fact that AMCO
also pays the Fund's subadvisory fees. The Board also considered the effect of
Fund's growth and size on its performance and fees, noting that the Fund may
realize other economies of scale if assets increase proportionately 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 AMCO, among others: (i) AMCO has demonstrated that it
possesses the capability and resources to perform the duties required of it
under the Advisory Agreement; (ii) AMCO 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 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 AMCO; and (v) AMCO's 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 AMCO
and the type of fund. Based on
================================================================================
58 | USAA GROWTH FUND
================================================================================
its conclusions, the Board determined that the 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) 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 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 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 considered, based on the materials provided to them by
the Subadvisers, whether the method of compensating portfolio managers is
reasonable and includes mechanisms to prevent a manager with underperformance
from taking undue risks. 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 AMCO's monitoring processes of each Subadviser
include: (i) regular telephonic meetings to discuss, among other matters,
investment strategies, and to review portfolio performance; (ii) monthly
portfolio compliance checklists and quarterly
================================================================================
ADVISORY AGREEMENT(S) | 59
================================================================================
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 AMCO. The Trustees also relied on the ability of AMCO 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 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 each Subadviser's management of the Fund was
not a material factor in considering each Subadvisory Agreement.
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 AMCO
and that, in turn, AMCO pays a subadvisory fee to each Subadviser. As noted
above, the Board considered 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 each Subadviser. The Board noted AMCO's experience and resources
in monitoring the performance, investment style, and risk-adjusted performance
of each Subadviser. The Board was mindful of AMCO'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 each
Subadvisory Agreement, among others: (i) each Subadviser is qualified to manage
the Fund's assets in accordance with its investment objectives and policies;
(ii) each Subadviser maintains an appropriate compliance program; (iii) the
overall performance of the Fund is reasonable in relation to the
================================================================================
60 | USAA GROWTH FUND
================================================================================
performance of funds with similar investment objectives and 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 AMCO 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.
================================================================================
ADVISORY AGREEMENT(S) | 61
================================================================================
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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62 | USAA GROWTH 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 of 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), (08/11-06/19); Director of USAA Investment
Management Company (IMCO) (09/09-present); Chairman of Board of IMCO
(4/13-present); President and Director of USAA Shareholder Account Services
(SAS) (10/09-06/19); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director and Vice Chairman of FPS
(12/13-present); President and Director of USAA Investment Corporation (ICORP)
(03/10-present); Chairman of Board of ICORP (12/31-present); Director of USAA
Financial Advisors, Inc. (FAI) (12/13-present); Chairman of Board of FAI
(3/15-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 | 63
================================================================================
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
--------------------------------------------------------------------------------
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
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64 | USAA GROWTH FUND
================================================================================
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.
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.
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
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 65
================================================================================
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 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.
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66 | USAA GROWTH FUND
================================================================================
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 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.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 67
================================================================================
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 was 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.
================================================================================
68 | USAA GROWTH 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).
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Executive Director, Victory Capital Management Inc. (7/1/19-present); Treasurer,
USAA ETF Trust (09/18-06/19); Executive Director, Investment and Financial
Administration, USAA (04/12-06/30/19); Assistant Treasurer,
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 69
================================================================================
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
Director, Accounting and Finance, Victory Capital Management Inc.
(7/1/19-present); Assistant Treasurer, USAA ETF Trust (09/18-06/19);
Accounting/Financial Director, USAA (12/13-06/30/19).
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).
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).
================================================================================
70 | USAA GROWTH FUND
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Richard Y. Newton III
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
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 111 West Houston St., Suite 1901
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
Copies of the Victory Capital Management Inc.'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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23419-0919
[LOGO OF USAA USAA(R)]
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MUTUAL FUNDS
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July 31, 2019
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ANNUAL REPORT
USAA Growth & Income Fund
FUND INSTITUTIONAL ADVISER
SHARES SHARES SHARES
USGRX UIGIX USGIX
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
"... NOW MAY BE AN OPPORTUNE TIME FOR
INVESTORS TO ENSURE THAT THEIR PORTFOLIOS ARE WELL [PHOTO OF BROOKS ENGLEHARDT]
DIVERSIFIED AND THAT THEIR OVERALL ALLOCATION IS
APPROPRIATE FOR THEIR PARTICULAR RISK APPETITE."
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SEPTEMBER 2019
Although the bull market in equities has continued running, it was not without a
few missteps. Trade turmoil, questions surrounding global economic growth,
changing monetary policy, and geopolitical disputes have all led to increased
volatility. But through it all, domestic stocks, as measured by the S&P 500(R)
Index, still managed an annual return of approximately 8% for the 12-month
period ended July 31, 2019.
Given the sometimes dire news flow and ample cross-currents, it's no surprise
that volatility returned to the market. On one hand, the U.S. economy continues
to look good. The unprecedented streak of job creation has continued
uninterrupted, and unemployment is bouncing along historic lows at 3.7%. The
consumer remains resilient and inflation is tepid. On the flip side, however,
U.S. trade policy seems to be evolving, with new tariffs threatened and
implemented. The markets generally dislike this type of trade turmoil and
uncertainty, and the ongoing tensions between the United States and China (and
other trading partners) threaten to upend global supply chains and hinder
economic growth.
It's not just the stock market that has been dealing with volatility. The bond
market also has experienced volatility, due largely to the U.S. Federal
Reserve's (the "Fed") famous "pivot" in late 2018. Against the backdrop of
rapidly falling equities in the fourth quarter of 2018, the Fed signaled that
its next policy move would be to lower--not increase--short-term interest rates.
This immediately altered the yield environment.
Meanwhile, the U.S. Treasury yield curve continued to flatten and, in fact,
inverted--whereby shorter-term yields became higher than longer-term
================================================================================
================================================================================
yields. Such a yield-curve inversion is a worrying sign as it sometimes, but not
always, portends to a recession.
Although we are not predicting a recession, we must acknowledge that risks have
increased for an economic slowdown. Given that the current run in stocks is more
than a decade old, it's important for investors to keep perspective that the
bull market cannot continue forever. Therefore, now may be an opportune time for
investors to ensure that their portfolios are well diversified and that their
overall allocation is appropriate for their particular risk appetite.
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,
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. On the following pages, you will find information
relating to your USAA Investments, which is now a Victory Capital Investment
Franchise. If you have any questions about your investments, we encourage you to
engage your financial advisor or else contact us directly at 800-235-8396 or
visit usaa.com.
My colleagues and I sincerely appreciate the confidence you have placed in us,
and we value the opportunity to help you meet your investment goals.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
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TABLE OF CONTENTS
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MANAGERS' COMMENTARY ON THE FUND 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 18
Financial Statements 19
Notes to Financial Statements 23
Financial Highlights 41
EXPENSE EXAMPLE 44
ADVISORY AGREEMENT(S) 46
TRUSTEES' AND OFFICERS' INFORMATION 66
THIS REPORT IS FOR THE INFORMATION OF THE SHAREHOLDERS AND OTHERS WHO HAVE
RECEIVED A COPY OF THE CURRENTLY EFFECTIVE PROSPECTUS OF THE FUND, MANAGED BY
VICTORY CAPITAL MANAGEMENT INC. 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
RS Investments Growth VictoryShares and Solutions
SCOTT TRACY, CFA MANNIK S. DHILLON, CFA, CAIA
STEPHEN J. BISHOP WASIF A. LATIF
MELISSA CHADWICK-DUNN
CHRISTOPHER CLARK, CFA
PAUL LEUNG, CFA
--------------------------------------------------------------------------------
o PLEASE DISCUSS THE MARKET BACKDROP DURING THE 12-MONTH REPORTING PERIOD
ENDED JULY 31, 2019.
The U.S. stock market generated solid gains for the reporting period
overall. Growth stocks significantly outperformed their value counterparts,
while large-cap stocks outpaced small-cap stocks.
When the 12-month reporting period began in August 2018, U.S. stocks
advanced on positive sentiment about the strength of the U.S. economy. A
healthy job market, characterized by rising wage growth and unemployment at
multi-year lows, supported consumer confidence, fueling increased
discretionary spending. Meanwhile, U.S. companies benefited from ongoing
earnings growth.
Conditions changed early in the fourth quarter, as investors grew
pessimistic about the global economic outlook and concerned about the
Federal Reserve's (the "Fed") plan to continue raising short-term interest
rates. Other worries included the trade dispute between the United States
and China, uncertainty related to the United Kingdom's exit from the
European Union, the stronger U.S. dollar, and the possibility of a U.S.
government shutdown. Market volatility surged, and stocks broadly sold off
though cyclically sensitive, value-oriented stocks held up better than
growth-oriented stocks. Investors' concerns persisted into December 2018,
which also was notable for the beginning of a U.S. government shutdown that
lasted 35 days. Although Fed officials raised short-term interest rates at
the December policy meeting, their tone turned more dovish.
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MANAGERS' COMMENTARY ON THE FUND | 1
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After reaching lows in late December, U.S. stocks rallied during the
first quarter of 2019, recovering almost fully from the selloff they
experienced in late 2018. The rally was led by large-cap stocks and
growth-oriented stocks, which benefited from better-than-expected U.S.
economic data and signs the Fed might not raise interest rates during 2019.
Fed officials left short-term interest rates unchanged at both their
January and March 2019 policy meetings. Higher crude oil prices and
progress in U.S.-China trade talks also bolstered stocks.
U.S. stocks recorded positive returns during the second quarter and
through the end of the reporting period. Optimism about U.S.-China trade
discussions and better-than-expected corporate earnings buoyed stock prices
in April 2019. In May 2019, however, market volatility increased as
U.S.-China trade tensions escalated, and stocks retreated amid fears of a
global economic slowdown. In June 2019, Fed policymakers remained on hold
but said an interest rate cut was possible if the U.S. economic outlook
deteriorated, reigniting the U.S. stock market's rise. The gains continued
into July 2019, as investors anticipated a Fed interest rate cut. On July
31, 2019, the Fed cut short-term interest rates and said it would end its
balance sheet reduction earlier than expected on August 1, 2019. (Since
October 2017, the Fed has been trimming its balance sheet by gradually
decreasing the reinvestment of maturing holdings of U.S. Treasury and
government-sponsored mortgage-backed securities.)
o HOW DID THE USAA GROWTH & INCOME 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 July 31, 2019, the Fund
Shares, Institutional Shares, and Adviser Shares had total returns of
0.89%, 0.90%, and 0.62%, respectively. This compares to returns of 7.05%
for the Russell 3000(R) Index (the "Index") and 4.56% for the Lipper
Multi-Cap Core Funds Index.
Refer to page 4 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
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2 | USAA GROWTH & INCOME FUND
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Victory Capital Management Inc. (the "Manager" or "Victory Capital") is
the Fund's investment adviser. The investment adviser provides day-to-day
discretionary management for the Fund's assets.
o WHAT WERE THE PRINCIPAL FACTORS IN THE FUND'S PERFORMANCE RELATIVE TO THE
INDEX?
During the 12-month reporting period, the Fund recorded a positive
return but underperformed the Index. Security selection detracted most from
relative returns, with sector allocations further hampering performance. In
terms of selection, the Fund was hurt most by its holdings in the energy,
financials, consumer discretionary, and consumer staples sectors. In
consumer discretionary, an overweight in the cruise line industry had a
negative impact. These stocks broadly declined after a cruise ship suffered
an accident, raising investor concerns about increased potential
liabilities for the industry. Regarding sector allocations, the Fund's
overweight position in energy, which lagged on fears about global economic
growth and trade wars, diminished relative performance. An overweight
position in financials detracted slightly. In addition, the Fund's
underweight position in consumer staples held back relative returns.
Less-cyclical sectors, such as consumer staples, tend to perform well
during periods of market volatility.
Conversely, the Fund was helped by stock selection in the healthcare
sector. An underweight position also contributed positively. Strong
selection in the materials sector, offset slightly by the Fund's overweight
position, bolstered relative returns. A substantial overweight in the
consumer discretionary sector also was advantageous.
Thank you for allowing us to help you with your investment needs.
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. o Investing in REITs has some of the same risks associated with
the direct ownership of real estate. o Diversification is a technique
intended to help reduce risk and does not guarantee a profit or prevent a
loss.
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MANAGERS' COMMENTARY ON THE FUND | 3
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INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 7/31/19 o
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SINCE INCEPTION
1 YEAR 5 YEAR 10 YEAR INCEPTION* DATE
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Fund Shares 0.89% 8.54% 12.09% - -
Institutional Shares 0.90% - - 7.97% 8/07/15
Adviser Shares 0.62% 8.23% - 11.11% 8/01/10
Russell 3000 Index**
(reflects no deduction
for fees, expenses,
or taxes) 7.05% 10.95% 13.97% - -
Lipper Multi-Cap
Core Funds Index***
(reflects no deduction
for taxes) 4.56% 9.26% 12.45% - -
*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 Russell 3000 Index measures the performance of the 3,000 largest
U.S. companies based on total market capitalization, which represents
approximately 98% of the investable U.S. equity market.
***The unmanaged Lipper Multi-Cap Core Funds Index tracks the total return
performance of funds within the Lipper Multi-Cap Core 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.
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4 | USAA GROWTH & INCOME FUND
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o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
USAA GROWTH &
RUSSELL 3000 LIPPER MULTI-CAP INCOME FUND
INDEX CORE FUNDS INDEX SHARES
7/31/2009 $10,000.00 $10,000.00 $10,000.00
8/31/2009 10,357.32 10,340.88 10,344.00
9/30/2009 10,791.25 10,809.93 10,841.00
10/31/2009 10,513.70 10,493.87 10,594.00
11/30/2009 11,111.13 11,066.41 11,212.00
12/31/2009 11,427.77 11,441.38 11,534.00
1/31/2010 11,015.82 11,020.39 11,083.00
2/28/2010 11,389.28 11,391.59 11,507.00
3/31/2010 12,107.11 12,092.34 12,218.00
4/30/2010 12,368.39 12,327.68 12,430.00
5/31/2010 11,391.32 11,357.59 11,404.00
6/30/2010 10,736.46 10,791.47 10,715.00
7/31/2010 11,481.81 11,489.51 11,574.00
8/31/2010 10,941.32 10,976.72 10,927.00
9/30/2010 11,974.37 11,978.31 12,046.00
10/31/2010 12,442.29 12,484.72 12,517.00
11/30/2010 12,514.12 12,530.57 12,535.00
12/31/2010 13,362.44 13,343.96 13,371.00
1/31/2011 13,654.30 13,663.44 13,656.00
2/28/2011 14,151.43 14,134.06 14,047.00
3/31/2011 14,215.26 14,195.78 14,030.00
4/30/2011 14,638.37 14,610.67 14,511.00
5/31/2011 14,471.35 14,408.38 14,333.00
6/30/2011 14,211.46 14,153.88 14,055.00
7/31/2011 13,886.02 13,821.10 13,600.00
8/31/2011 13,052.92 12,838.34 12,726.00
9/30/2011 12,040.07 11,743.00 11,672.00
10/31/2011 13,425.80 13,041.14 13,103.00
11/30/2011 13,389.51 12,964.49 12,996.00
12/31/2011 13,499.56 12,969.30 13,033.00
1/31/2012 14,180.79 13,679.32 13,796.00
2/29/2012 14,780.68 14,271.16 14,397.00
3/31/2012 15,236.62 14,608.91 14,772.00
4/30/2012 15,136.68 14,469.04 14,521.00
5/31/2012 14,200.95 13,477.78 13,379.00
6/30/2012 14,757.13 13,933.64 13,802.00
7/31/2012 14,903.30 14,060.69 13,910.00
8/31/2012 15,275.26 14,429.66 14,396.00
9/30/2012 15,676.39 14,811.65 14,743.00
10/31/2012 15,405.99 14,630.71 14,463.00
11/30/2012 15,525.29 14,815.50 14,526.00
12/31/2012 15,715.56 15,063.96 14,662.00
1/31/2013 16,577.88 15,919.91 15,459.00
2/28/2013 16,797.58 16,072.12 15,559.00
3/31/2013 17,455.82 16,681.20 16,056.00
4/30/2013 17,741.55 16,885.07 16,301.00
5/31/2013 18,160.08 17,313.82 16,855.00
6/30/2013 17,924.54 17,055.25 16,622.00
7/31/2013 18,906.95 18,008.43 17,651.00
8/31/2013 18,379.15 17,532.49 17,168.00
9/30/2013 19,062.41 18,239.94 17,828.00
10/31/2013 19,872.14 18,944.50 18,694.00
11/30/2013 20,448.85 19,451.61 19,369.00
12/31/2013 20,988.35 19,971.48 19,926.00
1/31/2014 20,325.25 19,349.50 19,241.00
2/28/2014 21,289.40 20,261.79 20,109.00
3/31/2014 21,402.40 20,302.61 20,175.00
4/30/2014 21,428.37 20,235.83 20,129.00
5/31/2014 21,895.95 20,693.10 20,661.00
6/30/2014 22,445.15 21,220.62 21,134.00
7/31/2014 22,002.37 20,775.41 20,794.00
8/31/2014 22,925.47 21,573.17 21,695.00
9/30/2014 22,447.60 21,042.93 21,355.00
10/31/2014 23,065.20 21,532.26 21,650.00
11/30/2014 23,624.16 21,979.23 22,147.00
12/31/2014 23,623.89 21,980.47 22,161.00
1/31/2015 22,966.40 21,385.78 21,337.00
2/28/2015 24,296.18 22,614.05 22,651.00
3/31/2015 24,049.19 22,454.97 22,325.00
4/30/2015 24,157.97 22,538.32 22,587.00
5/31/2015 24,492.11 22,875.26 23,099.00
6/30/2015 24,082.34 22,487.60 22,736.00
7/31/2015 24,485.13 22,698.75 23,029.00
8/31/2015 23,006.97 21,383.59 21,595.00
9/30/2015 22,336.55 20,646.72 20,857.00
10/31/2015 24,100.81 22,127.54 22,535.00
11/30/2015 24,234.42 22,255.99 22,640.00
12/31/2015 23,736.99 21,657.89 22,043.00
1/31/2016 22,397.63 20,364.47 20,402.00
2/29/2016 22,390.42 20,392.69 20,291.00
3/31/2016 23,966.84 21,876.19 21,672.00
4/30/2016 24,115.37 22,092.38 21,839.00
5/31/2016 24,546.80 22,480.26 22,240.00
6/30/2016 24,597.28 22,352.65 21,650.00
7/31/2016 25,573.47 23,244.16 22,685.00
8/31/2016 25,638.70 23,377.84 23,030.00
9/30/2016 25,679.01 23,422.71 23,227.00
10/31/2016 25,123.43 22,898.24 22,981.00
11/30/2016 26,247.75 23,944.14 24,331.00
12/31/2016 26,759.93 24,315.28 24,657.00
1/31/2017 27,263.60 24,822.23 25,286.00
2/28/2017 28,277.58 25,627.94 26,039.00
3/31/2017 28,296.82 25,673.21 26,080.00
4/30/2017 28,596.76 25,976.32 26,429.00
5/31/2017 28,889.42 26,166.26 26,654.00
6/30/2017 29,150.13 26,407.23 27,063.00
7/31/2017 29,699.75 26,877.89 27,334.00
8/31/2017 29,756.97 26,765.23 27,221.00
9/30/2017 30,482.68 27,594.65 27,834.00
10/31/2017 31,147.88 28,169.93 28,432.00
11/30/2017 32,093.69 29,007.69 29,381.00
12/31/2017 32,414.46 29,309.13 29,746.00
1/31/2018 34,123.05 30,792.82 31,472.00
2/28/2018 32,865.29 29,602.07 30,077.00
3/31/2018 32,205.54 29,081.70 29,288.00
4/30/2018 32,327.95 29,184.85 29,383.00
5/31/2018 33,240.58 29,890.14 30,010.00
6/30/2018 33,457.97 29,999.81 30,089.00
7/31/2018 34,568.30 30,950.61 31,049.00
8/31/2018 35,782.26 31,800.49 31,547.00
9/30/2018 35,841.49 31,801.52 31,684.00
10/31/2018 33,202.38 29,288.20 29,321.00
11/30/2018 33,867.38 29,888.51 30,104.00
12/31/2018 30,715.36 27,045.05 27,147.00
1/31/2019 33,351.79 29,490.50 29,673.00
2/28/2019 34,524.74 30,567.87 30,370.00
3/31/2019 35,028.86 30,839.99 30,353.00
4/30/2019 36,427.63 31,981.24 31,856.00
5/31/2019 34,070.33 29,896.96 29,483.00
6/30/2019 36,463.32 31,956.60 31,497.00
7/31/2019 37,005.35 32,362.78 31,325.00
[END CHART]
Data from 7/31/09 through 7/31/19.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Growth & Income Fund Shares 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 Multi-Cap Core Funds Index reflects the fees and expenses of the
underlying funds included in the index.
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INVESTMENT OVERVIEW | 5
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o TOP 10 HOLDINGS* - 7/31/19 o
(% of Net Assets)
Apple, Inc. .............................................................. 3.4%
Amazon.com, Inc. ......................................................... 3.1%
Merck & Co., Inc. ........................................................ 3.0%
Visa, Inc. "A" ........................................................... 2.5%
Facebook, Inc. "A" ....................................................... 2.1%
Home Depot, Inc. ......................................................... 2.1%
Johnson & Johnson ........................................................ 2.0%
Ingersoll-Rand plc ....................................................... 2.0%
Alphabet, Inc. "C" ....................................................... 1.9%
Verizon Communications, Inc. ............................................. 1.8%
o SECTOR ALLOCATION* - 7/31/19 o
(% of Net Assets)
[PIE CHART OF SECTOR ALLOCATION]
CONSUMER, NON-CYCLICAL 22.4%
TECHNOLOGY 17.8%
COMMUNICATIONS 15.4%
FINANCIAL 15.3%
CONSUMER, CYCLICAL 12.2%
INDUSTRIAL 9.2%
ENERGY 3.3%
UTILITIES 1.8%
BASIC MATERIALS 0.7%
[END CHART]
*Does not include exchange traded funds and money market instruments.
Percentages are of the net assets of the Fund and may not equal 100%.
Refer to the Portfolio of Investments for a complete list of securities.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
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6 | USAA GROWTH & INCOME 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 Management Inc. ("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 USAA Asset Management Company ("AMCO")
was acquired by Victory Capital Holdings, Inc., the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
---------------------------------------------------------------------------
FOR AGAINST ABSTAIN
---------------------------------------------------------------------------
47,314,153 5,870,906 2,797,989
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
person" as defined in the Investment Company Act of 1940, as amended (1940 Act)
("Interested Trustee"); 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
July 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 July 31, 2019:
DIVIDEND RECEIVED LONG-TERM
DEDUCTION (CORPORATE CAPITAL GAIN QUALIFIED INTEREST
SHAREHOLDERS)(1) DISTRIBUTIONS(2) INCOME
----------------------------------------------------------------------
100% $166,515,000 $716,000
----------------------------------------------------------------------
(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 July 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 GROWTH & INCOME FUND
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA GROWTH & INCOME FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Growth & Income Fund (the "Fund") (one of the funds constituting the USAA Mutual
Funds Trust (the "Trust")), including the portfolio of investments, as of July
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 the USAA Mutual Funds Trust) at July 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 July 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
September 20, 2019
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 9
================================================================================
PORTFOLIO OF INVESTMENTS
July 31, 2019
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (98.3%)
COMMON STOCKS (98.1%)
BASIC MATERIALS (0.7%)
---------------------
CHEMICALS (0.5%)
40,900 Air Products & Chemicals, Inc. $ 9,336
----------
MINING (0.2%)
73,300 Newmont Goldcorp Corp. 2,677
----------
Total Basic Materials 12,013
----------
COMMUNICATIONS (15.4%)
---------------------
ADVERTISING (0.3%)
56,900 Omnicom Group, Inc. 4,565
----------
INTERNET (9.8%)
29,800 Alphabet, Inc. "C"(a) 36,257
30,840 Amazon.com, Inc.(a) 57,572
28,200 Expedia Group, Inc. 3,743
201,108 Facebook, Inc. "A"(a) 39,061
86,100 IAC/InterActiveCorp.(a) 20,582
76,277 Netflix, Inc.(a) 24,637
----------
181,852
----------
MEDIA (1.5%)
143,500 Comcast Corp. "A" 6,195
13,000 FactSet Research Systems, Inc. 3,605
130,100 Walt Disney Co. 18,605
----------
28,405
----------
TELECOMMUNICATIONS (3.8%)
166,200 AT&T, Inc. 5,659
565,600 Cisco Systems, Inc. 31,334
598,300 Verizon Communications, Inc. 33,068
----------
70,061
----------
Total Communications 284,883
----------
================================================================================
10 | USAA GROWTH & INCOME FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
CONSUMER, CYCLICAL (12.2%)
-------------------------
AIRLINES (0.8%)
42,700 Alaska Air Group, Inc. $ 2,705
149,800 Delta Air Lines, Inc. 9,144
70,100 Southwest Airlines Co. 3,612
----------
15,461
----------
APPAREL (0.1%)
29,700 NIKE, Inc. "B" 2,555
----------
AUTO MANUFACTURERS (1.7%)
55,672 Ferrari N.V. 8,968
1,325,800 Ford Motor Co. 12,635
122,800 General Motors Co. 4,954
53,600 PACCAR, Inc. 3,759
----------
30,316
----------
AUTO PARTS & EQUIPMENT (0.2%)
78,200 Allison Transmission Holdings, Inc. 3,593
----------
ENTERTAINMENT (0.7%)
50,000 Vail Resorts, Inc. 12,326
----------
HOUSEWARES (0.2%)
40,300 Toro Co. 2,935
----------
LODGING (0.5%)
92,500 Hilton Worldwide Holdings, Inc. 8,931
----------
RETAIL (8.0%)
37,600 Best Buy Co., Inc. 2,877
37,059 Domino's Pizza, Inc. 9,062
36,600 Genuine Parts Co. 3,555
181,700 Home Depot, Inc. 38,827
30,600 Lowe's Companies, Inc. 3,103
21,700 McDonald's Corp. 4,573
149,700 Starbucks Corp. 14,175
59,700 Target Corp. 5,158
482,326 TJX Companies, Inc. 26,316
205,100 Walgreens Boots Alliance, Inc. 11,176
266,500 Walmart, Inc. 29,416
----------
148,238
----------
Total Consumer, Cyclical 224,355
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
CONSUMER, NON-CYCLICAL (22.4%)
------------------------------
BEVERAGES (1.0%)
589,469 Keurig Dr Pepper, Inc. $ 16,588
21,900 PepsiCo, Inc. 2,799
----------
19,387
----------
BIOTECHNOLOGY (3.5%)
83,100 Amgen, Inc. 15,505
46,700 BeiGene Ltd. ADR(a) 6,414
80,400 Bluebird Bio, Inc.(a) 10,551
117,100 Exact Sciences Corp.(a) 13,479
33,656 Illumina, Inc.(a) 10,076
51,900 Sage Therapeutics, Inc.(a) 8,321
----------
64,346
----------
COMMERCIAL SERVICES (2.3%)
184,900 IHS Markit Ltd.(a) 11,911
7,700 MarketAxess Holdings, Inc. 2,595
157,000 PayPal Holdings, Inc.(a) 17,333
40,800 Robert Half International, Inc. 2,465
31,800 S&P Global, Inc. 7,789
----------
42,093
----------
COSMETICS/PERSONAL CARE (1.9%)
96,900 Colgate-Palmolive Co. 6,952
241,800 Procter & Gamble Co. 28,542
----------
35,494
----------
FOOD (1.0%)
68,600 General Mills, Inc. 3,643
42,300 Sysco Corp. 2,901
154,700 Tyson Foods, Inc. "A" 12,299
----------
18,843
----------
HEALTHCARE PRODUCTS (2.9%)
68,700 Abbott Laboratories 5,984
15,700 Becton, Dickinson and Co. 3,969
37,500 Cooper Companies, Inc. 12,653
28,700 Danaher Corp. 4,032
26,300 Intuitive Surgical, Inc.(a) 13,663
104,200 Medtronic plc 10,622
13,300 Stryker Corp. 2,790
----------
53,713
----------
================================================================================
12 | USAA GROWTH & INCOME FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
HEALTHCARE-SERVICES (2.4%)
13,600 Anthem, Inc. $ 4,007
116,600 IQVIA Holdings, Inc.(a) 18,559
83,800 UnitedHealth Group, Inc. 20,867
----------
43,433
----------
HOUSEHOLD PRODUCTS/WARES (0.5%)
68,200 Kimberly-Clark Corp. 9,251
----------
PHARMACEUTICALS (6.9%)
255,900 AbbVie, Inc. 17,048
102,600 Cardinal Health, Inc. 4,692
289,600 Johnson & Johnson 37,712
33,900 McKesson Corp. 4,710
659,657 Merck & Co., Inc. 54,745
94,400 Neurocrine Biosciences, Inc.(a) 9,099
----------
128,006
----------
Total Consumer, Non-cyclical 414,566
----------
ENERGY (3.3%)
-------------
OIL & GAS (2.7%)
141,800 Cabot Oil & Gas Corp. 2,717
80,200 Chevron Corp. 9,873
117,000 EOG Resources, Inc. 10,044
189,400 Exxon Mobil Corp. 14,084
87,100 Occidental Petroleum Corp. 4,474
59,000 Phillips 66 6,051
27,200 Valero Energy Corp. 2,319
----------
49,562
----------
OIL & GAS SERVICES (0.4%)
182,900 Schlumberger Ltd. 7,311
----------
PIPELINES (0.2%)
67,900 ONEOK, Inc. 4,758
----------
Total Energy 61,631
----------
FINANCIAL (15.3%)
-----------------
BANKS (4.6%)
131,100 Bank of America Corp. 4,022
82,500 Bank of New York Mellon Corp. 3,871
74,500 BB&T Corp. 3,839
316,000 Citigroup, Inc. 22,487
45,900 Comerica, Inc. 3,360
129,500 Fifth Third Bancorp 3,845
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
408,700 Huntington Bancshares, Inc. $ 5,824
63,500 J.P. Morgan Chase & Co. 7,366
24,800 M&T Bank Corp. 4,073
61,700 PNC Financial Services Group, Inc. 8,817
110,700 U.S. Bancorp. 6,326
169,700 Wells Fargo & Co. 8,215
79,200 Zions Bancorp, N.A. 3,570
----------
85,615
----------
DIVERSIFIED FINANCIAL SERVICES (5.2%)
43,100 American Express Co. 5,360
78,200 Capital One Financial Corp. 7,227
36,900 Cboe Global Markets, Inc. 4,034
31,800 CME Group, Inc. 6,183
74,200 Discover Financial Services 6,659
254,500 Franklin Resources, Inc. 8,304
77,800 Intercontinental Exchange, Inc. 6,836
130,900 Invesco Ltd. 2,512
25,800 Nasdaq, Inc. 2,486
256,400 Visa, Inc. "A" 45,639
----------
95,240
----------
INSURANCE (3.7%)
131,500 Aflac, Inc. 6,922
74,900 Allstate Corp. 8,044
42,900 American Financial Group, Inc. 4,392
12,900 Everest Re Group Ltd. 3,182
24,300 Hanover Insurance Group, Inc. 3,152
86,300 Hartford Financial Services Group, Inc. 4,974
89,700 MetLife, Inc. 4,433
303,200 Progressive Corp. 24,553
25,300 RenaissanceRe Holdings Ltd. 4,583
31,100 Travelers Companies, Inc. 4,560
----------
68,795
----------
REAL ESTATE (0.2%)
26,100 Jones Lang LaSalle, Inc. 3,802
----------
REITS (1.4%)
287,000 Chimera Investment Corp. 5,533
20,000 Public Storage 4,855
66,100 Simon Property Group, Inc. 10,722
61,200 Ventas, Inc. 4,118
----------
25,228
----------
================================================================================
14 | USAA GROWTH & INCOME FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
SAVINGS & LOANS (0.2%)
266,800 People's United Financial, Inc. $ 4,381
----------
Total Financial 283,061
----------
INDUSTRIAL (9.2%)
-----------------
AEROSPACE/DEFENSE (0.6%)
28,600 Lockheed Martin Corp. 10,358
----------
BUILDING MATERIALS (0.4%)
86,400 Johnson Controls International plc 3,667
16,000 Lennox International, Inc. 4,104
----------
7,771
----------
ELECTRICAL COMPONENTS & EQUIPMENT (0.9%)
182,600 AMETEK, Inc. 16,363
----------
ELECTRONICS (1.9%)
30,800 Allegion plc 3,189
119,200 Amphenol Corp. "A" 11,124
55,900 Honeywell International, Inc. 9,641
101,200 Woodward, Inc. 11,338
----------
35,292
----------
ENVIRONMENTAL CONTROL (0.9%)
81,400 Republic Services, Inc. 7,216
75,900 Waste Management, Inc. 8,880
----------
16,096
----------
MACHINERY-DIVERSIFIED (1.5%)
29,500 Cummins, Inc. 4,838
15,100 Rockwell Automation, Inc. 2,428
56,100 Roper Technologies, Inc. 20,401
----------
27,667
----------
MISCELLANEOUS MANUFACTURERS (2.5%)
50,400 Eaton Corp. plc 4,142
34,800 Illinois Tool Works, Inc. 5,367
296,505 Ingersoll-Rand plc 36,666
----------
46,175
----------
TRANSPORTATION (0.5%)
67,200 CH Robinson Worldwide, Inc. 5,627
35,000 United Parcel Service, Inc. "B" 4,181
----------
9,808
----------
Total Industrial 169,530
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
TECHNOLOGY (17.8%)
------------------
COMPUTERS (4.6%)
294,967 Apple, Inc. $ 62,840
153,100 International Business Machines Corp. 22,696
----------
85,536
----------
SEMICONDUCTORS (5.2%)
58,307 Broadcom, Inc. 16,908
109,500 Intel Corp. 5,535
87,100 KLA Corp. 11,873
64,400 Lam Research Corp. 13,435
516,300 Marvell Technology Group Ltd. 13,558
102,200 Microchip Technology, Inc. 9,650
167,000 QUALCOMM, Inc. 12,218
99,400 Texas Instruments, Inc. 12,426
----------
95,603
----------
SOFTWARE (8.0%)
49,300 Activision Blizzard, Inc. 2,403
292,900 Black Knight, Inc.(a) 18,546
43,558 Fair Isaac Corp.(a) 15,133
305,500 Oracle Corp. 17,200
119,500 salesforce.com, Inc.(a) 18,463
111,091 ServiceNow, Inc.(a) 30,815
180,900 Twilio, Inc. "A"(a) 25,165
103,700 Workday, Inc. "A"(a) 20,738
----------
148,463
----------
Total Technology 329,602
----------
UTILITIES (1.8%)
----------------
ELECTRIC (1.8%)
73,100 CMS Energy Corp. 4,256
73,300 Dominion Energy, Inc. 5,445
97,300 Duke Energy Corp. 8,438
96,900 Evergy, Inc. 5,862
51,900 Southern Co. 2,917
66,000 WEC Energy Group, Inc. 5,640
----------
Total Utilities 32,558
----------
Total Common Stocks (cost: $1,623,709) 1,812,199
----------
EXCHANGE-TRADED FUNDS (0.2%)
32,936 iShares Russell 1000 Value ETF (cost: $4,245) 4,230
----------
Total Equity Securities (cost: $1,627,954) 1,816,429
----------
================================================================================
16 | USAA GROWTH & INCOME FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (1.8%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (1.8%)
32,998,324 State Street Institutional Treasury Money Market Fund
Premier Class, 2.09%(b) (cost: $32,998) $ 32,998
----------
TOTAL INVESTMENTS (COST: $1,660,952) $1,849,427
==========
------------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
------------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $1,812,199 $- $- $1,812,199
Exchange-Traded Funds 4,230 - - 4,230
Money Market Instruments:
Government & U.S. Treasury
Money Market Funds 32,998 - - 32,998
------------------------------------------------------------------------------------------------------------------
Total $1,849,427 $- $- $1,849,427
------------------------------------------------------------------------------------------------------------------
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 July 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
July 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
ADR American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S.
dollars.
REITS Real estate investment trusts - Dividend distributions from REITS
may be recorded as income and later characterized by the REIT at the
end of the fiscal year as capital gains or a return of capital.
Thus, the Fund will estimate the components of distributions from
these securities and revise when actual distributions are known.
o SPECIFIC NOTES
(a) Non-income-producing security.
(b) Rate represents the money market fund annualized seven-day yield at
July 31, 2019.
See accompanying notes to financial statements.
================================================================================
18 | USAA GROWTH & INCOME FUND
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
July 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $1,660,952) $1,849,427
Cash 70
Receivables:
Capital shares sold 253
Victory Capital (Note 8) 4
Dividends and interest 1,760
Other 132
----------
Total assets 1,851,646
----------
LIABILITIES
Payables:
Securities purchased 1,748
Capital shares redeemed 358
Accrued administration and servicing fees 232
Accrued management fees 956
Accrued transfer agent's fees 149
Other accrued expenses and payables 121
----------
Total liabilities 3,564
----------
Net assets applicable to capital shares outstanding $1,848,082
==========
NET ASSETS CONSIST OF:
Paid-in capital $1,298,583
Distributable earnings 549,499
----------
Net assets applicable to capital shares outstanding $1,848,082
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $1,673,033/70,598
capital shares outstanding, no par value) $ 23.70
==========
Institutional Shares (net assets of $165,137/6,975
capital shares outstanding, no par value) $ 23.68
==========
Adviser Shares (net assets of $9,912/420
capital shares outstanding, no par value) $ 23.61
==========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 19
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended July 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $220) $ 33,958
Interest 1,327
Securities lending (net) 51
---------
Total income 35,336
---------
EXPENSES
Management fees 11,022
Administration and servicing fees:
Fund Shares 2,506
Institutional Shares 156
Adviser Shares 15
Transfer agent's fees:
Fund Shares 1,664
Institutional Shares 156
Adviser Shares 1
Distribution and service fees (Note 8):
Adviser Shares 25
Custody and accounting fees:
Fund Shares 207
Institutional Shares 19
Adviser Shares 1
Postage:
Fund Shares 87
Shareholder reporting fees:
Fund Shares 55
Trustees' fees 37
Registration fees:
Fund Shares 40
Institutional Shares 20
Adviser Shares 19
Professional fees 93
Other 30
---------
Total expenses 16,153
---------
================================================================================
20 | USAA GROWTH & INCOME FUND
================================================================================
Expenses reimbursed:
Adviser Shares $ (8)
---------
Net expenses 16,145
---------
NET INVESTMENT INCOME 19,191
---------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain on:
Investments 394,987
Foreign currency transactions 1
Change in net unrealized appreciation/(depreciation) (399,883)
---------
Net realized and unrealized loss (4,895)
---------
Increase in net assets resulting from operations $ 14,296
=========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 21
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended July 31,
-----------------------------------------------------------------------------------------
2019 2018
-----------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 19,191 $ 14,939
Net realized gain on investments 394,987 153,769
Net realized gain on foreign currency transactions 1 4
Change in net unrealized appreciation/(depreciation) of:
Investments (399,883) 66,344
Foreign currency translations - (4)
--------------------------
Increase in net assets resulting from operations 14,296 235,052
--------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (166,142) (84,365)
Institutional Shares (15,193) (7,455)
Adviser Shares (1,013) (503)
--------------------------
Distributions to shareholders (182,348) (92,323)
--------------------------
NET INCREASE IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 7)
Fund Shares 70,902 20,836
Institutional Shares 18,880 7,556
Adviser Shares 87 71
--------------------------
Total net increase in net assets from capital
share transactions 89,869 28,463
--------------------------
Net increase (decrease) in net assets (78,183) 171,192
NET ASSETS
Beginning of year 1,926,265 1,755,073
--------------------------
End of year $1,848,082 $1,926,265
==========================
See accompanying notes to financial statements.
================================================================================
22 | USAA GROWTH & INCOME FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
July 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 & Income 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 objectives are to seek
capital growth and, secondarily, current income.
The Fund consists of three classes of shares: Growth & Income Fund Shares (Fund
Shares), Growth & Income Fund Institutional Shares (Institutional Shares), and
Growth & Income Fund Adviser Shares (Adviser Shares). Each class of shares has
equal rights to assets and earnings, except that each class bears certain
class-related expenses specific to the particular class. These expenses include
administration and servicing fees, transfer agent fees, postage, shareholder
reporting fees, distribution and service (12b-1) fees, and certain registration
and custodian fees. Expenses not attributable to a specific class, income, and
realized gains or losses on investments are allocated to each class of shares
based on each class' relative net assets. Each class has exclusive voting rights
on matters related solely to that class and separate voting rights on matters
that relate to all classes. The Institutional Shares are available for
investment through a USAA discretionary managed account program and certain
advisory programs sponsored by financial intermediaries, such as brokerage
firms, investment advisors, financial planners, third-party administrators, and
insurance companies. Institutional Shares also are available to institutional
investors, which include retirement plans, endowments, foundations, and
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
bank trusts, as well as other persons or legal entities that the Fund may
approve from time to time, or for purchase by an affiliate fund participating in
a fund-of-funds investment strategy (affiliated 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), the investment adviser to the
Fund, and USAA Transfer Agency Company, d/b/a USAA Shareholder Account Services
(SAS), the transfer agent to the Fund, announced that AMCO and SAS would be
acquired by Victory Capital Holdings, Inc., a global investment management firm
headquartered in Cleveland, Ohio (the Transaction) on July 1, 2019. Effective
August 5, 2019, Citibank, N.A. is the new custodian for the USAA Mutual Funds. 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. 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.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Pricing 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
================================================================================
24 | USAA GROWTH & INCOME FUND
================================================================================
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
closing bid price generally is used for U.S. listed equities and the
average of the bid and asked prices is used for foreign listed
equities. 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. 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
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 generally are priced but may be valued at amortized
cost, provided that amortized cost represents the fair value of such
securities.
5. Debt securities are valued each business day by a pricing service
(the Service) approved by the Board. The Service uses evaluated bid or
the last sales price to value a security when, in the Service's
judgment, these prices are readily available and are representative of
the security's market value. For many securities, such prices are not
readily available. The Service generally prices those securities based
on methods which include consideration of yields or prices of securities
of comparable quality, coupon, maturity, and type; indications as to
values from dealers in securities; and general market conditions.
Generally, debt securities are categorized in Level 2 of the fair value
hierarchy; however, to the extent the valuations include significant
unobservable inputs, the securities would be categorized in Level 3.
6. Repurchase agreements are valued at cost.
7. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has 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
================================================================================
26 | USAA GROWTH & INCOME FUND
================================================================================
traded and the actual price realized from the sale of a security may
differ materially from the fair value price. Valuing these securities
at fair value is intended to cause the Fund's NAV to be more reliable
than it otherwise would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
broker-dealers, other pricing services, or widely used quotation
systems. General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and duration
of any restrictions on disposition of the securities, evaluation of
credit quality, and an evaluation of the forces that influenced the
market in which the securities are purchased and sold.
B. FAIR VALUE MEASUREMENTS - Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the Portfolio of Investments is
based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted)
in active markets for identical securities.
Level 2 - inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
that are observable for the securities, either directly or indirectly, and
market-corroborated inputs such as market indexes.
Level 3 - inputs to the valuation methodology are unobservable and
significant to the fair value measurement, including the Manager's own
assumptions in determining the fair value.
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 | 27
================================================================================
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 July 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.
================================================================================
28 | USAA GROWTH & INCOME FUND
================================================================================
Since the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the
exchange rate obtained from an independent pricing service on the
respective dates of such transactions.
2. Market value of securities, other assets, and liabilities at the
exchange rate obtained from an independent pricing service on a daily
basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the amounts received. At
the end of the Fund's fiscal year, net realized foreign currency
gains/losses are reclassified from accumulated net realized gains/losses to
accumulated undistributed net investment income on the Statement of Assets
and Liabilities, as such amounts are treated as ordinary income/loss for
federal income tax purposes. Net unrealized foreign currency exchange
gains/losses arise from changes in the value of assets and liabilities,
other than investments in securities, resulting from changes in the exchange
rate.
G. EXPENSES PAID INDIRECTLY - A portion of the brokerage commissions that
the Fund pays may be recaptured as a credit that is tracked and used by the
custodian to directly reduce expenses paid by the Fund. Effective September
30, 2018, the commission recapture program ended. For the year ended
July 31, 2019, the Fund did not receive any brokerage commission recapture
credits.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
H. INDEMNIFICATIONS - Under the Trust's organizational documents, its
officers and trustees are indemnified against certain liabilities arising
out of the performance of their duties to the Trust. In addition, in the
normal course of business, the Trust enters into contracts that contain a
variety of representations and warranties that provide general
indemnifications. The Trust's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the
Trust that have not yet occurred. However, the Trust expects the risk of
loss to be remote.
I. USE OF ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINE OF CREDIT
The Fund participates, along with other funds of the Trust and 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. 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.
For the period July 1, 2019 to July 31, 2019, the Fund paid Citibank facility
fees of less than $500, which represents 1.3% of the total fees paid to Citibank
by the funds of the Trusts. The Fund had no borrowings under this agreement
during the period July 1, 2019 to July 31, 2019. Effective July 1, 2019, the
line of credit among the Trust, with respect to its funds,
================================================================================
30 | USAA GROWTH & INCOME FUND
================================================================================
and USAA Capital Corporation (CAPCO) terminated. For the period from August 1,
2018 to June 30, 2019, the Fund paid CAPCO facility fees of $15,000, which
represents 2.2% of the total fees paid to CAPCO by the funds of the Trusts. The
Fund had no borrowings under this agreement during the period from August 1,
2018 to June 30, 2019.
(3) INTERFUND LENDING
Effective July 1, 2019, the Trust relies on an exemptive order granted to
Victory Capital and its affiliated funds by the U.S. Securities and Exchange
Commission (SEC) in March 2017 (the 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 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 Order, by averaging the current repurchase
agreement rate and the current bank loan rate. For the period July 1, 2019 to
July 31, 2019, the Fund did not lend.
(4) 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, REIT return of capital dividend, REIT
capital gains dividend, equalization, merger, and additional adjustments
resulted in reclassifications to the Statement of Assets and Liabilities to
decrease distributable earnings by $3,138,000 and increase paid in capital by
$3,138,000. These reclassifications had no effect on net assets.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 31
================================================================================
The tax character of distributions paid during the years ended July 31, 2019,
and 2018, was as follows:
2019 2018
--------------------------------------------------------------------------------
Ordinary income* $ 18,971,000 $13,940,000
Long-term realized capital gains 163,377,000 78,383,000
------------ -----------
Total distributions paid $182,348,000 $92,323,000
============ ===========
As of July 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 4,548,000
Undistributed long-term capital gains 358,480,000
Unrealized appreciation of investments 186,471,000
*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
non-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 July 31, 2019, the Fund had no capital loss carryforwards, for federal income
tax purposes.
TAX BASIS OF INVESTMENTS - At July 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 Growth &
Income Fund $1,662,956,000 $219,190,000 $(32,719,000) $186,471,000
================================================================================
32 | USAA GROWTH & INCOME FUND
================================================================================
(5) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended July 31, 2019, were $1,652,626,000 and
$1,683,639,000, respectively.
(6) 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 July 31,
2019, the Fund had no securities on loan.
(7) CAPITAL SHARE TRANSACTIONS
At July 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 fund-of-funds as well as other persons
================================================================================
NOTES TO FINANCIAL STATEMENTS | 33
================================================================================
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
JULY 31, 2019 JULY 31, 2018
----------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------
FUND SHARES:
Shares sold 3,781 $ 90,122 4,764 $ 120,587
Shares issued from
reinvested dividends 7,465 163,732 3,327 83,086
Shares redeemed (7,709) (182,952) (7,236) (182,837)
----------------------------------------------------------
Net increase from
capital share transactions 3,537 $ 70,902 855 $ 20,836
==========================================================
INSTITUTIONAL SHARES:
Shares sold 625 $ 14,447 451 $ 11,224
Shares issued from
reinvested dividends 693 15,189 299 7,455
Shares redeemed (425) (10,756) (441) (11,123)
----------------------------------------------------------
Net increase from
capital share transactions 893 $ 18,880 309 $ 7,556
==========================================================
ADVISER SHARES:
Shares sold 9 $ 219 4 $ 105
Shares issued from
reinvested dividends 2 36 1 17
Shares redeemed (7) (168) (2) (51)
----------------------------------------------------------
Net increase from
capital share transactions 4 $ 87 3 $ 71
==========================================================
(8) TRANSACTIONS WITH MANAGER
MANAGEMENT FEES - The Manager provides investment management services to the
Fund pursuant to an Advisory Agreement. Effective July 1, 2019, the Trust relies
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
================================================================================
34 | USAA GROWTH & INCOME FUND
================================================================================
shareholder approval) one or more subadvisers to manage the day-to-day
investment of a 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 0.60% of the Fund's average daily net assets.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Multi-Cap Core Funds Index. The Lipper Multi-Cap Core
Funds Index tracks the total return performance of funds within the Lipper
Multi-Cap Core Funds category.
For the Fund Shares, Institutional Shares, and Adviser Shares, the performance
period consists of the current month plus the previous 35 months. The following
table is utilized to determine the extent of the performance adjustment:
OVER/UNDER PERFORMANCE
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
----------------------------------------------------------------------------
+/- 100 to 400 +/- 4
+/- 401 to 700 +/- 5
+/- 701 and greater +/- 6
(1)Based on the difference between average annual performance of the
relevant share class of the Fund and its relevant Lipper index,
rounded to the nearest basis point. Average daily net assets of the
share class are calculated over a rolling 36-month period.
Each class' annual performance adjustment rate is multiplied by the average
daily net assets of each respective class over the entire performance
================================================================================
NOTES TO FINANCIAL STATEMENTS | 35
================================================================================
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 Multi-Cap Core Funds Index over that period, even if the
class had overall negative returns during the performance period.
Under the investment advisory agreement with the Manager that took effect on
July 1, 2019, no performance adjustments will be made for the period beginning
July 1, 2019, through June 30, 2020. Only performance beginning as of July 1,
2019, and thereafter will be utilized in calculating future performance
adjustments.
For the period from August 1, 2018 to June 30, 2019, the Fund incurred
management fees, paid or payable to AMCO, of $10,066,000 which included no
performance adjustment for the Fund Shares, Institutional Shares and Adviser
Shares. For the period July 1, 2019 to July 31, 2019, the Fund incurred
management fees, paid or payable to Victory Capital of $956,000, which included
no performance adjustments.
SUBADVISORY ARRANGEMENT(S) - Effective July 1, 2019, Victory Capital terminated
an Investment Subadvisory Agreement with Barrow, Hanley, Mewhinney & Strauss,
LLC (BHMS). Prior to July 1, 2019, AMCO entered into an Investment Subadvisory
Agreement with BHMS, under which BHMS directed 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.
AMCO pays BHMS a subadvisory fee based on the aggregate net assets that BHMS
manages in the USAA Value Fund and the USAA Growth & Income Fund combined, in an
annual amount of 0.75% on the first $15 million of assets, 0.55% on assets over
$15 million and up to $25 million, 0.45% on assets over $25 million and up to
$100 million, 0.35% on assets
================================================================================
36 | USAA GROWTH & INCOME FUND
================================================================================
over $100 million and up to $200 million, 0.25% on assets over $200 million and
up to $1 billion, and 0.15% on assets over $1 billion. For the period from
August 1, 2018 to June 30, 2019, AMCO incurred subadvisory fees with respect to
the Fund, paid or payable to BHMS, of $1,361,000.
ADMINISTRATION AND SERVICING FEES - Effective July 1, 2019, Victory Capital is
obligated on a continuous basis to provide administrative services to the Fund.
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 period from August 1, 2018 to June 30, 2019, the
Fund Shares, Institutional Shares, and Adviser Shares incurred administration
and servicing fees, paid or payable to AMCO, of $2,289,000, $142,000, and
$14,000, respectively. For the period July 1, 2019 to July 31, 2019 the Fund
Shares, Institutional Shares and Adviser Shares incurred administration and
servicing fees by Victory Capital, paid or payable to Victory Capital of
$217,000, $14,000 and $1,000, respectively.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, AMCO also provided certain compliance and legal
services for the benefit of the Fund. The Board approved the reimbursement of a
portion of these expenses incurred by AMCO.
Effective July 1, 2019, these services are covered under a Compliance Services
Agreement between the Trust and Victory Capital. For the period from August 1,
2018 to June 30, 2019, the Fund reimbursed AMCO $6,000 for these compliance and
legal services. For the period July 1, 2019 to July 31, 2019, the Fund's portion
of fees paid to Victory Capital under the Compliance Service Agreement was
$1,000. These expenses are included in the professional fees on the Fund's
Statement of Operations.
EXPENSE LIMITATION - Effective July 1, 2019, the Manager has contractually
agreed to waive its management fee and/or reimburse expenses so that the total
annual operating expenses (excluding certain items such as interest, taxes and
brokerage commissions) do not exceed 0.88% of the Fund Shares, 0.84% of the
Institutional Shares and 1.15% of the Adviser Shares
================================================================================
NOTES TO FINANCIAL STATEMENTS | 37
================================================================================
through at least June 30, 2021. The Manager is permitted 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 limits in effect at the time of: (a) the original waiver or
expense reimbursement; or (b) the recoupment, after giving effect to the
recoupment amount. The amount of any waivers or reimbursements and the amount of
any recoupment is calculated without regard to the impact of any performance
adjustment to the Fund's management fee. This waiver agreement may only be
terminated by the Fund's Board of Trustees. Prior to July 1, 2019, AMCO agreed
to limit the total annual operating expenses of the Adviser Shares to 1.15% and
prior to December 1, 2018, AMCO has agreed to limit the total annual operating
expenses of Institutional Shares to 0.85%, of their average daily net assets,
excluding extraordinary expenses and before reductions of any expenses paid
indirectly, and to reimburse the Institutional Shares and Adviser Shares for all
expenses in excess of those amounts. For the period from August 1, 2018 to June
30, 2019, the Adviser Shares incurred reimbursable expenses from AMCO of $4,000.
For the period July 1, 2019 to July 31, 2019, the Adviser Shares incurred
reimbursable expenses of $4,000, of which $4,000 was receivable from the
Manager.
TRANSFER AGENT'S FEES - Victory Capital Transfer Agency, Inc., (VCTA) (formerly,
USAA Shareholder Account Services (SAS)) provides transfer agency services to
the Fund. VCTA, 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. VCTA 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 July 31, 2019, the Fund Shares, Institutional
Shares and Adviser Shares incurred transfer agent's fees, paid or payable to
VCTA, of $1,664,000, $156,000, and $1,000, respectively.
DISTRIBUTION AND SERVICE (12b-1) FEES - Effective July 1, 2019, the Trust has an
agreement with Victory Capital Advisers, Inc. (VCA), an affiliate of the
================================================================================
38 | USAA GROWTH & INCOME FUND
================================================================================
Manager for exclusive distribution of the Fund's shares on a continuing best
effort basis. Prior to July 1, 2019, the Fund 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. Prior to July 1, 2019,
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 period from August
1, 2018 to June 30, 2019, the Adviser Shares incurred distribution and service
(12b-1) fees, of $23,000. For the period July 1, 2019 to July 31, 2019, the
Adviser Shares incurred distribution and service (12b-1) fees, of $2,000.
UNDERWRITING SERVICES - Effective July 1, 2019, the Trust has an agreement with
Victory Capital Advisers, Inc. (VCA), an affiliate of the Manager for exclusive
underwriting and distribution of the Fund's shares on a continuing best effort
basis. This agreement provides that VCA receive no fee or other compensation for
such distribution services, but may receive 12b-1 fees with respect to Adviser
Shares. Prior to July 1, 2019, IMCO provided exclusive underwriting and
distribution of the Fund's shares on a continuing best-efforts basis and
received no fee or other compensation for these services, but may receive 12b-1
fees as described above, with respect to Adviser Shares.
(9) TRANSACTIONS WITH AFFILIATES
Effective July 1, 2019, Victory Capital replaced AMCO as the Fund's investment
adviser and began managing the Fund. Prior to July 1, 2019, AMCO was 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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 39
================================================================================
(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. The Manager has determined there is no significant
impact on the Fund's financial statements and various filings.
(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.
================================================================================
40 | USAA GROWTH & INCOME FUND
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 31,
------------------------------------------------------------------------------
2019 2018 2017 2016 2015
------------------------------------------------------------------------------
Net asset value at
beginning of period $ 26.19 $ 24.25 $ 20.39 $ 22.00 $ 22.63
------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .25 .19 .21 .15 .17
Net realized and
unrealized gain (loss) (.24) 3.03 3.94 (.51) 2.14
------------------------------------------------------------------------------
Total from investment
operations .01 3.22 4.15 (.36) 2.31
------------------------------------------------------------------------------
Less distributions from:
Net investment income (.24) (.18) (.22) (.14) (.18)
Realized capital gains (2.26) (1.10) (.07) (1.11) (2.76)
------------------------------------------------------------------------------
Total distributions (2.50) (1.28) (.29) (1.25) (2.94)
------------------------------------------------------------------------------
Net asset value at
end of period $ 23.70 $ 26.19 $ 24.25 $ 20.39 $ 22.00
==============================================================================
Total return (%)* .89 13.59 20.49 (1.49) 10.70
Net assets at
end of period (000) $1,673,033 $1,756,259 $1,605,220 $1,380,560 $1,583,353
Ratios to average
daily net assets:**
Expenses (%)(a) .88(b) .88 .91 .95 .93
Expenses, excluding
reimbursements (%)(a) .88 .88 .91 .95 .93
Net investment income (%) 1.04 .80 .89 .78 .66
Portfolio turnover (%) 93(c) 23 21 22 35
* 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 July 31, 2019, average daily net assets were
$1,670,652,000.
(a) Does not include acquired fund fees, if any.
(b) Effective July 1, 2019, the Manager had voluntarily agreed to limit the
annual expenses of the Fund Shares to 0.88% of the Fund Shares' average
daily net assets.
(c) Reflects increased tracking activity due to current year transition or asset
allocation shift.
================================================================================
FINANCIAL HIGHLIGHTS | 41
================================================================================
INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
PERIOD ENDED
YEAR ENDED JULY 31, JULY 31,
----------------------------------------------------------------------
2019 2018 2017 2016***
----------------------------------------------------------------------
Net asset value at
beginning of period $ 26.17 $ 24.23 $ 20.38 $ 22.10
-----------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .26 .20 .22 .16
Net realized and
unrealized gain (loss) (.24) 3.03 3.94 (.60)
-----------------------------------------------------------------
Total from investment
operations 0.02 3.23 4.16 (.44)
-----------------------------------------------------------------
Less distributions from:
Net investment income (.25) (.19) (.24) (.17)
Realized capital gains (2.26) (1.10) (.07) (1.11)
-----------------------------------------------------------------
Total distributions (2.51) (1.29) (.31) (1.28)
-----------------------------------------------------------------
Net asset value at
end of period $ 23.68 $ 26.17 $ 24.23 $ 20.38
=================================================================
Total return (%)* .94 13.66 20.54 (1.87)
Net assets at
end of period (000) $165,137 $159,148 $139,866 $117,512
Ratios to average
daily net assets:**
Expenses (%)(a) .83(b),(e) .84 .85 .85(c)
Expenses, excluding
reimbursements (%)(a) .83 .84 .85 .87(c)
Net investment income (%) 1.09 .85 .95 .83(c)
Portfolio turnover (%) 93(d) 23 21 22
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the year ended July 31, 2019, average daily net assets were
$156,191,000.
*** Institutional Shares commenced operations on August 7, 2015.
(a) Does not include acquired fund fees, if any.
(b) Prior to December 1, 2018, AMCO has voluntarily agreed to limit the annual
expenses of the Institutional Shares to 0.85% of the Institutional Shares'
average daily net assets.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) Reflects increased tracking activity due to current year transition or asset
allocation shift.
(e) Effective July 1, 2019, the Manager had voluntarily agreed to limit the
annual expenses of the Institutional Shares to 0.84% of the Institutional
Shares' average daily net assets.
================================================================================
42 | USAA GROWTH & INCOME FUND
================================================================================
ADVISER SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 31,
--------------------------------------------------------------------------
2019 2018 2017 2016 2015
--------------------------------------------------------------------------
Net asset value at
beginning of period $26.10 $ 24.17 $20.32 $21.93 $22.56
--------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .19 .12 .15 .10 .10
Net realized and
unrealized gain (loss) (.25) 3.02 3.91 (.50) 2.14
--------------------------------------------------------------------------
Total from investment
operations (.06) 3.14 4.06 (.40) 2.24
--------------------------------------------------------------------------
Less distributions from:
Net investment income (.17) (.11) (.14) (.10) (.11)
Realized capital gains (2.26) (1.10) (.07) (1.11) (2.76)
--------------------------------------------------------------------------
Total distributions (2.43) (1.21) (.21) (1.21) (2.87)
--------------------------------------------------------------------------
Net asset value at
end of period $23.61 $ 26.10 $24.17 $20.32 $21.93
==========================================================================
Total return (%)* .62 13.28 20.10 (1.72) 10.40
Net assets at
end of period (000) $9,912 $10,858 $9,987 $8,332 $9,098
Ratios to average
daily net assets:**
Expenses (%)(a) 1.15(e) 1.17(b) 1.20 1.20 1.22(c)
Expenses, excluding
reimbursements (%)(a) 1.23 1.20 1.24 1.28 1.27
Net investment income (%) .77 .52 .60 .53 .37
Portfolio turnover (%) 93(d) 23 21 22 35
* 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 July 31, 2019, average daily net assets were $9,974,000.
(a) Does not include acquired fund fees, if any.
(b) Prior to December 1, 2017, AMCO has voluntarily agreed to limit the annual
expenses of the Adviser Shares to 1.20% of the Adviser Shares' average daily
net assets.
(c) Prior to December 1, 2014, AMCO had voluntarily agreed to limit the annual
expenses of the Adviser Shares to 1.30% of the Adviser Shares' average daily
net assets.
(d) Reflects increased tracking activity due to current year transition or asset
allocation shift.
(e) Effective July 1, 2019, the Manager had voluntarily agreed to limit the
annual expenses of the Adviser Shares to 1.15% of the Adviser Shares'
average daily net assets.
================================================================================
FINANCIAL HIGHLIGHTS | 43
================================================================================
EXPENSE EXAMPLE
July 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 February 1, 2019, through
July 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
================================================================================
44 | USAA GROWTH & INCOME FUND
================================================================================
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 FEBRUARY 1, 2019 -
FEBRUARY 1, 2019 JULY 31, 2019 JULY 31, 2019
----------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,055.20 $4.48
Hypothetical
(5% return before expenses) 1,000.00 1,020.43 4.41
INSTITUTIONAL SHARES
Actual 1,000.00 1,055.50 4.23
Hypothetical
(5% return before expenses) 1,000.00 1,020.68 4.16
ADVISER SHARES
Actual 1,000.00 1,053.60 5.86
Hypothetical
(5% return before expenses) 1,000.00 1,019.09 5.76
*Expenses are equal to the annualized expense ratio of 0.88% for Fund Shares,
0.83% for Institutional Shares, and 1.15% for Adviser Shares, which are net of
any reimbursements and expenses paid indirectly, multiplied by the average
account value over the period, multiplied by 181 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 5.52% for Fund Shares, 5.55% for Institutional Shares,
and 5.36% for Adviser Shares for the six-month period of February 1, 2019,
through July 31, 2019.
================================================================================
EXPENSE EXAMPLE | 45
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
July 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.
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with
================================================================================
46 | USAA GROWTH & INCOME FUND
================================================================================
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 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
================================================================================
ADVISORY AGREEMENT(S) | 47
================================================================================
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.
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
================================================================================
48 | USAA GROWTH & INCOME FUND
================================================================================
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). For at
least two years after the Transaction closes, Victory Capital has agreed
to waive fees and/or reimburse expenses so that each Fund's annual expense
ratio (excluding certain customary items) does not exceed the levels
reflected in each Fund's most recent audited financial statements at the
time the Transaction closes (or the levels of AMCO's then-current expense
caps, if applicable), excluding the impact of any performance adjustment
to the Fund's advisory fee.
================================================================================
ADVISORY AGREEMENT(S) | 49
================================================================================
o The portfolio managers at AMCO that manage the Fixed Income Funds(1)
as well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are expected
to continue to do so Post-Transaction as employees of Victory Capital, if
they choose to become employees of Victory Capital. Post-Transaction, the
investment teams for the Funds, other than the Fixed Income Funds, will be
replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended Market
Index Fund, and USAA Nasdaq-100 Index Fund, which will be advised by
Victory Capital through its Victory Solutions platform, Victory Capital
proposes that the same subadvisers be retained Post-Transaction, although
Victory Capital may change the allocation to a particular subadviser
Post-Transaction. No changes are expected to the portfolio managers of the
subadvisers who will serve as subadvisers Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities for
the Funds to grow assets and lower fees and expenses through increased
economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to transition
and integrate AMCO's and USAA Transfer Agent's businesses to Victory
Capital. Victory Capital and USAA expect to
(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.
================================================================================
50 | USAA GROWTH & INCOME FUND
================================================================================
enter into a transition services agreement under which USAA will
continue to provide Victory Capital with certain services that are
currently provided by USAA to AMCO and the USAA Transfer Agent for a
specified period of time after the closing of the Transaction to assist
Victory Capital in transitioning the USAA member distribution channel and
member support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile Association,"
and the USAA Logo in connection with their asset management and transfer
agency businesses for a period of three years following the closing of the
Transaction, which agreement may thereafter be extended for an additional
year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital is capable of providing
the same level of investment management services
================================================================================
ADVISORY AGREEMENT(S) | 51
================================================================================
currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund, Growth
& Income Fund, Income Stock Fund, Global Equity Income Fund, and Precious
Metals and Minerals Fund.
================================================================================
52 | USAA GROWTH & INCOME FUND
================================================================================
The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored
================================================================================
ADVISORY AGREEMENT(S) | 53
================================================================================
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 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
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54 | USAA GROWTH & INCOME FUND
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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.
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
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ADVISORY AGREEMENT(S) | 55
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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.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
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56 | USAA GROWTH & INCOME FUND
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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) | 57
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND AMCO)
July 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.
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 AMCO and the
Subadvisory Agreement between AMCO and Barrow, Hanley, Mewhinney & Strauss 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
AMCO 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
(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"). Effective July 1, 2019, upon the closing of the
transaction whereby AMCO acquired by Victory Capital Holdings, Inc., the
parent company of Victory Capital, the Advisory Agreement between the Trust
and AMCO and the Sub-advisory Agreement with the Subadviser terminated and
the new investment advisory agreement between the Trust and Victory Capital
went into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are discussed above.
Effective June 30, 2019, the Subadviser no longer manages any portion of the
Fund.
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58 | USAA GROWTH & INCOME FUND
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rendered to the Fund, as well as information regarding AMCO's revenues and costs
of providing services to the Fund and compensation paid to affiliates of AMCO;
and (iii) information about AMCO'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 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 AMCO 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 AMCO and by the Subadviser. At the
meeting at which the renewal of the Advisory Agreement and Subadvisory Agreement
are considered, particular focus is given to information concerning Fund
performance, fees and total expenses as compared to comparable investment
companies, and AMCO's profitability with respect to the Fund. However, the Board
noted that the evaluation process with respect to AMCO 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 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
================================================================================
ADVISORY AGREEMENT(S) | 59
================================================================================
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 AMCO under the Advisory Agreement, the Board
reviewed information provided by AMCO relating to its operations and personnel.
The Board also took into account its knowledge of AMCO's management and the
quality of the performance of AMCO's duties through Board meetings, discussions,
and reports during the preceding year. The Board considered the fees paid to
AMCO and the services provided to the Fund by AMCO under the Advisory Agreement,
as well as other services provided by AMCO and its affiliates under other
agreements, and the personnel who provide these services. In addition to the
investment advisory services provided to the Fund, AMCO 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 AMCO in
connection with the services provided to the Fund including ongoing risks
including investment, operational, enterprise, litigation, regulatory and
compliance risks. The Board considered the level and depth of knowledge of AMCO,
including the professional experience and qualifications of its senior and
investment personnel, as well as current staffing levels. The Board discussed
AMCO's effectiveness in monitoring the performance of the Subadviser and AMCO's
timeliness in responding to performance issues. The allocation of the Fund's
brokerage, including AMCO's process for monitoring "best execution" and the
utilization of "soft dollars," also was considered. AMCO's role in coordinating
the activities of the Fund's other service providers also was considered. The
Board also considered AMCO's risk management processes. The Board considered
AMCO'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 AMCO and its affiliates in managing the
Fund, as well as other funds in the Trust.
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60 | USAA GROWTH & INCOME FUND
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The Board also reviewed the compliance and administrative services provided to
the Fund by AMCO and its affiliates, including AMCO's oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust,
also focused on the quality of AMCO'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
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 expense universe. The Board took into account the various
services provided to the Fund by AMCO and its affiliates, including the high
quality of services received by the Fund from AMCO. The Board also noted the
level and method of computing the management fee, including any performance
adjustment to such fee. The Trustees also took into account that the subadvisory
fees under the Subadvisory Agreement are paid by AMCO. The Board also considered
and discussed information about the Subadviser's fees, including the amount of
management fees retained by AMCO after payment of the subadvisory fees. 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
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ADVISORY AGREEMENT(S) | 61
================================================================================
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-year period ended December 31, 2018, was above
the average of its performance universe and below its Lipper index for the
three-year period ended December 31, 2018, was above the average of its
performance universe and its Lipper index for the five-year period ended
December 31, 2018, and was above the average of its performance universe and
below 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
bottom 50% of its performance universe for the one-year period ended December
31, 2018, and was in the top 50% of its performance universe for the 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 management fee. The information considered by the Board
included operating profit margin information for AMCO'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 AMCO
pays the Fund's subadvisory fees. The Trustees reviewed the profitability of
AMCO'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 AMCO, the Board also considered the fact that AMCO 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 AMCO from its relationship with the Trust,
including that AMCO may derive reputational and other benefits from its
association
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62 | USAA GROWTH & INCOME FUND
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with the Fund. The Trustees recognized that AMCO should be entitled to earn a
reasonable level of profits in exchange for the level of services it provides to
the Fund and the entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussion of
the current advisory fee structure. The Board also 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 also noted
that AMCO pays the subadvisory fees. 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 AMCO, among others: (i) AMCO has demonstrated that it
possesses the capability and resources to perform the duties required of it
under the Advisory Agreement; (ii) AMCO 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 AMCO; and (v) AMCO's 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 AMCO
and the type of fund. Based on its conclusions, the Board determined that the
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 personnel
providing services; (ii) the Subadviser's compensation and any
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ADVISORY AGREEMENT(S) | 63
================================================================================
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 AMCO's monitoring processes of the Subadviser include: (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 AMCO. The Trustees also relied on the ability of AMCO to negotiate
the Subadvisory Agreement and the fees thereunder at arm's length. For the above
reasons, the Board determined that the profitability of the Subadviser from its
relationship with the Fund was
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64 | USAA GROWTH & INCOME FUND
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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 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 AMCO and
that, in turn, AMCO pays subadvisory fees to the Subadviser. As noted
previously, 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 AMCO's experience and resources in monitoring the performance,
investment style, and risk- adjusted performance of the Subadviser. The Board
was mindful of AMCO's focus on the Subadviser's performance and the explanations
of management regarding the factors that contributed to the performance of the
Fund. The Board also noted the Subadviser's 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 objectives and policies;
(ii) the Subadviser maintains an appropriate compliance program; the overall
performance of the Fund is reasonable in relation to the performance of funds
with similar investment objectives and to relevant indices; and the Fund's
advisory expenses are reasonable in relation to those of similar funds and to
the services to be provided by AMCO 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) | 65
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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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66 | USAA GROWTH & INCOME 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 of 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), (08/11-06/19); Director of USAA Investment
Management Company (IMCO) (09/09-present); Chairman of Board of IMCO
(4/13-present); President and Director of USAA Shareholder Account Services
(SAS) (10/09-06/19); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director and Vice Chairman of FPS
(12/13-present); President and Director of USAA Investment Corporation (ICORP)
(03/10-present); Chairman of Board of ICORP (12/31-present); Director of USAA
Financial Advisors, Inc. (FAI) (12/13-present); Chairman of Board of FAI
(3/15-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 | 67
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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
--------------------------------------------------------------------------------
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
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68 | USAA GROWTH & INCOME FUND
================================================================================
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.
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.
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
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 69
================================================================================
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 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.
================================================================================
70 | USAA GROWTH & INCOME FUND
================================================================================
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 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.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 71
================================================================================
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 was 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.
================================================================================
72 | USAA GROWTH & INCOME 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).
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Executive Director, Victory Capital Management Inc. (7/1/19-present); Treasurer,
USAA ETF Trust (09/18-06/19); Executive Director, Investment and Financial
Administration, USAA (04/12-06/30/19); Assistant Treasurer,
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 73
================================================================================
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
Director, Accounting and Finance, Victory Capital Management Inc.
(7/1/19-present); Assistant Treasurer, USAA ETF Trust (09/18-06/19);
Accounting/Financial Director, USAA (12/13-06/30/19).
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).
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).
================================================================================
74 | USAA GROWTH & INCOME FUND
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Richard Y. Newton III
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
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 111 West Houston St., Suite 1901
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
Copies of the Victory Capital Management Inc.'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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23431-0919
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----------------------
MUTUAL FUNDS
--------------------------------------------------------------------------------
JULY 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA High Income Fund
FUND INSTITUTIONAL ADVISER R6
SHARES SHARES SHARES SHARES
USHYX UIHIX UHYOX URHIX
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
". . . NOW MAY BE AN OPPORTUNE TIME FOR
INVESTORS TO ENSURE THAT THEIR PORTFOLIOS ARE WELL [PHOTO OF BROOKS ENGLEHARDT]
DIVERSIFIED AND THAT THEIR OVERALL ALLOCATION IS
APPROPRIATE FOR THEIR PARTICULAR RISK APPETITE."
--------------------------------------------------------------------------------
SEPTEMBER 2019
Although the bull market in equities has continued running, it was not without a
few missteps. Trade turmoil, questions surrounding global economic growth,
changing monetary policy, and geopolitical disputes have all led to increased
volatility. But through it all, domestic stocks, as measured by the S&P 500 (R)
Index, still managed an annual return of approximately 8% for the 12-month
period ended July 31, 2019.
Given the sometimes dire news flow and ample cross-currents, it's no surprise
that volatility returned to the market. On one hand, the U.S. economy continues
to look good. The unprecedented streak of job creation has continued
uninterrupted, and unemployment is bouncing along historic lows at 3.7%. The
consumer remains resilient and inflation is tepid. On the flip side, however,
U.S. trade policy seems to be evolving, with new tariffs threatened and
implemented. The markets generally dislike this type of trade turmoil and
uncertainty, and the ongoing tensions between the United States and China (and
other trading partners) threaten to upend global supply chains and hinder
economic growth.
It's not just the stock market that has been dealing with volatility. The bond
market also has experienced volatility, due largely to the U.S. Federal
Reserve's (the "Fed") famous "pivot" in late 2018. Against the backdrop of
rapidly falling equities in the fourth quarter of 2018, the Fed signaled that
its next policy move would be to lower--not increase--short-term interest rates.
This immediately altered the yield environment.
Meanwhile, the U.S. Treasury yield curve continued to flatten and, in fact,
inverted--whereby shorter-term yields became higher than longer-term
================================================================================
================================================================================
yields. Such a yield-curve inversion is a worrying sign as it sometimes, but not
always, portends to a recession.
Although we are not predicting a recession, we must acknowledge that risks have
increased for an economic slowdown. Given that the current run in stocks is more
than a decade old, it's important for investors to keep perspective that the
bull market cannot continue forever. Therefore, now may be an opportune time for
investors to ensure that their portfolios are well diversified and that their
overall allocation is appropriate for their particular risk appetite.
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,
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. On the following pages, you will find information
relating to your USAA Investments, which is now a Victory Capital Investment
Franchise. If you have any questions about your investments, we encourage you to
engage your financial advisor or else contact us directly at 800-235-8396 or
visit usaa.com.
My colleagues and I sincerely appreciate the confidence you have placed in us,
and we value the opportunity to help you meet your investment goals.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGERS' COMMENTARY ON THE FUND 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 36
Financial Statements 42
Notes to Financial Statements 46
Financial Highlights 66
EXPENSE EXAMPLE 70
ADVISORY AGREEMENT(S) 73
TRUSTEES' AND OFFICERS' INFORMATION 91
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
VICTORY CAPITAL MANAGEMENT INC. IT MAY BE USED AS SALES LITERATURE ONLY WHEN
PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS, WHICH PROVIDES FURTHER DETAILS
ABOUT THE FUND.
IRA DISTRIBUTION WITHHOLDING DISCLOSURE
We generally must withhold federal income tax at a rate of 10% of the taxable
portion of your distribution and, if you live in a state that requires state
income tax withholding, at your state's set rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 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
USAA Investments, A Victory Capital Investment Franchise
JULIANNE BASS, CFA R. NEAL GRAVES, CFA, CPA
KURT DAUM, JD JOHN SPEAR, CFA
JAMES F. JACKSON Jr., CFA
--------------------------------------------------------------------------------
o WHAT WERE MARKET CONDITIONS DURING THE 12-MONTH REPORTING PERIOD ENDED JULY
31, 2019?
High-yield corporate bonds earned a positive return during the reporting
period, as investors favored them for the added interest income they earn.
When the reporting period began in August 2018, high-yield securities posted
gains, supported by tighter credit spreads. Interest rates rose during the
first three months of the reporting period, hurting longer-duration
securities, as investors anticipated continued short-term interest rate
increases by the U.S. Federal Reserve (the "Fed"). These expectations
changed during the fourth quarter amid worries about a potential trade war
between the United States and China, uncertainty related to the United
Kingdom's exit from the European Union, slowing global economic growth, a
stronger U.S. dollar, and the likelihood of a U.S. government shutdown.
High-yield credit spreads widened, driven by stock market volatility and a
sharp drop in crude oil prices. Meanwhile, the market appeared concerned
that the Fed might be raising short-term interest rates too quickly.
Interest rates on maturities of six months and longer began to trend
downward, pushing bond prices higher. In December 2018, the Fed hiked
short-term interest rates but adopted a more dovish tone.
In the first quarter of 2019, high-yield bond prices rebounded, as spreads
narrowed and interest rates fell. The spread tightening was fueled by a
strong rally in U.S. stocks, as concerns about U.S.-China
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
trade issues eased, crude oil prices increased, and corporate earnings came
in stronger than expected. Fed officials left rates unchanged at their March
policy meeting and said they would stop their balance sheet runoff earlier
than expected. (Since October 2017, the Fed has been trimming its balance
sheet by gradually decreasing the reinvestment of maturing holdings of U.S.
Treasury and government-sponsored mortgage-backed securities.) These
actions, along with the Fed's softer language about the U.S. economy,
generally sent interest rates lower, with the market anticipating zero Fed
interest rate increases in the 2019 calendar year.
In the second quarter and through the end of the reporting period, high-
yield bonds produced gains, benefiting from tighter credit spreads driven by
better-than-expected corporate earnings, subdued inflation, and supportive
Fed monetary policy. In June 2019, the Fed remained on hold but said a
interest rate cut was possible if the economic outlook weakened. The bond
market responded by pricing in an interest rate cut as soon as July. On July
31, 2019, the Fed cut short-term interest rates and said it would end its
balance sheet reduction on August 1, 2019, two months earlier than
previously announced.
During the reporting period, U.S. Treasury yields fell along the curve,
except those on one-month and three-month maturities, which ended the period
higher than they began. Expectations about Fed monetary policy also led to
an inversion in the very short end of the curve, with the 10-year U.S.
Treasury yield falling below the one-month U.S. Treasury yield. The
inversion occurred as the U.S. entered its tenth year of recovery from the
financial crisis, with ongoing economic growth and strong employment levels.
High-yield credit spreads widened for the reporting period as a whole.
Credit spreads based on the Bloomberg Barclays U.S. High Yield 2% Issuer
Capped Bond Index began the period at 336 basis points and ended the
reporting period at 371 basis points. (A basis point is 1/100th of a
percentage point.)
================================================================================
2 | USAA HIGH INCOME FUND
================================================================================
O BLOOMBERG BARCLAYS 2% ISSUER CAPPED U.S. CORPORATE HIGH YIELD INDEX O
Average Option Adjusted Spread
[CHART OF BLOOMBERG BARCLAYS 2% ISSUER CAPPED U.S. CORPORATE HIGH YIELD INDEX]
AVERAGE OPTION
DATE ADJUSTED SPREAD
7/31/2018 3.36
8/1/2018 3.33
8/2/2018 3.33
8/3/2018 3.34
8/6/2018 3.33
8/7/2018 3.26
8/8/2018 3.25
8/9/2018 3.28
8/10/2018 3.37
8/13/2018 3.2
8/14/2018 3.39
8/15/2018 3.47
8/16/2018 3.42
8/17/2018 3.41
8/20/2018 3.44
8/21/2018 3.4
8/22/2018 3.38
8/23/2018 3.38
8/24/2018 3.36
8/27/2018 3.33
8/28/2018 3.31
8/29/2018 3.31
8/30/2018 3.35
8/31/2018 3.38
9/3/2018 3.38
9/4/2018 3.35
9/5/2018 3.39
9/6/2018 3.41
9/7/2018 3.36
9/10/2018 3.35
9/11/2018 3.3
9/12/2018 3.28
9/13/2018 3.24
9/14/2018 3.2
9/17/2018 3.18
9/18/2018 3.15
9/19/2018 3.15
9/20/2018 3.16
9/21/2018 3.17
9/24/2018 3.18
9/25/2018 3.17
9/26/2018 3.18
9/27/2018 3.18
9/28/2018 3.16
10/1/2018 3.09
10/2/2018 3.1
10/3/2018 3.03
10/4/2018 3.16
10/5/2018 3.2
10/9/2018 3.31
10/10/2018 3.41
10/11/2018 3.48
10/12/2018 3.45
10/15/2018 3.41
10/16/2018 3.36
10/17/2018 3.36
10/18/2018 3.44
10/19/2018 3.43
10/22/2018 3.44
10/23/2018 3.57
10/24/2018 3.61
10/25/2018 3.64
10/26/2018 3.78
10/29/2018 3.77
10/30/2018 3.8
10/31/2018 3.72
11/1/2018 3.72
11/2/2018 3.63
11/5/2018 3.63
11/6/2018 3.6
11/7/2018 3.5
11/8/2018 3.47
11/9/2018 3.61
11/13/2018 3.79
11/14/2018 3.92
11/15/2018 4.04
11/16/2018 4.12
11/19/2018 4.18
11/20/2018 4.25
11/21/2018 4.19
11/23/2018 4.26
11/26/2018 4.22
11/27/2018 4.26
11/28/2018 4.2
11/29/2018 4.19
11/30/2018 4.18
12/3/2018 4.09
12/4/2018 4.19
12/6/2018 4.4
12/7/2018 4.4
12/10/2018 4.46
12/11/2018 4.39
12/12/2018 4.31
12/13/2018 4.3
12/14/2018 4.37
12/17/2018 4.47
12/18/2018 4.64
12/19/2018 4.75
12/20/2018 5.08
12/21/2018 5.14
12/24/2018 5.3
12/26/2018 5.3
12/27/2018 5.31
12/28/2018 5.23
12/31/2018 5.26
1/2/2019 5.27
1/3/2019 5.37
1/4/2019 4.99
1/7/2019 4.73
1/8/2019 4.57
1/9/2019 4.46
1/10/2019 4.45
1/11/2019 4.45
1/14/2019 4.52
1/15/2019 4.46
1/16/2019 4.36
1/17/2019 4.33
1/18/2019 4.22
1/22/2019 4.33
1/23/2019 4.34
1/24/2019 4.4
1/25/2019 4.29
1/28/2019 4.33
1/29/2019 4.34
1/30/2019 4.3
1/31/2019 4.23
2/1/2019 4.16
2/4/2019 4.11
2/5/2019 4.02
2/6/2019 4
2/7/2019 4.16
2/8/2019 4.22
2/11/2019 4.15
2/12/2019 4.05
2/13/2019 4.02
2/14/2019 4.07
2/15/2019 4.02
2/19/2019 4.01
2/20/2019 3.98
2/21/2019 3.94
2/22/2019 3.95
2/25/2019 3.88
2/26/2019 3.87
2/27/2019 3.83
2/28/2019 3.79
3/1/2019 3.76
3/4/2019 3.78
3/5/2019 3.81
3/6/2019 3.86
3/7/2019 3.96
3/8/2019 4.04
3/11/2019 3.99
3/12/2019 3.96
3/13/2019 3.88
3/14/2019 3.86
3/15/2019 3.88
3/18/2019 3.84
3/19/2019 3.82
3/20/2019 3.86
3/21/2019 3.8
3/22/2019 3.94
3/25/2019 4.02
3/26/2019 4.01
3/27/2019 4.02
3/28/2019 4.02
3/29/2019 3.91
4/1/2019 3.76
4/2/2019 3.77
4/3/2019 3.73
4/4/2019 3.72
4/5/2019 3.68
4/8/2019 3.66
4/9/2019 3.67
4/10/2019 3.66
4/11/2019 3.58
4/12/2019 3.49
4/15/2019 3.5
4/16/2019 3.46
4/17/2019 3.49
4/18/2019 3.54
4/22/2019 3.54
4/23/2019 3.54
4/24/2019 3.55
4/25/2019 3.56
4/26/2019 3.59
4/29/2019 3.56
4/30/2019 3.58
5/1/2019 3.53
5/2/2019 3.55
5/3/2019 3.54
5/6/2019 3.59
5/7/2019 3.68
5/8/2019 3.67
5/9/2019 3.78
5/10/2019 3.82
5/13/2019 3.99
5/14/2019 3.96
5/15/2019 4.01
5/16/2019 3.92
5/17/2019 3.93
5/20/2019 3.89
5/21/2019 3.85
5/22/2019 3.88
5/23/2019 3.98
5/24/2019 3.93
5/28/2019 4
5/29/2019 4.14
5/30/2019 4.12
5/31/2019 4.33
6/3/2019 4.43
6/4/2019 4.28
6/5/2019 4.24
6/6/2019 4.2
6/7/2019 4.07
6/10/2019 3.93
6/11/2019 3.89
6/12/2019 3.96
6/13/2019 3.95
6/14/2019 3.95
6/17/2019 3.92
6/18/2019 3.87
6/19/2019 3.84
6/20/2019 3.54
6/21/2019 3.61
6/24/2019 3.62
6/25/2019 3.78
6/26/2019 3.74
6/27/2019 3.81
6/28/2019 3.77
7/1/2019 3.67
7/2/2019 3.76
7/3/2019 3.71
7/5/2019 3.66
7/8/2019 3.68
7/9/2019 3.74
7/10/2019 3.72
7/11/2019 3.73
7/12/2019 3.71
7/15/2019 3.71
7/16/2019 3.71
7/17/2019 3.77
7/18/2019 3.86
7/19/2019 3.84
7/22/2019 3.79
7/23/2019 3.75
7/24/2019 3.72
7/25/2019 3.67
7/26/2019 3.64
7/29/2019 3.67
7/30/2019 3.71
7/31/2019 3.71
[END CHART]
In this environment, high-yield bonds underperformed both the S&P 500(R) Index
and 10-year U.S. Treasury securities--a departure from their historical
performance. Historically, high-yield securities tend to perform between stocks
and high-quality bonds, generally with less volatility, which can potentially
provide long-term investors with a significant diversification advantage. During
the reporting period, the S&P 500(R) Index produced a return of more than 8%,
while the prices of intermediate-term U.S. Treasuries rose by double digits.
High-yield bond default expectations remained well below historical averages at
the end of the reporting period. According to Fitch Ratings, the trailing
12-month U.S. high-yield default rate was 1.9% on July 31, 2019. The ratings
agency also forecast an increase in energy sector defaults in the near term, led
by exploration and production companies and oilfield services firms that were
hurt by the 2014-2016 drop in crude oil prices.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
o ONE-YEAR COMPARATIVE RETURNS o
[CHART OF ONE-YEAR COMPARATIVE RETURNS]
CITI U.S.
TREASURY S&P 500 USAA HIGH
10-YEAR INDEX INDEX INCOME FUND
7/31/2018 0.00 0.00 0.00
8/1/2018 -0.34 -0.10 0.00
8/2/2018 -0.19 0.40 0.00
8/3/2018 0.12 0.88 0.12
8/6/2018 0.27 1.25 0.25
8/7/2018 -0.04 1.53 0.37
8/8/2018 0.00 1.51 0.37
8/9/2018 0.24 1.39 0.37
8/10/2018 0.91 0.70 0.25
8/13/2018 0.76 0.30 0.12
8/14/2018 0.61 0.95 0.12
8/15/2018 0.99 0.20 0.00
8/16/2018 0.81 1.02 0.12
8/17/2018 0.82 1.36 0.12
8/20/2018 1.26 1.61 0.25
8/21/2018 1.09 1.83 0.37
8/22/2018 1.27 1.79 0.37
8/23/2018 1.32 1.62 0.37
8/24/2018 1.26 2.26 0.50
8/6/2018 0.27 1.25 0.25
8/7/2018 -0.04 1.53 0.37
8/8/2018 0.00 1.51 0.37
8/9/2018 0.24 1.39 0.37
8/10/2018 0.91 0.70 0.25
8/13/2018 0.76 0.30 0.12
8/14/2018 0.61 0.95 0.12
8/15/2018 0.99 0.20 0.00
8/16/2018 0.81 1.02 0.12
8/17/2018 0.82 1.36 0.12
8/20/2018 1.26 1.61 0.25
8/21/2018 1.09 1.83 0.37
8/22/2018 1.27 1.79 0.37
8/23/2018 1.32 1.62 0.37
8/24/2018 1.26 2.26 0.50
8/27/2018 1.11 3.05 0.50
8/28/2018 0.81 3.08 0.50
8/29/2018 0.84 3.68 0.52
8/30/2018 1.04 3.23 0.52
8/31/2018 1.11 3.26 0.52
9/3/2018 1.13 3.26 0.52
9/4/2018 0.70 3.10 0.39
9/5/2018 0.71 2.81 0.39
9/6/2018 0.94 2.46 0.39
9/7/2018 0.38 2.25 0.26
9/10/2018 0.45 2.44 0.26
9/11/2018 0.10 2.83 0.39
9/12/2018 0.24 2.87 0.52
9/13/2018 0.25 3.44 0.64
9/14/2018 -0.01 3.48 0.64
9/17/2018 -0.05 2.91 0.64
9/18/2018 -0.42 3.46 0.77
9/19/2018 -0.72 3.59 0.64
9/20/2018 -0.65 4.41 0.77
9/21/2018 -0.57 4.37 0.89
9/24/2018 -0.62 4.01 0.77
9/25/2018 -0.82 3.88 0.77
9/26/2018 -0.48 3.54 0.81
9/27/2018 -0.41 3.84 0.94
9/28/2018 -0.39 3.85 0.94
10/1/2018 -0.59 4.22 1.07
10/2/2018 -0.39 4.19 1.19
10/3/2018 -1.24 4.26 1.19
10/4/2018 -1.53 3.43 0.69
10/5/2018 -1.78 2.86 0.56
10/8/2018 -1.76 2.82 0.56
10/9/2018 -1.61 2.71 0.44
10/10/2018 -1.72 -0.67 0.06
10/11/2018 -0.94 -2.71 -0.07
10/12/2018 -1.00 -1.32 0.06
10/15/2018 -1.16 -1.90 0.18
10/16/2018 -1.09 0.21 0.31
10/17/2018 -1.29 0.19 0.31
10/18/2018 -1.25 -1.24 0.06
10/19/2018 -1.45 -1.27 -0.07
10/22/2018 -1.38 -1.70 -0.07
10/23/2018 -1.13 -2.30 -0.45
10/24/2018 -0.78 -5.25 -0.45
10/25/2018 -0.87 -3.49 -0.57
10/26/2018 -0.35 -5.16 -0.82
10/29/2018 -0.41 -5.78 -0.78
10/30/2018 -0.59 -4.29 -1.04
10/31/2018 -0.99 -3.25 -0.91
11/1/2018 -0.86 -2.23 -0.78
11/2/2018 -1.45 -2.84 -0.66
11/5/2018 -1.31 -2.29 -0.66
11/6/2018 -1.40 -1.67 -0.53
11/7/2018 -1.42 0.42 -0.28
11/8/2018 -1.55 0.22 -0.28
11/9/2018 -1.21 -0.69 -0.66
11/12/2018 -1.19 -2.64 -0.66
11/13/2018 -0.83 -2.79 -1.16
11/14/2018 -0.61 -3.50 -1.42
11/15/2018 -0.59 -2.44 -1.80
11/16/2018 -0.22 -2.22 -1.80
11/19/2018 -0.05 -3.84 -2.05
11/20/2018 0.02 -5.58 -2.43
11/21/2018 -0.07 -5.29 -2.18
11/22/2018 -0.06 -5.29 -2.18
11/23/2018 0.01 -5.90 -2.30
11/26/2018 -0.11 -4.43 -2.18
11/27/2018 0.02 -4.12 -2.43
11/28/2018 0.13 -1.91 -2.07
11/29/2018 0.23 -2.10 -1.95
11/30/2018 0.43 -1.28 -1.95
12/3/2018 0.64 -0.20 -1.57
12/4/2018 1.24 -3.43 -1.82
12/5/2018 1.24 -3.43 -1.82
12/6/2018 1.66 -3.54 -2.46
12/7/2018 1.88 -5.78 -2.46
12/10/2018 1.86 -5.61 -2.71
12/11/2018 1.65 -5.64 -2.58
12/12/2018 1.44 -5.13 -2.33
12/13/2018 1.41 -5.13 -2.46
12/14/2018 1.60 -6.93 -2.59
12/17/2018 1.91 -8.86 -2.98
12/18/2018 2.22 -8.84 -3.36
12/19/2018 2.62 -10.24 -3.62
12/20/2018 2.52 -11.65 -4.64
12/21/2018 2.50 -13.47 -5.03
12/24/2018 2.87 -15.81 -5.28
12/26/2018 2.50 -11.63 -5.28
12/27/2018 2.97 -10.87 -5.16
12/28/2018 3.03 -10.97 -4.77
12/31/2018 3.45 -10.20 -4.64
1/2/2019 3.74 -10.08 -4.52
1/3/2019 4.69 -12.29 -4.39
1/4/2019 3.77 -9.28 -3.36
1/7/2019 3.59 -8.64 -2.72
1/8/2019 3.31 -7.75 -2.21
1/9/2019 3.21 -7.34 -1.82
1/10/2019 3.18 -6.93 -1.82
1/11/2019 3.47 -6.94 -1.70
1/14/2019 3.40 -7.42 -1.82
1/15/2019 3.43 -6.42 -1.70
1/16/2019 3.25 -6.21 -1.31
1/17/2019 3.10 -5.49 -1.31
1/18/2019 2.80 -4.24 -0.80
1/21/2019 2.83 -4.24 -0.80
1/22/2019 3.27 -5.59 -1.06
1/23/2019 3.08 -5.39 -1.06
1/24/2019 3.46 -5.25 -1.18
1/25/2019 3.13 -4.45 -0.93
1/28/2019 3.23 -5.20 -1.18
1/29/2019 3.50 -5.33 -1.04
1/30/2019 3.65 -3.85 -0.78
1/31/2019 4.19 -3.00 -0.27
2/1/2019 3.70 -2.90 -0.14
2/4/2019 3.44 -2.24 -0.01
2/5/2019 3.62 -1.78 0.37
2/6/2019 3.66 -1.99 0.37
2/7/2019 4.09 -2.89 -0.01
2/8/2019 4.27 -2.80 -0.01
2/11/2019 4.03 -2.73 -0.01
2/12/2019 3.84 -1.46 0.37
2/13/2019 3.66 -1.16 0.37
2/14/2019 4.07 -1.39 0.37
2/15/2019 4.02 -0.31 0.63
2/18/2019 4.05 -0.31 0.63
2/19/2019 4.21 -0.15 0.50
2/20/2019 4.16 0.05 0.76
2/21/2019 3.85 -0.30 0.63
2/22/2019 4.14 0.35 0.76
2/25/2019 4.01 0.48 1.02
2/26/2019 4.33 0.41 1.11
2/27/2019 3.84 0.37 1.24
2/28/2019 3.70 0.11 1.24
3/1/2019 3.31 0.81 1.37
3/4/2019 3.63 0.42 1.37
3/5/2019 3.64 0.31 1.24
3/6/2019 3.92 -0.34 1.24
3/7/2019 4.43 -1.13 0.99
3/8/2019 4.54 -1.33 0.86
3/11/2019 4.42 0.12 1.11
3/12/2019 4.75 0.42 1.24
3/13/2019 4.71 1.12 1.50
3/14/2019 4.54 1.07 1.63
3/15/2019 4.89 1.58 1.76
3/18/2019 4.83 1.95 1.76
3/19/2019 4.74 1.94 1.89
3/20/2019 5.43 1.65 1.89
3/21/2019 5.42 2.76 2.02
3/22/2019 6.20 0.82 1.89
3/25/2019 6.56 0.74 1.76
3/26/2019 6.62 1.46 2.02
3/27/2019 7.00 0.99 1.99
3/28/2019 6.84 1.37 1.99
3/29/2019 6.64 2.06 2.25
4/1/2019 5.88 3.24 2.51
4/2/2019 6.05 3.25 2.64
4/3/2019 5.72 3.47 2.77
4/4/2019 5.79 3.71 2.77
4/5/2019 5.89 4.19 2.90
4/8/2019 5.74 4.30 3.03
4/9/2019 5.92 3.70 3.03
4/10/2019 6.13 4.07 3.16
4/11/2019 5.89 4.07 3.29
4/12/2019 5.39 4.77 3.42
4/15/2019 5.48 4.71 3.42
4/16/2019 5.11 4.76 3.55
4/17/2019 5.14 4.53 3.42
4/18/2019 5.45 4.70 3.42
4/19/2019 5.46 4.70 3.42
4/22/2019 5.19 4.81 3.42
4/23/2019 5.38 5.74 3.55
4/24/2019 5.83 5.51 3.68
4/25/2019 5.72 5.47 3.55
4/26/2019 6.00 5.97 3.66
4/29/2019 5.73 6.09 3.66
4/30/2019 6.00 6.19 3.79
5/1/2019 5.98 5.39 3.66
5/2/2019 5.61 5.17 3.53
5/3/2019 5.81 6.20 3.66
5/6/2019 6.11 5.73 3.53
5/7/2019 6.59 3.99 3.39
5/8/2019 6.29 3.82 3.39
5/9/2019 6.53 3.55 3.13
5/10/2019 6.55 3.97 3.13
5/15/2019 7.03 1.46 2.61
5/14/2019 6.89 2.29 2.74
5/15/2019 7.27 2.90 2.74
5/16/2019 7.02 3.85 3.00
5/17/2019 7.16 3.25 3.00
5/20/2019 6.97 2.56 2.87
5/21/2019 6.89 3.43 3.13
5/22/2019 7.20 3.14 3.00
5/23/2019 8.08 1.93 2.61
5/24/2019 7.78 2.08 2.74
5/27/2019 7.80 2.08 2.74
5/28/2019 8.38 1.22 2.74
5/29/2019 8.68 0.53 2.35
5/30/2019 8.77 0.75 2.48
5/31/2019 9.56 -0.56 2.09
6/3/2019 10.17 -0.83 2.09
6/4/2019 9.79 1.30 2.61
6/5/2019 9.78 2.14 2.87
6/6/2019 9.79 2.79 2.87
6/7/2019 10.16 3.88 3.27
6/10/2019 9.63 4.37 3.40
6/11/2019 9.66 4.33 3.53
6/12/2019 9.78 4.12 3.40
6/13/2019 10.14 4.58 3.40
6/14/2019 10.11 4.43 3.40
6/17/2019 10.22 4.52 3.40
6/18/2019 10.49 5.54 3.79
6/19/2019 10.80 5.86 3.92
6/20/2019 11.06 6.87 4.45
6/21/2019 10.43 6.74 4.58
6/24/2019 10.90 6.56 4.58
6/25/2019 11.18 5.55 4.32
6/26/2019 10.63 5.42 4.29
6/27/2019 11.06 5.84 4.29
6/28/2019 11.13 6.45 4.56
7/1/2019 10.82 7.27 4.42
7/2/2019 11.36 7.59 4.56
7/3/2019 11.58 8.44 4.69
7/4/2019 11.59 8.44 4.69
7/5/2019 10.73 8.25 4.69
7/8/2019 10.85 7.73 4.56
7/9/2019 10.64 7.90 4.42
7/10/2019 10.59 8.38 4.56
7/11/2019 10.03 8.63 4.56
7/12/2019 10.17 9.14 4.56
7/15/2019 10.33 9.16 4.56
7/16/2019 10.07 8.79 4.56
7/17/2019 10.64 8.09 4.42
7/18/2019 10.85 8.48 4.29
7/19/2019 10.76 7.82 4.29
7/22/2019 10.84 8.13 4.29
7/23/2019 10.55 8.87 4.42
7/24/2019 10.79 9.38 4.69
7/25/2019 10.56 8.81 4.69
7/26/2019 10.50 9.61 4.82
7/29/2019 10.78 9.44 4.85
7/30/2019 10.72 9.17 4.72
7/31/2019 11.11 7.98 4.85
[END CHART]
Source: Bloomberg L.P.
o HOW DID THE USAA HIGH INCOME 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 July 31, 2019, the
Fund Shares, Institutional Shares, Adviser Shares, and R6 Shares had total
returns of 4.85%, 4.94%, 4.69%, and 4.95%, respectively. This compares to
returns of 6.91% for the Bloomberg Barclays U.S. High Yield 2% Issuer Capped
Bond Index (the "Index") and 6.26% for the Lipper High Yield Bond Funds
Index. At the same time, the Fund Shares, Institutional Shares, Adviser
Shares, and R6 Shares provided a one-year dividend yield of 5.95%, 6.03%,
5.80%, and 6.17%, respectively, compared to 5.32% for the Lipper High Yield
Bond Funds Index Average.
Refer to page 6 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
4 | USAA HIGH INCOME FUND
================================================================================
Victory Capital Management Inc. (the "Manager" or "Victory Capital") is the
Fund's investment adviser. The investment adviser provides day-to-day
discretionary management for the Fund's assets.
o WHAT WERE YOUR STRATEGIES IN THIS ENVIRONMENT?
The Fund produced a positive total return during the reporting period but
underperformed the Index. Although the portfolio benefited from the income
generated by its holdings, it was hurt by a drop in bond prices during the
reporting period.
Relative to the Index, selection of high-yield corporate bonds detracted
from performance. In particular, the Fund was hampered by its investments in
the communications sector, especially its positioning in wireline
telecommunications. Holdings of bank loans and stocks also diminished
relative returns. On the positive side, the Fund was helped by its
positioning in exploration and production names within the energy sector. An
allocation to investment-grade bonds, which outpaced high-yield bonds
during the reporting period, added further to relative performance.
During the reporting period, we continued to build the portfolio bond by
bond, looking for relative value opportunities within the high-yield bond
market while continuing to maintain a diversified, liquid portfolio. We
seek ideas where our fundamental understanding of the credit risk is
different than that of the market, working with our team of analysts to
evaluate each potential investment individually, rather than on the basis of
thematic trends. Our analysts continued to analyze and monitor every holding
in the portfolio.
Thank you for allowing us to help you with your investment needs.
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 Diversification is a technique to help reduce risk and
does not guarantee a profit or prevent a loss. 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 creditworthy investment-grade securities.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 5
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 7/31/19 o
------------------------------------------------------------------------------------------------------------
SINCE DATE
1 YEAR 5 YEAR 10 YEAR INCEPTION* INCEPTION
------------------------------------------------------------------------------------------------------------
Fund Shares 4.85% 3.70% 8.35% - -
Institutional Shares 4.94% 3.77% 8.50% - -
Adviser Shares 4.69% 3.47% - 6.30% 8/01/10
R6 Shares 4.95% - - 5.83% 12/01/16
Bloomberg Barclays
U.S. High Yield 2%
Issuer Capped Bond
Index** (reflects no
deduction for fees,
expenses, or taxes) 6.91% 5.11% 8.64% - -
Lipper High Yield Bond
Funds Index***
(reflects no deduction
for taxes) 6.26% 4.34% 7.88% - -
*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. High Yield 2% Issuer Capped Bond Index
is an index comprised of fixed rate, non-investment grade debt securities that
are dollar denominated and non-convertible. The index limits the maximum
exposure to any one issuer to 2%.
***The unmanaged Lipper High Yield Bond Funds Index tracks the total return
performance of the funds within the Lipper High Yield 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 HIGH INCOME FUND
================================================================================
o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
BLOOMBERG BARCLAYS USAA HIGH LIPPER HIGH
U.S. HIGH YIELD 2% INCOME YIELD BOND
ISSUER CAPPED BOND INDEX FUND SHARES FUNDS INDEX
7/31/2009 $10,000.00 $10,000.00 $10,000.00
8/31/2009 10,192.13 10,275.00 10,167.52
9/30/2009 10,774.06 10,891.00 10,699.11
10/31/2009 10,969.44 11,142.00 10,856.95
11/30/2009 11,077.05 11,288.00 10,995.31
12/31/2009 11,440.18 11,582.00 11,324.61
1/31/2010 11,589.73 11,846.00 11,468.13
2/28/2010 11,604.68 11,897.00 11,485.43
3/31/2010 11,956.44 12,315.00 11,850.46
4/30/2010 12,241.55 12,621.00 12,108.10
5/31/2010 11,803.32 12,112.00 11,659.89
6/30/2010 11,948.96 12,232.00 11,752.39
7/31/2010 12,368.99 12,615.00 12,172.29
8/31/2010 12,372.89 12,666.00 12,165.00
9/30/2010 12,738.95 13,032.00 12,535.42
10/31/2010 13,064.69 13,378.00 12,883.85
11/30/2010 12,915.47 13,300.00 12,754.13
12/31/2010 13,148.89 13,567.00 13,013.19
1/31/2011 13,439.53 13,828.00 13,284.92
2/28/2011 13,616.38 14,100.00 13,498.97
3/31/2011 13,660.92 14,181.00 13,526.73
4/30/2011 13,871.91 14,441.00 13,738.93
5/31/2011 13,939.86 14,515.00 13,769.27
6/30/2011 13,804.29 14,313.00 13,616.50
7/31/2011 13,963.59 14,417.00 13,729.58
8/31/2011 13,402.47 13,759.00 13,112.48
9/30/2011 12,961.64 13,298.00 12,649.11
10/31/2011 13,739.60 13,865.00 13,386.52
11/30/2011 13,443.11 13,611.00 13,085.01
12/31/2011 13,801.37 13,909.00 13,384.04
1/31/2012 14,220.09 14,320.00 13,829.56
2/29/2012 14,558.19 14,651.00 14,149.43
3/31/2012 14,539.66 14,716.00 14,152.20
4/30/2012 14,689.21 14,814.00 14,277.94
5/31/2012 14,493.50 14,605.00 14,045.62
6/30/2012 14,799.41 14,844.00 14,309.49
7/31/2012 15,080.95 15,137.00 14,571.33
8/31/2012 15,257.48 15,406.00 14,755.72
9/30/2012 15,469.77 15,645.00 14,959.98
10/31/2012 15,605.98 15,879.00 15,089.07
11/30/2012 15,730.82 15,930.00 15,209.83
12/31/2012 15,978.54 16,209.00 15,450.25
1/31/2013 16,192.78 16,521.00 15,674.53
2/28/2013 16,275.03 16,662.00 15,757.17
3/31/2013 16,440.83 16,872.00 15,921.68
4/30/2013 16,737.97 17,161.00 16,221.17
5/31/2013 16,641.09 17,169.00 16,129.56
6/30/2013 16,204.81 16,730.00 15,709.62
7/31/2013 16,511.70 17,013.00 16,018.14
8/31/2013 16,411.57 16,887.00 15,904.40
9/30/2013 16,574.45 17,028.00 16,073.59
10/31/2013 16,988.62 17,392.00 16,462.06
11/30/2013 17,074.45 17,472.00 16,530.49
12/31/2013 17,167.10 17,582.00 16,629.84
1/31/2014 17,287.39 17,778.00 16,734.01
2/28/2014 17,636.22 18,086.00 17,063.26
3/31/2014 17,678.15 18,193.00 17,112.74
4/30/2014 17,789.99 18,347.00 17,198.61
5/31/2014 17,952.86 18,547.00 17,358.91
6/30/2014 18,103.38 18,739.00 17,506.93
7/31/2014 17,862.81 18,603.00 17,280.78
8/31/2014 18,146.62 18,785.00 17,510.80
9/30/2014 17,766.25 18,515.00 17,173.52
10/31/2014 17,976.92 18,605.00 17,363.14
11/30/2014 17,846.88 18,531.00 17,260.13
12/31/2014 17,589.08 18,203.00 17,001.78
1/31/2015 17,704.81 18,248.00 17,094.28
2/28/2015 18,131.34 18,546.00 17,491.29
3/31/2015 18,032.18 18,436.00 17,421.55
4/30/2015 18,250.33 18,635.00 17,625.47
5/31/2015 18,305.59 18,644.00 17,699.81
6/30/2015 18,033.49 18,348.00 17,439.05
7/31/2015 17,928.80 18,153.00 17,379.06
8/31/2015 17,614.76 17,766.00 17,072.18
9/30/2015 17,162.22 17,370.00 16,613.30
10/31/2015 17,632.64 17,681.00 17,007.38
11/30/2015 17,243.50 17,249.00 16,621.98
12/31/2015 16,809.17 16,644.00 16,174.80
1/31/2016 16,539.01 16,291.00 15,896.66
2/29/2016 16,633.62 16,428.00 15,916.13
3/31/2016 17,372.89 17,089.00 16,520.10
4/30/2016 18,052.99 17,763.00 17,045.99
5/31/2016 18,164.50 17,914.00 17,153.37
6/30/2016 18,331.92 18,197.00 17,275.93
7/31/2016 18,827.37 18,688.00 17,698.27
8/31/2016 19,221.39 19,118.00 18,069.78
9/30/2016 19,349.48 19,288.00 18,183.07
10/31/2016 19,424.25 19,356.00 18,230.28
11/30/2016 19,331.92 19,260.00 18,194.42
12/31/2016 19,688.56 19,626.00 18,526.71
1/31/2017 19,974.32 19,908.00 18,806.89
2/28/2017 20,264.95 20,222.00 19,075.34
3/31/2017 20,219.77 20,183.00 19,039.40
4/30/2017 20,452.86 20,299.00 19,244.24
5/31/2017 20,630.36 20,513.00 19,409.37
6/30/2017 20,658.32 20,496.00 19,400.39
7/31/2017 20,887.52 20,730.00 19,641.85
8/31/2017 20,879.06 20,679.00 19,636.67
9/30/2017 21,066.32 20,832.00 19,801.25
10/31/2017 21,155.72 20,904.00 19,888.02
11/30/2017 21,102.08 20,855.00 19,849.32
12/31/2017 21,165.80 21,033.00 19,922.37
1/31/2018 21,292.59 21,210.00 20,080.98
2/28/2018 21,111.83 21,031.00 19,876.77
3/31/2018 20,984.40 20,903.00 19,753.81
4/30/2018 21,120.61 21,004.00 19,857.81
5/31/2018 21,115.08 21,004.00 19,849.82
6/30/2018 21,199.61 21,075.00 19,893.56
7/31/2018 21,431.08 21,280.00 20,110.94
8/31/2018 21,589.08 21,390.00 20,233.71
9/30/2018 21,709.36 21,480.00 20,336.40
10/31/2018 21,362.16 21,087.00 19,994.14
11/30/2018 21,178.48 20,866.00 19,796.41
12/31/2018 20,724.64 20,292.00 19,329.38
1/31/2019 21,661.25 21,223.00 20,193.72
2/28/2019 22,021.46 21,545.00 20,522.01
3/31/2019 22,228.87 21,760.00 20,687.06
4/30/2019 22,544.86 22,086.00 21,016.05
5/31/2019 22,276.98 21,724.00 20,805.04
6/30/2019 22,784.46 22,249.00 21,265.75
7/31/2019 22,912.87 22,313.00 21,369.04
[END CHART]
Data from 7/31/09 through 7/31/19.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA High Income Fund Shares 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
that the Lipper High Yield Bond Funds Index reflects the fees and expenses of
the underlying funds included in the index.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
o TOP 10 HOLDINGS - 7/31/19 o
(% of Net Assets)
iShares iBoxx High Yield Corporate
Bond ETF ................................................................ 3.3%
SPDR Bloomberg Barclays High
Yield Bond ETF .......................................................... 2.9%
NuStar Logistics, LP, 9.04% ............................................... 1.4%
HCA, Inc., 5.63%, 9/01/2028 ............................................... 1.3%
Sprint Corp., 7.63&, 2/15/2025 ............................................ 1.0%
Sprint Corp.,7.63%, 3/01/2026 ............................................. 1.0%
Dairy Farmers of America, Inc.,
cumulative redeemable, 7.88% ............................................ 0.9%
Bausch Health Cos, Inc., 7.25%, 5/30/2029 ................................. 0.9%
Bombardier, Inc., 7.50%, 3/15/2025 ........................................ 0.8%
Bausch Health Cos, Inc., 6.13%, 4/15/2025 ................................. 0.7%
Refer to the Portfolio of Investments for a complete list of securities.
================================================================================
8 | USAA HIGH INCOME FUND
================================================================================
o SECTOR ALLOCATION* - 7/31/19 o
(% of Net Assets)
[PIE CHART OF SECTOR ALLOCATION]
CONSUMER, NON-CYCLICAL 16.1%
ENERGY 15.7%
COMMUNICATIONS 15.0%
FINANCIALS 11.7%
CONSUMER, CYCLICAL 9.8%
INDUSTRIAL 6.4%
BASIC MATERIALS 6.3%
UTILITIES 3.3%
TECHNOLOGY 1.7%
MUNICIPAL OBLIGATIONS 0.7%
GOVERNMENT 0.5%
MORTGAGE SECURITIES 0.3%
[END CHART]
*Does not include ETF's, money market instruments and short term investments
purchased with cash collateral from securities loaned.
Percentages are of the net assets of the Fund and may not equal 100%.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
================================================================================
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 Capital Management Inc. ("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 USAA Asset Management Company ("AMCO")
was acquired by Victory Capital Holdings, Inc., the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
----------------------------------------------------------------------------
FOR AGAINST ABSTAIN
----------------------------------------------------------------------------
181,277,136 10,868,387 4,583,498
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
person" as defined in the Investment Company Act of 1940, as amended (1940 Act)
("Interested Trustee"); 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 HIGH INCOME FUND
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
July 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 July 31, 2019:
DIVIDEND RECEIVED
DEDUCTION (CORPORATE QUALIFIED INTEREST
SHAREHOLDERS)(1) INCOME
-------------------------------------------------------------
4.21% $105,449,000
-------------------------------------------------------------
(1) Presented as a percentage of net investment income and short-term capital
gain distributions paid, if any.
For the fiscal year ended July 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 HIGH INCOME FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
High Income Fund (the "Fund") (one of the funds constituting the USAA Mutual
Funds Trust (the "Trust")), including the portfolio of investments, as of July
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 the USAA Mutual Funds Trust) at July 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 July 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
September 20, 2019
================================================================================
12 | USAA HIGH INCOME FUND
================================================================================
PORTFOLIO OF INVESTMENTS
July 31, 2019
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
BONDS (80.1%)
BANK LOANS (4.0%)(a)
BASIC MATERIALS (0.1%)
----------------------
PACKAGING & CONTAINERS (0.1%)
$ 1,500 Pregis Corp.(b) -%(c) 7/23/2026 $ 1,497
----------
COMMUNICATIONS (0.6%)
---------------------
ADVERTISING (0.2%)
5,000 Advantage Sales & Marketing, Inc.
(3 mo. LIBOR + 6.50%) 8.83 7/25/2022 4,003
----------
MEDIA (0.2%)
2,903 Cengage Learning Acquisitions, Inc.
(1 mo. LIBOR + 4.25%) 6.48 6/07/2023 2,793
1,725 iHeartCommunications, Inc. (3 mo. LIBOR + 4.00%) 6.58 5/01/2026 1,736
----------
4,529
----------
TELECOMMUNICATIONS (0.2%)
2,955 Avaya Holdings Corp. (1 mo. LIBOR + 4.25%) 6.58 12/22/2024 2,840
1,000 Intelsat Jackson Holdings S.A. 6.63 1/02/2024 1,010
----------
3,850
----------
Total Communications 12,382
----------
CONSUMER, CYCLICAL (1.3%)
-------------------------
RETAIL (1.3%)
6,439 Academy, Ltd. (1 mo. LIBOR + 4.00%) 6.40 7/01/2022 4,486
3,342 Academy, Ltd. (1 mo. LIBOR + 4.00%) 6.39 7/02/2022 2,329
4,987 Bass Pro Group, LLC (1 mo. LIBOR + 5.00%) 7.23 9/25/2024 4,711
7,001 Neiman Marcus Group Ltd., LLC
(1 mo. LIBOR + 3.25%) 8.88 8/06/2019 6,002
3,000 NPC International, Inc. (2 mo. LIBOR + 7.50%) 9.82 4/18/2025 1,690
2,985 P.F. Chang's China Bistro Inc.
(6 mo. LIBOR + 6.50%) 8.70 3/01/2026 2,854
8 P.F. Chang's China Bistro Inc. (3 mo. LIBOR + 6.50%) 8.83 3/01/2026 7
1,637 Petsmart, Inc. (3 mo. LIBOR + 4.25%) 6.38 3/11/2022 1,606
11,048 Serta Simmons Bedding, LLC
(1 mo. LIBOR + 8.00%) 10.31 11/08/2024 4,963
----------
Total Consumer, Cyclical 28,648
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
CONSUMER, NON-CYCLICAL (0.7%)
-----------------------------
COMMERCIAL SERVICES (0.3%)
$ 2,444 Constellis Holdings, LLC (3 mo. LIBOR + 5.00%) 7.26% 4/21/2024 $ 1,833
6 Constellis Holdings, LLC (2 mo. LIBOR + 5.00%) 7.26 4/21/2024 5
2,500 Constellis Holdings, LLC (3 mo. LIBOR + 9.00%) 11.26 4/21/2025 1,662
2,992 Team Health Holdings, Inc. (1 mo. LIBOR + 2.75%) 4.98 2/06/2024 2,613
----------
6,113
----------
HEALTHCARE-SERVICES (0.4%)
4,975 Envision Healthcare Corp. (1 mo. LIBOR + 3.75%) 5.98 10/10/2025 4,265
4,500 Wink Holdco, Inc. (1 mo. LIBOR + 6.75%) 8.99 12/01/2025 4,478
----------
8,743
----------
Total Consumer, Non-cyclical 14,856
----------
ENERGY (0.4%)
-------------
OIL & GAS (0.2%)
2,000 California Resources Corp. (1 mo. LIBOR + 4.75%) 6.99 12/31/2022 1,903
2,394 Citgo Petroleum Corp. (3 mo. LIBOR + 5.00%) 7.32 3/28/2024 2,396
4,087 Quicksilver Resources, Inc.(d),(e),(f) - 6/21/2019 6
----------
4,305
----------
PIPELINES (0.2%)
4,975 Lucid Energy Group II, LLC (1 mo. LIBOR + 3.00%) 5.23 2/18/2025 4,788
----------
Total Energy 9,093
----------
FINANCIAL (0.2%)
----------------
INVESTMENT COMPANIES (0.2%)
2,989 Getty Images, Inc. (1 mo. LIBOR + 4.50%) 6.75 2/19/2026 2,979
----------
INDUSTRIAL (0.4%)
-----------------
ENGINEERING & CONSTRUCTION (0.1%)
3,000 Waterbridge Midstream Operating, LLC(b) -(c) 6/21/2026 2,929
----------
TRANSPORTATION (0.3%)
5,583 YRC Worldwide, Inc. (3 mo. LIBOR + 8.50%) 10.76 7/26/2022 5,493
----------
Total Industrial 8,422
----------
TECHNOLOGY (0.3%)
-----------------
SOFTWARE (0.3%)
1,000 Kronos, Inc. (3 mo. LIBOR + 8.25%) 10.83 11/01/2024 1,031
5,000 Mitchell International, Inc. (1 mo. LIBOR + 7.25%) 9.48 12/01/2025 4,687
1,343 Veritas Bermuda Ltd. (1 mo. LIBOR + 4.50%) 6.73 1/27/2023 1,259
266 Veritas Bermuda Ltd. (3 mo. LIBOR 4.50%) 6.83 1/27/2023 250
----------
Total Technology 7,227
----------
Total Bank Loans (cost: $100,710) 85,104
----------
================================================================================
14 | USAA HIGH INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.1%)
MORTGAGE SECURITIES (0.1%)
--------------------------
WHOLE LOAN COLLATERAL CMO (0.1%)
$ 2,247 CHL Mortgage Pass-Through Trust
(1 mo. LIBOR + 0.96%) 3.23%(g) 2/25/2035 $ 465
967 Wells Fargo Mortgage Backed Securities Trust 5.16(h) 4/25/2035 967
----------
Total Mortgage Securities 1,432
----------
Total Collateralized Mortgage Obligations (cost: $2,091) 1,432
----------
COMMERCIAL MORTGAGE SECURITIES (0.2%)
MORTGAGE SECURITIES (0.2%)
--------------------------
COMMERCIAL MBS (0.2%)
163 Banc of America Commercial Mortgage Trust 6.57(h) 2/10/2051 167
5,000 Bear Stearns Commercial Mortgage Securities Trust 5.46(h) 1/12/2045 4,375
585 Citigroup Commercial Mortgage Trust 7.04(h) 12/10/2049 309
65 Credit Suisse Commercial Mortgage Trust
(1 mo. LIBOR + 0.19%) 2.50(g) 2/15/2040 64
94 Credit Suisse First Boston Securities Corp.(i) 1.91(h) 5/17/2040 2
----------
Total Mortgage Securities 4,917
----------
Total Commercial Mortgage Securities (cost: $5,916) 4,917
----------
CORPORATE OBLIGATIONS (57.7%)
BASIC MATERIALS (3.1%)
----------------------
CHEMICALS (0.9%)
6,000 CF Industries, Inc. 5.15 3/15/2034 5,923
3,000 Kraton Polymers, LLC / Kraton Polymers
Capital Corp.(j) 7.00 4/15/2025 3,074
5,000 Olin Corp. 5.00 2/01/2030 4,865
5,000 Starfruit Finco B.V. / Starfruit U.S. Holdco, LLC(j) 8.00 10/01/2026 4,955
----------
18,817
----------
IRON/STEEL (1.1%)
7,417 AK Steel Corp. 6.38 10/15/2025 6,308
10,456 Allegheny Ludlum, LLC 6.95 12/15/2025 10,891
7,000 United States Steel Corp. 6.25 3/15/2026 6,388
----------
23,587
----------
MINING (1.1%)
4,000 Alcoa Nederland Holding B.V.(j) 6.13 5/15/2028 4,212
5,000 Compass Minerals International, Inc.(j) 4.88 7/15/2024 4,806
10,000 Freeport-McMoRan, Inc. 5.45 3/15/2043 9,275
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 5,000 Novelis Corp.(j) 5.88% 9/30/2026 $ 5,201
----------
23,494
----------
Total Basic Materials 65,898
----------
COMMUNICATIONS (10.8%)
----------------------
ADVERTISING (0.2%)
5,000 National CineMedia, LLC 5.75 8/15/2026 4,770
----------
INTERNET (0.6%)
1,500 Getty Images, Inc.(j) 9.75 3/01/2027 1,568
5,000 Netflix, Inc. 4.88 4/15/2028 5,162
5,000 Zayo Group, LLC / Zayo Capital, Inc. 6.38 5/15/2025 5,135
500 Zayo Group, LLC / Zayo Capital, Inc.(j) 5.75 1/15/2027 508
----------
12,373
----------
MEDIA (4.1%)
5,000 Cablevision Systems Corp. 8.00 4/15/2020 5,172
5,000 CCO Holdings, LLC / CCO Holdings Capital Corp. 5.75 1/15/2024 5,109
5,000 CCO Holdings, LLC / CCO Holdings Capital Corp.(j) 5.75 2/15/2026 5,263
5,500 CCO Holdings, LLC / CCO Holdings Capital Corp.(j) 5.50 5/01/2026 5,759
5,000 CCO Holdings, LLC / CCO Holdings Capital Corp.(j) 5.13 5/01/2027 5,156
1,000 CCO Holdings, LLC / CCO Holdings Capital Corp.(j) 5.00 2/01/2028 1,026
10,000 Clear Channel Worldwide Holdings, Inc.(j) 9.25 2/15/2024 10,858
6,018 CSC Holdings, LLC(j) 10.88 10/15/2025 6,877
1,000 CSC Holdings, LLC(j) 5.38 2/01/2028 1,043
3,000 CSC Holdings, LLC(j) 7.50 4/01/2028 3,310
4,500 CSC Holdings, LLC(j) 6.50 2/01/2029 4,960
1,000 CSC Holdings, LLC(j) 5.75 1/15/2030 1,017
5,000 Diamond Sports Group, LLC / Diamond
Sports Finance Co.(b),(j) 6.63 8/15/2027 5,114
5,000 DISH DBS Corp. 5.00 3/15/2023 4,811
3,000 DISH DBS Corp. 5.88 11/15/2024 2,794
4,000 DISH DBS Corp. 7.75 7/01/2026 3,919
394 iHeartCommunications, Inc. 6.38 5/01/2026 419
714 iHeartCommunications, Inc. 8.38 5/01/2027 754
5,000 Meredith Corp. 6.88 2/01/2026 5,297
3,000 Radiate Holdco, LLC / Radiate Finance, Inc.(j) 6.88 2/15/2023 3,039
5,000 Salem Media Group, Inc.(j) 6.75 6/01/2024 4,400
1,000 Scripps Escrow, Inc.(j) 5.88 7/15/2027 1,009
----------
87,106
----------
TELECOMMUNICATIONS (5.9%)
10,000 CenturyLink, Inc. 5.80 3/15/2022 10,408
5,000 CenturyLink, Inc. 7.50 4/01/2024 5,479
5,000 Cincinnati Bell, Inc.(j) 7.00 7/15/2024 4,278
================================================================================
16 | USAA HIGH INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 2,000 Cincinnati Bell, Inc.(j) 8.00% 10/15/2025 $ 1,664
3,000 CommScope Technologies, LLC(j) 6.00 6/15/2025 2,734
9,000 CommScope Technologies, LLC(j) 5.00 3/15/2027 7,603
16,750 Frontier Communications Corp. 11.00 9/15/2025 9,709
2,000 Frontier Communications Corp.(j) 8.50 4/01/2026 1,957
9,000 Frontier Communications Corp. 9.00 8/15/2031 4,887
5,000 Level 3 Financing, Inc. 6.13 1/15/2021 5,018
20,000 Sprint Corp.(k) 7.63 2/15/2025 22,161
18,000 Sprint Corp. 7.63 3/01/2026 20,136
5,000 T-Mobile USA, Inc. 6.50 1/15/2024 5,180
5,000 T-Mobile USA, Inc. 6.00 4/15/2024 5,217
10,000 T-Mobile USA, Inc. 4.75 2/01/2028 10,300
5,000 Trilogy International Partners, LLC /
Trilogy International Finance, Inc.(j) 8.88 5/01/2022 4,815
7,437 Windstream Services, LLC / Windstream
Finance Corp.(d),(j) 9.00 6/30/2025 4,923
----------
126,469
----------
Total Communications 230,718
----------
CONSUMER, CYCLICAL (7.2%)
-------------------------
AUTO MANUFACTURERS (1.0%)
10,000 Ford Motor Co. 6.63 10/01/2028 11,321
3,000 JB Poindexter & Co., Inc.(j) 7.13 4/15/2026 3,067
3,000 Navistar International Corp.(j) 6.63 11/01/2025 3,088
5,000 Tesla, Inc.(j) 5.30 8/15/2025 4,400
----------
21,876
----------
AUTO PARTS & EQUIPMENT (0.5%)
7,500 Panther BF Aggregator 2, LP / Panther
Finance Co., Inc.(j) 8.50 5/15/2027 7,614
3,000 Titan International, Inc. 6.50 11/30/2023 2,617
----------
10,231
----------
DISTRIBUTION/WHOLESALE (0.3%)
2,000 H&E Equipment Services, Inc. 5.63 9/01/2025 2,055
2,250 IAA, Inc.(j) 5.50 6/15/2027 2,351
1,500 Resideo Funding, Inc.(j) 6.13 11/01/2026 1,582
----------
5,988
----------
ENTERTAINMENT (1.1%)
3,000 AMC Entertainment Holdings, Inc. 5.88 11/15/2026 2,722
3,000 AMC Entertainment Holdings, Inc. 6.13 5/15/2027 2,702
3,000 Downstream Development Authority of
the Quapaw Tribe(j) 10.50 2/15/2023 3,168
2,000 Eldorado Resorts, Inc. 7.00 8/01/2023 2,094
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 2,500 Eldorado Resorts, Inc. 6.00% 4/01/2025 $ 2,632
10,000 Scientific Games International, Inc.(j) 8.25 3/15/2026 10,711
----------
24,029
----------
HOME BUILDERS (1.4%)
4,000 Ashton Woods USA, LLC / Ashton Woods Finance Co.(j) 6.75 8/01/2025 3,898
2,000 Ashton Woods USA, LLC / Ashton Woods Finance Co.(j) 9.88 4/01/2027 2,124
7,000 Beazer Homes USA, Inc. 5.88 10/15/2027 6,437
2,500 LGI Homes, Inc.(j) 6.88 7/15/2026 2,543
3,000 M/I Homes, Inc. 6.75 1/15/2021 3,049
3,330 M/I Homes, Inc. 5.63 8/01/2025 3,388
5,000 Taylor Morrison Communities, Inc.(b),(j) 5.75 1/15/2028 5,182
3,000 Williams Scotsman International, Inc.(j) 6.88 8/15/2023 3,144
----------
29,765
----------
LEISURE TIME (0.4%)
10,000 Constellation Merger Sub, Inc.(j) 8.50 9/15/2025 9,110
----------
LODGING (0.1%)
1,721 Inn of the Mountain Gods Resort & Casino (l) 9.25(m) 11/30/2020 1,707
----------
RETAIL (2.3%)
5,000 CEC Entertainment, Inc. 8.00 2/15/2022 4,690
10,000 Golden Nugget, Inc.(j) 8.75 10/01/2025 10,534
10,000 L Brands, Inc. 6.95 3/01/2033 8,274
2,500 L Brands, Inc. 6.75 7/01/2036 2,202
5,162 Men's Wearhouse, Inc.(n) 7.00 7/01/2022 5,032
9,752 Party City Holdings, Inc.(j),(n) 6.63 8/01/2026 9,386
5,000 PetSmart, Inc.(j) 7.13 3/15/2023 4,709
1,670 PetSmart, Inc.(j) 5.88 6/01/2025 1,654
3,000 PetSmart, Inc.(j) 8.88 6/01/2025 2,911
----------
49,392
----------
TOYS/GAMES/HOBBIES (0.1%)
3,000 Mattel, Inc.(j) 6.75 12/31/2025 3,157
----------
Total Consumer, Cyclical 155,255
----------
CONSUMER, NON-CYCLICAL (11.1%)
------------------------------
AGRICULTURE (0.1%)
1,500 JBS Investments II GmbH(j) 5.75 1/15/2028 1,522
----------
COMMERCIAL SERVICES (2.3%)
3,000 Ahern Rentals, Inc.(j) 7.38 5/15/2023 2,604
3,312 Aptim Corp.(j),(n) 7.75 6/15/2025 2,450
3,000 Hertz Corp(j) 7.13 8/01/2026 3,000
10,000 Hertz Corp.(j) 7.63 6/01/2022 10,383
3,500 Matthews International Corp.(j) 5.25 12/01/2025 3,435
================================================================================
18 | USAA HIGH INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 4,733 Midas Intermediate Holdco II, LLC / Midas
Intermediate Holdco II Finance, Inc.(j) 7.88% 10/01/2022 $ 4,540
863 Prime Security Services Borrower,
LLC/Prime Finance, Inc.(j) 9.25 5/15/2023 906
3,000 R.R. Donnelley & Sons Co.(n) 6.00 4/01/2024 2,945
3,000 Refinitiv US Holdings, Inc.(j) 6.25 5/15/2026 3,228
3,000 Refinitiv US Holdings, Inc.(j) 8.25 11/15/2026 3,323
3,000 United Rentals North America, Inc. 5.50 7/15/2025 3,121
8,000 United Rentals North America, Inc. 5.50 5/15/2027 8,399
----------
48,334
----------
COSMETICS/PERSONAL CARE (0.2%)
5,000 Coty, Inc.(j) 6.50 4/15/2026 4,813
----------
FOOD (1.5%)
8,000 Albertson's Cos., LLC / Safeway, Inc. / New
Albertson's, LP / Albertson's, LLC 6.63 6/15/2024 8,327
12,000 Albertson's Cos., LLC / Safeway, Inc. / New
Albertson's, LP / Albertson's, LLC 5.75 3/15/2025 12,262
3,000 Matterhorn Merger Sub, LLC / Matterhorn
Finance Sub, Inc.(j) 8.50 6/01/2026 2,468
3,000 Pilgrim's Pride Corp.(j) 5.88 9/30/2027 3,151
3,000 Post Holdings, Inc.(j) 8.00 7/15/2025 3,214
3,000 Post Holdings, Inc.(j) 5.75 3/01/2027 3,114
----------
32,536
----------
HEALTHCARE-PRODUCTS (0.1%)
3,000 Mallinckrodt International Finance SA /
Mallinckrodt CB, LLC(j) 5.50 4/15/2025 1,730
----------
HEALTHCARE-SERVICES (4.4%)
13,000 CHS/Community Health Systems, Inc.(j) 8.00 3/15/2026 12,521
6,339 Community Health Systems, Inc. 6.88 2/01/2022 4,341
3,000 DaVita, Inc. 5.13 7/15/2024 3,012
5,000 DaVita, Inc. 5.00 5/01/2025 4,930
3,000 Eastern Maine Healthcare Systems 5.02 7/01/2036 3,001
2,000 Encompass Health Corp. 5.75 9/15/2025 2,096
24,500 HCA, Inc. 5.63 9/01/2028 27,034
10,000 RegionalCare Hospital Partners Holdings, Inc.(j) 8.25 5/01/2023 10,660
5,000 Select Medical Corp.(b),(j) 6.25 8/15/2026 5,079
14,000 Tenet Healthcare Corp. 6.75 6/15/2023 14,384
6,425 Tenet Healthcare Corp. 7.00 8/01/2025 6,406
----------
93,464
----------
PHARMACEUTICALS (2.5%)
15,000 Bausch Health Cos, Inc.(j) 6.13 4/15/2025 15,409
18,000 Bausch Health Cos, Inc.(j) 7.25 5/30/2029 18,823
================================================================================
PORTFOLIO OF INVESTMENTS | 19
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 15,000 Endo Dac / Endo Finance, LLC / Endo Finco, Inc.(j) 6.00% 7/15/2023 $ 9,651
9,000 Mallinckrodt International Finance S.A.(n) 4.75 4/15/2023 5,627
5,250 Par Pharmaceutical, Inc.(j) 7.50 4/01/2027 4,736
----------
54,246
----------
Total Consumer, Non-cyclical 236,645
----------
ENERGY (10.8%)
--------------
COAL (1.0%)
3,000 Alliance Resource Operating Partners, LP / Alliance
Resource Finance Corp.(j) 7.50 5/01/2025 3,110
5,000 CONSOL Energy, Inc.(j) 11.00 11/15/2025 5,313
500 Natural Resource Partners, LP / NRP Finance Corp.(j) 9.13 6/30/2025 503
5,000 SunCoke Energy Partners, LP / SunCoke Energy
Partners Finance Corp.(j) 7.50 6/15/2025 4,953
7,000 Warrior Met Coal, Inc.(j) 8.00 11/01/2024 7,288
----------
21,167
----------
OIL & GAS (5.3%)
5,000 Antero Resources Corp. 5.63 6/01/2023 4,727
5,162 California Resources Corp.(j) 8.00 12/15/2022 3,610
1,297 California Resources Corp. 6.00 11/15/2024 677
3,000 Carrizo Oil & Gas, Inc. 8.25 7/15/2025 3,000
6,000 Chesapeake Energy Corp. 7.50 10/01/2026 4,740
6,000 Chesapeake Energy Corp. 8.00 6/15/2027 4,811
1,000 Citgo Holding, Inc.(b),(j) 9.25 8/01/2024 1,041
1,875 CITGO Petroleum Corp.(j) 6.25 8/15/2022 1,892
7,000 Diamond Offshore Drilling, Inc. 7.88 8/15/2025 6,622
2,408 ESC Reuters Group plc ADR(o) 8.00 10/01/2020 66
6,000 HighPoint Operating Corp.(n) 7.00 10/15/2022 5,586
5,000 MPLX, LP 6.88 -(p) 5,000
4,000 Murphy Oil Corp. 6.88 8/15/2024 4,179
3,000 Murphy Oil Corp. 5.75 8/15/2025 3,075
3,000 Nabors Industries, Inc. 5.50 1/15/2023 2,811
3,000 Nabors Industries, Inc. 5.75 2/01/2025 2,625
8,000 Noble Holding International Ltd.(n) 7.95 4/01/2025 5,860
5,000 PBF Holding Co., LLC / PBF Finance Corp. 7.25 6/15/2025 5,215
5,000 Range Resources Corp. 4.88 5/15/2025 4,217
5,000 Rowan Companies, Inc. 7.38 6/15/2025 3,773
3,000 Southwestern Energy Co. 4.10 3/15/2022 2,937
7,000 Southwestern Energy Co. 6.20 1/23/2025 6,033
2,000 Southwestern Energy Co. 7.75 10/01/2027 1,735
5,000 SRC Energy, Inc. 6.25 12/01/2025 4,365
5,000 Transocean, Inc.(j) 9.00 7/15/2023 5,268
5,000 Transocean, Inc.(j) 7.50 1/15/2026 4,689
================================================================================
20 | USAA HIGH INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 5,750 Transocean, Inc. 7.50% 4/15/2031 $ 4,742
1,500 Valaris plc 5.20 3/15/2025 1,072
6,000 Whiting Petroleum Corp. 6.63 1/15/2026 5,655
3,000 WPX Energy, Inc. 8.25 8/01/2023 3,375
----------
113,398
----------
OIL & GAS SERVICES (0.9%)
5,000 CSI Compressco, LP / CSI Compressco Finance, Inc. 7.25 8/15/2022 4,494
9,000 McDermott Technology Americas, Inc. / McDermott
Technology US, Inc.(j) 10.63 5/01/2024 7,412
3,000 USA Compression Partners, LP / USA Compression
Finance Corp.(j) 6.88 9/01/2027 3,123
7,000 Weatherford International, LLC(d),(o) 9.88 3/01/2025 3,324
----------
18,353
----------
PIPELINES (3.6%)
5,000 Blue Racer Midstream, LLC / Blue Racer Finance
Corp.(j) 6.13 11/15/2022 5,018
12,754 Buckeye Partners, LP 5.60 10/15/2044 10,746
10,000 DCP Midstream Operating, LP
(3 mo. LIBOR + 3.85%)(j) 5.85(q) 5/21/2043 9,408
2,500 Energy Transfer Operating, LP 7.50 10/15/2020 2,641
5,000 Energy Transfer Operating, LP
(3 mo. LIBOR + 3.02%) 5.27(g) 11/01/2066 3,772
5,000 EnLink Midstream Partners, LP
(3 mo. LIBOR + 4.11%) 6.00(q) -(p) 3,910
12,000 Enterprise Products Operating, LLC
(3 mo. LIBOR + 2.78%) 5.30(g) 6/01/2067 11,107
3,000 Enterprise TE Partners, LP
(3 mo. LIBOR + 2.78%)(o) 5.30(g) 6/01/2067 2,560
6,000 Genesis Energy, LP / Genesis Energy Finance Corp. 6.50 10/01/2025 5,995
5,061 Kinder Morgan, Inc. 7.80 8/01/2031 6,822
3,500 Martin Midstream Partners, LP / Martin
Midstream Finance Corp. 7.25 2/15/2021 3,440
5,000 NGL Energy Partners, LP / NGL Energy
Finance Corp.(j) 7.50 4/15/2026 5,189
3,906 SemGroup Corp. 6.38 3/15/2025 3,753
5,000 Southern Union Co. (3 mo. LIBOR + 3.02%) 5.27(g) 11/01/2066 3,707
----------
78,068
----------
Total Energy 230,986
----------
FINANCIAL (7.6%)
----------------
BANKS (1.0%)
5,000 Bank OZK (3 mo. LIBOR + 4.43%) 5.50(q) 7/01/2026 5,089
================================================================================
PORTFOLIO OF INVESTMENTS | 21
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 5,000 First Midwest Bancorp, Inc. 5.88% 9/29/2026 $ 5,395
10,000 Synovus Financial Corp. (5 Yr. Semi-Annual
Swap + 3.38%) 5.90(q) 2/07/2029 10,434
----------
20,918
----------
DIVERSIFIED FINANCIAL SERVICES (3.1%)
5,000 Credit Acceptance Corp. 6.13 2/15/2021 5,037
9,750 Credit Acceptance Corp.(j) 6.63 3/15/2026 10,527
2,454 ILFC E-Capital Trust I (Highest of 3 mo.
LIBOR/10 Year CMT/30 Year CMT + 1.55%)(j) 4.09(g) 12/21/2065 1,744
5,362 ILFC E-Capital Trust II (Highest of 3 mo.
LIBOR/10 Year CMT/30 Year CMT + 1.80%)(j) 4.34(g) 12/21/2065 3,893
1,000 Lehman Brothers Holdings, Inc.(d),(o) 1.00 12/31/2049 14
1,447 Lehman Brothers Treasury Co. B.V.
(Zero Coupon)(o) -(r) -(p) 19
12,000 Navient Corp. 7.25 1/25/2022 13,057
1,000 Navient Corp. 6.13 3/25/2024 1,051
7,000 Navient Corp. 6.75 6/25/2025 7,313
5,000 Navient Corp. 6.75 6/15/2026 5,208
3,000 Ocwen Loan Servicing, LLC(j) 8.38 11/15/2022 2,635
9,000 Springleaf Finance Corp. 7.13 3/15/2026 10,102
1,000 Springleaf Finance Corp. 6.63 1/15/2028 1,085
5,000 Synchrony Financial 3.95 12/01/2027 5,062
----------
66,747
----------
INSURANCE (2.5%)
10,000 AmTrust Financial Services, Inc. 6.13 8/15/2023 9,834
3,000 AmWINS Group, Inc.(j) 7.75 7/01/2026 3,131
14,000 Genworth Holdings, Inc. (3 mo. LIBOR + 2.00%) 4.52(g) 11/15/2036 8,594
3,780 Hanover Insurance Group, Inc. 8.21 2/03/2027 4,328
8,000 Hartford Financial Services Group, Inc.
(3 mo. LIBOR + 2.13%)(j) 4.64(g) 2/12/2047 6,911
5,000 HUB International Ltd.(j) 7.00 5/01/2026 5,085
2,000 MetLife, Inc. 10.75 8/01/2039 3,206
10,000 Prudential Financial, Inc. (3 mo. LIBOR + 3.04%) 5.20(q) 3/15/2044 10,422
2,000 Zenith National Insurance Capital Trust I(j) 8.55 8/01/2028 2,343
----------
53,854
----------
REITS (0.8%)
5,000 CBL & Associates, LP 4.60 10/15/2024 3,353
3,000 Sabra Health Care, LP 5.13 8/15/2026 3,152
3,000 Uniti Group, LP / Uniti Fiber Holdings,
Inc. / CSL Capital, LLC(j) 7.13 12/15/2024 2,593
================================================================================
22 | USAA HIGH INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 1,000 Uniti Group, LP / Uniti Group Finance,
Inc. / CSL Capital, LLC(j) 6.00% 4/15/2023 $ 954
2,000 Uniti Group, LP / Uniti Group Finance,
Inc. / CSL Capital, LLC 8.25 10/15/2023 1,817
5,000 Washington Prime Group, LP 5.95 8/15/2024 4,686
----------
16,555
----------
SAVINGS & LOANS (0.2%)
5,000 Banc of California, Inc. 5.25 4/15/2025 5,147
----------
Total Financial 163,221
----------
GOVERNMENT (0.0%)
-----------------
REGIONAL(STATE/PROVINCE) (0.0%)
3,000 Mashantucket (Western) Pequot Tribe(l),(o) 7.35(m) 7/01/2026 479
----------
INDUSTRIAL (4.3%)
-----------------
AEROSPACE/DEFENSE (0.6%)
5,000 Arconic, Inc. 5.95 2/01/2037 5,320
2,000 Bombardier, Inc.(j) 7.88 4/15/2027 2,024
5,000 TransDigm, Inc.(j) 7.50 3/15/2027 5,271
----------
12,615
----------
BUILDING MATERIALS (0.1%)
2,333 Builders FirstSource, Inc.(j) 6.75 6/01/2027 2,455
----------
ELECTRICAL COMPONENTS & EQUIPMENT (0.4%)
5,079 Artesyn Embedded Technologies, Inc.(j),(n) 9.75 10/15/2020 5,133
3,000 Energizer Holdings, Inc.(j) 7.75 1/15/2027 3,260
----------
8,393
----------
ELECTRONICS (0.1%)
1,500 Itron, Inc.(j) 5.00 1/15/2026 1,539
----------
ENGINEERING & CONSTRUCTION (0.5%)
4,000 Brand Industrial Services, Inc.(j) 8.50 7/15/2025 3,500
2,000 New Enterprise Stone & Lime Co., Inc.(j) 10.13 4/01/2022 2,051
1,000 New Enterprise Stone & Lime Co., Inc.(j) 6.25 3/15/2026 1,023
5,000 Weekley Homes, LLC / Weekley Finance Corp. 6.63 8/15/2025 4,975
----------
11,549
----------
ENVIRONMENTAL CONTROL (0.3%)
3,000 Covanta Holding Corp. 5.88 7/01/2025 3,131
3,000 Waste Pro USA, Inc.(j) 5.50 2/15/2026 3,084
----------
6,215
----------
METAL FABRICATION/HARDWARE (0.1%)
3,000 Zekelman Industries, Inc.(j) 9.88 6/15/2023 3,157
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 23
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
MISCELLANEOUS MANUFACTURERS (0.7%)
$ 5,000 General Electric Co. (3 mo. LIBOR + 3.33%) 5.00%(q) -(p) $ 4,844
12,000 Textron Financial Corp. (3 mo. LIBOR + 1.74%)(j) 4.25(g) 2/15/2042 9,397
----------
14,241
----------
PACKAGING & CONTAINERS (1.2%)
3,150 Flex Acquisition Co., Inc.(j) 6.88 1/15/2025 2,796
2,000 Flex Acquisition Co., Inc.(j) 7.88 7/15/2026 1,804
1,000 LABL Escrow Issuer, LLC(j) 6.75 7/15/2026 1,020
2,000 LABL Escrow Issuer, LLC(j) 10.50 7/15/2027 2,016
10,000 Mauser Packaging Solutions Holding Co.(j) 7.25 4/15/2025 9,473
3,000 Plastipak Holdings, Inc.(j) 6.25 10/15/2025 2,701
3,000 Sealed Air Corp.(j) 6.88 7/15/2033 3,352
3,000 Trident Merger Sub, Inc.(j) 6.63 11/01/2025 2,646
----------
25,808
----------
TRANSPORTATION (0.3%)
2,000 Navios Maritime Holdings, Inc. / Navios Maritime
Finance II US, Inc.(j) 7.38 1/15/2022 1,358
5,333 XPO Logistics, Inc.(j) 6.75 8/15/2024 5,689
----------
7,047
----------
Total Industrial 93,019
----------
TECHNOLOGY (1.1%)
-----------------
COMPUTERS (0.1%)
3,000 Western Digital Corp. 4.75 2/15/2026 2,971
----------
SOFTWARE (1.0%)
5,000 First Data Corp.(j) 5.38 8/15/2023 5,134
5,000 Informatica, LLC(j) 7.13 7/15/2023 5,090
2,000 Solera, LLC / Solera Finance, Inc.(j) 10.50 3/01/2024 2,144
6,000 Sophia, LP / Sophia Finance, Inc.(j) 9.00 9/30/2023 6,225
3,000 Veritas US, Inc. / Veritas Bermuda Ltd.(j),(n) 10.50 2/01/2024 2,653
----------
21,246
----------
Total Technology 24,217
----------
UTILITIES (1.7%)
----------------
ELECTRIC (1.7%)
10,000 Calpine Corp. 5.75 1/15/2025 9,958
7,000 GenOn Energy, Inc.(e),(f) 9.88 10/15/2020 -
3,500 National Rural Utilities Cooperative Finance Corp.
(3 mo. LIBOR + 2.91%) 4.75(q) 4/30/2043 3,495
1,500 NRG Energy, Inc. 7.25 5/15/2026 1,622
3,000 NRG Energy, Inc. 5.75 1/15/2028 3,195
10,000 PPL Capital Funding, Inc. (3 mo. LIBOR + 2.67%) 4.99(g) 3/30/2067 9,095
================================================================================
24 | USAA HIGH INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 3,000 Talen Energy Supply, LLC(j) 7.25% 5/15/2027 $ 2,965
5,000 Vistra Energy Corp. 5.88 6/01/2023 5,111
----------
Total Utilities 35,441
----------
Total Corporate Obligations (cost: $1,250,088) 1,235,879
----------
EURODOLLAR AND YANKEE OBLIGATIONS (16.8%)
BASIC MATERIALS (2.9%)
----------------------
CHEMICALS (0.2%)
5,000 Venator Finance Sarl / Venator Materials, LLC(j) 5.75 7/15/2025 4,413
----------
FOREST PRODUCTS & PAPER (0.2%)
3,200 Smurfit Kappa Treasury Funding Ltd. 7.50 11/20/2025 3,777
----------
IRON/STEEL (0.7%)
10,000 ArcelorMittal 7.00 10/15/2039 11,924
3,000 Mineral Resources Ltd.(j) 8.13 5/01/2027 3,146
----------
15,070
----------
MINING (1.8%)
3,000 Eldorado Gold Corp.(j) 9.50 6/01/2024 3,097
10,000 First Quantum Minerals Ltd.(j) 7.50 4/01/2025 9,735
3,000 First Quantum Minerals Ltd.(j) 6.88 3/01/2026 2,832
1,394 New Gold, Inc.(j) 6.38 5/15/2025 1,209
13,000 Teck Resources Ltd. 6.13 10/01/2035 14,868
5,000 Vedanta Resources Ltd.(j) 8.25 6/07/2021 5,275
3,000 Vedanta Resources Ltd.(j) 6.38 7/30/2022 2,994
----------
40,010
----------
Total Basic Materials 63,270
----------
COMMUNICATIONS (3.0%)
---------------------
MEDIA (0.9%)
4,000 Altice Financing S.A.(j) 7.50 5/15/2026 4,182
2,000 Altice Finco S.A.(j) 7.63 2/15/2025 1,946
740 Altice Luxembourg S.A.(j) 7.75 5/15/2022 754
7,000 Altice Luxembourg S.A.(j) 7.63 2/15/2025 6,824
5,000 Altice Luxembourg S.A.(j) 10.50 5/15/2027 5,291
----------
18,997
----------
TELECOMMUNICATIONS (2.1%)
10,000 Altice France S.A.(j) 7.38 5/01/2026 10,650
4,000 Altice France S.A.(j) 8.13 2/01/2027 4,341
3,000 Digicel International Finance Ltd. / Digicel
Holdings Bermuda Ltd.(j) 8.75 5/25/2024 2,829
6,500 Digicel Ltd.(j) 6.00 4/15/2021 4,474
2,000 Intelsat Connect Finance S.A.(j) 9.50 2/15/2023 1,796
================================================================================
PORTFOLIO OF INVESTMENTS | 25
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 5,000 Intelsat Jackson Holdings S.A. 5.50% 8/01/2023 $ 4,610
5,000 Intelsat Jackson Holdings S.A.(j) 8.50 10/15/2024 5,030
5,000 Intelsat Jackson Holdings S.A.(j) 9.75 7/15/2025 5,177
5,000 Telecom Italia Capital S.A. 7.20 7/18/2036 5,581
----------
44,488
----------
Total Communications 63,485
----------
CONSUMER, CYCLICAL (1.0%)
-------------------------
AIRLINES (0.6%)
5,000 Air Canada Pass-Through Trust(j) 5.00 3/15/2020 5,039
3,315 Latam Airlines Pass-Through Trust 4.50 11/15/2023 3,283
3,857 Norwegian Air Pass-Through Trust(j) 7.50 11/10/2023 3,972
----------
12,294
----------
ENTERTAINMENT (0.1%)
3,000 Cirsa Finance Internationl Sarl(j) 7.88 12/20/2023 3,179
----------
HOME BUILDERS (0.3%)
3,000 Brookfield Residential Properties, Inc.(j) 6.38 5/15/2025 3,050
1,750 Mattamy Group Corp.(j) 6.88 12/15/2023 1,827
1,250 Mattamy Group Corp.(j) 6.50 10/01/2025 1,309
----------
6,186
----------
Total Consumer, Cyclical 21,659
----------
CONSUMER, NON-CYCLICAL (2.0%)
-----------------------------
COSMETICS/PERSONAL CARE (0.3%)
7,000 Avon International Capital plc(j) 6.50 8/15/2022 7,130
----------
FOOD (0.8%)
1,000 JBS Investments GmbH(j) 7.25 4/03/2024 1,038
3,000 JBS USA LUX S.A. / JBS USA Finance, Inc.(j) 5.88 7/15/2024 3,083
6,000 JBS USA LUX S.A. / JBS USA Finance, Inc.(j) 6.75 2/15/2028 6,475
3,000 Minerva Luxembourg S.A.(j) 5.88 1/19/2028 2,941
800 NBM U.S. Holdings, Inc. 7.00 5/14/2026 827
3,000 NBM U.S. Holdings, Inc.(b),(j) 6.63 8/06/2029 3,001
----------
17,365
----------
HOUSEHOLD PRODUCTS/WARES (0.3%)
8,000 Kronos Acquisition Holdings, Inc.(j) 9.00 8/15/2023 6,911
----------
PHARMACEUTICALS (0.6%)
10,000 Teva Pharmaceutical Finance Netherlands III B.V. 3.15 10/01/2026 7,790
500 Teva Pharmaceutical Finance Netherlands III B.V. 6.75 3/01/2028 448
5,000 Teva Pharmaceutical Finance Netherlands III B.V. 4.10 10/01/2046 3,319
----------
11,557
----------
Total Consumer, Non-cyclical 42,963
----------
================================================================================
26 | USAA HIGH INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
ENERGY (2.8%)
-------------
OIL & GAS (2.1%)
$ 3,060 Hunt Oil Co. of Peru, LLC Sucursal Del Peru(j) 6.38% 6/01/2028 $ 3,456
8,000 MEG Energy Corp.(j) 7.00 3/31/2024 7,627
4,093 Petrobras Global Finance B.V. 5.75 2/01/2029 4,381
10,000 Petroleos Mexicanos 6.50 3/13/2027 9,986
15,000 Petroleos Mexicanos 6.63 6/15/2035 14,053
5,000 Tecpetrol S.A.(j) 4.88 12/12/2022 4,837
----------
44,340
----------
OIL & GAS SERVICES (0.0%)
135 Schahin II Finance Co. SPV Ltd.(e),(f),(j),(l) 8.00(m) 5/25/2020 125
5,212 Schahin II Finance Co. SPV Ltd.(d),(j),(o) 5.88 9/25/2022 387
----------
512
----------
PIPELINES (0.7%)
10,000 Transcanada Trust (3 mo. LIBOR + 3.53%) 5.63(q) 5/20/2075 10,251
5,000 Transportadora de Gas del Sur S.A.(j) 6.75 5/02/2025 4,684
----------
14,935
----------
Total Energy 59,787
----------
FINANCIAL (1.9%)
----------------
BANKS (1.2%)
5,000 Deutsche Bank AG 4.50 4/01/2025 4,768
2,000 Deutsche Bank AG (5 Yr. Semi-Annual Swap + 2.25%) 4.30(q) 5/24/2028 1,860
13,000 Deutsche Bank AG (5 Yr. Semi-Annual Swap + 2.55%) 4.88(q) 12/01/2032 11,676
5,000 Royal Bank of Scotland Group plc
(3 mo. LIBOR + 2.32%) 4.65(g) -(p) 4,741
3,000 UniCredit S.p.A. (5 Yr. Semi-Annual
Swap + 4.91%)(j) 7.30(q) 4/02/2034 3,357
----------
26,402
----------
INSURANCE (0.7%)
10,000 QBE Capital Funding III Ltd. (10 Yr. Semi-Annual
Swap + 4.05%)(j) 7.25(q) 5/24/2041 10,600
4,000 XLIT Ltd. (3 mo. LIBOR + 2.46%) 4.76(g) -(p) 3,977
----------
14,577
----------
Total Financial 40,979
----------
INDUSTRIAL (1.7%)
-----------------
AEROSPACE/DEFENSE (0.9%)
2,500 Bombardier, Inc.(j) 7.50 12/01/2024 2,581
17,000 Bombardier, Inc.(j) 7.50 3/15/2025 17,315
----------
19,896
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 27
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
PACKAGING & CONTAINERS (0.8%)
$ 3,274 ARD Securities Finance SARL(j),(l) 8.75%(m) 1/31/2023 $ 3,395
5,500 Ardagh Packaging Finance plc / Ardagh Holdings
USA, Inc.(j) 7.25 5/15/2024 5,805
3,000 Ardagh Packaging Finance plc / Ardagh Holdings
USA, Inc.(j) 6.00 2/15/2025 3,096
3,250 Reynolds Group Issuer, Inc. / Reynolds
Group Issuer, LLC / Reynolds Group Issuer Lu(j) 7.00 7/15/2024 3,364
----------
15,660
----------
Total Industrial 35,556
----------
UTILITIES (1.5%)
----------------
ELECTRIC (1.5%)
5,000 AES Gener S.A. (5 Yr. Semi-Annual Swap + 4.64%)(j) 7.13(q) 3/26/2079 5,408
10,000 Electricite de France S.A. (10 Yr. Semi-Annual
Swap + 3.71%)(j) 5.25(q) -(p) 10,230
8,975 Enel S.p.A. (5 Yr. Semi-Annual Swap + 5.88%)(j) 8.75(q) 9/24/2073 10,482
5,000 Vistra Operations Co., LLC(j) 5.00 7/31/2027 5,125
----------
Total Utilities 31,245
----------
Total Eurodollar and Yankee Obligations (cost: $344,566) 358,944
----------
FOREIGN GOVERNMENT OBLIGATIONS (0.1%)
3,000 Bahamas Government International Bond(j)
(cost: $3,000) 6.00 11/21/2028 3,304
----------
MUNICIPAL OBLIGATIONS (0.7%)
FLORIDA (0.4%)
9,200 Liberty County (Put Date 8/07/2019)(s) 1.55 10/01/2028 9,200
----------
ILLINOIS (0.1%)
2,000 City of Chicago 7.05 1/01/2029 2,226
----------
NEW JERSEY (0.2%)
2,500 EDA 5.71 6/15/2030 2,927
----------
Total Municipal Obligations (cost: $13,700) 14,353
----------
PREFERRED BONDS (0.1%)
FINANCIAL (0.1%)
----------------
INSURANCE (0.1%)
3,000 Catlin Insurance Co. Ltd. (3 mo. LIBOR + 2.98%)(j)
(cost: $3,000) 5.28(g) -(p) 2,994
----------
================================================================================
28 | USAA HIGH INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY ISSUES (0.4%)(t)
COMMERCIAL MBS (0.4%)
$ 2,428 Freddie Mac(+) 3.12%(h) 10/25/2031 $ 2,534
5,000 Freddie Mac(+) 3.15(h) 11/25/2025 5,239
----------
Total U.S. Government Agency Issues (cost: $7,535) 7,773
----------
U.S. TREASURY SECURITIES (0.0%)
NOTES (0.0%)
550 U.S. Treasury Note (cost: $544) 2.00 2/15/2025 553
----------
Total Bonds (cost: $1,731,150) 1,715,253
----------
-------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
-------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (13.6%)
COMMON STOCKS (3.0%)
BASIC MATERIALS (0.2%)
----------------------
CHEMICALS (0.1%)
19,215 LyondellBasell Industries N.V. "A" 1,608
----------
FOREST PRODUCTS & PAPER (0.0%)
534 Resolute Forest Products, Inc. 3
----------
MINING (0.1%)
245,000 Alamos Gold, Inc. "A" 1,605
33,650 Newmont Goldcorp Corp. 1,229
----------
2,834
----------
Total Basic Materials 4,445
----------
COMMUNICATIONS (0.4%)
---------------------
ADVERTISING (0.0%)
163,905 Clear Channel outdoor Holdings, Inc.(u) 496
----------
MEDIA (0.2%)
77,900 Comcast Corp. "A" 3,363
69,703 iHeartMedia, Inc. "A"(u) 1,043
----------
4,406
----------
TELECOMMUNICATIONS (0.2%)
50,503 AT&T, Inc. 1,720
63,000 CenturyLink, Inc. 762
28,650 Verizon Communications, Inc. 1,583
----------
4,065
----------
Total Communications 8,967
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 29
================================================================================
-------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------
CONSUMER, CYCLICAL (0.3%)
-------------------------
AIRLINES (0.1%)
23,000 United Airlines Holdings, Inc.(u) $ 2,114
----------
AUTO PARTS & EQUIPMENT (0.1%)
10,356 Lear Corp. 1,313
----------
LODGING (0.1%)
25,400 Hyatt Hotels Corp. "A" 1,965
13,500 Las Vegas Sands Corp. 816
----------
2,781
----------
Total Consumer, Cyclical 6,208
----------
CONSUMER, NON-CYCLICAL (0.6%)
-----------------------------
COMMERCIAL SERVICES (0.1%)
13,899 Automatic Data Processing, Inc. 2,314
----------
HEALTHCARE-PRODUCTS (0.0%)
2,921 Alcon, Inc.(u) 172
----------
HOUSEHOLD PRODUCTS/WARES (0.1%)
11,242 Kimberly-Clark Corp. 1,525
----------
PHARMACEUTICALS (0.4%)
22,300 AbbVie, Inc. 1,485
18,400 CVS Health Corp. 1,028
16,562 Johnson & Johnson 2,157
30,900 Merck & Co., Inc. 2,564
14,607 Novartis AG ADR 1,338
----------
8,572
----------
Total Consumer, Non-cyclical 12,583
----------
ENERGY (0.2%)
-------------
OIL & GAS (0.2%)
414,000 Approach Resources, Inc.(u) 112
8,522 Chevron Corp. 1,049
5,500 Comstock Resources, Inc.(u) 37
55,337 Harvest Oil & Gas Corp.(n),(u) 669
21,663 Nine Point Energy Holdings, Inc.(e),(f),(o),(u) 22
32,263 Royal Dutch Shell plc ADR "A" 2,029
2,772 Sabine Oil & Gas Holdings, Inc.(o),(v) 139
4,982 SilverBow Resources, Inc.(u) 52
22,883 Thunderbird Resources Equity, Inc.(e),(f),(o),(u) 8
----------
4,117
----------
================================================================================
30 | USAA HIGH INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------
OIL & GAS SERVICES (0.0%)
3,813 Paragon Litigation "B"(e),(o),(u) $ 55
2,542 Paragon Litigation "A"(e),(o),(u) 1
----------
56
----------
Total Energy 4,173
----------
FINANCIAL (0.9%)
----------------
BANKS (0.3%)
27,800 BB&T Corp. 1,432
18,507 J.P. Morgan Chase & Co. 2,147
111,918 KeyCorp. 2,056
109,207 Regions Financial Corp. 1,740
----------
7,375
----------
DIVERSIFIED FINANCIAL SERVICES (0.2%)
24,700 CME Group, Inc. 4,802
13,639 Synchrony Financial 490
----------
5,292
----------
INSURANCE (0.1%)
1,995 Brighthouse Financial, Inc.(u) 78
21,952 MetLife, Inc. 1,085
----------
1,163
----------
INVESTMENT COMPANIES (0.1%)
202,000 Prospect Capital Corp.(n) 1,337
----------
REITS (0.2%)
17,000 Crown Castle International Corp. 2,265
129,100 MFA Financial, Inc. 927
----------
3,192
----------
Total Financial 18,359
----------
INDUSTRIAL (0.0%)
-----------------
MACHINERY-DIVERSIFIED (0.0%)
189 Wabtec Corp. 15
----------
MISCELLANEOUS MANUFACTURERS (0.0%)
35,316 General Electric Co. 369
----------
Total Industrial 384
----------
TECHNOLOGY (0.3%)
-----------------
SEMICONDUCTORS (0.1%)
42,500 Intel Corp. 2,149
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 31
================================================================================
-------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------
SOFTWARE (0.2%)
176 Avaya Holdings Corp.(u) $ 2
33,200 Microsoft Corp. 4,524
----------
4,526
----------
Total Technology 6,675
----------
UTILITIES (0.1%)
----------------
ELECTRIC (0.1%)
16,168 GenOn(e),(o),(u) 2,991
----------
Total Common Stocks (cost: $50,234) 64,785
----------
EXCHANGE-TRADED FUNDS (6.2%)
807,670 iShares iBoxx High Yield Corporate Bond ETF 70,211
580,566 SPDR Bloomberg Barclays High Yield Bond ETF 63,043
----------
Total Exchange-Traded Funds (cost: $130,640) 133,254
----------
PREFERRED STOCKS (4.4%)
COMMUNICATIONS (0.2%)
---------------------
TELECOMMUNICATIONS (0.2%)
200,000 Qwest Corp., 6.50% 4,928
----------
CONSUMER, NON-CYCLICAL (1.7%)
-----------------------------
AGRICULTURE (0.8%)
400,000 CHS, Inc., 7.10%, (3 mo. LIBOR + 4.30%)(p) 10,812
200,000 CHS, Inc., cumulative redeemable, 7.88%(p) 5,480
----------
16,292
----------
FOOD (0.9%)
200,000 Dairy Farmers of America, Inc., cumulative redeemable, 7.88%(j),(p) 20,000
----------
Total Consumer, Non-cyclical 36,292
----------
ENERGY (1.5%)
-------------
OIL & GAS (0.1%)
3,800 Chesapeake Energy Corp., 5.75%(j),(p) 1,742
464 Nine Point Energy Holdings, Inc.,(e),(f),(o) 46
----------
1,788
----------
PIPELINES (1.4%)
1,127,328 NuStar Logistics, LP, 9.04%, (3 mo. LIBOR + 6.73%)(k) 29,277
----------
Total Energy 31,065
----------
================================================================================
32 | USAA HIGH INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------
FINANCIAL (1.0%)
----------------
BANKS (0.4%)
1,265 M&T Bank Corp., cumulative redeemable, 6.38%(p) $ 1,271
8,000 U.S. Bancorp, 3.50%, (3 mo. LIBOR + 1.02%)(p) 6,600
----------
7,871
----------
DIVERSIFIED FINANCIAL SERVICES (0.0%)
928 Ditech Holding Corp., (Zero Coupon)(o),(p),(u) -
----------
INSURANCE (0.3%)
3,000 American Overseas Group Ltd., non-cumulative, 5.82%,
(3 mo. LIBOR + 3.56%)(e),(f),(o) 750
274,059 Delphi Financial Group, Inc., cumulative redeemable, 5.71%,
(3 mo. LIBOR + 3.19%) 6,098
----------
6,848
----------
REITS (0.3%)
100,000 Equity Residential Properties Trust, 8.29%, Series K, depositary
shares, cumulative redeemable(p) 6,475
----------
Total Financial 21,194
----------
Total Preferred Stocks (cost: $96,895) 93,479
----------
WARRANTS (0.0%)
ENERGY (0.0%)
-------------
OIL & GAS (0.0%)
8,791 Sabine Oil & Gas Holdings, Inc.(o),(v) 88
1,565 Sabine Oil & Gas Holdings, Inc.(o),(u),(v) 12
5,795 SandRidge Energy, Inc.(u) 1
13,764 SandRidge Energy, Inc.(o),(u) -
----------
Total Energy 101
----------
Warrants (cost: $0) 101
----------
Total Equity Securities (cost: $277,769) 291,619
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 33
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (6.0%)
COMMERCIAL PAPER (6.0%)
$ 7,345 Autozone, Inc.(j) 2.45% 8/01/2019 $ 7,345
2,700 Cabot Corp.(j) 2.47 8/01/2019 2,700
19,000 Cabot Corp.(j) 2.47 8/05/2019 18,995
11,490 CenterPoint Energy, Inc.(j) 2.48 8/14/2019 11,480
5,300 CSLB Holdings, Inc.(j) 2.50 8/02/2019 5,300
3,500 CSLB Holdings, Inc.(j) 2.45 8/05/2019 3,499
4,500 CSLB Holdings, Inc.(j) 2.50 8/12/2019 4,496
3,968 Eversource Energy(j) 2.40 8/08/2019 3,966
11,900 Experian Finance Plc(j) 2.45 8/20/2019 11,885
3,152 Keurig Dr Pepper, Inc.(j) 2.43 8/07/2019 3,151
15,000 Nutrien Ltd. 2.44 8/07/2019 14,994
20,748 Oge Energy Corp. 2.46 8/02/2019 20,746
20,000 Spire, Inc. 2.52 8/01/2019 20,000
----------
Total Commercial Paper (cost: $128,557) 128,557
----------
-------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
-------------------------------------------------------------------------------------------------------------
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.0%)
52,916 State Street Institutional Treasury Money Market Fund Premier
Class, 2.09%(w) (cost: $53) 53
----------
Total Money Market Instruments (cost: $128,610) 128,610
----------
SHORT-TERM INVESTMENT PURCHASED WITH CASH COLLATERAL
FROM SECURITIES LOANED (0.6%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.6%)
12,807,115 HSBC U.S. Government Money Market Fund Class I, 2.26%(w) 12,807
----------
Total Short-Term Investment Purchased with Cash Collateral from Securities
Loaned (cost: $12,807) 12,807
----------
TOTAL INVESTMENTS (COST: $2,150,336) $2,148,289
----------
================================================================================
34 | USAA HIGH INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
-------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------------------------------------------------------------------------------------------------------
Bonds:
Bank Loans $ - $ 85,098 $ 6 $ 85,104
Collateralized Mortgage Obligations - 1,432 - 1,432
Commercial Mortgage Securities - 4,917 - 4,917
Corporate Obligations - 1,235,879 - 1,235,879
Eurodollar and Yankee Obligations - 358,819 125 358,944
Foreign Government Obligations - 3,304 - 3,304
Municipal Obligations - 14,353 - 14,353
Preferred Bonds - 2,994 - 2,994
U.S. Government Agency Issues - 7,773 - 7,773
U.S. Treasury Securities 553 - - 553
Equity Securities:
Common Stocks 61,569 3,186 30 64,785
Exchange-Traded Funds 133,254 - - 133,254
Preferred Stocks - 92,683 796 93,479
Warrants 1 100 - 101
Money Market Instruments:
Commercial Paper - 128,557 - 128,557
Government & U.S. Treasury
Money Market Funds 53 - - 53
Short-Term Investment Purchased
with CashCollateral from
Securities Loaned:
Government & U.S. Treasury
Money Market Funds 12,807 - - 12,807
-------------------------------------------------------------------------------------------------------------
Total $208,237 $1,939,095 $957 $2,148,289
-------------------------------------------------------------------------------------------------------------
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 July 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
PORTFOLIO OF INVESTMENTS | 35
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
July 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 18.7% of net assets at July 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
================================================================================
36 | USAA HIGH INCOME FUND
================================================================================
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 issued in multiple classes (tranches), with specific adjustable or
fixed interest rates, varying maturities, and must be fully retired no later
than its final distribution date. The cash flow from the underlying
mortgages is used to pay off each tranche separately. CMOs are designed to
provide investors with more predictable cash flows than regular mortgage
securities, but such cash flows can be difficult to predict because of the
effect of prepayments.
COMMERCIAL PAPER - Consists of short-term unsecured promissory notes with
maturities ranging from one to 270 days, issued mainly by corporations.
Commercial paper is usually purchased at a discount and matures at par
value; however, it also may be interest-bearing. Rate represents an
annualized yield at time of purchase or coupon rate, if applicable.
WARRANTS - Entitle the holder to buy a proportionate amount of common stock
at a specified price for a stated period.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 37
================================================================================
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.
CMT Constant Maturity Treasury
EDA Economic Development Authority
LIBOR London Interbank Offered Rate
REITS Real estate investment trusts - Dividend distributions from
REITS may be recorded as income and later characterized by the
REIT at the end of the fiscal year as capital gains or a return
of capital. Thus, the Fund will estimate the components of
distributions from these securities and revise when actual
distributions are known.
Zero Coupon Normally issued at a significant discount from face value and
do not provide for periodic interest payments. Income is earned
from the purchase date by accreting the purchase discount of
the security to par over the life of the security.
o SPECIFIC NOTES
(a) Bank loans (loans) - are not registered under the Securities Act of
1933. The loans contain certain restrictions on resale and cannot be
sold publicly. The stated interest rates represent the all in interest
rate of all contracts within the loan facilities. The interest rates
are adjusted periodically, and the rates disclosed represent the
current rate at July 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
Victory Capital, under liquidity guidelines approved by USAA Mutual
Funds Trust's Board of Trustees, unless otherwise noted as illiquid.
(b) Security or a portion of the security purchased on a delayed-delivery
and/or when-issued basis.
(c) The bank loan will settle after July 31, 2019, at which time the
interest rate will be determined.
================================================================================
38 | USAA HIGH INCOME FUND
================================================================================
(d) At July 31, 2019, the issuer was in default with respect to interest
and/or principal payments.
(e) Security was fair valued at July 31, 2019, by Victory Capital in
accordance with valuation procedures approved by USAA Mutual Funds
Trust's Board of Trustees. The total value of all such securities was
$4,004,000, which represented 0.2% of the Fund's net assets.
(f) Security was classified as Level 3.
(g) Variable-rate security - interest rate is adjusted periodically.
The interest rate disclosed represents the rate at July 31, 2019.
(h) Stated interest rates may change slightly over time as underlying
mortgages paydown.
(i) Security is interest only. Interest-only commercial mortgage-backed
securities (CMBS IOs) represent the right to receive only the interest
payments on an underlying pool of commercial mortgage loans. The
purchase yield reflects an anticipated yield based upon interest rates
at the time of purchase and the estimated timing and amount of future
cash flows. Coupon rates after purchase vary from period to period. The
principal amount represents the notional amount of the underlying pool
on which current interest is calculated. CMBS IOs are backed by loans
that have various forms of prepayment protection, which include
lock-out provisions, yield maintenance provisions, and prepayment
penalties. This serves to moderate their prepayment risk. CMBS IOs are
subject to default-related prepayments that may have a negative impact
on yield.
(j) 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 Victory Capital under
liquidity guidelines approved by USAA Mutual Funds Trust's Board of
Trustees, unless otherwise noted as illiquid.
(k) At July 31, 2019, the security, or a portion thereof, was segregated to
cover delayed-delivery and/or when-issued purchases.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 39
================================================================================
(l) 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.
(m) All of the coupon is PIK.
(n) The security, or a portion thereof, was out on loan as of July 31,
2019.
(o) Security deemed illiquid by Victory Capital, under liquidity guidelines
approved by USAA Mutual Funds Trust's Board of Trustees.
(p) Security is perpetual and has no final maturity date but may be subject
to calls at various dates in the future.
(q) 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.
(r) Zero-coupon security. Rate represents the effective yield at the date
of purchase.
(s) Variable-rate demand notes (VRDNs) - Provide the right to sell the
security at face value on either that day or within the rate-reset
period. VRDNs will normally trade as if the maturity is the earlier put
date, even though stated maturity is longer. The interest rate is reset
on the put date at a stipulated daily, weekly, monthly, quarterly, or
other specified time interval to reflect current market conditions.
These securities do not indicate a reference rate and spread in their
description.
(t) 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'
================================================================================
40 | USAA HIGH INCOME FUND
================================================================================
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.
(u) Non-income-producing security.
(v) Restricted security that is not registered under the Securities Act
of 1933.
(w) Rate represents the money market fund annualized seven-day yield at
July 31, 2019.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 41
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
July 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value
(including securities on loan of $12,156) (cost of $2,150,336) $2,148,289
Cash 7,785
Receivables:
Capital shares sold 843
Victory Capital (Note 8) 10
Dividends and interest 31,099
Securities sold 18,044
Other 68
----------
Total assets 2,206,138
----------
LIABILITIES
Payables:
Upon return of securities loaned 12,807
Securities purchased 49,140
Capital shares redeemed 1,099
Accrued administration and servicing fees 233
Accrued management fees 909
Accrued transfer agent's fees 205
Other accrued expenses and payables 200
----------
Total liabilities 64,593
----------
Net assets applicable to capital shares outstanding $2,141,545
==========
NET ASSETS CONSIST OF:
Paid-in capital $2,229,203
Accumulated loss (87,658)
----------
Net assets applicable to capital shares outstanding $2,141,545
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $1,212,711/153,383
capital shares outstanding, no par value) $ 7.91
==========
Institutional Shares (net assets of $913,599/115,697
capital shares outstanding, no par value) $ 7.90
==========
Adviser Shares (net assets of $10,021/1,265
capital shares outstanding, no par value) $ 7.93
==========
R6 Shares (net assets of $5,214/660 capital shares
outstanding, no par value) $ 7.90
==========
See accompanying notes to financial statements.
================================================================================
42 | USAA HIGH INCOME FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended July 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $26) $ 15,221
Interest 126,947
Securities lending (net) 1,290
----------
Total income 143,458
----------
EXPENSES
Management fees 11,308
Administration and servicing fees:
Fund Shares 1,779
Institutional Shares 915
Adviser Shares 15
R6 Shares 2
Transfer agent's fees:
Fund Shares 1,584
Institutional Shares 915
Adviser Shares 7
R6 Shares 1
Distribution and service fees (Note 8):
Adviser Shares 25
Custody and accounting fees:
Fund Shares 198
Institutional Shares 150
Adviser Shares 2
R6 Shares 1
Postage:
Fund Shares 69
Institutional Shares 107
Shareholder reporting fees:
Fund Shares 34
Institutional Shares 14
Trustees' fees 37
================================================================================
FINANCIAL STATEMENTS | 43
================================================================================
Registration fees:
Fund Shares $ 35
Institutional Shares 30
Adviser Shares 18
R6 Shares 18
Professional fees 108
Other 32
----------
Total expenses 17,404
----------
Expenses reimbursed:
Adviser Shares (21)
R6 Shares (15)
----------
Net expenses 17,368
----------
NET INVESTMENT INCOME 126,090
----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FUTURES CONTRACTS
Net realized gain (loss) on
Unaffiliated transactions (16,512)
Affiliated transactions (Note 5) 9,753
Futures transactions (692)
Change in net unrealized appreciation/(depreciation) of:
Investments (20,708)
Futures contracts (68)
----------
Net realized and unrealized loss (28,227)
----------
Increase in net assets resulting from operations $ 97,863
==========
See accompanying notes to financial statements.
================================================================================
44 | USAA HIGH INCOME FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended July 31,
-------------------------------------------------------------------------------------------------------
2019 2018
-------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 126,090 $ 128,287
Net realized loss on investments (6,759) (3,914)
Net realized loss on futures transactions (692) (5,520)
Change in net unrealized appreciation/(depreciation) of:
Investments (20,708) (60,046)
Futures contracts (68) 158
--------------------------------
Increase in net assets resulting from operations 97,863 58,965
--------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (71,053) (70,436)
Institutional Shares (55,401) (57,110)
Adviser Shares (574) (555)
R6 Shares (315) (304)
--------------------------------
Distributions to shareholders (127,343) (128,405)
--------------------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (NOTE 7)
Fund Shares 21,580 20,277
Institutional Shares (39,909) 25,850
Adviser Shares 145 232
R6 Shares 221 39
--------------------------------
Total net increase (decrease) in net assets from
capital share transactions (17,963) 46,398
--------------------------------
Net decrease in net assets (47,443) (23,042)
NET ASSETS
Beginning of year 2,188,988 2,212,030
--------------------------------
End of year $2,141,545 $2,188,988
================================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 45
================================================================================
NOTES TO FINANCIAL STATEMENTS
July 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 High Income 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 to
provide an attractive total return primarily through high current income and
secondarily through capital appreciation.
The Fund consists of four classes of shares: High Income Fund Shares (Fund
Shares), High Income Fund Institutional Shares (Institutional Shares), High
Income Fund Adviser Shares (Adviser Shares), and High Income Fund R6 Shares (R6
Shares). Each class of shares has equal rights to assets and earnings, except
that each class bears certain class-related expenses specific to the particular
class. These expenses include administration and servicing fees, transfer agent
fees, postage, shareholder reporting fees, distribution and service (12b-1)
fees, and certain registration and custodian fees. Expenses not attributable to
a specific class, income, and realized gains or losses on investments are
allocated to each class of shares based on each class' relative net assets. Each
class has exclusive voting rights on matters related solely to that class and
separate voting rights on matters that relate to all classes. The Institutional
Shares are available for investment through a USAA discretionary managed account
program and certain advisory programs sponsored by financial intermediaries,
such as brokerage firms,
================================================================================
46 | USAA HIGH INCOME FUND
================================================================================
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 an affiliate fund participating in a
fund-of-funds investment strategy (affiliated 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), the investment adviser to the
Fund, and USAA Transfer Agency Company, d/b/a USAA Shareholder Account Services
(SAS), the transfer agent to the Fund, announced that AMCO and SAS would be
acquired by Victory Capital Holdings, Inc., a global investment management firm
headquartered in Cleveland, Ohio (the Transaction) on July 1, 2019. Effective
August 5, 2019, Citibank, N.A. is the new custodian for the USAA Mutual Funds. 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. 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.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Pricing 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 | 47
================================================================================
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 are valued each business day by a pricing service (the
Service) approved by the Board. The Service uses an evaluated bid 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.
Effective July 1, 2019 the valuation methodology applied to certain
debt securities changed. Securities that were previously valued at an
evaluated mean are now valued at the evaluated bid or the last sales
price.
2. Equity securities, including exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange or
the over-the-counter markets, are valued at the last sales price or
official closing price on the exchange or primary market on which they
trade. Securities traded primarily on foreign securities exchanges or
markets are valued at the last quoted sale price, or the most recently
determined official closing price calculated according to local market
convention, available at the time the Fund is valued. If no last sale
or official closing price is reported or available, the closing bid
price generally is used for U.S. listed equities and the average of the
bid and asked prices is used for foreign listed equities. Actively
traded equity securities listed on a domestic exchange
================================================================================
48 | USAA HIGH INCOME FUND
================================================================================
generally are categorized in Level 1 of the fair value hierarchy.
Certain preferred and equity securities traded in inactive markets
generally are categorized in Level 2 of the fair value hierarchy.
3. Equity securities trading in various foreign markets may take place on
days when the NYSE is closed. Further, when the NYSE is open, the
foreign markets may be closed. Therefore, the calculation of the Fund's
net asset value (NAV) may not take place at the same time the prices of
certain foreign securities held by the Fund are determined. In many
cases, events affecting the values of foreign securities that occur
between the time of their last quoted sale or official closing price
and the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not need to be reflected in the value of the Fund's
foreign securities. However, the Manager will monitor for events that
would materially affect the value of the Fund's foreign securities and
the Committee will consider such available information that it deems
relevant and will determine a fair value for the affected foreign
securities in accordance with valuation procedures. In addition,
information from an external vendor or other sources may be used to
adjust the foreign market closing prices of foreign equity securities
to reflect what the Committee believes to be the fair value of the
securities as of the close of the NYSE. Fair valuation of affected
foreign equity securities may occur frequently based on an assessment
that events which occur on a fairly regular basis (such as U.S. market
movements) are significant. Such securities are categorized in Level 2
of the fair value hierarchy.
4. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value hierarchy.
5. Short-term debt securities with original or remaining maturities of 60
days or less generally are priced but may be valued at amortized cost,
provided that amortized cost represents the fair value of such
securities.
6. Repurchase agreements are valued at cost.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 49
================================================================================
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 last sale on the prior trading date.
8. Options are valued by a pricing service at the bid and ask price.
9. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has been recognized in relation to a security or class of securities,
the securities are valued in good faith by the Committee in accordance
with valuation procedures approved by the Board. The effect of fair
value pricing is that securities may not be priced on the basis of
quotations from the primary market in which they are traded and the
actual price realized from the sale of a security may differ materially
from the fair value price. Valuing these securities at fair value is
intended to cause the Fund's NAV to be more reliable than it otherwise
would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
broker-dealers, other pricing services, or widely used quotation
systems. General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and duration
of any restrictions on disposition of the securities, evaluation of
credit quality, and an evaluation of the forces that influenced the
market in which the securities are purchased and sold. Level 2
securities include debt securities that are valued using market inputs
and other observable factors deemed by the Manager to appropriately
reflect fair value. 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
================================================================================
50 | USAA HIGH INCOME FUND
================================================================================
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 July 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 | 51
================================================================================
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 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
================================================================================
52 | USAA HIGH INCOME FUND
================================================================================
assets and liabilities, other than investments in securities, resulting from
changes in the exchange rate.
F. SECURITIES PURCHASED ON A DELAYED-DELIVERY OR WHEN-ISSUED BASIS - Delivery
and payment for securities that have been purchased by the Fund on a
delayed-delivery or when-issued basis or for delayed draws on loans can take
place a month or more after the trade date. During the period prior to
settlement, these securities do not earn interest, are subject to market
fluctuation, and may increase or decrease in value prior to their delivery.
The Fund receives a commitment fee for delayed draws on loans. The Fund
maintains segregated assets with a market value equal to or greater than the
amount of its purchase commitments. The purchase of securities on a
delayed-delivery or when-issued basis and delayed-draw loan commitments may
increase the volatility of the Fund's NAV to the extent that the Fund makes
such purchases and commitments while remaining substantially fully invested.
G. REDEMPTION FEES - All share classes held in the Fund less than 180 days are
subject to a redemption fee equal to 1.00% of the proceeds of the redeemed
or exchanged shares. All redemption fees paid will be accounted for by the
Fund as an addition to paid in capital. Effective July 1, 2019 the Fund will
no longer charge redemption fees. For the period from August 1, 2018 to June
30, 2019, the Fund Shares, Institutional Shares and Adviser Shares charged
redemption fees of $18,000, $1,000, less than $500 respectively. The R6
Shares did not charge any redemption fees.
H. INDEMNIFICATIONS - Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities arising out of the
performance of their duties to the Trust. In addition, in the normal course
of business, the Trust enters into contracts that contain a variety of
representations and warranties that provide general indemnifications. The
Trust's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Trust that have not yet
occurred. However, the Trust expects the risk of loss to be remote.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 53
================================================================================
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 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. 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.
For the period July 1, 2019 to July 31, 2019, the Fund paid Citibank facility
fees of 1,000, which represents 1.5% of the total fees paid to Citibank by the
funds of the Trusts. The Fund had no borrowings under this agreement during the
period July 1, 2019 to July 31, 2019. Effective July 1, 2019, the line of credit
among the Trust, with respect to its funds, and USAA Capital Corporation (CAPCO)
terminated. For the period from August 1, 2018 to June 30, 2019, the Fund paid
CAPCO facility fees of $17,000, which represents 2.6% of the total fees paid to
CAPCO by the funds of the Trusts. The Fund had no borrowings under this
agreement during the period from August 1, 2018 to June 30, 2019.
(3) INTERFUND LENDING
Effective July 1, 2019, the Trust relies on an exemptive order granted to
Victory Capital and its affiliated funds by the U.S. Securities and Exchange
Commission (SEC) in March 2017 (the Order), permitting the establishment and
operation of an Interfund Lending Facility (the Facility). The Facility
================================================================================
54 | USAA HIGH INCOME FUND
================================================================================
allows each fund to directly lend and borrow money to or from certain other
affiliated funds relying upon the 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 Order, by averaging the current repurchase
agreement rate and the current bank loan rate. For the period July 1, 2019 to
July 31, 2019, the Fund did not lend.
(4) 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 July 31, 2019,
and 2018, was as follows:
2019 2018
---------------------------------
Ordinary income* $127,343,000 $128,405,000
As of July 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 1,700,000
Accumulated capital and other losses (86,570,000)
Unrealized depreciation of investments (2,315,000)
* 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
basis, perpetual bond, defaulted bond and hybrid interest accrual.
Distributions of net investment income are made monthly. Distributions of
realized gains from security transactions not offset by capital losses are made
================================================================================
NOTES TO FINANCIAL STATEMENTS | 55
================================================================================
annually in the succeeding fiscal year or as otherwise required to avoid the
payment of federal taxes.
At July 31, 2019, the Fund had net capital loss carryforwards of $86,570,000,
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 $(13,619,000)
Long-Term (72,951,000)
------------
Total $(86,570,000)
============
TAX BASIS OF INVESTMENTS - At July 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 High
Income Fund $2,150,604,000 $110,956,000 $(113,271,000) $(2,315,000)
(5) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended July 31, 2019, were $688,973,000 and
$622,003,000, respectively.
In accordance with affiliated transaction procedures approved by the Board,
purchases and sales of security transactions were executed between the Fund and
affiliated 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 July 31, 2019 were as follows:
PURCHASES SALES NET REALIZED GAIN (LOSS)
--------------------------------------------------------------------------------
$9,200,000 $97,138,000 $9,753,000
================================================================================
56 | USAA HIGH INCOME FUND
================================================================================
(6) 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 July 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
--------------------------------------------------------------------------------
$12,156,000 $- $12,807,000
(7) CAPITAL SHARE TRANSACTIONS
At July 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 fund-of-funds as well as other persons or
================================================================================
NOTES TO FINANCIAL STATEMENTS | 57
================================================================================
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
JULY 31, 2019 JULY 31, 2018
-------------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
FUND SHARES:
Shares sold 26,154 $ 205,681 28,387 $ 231,121
Shares issued from reinvested
dividends 8,428 66,013 8,071 65,364
Shares redeemed** (31,952) (250,114) (34,005) (276,208)
-----------------------------------------------------------
Net increase from capital
share transactions 2,630 $ 21,580 2,453 $ 20,277
===========================================================
INSTITUTIONAL SHARES:
Shares sold 9,714 $ 76,300 14,057 $ 114,252
Shares issued from reinvested
dividends 6,820 53,355 6,800 55,026
Shares redeemed** (21,566) (169,564) (17,670) (143,428)
-----------------------------------------------------------
Net increase (decrease) from
capital share transactions (5,032) $ (39,909) 3,187 $ 25,850
===========================================================
ADVISER SHARES:
Shares sold 118 $ 926 177 $ 1,443
Shares issued from reinvested
dividends 32 255 30 242
Shares redeemed** (133) (1,036) (178) (1,453)
-----------------------------------------------------------
Net increase from capital
share transactions 17 $ 145 29 $ 232
===========================================================
R6 SHARES:
Shares sold 31 $ 243 5 $ 39
Shares issued from reinvested
dividends 1 9 -* -*
Shares redeemed** (4) (31) (-)* (-)*
-----------------------------------------------------------
Net increase from capital
share transactions 28 $ 221 5 $ 39
===========================================================
* Represents less than 500 shares or $500.
** Net of redemption fees, if any.
================================================================================
58 | USAA HIGH INCOME FUND
================================================================================
(8) TRANSACTIONS WITH MANAGER
MANAGEMENT FEES - The Manager provides investment management services to the
Fund pursuant to an Advisory Agreement. Effective July 1, 2019, the Trust relies
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. For the year ended July 31, 2019, the
Fund had no subadviser(s).
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee is accrued daily and paid monthly at
an annualized rate of 0.50% of the Fund's average daily net assets.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper High Yield Bond Funds Index. The Lipper High Yield Bond
Funds Index tracks the total return performance of funds within the Lipper High
Yield Funds category.
The performance period for each class consists of the current month plus the
previous 35 months. The performance period for the R6 Shares commenced on
December 1, 2016, and includes the performance of the Fund Shares for periods
prior to December 1, 2016. The following table is utilized to determine the
extent of the performance adjustment:
OVER/UNDER PERFORMANCE
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
------------------------------------------------------------------
+/- 20 to 50 +/- 4
+/- 51 to 100 +/- 5
+/- 101 and greater +/- 6
(1)Based on the difference between average annual performance of the
relevant share class of the Fund and its relevant Lipper index, rounded
to the nearest basis point. Average daily net assets of the share class
are calculated over a rolling 36-month period.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 59
================================================================================
Each class' annual performance adjustment rate is multiplied by the average
daily net assets of each respective class over the entire performance period,
which is then multiplied by a fraction, the numerator of which is the number of
days in the month and the denominator of which is 365 (366 in leap years). The
resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper High Yield Bond Funds Index over that period, even if the
class had overall negative returns during the performance period.
Under the investment advisory agreement with the Manager that took effect on
July 1, 2019, no performance adjustments will be made for the period beginning
July 1, 2019, through June 30, 2020. Only performance beginning as of July 1,
2019, and thereafter will be utilized in calculating future performance
adjustments.
For the period from August 1, 2018 to June 30, 2019, the Fund incurred
management fees, paid or payable to AMCO, of $10,399,000, which included a
performance adjustment for the Fund Shares, Institutional Shares, Adviser
Shares, and R6 Shares of $378,000, $350,000, $2,000, and less than $500,
respectively. For the Fund Shares, Institutional Shares, Adviser Shares, and R6
Shares, the performance adjustments were 0.03%, 0.04%, 0.02%, and less than
0.01%, respectively. For the period July 1, 2019 to July 31, 2019 the Fund
incurred management fees, paid or payable to Victory Capital of $909,000, which
included no performance adjustments.
ADMINISTRATION AND SERVICING FEES - Effective July 1, 2019, Victory Capital is
obligated on a continuous basis to provide administrative services to the Fund.
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 period from August 1, 2018 to June 30, 2019, the Fund Shares,
Institutional Shares, Adviser Shares, and R6 Shares incurred administration and
servicing fees, paid or payable to the AMCO, of $1,625,000, $837,000,
================================================================================
60 | USAA HIGH INCOME FUND
================================================================================
$14,000, and $2,000, respectively. For the period July 1, 2019 to July 31, 2019
the Fund Shares, Institutional Shares, Adviser Shares, and R6 Shares incurred
administration and servicing fees by Victory Capital, paid or payable to Victory
Capital of $154,000, $78,000, $1,000, and less than $500, respectively.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, AMCO also provided certain compliance and legal
services for the benefit of the Fund. The Board approved the reimbursement of a
portion of these expenses incurred by AMCO.
Effective July 1, 2019, these services are covered under a Compliance Services
Agreement between the Trust and Victory Capital. For the period from August 1,
2018 to June 30, 2019, the Fund reimbursed AMCO $7,000 for these compliance and
legal services. For the period from July 1, 2019 to July 31, 2019, the Fund's
portion of fees paid to Victory Capital under the Compliance Service Agreement
was $1,000. These expenses are included in the professional fees on the Fund's
Statement of Operations.
EXPENSE LIMITATION - Effective July 1, 2019, the Manager has contractually
agreed to waive its management fee and/or reimburse expenses so that the total
annual operating expenses (excluding certain items such as interest, taxes and
brokerage commissions) do not exceed 0.83% of the Fund Shares, 0.73% of the
Institutional Shares, 1.00% of the Adviser Shares, and 0.65% of the R6 Shares,
through at least June 30, 2021. The Manager is permitted 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 limits in effect at the time of: (a) the original waiver or
expense reimbursement; or (b) the recoupment, after giving effect to the
recoupment amount. The amount of any waivers or reimbursements and the amount of
any recoupment is calculated without regard to the impact of any performance
adjustment to the Fund's management fee. This waiver agreement may only be
terminated by the Fund's Board of Trustees. Prior to July 1, 2019, AMCO agreed
to limit the total annual operating expenses of the Adviser Shares and R6 Shares
to 1.00% and 0.65%, respectively, of their average daily net assets, excluding
extraordinary expenses and before reductions of any expenses paid indirectly,
and to reimburse the Adviser Shares and R6 Shares for all expenses in excess of
================================================================================
NOTES TO FINANCIAL STATEMENTS | 61
================================================================================
those amounts. For the period from August 1, 2018 to June 30, 2019, the Adviser
Shares and R6 Shares incurred reimbursable expenses from AMCO of $14,000, and
$12,000. For the period July 1, 2019 to July 31, 2019, the Adviser Shares and R6
Shares incurred reimbursable expenses of $7,000, and $3,000, respectively, all
of which was receivable from the Manager.
TRANSFER AGENT'S FEES - Victory Capital Transfer Agency, Inc. (VCTA), (formerly,
USAA Shareholder Account Services (SAS)) provides transfer agency services to
the Fund. VCTA, 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. VCTA 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 July 31, 2019, the Fund Shares, Institutional Shares, Adviser Shares, and
R6 Shares incurred transfer agent's fees, paid or payable to VCTA, of
$1,584,000, $915,000, $7,000, and $1,000, respectively.
DISTRIBUTION AND SERVICE (12b-1) FEES - Effective July 1, 2019, the Trust has an
agreement with Victory Capital Advisers, Inc. (VCA), an affiliate of the Manager
for exclusive distribution of the Fund's shares on a continuing best effort
basis. Prior to July 1, 2019, the Fund adopted a plan pursuant to Rule 12b-1
under the 1940 Act with respect to the Adviser Shares. Under the plan, the
Adviser Shares paid fees to USAA Investment Management Company (IMCO), the
distributor, for distribution and shareholder services. Prior to July 1, 2019,
IMCO paid 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 period from August
1, 2018 to June 30, 2019, the Adviser Shares incurred distribution and service
(12b-1) fees, of $23,000. For the period July 1, 2019 to July 31, 2019, the
Adviser Shares incurred distribution and service (12b-1) fees, of $2,000.
================================================================================
62 | USAA HIGH INCOME FUND
================================================================================
UNDERWRITING SERVICES - Effective July 1, 2019, the Trust has an agreement with
Victory Capital Advisers, Inc. (VCA), an affiliate of the Manager for exclusive
underwriting and distribution of the Fund's shares on a continuing best effort
basis. This agreement provides that VCA receive no fee or other compensation for
such distribution services, but may receive 12b-1 fees with respect to Adviser
Shares. Prior to July 1, 2019, IMCO provided exclusive underwriting and
distribution of the Fund's shares on a continuing best-efforts basis and
received no fee or other compensation for these services, but may receive 12b-1
fees as described above, with respect to Adviser Shares.
(9) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other affiliated
funds in which the affiliated fund-of-funds invest. The fund-of-funds do not
invest in the underlying affiliated 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 July 31, 2019, the fund-of-funds owned
the following percentages of the total outstanding shares of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
--------------------------------------------------------------------------------
Cornerstone Conservative 0.3
Target Retirement Income 0.4
Target Retirement 2020 0.7
Target Retirement 2030 1.3
Target Retirement 2040 1.1
Target Retirement 2050 0.1
Target Retirement 2060 0.0*
*Represents less than 0.1%.
Effective July 1, 2019, Victory Capital replaced AMCO as the Fund's investment
adviser and began managing the Fund. Prior to July 1, 2019, AMCO was 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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 63
================================================================================
(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. The Manager has determined there is no significant
impact on the Fund's financial statements and various filings.
(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.
================================================================================
64 | USAA HIGH INCOME 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 is effective for funds
with fiscal years beginning after December 15, 2018. The Manager has determined
the adoption of this standard will have no significant impact on the financial
statements and reporting disclosures of the Fund.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 65
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 31,
--------------------------------------------------------------------------
2019 2018 2017 2016 2015
--------------------------------------------------------------------------
Net asset value at
beginning of period $ 8.01 $ 8.27 $ 7.90 $ 8.17 $ 8.91
--------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .47 .47 .47 .48 .47
Net realized and unrealized
gain (loss) (.10) (.26) .37 (.28) (.68)
--------------------------------------------------------------------------
Total from investment
operations .37 .21 .84 .20 (.21)
--------------------------------------------------------------------------
Less distributions from:
Net investment income (.47) (.47) (.47) (.47) (.47)
Realized capital gains - - - - (.06)
--------------------------------------------------------------------------
Total distributions (.47) (.47) (.47) (.47) (.53)
--------------------------------------------------------------------------
Redemption fees added to
benefical interests(a) .00 .00 .00 .00 .00
--------------------------------------------------------------------------
Net asset value at
end of period $ 7.91 $ 8.01 $ 8.27 $ 7.90 $ 8.17
==========================================================================
Total return (%)* 4.85 2.65 10.92 2.95 (2.42)
Net assets at end of
period (000) $1,212,711 $1,207,790 $1,225,990 $1,105,081 $1,322,058
Ratios to average daily
net assets:**
Expenses (%)(b) .85(c) .81 .83 .82 .89
Expenses, excluding
reimbursements (%)(b) .85 .81 .83 .82 .89
Net investment income (%) 5.93 5.79 5.80 6.22 5.46
Portfolio turnover (%) 31 22 21 36 16
* 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 July 31, 2019, average daily net assets were
$1,186,080,000.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Fund Shares to 0.83% of the Fund Shares' average
daily net assets.
================================================================================
66 | USAA HIGH INCOME FUND
================================================================================
INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 31,
-----------------------------------------------------------------------
2019 2018 2017 2016 2015
-----------------------------------------------------------------------
Net asset value at
beginning of period $ 8.00 $ 8.26 $ 7.90 $ 8.16 $ 8.91
------------------------------------------------------------------------
Income (loss) from investment
operations:
Net investment income .47 .48 .48 .48 .48
Net realized and unrealized
gain (loss) (.09) (.26) .36 (.26) (.69)
------------------------------------------------------------------------
Total from investment
operations .38 .22 .84 .22 (.21)
------------------------------------------------------------------------
Less distributions from:
Net investment income (.48) (.48) (.48) (.48) (.48)
Realized capital gains - - - - (.06)
------------------------------------------------------------------------
Total distributions (.48) (.48) (.48) (.48) (.54)
------------------------------------------------------------------------
Redemption fees added
to benefical interests(a) .00 .00 .00 .00 .00
------------------------------------------------------------------------
Net asset value at
end of period $ 7.90 $ 8.00 $ 8.26 $ 7.90 $ 8.16
=======================================================================
Total return (%)* 4.94 2.74 10.89 3.19 (2.44)
Net assets at end of
period (000) $913,599 $966,124 $970,767 $990,980 $811,060
Ratios to average daily
net assets:**
Expenses (%)(b) .78(c) .72 .75 .71 .80
Expenses, excluding
reimbursements (%)(b) .78 .72 .75 .71 .80
Net investment income (%) 6.00 5.88 5.89 6.32 5.55
Portfolio turnover (%) 31 22 21 36 16
* 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 July 31, 2019, average daily net assets were
$914,725,000.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Institutional Shares to 0.73% of the Institutional
Shares' average daily net assets.
================================================================================
FINANCIAL HIGHLIGHTS | 67
================================================================================
ADVISER SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 31,
-----------------------------------------------------------------------
2019 2018 2017 2016 2015
-----------------------------------------------------------------------
Net asset value at
beginning of period $ 8.03 $ 8.28 $ 7.92 $ 8.18 $ 8.92
-----------------------------------------------------------------------
Income (loss) from investment
operations:
Net investment income .46 .46 .46 .44 .45
Net realized and unrealized
gain (loss) (.10) (.26) .35 (.25) (.69)
-----------------------------------------------------------------------
Total from investment
operations .36 .20 .81 .19 (.24)
-----------------------------------------------------------------------
Less distributions from:
Net investment income (.46) (.45) (.45) (.45) (.45)
Realized capital gains - - - - (.06)
-----------------------------------------------------------------------
Total distributions (.46) (.45) (.45) (.45) (.51)
-----------------------------------------------------------------------
Redemption fees added to
benefical interests .00(a) .00(a) .00(a) .00(a) .01
-----------------------------------------------------------------------
Net asset value at
end of period $ 7.93 $ 8.03 $ 8.28 $ 7.92 $ 8.18
=======================================================================
Total return (%)* 4.69 2.55 10.49 2.73 (2.67)
Net assets at
end of period (000) $10,021 $10,019 $10,096 $9,183 $12,545
Ratios to average daily
net assets:**
Expenses (%)(b) 1.00(f) 1.02(c) 1.08(d) 1.15 1.16(e)
Expenses, excluding
reimbursements (%)(b) 1.21 1.13 1.15 1.19 1.21
Net investment income (%) 5.78 5.58 5.55 5.88 5.19
Portfolio turnover (%) 31 22 21 36 16
* 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 July 31, 2019, average daily net assets were $9,835,000.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Prior to December 1, 2017, AMCO voluntarily agreed to limit the annual
expenses of the Adviser Shares to 1.05% of the Adviser Shares' average
daily net assets.
(d) Prior to December 1, 2016, AMCO voluntarily agreed to limit the annual
expenses of the Adviser Shares to 1.15% of the Adviser Shares' average
daily net assets.
(e) Prior to December 1, 2014, AMCO voluntarily agreed to limit the annual
expense of the Adviser Shares to 1.20% of the Adviser Shares' average
daily net assets.
(f) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Adviser Shares to 1.00% of the Adviser Shares'
average daily net assets.
================================================================================
68 | USAA HIGH INCOME FUND
================================================================================
R6 SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
PERIOD ENDED
YEAR ENDED JULY 31, JULY 31,
-------------------------------------------------
2019 2018 2017***
-------------------------------------------------
Net asset value at beginning of period $ 8.01 $ 8.26 $ 7.98
----------------------------------------------
Income (loss) from investment operations:
Net investment income .48 .48 .32
Net realized and unrealized gain (loss) (.10) (.25) .28
----------------------------------------------
Total from investment operations .38 .23 .60
----------------------------------------------
Less distributions from:
Net investment income (.49) (.48) (.32)
----------------------------------------------
Net asset value at end of period $ 7.90 $ 8.01 $ 8.26
==============================================
Total return (%)* 4.95 2.94 7.64
Net assets at end of period (000) $5,214 $5,055 $5,177
Ratios to average daily net assets:**
Expenses (%)(a) .65(c) .65 .65(b)
Expenses, excluding reimbursements (%)(a) .96 .92 1.26(b)
Net investment income (%) 6.13 5.95 5.88(b)
Portfolio turnover (%) 31 22 21
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in
accordance with U.S. generally accepted accounting principles and could
differ from the Lipper reported return. Total returns for periods of less
than one year are not annualized.
** For the year ended July 31, 2019, average daily net assets were $5,063,000.
*** 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.
(c) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the R6 Shares to 0.65% of the R6 Shares' average daily
net assets.
================================================================================
FINANCIAL HIGHLIGHTS | 69
================================================================================
EXPENSE EXAMPLE
July 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 February 1, 2019, through
July 31, 2019.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table provides
information about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested at the beginning
of the period, to estimate the expenses that you paid over the period. Simply
divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number for your share
class in the "actual" line under the heading "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class and an assumed rate of return of
5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing costs of
================================================================================
70 | USAA HIGH INCOME FUND
================================================================================
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 FEBRUARY 1, 2019 -
FEBRUARY 1, 2019 JULY 31, 2019 JULY 31, 2019
-----------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,051.40 $4.22
Hypothetical
(5% return before expenses) 1,000.00 1,020.68 4.16
INSTITUTIONAL SHARES
Actual 1,000.00 1,051.80** 3.87**
Hypothetical
(5% return before expenses) 1,000.00 1,021.03** 3.81**
ADVISER SHARES
Actual 1,000.00 1,050.40 5.08
Hypothetical
(5% return before expenses) 1,000.00 1,019.84 5.01
R6 SHARES
Actual 1,000.00 1,051.00 3.31
Hypothetical
(5% return before expenses) 1,000.00 1,021.57 3.26
*Expenses are equal to the annualized expense ratio of 0.83% for Fund Shares,
0.76% for Institutional Shares, 1.00% for Adviser Shares, and 0.65% for R6
Shares, which are net of any reimbursements and expenses paid indirectly,
multiplied by the average account value over the period, multiplied by 181
days/365 days for Fund Shares, Institutional Shares, Adviser Shares, and R6
Shares (to reflect the one-half-year period). The Fund's actual ending account
values are based on its actual total returns of 5.14% for Fund Shares, 5.18%
for Institutional Shares, 5.04% for Adviser Shares, and 5.10% for R6 Shares,
for the six-month period of February 1, 2019, through July 31, 2019.
================================================================================
EXPENSE EXAMPLE | 71
================================================================================
**The Fund's annualized expense ratio of 0.76% for Institutional Shares above
reflects a change effective July 1, 2019, to implement the Manager's expense
limitation of 0.73% for the Institutional Shares average annual net assets.
Had the expense limitation of 0.73% for the Institutional Shares, which is net
of expenses paid indirectly, been in effect for the entire six-month period of
February 1, 2019, through July 31, 2019, the values in the table above would
be as shown below.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE FEBRUARY 1, 2019 -
FEBRUARY 1, 2019 JULY 31, 2019 JULY 31, 2019
-----------------------------------------------------------------
INSTITUTIONAL SHARES
Actual $1,000.00 $1,051.80 $3.71
Hypothetical
(5% return before expenses) 1,000.00 1,021.17 3.66
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72 | USAA HIGH INCOME FUND
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
July 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.
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with
================================================================================
ADVISORY AGREEMENT(S) | 73
================================================================================
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 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
================================================================================
74 | USAA HIGH INCOME FUND
================================================================================
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.
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
================================================================================
ADVISORY AGREEMENT(S) | 75
================================================================================
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).
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.
================================================================================
76 | USAA HIGH INCOME FUND
================================================================================
o The portfolio managers at AMCO that manage the Fixed Income Funds(1)
as well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be
advised by Victory Capital through its Victory Solutions platform,
Victory Capital proposes that the same subadvisers be retained
Post-Transaction, although Victory Capital may change the allocation to
a particular subadviser Post-Transaction. No changes are expected to
the portfolio managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's businesses to
Victory Capital. Victory Capital and USAA expect to
(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) | 77
================================================================================
enter into a transition services agreement under which USAA will
continue to provide Victory Capital with certain services that are
currently provided by USAA to AMCO and the USAA Transfer Agent for a
specified period of time after the closing of the Transaction to assist
Victory Capital in transitioning the USAA member distribution channel
and member support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital is capable of providing
the same level of investment management services
================================================================================
78 | USAA HIGH INCOME FUND
================================================================================
currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund,
Growth & Income Fund, Income Stock Fund, Global Equity Income Fund, and
Precious Metals and Minerals Fund.
================================================================================
ADVISORY AGREEMENT(S) | 79
================================================================================
The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored
================================================================================
80 | USAA High Income Fund
================================================================================
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 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
================================================================================
ADVISORY AGREEMENT(S) | 81
================================================================================
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.
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
================================================================================
82 | USAA HIGH INCOME FUND
================================================================================
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.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
================================================================================
ADVISORY AGREEMENT(S) | 83
================================================================================
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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84 | USAA HIGH INCOME FUND
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND AMCO)
July 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.
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 AMCO 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 AMCO, 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 AMCO's revenues
and costs of providing services to the Fund and compensation paid to affiliates
of AMCO; and (iii) information about AMCO's
(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"). Eff ective July 1, 2019, upon the closing of the
transaction whereby AMCO acquired by Victory Capital Holdings, Inc., the
parent company of Victory Capital, the Advisory Agreement between the Trust
and AMCO and the Sub-advisory Agreement with the Subadviser terminated and
the new investment advisory agreement between the Trust and Victory Capital
went into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are discussed above.
Effective June 30, 2019, the Subadviser no longer manages any portion of the
Fund.
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ADVISORY AGREEMENT(S) | 85
================================================================================
operations and personnel. Prior to voting, the Independent Trustees reviewed the
proposed continuance of the Advisory Agreement with management and with
experienced 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 AMCO. 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 AMCO's profitability with respect to the
Fund. However, the Board noted that the evaluation process with respect to AMCO
is an ongoing one. In this regard, the Board's and its committees' consideration
of the Advisory Agreement included 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 AMCO under the Advisory Agreement, the Board
reviewed information provided by AMCO relating to its operations and personnel.
The Board also took into account its knowledge of AMCO's management and the
quality of the performance of AMCO's duties through Board meetings, discussions,
and reports during the preceding year. The Board considered the fees paid to
AMCO and the services provided to the
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86 | USAA HIGH INCOME FUND
================================================================================
Fund by AMCO under the Advisory Agreement, as well as other services provided by
AMCO and its affiliates under other agreements, and the personnel who provide
these services. In addition to the investment advisory services provided to the
Fund, AMCO 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 AMCO in connection with the services provided to the Fund
including ongoing risks including investment, operational, enterprise,
litigation, regulatory and compliance risks.
The Board considered AMCO's management style and the performance of AMCO's
duties under the Advisory Agreement. The Board considered the level and depth of
knowledge of AMCO, 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 AMCO's process for monitoring
"best execution," also was considered. AMCO's role in coordinating the
activities of the Fund's other service providers also was considered. The Board
also considered AMCO's risk management processes. The Board considered AMCO'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 AMCO 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 AMCO and its affiliates, including AMCO's oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust,
also focused on the quality of AMCO'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 ratios of the
Fund as compared to other open-end investment companies deemed to be comparable
to the Fund as determined by the independent third
================================================================================
ADVISORY AGREEMENT(S) | 87
================================================================================
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 equal to the median of its expense universe. The data
indicated that the Fund's total expenses were above the median of its expense
group and equal to 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 AMCO and its affiliates,
including the high quality of services received by the Fund from the AMCO. The
Board also noted the level and method of computing the management fee, including
any performance adjustment to such fee.
In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total return with its Lipper index and with that of other mutual funds deemed to
be in its peer group by the independent third party in its report (the
performance universe). The Fund's performance universe consisted of the Fund and
all retail and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or primary channel
of distribution. This comparison indicated that, among other data, the Fund's
performance was below the average of its performance universe and its Lipper
index for the one-year period ended December 31, 2018, was above the average of
its performance universe and its Lipper index for the three- and ten-year
periods ended December 31, 2018, and was above the average of its performance
universe and below its Lipper index for the five-year period ended
================================================================================
88 | USAA HIGH INCOME FUND
================================================================================
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-year
period ended December 31, 2018, was in the top 15% of its performance universe
for the three- and ten-year periods ended December 31, 2018, and was in the top
45% of its performance universe for the five-year period ended December 31,
2018. The Board took into account management's discussion of the Fund's
performance, including the impact of market conditions on the Fund's recent
performance.
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 AMCO'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 AMCO'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 AMCO, the Board
also considered the fact that AMCO 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 AMCO from its relationship with the Trust, including that AMCO may
derive reputational and other benefits from its association with the Fund. The
Trustees recognized that AMCO 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 - 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 also took into account management's discussion
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.
================================================================================
ADVISORY AGREEMENT(S) | 89
================================================================================
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 AMCO, among others: (i) AMCO has demonstrated that it
possesses the capability and resources to perform the duties required of it
under the Advisory Agreement; (ii) AMCO 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 AMCO; and (v) AMCO's 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 AMCO
and the type of fund. Based on its conclusions, the Board determined that the
continuation of the Advisory Agreement would be in the best interests of the
Fund and its shareholders.
================================================================================
90 | USAA HIGH INCOME FUND
================================================================================
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").
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 91
================================================================================
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 of 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), (08/11-06/19); Director of USAA Investment
Management Company (IMCO) (09/09-present); Chairman of Board of IMCO
(4/13-present); President and Director of USAA Shareholder Account Services
(SAS) (10/09-06/19); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director and Vice Chairman of FPS
(12/13-present); President and Director of USAA Investment Corporation (ICORP)
(03/10-present); Chairman of Board of ICORP (12/31-present); Director of USAA
Financial Advisors, Inc. (FAI) (12/13-present); Chairman of Board of FAI
(3/15-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
================================================================================
92 | USAA HIGH INCOME 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
--------------------------------------------------------------------------------
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
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 93
================================================================================
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.
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.
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
================================================================================
94 | USAA HIGH INCOME FUND
================================================================================
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 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.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 95
================================================================================
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 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.
================================================================================
96 | USAA HIGH INCOME FUND
================================================================================
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 was 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 | 97
================================================================================
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).
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Executive Director, Victory Capital Management Inc. (7/1/19-present); Treasurer,
USAA ETF Trust (09/18-06/19); Executive Director, Investment and Financial
Administration, USAA (04/12-06/30/19); Assistant Treasurer,
================================================================================
98 | USAA HIGH INCOME FUND
================================================================================
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
Director, Accounting and Finance, Victory Capital Management Inc.
(7/1/19-present); Assistant Treasurer, USAA ETF Trust (09/18-06/19);
Accounting/Financial Director, USAA (12/13-06/30/19).
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).
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).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 99
================================================================================
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 111 West Houston St., Suite 1901
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
Copies of the Victory Capital Management Inc.'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
--------------------------------------------------------------------------------
JULY 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA Income Fund
FUND INSTITUTIONAL ADVISER R6
SHARES SHARES SHARES SHARES
USAIX UIINX UINCX URIFX
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
". . . NOW MAY BE AN OPPORTUNE TIME FOR
INVESTORS TO ENSURE THAT THEIR PORTFOLIOS ARE WELL [PHOTO OF BROOKS ENGLEHARDT]
DIVERSIFIED AND THAT THEIR OVERALL ALLOCATION IS
APPROPRIATE FOR THEIR PARTICULAR RISK APPETITE."
--------------------------------------------------------------------------------
SEPTEMBER 2019
Although the bull market in equities has continued running, it was not without a
few missteps. Trade turmoil, questions surrounding global economic growth,
changing monetary policy, and geopolitical disputes have all led to increased
volatility. But through it all, domestic stocks, as measured by the S&P 500(R)
Index, still managed an annual return of approximately 8% for the 12-month
period ended July 31, 2019.
Given the sometimes dire news flow and ample cross-currents, it's no surprise
that volatility returned to the market. On one hand, the U.S. economy continues
to look good. The unprecedented streak of job creation has continued
uninterrupted, and unemployment is bouncing along historic lows at 3.7%. The
consumer remains resilient and inflation is tepid. On the flip side, however,
U.S. trade policy seems to be evolving, with new tariffs threatened and
implemented. The markets generally dislike this type of trade turmoil and
uncertainty, and the ongoing tensions between the United States and China (and
other trading partners) threaten to upend global supply chains and hinder
economic growth.
It's not just the stock market that has been dealing with volatility. The bond
market also has experienced volatility, due largely to the U.S. Federal
Reserve's (the "Fed") famous "pivot" in late 2018. Against the backdrop of
rapidly falling equities in the fourth quarter of 2018, the Fed signaled that
its next policy move would be to lower--not increase--short-term interest rates.
This immediately altered the yield environment.
Meanwhile, the U.S. Treasury yield curve continued to flatten and, in fact,
inverted--whereby shorter-term yields became higher than longer-term
================================================================================
================================================================================
yields. Such a yield-curve inversion is a worrying sign as it sometimes, but not
always, portends to a recession.
Although we are not predicting a recession, we must acknowledge that risks have
increased for an economic slowdown. Given that the current run in stocks is more
than a decade old, it's important for investors to keep perspective that the
bull market cannot continue forever. Therefore, now may be an opportune time for
investors to ensure that their portfolios are well diversified and that their
overall allocation is appropriate for their particular risk appetite.
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,
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. On the following pages, you will find information
relating to your USAA Investments, which is now a Victory Capital Investment
Franchise. If you have any questions about your investments, we encourage you to
engage your financial advisor or else contact us directly at 800-235-8396 or
visit usaa.com.
My colleagues and I sincerely appreciate the confidence you have placed in us,
and we value the opportunity to help you meet your investment goals.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGERS' COMMENTARY ON THE FUND 1
INVESTMENT OVERVIEW 5
SHAREHOLDER VOTING RESULTS 11
FINANCIAL INFORMATION
Distributions to Shareholders 12
Report of Independent Registered
Public Accounting Firm 13
Portfolio of Investments 14
Notes to Portfolio of Investments 53
Financial Statements 59
Notes to Financial Statements 63
Financial Highlights 84
EXPENSE EXAMPLE 88
ADVISORY AGREEMENT(S) 91
TRUSTEES' AND OFFICERS' INFORMATION 109
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
VICTORY CAPITAL MANAGEMENT INC. 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
USAA Investments, A Victory Capital Investment Franchise
JULIANNE BASS, CFA R. NEAL GRAVES, CFA, CPA
KURT DAUM, JD BRIAN W. SMITH, CFA, CPA
JAMES F. JACKSON JR., CFA JOHN SPEAR, CFA
--------------------------------------------------------------------------------
o WHAT WERE MARKET CONDITIONS DURING THE 12-MONTH REPORTING PERIOD ENDED
JULY 31, 2019?
When the reporting period started in August 2018, investors expected the
U.S. Federal Reserve (the "Fed") to continue raising short-term interest
rates into 2019. This outlook changed in November 2018, as investors grew
concerned about a potential trade war between the United States and China,
uncertainty related to the United Kingdom's exit from the European Union,
slowing global economic growth, a stronger U.S. dollar, and the possibility
of a U.S. government shutdown. Interest rates on maturities of six months
and longer began to trend downward, pushing bond prices higher. Investors'
concerns persisted into December 2018, which also was notable for the
beginning of a U.S. government shutdown that lasted 35 days. Although Fed
officials raised short-term interest rates at the December policy meeting,
their tone turned more dovish. In March 2019, the Fed left rates unchanged
and indicated it would stop its balance sheet runoff earlier than expected.
(Since October 2017, the Fed has been trimming its balance sheet by
gradually decreasing the reinvestment of maturing holdings of U.S. Treasury
and government-sponsored mortgage-backed securities.) These actions, along
with the Fed's softer language about the U.S. economy, generally sent
interest rates lower, with the market anticipating zero Fed interest rate
increases in the 2019 calendar year. In June 2019, Fed policymakers
indicated an interest rate cut was possible if the economic outlook
weakened. The bond market responded by pricing in an interest
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
rate cut as soon as July 2019. On July 31, 2019, the Fed cut short-term
interest rates and said it would end its balance sheet reduction on August
1, 2019, two months earlier than previously announced.
During the reporting period, U.S. Treasury yields fell along the curve,
except those on one-month and three-month maturities, which ended the period
higher than they began. The two-year U.S. Treasury yield decreased 80 basis
points, while 10-year and 30-year U.S. Treasury yields dropped 95 and 56
basis points, respectively. (A basis point is 1/100th of a percentage
point.) Expectations about Fed monetary policy also led to an inversion in
the very short end of the curve, with the 10-year U.S. Treasury yield
falling below the one-month U.S. Treasury yield. The inversion occurred as
the U.S. entered its tenth year of recovery from the financial crisis, with
ongoing economic growth and strong employment levels.
o U.S. TREASURY YIELD CURVE o
[CHART OF U.S. TREASURY YIELD CURVE]
YIELD (MID CONVENTIONAL %) YIELD (CHANGE IN
MATURITY 7/31/19 YIELD 7/31/18 YIELD BASIS POINTS)
1M 1.988 1.885 10.2
3M 2.062 2.02 4.1
6M 2.067 2.191 -12.4
1Y 1.985 2.409 -42.4
2Y 1.872 2.669 -79.7
3Y 1.826 2.766 -94
5Y 1.827 2.848 -102.1
7Y 1.913 2.925 -101.1
10Y 2.014 2.96 -94.5
30Y 2.525 3.082 -55.7
[END CHART]
Source: Bloomberg Finance L.P.
================================================================================
2 | USAA INCOME FUND
================================================================================
With the exception of high-yield spreads, credit spreads (yield
differentials between corporate bonds and U.S. Treasury securities of
comparable maturity) ended the reporting period largely unchanged. AAA and
BBB spreads widened by four and two basis points, respectively. AA spreads
were flat, while A spreads tightened by eight basis points. High-yield
spreads widened by 35 basis points. (Spreads are generally considered an
indication of risk; the wider the spread, the greater the perceived risk.)
o BLOOMBERG BARCLAYS U.S. AGGREGATE CREDIT INDEX o
AVERAGE OPTION ADJUSTED SPREAD
[CHART OF BLOOMBERG BARCLAYS U.S. AGGREGATE CREDIT INDEX]
AVERAGE OPTION
DATE ADJUSTED SPREAD
7/31/2018 1.03
8/1/2018 1.03
8/2/2018 1.03
8/3/2018 1.03
8/6/2018 1.03
8/7/2018 1.02
8/8/2018 1.03
8/9/2018 1.04
8/10/2018 1.07
8/13/2018 1.07
8/14/2018 1.06
8/15/2018 1.07
8/16/2018 1.06
8/17/2018 1.06
8/20/2018 1.06
8/21/2018 1.06
8/22/2018 1.07
8/23/2018 1.07
8/24/2018 1.07
8/27/2018 1.06
8/28/2018 1.06
8/29/2018 1.06
8/30/2018 1.07
8/31/2018 1.08
9/3/2018 1.08
9/4/2018 1.08
9/5/2018 1.09
9/6/2018 1.08
9/7/2018 1.07
9/10/2018 1.07
9/11/2018 1.06
9/12/2018 1.05
9/13/2018 1.04
9/14/2018 1.03
9/17/2018 1.03
9/18/2018 1.02
9/19/2018 1.02
9/20/2018 1.01
9/21/2018 1
9/24/2018 1.01
9/25/2018 1.01
9/26/2018 1.01
9/27/2018 1
9/28/2018 1
10/1/2018 1
10/2/2018 1
10/3/2018 0.99
10/4/2018 1
10/5/2018 1
10/9/2018 1
10/10/2018 1.01
10/11/2018 1.02
10/12/2018 1.03
10/15/2018 1.03
10/16/2018 1.03
10/17/2018 1.04
10/18/2018 1.04
10/19/2018 1.05
10/22/2018 1.05
10/23/2018 1.07
10/24/2018 1.08
10/25/2018 1.09
10/26/2018 1.11
10/29/2018 1.11
10/30/2018 1.12
10/31/2018 1.12
11/1/2018 1.13
11/2/2018 1.11
11/5/2018 1.1
11/6/2018 1.09
11/7/2018 1.07
11/8/2018 1.08
11/9/2018 1.09
11/13/2018 1.13
11/14/2018 1.16
11/15/2018 1.21
11/16/2018 1.21
11/19/2018 1.22
11/20/2018 1.25
11/21/2018 1.23
11/23/2018 1.24
11/26/2018 1.24
11/27/2018 1.25
11/28/2018 1.26
11/29/2018 1.27
11/30/2018 1.29
12/3/2018 1.28
12/4/2018 1.31
12/6/2018 1.36
12/7/2018 1.35
12/10/2018 1.36
12/11/2018 1.35
12/12/2018 1.32
12/13/2018 1.31
12/14/2018 1.31
12/17/2018 1.32
12/18/2018 1.33
12/19/2018 1.34
12/20/2018 1.37
12/21/2018 1.38
12/24/2018 1.4
12/26/2018 1.4
12/27/2018 1.42
12/28/2018 1.41
12/31/2018 1.43
1/2/2019 1.44
1/3/2019 1.47
1/4/2019 1.45
1/7/2019 1.43
1/8/2019 1.41
1/9/2019 1.38
1/10/2019 1.38
1/11/2019 1.37
1/14/2019 1.37
1/15/2019 1.37
1/16/2019 1.35
1/17/2019 1.33
1/18/2019 1.29
1/22/2019 1.29
1/23/2019 1.27
1/24/2019 1.26
1/25/2019 1.24
1/28/2019 1.24
1/29/2019 1.23
1/30/2019 1.23
1/31/2019 1.21
2/1/2019 1.19
2/4/2019 1.18
2/5/2019 1.16
2/6/2019 1.17
2/7/2019 1.19
2/8/2019 1.19
2/11/2019 1.19
2/12/2019 1.18
2/13/2019 1.17
2/14/2019 1.19
2/15/2019 1.18
2/19/2019 1.18
2/20/2019 1.18
2/21/2019 1.17
2/22/2019 1.17
2/25/2019 1.16
2/26/2019 1.16
2/27/2019 1.16
2/28/2019 1.14
3/1/2019 1.13
3/4/2019 1.13
3/5/2019 1.13
3/6/2019 1.14
3/7/2019 1.15
3/8/2019 1.16
3/11/2019 1.15
3/12/2019 1.14
3/13/2019 1.14
3/14/2019 1.14
3/15/2019 1.13
3/18/2019 1.12
3/19/2019 1.12
3/20/2019 1.13
3/21/2019 1.11
3/22/2019 1.12
3/25/2019 1.12
3/26/2019 1.11
3/27/2019 1.12
3/28/2019 1.12
3/29/2019 1.13
4/1/2019 1.12
4/2/2019 1.12
4/3/2019 1.11
4/4/2019 1.1
4/5/2019 1.09
4/8/2019 1.09
4/9/2019 1.08
4/10/2019 1.08
4/11/2019 1.06
4/12/2019 1.04
4/15/2019 1.04
4/16/2019 1.03
4/17/2019 1.04
4/18/2019 1.04
4/22/2019 1.05
4/23/2019 1.04
4/24/2019 1.04
4/25/2019 1.04
4/26/2019 1.04
4/29/2019 1.04
4/30/2019 1.04
5/1/2019 1.05
5/2/2019 1.06
5/3/2019 1.06
5/6/2019 1.07
5/7/2019 1.08
5/8/2019 1.08
5/9/2019 1.1
5/10/2019 1.1
5/13/2019 1.12
5/14/2019 1.11
5/15/2019 1.12
5/16/2019 1.11
5/17/2019 1.11
5/20/2019 1.11
5/21/2019 1.11
5/22/2019 1.12
5/23/2019 1.15
5/24/2019 1.15
5/28/2019 1.16
5/29/2019 1.19
5/30/2019 1.17
5/31/2019 1.2
6/3/2019 1.22
6/4/2019 1.21
6/5/2019 1.2
6/6/2019 1.2
6/7/2019 1.2
6/10/2019 1.18
6/11/2019 1.17
6/12/2019 1.18
6/13/2019 1.19
6/14/2019 1.19
6/17/2019 1.19
6/18/2019 1.17
6/19/2019 1.16
6/20/2019 1.13
6/21/2019 1.11
6/24/2019 1.1
6/25/2019 1.11
6/26/2019 1.1
6/27/2019 1.1
6/28/2019 1.09
7/1/2019 1.07
7/2/2019 1.08
7/3/2019 1.07
7/5/2019 1.07
7/8/2019 1.07
7/9/2019 1.07
7/10/2019 1.07
7/11/2019 1.07
7/12/2019 1.06
7/15/2019 1.06
7/16/2019 1.06
7/17/2019 1.07
7/18/2019 1.07
7/19/2019 1.06
7/22/2019 1.06
7/23/2019 1.04
7/24/2019 1.03
7/25/2019 1.02
7/26/2019 1.02
7/29/2019 1.02
7/30/2019 1.03
7/31/2019 1.03
[END CHART]
o HOW DID THE USAA INCOME 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 July 31, 2019, the
Fund Shares, Institutional Shares, Adviser Shares, and R6 Shares had total
returns of 8.50%, 8.50%, 8.20%, and 8.68%, respectively. This compares to
returns of 8.08% for the Bloomberg Barclays U.S. Aggregate Bond Index (the
"Index") and 10.11% for the Lipper A Rated Bond Funds Index. At the same
time, the Fund Shares, Institutional
Refer to page 5 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
Shares, Adviser Shares, and R6 Shares provided a one-year dividend yield of
3.36%, 3.16%, 3.44%, and 3.53%, respectively, compared to 2.80% for the
Lipper A Rated Bond Funds Index.
Victory Capital Management Inc. (the "Manager" or "Victory Capital") is the
Fund's investment adviser. The investment adviser provides day-to-day
discretionary management for the Fund's assets.
o WHAT WERE YOUR STRATEGIES IN THIS ENVIRONMENT?
The Fund generated a positive total return and outperformed the Index,
driven by price appreciation and to a lesser extent, income generation. As
bond prices rose during the reporting period, the Fund's overweight position
in corporate bonds, the strongest-performing sector in the fixed income
market, bolstered relative returns. The Fund also benefited from its
holdings of commercial mortgage-backed securities, asset backed securities,
and bank loans. These positive results were offset somewhat by the
portfolio's underweights and duration positioning in U.S. Treasury
securities and agency mortgage-backed securities. (Duration is a measure of
interest-rate sensitivity.) As of July 31, 2019, the Fund's SEC yield was
3.02%. This compares to an SEC yield of 3.57% on July 31, 2018.
During the reporting period, we continued to build the portfolio bond by
bond. We seek ideas where our fundamental understanding of the credit risk
is different than that of the market, working with our team of analysts to
evaluate each potential investment individually, rather than on the basis of
thematic trends. Our analysts continued to analyze and monitor every holding
in the portfolio. We are committed to building a portfolio diversified among
multiple asset classes and across a large number of issuers. To minimize the
Fund's exposure to potential surprises, we limit the positions we take in
any one issuer.
Thank you for allowing us to help you with your investment needs.
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 Diversification is a technique intended to help reduce
risk and does not guarantee a profit or prevent a loss. 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.
================================================================================
4 | USAA INCOME FUND
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 7/31/19 o
-----------------------------------------------------------------------------------------------------
SINCE* INCEPTION
1 YEAR 5 YEAR 10 YEAR INCEPTION DATE
-----------------------------------------------------------------------------------------------------
Fund Shares 8.50% 3.59% 5.04% - -
Institutional Shares 8.50% 3.64% 5.15% - -
Adviser Shares 8.20% 3.35% - 3.93% 8/01/10
R6 Shares 8.68% - - 5.04% 12/01/16
Bloomberg Barclays U.S.
Aggregate Bond Index**
(reflects no deduction for
fees, expenses, or taxes) 8.08% 3.04% 3.75% - -
Lipper A Rated Bond Funds
Index*** (reflects no
deduction for taxes) 10.11% 4.11% 5.16% - -
*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. Aggregate Bond Index covers the U.S.
investment-grade rated 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 unmanaged Lipper A Rated Bond Funds Index tracks the total return
performance of funds within the Lipper Corporate Debt Funds A Rated 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
================================================================================
AVERAGE ANNUAL COMPOUNDED RETURNS WITH REINVESTMENT OF DIVIDENDS - PERIODS ENDED
JULY 31, 2019
--------------------------------------------------------------------------------
TOTAL RETURN = DIVIDEND RETURN + PRICE CHANGE
--------------------------------------------------------------------------------
10 YEARS 5.04% = 3.83% + 1.21%
5 YEARS 3.59% = 3.50% + 0.09%
1 YEAR 8.50% = 3.73% + 4.77%
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 ONE-YEAR PERIODS ENDED
JULY 31, 2010-JULY 31, 2019
[CHART OF ANNUAL TOTAL RETURNS AND COMPOUNDED DIVIDEND RETURNS]
CHANGE IN
TOTAL RETURN DIVIDEND RETURN SHARE PRICE
7/31/2010 13.00% 5.24% 7.76%
7/31/2011 6.34% 4.23% 2.11%
7/31/2012 6.85% 3.94% 2.91%
7/31/2013 1.30% 3.51% -2.21%
7/31/2014 5.43% 4.02% 1.41%
7/31/2015 1.45% 3.44% -1.99%
7/31/2016 6.88% 3.72% 3.16%
7/31/2017 1.91% 3.40% -1.49%
7/31/2018 -0.47% 3.28% -3.75%
7/31/2019 8.50% 3.73% 4.77%
[END CHART]
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 gains distributions), redemption of shares, or reinvested net investment
income.
================================================================================
6 | USAA INCOME FUND
================================================================================
o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
BLOOMBERG
LIPPER A BARCLAYS
RATED BOND USAA INCOME U.S. AGGREGATE
FUNDS INDEX FUND SHARES BOND INDEX
7/31/2009 $10,000.00 $10,000.00 $10,000.00
8/31/2009 10,121.30 10,240.00 10,103.54
9/30/2009 10,371.19 10,429.00 10,209.68
10/31/2009 10,455.28 10,524.00 10,260.09
11/30/2009 10,578.87 10,665.00 10,392.92
12/31/2009 10,480.24 10,615.00 10,230.47
1/31/2010 10,652.53 10,813.00 10,386.75
2/28/2010 10,683.35 10,860.00 10,425.53
3/31/2010 10,723.65 10,896.00 10,412.71
4/30/2010 10,879.49 11,040.00 10,521.11
5/31/2010 10,880.10 11,043.00 10,609.64
6/30/2010 11,060.18 11,171.00 10,776.02
7/31/2010 11,202.86 11,300.00 10,890.98
8/31/2010 11,400.20 11,481.00 11,031.12
9/30/2010 11,435.00 11,559.00 11,042.88
10/31/2010 11,456.09 11,631.00 11,082.20
11/30/2010 11,382.10 11,582.00 11,018.50
12/31/2010 11,296.97 11,481.00 10,899.68
1/31/2011 11,309.46 11,522.00 10,912.37
2/28/2011 11,388.09 11,576.00 10,939.67
3/31/2011 11,392.23 11,610.00 10,945.71
4/30/2011 11,558.44 11,748.00 11,084.66
5/31/2011 11,701.77 11,877.00 11,229.31
6/30/2011 11,617.87 11,850.00 11,196.43
7/31/2011 11,821.00 12,017.00 11,374.10
8/31/2011 11,886.90 12,094.00 11,540.28
9/30/2011 11,948.64 12,087.00 11,624.23
10/31/2011 12,050.33 12,162.00 11,636.71
11/30/2011 11,952.36 12,139.00 11,626.62
12/31/2011 12,116.76 12,270.00 11,754.40
1/31/2012 12,307.64 12,402.00 11,857.62
2/29/2012 12,358.46 12,450.00 11,854.89
3/31/2012 12,276.51 12,440.00 11,789.94
4/30/2012 12,431.09 12,570.00 11,920.65
5/31/2012 12,556.69 12,651.00 12,028.51
6/30/2012 12,579.78 12,669.00 12,033.22
7/31/2012 12,860.24 12,840.00 12,199.20
8/31/2012 12,889.73 12,898.00 12,207.17
9/30/2012 12,917.93 12,983.00 12,223.97
10/31/2012 13,008.27 13,080.00 12,248.01
11/30/2012 13,027.84 13,138.00 12,267.34
12/31/2012 12,999.49 13,129.00 12,249.87
1/31/2013 12,916.83 13,130.00 12,164.20
2/28/2013 13,006.19 13,226.00 12,225.17
3/31/2013 13,017.60 13,264.00 12,234.93
4/30/2013 13,251.26 13,429.00 12,358.73
5/31/2013 12,919.80 13,236.00 12,138.23
6/30/2013 12,562.16 12,947.00 11,950.47
7/31/2013 12,604.80 13,007.00 11,966.80
8/31/2013 12,496.20 12,926.00 11,905.63
9/30/2013 12,603.09 13,035.00 12,018.34
10/31/2013 12,785.98 13,176.00 12,115.51
11/30/2013 12,733.72 13,162.00 12,070.15
12/31/2013 12,682.29 13,105.00 12,001.94
1/31/2014 12,988.65 13,305.00 12,179.27
2/28/2014 13,124.20 13,405.00 12,244.03
3/31/2014 13,157.84 13,415.00 12,223.17
4/30/2014 13,311.77 13,548.00 12,326.32
5/31/2014 13,499.37 13,700.00 12,466.66
6/30/2014 13,537.03 13,744.00 12,473.10
7/31/2014 13,528.70 13,713.00 12,441.82
8/31/2014 13,741.28 13,844.00 12,579.17
9/30/2014 13,567.19 13,746.00 12,493.76
10/31/2014 13,716.83 13,847.00 12,616.56
11/30/2014 13,836.96 13,903.00 12,706.07
12/31/2014 13,898.59 13,877.00 12,717.98
1/31/2015 14,371.43 14,134.00 12,984.64
2/28/2015 14,105.99 14,065.00 12,862.57
3/31/2015 14,155.83 14,104.00 12,922.28
4/30/2015 14,046.02 14,071.00 12,875.92
5/31/2015 13,944.72 14,046.00 12,844.90
6/30/2015 13,716.76 13,858.00 12,704.83
7/31/2015 13,846.80 13,912.00 12,793.16
8/31/2015 13,735.47 13,819.00 12,774.77
9/30/2015 13,822.12 13,858.00 12,861.18
10/31/2015 13,888.25 13,909.00 12,863.37
11/30/2015 13,842.72 13,851.00 12,829.36
12/31/2015 13,735.41 13,723.00 12,787.92
1/31/2016 13,858.85 13,805.00 12,963.86
2/29/2016 13,974.92 13,877.00 13,055.84
3/31/2016 14,274.71 14,140.00 13,175.59
4/30/2016 14,423.97 14,332.00 13,226.20
5/31/2016 14,437.12 14,360.00 13,229.59
6/30/2016 14,763.99 14,677.00 13,467.30
7/31/2016 14,967.37 14,870.00 13,552.44
8/31/2016 14,986.46 14,914.00 13,536.97
9/30/2016 14,950.59 14,924.00 13,529.00
10/31/2016 14,793.42 14,817.00 13,425.52
11/30/2016 14,399.63 14,447.00 13,107.98
12/31/2016 14,460.12 14,525.00 13,126.44
1/31/2017 14,518.41 14,601.00 13,152.21
2/28/2017 14,662.90 14,752.00 13,240.62
3/31/2017 14,648.24 14,750.00 13,233.64
4/30/2017 14,782.09 14,878.00 13,335.79
5/31/2017 14,947.70 15,030.00 13,438.40
6/30/2017 15,001.15 15,052.00 13,424.92
7/31/2017 15,083.93 15,153.00 13,482.71
8/31/2017 15,237.17 15,289.00 13,603.58
9/30/2017 15,175.83 15,225.00 13,538.83
10/31/2017 15,224.98 15,277.00 13,546.66
11/30/2017 15,239.69 15,264.00 13,529.26
12/31/2017 15,370.14 15,347.00 13,591.36
1/31/2018 15,219.41 15,196.00 13,434.82
2/28/2018 14,990.10 15,035.00 13,307.50
3/31/2018 15,075.65 15,097.00 13,392.84
4/30/2018 14,920.76 14,994.00 13,293.22
5/31/2018 15,008.82 15,073.00 13,388.06
6/30/2018 14,959.66 15,044.00 13,371.59
7/31/2018 15,030.93 15,082.00 13,374.78
8/31/2018 15,113.49 15,187.00 13,460.85
9/30/2018 15,014.44 15,107.00 13,374.18
10/31/2018 14,780.90 14,976.00 13,268.51
11/30/2018 14,806.32 14,995.00 13,347.68
12/31/2018 15,083.79 15,136.00 13,592.91
1/31/2019 15,356.02 15,380.00 13,737.26
2/28/2019 15,360.85 15,433.00 13,729.31
3/31/2019 15,783.87 15,755.00 13,992.93
4/30/2019 15,803.99 15,822.00 13,996.51
5/31/2019 16,147.70 16,065.00 14,244.97
6/30/2019 16,452.80 16,316.00 14,423.83
7/31/2019 16,550.07 16,363.00 14,455.58
[END CHART]
Data from 7/31/09 through 7/31/19.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Income Fund Shares 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 into an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes, except
that the Lipper A Rated Bond Funds Index reflects the fees and expenses of the
underlying funds included in the index.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
o 12-MONTH DIVIDEND YIELD COMPARISON o
[CHART OF 12-MONTH DIVIDEND YIELD COMPARISON]
LIPPER CORPORATE
DEBT FUNDS
USAA INCOME A RATED
FUND SHARES AVERAGE
7/31/2010 4.64% 3.96%
7/31/2011 4.01% 3.53%
7/31/2012 3.68% 3.02%
7/31/2013 3.62% 2.83%
7/31/2014 3.86% 3.14%
7/31/2015 3.68% 2.73%
7/31/2016 3.41% 2.61%
7/31/2017 3.37% 2.65%
7/31/2018 3.44% 2.76%
7/31/2019 3.36% 2.80%
[END CHART]
The 12-month dividend yield is computed by dividing net investment income
dividends paid during the previous 12 months by the latest adjusted month-end
net asset value. The yields quoted do not reflect adjustments made to the
enclosed financial statements in accordance with U.S. generally accepted
accounting principles. The net asset value is adjusted for a portion of the
capital gains, if any, distributed during the previous nine months. The graph
represents data for periods ending 7/31/10 through 7/31/19.
The Lipper Corporate Debt Funds A Rated Average is the average performance level
of all corporate A rated debt funds, reported by Lipper Inc., an independent
organization that monitors the performance of mutual funds.
================================================================================
8 | USAA INCOME FUND
================================================================================
o PORTFOLIO RATINGS MIX - 7/31/19 o
(% of Net Assets)
[PIE CHART OF PORTFOLIO RATINGS MIX]
AAA 20.0%
AA 12.3%
A 36.0%
BBB 26.3%
BELOW INVESTMENT-GRADE 5.4%
[END CHART]
This chart reflects the highest long-term rating from a Nationally Recognized
Statistical Rating Organization (NRSRO), with the four highest long-term credit
ratings labeled, in descending order of credit quality, AAA, AA, A, and BBB.
These categories represent investment-grade quality. NRSRO ratings are shown
because they provide independent analysis of the credit quality of the Funds'
investments. Victory Capital (the Manager) also performs its own fundamental
credit analysis of each security. As part of its fundamental credit analysis,
the Manager considers various criteria, including industry specific actions,
peer comparisons, payment ranking, and structure specific characteristics. Any
of the Funds' securities that are not rated by an NRSRO appear in the chart
above as "Unrated," but these securities are analyzed and monitored by the
Manager on an ongoing basis. Government securities that are issued or guaranteed
as to principal and interest by the U.S. government and pre-refunded and
escrowed-to-maturity municipal bonds that are not rated are treated as AAA for
credit quality purposes.
Percentages are of the total market value of the Fund's investments.
Refer To The Portfolio of Investments For A Complete List Of Securities.
================================================================================
INVESTMENT OVERVIEW | 9
================================================================================
o TOP 10 HOLDINGS* - 7/31/19 o
(% of Net Assets)
U.S. Treasury Note, 2.00%, 2/15/2025 ...................................... 1.0%
U.S. Treasury Bond, 2.50%, 2/15/2045 ...................................... 0.8%
U.S. Treasury Bond, 2.38%, 1/15/2025 ...................................... 0.7%
U.S. Treasury Bond, 2.50%, 2/15/2046 ...................................... 0.7%
U.S. Treasury Note, 2.63%, 11/15/2020 ..................................... 0.6%
U.S. Treasury Note, 1.63%, 2/15/2026 ...................................... 0.6%
U.S. Treasury Bond, 2.75%, 8/15/2042 ...................................... 0.5%
U.S. Treasury Bond, 3.88%, 8/15/2040 ...................................... 0.4%
SBA Tower Trust, 3.45%, 3/15/2023 ......................................... 0.4%
Nationwide Mutual Insurance Co.,
4.70%, 12/15/2024 ....................................................... 0.4%
o ASSET ALLOCATION** - 7/31/19 o
(% of Net Assets)
[PIE CHART OF ASSET ALLOCATION]
CORPORATE OBLIGATIONS 44.5%
EURODOLLAR AND YANKEE OBLIGATIONS 19.0%
U.S. TREASURY SECURITIES 9.7%
MUNICIPAL OBLIGATIONS 6.3%
ASSET-BACKED SECURITIES 5.6%
U.S. GOVERNMENT AGENCY ISSUES 5.2%
COMMERCIAL MORTGAGE SECURITIES 3.7%
COLLATERALIZED LOAN OBLIGATIONS 1.5%
PREFERRED STOCKS 1.0%
MONEY MARKET INSTRUMENTS 1.0%
BANK LOANS 0.8%
FOREIGN GOVERNMENT OBLIGATIONS 0.4%
COMMON STOCKS 0.3%
PREFERRED BONDS 0.1%
[END CHART]
*Does not include money market instruments, and short term investments purchased
with cash collateral from securities loaned.
**Does not include short-term investments purchased with cash collateral from
securities loaned.
Percentages are of the net assets of the Fund and may not equal 100%.
Refer to the Portfolio of Investments for a complete list of securities.
================================================================================
10 | USAA INCOME 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 Management Inc. ("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 USAA Asset Management Company ("AMCO")
was acquired by Victory Capital Holdings, Inc., the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
-------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
-------------------------------------------------------------------------------
409,588,889 14,988,426 8,795,316
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
person" as defined in the Investment Company Act of 1940, as amended (1940 Act)
("Interested Trustee"); 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 | 11
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
July 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 July 31, 2019:
DIVIDEND RECEIVED LONG-TERM
DEDUCTION (CORPORATE CAPITAL GAIN QUALIFIED INTEREST
SHAREHOLDERS)(1) DISTRIBUTIONS(2) INCOME
----------------------------------------------------------------------
1.06% $2,039,000 $268,309,000
----------------------------------------------------------------------
(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 July 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.
================================================================================
12 | USAA INCOME FUND
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA INCOME FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities USAA Income
Fund (the "Fund") (one of the funds constituting the USAA Mutual Funds Trust
(the "Trust")), including the portfolio of investments, as of July 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 the USAA Mutual
Funds Trust) at July 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 July 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
September 20, 2019
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 13
================================================================================
PORTFOLIO OF INVESTMENTS
July 31, 2019
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
BONDS (96.8%)
ASSET-BACKED SECURITIES (5.6%)
ASSET BACKED SECURITIES (5.1%)
------------------------------
AUTOMOBILE ABS (1.8%)
$ 5,000 AmeriCredit Automobile Receivables Trust 3.65% 5/09/2022 $ 5,058
9,650 AmeriCredit Automobile Receivables Trust 2.71 9/08/2022 9,678
5,000 AmeriCredit Automobile Receivables Trust 2.60 9/18/2023 4,989
4,000 AmeriCredit Automobile Receivables Trust 3.59 6/18/2024 4,088
2,827 Avis Budget Rental Car Funding AESOP, LLC(a) 4.94 6/20/2022 2,894
6,000 Avis Budget Rental Car Funding AESOP, LLC(a) 3.36 11/20/2022 6,051
5,250 Avis Budget Rental Car Funding AESOP, LLC(a) 4.27 3/20/2025 5,527
7,500 Avis Budget Rental Car Funding AESOP, LLC(a) 3.55 9/22/2025 7,687
6,500 California Republic Auto Receivables Trust 2.91 12/15/2022 6,511
1,250 Canadian Pacer Auto Receivables Trust(a) 3.63 1/19/2024 1,284
1,376 Centre Point Funding, LLC(a) 2.61 8/20/2021 1,369
6,000 Chesapeake Funding II, LLC(a) 3.52 8/15/2030 6,109
6,000 Chesapeake Funding II, LLC(a) 3.81 1/15/2031 6,170
2,500 CPS Auto Receivables Trust(a) 2.84 6/16/2025 2,497
4,850 Credit Acceptance Auto Loan Trust(a) 3.35 6/15/2026 4,869
3,000 Hertz Vehicle Financing II, LP(a) 2.65 7/25/2022 2,995
6,250 Hertz Vehicle Financing II, LP(a) 4.10 3/25/2023 6,391
8,667 Hertz Vehicle Financing II, LP(a) 3.29 10/25/2023 8,790
5,000 Hertz Vehicle Financing, LLC(a) 4.03 7/25/2024 5,221
8,500 OneMain Direct Auto Receivables Trust(a) 2.82 7/15/2024 8,495
12,000 OSCAR U.S. Funding Trust IX, LLC(a) 3.63 9/10/2025 12,324
4,760 OSCAR U.S. Funding Trust VIII, LLC(a) 3.50 5/12/2025 4,860
16,400 Santander Drive Auto Receivables Trust 3.39 4/15/2022 16,534
1,143 Tesla Auto Lease Trust(a) 2.75 2/20/2020 1,143
4,500 Westlake Automobile Receivables Trust(a) 6.41 5/15/2023 4,548
4,000 World Omni Auto Receivables Trust 3.87 8/15/2025 4,182
----------
150,264
----------
CREDIT CARD ABS (0.2%)
18,417 Synchrony Credit Card Master Note Trust 3.87 5/15/2026 18,920
----------
OTHER ABS (2.4%)
4,000 Ares Ltd. (3 mo. LIBOR + 1.65%)(a) 3.93(b) 4/22/2031 3,988
1,951 BCC Funding XIII, LLC(a) 4.78 8/20/2022 1,987
================================================================================
14 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 25,000 Element Rail Leasing I, LLC(a) 3.67% 4/19/2044 $ 25,041
5,625 ExteNet, LLC(a) 3.20 7/26/2049 5,618
2,000 Goldentree Loan Management U.S. Ltd. 1.00 10/20/2032 2,000
15,000 Hawaii Dept. of Business Economic Dev. & Tourism 3.24 1/01/2031 15,532
8,000 InSite Issuer, LLC(a) 4.10 12/15/2048 8,411
20,000 Louisiana Environmental Facilities
& Community Dev. Auth. 3.24 8/01/2028 20,595
5,320 Madison Park Funding Ltd.(a) 1.00 4/20/2030 5,230
2,750 MMAF Equipment Finance, LLC(a) 2.68 7/16/2027 2,769
9,937 MMAF Equipment Finance, LLC(a) 2.49 2/19/2036 9,951
15,625 NP SPE II, LLC(a) 4.22 10/21/2047 16,277
5,000 Project Silver(a),(c) 3.97 7/15/2044 5,000
15,545 PSNH Funding, LLC 3.81 2/01/2035 16,893
6,067 Renew Financial(a) 3.95 9/20/2053 6,322
1,495 Renew Financial(a) 3.22 9/22/2053 1,539
4,681 Sapphire Aviation Finance I Ltd.(a) 4.25 3/15/2040 4,776
5,000 SBA Tower Trust(a) 2.90 10/15/2044 4,986
3,715 SCF Equipment Leasing, LLC(a) 3.41 12/20/2023 3,743
6,000 SCF Equipment Leasing, LLC(a) 3.49 1/20/2026 6,097
7,723 Start Ltd.(a) 4.09 5/15/2043 7,866
7,600 Trinitas Ltd.(a) 1.00 1/20/2032 7,557
10,000 TRIP Rail Master Funding, LLC(a) 4.09 4/15/2044 10,130
3,334 TRIP Rail Master Funding, LLC(a) 3.74 8/15/2047 3,402
7,850 VB-S1 Issuer, LLC(a) 3.41 2/15/2048 7,895
----------
203,605
----------
STUDENT LOAN ABS (0.7%)
4,993 CIT Education Loan Trust (3 mo. LIBOR + 0.30%)(a) 2.65(b) 6/25/2042 4,571
3,000 Navient Student Loan Trust (1 mo. LIBOR + 1.50%) 3.77(b) 8/25/2050 2,986
3,500 Navient Student Loan Trust (1 mo. LIBOR + 1.15%)(a) 3.42(b) 3/25/2067 3,532
1,283 Nelnet Student Loan Trust (3 mo. LIBOR + 0.28%) 2.62(b) 9/22/2035 1,169
3,111 SLM Private Education Loan Trust(a) 2.50 3/15/2047 3,109
5,241 SLM Student Loan Trust (3 mo. LIBOR + 0.23%) 2.51(b) 1/25/2041 4,878
1,642 SLM Student Loan Trust (3 mo. LIBOR + 0.30%) 2.58(b) 1/25/2041 1,549
7,822 SLM Student Loan Trust (3 mo. LIBOR + 0.22%) 2.50(b) 1/27/2042 7,324
20,862 SLM Student Loan Trust (1 mo. LIBOR + 1.00%) 3.27(b) 4/27/2043 20,160
2,203 SLM Student Loan Trust (3 mo. LIBOR + 0.22%) 2.50(b) 3/25/2044 2,040
1,836 SLM Student Loan Trust (3 mo. LIBOR + 0.55%) 2.83(b) 10/25/2065 1,744
5,740 SLM Student Loan Trust (3 mo. LIBOR + 0.75%) 3.03(b) 10/27/2070 5,392
----------
58,454
----------
Total Asset Backed Securities 431,243
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
COMMUNICATIONS (0.1%)
---------------------
TELECOMMUNICATIONS (0.1%)
$ 10,000 Crown Castle Towers, LLC(a) 3.22% 5/15/2022 $ 10,073
----------
FINANCIAL (0.4%)
----------------
REITS (0.4%)
30,000 SBA Tower Trust(a) 3.45 3/15/2023 30,580
----------
Total Asset-Backed Securities (cost: $463,512) 471,896
----------
BANK LOANS (0.8%)(d)
COMMUNICATIONS (0.2%)
---------------------
MEDIA (0.1%)
2,406 CSC Holdings, LLC (1 mo. LIBOR + 2.25%) 4.58 7/17/2025 2,397
3,366 McGraw-Hill Global Education Intermediate
Holdings, LLC (1 mo. LIBOR + 4.00%) 6.23 5/04/2022 3,217
----------
5,614
----------
TELECOMMUNICATIONS (0.1%)
7,214 Sprint Communications, Inc. (1 mo. LIBOR + 3.00%) 5.25 2/02/2024 7,207
----------
Total Communications 12,821
----------
CONSUMER, CYCLICAL (0.1%)
-------------------------
RETAIL (0.1%)
4,404 1011778 B.C. Unlimited Liability Co.
(1 mo. LIBOR + 2.25%) 4.48 2/16/2024 4,402
7,451 Harbor Freight Tools USA, Inc.
(1 mo. LIBOR + 2.50%) 4.73 8/18/2023 7,314
----------
Total Consumer, Cyclical 11,716
----------
CONSUMER, NON-CYCLICAL (0.1%)
-----------------------------
FOOD (0.1%)
1,945 Albertson's, LLC (3 mo. LIBOR + 3.00%) 5.31 12/21/2022 1,949
4,039 Albertson's, LLC (1 mo. LIBOR + 3.00%) 5.23 6/22/2023 4,045
4,975 Albertson's, LLC (1 mo. LIBOR + 3.00%) 5.23 11/17/2025 4,979
----------
Total Consumer, Non-cyclical 10,973
----------
FINANCIAL (0.0%)
----------------
REITS (0.0%)
4,322 Communications Sales & Leasing, Inc.
(1 mo. LIBOR + 5.00%) 7.23 10/24/2022 4,199
----------
INDUSTRIAL (0.2%)
Machinery-Construction & Mining (0.1%)
4,802 Terex Corp. (2 mo. LIBOR + 2.00%) 4.35 1/31/2024 4,788
----------
================================================================================
16 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
PACKAGING & CONTAINERS (0.1%)
$ 2,692 Klockner-Pentaplast of America, Inc.
(1 mo. LIBOR + 4.25%) 6.48% 6/30/2022 $ 2,445
8,586 Reynolds Group Holdings, Inc.
(1 mo. LIBOR + 2.75%) 4.98 2/05/2023 8,580
----------
11,025
----------
Total Industrial 15,813
----------
TECHNOLOGY (0.1%)
-----------------
SOFTWARE (0.1%)
7,220 Solera, LLC (1 mo. LIBOR + 2.75%) 4.98 3/03/2023 7,193
----------
UTILITIES (0.1%)
----------------
ELECTRIC (0.1%)
4,800 Calpine Corp. (3 mo. LIBOR + 2.50%) 4.83 1/15/2024 4,801
----------
Total Bank Loans (cost: $67,924) 67,516
----------
COLLATERALIZED LOAN OBLIGATIONS (1.5%)
ASSET BACKED SECURITIES (1.5%)
------------------------------
OTHER ABS (1.5%)
3,500 American Money Management Corp.
(3 mo. LIBOR + 1.50%)(a) 3.80(b) 10/15/2028 3,494
3,500 CIFC Funding Ltd. (3 mo. LIBOR + 1.70%)(a) 3.98(b) 4/23/2029 3,486
2,500 Dryden Ltd. (1 mo. LIBOR + 1.01%)(a) 3.53(b) 5/15/2031 2,475
5,000 Dryden Ltd. (1 mo. LIBOR + 1.50%)(a) 3.80(b) 7/17/2031 4,901
4,000 Dryden Senior Loan Fund (3 mo. LIBOR + 1.75%)(a) 4.03(b) 7/20/2029 4,000
10,000 Dryden Senior Loan Fund (1 mo. LIBOR + 1.10%)(a) 3.40(b) 1/15/2031 9,933
10,000 Eaton Vance Ltd. (1 mo. LIBOR + 1.25%)(a) 3.53(b) 1/20/2030 9,706
5,000 Goldentree Loan Management U.S. Ltd.
(3 mo. LIBOR + 1.30%)(e) 1.00(b) 10/20/2032 5,000
10,000 Grippen Park Ltd.(a) 3.85 1/20/2030 9,978
5,000 Loomis Sayles Ltd. (1 mo. LIBOR + 0.90%)(a) 3.20(b) 4/15/2028 4,955
5,000 Magnetite VII Ltd. (1 mo. LIBOR + 0.80%)(a) 3.10(b) 1/15/2028 4,967
10,000 Oaktree EIF Ltd. (3 mo. LIBOR + 2.00%)(a) 4.28(b) 10/20/2027 10,023
10,000 Octagon Investment Partners XXIII, Ltd.
(1 mo. LIBOR + 0.85%)(a) 3.15(b) 7/15/2027 9,952
4,500 Palmer Square Loan Funding Ltd.
(3 mo. LIBOR + 2.25%)(a) 4.77(b) 4/20/2027 4,495
4,500 Race Point Ltd. (1 mo. LIBOR + 1.10%) 3.38(b) 7/25/2031 4,458
7,000 Stewart Park Ltd. (1 mo. LIBOR + 1.25%)(a) 3.55(b) 1/15/2030 6,795
7,000 TIAA Ltd. (3 mo. LIBOR + 1.70%)(a) 3.98(b) 4/20/2029 6,965
9,750 Trinitas Ltd. (3 mo. LIBOR + 1.39%)(a) 3.67(b) 10/25/2028 9,762
10,000 Trinitas Ltd. (3 mo. LIBOR + 1.32%)(a) 3.60(b) 7/25/2029 9,996
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 3,000 Voya Ltd. (3 mo. LIBOR + 1.60%)(a) 3.90%(b) 4/17/2030 $ 2,973
----------
Total Asset Backed Securities 128,314
----------
Total Collateralized Loan Obligations (cost: $129,251) 128,314
----------
COMMERCIAL MORTGAGE SECURITIES (3.7%)
MORTGAGE SECURITIES (3.7%)
--------------------------
COMMERCIAL MBS (3.7%)
9,027 BAMLL Commercial Mortgage Securities Trust(a) 3.49 4/14/2033 9,390
1,937 Banc of America Commercial Mortgage Trust(f) 5.66(g) 7/10/2044 768
10,000 Caesars Palace Las Vegas Trust(a) 3.83 10/15/2034 10,352
2,125 Caesars Palace Las Vegas Trust(a) 4.14 10/15/2034 2,210
8,100 Citigroup Commercial Mortgage Trust(a) 4.68 1/10/2024 8,625
8,568 Citigroup Commercial Mortgage Trust 3.36 7/10/2047 8,893
2,500 Citigroup Commercial Mortgage Trust 3.62 7/10/2047 2,633
4,000 Citigroup Commercial Mortgage Trust 3.86 7/10/2047 4,211
9,500 Citigroup Commercial Mortgage Trust 3.79(g) 9/15/2050 10,103
35,078 Commercial Mortgage Trust(f) 1.86(g) 5/15/2045 1,496
59,832 Commercial Mortgage Trust(f) 1.76(g) 10/15/2045 2,511
8,600 Commercial Mortgage Trust 3.25 10/15/2045 8,602
5,925 Commercial Mortgage Trust(a) 3.42 10/15/2045 6,035
5,000 Commercial Mortgage Trust 3.80 8/10/2047 5,306
7,500 Commercial Mortgage Trust 4.08 8/10/2047 7,958
6,300 Commercial Mortgage Trust 4.16(g) 10/10/2048 6,766
15,000 Commercial Mortgage Trust 3.90 7/10/2050 16,029
2,000 Commercial Mortgage Trust 4.29(g) 7/10/2050 2,154
4,750 DB-JPM Mortgage Trust(a) 2.83 8/10/2036 4,742
2,500 DB-JPM Mortgage Trust(a) 3.24 8/10/2036 2,488
975 GE Capital Commercial Mortgage Corp. 5.61(g) 12/10/2049 850
190,667 GS Mortgage Securities Corp.(a),(f) 0.21(g) 5/03/2032 2,794
5,000 GS Mortgage Securities Corp. 3.28 2/10/2046 5,125
10,000 GS Mortgage Securities Corp.(a) 3.68 2/10/2046 10,258
23,370 GS Mortgage Securities Trust(f) 2.17(g) 5/10/2045 881
3,998 GS Mortgage Securities Trust 3.38 5/10/2045 4,064
5,000 GS Mortgage Securities Trust 4.24 8/10/2046 5,338
6,000 GS Mortgage Securities Trust 3.76 7/10/2048 6,406
15,000 J.P. Morgan Chase Commercial Mortgage
Securities Trust(a) 5.60(g) 11/15/2043 15,652
10,697 J.P. Morgan Chase Commercial Mortgage
Securities Trust 4.82(g) 5/15/2045 11,224
10,000 J.P. Morgan Chase Commercial Mortgage
Securities Trust 4.27 6/15/2045 10,435
9,000 J.P. Morgan Chase Commercial Mortgage
Securities Trust 4.44(g) 2/15/2047 9,628
================================================================================
18 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 3,200 Morgan Stanley Bank of America Merrill Lynch Trust 3.46% 5/15/2046 $ 3,287
2,750 Morgan Stanley Capital I Trust(a) 5.20(g) 6/15/2044 2,798
3,000 Morgan Stanley Capital I Trust 3.77 3/15/2045 3,076
7,000 Morgan Stanley Capital I Trust 4.03(g) 5/15/2048 7,440
49,846 UBS Commercial Mortgage Trust(a),(f) 2.06(g) 5/10/2045 2,236
9,375 UBS Commercial Mortgage Trust 4.17 5/10/2045 9,721
15,000 UBS Commercial Mortgage Trust 4.82 5/10/2045 15,754
2,313 UBS-Barclays Commercial Mortgage Trust(a) 4.18 5/10/2063 2,396
25,959 Wells Fargo Commercial Mortgage Trust(a),(f) 1.77(g) 10/15/2045 1,182
7,000 Wells Fargo Commercial Mortgage Trust 3.54 5/15/2048 7,382
6,500 WF-RBS Commercial Mortgage Trust(a) 5.23(g) 6/15/2044 6,785
5,000 WF-RBS Commercial Mortgage Trust 3.35 5/15/2045 5,138
10,000 WF-RBS Commercial Mortgage Trust 4.09(g) 6/15/2045 10,349
5,000 WF-RBS Commercial Mortgage Trust 3.24 12/15/2045 5,055
20,000 WF-RBS Commercial Mortgage Trust 3.65 12/15/2046 20,250
----------
Total Mortgage Securities 306,776
----------
Total Commercial Mortgage Securities (cost: $294,946) 306,776
----------
CORPORATE OBLIGATIONS (44.5%)
BASIC MATERIALS (1.4%)
----------------------
CHEMICALS (0.9%)
10,000 CF Industries, Inc.(a) 4.50 12/01/2026 10,604
10,000 Chevron Phillips Chemical Co., LLC / Chevron
Phillips Chemical Co., LP(a) 3.40 12/01/2026 10,299
20,000 Dow Chemical Co. 4.25 10/01/2034 21,167
2,700 Huntsman International, LLC 4.50 5/01/2029 2,777
1,925 LYB International Finance II B.V. 3.50 3/02/2027 1,950
5,000 Monsanto Co. 3.38 7/15/2024 4,893
5,000 Monsanto Co. 3.95 4/15/2045 4,033
5,000 Mosaic Co. 4.05 11/15/2027 5,166
2,900 Sherwin-Williams Co. 3.45 6/01/2027 2,967
10,000 Westlake Chemical Corp. 3.60 8/15/2026 10,165
----------
74,021
----------
FOREST PRODUCTS & PAPER (0.1%)
5,000 International Paper Co. 3.80 1/15/2026 5,245
7,500 International Paper Co. 3.00 2/15/2027 7,454
----------
12,699
----------
IRON/STEEL (0.2%)
5,000 Allegheny Ludlum, LLC 6.95 12/15/2025 5,208
10,000 Allegheny Technologies, Inc. 5.95 1/15/2021 10,256
----------
15,464
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 19
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
MINING (0.2%)
$ 5,000 Freeport-McMoRan, Inc. 4.00% 11/14/2021 $ 5,102
10,000 Freeport-McMoRan, Inc. 5.45 3/15/2043 9,275
----------
14,377
----------
Total Basic Materials 116,561
----------
COMMUNICATIONS (2.9%)
---------------------
INTERNET (0.2%)
12,000 Amazon.com, Inc. 3.88 8/22/2037 13,266
4,250 VeriSign, Inc. 5.25 4/01/2025 4,619
----------
17,885
----------
MEDIA (1.2%)
10,000 CBS Corp. 4.20 6/01/2029 10,605
5,000 CCO Holdings, LLC / CCO Holdings Capital Corp.(a) 5.75 2/15/2026 5,263
20,000 Charter Communications Operating, LLC / Charter
Communications Operating Capital 6.38 10/23/2035 23,515
15,000 Comcast Corp. 3.90 3/01/2038 16,029
3,000 CSC Holdings, LLC(a) 5.50 4/15/2027 3,151
10,000 CSC Holdings, LLC(a) 5.75 1/15/2030 10,168
15,000 Discovery Communications, LLC 3.95 3/20/2028 15,491
7,600 Fox Corp.(a) 4.71 1/25/2029 8,503
5,000 Sirius XM Radio, Inc.(a) 5.38 7/15/2026 5,229
----------
97,954
----------
TELECOMMUNICATIONS (1.5%)
25,000 AT&T, Inc. 4.50 5/15/2035 26,513
10,000 AT&T, Inc. 5.25 3/01/2037 11,330
5,000 AT&T, Inc. 4.85 3/01/2039 5,452
10,000 Centel Capital Corp. 9.00 10/15/2019 10,104
10,000 CenturyLink, Inc. 5.80 3/15/2022 10,407
2,000 CenturyLink, Inc. 6.75 12/01/2023 2,161
2,500 CommScope, Inc.(a) 6.00 3/01/2026 2,530
1,750 Frontier Communications Corp. 1.00 9/15/2025 1,014
10,000 Motorola Solutions, Inc. 4.60 2/23/2028 10,534
5,000 Qwest Corp. 6.75 12/01/2021 5,369
2,250 Sprint Corp. 7.25 9/15/2021 2,417
19,500 Sprint Spectrum Co., LLC / Sprint Spectrum Co. II,
LLC / Sprint Spectrum Co. III, LLC(a) 4.74 3/20/2025 20,520
10,000 Verizon Communications, Inc. 4.40 11/01/2034 11,083
5,000 Verizon Communications, Inc. 4.13 8/15/2046 5,267
----------
124,701
----------
Total Communications 240,540
----------
================================================================================
20 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
CONSUMER, CYCLICAL (2.9%)
-------------------------
AIRLINES (1.7%)
$ 7,519 American Airlines, Inc. Pass-Through Trust 3.70% 10/01/2026 $ 7,805
8,579 American Airlines, Inc. Pass-Through Trust 4.00 9/22/2027 8,939
4,500 American Airlines, Inc. Pass-Through Trust 4.00 2/15/2029 4,709
9,459 American Airlines, Inc. Pass-Through Trust 3.60 10/15/2029 9,535
1,500 Continental Airlines, Inc. Pass-Through Trust 5.50 10/29/2020 1,536
7,047 Continental Airlines, Inc. Pass-Through Trust 4.15 4/11/2024 7,407
3,618 Continental Airlines, Inc. Pass-Through Trust 4.00 10/29/2024 3,788
7,441 Delta Air Lines Pass-Through Trust 3.88 7/30/2027 7,790
13,471 Hawaiian Airlines, Inc. Pass-Through Trust 4.95 1/15/2022 13,760
12,265 Hawaiian Airlines, Inc. Pass-Through Trust 3.90 1/15/2026 12,485
2,826 Spirit Airlines Pass Through Trust 4.45 4/01/2024 2,901
11,971 Spirit Airlines Pass Through Trust 4.10 4/01/2028 12,582
9,528 Spirit Airlines Pass Through Trust 3.38 2/15/2030 9,662
7,000 United Airlines, Inc. Pass-Through Trust 3.70 12/01/2022 7,024
3,888 United Airlines, Inc. Pass-Through Trust 4.30 8/15/2025 4,134
16,029 United Airlines, Inc. Pass-Through Trust 3.75 9/03/2026 16,681
2,418 US Airways Group, Inc. Pass-Through Trust 6.25 4/22/2023 2,630
6,873 US Airways Group, Inc. Pass-Through Trust 3.95 11/15/2025 7,167
----------
140,535
----------
AUTO MANUFACTURERS (0.2%)
2,000 Ford Motor Credit Co., LLC 4.54 8/01/2026 2,014
15,000 Hyundai Capital America(a) 3.25 9/20/2022 15,123
----------
17,137
----------
ENTERTAINMENT (0.0%)
3,000 International Game Technology plc(a) 6.50 2/15/2025 3,289
----------
HOME BUILDERS (0.2%)
4,800 KB Home 7.63 5/15/2023 5,366
5,000 Lennar Corp. 4.13 1/15/2022 5,127
5,000 Lennar Corp. 5.88 11/15/2024 5,482
----------
15,975
----------
HOUSEWARES (0.1%)
7,500 Newell Brands, Inc. 3.85 4/01/2023 7,594
----------
LODGING (0.1%)
8,000 Hilton Worldwide Finance, LLC / Hilton
Worldwide Finance Corp. 4.88 4/01/2027 8,302
3,000 Hyatt Hotels Corp. 3.38 7/15/2023 3,061
----------
11,363
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 21
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
RETAIL (0.6%)
$ 15,048 Advance Auto Parts, Inc. 4.50% 12/01/2023 $ 16,015
5,000 AutoZone, Inc. 3.75 6/01/2027 5,238
10,000 L Brands, Inc. 5.63 2/15/2022 10,499
7,667 L Brands, Inc. 7.50 6/15/2029 7,697
10,000 Walgreens Boots Alliance, Inc. 3.80 11/18/2024 10,450
----------
49,899
----------
Total Consumer, Cyclical 245,792
----------
CONSUMER, NON-CYCLICAL (5.6%)
-----------------------------
AGRICULTURE (0.2%)
3,000 Bunge Ltd. Finance Corp. 3.25 8/15/2026 2,907
10,000 Reynolds American, Inc. 4.00 6/12/2022 10,357
----------
13,264
----------
BEVERAGES (0.2%)
7,143 Keurig Dr Pepper, Inc. 4.60 5/25/2028 7,839
4,667 Keurig Dr Pepper, Inc. 4.99 5/25/2038 5,227
5,000 PepsiCo, Inc. 4.25 10/22/2044 5,717
----------
18,783
----------
BIOTECHNOLOGY (0.5%)
15,000 Baxalta, Inc. 4.00 6/23/2025 15,915
10,000 Celgene Corp. 3.90 2/20/2028 10,726
10,000 Gilead Sciences, Inc. 3.65 3/01/2026 10,549
----------
37,190
----------
COMMERCIAL SERVICES (0.5%)
2,750 Art Institute of Chicago(h) 3.23 3/01/2022 2,775
3,000 Bon Secours Charity Health System, Inc. 5.25 11/01/2025 3,149
4,250 Boston Medical Center Corp. 4.52 7/01/2026 4,502
2,500 Horace Mann School(h) 3.27 7/01/2027 2,533
2,285 Metropolitan Opera Association, Inc. 2.39 10/01/2019 2,281
6,080 Princeton Theological Seminary(h) 4.11 7/01/2023 6,412
10,000 S&P Global, Inc. 4.00 6/15/2025 10,779
5,000 Total System Services, Inc. 4.80 4/01/2026 5,515
5,000 University of Notre Dame 3.44 2/15/2045 5,126
----------
43,072
----------
FOOD (0.9%)
10,000 Flowers Foods, Inc. 3.50 10/01/2026 10,079
4,667 General Mills, Inc. 4.55 4/17/2038 5,068
5,000 J.M. Smucker Co. 4.25 3/15/2035 5,196
13,899 Kraft Heinz Foods Co.(a) 4.88 2/15/2025 14,339
================================================================================
22 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 10,000 Kraft Heinz Foods Co. 3.95% 7/15/2025 $ 10,409
14,000 Mars, Inc.(a) 3.88 4/01/2039 15,240
5,000 Smithfield Foods, Inc.(a) 4.25 2/01/2027 5,090
10,000 Smithfield Foods, Inc.(a) 5.20 4/01/2029 10,842
----------
76,263
----------
HEALTHCARE PRODUCTS (0.3%)
5,000 Becton Dickinson & Co. 3.70 6/06/2027 5,239
10,000 Covidien International Finance S.A. 2.95 6/15/2023 10,199
7,154 Medtronic, Inc. 4.38 3/15/2035 8,361
2,000 Teleflex, Inc. 4.88 6/01/2026 2,079
----------
25,878
----------
HEALTHCARE-SERVICES (1.7%)
7,000 Baylor Scott & White Holdings 3.10 11/15/2025 7,261
20,000 Baylor Scott & White Holdings 2.65 11/15/2026 19,609
10,000 Cigna Holding Co. 3.05 10/15/2027 9,935
10,000 Community Health Network, Inc. 4.24 5/01/2025 10,693
17,000 Eastern Maine Healthcare Systems 5.02 7/01/2036 17,004
5,000 HCA, Inc. 5.00 3/15/2024 5,435
15,000 HCA, Inc. 5.25 4/15/2025 16,515
2,500 HCA, Inc. 4.50 2/15/2027 2,656
15,000 Mercy Health 3.38 11/01/2025 15,290
3,720 Mercy Health 4.30 7/01/2028 4,077
3,900 Northwell Healthcare, Inc. 3.39 11/01/2027 3,969
6,500 NYU Langone Hospitals 4.17 7/01/2037 6,581
10,000 Premier Health Partners 2.91 11/15/2026 9,651
8,500 SSM Health Care Corp. 3.82 6/01/2027 8,957
5,000 UnitedHealth Group, Inc. 3.10 3/15/2026 5,157
1,000 Vanderbilt University Medical Center 4.17 7/01/2037 1,080
----------
143,870
----------
HOUSEHOLD PRODUCTS/WARES (0.1%)
10,000 SC Johnson & Son, Inc.(a) 4.35 9/30/2044 10,889
----------
PHARMACEUTICALS (1.2%)
5,000 AbbVie, Inc. 3.20 11/06/2022 5,085
10,000 AbbVie, Inc. 3.60 5/14/2025 10,301
15,000 Allergan Funding SCS 3.80 3/15/2025 15,565
11,700 CVS Health Corp. 4.30 3/25/2028 12,420
5,856 CVS Pass-Through Trust 6.04 12/10/2028 6,507
3,685 CVS Pass-Through Trust(a) 7.51 1/10/2032 4,524
3,955 CVS Pass-Through Trust(a) 5.93 1/10/2034 4,525
15,000 Express Scripts Holding Co. 3.40 3/01/2027 15,278
15,000 Mallinckrodt International Finance S.A.(i) 4.75 4/15/2023 9,379
================================================================================
PORTFOLIO OF INVESTMENTS | 23
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 3,500 Mead Johnson Nutrition Co. 4.13% 11/15/2025 $ 3,795
5,000 Mylan N.V. 3.95 6/15/2026 5,111
5,555 Mylan, Inc. 4.55 4/15/2028 5,847
----------
98,337
----------
Total Consumer, Non-cyclical 467,546
----------
ENERGY (5.9%)
-------------
OIL & GAS (2.0%)
15,000 BP Capital Markets America, Inc. 3.59 4/14/2027 15,811
5,000 Chesapeake Energy Corp. 7.00 10/01/2024 4,125
10,000 ConocoPhillips Co. 4.95 3/15/2026 11,391
10,000 ConocoPhillips Co. 4.15 11/15/2034 10,778
5,888 Continental Resources, Inc. 5.00 9/15/2022 5,941
10,000 EOG Resources, Inc. 3.90 4/01/2035 10,688
7,500 Hess Corp. 4.30 4/01/2027 7,699
10,000 Marathon Petroleum Corp. 4.75 9/15/2044 10,487
5,000 Murphy Oil Corp. 5.75 8/15/2025 5,124
7,000 Nabors Industries, Inc. 4.63 9/15/2021 6,834
6,730 Newfield Exploration Co. 5.63 7/01/2024 7,428
9,500 Newfield Exploration Co. 5.38 1/01/2026 10,409
10,000 Noble Holding International Ltd.(i) 4.90 8/01/2020 9,504
10,000 Occidental Petroleum Corp. 3.40 4/15/2026 10,167
5,000 Occidental Petroleum Corp. 3.00 2/15/2027 4,946
10,000 Phillips 66 4.65 11/15/2034 11,173
5,000 Rowan Companies, Inc. 4.88 6/01/2022 4,619
5,000 Rowan Companies, Inc. 4.75 1/15/2024 3,794
2,000 Southwestern Energy Co. 6.20 1/23/2025 1,724
7,000 Southwestern Energy Co. 7.50 4/01/2026 6,128
2,205 Transocean Pontus Ltd.(a) 6.13 8/01/2025 2,276
2,250 Transocean, Inc. 8.38 12/15/2021 2,348
5,000 Whiting Petroleum Corp. 6.63 1/15/2026 4,713
----------
168,107
----------
OIL & GAS SERVICES (0.5%)
20,000 Halliburton Co. 3.80 11/15/2025 20,968
961 Schlumberger Holdings Corp.(a) 4.00 12/21/2025 1,019
14,669 Schlumberger Holdings Corp.(a) 3.90 5/17/2028 15,324
5,000 Weatherford International, Ltd.(j) 4.50 4/15/2022 2,204
----------
39,515
----------
PIPELINES (3.4%)
15,000 Boardwalk Pipelines, LP 4.95 12/15/2024 15,951
10,000 Boardwalk Pipelines, LP 4.45 7/15/2027 10,212
8,000 Buckeye Partners, LP 4.13 12/01/2027 7,110
================================================================================
24 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 10,000 Buckeye Partners, LP 5.60% 10/15/2044 $ 8,425
15,000 Columbia Pipeline Group, Inc. 4.50 6/01/2025 16,085
15,000 DCP Midstream Operating, LP
(3 mo. LIBOR + 3.85%)(a) 5.85(k) 5/21/2043 14,112
9,307 Enable Oklahoma Intrastate Transmission, LLC(a) 6.25 3/15/2020 9,451
5,000 Energy Transfer Operating, LP 4.75 1/15/2026 5,397
17,010 Energy Transfer Operating, LP
(3 mo. LIBOR + 3.02%) 5.27(b) 11/01/2066 12,833
7,000 Energy Transfer Partners, LP / Regency Energy
Finance Corp. 4.50 11/01/2023 7,393
14,000 EnLink Midstream Partners, LP 4.15 6/01/2025 13,845
5,000 EnLink Midstream Partners, LP 4.85 7/15/2026 5,072
6,437 EQM Midstream Partners, LP 4.00 8/01/2024 6,325
14,000 EQM Midstream Partners, LP 4.13 12/01/2026 13,258
25,000 Midwest Connector Capital Co., LLC(a) 4.63 4/01/2029 26,676
7,500 MPLX, LP 4.00 2/15/2025 7,816
6,067 Northwest Pipeline, LLC 4.00 4/01/2027 6,337
3,500 NuStar Logistics, LP 6.00 6/01/2026 3,674
10,000 ONEOK Partners, LP 4.90 3/15/2025 10,869
13,730 Rockies Express Pipeline, LLC(a) 4.95 7/15/2029 14,033
15,000 Sabal Trail Transmission, LLC(a) 4.68 5/01/2038 16,183
5,000 Spectra Energy Partners, LP 3.38 10/15/2026 5,122
10,000 TC PipeLines, LP 4.65 6/15/2021 10,295
3,000 Transcontinental Gas Pipe Line Co., LLC 7.85 2/01/2026 3,820
10,000 Western Midstream Operating, LP 5.38 6/01/2021 10,350
6,250 Western Midstream Operating, LP 4.65 7/01/2026 6,385
15,000 Williams Companies, Inc. 4.55 6/24/2024 16,101
----------
283,130
----------
Total Energy 490,752
----------
FINANCIAL (15.2%)
-----------------
BANKS (5.8%)
5,000 AmSouth Bancorp. 6.75 11/01/2025 5,879
4,864 Bank of America Corp. 4.00 4/01/2024 5,173
10,000 Bank of America Corp. 4.20 8/26/2024 10,603
5,000 Bank of America Corp. 3.95 4/21/2025 5,236
8,000 Bank of America Corp. (3 mo. LIBOR + 1.51%) 3.71(k) 4/24/2028 8,392
4,383 Bank of America Corp. (1 mo. LIBOR + 1.04%) 3.42(k) 12/20/2028 4,510
5,000 Bank OZK (3 mo. LIBOR + 4.43%) 5.50(k) 7/01/2026 5,089
10,000 BankUnited, Inc. 4.88 11/17/2025 10,818
20,000 BBVA USA 3.88 4/10/2025 20,588
8,000 BOKF Merger Corp Number Sixteen
(3 mo. LIBOR + 3.17%) 5.63(k) 6/25/2030 8,414
================================================================================
PORTFOLIO OF INVESTMENTS | 25
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 10,000 CIT Group, Inc. 5.25% 3/07/2025 $ 10,957
20,000 Citigroup, Inc. 4.40 6/10/2025 21,303
5,000 Citigroup, Inc. 4.45 9/29/2027 5,391
10,000 Citigroup, Inc. (3 mo. LIBOR + 1.39%) 3.67(k) 7/24/2028 10,424
15,000 Citizens Financial Group, Inc.(a) 4.15 9/28/2022 15,478
5,500 Citizens Financial Group, Inc. 3.75 7/01/2024 5,562
3,500 Cullen/Frost Bankers, Inc. 4.50 3/17/2027 3,635
10,000 Discover Bank (5 Yr. Semi-Annual Swap + 1.73%) 4.68(k) 8/09/2028 10,364
10,000 Eagle Bancorp, Inc. (3 mo. LIBOR + 3.85%) 5.00(k) 8/01/2026 10,069
10,000 Fifth Third Bank 3.85 3/15/2026 10,558
3,500 First Maryland Capital Trust I (3 mo. LIBOR + 1.00%) 3.30(b) 1/15/2027 3,265
10,000 FirstMerit Bank, N.A. 4.27 11/25/2026 10,495
10,000 Flagstar Bancorp., Inc. 6.13 7/15/2021 10,324
3,250 Fulton Financial Corp. 3.60 3/16/2022 3,284
10,000 Fulton Financial Corp. 4.50 11/15/2024 10,585
5,000 Hilltop Holdings, Inc. 5.00 4/15/2025 5,119
5,000 Home BancShares, Inc. (3 mo. LIBOR + 3.58%) 5.63(k) 4/15/2027 5,091
10,000 Huntington Bancshares, Inc. 4.35 2/04/2023 10,445
20,000 J.P. Morgan Chase & Co. 2.95 10/01/2026 20,253
4,000 J.P. Morgan Chase & Co. (1 mo. LIBOR + 0.50%) 2.75(b) 2/01/2027 3,690
5,000 J.P. Morgan Chase & Co. 4.25 10/01/2027 5,437
20,000 KeyBank, N.A. 3.40 5/20/2026 20,627
5,000 LegacyTexas Financial Group, Inc.
(3 mo. LIBOR + 3.89%) 5.50(k) 12/01/2025 4,870
5,000 Manufacturers & Traders Trust Co. 3.40 8/17/2027 5,264
10,417 MB Financial Bank, N.A. (3 mo. LIBOR + 1.87%) 4.00(k) 12/01/2027 10,566
16,000 MUFG Americas Holdings Corp. 3.00 2/10/2025 16,131
1,000 People's United Bank, N.A. 4.00 7/15/2024 1,039
7,000 PNC Bank, N.A. 4.20 11/01/2025 7,568
10,000 PNC Financial Services Group, Inc. 2.85 11/09/2022 10,127
5,000 PNC Financial Services Group, Inc. 3.15 5/19/2027 5,159
10,409 Regions Bank 6.45 6/26/2037 13,166
5,818 Santander Holdings USA, Inc. 4.40 7/13/2027 6,146
10,000 State Street Corp. (3 mo. LIBOR + 1.00%) 3.41(b) 6/15/2047 7,768
5,000 Sterling National Bank (3 mo. LIBOR + 3.94%) 5.25(k) 4/01/2026 5,065
6,021 Susquehanna Bancshares, Inc. 5.38 8/15/2022 6,484
10,000 Synovus Financial Corp.
(5 Yr. Semi-Annual Swap + 3.38%) 5.90(k) 2/07/2029 10,434
10,000 TCF National Bank 6.25 6/08/2022 10,678
4,000 TCF National Bank (3 mo. LIBOR + 2.38%) 4.13(k) 7/02/2029 3,973
2,335 Texas Capital Bank N.A. 5.25 1/31/2026 2,434
11,062 Towne Bank (3 mo. LIBOR + 2.55%) 4.50(k) 7/30/2027 11,163
5,000 U.S. Bancorp. 3.10 4/27/2026 5,109
================================================================================
26 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 10,000 Union Bankshares Corp. (3 mo. LIBOR + 3.18%) 5.00%(k) 12/15/2026 $ 10,094
16,800 USB Realty Corp. (3 mo. LIBOR + 1.15%)(a) 3.45(b) -(l) 14,438
5,000 Webster Financial Corp. 4.38 2/15/2024 5,261
20,000 Wells Fargo & Co. 3.00 10/23/2026 20,219
----------
490,214
----------
DIVERSIFIED FINANCIAL SERVICES (1.9%)
10,000 Air Lease Corp. 3.63 4/01/2027 10,159
5,000 Capital One Bank USA, N.A. 3.38 2/15/2023 5,101
20,000 Capital One Financial Corp. 4.75 7/15/2021 20,848
10,000 Capital One Financial Corp. 3.75 4/24/2024 10,402
15,000 Capital One Financial Corp. 3.75 3/09/2027 15,493
4,875 Credit Acceptance Corp.(a) 6.63 3/15/2026 5,263
10,000 Cullen/Frost Capital Trust II (3 mo. LIBOR + 1.55%) 4.07(b) 3/01/2034 8,626
4,492 Grain Spectrum Funding II, LLC(a) 3.29 10/10/2019 4,486
10,000 ILFC E-Capital Trust I (Highest of 3 mo.
LIBOR/10 Year CMT/30 Year CMT + 1.55%)(a) 4.09(b) 12/21/2065 7,109
15,000 Intercontinental Exchange, Inc. 3.10 9/15/2027 15,429
5,000 Nuveen Finance, LLC(a) 4.13 11/01/2024 5,350
20,000 Pine Street Trust I(a) 4.57 2/15/2029 20,650
13,500 Synchrony Financial 3.95 12/01/2027 13,668
9,250 Synchrony Financial 5.15 3/19/2029 10,133
4,294 Washington Aircraft 1 Co.
(NBGA - United States Government) 2.64 9/15/2026 4,369
----------
157,086
----------
INSURANCE (4.7%)
5,000 Allstate Corp. (3 mo. LIBOR + 2.94%) 5.75(k) 8/15/2053 5,327
5,000 American Equity Investment Life Holding Co. 5.00 6/15/2027 5,140
10,000 American International Group, Inc. 3.88 1/15/2035 10,159
10,000 AmTrust Financial Services, Inc. 6.13 8/15/2023 9,834
5,000 Assurant, Inc. 4.90 3/27/2028 5,394
20,000 Athene Global Funding(a) 3.00 7/01/2022 20,236
8,000 Athene Holding Ltd. 4.13 1/12/2028 8,072
15,000 AXA Equitable Holdings, Inc. 4.35 4/20/2028 15,766
5,000 Chubb INA Holdings, Inc. 3.35 5/15/2024 5,231
10,000 Chubb INA Holdings, Inc. 3.35 5/03/2026 10,504
11,500 Genworth Holdings, Inc. (3 mo. LIBOR + 2.00%) 4.52(b) 11/15/2036 7,059
10,000 Global Atlantic Financial Co.(a) 8.63 4/15/2021 10,827
13,086 Hanover Insurance Group, Inc. 4.50 4/15/2026 13,950
14,000 Hartford Financial Services Group, Inc.
(3 mo. LIBOR + 2.13%)(a) 4.64(b) 2/12/2047 12,095
10,000 Jackson National Life Global Funding(a) 2.50 6/27/2022 10,005
20,000 Jackson National Life Global Funding(a) 3.25 1/30/2024 20,524
================================================================================
PORTFOLIO OF INVESTMENTS | 27
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 25,500 Kemper Corp. 4.35% 2/15/2025 $ 26,625
10,000 Lincoln National Corp. 4.20 3/15/2022 10,408
15,000 Lincoln National Corp. (3 mo. LIBOR + 2.36%) 4.88(b) 5/17/2066 12,450
5,000 Loews Corp. 3.75 4/01/2026 5,279
10,000 MassMutual Global Funding II(a) 3.60 4/09/2024 10,452
10,000 MassMutual Global Funding II(a) 2.75 6/22/2024 10,134
15,000 Mercury General Corp. 4.40 3/15/2027 15,385
10,000 MetLife, Inc. 4.13 8/13/2042 10,820
29,505 Nationwide Mutual Insurance Co.
(3 mo. LIBOR + 2.29%)(a) 4.70(b) 12/15/2024 29,362
5,000 Ohio National Financial Services, Inc.(a) 6.63 5/01/2031 5,707
20,000 Old Republic International Corp. 3.88 8/26/2026 20,674
10,000 Primerica, Inc. 4.75 7/15/2022 10,557
10,000 ProAssurance Corp. 5.30 11/15/2023 10,819
10,000 Prudential Financial, Inc. (3 mo. LIBOR + 3.92%) 5.63(k) 6/15/2043 10,733
5,000 Prudential Financial, Inc. 4.35 2/25/2050 5,646
17,050 StanCorp Financial Group, Inc. 5.00 8/15/2022 17,860
7,670 Torchmark Corp. 4.55 9/15/2028 8,375
----------
391,409
----------
INVESTMENT COMPANIES (0.4%)
10,000 Ares Capital Corp. 3.50 2/10/2023 9,998
5,000 Ares Capital Corp. 4.25 3/01/2025 5,097
5,000 Main Street Capital Corp. 4.50 12/01/2019 5,020
4,500 Main Street Capital Corp. 4.50 12/01/2022 4,624
7,800 Main Street Capital Corp. 5.20 5/01/2024 8,327
----------
33,066
----------
REITS (1.9%)
5,000 Alexandria Real Estate Equities, Inc. 4.50 7/30/2029 5,536
5,000 AvalonBay Communities, Inc. 3.45 6/01/2025 5,236
2,679 AvalonBay Communities, Inc. 3.20 1/15/2028 2,771
10,000 Boston Properties, LP 3.85 2/01/2023 10,425
7,500 Columbia Property Trust Operating Partnership, LP 3.65 8/15/2026 7,384
10,000 EPR Properties 4.75 12/15/2026 10,587
9,000 ERP Operating, LP 2.85 11/01/2026 9,121
7,000 Federal Realty Investment Trust 3.00 8/01/2022 7,088
10,000 Federal Realty Investment Trust 2.75 6/01/2023 10,066
1,852 Federal Realty Investment Trust 3.25 7/15/2027 1,897
5,000 Hospitality Properties Trust 4.95 2/15/2027 5,051
5,000 Hudson Pacific Properties, LP 3.95 11/01/2027 5,133
1,979 Hudson Pacific Properties, LP 4.65 4/01/2029 2,142
4,901 MPT Operating Partnership, LP / MPT Finance Corp. 5.25 8/01/2026 5,101
1,000 MPT Operating Partnership, LP / MPT Finance Corp. 4.63 8/01/2029 1,013
================================================================================
28 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 7,500 Physicians Realty, LP 4.30% 3/15/2027 $ 7,778
5,000 Realty Income Corp. 4.13 10/15/2026 5,424
6,000 Realty Income Corp. 3.00 1/15/2027 6,070
4,000 Sabra Health Care, LP 5.13 8/15/2026 4,203
6,000 Sabra Health Care, LP / Sabra Capital Corp. 5.38 6/01/2023 6,105
4,444 SL Green Operating Partnership, LP 3.25 10/15/2022 4,494
7,500 Spirit Realty, LP 4.45 9/15/2026 7,842
5,450 Starwood Property Trust, Inc. 3.63 2/01/2021 5,464
5,000 STORE Capital Corp. 4.63 3/15/2029 5,334
14,000 Washington REIT 3.95 10/15/2022 14,446
----------
155,711
----------
SAVINGS & LOANS (0.5%)
15,000 Banc of California, Inc. 5.25 4/15/2025 15,441
10,000 New York Community Bancorp, Inc.
(1 mo. LIBOR + 2.78%) 5.90(k) 11/06/2028 10,421
8,000 Sterling Bancorp. 3.50 6/08/2020 7,944
10,000 TIAA FSB Holdings, Inc. 5.75 7/02/2025 10,274
----------
44,080
----------
Total Financial 1,271,566
----------
GOVERNMENT (0.0%)
-----------------
REGIONAL(STATE/PROVINCE) (0.0%)
1,000 Mashantucket (Western) Pequot Tribe(h),(m) 7.35 7/01/2026 160
----------
INDUSTRIAL (3.4%)
-----------------
AEROSPACE/DEFENSE (0.5%)
17,750 Arconic, Inc. 5.13 10/01/2024 18,784
10,000 Lockheed Martin Corp. 3.60 3/01/2035 10,461
10,000 Raytheon Co. 4.20 12/15/2044 11,104
----------
40,349
----------
BUILDING MATERIALS (0.0%)
3,000 Eagle Materials, Inc. 4.50 8/01/2026 3,046
----------
ELECTRICAL COMPONENTS & EQUIPMENT (0.3%)
10,000 Hubbell, Inc. 3.35 3/01/2026 10,101
5,000 Hubbell, Inc. 3.50 2/15/2028 5,104
10,000 Molex Electronic Technologies, LLC(a) 3.90 4/15/2025 10,308
----------
25,513
----------
ELECTRONICS (0.1%)
2,604 Keysight Technologies, Inc. 4.60 4/06/2027 2,792
3,000 Trimble, Inc. 4.15 6/15/2023 3,118
----------
5,910
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 29
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
HAND/MACHINE TOOLS (0.2%)
$ 8,295 Kennametal, Inc. 4.63% 6/15/2028 $ 8,668
10,000 Snap-on, Inc. 3.25 3/01/2027 10,344
----------
19,012
----------
MACHINERY-DIVERSIFIED (0.2%)
14,050 Wabtec Corp. 3.45 11/15/2026 14,062
----------
METAL FABRICATION/HARDWARE (0.1%)
8,890 Worthington Industries, Inc. 4.30 8/01/2032 9,040
----------
MISCELLANEOUS MANUFACTURERS (0.4%)
10,000 Eaton Corp. 2.75 11/02/2022 10,086
10,000 Eaton Corp. 3.10 9/15/2027 10,177
11,842 General Electric Co. (3 mo. LIBOR + 3.33%) 5.00(k) -(l) 11,472
5,000 Hillenbrand, Inc. 5.50 7/15/2020 5,104
1,500 Ingersoll-Rand Co. 9.00 8/15/2021 1,656
----------
38,495
----------
PACKAGING & CONTAINERS (0.3%)
5,000 Ball Corp. 5.25 7/01/2025 5,443
5,000 Crown Americas, LLC / Crown Americas Capital Corp. 4.25 9/30/2026 5,081
2,000 Graphic Packaging International, LLC 4.13 8/15/2024 2,055
9,000 Sealed Air Corp.(a) 6.88 7/15/2033 10,056
----------
22,635
----------
TRANSPORTATION (1.2%)
8,000 Burlington Northern Santa Fe, LLC 3.75 4/01/2024 8,461
10,000 Burlington Northern Santa Fe, LLC 3.65 9/01/2025 10,622
7,000 Burlington Northern Santa Fe, LLC 3.90 8/01/2046 7,442
10,000 FedEx Corp. 3.90 2/01/2035 10,179
7,000 Kansas City Southern 3.13 6/01/2026 7,002
9,412 Ryder System, Inc. 3.40 3/01/2023 9,658
5,000 TTX Co.(a) 4.15 1/15/2024 5,293
10,000 TTX Co.(a) 3.60 1/15/2025 10,504
10,000 Union Pacific Corp. 3.38 2/01/2035 9,980
10,000 Union Pacific Corp. 4.25 4/15/2043 10,717
12,000 Union Pacific Corp. 4.30 3/01/2049 13,266
----------
103,124
----------
TRUCKING & LEASING (0.1%)
5,000 Penske Truck Leasing Co., LP / PTL Finance Corp.(a) 3.95 3/10/2025 5,241
----------
Total Industrial 286,427
----------
================================================================================
30 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
TECHNOLOGY (1.4%)
-----------------
COMPUTERS (0.1%)
$ 2,500 Dell International, LLC / EMC Corp.(a) 5.88% 6/15/2021 $ 2,544
5,000 Dell International, LLC / EMC Corp.(a) 4.90 10/01/2026 5,228
----------
7,772
----------
SEMICONDUCTORS (0.7%)
5,000 Analog Devices, Inc. 4.50 12/05/2036 5,247
10,000 Applied Materials, Inc. 3.30 4/01/2027 10,445
10,000 Applied Materials, Inc. 5.10 10/01/2035 12,225
5,000 Broadcom, Inc.(a) 3.63 10/15/2024 5,012
10,000 Micron Technology, Inc. 4.66 2/15/2030 10,116
7,000 QUALCOMM, Inc. 3.25 5/20/2027 7,176
10,000 QUALCOMM, Inc. 4.65 5/20/2035 11,319
----------
61,540
----------
SOFTWARE (0.6%)
7,500 Activision Blizzard, Inc. 3.40 9/15/2026 7,733
10,000 Microsoft Corp. 3.30 2/06/2027 10,595
20,000 Microsoft Corp. 4.20 11/03/2035 23,095
10,000 Microsoft Corp. 3.45 8/08/2036 10,588
----------
52,011
----------
Total Technology 121,323
----------
UTILITIES (5.8%)
----------------
ELECTRIC (4.6%)
5,000 AES Corp. 4.88 5/15/2023 5,069
10,000 AES Corp. 5.50 4/15/2025 10,383
5,000 Atlantic City Electric Co. 3.38 9/01/2024 5,150
15,000 Berkshire Hathaway Energy Co. 4.50 2/01/2045 17,133
5,000 Black Hills Corp. 5.88 7/15/2020 5,145
10,000 Black Hills Corp. 4.25 11/30/2023 10,572
15,000 Cleco Corporate Holdings, LLC 3.74 5/01/2026 15,220
10,000 Consumers Energy Co. 3.95 7/15/2047 10,984
5,000 Delmarva Power & Light Co. 4.15 5/15/2045 5,505
5,000 Dominion Energy South Carolina, Inc. 5.30 5/15/2033 6,075
5,000 Dominion Energy South Carolina, Inc. 4.10 6/15/2046 5,136
6,354 Dominion Energy, Inc. 3.07 8/15/2024 6,422
7,000 Duke Energy Carolinas, LLC 3.88 3/15/2046 7,462
10,000 Duke Energy Indiana, LLC 3.75 5/15/2046 10,362
10,000 Duke Energy Progress, LLC 4.15 12/01/2044 11,017
3,500 Duquesne Light Holdings, Inc.(a) 5.90 12/01/2021 3,722
4,000 Entergy Arkansas, LLC 3.05 6/01/2023 4,066
7,000 Entergy Louisiana, LLC 4.95 1/15/2045 7,299
5,000 Entergy Mississippi, LLC 3.25 12/01/2027 5,105
================================================================================
PORTFOLIO OF INVESTMENTS | 31
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 10,000 Entergy Texas, Inc. 2.55% 6/01/2021 $ 9,952
15,000 Entergy Texas, Inc. 3.45 12/01/2027 15,207
5,000 Georgia Power Co. 3.25 4/01/2026 5,115
10,000 Gulf Power Co. 3.30 5/30/2027 10,371
7,500 ITC Holdings Corp. 3.35 11/15/2027 7,743
3,168 Mississippi Power Co. 4.25 3/15/2042 3,288
10,000 Monongahela Power Co.(a) 4.10 4/15/2024 10,663
9,500 National Rural Utilities Cooperative Finance Corp.
(3 mo. LIBOR + 2.91%) 4.75(k) 4/30/2043 9,486
4,000 NextEra Energy Capital Holdings, Inc.
(3 mo. LIBOR + 2.13%) 4.54(b) 6/15/2067 3,381
15,000 Northern States Power Co. 4.00 8/15/2045 16,270
20,000 Northern States Power Co. 3.60 5/15/2046 20,657
5,000 Oncor Electric Delivery Co., LLC 3.75 4/01/2045 5,293
15,000 Pacific Gas & Electric Co.(j) 2.95 3/01/2026 14,389
3,530 Pedernales Electric Cooperative, Inc.(a) 5.95 11/15/2022 3,907
5,000 Potomac Electric Power Co. 4.15 3/15/2043 5,484
26,130 PPL Capital Funding, Inc. (3 mo. LIBOR + 2.67%) 4.99(b) 3/30/2067 23,766
10,000 Public Service Electric & Gas Co. 3.80 3/01/2046 10,668
10,000 Southern California Edison Co.
(3 mo. LIBOR + 4.20%) 6.25(k) -(l) 10,250
10,000 Southern Co. 3.25 7/01/2026 10,201
5,000 System Energy Resources, Inc. 4.10 4/01/2023 5,234
10,000 Tri-State Generation & Transmission Association, Inc. 4.70 11/01/2044 11,091
10,000 Tri-State Generation & Transmission Association, Inc. 4.25 6/01/2046 10,372
15,000 WEC Energy Group, Inc. (3 mo. LIBOR + 2.11%) 4.63(b) 5/15/2067 12,502
----------
387,117
----------
GAS (0.7%)
10,000 Atmos Energy Corp. 4.13 10/15/2044 11,049
10,000 National Fuel Gas Co. 4.90 12/01/2021 10,368
10,000 National Fuel Gas Co. 5.20 7/15/2025 10,807
10,000 National Fuel Gas Co. 3.95 9/15/2027 9,987
7,000 Southern Co. Gas Capital Corp. 3.25 6/15/2026 7,112
11,880 Spire, Inc. 3.54 2/27/2024 11,998
----------
61,321
----------
WATER (0.5%)
10,000 American Water Capital Corp. 2.95 9/01/2027 10,098
10,000 Aqua America, Inc. 4.28 5/01/2049 10,951
15,000 Aquarion Co.(a) 4.00 8/15/2024 15,644
----------
36,693
----------
Total Utilities 485,131
----------
Total Corporate Obligations (cost: $3,598,153) 3,725,798
----------
================================================================================
32 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
EURODOLLAR AND YANKEE OBLIGATIONS (19.0%)
BASIC MATERIALS (1.9%)
----------------------
CHEMICALS (0.5%)
$ 10,000 Air Liquide Finance S.A.(a) 3.50% 9/27/2046 $ 10,013
10,000 Braskem Finance Ltd. 6.45 2/03/2024 11,098
8,000 SASOL Financing USA, LLC 5.88 3/27/2024 8,571
5,000 Syngenta Finance N.V.(a) 3.93 4/23/2021 5,083
11,673 Yara International ASA(a) 4.75 6/01/2028 12,573
----------
47,338
----------
IRON/STEEL (0.4%)
10,000 ArcelorMittal 6.25 2/25/2022 10,805
8,000 ArcelorMittal 7.00 10/15/2039 9,539
1,968 Vale Overseas Ltd. 4.38 1/11/2022 2,032
9,000 Vale Overseas Ltd. 6.25 8/10/2026 10,224
----------
32,600
----------
MINING (1.0%)
2,500 Anglo American Capital plc(a) 3.75 4/10/2022 2,554
5,000 Anglo American Capital plc(a) 4.88 5/14/2025 5,373
6,667 Anglo American Capital plc(a) 4.00 9/11/2027 6,734
20,000 Fresnillo plc(a) 5.50 11/13/2023 21,664
5,000 Glencore Funding, LLC(a) 4.13 5/30/2023 5,191
15,000 Glencore Funding, LLC(a) 4.00 3/27/2027 15,317
6,700 Glencore Funding, LLC(a) 4.88 3/12/2029 7,103
10,000 Kinross Gold Corp. 5.95 3/15/2024 10,962
2,000 Kinross Gold Corp. 4.50 7/15/2027 2,025
5,000 Teck Resources Ltd. 6.13 10/01/2035 5,718
----------
82,641
----------
Total Basic Materials 162,579
----------
COMMUNICATIONS (0.8%)
---------------------
INTERNET (0.0%)
3,000 Tencent Holdings Ltd.(a) 3.93 1/19/2038 3,105
----------
MEDIA (0.1%)
10,000 Pearson Funding Four plc(a) 3.75 5/08/2022 10,025
----------
TELECOMMUNICATIONS (0.7%)
14,000 British Telecommunications plc 5.13 12/04/2028 15,780
15,000 Deutsche Telekom International Finance B.V.(a) 3.60 1/19/2027 15,507
5,000 Deutsche Telekom International Finance B.V.(a) 4.75 6/21/2038 5,501
10,000 Telecom Italia Capital S.A. 6.38 11/15/2033 10,499
6,667 Vodafone Group plc 5.00 5/30/2038 7,382
----------
54,669
----------
Total Communications 67,799
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 33
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
CONSUMER, CYCLICAL (1.1%)
-------------------------
AIRLINES (1.1%)
$ 3,423 Air Canada Pass-Through Trust(a) 5.38% 5/15/2021 $ 3,502
18,822 Air Canada Pass-Through Trust(a) 4.13 5/15/2025 19,795
8,396 Air Canada Pass-Through Trust(a) 3.60 3/15/2027 8,663
5,132 Air Canada Pass-Through Trust(a) 3.75 12/15/2027 5,359
15,000 British Airways Pass-Through Trust(a) 4.63 6/20/2024 15,802
7,000 British Airways Pass-Through Trust(a) 3.35 6/15/2029 7,061
3,994 British Airways Pass-Through Trust(a) 3.80 9/20/2031 4,186
11,703 Latam Airlines Pass-Through Trust 4.20 11/15/2027 11,760
7,460 Turkish Airlines Pass-Through Trust(a) 4.20 3/15/2027 7,001
10,000 WestJet Airlines Ltd.(a) 3.50 6/16/2021 10,031
----------
Total Consumer, Cyclical 93,160
----------
CONSUMER, NON-CYCLICAL (1.8%)
-----------------------------
AGRICULTURE (0.7%)
5,000 BAT Capital Corp. 4.39 8/15/2037 4,831
20,000 BAT International Finance plc(a) 3.95 6/15/2025 20,717
20,000 Imperial Brands Finance plc(a) 4.25 7/21/2025 20,963
10,000 Imperial Brands Finance plc(a) 3.88 7/26/2029 9,969
----------
56,480
----------
BEVERAGES (0.6%)
20,000 Anheuser-Busch Cos., LLC / Anheuser-Busch InBev
Worldwide, Inc. 4.70 2/01/2036 22,316
6,500 Anheuser-Busch InBev Worldwide, Inc. 4.38 4/15/2038 7,014
5,250 Anheuser-Busch InBev Worldwide, Inc. 5.45 1/23/2039 6,353
10,000 Bacardi Ltd.(a) 4.70 5/15/2028 10,712
7,500 Becle S.A.B de C.V.(a) 3.75 5/13/2025 7,596
----------
53,991
----------
COSMETICS/PERSONAL CARE (0.1%)
6,000 Avon International Capital plc(a) 6.50 8/15/2022 6,112
----------
PHARMACEUTICALS (0.4%)
8,333 Elanco Animal Health, Inc. 4.27 8/28/2023 8,762
10,000 GlaxoSmithKline Capital, Inc. 4.20 3/18/2043 11,221
5,000 Takeda Pharmaceutical Co. Ltd.(a) 5.00 11/26/2028 5,738
15,000 Teva Pharmaceutical Finance Netherlands III B.V. 3.15 10/01/2026 11,684
----------
37,405
----------
Total Consumer, Non-cyclical 153,988
----------
================================================================================
34 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
DIVERSIFIED (0.5%)
------------------
HOLDING COMPANIES-DIVERSIFIED (0.5%)
$ 7,500 CK Hutchison International Ltd.(a) 2.75% 10/03/2026 $ 7,397
10,000 CK Hutchison International Ltd.(a) 3.50 4/05/2027 10,344
10,000 CK Hutchison International Ltd.(a) 3.25 9/29/2027 10,186
5,000 Hutchison Whampoa International Ltd.(a) 4.63 1/13/2022 5,228
10,000 Hutchison Whampoa International Ltd.(a) 3.63 10/31/2024 10,429
----------
Total Diversified 43,584
----------
ENERGY (1.2%)
-------------
OIL & GAS (1.0%)
4,500 Aker BP ASA(a) 5.88 3/31/2025 4,728
5,000 BP Capital Markets plc 3.28 9/19/2027 5,176
10,000 BP Capital Markets plc 3.72 11/28/2028 10,705
11,000 Eni SpA(a) 4.75 9/12/2028 12,112
4,000 Eni SpA(a) 4.25 5/09/2029 4,247
5,000 Noble Holding International Ltd.(i) 7.95 4/01/2025 3,663
7,407 Petrobras Global Finance B.V. 5.75 2/01/2029 7,929
6,000 Petroleos Mexicanos 5.38 3/13/2022 6,092
15,000 Saudi Arabian Oil Co.(a) 4.25 4/16/2039 15,615
10,000 Shell International Finance B.V. 3.63 8/21/2042 10,302
----------
80,569
----------
PIPELINES (0.2%)
6,000 APT Pipelines Ltd.(a) 4.25 7/15/2027 6,312
12,124 TransCanada PipeLines Ltd. (3 mo. LIBOR + 2.21%) 4.73(b) 5/15/2067 9,843
----------
16,155
----------
Total Energy 96,724
----------
FINANCIAL (8.5%)
----------------
BANKS (6.7%)
15,000 ABN AMRO Bank N.V.(a) 4.75 7/28/2025 16,103
10,000 ABN AMRO Bank N.V.(a) 4.80 4/18/2026 10,792
10,000 Australia & New Zealand Banking Group Ltd.(a) 4.40 5/19/2026 10,504
1,000 Banco Santander Mexico S.A. Institucion de Banca
Multiple Grupo Financiero Santand
(1 mo. LIBOR + 3.00%)(a) 5.95(k) 10/01/2028 1,059
7,500 Bank of Montreal (5 Yr. Semi-Annual Swap + 1.43%) 3.80(k) 12/15/2032 7,627
10,000 Bank of Nova Scotia 4.50 12/16/2025 10,766
5,000 Banque Federative du Credit Mutuel S.A.(a) 2.70 7/20/2022 5,023
12,300 Barclays plc 4.84 5/09/2028 12,482
10,000 Barclays plc (3 mo. LIBOR + 3.05%) 5.09(k) 6/20/2030 10,106
10,000 BBVA Bancomer S.A.(a) 4.38 4/10/2024 10,447
5,000 BNP Paribas S.A. (3 mo. LIBOR + 1.29%)(a) 7.20(k) -(l) 5,495
================================================================================
PORTFOLIO OF INVESTMENTS | 35
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 10,000 BNP Paribas S.A. (1 mo. LIBOR + 2.24%)(a) 4.71%(k) 1/10/2025 $ 10,691
5,000 BNP Paribas S.A.(a) 4.38 9/28/2025 5,230
10,000 BNP Paribas S.A.(a) 4.38 5/12/2026 10,542
4,000 BNP Paribas S.A.(a) 4.63 3/13/2027 4,264
9,200 BPCE S.A.(a) 3.00 5/22/2022 9,280
5,000 BPCE S.A.(a) 4.00 9/12/2023 5,226
9,524 BPCE S.A.(a) 3.50 10/23/2027 9,741
10,000 BPCE S.A.(a) 3.25 1/11/2028 10,182
5,833 Cadence BanCorp (3 mo. LIBOR + 3.03%) 4.75(k) 6/30/2029 5,576
3,177 Canadian Imperial Bank of Commerce(a) 7.26 4/10/2032 3,796
10,000 Commonwealth Bank of Australia(a) 3.25 7/20/2023 10,371
10,000 Cooperatieve Rabobank U.A. 3.88 2/08/2022 10,357
16,903 Cooperatieve Rabobank U.A. 3.95 11/09/2022 17,498
8,000 Cooperatieve Rabobank U.A. (5-Yr. Semi-Annual
Swap + 1.89%), acquired 11/02/2017-11/03/2017;
cost $4,099-$4,104(n) 4.00(k) 4/10/2029 8,209
14,286 Credit Agricole S.A.(a) 3.25 10/04/2024 14,570
15,000 Credit Agricole S.A.(a) 4.13 1/10/2027 15,970
21,400 Credit Suisse Group AG(a) 3.57 1/09/2023 21,792
4,445 Credit Suisse Group AG (3 mo. LIBOR + 1.41%)(a) 3.87(k) 1/12/2029 4,585
10,000 Credit Suisse Group Funding Guernsey Ltd. 4.55 4/17/2026 10,856
5,000 Danske Bank A/S(a) 5.38 1/12/2024 5,449
10,000 Deutsche Bank AG 5.00 2/14/2022 10,321
10,000 Deutsche Bank AG (5 Yr. Semi-Annual Swap + 2.55%) 4.88(k) 12/01/2032 8,982
15,000 HSBC Bank plc (6 mo. LIBOR + 0.25%), acquired
10/16/2012; cost $7,350(n) 2.50(b) -(l) 10,357
10,000 HSBC Holdings plc 3.90 5/25/2026 10,475
5,000 HSBC Holdings plc 4.38 11/23/2026 5,304
14,100 ING Groep N.V. 3.95 3/29/2027 14,991
25,000 Lloyds Banking Group plc 3.75 1/11/2027 25,358
5,000 Lloyds Banking Group plc (3 mo. LIBOR + 1.21%) 3.57(k) 11/07/2028 4,961
20,000 Mizuho Financial Group, Inc. 3.17 9/11/2027 20,446
5,000 National Australia Bank Ltd. 3.00 1/20/2023 5,103
11,000 Nordea Bank AB(a) 4.88 5/13/2021 11,384
20,000 Royal Bank of Canada 4.65 1/27/2026 21,821
10,000 Royal Bank of Scotland Group plc 6.13 12/15/2022 10,789
5,000 Royal Bank of Scotland Group plc 6.10 6/10/2023 5,387
7,000 Royal Bank of Scotland Group plc 3.88 9/12/2023 7,126
4,000 Royal Bank of Scotland Group plc
(3 mo. LIBOR + 1.76%) 4.27(k) 3/22/2025 4,098
5,000 Royal Bank of Scotland Group plc 4.80 4/05/2026 5,348
10,000 Royal Bank of Scotland Group plc
(1 mo. LIBOR + 1.91%) 5.08(k) 1/27/2030 10,793
================================================================================
36 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 5,000 Santander UK Group Holdings plc 3.57% 1/10/2023 $ 5,055
20,000 Santander UK plc(a) 5.00 11/07/2023 21,088
5,000 Santander UK plc 4.00 3/13/2024 5,251
7,500 Standard Chartered plc (1 mo. LIBOR + 1.97%)(a) 4.87(k) 3/15/2033 7,860
7,500 Suncorp-Metway Ltd.(a) 2.80 5/04/2022 7,547
7,500 Swedbank AB(a) 2.65 3/10/2021 7,500
10,000 Toronto-Dominion Bank
(5-Yr. Semi-Annual Swap + 2.21%) 3.63(k) 9/15/2031 10,140
10,000 Westpac Banking Corp.
(5 Yr. Semi-Annual Swap + 2.24%) 4.32(k) 11/23/2031 10,357
----------
562,431
----------
DIVERSIFIED FINANCIAL SERVICES (0.4%)
7,000 AerCap Ireland Capital DAC / AerCap
Global Aviation Trust 4.63 7/01/2022 7,348
6,460 Avolon Holdings Funding Ltd.(a) 4.38 5/01/2026 6,676
10,000 Brookfield Finance, Inc. 4.85 3/29/2029 10,976
10,000 ORIX Corp. 3.70 7/18/2027 10,503
----------
35,503
----------
INSURANCE (0.6%)
19,300 Oil Insurance Ltd. (3 mo. LIBOR + 2.98%)(a) 5.30(b) -(l) 18,503
20,000 QBE Capital Funding III Ltd.
(10 Yr. Semi-Annual Swap + 4.05%)(a) 7.25(k) 5/24/2041 21,200
5,000 XLIT Ltd. (3 mo. LIBOR + 2.46%) 4.76(b) -(l) 4,971
5,000 XLIT Ltd. 4.45 3/31/2025 5,368
----------
50,042
----------
REITS (0.4%)
5,000 Scentre Group Trust(a) 2.38 4/28/2021 4,977
10,000 Scentre Group Trust(a) 3.25 10/28/2025 10,106
20,000 WEA Finance, LLC / Westfield
UK & Europe Finance plc(a) 3.75 9/17/2024 20,952
----------
36,035
----------
SAVINGS & LOANS (0.4%)
20,000 Nationwide Building Society(a) 4.00 9/14/2026 20,013
12,000 Nationwide Building Society
(1 mo. LIBOR + 1.85%)(a) 4.13(k) 10/18/2032 11,570
----------
31,583
----------
Total Financial 715,594
----------
GOVERNMENT (0.1%)
-----------------
MULTI-NATIONAL (0.1%)
5,000 Caribbean Development Bank(a) 4.38 11/09/2027 5,153
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 37
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
INDUSTRIAL (2.1%)
-----------------
AEROSPACE/DEFENSE (0.1%)
$ 5,000 Rolls-Royce plc(a) 3.63% 10/14/2025 $ 5,152
----------
BUILDING MATERIALS (0.3%)
3,462 Boral Finance Proprietary Ltd.(a) 3.75 5/01/2028 3,496
9,250 Cemex SAB de CV(a) 7.75 4/16/2026 10,019
10,000 Holcim U.S. Finance Sarl & Cie SCS(a) 6.00 12/30/2019 10,117
1,435 LafargeHolcim Finance U.S., LLC(a) 3.50 9/22/2026 1,438
----------
25,070
----------
ELECTRONICS (0.1%)
4,800 Tyco Electronics Group S.A. 3.13 8/15/2027 4,825
----------
ENGINEERING & CONSTRUCTION (0.4%)
10,000 Heathrow Funding Ltd.(a) 4.88 7/15/2021 10,365
10,000 Sydney Airport Finance Co. Proprietary Ltd.(a) 3.90 3/22/2023 10,407
10,000 Sydney Airport Finance Co. Proprietary Ltd.(a) 3.63 4/28/2026 10,270
----------
31,042
----------
MACHINERY-DIVERSIFIED (0.3%)
15,000 CNH Industrial N.V. 4.50 8/15/2023 15,861
5,000 CNH Industrial N.V. 3.85 11/15/2027 5,065
----------
20,926
----------
MISCELLANEOUS MANUFACTURERS (0.5%)
20,000 Siemens Financieringsmatschappij N.V.(a) 3.25 5/27/2025 20,741
10,000 Siemens Financieringsmatschappij N.V.(a) 3.40 3/16/2027 10,533
12,250 Smiths Group plc(a) 3.63 10/12/2022 12,396
----------
43,670
----------
PACKAGING & CONTAINERS (0.3%)
4,750 Amcor Finance USA, Inc.(a) 3.63 4/28/2026 4,812
5,500 Brambles USA, Inc.(a) 4.13 10/23/2025 5,754
7,500 CCL Industries, Inc.(a) 3.25 10/01/2026 7,409
2,500 Reynolds Group Issuer, Inc. / Reynolds Group
Issuer, LLC / Reynolds Group Issuer Lu(a) 5.13 7/15/2023 2,546
5,000 Reynolds Group Issuer, Inc. / Reynolds Group
Issuer, LLC / Reynolds Group Issuer Lu(a) 7.00 7/15/2024 5,176
----------
25,697
----------
TRANSPORTATION (0.1%)
12,000 Canadian National Railway Co. 2.75 3/01/2026 12,179
----------
TRUCKING & LEASING (0.0%)
3,000 DAE Funding, LLC(a) 5.00 8/01/2024 3,156
----------
Total Industrial 171,717
----------
================================================================================
38 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
UTILITIES (1.0%)
----------------
ELECTRIC (1.0%)
$ 5,000 Comision Federal de Electricidad(a) 4.75% 2/23/2027 $ 5,156
2,500 Edison International 5.75 6/15/2027 2,787
5,000 EDP Finance B.V.(a) 5.25 1/14/2021 5,177
25,000 Electricite de France S.A. (10 Yr. Semi-Annual
Swap + 3.71%)(a) 5.25(k) -(l) 25,574
6,000 Emera U.S. Finance, LP 3.55 6/15/2026 6,182
10,000 Enel Chile S.A. 4.88 6/12/2028 10,945
5,000 Enel Finance International N.V.(a) 4.63 9/14/2025 5,374
5,000 Enel Finance International N.V.(a) 3.63 5/25/2027 5,050
10,000 Fortis, Inc. 3.06 10/04/2026 10,013
3,500 Transelec S.A.(a) 3.88 1/12/2029 3,559
----------
Total Utilities 79,817
----------
Total Eurodollar and Yankee Obligations (cost: $1,527,989) 1,590,115
----------
FOREIGN GOVERNMENT OBLIGATIONS (0.4%)
10,000 Italy Government International Bond 5.38 6/15/2033 11,132
CAD15,000 Province of Alberta 2.55 12/15/2022 11,619
CAD20,000 Province of Ontario 2.85 6/02/2023 15,694
----------
Total Foreign Government Obligations (cost: $45,824) 38,445
----------
MUNICIPAL OBLIGATIONS (6.3%)
ARIZONA (0.0%)
3,500 School Facilities Board 2.38 9/01/2019 3,498
----------
CALIFORNIA (0.8%)
5,000 Industry Public Facilities Auth. (INS - Assured
Guaranty Municipal Corp.) 3.47 1/01/2021 5,051
5,000 Industry Public Facilities Auth. (INS - Assured
Guaranty Municipal Corp.) 3.82 1/01/2022 5,139
1,250 Las Virgenes Unified School District 5.54 8/01/2025 1,414
850 Placentia Yorba Linda Unified School District 5.40 8/01/2021 902
5,000 Port of Oakland 4.50 5/01/2030 5,383
75 Port of Oakland (PRE) 4.50 5/01/2032 81
11,625 Port of Oakland 4.50 5/01/2032 12,444
4,250 Riverside CCD 3.49 8/01/2023 4,470
3,000 Riverside CCD 3.61 8/01/2024 3,194
10,000 San Jose Redev. Agency Successor Agency 3.13 8/01/2028 10,341
5,250 San Marcos Redev. Agency Successor Agency 4.02 10/01/2025 5,676
6,500 San Marcos Redev. Agency Successor Agency 4.47 10/01/2029 7,321
================================================================================
PORTFOLIO OF INVESTMENTS | 39
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 2,000 Torrance Unified School District 5.52% 8/01/2021 $ 2,131
2,590 Vista Redev. Agency (INS - Assured Guaranty
Municipal Corp.) 4.13 9/01/2030 2,740
----------
66,287
----------
COLORADO (0.1%)
5,000 El Paso County 4.47 10/01/2035 5,738
----------
CONNECTICUT (0.7%)
10,000 City of Bridgeport 4.03 8/15/2028 10,487
7,380 City of Bridgeport 4.08 8/15/2029 7,727
10,000 City of New Haven 4.68 8/01/2031 11,096
5,000 State 3.23 1/15/2025 5,174
1,500 State 3.43 4/15/2028 1,577
2,500 State 3.90 9/15/2028 2,721
3,845 Town of Hamden 4.93 8/15/2030 4,173
10,000 Town of Stratford 5.75 8/15/2030 11,157
----------
54,112
----------
FLORIDA (0.4%)
3,250 City of Jacksonville 2.00 10/01/2019 3,244
3,000 City of Jacksonville 2.37 10/01/2020 2,982
2,500 County of Miami-Dade Aviation Revenue 3.38 10/01/2030 2,623
8,250 Miami-Dade County Aviation 2.70 10/01/2026 8,316
10,000 Miami-Dade County School Board (INS - Assured
Guaranty Municipal Corp.) 5.38 5/01/2031 10,598
6,000 Palm Beach County School District 5.40 8/01/2025 6,941
----------
34,704
----------
GEORGIA (0.0%)
2,000 Atlanta & Fulton County Recreation Auth. 3.80 12/15/2037 2,063
1,500 Atlanta & Fulton County Recreation Auth. 4.00 12/15/2046 1,519
----------
3,582
----------
HAWAII (0.3%)
900 City & County of Honolulu 2.81 11/01/2023 916
680 City & County of Honolulu 3.06 11/01/2025 694
775 City & County of Honolulu 3.16 11/01/2026 792
625 City & County of Honolulu 3.26 11/01/2027 640
690 City & County of Honolulu 3.36 11/01/2028 708
7,000 State 2.80 10/01/2027 7,138
3,000 State Department of Budget and Finance 3.25 1/01/2025 3,157
7,235 State Department of Budget and Finance 3.10 5/01/2026 7,586
----------
21,631
----------
================================================================================
40 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
IDAHO (0.1%)
$ 2,500 State Building Auth. 3.78% 9/01/2030 $ 2,700
2,120 State Building Auth. 3.93 9/01/2031 2,305
2,000 State Building Auth. 3.98 9/01/2032 2,175
----------
7,180
----------
ILLINOIS (0.5%)
6,500 Chicago Midway International Airport 5.00 1/01/2025 7,441
8,000 Chicago Midway International Airport 5.00 1/01/2026 9,141
5,000 Chicago O'Hare International Airport 5.00 1/01/2021 5,250
6,500 City of Chicago Wastewater Transmission 5.84 1/01/2035 7,896
2,025 Finance Auth. 3.55 8/15/2029 2,112
3,000 Finance Auth. 3.60 8/15/2030 3,139
4,500 Winnebago & Boone County School District No. 205 3.80 12/01/2026 4,729
----------
39,708
----------
INDIANA (0.1%)
4,955 Finance Auth. 4.36 7/15/2029 5,595
4,260 Finance Auth. 4.53 7/15/2031 4,928
1,500 Finance Auth. 3.62 7/01/2036 1,559
----------
12,082
----------
KANSAS (0.1%)
10,000 Dev. Finance Auth. 4.73 4/15/2037 11,585
----------
KENTUCKY (0.1%)
1,000 Economic Dev. Finance Auth. (INS - Assured
Guaranty Municipal Corp.) 3.62 12/01/2025 1,033
2,335 Economic Dev. Finance Auth. 3.72 12/01/2026 2,433
1,985 Economic Dev. Finance Auth. 3.82 12/01/2027 2,087
1,000 Economic Dev. Finance Auth. 3.92 12/01/2028 1,057
1,500 Economic Dev. Finance Auth. 4.02 12/01/2029 1,592
1,300 Economic Dev. Finance Auth. 4.12 12/01/2030 1,387
----------
9,589
----------
MAINE (0.1%)
5,000 Municipal Bond Bank 4.25 6/01/2023 5,359
----------
MARYLAND (0.1%)
2,290 EDC 4.05 6/01/2027 2,381
2,390 EDC 4.15 6/01/2028 2,495
2,495 EDC 4.25 6/01/2029 2,614
1,325 EDC 4.35 6/01/2030 1,396
1,385 EDC 4.40 6/01/2031 1,462
----------
10,348
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 41
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
MISSISSIPPI (0.2%)
$ 1,800 State 2.83% 12/01/2024 $ 1,851
2,000 State 3.03 12/01/2025 2,076
10,000 State 3.73 10/01/2032 10,840
----------
14,767
----------
NEW JERSEY (0.5%)
2,525 City of Atlantic 4.23 9/01/2025 2,683
2,415 City of Atlantic 4.29 9/01/2026 2,567
14,310 EDA 4.45 6/15/2020 14,522
2,700 EDA 5.25 9/01/2022 2,861
2,500 EDA 5.71 6/15/2030 2,927
3,000 Educational Facilities Auth. 4.02 7/01/2039 3,092
500 South Jersey Port Corp. 5.00 1/01/2025 572
1,000 South Jersey Port Corp. 5.00 1/01/2026 1,164
1,000 South Jersey Port Corp. 5.00 1/01/2027 1,181
500 South Jersey Port Corp. 5.00 1/01/2028 598
5,000 Transportation Trust Fund Auth.
(INS - AMBAC Assurance Corp.) 5.25 12/15/2022 5,592
3,320 Transportation Trust Fund Auth. 5.50 12/15/2022 3,740
1,810 Transportation Trust Fund Auth. 5.75 12/15/2028 2,081
----------
43,580
----------
NEW MEXICO (0.0%)
1,000 Sandoval County 2.72 6/01/2020 1,000
----------
NEW YORK (0.5%)
11,400 Dormitory Auth. 5.10 8/01/2034 13,173
10,000 Long Island Power Auth.(h) 5.25 5/01/2022 10,641
2,500 Long Island Power Auth. 3.98 9/01/2025 2,652
2,500 Long Island Power Auth. 4.13 9/01/2026 2,687
5,000 New York City Transitional Finance Auth. 5.00 2/01/2035 5,273
1,830 Town of Oyster Bay 3.80 2/01/2020 1,836
1,500 Town of Oyster Bay 3.95 2/01/2021 1,521
----------
37,783
----------
NORTH CAROLINA (0.1%)
5,000 City of Kannapolis 7.28 3/01/2027 5,133
----------
OHIO (0.1%)
10,000 Cleveland Public Power 5.50 11/15/2038 10,539
----------
OKLAHOMA (0.2%)
10,250 Dev. Finance Auth. 5.45 8/15/2028 11,591
1,365 Dev. Finance Auth. 5.88 8/01/2037 1,142
----------
12,733
----------
================================================================================
42 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
PENNSYLVANIA (0.4%)
$ 5,045 Commonwealth Financing Auth. 3.86% 6/01/2038 $ 5,321
1,375 Economic Dev. Finance Auth. 3.20 11/15/2027 1,418
10,000 IDA 3.56 7/01/2024 10,312
10,000 Philadelphia School District 5.06 9/01/2042 11,371
1,625 Public School Building Auth.
(INS - Build America Mutual Assurance Co.) 2.84 12/01/2019 1,626
1,300 Public School Building Auth.
(INS - Build America Mutual Assurance Co.) 4.08 12/01/2023 1,376
2,810 Scranton School District (Put Date 6/15/2024)(o) 3.15 6/15/2034 2,805
1,415 Scranton School District (Put Date 6/15/2024)(o) 3.15 6/15/2034 1,413
----------
35,642
----------
SOUTH CAROLINA (0.1%)
10,000 Public Service Auth. 4.77 12/01/2045 11,758
----------
TENNESSEE (0.2%)
2,000 Jackson Energy Auth. 2.90 4/01/2022 2,023
2,745 Jackson Energy Auth. 3.05 4/01/2023 2,801
3,915 Jackson Energy Auth. 3.20 4/01/2024 4,008
8,000 Metropolitan Nashville & Davidson County
Health & Educational Board 4.05 7/01/2026 8,667
----------
17,499
----------
TEXAS (0.6%)
1,550 City of Austin CCD 6.76 8/01/2030 2,012
2,000 City of Austin CCD 6.91 8/01/2035 2,802
5,000 City of Houston Combined Utility System 5.00 11/15/2033 5,224
9,000 Colony Local Dev. Corp. (INS - Berkshire
Hathaway Assurance Corp.) 4.38 10/01/2033 10,312
12,570 Dallas-Fort Worth International Airport Facilities 4.00 11/01/2021 12,984
2,265 Dallas-Fort Worth International Airport Facilities 4.44 11/01/2021 2,370
9,700 Ector County Hospital District 7.18 9/15/2035 9,878
2,000 McLennan County Public Facility Corp. 3.90 6/01/2029 2,091
1,000 Nueces County Port of Corpus Christi Auth. 3.49 12/01/2025 1,044
----------
48,717
----------
Total Municipal Obligations (cost: $488,036) 524,554
----------
PREFERRED BONDS (0.1%)
FINANCIAL (0.1%)
----------------
INSURANCE (0.1%)
5,000 Catlin Insurance Co. Ltd. (3 mo. LIBOR + 2.98%)(a)
(cost: $5,000) 5.28(b) -(l) 4,990
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 43
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY ISSUES (5.2%)(p)
---------------------------------------
AGENCY COLLATERAL CMO (0.1%)
$ 9,253 Freddie Mac(+) 4.00% 6/15/2029 $ 9,491
----------
COMMERCIAL MBS (4.2%)
10,524 Fannie Mae(+) 2.15 1/25/2023 10,496
4,834 Fannie Mae(+) 2.64(g) 11/25/2024 4,921
3,500 Fannie Mae(+) 2.79(g) 2/25/2027 3,594
8,000 Fannie Mae(+) 2.89(g) 5/25/2029 8,222
2,500 Fannie Mae(+) 2.96(g) 2/25/2027 2,584
7,105 Fannie Mae(+) 3.04(g) 3/25/2028 7,443
64,866 Freddie Mac(+)(f) 0.83(g) 10/25/2022 1,405
90,358 Freddie Mac(+)(f) 0.99(g) 11/25/2022 2,368
55,047 Freddie Mac(+)(f) 1.33(g) 1/25/2022 1,318
88,514 Freddie Mac(+)(f) 1.40(g) 5/25/2022 2,742
67,485 Freddie Mac(+)(f) 1.43(g) 6/25/2022 2,226
3,401 Freddie Mac(+) 1.60 8/15/2051 3,430
10,000 Freddie Mac(+) 2.59 5/25/2026 10,094
20,000 Freddie Mac(+) 2.65 8/25/2026 20,395
17,000 Freddie Mac(+) 2.77 5/25/2025 17,393
15,000 Freddie Mac(+) 2.81 1/25/2025 15,401
12,000 Freddie Mac(+) 2.85 3/25/2026 12,355
10,000 Freddie Mac(+) 2.90 6/25/2029 10,358
7,000 Freddie Mac(+) 3.00 12/25/2025 7,274
8,000 Freddie Mac(+) 3.01 7/25/2025 8,312
10,000 Freddie Mac(+) 3.02 1/25/2025 10,377
11,911 Freddie Mac(+) 3.02 3/25/2027 12,309
5,500 Freddie Mac(+) 3.06 4/25/2034 5,668
4,855 Freddie Mac(+) 3.12(g) 10/25/2031 5,068
9,500 Freddie Mac(+) 3.17 3/25/2027 10,001
5,759 Freddie Mac(+) 3.19(g) 9/25/2027 6,081
4,533 Freddie Mac(+) 3.24 8/25/2027 4,801
7,500 Freddie Mac(+) 3.29(g) 3/25/2029 7,988
8,766 Freddie Mac(+) 3.30(g) 11/25/2027 9,326
8,420 Freddie Mac(+) 3.33(g) 3/25/2027 8,912
10,000 Freddie Mac(+) 3.37 7/25/2025 10,513
10,000 Freddie Mac(+) 3.41 12/25/2026 10,695
9,000 Freddie Mac(+) 3.43(g) 1/25/2027 9,628
4,455 Freddie Mac(+) 3.46 11/25/2032 4,814
15,500 Freddie Mac(+) 3.51 4/25/2030 16,732
10,000 Freddie Mac(+) 3.54 3/25/2034 10,888
3,000 Freddie Mac(+) 3.65(g) 2/25/2028 3,267
19,200 Freddie Mac(+) 3.79 1/25/2034 21,369
================================================================================
44 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 7,000 Freddie Mac(+) 3.90% 12/25/2030 $ 7,852
5,000 Freddie Mac(+) 3.90 10/25/2033 5,621
5,000 Freddie Mac(+) 3.92(g) 9/25/2028 5,565
5,000 Freddie Mac(+) 4.05(g) 9/25/2028 5,617
6,794 Freddie Mac(+) 4.06(g) 10/25/2028 7,645
----------
353,068
----------
FGLMC COLLATERAL (0.4%)
8,892 Freddie Mac(+) 3.50 5/01/2042 9,257
9,959 Freddie Mac(+) 3.50 6/01/2046 10,290
3,621 Freddie Mac(+) 3.50 8/01/2046 3,770
7,992 Freddie Mac(+) 3.50 5/01/2047 8,245
26 Freddie Mac(+) 5.00 6/01/2020 26
172 Freddie Mac(+) 5.00 1/01/2021 174
162 Freddie Mac(+) 5.50 11/01/2020 164
86 Freddie Mac(+) 5.50 12/01/2020 87
553 Freddie Mac(+) 5.50 12/01/2035 618
338 Freddie Mac(+) 5.50 4/01/2036 378
----------
33,009
----------
GNMA COLLATERAL (0.1%)
2,322 Government National Mortgage Assn. I 5.00 8/15/2033 2,488
45 Government National Mortgage Assn. I 6.00 8/15/2028 47
40 Government National Mortgage Assn. I 6.00 9/15/2028 42
101 Government National Mortgage Assn. I 6.00 9/15/2028 110
1,000 Government National Mortgage Assn. I 6.00 9/15/2028 1,103
163 Government National Mortgage Assn. I 6.00 10/15/2028 179
105 Government National Mortgage Assn. I 6.00 1/15/2029 111
12 Government National Mortgage Assn. I 6.00 1/15/2029 13
135 Government National Mortgage Assn. I 6.00 1/15/2029 148
179 Government National Mortgage Assn. I 6.00 1/15/2033 203
4 Government National Mortgage Assn. I 6.50 6/15/2023 3
100 Government National Mortgage Assn. I 6.50 7/15/2023 106
17 Government National Mortgage Assn. I 6.50 9/15/2023 18
83 Government National Mortgage Assn. I 6.50 10/15/2023 87
36 Government National Mortgage Assn. I 6.50 10/15/2023 38
9 Government National Mortgage Assn. I 6.50 10/15/2023 9
101 Government National Mortgage Assn. I 6.50 12/15/2023 107
46 Government National Mortgage Assn. I 6.50 12/15/2023 48
18 Government National Mortgage Assn. I 6.50 1/15/2024 19
31 Government National Mortgage Assn. I 6.50 2/15/2024 33
39 Government National Mortgage Assn. I 6.50 4/15/2026 42
184 Government National Mortgage Assn. I 6.50 5/15/2028 205
422 Government National Mortgage Assn. I 6.50 10/15/2031 483
================================================================================
PORTFOLIO OF INVESTMENTS | 45
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 16 Government National Mortgage Assn. I 7.00% 5/15/2023 $ 17
17 Government National Mortgage Assn. I 7.00 5/15/2023 18
6 Government National Mortgage Assn. I 7.00 5/15/2023 6
10 Government National Mortgage Assn. I 7.00 5/15/2023 10
37 Government National Mortgage Assn. I 7.00 6/15/2023 39
7 Government National Mortgage Assn. I 7.00 6/15/2023 7
6 Government National Mortgage Assn. I 7.00 8/15/2023 6
6 Government National Mortgage Assn. I 7.00 8/15/2023 6
45 Government National Mortgage Assn. I 7.00 8/15/2023 47
6 Government National Mortgage Assn. I 7.00 8/15/2023 6
23 Government National Mortgage Assn. I 7.00 9/15/2023 23
10 Government National Mortgage Assn. I 7.00 1/15/2026 11
17 Government National Mortgage Assn. I 7.00 3/15/2026 18
4 Government National Mortgage Assn. I 7.00 3/15/2026 5
105 Government National Mortgage Assn. I 7.00 10/15/2027 118
148 Government National Mortgage Assn. I 7.00 6/15/2029 165
95 Government National Mortgage Assn. I 7.00 6/15/2029 103
18 Government National Mortgage Assn. I 7.00 7/15/2029 18
181 Government National Mortgage Assn. I 7.00 8/15/2031 213
50 Government National Mortgage Assn. I 7.00 7/15/2032 59
37 Government National Mortgage Assn. I 7.50 7/15/2023 39
114 Government National Mortgage Assn. I 7.50 6/15/2026 125
50 Government National Mortgage Assn. I 7.50 6/15/2026 54
35 Government National Mortgage Assn. I 7.50 7/15/2026 36
62 Government National Mortgage Assn. I 7.50 5/15/2027 68
107 Government National Mortgage Assn. I 7.50 2/15/2028 119
77 Government National Mortgage Assn. I 7.50 12/15/2028 88
59 Government National Mortgage Assn. I 7.50 8/15/2029 69
----------
7,135
----------
GNMA2 COLLATERAL (0.0%)
395 Government National Mortgage Assn. II 5.50 4/20/2033 443
380 Government National Mortgage Assn. II 6.00 8/20/2032 432
282 Government National Mortgage Assn. II 6.00 9/20/2032 321
126 Government National Mortgage Assn. II 6.50 8/20/2031 144
----------
1,340
----------
TRANSPORTATION (0.1%)
7,692 Totem Ocean Trailer Express, Inc., Title XI
(NBGA - United States Government) 6.37 4/15/2028 8,828
----------
UMBS COLLATERAL (0.3%)
6,873 Fannie Mae(+) 2.50 2/01/2028 6,919
4,548 Fannie Mae(+) 4.00 4/01/2048 4,715
================================================================================
46 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 1,224 Fannie Mae(+) 5.00% 6/01/2033 $ 1,330
117 Fannie Mae(+) 5.50 7/01/2021 120
1,503 Fannie Mae(+) 5.50 9/01/2035 1,679
750 Fannie Mae(+) 5.50 10/01/2035 838
239 Fannie Mae(+) 5.50 1/01/2036 267
663 Fannie Mae(+) 5.50 4/01/2036 741
763 Fannie Mae(+) 5.50 2/01/2037 851
417 Fannie Mae(+) 5.50 3/01/2037 467
334 Fannie Mae(+) 5.50 11/01/2037 374
908 Fannie Mae(+) 5.50 5/01/2038 1,011
686 Fannie Mae(+) 6.00 5/01/2036 783
492 Fannie Mae(+) 6.00 6/01/2036 562
714 Fannie Mae(+) 6.00 8/01/2037 817
176 Fannie Mae(+) 6.50 4/01/2031 201
4 Fannie Mae(+) 6.50 7/01/2031 4
302 Fannie Mae(+) 6.50 3/01/2032 347
6 Fannie Mae(+) 7.00 10/01/2022 6
3 Fannie Mae(+) 7.00 3/01/2023 3
----------
22,035
----------
Total U.S. Government Agency Issues (cost: $417,237) 434,906
----------
U.S. TREASURY SECURITIES (9.7%)
BONDS (4.7%)
22,950 U.S. Treasury Bond 2.25 8/15/2046 21,655
54,340 U.S. Treasury Bond 2.38 1/15/2025 60,490
65,000 U.S. Treasury Bond(q) 2.50 2/15/2045 64,695
60,000 U.S. Treasury Bond 2.50 2/15/2046 59,672
40,000 U.S. Treasury Bond(r),(s) 2.75 8/15/2042 41,969
10,000 U.S. Treasury Bond 2.75 11/15/2042 10,473
10,000 U.S. Treasury Bond 2.75 8/15/2047 10,423
22,000 U.S. Treasury Bond 2.75 11/15/2047 22,935
25,000 U.S. Treasury Bond 3.00 11/15/2044 27,285
10,000 U.S. Treasury Bond 3.00 2/15/2049 10,983
5,000 U.S. Treasury Bond 3.38 5/15/2044 5,804
20,000 U.S. Treasury Bond(r),(s) 3.38 11/15/2048 23,544
30,000 U.S. Treasury Bond 3.88 8/15/2040 37,439
----------
397,367
----------
NOTES (5.0%)
10,142 U.S. Treasury Note 0.88 1/15/2029 10,691
20,000 U.S. Treasury Note 1.63 11/15/2022 19,850
50,000 U.S. Treasury Note 1.63 2/15/2026 49,078
15,000 U.S. Treasury Note 2.00 2/15/2022 15,050
================================================================================
PORTFOLIO OF INVESTMENTS | 47
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 10,000 U.S. Treasury Note 2.00% 2/15/2023 $ 10,050
80,000 U.S. Treasury Note 2.00 2/15/2025 80,494
10,000 U.S. Treasury Note 2.25 11/15/2024 10,191
5,000 U.S. Treasury Note 2.25 11/15/2025 5,099
10,000 U.S. Treasury Note 2.25 2/15/2027 10,208
10,000 U.S. Treasury Note 2.25 8/15/2027 10,211
10,000 U.S. Treasury Note 2.25 11/15/2027 10,206
5,000 U.S. Treasury Note 2.38 1/31/2023 5,087
10,000 U.S. Treasury Note 2.38 5/15/2027 10,305
5,000 U.S. Treasury Note 2.50 5/15/2024 5,148
5,000 U.S. Treasury Note 2.50 1/31/2025 5,163
50,000 U.S. Treasury Note 2.63 11/15/2020 50,391
20,000 U.S. Treasury Note 2.63 2/15/2029 21,041
10,000 U.S. Treasury Note 2.75 8/31/2025 10,485
5,000 U.S. Treasury Note 2.75 2/15/2028 5,300
5,000 U.S. Treasury Note 2.88 5/15/2028 5,354
15,000 U.S. Treasury Note 2.88 8/15/2028 16,080
10,000 U.S. Treasury Note 2.88 11/15/2046 10,689
15,000 U.S. Treasury Note 3.00 10/31/2025 15,960
5,000 U.S. Treasury Note 3.13 11/15/2028 5,468
20,000 U.S. Treasury Note 3.63 2/15/2020 20,155
----------
417,754
----------
Total U.S. Treasury Securities (cost: $780,982) 815,121
----------
Total Bonds (cost: $7,818,854) 8,108,431
----------
-------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
-------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (1.3%)
COMMON STOCKS (0.3%)
COMMUNICATIONS (0.0%)
---------------------
TELECOMMUNICATIONS (0.0%)
44,050 AT&T, Inc. 1,500
21,000 Verizon Communications, Inc. 1,161
----------
Total Communications 2,661
----------
CONSUMER, NON-CYCLICAL (0.1%)
-----------------------------
HOUSEHOLD PRODUCTS/WARES (0.1%)
24,000 Kimberly-Clark Corp. 3,256
----------
================================================================================
48 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------
ENERGY (0.1%)
-------------
OIL & GAS (0.1%)
23,780 Chevron Corp. $ 2,927
55,000 Royal Dutch Shell plc ADR "A" 3,459
----------
Total Energy 6,386
----------
FINANCIAL (0.1%)
----------------
BANKS (0.1%)
50,000 Bank of Montreal 3,740
25,000 Canadian Imperial Bank of Commerce 1,967
----------
5,707
----------
INVESTMENT COMPANIES (0.0%)
202,000 Prospect Capital Corp.(i) 1,337
----------
REITS (0.0%)
199,850 MFA Financial, Inc. 1,435
----------
Total Financial 8,479
----------
INDUSTRIAL (0.0%)
-----------------
MACHINERY-DIVERSIFIED (0.0%)
299 Wabtec Corp. 23
----------
MISCELLANEOUS MANUFACTURERS (0.0%)
55,835 General Electric Co. 584
----------
Total Industrial 607
----------
UTILITIES (0.0%)
----------------
ELECTRIC (0.0%)
15,200 Dominion Energy, Inc. 1,129
27,500 Southern Co. 1,546
----------
Total Utilities 2,675
----------
Total Common Stocks (cost: $20,044) 24,064
----------
PREFERRED STOCKS (1.0%)
CONSUMER, NON-CYCLICAL (0.3%)
-----------------------------
AGRICULTURE (0.1%)
200,000 CHS, Inc., cumulative redeemable, 7.88%(l) 5,480
----------
FOOD (0.2%)
172,520 Dairy Farmers of America, Inc., cumulative redeemable, 7.88%(a),(l) 17,252
----------
Total Consumer, Non-cyclical 22,732
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 49
================================================================================
-------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------
FINANCIAL (0.7%)
----------------
BANKS (0.1%)
40,000 Citigroup Capital XIII, 8.64%, (3 mo. LIBOR + 6.37%)(b) $ 1,088
10,800 M&T Bank Corp., cumulative redeemable, 6.38% (l) 10,854
----------
11,942
----------
REITS (0.6%)
142,500 Equity Residential Properties Trust, 8.29%, Series K, depositary
shares, cumulative redeemable(l) 9,227
250,000 Mid-America Apartment Communities, Inc., 8.50%(h),(l) 16,000
344,500 Prologis, Inc., 8.54%(h),(l) 22,909
----------
48,136
----------
Total Financial 60,078
----------
UTILITIES (0.0%)
----------------
ELECTRIC (0.0%)
200,000 Entergy Texas, Inc., 5.63% 5,472
----------
Total Preferred Stocks (cost: $74,037) 88,282
----------
Total Equity Securities (cost: $94,081) 112,346
----------
-------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
-------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (1.0%)
COMMERCIAL PAPER (1.0%)
$ 10,000 Ei Du Pont De Nemours 2.43% 8/08/2019 9,995
10,000 Ei Du Pont De Nemours 2.43 8/09/2019 9,995
2,502 Ei Du Pont De Nemours 2.39 8/12/2019 2,500
4,909 Ei Du Pont De Nemours 2.37 8/14/2019 4,905
3,578 Ei Du Pont De Nemours 2.41 8/16/2019 3,574
10,050 Eversource Energy 2.45 8/05/2019 10,047
17,100 Eversource Energy 2.42 8/13/2019 17,086
5,245 National Rural Utilities Cooperative Finance Corp. 2.32 8/02/2019 5,245
17,000 Northern Illinois Gas Corp. 2.38 8/05/2019 16,996
2,000 Virginia Electric & Power Co. 2.50 8/05/2019 1,999
----------
Total Commercial Paper (cost: $82,342) 82,342
----------
================================================================================
50 | USAA INCOME FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.0%)
5,431,865 State Street Institutional Treasury Money Market Fund
Premier Class, 2.09%(t) (cost: $5,432) $ 5,432
----------
Total Money Market Instruments (cost: $87,774) 87,774
----------
SHORT-TERM INVESTMENT PURCHASED WITH CASH COLLATERAL
FROM SECURITIES LOANED (0.2%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.2%)
13,427,760 HSBC U.S. Government Money Market Fund Class I, 2.26%(t) 13,428
----------
Total Short-Term Investment Purchased with Cash Collateral from
Securities Loaned (cost: $13,428) 13,428
----------
TOTAL INVESTMENTS (COST: $8,014,137) $8,321,979
==========
-------------------------------------------------------------------------------------------------------------
UNREALIZED
APPRECIATION/
NUMBER OF EXPIRATION NOTIONAL CONTRACT (DEPRECIATION)
CONTRACTS DESCRIPTION DATE AMOUNT (000) VALUE (000) (000)
-------------------------------------------------------------------------------------------------------------
FUTURES (0.8%)
LONG FUTURES
INTEREST RATE CONTRACTS
444 U.S. Treasury Bond 9/19/2019 USD 66,754 $69,084 $2,330
------- ------
TOTAL LONG FUTURES $69,084 $2,330
------- ------
TOTAL FUTURES $69,084 $2,330
======= ======
================================================================================
PORTFOLIO OF INVESTMENTS | 51
================================================================================
-------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
-------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------------------------------------------------------------------------------------------------------
Bonds:
Asset-Backed Securities $ - $ 471,896 $- $ 471,896
Bank Loans - 67,516 - 67,516
Collateralized Loan Obligations - 128,314 - 128,314
Commercial Mortgage Securities - 306,776 - 306,776
Corporate Obligations - 3,725,798 - 3,725,798
Eurodollar and Yankee Obligations - 1,590,115 - 1,590,115
Foreign Government Obligations - 38,445 - 38,445
Municipal Obligations - 524,554 - 524,554
Preferred Bonds - 4,990 - 4,990
U.S. Government Agency Issues - 434,906 - 434,906
U.S. Treasury Securities 815,121 - - 815,121
Equity Securities:
Common Stocks 24,064 - - 24,064
Preferred Stocks 16,000 72,282 - 88,282
Money Market Instruments:
Commercial Paper - 82,342 - 82,342
Government & U.S. Treasury
Money Market Funds 5,432 - - 5,432
Short-Term Investment Purchased with
Cash Collateral from Securities Loaned:
Government & U.S. Treasury
Money Market Funds 13,428 - - 13,428
Futures(1) 2,330 - - 2,330
-------------------------------------------------------------------------------------------------------------
Total $876,375 $7,447,934 $- $8,324,309
-------------------------------------------------------------------------------------------------------------
(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 July 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
52 | USAA INCOME FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
July 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 22.2% of net assets at July 31, 2019.
o CATEGORIES AND DEFINITIONS
EURODOLLAR AND YANKEE OBLIGATIONS - Eurodollar obligations are U.S.
dollar-denominated instruments that are issued outside the U.S. capital
markets by foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions. Yankee obligations
are dollar-denominated instruments that are issued by foreign issuers in the
U.S. capital markets.
ASSET-BACKED AND COMMERCIAL MORTGAGE-BACKED SECURITIES - Asset-backed
securities represent a participation in, or are secured by and payable from,
a stream of payments generated by particular assets. Commercial
mortgage-backed securities reflect an interest in, and are secured by,
mortgage loans on commercial real property. These securities represent
ownership in a pool of loans and are divided into pieces (tranches) with
varying maturities. The stated final maturity of such securities represents
the date the final principal payment will be made for the last outstanding
loans in the pool. The weighted average life is the average time for
principal to be repaid, which is calculated by assuming prepayment rates
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 53
================================================================================
of the underlying loans. The weighted average life is likely to be
substantially shorter than the stated final maturity as a result of
scheduled principal payments and unscheduled principal prepayments. Stated
interest rates on commercial mortgage-backed securities may change slightly
over time as underlying mortgages paydown.
COLLATERALIZED LOAN OBLIGATIONS (CLOs) - Collateralized loan obligations are
securities issued by entities that are collateralized by a pool of loans.
CLOs are issued in multiple classes (tranches), and can be equity or debt
with specific adjustable or fixed interest rates, and varying maturities.
The cash flow from the underlying loans is used to pay off each tranche
separately within the debt, or senior tranches. Equity, or subordinated
tranches, typically are not paid a cash flow but do offer ownership in the
CLO itself in the event of a sale.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs) - Collateralized mortgage
obligations are debt obligations of a legal entity that are fully
collateralized by a portfolio of mortgages or mortgage-related securities.
CMOs are issued in multiple classes (tranches), with specific adjustable or
fixed interest rates, varying maturities, and must be fully retired no later
than its final distribution date. The cash flow from the underlying
mortgages is used to pay off each tranche separately. CMOs are designed to
provide investors with more predictable cash flows than regular mortgage
securities, but such cash flows can be difficult to predict because of the
effect of prepayments.
COMMERCIAL PAPER - Consists of short-term unsecured promissory notes with
maturities ranging from one to 270 days, issued mainly by corporations.
Commercial paper is usually purchased at a discount and matures at par
value; however, it also may be interest-bearing. Rate represents an
annualized yield at time of purchase or coupon rate, if applicable.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
ADR American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in
U.S. dollars.
================================================================================
54 | USAA INCOME FUND
================================================================================
CAD Canadian Dollar
CCD Community College District
CMT Constant Maturity Treasury
EDA Economic Development Authority
EDC Economic Development Corp.
IDA Industrial Development Authority/Agency
LIBOR London Interbank Offered Rate
PRE Pre-refunded to a date prior to maturity
REITS Real estate investment trusts - Dividend distributions from REITS
may be recorded as income and later characterized by the REIT at
the end of the fiscal year as capital gains or a return of
capital. Thus, the Fund will estimate the components of
distributions from these securities and revise when actual
distributions are known.
Title XI The Title XI Guarantee Program provides a guarantee of payment of
principal and interest of debt obligations issued by U.S.
merchant marine and U.S. shipyards by enabling owners of eligible
vessels and shipyards to obtain financing at attractive terms.
The guarantee carries the full faith and credit of the U.S.
government.
CREDIT ENHANCEMENTS - Adds the financial strength of the provider of the
enhancement to support the issuer's ability to repay the principal and
interest payments when due. The enhancement may be provided by a
high-quality bank, insurance company or other corporation, or a collateral
trust. The enhancements do not guarantee the market values of the
securities.
INS Principal and interest payments are insured by the name listed.
Although bond insurance reduces the risk of loss due to default
by an issuer, such bonds remain subject to the risk that value
may fluctuate for other reasons, and there is no assurance that
the insurance company will meet its obligations.
NBGA Principal and interest payments or, under certain circumstances,
underlying mortgages, are guaranteed by a nonbank guarantee
agreement from the name listed.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 55
================================================================================
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 Victory Capital
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 July 31, 2019.
(c) Security was fair valued at July 31, 2019, by Victory Capital in
accordance with valuation procedures approved by USAA Mutual Funds
Trust's Board of Trustees. The total value of all such securities was
$5,000,000, which represented 0.1% of the Fund's net assets.
(d) Bank loans (loans) - are not registered under the Securities Act
of 1933. The loans contain certain restrictions on resale and cannot
be sold publicly. The stated interest rates represent the all in
interest rate of all contracts within the loan facilities. The
interest rates are adjusted periodically, and the rates disclosed
represent the current rate at July 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 Victory Capital, under liquidity guidelines approved by USAA
Mutual Funds Trust's Board of Trustees, unless otherwise noted as
illiquid.
(e) Security or a portion of the security purchased on a
delayed-delivery and/or when-issued basis.
(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
================================================================================
56 | USAA INCOME FUND
================================================================================
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) Stated interest rates may change slightly over time as underlying
mortgages paydown.
(h) Security deemed illiquid by Victory Capital, under liquidity
guidelines approved by USAA Mutual Funds Trust's Board of Trustees.
(i) The security, or a portion thereof, was out on loan as of July
31, 2019.
(j) At July 31, 2019, the issuer was in default with respect to
interest and/or principal payments.
(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.
(l) Security is perpetual and has no final maturity date but may be
subject to calls at various dates in the future.
(m) Payment-in-kind (PIK) - security in which the issuer has or will
have the option to make all or a portion of the interest or dividend
payments in additional securities in lieu of cash.
(n) Restricted security that is not registered under the Securities
Act of 1933. The aggregate market value of these securities at July
31, 2019, was $18,566,000, which represented 0.2% of the Fund's net
assets.
(o) Put bond - provides the right to sell the bond at face value at
specific tender dates prior to final maturity. The put feature
shortens the effective maturity of the security.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 57
================================================================================
(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 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) Securities with a value of $1,995,000 are segregated as collateral
for initial margin requirements on open futures contracts.
(r) The security, or a portion thereof, is segregated to cover the
value of open futures contracts at July 31, 2019.
(s) At July 31, 2019, the security, or a portion thereof, was
segregated to cover delayed-delivery and/or when-issued purchases.
(t) Rate represents the money market fund annualized seven-day yield
at July 31, 2019.
See accompanying notes to financial statements.
================================================================================
58 | USAA INCOME FUND
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
July 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value
(including securities on loan of $12,800) (cost of $8,014,137) $8,321,979
Cash 16,937
Receivables:
Capital shares sold 4,190
Victory Capitial (Note 8) 2
Dividends and interest 74,297
Securities sold 8,745
Other 49
Variation margin on futures contracts 2,331
----------
Total assets 8,428,530
----------
LIABILITIES
Payables:
Upon return of securities loaned 13,428
Securities purchased 26,908
Capital shares redeemed 4,058
Payable to broker 1,901
Accrued administration and servicing fees 847
Accrued management fees 1,699
Accrued transfer agent's fees 716
Other accrued expenses and payables 397
----------
Total liabilities 49,954
----------
Net assets applicable to capital shares outstanding $8,378,576
==========
NET ASSETS CONSIST OF:
Paid-in capital $8,058,491
Distributable earnings 320,085
----------
Net assets applicable to capital shares outstanding $8,378,576
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $3,214,507/242,141
capital shares outstanding, no par value) $ 13.28
==========
Institutional Shares (net assets of $5,048,203/380,564
capital shares outstanding, no par value) $ 13.27
==========
Adviser Shares (net assets of $95,026/7,177
capital shares outstanding, no par value) $ 13.24
==========
R6 Shares (net assets of $20,840/1,571
capital shares outstanding, no par value) $ 13.27
==========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 59
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended July 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $69) $ 7,190
Interest 312,783
Securities lending (net) 560
--------
Total income 320,533
--------
EXPENSES
Management fees 20,541
Administration and servicing fees:
Fund Shares 4,576
Institutional Shares 4,763
Adviser Shares 146
R6 Shares 9
Transfer agent's fees:
Fund Shares 3,548
Institutional Shares 4,763
Adviser Shares 96
R6 Shares 2
Distribution and service fees (Note 8):
Adviser Shares 243
Custody and accounting fees:
Fund Shares 337
Institutional Shares 527
Adviser Shares 11
R6 Shares 2
Postage:
Fund Shares 177
Institutional Shares 164
Adviser Shares 5
Shareholder reporting fees:
Fund Shares 81
Institutional Shares 16
Adviser Shares 1
================================================================================
60 | USAA INCOME FUND
================================================================================
Trustees' fees $ 37
Registration fees:
Fund Shares 100
Institutional Shares 118
Adviser Shares 19
R6 Shares 20
Professional fees 133
Other 93
--------
Total expenses 40,528
Expenses reimbursed:
R6 Shares (7)
--------
Net expenses 40,521
--------
NET INVESTMENT INCOME 280,012
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FOREIGN CURRENCY, AND FUTURES CONTRACTS
Net realized gain (loss) on:
Unaffiliated transactions 14,073
Affiliated transactions (Note 5) (14)
Foreign currency transactions (10)
Futures transactions 2,062
Change in net unrealized appreciation/(depreciation) of:
Investments 356,474
Foreign currency translations (1)
Futures contracts 2,307
--------
Net realized and unrealized gain 374,891
--------
Increase in net assets resulting from operations $654,903
========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 61
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended July 31,
--------------------------------------------------------------------------------------------------
2019 2018
--------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 280,012 $ 263,650
Net realized gain (loss) on investments 14,059 (6,283)
Net realized loss on foreign currency transactions (10) (17)
Net realized gain (loss) on futures transactions 2,062 (44)
Change in net unrealized appreciation/(depreciation) of:
Investments 356,474 (293,352)
Foreign currency translations (1) (3)
Futures contracts 2,307 23
-----------------------------
Increase (decrease) in net assets resulting from operations 654,903 (36,026)
-----------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (107,662) (133,365)
Institutional Shares (171,913) (137,846)
Adviser Shares (3,223) (3,980)
R6 Shares (702) (595)
-----------------------------
Distributions to shareholders (283,500) (275,786)
-----------------------------
NET INCREASE IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (NOTE 7)
Fund Shares 16,927 (410,870)
Institutional Shares 194,097 1,140,204
Adviser Shares (14,333) (21,090)
R6 Shares 1,084 14,567
-----------------------------
Total net increase in net assets from capital
share transactions 197,775 722,811
-----------------------------
Net increase in net assets 569,178 410,999
NET ASSETS
Beginning of year 7,809,398 7,398,399
-----------------------------
End of year $8,378,576 $7,809,398
=============================
See accompanying notes to financial statements.
================================================================================
62 | USAA INCOME FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
July 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 Income 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 maximum current
income without undue risk to principal.
The Fund consists of four classes of shares: Income Fund Shares (Fund Shares),
Income Fund Institutional Shares (Institutional Shares), Income Fund Adviser
Shares (Adviser Shares), and Income Fund R6 Shares (R6 Shares). Each class of
shares has equal rights to assets and earnings, except that each class bears
certain class-related expenses specific to the particular class. These expenses
include administration and servicing fees, transfer agent fees, postage,
shareholder reporting fees, distribution and service (12b-1) fees, and certain
registration and custodian fees. Expenses not attributable to a specific class,
income, and realized gains or losses on investments are allocated to each class
of shares based on each class' relative net assets. Each class has exclusive
voting rights on matters related solely to that class and separate voting rights
on matters that relate to all classes. The Institutional Shares are available
for investment through a USAA discretionary managed account program and certain
advisory programs sponsored by financial intermediaries, such as brokerage
firms, investment advisors, financial planners, third-party administrators, and
insurance companies. Institutional Shares also are available to institutional
investors, which include retirement plans, endowments,
================================================================================
NOTES TO FINANCIAL STATEMENTS | 63
================================================================================
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 an affiliate fund
participating in a fund-of-funds investment strategy (affiliated 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), the investment adviser to the
Fund, and USAA Transfer Agency Company, d/b/a USAA Shareholder Account Services
(SAS), the transfer agent to the Fund, announced that AMCO and SAS would be
acquired by Victory Capital Holdings, Inc., a global investment management firm
headquartered in Cleveland, Ohio (the Transaction) on July 1, 2019. Effective
August 5, 2019, Citibank, N.A. is the new custodian for the USAA Mutual Funds. 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. 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.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Pricing 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.
================================================================================
64 | USAA INCOME FUND
================================================================================
The value of each security is determined (as of the close of trading on the
New York Stock Exchange (NYSE) on each business day the NYSE is open) as set
forth below:
1. Debt securities are valued each business day by a pricing service
(the Service) approved by the Board. The Service uses an evaluated bid
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.
Effective July 1, 2019 the valuation methodology applied to certain debt
securities changed. Securities that were previously valued at an
evaluated mean are now valued at the evaluated bid or the last sales
price.
2. Equity securities, including exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange or
the over-the-counter markets, are valued at the last sales price or
official closing price on the exchange or primary market on which they
trade. Securities traded primarily on foreign securities exchanges or
markets are valued at the last quoted sale price, or the most recently
determined official closing price calculated according to local market
convention, available at the time the Fund is valued. If no last sale or
official closing price is reported or available, the closing bid price
generally is used for U.S. listed equities and the average of the bid
and asked prices is used for foreign listed equities. 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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 65
================================================================================
3. Equity securities trading in various foreign markets may take place
on days when the NYSE is closed. Further, when the NYSE is open, the
foreign markets may be closed. Therefore, the calculation of the Fund's
net asset value (NAV) may not take place at the same time the prices of
certain foreign securities held by the Fund are determined. In many
cases, events affecting the values of foreign securities that occur
between the time of their last quoted sale or official closing price and
the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not need to be reflected in the value of the Fund's
foreign securities. However, the Manager will monitor for events that
would materially affect the value of the Fund's foreign securities and
the Committee will consider such available information that it deems
relevant and will determine a fair value for the affected foreign
securities in accordance with valuation procedures. In addition,
information from an external vendor or other sources may be used to
adjust the foreign market closing prices of foreign equity securities to
reflect what the Committee believes to be the fair value of the
securities as of the close of the NYSE. Fair valuation of affected
foreign equity securities may occur frequently based on an assessment
that events which occur on a fairly regular basis (such as U.S. market
movements) are significant. Such securities are categorized in Level 2
of the fair value hierarchy.
4. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value hierarchy.
5. Short-term debt securities with original or remaining maturities of
60 days or less generally are priced but may be valued at amortized
cost, provided that amortized cost represents the fair value of such
securities.
6. Repurchase agreements are valued at cost.
7. Futures are valued at the settlement price at the close of market on
the principal exchange on which they are traded or, in the absence of
any transactions that day, the last sale on the prior trading date.
8. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has
================================================================================
66 | USAA INCOME FUND
================================================================================
been recognized in relation to a security or class of securities, the
securities are valued in good faith by the Committee in accordance with
valuation procedures approved by the Board. The effect of fair value
pricing is that securities may not be priced on the basis of quotations
from the primary market in which they are traded and the actual price
realized from the sale of a security may differ materially from the fair
value price. Valuing these securities at fair value is intended to cause
the Fund's NAV to be more reliable than it otherwise would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
broker-dealers, other pricing services, or widely used quotation
systems. General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and duration
of any restrictions on disposition of the securities, evaluation of
credit quality, and an evaluation of the forces that influenced the
market in which the securities are purchased and sold. Level 2
securities include debt securities that are valued using market inputs
and other observable factors deemed by the Manager to appropriately
reflect fair value.
B. FAIR VALUE MEASUREMENTS - Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the Portfolio of Investments is
based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted)
in active markets for identical securities.
Level 2 - inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
that are observable for the securities, either directly or indirectly, and
market-corroborated inputs such as market indexes.
Level 3 - inputs to the valuation methodology are unobservable and
significant to the fair value measurement, including the Manager's own
assumptions in determining the fair value.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 67
================================================================================
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 July 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
================================================================================
68 | USAA INCOME FUND
================================================================================
direction, in which case, the Fund may not achieve the anticipated benefits
of the futures contracts.
FAIR VALUES OF DERIVATIVE INSTRUMENTS AS OF JULY 31, 2019* (IN THOUSANDS)
ASSET DERIVATIVES
------------------------------------------------------------------------------------------------
DERIVATIVES NOT STATEMENT OF
ACCOUNTED FOR AS ASSETS AND INTEREST FOREIGN
HEDGING LIABILITIES RATE EQUITY EXCHANGE
INSTRUMENTS LOCATION CONTRACTS CONTRACTS CONTRACTS TOTAL
------------------------------------------------------------------------------------------------
USAA Income Distributable
Fund earnings $2,330** $- $- $2,330
------------------------------------------------------------------------------------------------
* For open derivative instruments as of July 31, 2019, see the Portfolio of
Investments, which also is indicative of activity for the year ended July
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 JULY 31, 2019 (IN THOUSANDS)
NET REALIZED GAIN (LOSS)
------------------------------------------------------------------------------------------------
DERIVATIVES NOT
ACCOUNTED FOR AS STATEMENT OF FOREIGN
HEDGING OPERATIONS INTEREST RATE EQUITY EXCHANGE
INSTRUMENTS LOCATION CONTRACTS CONTRACTS CONTRACTS TOTAL
------------------------------------------------------------------------------------------------
USAA Income Net realized
Fund gain (loss) on
Futures
transactions $2,062 $- $- $2,062
------------------------------------------------------------------------------------------------
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
------------------------------------------------------------------------------------------------
DERIVATIVES NOT
ACCOUNTED FOR AS STATEMENT OF FOREIGN
HEDGING OPERATIONS INTEREST RATE EQUITY EXCHANGE
INSTRUMENTS LOCATION CONTRACTS CONTRACTS CONTRACTS TOTAL
------------------------------------------------------------------------------------------------
USAA Income Change in net
Fund unrealized
appreciation/
(depreciation)
of Futures
contracts $2,307 $- $- $2,307
------------------------------------------------------------------------------------------------
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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 69
================================================================================
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 July 31, 2019, the Fund did not incur any income tax,
interest, or penalties, and has recorded no liability for net unrecognized
tax benefits relating to uncertain income tax positions. On an ongoing
basis, the Manager will monitor the Fund's tax basis to determine if
adjustments to this conclusion are necessary. The statute of limitations on
the Fund's tax return filings generally remain open for the three preceding
fiscal reporting year ends and remain subject to examination by the Internal
Revenue Service and state taxing authorities.
F. FOREIGN TAXATION - Foreign income and capital gains on some foreign
securities may be subject to foreign taxes, which are reflected as a
reduction to such income and realized gains. The Fund records a liability
based on unrealized gains to provide for potential foreign taxes payable
upon the sale of these securities. Foreign taxes have been provided for in
accordance with the Fund's understanding of the applicable countries'
prevailing tax rules and rates.
G. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the exchange
rate obtained from an independent pricing service on the respective
dates of such transactions.
================================================================================
70 | USAA INCOME FUND
================================================================================
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 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 71
================================================================================
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 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. 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.
For the period July 1, 2019 to July 31, 2019, the Fund paid Citibank facility
fees of 2,000, which represents 5.9% of the total fees paid to Citibank by the
funds of the Trusts. The Fund had no borrowings under this agreement during the
period July 1, 2019 to July 31, 2019. Effective July 1, 2019, the line of credit
among the Trust, with respect to its funds, and USAA Capital Corporation (CAPCO)
terminated. For the period from August 1, 2018 to June 30, 2019, the Fund paid
CAPCO facility fees of $65,000, which represents 9.6% of the total fees paid to
CAPCO by the funds of the Trusts. The Fund had no borrowings under this
agreement during the period from August 1, 2018 to June 30, 2019.
================================================================================
72 | USAA INCOME FUND
================================================================================
(3) INTERFUND LENDING
Effective July 1, 2019, the Trust relies on an exemptive order granted to
Victory Capital and its affiliated funds by the U.S. Securities and Exchange
Commission (SEC) in March 2017 (the 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 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 Order, by averaging the current repurchase
agreement rate and the current bank loan rate. For the period July 1, 2019 to
July 31, 2019, the Fund did not lend.
(4) 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 July 31, 2019,
and 2018, was as follows:
2019 2018
-----------------------------------
Ordinary income* $281,461,000 $261,578,000
Long-term realized capital gains 2,039,000 14,208,000
------------ ------------
Total distributions paid $283,500,000 $275,786,000
============ ============
As of July 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 5,390,000
Undistributed long-term capital gains 6,812,000
Unrealized appreciation of investments 308,159,000
*Includes short-term realized capital gains, if any, which are taxable as
ordinary income.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 73
================================================================================
The difference between book-basis and tax-basis unrealized appreciation of
investments is attributable to the tax deferral of losses on wash sales, futures
contracts mark to market, defaulted bond income, perpetual bond, and hybrid
interest accrual adjustments.
Distributions of net investment income are made monthly. Distributions of
realized gains from security transactions not offset by capital losses are made
annually in the succeeding fiscal year or as otherwise required to avoid the
payment of federal taxes.
At July 31, 2019, the Fund had no capital loss carryforwards, for federal income
tax purposes.
TAX BASIS OF INVESTMENTS - At July 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 Income Fund $8,013,819,000 $364,579,000 $(56,419,000) $308,160,000
(5) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended July 31, 2019, were $1,094,698,000 and
$1,011,193,000, respectively.
In accordance with affiliated transaction procedures approved by the Board,
purchases and sales of security transactions were executed between the Fund and
affiliated 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 July 31, 2019 were as follows:
PURCHASES SALES NET REALIZED GAIN (LOSS)
--------------------------------------------------------------------------------------
$90,678,000 $9,435,000 $(14,000)
================================================================================
74 | USAA INCOME FUND
================================================================================
(6) 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 July 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
----------------------------------------------------------------------------------
$12,800,000 $- $13,428,000
(7) CAPITAL SHARE TRANSACTIONS
At July 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 fund-of-funds as well as other persons or legal
================================================================================
NOTES TO FINANCIAL STATEMENTS | 75
================================================================================
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
JULY 31, 2019 JULY 31, 2018
--------------------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------
FUND SHARES:
Shares sold 48,140 $ 615,756 74,507 $ 968,080
Shares issued from
reinvested dividends 8,039 102,735 9,880 128,134
Shares redeemed (55,041) (701,564) (117,486) (1,507,084)
-------------------------------------------------------------
Net increase (decrease) from
capital share transactions 1,138 $ 16,927 (33,099) $ (410,870)
=============================================================
INSTITUTIONAL SHARES:
Shares sold 74,103 $ 949,163 117,028 $ 1,502,397
Shares issued from
reinvested dividends 13,197 168,534 10,355 134,109
Shares redeemed (72,144) (923,600) (38,331) (496,302)
-------------------------------------------------------------
Net increase from
capital share transactions 15,156 $ 194,097 89,052 $ 1,140,204
=============================================================
ADVISER SHARES:
Shares sold 292 $ 3,771 307 $ 4,008
Shares issued from
reinvested dividends 250 3,180 304 3,941
Shares redeemed (1,673) (21,284) (2,247) (29,039)
-------------------------------------------------------------
Net decrease from
capital share transactions (1,131) $ (14,333) (1,636) $ (21,090)
=============================================================
R6 SHARES:
Shares sold 321 $ 4,116 1,344 $ 17,703
Shares issued from
reinvested dividends 40 518 32 408
Shares redeemed (280) (3,550) (276) (3,544)
-------------------------------------------------------------
Net increase from
capital share transactions 81 $ 1,084 1,100 $ 14,567
=============================================================
================================================================================
76 | USAA INCOME FUND
================================================================================
(8) TRANSACTIONS WITH MANAGER
MANAGEMENT FEES - The Manager provides investment management services to the
Fund pursuant to an Advisory Agreement. Effective July 1, 2019, the Trust relies
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.
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 0.24% of the Fund's average daily net assets.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper A Rated Bond Funds Index. The Lipper A Rated Bond Funds
Index tracks the total return performance of funds within the Lipper Corporate
Debt Funds A Rated category.
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
December 1, 2016, and includes the performance of the Fund
================================================================================
NOTES TO FINANCIAL STATEMENTS | 77
================================================================================
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). The
resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper A Rated Bond Funds Index over that period, even if the
class had overall negative returns during the performance period.
Under the investment advisory agreement with the Manager that took effect on
July 1, 2019, no performance adjustments will be made for the period beginning
July 1, 2019, through June 30, 2020. Only performance beginning as of July 1,
2019, and thereafter will be utilized in calculating future performance
adjustments.
For the period from August 1, 2018 to June 30, 2019, the Fund incurred
management fees, paid or payable to AMCO, of $18,842,000, which included a
performance adjustment for the Fund Shares, Institutional Shares, Adviser
Shares, and R6 Shares of $567,000, $955,000, $(13,000), and $1,000,
respectively. For the Fund Shares, Institutional Shares, Adviser Shares, and R6
Shares the performance adjustments were 0.02%, 0.02%, (0.01)%, and less than
0.01%, respectively. For the period July 1, 2019 to July 31, 2019 the
================================================================================
78 | USAA INCOME FUND
================================================================================
Fund incurred management fees, paid or payable to Victory Capital of $1,699,000,
which included no performance adjustments.
ADMINISTRATION AND SERVICING FEES - Effective July 1, 2019, Victory Capital is
obligated on a continuous basis to provide administrative services to the Fund.
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 period from August 1, 2018 to June 30, 2019, the Fund Shares,
Institutional Shares, Adviser Shares, and R6 Shares incurred administration and
servicing fees, paid or payable to AMCO, of $4,168,000, $4,337,000, $134,000,
and $8,000, respectively. For the period July 1, 2019 to July 31, 2019 the Fund
Shares, Institutional Shares, Adviser Shares, and R6 Shares incurred
administration and servicing fees, paid or payable to Victory Capital of
$408,000, $426,000, $12,000, and $1,000, respectively.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, AMCO also provided certain compliance and legal
services for the benefit of the Fund. The Board approved the reimbursement of a
portion of these expenses incurred by AMCO.
Effective July 1, 2019, these services are covered under a Compliance Services
Agreement between the Trust and Victory Capital. For the period from August 1,
2018 to June 30, 2019, the Fund reimbursed AMCO $26,000 for these compliance and
legal services. For the period July 1, 2019 to July 31, 2019, the Fund's portion
of fees paid to Victory Capital under the Compliance Service Agreement was
$4,000. These expenses are included in the professional fees on the Fund's
Statement of Operations.
EXPENSE LIMITATION - Effective July 1, 2019, the Manager has contractually
agreed to waive its management fee and/or reimburse expenses so that the total
annual operating expenses (excluding certain items such as interest, taxes and
brokerage commissions) do not exceed 0.52% of the Fund Shares, 0.46% of the
Institutional Shares, 0.77% of the Adviser Shares, and 0.39% of
================================================================================
NOTES TO FINANCIAL STATEMENTS | 79
================================================================================
the R6 Shares, through at least June 30, 2021. The Manager is permitted 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 limits in effect at the time of: (a) the
original waiver or expense reimbursement; or (b) the recoupment, after giving
effect to the recoupment amount. The amount of any waivers or reimbursements and
the amount of any recoupment is calculated without regard to the impact of any
performance adjustment to the Fund's management fee. This waiver agreement may
only be terminated by the Fund's Board of Trustees. Prior to July 1, 2019, AMCO
agreed to limit the total annual operating expenses of the R6 Shares to 0.39% of
their average daily net assets, excluding extraordinary expenses and before
reductions of any expenses paid indirectly, and to reimburse the R6 Shares for
all expenses in excess of those amounts. For the period from August 1, 2018 to
June 30, 2019, the R6 Shares incurred reimbursable expenses from AMCO of $5,000.
For the period July 1, 2019 to July 31, 2019, the R6 Shares incurred
reimbursable expenses of $2,000, all of which was receivable from the Manager.
TRANSFER AGENT'S FEES - Victory Capital Transfer Agency, Inc. (VCTA), (formerly,
USAA Shareholder Account Services (SAS)) provides transfer agency services to
the Fund. VCTA, 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. VCTA 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 July 31, 2019, the Fund Shares, Institutional Shares, Adviser Shares, and
R6 Shares incurred transfer agent's fees, paid or payable to VCTA, of
$3,548,000, $4,763,000, $96,000, and $2,000, respectively.
DISTRIBUTION AND SERVICE (12b-1) fees - Effective July 1, 2019, the Trust has an
agreement with Victory Capital Advisers, Inc. (VCA), an affiliate of the Manager
for exclusive distribution of the Fund's shares on a continuing best
================================================================================
80 | USAA INCOME FUND
================================================================================
effort basis. Prior to July 1, 2019, the Fund adopted a plan pursuant to Rule
12b-1 under the 1940 Act with respect to the Adviser Shares. Under the plan, the
Adviser Shares paid fees to USAA Investment Management Company (IMCO), the
distributor, for distribution and shareholder services. Prior to July 1, 2019,
IMCO paid 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 period from August
1, 2018 to June 30, 2019, the Adviser Shares incurred distribution and service
(12b-1) fees, of $223,000. For the period July 1, 2019 to July 31, 2019, the
Adviser Shares incurred distribution and service (12b-1) fees, of $20,000.
UNDERWRITING SERVICES - Effective July 1, 2019, the Trust has an agreement with
Victory Capital Advisers, Inc. (VCA), an affiliate of the Manager for exclusive
underwriting and distribution of the Fund's shares on a continuing best effort
basis. This agreement provides that VCA receive no fee or other compensation for
such distribution services, but may receive 12b-1 fees with respect to Adviser
Shares. Prior to July 1, 2019, IMCO provided exclusive underwriting and
distribution of the Fund's shares on a continuing best-efforts basis and
received no fee or other compensation for these services, but may receive 12b-1
fees as described above, with respect to Adviser Shares.
(9) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other affiliated
funds in which the affiliated fund-of-funds invest. The fund-of-funds do not
invest in the underlying affiliated 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 July 31, 2019, the
================================================================================
NOTES TO FINANCIAL STATEMENTS | 81
================================================================================
fund-of-funds owned the following percentages of the total outstanding shares of
the Fund:
AFFILIATED USAA FUND OWNERSHIP %
-------------------------------------------------------------------------------
Cornerstone Conservative 0.7
Target Retirement Income 0.8
Target Retirement 2020 1.1
Target Retirement 2030 1.4
Target Retirement 2040 0.9
Target Retirement 2050 0.4
Target Retirement 2060 0.0*
*Represents less than 0.1%.
Effective July 1, 2019, Victory Capital replaced AMCO as the Fund's investment
adviser and began managing the Fund. Prior to July 1, 2019, AMCO was 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.
(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. The Manager has determined there is no significant
impact on the Fund's financial statements and various filings.
================================================================================
82 | USAA INCOME FUND
================================================================================
(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.
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 is effective for funds
with fiscal years beginning after December 15, 2018. The Manager has determined
the adoption of this standard will have no significant impact on the financial
statements and reporting disclosures of the Fund.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 83
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 31,
--------------------------------------------------------------------------
2019 2018 2017 2016 2015
--------------------------------------------------------------------------
Net asset value at
beginning of period $ 12.68 $ 13.20 $ 13.40 $ 12.99 $ 13.28
--------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .45 .45 .44 .47 .47
Net realized and
unrealized gain (loss) .60 (.51) (.20) .40 (.27)
--------------------------------------------------------------------------
Total from investment
operations 1.05 (.06) .24 .87 .20
--------------------------------------------------------------------------
Less distributions from:
Net investment income (.45) (.44) (.44) (.46) (.46)
Realized capital gains (.00)(a) (.02) - - (.01)
Return of capital - - - - (.02)
--------------------------------------------------------------------------
Total distributions (.45) (.46) (.44) (.46) (.49)
--------------------------------------------------------------------------
Net asset value at
end of period $ 13.28 $ 12.68 $ 13.20 $ 13.40 $ 12.99
==========================================================================
Total return (%)* 8.50 (.47) 1.91 6.88 1.45
Net assets at end of
period (000) $3,214,507 $3,055,739 $3,617,550 $3,394,088 $3,544,344
Ratios to average
daily net assets:**
Expenses (%)(b) .55(c) .52 .49 .51 .53
Expenses, excluding
reimbursements (%)(b) .55 .52 .49 .51 .53
Net investment income (%) 3.49 3.40 3.40 3.61 3.36
Portfolio turnover (%) 13 8 9 11 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 July 31, 2019, average daily net assets were
$3,050,475,000.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Fund Shares to 0.52% of the Fund Shares' average
daily net assets.
================================================================================
84 | USAA INCOME FUND
================================================================================
INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 31,
--------------------------------------------------------------------------
2019 2018 2017 2016 2015
--------------------------------------------------------------------------
Net asset value at
beginning of period $ 12.67 $ 13.19 $ 13.39 $ 12.99 $ 13.28
--------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .45 .44 .45 .48 .49
Net realized and
unrealized gain (loss) .61 (.50) (.20) .39 (.28)
--------------------------------------------------------------------------
Total from investment
operations 1.06 (.06) .25 .87 .21
--------------------------------------------------------------------------
Less distributions from:
Net investment income (.46) (.44) (.45) (.47) (.47)
Realized capital gains (.00)(a) (.02) - - (.01)
Tax return of capital - - - - (.02)
--------------------------------------------------------------------------
Total distributions (.46) (.46) (.45) (.47) (.50)
--------------------------------------------------------------------------
Net asset value at
end of period $ 13.27 $ 12.67 $ 13.19 $ 13.39 $ 12.99
==========================================================================
Total return (%)* 8.58 (.41) 1.97 6.89 1.51
Net assets at end of
period (000) $5,048,203 $4,629,713 $3,644,795 $3,114,810 $2,227,221
Ratios to average
daily net assets:**
Expenses (%)(b) .48(c) .47 .43 .44 .46
Expenses, excluding
reimbursements (%)(b) .48 .47 .43 .44 .46
Net investment
income (%) 3.56 3.46 3.45 3.66 3.43
Portfolio turnover (%) 13 8 9 11 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 July 31, 2019, average daily net assets were
$4,765,022,000.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Institutional Shares to 0.46% of the Institutional
Shares' average daily net assets.
================================================================================
FINANCIAL HIGHLIGHTS | 85
================================================================================
ADVISER SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each
period is as follows:
YEAR ENDED JULY 31,
------------------------------------------------------------------------
2019 2018 2017 2016 2015
------------------------------------------------------------------------
Net asset value at
beginning of period $ 12.65 $ 13.16 $ 13.36 $ 12.96 $ 13.25
------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .42 .41 .42 .44 .44
Net realized and
unrealized gain (loss) .59 (.49) (.21) .38 (.27)
------------------------------------------------------------------------
Total from investment
operations 1.01 (.08) .21 .82 .17
------------------------------------------------------------------------
Less distributions from:
Net investment income (.42) (.41) (.41) (.42) (.43)
Realized capital gains (.00)(a) (.02) - - (.01)
Tax return of capital - - - - (.02)
------------------------------------------------------------------------
Total distributions (.42) (.43) (.41) (.42) (.46)
------------------------------------------------------------------------
Net asset value at
end of period $ 13.24 $ 12.65 $ 13.16 $ 13.36 $ 12.96
========================================================================
Total return (%)* 8.20 (.61) 1.67 6.53 1.23
Net assets at
end of period (000) $ 95,026 $105,072 $130,912 $171,518 $222,494
Ratios to average
daily net assets:**
Expenses (%)(b) .77(d) .74 .72 .77 .79(c)
Expenses, excluding
reimbursements (%)(b) .77 .74 .72 .77 .79
Net investment
income (%) 3.28 3.18 3.17 3.36 3.10
Portfolio turnover (%) 13 8 9 11 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 July 31, 2019, average daily net assets were
$97,302,000.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Prior to December 1, 2014, AMCO had voluntarily agreed to limit the
annual expenses of the Adviser Shares to 0.90% of the Adviser Shares'
average daily net assets.
(d) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Adviser Shares to 0.77% of the Adviser Shares'
average daily net assets.
================================================================================
86 | USAA INCOME FUND
================================================================================
R6 SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
PERIOD ENDED
YEAR ENDED JULY 31, JULY 31,
-----------------------------------------------
2019 2018 2017***
-----------------------------------------------
Net asset value at beginning of period $ 12.67 $ 13.19 $12.83
--------------------------------------------
Income (loss) from investment operations:
Net investment income .47 .45 .30
Net realized and unrealized gain (loss) .60 (.49) .36
--------------------------------------------
Total from investment operations 1.07 (.04) .66
--------------------------------------------
Less distributions from:
Net investment income (.47) (.46) (.30)
Realized capital gains (.00)(a) (.02) -
--------------------------------------------
Total distributions (.47) (.48) (.30)
--------------------------------------------
Net asset value at end of period $ 13.27 $ 12.67 $13.19
============================================
Total return (%)* 8.68 (.32) 5.22
Net assets at end of period (000) $20,840 $18,874 $5,142
Ratios to average daily net assets:**
Expenses (%)(b) .39(d) .39 .39(c)
Expenses, excluding reimbursements (%)(b) .43 .58 .99(c)
Net investment income (%) 3.65 3.56 3.50(c)
Portfolio turnover (%) 13 8 9
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the year ended July 31, 2019, average daily net assets were $18,951,000.
*** R6 Shares commenced operations on December 1, 2016.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the R6 Shares to 0.39% of the R6 Shares' average daily
net assets.
================================================================================
FINANCIAL HIGHLIGHTS | 87
================================================================================
EXPENSE EXAMPLE
July 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 February 1, 2019, through
July 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
================================================================================
88 | USAA INCOME FUND
================================================================================
period. You may use this information to compare the ongoing costs of investing
in the Fund and other funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of other
funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled "hypothetical"
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if these direct
costs were included, your costs would have been higher.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE FEBRUARY 1, 2019 -
FEBRUARY 1, 2019 JULY 31, 2019 JULY 31, 2019
------------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,063.90** $2.76**
Hypothetical
(5% return before expenses) 1,000.00 1,022.12** 2.71**
INSTITUTIONAL SHARES
Actual 1,000.00 1,064.30 2.46**
Hypothetical
(5% return before expenses) 1,000.00 1,022.41** 2.41**
ADVISER SHARES
Actual 1,000.00 1,062.90 3.89
Hypothetical
(5% return before expenses) 1,000.00 1,021.03 3.81
R6 SHARES
Actual 1,000.00 1,064.80 2.00
Hypothetical
(5% return before expenses) 1,000.00 1,022.86 1.96
*Expenses are equal to the annualized expense ratio of 0.54% for Fund Shares,
0.48% for Institutional Shares, 0.76% for Adviser Shares, and 0.39% for R6
Shares, which are net of any reimbursements and expenses paid indirectly,
multiplied by the average account value over the period, multiplied by 181
days/365 days for Fund Shares, Institutional Shares, Adviser Shares, and R6
Shares (to reflect the one-half-year period). The Fund's actual ending
account values are based on its actual total returns of 6.39% for Fund
Shares, 6.43% for Institutional Shares, 6.29% for Adviser Shares, and 6.48%
for R6 Shares, for the six-month period of February 1, 2019, through July 31,
2019.
================================================================================
EXPENSE EXAMPLE | 89
================================================================================
**The Fund's annualized expense ratio of 0.54% for Fund Shares, 0.48% for
Institutional Shares above reflects a change effective July 1, 2019, to
implement the Manager's expense limitation of 0.52% of the Fund Shares'
average annual net assets and 0.46% for the Institutional Shares' average
annual net assets. Had the expense limitation of 0.52% for the Fund Shares
and 0.46% for the Institutional Shares, which is net of expenses paid
indirectly, been in effect for the entire six-month period of February 1,
2019, through July 31, 2019, the values in the table above would be as shown
below.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD
ACCOUNT VALUE ACCOUNT VALUE FEBRUARY 1, 2019 -
FEBRUARY 1, 2019 JULY 31, 2019 JULY 31, 2019
------------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,063.90 $2.66
Hypothetical
(5% return before expenses) 1,000.00 1,022.22 2.61
INSTITUTIONAL SHARES
Actual 1,000.00 1,064.30 2.35
Hypothetical
(5% return before expenses) 1,000.00 1,022.51 2.31
================================================================================
90 | USAA INCOME FUND
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
July 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.
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with
================================================================================
ADVISORY AGREEMENT(S) | 91
================================================================================
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 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
================================================================================
92 | USAA INCOME FUND
================================================================================
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.
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
================================================================================
ADVISORY AGREEMENT(S) | 93
================================================================================
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).
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.
================================================================================
94 | USAA INCOME FUND
================================================================================
o The portfolio managers at AMCO that manage the Fixed Income Funds(1)
as well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be
advised by Victory Capital through its Victory Solutions platform,
Victory Capital proposes that the same subadvisers be retained
Post-Transaction, although Victory Capital may change the allocation to
a particular subadviser Post-Transaction. No changes are expected to
the portfolio managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's businesses to
Victory Capital. Victory Capital and USAA expect to
(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) | 95
================================================================================
enter into a transition services agreement under which USAA will
continue to provide Victory Capital with certain services that are
currently provided by USAA to AMCO and the USAA Transfer Agent for a
specified period of time after the closing of the Transaction to assist
Victory Capital in transitioning the USAA member distribution channel
and member support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital is capable of providing
the same level of investment management services
================================================================================
96 | USAA INCOME FUND
================================================================================
currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund,
Growth & Income Fund, Income Stock Fund, Global Equity Income Fund, and
Precious Metals and Minerals Fund.
================================================================================
ADVISORY AGREEMENT(S) | 97
================================================================================
The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored
=============================================================================
98 | USAA INCOME FUND
================================================================================
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 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
================================================================================
ADVISORY AGREEMENT(S) | 99
================================================================================
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.
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
==============================================================================
100 | USAA INCOME FUND
================================================================================
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.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
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ADVISORY AGREEMENT(S) | 101
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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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102 | USAA INCOME FUND
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND AMCO)
July 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.
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 AMCO 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 AMCO, 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 AMCO's revenues
and costs of providing services to the Fund and compensation paid to affiliates
of AMCO; and (iii) information about
(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"). Effective July 1, 2019, upon the closing of the transaction whereby
AMCO acquired by Victory Capital Holdings, Inc., the parent company of Victory
Capital, the Advisory Agreement between the Trust and AMCO and the Sub-advisory
Agreement with the Subadviser terminated and the new investment advisory
agreement between the Trust and Victory Capital went into effect. The factors
the Board considered in approving the new investment advisory agreement with
Victory Capital are discussed above. Effective June 30, 2019, the Subadviser no
longer manages any portion of the Fund.
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ADVISORY AGREEMENT(S) | 103
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AMCO's operations and personnel. Prior to voting, the Independent Trustees
reviewed the proposed continuance of the Advisory Agreement with management and
with experienced 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 AMCO. 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 AMCO's profitability with respect to the
Fund. However, the Board noted that the evaluation process with respect to AMCO
is an ongoing one. In this regard, the Board's and its committees' consideration
of the Advisory Agreement included 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 AMCO under the Advisory Agreement, the Board
reviewed information provided by AMCO relating to its operations and personnel.
The Board also took into account its knowledge of AMCO's management and the
quality of the performance of AMCO's duties through Board meetings, discussions,
and reports during the preceding year. The Board considered the fees paid to
AMCO and the services provided to the Fund by AMCO under the Advisory Agreement,
as well as other services
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104 | USAA INCOME FUND
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provided by AMCO and its affiliates under other agreements, and the personnel
who provide these services. In addition to the investment advisory services
provided to the Fund, AMCO 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 AMCO in connection with the services provided
to the Fund including ongoing risks including investment, operational,
enterprise, litigation, regulatory and compliance risks.
The Board considered AMCO's management style and the performance of AMCO's
duties under the Advisory Agreement. The Board considered the level and depth of
experience of AMCO, 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 AMCO's process for monitoring
"best execution," also was considered. AMCO's role in coordinating the
activities of the Fund's other service providers also was considered. The Board
also considered AMCO's risk management processes. The Board considered AMCO'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 AMCO and its affiliates in managing the
Fund, as well as other funds in the Trust.
The Board also reviewed the compliance and administrative services provided to
the Fund by AMCO and its affiliates, including AMCO's oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust,
also focused on the quality of AMCO'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
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ADVISORY AGREEMENT(S) | 105
================================================================================
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 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 AMCO and its affiliates, including the high
quality of services received by the Fund from AMCO. The Board also noted the
level and method of computing the management fee, including any performance
adjustment to such fee.
In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total return with its Lipper index and with that of other mutual funds deemed to
be in its peer group by the independent third party in its report (the
performance universe). The Fund's performance universe consisted of the Fund and
all retail and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or primary channel
of distribution. This comparison indicated that, among other data, the Fund's
performance was above the average of its performance universe and its Lipper
index for the one-, three- and ten-year periods ended December 31, 2018, and was
below the average of its performance universe and 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 bottom 50% of its
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106 | USAA INCOME FUND
================================================================================
performance universe for the one-year period ended December 31, 2018, was in the
top 30% of its performance universe for the three- and ten-year periods ended
December 31, 2018, and was in the top 40% of its performance universe for the
five-year period ended December 31, 2018.
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 AMCO'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 AMCO'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 AMCO, the Board
also considered the fact that AMCO 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 AMCO from its relationship with the Trust, including that AMCO may
derive reputational and other benefits from its association with the Fund. The
Trustees recognized that AMCO 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 - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussion of
the current advisory fee structure. The Board also considered the effect of
Fund's growth and size on its performance and fees, noting that the Fund may
realize other economies of scale if assets increase proportionately 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 AMCO, among others: (i) AMCO has demonstrated that it
possesses the capability and resources to perform the duties required of it
under the Advisory Agreement; (ii) AMCO maintains an
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ADVISORY AGREEMENT(S) | 107
================================================================================
appropriate compliance program; (iii) the performance of the Fund is reasonable
in relation to the performance of funds with similar investment objectives and
to relevant indices; (iv) the Fund's advisory expenses are reasonable in
relation to those of similar funds and to the services to be provided by AMCO;
and (v) AMCO's 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 AMCO and the type of fund. Based on its conclusions, the
Board determined that the continuation of the Advisory Agreement would be in the
best interests of the Fund and its shareholders.
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108 | USAA INCOME FUND
================================================================================
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 | 109
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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 of 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), (08/11-06/19); Director of USAA Investment
Management Company (IMCO) (09/09-present); Chairman of Board of IMCO
(4/13-present); President and Director of USAA Shareholder Account Services
(SAS) (10/09-06/19); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director and Vice Chairman of FPS
(12/13-present); President and Director of USAA Investment Corporation (ICORP)
(03/10-present); Chairman of Board of ICORP (12/31-present); Director of USAA
Financial Advisors, Inc. (FAI) (12/13-present); Chairman of Board of FAI
(3/15-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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110 | USAA INCOME 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
--------------------------------------------------------------------------------
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
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TRUSTEES' AND OFFICERS' INFORMATION | 111
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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.
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.
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
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112 | USAA INCOME FUND
================================================================================
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 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.
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TRUSTEES' AND OFFICERS' INFORMATION | 113
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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 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.
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114 | USAA INCOME FUND
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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 was 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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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).
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Executive Director, Victory Capital Management Inc. (7/1/19-present); Treasurer,
USAA ETF Trust (09/18-06/19); Executive Director, Investment and Financial
Administration, USAA (04/12-06/30/19); Assistant Treasurer,
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116 | USAA INCOME FUND
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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
Director, Accounting and Finance, Victory Capital Management Inc.
(7/1/19-present); Assistant Treasurer, USAA ETF Trust (09/18-06/19);
Accounting/Financial Director, USAA (12/13-06/30/19).
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).
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).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 117
================================================================================
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 111 West Houston St., Suite 1901
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
Copies of the Victory Capital Management Inc.'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
--------------------------------------------------------------------------------
July 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA Income Stock Fund
FUND INSTITUTIONAL R6
SHARES SHARES SHARES
USISX UIISX URISX
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
". . . NOW MAY BE AN OPPORTUNE TIME FOR
INVESTORS TO ENSURE THAT THEIR PORTFOLIOS ARE WELL [PHOTO OF BROOKS ENGLEHARDT]
DIVERSIFIED AND THAT THEIR OVERALL ALLOCATION IS
APPROPRIATE FOR THEIR PARTICULAR RISK APPETITE."
--------------------------------------------------------------------------------
SEPTEMBER 2019
Although the bull market in equities has continued running, it was not without a
few missteps. Trade turmoil, questions surrounding global economic growth,
changing monetary policy, and geopolitical disputes have all led to increased
volatility. But through it all, domestic stocks, as measured by the S&P 500(R)
Index, still managed an annual return of approximately 8% for the 12-month
period ended July 31, 2019.
Given the sometimes dire news flow and ample cross-currents, it's no surprise
that volatility returned to the market. On one hand, the U.S. economy continues
to look good. The unprecedented streak of job creation has continued
uninterrupted, and unemployment is bouncing along historic lows at 3.7%. The
consumer remains resilient and inflation is tepid. On the flip side, however,
U.S. trade policy seems to be evolving, with new tariffs threatened and
implemented. The markets generally dislike this type of trade turmoil and
uncertainty, and the ongoing tensions between the United States and China (and
other trading partners) threaten to upend global supply chains and hinder
economic growth.
It's not just the stock market that has been dealing with volatility. The bond
market also has experienced volatility, due largely to the U.S. Federal
Reserve's (the "Fed") famous "pivot" in late 2018. Against the backdrop of
rapidly falling equities in the fourth quarter of 2018, the Fed signaled that
its next policy move would be to lower--not increase--short-term interest rates.
This immediately altered the yield environment.
Meanwhile, the U.S. Treasury yield curve continued to flatten and, in fact,
inverted--whereby shorter-term yields became higher than longer-term
================================================================================
================================================================================
yields. Such a yield-curve inversion is a worrying sign as it sometimes, but not
always, portends to a recession.
Although we are not predicting a recession, we must acknowledge that risks have
increased for an economic slowdown. Given that the current run in stocks is more
than a decade old, it's important for investors to keep perspective that the
bull market cannot continue forever. Therefore, now may be an opportune time for
investors to ensure that their portfolios are well diversified and that their
overall allocation is appropriate for their particular risk appetite.
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,
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. On the following pages, you will find information
relating to your USAA Investments, which is now a Victory Capital Investment
Franchise. If you have any questions about your investments, we encourage you to
engage your financial advisor or else contact us directly at 800-235-8396 or
visit usaa.com.
My colleagues and I sincerely appreciate the confidence you have placed in us,
and we value the opportunity to help you meet your investment goals.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGERS' COMMENTARY ON THE FUND 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 18
Financial Statements 19
Notes to Financial Statements 23
Financial Highlights 41
EXPENSE EXAMPLE 44
ADVISORY AGREEMENT(S) 47
TRUSTEES' AND OFFICERS' INFORMATION 67
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
VICTORY CAPITAL MANAGEMENT INC. 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
VictoryShares and Solutions Epoch Investment Partners, Inc.
MANNIK S. DHILLON, CFA, CAIA MICHAEL A. WELHOELTER, CFA
WASIF A. LATIF JOHN TOBIN, Ph.D., CFA
KERA VAN VALEN, CFA
WILLIAM W. PRIEST, CFA
--------------------------------------------------------------------------------
o PLEASE REVIEW MARKET CONDITIONS OVER THE 12-MONTH REPORTING PERIOD ENDED
JULY 31, 2019.
While U.S. stocks ended the 12-month reporting period in positive territory,
there was significant volatility along the way. Against a backdrop of
slowing global growth, for much of the reporting period, markets responded
primarily to headlines around U.S. monetary and trade policy. Entering the
reporting period, the U.S. Federal Reserve (the "Fed") was on a tightening
trajectory, which market participants interpreted as confirming a relatively
sanguine outlook for the U.S. economy. The fourth quarter of 2018 saw a
sharp reversal in risk appetites, however, as softening data out of Europe
and China raised concerns that the Fed would increase interest rates too
quickly even as a global recession possibly loomed. Uncertainty around U.S.
trade policy and corporate earnings also weighed on sentiment heading into
calendar year-end. While the Fed followed through on its previously signaled
December interest rate increase, it pivoted to a more dovish stance entering
2019, leading to a rebound in risk asset valuations.
Escalating rhetoric between the United States and China around trade
generated concerns throughout the reporting period. May of 2019 saw markets
decline as President Trump announced plans to impose a 25% tariff on some
$200 billion in Chinese imports. The lost ground was subsequently recovered
as the Fed indicated that it was prepared to cut its benchmark interest
rate, if needed, to help offset any drag on economic growth stemming from
trade friction. Corporate earnings reports that
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
generally were in line with expectations also served to bolster sentiment.
Most major stock indices ended July 2019 near their all-time highs.
For the 12-month reporting period, the growth style outpaced value by a
notable margin, as investors favored companies viewed as having the ability
to maintain profit growth against a backdrop of a slowing global economy.
The Russell 1000(R) Growth Index returned 10.82% for the reporting period
as compared to 5.20% for the Russell 1000(R) Value Index.
o HOW DID THE USAA INCOME STOCK FUND (THE "FUND") PERFORM DURING THE REPORTING
PERIOD?
The Fund has three share classes: Fund Shares, Institutional Shares, and R6
Shares. For the reporting period ended July 31, 2019, the Fund Shares,
Institutional Shares, and R6 Shares had a total return of 6.26%, 6.30%, and
6.37%, respectively. This compares to returns of 5.20% for the Russell 1000
Value Index (the "Index") and 5.93% for the Lipper Equity Income Funds
Index.
Victory Capital Management Inc. (the "Manager" or "Victory Capital") is the
Investment Adviser for the Fund. The Manager, along with subadviser Epoch
Investment Partners ("Epoch"), provides day-to-day discretionary management
of the Fund's assets. As the investment adviser, the Manager has dedicated
resources that support the research, selection, and monitoring of
subadvisers.
o WHAT WERE YOUR STRATEGIES IN THIS ENVIRONMENT?
Performance of the Fund relative to the Index was driven principally by the
Epoch and USAA Investments strategies that were in effect for the first 11
months of the fiscal period ended July 31, 2019.
The Epoch strategy generated a positive return and outperformed the broader
market as measured by the Index. Outperformance was driven
Refer to page 5 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
2 | USAA INCOME STOCK FUND
================================================================================
by the utilities, energy, and financials sectors. Specifically, a sector
overweight to the utilities sector and an underweight to the energy sector
drove relative return, which also was aided by stock selection in both
sectors. Stock selection in the financial sector also was beneficial, driven
by an overweight to the insurance industry, while an underweight to the
lagging sector aided performance as well. The largest detractor was health
care, as an underweight to and selection within the sector hindered results.
Stock selection in the consumer staples also detracted from relative
performance, largely driven by the portfolio's tobacco holdings, although
the negative impact was partially offset by an overweight to the sector.
The largest individual positive contributors to performance within the Epoch
strategy were Welltower, Inc.* and Entergy Corp.* Welltower, Inc. is
structured as a Real Estate Investment Trust and operates in the United
States, Canada, and the United Kingdom. It owns a diversified portfolio of
healthcare-related properties including senior housing communities,
post-acute facilities, outpatient medical properties, and medical office
buildings. The company's shares trended higher on growing confidence in
Welltower's growth trajectory following the acquisition of Quality Care
Properties in July 2018. A favorable first quarter earnings report showing
good same-store net operating income growth driven by both higher occupancy
and rate increases also boosted the stock. Entergy Corp. is a domestic
utility company that provides regulated electricity and natural gas services
to customers in the states of Arkansas, Louisiana, Alabama, and Texas. The
stock outperformed as the company made further progress on exiting the
merchant generation business in unregulated markets. In addition, shares
traded higher along with the broader utility group as market volatility
increased, particularly in the fourth quarter of 2018, and as interest rates
declined over the period.
The largest individual detractors from performance were British American
Tobacco plc ADR* and Occidental Petroleum Corp. ("Occidental"). British
American Tobacco plc ADR is a global tobacco producer. The shares came under
pressure in 2018, along with tobacco peers on concerns around the pace of
growth in "next generation" products and comments from the Federal Drug
Administration about reducing nicotine to non-addictive levels. Occidental
is a global energy company that explores, produces, and markets crude oil
and natural gas. It also owns midstream, marketing, and
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
chemical assets that provide diversification in cash flow. Occidental shares
underperformed as an agreement to acquire Anadarko Petroleum Corporation was
viewed unfavorably by some investors. In addition, declining oil and gas
prices weighed on the broader energy segment.
The USAA Investments' strategy performed essentially in line with the Index.
Performance was supported by an overweight to and strong stock selection
within the information technology sector, as well as by selection within
financials. The biggest detractors in sector terms included stock selection
within the health care and materials sectors.
In terms of individual holdings, positive contributions were led by
Microsoft Corp.* ("Microsoft") and Progressive Corp. ("Progressive").
Information technology company Microsoft has continued to successfully
transition into cloud-based enterprise services, with a corresponding
positive impact on earnings visibility. Auto insurance giant Progressive has
continued to display strong customer acquisition and underwriting results,
fueling a sharp rise in year-over-year earnings.
Negative contributions to performance were most notable within the
strategy's energy holdings as oil price volatility hampered the segment.
Within health care, an overweight to pharmaceutical company AbbVie, Inc.*
was the largest detractor, as pricing pressure from biosimilars and a
proposed acquisition of competitor Allergan Funding SCS weighed on the
stock. Within materials, exposure to silver miner Tahoe Resources, Inc. led
detractors as its appeal of an operating license suspension by the
Guatemalan government was unsuccessful.
Thank you for allowing us to help you with your investment needs.
*Welltower, Inc., Entergy Corp., British American Tobacco plc ADR, Microsoft
Corp., and Tahoe Resources were sold out of the Fund prior to July 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. o Dividends
are not guaranteed. In any year, dividends may be higher, lower, or not paid
at all.
================================================================================
4 | USAA INCOME STOCK FUND
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 7/31/19 o
--------------------------------------------------------------------------------------------------------
SINCE INCEPTION
1 YEAR 5 YEAR 10 YEAR INCEPTION* DATE
--------------------------------------------------------------------------------------------------------
Fund Shares 6.26% 8.33% 11.88% - -
Institutional Shares 6.30% 8.37% 11.99% - -
R6 Shares 6.37% - - 10.57% 12/01/16
Russell 1000(R) Value Index**
(reflects no deduction for fees,
expenses, or taxes) 5.20% 8.01% 12.39% - -
Lipper Equity Income Funds Index***
(reflects no deduction for taxes) 5.93% 8.28% 11.75% - -
*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 Russell 1000 Value Index measures the performance of those
Russell 1000 companies with lower price-to-book ratios and lower forecasted
growth values.
***The unmanaged Lipper Equity Income Funds Index tracks the total return
performance of funds within the Lipper Equity Income 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]
USAA INCOME LIPPER EQUITY
RUSSELL 1000 STOCK FUND INCOME FUNDS
VALUE INDEX SHARES INDEX
7/31/2009 $10,000.00 $10,000.00 $10,000.00
8/31/2009 10,523.05 10,420.00 10,445.94
9/30/2009 10,929.62 10,745.00 10,758.42
10/31/2009 10,595.12 10,545.00 10,583.96
11/30/2009 11,192.29 11,104.00 11,145.83
12/31/2009 11,390.36 11,317.00 11,359.27
1/31/2010 11,070.02 10,989.00 10,995.99
2/28/2010 11,419.45 11,286.00 11,291.28
3/31/2010 12,162.85 11,945.00 11,930.71
4/30/2010 12,477.58 12,093.00 12,085.87
5/31/2010 11,451.97 11,106.00 11,177.23
6/30/2010 10,807.29 10,474.00 10,628.55
7/31/2010 11,538.92 11,177.00 11,382.16
8/31/2010 11,045.18 10,762.00 10,940.88
9/30/2010 11,902.10 11,696.00 11,816.45
10/31/2010 12,259.23 12,176.00 12,169.54
11/30/2010 12,194.36 12,069.00 12,113.32
12/31/2010 13,156.55 12,792.00 12,953.78
1/31/2011 13,454.16 13,177.00 13,237.22
2/28/2011 13,950.42 13,723.00 13,669.25
3/31/2011 14,005.82 13,724.00 13,711.90
4/30/2011 14,378.78 14,249.00 14,154.95
5/31/2011 14,226.86 14,088.00 14,025.83
6/30/2011 13,935.15 13,876.00 13,782.84
7/31/2011 13,472.94 13,478.00 13,380.60
8/31/2011 12,632.15 12,704.00 12,700.91
9/30/2011 11,677.49 11,872.00 11,848.23
10/31/2011 13,014.47 13,102.00 13,031.70
11/30/2011 12,947.02 13,146.00 13,057.64
12/31/2011 13,207.92 13,275.00 13,298.12
1/31/2012 13,707.58 13,752.00 13,721.63
2/29/2012 14,254.01 14,315.00 14,213.61
3/31/2012 14,676.56 14,722.00 14,532.57
4/30/2012 14,526.90 14,592.00 14,479.26
5/31/2012 13,675.02 13,765.00 13,652.32
6/30/2012 14,353.98 14,337.00 14,225.09
7/31/2012 14,502.53 14,468.00 14,457.77
8/31/2012 14,817.41 14,752.00 14,696.08
9/30/2012 15,287.75 15,022.00 15,021.07
10/31/2012 15,212.70 14,814.00 14,925.07
11/30/2012 15,206.39 14,847.00 14,952.67
12/31/2012 15,520.46 14,961.00 15,119.71
1/31/2013 16,529.24 15,797.00 15,931.58
2/28/2013 16,766.49 15,984.00 16,111.13
3/31/2013 17,430.72 16,590.00 16,720.33
4/30/2013 17,694.30 17,032.00 17,105.99
5/31/2013 18,148.44 17,407.00 17,328.81
6/30/2013 17,988.48 17,204.00 17,143.91
7/31/2013 18,959.74 18,069.00 17,933.05
8/31/2013 18,240.47 17,504.00 17,374.82
9/30/2013 18,697.41 17,961.00 17,857.07
10/31/2013 19,516.23 18,785.00 18,587.52
11/30/2013 20,060.69 19,152.00 19,015.41
12/31/2013 20,568.77 19,600.00 19,458.99
1/31/2014 19,838.28 18,948.00 18,715.88
2/28/2014 20,696.14 19,600.00 19,500.34
3/31/2014 21,190.23 20,074.00 19,856.26
4/30/2014 21,391.60 20,317.00 20,055.71
5/31/2014 21,704.88 20,618.00 20,403.56
6/30/2014 22,271.83 21,110.00 20,862.94
7/31/2014 21,892.29 20,610.00 20,410.45
8/31/2014 22,696.94 21,366.00 21,105.67
9/30/2014 22,228.75 20,983.00 20,732.84
10/31/2014 22,728.13 21,428.00 21,127.95
11/30/2014 23,193.50 21,966.00 21,597.71
12/31/2014 23,335.77 21,922.00 21,539.72
1/31/2015 22,402.96 21,139.00 20,852.38
2/28/2015 23,487.03 22,067.00 21,863.81
3/31/2015 23,167.30 21,505.00 21,536.91
4/30/2015 23,383.90 21,954.00 21,790.71
5/31/2015 23,664.92 22,100.00 21,937.03
6/30/2015 23,192.41 21,349.00 21,406.36
7/31/2015 23,294.09 21,703.00 21,668.41
8/31/2015 21,906.78 20,544.00 20,399.21
9/30/2015 21,245.41 20,155.00 19,854.16
10/31/2015 22,848.44 21,653.00 21,314.27
11/30/2015 22,935.89 21,579.00 21,289.64
12/31/2015 22,442.64 21,207.00 20,902.39
1/31/2016 21,283.02 20,530.00 20,070.52
2/29/2016 21,277.59 20,722.00 20,110.32
3/31/2016 22,810.33 22,026.00 21,416.72
4/30/2016 23,289.49 22,194.00 21,689.65
5/31/2016 23,651.23 22,490.00 21,976.76
6/30/2016 23,855.75 23,024.00 22,199.17
7/31/2016 24,548.41 23,516.00 22,778.47
8/31/2016 24,737.69 23,399.00 22,846.06
9/30/2016 24,686.13 23,268.00 22,754.76
10/31/2016 24,304.07 22,904.00 22,386.15
11/30/2016 25,692.18 23,670.00 23,343.34
12/31/2016 26,334.29 24,197.00 23,900.05
1/31/2017 26,521.90 24,393.00 24,099.64
2/28/2017 27,474.94 25,257.00 24,948.54
3/31/2017 27,195.05 25,246.00 24,862.51
4/30/2017 27,144.02 25,273.00 24,983.02
5/31/2017 27,117.41 25,588.00 25,162.39
6/30/2017 27,560.71 25,717.00 25,401.46
7/31/2017 27,927.01 26,034.00 25,763.16
8/31/2017 27,601.70 26,021.00 25,646.38
9/30/2017 28,419.20 26,681.00 26,372.94
10/31/2017 28,625.54 27,159.00 26,728.22
11/30/2017 29,502.10 27,995.00 27,510.51
12/31/2017 29,932.75 28,221.00 27,826.99
1/31/2018 31,090.00 29,282.00 28,922.02
2/28/2018 29,605.42 28,009.00 27,570.97
3/31/2018 29,084.63 27,527.00 27,094.91
4/30/2018 29,180.65 27,570.00 27,214.93
5/31/2018 29,353.87 27,883.00 27,492.10
6/30/2018 29,426.57 27,882.00 27,596.63
7/31/2018 30,591.25 28,940.00 28,690.29
8/31/2018 31,043.40 29,340.00 29,100.52
9/30/2018 31,104.96 29,422.00 29,127.29
10/31/2018 29,494.31 28,002.00 27,623.59
11/30/2018 30,374.87 28,992.00 28,445.20
12/31/2018 27,458.12 26,672.00 25,987.00
1/31/2019 29,595.31 28,470.00 27,779.88
2/28/2019 30,540.92 29,407.00 28,654.91
3/31/2019 30,735.09 29,602.00 28,976.04
4/30/2019 31,825.31 30,452.00 29,926.02
5/31/2019 29,779.03 28,844.00 28,335.83
6/30/2019 31,916.70 30,597.00 30,061.79
7/31/2019 32,181.26 30,753.00 30,392.85
[END CHART]
Data from 7/31/09 through 7/31/19.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Income Stock Fund Shares 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 Equity Income Funds Index reflects the fees and expenses of the
underlying funds included in the index.
================================================================================
6 | USAA INCOME STOCK FUND
================================================================================
o TOP 10 HOLDINGS - 7/31/19 o
(% of Net Assets)
Johnson & Johnson ........................................................ 4.0%
Verizon Communications, Inc. ............................................. 3.5%
Merck & Co., Inc. ........................................................ 3.5%
Cisco Systems, Inc. ...................................................... 3.4%
Walmart, Inc. ............................................................ 3.2%
Procter & Gamble Co. ..................................................... 3.1%
Citigroup, Inc. .......................................................... 2.4%
International Business Machines Corp. .................................... 2.3%
Apple, Inc. .............................................................. 2.1%
Home Depot, Inc. ......................................................... 1.8%
o SECTOR ALLOCATION* - 7/31/19 o
(% of Net Assets)
[PIE CHART OF SECTOR ALLOCATION]
FINANCIAL 23.1%
CONSUMER, NON-CYCLICAL 22.6%
CONSUMER, CYCLICAL 14.9%
COMMUNICATIONS 9.9%
TECHNOLOGY 9.7%
INDUSTRIAL 7.9%
ENERGY 5.8%
UTILITIES 3.5%
BASIC MATERIALS 1.3%
[END CHART]
*Does not include exchange-traded funds and money market instruments.
Percentages are of the net assets of the Fund and may not equal 100%.
Refer to the Portfolio of Investments for a complete list of securities.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
================================================================================
INVESTMENT OVERVIEW | 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 Management Inc. ("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 USAA Asset Management Company ("AMCO")
was acquired by Victory Capital Holdings, Inc., the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
-----------------------------------------------------------------------------
FOR AGAINST ABSTAIN
-----------------------------------------------------------------------------
107,307,574 6,143,419 3,415,495
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
person" as defined in the Investment Company Act of 1940, as amended (1940 Act)
("Interested Trustee"); 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 INCOME STOCK FUND
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
July 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 July 31, 2019:
DIVIDEND RECEIVED LONG-TERM
DEDUCTION (CORPORATE CAPITAL GAIN QUALIFIED INTEREST
SHAREHOLDERS)(1) DISTRIBUTIONS(2) INCOME
--------------------------------------------------------------------------
100% $167,823,000 $1,176,000
--------------------------------------------------------------------------
(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 July 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 INCOME STOCK FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Income Stock Fund (the "Fund") (one of the funds constituting the USAA Mutual
Funds Trust (the "Trust")), including the portfolio of investments, as of July
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 the USAA Mutual Funds Trust) at July 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 July 31, 2019, by correspondence with the custodian and brokers. 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
September 20, 2019
================================================================================
10 | USAA INCOME STOCK FUND
================================================================================
PORTFOLIO OF INVESTMENTS
July 31, 2019
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (99.7%)
COMMON STOCKS (98.7%)
BASIC MATERIALS (1.3%)
----------------------
CHEMICALS (1.0%)
122,900 Air Products & Chemicals, Inc. $ 28,054
----------
MINING (0.3%)
220,400 Newmont Goldcorp Corp. 8,049
----------
Total Basic Materials 36,103
----------
COMMUNICATIONS (9.9%)
---------------------
ADVERTISING (0.5%)
171,100 Omnicom Group, Inc. 13,726
----------
INTERNET (0.4%)
84,900 Expedia Group, Inc. 11,270
----------
MEDIA (1.5%)
431,600 Comcast Corp. "A" 18,632
39,100 FactSet Research Systems, Inc. 10,842
93,200 Walt Disney Co. 13,329
----------
42,803
----------
TELECOMMUNICATIONS (7.5%)
499,900 AT&T, Inc. 17,022
1,701,200 Cisco Systems, Inc. 94,246
1,799,800 Verizon Communications, Inc. 99,475
----------
210,743
----------
Total Communications 278,542
----------
CONSUMER, CYCLICAL (14.9%)
--------------------------
AIRLINES (1.7%)
128,300 Alaska Air Group, Inc. 8,129
450,500 Delta Air Lines, Inc. 27,498
210,900 Southwest Airlines Co. 10,868
----------
46,495
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
APPAREL (0.3%)
89,300 NIKE, Inc."B" $ 7,682
----------
AUTO MANUFACTURERS (2.1%)
3,576,625 Ford Motor Co. 34,085
369,400 General Motors Co. 14,902
161,300 PACCAR, Inc. 11,313
----------
60,300
----------
AUTO PARTS & EQUIPMENT (0.4%)
235,100 Allison Transmission Holdings, Inc. 10,803
----------
HOUSEWARES (0.3%)
121,100 Toro Co. 8,819
----------
RETAIL (10.1%)
113,100 Best Buy Co., Inc. 8,655
110,200 Genuine Parts Co. 10,703
243,100 Home Depot, Inc. 51,948
91,900 Lowe's Companies, Inc. 9,319
65,300 McDonald's Corp. 13,760
450,300 Starbucks Corp. 42,639
179,700 Target Corp. 15,526
178,800 TJX Companies, Inc. 9,755
617,100 Walgreens Boots Alliance, Inc. 33,626
801,800 Walmart, Inc. 88,503
----------
284,434
----------
Total Consumer, Cyclical 418,533
----------
CONSUMER, NON-CYCLICAL (22.6%)
------------------------------
BEVERAGES (0.3%)
65,900 PepsiCo, Inc. 8,423
----------
BIOTECHNOLOGY (1.7%)
249,900 Amgen, Inc. 46,626
----------
COMMERCIAL SERVICES (1.4%)
23,000 MarketAxess Holdings, Inc. 7,752
122,700 Robert Half International, Inc. 7,412
95,600 S&P Global, Inc. 23,417
----------
38,581
----------
COSMETICS/PERSONAL CARE (3.8%)
291,400 Colgate-Palmolive Co. 20,905
727,300 Procter & Gamble Co. 85,851
----------
106,756
----------
================================================================================
12 | USAA INCOME STOCK FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
FOOD (0.7%)
206,400 General Mills, Inc. $ 10,962
127,100 Sysco Corp. 8,715
----------
19,677
----------
HEALTHCARE PRODUCTS (2.9%)
206,600 Abbott Laboratories 17,995
47,300 Becton, Dickinson and Co. 11,958
86,300 Danaher Corp. 12,125
313,500 Medtronic plc 31,958
40,000 Stryker Corp. 8,391
----------
82,427
----------
HEALTHCARE-SERVICES (0.4%)
41,000 Anthem, Inc. 12,079
----------
HOUSEHOLD PRODUCTS/WARES (1.0%)
205,200 Kimberly-Clark Corp. 27,835
----------
PHARMACEUTICALS (10.4%)
769,900 AbbVie, Inc. 51,291
308,600 Cardinal Health, Inc. 14,112
871,200 Johnson & Johnson 113,448
102,100 McKesson Corp. 14,187
1,179,400 Merck & Co., Inc. 97,878
----------
290,916
----------
Total Consumer, Non-cyclical 633,320
----------
ENERGY (5.8%)
-------------
OIL & GAS (4.5%)
426,600 Cabot Oil & Gas Corp. 8,174
241,100 Chevron Corp. 29,682
94,800 EOG Resources, Inc. 8,139
569,800 Exxon Mobil Corp. 42,370
261,900 Occidental Petroleum Corp. 13,451
177,400 Phillips 66 18,194
81,800 Valero Energy Corp. 6,973
----------
126,983
----------
OIL & GAS SERVICES (0.8%)
550,000 Schlumberger Ltd. 21,984
----------
PIPELINES (0.5%)
204,300 ONEOK, Inc. 14,317
----------
Total Energy 163,284
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
FINANCIAL (23.1%)
-----------------
BANKS (9.2%)
394,300 Bank of America Corp. $ 12,097
248,300 Bank of New York Mellon Corp. 11,650
224,000 BB&T Corp. 11,543
950,500 Citigroup, Inc. 67,638
138,000 Comerica, Inc. 10,102
389,600 Fifth Third Bancorp 11,567
1,229,500 Huntington Bancshares, Inc. 17,520
190,900 J.P. Morgan Chase & Co. 22,145
74,600 M&T Bank Corp. 12,253
185,500 PNC Financial Services Group, Inc. 26,508
332,900 U.S. Bancorp. 19,025
510,600 Wells Fargo & Co. 24,718
238,300 Zions Bancorp, N.A. 10,740
----------
257,506
----------
DIVERSIFIED FINANCIAL SERVICES (5.3%)
129,700 American Express Co. 16,131
235,400 Capital One Financial Corp. 21,756
99,845 Cboe Global Markets, Inc. 10,914
95,600 CME Group, Inc. 18,586
223,100 Discover Financial Services 20,021
765,500 Franklin Resources, Inc. 24,978
234,100 Intercontinental Exchange, Inc. 20,568
393,800 Invesco Ltd. 7,557
77,700 Nasdaq, Inc. 7,488
----------
147,999
----------
INSURANCE (5.1%)
395,600 Aflac, Inc. 20,824
225,300 Allstate Corp. 24,197
129,200 American Financial Group, Inc. 13,228
38,800 Everest Re Group Ltd. 9,570
73,200 Hanover Insurance Group, Inc. 9,495
259,600 Hartford Financial Services Group, Inc. 14,961
269,900 MetLife, Inc. 13,338
119,300 Progressive Corp. 9,661
76,000 RenaissanceRe Holdings Ltd. 13,767
93,600 ravelers Companies, Inc. 13,724
----------
142,765
----------
REAL ESTATE (0.4%)
78,600 Jones Lang LaSalle, Inc. 11,451
----------
================================================================================
14 | USAA INCOME STOCK FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
REITS (2.6%)
763,999 Chimera Investment Corp. $ 14,730
60,100 Public Storage 14,590
199,000 Simon Property Group, Inc. 32,278
184,000 Ventas, Inc. 12,381
----------
73,979
----------
SAVINGS & LOANS (0.5%)
802,500 People's United Financial, Inc. 13,177
----------
Total Financial 646,877
----------
INDUSTRIAL (7.9%)
-----------------
AEROSPACE/DEFENSE (1.1%)
86,100 Lockheed Martin Corp. 31,183
----------
BUILDING MATERIALS (0.8%)
259,800 Johnson Controls International plc 11,026
48,200 Lennox International, Inc. 12,362
----------
23,388
----------
ELECTRONICS (1.4%)
92,700 Allegion plc 9,598
168,200 Honeywell International, Inc. 29,008
----------
38,606
----------
ENVIRONMENTAL CONTROL (1.7%)
244,900 Republic Services, Inc. 21,710
228,300 Waste Management, Inc. 26,711
----------
48,421
----------
MACHINERY-DIVERSIFIED (0.8%)
88,800 Cummins, Inc. 14,563
45,300 Rockwell Automation, Inc. 7,284
----------
21,847
----------
MISCELLANEOUS MANUFACTURERS (1.0%)
151,700 Eaton Corp. plc 12,468
104,600 Illinois Tool Works, Inc. 16,133
----------
28,601
----------
TRANSPORTATION (1.1%)
202,300 CH Robinson Worldwide, Inc. 16,939
105,300 United Parcel Service, Inc. "B" 12,580
----------
29,519
----------
Total Industrial 221,565
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
TECHNOLOGY (9.7%)
-----------------
COMPUTERS (4.4%)
282,800 Apple, Inc. $ 60,248
427,490 International Business Machines Corp. 63,371
----------
123,619
----------
SEMICONDUCTORS (3.2%)
329,300 Intel Corp. 16,646
502,500 QUALCOMM, Inc. 36,763
299,100 Texas Instruments, Inc. 37,390
----------
90,799
----------
SOFTWARE (2.1%)
148,300 Activision Blizzard, Inc. 7,228
918,800 Oracle Corp. 51,729
----------
58,957
----------
Total Technology 273,375
----------
UTILITIES (3.5%)
----------------
ELECTRIC (3.5%)
219,900 CMS Energy Corp. 12,802
220,400 Dominion Energy, Inc. 16,373
292,500 Duke Energy Corp. 25,366
291,600 Evergy, Inc. 17,639
156,100 Southern Co. 8,773
198,700 WEC Energy Group, Inc. 16,981
----------
Total Utilities 97,934
----------
Total Common Stocks (cost: $2,438,141) 2,769,533
----------
EXCHANGE-TRADED FUNDS (1.0%)
220,000 iShares Russell 1000 Value ETF 28,257
----------
Total Equity Securities (cost: $2,466,376) 2,797,790
----------
MONEY MARKET INSTRUMENTS (0.2%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.2%)
6,568,169 State Street Institutional Treasury Money Market Fund Premier Class, 2.09%(a)
(cost: $6,568) 6,568
----------
TOTAL INVESTMENTS (COST: $2,472,944) $2,804,358
==========
================================================================================
16 | USAA INCOME STOCK FUND
================================================================================
--------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
--------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $2,769,533 $- $- $2,769,533
Exchange-Traded Funds 28,257 - - 28,257
Money Market Instruments:
Government & U.S. Treasury
Money Market Funds 6,568 - - 6,568
--------------------------------------------------------------------------------------------------------
Total $2,804,358 $- $- $2,804,358
--------------------------------------------------------------------------------------------------------
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 July 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
July 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
REITS Real estate investment trusts - Dividend distributions from REITS may
be recorded as income and later characterized by the REIT at the end
of the fiscal year as capital gains or a return of capital. Thus, the
Fund will estimate the components of distributions from these
securities and revise when actual distributions are known.
o SPECIFIC NOTES
(a) Rate represents the money market fund annualized seven-day yield at
July 31, 2019.
See accompanying notes to financial statements.
================================================================================
18 | USAA INCOME STOCK FUND
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
July 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $2,472,944) $2,804,358
Cash 799
Receivables:
Capital shares sold 396
Victory Capital (Note 8) 4
Dividends and interest 4,986
Other 66
----------
Total assets 2,810,609
----------
LIABILITIES
Payables:
Capital shares redeemed 1,171
Accrued administration and servicing fees 318
Accrued management fees 1,226
Accrued transfer agent's fees 200
Other accrued expenses and payables 176
----------
Total liabilities 3,091
----------
Net assets applicable to capital shares outstanding $2,807,518
==========
NET ASSETS CONSIST OF:
Paid-in capital $2,034,016
Distributable earnings 773,502
----------
Net assets applicable to capital shares outstanding $2,807,518
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $1,707,034/86,291 capital shares
outstanding, no par value) $ 19.78
==========
Institutional Shares (net assets of $1,088,446/55,084
capital shares outstanding, no par value) $ 19.76
==========
R6 Shares (net assets of $12,038/609 capital shares
outstanding, no par value) $ 19.77
==========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 19
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended July 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $933) $ 87,010
Interest 1,548
Securities lending (net) 38
---------
Total income 88,596
---------
EXPENSES
Management fees 13,882
Administration and servicing fees:
Fund Shares 2,504
Institutional Shares 1,095
R6 Shares 6
Transfer agent's fees:
Fund Shares 1,264
Institutional Shares 1,095
R6 Shares 1
Custody and accounting fees:
Fund Shares 194
Institutional Shares 125
R6 Shares 1
Postage:
Fund Shares 68
Institutional Shares 54
Shareholder reporting fees:
Fund Shares 44
Institutional Shares 8
Trustees' fees 37
Registration fees:
Fund Shares 30
Institutional Shares 31
R6 Shares 18
================================================================================
20 | USAA INCOME STOCK FUND
================================================================================
Professional fees $ 99
Other 38
---------
Total expenses 20,594
---------
Expenses reimbursed:
R6 Shares (10)
---------
Net expenses 20,584
---------
NET INVESTMENT INCOME 68,012
---------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY
Net realized gain on:
Investments 486,558
Foreign currency transactions 9
Change in net unrealized appreciation/(depreciation) (375,906)
---------
Net realized and unrealized gain 110,661
---------
Increase in net assets resulting from operations $ 178,673
=========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 21
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended July 31,
------------------------------------------------------------------------------------------------
2019 2018
------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 68,012 $ 61,566
Net realized gain on investments 486,558 159,509
Net realized gain (loss) on foreign currency transactions 9 (2)
Change in net unrealized appreciation/(depreciation) of:
Investments (375,906) 76,550
Foreign currency translations - (1)
------------------------
Increase in net assets resulting from operations 178,673 297,622
------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (133,413) (131,173)
Institutional Shares (86,990) (84,820)
R6 Shares (991) (973)
------------------------
Distributions to shareholders (221,394) (216,966)
------------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 7)
Fund Shares 25,961 13,921
Institutional Shares 63,566 (94,681)
R6 Shares (434) 7,300
------------------------
Total net increase (decrease) in net assets from capital
share transactions 89,093 (73,460)
------------------------
Net increase in net assets 46,372 7,196
NET ASSETS
Beginning of year 2,761,146 2,753,950
------------------------
End of year $2,807,518 $2,761,146
========================
See accompanying notes to financial statements.
================================================================================
22 | USAA INCOME STOCK FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
July 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 Income Stock 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 current income
with the prospect of increasing dividend income and the potential for capital
appreciation.
The Fund consists of three classes of shares: Income Stock Fund Shares (Fund
Shares), Income Stock Fund Institutional Shares (Institutional Shares), and
Income Stock Fund R6 Shares (R6 Shares). Each class of shares has equal rights
to assets and earnings, except that each class bears certain class-related
expenses specific to the particular class. These expenses include administration
and servicing fees, transfer agent fees, postage, shareholder reporting fees,
and certain registration and custodian fees. Expenses not attributable to a
specific class, income, and realized gains or losses on investments are
allocated to each class of shares based on each class' relative net assets. Each
class has exclusive voting rights on matters related solely to that class and
separate voting rights on matters that relate to all classes. The Institutional
Shares are available for investment through a USAA discretionary managed account
program and certain advisory programs sponsored by financial intermediaries,
such as brokerage firms, investment advisors, financial planners, third-party
administrators, and insurance companies. Institutional Shares also are available
to institutional
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
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 an affiliate fund participating in a
fund-of-funds investment strategy (affiliated funds). The R6 Shares are
available for investment by participants in employer-sponsored retirement plans
where a financial intermediary provides retirement recordkeeping services to
plan participants and to endowment funds and foundations.
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of USAA Asset Management Company (AMCO), the investment adviser to the
Fund, and USAA Transfer Agency Company, d/b/a USAA Shareholder Account Services
(SAS), the transfer agent to the Fund, announced that AMCO and SAS would be
acquired by Victory Capital Holdings, Inc., a global investment management firm
headquartered in Cleveland, Ohio (the Transaction) on July 1, 2019. Effective
August 5, 2019, Citibank, N.A. is the new custodian for the USAA Mutual Funds. 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. 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.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Pricing 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
================================================================================
24 | USAA INCOME STOCK FUND
================================================================================
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 closing bid price
generally is used for U.S. listed equities and the average of the bid
and asked prices is used for foreign listed equities. 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
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 generally are priced but 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 bid or the last sales price to value a
security when, in the Service's judgment, these prices are readily
available and are representative of the security's market value. For
many securities, such prices are not readily available. The Service
generally prices those securities based on methods which include
consideration of yields or prices of securities of comparable quality,
coupon, maturity, and type; indications as to values from dealers in
securities; and general market conditions. Generally, debt securities
are categorized in Level 2 of the fair value hierarchy; however, to the
extent the valuations include significant unobservable inputs, the
securities would be categorized in Level 3.
6. Repurchase agreements are valued at cost.
7. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has 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
================================================================================
26 | USAA INCOME STOCK FUND
================================================================================
quotations from the primary market in which they are traded and the
actual price realized from the sale of a security may differ materially
from the fair value price. Valuing these securities at fair value is
intended to cause the Fund's NAV to be more reliable than it otherwise
would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
broker-dealers, other pricing services, or widely used quotation
systems. General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and duration
of any restrictions on disposition of the securities, evaluation of
credit quality, and an evaluation of the forces that influenced the
market in which the securities are purchased and sold.
B. FAIR VALUE MEASUREMENTS - Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the Portfolio of Investments is
based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted)
in active markets for identical securities.
Level 2 - inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
that are observable for the securities, either directly or indirectly, and
market-corroborated inputs such as market indexes.
Level 3 - inputs to the valuation methodology are unobservable and
significant to the fair value measurement, including the Manager's own
assumptions in determining the fair value.
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 | 27
================================================================================
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 July 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
================================================================================
28 | USAA INCOME STOCK FUND
================================================================================
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the exchange
rate obtained from an independent pricing service on the respective
dates of such transactions.
2. Market value of securities, other assets, and liabilities at the
exchange rate obtained from an independent pricing service on a daily
basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the amounts received. At
the end of the Fund's fiscal year, net realized foreign currency
gains/losses are reclassified from accumulated net realized gains/losses to
accumulated undistributed net investment income on the Statement of Assets
and Liabilities, as such amounts are treated as ordinary income/loss for
federal income tax purposes. Net unrealized foreign currency exchange
gains/losses arise from changes in the value of assets and liabilities,
other than investments in securities, resulting from changes in the exchange
rate.
G. EXPENSES PAID INDIRECTLY - A portion of the brokerage commissions that
the Fund pays may be recaptured as a credit that is tracked and used by the
custodian to directly reduce expenses paid by the Fund. Effective September
30, 2018, the commission recapture program ended. For the year ended July
31, 2019, the Fund did not receive any brokerage commission recapture
credits.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
H. INDEMNIFICATIONS - Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities arising out of the
performance of their duties to the Trust. In addition, in the normal course
of business, the Trust enters into contracts that contain a variety of
representations and warranties that provide general indemnifications. The
Trust's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Trust that have not yet
occurred. However, the Trust expects the risk of loss to be remote.
I. USE OF ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINE OF CREDIT
The Fund participates, along with other funds of the Trust and 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. 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.
For the period July 1, 2019 to July 31, 2019, the Fund paid Citibank facility
fees of $1,000, which represents 2.0% of the total fees paid to Citibank by the
funds of the Trusts. The Fund had no borrowings under this agreement during the
period July 1, 2019 to July 31, 2019. Effective July 1, 2019, the line of credit
among the Trust, with respect to its funds, and USAA Capital Corporation (CAPCO)
terminated. For the period from August 1, 2018 to
================================================================================
30 | USAA INCOME STOCK FUND
================================================================================
June 30, 2019, the Fund paid CAPCO facility fees of $23,000, 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 period August 1, 2018 to June 30,
2019.
(3) INTERFUND LENDING
Effective July 1, 2019, the Trust relies on an exemptive order granted to
Victory Capital and its affiliated funds by the U.S. Securities and Exchange
Commission (SEC) in March 2017 (the 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 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 Order, by averaging the current repurchase
agreement rate and the current bank loan rate. For the period July 1, 2019 to
July 31, 2019, the Fund did not lend.
(4) 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, partnership basis
ordinary recapture, partnership non deductible expenses, non-REIT return of
capital dividend, REIT return of capital dividend, REIT capital gain dividend,
equalization, distribution re-designations, and additional adjustments resulted
in reclassifications to the Statement of Assets and Liabilities to decrease
distributable earnings by $11,316,000 and increase paid in capital by
$11,316,000. These reclassifications had no effect on net assets.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 31
================================================================================
The tax character of distributions paid during the years ended July 31, 2019,
and 2018, was as follows:
2019 2018
--------------------------------------
Ordinary income* $ 64,890,000 $ 60,589,000
Long-term realized capital gains 156,504,000 156,377,000
------------ ------------
Total distributions paid $221,394,000 $216,966,000
============ ============
As of July 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 3,863,000
Undistributed long-term capital gains 437,477,000
Unrealized appreciation of investments 332,163,000
*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.
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are made
annually in the succeeding fiscal year or as otherwise required to avoid the
payment of federal taxes.
At July 31, 2019, the Fund had no capital loss carryforwards, for federal income
tax purposes.
TAX BASIS OF INVESTMENTS - At July 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 Income Stock Fund $2,472,195,000 $373,402,000 $(41,239,000) $332,163,000
================================================================================
32 | USAA INCOME STOCK FUND
================================================================================
(5) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended July 31, 2019, were $2,343,926,000 and
$2,334,613,000, respectively.
(6) 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 July 31,
2019, the Fund had no securities on loan.
(7) CAPITAL SHARE TRANSACTIONS
At July 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 fund-of-funds as well as other persons or
================================================================================
NOTES TO FINANCIAL STATEMENTS | 33
================================================================================
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
JULY 31, 2019 JULY 31, 2018
-----------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------
FUND SHARES:
Shares sold 4,818 $ 93,141 4,993 $ 99,734
Shares issued from
reinvested dividends 6,925 128,119 6,350 125,905
Shares redeemed (10,114) (195,299) (10,601) (211,718)
-----------------------------------------------
Net increase from capital
share transactions 1,629 $ 25,961 742 $ 13,921
===============================================
INSTITUTIONAL SHARES:
Shares sold 11,479 $ 216,857 5,540 $ 110,461
Shares issued from
reinvested dividends 4,705 86,971 4,281 84,794
Shares redeemed (12,280) (240,262) (14,446) (289,936)
-----------------------------------------------
Net increase (decrease) from capital
share transactions 3,904 $ 63,566 (4,625) $ (94,681)
===============================================
R6 SHARES:
Shares sold 32 $ 625 374 $ 7,678
Shares issued from
reinvested dividends 30 550 27 533
Shares redeemed (83) (1,609) (46) (911)
-----------------------------------------------
Net increase (decrease) from capital
share transactions (21) $ (434) 355 $ 7,300
===============================================
(8) TRANSACTIONS WITH MANAGER
MANAGEMENT FEES - The Manager provides investment management services to the
Fund pursuant to an Advisory Agreement. Effective July 1, 2019, the Trust relies
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
================================================================================
34 | USAA INCOME STOCK FUND
================================================================================
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.
The Manager monitors each subadviser's performance through quantitative and
qualitative analysis and periodically reports to the Board as to whether each
subadviser's agreement should be renewed, terminated, or modified. The Manager
is also responsible for determining the asset allocation for the subadviser(s).
The allocation for each subadviser could range from 0% to 100% of the Fund's
assets, and the Manager could change the allocations without shareholder
approval.
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee is accrued daily and paid monthly at
an annualized rate of 0.50% of the Fund's average daily net assets.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Equity Income Funds Index. The Lipper Equity Income Funds
Index tracks the total return performance of funds within the Lipper Equity
Income Funds category.
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
December 1, 2016, and includes the performance of the Fund Shares for periods
prior to December 1, 2016. The following table is utilized to determine the
extent of the performance adjustment:
OVER/UNDER PERFORMANCE
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
--------------------------------------------------------------------------------
+/- 100 to 400 +/- 4
+/- 401 to 700 +/- 5
+/- 701 and greater +/- 6
(1)Based on the difference between average annual performance of the relevant
share class of the Fund and its relevant Lipper index, rounded to the nearest
basis point. Average daily net assets of the share class are calculated over
a rolling 36-month period.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 35
================================================================================
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 Equity Income Funds Index over that period, even if the
class had overall negative returns during the performance period.
Under the investment advisory agreement with the Manager that took effect on
July 1, 2019, no performance adjustments will be made for the period beginning
July 1, 2019, through June 30, 2020. Only performance beginning as of July 1,
2019, and thereafter will be utilized in calculating future performance
adjustments.
For the period from August 1, 2018 to June 30, 2019, the Fund incurred
management fees, paid or payable to AMCO, of $12,656,000, which included a
performance adjustment for the R6 Shares of less than $500. For the R6 Shares
the performance adjustments was less than 0.01%. The Fund Shares and
Institutional Shares did not incur any performance adjustment. For the period
July 1, 2019 to July 31, 2019, the Fund incurred management fees, paid or
payable to Victory Capital of $1,226,000, which included no performance
adjustments.
SUBADVISORY ARRANGEMENT(S) - Effective July 1, 2019, Victory Capital entered
into a Subadvisory Agreement with Epoch Investment Partners, Inc. (Epoch), under
which Epoch directs the investment and reinvestment of a portion of the Fund's
assets (as allocated from time to time by the Manager). This arrangement
provides for monthly fees that are paid by the Manager. The Manager (not the
Fund) pays the subadviser fees. For the period July 1, 2019 to July 31, 2019,
Victory Capital didn't incur any subadvisory fees with respect to the Fund,
paid or payable to Epoch.
Prior to July 1, 2019, AMCO had entered into an Investment Subadvisory Agreement
with Epoch, under which Epoch directed the investment and
================================================================================
36 | USAA INCOME STOCK FUND
================================================================================
reinvestment of a portion of the Fund's assets (as allocated from time to time
by the Manager). This arrangement provides monthly fees that are paid by AMCO.
AMCO (not the Fund) pays Epoch a subadvisory fee in the annual amount of 0.30%
of the Fund's average daily net assets for the first $600 million of assets that
Epoch manages, 0.20% on the next $900 million of assets, and 0.18% on assets
over $1.5 billion that Epoch manages. For the period from August 1, 2018 to June
30, 2019, AMCO incurred subadvisory fees with respect to the Fund, paid or
payable to Epoch of $2,637,000.
ADMINISTRATION AND SERVICING FEES - Effective July 1, 2019, Victory Capital is
obligated on a continuous basis to provide administrative services to the Fund.
The Manager provides certain administration and servicing functions for the
Fund. For such services, the Manager receives a fee accrued daily and paid
monthly at an annualized rate of 0.15% of average daily net assets of the Fund
Shares, 0.10% of average daily net assets of the Institutional Shares, and 0.05%
of average daily net assets of the R6 Shares. For the period from August 1, 2018
to June 30, 2019, the Fund Shares, Institutional Shares, and R6 Shares incurred
administration and servicing fees, paid or payable to AMCO, of $2,285,000,
$997,000, and $5,000, respectively. For the period July 1, 2019 to July 31,
2019, the Fund Shares, Institutional Shares, and R6 Shares incurred
administration and servicing fees, paid or payable to Victory Capital of
$219,000, $98,000 and $1,000, respectively.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, AMCO also provided certain compliance and legal
services for the benefit of the Fund. The Board approved the reimbursement of a
portion of these expenses incurred by AMCO.
Effective July 1, 2019, these services are covered under a Compliance Services
Agreement between the Trust and Victory Capital. For the period from August 1,
2018 to June 30, 2019, the Fund reimbursed AMCO $9,000 for these compliance and
legal services. For the period July 1, 2019 to July 31, 2019, the Fund's portion
of fees paid to Victory Capital under the Compliance Service Agreement was
$1,000. These expenses are included in the professional fees on the Fund's
Statement of Operations.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 37
================================================================================
EXPENSE LIMITATION - Effective July 1, 2019, the Manager has contractually
agreed to waive its management fee and/or reimburse expenses so that the total
annual operating expenses (excluding certain items such as interest, taxes and
brokerage commissions) do not exceed 0.76% of the Fund Shares, 0.72% of the
Institutional Shares and 0.65% of the R6 Shares, through at least June 30, 2021.
The Manager is permitted 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 limits in effect at
the time of: (a) the original waiver or expense reimbursement; or (b) the
recoupment, after giving effect to the recoupment amount. The amount of any
waivers or reimbursements and the amount of any recoupment is calculated without
regard to the impact of any performance adjustment to the Fund's management fee.
This waiver agreement may only be terminated by the Fund's Board of Trustees.
Prior to July 1, 2019, AMCO agreed to limit the total annual operating expenses
of the R6 Shares to 0.65%, respectively, of their average daily net assets,
excluding extraordinary expenses and before reductions of any expenses paid
indirectly, and to reimburse the R6 Shares for all expenses in excess of those
amounts. For the period from August 1, 2018 to June 30, 2019, the R6 Shares
incurred reimbursable expenses from AMCO of $7,000. For the period July 1, 2019
to July 31, 2019, the R6 Shares incurred reimbursable expenses of $4,000, all of
which was receivable from the Manager.
TRANSFER AGENT'S FEES - Victory Capital Transfer Agency, Inc. (VCTA), (formerly,
USAA Shareholder Account Services (SAS)) provides transfer agency services to
the Fund. VCTA, an affiliate of the Manager, provides transfer agent services to
the Fund Shares based on an annual charge of $23 per shareholder account plus
out-of-pocket expenses. VCTA 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 July 31, 2019, the Fund
Shares, Institutional Shares, and R6 Shares incurred transfer agent's fees, paid
or payable to VCTA, of $1,264,000, $1,095,000, and $1,000, respectively.
================================================================================
38 | USAA INCOME STOCK FUND
================================================================================
UNDERWRITING SERVICES - Effective July 1, 2019, the Trust has an agreement with
Victory Capital Advisers, Inc. (VCA), an affiliate of the Manager for exclusive
underwriting and distribution of the Fund's shares on a continuing best effort
basis. This agreement provides that VCA receive no fee or other compensation for
such distribution services. Prior to July 1, 2019, USAA Investment Management
Company (IMCO) provided exclusive underwriting and distribution of the Fund's
shares on a continuing best-efforts basis and received no fee or other
compensation for these services.
(9) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other affiliated
Funds in which the affiliated fund-of-funds invest. The fund-of-funds do not
invest in the underlying affiliated 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 July 31, 2019, the fund-of-funds owned
the following percentages of the total outstanding shares of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
---------------------------------------------------------------------------------
Cornerstone Conservative 0.1
Cornerstone Equity 0.3
Target Retirement Income 0.1
Target Retirement 2020 0.2
Target Retirement 2030 0.8
Target Retirement 2040 1.0
Target Retirement 2050 0.6
Target Retirement 2060 0.1
Effective July 1, 2019, Victory Capital replaced AMCO as the Fund's investment
adviser and began managing the Fund. Prior to July 1, 2019, AMCO was 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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 39
================================================================================
(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. The Manager has determined there is no significant
impact on the Fund's financial statements and various filings.
(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.
================================================================================
40 | USAA INCOME STOCK FUND
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 31,
-------------------------------------------------------------------------
2019 2018 2017 2016 2015
-------------------------------------------------------------------------
Net asset value at
beginning of period $ 20.24 $ 19.68 $ 18.18 $ 17.79 $ 17.72
-------------------------------------------------------------------------
Income from investment
operations:
Net investment income .43 .40 .42 .40 .44
Net realized and
unrealized gain .70 1.74 1.51 .97 .51
-------------------------------------------------------------------------
Total from investment
operations 1.13 2.14 1.93 1.37 .95
-------------------------------------------------------------------------
Less distributions from:
Net investment income (.44) (.40) (.43) (.40) (.46)
Realized capital gains (1.15) (1.18) - (.58) (.42)
-------------------------------------------------------------------------
Total distributions (1.59) (1.58) (.43) (.98) (.88)
-------------------------------------------------------------------------
Net asset value at
end of period $ 19.78 $ 20.24 $ 19.68 $ 18.18 $ 17.79
=========================================================================
Total return (%)* 6.26 11.16 10.71 8.29 5.36
Net assets at end
of period (000) $1,707,034 $1,713,558 $1,651,374 $1,564,900 $1,657,268
Ratios to average
daily net assets:**
Expenses (%)(a) .75(d) .76(b) .77(b) .80(b) .79(b)
Expenses, excluding
reimbursements (%)(a) .75 .76(b) .77(b) .80(b) .79(b)
Net investment income (%) 2.44 2.19 2.24 2.42 2.38
Portfolio turnover (%) 86(c) 23 23 19 12
* 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 July 31, 2019, average daily net assets were
$1,669,245,000.
(a) Does not include acquired fund fees, if any.
(b) Reflects total annual operating expenses of the Fund Shares before
reductions of any expenses paid indirectly. The Fund Shares' expenses paid
indirectly decreased the expense ratio by less than 0.01%.
(c) Reflects increased trading activity due to current year transition or asset
allocation shift.
(d) Effective July, 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Fund Shares to 0.76% of the Fund Shares' average
daily net assets.
================================================================================
FINANCIAL HIGHLIGHTS | 41
================================================================================
INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 31,
-------------------------------------------------------------------------
2019 2018 2017 2016 2015
-------------------------------------------------------------------------
Net asset value at
beginning of period $ 20.22 $ 19.66 $ 18.16 $ 17.77 $ 17.71
-------------------------------------------------------------------------
Income from investment
operations:
Net investment income .43 .41 .43 .40 .45
Net realized and
unrealized gain .70 1.73 1.50 .98 .50
-------------------------------------------------------------------------
Total from investment
operations 1.13 2.14 1.93 1.38 .95
-------------------------------------------------------------------------
Less distributions from:
Net investment income (.44) (.40) (.43) (.41) (.47)
Realized capital gains (1.15) (1.18) - (.58) (.42)
-------------------------------------------------------------------------
Total distributions (1.59) (1.58) (.43) (.99) (.89)
-------------------------------------------------------------------------
Net asset value at
end of period $ 19.76 $ 20.22 $ 19.66 $ 18.16 $ 17.77
=========================================================================
Total return (%)* 6.30 11.21 10.76 8.36 5.37
Net assets at end
of period (000) $1,088,446 $1,034,842 $1,097,164 $1,158,385 $1,080,528
Ratios to average
daily net assets:**
Expenses (%)(a) .73(d) .72(b) .73(b) .75(b) .73(b)
Expenses, excluding
reimbursements (%)(a) .73 .72(b) .73(b) .75(b) .73(b)
Net investment income (%) 2.47 2.22 2.30 2.47 2.45
Portfolio turnover (%) 86(c) 23 23 19 12
* 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 July 31, 2019, average daily net assets were
$1,095,233,000.
(a) Does not include acquired fund fees, if any.
(b) Reflects total annual operating expenses of the Institutional Shares before
reductions of any expenses paid indirectly. The Institutional Shares'
expenses paid indirectly decreased the expense ratios by less than 0.01%.
(c) Reflects increased trading activity due to current year transition or asset
allocation shift.
(d) Effective July, 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Institutional Shares to 0.72% of the Institutional
Shares' average daily net assets.
================================================================================
42 | USAA INCOME STOCK FUND
================================================================================
R6 SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
PERIOD ENDED
YEAR ENDED JULY 31, JULY 31,
-------------------------------------------------
2019 2018 2017***
-------------------------------------------------
Net asset value at beginning of period $ 20.23 $ 19.67 $18.17
---------------------------------------------
Income from investment operations:
Net investment income .45 .47 .27
Net realized and unrealized gain .69 1.69 1.60
---------------------------------------------
Total from investment operations 1.14 2.16 1.87
---------------------------------------------
Less distributions from:
Net investment income (.45) (.42) (.37)
Realized capital gains (1.15) (1.18) -
---------------------------------------------
Total distributions (1.60) (1.60) (.37)
---------------------------------------------
Net asset value at end of period $ 19.77 $ 20.23 $19.67
=============================================
Total return (%)* 6.37 11.31 10.36
Net assets at end of period (000) $12,038 $12,746 $5,412
Ratios to average daily net assets:**
Expenses (%)(a) .65(e) .65(b) .65(b),(c)
Expenses, excluding reimbursements (%)(a) .73 .90(b) 1.24(b),(c)
Net investment income (%) 2.54 2.33 2.13(c)
Portfolio turnover (%) 86(d) 23 23
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in
accordance with U.S. generally accepted accounting principles and could
differ from the Lipper reported return. Total returns for periods of less
than one year are not annualized.
** For the year ended July 31, 2019, average daily net assets were
$12,046,000.
*** R6 Shares commenced operations on December 1, 2016.
(a) Does not include acquired fund fees, if any.
(b) Reflects total annual operating expenses of the R6 Shares before reductions
of any expenses paid indirectly. The R6 Shares' expenses paid indirectly
decreased the expense ratios by less than 0.01%
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) Reflects increased trading activity due to current year transition or asset
allocation shift.
(e) Effective July 1, 2019 the Manager has voluntarily agreed to limit the
annual expenses of the R6 Shares to 0.65% of the R6 Shares' average daily
net assets.
================================================================================
FINANCIAL HIGHLIGHTS | 43
================================================================================
EXPENSE EXAMPLE
July 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 February 1, 2019, through
July 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
================================================================================
44 | USAA INCOME STOCK FUND
================================================================================
use this information to compare the ongoing costs of investing in the Fund and
other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled "hypothetical"
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if these direct
costs were included, your costs would have been higher.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE FEBRUARY 1, 2019 -
FEBRUARY 1, 2019 JULY 31, 2019 JULY 31, 2019
----------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,080.20 $3.87
Hypothetical
(5% return before expenses) 1,000.00 1,021.08 3.76
INSTITUTIONAL SHARES
Actual 1,000.00 1,080.40** 3.77**
Hypothetical
(5% return before expenses) 1,000.00 1,021.17** 3.66**
R6 SHARES
Actual 1,000.00 1,080.80 3.35
Hypothetical
(5% return before expenses) 1,000.00 1,021.57 3.26
*Expenses are equal to the annualized expense ratio of 0.75% for Fund Shares,
0.73% for Institutional Shares, and 0.65% for R6 Shares, which are net of any
reimbursements and expenses paid indirectly, multiplied by the average account
value over the period, multiplied by 181 days/365 days (to reflect the
one-half-year period). The Fund's actual ending account values are based on
its actual total returns of 8.02% for Fund Shares, 8.04% for Institutional
Shares, and 8.08% for R6 Shares for the six-month period of February 1, 2019,
through July 31, 2019.
**The Fund's annualized expense ratio of 0.73% for Institutional Shares above
reflects a change effective July 1, 2019, to implement the Manager's expense
limitation of 0.72% for the Institutional Shares's
================================================================================
EXPENSE EXAMPLE | 45
================================================================================
average annual net assets. Had the expense limitation of 0.72% for the
Institutional Shares, which is net of expenses paid indirectly, been in effect
for the entire six-month period of February 1, 2019, through July 31, 2019,
the values in the table above would be as shown below.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE FEBRUARY 1, 2019 -
FEBRUARY 1, 2019 JULY 31, 2019 JULY 31, 2019
----------------------------------------------------------------
INSTITUTIONAL SHARES
Actual $1,000.00 $1,080.40 $3.71
Hypothetical
(5% return before expenses) 1,000.00 1,021.22 3.61
================================================================================
46 | USAA INCOME STOCK FUND
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
July 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.
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with
================================================================================
ADVISORY AGREEMENT(S) | 47
================================================================================
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 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
================================================================================
48 | USAA INCOME STOCK FUND
================================================================================
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.
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
================================================================================
ADVISORY AGREEMENT(S) | 49
================================================================================
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).
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.
================================================================================
50 | USAA INCOME STOCK FUND
================================================================================
o The portfolio managers at AMCO that manage the Fixed Income Funds(1)
as well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be
advised by Victory Capital through its Victory Solutions platform,
Victory Capital proposes that the same subadvisers be retained
Post-Transaction, although Victory Capital may change the allocation to
a particular subadviser Post-Transaction. No changes are expected to
the portfolio managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's businesses to
Victory Capital. Victory Capital and USAA expect to
(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) | 51
================================================================================
enter into a transition services agreement under which USAA will
continue to provide Victory Capital with certain services that are
currently provided by USAA to AMCO and the USAA Transfer Agent for a
specified period of time after the closing of the Transaction to assist
Victory Capital in transitioning the USAA member distribution channel
and member support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital is capable of providing
the same level of investment management services
================================================================================
52 | USAA INCOME STOCK FUND
================================================================================
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 AMCO personnel who had been extended offers may not accept such
offers and personnel changes may occur in the future in the ordinary course. The
Board considered the resources and infrastructure that Victory Capital intends
to devote to its compliance program to ensure compliance with applicable laws
and regulations, as well as Victory Capital's commitment to those programs. The
Board also considered the resources that Victory Capital has devoted to its risk
management program and cybersecurity program. The Board also reviewed
information provided by Victory Capital related to its business, legal, and
regulatory affairs. This review considered the resources available to Victory
Capital to provide the services specified under the New Advisory Agreement. The
Board considered Victory Capital's financial condition, including the financing
of the Transaction, and noted that Victory Capital is expected to be able to
provide a high level of service to the Funds and continuously invest and
re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund,
Growth & Income Fund, Income Stock Fund, Global Equity Income Fund, and
Precious Metals and Minerals Fund.
================================================================================
ADVISORY AGREEMENT(S) | 53
================================================================================
The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored
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54 | USAA INCOME STOCK FUND
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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 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
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ADVISORY AGREEMENT(S) | 55
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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.
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
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56 | USAA INCOME STOCK FUND
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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.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
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ADVISORY AGREEMENT(S) | 57
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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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58 | USAA INCOME STOCK FUND
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND AMCO)
July 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.
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 AMCO and the
Subadvisory Agreement between AMCO and Epoch Investment Partners, 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
AMCO 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 AMCO's revenues and
(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"). Effective July 1, 2019, upon the closing of the
transaction whereby AMCO acquired by Victory Capital Holdings, Inc., the
parent company of Victory Capital, the Advisory Agreement between the Trust
and AMCO and the Sub-advisory Agreement with the Subadviser terminated and
the new investment advisory agreement between the Trust and Victory Capital
went into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are discussed above.
Effective June 30, 2019, the Subadviser no longer manages any portion of the
Fund.
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ADVISORY AGREEMENT(S) | 59
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costs of providing services to the Fund and compensation paid to affiliates of
AMCO; and (iii) information about AMCO's and the 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 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 AMCO 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 AMCO 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 AMCO's profitability with respect to the Fund. However, the Board
noted that the evaluation process with respect to AMCO 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 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.
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60 | USAA INCOME STOCK FUND
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NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent, and
quality of the services provided by AMCO under the Advisory Agreement, the Board
reviewed information provided by AMCO relating to its operations and personnel.
The Board also took into account its knowledge of AMCO's management and the
quality of the performance of AMCO's duties through Board meetings, discussions,
and reports during the preceding year. The Board considered the fees paid to
AMCO and the services provided to the Fund by AMCO under the Advisory Agreement,
as well as other services provided by AMCO and its affiliates under other
agreements, and the personnel who provide these services. In addition to the
investment advisory services provided to the Fund, AMCO 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 AMCO 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 AMCO, including the
professional experience and qualifications of its senior and investment
personnel, as well as current staffing levels. The Board considered AMCO's
process for monitoring the performance of the Subadviser and AMCO's timeliness
in responding to performance issues. The allocation of the Fund's brokerage,
including AMCO's process for monitoring "best execution" and the utilization of
"soft dollars," also was considered.
AMCO's role in coordinating the activities of the Fund's other service providers
also was considered. The Board also considered AMCO's risk management processes.
The Board considered AMCO'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 AMCO 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 AMCO and its affiliates, including AMCO's oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The
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ADVISORY AGREEMENT(S) | 61
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Trustees, guided also by information obtained from their experiences as trustees
of the Trust, also focused on the quality of AMCO'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
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 AMCO and its affiliates, including the high
quality of services received by the Fund from AMCO. The Board also noted the
level and method of computing the management fee. The Board also took into
account that the subadvisory fee under the Subadvisory Agreement is paid by
AMCO. The Board also considered and discussed information about the
Subadviser's fee, including the amount of management fees retained by AMCO after
payment of the subadvisory 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
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62 | USAA INCOME STOCK FUND
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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 of its performance universe and below 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- and three-year periods ended
December 31, 2018, was in the top 40% of its performance universe for the
five-year period ended December 31, 2018, and was in the bottom 50% 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 management fee. The information considered by the Board
included operating profit margin information for AMCO'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 AMCO
pays the subadvisory fees. The Trustees reviewed the profitability of AMCO'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 AMCO, the Board also considered the fact that AMCO 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 AMCO from its relationship with the Trust, including that
AMCO may derive reputational and other benefits from its association with the
Fund. The Trustees recognized that AMCO 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.
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ADVISORY AGREEMENT(S) | 63
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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 discussion of
the current advisory fee structure. The Board also considered that AMCO 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 the Fund may realize
additional 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 AMCO, among others: (i) AMCO has demonstrated that it
possesses the capability and resources to perform the duties required of it
under the Advisory Agreement; (ii) AMCO maintains an appropriate compliance
program; (iii) the performance of the Fund is reasonable in relation to the
performance of funds with similar investment objectives and to relevant indices;
(iv) the Fund's advisory expenses are reasonable in relation to those of similar
funds and to the services to be provided by AMCO; and (v) AMCO's 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 AMCO
and the type of fund. Based on its conclusions, the Board determined that the
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 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
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64 | USAA INCOME STOCK FUND
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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 considered, based on the materials provided to them by
the Subadviser, whether the method of compensating portfolio managers is
reasonable and includes mechanisms to prevent a manager with underperformance
from taking undue risks. 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 AMCO's monitoring processes of the Subadviser
include: (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 AMCO. The Trustees also relied on the ability of AMCO to negotiate
the Subadvisory Agreement and the fees thereunder at arm's length. For the above
reasons, the Board 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
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ADVISORY AGREEMENT(S) | 65
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Subadvisory Agreement, although the Board noted that the Subadvisory Agreement
contains breakpoints in its fee schedule.
SUBADVISORY FEES AND 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 AMCO and
that, in turn, AMCO pays subadvisory fees to the Subadviser. As noted above, the
Board considered 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 AMCO's experience and
resources in monitoring the performance, investment style, and risk-adjusted
performance of the Subadviser. The Board was mindful of AMCO's focus on the
Subadviser's performance. The Board also noted the Subadviser's 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 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 similar investment objectives 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 AMCO 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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66 | USAA INCOME STOCK 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 | 67
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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 of 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), (08/11-06/19); Director of USAA Investment
Management Company (IMCO) (09/09-present); Chairman of Board of IMCO
(4/13-present); President and Director of USAA Shareholder Account Services
(SAS) (10/09-06/19); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director and Vice Chairman of FPS
(12/13-present); President and Director of USAA Investment Corporation (ICORP)
(03/10-present); Chairman of Board of ICORP (12/31-present); Director of USAA
Financial Advisors, Inc. (FAI) (12/13-present); Chairman of Board of FAI
(3/15-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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68 | USAA INCOME STOCK 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
--------------------------------------------------------------------------------
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
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 69
================================================================================
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.
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.
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
================================================================================
70 | USAA INCOME STOCK FUND
================================================================================
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 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.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 71
================================================================================
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 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.
================================================================================
72 | USAA INCOME STOCK FUND
================================================================================
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 was 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 | 73
================================================================================
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).
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Executive Director, Victory Capital Management Inc. (7/1/19-present); Treasurer,
USAA ETF Trust (09/18-06/19); Executive Director, Investment and Financial
Administration, USAA (04/12-06/30/19); Assistant Treasurer,
================================================================================
74 | USAA INCOME STOCK FUND
================================================================================
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
Director, Accounting and Finance, Victory Capital Management Inc.
(7/1/19-present); Assistant Treasurer, USAA ETF Trust (09/18-06/19);
Accounting/Financial Director, USAA (12/13-06/30/19).
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).
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).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 75
================================================================================
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 111 West Houston St., Suite 1901
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
Copies of the Victory Capital Management Inc.'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
--------------------------------------------------------------------------------
July 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA Intermediate-Term Bond Fund
FUND INSTITUTIONAL ADVISER R6
SHARES SHARES SHARES SHARES
USIBX UIITX UITBX URIBX
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
". . . NOW MAY BE AN OPPORTUNE TIME FOR
INVESTORS TO ENSURE THAT THEIR PORTFOLIOS ARE WELL [PHOTO OF BROOKS ENGLEHARDT]
DIVERSIFIED AND THAT THEIR OVERALL ALLOCATION IS
APPROPRIATE FOR THEIR PARTICULAR RISK APPETITE."
--------------------------------------------------------------------------------
SEPTEMBER 2019
Although the bull market in equities has continued running, it was not without a
few missteps. Trade turmoil, questions surrounding global economic growth,
changing monetary policy, and geopolitical disputes have all led to increased
volatility. But through it all, domestic stocks, as measured by the S&P 500(R)
Index, still managed an annual return of approximately 8% for the 12-month
period ended July 31, 2019.
Given the sometimes dire news flow and ample cross-currents, it's no surprise
that volatility returned to the market. On one hand, the U.S. economy continues
to look good. The unprecedented streak of job creation has continued
uninterrupted, and unemployment is bouncing along historic lows at 3.7%. The
consumer remains resilient and inflation is tepid. On the flip side, however,
U.S. trade policy seems to be evolving, with new tariffs threatened and
implemented. The markets generally dislike this type of trade turmoil and
uncertainty, and the ongoing tensions between the United States and China (and
other trading partners) threaten to upend global supply chains and hinder
economic growth.
It's not just the stock market that has been dealing with volatility. The bond
market also has experienced volatility, due largely to the U.S. Federal
Reserve's (the "Fed") famous "pivot" in late 2018. Against the backdrop of
rapidly falling equities in the fourth quarter of 2018, the Fed signaled that
its next policy move would be to lower--not increase--short-term interest rates.
This immediately altered the yield environment.
Meanwhile, the U.S. Treasury yield curve continued to flatten and, in fact,
inverted--whereby shorter-term yields became higher than longer-term
================================================================================
================================================================================
yields. Such a yield-curve inversion is a worrying sign as it sometimes, but not
always, portends to a recession.
Although we are not predicting a recession, we must acknowledge that risks have
increased for an economic slowdown. Given that the current run in stocks is more
than a decade old, it's important for investors to keep perspective that the
bull market cannot continue forever. Therefore, now may be an opportune time for
investors to ensure that their portfolios are well diversified and that their
overall allocation is appropriate for their particular risk appetite.
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,
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. On the following pages, you will find information
relating to your USAA Investments, which is now a Victory Capital Investment
Franchise. If you have any questions about your investments, we encourage you to
engage your financial advisor or else contact us directly at 800-235-8396 or
visit usaa.com.
My colleagues and I sincerely appreciate the confidence you have placed in us,
and we value the opportunity to help you meet your investment goals.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGERS' COMMENTARY ON THE FUND 1
INVESTMENT OVERVIEW 6
SHAREHOLDER VOTING RESULTS 12
FINANCIAL INFORMATION
Distributions to Shareholders 13
Report of Independent Registered
Public Accounting Firm 14
Portfolio of Investments 15
Notes to Portfolio of Investments 43
Financial Statements 49
Notes to Financial Statements 53
Financial Highlights 74
EXPENSE EXAMPLE 78
ADVISORY AGREEMENT(S) 81
TRUSTEES' AND OFFICERS' INFORMATION 99
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
VICTORY CAPITAL MANAGEMENT INC. 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
USAA Investments, A Victory Capital Investment Franchise
JULIANNE BASS, CFA R. NEAL GRAVES, CFA, CPA
KURT DAUM, JD BRIAN SMITH, CFA, CPA
JAMES F. JACKSON Jr., CFA JOHN SPEAR, CFA
--------------------------------------------------------------------------------
o WHAT WERE MARKET CONDITIONS DURING THE 12-MONTH REPORTING PERIOD ENDED JULY
31, 2019?
When the reporting period started in August 2018, investors expected the
U.S. Federal Reserve (the "Fed") to continue raising short-term interest
rates into 2019. This outlook changed in November 2018, as investors grew
concerned about a potential trade war between the United States and China,
uncertainty related to the United Kingdom's exit from the European Union,
slowing global economic growth, a stronger U.S. dollar, and the possibility
of a U.S. government shutdown. Interest rates on maturities of six months
and longer began to trend downward, pushing bond prices higher. Investors'
concerns persisted into December 2018, which also was notable for the
beginning of a U.S. government shutdown that lasted 35 days. Although Fed
officials raised short-term interest rates at the December policy meeting,
their tone turned more dovish. In March 2019, the Fed left rates unchanged
and indicated it would stop its balance sheet runoff earlier than expected.
(Since October 2017, the Fed has been trimming its balance sheet by
gradually decreasing the reinvestment of maturing holdings of U.S. Treasury
and government-sponsored mortgage-backed securities.) These actions, along
with the Fed's softer language about the U.S. economy, generally sent
interest rates lower, with the market anticipating zero Fed interest rate
increases in the 2019 calendar year. In June 2019, Fed policymakers
indicated an interest rate cut was possible if the economic outlook
weakened. The bond market responded by pricing in an interest
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
rate cut as soon as July. On July 31, 2019, the Fed cut short-term interest
rates and said it would end its balance sheet reduction on August 1, 2019,
two months earlier than previously announced.
During the reporting period, U.S. Treasury yields fell along the curve,
except those on one-month and three-month maturities, which ended the period
higher than they began. The two-year U.S. Treasury yield decreased 80 basis
points, while 10-year and 30-year U.S. Treasury yields dropped 95 and 56
basis points, respectively. (A basis point is 1/100(th) of a percentage
point.) Expectations about Fed monetary policy also led to an inversion in
the very short end of the curve, with the 10-year U.S. Treasury yield
falling below the one-month U.S. Treasury yield. The inversion occurred as
the U.S. entered its tenth year of recovery from the financial crisis, with
ongoing economic growth and strong employment levels.
o U.S. TREASURY YIELD CURVE o
[CHART OF U.S. TREASURY YIELD CURVE]
YIELD (MID CONVENTIONAL %) YIELD (CHANGE IN
MATURITY 7/31/18 YIELD 7/31/19 YIELD BASIS POINTS)
1M 1.988 1.885 10.2
2M 2.042
3M 2.062 2.02 4.1
6M 2.067 2.191 -12.4
1Y 1.985 2.409 -42.4
2Y 1.872 2.669 -79.7
3Y 1.826 2.766 -94
5Y 1.827 2.848 -102.1
7Y 1.913 2.925 -101.1
10Y 2.014 2.96 -94.5
30Y 2.525 3.082 -55.7
[END CHART]
Source: Bloomberg Finance L.P.
================================================================================
2 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
With the exception of high-yield spreads, credit spreads (yield
differentials between corporate bonds and U.S. Treasury securities of
comparable maturity) ended the reporting period largely unchanged. AAA and
BBB spreads widened by four and two basis points, respectively, during the
reporting period. AA spreads were flat, while A spreads tightened by eight
basis points. High-yield spreads widened by 35 basis points. (Spreads are
generally considered an indication of risk; the wider the spread, the
greater the perceived risk.)
o BLOOMBERG BARCLAYS U.S. AGGREGATE CREDIT INDEX o
Average Option Adjusted Spread
[CHART OF BLOOMBERG BARCLAYS U.S. AGGREGATE CREDIT INDEX]
AVERAGE OPTION
ADJUSTED SPREAD
7/31/2018 1.03
8/1/2018 1.03
8/2/2018 1.03
8/3/2018 1.03
8/6/2018 1.03
8/7/2018 1.02
8/8/2018 1.03
8/9/2018 1.04
8/10/2018 1.07
8/13/2018 1.07
8/14/2018 1.06
8/15/2018 1.07
8/16/2018 1.06
8/17/2018 1.06
8/20/2018 1.06
8/21/2018 1.06
8/22/2018 1.07
8/23/2018 1.07
8/24/2018 1.07
8/27/2018 1.06
8/28/2018 1.06
8/29/2018 1.06
8/30/2018 1.07
8/31/2018 1.08
9/3/2018 1.08
9/4/2018 1.08
9/5/2018 1.09
9/6/2018 1.08
9/7/2018 1.07
9/10/2018 1.07
9/11/2018 1.06
9/12/2018 1.05
9/13/2018 1.04
9/14/2018 1.03
9/17/2018 1.03
9/18/2018 1.02
9/19/2018 1.02
9/20/2018 1.01
9/21/2018 1
9/24/2018 1.01
9/25/2018 1.01
9/26/2018 1.01
9/27/2018 1
9/28/2018 1
10/1/2018 1
10/2/2018 1
10/3/2018 0.99
10/4/2018 1
10/5/2018 1
10/9/2018 1
10/10/2018 1.01
10/11/2018 1.02
10/12/2018 1.03
10/15/2018 1.03
10/16/2018 1.03
10/17/2018 1.04
10/18/2018 1.04
10/19/2018 1.05
10/22/2018 1.05
10/23/2018 1.07
10/24/2018 1.08
10/25/2018 1.09
10/26/2018 1.11
10/29/2018 1.11
10/30/2018 1.12
10/31/2018 1.12
11/1/2018 1.13
11/2/2018 1.11
11/5/2018 1.1
11/6/2018 1.09
11/7/2018 1.07
11/8/2018 1.08
11/9/2018 1.09
11/13/2018 1.13
11/14/2018 1.16
11/15/2018 1.21
11/16/2018 1.21
11/19/2018 1.22
11/20/2018 1.25
11/21/2018 1.23
11/23/2018 1.24
11/26/2018 1.24
11/27/2018 1.25
11/28/2018 1.26
11/29/2018 1.27
11/30/2018 1.29
12/3/2018 1.28
12/4/2018 1.31
12/6/2018 1.36
12/7/2018 1.35
12/10/2018 1.36
12/11/2018 1.35
12/12/2018 1.32
12/13/2018 1.31
12/14/2018 1.31
12/17/2018 1.32
12/18/2018 1.33
12/19/2018 1.34
12/20/2018 1.37
12/21/2018 1.38
12/24/2018 1.4
12/26/2018 1.4
12/27/2018 1.42
12/28/2018 1.41
12/31/2018 1.43
1/2/2019 1.44
1/3/2019 1.47
1/4/2019 1.45
1/7/2019 1.43
1/8/2019 1.41
1/9/2019 1.38
1/10/2019 1.38
1/11/2019 1.37
1/14/2019 1.37
1/15/2019 1.37
1/16/2019 1.35
1/17/2019 1.33
1/18/2019 1.29
1/22/2019 1.29
1/23/2019 1.27
1/24/2019 1.26
1/25/2019 1.24
1/28/2019 1.24
1/29/2019 1.23
1/30/2019 1.23
1/31/2019 1.21
2/1/2019 1.19
2/4/2019 1.18
2/5/2019 1.16
2/6/2019 1.17
2/7/2019 1.19
2/8/2019 1.19
2/11/2019 1.19
2/12/2019 1.18
2/13/2019 1.17
2/14/2019 1.19
2/15/2019 1.18
2/19/2019 1.18
2/20/2019 1.18
2/21/2019 1.17
2/22/2019 1.17
2/25/2019 1.16
2/26/2019 1.16
2/27/2019 1.16
2/28/2019 1.14
3/1/2019 1.13
3/4/2019 1.13
3/5/2019 1.13
3/6/2019 1.14
3/7/2019 1.15
3/8/2019 1.16
3/11/2019 1.15
3/12/2019 1.14
3/13/2019 1.14
3/14/2019 1.14
3/15/2019 1.13
3/18/2019 1.12
3/19/2019 1.12
3/20/2019 1.13
3/21/2019 1.11
3/22/2019 1.12
3/25/2019 1.12
3/26/2019 1.11
3/27/2019 1.12
3/28/2019 1.12
3/29/2019 1.13
4/1/2019 1.12
4/2/2019 1.12
4/3/2019 1.11
4/4/2019 1.1
4/5/2019 1.09
4/8/2019 1.09
4/9/2019 1.08
4/10/2019 1.08
4/11/2019 1.06
4/12/2019 1.04
4/15/2019 1.04
4/16/2019 1.03
4/17/2019 1.04
4/18/2019 1.04
4/22/2019 1.05
4/23/2019 1.04
4/24/2019 1.04
4/25/2019 1.04
4/26/2019 1.04
4/29/2019 1.04
4/30/2019 1.04
5/1/2019 1.05
5/2/2019 1.06
5/3/2019 1.06
5/6/2019 1.07
5/7/2019 1.08
5/8/2019 1.08
5/9/2019 1.1
5/10/2019 1.1
5/13/2019 1.12
5/14/2019 1.11
5/15/2019 1.12
5/16/2019 1.11
5/17/2019 1.11
5/20/2019 1.11
5/21/2019 1.11
5/22/2019 1.12
5/23/2019 1.15
5/24/2019 1.15
5/28/2019 1.16
5/29/2019 1.19
5/30/2019 1.17
5/31/2019 1.2
6/3/2019 1.22
6/4/2019 1.21
6/5/2019 1.2
6/6/2019 1.2
6/7/2019 1.2
6/10/2019 1.18
6/11/2019 1.17
6/12/2019 1.18
6/13/2019 1.19
6/14/2019 1.19
6/17/2019 1.19
6/18/2019 1.17
6/19/2019 1.16
6/20/2019 1.13
6/21/2019 1.11
6/24/2019 1.1
6/25/2019 1.11
6/26/2019 1.1
6/27/2019 1.1
6/28/2019 1.09
7/1/2019 1.07
7/2/2019 1.08
7/3/2019 1.07
7/5/2019 1.07
7/8/2019 1.07
7/9/2019 1.07
7/10/2019 1.07
7/11/2019 1.07
7/12/2019 1.06
7/15/2019 1.06
7/16/2019 1.06
7/17/2019 1.07
7/18/2019 1.07
7/19/2019 1.06
7/22/2019 1.06
7/23/2019 1.04
7/24/2019 1.03
7/25/2019 1.02
7/26/2019 1.02
7/29/2019 1.02
7/30/2019 1.03
7/31/2019 1.03
[END CHART]
o HOW DID THE USAA INTERMEDIATE-TERM BOND 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 July 31, 2019, the
Fund Shares, Institutional Shares, Adviser Shares, and R6 Shares had total
returns of 8.28%, 8.35%, 7.97%, and 8.65%, respectively. This compares to
returns of 8.08% for the Bloomberg Barclays U.S. Aggregate
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
Bond Index (the "Index") and 7.78% for the Lipper Core Plus Bond Funds
Index. At the same time, the Fund Shares, Institutional Shares, Adviser
Shares, and R6 Shares provided a one-year dividend yield of 3.58%, 3.64%,
3.29%, and 3.82%, respectively, compared to 2.96% for the Lipper Core Plus
Bond Funds Average.
Victory Capital Management Inc. (the "Manager" or "Victory Capital") is the
Fund's investment adviser. The investment adviser provides day-to-day
discretionary management for the Fund's assets.
o WHAT WERE YOUR STRATEGIES IN THIS ENVIRONMENT?
The Fund produced a positive total return and outperformed the Index, as
bond prices appreciated during the reporting period. Relative to the Index,
the Fund was helped by its allocation to and our issue selection of
corporate bonds. Specifically, overweight positions in consumer non-
cyclical bonds within the healthcare, food and beverage sectors contributed
positively. In addition, the Fund benefited from overweight positions in
industrial sectors, such as chemicals and metals and mining, as well as
banking, insurance, and real estate investment trusts. Bond selection,
especially within the utilities, capital goods, banking, insurance, and
transportation sectors, also added to relative returns. An underweight in
U.S. Treasury securities, which generated weaker returns than the Index,
bolstered relative performance, as did an overweight position in
longer-maturity U.S. Treasuries. Finally, our income orientation had a
modestly positive impact on results. Over time, the income generated by the
Fund accounts for the majority of its long-term return. As of July 31, 2019,
the Fund's SEC yield was 3.19%. This compares to an SEC yield of 3.70% on
July 31, 2018.
In keeping with our investment process, we continued to build the portfolio
bond by bond. We seek ideas where our fundamental understanding of
Refer to page 6 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
4 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
the credit risk is different than that of the market, working with our team
of analysts to evaluate each potential investment individually, rather than
on the basis of thematic trends. During the reporting period, we found a
number of attractive opportunities as we continued to seek relative values
across the fixed income market. We took advantage of periods of volatility
to add select investments in corporate credit and commercial mortgage-backed
securities.
Our analysts continued to analyze and monitor every holding in the
portfolio. We are committed to building a portfolio diversified among
multiple asset classes and across a large number of issuers. To minimize the
Fund's exposure to potential surprises, we limit the positions we take in
any one issuer.
Thank you for allowing us to help you with your investment needs.
Diversification is a technique intended to help reduce risk and does not
guarantee a profit or prevent a loss. 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.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 5
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 7/31/19 o
-----------------------------------------------------------------------------------------------------
SINCE INCEPTION
1 YEAR 5 YEAR 10 YEAR INCEPTION* DATE
-----------------------------------------------------------------------------------------------------
Fund Shares 8.28% 3.53% 6.50% - -
Institutional Shares 8.35% 3.61% 6.61% - -
Adviser Shares 7.97% 3.27% - 4.79% 8/01/10
R6 Shares 8.65% - - 5.42% 12/01/16
Bloomberg Barclays U.S.
Aggregate Bond Index**
(reflects no deduction for
fees, expenses, or taxes) 8.08% 3.04% 3.75% - -
Lipper Core Plus Bond Funds
Index*** (reflects no
deduction for taxes) 7.78% 3.19% 4.78% - -
*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. Aggregate Bond Index covers the U.S.
investment-grade rated 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 Lipper Core Plus Bond Funds Index measures performance of funds primarily
invested in domestic investment-grade debt issues (rated in the top four
grades), with any remaining investment in non-benchmark sectors such as
high-yield, global and emerging market, and with dollar-weighted average
maturities of five to ten years.
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 INTERMEDIATE-TERM BOND FUND
================================================================================
AVERAGE ANNUAL COMPOUNDED RETURNS WITH REINVESTMENT OF DIVIDENDS - PERIODS ENDED
JULY 31, 2019
-------------------------------------------------------------------------------------------
TOTAL RETURN = DIVIDEND RETURN + PRICE CHANGE
-------------------------------------------------------------------------------------------
10 YEARS 6.50% = 4.56% + 1.94%
5 YEARS 3.53% = 3.82% + -0.29%
1 YEAR 8.28% = 3.92% + 4.36%
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 ONE-YEAR PERIODS ENDED
JULY 31, 2010-JULY 31, 2019
[CHART OF ANNUAL TOTAL RETURNS AND COMPOUNDED DIVIDEND RETURNS]
CHANGE IN
TOTAL RETURN DIVIDEND RETURN SHARE PRICE
7/31/2010 20.30% 6.97% 13.33%
7/31/2011 10.44% 5.70% 4.74%
7/31/2012 7.27% 5.29% 1.98%
7/31/2013 4.08% 4.43% -0.35%
7/31/2014 6.37% 4.38% 1.99%
7/31/2015 0.58% 3.91% -3.33%
7/31/2016 5.55% 4.32% 1.23%
7/31/2017 -0.03% 3.61% -0.09%
7/31/2018 -0.03% 3.43% -3.46%
7/31/2019 8.28% 3.92% 4.36%
[END CHART]
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 gains distributions), redemption of shares, or reinvested net investment
income.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
BLOOMBERG
USAA INTERMEDIATE- LIPPER CORE BARCLAYS
TERM BOND PLUS BOND U.S. AGGREGATE
FUND SHARES FUNDS INDEX BOND INDEX*
7/31/2009 $10,000.00 $10,000.00 $10,000.00
8/31/2009 10,319.00 10,146.69 10,103.54
9/30/2009 10,657.00 10,342.25 10,209.68
10/31/2009 10,850.00 10,447.77 10,260.09
11/30/2009 11,004.00 10,570.28 10,392.92
12/31/2009 11,043.00 10,510.21 10,230.47
1/31/2010 11,357.00 10,699.42 10,386.75
2/28/2010 11,435.00 10,745.97 10,425.53
3/31/2010 11,610.00 10,809.03 10,412.71
4/30/2010 11,833.00 10,960.93 10,521.11
5/31/2010 11,698.00 10,947.61 10,609.64
6/30/2010 11,804.00 11,111.75 10,776.02
7/31/2010 12,027.00 11,285.21 10,890.98
8/31/2010 12,233.00 11,439.91 11,031.12
9/30/2010 12,409.00 11,521.28 11,042.88
10/31/2010 12,595.00 11,602.63 11,082.20
11/30/2010 12,564.00 11,514.51 11,018.50
12/31/2010 12,529.00 11,449.19 10,899.68
1/31/2011 12,690.00 11,506.59 10,912.37
2/28/2011 12,795.00 11,580.82 10,939.67
3/31/2011 12,855.00 11,594.98 10,945.71
4/30/2011 13,063.00 11,770.90 11,084.66
5/31/2011 13,217.00 11,885.82 11,229.31
6/30/2011 13,113.00 11,822.02 11,196.43
7/31/2011 13,281.00 11,987.69 11,374.10
8/31/2011 13,151.00 11,993.77 11,540.28
9/30/2011 13,037.00 11,925.29 11,624.23
10/31/2011 13,219.00 12,065.35 11,636.71
11/30/2011 13,162.00 11,976.34 11,626.62
12/31/2011 13,323.00 12,138.48 11,754.40
1/31/2012 13,568.00 12,358.29 11,857.62
2/29/2012 13,689.00 12,432.11 11,854.89
3/31/2012 13,721.00 12,406.92 11,789.94
4/30/2012 13,853.00 12,541.19 11,920.65
5/31/2012 13,885.00 12,598.91 12,028.51
6/30/2012 13,957.00 12,662.20 12,033.22
7/31/2012 14,247.00 12,882.88 12,199.20
8/31/2012 14,363.00 12,948.81 12,207.17
9/30/2012 14,504.00 13,044.18 12,223.97
10/31/2012 14,702.00 13,108.61 12,248.01
11/30/2012 14,777.00 13,153.65 12,267.34
12/31/2012 14,817.00 13,180.78 12,249.87
1/31/2013 14,868.00 13,158.23 12,164.20
2/28/2013 14,991.00 13,224.76 12,225.17
3/31/2013 15,073.00 13,265.42 12,234.93
4/30/2013 15,275.00 13,426.24 12,358.73
5/31/2013 15,111.00 13,197.10 12,138.23
6/30/2013 14,735.00 12,892.78 11,950.47
7/31/2013 14,829.00 12,944.72 11,966.80
8/31/2013 14,749.00 12,841.85 11,905.63
9/30/2013 14,826.00 12,998.94 12,018.34
10/31/2013 15,019.00 13,160.81 12,115.51
11/30/2013 15,033.00 13,140.16 12,070.15
12/31/2013 15,010.00 13,078.11 12,001.94
1/31/2014 15,233.00 13,259.32 12,179.27
2/28/2014 15,358.00 13,371.73 12,244.03
3/31/2014 15,408.00 13,364.97 12,223.17
4/30/2014 15,560.00 13,471.80 12,326.32
5/31/2014 15,713.00 13,631.82 12,466.66
6/30/2014 15,765.00 13,662.34 12,473.10
7/31/2014 15,773.00 13,631.24 12,441.82
8/31/2014 15,901.00 13,758.30 12,579.17
9/30/2014 15,808.00 13,667.75 12,493.76
10/31/2014 15,878.00 13,780.06 12,616.56
11/30/2014 15,943.00 13,854.68 12,706.07
12/31/2014 15,873.00 13,813.33 12,717.98
1/31/2015 16,099.00 14,083.50 12,984.64
2/28/2015 16,049.00 14,023.55 12,862.57
3/31/2015 16,085.00 14,050.37 12,922.28
4/30/2015 16,078.00 14,027.84 12,875.92
5/31/2015 16,041.00 14,000.71 12,844.90
6/30/2015 15,857.00 13,843.95 12,704.83
7/31/2015 15,867.00 13,921.55 12,793.16
8/31/2015 15,723.00 13,835.56 12,774.77
9/30/2015 15,734.00 13,823.85 12,861.18
10/31/2015 15,788.00 13,901.11 12,863.37
11/30/2015 15,706.00 13,853.29 12,829.36
12/31/2015 15,509.00 13,750.27 12,787.92
1/31/2016 15,557.00 13,846.87 12,963.86
2/29/2016 15,610.00 13,876.54 13,055.84
3/31/2016 15,927.00 14,102.50 13,175.59
4/30/2016 16,152.00 14,228.24 13,226.20
5/31/2016 16,219.00 14,242.06 13,229.59
6/30/2016 16,522.00 14,471.17 13,467.30
7/31/2016 16,745.00 14,626.40 13,552.44
8/31/2016 16,845.00 14,654.81 13,536.97
9/30/2016 16,900.00 14,670.99 13,529.00
10/31/2016 16,834.00 14,594.87 13,425.52
11/30/2016 16,458.00 14,276.02 13,107.98
12/31/2016 16,543.00 14,326.88 13,126.44
1/31/2017 16,668.00 14,401.94 13,152.21
2/28/2017 16,845.00 14,518.88 13,240.62
3/31/2017 16,851.00 14,524.94 13,233.64
4/30/2017 17,022.00 14,646.86 13,335.79
5/31/2017 17,202.00 14,761.61 13,438.40
6/30/2017 17,209.00 14,765.94 13,424.92
7/31/2017 17,335.00 14,850.82 13,482.71
8/31/2017 17,482.00 14,987.69 13,603.58
9/30/2017 17,437.00 14,935.36 13,538.83
10/31/2017 17,499.00 14,946.87 13,546.66
11/30/2017 17,450.00 14,929.13 13,529.26
12/31/2017 17,518.00 14,989.40 13,591.36
1/31/2018 17,418.00 14,871.41 13,434.82
2/28/2018 17,271.00 14,740.57 13,307.50
3/31/2018 17,324.00 14,805.95 13,392.84
4/30/2018 17,224.00 14,705.50 13,293.22
5/31/2018 17,292.00 14,771.19 13,388.06
6/30/2018 17,263.00 14,763.67 13,371.59
7/31/2018 17,329.00 14,800.26 13,374.78
8/31/2018 17,454.00 14,873.94 13,460.85
9/30/2018 17,368.00 14,807.12 13,374.18
10/31/2018 17,234.00 14,691.10 13,268.51
11/30/2018 17,224.00 14,730.73 13,347.68
12/31/2018 17,346.00 14,913.97 13,592.91
1/31/2019 17,637.00 15,138.89 13,737.26
2/28/2019 17,726.00 15,166.72 13,729.31
3/31/2019 18,075.00 15,422.07 13,992.93
4/30/2019 18,198.00 15,466.59 13,996.51
5/31/2019 18,413.00 15,706.70 14,244.97
6/30/2019 18,709.00 15,913.41 14,423.83
7/31/2019 18,765.00 15,951.11 14,455.58
[END CHART]
Data from 7/31/09 through 7/31/19.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Intermediate-Term Bond Fund Shares to the benchmarks listed above (see page
6 for benchmark definitions)
* The Lipper Index tracks the performance of funds that invest primarily in
investment grade debt issues (rated in top four grades) with dollar-weighted
average maturities of five to ten years. Source: Lipper, a Thomson Reuters
Company.
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 Index reflects the fees and expenses of the underlying funds
included in the index.
================================================================================
8 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
o 12-MONTH DIVIDEND YIELD COMPARISON o
[CHART OF 12-MONTH DIVIDEND YIELD COMPARISON]
USAA INTERMEDIATE-TERM LIPPER CORE
BOND PLUS BOND
FUND SHARES FUNDS AVERAGE
7/31/2010 5.77 3.86
7/31/2011 5.23 3.24
7/31/2012 4.93 2.85
7/31/2013 4.46 2.57
7/31/2014 4.15 2.74
7/31/2015 4.06 2.85
7/31/2016 3.95 2.76
7/31/2017 3.53 2.56
7/31/2018 3.56 2.71
7/31/2019 3.58 2.96
[END CHART]
The 12-month dividend yield is computed by dividing net investment income
dividends paid during the previous 12 months by the latest adjusted month-end
net asset value. The net asset value is adjusted for a portion of the capital
gains distributed during the previous nine months. The graph represents data for
periods ending 7/31/10 through 7/31/19.
The Lipper Core Plus Bond Funds Average is the average performance level of all
investment-grade debt funds, as reported by Lipper Inc., an independent
organization that monitors the performance of mutual funds.
================================================================================
INVESTMENT OVERVIEW | 9
================================================================================
o PORTFOLIO RATINGS MIX - 7/31/19 o
(% of Net Assets)
[PIE CHART OF PORTFOLIO RATINGS MIX]
AAA 12.1%
AA 6.9%
A 23.8%
BBB 50.7%
BELOW INVESTMENT-GRADE 6.0%
UNRATED 0.5%
[END CHART]
This chart reflects the highest long-term rating from a Nationally Recognized
Statistical Rating Organization (NRSRO), with the four highest long-term credit
ratings labeled, in descending order of credit quality, AAA, AA, A, and BBB.
These categories represent investment-grade quality. NRSRO ratings are shown
because they provide independent analysis of the credit quality of the Funds'
investments. USAA Asset Management Company (the Manager) also performs its own
fundamental credit analysis of each security. As part of its fundamental credit
analysis, the Manager considers various criteria, including industry specific
actions, peer comparisons, payment ranking, and structure specific
characteristics. Any of the Funds' securities that are not rated by an NRSRO
appear in the chart above as "Unrated," but these securities are analyzed and
monitored by the Manager on an ongoing basis. Government securities that are
issued or guaranteed as to principal and interest by the U.S. government and
pre-refunded and escrowed-to-maturity municipal bonds that are not rated are
treated as AAA for credit quality purposes.
Percentages are of the total market value of the Fund's investments.
Refer to the Portfolio of Investments for a complete list of securities.
================================================================================
10 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
o ASSET ALLOCATION** - 7/31/19 o
(% of Net Assets)
[PIE CHART ASSET ALLOCATION]
CORPORATE OBLIGATIONS 49.5%
EURODOLLAR AND YANKEE OBLIGATIONS 20.7%
U.S. TREASURY SECURITIES 6.7%
U.S. GOVERNMENT AGENCY ISSUES 3.7%
COMMERCIAL MORTGAGE SECURITIES 3.3%
MUNICIPAL OBLIGATIONS 3.3%
COMMERCIAL PAPER 3.2%
COLLATERALIZED LOAN OBLIGATIONS 2.3%
BANK LOANS 2.2%
ASSET-BACKED SECURITIES 2.0%
PREFERRED STOCKS 1.6%
FOREIGN GOVERNMENT OBLIGATIONS 0.2%
PREFERRED BONDS 0.1%
COLLATERALIZED MORTGAGE OBLIGATIONS** 0.0%
[END CHART]
*Does not include futures and short-term investments purchased with cash
collateral from securities loaned.
**Represents less than 0.1%.
Percentages are of the net assets of the Fund and may not equal 100%.
Refer to the Portfolio of Investments for a complete list of securities.
================================================================================
INVESTMENT OVERVIEW | 11
================================================================================
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 Management Inc. ("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 USAA Asset Management Company ("AMCO")
was acquired by Victory Capital Holdings, Inc., the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
--------------------------------------------------------------------------------
246,442,180 9,591,267 6,212,198
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
person" as defined in the Investment Company Act of 1940, as amended (1940 Act)
("Interested Trustee"); 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
================================================================================
12 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
July 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 July 31, 2019:
DIVIDEND RECEIVED
DEDUCTION (CORPORATE QUALIFIED INTEREST
SHAREHOLDERS)(1) INCOME
----------------------------------------------------------
1.45% $133,716,000
----------------------------------------------------------
(1)Presented as a percentage of net investment income and short-term capital
gain distributions paid, if any.
For the fiscal year ended July 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 | 13
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA INTERMEDIATE-TERM BOND FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Intermediate-Term Bond Fund (the "Fund") (one of the funds constituting the USAA
Mutual Funds Trust (the "Trust")), including the portfolio of investments, as of
July 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 the USAA Mutual Funds Trust) at July 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 July 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
September 20, 2019
================================================================================
14 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
PORTFOLIO OF INVESTMENTS
July 31, 2019
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
BONDS (94.0%)
ASSET-BACKED SECURITIES (2.0%)
ASSET BACKED SECURITIES (2.0%)
------------------------------
AUTOMOBILE ABS (0.3%)
$ 1,000 Hertz Vehicle Financing II, LP(a) 2.65% 7/25/2022 $ 998
6,250 Hertz Vehicle Financing II, LP(a) 4.10 3/25/2023 6,391
4,333 Hertz Vehicle Financing II, LP(a) 3.29 10/25/2023 4,395
286 Tesla Auto Lease Trust(a) 2.75 2/20/2020 286
----------
12,070
----------
CREDIT CARD ABS (0.2%)
7,583 Synchrony Credit Card Master Note Trust 3.87 5/15/2026 7,790
----------
OTHER ABS (1.3%)
5,000 Element Rail Leasing I, LLC(a) 3.67 4/19/2044 5,008
1,875 ExteNet, LLC(a) 3.20 7/26/2049 1,873
15,000 Hawaii Dept. of Business Economic Dev. & Tourism 3.24 1/01/2031 15,532
5,875 NP SPE II, LLC(a) 4.22 10/21/2047 6,120
5,000 Palmer Square Loan Funding Ltd.
(3 mo. LIBOR + 2.10%)(a),(b) 1.00(c) 8/20/2027 5,000
2,341 Sapphire Aviation Finance I Ltd.(a) 4.25 3/15/2040 2,389
1,858 SCF Equipment Leasing, LLC(a) 3.41 12/20/2023 1,872
1,869 Trinity Rail Leasing, LP(a) 5.90 5/14/2036 1,908
3,904 Trinity Rail Leasing, LP(a) 3.82 4/17/2049 4,024
3,333 TRIP Rail Master Funding, LLC(a) 3.74 8/15/2047 3,401
----------
47,127
----------
STUDENT LOAN ABS (0.2%)
3,403 AccessLex Institute (3 mo. LIBOR + 0.19%) 2.47(c) 10/25/2024 3,349
2,044 SLM Student Loan Trust (3 mo. LIBOR + 0.22%) 2.50(c) 1/25/2041 1,879
2,500 SLM Student Loan Trust (1 mo. LIBOR + 1.00%) 3.27(c) 4/27/2043 2,416
735 SLM Student Loan Trust (3 mo. LIBOR + 0.55%) 2.83(c) 10/25/2065 697
----------
8,341
----------
Total Asset Backed Securities 75,328
----------
Total Asset-Backed Securities (cost: $73,839) 75,328
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
BANK LOANS (2.2%)(d)
COMMUNICATIONS (0.2%)
---------------------
INTERNET (0.1%)
$ 5,000 Zayo Group, LLC (1 mo. LIBOR + 2.25%) 4.48% 1/19/2024 $ 4,999
----------
MEDIA (0.1%)
2,406 CSC Holdings, LLC (1 mo. LIBOR + 2.25%) 4.58 7/17/2025 2,397
983 E.W. Scripps Co. (1 mo. LIBOR + 2.00%) 4.23 10/02/2024 966
----------
3,363
----------
Total Communications 8,362
----------
CONSUMER, CYCLICAL (1.1%)
-------------------------
ENTERTAINMENT (0.1%)
2,993 AMC Entertainment Holdings, Inc.
(6 mo. LIBOR + 3.00%) -(e) 4/22/2026 2,995
----------
LEISURE TIME (0.2%)
7,000 ClubCorp Holdings, Inc. (3 mo. LIBOR + 2.75%) -(e) 9/18/2024 6,440
----------
RETAIL (0.8%)
3,254 Academy, Ltd. (1 mo. LIBOR + 4.00%) 6.40 7/01/2022 2,267
1,689 Academy, Ltd. (1 mo. LIBOR + 4.00%) 6.39 7/02/2022 1,177
4,966 Bass Pro Group, LLC (1 mo. LIBOR + 5.00%) 7.23 9/25/2024 4,691
2,500 Burlington Coat Factory Warehouse Corp.
(1 mo. LIBOR + 2.00%) 4.32 11/17/2024 2,505
10,000 CEC Entertainment, Inc.(b) - 2/14/2021 9,947
4,000 Sally Holdings, LLC (3 mo. LIBOR + 4.50%) 4.50 7/05/2024 3,820
2,076 Serta Simmons Bedding, LLC (1 mo. LIBOR + 3.50%) 5.81 11/08/2023 1,415
7,320 Serta Simmons Bedding, LLC (1 mo. LIBOR + 3.50%) 5.88 11/08/2023 4,988
----------
30,810
----------
Total Consumer, Cyclical 40,245
----------
CONSUMER, NON-CYCLICAL (0.2%)
-----------------------------
FOOD (0.1%)
4,975 Albertson's, LLC (1 mo. LIBOR + 3.00%) 5.23 11/17/2025 4,979
----------
PHARMACEUTICALS (0.1%)
4,962 Endo Luxembourg Finance Co. I S.a r.l.
(3 mo. LIBOR + 4.25%) 6.50 4/29/2024 4,519
----------
Total Consumer, Non-cyclical 9,498
----------
================================================================================
16 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
ENERGY (0.2%)
-------------
OIL & GAS (0.1%)
$ 2,000 California Resources Corp. (1 mo. LIBOR + 4.75%) 6.99% 12/31/2022 $ 1,903
1,596 Citgo Petroleum Corp. (3 mo. LIBOR + 5.00%) 7.32 3/28/2024 1,597
----------
3,500
----------
PIPELINES (0.1%)
1,000 Blackstone CQP Holdco, LP (3 mo. LIBOR + 3.50%) 5.89 9/30/2024 1,003
4,000 Epic Crude Services, LP (1 mo. LIBOR + 5.00%) 7.24 2/20/2026 3,929
----------
4,932
----------
Total Energy 8,432
----------
FINANCIAL (0.1%)
----------------
REAL ESTATE (0.0%)
498 Forest City Enterprises, L.P. (1 mo. LIBOR + 4.00%) 6.23 12/07/2025 501
----------
REITS (0.1%)
2,000 VICI Properties 1, LLC (1 mo. LIBOR + 2.00%) 4.27 12/20/2024 1,995
----------
Total Financial 2,496
----------
INDUSTRIAL (0.3%)
-----------------
PACKAGING & CONTAINERS (0.2%)
5,853 BWAY Holding Co. (3 mo. LIBOR + 3.25%)(b) -(e) 4/03/2024 5,754
2,692 Klockner-Pentaplast of America, Inc.
(1 mo. LIBOR + 4.25%) 6.48 6/30/2022 2,445
----------
8,199
----------
TRANSPORTATION (0.1%)
3,000 XPO Logistics, Inc. (1 mo. LIBOR + 2.50%) 4.80 2/24/2025 3,014
----------
Total Industrial 11,213
----------
TECHNOLOGY (0.1%)
-----------------
SOFTWARE (0.1%)
4,466 Solera, LLC (1 mo. LIBOR + 2.75%) 4.98 3/03/2023 4,449
----------
Total Bank Loans (cost: $88,532) 84,695
----------
COLLATERALIZED LOAN OBLIGATIONS (2.3%)
ASSET BACKED SECURITIES (2.3%)
------------------------------
OTHER ABS (2.3%)
5,000 Annisa Ltd. (3 mo. LIBOR + 1.65%)(a) 3.93(c) 7/20/2031 4,942
5,000 Ares Ltd. (3 mo. LIBOR + 1.85%)(a) 4.13(c) 4/22/2031 4,999
3,500 CIFC Funding Ltd. (3 mo. LIBOR + 1.70%)(a) 3.98(c) 4/23/2029 3,486
5,000 CIFC Funding Ltd. (3 mo. LIBOR + 1.22%)(a) 3.50(c) 7/20/2030 4,988
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 4,000 Dryden Senior Loan Fund (3 mo. LIBOR + 1.75%)(a) 4.03%(c) 7/20/2029 $ 4,000
5,000 Dryden Senior Loan Fund (3 mo. LIBOR + 1.55%)(a) 3.85(c) 7/15/2030 4,897
1,000 LCM XVIII, LP (3 mo. LIBOR + 1.02%)(a) 3.30(c) 4/20/2031 988
3,240 Magnetite XII Ltd. (3 mo. LIBOR + 1.60%)(a) 3.90(c) 10/15/2031 3,197
4,000 Neuberger Berman Loan Advisers Ltd.
(3 mo. LIBOR + 1.70%)(a) 4.00(c) 10/19/2031 3,964
5,000 Neuberger Berman Loan Advisers Ltd.(a) 4.60 10/19/2031 5,040
10,000 Oaktree EIF Ltd. (3 mo. LIBOR + 2.00%)(a) 4.28(c) 10/20/2027 10,023
5,000 Octagon Investment Partners 42 Ltd.
(3 mo. LIBOR + 1.95%)(a) 4.45(c) 4/15/2031 5,006
5,000 Palmer Square Loan Funding Ltd.
(3 mo. LIBOR + 2.25%)(a) 4.77(c) 4/20/2027 4,994
5,000 Race Point Ltd. (1 mo. LIBOR + 1.65%)(a) 3.93(c) 7/25/2031 4,919
2,000 Stewart Park Ltd. (1 mo. LIBOR + 1.25%)(a) 3.55(c) 1/15/2030 1,941
2,500 TIAA I Ltd. (1 mo. LIBOR + 1.75%)(a) 4.03(c) 7/20/2031 2,469
2,500 TIAA I Ltd.(a) 4.59 7/20/2031 2,512
5,000 TIAA IV Ltd. (1 mo. LIBOR + 1.70%)(a) 3.98(c) 1/20/2032 4,951
5,000 Trinitas Ltd. (3 mo. LIBOR + 2.30%)(a) 4.58(c) 7/15/2032 5,040
3,000 Voya Ltd. (3 mo. LIBOR + 1.60%)(a) 3.90(c) 4/17/2030 2,973
2,500 Voya Ltd. (3 mo. LIBOR + 1.65%)(a) 3.95(c) 10/15/2031 2,474
----------
Total Asset Backed Securities 87,803
----------
Total Collateralized Loan Obligations (cost: $88,225) 87,803
----------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.0%)
MORTGAGE SECURITIES (0.0%)
--------------------------
WHOLE LOAN COLLATERAL CMO (0.0%)
1,637 Structured Asset Mortgage Investments Trust
(1 mo. LIBOR + 0.50%) (cost: $1,636) 2.80(c) 7/19/2035 1,638
----------
COMMERCIAL MORTGAGE SECURITIES (3.3%)
MORTGAGE SECURITIES (3.3%)
--------------------------
COMMERCIAL MBS (3.3%)
10,250 BAMLL Commercial Mortgage Securities Trust(a) 3.49 4/14/2033 10,662
1,319 Bear Stearns Commercial Mortgage Securities Trust 5.21(f) 2/11/2041 1,329
5,000 BENCHMARK Mortgage Trust 3.67(f) 1/15/2051 5,359
5,000 BENCHMARK Mortgage Trust 4.03 4/10/2051 5,499
6,000 BENCHMARK Mortgage Trust(b) 3.42 8/15/2052 6,195
2,000 Caesars Palace Las Vegas Trust(a) 3.83 10/15/2034 2,070
5,125 Caesars Palace Las Vegas Trust(a) 4.14 10/15/2034 5,329
1,000 Caesars Palace Las Vegas Trust(a) 4.35(f) 10/15/2034 1,041
7,000 CFCRE Commercial Mortgage Trust(a) 5.75(f) 12/15/2047 7,429
1,000 Citigroup Commercial Mortgage Trust 4.35 5/10/2036 1,031
================================================================================
18 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 1,098 Commercial Mortgage Trust 5.64%(f) 7/10/2038 $ 1,105
3,000 Commercial Mortgage Trust 4.29(f) 7/10/2050 3,231
2,500 DB-JPM Mortgage Trust(a) 3.24 8/10/2036 2,488
1,950 DB-UBS Mortgage Trust(a) 5.33(f) 8/10/2044 2,047
3,000 GS Mortgage Securities Trust(a) 4.95 1/10/2045 3,157
2,250 Hudson Yards Mortgage Trust(a) 3.56(f) 7/10/2039 2,261
343 J.P. Morgan Chase Commercial Mortgage
Securities Trust 4.99(f) 9/12/2037 346
2,000 J.P. Morgan Chase Commercial Mortgage
Securities Trust(a) 3.78(f) 6/05/2039 2,080
4,000 J.P. Morgan Chase Commercial Mortgage
Securities Trust(a) 5.60(f) 11/15/2043 4,174
1,063 J.P. Morgan Chase Commercial Mortgage
Securities Trust 6.08(f) 4/17/2045 430
7,637 J.P. Morgan Chase Commercial Mortgage
Securities Trust 3.51 5/15/2045 7,847
20,729 J.P. Morgan Chase Commercial Mortgage
Securities Trust(g) 1.77(f) 10/15/2045 911
6,100 J.P. Morgan Chase Commercial Mortgage
Securities Trust(a) 5.37(f) 8/15/2046 6,397
2,500 KNDL Mortgage Trust (1 mo. LIBOR + 1.80%)(a) 4.13(c) 5/15/2036 2,503
19,485 Morgan Stanley Bank of America Merrill
Lynch Trust(a),(g) 1.62(f) 11/15/2045 811
5,000 Morgan Stanley Bank of America Merrill Lynch Trust 3.74 8/15/2047 5,282
25,353 UBS Commercial Mortgage Trust(a),(g) 2.06(f) 5/10/2045 1,137
4,756 UBS-Citigroup Commercial Mortgage Trust(a) 5.15 1/10/2045 4,985
3,500 Wells Fargo Commercial Mortgage Trust(a) 4.06(f) 8/17/2036 3,832
3,000 Wells Fargo Commercial Mortgage Trust(a) 5.28(f) 11/15/2043 3,084
3,500 Wells Fargo Commercial Mortgage Trust 3.97 12/15/2048 3,713
5,000 Wells Fargo Commercial Mortgage Trust 4.22(f) 12/15/2048 5,283
2,000 Wells Fargo Commercial Mortgage Trust 4.49(f) 9/15/2057 2,142
6,000 WF-RBS Commercial Mortgage Trust(a) 5.17(f) 2/15/2044 6,193
61,806 WF-RBS Commercial Mortgage Trust(a),(g) 1.55(f) 12/15/2045 2,630
----------
Total Mortgage Securities 124,013
----------
Total Commercial Mortgage Securities (cost: $118,055) 124,013
----------
CORPORATE OBLIGATIONS (49.5%)
BASIC MATERIALS (1.8%)
----------------------
CHEMICALS (1.3%)
5,000 Cabot Corp. 4.00 7/01/2029 5,085
7,500 CF Industries, Inc.(a) 4.50 12/01/2026 7,953
5,000 Chevron Phillips Chemical Co., LLC /
Chevron Phillips Chemical Co., LP(a) 3.40 12/01/2026 5,150
================================================================================
PORTFOLIO OF INVESTMENTS | 19
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 3,500 H.B. Fuller Co. 4.00% 2/15/2027 $ 3,258
5,000 Huntsman International, LLC 4.50 5/01/2029 5,142
3,850 LYB International Finance II B.V. 3.50 3/02/2027 3,899
5,000 Mosaic Co. 4.05 11/15/2027 5,166
2,500 Olin Corp. 5.63 8/01/2029 2,563
10,000 Westlake Chemical Corp. 3.60 8/15/2026 10,165
----------
48,381
----------
FOREST PRODUCTS & PAPER (0.2%)
7,500 International Paper Co. 3.00 2/15/2027 7,453
----------
IRON/STEEL (0.3%)
5,000 Allegheny Technologies, Inc. 5.95 1/15/2021 5,128
3,000 Allegheny Technologies, Inc. 7.88 8/15/2023 3,233
2,000 Carpenter Technology Corp. 5.20 7/15/2021 2,056
2,272 Carpenter Technology Corp. 4.45 3/01/2023 2,327
----------
12,744
----------
MINING (0.0%)
1,000 Alcoa Nederland Holding B.V.(a) 6.75 9/30/2024 1,053
----------
Total Basic Materials 69,631
----------
COMMUNICATIONS (2.9%)
---------------------
INTERNET (0.1%)
5,000 Expedia Group, Inc. 3.80 2/15/2028 5,134
----------
MEDIA (0.9%)
5,000 CBS Corp. 4.20 6/01/2029 5,302
10,000 Charter Communications Operating, LLC /
Charter Communications Operating Capital 4.91 7/23/2025 10,809
5,000 Comcast Corp. 4.20 8/15/2034 5,568
2,000 CSC Holdings, LLC(a) 5.50 4/15/2027 2,101
4,000 Diamond Sports Group, LLC / Diamond
Sports Finance Co.(a),(b) 5.38 8/15/2026 4,068
5,000 Fox Corp.(a) 5.48 1/25/2039 5,920
----------
33,768
----------
TELECOMMUNICATIONS (1.9%)
10,000 AT&T, Inc. 4.50 5/15/2035 10,605
10,000 AT&T, Inc. 4.85 3/01/2039 10,904
3,000 Frontier Communications Corp. 6.25 9/15/2021 1,886
5,000 Motorola Solutions, Inc. 4.60 2/23/2028 5,267
6,000 Qwest Corp. 6.75 12/01/2021 6,443
10,000 Sprint Spectrum Co., LLC / Sprint Spectrum
Co. II, LLC / Sprint Spectrum Co. III, LLC(a) 5.15 9/20/2028 10,619
3,375 Sprint Spectrum Co., LLC/Sprint Spectrum
Co. II, LLC/Sprint Spectrum Co. III, LLC(a) 3.36 9/20/2021 3,390
================================================================================
20 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 1,000 T-Mobile USA, Inc. 4.75% 2/01/2028 $ 1,030
20,000 Verizon Communications, Inc. 4.50 8/10/2033 22,633
----------
72,777
----------
Total Communications 111,679
----------
CONSUMER, CYCLICAL (3.7%)
-------------------------
AIRLINES (1.2%)
5,824 American Airlines, Inc. Pass-Through Trust 4.00 1/15/2027 6,106
1,892 American Airlines, Inc. Pass-Through Trust 3.60 10/15/2029 1,907
51 Continental Airlines, Inc. Pass-Through Trust
(INS - AMBAC Assurance Corp.) 6.24 9/15/2021 51
7,752 Continental Airlines, Inc. Pass-Through Trust 4.15 4/11/2024 8,148
7,003 Hawaiian Airlines, Inc. Pass-Through Trust 3.90 1/15/2026 7,128
4,708 United Airlines, Inc. Pass-Through Trust 4.63 9/03/2022 4,807
3,888 United Airlines, Inc. Pass-Through Trust 4.30 8/15/2025 4,134
261 US Airways Group, Inc. Pass-Through Trust
(INS - MBIA Insurance Corp.) 7.08 3/20/2021 275
2,418 US Airways Group, Inc. Pass-Through Trust 6.25 4/22/2023 2,630
1,573 US Airways Group, Inc. Pass-Through Trust 7.13 4/22/2025 1,772
6,873 US Airways Group, Inc. Pass-Through Trust 3.95 11/15/2025 7,167
----------
44,125
----------
AUTO MANUFACTURERS (0.2%)
3,571 Ford Motor Credit Co., LLC 5.58 3/18/2024 3,819
5,000 General Motors Financial Co., Inc. 4.35 1/17/2027 5,104
----------
8,923
----------
DISTRIBUTION/WHOLESALE (0.2%)
6,125 Ferguson Finance plc(a) 4.50 10/24/2028 6,411
----------
ENTERTAINMENT (0.1%)
1,500 Cedar Fair, LP(a) 5.25 7/15/2029 1,549
2,787 Scientific Games International, Inc. 10.00 12/01/2022 2,910
----------
4,459
----------
HOME BUILDERS (0.2%)
2,000 Beazer Homes USA, Inc. 8.75 3/15/2022 2,075
2,000 D.R. Horton, Inc. 5.75 8/15/2023 2,213
5,000 Lennar Corp. 4.50 11/15/2019 5,007
----------
9,295
----------
HOME FURNISHINGS (0.1%)
4,167 Whirlpool Corp. 4.75 2/26/2029 4,543
----------
HOUSEWARES (0.5%)
7,500 Newell Brands, Inc. 3.85 4/01/2023 7,594
10,000 Newell Brands, Inc. 4.20 4/01/2026 10,007
----------
17,601
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 21
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
LEISURE TIME (0.3%)
$ 11,400 Silversea Cruise Finance Ltd.(a) 7.25% 2/01/2025 $ 12,220
----------
RETAIL (0.9%)
5,302 Advance Auto Parts, Inc. 4.50 12/01/2023 5,643
3,000 AutoZone, Inc. 3.75 6/01/2027 3,143
5,333 L Brands, Inc. 7.50 6/15/2029 5,353
4,167 O'Reilly Automotive, Inc. 3.90 6/01/2029 4,427
5,000 Party City Holdings, Inc.(a),(h) 6.63 8/01/2026 4,812
4,339 PetSmart, Inc.(a) 5.88 6/01/2025 4,297
5,000 Walgreens Boots Alliance, Inc. 3.80 11/18/2024 5,225
----------
32,900
----------
Total Consumer, Cyclical 140,477
----------
CONSUMER, NON-CYCLICAL (6.0%)
-----------------------------
AGRICULTURE (0.1%)
5,000 Bunge Ltd. Finance Corp. 3.25 8/15/2026 4,846
----------
BEVERAGES (0.2%)
3,571 Keurig Dr Pepper, Inc. 4.60 5/25/2028 3,919
2,333 Keurig Dr Pepper, Inc. 4.99 5/25/2038 2,612
----------
6,531
----------
BIOTECHNOLOGY (0.3%)
5,000 Baxalta, Inc. 4.00 6/23/2025 5,305
4,000 Celgene Corp. 3.90 2/20/2028 4,291
----------
9,596
----------
COMMERCIAL SERVICES (0.4%)
5,000 Bon Secours Charity Health System, Inc. 5.25 11/01/2025 5,249
3,000 Boston Medical Center Corp. 3.91 7/01/2028 3,166
5,000 ERAC USA Finance, LLC(a) 3.30 10/15/2022 5,105
833 Verisk Analytics, Inc. 4.13 3/15/2029 900
----------
14,420
----------
FOOD (1.1%)
2,000 Albertson's Cos., LLC / Safeway, Inc. /
New Albertson's, LP / Albertson's, LLC 5.75 3/15/2025 2,044
5,000 Flowers Foods, Inc. 3.50 10/01/2026 5,040
10,000 J.M. Smucker Co. 4.25 3/15/2035 10,392
11,799 Kraft Heinz Foods Co.(a) 4.88 2/15/2025 12,172
1,667 Kroger Co. 4.50 1/15/2029 1,819
1,042 McCormick & Co., Inc. 3.40 8/15/2027 1,071
1,000 Post Holdings, Inc.(a) 5.50 12/15/2029 1,012
5,000 Smithfield Foods, Inc.(a) 4.25 2/01/2027 5,090
3,167 Smithfield Foods, Inc.(a) 5.20 4/01/2029 3,434
----------
42,074
----------
================================================================================
22 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
HEALTHCARE-PRODUCTS (0.2%)
$ 6,520 Becton Dickinson & Co. 3.70% 6/06/2027 $ 6,832
----------
HEALTHCARE-SERVICES (1.8%)
5,000 Baylor Scott & White Holdings(h) 2.65 11/15/2026 4,902
4,302 DaVita, Inc. 5.00 5/01/2025 4,242
14,610 Eastern Maine Healthcare Systems(i) 3.71 7/01/2026 14,334
5,000 Eastern Maine Healthcare Systems 5.02 7/01/2036 5,001
10,000 HCA, Inc. 4.50 2/15/2027 10,625
5,000 HCA, Inc. 5.13 6/15/2039 5,253
8,000 MEDNAX, Inc.(a) 6.25 1/15/2027 7,933
545 Orlando Health Obligated Group 3.78 10/01/2028 585
6,595 Premier Health Partners 2.91 11/15/2026 6,365
4,000 SSM Health Care Corp. 3.82 6/01/2027 4,215
5,000 UnitedHealth Group, Inc. 3.10 3/15/2026 5,157
1,445 Vanderbilt University Medical Center 4.17 7/01/2037 1,561
----------
70,173
----------
HOUSEHOLD PRODUCTS/WARES (0.1%)
5,000 Avery Dennison Corp. 4.88 12/06/2028 5,566
----------
PHARMACEUTICALS (1.8%)
3,000 AbbVie, Inc. 4.25 11/14/2028 3,203
1,000 Bausch Health Companies, Inc.(a) 7.00 1/15/2028 1,037
5,000 Cigna Corp.(a) 4.38 10/15/2028 5,413
10,000 CVS Health Corp. 4.30 3/25/2028 10,615
5,000 CVS Health Corp. 4.88 7/20/2035 5,421
5,000 CVS Health Corp. 5.05 3/25/2048 5,412
7,909 CVS Pass-Through Trust(a) 5.93 1/10/2034 9,051
7,000 Elanco Animal Health, Inc. 4.90 8/28/2028 7,791
5,000 Mylan N.V. 3.75 12/15/2020 5,069
8,000 Mylan N.V. 3.95 6/15/2026 8,178
7,778 Mylan, Inc. 4.55 4/15/2028 8,186
----------
69,376
----------
Total Consumer, Non-cyclical 229,414
----------
ENERGY (8.0%)
-------------
OIL & GAS (2.2%)
5,000 Antero Resources Corp. 5.13 12/01/2022 4,763
10,000 BP Capital Markets America, Inc. 3.02 1/16/2027 10,209
2,000 Carrizo Oil & Gas, Inc. 6.25 4/15/2023 1,962
10,000 ConocoPhillips Co. 4.95 3/15/2026 11,391
1,964 Continental Resources, Inc. 5.00 9/15/2022 1,982
4,000 Devon Energy Corp. 5.85 12/15/2025 4,717
3,000 EQT Corp. 3.00 10/01/2022 2,913
================================================================================
PORTFOLIO OF INVESTMENTS | 23
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 5,000 Hilcorp Energy I, LP / Hilcorp Finance Co.(a) 6.25% 11/01/2028 $ 4,853
5,000 Marathon Petroleum Corp. 4.75 9/15/2044 5,243
596 Motiva Enterprises, LLC(a) 5.75 1/15/2020 604
7,000 Murphy Oil Corp. 5.75 8/15/2025 7,174
10,000 Nabors Industries, Inc. 4.63 9/15/2021 9,763
5,000 Range Resources Corp.(h) 4.88 5/15/2025 4,218
5,000 Southwestern Energy Co. 6.20 1/23/2025 4,310
890 Transocean Guardian Ltd.(a) 5.88 1/15/2024 910
630 Transocean Pontus Ltd.(a) 6.13 8/01/2025 651
1,500 Transocean Poseidon Ltd.(a) 6.88 2/01/2027 1,602
1,500 Transocean Sentry Ltd.(a) 5.38 5/15/2023 1,508
5,000 Transocean, Inc.(a) 7.25 11/01/2025 4,703
----------
83,476
----------
PIPELINES (5.8%)
6,000 Andeavor Logistics, LP / Tesoro Logistics
Finance Corp. 4.25 12/01/2027 6,312
10,000 Antero Midstream Partners, LP / Antero
Midstream Finance Corp. 5.38 9/15/2024 9,628
2,941 Antero Midstream Partners, LP / Antero
Midstream Finance Corp.(a) 5.75 3/01/2027 2,761
4,000 Boardwalk Pipelines, LP 4.95 12/15/2024 4,253
17,000 Boardwalk Pipelines, LP 4.45 7/15/2027 17,361
10,000 Buckeye Partners, LP 4.35 10/15/2024 9,599
10,000 Buckeye Partners, LP 3.95 12/01/2026 8,903
3,000 DCP Midstream Operating, LP 4.95 4/01/2022 3,119
5,000 DCP Midstream Operating, LP
(3 mo. LIBOR + 3.85%)(a) 5.85(j) 5/21/2043 4,704
9,306 Enable Oklahoma Intrastate Transmission, LLC(a) 6.25 3/15/2020 9,450
5,000 Energy Transfer Operating, LP
(3 mo. LIBOR + 3.02%) 5.27(c) 11/01/2066 3,772
7,000 EnLink Midstream Partners, LP 4.15 6/01/2025 6,922
2,000 EnLink Midstream, LLC 5.38 6/01/2029 2,061
9,000 EQM Midstream Partners, LP 4.00 8/01/2024 8,843
9,000 EQM Midstream Partners, LP 4.13 12/01/2026 8,523
5,000 EQM Midstream Partners, LP 5.50 7/15/2028 4,948
3,000 Florida Gas Transmission Co., LLC(a) 5.45 7/15/2020 3,082
2,000 Kinder Morgan Energy Partners, LP 6.50 4/01/2020 2,051
1,000 Kinder Morgan, Inc. 6.50 9/15/2020 1,043
10,000 Midwest Connector Capital Co., LLC(a) 4.63 4/01/2029 10,670
7,500 MPLX, LP 4.00 2/15/2025 7,816
6,955 Northwest Pipeline, LLC 4.00 4/01/2027 7,265
5,000 NuStar Logistics, LP 4.80 9/01/2020 5,077
3,000 NuStar Logistics, LP 4.75 2/01/2022 3,053
5,000 ONEOK Partners, LP 4.90 3/15/2025 5,434
================================================================================
24 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 4,917 ONEOK, Inc. 4.35% 3/15/2029 $ 5,252
5,000 Phillips 66 Partners, LP 3.55 10/01/2026 5,102
5,000 Plains All American Pipeline, LP / PAA Finance Corp. 3.85 10/15/2023 5,149
10,960 Rockies Express Pipeline, LLC(a) 4.95 7/15/2029 11,202
10,000 Sabal Trail Transmission, LLC(a) 4.68 5/01/2038 10,789
6,000 Sabine Pass Liquefaction, LLC 5.63 2/01/2021 6,215
5,000 Spectra Energy Partners, LP 3.38 10/15/2026 5,122
5,000 Tallgrass Energy Partners, LP / Tallgrass
Energy Finance Corp.(a) 5.50 1/15/2028 4,961
6,250 Western Midstream Operating, LP 4.65 7/01/2026 6,385
5,000 Western Midstream Operating, LP 4.50 3/01/2028 4,923
----------
221,750
----------
Total Energy 305,226
----------
FINANCIAL (18.7%)
-----------------
BANKS (6.3%)
10,000 Associated Banc-Corp. 4.25 1/15/2025 10,419
10,000 Bank of America Corp. (3 mo. LIBOR + 1.51%) 3.71(j) 4/24/2028 10,490
5,000 BankUnited, Inc. 4.88 11/17/2025 5,409
4,750 BOKF Merger Corp Number Sixteen
(3 mo. LIBOR + 3.17%) 5.63(j) 6/25/2030 4,996
10,000 Citigroup, Inc. 4.40 6/10/2025 10,651
15,000 Citizens Financial Group, Inc.(a) 4.15 9/28/2022 15,478
5,500 Citizens Financial Group, Inc. 3.75 7/01/2024 5,562
2,000 Cullen/Frost Bankers, Inc. 4.50 3/17/2027 2,077
5,000 Discover Bank (5 Yr. Semi-Annual Swap + 1.73%) 4.68(j) 8/09/2028 5,182
10,000 Eagle Bancorp, Inc. (3 mo. LIBOR + 3.85%) 5.00(j) 8/01/2026 10,069
10,000 Fifth Third Bank 3.85 3/15/2026 10,558
5,000 First Financial Bancorp 5.13 8/25/2025 5,089
1,000 First Maryland Capital Trust I (3 mo. LIBOR + 1.00%) 3.30(c) 1/15/2027 933
5,000 First Midwest Bancorp, Inc. 5.88 9/29/2026 5,394
5,000 FirstMerit Bank, N.A. 4.27 11/25/2026 5,247
10,000 Fulton Financial Corp. 4.50 11/15/2024 10,585
5,000 Hilltop Holdings, Inc. 5.00 4/15/2025 5,119
10,000 Huntington Bancshares, Inc. 3.15 3/14/2021 10,103
10,000 Huntington Bancshares, Inc. 4.35 2/04/2023 10,445
5,000 KeyBank, N.A. 3.40 5/20/2026 5,157
5,000 KeyBank, N.A. 3.90 4/13/2029 5,331
750 KeyCorp Capital II 6.88 3/17/2029 864
5,000 LegacyTexas Financial Group, Inc.
(3 mo. LIBOR + 3.89%) 5.50(j) 12/01/2025 4,870
7,717 MB Financial Bank, N.A. (3 mo. LIBOR + 1.87%) 4.00(j) 12/01/2027 7,827
5,000 MUFG Americas Holdings Corp. 3.50 6/18/2022 5,115
10,000 People's United Bank, N.A. 4.00 7/15/2024 10,385
================================================================================
PORTFOLIO OF INVESTMENTS | 25
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 12,818 Santander Holdings USA, Inc. 4.40% 7/13/2027 $ 13,542
5,000 Sterling National Bank (3 mo. LIBOR + 3.94%) 5.25(j) 4/01/2026 5,065
5,000 SunTrust Capital I (3 mo. LIBOR + 0.67%) 3.19(c) 5/15/2027 4,601
5,000 TCF National Bank 4.60 2/27/2025 5,084
4,000 TCF National Bank (3 mo. LIBOR + 2.38%) 4.13(j) 7/02/2029 3,973
4,225 Texas Capital Bank N.A. 5.25 1/31/2026 4,404
4,643 Towne Bank (3 mo. LIBOR + 2.55%) 4.50(j) 7/30/2027 4,685
5,000 Webster Financial Corp. 4.38 2/15/2024 5,262
5,000 Wells Fargo & Co. 3.00 10/23/2026 5,055
3,500 Wintrust Financial Corp. 5.00 6/13/2024 3,649
----------
238,675
----------
DIVERSIFIED FINANCIAL SERVICES (1.3%)
5,000 Air Lease Corp. 3.63 12/01/2027 5,056
5,000 Aircastle Ltd. 4.25 6/15/2026 5,067
5,000 Cantor Fitzgerald, LP(a) 4.88 5/01/2024 5,219
10,000 Capital One Financial Corp. 3.75 3/09/2027 10,329
4,492 Grain Spectrum Funding II, LLC(a) 3.29 10/10/2019 4,486
7,000 ILFC E-Capital Trust I (Highest of 3 mo.
LIBOR/10 Year CMT/30 Year CMT + 1.55%)(a) 4.09(c) 12/21/2065 4,976
388 Keenan Dev. Association of Tennessee,
LLC (INS - XL Capital Assurance)(a) 5.02 7/15/2028 407
5,000 Pine Street Trust I(a) 4.57 2/15/2029 5,163
5,000 Synchrony Financial 3.95 12/01/2027 5,062
1,583 Synchrony Financial 5.15 3/19/2029 1,734
----------
47,499
----------
INSURANCE (5.8%)
5,000 Alleghany Corp. 5.63 9/15/2020 5,170
5,000 Allied World Assurance Co. Holdings Ltd. 4.35 10/29/2025 5,107
10,000 Allstate Corp. (3 mo. LIBOR + 2.94%) 5.75(j) 8/15/2053 10,653
5,000 American Equity Investment Life Holding Co. 5.00 6/15/2027 5,140
2,000 American International Group, Inc.
(3 mo. LIBOR + 4.20%) 8.18(j) 5/15/2058 2,678
2,500 Assurant, Inc. 4.90 3/27/2028 2,697
1,535 Assured Guaranty U.S. Holdings, Inc. 7.00 6/01/2034 1,901
3,000 Athene Global Funding(a) 3.00 7/01/2022 3,035
5,000 Athene Holding Ltd. 4.13 1/12/2028 5,045
10,000 AXA Equitable Holdings, Inc. 4.35 4/20/2028 10,511
10,000 Genworth Holdings, Inc. (3 mo. LIBOR + 2.00%) 4.52(c) 11/15/2036 6,138
2,000 Global Atlantic Financial Co.(a) 8.63 4/15/2021 2,166
7,000 Hanover Insurance Group, Inc. 4.50 4/15/2026 7,462
10,000 Hartford Financial Services Group, Inc.
(3 mo. LIBOR + 2.13%)(a) 4.64(c) 2/12/2047 8,639
15,000 Kemper Corp. 4.35 2/15/2025 15,662
================================================================================
26 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 13,018 Lincoln National Corp. (3 mo. LIBOR + 2.36%) 4.88%(c) 5/17/2066 $ 10,805
5,000 Loews Corp. 3.75 4/01/2026 5,279
4,000 Markel Corp. 3.63 3/30/2023 4,118
12,350 Mercury General Corp. 4.40 3/15/2027 12,667
5,000 MetLife, Inc.(a) 9.25 4/08/2038 7,083
8,000 MetLife, Inc. 6.40 12/15/2066 9,255
20,235 Nationwide Mutual Insurance Co.
(3 mo. LIBOR + 2.29%)(a) 4.70(c) 12/15/2024 20,137
2,000 Ohio National Financial Services, Inc.(a) 6.63 5/01/2031 2,283
7,000 Old Republic International Corp. 3.88 8/26/2026 7,236
10,025 OneBeacon U.S. Holdings, Inc. 4.60 11/09/2022 10,334
5,000 Primerica, Inc. 4.75 7/15/2022 5,278
3,000 Principal Financial Global Funding, LLC
(3 mo. LIBOR + 0.52%) 2.86(c) 1/10/2031 2,767
10,000 ProAssurance Corp. 5.30 11/15/2023 10,819
10,000 Prudential Financial, Inc.
(3 mo. LIBOR + 4.18%) 5.88(j) 9/15/2042 10,687
5,000 RLI Corp. 4.88 9/15/2023 5,332
3,830 Torchmark Corp. 4.55 9/15/2028 4,182
----------
220,266
----------
INVESTMENT COMPANIES (0.4%)
5,000 Ares Capital Corp. 4.20 6/10/2024 5,107
5,000 Main Street Capital Corp. 4.50 12/01/2019 5,020
5,000 Main Street Capital Corp. 4.50 12/01/2022 5,137
----------
15,264
----------
REITS (3.7%)
10,000 Alexandria Real Estate Equities, Inc. 4.70 7/01/2030 11,354
5,000 American Tower Corp. 3.95 3/15/2029 5,265
10,000 Boston Properties, LP 4.50 12/01/2028 11,203
5,000 CBL & Associates, LP 5.25 12/01/2023 3,645
7,500 Columbia Property Trust Operating
Partnership, LP 3.65 8/15/2026 7,384
10,000 Crown Castle International Corp. 4.30 2/15/2029 10,838
5,000 Equinix, Inc. 5.38 5/15/2027 5,396
9,000 ERP Operating, LP 2.85 11/01/2026 9,121
5,409 Highwoods Realty, LP 4.20 4/15/2029 5,680
5,000 Hospitality Properties Trust 4.95 2/15/2027 5,050
2,000 Hospitality Properties Trust 4.38 2/15/2030 1,915
5,000 Hudson Pacific Properties, LP 3.95 11/01/2027 5,133
4,901 MPT Operating Partnership, LP / MPT
Finance Corp. 5.25 8/01/2026 5,101
2,000 Nationwide Health Properties, Inc.
(Put Date 10/01/2027)(k) 6.90 10/01/2037 2,533
================================================================================
PORTFOLIO OF INVESTMENTS | 27
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 10,000 Omega Healthcare Investors, Inc. 4.95% 4/01/2024 $ 10,590
7,500 Physicians Realty, LP 4.30 3/15/2027 7,778
2,000 Realty Income Corp. 5.75 1/15/2021 2,077
6,000 Realty Income Corp. 3.00 1/15/2027 6,070
4,000 Sabra Health Care, LP 5.13 8/15/2026 4,203
2,000 Sabra Health Care, LP / Sabra Capital Corp. 5.38 6/01/2023 2,035
2,000 Senior Housing Properties Trust 6.75 12/15/2021 2,129
4,444 SL Green Operating Partnership, LP 3.25 10/15/2022 4,494
2,000 Starwood Property Trust, Inc. 5.00 12/15/2021 2,064
5,000 Washington REIT 3.95 10/15/2022 5,159
2,000 Welltower, Inc. 4.95 1/15/2021 2,057
3,000 Welltower, Inc. 4.25 4/15/2028 3,233
----------
141,507
----------
SAVINGS & LOANS (1.2%)
10,000 Banc of California, Inc. 5.25 4/15/2025 10,294
10,000 First Niagara Financial Group, Inc. 7.25 12/15/2021 11,036
10,000 People's United Financial, Inc. 3.65 12/06/2022 10,241
5,000 Sterling Bancorp. 3.50 6/08/2020 4,965
10,000 TIAA FSB Holdings, Inc. 5.75 7/02/2025 10,274
----------
46,810
----------
Total Financial 710,021
----------
INDUSTRIAL (3.1%)
-----------------
AEROSPACE/DEFENSE (0.6%)
10,000 Arconic, Inc. 5.40 4/15/2021 10,349
5,000 Northrop Grumman Corp. 3.25 1/15/2028 5,150
5,000 Spirit AeroSystems, Inc. 3.85 6/15/2026 5,054
----------
20,553
----------
BUILDING MATERIALS (0.4%)
5,000 Martin Marietta Materials, Inc. 4.25 7/02/2024 5,296
3,534 Owens Corning 3.40 8/15/2026 3,480
5,000 Vulcan Materials Co. 3.90 4/01/2027 5,155
----------
13,931
----------
ELECTRICAL COMPONENTS & EQUIPMENT (0.1%)
5,000 Molex Electronic Technologies, LLC(a) 3.90 4/15/2025 5,154
----------
ELECTRONICS (0.2%)
5,000 Jabil, Inc. 3.95 1/12/2028 4,965
2,604 Keysight Technologies, Inc. 4.60 4/06/2027 2,792
----------
7,757
----------
ENGINEERING & CONSTRUCTION (0.1%)
5,000 Fluor Corp. 4.25 9/15/2028 5,223
----------
================================================================================
28 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL CONTROL (0.0%)
$ 1,000 Waste Pro USA, Inc.(a) 5.50% 2/15/2026 $ 1,028
----------
HAND/MACHINE TOOLS (0.3%)
5,000 Colfax Corp.(a) 6.38 2/15/2026 5,353
5,400 Kennametal, Inc. 4.63 6/15/2028 5,643
----------
10,996
----------
MACHINERY-DIVERSIFIED (0.3%)
9,091 Wabtec Corp. 4.95 9/15/2028 9,788
----------
METAL FABRICATION/HARDWARE (0.4%)
5,658 Timken Co. 4.50 12/15/2028 5,900
10,000 Worthington Industries, Inc. 4.55 4/15/2026 10,413
----------
16,313
----------
MISCELLANEOUS MANUFACTURERS (0.3%)
10,000 Pentair Finance Sarl 4.50 7/01/2029 10,218
----------
PACKAGING & CONTAINERS (0.1%)
5,000 WRKCo, Inc. 4.20 6/01/2032 5,256
----------
TRANSPORTATION (0.3%)
5,000 FedEx Corp. 3.90 2/01/2035 5,090
1,000 Polar Tankers, Inc.(a) 5.95 5/10/2037 1,214
5,000 Ryder System, Inc. 3.45 11/15/2021 5,099
----------
11,403
----------
Total Industrial 117,620
----------
TECHNOLOGY (1.1%)
-----------------
COMPUTERS (0.2%)
5,000 Dell International, LLC / EMC Corp.(a) 5.30 10/01/2029 5,312
----------
SEMICONDUCTORS (0.4%)
10,000 Broadcom, Inc.(a) 4.75 4/15/2029 10,186
5,000 Micron Technology, Inc. 5.33 2/06/2029 5,325
----------
15,511
----------
SOFTWARE (0.5%)
6,500 Activision Blizzard, Inc. 3.40 9/15/2026 6,702
3,000 CDK Global, Inc.(a) 5.25 5/15/2029 3,110
5,000 Fiserv, Inc. 3.50 7/01/2029 5,141
5,000 VMware, Inc. 3.90 8/21/2027 5,067
----------
20,020
----------
Total Technology 40,843
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 29
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
UTILITIES (4.2%)
----------------
ELECTRIC (3.3%)
$ 3,000 Black Hills Corp. 5.88% 7/15/2020 $ 3,087
5,000 Black Hills Corp. 3.95 1/15/2026 5,205
15,000 Cleco Corporate Holdings, LLC 3.74 5/01/2026 15,221
5,000 Cleveland Electric Illuminating Co.(a) 4.55 11/15/2030 5,519
2,646 Dominion Energy, Inc. 3.07 8/15/2024 2,674
6,050 Dominion Energy, Inc. (3 mo. LIBOR + 2.83%) 5.15(c) 6/30/2066 5,785
1,608 DPL, Inc. 7.25 10/15/2021 1,724
5,000 Duke Energy Corp. 3.40 6/15/2029 5,161
3,500 Duquesne Light Holdings, Inc.(a) 5.90 12/01/2021 3,722
13,000 Duquesne Light Holdings, Inc.(a) 3.62 8/01/2027 13,138
5,000 Georgia Power Co. 3.25 4/01/2026 5,115
3,750 ITC Holdings Corp. 3.35 11/15/2027 3,872
3,000 Jersey Central Power & Light Co.(a) 4.30 1/15/2026 3,215
3,000 N.V. Energy, Inc. 6.25 11/15/2020 3,139
12,000 PPL Capital Funding, Inc. (3 mo. LIBOR + 2.67%) 4.99(c) 3/30/2067 10,914
10,000 Southern Co. 3.25 7/01/2026 10,201
5,000 System Energy Resources, Inc. 4.10 4/01/2023 5,234
10,000 Vistra Operations Co., LLC(a) 4.30 7/15/2029 10,058
4,500 WEC Energy Group, Inc. (3 mo. LIBOR + 2.11%) 4.63(c) 5/15/2067 3,751
10,000 Xcel Energy, Inc. 3.30 6/01/2025 10,330
----------
127,065
----------
GAS (0.6%)
10,000 National Fuel Gas Co. 3.75 3/01/2023 10,168
1,000 National Fuel Gas Co. 7.38 6/13/2025 1,172
4,000 National Fuel Gas Co. 3.95 9/15/2027 3,995
6,120 Spire, Inc. 3.54 2/27/2024 6,181
----------
21,516
----------
WATER (0.3%)
10,000 Aquarion Co.(a) 4.00 8/15/2024 10,429
----------
Total Utilities 159,010
----------
Total Corporate Obligations (cost: $1,810,647) 1,883,921
----------
EURODOLLAR AND YANKEE OBLIGATIONS (20.7%)
BASIC MATERIALS (3.1%)
----------------------
CHEMICALS (0.8%)
10,000 Braskem Finance Ltd. 6.45 2/03/2024 11,098
3,000 Incitec Pivot Finance, LLC(a) 6.00 12/10/2019 3,033
7,230 Yara International ASA(a) 3.80 6/06/2026 7,305
7,773 Yara International ASA(a) 4.75 6/01/2028 8,372
----------
29,808
----------
================================================================================
30 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
IRON/STEEL (0.5%)
$ 2,000 ArcelorMittal 5.50% 3/01/2021 $ 2,080
4,000 ArcelorMittal 6.25 2/25/2022 4,322
5,000 Vale Overseas Ltd. 4.38 1/11/2022 5,162
5,000 Vale Overseas Ltd. 6.25 8/10/2026 5,680
----------
17,244
----------
MINING (1.8%)
2,500 Anglo American Capital plc(a) 3.75 4/10/2022 2,554
6,333 Anglo American Capital plc(a) 4.00 9/11/2027 6,396
5,000 First Quantum Minerals Ltd.(a) 6.88 3/01/2026 4,721
12,000 Fresnillo plc(a) 5.50 11/13/2023 12,998
15,000 Glencore Funding, LLC(a) 4.00 3/27/2027 15,317
5,000 Glencore Funding, LLC(a) 4.88 3/12/2029 5,301
3,000 Kinross Gold Corp. 4.50 7/15/2027 3,038
3,000 Southern Copper Corp. 3.88 4/23/2025 3,114
5,000 Teck Resources Ltd. 3.75 2/01/2023 5,083
10,000 Teck Resources Ltd. 6.13 10/01/2035 11,437
----------
69,959
----------
Total Basic Materials 117,011
----------
COMMUNICATIONS (0.5%)
---------------------
INTERNET (0.1%)
5,000 Tencent Holdings Ltd.(a) 3.98 4/11/2029 5,267
----------
MEDIA (0.1%)
4,622 Pearson Funding Four plc(a) 3.75 5/08/2022 4,634
----------
TELECOMMUNICATIONS (0.3%)
10,000 Deutsche Telekom International Finance B.V.(a) 4.38 6/21/2028 10,941
----------
Total Communications 20,842
----------
CONSUMER, CYCLICAL (1.5%)
-------------------------
AIRLINES (1.4%)
5,000 Air Canada Pass-Through Trust(a) 5.00 3/15/2020 5,039
2,887 Air Canada Pass-Through Trust(a) 5.38 5/15/2021 2,954
7,395 Air Canada Pass-Through Trust(a) 3.88 9/15/2024 7,444
7,377 Air Canada Pass-Through Trust(a) 4.13 5/15/2025 7,758
5,132 Air Canada Pass-Through Trust(a) 3.75 12/15/2027 5,359
11,250 British Airways Pass-Through Trust(a) 4.63 6/20/2024 11,851
2,500 British Airways Pass-Through Trust(a) 3.35 6/15/2029 2,522
2,774 Latam Airlines Pass-Through Trust 4.20 11/15/2027 2,787
10,000 WestJet Airlines Ltd.(a) 3.50 6/16/2021 10,031
----------
55,745
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 31
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
RETAIL (0.1%)
$ 3,334 Alimentation Couche-Tard, Inc.(a) 3.55% 7/26/2027 $ 3,419
----------
Total Consumer, Cyclical 59,164
----------
CONSUMER, NON-CYCLICAL (2.6%)
-----------------------------
AGRICULTURE (0.7%)
2,000 BAT Capital Corp. 4.39 8/15/2037 1,932
10,000 Imperial Brands Finance plc(a) 4.25 7/21/2025 10,482
5,000 Imperial Brands Finance plc(a) 3.50 7/26/2026 4,975
8,000 Viterra, Inc.(a) 5.95 8/01/2020 8,243
----------
25,632
----------
BEVERAGES (0.7%)
5,000 Anheuser-Busch InBev Worldwide, Inc. 4.90 1/23/2031 5,812
6,500 Anheuser-Busch InBev Worldwide, Inc. 4.38 4/15/2038 7,014
5,000 Bacardi Ltd.(a) 2.75 7/15/2026 4,757
10,000 Becle S.A.B de C.V.(a) 3.75 5/13/2025 10,128
----------
27,711
----------
COMMERCIAL SERVICES (0.2%)
2,500 Ashtead Capital, Inc.(a) 4.13 8/15/2025 2,533
2,500 Ashtead Capital, Inc.(a) 5.25 8/01/2026 2,619
3,333 RELX Capital, Inc. 4.00 3/18/2029 3,563
----------
8,715
----------
HEALTHCARE-SERVICES (0.3%)
10,000 Fresenius Medical Care U.S. Finance III, Inc.(a) 3.75 6/15/2029 9,934
----------
PHARMACEUTICALS (0.7%)
5,405 Bayer U.S. Finance II, LLC(a) 2.85 4/15/2025 5,074
5,000 Bayer U.S. Finance II, LLC(a) 4.63 6/25/2038 5,059
18,000 Teva Pharmaceutical Finance Netherlands III B.V. 3.15 10/01/2026 14,021
500 Teva Pharmaceutical Finance Netherlands III B.V. 6.75 3/01/2028 448
3,000 Teva Pharmaceutical Finance Netherlands III B.V. 4.10 10/01/2046 1,992
----------
26,594
----------
Total Consumer, Non-cyclical 98,586
----------
DIVERSIFIED (0.4%)
------------------
HOLDING COMPANIES-DIVERSIFIED (0.4%)
7,500 CK Hutchison International Ltd.(a) 2.75 10/03/2026 7,397
5,000 CK Hutchison International Ltd.(a) 3.50 4/05/2027 5,172
2,000 Hutchison Whampoa International Ltd.(a) 4.63 1/13/2022 2,091
----------
Total Diversified 14,660
----------
================================================================================
32 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
ENERGY (1.6%)
-------------
OIL & GAS (1.4%)
$ 2,750 Aker BP ASA(a) 6.00% 7/01/2022 $ 2,831
5,000 Aker BP ASA(a) 4.75 6/15/2024 5,151
4,500 Canadian Natural Resources Ltd. 3.85 6/01/2027 4,655
5,000 Eni SpA(a) 4.75 9/12/2028 5,506
2,940 Hunt Oil Co. of Peru, LLC Sucursal Del Peru(a) 6.38 6/01/2028 3,320
1,000 Husky Energy, Inc. 7.25 12/15/2019 1,017
5,000 Petroleos Mexicanos 4.50 1/23/2026 4,586
10,000 Petroleos Mexicanos 6.50 3/13/2027 9,986
5,000 Saudi Arabian Oil Co.(a) 3.50 4/16/2029 5,122
5,000 Saudi Arabian Oil Co.(a) 4.38 4/16/2049 5,193
2,000 Woodside Finance Ltd.(a) 4.60 5/10/2021 2,053
4,400 Woodside Finance Ltd.(a) 4.50 3/04/2029 4,698
----------
54,118
----------
PIPELINES (0.2%)
5,000 APT Pipelines Ltd.(a) 4.20 3/23/2025 5,248
----------
Total Energy 59,366
----------
FINANCIAL (8.0%)
----------------
BANKS (5.7%)
10,000 ABN AMRO Bank N.V.(a) 4.75 7/28/2025 10,736
10,000 ABN AMRO Bank N.V.(a) 4.80 4/18/2026 10,792
10,000 Australia & New Zealand Banking Group Ltd.(a) 4.40 5/19/2026 10,504
3,750 Bank of Montreal (5 Yr. Semi-Annual Swap + 1.43%) 3.80(j) 12/15/2032 3,813
2,450 Barclays Bank plc (6 mo. LIBOR + 0.25%),
acquired 4/13/2012; cost $1,188(l) 2.44(c) -(m) 1,713
6,200 Barclays plc 4.84 5/09/2028 6,292
15,000 BNP Paribas S.A.(a) 4.38 5/12/2026 15,814
5,000 BPCE S.A.(a) 4.63 9/12/2028 5,553
8,451 Cooperatieve Rabobank U.A. 3.95 11/09/2022 8,748
10,000 Credit Suisse Group Funding Guernsey Ltd. 4.55 4/17/2026 10,856
8,000 Deutsche Bank AG 5.00 2/14/2022 8,257
10,000 HSBC Bank plc (6 mo. LIBOR + 0.25%), acquired
1/18/2045-4/03/2012; cost $2,450-$2,500(l) 2.50(c) -(m) 6,905
10,000 HSBC Holdings plc 3.90 5/25/2026 10,475
5,900 ING Groep N.V. 3.95 3/29/2027 6,273
5,000 ING Groep N.V. 4.55 10/02/2028 5,575
5,000 Lloyds Banking Group plc 4.55 8/16/2028 5,366
5,000 Lloyds Banking Group plc (3 mo. LIBOR + 1.21%) 3.57(j) 11/07/2028 4,961
10,000 Nordea Bank Abp(a) 4.25 9/21/2022 10,405
4,000 Royal Bank of Scotland Group plc
(3 mo. LIBOR + 2.32%) 4.65(c) -(m) 3,792
================================================================================
PORTFOLIO OF INVESTMENTS | 33
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 10,000 Royal Bank of Scotland Group plc 6.13% 12/15/2022 $ 10,789
5,000 Royal Bank of Scotland Group plc
(1 mo. LIBOR + 1.91%) 5.08(j) 1/27/2030 5,397
15,000 Santander UK plc(a) 5.00 11/07/2023 15,816
7,500 Societe Generale S.A.(a) 3.88 3/28/2024 7,761
7,500 Standard Chartered plc (1 mo. LIBOR + 1.97%)(a) 4.87(j) 3/15/2033 7,860
7,500 Swedbank AB(a) 2.65 3/10/2021 7,499
5,000 Westpac Banking Corp.
(5 Yr. Semi-Annual Swap + 2.24%) 4.32(j) 11/23/2031 5,179
10,000 Westpac Banking Corp.
(5 Yr. Semi-Annual Swap + 2.00%) 4.11(j) 7/24/2034 10,203
----------
217,334
----------
DIVERSIFIED FINANCIAL SERVICES (0.3%)
3 Ahold Lease USA, Inc. Pass-Through Trust 7.82 1/02/2020 3
1,500 Avolon Holdings Funding Ltd.(a) 5.25 5/15/2024 1,611
5,000 Avolon Holdings Funding Ltd.(a) 4.38 5/01/2026 5,167
5,000 Brookfield Finance, Inc. 4.85 3/29/2029 5,488
----------
12,269
----------
INSURANCE (1.2%)
8,000 Oil Insurance Ltd. (3 mo. LIBOR + 2.98%)(a) 5.30(c) -(m) 7,670
20,056 QBE Capital Funding III Ltd. (10 Yr.
Semi-Annual Swap + 4.05%)(a) 7.25(j) 5/24/2041 21,259
5,000 XLIT Ltd. (3 mo. LIBOR + 2.46%) 4.76(c) -(m) 4,971
10,000 XLIT Ltd. 4.45 3/31/2025 10,736
----------
44,636
----------
REAL ESTATE (0.1%)
4,167 Ontario Teachers' Cadillac Fairview
Properties Trust(a) 4.13 2/01/2029 4,529
----------
REITS (0.3%)
10,750 WEA Finance, LLC / Westfield UK &
Europe Finance plc(a) 3.75 9/17/2024 11,262
----------
SAVINGS & LOANS (0.4%)
2,850 Nationwide Building Society
(3 mo. LIBOR + 1.39%)(a) 4.36(j) 8/01/2024 2,963
10,000 Nationwide Building Society(a) 4.00 9/14/2026 10,006
----------
12,969
----------
Total Financial 302,999
----------
================================================================================
34 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
INDUSTRIAL (1.8%)
-----------------
AEROSPACE/DEFENSE (0.3%)
$ 10,000 BAE Systems Holdings, Inc.(a) 3.85% 12/15/2025 $ 10,389
----------
BUILDING MATERIALS (0.1%)
1,154 Boral Finance Proprietary Ltd.(a) 3.75 5/01/2028 1,166
3,000 CRH America, Inc. 5.75 1/15/2021 3,129
----------
4,295
----------
ELECTRONICS (0.0%)
1,200 Tyco Electronics Group S.A. 3.13 8/15/2027 1,206
----------
ENGINEERING & CONSTRUCTION (0.6%)
10,000 Heathrow Funding Ltd.(a) 4.88 7/15/2021 10,364
10,000 Sydney Airport Finance Co. Proprietary Ltd.(a) 3.90 3/22/2023 10,407
2,000 Sydney Airport Finance Co. Proprietary Ltd.(a) 3.63 4/28/2026 2,054
----------
22,825
----------
MACHINERY-DIVERSIFIED (0.1%)
5,000 CNH Industrial N.V. 3.85 11/15/2027 5,065
----------
PACKAGING & CONTAINERS (0.5%)
5,000 Amcor Finance USA, Inc.(a) 3.63 4/28/2026 5,065
1,000 Ardagh Packaging Finance plc / Ardagh
Holdings USA, Inc.(a) 4.25 9/15/2022 1,015
5,500 Brambles USA, Inc.(a) 4.13 10/23/2025 5,755
7,500 CCL Industries, Inc.(a) 3.25 10/01/2026 7,409
----------
19,244
----------
TRANSPORTATION (0.1%)
4,261 Pacific National Finance Proprietary Ltd.(a) 4.63 9/23/2020 4,338
----------
TRUCKING & LEASING (0.1%)
2,898 DAE Funding, LLC(a) 4.50 8/01/2022 2,951
----------
Total Industrial 70,313
----------
UTILITIES (1.2%)
----------------
ELECTRIC (1.2%)
5,000 Comision Federal de Electricidad(a) 4.75 2/23/2027 5,156
6,000 EDP Finance B.V.(a) 4.13 1/15/2020 6,031
10,000 Electricite de France S.A.
(10 Yr. Semi-Annual Swap + 3.71%)(a) 5.25(j) -(m) 10,230
5,000 Emera U.S. Finance, LP 3.55 6/15/2026 5,151
5,000 Enel Finance International N.V.(a) 3.63 5/25/2027 5,050
6,192 Fortis, Inc. 3.06 10/04/2026 6,200
5,000 Infraestructura Energetica Nova S.A.B. de C.V.(a) 3.75 1/14/2028 4,700
================================================================================
PORTFOLIO OF INVESTMENTS | 35
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 3,500 Transelec S.A.(a) 3.88% 1/12/2029 $ 3,559
----------
Total Utilities 46,077
----------
Total Eurodollar and Yankee Obligations (cost: $757,743) 789,018
----------
FOREIGN GOVERNMENT OBLIGATIONS (0.2%)
5,000 Italy Government International Bond (cost: $5,930) 5.38 6/15/2033 5,566
----------
MUNICIPAL OBLIGATIONS (3.3%)
CALIFORNIA (0.3%)
3,000 Long Beach Unified School District 5.91 8/01/2025 3,440
3,000 Los Alamitos Unified School District 6.19 2/01/2026 3,671
5,000 San Jose Redev. Agency Successor Agency 3.23 8/01/2027 5,245
----------
12,356
----------
COLORADO (0.0%)
1,000 State Board of Governors Univ. Enterprise System 4.90 3/01/2021 1,039
----------
CONNECTICUT (0.2%)
1,250 City of New Haven 4.43 8/01/2028 1,383
2,200 State 3.69 9/15/2024 2,323
3,000 State Dev. Auth. 5.50 4/01/2021 3,194
----------
6,900
----------
FLORIDA (0.3%)
3,300 Miami-Dade County Transit System 4.59 7/01/2021 3,438
4,000 Palm Beach County School District 5.40 8/01/2025 4,627
2,500 Tohopekaliga Water Auth. (PRE) 5.25 10/01/2036 2,719
----------
10,784
----------
ILLINOIS (0.1%)
2,470 Chicago Midway International Airport 5.00 1/01/2025 2,827
1,500 Finance Auth. 5.45 8/01/2038 1,648
----------
4,475
----------
MARYLAND (0.4%)
3,000 Baltimore Board of School Commissioners 5.69 12/15/2025 3,546
2,295 EDC 4.05 6/01/2027 2,386
2,390 EDC 4.15 6/01/2028 2,495
2,490 EDC 4.25 6/01/2029 2,609
1,330 EDC 4.35 6/01/2030 1,401
1,385 EDC 4.40 6/01/2031 1,462
----------
13,899
----------
MASSACHUSETTS (0.0%)
750 Dev. Finance Agency 4.00 6/01/2024 765
----------
================================================================================
36 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
NEW JERSEY (0.6%)
$ 2,525 City of Atlantic 4.23% 9/01/2025 $ 2,683
2,410 City of Atlantic 4.29 9/01/2026 2,562
10,000 EDA 4.45 6/15/2020 10,148
2,500 EDA 5.71 6/15/2030 2,927
3,000 Transportation Trust Fund Auth. 5.75 12/15/2028 3,449
----------
21,769
----------
NEW YORK (0.6%)
5,000 City of New York 6.27 12/01/2037 6,831
5,000 MTA 6.73 11/15/2030 6,502
2,500 New York City Transitional Finance Auth. 5.00 2/01/2035 2,636
3,500 State Mortgage Agency 4.20 10/01/2027 3,591
1,825 Town of Oyster Bay 3.80 2/01/2020 1,831
1,500 Town of Oyster Bay 3.95 2/01/2021 1,521
----------
22,912
----------
NORTH CAROLINA (0.1%)
3,000 City of Kannapolis 7.28 3/01/2027 3,080
----------
OHIO (0.1%)
3,000 Miami University 6.67 9/01/2028 3,763
----------
OKLAHOMA (0.2%)
7,951 Dev. Finance Auth. 5.45 8/15/2028 8,992
----------
PENNSYLVANIA (0.0%)
1,000 Economic Dev. Finance Auth. 3.20 11/15/2027 1,031
----------
TEXAS (0.4%)
3,430 City of Austin CCD 6.76 8/01/2030 4,451
4,350 Ector County Hospital District 6.80 9/15/2025 4,436
1,480 Gainesville Hospital District 4.56 8/15/2021 1,511
4,100 Harris County 4.45 11/15/2031 4,217
----------
14,615
----------
Total Municipal Obligations (cost: $114,393) 126,380
----------
PREFERRED BONDS (0.1%)
FINANCIAL (0.1%)
----------------
INSURANCE (0.1%)
3,000 Catlin Insurance Co. Ltd.
(3 mo. LIBOR + 2.98%)(a) (cost: $3,000) 5.28(c) -(m) 2,994
----------
U.S. GOVERNMENT AGENCY ISSUES (3.7%)(n)
COMMERCIAL MBS (3.5%)
107,209 Fannie Mae(+)(g) 0.53(f) 4/25/2022 981
================================================================================
PORTFOLIO OF INVESTMENTS | 37
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
$ 3,500 Fannie Mae(+) 2.79%(f) 2/25/2027 $ 3,594
2,500 Fannie Mae(+) 2.96(f) 2/25/2027 2,584
3,553 Fannie Mae(+) 3.04(f) 3/25/2028 3,722
64,866 Freddie Mac(+)(g) 0.83(f) 10/25/2022 1,405
66,786 Freddie Mac(+)(g) 1.25(f) 8/25/2022 2,165
37,123 Freddie Mac(+)(g) 1.30(f) 12/25/2021 882
20,215 Freddie Mac(+)(g) 1.61(f) 3/25/2022 678
20,000 Freddie Mac(+) 2.65 8/25/2026 20,395
15,000 Freddie Mac(+) 2.67 3/25/2026 15,317
12,000 Freddie Mac(+) 2.85 3/25/2026 12,355
2,922 Freddie Mac(+) 3.30(f) 11/25/2027 3,109
10,000 Freddie Mac(+) 3.37 7/25/2025 10,513
5,000 Freddie Mac(+) 3.41 12/25/2026 5,348
3,000 Freddie Mac(+) 3.42 2/25/2029 3,231
5,000 Freddie Mac(+) 3.43(f) 1/25/2027 5,349
891 Freddie Mac(+) 3.46 11/25/2032 963
9,857 Freddie Mac(+) 3.51 3/25/2029 10,689
3,171 Freddie Mac(+) 3.56 1/25/2029 3,448
3,000 Freddie Mac(+) 3.65(f) 2/25/2028 3,267
5,000 Freddie Mac(+) 3.69 1/25/2029 5,487
10,000 Freddie Mac(+) 3.77 12/25/2028 11,031
4,800 Freddie Mac(+) 3.79 1/25/2034 5,342
3,000 FREMF Mortgage Trust(a) 3.49(f) 11/25/2023 3,064
----------
134,919
----------
FGLMC COLLATERAL (0.0%)
39 Freddie Mac(+) 5.00 9/01/2020 39
56 Freddie Mac(+) 5.50 4/01/2036 63
----------
102
----------
FNMA COLLATERAL (0.2%)
5,923 Fannie Mae(+) 2.50 7/01/2027 5,964
----------
Total U.S. Government Agency Issues (cost: $135,447) 140,985
----------
U.S. TREASURY SECURITIES (6.7%)
BONDS (4.0%)
5,050 U.S. Treasury Bond 2.25 8/15/2046 4,765
50,000 U.S. Treasury Bond(o),(p) 2.50 2/15/2045 49,766
20,000 U.S. Treasury Bond 2.75 8/15/2042 20,984
5,000 U.S. Treasury Bond 2.75 11/15/2042 5,237
50,000 U.S. Treasury Bond(o),(p) 3.38 11/15/2048 58,859
10,000 U.S. Treasury Bond 3.50 2/15/2039 11,855
----------
151,466
----------
================================================================================
38 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-------------------------------------------------------------------------------------------------------------
NOTES (2.7%)
$ 47,900 U.S. Treasury Note(q) 2.38% 5/15/2027 $ 49,359
10,000 U.S. Treasury Note 2.75 2/15/2028 10,600
10,000 U.S. Treasury Note 2.88 11/15/2046 10,689
30,000 U.S. Treasury Note 3.13 11/15/2028 32,808
----------
103,456
----------
Total U.S. Treasury Securities (cost: $245,278) 254,922
----------
Total Bonds (cost: $3,442,725) 3,577,263
----------
-------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
-------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (1.6%)
PREFERRED STOCKS (1.6%)
COMMUNICATIONS (0.3%)
---------------------
TELECOMMUNICATIONS (0.3%)
7,000 Centaur Funding Corp., 9.08%(a) 7,385
200,000 Qwest Corp., 6.50% 4,928
----------
Total Communications 12,313
----------
CONSUMER, NON-CYCLICAL (0.7%)
-----------------------------
AGRICULTURE (0.3%)
400,000 CHS, Inc., 7.10%, (3 mo. LIBOR + 4.30%)(c),(m) 10,812
----------
FOOD (0.4%)
150,000 Dairy Farmers of America, Inc., cumulative
redeemable, 7.88%(a),(m) 15,000
----------
Total Consumer, Non-cyclical 25,812
----------
FINANCIAL (0.6%)
----------------
BANKS (0.2%)
87,500 Citigroup Capital XIII, 8.64%, (3 mo. LIBOR + 6.37%)(c) 2,380
50,000 HSBC Holdings plc, 6.20% (m) 1,314
5,000 U.S. Bancorp, 3.50%, (3 mo. LIBOR + 1.02%)(c),(m) 4,125
----------
7,819
----------
INSURANCE (0.2%)
2,000 American Overseas Group Ltd., non-cumulative, 5.82%,
(3 mo. LIBOR + 3.56%)(c),(i),(r),(s) 500
369,987 Delphi Financial Group, Inc., cumulative
redeemable, 5.71%, (3 mo. LIBOR + 3.19%)(c) 8,232
----------
8,732
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 39
================================================================================
-------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------
REITS (0.2%)
100,000 Equity Residential Properties Trust, 8.29%, Series K,
depositary shares, cumulative redeemable(m) $ 6,475
----------
Total Financial 23,026
----------
GOVERNMENT (0.0%)
-----------------
SOVEREIGN (0.0%)
2,000 CoBank ACB, 3.52%, (3 mo. LIBOR + 1.18%)(a),(c),(m) 1,330
----------
Total Preferred Stocks (cost: $62,431) 62,481
----------
Total Equity Securities (cost: $62,431) 62,481
----------
-------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
-------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (3.2%)
COMMERCIAL PAPER (3.2%)
$ 15,000 AutoZone, Inc. 2.46% 8/02/2019 14,999
8,933 Canadian Natural Resources Ltd. 2.46 8/06/2019 8,930
5,767 Canadian Natural Resources Ltd. 2.46 8/14/2019 5,762
5,000 CenterPoint Energy, Inc. 2.53 8/02/2019 5,000
8,510 CenterPoint Energy, Inc.(a) 2.48 8/14/2019 8,502
15,000 CSLB Holdings, Inc.(a) 2.50 8/12/2019 14,988
10,000 Duke Energy Corp. 2.46 8/02/2019 9,999
7,400 Fortive Corp. 2.57 8/07/2019 7,397
12,000 Glencore Funding, LLC 2.55 8/05/2019 11,997
6,720 Hyundai Capital America 2.47 8/06/2019 6,718
5,000 Nutrien Ltd. 2.44 8/07/2019 4,998
15,000 Ryder System, Inc. 2.42 8/09/2019 14,992
8,575 Spire, Inc. 2.45 8/16/2019 8,566
----------
Total Commercial Paper (cost: $122,848) 122,848
----------
-------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
-------------------------------------------------------------------------------------------------------------
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.0%)
46,073 State Street Institutional Treasury Money Market Fund
Premier Class, 2.09%(t) (cost: $46) 46
----------
Total Money Market Instruments (cost: $122,894) 122,894
----------
================================================================================
40 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
-------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (0.1%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.1%)
1,779,565 HSBC U.S. Government Money Market Fund Class I, 2.26%(t) $ 1,780
----------
Total Short-Term Investment Purchased with Cash Collateral from
Securities Loaned (cost: $1,780) 1,780
----------
TOTAL INVESTMENTS (COST: $3,629,830) $3,764,418
==========
-------------------------------------------------------------------------------------------------------------
UNREALIZED
NOTIONAL APPRECIATION/
NUMBER OF EXPIRATION AMOUNT CONTRACT (DEPRECIATION)
CONTRACTS DESCRIPTION DATE (000) VALUE (000) (000)
-------------------------------------------------------------------------------------------------------------
FUTURES (1.4%)
LONG FUTURES
INTEREST RATE CONTRACTS
180 U.S. Treasury Bond 9/19/2019 USD 27,062 $28,007 $ 945
200 U.S. Treasury Note 9/19/2019 USD 25,044 25,484 440
------- ------
TOTAL LONG FUTURES $53,491 $1,385
------- ------
TOTAL FUTURES $53,491 $1,385
======= ======
================================================================================
PORTFOLIO OF INVESTMENTS | 41
================================================================================
-------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
-------------------------------------------------------------------------------------------------------------
Assets LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------------------------------------------------------------------------------------------------------
Bonds:
Asset-Backed Securities $ - $ 75,328 $ - $ 75,328
Bank Loans - 84,695 - 84,695
Collateralized Loan Obligations - 87,803 - 87,803
Collateralized Mortgage Obligations - 1,638 - 1,638
Commercial Mortgage Securities - 124,013 - 124,013
Corporate Obligations - 1,883,921 - 1,883,921
Eurodollar and Yankee Obligations - 789,018 - 789,018
Foreign Government Obligations - 5,566 - 5,566
Municipal Obligations - 126,380 - 126,380
Preferred Bonds - 2,994 - 2,994
U.S. Government Agency Issues - 140,985 - 140,985
U.S. Treasury Securities 254,922 - - 254,922
Equity Securities:
Preferred Stocks 1,314 60,667 500 62,481
Money Market Instruments:
Commercial Paper - 122,848 - 122,848
Government & U.S. Treasury Money
Market Funds 46 - - 46
Short-Term Investment Purchased with
Cash Collateral from Securities Loaned:
Government & U.S. Treasury Money
Market Funds 1,780 - - 1,780
Futures(1) 1,385 - - 1,385
-------------------------------------------------------------------------------------------------------------
Total $259,447 $3,505,856 $500 $3,765,803
-------------------------------------------------------------------------------------------------------------
(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 July 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
42 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
July 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 24.7% of net assets at July 31, 2019.
o CATEGORIES AND DEFINITIONS
EURODOLLAR AND YANKEE OBLIGATIONS - Eurodollar obligations are U.S.
dollar-denominated instruments that are issued outside the U.S. capital
markets by foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions. Yankee obligations
are dollar-denominated instruments that are issued by foreign issuers in the
U.S. capital markets.
ASSET-BACKED AND COMMERCIAL MORTGAGE-BACKED SECURITIES - Asset-backed
securities represent a participation in, or are secured by and payable from,
a stream of payments generated by particular assets. Commercial
mortgage-backed securities reflect an interest in, and are secured by,
mortgage loans on commercial real property. These securities represent
ownership in a pool of loans and are divided into pieces (tranches) with
varying maturities. The stated final maturity of such securities represents
the date the final principal payment will be made for the last outstanding
loans in the pool. The weighted average life is the average time for
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 43
================================================================================
principal to be repaid, which is calculated by assuming prepayment rates of
the underlying loans. The weighted average life is likely to be
substantially shorter than the stated final maturity as a result of
scheduled principal payments and unscheduled principal prepayments. Stated
interest rates on commercial mortgage-backed securities may change slightly
over time as underlying mortgages paydown.
COLLATERALIZED LOAN OBLIGATIONS (CLOs) - Collateralized loan obligations are
securities issued by entities that are collateralized by a pool of loans.
CLOs are issued in multiple classes (tranches), and can be equity or debt
with specific adjustable or fixed interest rates, and varying maturities.
The cash flow from the underlying loans is used to pay off each tranche
separately within the debt, or senior tranches. Equity, or subordinated
tranches, typically are not paid a cash flow but do offer ownership in the
CLO itself in the event of a sale.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs) - Collateralized mortgage
obligations are debt obligations of a legal entity that are fully
collateralized by a portfolio of mortgages or mortgage-related securities.
CMOs are issued in multiple classes (tranches), with specific adjustable or
fixed interest rates, varying maturities, and must be fully retired no later
than its final distribution date. The cash flow from the underlying
mortgages is used to pay off each tranche separately. CMOs are designed to
provide investors with more predictable cash flows than regular mortgage
securities, but such cash flows can be difficult to predict because of the
effect of prepayments.
COMMERCIAL PAPER - Consists of short-term unsecured promissory notes with
maturities ranging from one to 270 days, issued mainly by corporations.
Commercial paper is usually purchased at a discount and matures at par
value; however, it also may be interest-bearing. Rate represents an
annualized yield at time of purchase or coupon rate, if applicable.
================================================================================
44 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
CCD Community College District
CMT Constant Maturity Treasury
EDA Economic Development Authority
EDC Economic Development Corp.
LIBOR London Interbank Offered Rate
MTA Metropolitan Transportation Authority
PRE Pre-refunded to a date prior to maturity
REITS Real estate investment trusts - Dividend distributions from REITS
may be recorded as income and later characterized by the REIT at
the end of the fiscal year as capital gains or a return of
capital. Thus, the Fund will estimate the components of
distributions from these securities and revise when actual
distributions are known.
CREDIT ENHANCEMENTS - Adds the financial strength of the provider of the
enhancement to support the issuer's ability to repay the principal and
interest payments when due. The enhancement may be provided by a
high-quality bank, insurance company or other corporation, or a collateral
trust. The enhancements do not guarantee the market values of the
securities.
INS Principal and interest payments are insured by the name listed.
Although bond insurance reduces the risk of loss due to default by
an issuer, such bonds remain subject to the risk that value may
fluctuate for other reasons, and there is no assurance that the
insurance company will meet its obligations.
o SPECIFIC NOTES
(a) Restricted security that is not registered under the Securities Act of
1933. A resale of this security in the United States may occur in an
exempt transaction to a qualified institutional buyer as defined by
Rule 144A, and as such has been deemed liquid by Victory Capital under
liquidity guidelines approved by USAA Mutual Funds Trust's Board of
Trustees, unless otherwise noted as illiquid.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 45
================================================================================
(b) Security or a portion of the security purchased on a delayed-delivery
and/or when-issued basis.
(c) Variable-rate security - interest rate is adjusted periodically. The
interest rate disclosed represents the rate at July 31, 2019.
(d) Bank loans (loans) - are not registered under the Securities Act of
1933. The loans contain certain restrictions on resale and cannot be
sold publicly. The stated interest rates represent the all in interest
rate of all contracts within the loan facilities. The interest rates
are adjusted periodically, and the rates disclosed represent the
current rate at July 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
Victory Capital, under liquidity guidelines approved by USAA Mutual
Funds Trust's Board of Trustees, unless otherwise noted as illiquid.
(e) The bank loan will settle after July 31, 2019, at which time the
interest rate will be determined.
(f) Stated interest rates may change slightly over time as underlying
mortgages paydown.
(g) Security is interest only. Interest-only commercial mortgage-backed
securities (CMBS IOs) represent the right to receive only the interest
payments on an underlying pool of commercial mortgage loans. The
purchase yield reflects an anticipated yield based upon interest rates
at the time of purchase and the estimated timing and amount of future
cash flows. Coupon rates after purchase vary from period to period. The
principal amount represents the notional amount of the underlying pool
on which current interest is calculated. CMBS IOs are backed by loans
that have various forms of prepayment protection, which include
lock-out provisions, yield maintenance provisions, and prepayment
penalties. This serves to moderate their prepayment risk. CMBS IOs are
subject to default-related prepayments that may have a negative impact
on yield.
(h) The security, or a portion thereof, was out on loan as of July 31, 2019.
================================================================================
46 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
(i) Security deemed illiquid by Victory Capital, under liquidity guidelines
approved by USAA Mutual Funds Trust's Board of Trustees.
(j) 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.
(k) Put bond - provides the right to sell the bond at face value at specific
tender dates prior to final maturity. The put feature shortens the
effective maturity of the security.
(l) Restricted security that is not registered under the Securities Act of
1933. The aggregate market value of these securities at July 31, 2019,
was $8,618,000, which represented 0.2% of the Fund's net assets.
(m) Security is perpetual and has no final maturity date but may be subject
to calls at various dates in the future.
(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
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 47
================================================================================
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 July 31, 2019.
(p) At July 31, 2019, the security, or a portion thereof, was segregated to
cover delayed-delivery and/or when-issued purchases.
(q) Securities with a value of $2,061,000 are segregated as collateral for
initial margin requirements on open futures contracts.
(r) Security was fair valued at July 31, 2019, by Victory Capital in
accordance with valuation procedures approved by USAA Mutual Funds
Trust's Board of Trustees. The total value of all such securities was
$500,000, which represented less than 0.1% of the Fund's net assets.
(s) Security was classified as Level 3.
(t) Rate represents the money market fund annualized seven-day yield at
July 31, 2019.
See accompanying notes to financial statements.
================================================================================
48 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
July 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (including
securities on loan of $1,695) (cost of $3,629,830) $3,764,418
Receivables:
Capital shares sold 1,467
Victory Capital (Note 8) 4
Interest 36,180
Securities sold 39,065
Other 17
Variation margin on futures contracts 1,386
----------
Total assets 3,842,537
----------
LIABILITIES
Payables:
Upon return of securities loaned 1,780
Securities purchased 29,994
Capital shares redeemed 2,662
Bank overdraft 152
Payable to broker 1,137
Dividends on capital shares 392
Accrued administration and servicing fees 405
Accrued management fees 976
Accrued transfer agent's fees 322
Other accrued expenses and payables 169
----------
Total liabilities 37,989
----------
Net assets applicable to capital shares outstanding $3,804,548
==========
NET ASSETS CONSIST OF:
Paid-in capital $3,661,830
Distributable earnings 142,718
----------
Net assets applicable to capital shares outstanding $3,804,548
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $1,949,989/180,889 capital shares
outstanding, no par value) $ 10.78
==========
Institutional Shares (net assets of $1,798,154/166,783 capital shares
outstanding, no par value) $ 10.78
==========
Adviser Shares (net assets of $50,892/4,726 capital shares
outstanding, no par value) $ 10.77
==========
R6 Shares (net assets of $5,513/511 capital shares
outstanding, no par value) $ 10.79
==========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 49
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended July 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 4,105
Interest 158,904
Securities lending (net) 266
--------
Total income 163,275
--------
EXPENSES
Management fees 13,176
Administration and servicing fees:
Fund Shares 2,817
Institutional Shares 1,822
Adviser Shares 73
R6 Shares 2
Transfer agent's fees:
Fund Shares 2,084
Institutional Shares 1,822
Adviser Shares 54
R6 Shares 1
Distribution and service fees (Note 8):
Adviser Shares 121
Custody and accounting fees:
Fund Shares 260
Institutional Shares 252
Adviser Shares 7
R6 Shares 1
Postage:
Fund Shares 83
Institutional Shares 51
Adviser Shares 2
Shareholder reporting fees:
Fund Shares 54
Institutional Shares 10
Adviser Shares 1
Trustees' fees 37
Registration fees:
Fund Shares 63
Institutional Shares 131
================================================================================
50 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
Adviser Shares $ 17
R6 Shares 16
Professional fees 106
Other 50
--------
Total expenses 23,113
--------
Expenses reimbursed:
R6 Shares (18)
--------
Net expenses 23,095
--------
NET INVESTMENT INCOME 140,180
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FOREIGN CURRENCY, AND FUTURES CONTRACTS
Net realized gain (loss) on:
Unaffiliated transactions 6,562
Affiliated transactions (Note 5) (1,637)
Foreign currency transactions 3
Futures transactions 4,558
Change in net unrealized appreciation/(depreciation) of:
Investments 148,176
Foreign currency translations (1)
Futures contracts 2,271
--------
Net realized and unrealized gain 159,932
--------
Increase in net assets resulting from operations $300,112
--------
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 51
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended July 31,
--------------------------------------------------------------------------------------------------------
2019 2018
--------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 140,180 $ 141,526
Net realized gain on investments 4,925 3,787
Net realized gain (loss) on foreign currency transactions 3 (9)
Net realized gain on futures transactions 4,558 480
Change in net unrealized appreciation/(depreciation) of:
Investments 148,176 (146,689)
Foreign currency translations (1) -
Futures contracts 2,271 (886)
-------------------------------------
Increase (decrease) in net assets resulting from
operations 300,112 (1,791)
-------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (69,671) (68,358)
Institutional Shares (68,783) (70,776)
Adviser Shares (1,653) (1,944)
R6 Shares (205) (190)
-------------------------------------
Distributions to shareholders (140,312) (141,268)
-------------------------------------
NET DECREASE IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 7)
Fund Shares (38,027) 29,056
Institutional Shares (243,763) (14,756)
Adviser Shares (4,370) (18,998)
R6 Shares 288 17
-------------------------------------
Total net decrease in net assets from
capital share transactions (285,872) (4,681)
-------------------------------------
Net decrease in net assets (126,072) (147,740)
NET ASSETS
Beginning of year 3,930,620 4,078,360
-------------------------------------
End of year $3,804,548 $3,930,620
=====================================
See accompanying notes to financial statements.
================================================================================
52 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
July 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 Intermediate-Term Bond 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
maximum current income without undue risk to principal.
The Fund consists of four classes of shares: Intermediate-Term Bond Fund Shares
(Fund Shares), Intermediate-Term Bond Fund Institutional Shares (Institutional
Shares), Intermediate-Term Bond Fund Adviser Shares (Adviser Shares), and
Intermediate-Term Bond Fund R6 Shares (R6 Shares). Each class of shares has
equal rights to assets and earnings, except that each class bears certain
class-related expenses specific to the particular class. These expenses include
administration and servicing fees, transfer agent fees, postage, shareholder
reporting fees, distribution and service (12b-1) fees, and certain registration
and custodian fees. Expenses not attributable to a specific class, income, and
realized gains or losses on investments are allocated to each class of shares
based on each class' relative net assets. Each class has exclusive voting rights
on matters related solely to that class and separate voting rights on matters
that relate to all classes. The Institutional Shares are available for
investment through a USAA discretionary managed account program and certain
advisory programs sponsored by financial intermediaries, such as brokerage
firms, investment advisors, financial planners, third-party administrators, and
insurance companies. Institutional Shares also are available to institutional
investors, which include retirement plans, endowments,
================================================================================
NOTES TO FINANCIAL STATEMENTS | 53
================================================================================
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 an affiliate fund
participating in a fund-of-funds investment strategy (affiliated 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), the investment adviser to the
Fund, and USAA Transfer Agency Company, d/b/a USAA Shareholder Account Services
(SAS), the transfer agent to the Fund, announced that AMCO and SAS would be
acquired by Victory Capital Holdings, Inc., a global investment management firm
headquartered in Cleveland, Ohio (the Transaction) on July 1, 2019. Effective
August 5, 2019, Citibank, N.A. is the new custodian for the USAA Mutual Funds. 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. 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.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Pricing 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.
================================================================================
54 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
The value of each security is determined (as of the close of trading on the
New York Stock Exchange (NYSE) on each business day the NYSE is open) as set
forth below:
1. Debt securities with maturities greater than 60 days are valued each
business day by a pricing service (the Service) approved by the Board.
The Service uses an evaluated bid 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.
Effective July 1, 2019, the valuation methodology applied to certain
debt securities changed. Securities that were previously valued at an
evaluated mean are now valued at the evaluated bid or the last sales
price.
2. Equity securities, including exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange or
the over-the-counter markets, are valued at the last sales price or
official closing price on the exchange or primary market on which they
trade. Securities traded primarily on foreign securities exchanges or
markets are valued at the last quoted sale price, or the most recently
determined official closing price calculated according to local market
convention, available at the time the Fund is valued. If no last sale
or official closing price is reported or available, the closing bid
price generally is used for U.S. listed equities and the average of the
bid and asked prices is used for foreign listed equities. 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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 55
================================================================================
3. Equity securities trading in various foreign markets may take place on
days when the NYSE is closed. Further, when the NYSE is open, the
foreign markets may be closed. Therefore, the calculation of the Fund's
net asset value (NAV) may not take place at the same time the prices of
certain foreign securities held by the Fund are determined. In many
cases, events affecting the values of foreign securities that occur
between the time of their last quoted sale or official closing price
and the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not need to be reflected in the value of the Fund's
foreign securities. However, the Manager will monitor for events that
would materially affect the value of the Fund's foreign securities and
the Committee will consider such available information that it deems
relevant and will determine a fair value for the affected foreign
securities in accordance with valuation procedures. In addition,
information from an external vendor or other sources may be used to
adjust the foreign market closing prices of foreign equity securities
to reflect what the Committee believes to be the fair value of the
securities as of the close of the NYSE. Fair valuation of affected
foreign equity securities may occur frequently based on an assessment
that events which occur on a fairly regular basis (such as U.S. market
movements) are significant. Such securities are categorized in Level 2
of the fair value hierarchy.
4. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value hierarchy.
5. Short-term debt securities with original or remaining maturities of 60
days or less generally are priced but may be valued at amortized cost,
provided that amortized cost represents the fair value of such
securities.
6. Repurchase agreements are valued at cost.
7. Futures are valued at the settlement price at the close of market on
the principal exchange on which they are traded or, in the absence of
any transactions that day, the last sale on the prior trading date.
================================================================================
56 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
8. Options are valued by a pricing service at the bid and ask price.
9. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has been recognized in relation to a security or class of securities,
the securities are valued in good faith by the Committee in accordance
with valuation procedures approved by the Board. The effect of fair
value pricing is that securities may not be priced on the basis of
quotations from the primary market in which they are traded and the
actual price realized from the sale of a security may differ materially
from the fair value price. Valuing these securities at fair value is
intended to cause the Fund's NAV to be more reliable than it otherwise
would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
broker-dealers, other pricing services, or widely used quotation
systems. General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and duration
of any restrictions on disposition of the securities, evaluation of
credit quality, and an evaluation of the forces that influenced the
market in which the securities are purchased and sold.
B. FAIR VALUE MEASUREMENTS - Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the Portfolio of Investments is
based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted)
in active markets for identical securities.
Level 2 - inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
that are observable for the securities, either directly or indirectly, and
market-corroborated inputs such as market indexes.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 57
================================================================================
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 July 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
================================================================================
58 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
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 JULY 31, 2019* (IN THOUSANDS)
ASSET DERIVATIVES
----------------------------------------------------------------------------------------------------
STATEMENT OF
DERIVATIVES NOT ASSETS AND FOREIGN
ACCOUNTED FOR AS LIABILITIES INTEREST RATE EQUITY EXCHANGE
HEDGING INSTRUMENTS LOCATION CONTRACTS CONTRACTS CONTRACTS TOTAL
-----------------------------------------------------------------------------------------------------
USAA Distributable $1,385 ** $- $- $1,385
Intermediate-Term earnings
Bond Fund
* For open derivative instruments as of July 31, 2019, see the Portfolio of
Investments which also is indicative of activity for the year ended July 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 THE YEAR ENDED JULY 31, 2019 (IN THOUSANDS)
NET REALIZED GAIN (LOSS)
----------------------------------------------------------------------------------------------------
DERIVATIVES NOT STATEMENT OF FOREIGN
ACCOUNTED FOR AS OPERATIONS INTEREST RATE EQUITY EXCHANGE
HEDGING INSTRUMENTS LOCATION CONTRACTS CONTRACTS CONTRACTS TOTAL
----------------------------------------------------------------------------------------------------
USAA Net realized $4,558 $- $- $4,558
Intermediate-Term gain on
Bond Fund Futures
transactions
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
----------------------------------------------------------------------------------------------------
DERIVATIVES NOT STATEMENT OF FOREIGN
ACCOUNTED FOR AS OPERATIONS INTEREST RATE EQUITY EXCHANGE
HEDGING INSTRUMENTS LOCATION CONTRACTS CONTRACTS CONTRACTS TOTAL
----------------------------------------------------------------------------------------------------
USAA Change in net $2,271 $- $- $2,271
Intermediate-Term unrealized
Bond Fund appreciation/
(depreciation)
of Futures
================================================================================
NOTES TO FINANCIAL STATEMENTS | 59
================================================================================
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 July 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.
================================================================================
60 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
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. 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 61
================================================================================
representations and warranties that provide general indemnifications. The
Trust's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Trust that have not yet
occurred. However, the Trust expects the risk of loss to be remote.
I. USE OF ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINE OF CREDIT
The Fund participates, along with other funds of the Trust and 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. 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.
For the period July 1, 2019 to July 31, 2019, the Fund paid Citibank facility
fees of 1,000, which represents 2.7% of the total fees paid to Citibank by the
funds of the Trusts. The Fund had no borrowings under this agreement during the
period July 1, 2019 to July 31, 2019. Effective July 1, 2019, the line of credit
among the Trust, with respect to its funds, and USAA Capital Corporation (CAPCO)
terminated. For the period from August 1, 2018 to June 30, 2019, the Fund paid
CAPCO facility fees of $31,000, which represents 4.6% of the total fees paid to
CAPCO by the funds of the Trusts. The Fund had no borrowings under this
agreement during the period from August 1, 2018 to June 30, 2019.
================================================================================
62 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
(3) INTERFUND LENDING
Effective July 1, 2019, the Trust relies on an exemptive order granted to
Victory Capital and its affiliated funds by the U.S. Securities and Exchange
Commission (SEC) in March 2017 (the 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 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 Order, by averaging the current repurchase
agreement rate and the current bank loan rate. For the period July 1, 2019 to
July 31, 2019, the Fund did not lend.
(4) 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 July 31, 2019,
and 2018, was as follows:
2019 2018
---------------------------------
Ordinary income* $140,312,000 $141,268,000
As of July 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 8,381,000
Unrealized appreciation of investments 135,074,000
* 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 hybrid interest
================================================================================
NOTES TO FINANCIAL STATEMENTS | 63
================================================================================
accrual, futures contracts mark to market, passive foreign investment company
and perpetual bond adjustments.
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. Distributions of realized gains from security transactions
not offset by capital losses are made annually in the succeeding fiscal year or
as otherwise required to avoid the payment of federal taxes.
At July 31, 2019, the Fund had no capital loss carryforwards, for federal income
tax purposes.
TAX BASIS OF INVESTMENTS - At July 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 Intermediate-
Term Bond Fund $3,629,395,000 $162,771,000 $(27,748,000) $135,023,000
(5) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended July 31, 2019, were $1,279,624,000 and
$1,654,535,000, respectively.
In accordance with affiliated transaction procedures approved by the Board,
purchases and sales of security transactions were executed between the Fund and
affiliated 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 July 31, 2019 were as follows:
PURCHASES SALES NET REALIZED GAIN (LOSS)
--------------------------------------------------------------------------------
$- $21,393,000 $(1,637,000)
(6) SECURITIES LENDING
The Fund, through a securities lending agreement with Citibank, N.A. (Citibank),
may lend its securities to qualified financial institutions, such as
================================================================================
64 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
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 July 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
--------------------------------------------------------------------------------
$1,695,000 $- $1,780,000
(7) CAPITAL SHARE TRANSACTIONS
At July 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 fund-of-funds as well as other persons or
================================================================================
NOTES TO FINANCIAL STATEMENTS | 65
================================================================================
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
JULY 31, 2019 JULY 31, 2018
-------------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
FUND SHARES:
Shares sold 32,829 $ 341,437 39,876 $ 420,769
Shares issued from
reinvested dividends 6,420 66,889 6,209 65,347
Shares redeemed (43,105) (446,353) (43,469) (457,060)
-----------------------------------------------------------
Net increase (decrease) from
capital share transactions (3,856) $ (38,027) 2,616 $ 29,056
===========================================================
INSTITUTIONAL SHARES:
Shares sold 45,934 $ 482,475 36,762 $ 386,878
Shares issued from
reinvested dividends 6,291 65,556 6,331 66,622
Shares redeemed (75,621) (791,794) (44,416) (468,256)
-----------------------------------------------------------
Net decrease from capital
share transactions (23,396) $(243,763) (1,323) $ (14,756)
===========================================================
ADVISER SHARES:
Shares sold 644 $ 6,834 389 $ 4,113
Shares issued from
reinvested dividends 156 1,624 180 1,894
Shares redeemed (1,242) (12,828) (2,359) (25,005)
-----------------------------------------------------------
Net decrease from capital
share transactions (442) $ (4,370) (1,790) $ (18,998)
===========================================================
R6 SHARES:
Shares sold 31 $ 316 3 $ 32
Shares issued from
reinvested dividends -* -* -* -*
Shares redeemed (3) (28) (1) (15)
-----------------------------------------------------------
Net increase from capital
share transactions 28 $ 288 2 $ 17
===========================================================
*Represents less than 500 shares or $500.
================================================================================
66 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
(8) TRANSACTIONS WITH MANAGER
MANAGEMENT FEES - The Manager provides investment management services to the
Fund pursuant to an Advisory Agreement. Effective July 1, 2019, the Trust relies
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. For the year ended July 31, 2019, the
Fund had no subadviser(s).
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee, accrued daily and paid monthly, is
computed as a percentage of the Fund's average daily net assets at annualized
rates of 0.50% of the first $50 million of average daily net assets, 0.40% of
that portion of average daily net assets over $50 million but not over $100
million, and 0.30% of that portion of average daily net assets over $100
million. For the year ended July 31, 2019, the Fund's effective annualized base
fee was 0.30% of the Fund's average daily net assets for the same period.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Core Plus Bond Funds Index. The Lipper Core Plus Bond
Funds Index tracks the total return performance of funds within the Lipper Core
Plus Bond Funds category.
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
December 1, 2016, and includes the performance of the
================================================================================
NOTES TO FINANCIAL STATEMENTS | 67
================================================================================
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). The
resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper Index over that period, even if the class had overall
negative returns during the performance period.
Under the investment advisory agreement with the Manager that took effect on
July 1, 2019, no performance adjustments will be made for the period beginning
July 1, 2019, through June 30, 2020. Only performance beginning as of July 1,
2019, and thereafter will be utilized in calculating future performance
adjustments.
For the period from August 1, 2018 to June 30, 2019, the Fund incurred
management fees, paid or payable to AMCO, of $12,200,000, which included a
performance adjustment for the Fund Shares, Institutional Shares, Adviser
Shares, and R6 Shares of $842,000, $892,000, $27,000, and $2,000, respectively.
For the Fund Shares, Institutional Shares, Adviser Shares, and R6 Shares the
performance adjustments were 0.05%, 0.05%, 0.06%, and 0.03%, respectively. For
the period July 1, 2019 to July 31, 2019, the Fund incurred management fees,
paid or payable to Victory Capital of $976,000, which included no performance
adjustments.
================================================================================
68 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
ADMINISTRATION AND SERVICING FEES - Effective July 1, 2019, Victory Capital is
obligated on a continuous basis to provide administrative services to the Fund.
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 period from August 1, 2018 to June 30, 2019, the Fund Shares,
Institutional Shares, Adviser Shares, and R6 Shares incurred administration and
servicing fees, paid or payable to AMCO of $2,570,000, $1,670,000, $67,000, and
$2,000, respectively. For the period July 1, 2019 to July 31, 2019, the Fund
Shares, Institutional Shares, Adviser Shares, and R6 Shares incurred
administration and servicing fees, paid or payable to Victory Capital of
$247,000, $152,000, $6,000, and less than $500, respectively.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, AMCO also provided certain compliance and legal
services for the benefit of the Fund. The Board approved the reimbursement of a
portion of these expenses incurred by AMCO.
Effective July 1, 2019, these services are covered under a Compliance Services
Agreement between the Trust and Victory Capital. For the period from August 1,
2018 to June 30, 2019, the Fund reimbursed AMCO $12,000 for these compliance and
legal services. For the period July 1, 2019 to July 31, 2019, the Fund's portion
of fees paid to Victory Capital under the Compliance Service Agreement was
$2,000. These expenses are included in the professional fees on the Fund's
Statement of Operations.
EXPENSE LIMITATION - Effective July 1, 2019, the Manager has contractually
agreed to waive its management fee and/or reimburse expenses so that the total
annual operating expenses (excluding certain items such as interest, taxes and
brokerage commissions) do not exceed 0.59% of the Fund Shares, 0.52% of the
Institutional Shares, 0.87% of the Adviser Shares, and 0.39% of the R6 Shares,
through at least June 30, 2021. The Manager is permitted 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 limits in effect at the time of: (a) the original waiver or
expense reimbursement; or (b) the recoupment, after
================================================================================
NOTES TO FINANCIAL STATEMENTS | 69
================================================================================
giving effect to the recoupment amount. The amount of any waivers or
reimbursements and the amount of any recoupment is calculated without regard to
the impact of any performance adjustment to the Fund's management fee. This
waiver agreement may only be terminated by the Fund's Board of Trustees. Prior
to July 1, 2019, AMCO agreed to limit the total annual operating expenses of the
R6 Shares 0.39% of their average daily net assets, excluding extraordinary
expenses and before reductions of any expenses paid indirectly, and to reimburse
the R6 Shares for all expenses in excess of those amounts. For the period from
August 1, 2018 to June 30, 2019, the R6 Shares incurred reimbursable expenses
from AMCO of $14,000. For the period July 1, 2019 to July 31, 2019, the R6
Shares incurred reimbursable expenses of $4,000, all of which was receivable
from the Manager.
TRANSFER AGENT'S FEES - Victory Capital Transfer Agency, Inc. (VCTA), (formerly,
USAA Shareholder Account Services (SAS)) provides transfer agency services to
the Fund. VCTA, 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. VCTA 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 July 31, 2019, the Fund Shares, Institutional Shares, Adviser Shares, and
R6 Shares incurred transfer agent's fees, paid or payable to VCTA, of
$2,084,000, $1,822,000, $54,000 and $1,000, respectively.
DISTRIBUTION AND SERVICE (12b-1) fees - Effective July 1, 2019, the Trust has an
agreement with Victory Capital Advisers, Inc. (VCA), an affiliate of the Manager
for exclusive distribution of the Fund's shares on a continuing best effort
basis. Prior to July 1, 2019, the Fund 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. Prior to July 1, 2019,
IMCO pays all or a portion of such fees to intermediaries that make the Adviser
Shares available for investment by their customers. The fee
================================================================================
70 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
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 period from August 1, 2018 to June 30, 2019, the Adviser Shares incurred
distribution and service (12b-1) fees, of $111,000. For the period July 1, 2019
to July 31, 2019, the Adviser Shares incurred distribution and service (12b-1)
fees, of $10,000.
UNDERWRITING SERVICES - Effective July 1, 2019, the Trust has an agreement with
VCA, an affiliate of the Manager for exclusive underwriting and distribution of
the Fund's shares on a continuing best effort basis. This agreement provides
that VCA receive no fee or other compensation for such distribution services,
but may receive 12b-1 fees with respect to Adviser Shares. Prior to July 1,
2019, IMCO provided exclusive underwriting and distribution of the Fund's shares
on a continuing best-efforts basis and received no fee or other compensation for
these services, but may receive 12b-1 fees as described above, with respect to
Adviser Shares.
(9) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other affiliated
Funds in which the affiliated fund-of-funds invest. The fund-of-funds do not
invest in the underlying affiliated 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 July 31, 2019, the fund-of-funds owned
the following percentages of the total outstanding shares of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
--------------------------------------------------------------------------------
Cornerstone Conservative 0.8
Target Retirement 2020 0.0*
Target Retirement 2030 0.0*
Target Retirement 2040 0.0*
Target Retirement 2050 0.0*
Target Retirement 2060 0.0*
* Represents less than 0.1%.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 71
================================================================================
Effective July 1, 2019, Victory Capital replaced AMCO as the Fund's investment
adviser and began managing the Fund. Prior to July 1, 2019, AMCO was 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.
(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. The Manager has determined there is no significant
impact on the Fund's financial statements and various filings.
(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
================================================================================
72 | USAA INTERMEDIATE-TERM BOND 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 is effective for funds
with fiscal years beginning after December 15, 2018. The Manager has determined
the adoption of this standard will have no significant impact on the financial
statements and reporting disclosures of the Fund.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 73
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 31,
--------------------------------------------------------------------------
2019 2018 2017 2016 2015
--------------------------------------------------------------------------
Net asset value at
beginning of period $ 10.33 $ 10.70 $ 10.71 $ 10.58 $ 10.96
--------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .38 .37 .38 .42 .43
Net realized and
unrealized gain (loss) .46 (.37) (.01) .14 (.36)
--------------------------------------------------------------------------
Total from investment
operations .84 - .37 .56 .07
--------------------------------------------------------------------------
Less distributions from:
Net investment income (.39) (.37) (.38) (.42) (.43)
Realized capital gains - - - (.01) (.02)
--------------------------------------------------------------------------
Total distributions (.39) (.37) (.38) (.43) (.45)
--------------------------------------------------------------------------
Net asset value at
end of period $ 10.78 $ 10.33 $ 10.70 $ 10.71 $ 10.58
==========================================================================
Total return (%)* 8.28 (.03) 3.52 5.55 .58
Net assets at end
of period (000) $1,949,989 $1,907,941 $1,949,102 $1,812,716 $2,079,610
Ratios to average
daily net assets:**
Expenses (%)(a) .64(b) .63 .63 .62 .68
Expenses, excluding
reimbursements (%) .64 (a) .63 .63 .62 .68
Net investment income (%) 3.71 3.50 3.57 4.08 3.96
Portfolio turnover (%) 35 15 13 18 13
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the year ended July 31, 2019, average daily net assets were
$1,877,739,000.
(a) Does not include acquired fund fees, if any.
(b) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Fund Shares to 0.59% of the Fund Shares' average
daily net assets.
================================================================================
74 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 31,
--------------------------------------------------------------------------
2019 2018 2017 2016 2015
--------------------------------------------------------------------------
Net asset value at
beginning of period $ 10.33 $ 10.70 $ 10.72 $ 10.58 $ 10.96
--------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .39 .38 .39 .43 .44
Net realized and
unrealized gain (loss) .45 (.37) (.02) .15 (.36)
--------------------------------------------------------------------------
Total from investment
operations .84 .01 .37 .58 .08
--------------------------------------------------------------------------
Less distributions from:
Net investment income (.39) (.38) (.39) (.43) (.44)
Realized capital gains - - - (.01) (.02)
--------------------------------------------------------------------------
Total distributions (.39) (.38) (.39) (.44) (.46)
--------------------------------------------------------------------------
Net asset value at
end of period $ 10.78 $ 10.33 $ 10.70 $ 10.72 $ 10.58
==========================================================================
Total return (%)* 8.35 .04 3.51 5.72 .68
Net assets at end
of period (000) $1,798,154 $1,964,377 $2,049,723 $1,771,357 $1,280,804
Ratios to average
daily net assets:**
Expenses (%)(a) .58(b) .56 .56 .54 .58
Expenses, excluding
reimbursements (%)(a) .58 .56 .56 .54 .58
Net investment income (%) 3.77 3.57 3.64 4.13 4.07
Portfolio turnover (%) 35 15 13 18 13
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the year ended July 31, 2019, average daily net assets were
$1,822,406,000.
(a) Does not include acquired fund fees, if any.
(b) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Institutional Shares to 0.52% of the Institutional
Shares' average daily net assets.
================================================================================
FINANCIAL HIGHLIGHTS | 75
================================================================================
ADVISER SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 31,
---------------------------------------------------------------
2019 2018 2017 2016 2015
---------------------------------------------------------------
Net asset value at
beginning of period $ 10.32 $ 10.69 $ 10.70 $ 10.58 $ 10.95
---------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .35 .34 .35 .40 .41
Net realized and
unrealized gain (loss) .45 (.37) (.01) .13 (.35)
---------------------------------------------------------------
Total from investment
operations .80 (.03) .34 .53 .06
---------------------------------------------------------------
Less distributions from:
Net investment income (.35) (.34) (.35) (.40) (.41)
Realized capital gains - - - (.01) (.02)
---------------------------------------------------------------
Total distributions (.35) (.34) (.35) (.41) (.43)
---------------------------------------------------------------
Net asset value at
end of period $ 10.77 $ 10.32 $ 10.69 $ 10.70 $ 10.58
===============================================================
Total return (%)* 7.97 (.31) 3.28 5.19 .46
Net assets at end
of period (000) $50,892 $53,308 $74,377 $98,835 $118,753
Ratios to average
daily net assets:**
Expenses (%)(a)
Expenses, excluding
reimbursements (%)(a) .93 .90 .87 .86 .89
Net investment income (%) 3.42 3.22 3.44 3.85 3.74
Portfolio turnover (%) 35 15 13 18 13
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the year ended July 31, 2019, average daily net assets were $48,386,000.
(a) Does not include acquired fund fees, if any.
(b) Prior to December 1, 2014, AMCO had voluntarily agreed to limit the annual
expenses of the Adviser Shares to 0.95% of the Adviser Shares' average daily
net assets.
(c) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Adviser Shares to 0.87% of the Adviser Shares'
average daily net assets.
================================================================================
76 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
R6 SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
PERIOD ENDED
YEAR ENDED JULY 31, JULY 31,
-------------------------------------------------
2019 2018 2017***
-------------------------------------------------
Net asset value at beginning of period $10.33 $10.71 $10.38
----------------------------------------------
Income (loss) from investment operations:
Net investment income .41 .39 .26
Net realized and unrealized gain (loss). .46 (.38) .33
----------------------------------------------
Total from investment operations .87 .01 .59
----------------------------------------------
Less distributions from:
Net investment income (.41) (.39) (.26)
----------------------------------------------
Net asset value at end of period $10.79 $10.33 $10.71
==============================================
Total return (%)* 8.66 .12 5.79
Net assets at end of period (000) $5,513 $4,994 $5,158
Ratios to average daily net assets:**
Expenses (%)(a) .39(c) .39 .39(b)
Expenses, excluding reimbursements (%)(a) .74 .80 1.07(b)
Net investment income (%) 3.96 3.74 3.78(b)
Portfolio turnover (%) 35 15 13
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the year ended July 31, 2019, average daily net assets were $5,168,000.
*** 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.
(c) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the R6 Shares to 0.39% of the R6 Shares' average daily
net assets.
================================================================================
FINANCIAL HIGHLIGHTS | 77
================================================================================
EXPENSE EXAMPLE
July 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 February 1, 2019, through
July 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.
================================================================================
78 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
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 FEBRUARY 1, 2019 -
FEBRUARY 1, 2019 JULY 31, 2019 JULY 31, 2019
----------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,064.00** $3.22**
Hypothetical
(5% return before expenses) 1,000.00 1,021.67** 3.16**
INSTITUTIONAL SHARES
Actual 1,000.00 1,064.30** 2.97**
Hypothetical
(5% return before expenses) 1,000.00 1,021.92** 2.91**
ADVISER SHARES
Actual 1,000.00 1,062.60** 4.60**
Hypothetical
(5% return before expenses) 1,000.00 1,020.33** 4.51**
R6 SHARES
Actual 1,000.00 1,065.20 2.00
Hypothetical
(5% return before expenses) 1,000.00 1,022.86 1.96
*Expenses are equal to the annualized expense ratio of 0.63% for Fund Shares,
0.58% for Institutional Shares, 0.90% for Adviser Shares, and 0.39% for R6
Shares, which are net of any reimbursements and expenses paid indirectly,
multiplied by the average account value over the period, multiplied by 181
days/365 days for Fund Shares, Institutional Shares, Adviser Shares, and R6
Shares (to reflect the one-half-year period). The Fund's actual ending account
values are based on its actual total returns of 6.40% for Fund Shares, 6.43%
for Institutional Shares, 6.26% for Adviser Shares, and 6.52% for R6 Shares,
for the six-month period of February 1, 2019, through July 31, 2019.
================================================================================
EXPENSE EXAMPLE | 79
================================================================================
**The Fund's annualized expense ratio of 0.63% for Fund shares, 0.58% for
Institutional Shares and 0.90% for Adviser Shares above reflects a change
effective July 1, 2019, to implement the Manager's expense limitation of 0.59%
of the Fund shares' average annual net assets, 0.52% for the Institutional
Shares' average annual net assets and 0.87% for the Adviser Shares' average
annual net assets. Had the expense limitation of 0.59% for the Fund Shares,
0.52% for the Institutional Shares and 0.87% for the Adviser Shares, which is
net of expenses paid indirectly, been in effect for the entire six-month
period of February 1, 2019, through July 31, 2019, the values in the table
above would be as shown below
EXPENSES PAID
BEGINNING ENDING DURING PERIOD
ACCOUNT VALUE ACCOUNT VALUE FEBRUARY 1, 2019 -
FEBRUARY 1, 2019 JULY 31, 2019 JULY 31, 2019
----------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,064.00 $3.02
Hypothetical
(5% return before expenses) 1,000.00 1,021.87 2.96
INSTITUTIONAL SHARES
Actual 1,000.00 1,064.30 2.66
Hypothetical
(5% return before expenses) 1,000.00 1,022.22 2.61
ADVISER SHARES
Actual 1,000.00 1,062.60 4.45
Hypothetical
(5% return before expenses) 1,000.00 1,020.48 4.36
================================================================================
80 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
July 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.
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with
================================================================================
ADVISORY AGREEMENT(S) | 81
================================================================================
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 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
================================================================================
82 | USAA Intermediate-Term Bond Fund
================================================================================
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.
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
================================================================================
ADVISORY AGREEMENT(S) | 83
================================================================================
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). 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.
================================================================================
84 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
o The portfolio managers at AMCO that manage the Fixed Income Funds(1) as
well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended Market
Index Fund, and USAA Nasdaq-100 Index Fund, which will be advised by
Victory Capital through its Victory Solutions platform, Victory Capital
proposes that the same subadvisers be retained Post-Transaction,
although Victory Capital may change the allocation to a particular
subadviser Post-Transaction. No changes are expected to the portfolio
managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's businesses to
Victory Capital. Victory Capital and USAA expect to
(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) | 85
================================================================================
enter into a transition services agreement under which USAA will continue
to provide Victory Capital with certain services that are currently
provided by USAA to AMCO and the USAA Transfer Agent for a specified
period of time after the closing of the Transaction to assist Victory
Capital in transitioning the USAA member distribution channel and member
support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO for
the Transaction and AMCO's recommendation that the Board approve the New
Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital is capable of providing
the same level of investment management services
================================================================================
86 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
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 AMCO personnel who had been extended offers may not accept such
offers and personnel changes may occur in the future in the ordinary course. The
Board considered the resources and infrastructure that Victory Capital intends
to devote to its compliance program to ensure compliance with applicable laws
and regulations, as well as Victory Capital's commitment to those programs. The
Board also considered the resources that Victory Capital has devoted to its risk
management program and cybersecurity program. The Board also reviewed
information provided by Victory Capital related to its business, legal, and
regulatory affairs. This review considered the resources available to Victory
Capital to provide the services specified under the New Advisory Agreement. The
Board considered Victory Capital's financial condition, including the financing
of the Transaction, and noted that Victory Capital is expected to be able to
provide a high level of service to the Funds and continuously invest and
re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund, Growth
& Income Fund, Income Stock Fund, Global Equity Income Fund, and Precious
Metals and Minerals Fund.
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ADVISORY AGREEMENT(S) | 87
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The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The Board
considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored
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88 | USAA INTERMEDIATE-TERM BOND FUND
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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 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
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ADVISORY AGREEMENT(S) | 89
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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.
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
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90 | USAA INTERMEDIATE-TERM BOND FUND
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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.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
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ADVISORY AGREEMENT(S) | 91
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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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92 | USAA INTERMEDIATE-TERM BOND FUND
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND AMCO)
July 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.
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 AMCO 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 AMCO, 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
AMCO's revenues and costs of providing services to the Fund and
compensation paid to affiliates of AMCO; and (iii) information about AMCO's
operations and personnel. Prior to voting, the Independent Trustees reviewed
the proposed continuance of the Advisory Agreement with management and
(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"). Effective July 1, 2019, upon the closing of the
transaction whereby AMCO acquired by Victory Capital Holdings, Inc., the
parent company of Victory Capital, the Advisory Agreement between the Trust
and AMCO and the Sub-advisory Agreement with the Subadviser terminated and
the new investment advisory agreement between the Trust and Victory Capital
went into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are discussed above.
Effective June 30, 2019, the Subadviser no longer manages any portion of the
Fund.
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ADVISORY AGREEMENT(S) | 93
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with experienced 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 AMCO. 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 AMCO's profitability with respect to the
Fund. However, the Board noted that the evaluation process with respect to AMCO
is an ongoing one. In this regard, the Board's and its committees' consideration
of the Advisory Agreement included 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 AMCO under the Advisory Agreement, the Board
reviewed information provided by AMCO relating to its operations and personnel.
The Board also took into account its knowledge of AMCO's management and the
quality of the performance of AMCO's duties through Board meetings, discussions,
and reports during the preceding year. The Board considered the fees paid to
AMCO and the services provided to the Fund by AMCO under the Advisory Agreement,
as well as other services provided by AMCO and its affiliates under other
agreements, and the personnel who
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94 | USAA INTERMEDIATE-TERM BOND FUND
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provide these services. In addition to the investment advisory services provided
to the Fund, AMCO 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 AMCO in connection with the services provided
to the Fund, including investment, operational, enterprise, litigation,
regulatory and compliance risks.
The Board considered AMCO's management style and the performance of AMCO's
duties under the Advisory Agreement. The Board considered the level and depth of
experience of AMCO, 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 AMCO's process for monitoring
"best execution," also was considered. AMCO's role in coordinating the
activities of the Fund's other service providers also was considered. The Board
also considered AMCO's risk management processes. The Board considered AMCO'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 AMCO 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 AMCO and its affiliates, including AMCO's oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust,
also focused on the quality of AMCO'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
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ADVISORY AGREEMENT(S) | 95
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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 the various services provided to the Fund
by AMCO and its affiliates, including the high quality of services received by
the Fund from AMCO. The Board also noted the level and method of computing the
management fee, including any performance adjustment to such fee. The Board took
into account management's discussion of the Fund's expenses. 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-year period ended December 31, 2018, and was above the average
of its performance universe and its Lipper index for the 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-year period ended December 31, 2018, was in the top 10% of its
performance universe for the three-year period ended December 31, 2018, was in
the top 25% of its performance universe for
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96 | USAA INTERMEDIATE-TERM BOND FUND
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the five-year period ended December 31, 2018, and was in the top 5% of its
performance universe for the ten-year period ended December 31, 2018. The Board
took into account management's discussion of the Fund's performance, including
the impact of market conditions on the Fund's recent performance.
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 AMCO'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 AMCO'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 AMCO, the Board
also considered the fact that AMCO 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 AMCO from its relationship with the Trust, including that AMCO may
derive reputational and other benefits from its association with the Fund. The
Trustees recognized that AMCO 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 - The Board noted that the Fund has advisory fee breakpoints
at specified asset levels, which allows the Fund to participate in any economies
of scale. The Board took into account management's discussion of the Fund's
current advisory fee structure. The Board also considered the effect of the
Fund's growth and size on its performance and fees, noting that if the Fund's
assets increase over time, the Fund may realize other economies of scale if
assets increase proportionally more than some expenses.
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with AMCO, among others: (i) AMCO has demonstrated that it
possesses the capability and resources to perform the duties required of it
under the Advisory Agreement; (ii) AMCO maintains
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ADVISORY AGREEMENT(S) | 97
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an appropriate compliance program; (iii) the performance of the Fund is
reasonable in relation to the performance of funds with similar investment
objectives and to relevant indices; (iv) the Fund's advisory expenses are
reasonable in relation to those of similar funds and to the services to be
provided by AMCO; and (v) AMCO 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 AMCO and the type of fund. Based on its
conclusions, the Board determined that the continuation of the Advisory
Agreement would be in the best interests of the Fund and its shareholders.
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98 | USAA INTERMEDIATE-TERM BOND 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 | 99
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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 of 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), (08/11-06/19); Director of USAA Investment
Management Company (IMCO) (09/09-present); Chairman of Board of IMCO
(4/13-present); President and Director of USAA Shareholder Account Services
(SAS) (10/09-06/19); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director and Vice Chairman of FPS
(12/13-present); President and Director of USAA Investment Corporation (ICORP)
(03/10-present); Chairman of Board of ICORP (12/31-present); Director of USAA
Financial Advisors, Inc. (FAI) (12/13-present); Chairman of Board of FAI
(3/15-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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100 | USAA INTERMEDIATE-TERM BOND 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
--------------------------------------------------------------------------------
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
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TRUSTEES' AND OFFICERS' INFORMATION | 101
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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.
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.
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
================================================================================
102 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
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 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.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 103
================================================================================
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 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.
================================================================================
104 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
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 was 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 | 105
================================================================================
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).
JAMES K. DE VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Executive Director, Victory Capital Management Inc. (7/1/19-present); Treasurer,
USAA ETF Trust (09/18-06/19); Executive Director, Investment and Financial
Administration, USAA (04/12-06/30/19); Assistant Treasurer,
================================================================================
106 | USAA INTERMEDIATE-TERM BOND FUND
================================================================================
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
Director, Accounting and Finance, Victory Capital Management Inc.
(7/1/19-present); Assistant Treasurer, USAA ETF Trust (09/18-06/19);
Accounting/Financial Director, USAA (12/13-06/30/19).
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).
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).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 107
================================================================================
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 111 West Houston St., Suite 1901
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
Copies of the Victory Capital Management Inc.'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
--------------------------------------------------------------------------------
July 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA Money Market Fund
FUND
SHARES
USAXX
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
". . . NOW MAY BE AN OPPORTUNE TIME FOR
INVESTORS TO ENSURE THAT THEIR PORTFOLIOS ARE WELL [PHOTO OF BROOKS ENGLEHARDT]
DIVERSIFIED AND THAT THEIR OVERALL ALLOCATION IS
APPROPRIATE FOR THEIR PARTICULAR RISK APPETITE."
--------------------------------------------------------------------------------
SEPTEMBER 2019
Although the bull market in equities has continued running, it was not without a
few missteps. Trade turmoil, questions surrounding global economic growth,
changing monetary policy, and geopolitical disputes have all led to increased
volatility. But through it all, domestic stocks, as measured by the S&P 500(R)
Index, still managed an annual return of approximately 8% for the 12-month
period ended July 31, 2019.
Given the sometimes dire news flow and ample cross-currents, it's no surprise
that volatility returned to the market. On one hand, the U.S. economy continues
to look good. The unprecedented streak of job creation has continued
uninterrupted, and unemployment is bouncing along historic lows at 3.7%. The
consumer remains resilient and inflation is tepid. On the flip side, however,
U.S. trade policy seems to be evolving, with new tariffs threatened and
implemented. The markets generally dislike this type of trade turmoil and
uncertainty, and the ongoing tensions between the United States and China (and
other trading partners) threaten to upend global supply chains and hinder
economic growth.
It's not just the stock market that has been dealing with volatility. The bond
market also has experienced volatility, due largely to the U.S. Federal
Reserve's (the "Fed") famous "pivot" in late 2018. Against the backdrop of
rapidly falling equities in the fourth quarter of 2018, the Fed signaled that
its next policy move would be to lower--not increase--short-term interest rates.
This immediately altered the yield environment.
Meanwhile, the U.S. Treasury yield curve continued to flatten and, in fact,
inverted--whereby shorter-term yields became higher than longer-term
================================================================================
================================================================================
yields. Such a yield-curve inversion is a worrying sign as it sometimes, but not
always, portends to a recession.
Although we are not predicting a recession, we must acknowledge that risks have
increased for an economic slowdown. Given that the current run in stocks is more
than a decade old, it's important for investors to keep perspective that the
bull market cannot continue forever. Therefore, now may be an opportune time for
investors to ensure that their portfolios are well diversified and that their
overall allocation is appropriate for their particular risk appetite.
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,
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. On the following pages, you will find information
relating to your USAA Investments, which is now a Victory Capital Investment
Franchise. If you have any questions about your investments, we encourage you to
engage your financial advisor or else contact us directly at 800-235-8396 or
visit usaa.com.
My colleagues and I sincerely appreciate the confidence you have placed in us,
and we value the opportunity to help you meet your investment goals.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGERS' COMMENTARY ON THE FUND 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 19
Financial Statements 22
Notes to Financial Statements 25
Financial Highlights 34
EXPENSE EXAMPLE 35
ADVISORY AGREEMENT(S) 37
TRUSTEES' AND OFFICERS' INFORMATION 55
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
VICTORY CAPITAL MANAGEMENT INC. 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
USAA Investments, A Victory Capital Investment Franchise
CODY PERKINS, CFA
ANDREW HATTMAN, CFA, CAIA
--------------------------------------------------------------------------------
o WHAT WERE MARKET CONDITIONS DURING THE 12-MONTH REPORTING PERIOD ENDED
JULY 31, 2019?
The U.S. Federal Reserve (the "Fed") shifted its monetary policy stance
during the 12-month reporting period ending July 31, 2019. In August 2018,
when the period began, Fed policymakers left the federal funds ("fed
funds") target rate unchanged in a range between 1.75% and 2.00%, but
signaled that an interest rate increase was likely in September 2019, if the
U.S. economy continued to perform in line with their expectations. Indeed,
at the September 2019 policy meeting, Fed officials raised the fed funds
target rate by 0.25% to range between 2.00% and 2.25% and projected three
interest rate increases in 2019. They reduced this projection to two
interest rate increases after their December 2018 meeting, when they raised
the fed funds target rate to a range between 2.25% and 2.50%. In January
2019, Fed Chair Jerome Powell said U.S. economic growth remained on track,
but that policymakers were "prepared to adjust policy quickly and flexibly"
if conditions changed. In January 2019, Fed officials held interest rates
steady, and said they would be "patient" about further interest rate
increases. At the March 2019 meeting, they took no action, agreeing to a
pause, with a majority of policymakers signaling no interest rate increase
at all during the 2019 calendar year. They also said they planned to stop
reducing the size of their balance sheet at the end of September 2019; since
October 2017, the Fed had been gradually decreasing the reinvestment of
maturing holdings of U.S.Treasury and government-sponsored mortgage-backed
securities. In May 2019, the Fed remained on hold, as inflation remained
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
below its 2% target. Policymakers kept interest rates unchanged in June 2019
but said an interest rate cut was possible if the economic outlook weakened.
As a result, the market began pricing in the potential of a cut as soon as
July 2019. In fact, at the July 31, policy meeting, Fed officials eased
monetary policy in response to global economic weakness and rising trade
tensions, cutting the fed funds target rate by 0.25% to a range between
2.00% and 2.25%.
Interest rates on money market instruments increased slightly during the
reporting period overall. They went up for most of the period but edged down
in June and July 2019 in anticipation of a Fed interest rate cut. As
interest rates on money market instruments rose, the interest rates on money
market securities climbed. Consequently, yields on money market funds ended
the period higher than they began. Investors continued to rely on money
market funds for the low risk and liquidity they offered.
o HOW DID THE USAA MONEY MARKET FUND (THE "FUND") PERFORM DURING THE
REPORTING PERIOD?
For the reporting period ended July 31, 2019, the seven-day yield for the
Fund was 1.93%. The total return for the same period was 1.97%, compared to
an average of 1.97% for all money market funds ranked by iMoneyNet, Inc.
Victory Capital Management Inc. (the "Manager" or "Victory Capital") is the
Fund's investment adviser. The investment adviser provides day-to-day
discretionary management for the Fund's assets.
o WHAT WERE YOUR STRATEGIES IN THIS ENVIRONMENT?
During the reporting period ending July 31, 2019, we continued to invest in
floating-rate certificates of deposit ("CDs") and floating-rate notes, as
well as commercial paper, fixed-rate Yankee CDs, U.S. Treasury securities
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
2 | USAA MONEY MARKET FUND
================================================================================
and corporate notes. We moderated the Fund's investments in variable rate
demand notes ("VRDNs") as strong demand made them less attractive in terms
of relative value. VRDNs tend to benefit when interest rates rise because of
the frequency of their interest rate reset feature. The VRDNs owned by the
Fund also give us flexibility because they can be sold at par (100% of face
value) upon notice of seven days or less. Furthermore, most of these VRDNs
are guaranteed by a bank letter of credit for the payment of both principal
and interest, providing the Fund with a degree of safety and liquidity.
As always, we relied on our team of analysts to help us identify securities
that represented relative value. These specialists also continue to analyze
and monitor every holding in the portfolio.
Thank you for your continued investment in the Fund.
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 Variable-rate demand notes (VRDNs) are securities which
the interest rate is reset periodically; typically weekly, although reset
intervals may vary.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 7/31/19 o
--------------------------------------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
--------------------------------------------------------------------------------
USAA Money Market Fund 1.97% 0.69% 0.37%
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.
================================================================================
4 | USAA MONEY MARKET FUND
================================================================================
o 7-DAY YIELD COMPARISON o
[CHART OF 7-DAY YIELD COMPARISON]
iMoneyNET USAA MONEY
AVERAGE MARKET FUND
7/31/2018 1.63% 1.68%
8/28/2018 1.63% 1.67%
9/25/2018 1.66% 1.69%
10/30/2018 1.81% 1.88%
11/27/2018 1.89% 1.90%
1/2/2019 2.07% 2.04%
1/29/2019 2.11% 2.09%
2/26/2019 2.11% 2.10%
3/26/2019 2.09% 2.08%
4/30/2019 2.09% 2.08%
5/28/2019 2.04% 2.05%
6/25/2019 2.00% 1.99%
7/30/2019 1.95% 1.93%
[END CHART]
Data represents the last Tuesday of each month. Ending date 7/31/19.
The graph tracks the USAA Money Market Fund's seven-day yield against an average
of first-tier major money market fund yields calculated by iMoneyNet, Inc.,
which is an organization that tracks the performance of money market funds.
Past performance is no guarantee of future results.
================================================================================
INVESTMENT OVERVIEW | 5
================================================================================
o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
USAA MONEY
MARKET FUND
7/31/2009 $10,000.00
8/31/2009 10,005.00
9/30/2009 10,009.00
10/31/2009 10,011.00
11/30/2009 10,013.00
12/31/2009 10,015.00
1/31/2010 10,015.00
2/28/2010 10,015.00
3/31/2010 10,015.00
4/30/2010 10,015.00
5/31/2010 10,015.00
6/30/2010 10,015.00
7/31/2010 10,016.00
8/31/2010 10,016.00
9/30/2010 10,016.00
10/31/2010 10,016.00
11/30/2010 10,016.00
12/31/2010 10,017.00
1/31/2011 10,017.00
2/28/2011 10,017.00
3/31/2011 10,017.00
4/30/2011 10,017.00
5/31/2011 10,017.00
6/30/2011 10,018.00
7/31/2011 10,018.00
8/31/2011 10,018.00
9/30/2011 10,018.00
10/31/2011 10,018.00
11/30/2011 10,018.00
12/31/2011 10,018.00
1/31/2012 10,020.00
2/29/2012 10,020.00
3/31/2012 10,020.00
4/30/2012 10,020.00
5/31/2012 10,020.00
6/30/2012 10,020.00
7/31/2012 10,020.00
8/31/2012 10,020.00
9/30/2012 10,021.00
10/31/2012 10,021.00
11/30/2012 10,021.00
12/31/2012 10,021.00
1/31/2013 10,021.00
2/28/2013 10,021.00
3/31/2013 10,021.00
4/30/2013 10,021.00
5/31/2013 10,021.00
6/30/2013 10,022.00
7/31/2013 10,022.00
8/31/2013 10,022.00
9/30/2013 10,022.00
10/31/2013 10,022.00
11/30/2013 10,022.00
12/31/2013 10,022.00
1/31/2014 10,022.00
2/28/2014 10,022.00
3/31/2014 10,022.00
4/30/2014 10,022.00
5/31/2014 10,023.00
6/30/2014 10,023.00
7/31/2014 10,023.00
8/31/2014 10,023.00
9/30/2014 10,023.00
10/31/2014 10,023.00
11/30/2014 10,023.00
12/31/2014 10,023.00
1/31/2015 10,023.00
2/28/2015 10,023.00
3/31/2015 10,023.00
4/30/2015 10,024.00
5/31/2015 10,024.00
6/30/2015 10,024.00
7/31/2015 10,024.00
8/31/2015 10,024.00
9/30/2015 10,024.00
10/31/2015 10,024.00
11/30/2015 10,024.00
12/31/2015 10,024.00
1/31/2016 10,024.00
2/29/2016 10,024.00
3/31/2016 10,024.00
4/30/2016 10,025.00
5/31/2016 10,025.00
6/30/2016 10,025.00
7/31/2016 10,025.00
8/31/2016 10,025.00
9/30/2016 10,026.00
10/31/2016 10,028.00
11/30/2016 10,029.00
12/31/2016 10,031.00
1/31/2017 10,033.00
2/28/2017 10,035.00
3/31/2017 10,038.00
4/30/2017 10,041.00
5/31/2017 10,045.00
6/30/2017 10,051.00
7/31/2017 10,056.00
8/31/2017 10,062.00
9/30/2017 10,068.00
10/31/2017 10,075.00
11/30/2017 10,081.00
12/31/2017 10,090.00
1/31/2018 10,098.00
2/28/2018 10,107.00
3/31/2018 10,117.00
4/30/2018 10,129.00
5/31/2018 10,142.00
6/30/2018 10,155.00
7/31/2018 10,169.00
8/31/2018 10,185.00
9/30/2018 10,198.00
10/31/2018 10,214.00
11/30/2018 10,231.00
12/31/2018 10,248.00
1/31/2019 10,265.00
2/28/2019 10,281.00
3/31/2019 10,300.00
4/30/2019 10,317.00
5/31/2019 10,336.00
6/30/2019 10,352.00
7/31/2019 10,369.00
[END CHART]
Data from 7/31/09 through 7/31/19.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Money Market Fund.
Past performance is no guarantee of future results. The cumulative performance
quoted assumes reinvestment of all net investment income and realized capital
gain distributions and does not reflect the deduction of taxes that a
shareholder would pay on distributions or the redemption of shares. For
seven-day yield information, please refer to the Fund's investment overview
page.
================================================================================
6 | USAA MONEY MARKET FUND
================================================================================
o PORTFOLIO MIX - 7/31/19 o
(% of Net Assets)
[PIE CHART OF PORTFOLIO MIX]
COMMERCIAL PAPER 38.0%
EURODOLLAR AND YANKEE OBLIGATIONS 18.8%
CORPORATE OBLIGATIONS 17.6%
REPURCHASE AGREEMENTS 10.0%
MUNICIPAL OBLIGATIONS 7.0%
U.S. TREASURY SECURITIES 4.6%
CERTIFICATES OF DEPOSIT 4.0%
[END CHART]
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 Management Inc. ("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 USAA Asset Management Company ("AMCO")
was acquired by Victory Capital Holdings, Inc., the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
----------------------------------------------------------------------------
FOR AGAINST ABSTAIN
----------------------------------------------------------------------------
2,277,008,234 253,418,859 171,746,506
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
person" as defined in the Investment Company Act of 1940, as amended (1940 Act)
("Interested Trustee"); 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 MONEY MARKET FUND
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
July 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 July 31, 2019:
QUALIFIED INTEREST INCOME
-------------------------
$94,412,000
-------------------------
For the fiscal year ended July 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 MONEY MARKET FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Money Market Fund (the "Fund") (one of the funds constituting the USAA Mutual
Funds Trust (the "Trust")), including the portfolio of investments, as of July
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 the USAA Mutual Funds Trust) at July 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 July 31, 2019, by correspondence with the custodian and brokers. 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
September 20, 2019
================================================================================
10 | USAA MONEY MARKET FUND
================================================================================
PORTFOLIO OF INVESTMENTS
July 31, 2019
------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (38.0%)
$ 40,000 Alabama Power Co.(a) 2.43% 8/06/2019 $ 39,987
8,000 American Honda Finance Corp. 2.26 9/25/2019 7,973
50,000 Amphenol Corp.(a) 2.52 8/01/2019 50,000
50,000 Amphenol Corp.(a) 2.47 8/06/2019 49,983
25,000 AT&T, Inc.(a) 2.80 9/26/2019 24,893
26,000 AT&T, Inc.(a) 2.57 12/10/2019 25,759
41,000 Autozone, Inc.(a) 2.45 8/01/2019 41,000
13,700 Barton Capital Corp.(a) 2.78 8/12/2019 13,689
25,000 Coca-Cola Co.(a) 2.30 9/27/2019 24,911
200,000 Dairy Farmers of America(a) 2.50 8/01/2019 200,000
50,000 Duke Energy Corp.(a) 2.49 8/07/2019 49,979
22,300 Duke Energy Corp.(a) 2.54 8/23/2019 22,266
15,700 Ei Du Pont De Nemours(a) 2.57 8/02/2019 15,699
25,000 Ei Du Pont De Nemours(a) 2.70 8/02/2019 24,998
15,000 Ei Du Pont De Nemours(a) 2.96 8/07/2019 14,994
10,000 Ei Du Pont De Nemours(a) 2.48 9/16/2019 9,968
40,000 Exxon Mobil Corp. 2.32 9/30/2019 39,848
40,000 Exxon Mobil Corp. 2.31 10/16/2019 39,807
25,000 Glencore Funding, LLC(a) 2.52 8/14/2019 24,977
50,000 Gotham Funding Corp.(a) 2.40 8/19/2019 49,940
100,000 Gotham Funding Corp.(a) 2.29 9/05/2019 99,777
25,000 Hyundai Capital America(a) 2.48 8/09/2019 24,986
25,000 Hyundai Capital America(a) 2.48 9/03/2019 24,943
25,000 Hyundai Capital America(a) 2.48 9/09/2019 24,933
25,000 Hyundai Capital America(a) 2.47 9/19/2019 24,916
30,000 International Paper(a) 2.50 8/05/2019 29,992
40,000 International Paper(a) 2.45 8/16/2019 39,959
50,000 Liberty Funding, LLC(a) 3.07 8/05/2019 49,986
40,000 Lloyds Bank plc(a) 2.57 4/20/2020 40,000
40,000 LMA Americas, LLC(a) 2.72 8/01/2019 40,000
15,000 LMA Americas, LLC(a) 2.69 9/09/2019 14,957
40,000 LMA Americas, LLC(a) 2.68 10/21/2019 39,762
25,000 LyondellBasell Investment, LLC(a) 2.92 8/06/2019 24,991
25,000 LyondellBasell Investment, LLC(a) 2.69 8/13/2019 24,979
25,000 LyondellBasell Investment, LLC(a) 2.67 8/15/2019 24,976
25,000 LyondellBasell Investment, LLC(a) 2.50 8/30/2019 24,950
38,500 Manhattan Asset Funding Co.(a) 2.59 8/20/2019 38,450
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------------
$ 40,000 Manhattan Asset Funding Co.(a) 2.38% 8/23/2019 $ 39,942
19,000 Nieuw Amsterdam Receivables(a) 2.85 8/08/2019 18,991
25,000 Nissan Motor Acceptance Corp.(a) 3.20 8/06/2019 24,990
20,000 Nissan Motor Acceptance Corp.(a) 2.80 9/03/2019 19,950
15,000 Nissan Motor Acceptance Corp.(a) 2.57 9/13/2019 14,954
25,000 Nissan Motor Acceptance Corp.(a) 2.57 9/20/2019 24,911
20,000 Nutrien Ltd.(a) 2.82 8/08/2019 19,990
20,000 Nutrien Ltd.(a) 2.55 8/16/2019 19,979
25,000 Nutrien Ltd.(a) 2.67 8/23/2019 24,961
25,000 Nutrien Ltd.(a) 2.48 9/06/2019 24,938
3,800 Pacific Corp. 2.43 8/05/2019 3,799
40,000 Ridgefield Funding Co., LLC(a) 2.51 9/04/2019 39,908
50,000 Ridgefield Funding Co., LLC(a) 2.35 9/10/2019 49,869
25,000 Sheffield Receivable Co., LLC(a) 2.75 8/15/2019 24,975
25,000 Sheffield Receivable Co., LLC(a) 2.54 9/03/2019 24,943
25,000 Sheffield Receivable Co., LLC(a) 2.65 9/24/2019 24,903
25,000 Sheffield Receivable Co., LLC(a) 2.63 10/23/2019 24,850
32,000 Westar Energy, Inc.(a) 2.52 8/12/2019 31,975
30,600 Westar Energy, Inc.(a) 2.50 8/14/2019 30,572
----------
Total Commercial Paper (cost: $1,852,628) 1,852,628
----------
EURODOLLAR AND YANKEE OBLIGATIONS (18.8%)
BANKS (18.1%)
16,854 Bank of Montreal 1.75 9/11/2019 16,837
50,000 Bank of Montreal (1 mo. LIBOR + 0.18%) 2.45(b) 4/27/2020 50,000
40,000 Bank of Montreal (1 mo. LIBOR + 0.31%) 2.71(b) 7/13/2020 40,000
40,000 Bank of Montreal (SOFR + 0.26%) 2.66(b) 8/03/2020 40,000
50,000 Bank of Nova Scotia (1 mo. LIBOR + 0.26%) 2.65(b) 4/17/2020 50,000
50,000 Bank of Nova Scotia (1 mo. LIBOR + 0.28%) 2.67(b) 4/29/2020 50,000
30,000 Canadian Imperial Bank of Commerce
(1 mo. LIBOR + 0.26%) 2.65(b) 5/18/2020 30,000
30,000 Canadian Imperial Bank of Commerce
(1 mo. LIBOR + 0.29%) 2.68(b) 7/17/2020 30,000
30,000 Credit Agricole Corporate and Investment Bank
(1 mo. LIBOR + 0.25%) 2.65(b) 5/29/2020 30,000
25,000 Credit Industriel et Commercial
(1 mo. LIBOR + 0.24%) 2.63(b) 1/17/2020 25,000
25,000 Credit Industriel et Commercial
(1 mo. LIBOR + 0.24%) 2.63(b) 1/22/2020 25,000
50,000 Credit Suisse AG (1 mo. LIBOR + 0.13%) 2.37(b) 10/28/2019 50,000
40,000 Credit Suisse AG (1 mo. LIBOR + 0.15%) 2.55(b) 12/02/2019 40,000
40,000 Credit Suisse AG (SOFR + 0.22%) 2.61(b) 4/27/2020 40,000
30,000 Natixis (1 mo. LIBOR + 0.29%) 2.65(b) 6/08/2020 30,000
================================================================================
12 | USAA MONEY MARKET FUND
================================================================================
------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------------
$ 40,000 Royal Bank of Canada (SOFR + 0.20%) 2.59%(b) 4/14/2020 $ 40,000
40,000 Royal Bank of Canada (SOFR + 0.29%) 2.76(b) 7/16/2020 40,000
40,000 Royal Bank of Canada (1 mo. LIBOR + 0.35%) 2.74(b) 7/24/2020 40,000
40,000 Societe Generale (1 mo. LIBOR + 0.22%) 2.55(b) 2/14/2020 40,000
40,000 Societe Generale (1 mo. LIBOR + 0.22%) 2.58(b) 3/04/2020 40,000
40,000 Societe Generale (1 mo. LIBOR + 0.32%) 2.65(b) 5/14/2020 40,000
40,000 Societe Generale (1 mo. LIBOR + 0.31%) 2.70(b) 6/03/2020 40,000
25,000 Standard Chartered Bank (1 mo. LIBOR + 0.15%) 2.51(b) 10/08/2019 25,000
30,000 Toronto-Dominion Bank (1 mo. LIBOR + 0.30%) 2.70(b) 7/15/2020 30,000
----------
881,837
----------
IRON/STEEL (0.7%)
20,000 SSAB AB (LOC - Swedbank AB)(c) 2.30 4/01/2034 20,000
15,000 SSAB AB (LOC - Credit Agricole Corp. Inv. Bank)(c) 2.30 5/01/2034 15,000
----------
35,000
----------
Total Eurodollar and Yankee Obligations (cost: $916,837) 916,837
----------
CORPORATE OBLIGATIONS (17.6%)
BANKS (8.5%)
53,505 BB&T Corp. 2.45 1/15/2020 53,426
74,409 Citigroup, Inc. 2.45 1/10/2020 74,252
36,107 JPMorgan Chase & Co. 2.25 1/23/2020 36,016
10,000 JPMorgan Chase & Co. 4.95 3/25/2020 10,137
134,544 Morgan Stanley 2.65 1/27/2020 134,397
47,766 Wells Fargo & Co. 2.15 1/30/2020 47,594
35,000 Wells Fargo Bank, N.A. (1 mo. LIBOR + 0.31%) 2.55(b) 8/01/2019 35,000
25,000 Wells Fargo Bank, N.A. (1 mo. LIBOR + 0.18%) 2.45(b) 4/24/2020 25,000
----------
415,822
----------
COMMERCIAL SERVICES (1.5%)
50,000 AARP, Inc. (LOC - Bank of America Corp.)
(Put Date 8/07/2019)(c) 2.35 5/01/2031 50,000
20,000 Altoona-Blair County Dev. Corp. (LOC - PNC
Financial Services Group) (Put Date 8/07/2019)(a),(c) 2.40 4/01/2035 20,000
4,475 Harvest Time Tabernacle, Inc. (LOC - Federal
Home Loan Bank of Dallas)(c) 2.40 8/01/2037 4,475
----------
74,475
----------
DIVERSIFIED FINANCIAL SERVICES (6.4%)
2,670 2016 David S Pearl II Irrevocable Trust
(LOC - Federal Home Loan Bank of Dallas)
(Put Date 8/09/2019)(c) 2.40 11/01/2036 2,670
14,270 ASC Admiral Way, LLC (LOC - Federal
Home Loan Bank of San Francisco)(c) 2.44 8/01/2056 14,270
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------------
$ 25,270 Bass Pro Rossford Dev. Co., LLC
(LOC - Fifth Third Bank)(c) 2.38% 11/01/2027 $ 25,270
25,000 Carol Allen Family Liquidity Trust
(LOC - Comerica Bank, N.A.)(c) 2.27 3/01/2048 25,000
8,720 CEI Capital, LLC (LOC - Fifth Third Bank)(c) 2.35 3/01/2033 8,720
5,290 Chad J Himmel Irrevocable Trust
(LOC - Federal Home Loan Bank of Dallas)(c) 2.43 7/01/2048 5,290
6,535 Columbus Hotel Investment One, LLC
(LOC - Federal Home Loan Bank of New York)
(Put Date 8/07/2019)(c) 2.30 10/01/2048 6,535
4,420 Debra B Kennedy Irrevocable Trust
(LOC - Federal Home Loan Bank of Dallas)
(Put Date 8/07/2019)(c) 2.30 5/01/2048 4,420
2,250 Dennis Wesley Co., Inc. (LOC - Federal
Home Loan Bank of Indianapolis)(c) 2.40 6/15/2034 2,250
7,000 Desert Vistas, LP (LOC - Federal Home Loan
Bank of San Francisco)
(Put Date 8/07/2019)(c) 2.25 9/01/2055 7,000
4,125 Elsinore Properties, LP (LOC - Fifth Third Bank)
(Put Date 8/07/2019)(c) 2.35 2/01/2037 4,125
6,720 EMF, LLC (LOC - Comerica Bank, N.A.)
(Put Date 8/07/2019)(c) 2.26 6/01/2042 6,720
45,000 Fiore Capital, LLC (LOC - Wells Fargo & Co.)
(Put Date 8/07/2019)(c) 2.38 8/01/2045 45,000
5,595 Foster/Schweihofer Real Estate Co., LLC
(LOC - Comerica Bank, N.A.)(c) 2.49 9/01/2033 5,595
14,215 Gerald J Rubin Special Trust No. 1
(LOC - Goldman Sachs Bank USA)
(Put Date 8/07/2019)(c) 2.32 12/01/2048 14,215
3,675 Herman & Kittle Capital, LLC (LOC - Federal
Home Loan Bank of Cincinnati)(c) 2.30 2/01/2037 3,675
5,800 Jacob Rosenstein 2017 Irrevocable Life Insurance
Trust (LOC - Bank of Oklahoma, N.A.)
(Put Date 8/07/2019)(c) 2.35 8/01/2037 5,800
4,445 Lamar Avenue Trust (LOC - Federal Home Loan
Bank of Dallas)(c) 2.30 12/01/2037 4,445
6,000 Lavonia O Frick Family Trust (LOC - Federal
Home Loan Bank of Atlanta)(c) 2.30 8/01/2048 6,000
5,490 Linda E Krejsek Life Insurance Trust (LOC - Federal
Home Loan Bank of Dallas)(c) 2.30 9/01/2037 5,490
4,025 Mark E Potteiger Irrevocable Life Insurance Trust
(LOC - Federal Home Loan Bank of Dallas)(c) 2.30 6/01/2048 4,025
================================================================================
14 | USAA MONEY MARKET FUND
================================================================================
------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------------
$ 6,630 Medilucent MOB I, LP (LOC - PNC Financial
Services Group) (Put Date 8/07/2019)(c) 2.34% 8/01/2030 $ 6,630
2,110 NextGen Automotive, LLC (LOC - Fifth Third Bank)
(Put Date 8/30/2019)(c) 2.35 4/01/2048 2,110
22,280 OSF Finance Co., LLC (LOC - PNC Financial
Services Group) (Put Date 8/07/2019)(c) 2.34 12/01/2037 22,280
25,560 Paca-Pratt Associates, Inc.
(LOC - Manufacturers & Traders Trust Co.)
(Put Date 8/07/2019)(c) 2.71 1/01/2038 25,560
3,225 Partisan Property, Inc. (LOC - Wells Fargo & Co.)
(Put Date 8/07/2019)(c) 2.26 8/01/2044 3,225
11,459 Pinnacle Properties Dev. Group, LLC
(LOC - Federal Home Loan Bank of Cincinnati)
(Put Date 8/07/2019)(c) 2.30 6/15/2041 11,459
5,140 Rathbone, LLC (LOC - Comerica Bank, N.A.)(c) 2.63 1/01/2038 5,140
10,915 Stobro Co., LP (LOC - Federal Home Loan
Bank of Pittsburgh) (Put Date 8/07/2019)(c) 2.51 1/01/2032 10,915
17,935 Sugar Creek Finance Co., LLC (LOC - Northern
Trust Corp.) (Put Date 8/07/2019)(c) 2.46 6/01/2042 17,935
----------
311,769
----------
HEALTHCARE-PRODUCTS (0.2%)
7,320 Labcon North America (LOC - BNP Paribas)(c) 2.40 6/01/2044 7,320
----------
HEALTHCARE-SERVICES (0.1%)
2,100 Tallahassee Orthopedic Center LC
(LOC - Wells Fargo & Co.)(c) 2.40 4/03/2034 2,100
----------
INVESTMENT COMPANIES (0.0%)
1,065 Cain Capital Investments, LLC (LOC - BB&T Corp.)
(Put Date 8/30/2019)(c) 2.52 10/01/2046 1,065
----------
LEISURE TIME (0.1%)
3,270 Cattail Creek Country Club, Inc. (LOC -
Manufacturers & Traders Trust Co.)
(Put Date 8/07/2019)(c) 2.71 3/01/2031 3,270
----------
MACHINERY-DIVERSIFIED (0.3%)
15,000 Opus Inspection, Inc. (LOC - Swedbank AB)
(Put Date 8/07/2019)(c) 2.45 1/01/2034 15,000
----------
REAL ESTATE (0.5%)
9,510 Delos, LLC (LOC - Wells Fargo & Co.)
(Put Date 8/07/2019)(c) 2.25 3/01/2037 9,510
9,345 Housing Venture I, LP (LOC - Federal
Home Loan Bank of San Francisco)(c) 2.44 12/01/2055 9,345
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------------
$ 6,930 Stivers Realty LC (LOC - Federal
Home Loan Bank of Dallas)(c) 2.34% 7/01/2043 $ 6,930
----------
25,785
----------
Total Corporate Obligations (cost: $856,606) 856,606
----------
REPURCHASE AGREEMENTS (10.0%)
490,000 Fixed Income Clearing Corp., 2.53%, acquired
7/31/2019 and due on 8/01/2019 at $490,000
(collateralized by $466,815 of U.S. Treasury, 2.88%
due 8/15/2045; market value $499,801)(d)
(cost: $490,000) 490,000
----------
MUNICIPAL OBLIGATIONS (7.0%)
ARIZONA (0.5%)
26,625 Yavapai County IDA (LOC - Bank of Nova Scotia)
(Put Date 8/07/2019)(c) 2.55 9/01/2035 26,625
----------
ARKANSAS (0.6%)
29,000 Union County (LOC - Bank of America Corp.)
(Put Date 8/07/2019)(c) 2.44 10/01/2027 29,000
----------
COLORADO (0.2%)
2,600 Sheridan Redev. Agency (LOC - JP Morgan
Chase & Co.) (Put Date 8/07/2019)(c) 2.60 12/01/2029 2,600
9,785 Traer Creek Metropolitan District (LOC - BNP
Paribas) (Put Date 8/07/2019)(c) 2.35 10/01/2030 9,785
----------
12,385
----------
CONNECTICUT (0.1%)
4,490 State Dev. Auth. (LOC - Toronto-Dominion Bank)
(Put Date 8/07/2019)(c) 2.28 12/01/2028 4,490
----------
ILLINOIS (0.1%)
3,015 Finance Auth. (LOC - Federal Home Loan Bank
of Chicago) (Put Date 8/07/2019)(c) 2.36 7/01/2040 3,015
----------
INDIANA (0.3%)
11,300 City of Knox (LOC - SunTrust Bank)
(Put Date 8/07/2019)(c) 2.47 2/01/2046 11,300
5,200 City of Marion (LOC - Key Bank, N.A.)
(Put Date 8/07/2019)(c) 2.50 2/01/2035 5,200
----------
16,500
----------
LOUISIANA (0.1%)
3,445 St. Charles Parish (LOC - Federal Home Loan
Bank of Atlanta) (Put Date 8/07/2019)(c) 2.38 9/01/2024 3,445
----------
================================================================================
16 | USAA MONEY MARKET FUND
================================================================================
------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------------
MICHIGAN (2.9%)
$ 21,965 Finance Auth. (LOC - Bank of Montreal)
(Put Date 8/07/2019)(c) 2.31% 9/01/2050 $ 21,965
40,000 Finance Auth. (LOC - PNC Financial Services Group)
(Put Date 8/07/2019)(c) 2.32 9/01/2050 40,000
80,000 Finance Auth. (LOC - JP Morgan Chase & Co.)
(Put Date 8/05/2019)(c) 2.32 9/01/2053 80,000
----------
141,965
----------
MISSISSIPPI (0.1%)
2,700 Business Finance Corp. (LOC - Federal Home Loan
Bank of Dallas) (Put Date 8/07/2019)(c) 2.40 8/01/2021 2,700
----------
NEW YORK (1.9%)
1,380 Columbia County IDA (LOC - HSBC Bank
USA, Inc.) (Put Date 8/07/2019)(c) 2.55 7/01/2027 1,380
19,470 Saratoga County IDA (LOC - JP Morgan
Chase & Co.) (Put Date 8/07/2019)(c) 2.37 11/01/2021 19,470
20,000 State Housing Finance Agency (LOC - Landesbank
Hessen-Thuringen) (Put Date 8/01/2019)(c) 2.43 5/01/2042 20,000
25,450 State Housing Finance Agency (LOC - JP Morgan
Chase & Co.) (Put Date 8/07/2019)(c) 2.35 11/01/2048 25,450
28,700 State Housing Finance Agency (LOC - Landesbank
Hessen-Thuringen) (Put Date 8/07/2019)(c) 2.30 11/01/2044 28,700
----------
95,000
----------
PENNSYLVANIA (0.2%)
4,736 Allegheny County IDA (LOC - PNC Financial Services
Group) (Put Date 8/07/2019)(c) 2.36 11/01/2027 4,736
3,245 Economic Dev. Finance Auth. (LOC - PNC Financial
Services Group) (Put Date 8/07/2019)(c) 2.34 4/01/2035 3,245
1,100 Lancaster IDA (LOC - Fulton Bank)
(Put Date 8/07/2019)(c) 2.66 6/01/2027 1,100
----------
9,081
----------
Total Municipal Obligations (cost: $344,206) 344,206
----------
U.S. TREASURY SECURITIES (4.6%)
NOTES (4.6%)
75,000 U.S. Treasury Note (3 mo. USTMMR + 0.07%) 2.07(b),(e) 1/31/2020 74,989
150,000 U.S. Treasury Note (3 mo. USTMMR + 0.048%) 2.12(b),(e) 10/31/2019 150,032
----------
Total U.S. Treasury Securities (cost: $225,021) 225,021
----------
CERTIFICATES OF DEPOSIT (4.0%)
25,000 Bayerische Landesbank (1 mo. LIBOR + 0.40%) 2.58(b) 8/02/2019 25,000
30,000 Landesbank Baden-Wurttemberg 2.76 11/07/2019 30,000
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON FINAL VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------------
$ 30,000 Landesbank Hessen-Thuringen 2.85% 10/18/2019 $ 30,000
30,000 Natixis 2.86 9/23/2019 30,000
30,000 Natixis 2.85 10/22/2019 30,000
50,000 Toronto-Dominion 3.01 9/04/2019 50,000
----------
Total Certificates of Deposit (cost: $195,000) 195,000
----------
TOTAL INVESTMENTS (COST: $4,880,298) $4,880,298
==========
------------------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
------------------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------------------------------------------------------------------------------------------------------------------
Money Market Instruments:
Commercial Paper $- $1,852,628 $- $1,852,628
Eurodollar and Yankee Obligations - 916,837 - 916,837
Corporate Obligations - 856,606 - 856,606
Repurchase Agreements - 490,000 - 490,000
Municipal Obligations - 344,206 - 344,206
U.S. Treasury Securities - 225,021 - 225,021
Certificates of Deposit - 195,000 - 195,000
------------------------------------------------------------------------------------------------------------------------
Total $- $4,880,298 $- $4,880,298
------------------------------------------------------------------------------------------------------------------------
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
================================================================================
18 | USAA MONEY MARKET FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
July 31, 2019
--------------------------------------------------------------------------------
o GENERAL NOTES
Values of securities are determined by procedures and practices discussed in
Note 1A to the financial statements.
The cost of securities at July 31, 2019, for federal income tax purposes,
was $4,880,298,000.
The Portfolio of Investments category percentages shown represent the
percentages of the investments to net assets, and, in total, may not equal
100%. A category percentage of 0.0% represents less than 0.1% of net assets.
o CATEGORIES AND DEFINITIONS
EURODOLLAR AND YANKEE OBLIGATIONS - Eurodollar obligations are U.S.
dollar-denominated instruments that are issued outside the U.S. capital
markets by foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions. Yankee obligations
are dollar-denominated instruments that are issued by foreign issuers in the
U.S. capital markets.
CERTIFICATES OF DEPOSIT - Certificates of deposit are receipts issued by a
depository institution in exchange for the deposit of funds. The issuer
agrees to pay the amount deposited plus interest to the bearer of the
receipt on the date specified on the certificate. The certificate usually
can be traded in the secondary market prior to maturity.
COMMERCIAL PAPER - Consists of short-term unsecured promissory notes with
maturities ranging from one to 270 days, issued mainly by
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 19
================================================================================
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
IDA Industrial Development Authority/Agency
LIBOR London Interbank Offered Rate
SOFR Secured Overnight Financing Rate
USTMMR Quarterly US Treasury Money Market Rate
CREDIT ENHANCEMENTS - Adds the financial strength of the provider of the
enhancement to support the issuer's ability to repay the principal and
interest payments when due. The enhancement may be provided by a
high-quality bank, insurance company or other corporation, or a collateral
trust. The enhancements do not guarantee the market values of the
securities.
The Fund's purchases consist of securities meeting the requirements to
qualify as "eligible securities" under the U.S. Securities and Exchange
Commission (SEC) regulations applicable to money market funds. In order to
qualify as an eligible security, USAA Mutual Funds Trust's Board of
Trustees, must determine that the particular investment presents minimal
credit risk in accordance with these SEC regulations.
LOC Principal and interest payments are guaranteed by a bank letter of
credit or other bank credit agreement.
o SPECIFIC NOTES
(a) Restricted security that is not registered under the Securities Act
of 1933. A resale of this security in the United States may occur in an
exempt transaction to a qualified institutional buyer as defined by Rule
144A, and as such has been deemed liquid by Victory Capital under
liquidity guidelines approved by USAA Mutual Funds Trust's Board of
Trustees, unless otherwise noted as illiquid.
================================================================================
20 | USAA MONEY MARKET FUND
================================================================================
(b) Variable-rate security - interest rate is adjusted periodically. The
interest rate disclosed represents the rate at July 31, 2019.
(c) Variable-rate demand notes (VRDNs) - Provide the right to sell the
security at face value on either that day or within the rate-reset
period. VRDNs will normally trade as if the maturity is the earlier put
date, even though stated maturity is longer. The interest rate is reset
on the put date at a stipulated daily, weekly, monthly, quarterly, or
other specified time interval to reflect current market conditions.
These securities do not indicate a reference rate and spread in their
description.
(d) Rates for U.S. Treasury notes or bonds represent the stated coupon
payment rate at time of issuance.
(e) 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.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 21
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
July 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities (amortized cost approximates market value) $4,880,298
Cash 755
Receivables:
Capital shares sold 14,565
Interest 6,331
----------
Total assets 4,901,949
----------
LIABILITIES
Payables:
Capital shares redeemed 20,471
Dividends on capital shares 112
Accrued administration and servicing fees 419
Accrued management fees 1,005
Accrued transfer agent's fees 1,047
Other accrued expenses and payables 252
----------
Total liabilities 23,306
----------
Net assets applicable to capital shares outstanding $4,878,643
==========
NET ASSETS CONSIST OF:
Paid-in capital $4,878,645
Accumulated loss (2)
----------
Net assets applicable to capital shares outstanding $4,878,643
==========
Capital shares outstanding, no par value 4,879,167
==========
Net asset value, redemption price, and offering price per share $ 1.00
==========
See accompanying notes to financial statements.
================================================================================
22 | USAA MONEY MARKET FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended July 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income $124,292
--------
EXPENSES
Management fees 11,605
Administration and servicing fees 4,836
Transfer agent's fees 12,089
Custody and accounting fees 459
Postage 505
Shareholder reporting fees 144
Trustees' fees 37
Registration fees 78
Professional fees 77
Other 50
--------
Total expenses 29,880
--------
NET INVESTMENT INCOME 94,412
--------
NET REALIZED GAIN ON INVESTMENTS
Net realized gain 6
--------
Increase in net assets resulting from operations $ 94,418
========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 23
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended July 31,
--------------------------------------------------------------------------------------------
2019 2018
--------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 94,412 $ 50,016
Net realized gain on investments 6 -
------------------------------
Increase in net assets resulting from operations 94,418 50,016
------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM DISTRIBUTABLE EARNINGS: (94,412) (50,007)
------------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 6,144,694 5,931,753
Reinvested dividends 93,847 49,721
Cost of shares redeemed (5,983,514) (5,871,143)
------------------------------
Increase in net assets from capital share transactions 255,027 110,331
------------------------------
Net increase in net assets 255,033 110,340
NET ASSETS
Beginning of year 4,623,610 4,513,270
------------------------------
End of year $ 4,878,643 $ 4,623,610
==============================
CHANGE IN SHARES OUTSTANDING
Shares sold 6,144,694 5,931,753
Shares issued for dividends reinvested 93,847 49,721
Shares redeemed (5,983,514) (5,871,143)
------------------------------
Increase in shares outstanding 255,027 110,331
==============================
See accompanying notes to financial statements.
================================================================================
24 | USAA MONEY MARKET FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
July 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 Money Market 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 the highest income
consistent with preservation of capital and the maintenance of liquidity.
The Fund operates as a retail money market fund in compliance with the
requirements of Rule 2a-7 under the 1940 Act; and as a retail money market fund,
shares of the Fund are available for sale only to accounts that are beneficially
owned by natural persons.
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of USAA Asset Management Company (AMCO), the investment adviser to the
Fund, and USAA Transfer Agency Company, d/b/a USAA Shareholder Account Services
(SAS), the transfer agent to the Fund, announced that AMCO and SAS would be
acquired by Victory Capital Holdings, Inc., a global investment management firm
headquartered in Cleveland, Ohio (the Transaction) on July 1, 2019. Effective
August 5, 2019, Citibank, N.A. is the new custodian for the USAA Mutual Funds. 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. 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
an Interested Trustee; and (2) John C. Walters, to serve as an Independent
Trustee.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Pricing and Liquidity Committee (the Committee), and subject
to Board oversight, the Committee administers and oversees the Fund's
valuation policies and procedures, which are approved by the Board. The Fund
utilizes independent pricing services, quotations from securities dealers,
and a wide variety of sources and information to establish and adjust the
fair value of securities as events occur and circumstances warrant.
The value of each security is determined (as of the close of trading on the
New York Stock Exchange (NYSE) on each business day the NYSE is open) as set
forth below:
1. All securities held in the Fund are short-term debt securities, which
are valued pursuant to Rule 2a-7 under the 1940 Act. This method values
a security at its purchase price, and thereafter, assumes a constant
amortization to maturity of any premiums or discounts.
2. Repurchase agreements are valued at cost.
3. Securities for which amortized cost valuations are considered unreliable
or whose values have been materially affected by a significant event are
valued in good faith, at fair value, using methods determined by the
Committee, under procedures to stabilize net assets and valuation
procedures approved by the Board.
B. FAIR VALUE MEASUREMENTS - Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the Portfolio of Investments is
based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted)
in active markets for identical securities.
Level 2 - inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
================================================================================
26 | USAA MONEY MARKET FUND
================================================================================
that are observable for the securities, either directly or indirectly, and
market-corroborated inputs such as market indexes.
Level 3 - inputs to the valuation methodology are unobservable and
significant to the fair value measurement, including the Manager's own
assumptions in determining the fair value.
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risks associated with investing in those securities.
For example, money market securities are valued using amortized cost, in
accordance with rules under the 1940 Act. Generally, amortized cost
approximates the current fair value of a security, but since the value is
not obtained from a quoted price in an active market, such securities are
reflected as Level 2.
C. INVESTMENTS IN SECURITIES - Securities transactions are accounted for as
of the date the securities are purchased or sold (trade date). Gains or
losses from sales of investment securities are computed on the identified
cost basis. Interest income is recorded daily on the accrual basis. Premiums
and discounts are amortized over the life of the respective securities using
the straight-line method.
D. FEDERAL TAXES - The Fund's policy is to comply with the requirements of
the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its taxable
income and net capital gains, if any, to its shareholders. Therefore, no
federal income tax provision is required.
For the year ended July 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
================================================================================
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 July 31, 2019, the
value of the related collateral exceeded the value of the repurchase
agreements, reducing the net settlement amount to zero. Details on the
collateral are included on the Portfolio of Investments.
F. SECURITIES PURCHASED ON A DELAYED-DELIVERY OR WHEN-ISSUED BASIS - Delivery
and payment for securities that have been purchased by the Fund on a
delayed-delivery or when-issued basis can take place a month or more after
the trade date. During the period prior to settlement, these securities do
not earn interest, are subject to market fluctuation, and may increase or
decrease in value prior to their delivery. The Fund maintains segregated
assets with a market value equal to or greater than the amount of its
purchase commitments.
G. INDEMNIFICATIONS - Under the Trust's organizational documents, its
officers and trustees are indemnified against certain liabilities arising
out of the performance of their duties to the Trust. In addition, in the
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
================================================================================
28 | USAA MONEY MARKET FUND
================================================================================
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 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. 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.
For the period July 1, 2019 to July 31, 2019, the Fund paid Citibank facility
fees of 1,000, which represents 3.4% of the total fees paid to Citibank by the
funds of the Trusts. The Fund had no borrowings under this agreement during the
period July 1 to July 31, 2019. Effective July 1, 2019, the line of credit among
the Trust, with respect to its funds, and USAA Capital Corporation (CAPCO)
terminated. For the period from August 1, 2018 to June 30, 2019, the Fund paid
CAPCO facility fees of $40,000, which represents 5.9% of the total fees paid to
CAPCO by the funds of the Trusts. The Fund had no borrowings under this
agreement during the period from August 1, 2018 to June 30, 2019.
(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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
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 July 31, 2019,
and 2018, was as follows:
2019 2018
------------------------------
Ordinary income* $94,412,000 $50,007,000
=========== ===========
As of July 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $110,000
*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 July 31, 2019, the Fund had no capital loss carryforwards, for federal income
tax purposes. The cost of securities at July 31, 2019, for federal income tax
purposes, was $4,880,298,000.
(4) TRANSACTIONS WITH MANAGER
MANAGEMENT FEES - The Manager provides investment management services to the
Fund pursuant to an Advisory Agreement. Effective July 1, 2019, the Trust relies
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 all or a portion of the Fund's assets.
================================================================================
30 | USAA MONEY MARKET FUND
================================================================================
The Fund's investment management fee is accrued daily and paid monthly at an
annualized rate of 0.24% of the Fund's average daily net assets. For the period
from August 1, 2018 to June 30, 2019, the Fund incurred management fees, paid or
payable to AMCO, of $10,600,000. For the period July 1, 2019 to July 31, 2019,
the Fund incurred management fees, paid or payable to Victory Capital, of
$1,005,000.
ADMINISTRATION AND SERVICING FEES - Effective July 1, 2019, Victory Capital is
obligated on a continuous basis to provide administrative services to the Fund.
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 period from August 1, 2018 to June 30, 2019, the Fund incurred
administration and servicing fees by AMCO, paid or payable to AMCO, of
$4,417,000. For the period July 1, 2019 to July 31, 2019, the Fund incurred
administration and servicing fees by Victory Capital, paid or payable to Victory
Capital, of $419,000.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, AMCO also provided certain compliance and legal
services for the benefit of the Fund. The Board approved the reimbursement of a
portion of these expenses incurred by AMCO.
Effective July 1, 2019, these services are covered under a Compliance Services
Agreement between the Trust and Victory Capital. For the period from August 1,
2018 to June 30, 2019, the Fund reimbursed AMCO $15,000 for these compliance and
legal services. For the period July 1, 2019 to July 31, 2019, the Fund's portion
of fees paid to Victory Capital under the Compliance Service Agreement was
$2,000. These expenses are included in the professional fees on the Fund's
Statement of Operations.
EXPENSE LIMITATION - Effective July 1, 2019, the Manager has contractually
agreed to waive its management fee and/or reimburse expenses so that the total
annual operating expenses (excluding certain items such as interest, taxes and
brokerage commissions) do not exceed 0.62% of the Fund through at least June 30,
2021. The Manager is permitted to recoup advisory fees waived and expenses
reimbursed for up to three years after the fiscal year in which
================================================================================
NOTES TO FINANCIAL STATEMENTS | 31
================================================================================
the waiver or reimbursement took place, subject to the lesser of any operating
expense limits in effect at the time of: (a) the original waiver or expense
reimbursement; or (b) the recoupment, after giving effect to the recoupment
amount. The amount of any waivers or reimbursements and the amount of any
recoupment is calculated without regard to the impact of any performance
adjustment to the Fund's management fee. This waiver agreement may only be
terminated by the Fund's Board of Trustees.
TRANSFER AGENT'S FEES - Victory Capital Transfer Agency, Inc. (VCTA), (formerly,
USAA Shareholder Account Services (SAS)) provides transfer agency services to
the Fund. VCTA, an affiliate of the Manager, provides transfer agent services to
the Fund based on an annualized rate of 0.25% of the Fund's average net assets
for the fiscal year. VCTA pays a portion of these fees to certain intermediaries
for administration and servicing of accounts that are held with such
intermediaries. For the year ended July 31, 2019, the Fund incurred transfer
agent's fees, paid or payable to VCTA, of $12,089,000.
UNDERWRITING SERVICES - Effective July 1, 2019, the Trust has an agreement with
Victory Capital Advisers, Inc. (VCA), an affiliate of the Manager for exclusive
underwriting and distribution of the Fund's shares on a continuing best effort
basis. This agreement provides that VCA receive no fee or other compensation for
such distribution services. Prior to July 1, 2019, USAA Investment Management
Company (IMCO) provided exclusive underwriting and distribution of the Fund's
shares on a continuing best-efforts basis and received no fee or other
compensation for these services.
(5) TRANSACTIONS WITH AFFILIATES
Effective July 1, 2019, Victory Capital replaced AMCO as the Fund's investment
adviser and began managing the Fund. Prior to July 1, 2019, AMCO was indirectly
wholly owned by United States Automobile Association ("USAA"), a large,
diversified financial services institution.
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
================================================================================
32 | USAA MONEY MARKET FUND
================================================================================
(6) UPCOMING REGULATORY MATTERS
In October 2016, the U.S. Securities and Exchange Commission (SEC) issued Final
Rule Release No. 33-10233, INVESTMENT COMPANY LIQUIDITY RISK MANAGEMENT PROGRAMS
(Liquidity Rule). The Liquidity Rule requires funds to establish a liquidity
risk management program and enhances disclosures regarding funds' liquidity. The
requirements to implement a liquidity risk management program and establish a
15% illiquid investment limit became effective December 1, 2018. However, in
February 2018, the SEC issued Release No. IC-33010, INVESTMENT COMPANY LIQUIDITY
RISK MANAGEMENT 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 has determined there is no significant
impact on the Fund's financial statements and various filings.
(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.
ASU 2018-13, FAIR VALUE MEASUREMENT
-----------------------------------
In August 2018, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2018-13, Fair Value Measurement (Topic 820).
The amendments in the ASU impact disclosure requirements for fair value
measurement. ASU 2018-13 is effective for fiscal years beginning after December
15, 2019. Early adoption is permitted and can include the entire standard or
certain provisions that exclude or amend disclosures. Management has elected to
early adopt ASU 2018-13 effective with the current reporting period. The
adoption of ASU 2018-13 guidance is limited to changes in the Fund's notes to
financial statement disclosures regarding valuation method, fair value, and
transfers between levels of the fair value hierarchy.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 33
================================================================================
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 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)
Net realized and
unrealized gain(a) .00 .00 .00 .00 .00
--------------------------------------------------------------------------
Total from investment
operations .02 .01 .00(a) .00(a) .00(a)
--------------------------------------------------------------------------
Less distributions from:
Net investment income (.02) (.01) (.00)(a) (.00)(a) (.00)(a)
Realized capital gains - - (.00)(a) (.00)(a) -
--------------------------------------------------------------------------
Total distributions (.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 (%)* 1.97 1.13 .31(b) .01(b) .01(b)
Net assets at end of
period (000) $4,878,643 $4,623,610 $4,513,270 $5,606,434 $5,289,252
Ratios to average
daily net assets:**
Expenses (%) .62(d) .62 .63(b),(c) .41(b),(c) .24(b),(c)
Expenses, excluding
reimbursements (%) .62 .62 .63(c) .67(c) .65(c)
Net investment income (%) 1.95 1.12 .29 .01 .01
* Assumes reinvestment of all net investment income and realized capital
gain distributions, if any, during the period. Includes adjustments in
accordance with U.S. generally accepted accounting principles and could
differ from the iMoneyNet reported return. Total returns for periods of less
than one year are not annualized.
** For the year ended July 31, 2019, average daily net assets were
$4,836,080,000.
(a) Represents less than $0.01 per share.
(b) AMCO 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) Reflects total annual operating expenses of the Fund before reductions of
any expenses paid indirectly. The Fund's expenses paid indirectly decreased
the expense ratios by less than 0.01%.
(d) Effective July 1, 2019, the Manager had voluntarily agreed to limit the
annual expenses of the Fund to 0.62% of the Fund's average daily net assets.
================================================================================
34 | USAA MONEY MARKET FUND
================================================================================
EXPENSE EXAMPLE
July 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 February 1, 2019, through
July 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 | 35
================================================================================
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 FEBRUARY 1, 2019 -
FEBRUARY 1, 2019 JULY 31, 2019 JULY 31, 2019
-----------------------------------------------------------------
Actual $1,000.00 $1,010.20 $3.09
Hypothetical
(5% return before expenses) 1,000.00 1,021.72 3.11
*Expenses are equal to the Fund's annualized expense ratio of 0.62%, which is
net of any reimbursements and expenses paid indirectly, multiplied by the
average account value over the period, multiplied by 181 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 1.02% for the six-month period of
February 1, 2019, through July 31, 2019.
================================================================================
36 | USAA MONEY MARKET FUND
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
July 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.
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with
================================================================================
ADVISORY AGREEMENT(S) | 37
================================================================================
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 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
================================================================================
38 | USAA MONEY MARKET FUND
================================================================================
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.
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
================================================================================
ADVISORY AGREEMENT(S) | 39
================================================================================
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).
For at least two years after the Transaction closes, Victory Capital has
agreed to waive fees and/or reimburse expenses so that each Fund's
annual expense ratio (excluding certain customary items) does not exceed
the levels reflected in each Fund's most recent audited financial
statements at the time the Transaction closes (or the levels of AMCO's
then-current expense caps, if applicable), excluding the impact of any
performance adjustment to the Fund's advisory fee.
================================================================================
40 | USAA MONEY MARKET FUND
================================================================================
o The portfolio managers at AMCO that manage the Fixed Income Funds(1) as
well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be advised
by Victory Capital through its Victory Solutions platform, Victory
Capital proposes that the same subadvisers be retained Post-Transaction,
although Victory Capital may change the allocation to a particular
subadviser Post-Transaction. No changes are expected to the portfolio
managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's businesses to
Victory Capital. Victory Capital and USAA expect to
(1)The Fixed Income Funds include the following Funds: California Bond Fund,
Government Securities Fund, High Income Fund, Income Fund, Intermediate-Term
Bond Fund, Tax Exempt Intermediate-Term Fund, Tax Exempt Long-Term Fund, New
York Bond Fund, Short-Term Bond Fund, Tax Exempt Short-Term Fund, Ultra
Short-Term Bond Fund, Virginia Bond Fund, Money Market Fund, Tax Exempt Money
Market Fund and Treasury Money Market Trust.
(2)The Cornerstone Funds include the following Funds: Cornerstone Aggressive
Fund, Cornerstone Conservative Fund, Cornerstone Equity Fund, Cornerstone
Moderate Fund, Cornerstone Moderately Aggressive Fund, and Cornerstone
Moderately Conservative Fund.
(3)The Target Retirement Funds include the following Funds: Target Retirement
2020 Fund, Target Retirement 2030 Fund, Target Retirement 2040 Fund, Target
Retirement 2050 Fund, Target Retirement 2060 Fund, and Target Retirement
Income Fund.
================================================================================
ADVISORY AGREEMENT(S) | 41
================================================================================
enter into a transition services agreement under which USAA will
continue to provide Victory Capital with certain services that are
currently provided by USAA to AMCO and the USAA Transfer Agent for a
specified period of time after the closing of the Transaction to assist
Victory Capital in transitioning the USAA member distribution channel
and member support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital is capable of providing
the same level of investment management services
================================================================================
42 | USAA MONEY MARKET FUND
================================================================================
currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund, Growth
& Income Fund, Income Stock Fund, Global Equity Income Fund, and Precious
Metals and Minerals Fund.
================================================================================
ADVISORY AGREEMENT(S) | 43
================================================================================
The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored
================================================================================
44 | USAA MONEY MARKET FUND
================================================================================
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 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
================================================================================
ADVISORY AGREEMENT(S) | 45
================================================================================
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.
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
================================================================================
46 | USAA MONEY MARKET FUND
================================================================================
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.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
================================================================================
ADVISORY AGREEMENT(S) | 47
================================================================================
deliver investment products and services to USAA's direct member-based channel.
The Board also considered that Victory Capital may derive reputational and other
benefits from its ability to use "USAA" and related names in connection with
operating and marketing the Funds. The Board considered that the Transaction, if
completed, would significantly increase Victory Capital's assets under
management and expand Victory Capital's investment capabilities. This increased
size and diversification could facilitate Victory Capital's continued investment
in its business and products, which Victory Capital would be able to leverage
across a broader base of assets. Victory Capital also would be able to use
trading commission credits from the Funds' transactions in securities to
"purchase" third party research and execution services to support its investment
process. Based on its review, the Board determined that any "fall-out" benefits
and other types of benefits that may accrue to Victory Capital are fair and
reasonable.
CONCLUSIONS - Based on the foregoing and other relevant considerations, at the
Meeting of the Board held on January 15, 2019, the Board, including a majority
of the Independent Trustees, acting within its business judgment, (1) concluded
that the terms of the New Advisory Agreement are fair and reasonable and that
approval of the New Advisory Agreement is in the best interests of each Fund and
its respective shareholders, (2) voted to approve the New Advisory Agreement,
and (3) voted to recommend approval of the New Advisory Agreement by
shareholders of the Funds. The Board evaluated all information available to it
on a Fund-by-Fund basis and its determinations were made separately in respect
of each Fund. The Board noted some factors may have been more or less important
with respect to any particular Fund and that no one factor was determinative of
its decisions which, instead, were premised upon the totality of factors
considered. In this connection, the Board also noted that different Board
members likely placed emphasis on different factors in reaching their individual
conclusions to vote in favor of the New Advisory Agreement and to recommend
approval of the New Advisory Agreement by shareholders of the Funds.
================================================================================
48 | USAA MONEY MARKET FUND
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND AMCO)
July 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.
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 AMCO 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 AMCO, 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 AMCO's revenues
and costs of providing services to the Fund and compensation paid to affiliates
of AMCO; and (iii) information about
(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"). Effective July 1, 2019, upon the closing of the
transaction whereby AMCO acquired by Victory Capital Holdings, Inc., the
parent company of Victory Capital, the Advisory Agreement between the Trust
and AMCO and the Sub-advisory Agreement with the Subadviser terminated and
the new investment advisory agreement between the Trust and Victory Capital
went into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are discussed above.
Effective June 30, 2019, the Subadviser no longer manages any portion of the
Fund.
================================================================================
ADVISORY AGREEMENT(S) | 49
================================================================================
AMCO's operations and personnel. Prior to voting, the Independent Trustees
reviewed the proposed continuance of the Advisory Agreement with management and
with experienced 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 AMCO. 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 AMCO's profitability with respect to the
Fund. However, the Board noted that the evaluation process with respect to AMCO
is an ongoing one. In this regard, the Board's and its committees' consideration
of the Advisory Agreement included 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 AMCO under the Advisory Agreement, the Board
reviewed information provided by AMCO relating to its operations and personnel.
The Board also took into account its knowledge of AMCO's management and the
quality of the performance of AMCO's duties through Board meetings, discussions,
and reports during the
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50 | USAA MONEY MARKET FUND
================================================================================
preceding year. The Board considered the fees paid to AMCO and the services
provided to the Fund by AMCO under the Advisory Agreement, as well as other
services provided by AMCO and its affiliates under other agreements, and the
personnel who provide these services. In addition to the investment advisory
services provided to the Fund, AMCO 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 AMCO in connection with the services
provided to the Fund, including investment, operational, enterprise, litigation,
regulatory and compliance risks.
The Board considered AMCO's management style and the performance of AMCO's
duties under the Advisory Agreement. The Board considered the level and depth of
experience of AMCO, 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 AMCO's process for monitoring
"best execution," also was considered. AMCO's role in coordinating the
activities of the Fund's other service providers also was considered. The Board
also considered AMCO's risk management processes. The Board considered AMCO'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 AMCO and its affiliates in managing the
Fund, as well as other funds in the Trust.
The Board also reviewed the compliance and administrative services provided to
the Fund by AMCO and its affiliates, including AMCO's oversight of the Fund's
day to- day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust,
also focused on the quality of AMCO'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
================================================================================
ADVISORY AGREEMENT(S) | 51
================================================================================
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 objectives 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 the Fund and all other
no-load retail money market funds 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
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 also took into account the various
services provided to the Fund by AMCO and its affiliates, including the high
quality of services received by the Fund from AMCO. 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 money market funds regardless of asset size or primary channel of
distribution. This comparison indicated that, among other data, the Fund's
performance was above the average of its performance universe and lower than its
Lipper index for the one-year period ended December 31, 2018, was below the
average of its performance universe and its Lipper index for the three- and
five-year periods ended December 31, 2018, and was above the average of its
performance universe and its Lipper index for the ten-year period. The Board
also noted that the Fund's percentile performance ranking was in the bottom 50%
of its performance
================================================================================
52 | USAA MONEY MARKET FUND
================================================================================
universe for the one-, three- and five-year periods ended December 31, 2018, and
was in the top 35% of its performance universe for the ten-year period ended
December 31, 2018. The Board also took into account management's discussion
regarding current market conditions, including the relatively narrow range of
the returns 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 AMCO'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 AMCO'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 AMCO, the Board
also considered the fact that AMCO 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 AMCO from its relationship with the Trust, including that AMCO may
derive reputational and other benefits from its association with the Fund. The
Board also took into account the high quality of the services received by the
Fund from AMCO as well as the type of fund. The Trustees recognized that AMCO
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 - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussion of
the current advisory fee structure. The Board also considered the effect of the
Fund's growth and size on its performance and fees, noting that the Fund may
realize additional 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 AMCO, among others: (i) AMCO has
================================================================================
ADVISORY AGREEMENT(S) | 53
================================================================================
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) AMCO maintains an
appropriate compliance program; (iii) the performance of the Fund is reasonable
in relation to the performance of funds with similar investment objectives and
to relevant indices; (iv) the Fund's advisory expenses are reasonable in
relation to those of similar funds and to the services to be provided by AMCO;
and (v) AMCO's 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 AMCO 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.
================================================================================
54 | USAA MONEY MARKET FUND
================================================================================
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").
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 55
================================================================================
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 of 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), (08/11-06/19); Director of USAA Investment
Management Company (IMCO) (09/09-present); Chairman of Board of IMCO
(4/13-present); President and Director of USAA Shareholder Account Services
(SAS) (10/09-06/19); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director and Vice Chairman of FPS
(12/13-present); President and Director of USAA Investment Corporation (ICORP)
(03/10-present); Chairman of Board of ICORP (12/31-present); Director of USAA
Financial Advisors, Inc. (FAI) (12/13-present); Chairman of Board of FAI
(3/15-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
================================================================================
56 | USAA MONEY MARKET 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
--------------------------------------------------------------------------------
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
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 57
================================================================================
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.
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.
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
================================================================================
58 | USAA MONEY MARKET FUND
================================================================================
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 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.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 59
================================================================================
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 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.
================================================================================
60 | USAA MONEY MARKET FUND
================================================================================
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 was 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 | 61
================================================================================
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).
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Executive Director, Victory Capital Management Inc. (7/1/19-present); Treasurer,
USAA ETF Trust (09/18-06/19); Executive Director, Investment and Financial
Administration, USAA (04/12-06/30/19); Assistant Treasurer,
================================================================================
62 | USAA MONEY MARKET FUND
================================================================================
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
Director, Accounting and Finance, Victory Capital Management Inc.
(7/1/19-present); Assistant Treasurer, USAA ETF Trust (09/18-06/19);
Accounting/Financial Director, USAA (12/13-06/30/19).
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).
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).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 63
================================================================================
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 111 West Houston St., Suite 1901
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
Copies of the Victory Capital Management Inc.'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
--------------------------------------------------------------------------------
JULY 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA Short-Term Bond Fund
FUND INSTITUTIONAL ADVISER R6
SHARES SHARES SHARES SHARES
USSBX UISBX UASBX URSBX
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
". . . NOW MAY BE AN OPPORTUNE TIME FOR
INVESTORS TO ENSURE THAT THEIR PORTFOLIOS ARE WELL [PHOTO OF BROOKS ENGLEHARDT]
DIVERSIFIED AND THAT THEIR OVERALL ALLOCATION IS
APPROPRIATE FOR THEIR PARTICULAR RISK APPETITE."
--------------------------------------------------------------------------------
SEPTEMBER 2019
Although the bull market in equities has continued running, it was not without a
few missteps. Trade turmoil, questions surrounding global economic growth,
changing monetary policy, and geopolitical disputes have all led to increased
volatility. But through it all, domestic stocks, as measured by the S&P 500(R)
Index, still managed an annual return of approximately 8% for the 12-month
period ended July 31, 2019.
Given the sometimes dire news flow and ample cross-currents, it's no surprise
that volatility returned to the market. On one hand, the U.S. economy continues
to look good. The unprecedented streak of job creation has continued
uninterrupted, and unemployment is bouncing along historic lows at 3.7%. The
consumer remains resilient and inflation is tepid. On the flip side, however,
U.S. trade policy seems to be evolving, with new tariffs threatened and
implemented. The markets generally dislike this type of trade turmoil and
uncertainty, and the ongoing tensions between the United States and China (and
other trading partners) threaten to upend global supply chains and hinder
economic growth.
It's not just the stock market that has been dealing with volatility. The bond
market also has experienced volatility, due largely to the U.S. Federal
Reserve's (the "Fed") famous "pivot" in late 2018. Against the backdrop of
rapidly falling equities in the fourth quarter of 2018, the Fed signaled that
its next policy move would be to lower--not increase--short-term interest rates.
This immediately altered the yield environment.
Meanwhile, the U.S. Treasury yield curve continued to flatten and, in fact,
inverted--whereby shorter-term yields became higher than longer-term
================================================================================
================================================================================
yields. Such a yield-curve inversion is a worrying sign as it sometimes, but not
always, portends to a recession.
Although we are not predicting a recession, we must acknowledge that risks have
increased for an economic slowdown. Given that the current run in stocks is more
than a decade old, it's important for investors to keep perspective that the
bull market cannot continue forever. Therefore, now may be an opportune time for
investors to ensure that their portfolios are well diversified and that their
overall allocation is appropriate for their particular risk appetite.
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,
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. On the following pages, you will find information
relating to your USAA Investments, which is now a Victory Capital Investment
Franchise. If you have any questions about your investments, we encourage you to
engage your financial advisor or else contact us directly at 800-235-8396 or
visit usaa.com.
My colleagues and I sincerely appreciate the confidence you have placed in us,
and we value the opportunity to help you meet your investment goals.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGERS' COMMENTARY ON THE FUND 1
INVESTMENT OVERVIEW 6
SHAREHOLDER VOTING RESULTS 12
FINANCIAL INFORMATION
Distributions to Shareholders 13
Report of Independent Registered
Public Accounting Firm 14
Portfolio of Investments 15
Notes to Portfolio of Investments 38
Financial Statements 44
Notes to Financial Statements 48
Financial Highlights 66
EXPENSE EXAMPLE 70
ADVISORY AGREEMENT(S) 73
TRUSTEES' AND OFFICERS' INFORMATION 91
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
VICTORY CAPITAL MANAGEMENT INC. 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
USAA Investments, A Victory Capital Investment Franchise
BRIAN W. SMITH, CFA, CPA R. NEAL GRAVES, CFA, CPA
JULIANNE BASS, CFA KURT DAUM, JD
JAMES F. JACKSON Jr., CFA JOHN SPEAR, CFA
--------------------------------------------------------------------------------
o WHAT WERE MARKET CONDITIONS DURING THE 12-MONTH REPORTING PERIOD ENDED JULY
31, 2019?
When the reporting period started in August 2018, investors expected the
U.S. Federal Reserve (the "Fed") to continue raising short-term interest
rates into 2019. This outlook changed in November 2018, as investors grew
concerned about a potential trade war between the United States and China,
uncertainty related to the United Kingdom's exit from the European Union,
slowing global economic growth, a stronger U.S. dollar, and the possibility
of a U.S. government shutdown. Interest rates on maturities of six months
and longer began to trend downward, pushing bond prices higher. Investors'
concerns persisted into December 2018, which also was notable for the
beginning of a U.S. government shutdown that lasted 35 days. Although Fed
officials raised short-term interest rates at the December policy meeting,
their tone turned more dovish. In March 2019, the Fed left rates unchanged
and indicated it would stop its balance sheet runoff earlier than expected.
(Since October 2017, the Fed has been trimming its balance sheet by
gradually decreasing the reinvestment of maturing holdings of U.S. Treasury
and government-sponsored mortgage-backed securities.) These actions, along
with the Fed's softer language about the U.S. economy, generally sent
interest rates lower, with the market anticipating zero Fed interest rate
increase in the 2019 calendar year. In June 2019, Fed policymakers indicated
an interest rate cut was possible if the economic outlook weakened. The bond
market responded by pricing in an interest
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
rate cut as soon as July 2019. On July 31, 2019, the Fed cut short-term
interest rates and said it would end its balance sheet reduction on August
1, 2019, two months earlier than previously announced.
During the 12-month reporting period, U.S. Treasury yields fell along the
curve, except those on one-month and three-month maturities, which ended the
period higher than they began. The two-year U.S. Treasury yield decreased 80
basis points, while 10-year and 30-year U.S. Treasury yields dropped 95 and
56 basis points, respectively. (A basis point is 1/100th of a percentage
point.) Expectations about Fed monetary policy also led to an inversion in
the very short end of the curve, with the 10-year U.S. Treasury yield
falling below the one-month U.S. Treasury yield. The inversion occurred as
the U.S. entered its tenth year of recovery from the financial crisis, with
ongoing economic growth and strong employment levels.
o U.S. TREASURY YIELD CURVE o
[CHART OF U.S. TREASURY YIELD CURVE]
YIELD (MID CONVENTIONAL %) YIELD (CHANGE
MATURITY 07/31/19 YIELD 07/31/18 YIELD IN BASIS POINTS)
1M 1.988 1.885 10.2
3M 2.062 2.02 4.1
6M 2.067 2.191 -12.4
1Y 1.985 2.409 -42.4
2Y 1.872 2.669 -79.7
3Y 1.826 2.766 -94
5Y 1.827 2.848 -102.1
7Y 1.913 2.925 -101.1
10Y 2.014 2.96 -94.5
30Y 2.525 3.082 -55.7
[END CHART]
Source: Bloomberg Finance L.P.
================================================================================
2 | USAA SHORT-TERM BOND FUND
================================================================================
With the exception of high-yield spreads, credit spreads (yield
differentials between corporate bonds and U.S. Treasury securities of
comparable maturity) ended the reporting period largely unchanged. AAA and
BBB spreads widened by four and two basis points, respectively. AA spreads
were flat, while A spreads tightened by eight basis points. High-yield
spreads widened by 35 basis points. (Spreads are generally considered an
indication of risk; the wider the spread, the greater the perceived risk.)
o BLOOMBERG BARCLAYS U.S. AGGREGATE CREDIT INDEX o
AVERAGE OPTION ADJUSTED SPREAD
[CHART OF BLOOMBERG BARCLAYS U.S. AGGREGATE CREDIT INDEX]
AVERAGE OPTION
DATE ADJUSTED SPREAD
7/31/2018 1.03
8/1/2018 1.03
8/2/2018 1.03
8/3/2018 1.03
8/6/2018 1.03
8/7/2018 1.02
8/8/2018 1.03
8/9/2018 1.04
8/10/2018 1.07
8/13/2018 1.07
8/14/2018 1.06
8/15/2018 1.07
8/16/2018 1.06
8/17/2018 1.06
8/20/2018 1.06
8/21/2018 1.06
8/22/2018 1.07
8/23/2018 1.07
8/24/2018 1.07
8/27/2018 1.06
8/28/2018 1.06
8/29/2018 1.06
8/30/2018 1.07
8/31/2018 1.08
9/3/2018 1.08
9/4/2018 1.08
9/5/2018 1.09
9/6/2018 1.08
9/7/2018 1.07
9/10/2018 1.07
9/11/2018 1.06
9/12/2018 1.05
9/13/2018 1.04
9/14/2018 1.03
9/17/2018 1.03
9/18/2018 1.02
9/19/2018 1.02
9/20/2018 1.01
9/21/2018 1
9/24/2018 1.01
9/25/2018 1.01
9/26/2018 1.01
9/27/2018 1
9/28/2018 1
10/1/2018 1
10/2/2018 1
10/3/2018 0.99
10/4/2018 1
10/5/2018 1
10/9/2018 1
10/10/2018 1.01
10/11/2018 1.02
10/12/2018 1.03
10/15/2018 1.03
10/16/2018 1.03
10/17/2018 1.04
10/18/2018 1.04
10/19/2018 1.05
10/22/2018 1.05
10/23/2018 1.07
10/24/2018 1.08
10/25/2018 1.09
10/26/2018 1.11
10/29/2018 1.11
10/30/2018 1.12
10/31/2018 1.12
11/1/2018 1.13
11/2/2018 1.11
11/5/2018 1.1
11/6/2018 1.09
11/7/2018 1.07
11/8/2018 1.08
11/9/2018 1.09
11/13/2018 1.13
11/14/2018 1.16
11/15/2018 1.21
11/16/2018 1.21
11/19/2018 1.22
11/20/2018 1.25
11/21/2018 1.23
11/23/2018 1.24
11/26/2018 1.24
11/27/2018 1.25
11/28/2018 1.26
11/29/2018 1.27
11/30/2018 1.29
12/3/2018 1.28
12/4/2018 1.31
12/6/2018 1.36
12/7/2018 1.35
12/10/2018 1.36
12/11/2018 1.35
12/12/2018 1.32
12/13/2018 1.31
12/14/2018 1.31
12/17/2018 1.32
12/18/2018 1.33
12/19/2018 1.34
12/20/2018 1.37
12/21/2018 1.38
12/24/2018 1.4
12/26/2018 1.4
12/27/2018 1.42
12/28/2018 1.41
12/31/2018 1.43
1/2/2019 1.44
1/3/2019 1.47
1/4/2019 1.45
1/7/2019 1.43
1/8/2019 1.41
1/9/2019 1.38
1/10/2019 1.38
1/11/2019 1.37
1/14/2019 1.37
1/15/2019 1.37
1/16/2019 1.35
1/17/2019 1.33
1/18/2019 1.29
1/22/2019 1.29
1/23/2019 1.27
1/24/2019 1.26
1/25/2019 1.24
1/28/2019 1.24
1/29/2019 1.23
1/30/2019 1.23
1/31/2019 1.21
2/1/2019 1.19
2/4/2019 1.18
2/5/2019 1.16
2/6/2019 1.17
2/7/2019 1.19
2/8/2019 1.19
2/11/2019 1.19
2/12/2019 1.18
2/13/2019 1.17
2/14/2019 1.19
2/15/2019 1.18
2/19/2019 1.18
2/20/2019 1.18
2/21/2019 1.17
2/22/2019 1.17
2/25/2019 1.16
2/26/2019 1.16
2/27/2019 1.16
2/28/2019 1.14
3/1/2019 1.13
3/4/2019 1.13
3/5/2019 1.13
3/6/2019 1.14
3/7/2019 1.15
3/8/2019 1.16
3/11/2019 1.15
3/12/2019 1.14
3/13/2019 1.14
3/14/2019 1.14
3/15/2019 1.13
3/18/2019 1.12
3/19/2019 1.12
3/20/2019 1.13
3/21/2019 1.11
3/22/2019 1.12
3/25/2019 1.12
3/26/2019 1.11
3/27/2019 1.12
3/28/2019 1.12
3/29/2019 1.13
4/1/2019 1.12
4/2/2019 1.12
4/3/2019 1.11
4/4/2019 1.1
4/5/2019 1.09
4/8/2019 1.09
4/9/2019 1.08
4/10/2019 1.08
4/11/2019 1.06
4/12/2019 1.04
4/15/2019 1.04
4/16/2019 1.03
4/17/2019 1.04
4/18/2019 1.04
4/22/2019 1.05
4/23/2019 1.04
4/24/2019 1.04
4/25/2019 1.04
4/26/2019 1.04
4/29/2019 1.04
4/30/2019 1.04
5/1/2019 1.05
5/2/2019 1.06
5/3/2019 1.06
5/6/2019 1.07
5/7/2019 1.08
5/8/2019 1.08
5/9/2019 1.1
5/10/2019 1.1
5/13/2019 1.12
5/14/2019 1.11
5/15/2019 1.12
5/16/2019 1.11
5/17/2019 1.11
5/20/2019 1.11
5/21/2019 1.11
5/22/2019 1.12
5/23/2019 1.15
5/24/2019 1.15
5/28/2019 1.16
5/29/2019 1.19
5/30/2019 1.17
5/31/2019 1.2
6/3/2019 1.22
6/4/2019 1.21
6/5/2019 1.2
6/6/2019 1.2
6/7/2019 1.2
6/10/2019 1.18
6/11/2019 1.17
6/12/2019 1.18
6/13/2019 1.19
6/14/2019 1.19
6/17/2019 1.19
6/18/2019 1.17
6/19/2019 1.16
6/20/2019 1.13
6/21/2019 1.11
6/24/2019 1.1
6/25/2019 1.11
6/26/2019 1.1
6/27/2019 1.1
6/28/2019 1.09
7/1/2019 1.07
7/2/2019 1.08
7/3/2019 1.07
7/5/2019 1.07
7/8/2019 1.07
7/9/2019 1.07
7/10/2019 1.07
7/11/2019 1.07
7/12/2019 1.06
7/15/2019 1.06
7/16/2019 1.06
7/17/2019 1.07
7/18/2019 1.07
7/19/2019 1.06
7/22/2019 1.06
7/23/2019 1.04
7/24/2019 1.03
7/25/2019 1.02
7/26/2019 1.02
7/29/2019 1.02
7/30/2019 1.03
7/31/2019 1.03
[END CHART]
o HOW DID THE USAA SHORT-TERM BOND 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 July 31, 2019, the
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
Fund Shares, Institutional Shares, Adviser Shares, and R6 Shares had total
returns of 4.43%, 4.42%, 4.17%, and 4.50%, respectively. This compares to
returns of 4.67% for the Bloomberg Barclays 1-3 Year Credit Index (the
"Index") and 4.18% for the Lipper Short Investment Grade Debt Funds Index.
At the same time, the Fund Shares, Institutional Shares, Adviser Shares, and
R6 Shares provided a one-year dividend yield of 2.65%, 2.75%, 2.41%, and
2.83%, respectively, compared to 2.51% for the Lipper Short Investment Grade
Debt Funds Average.
Victory Capital Management Inc. (the "Manager" or "Victory Capital") is the
Fund's investment adviser. The investment adviser provides day-to-day
discretionary management for the Fund's assets.
o WHAT WERE YOUR STRATEGIES IN THIS ENVIRONMENT?
The Fund earned a positive total return during the reporting period and
outperformed the Index, driven primarily by coupon income and the decline in
U.S. Treasury yields.
Reflecting the portfolio's diversification, these results were spread among
a variety of sectors. Within corporate bonds, the Fund benefited from
investments in aerospace and defense, life insurance, real estate investment
trusts, utilities, and banks. Holdings of residential mortgage-backed
securities also added to relative returns. Certain other market segments
weighed on relative performance, although they generally produced positive
returns. These included oil field services, consumer cyclicals, and
airlines, as well U.S. Treasury securities. In addition, the Fund's cash
position was a drag on performance as bond prices rose during the reporting
period. We continued to adhere to our disciplined investment approach, which
is to maintain an attractive yield with an acceptable level of risk.
Refer to page 6 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
4 | USAA SHORT-TERM BOND FUND
================================================================================
To identify attractive investment opportunities, we worked with our in-
house team of analysts, continuing to build the portfolio bond-by-bond,
through fundamental bottom-up analysis. We seek ideas where our fundamental
understanding of the credit risk is different than the market. This
approach, we believe, will generate total returns that may outperform our
Lipper peers over the long run, with less volatility. Our analysts review
all securities considered for purchase and assign their own independent
credit rating. As always, they continuously monitor every holding in the
Fund. We are committed to building a portfolio diversified among multiple
asset classes and across a large number of issuers. To minimize the Fund's
exposure to potential surprises, we limit the positions we take in any one
issuer.
Thank you for allowing us to help you with your investment needs.
Diversification is a technique to help reduce risk and does not guarantee a
profit or prevent a loss. 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 Mortgage-backed securities
have prepayment, credit, interest rate, and extension 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.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 5
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 7/31/19 o
------------------------------------------------------------------------------------------------
SINCE DATE
1 YEAR 5 YEAR 10 YEAR INCEPTION* INCEPTION
------------------------------------------------------------------------------------------------
Fund Shares 4.43% 2.02% 2.74% - -
Institutional Shares 4.42% 2.11% 2.88% - -
Adviser Shares 4.17% 1.80% - 1.99% 8/01/10
R6 Shares 4.50% - - 2.91% 12/01/16
Bloomberg Barclays
1-3 Year Credit Index**
(reflects no deduction
for fees, expenses, or
taxes) 4.67% 1.95% 2.48% - -
Lipper Short Investment
Grade Debt Funds
Index*** (reflects no
deduction for taxes) 4.18% 1.75% 2.41% - -
*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 broad-based Bloomberg Barclays 1-3 Year Credit Index measures
the performance of investment grade corporate debt and sovereign, supranational,
local authority, and non-U.S. agency bonds that have a remaining maturity of at
least one year and less than three years.
***The unmanaged Lipper Short Investment Grade Debt Funds Index tracks the total
return performance of funds in the Lipper Short Investment Grade Debt 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 SHORT-TERM BOND FUND
================================================================================
AVERAGE ANNUAL COMPOUNDED RETURNS WITH REINVESTMENT OF DIVIDENDS - PERIODS ENDED
JULY 31, 2019
--------------------------------------------------------------------------------
TOTAL RETURN = DIVIDEND RETURN + PRICE CHANGE
--------------------------------------------------------------------------------
10 YEARS 2.74% = 2.38% + 0.36%
5 YEARS 2.02% = 2.05% + -0.03%
1 YEAR 4.43% = 2.76% + 1.67%
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 ONE-YEAR PERIODS ENDED
JULY 31, 2010 - JULY 31, 2019
[CHART OF ANNUAL TOTAL RETURNS AND COMPOUNDED DIVIDEND RETURNS]
TOTAL RETURN DIVIDEND RETURN CHANGE IN SHARE PRICE
7/31/2010 7.52% 3.92% 3.60%
7/31/2011 2.85% 2.96% -0.11%
7/31/2012 3.21% 2.78% 0.43%
7/31/2013 1.61% 2.14% -0.53%
7/31/2014 2.28% 1.84% 0.44%
7/31/2015 0.83% 1.65% -0.82%
7/31/2016 2.34% 1.79% 0.55%
7/31/2017 2.02% 1.91% 0.11%
7/31/2018 0.54% 2.17% -1.63%
7/31/2019 4.43% 2.76% 1.67%
[END CHART]
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 total returns quoted do not reflect adjustments made to the enclosed
financial statements in accordance with U.S. generally accepted accounting
principles or the deduction of taxes that a shareholder would pay on
distributions (including capital gains distributions), redemption of shares, or
reinvested net investment income.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
O GROWTH OF $10,000 INVESTMENT O
[CHART OF GROWTH OF $10,000 INVESTMENT]
USAA SHORT-TERM BLOOMBERG BARCLAYS LIPPER SHORT
BOND FUND 1-3 YEAR INVESTMENT GRADE
SHARES CREDIT INDEX FUNDS INDEX
7/31/2009 $10,000.00 $10,000.00 $10,000.00
8/31/2009 10,117.00 10,100.59 10,118.23
9/30/2009 10,225.00 10,175.33 10,207.38
10/31/2009 10,304.00 10,238.71 10,320.82
11/30/2009 10,389.00 10,327.23 10,346.98
12/31/2009 10,358.00 10,308.46 10,362.66
1/31/2010 10,480.00 10,402.28 10,467.39
2/28/2010 10,512.00 10,431.40 10,492.52
3/31/2010 10,531.00 10,460.05 10,525.20
4/30/2010 10,598.00 10,505.13 10,611.75
5/31/2010 10,612.00 10,473.75 10,595.27
6/30/2010 10,675.00 10,530.66 10,657.24
7/31/2010 10,750.00 10,626.58 10,738.54
8/31/2010 10,801.00 10,667.53 10,798.79
9/30/2010 10,840.00 10,722.89 10,835.32
10/31/2010 10,878.00 10,767.81 10,881.71
11/30/2010 10,869.00 10,740.64 10,848.91
12/31/2010 10,850.00 10,736.67 10,833.97
1/31/2011 10,885.00 10,776.45 10,862.71
2/28/2011 10,900.00 10,795.84 10,891.30
3/31/2011 10,903.00 10,798.56 10,894.23
4/30/2011 10,978.00 10,872.06 10,960.82
5/31/2011 11,014.00 10,915.89 11,007.02
6/30/2011 11,017.00 10,913.40 10,991.13
7/31/2011 11,056.00 10,958.56 11,046.03
8/31/2011 11,046.00 10,930.14 10,990.09
9/30/2011 11,039.00 10,885.68 10,972.17
10/31/2011 11,087.00 10,950.23 11,000.35
11/30/2011 11,090.00 10,900.71 10,962.54
12/31/2011 11,117.00 10,924.77 11,000.54
1/31/2012 11,189.00 11,031.04 11,097.76
2/29/2012 11,228.00 11,076.35 11,138.33
3/31/2012 11,242.00 11,096.67 11,157.74
4/30/2012 11,291.00 11,117.30 11,197.30
5/31/2012 11,290.00 11,098.85 11,193.05
6/30/2012 11,327.00 11,128.28 11,221.42
7/31/2012 11,411.00 11,201.70 11,298.68
8/31/2012 11,448.00 11,240.55 11,336.80
9/30/2012 11,493.00 11,279.48 11,383.45
10/31/2012 11,540.00 11,306.42 11,407.18
11/30/2012 11,562.00 11,311.94 11,423.75
12/31/2012 11,571.00 11,327.67 11,436.14
1/31/2013 11,589.00 11,343.40 11,446.56
2/28/2013 11,624.00 11,365.12 11,471.50
3/31/2013 11,656.00 11,375.24 11,482.91
4/30/2013 11,702.00 11,406.93 11,519.13
5/31/2013 11,647.00 11,394.00 11,479.08
6/30/2013 11,551.00 11,355.15 11,393.73
7/31/2013 11,595.00 11,399.14 11,429.89
8/31/2013 11,577.00 11,394.16 11,411.50
9/30/2013 11,632.00 11,436.98 11,461.52
10/31/2013 11,688.00 11,475.99 11,506.65
11/30/2013 11,708.00 11,503.62 11,528.85
12/31/2013 11,688.00 11,492.02 11,514.13
1/31/2014 11,758.00 11,523.48 11,553.47
2/28/2014 11,789.00 11,550.88 11,585.24
3/31/2014 11,780.00 11,546.13 11,573.02
4/30/2014 11,823.00 11,572.45 11,605.00
5/31/2014 11,865.00 11,605.85 11,639.60
6/30/2014 11,869.00 11,600.87 11,646.86
7/31/2014 11,859.00 11,598.14 11,631.04
8/31/2014 11,889.00 11,622.51 11,647.26
9/30/2014 11,866.00 11,606.32 11,634.77
10/31/2014 11,896.00 11,637.92 11,656.71
11/30/2014 11,912.00 11,655.21 11,668.10
12/31/2014 11,882.00 11,620.17 11,628.56
1/31/2015 11,925.00 11,680.59 11,677.65
2/28/2015 11,929.00 11,677.79 11,686.65
3/31/2015 11,957.00 11,701.92 11,710.49
4/30/2015 11,961.00 11,722.16 11,727.03
5/31/2015 11,978.00 11,734.08 11,737.09
6/30/2015 11,956.00 11,715.31 11,718.84
7/31/2015 11,959.00 11,722.79 11,725.50
8/31/2015 11,935.00 11,708.15 11,705.76
9/30/2015 11,952.00 11,743.42 11,714.11
10/31/2015 11,955.00 11,754.55 11,727.13
11/30/2015 11,932.00 11,742.95 11,713.96
12/31/2015 11,885.00 11,719.36 11,680.08
1/31/2016 11,914.00 11,757.82 11,706.03
2/29/2016 11,918.00 11,764.13 11,706.05
3/31/2016 12,029.00 11,853.04 11,782.48
4/30/2016 12,103.00 11,894.15 11,828.79
5/31/2016 12,107.00 11,892.59 11,834.31
6/30/2016 12,193.00 11,968.50 11,898.88
7/31/2016 12,238.00 11,987.81 11,927.97
8/31/2016 12,257.00 11,987.18 11,935.51
9/30/2016 12,291.00 11,999.02 11,955.68
10/31/2016 12,296.00 12,001.59 11,957.92
11/30/2016 12,209.00 11,951.22 11,911.37
12/31/2016 12,242.00 11,966.63 11,924.26
1/31/2017 12,287.00 12,000.11 11,954.26
2/28/2017 12,319.00 12,034.91 11,983.99
3/31/2017 12,327.00 12,044.41 11,996.95
4/30/2017 12,386.00 12,075.63 12,027.48
5/31/2017 12,433.00 12,104.12 12,058.86
6/30/2017 12,440.00 12,109.34 12,066.28
7/31/2017 12,485.00 12,152.94 12,100.97
8/31/2017 12,518.00 12,177.93 12,126.81
9/30/2017 12,514.00 12,174.04 12,128.40
10/31/2017 12,533.00 12,181.51 12,136.91
11/30/2017 12,513.00 12,154.73 12,123.62
12/31/2017 12,522.00 12,165.01 12,135.39
1/31/2018 12,503.00 12,141.96 12,117.59
2/28/2018 12,472.00 12,118.61 12,102.41
3/31/2018 12,482.00 12,127.09 12,109.33
4/30/2018 12,478.00 12,131.92 12,112.83
5/31/2018 12,530.00 12,177.54 12,145.32
6/30/2018 12,528.00 12,178.48 12,147.80
7/31/2018 12,553.00 12,201.99 12,176.55
8/31/2018 12,608.00 12,250.18 12,214.40
9/30/2018 12,618.00 12,254.31 12,221.51
10/31/2018 12,603.00 12,258.43 12,221.54
11/30/2018 12,620.00 12,275.17 12,230.58
12/31/2018 12,677.00 12,363.93 12,275.90
1/31/2019 12,774.00 12,445.83 12,362.79
2/28/2019 12,818.00 12,480.79 12,406.56
3/31/2019 12,919.00 12,571.41 12,485.34
4/30/2019 12,963.00 12,608.08 12,538.85
5/31/2019 13,023.00 12,683.29 12,598.55
6/30/2019 13,108.00 12,764.96 12,671.60
7/31/2019 13,108.00 12,772.20 12,684.99
[END CHART]
Data from 7/31/09 through 7/31/19.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Short-Term Bond Fund Shares 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
that the Lipper Short Investment Grade Debt Funds Index reflects the fees and
expenses of the underlying funds included in the index.
================================================================================
8 | USAA SHORT-TERM BOND FUND
================================================================================
o 12-MONTH DIVIDEND YIELD COMPARISON o
[CHART OF 12-MONTH DIVIDEND YIELD COMPARISON]
USAA SHORT-TERM LIPPER SHORT
BOND FUND INVESTMENT GRADE
SHARES DEBT FUNDS AVERAGE
7/31/2010 3.68% 2.53%
7/31/2011 2.92% 2.10%
7/31/2012 2.71% 1.83%
7/31/2013 2.14% 1.47%
7/31/2014 1.82% 1.25%
7/31/2015 1.66% 1.47%
7/31/2016 1.75% 1.53%
7/31/2017 1.89% 1.62%
7/31/2018 2.20% 1.98%
7/31/2019 2.65% 2.51%
[END CHART]
The 12-month dividend yield is computed by dividing net investment income
dividends paid during the previous 12 months by the latest adjusted month-end
net asset value. The net asset value is adjusted for a portion of the capital
gains distributed during the previous nine months. The graph represents data for
periods ending 7/31/10 through 7/31/19.
The Lipper Short Investment Grade Debt Funds Average is the average performance
level of all short-term investment-grade debt funds, reported by Lipper Inc., an
independent organization that monitors the performance of mutual funds.
================================================================================
INVESTMENT OVERVIEW | 9
================================================================================
o PORTFOLIO RATINGS MIX - 7/31/19 o
[PIE CHART OF PORTFOLIO RATINGS MIX]
AAA 23.0%
AA 8.1%
A 22.7%
BBB 41.7%
BELOW INVESTMENT-GRADE 4.0%
NON-RATED 0.5%
[END CHART]
This chart reflects the highest long-term rating from a Nationally Recognized
Statistical Rating Organization (NRSRO), with the four highest long-term credit
ratings labeled, in descending order of credit quality, AAA, AA, A, and BBB.
These categories represent investment-grade quality. NRSRO ratings are shown
because they provide independent analysis of the credit quality of the Funds'
investments. Victory Capital (the Manager) also performs its own fundamental
credit analysis of each security. As part of its fundamental credit analysis,
the Manager considers various criteria, including industry specific actions,
peer comparisons, payment ranking, and structure specific characteristics. Any
of the Funds' securities that are not rated by an NRSRO appear in the chart
above as "Unrated," but these securities are analyzed and monitored by the
Manager on an ongoing basis. Government securities that are issued or guaranteed
as to principal and interest by the U.S. government and pre-refunded and
escrowed-to-maturity municipal bonds that are not rated are treated as AAA for
credit quality purposes.
Percentages are of the total market value of the Fund's investments.
Refer to the Portfolio of Investments for a complete list of securities.
================================================================================
10 | USAA SHORT-TERM BOND FUND
================================================================================
o ASSET ALLOCATION - 7/31/19 o
(% of Net Assets)
[PIE CHART OF ASSET ALLOCATION]
CORPORATE OBLIGATIONS 47.8%
ASSET-BACKED SECURITIES 14.8%
EURODOLLAR AND YANKEE OBLIGATIONS 14.5%
U.S. TREASURY SECURITIES 5.9%
MUNICIPAL OBLIGATIONS 4.5%
COMMERCIAL MORTGAGE SECURITIES 2.9%
MONEY MARKET INSTRUMENTS 2.6%
COLLATERALIZED LOAN OBLIGATIONS 1.7%
BANK LOANS 1.6%
PREFERRED STOCKS 1.2%
U.S. GOVERNMENT AGENCY ISSUES 1.1%
FOREIGN GOVERNMENT OBLIGATIONS 1.0%
COLLATERALIZED MORTGAGE OBLIGATIONS 0.1%
[END CHART]
Percentages are of the net assets of the Fund and may not equal 100%.
================================================================================
INVESTMENT OVERVIEW | 11
================================================================================
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 Management Inc. ("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 USAA Asset Management Company ("AMCO")
was acquired by Victory Capital Holdings, Inc., the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
-------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
-------------------------------------------------------------------------------
269,915,048 5,801,347 4,454,186
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
person" as defined in the Investment Company Act of 1940, as amended (1940 Act)
("Interested Trustee"); 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
================================================================================
12 | USAA SHORT-TERM BOND FUND
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
July 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 July 31, 2019:
LONG-TERM
CAPITAL GAIN QUALIFIED INTEREST
DISTRIBUTIONS(1) INCOME
-----------------------------------------------------------
$476,000 $83,744,000
-----------------------------------------------------------
(1)Pursuant to Section 852 of the Internal Revenue Code.
For the fiscal year ended July 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 | 13
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA SHORT-TERM BOND FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Short-Term Bond Fund (the "Fund") (one of the funds constituting the USAA Mutual
Funds Trust (the "Trust")), including the portfolio of investments, as of July
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 the USAA Mutual Funds Trust) at July 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. f ederal
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 July 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
September 20, 2019
================================================================================
14 | USAA SHORT-TERM BOND FUND
================================================================================
PORTFOLIO OF INVESTMENTS
July 31, 2019
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
BONDS (95.9%)
ASSET-BACKED SECURITIES (14.8%)
ASSET BACKED SECURITIES (14.5%)
-------------------------------
AUTOMOBILE ABS (10.4%)
$ 10,000 AmeriCredit Automobile Receivables Trust 2.24% 4/08/2022 $ 9,966
5,000 AmeriCredit Automobile Receivables Trust 3.65 5/09/2022 5,058
2,857 AmeriCredit Automobile Receivables Trust 3.15 3/20/2023 2,889
5,000 AmeriCredit Automobile Receivables Trust 2.60 9/18/2023 4,989
2,580 ARI Fleet Lease Trust(a) 2.55 10/15/2026 2,581
6,063 ARI Fleet Lease Trust(a) 2.84 10/15/2026 6,107
5,000 ARI Fleet Lease Trust(a) 2.53 11/15/2027 5,006
3,381 Avis Budget Rental Car Funding AESOP, LLC(a) 2.50 2/20/2021 3,380
3,500 Avis Budget Rental Car Funding AESOP, LLC(a) 3.29 2/20/2021 3,503
2,827 Avis Budget Rental Car Funding AESOP, LLC(a) 4.94 6/20/2022 2,894
5,000 Avis Budget Rental Car Funding AESOP, LLC(a) 3.36 11/20/2022 5,043
3,300 Avis Budget Rental Car Funding AESOP, LLC(a) 3.35 9/22/2025 3,393
5,455 Bank of The West Auto Trust(a) 2.33 9/15/2023 5,463
5,000 Bank of The West Auto Trust(a) 3.59 12/15/2023 5,148
5,000 Bank of The West Auto Trust(a) 2.96 2/15/2024 5,055
3,300 Bank of The West Auto Trust(a) 2.76 1/15/2025 3,319
1,400 Bank of The West Auto Trust(a) 2.90 4/15/2025 1,408
4,576 California Republic Auto Receivables Trust 2.53 6/15/2021 4,573
5,000 Canadian Pacer Auto Receivables Trust(a) 3.47 2/19/2023 5,098
1,250 Canadian Pacer Auto Receivables Trust(a) 3.63 1/19/2024 1,284
5,000 Canadian Pacer Auto Receivables Trust(a) 3.82 4/19/2024 5,070
1,376 Centre Point Funding, LLC(a) 2.61 8/20/2021 1,369
2,310 Chesapeake Funding II, LLC(a) 3.04 4/15/2030 2,327
4,304 Chesapeake Funding II, LLC(a) 3.23 8/15/2030 4,339
6,000 Chesapeake Funding II, LLC(a) 3.11 4/15/2031 6,098
3,985 Credit Acceptance Auto Loan Trust(a) 4.29 11/15/2024 3,986
2,711 Credit Acceptance Auto Loan Trust(a) 2.55 2/17/2026 2,711
1,500 Credit Acceptance Auto Loan Trust(a) 3.21 8/17/2026 1,509
3,030 Credit Acceptance Auto Loan Trust(a) 3.01 2/16/2027 3,041
11,000 Credit Acceptance Auto Loan Trust(a) 3.60 4/15/2027 11,201
2,348 Credit Acceptance Auto Loan Trust(a) 3.55 8/15/2027 2,385
4,850 Credit Acceptance Auto Loan Trust(a) 3.35 6/15/2026 4,869
10,000 Drive Auto Receivables Trust 3.22 3/15/2023 10,026
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
$ 5,000 Drive Auto Receivables Trust 4.14% 8/15/2024 $ 5,107
2,805 Drive Auto Receivables Trust 4.30 9/16/2024 2,881
3,500 Drive Auto Receivables Trust 3.66 11/15/2024 3,540
1,072 Drive Auto Receivables Trust(a) 4.59 1/17/2023 1,078
5,000 Drive Auto Receivables Trust 3.68 7/15/2023 5,070
2,325 Enterprise Fleet Financing, LLC(a) 2.04 2/22/2022 2,320
1,730 Enterprise Fleet Financing, LLC(a) 2.13 7/20/2022 1,728
10,000 Enterprise Fleet Financing, LLC(a) 2.60 7/20/2022 10,003
672 Enterprise Fleet Financing, LLC(a) 1.97 1/20/2023 671
2,344 Enterprise Fleet Financing, LLC(a) 2.36 5/20/2023 2,340
81 Exeter Automobile Receivables Trust(a) 4.10 12/15/2020 81
512 Exeter Automobile Receivables Trust(a) 2.05 12/15/2021 512
3,175 Exeter Automobile Receivables Trust(a) 5.83 12/15/2021 3,240
1,393 Exeter Automobile Receivables Trust(a) 2.90 1/18/2022 1,394
4,285 Exeter Automobile Receivables Trust(a) 2.75 4/15/2022 4,287
2,276 Exeter Automobile Receivables Trust(a) 2.82 5/16/2022 2,277
4,209 Exeter Automobile Receivables Trust(a) 3.27 5/16/2022 4,222
4,000 Exeter Automobile Receivables Trust(a) 3.97 9/15/2023 4,074
5,000 Exeter Automobile Receivables Trust(a) 3.30 3/15/2024 5,045
3,490 Exeter Automobile Receivables Trust(a) 2.79 5/15/2024 3,483
2,500 Exeter Automobile Receivables Trust(a) 4.35 6/17/2024 2,589
5,695 First Investors Auto Owner Trust(a) 3.56 9/15/2023 5,758
1,170 GM Financial Consumer Automobile Receivables Trust 2.08 1/19/2021 1,169
8,000 OneMain Direct Auto Receivables Trust(a) 2.55 11/14/2023 7,993
3,033 OSCAR U.S. Funding Trust IX, LLC(a) 3.15 8/10/2021 3,041
5,000 OSCAR U.S. Funding Trust IX, LLC(a) 3.39 9/12/2022 5,057
4,000 OSCAR U.S. Funding Trust VI, LLC(a) 3.30 5/10/2024 4,042
3,980 OSCAR U.S. Funding Trust VII, LLC(a) 2.45 12/10/2021 3,977
5,000 OSCAR U.S. Funding Trust VIII, LLC(a) 3.23 5/10/2022 5,037
2,678 Prestige Auto Receivables Trust(a) 3.05 4/15/2021 2,678
2,500 Prestige Auto Receivables Trust(a) 2.39 5/16/2022 2,496
2,468 Prestige Auto Receivables Trust(a) 2.88 11/15/2022 2,471
2,139 Santander Drive Auto Receivables Trust 2.66 11/15/2021 2,139
4,792 Santander Drive Auto Receivables Trust 3.52 12/15/2022 4,827
5,000 Securitized Term Auto Receivables Trust(a) 2.21 6/25/2021 4,990
3,906 Securitized Term Auto Receivables Trust(a) 2.29 3/25/2022 3,897
450 TCF Auto Receivables Owner Trust(a) 2.55 4/15/2021 450
5,000 TCF Auto Receivables Owner Trust "B"(a) 2.92 10/17/2022 5,029
4,250 United Airlines, Inc. Pass-Through Trust(a) 3.03 4/10/2024 4,273
5,706 Westlake Automobile Receivables Trust(a) 2.67 5/17/2021 5,706
981 Westlake Automobile Receivables Trust(a) 2.70 10/17/2022 981
2,000 Westlake Automobile Receivables Trust(a) 3.28 12/15/2022 2,014
5,000 Westlake Automobile Receivables Trust(a) 4.53 5/15/2023 5,107
3,000 Westlake Automobile Receivables Trust(a) 3.61 10/16/2023 3,038
================================================================================
16 | USAA SHORT-TERM BOND FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
$ 5,000 Westlake Automobile Receivables Trust(a) 4.00% 1/16/2024 $ 5,095
2,538 Wheels SPV, LLC(a) 1.87 5/20/2025 2,533
4,000 World Omni Auto Receivables Trust 3.87 8/15/2025 4,182
5,000 World Omni Select Auto Trust(a) 3.68 7/15/2023 5,084
----------
314,094
----------
CREDIT CARD ABS (1.4%)
3,740 Evergreen Credit Card Trust(a) 3.59 1/15/2023 3,782
4,000 Evergreen Credit Card Trust(a) 3.98 1/15/2023 4,047
5,000 Master Credit Card Trust "A"(a) 2.26 7/21/2021 4,995
4,565 Synchrony Credit Card Master Note Trust 2.95 5/15/2024 4,580
5,000 Synchrony Credit Card Master Note Trust 3.87 5/15/2026 5,137
15,000 Synchrony Credit Card Master Note Trust "C" 2.56 6/15/2023 14,970
5,000 Trillium Credit Card Trust ll(a) 3.04 1/26/2024 5,050
----------
42,561
----------
OTHER ABS (2.4%)
560 ARL Second, LLC(a) 2.92 6/15/2044 553
1,951 BCC Funding XIII, LLC(a) 4.78 8/20/2022 1,987
5,878 BCC Funding XIV, LLC(a) 2.96 6/20/2023 5,898
1,200 CNH Equipment Trust 2.47 12/16/2024 1,203
263 Dell Equipment Finance Trust(a) 2.14 4/22/2022 263
1,000 Dell Equipment Finance Trust(a) 2.95 4/22/2022 1,002
1,750 Dell Equipment Finance Trust(a) 2.73 10/24/2022 1,752
1,185 Dell Equipment Finance Trust(a) 3.44 4/24/2023 1,188
1,407 Element Rail Leasing I, LLC(a) 2.30 4/19/2044 1,394
12,000 Element Rail Leasing I, LLC(a) 3.67 4/19/2044 12,020
5,000 Great America Leasing Receivables Funding, LLC(a) 2.83 6/17/2024 5,043
2,900 MMAF Equipment Finance, LLC(a) 2.41 8/16/2024 2,899
2,454 NP SPE II, LLC(a) 3.37 10/21/2047 2,463
5,000 Palmer Square Loan Funding Ltd.
(3 mo. LIBOR + 0.85%)(b) 1.00(c) 8/20/2027 5,000
5,000 SBA Tower Trust(a) 2.90 10/15/2044 4,985
7,529 SCF Equipment Leasing, LLC(a) 3.77 1/20/2023 7,600
1,746 SCF Equipment Leasing, LLC(a) 3.41 12/20/2023 1,759
3,000 SCF Equipment Leasing, LLC(a) 3.23 10/20/2024 3,028
5,500 SCF Equipment Leasing, LLC(a) 3.49 1/20/2026 5,589
2,767 Trinity Rail Leasing, LP(a) 2.27 1/15/2043 2,715
2,520 VB-S1 Issuer, LLC(a) 3.07 6/15/2046 2,517
----------
70,858
----------
STUDENT LOAN ABS (0.3%)
1,512 College Loan Corp. Trust (3 mo. LIBOR + 0.49%) 2.79(c) 1/15/2037 1,443
2,171 Iowa Student Loan Liquidity Corp.
(3 mo. LIBOR + 0.35%) 2.70(c) 9/25/2037 1,986
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
$ 1,048 Nelnet Student Loan Trust (3 mo. LIBOR + 0.28%) 2.62%(c) 9/22/2037 $ 1,029
3,422 SLM Private Education Loan Trust(a) 2.50 3/15/2047 3,420
----------
7,878
----------
Total Asset Backed Securities 435,391
----------
FINANCIAL (0.3%)
----------------
REITS (0.3%)
10,000 SBA Tower Trust(a) 3.45 3/15/2023 10,193
----------
Total Asset-Backed Securities (cost: $442,558) 445,584
----------
BANK LOANS (1.6%)(d)
CONSUMER, CYCLICAL (0.4%)
-------------------------
RETAIL (0.4%)
5,000 CEC Entertainment, Inc.(b) -(e) 2/14/2021 4,974
5,701 Petsmart, Inc. (3 mo. LIBOR + 4.25%) 6.38 3/11/2022 5,593
----------
Total Consumer, Cyclical 10,567
----------
CONSUMER, NON-CYCLICAL (0.1%)
-----------------------------
HEALTHCARE-SERVICES (0.1%)
3,597 DaVita, Inc. (1 mo. LIBOR + 2.75%) 5.13 6/24/2021 3,593
----------
FINANCIAL (0.7%)
----------------
REITS (0.7%)
10,000 GLP Financing, LLC (1 mo. LIBOR + 1.50%) 3.74 4/28/2021 9,925
12,686 Sabra Health Care Ltd. (1 mo. LIBOR + 1.45%) 3.69 8/17/2020 12,560
----------
Total Financial 22,485
----------
INDUSTRIAL (0.2%)
-----------------
HAND/MACHINE TOOLS (0.2%)
7,264 Colfax Corp. (1 mo. LIBOR + 1.75%) 3.98 12/17/2020 7,246
----------
TECHNOLOGY (0.2%)
-----------------
COMPUTERS (0.2%)
5,000 Dell International, LLC (1 mo. LIBOR + 1.75%)(b) -(e) 9/07/2021 5,000
----------
Total Bank Loans (cost: $49,022) 48,891
----------
COLLATERALIZED LOAN OBLIGATIONS (1.7%)
ASSET BACKED SECURITIES (1.7%)
------------------------------
OTHER ABS (1.7%)
1,500 American Money Management Corp.
(3 mo. LIBOR + 1.50%)(a) 3.80(c) 10/15/2028 1,498
3,000 Annisa Ltd. (1 mo. LIBOR + 1.10%)(a) 3.38(c) 7/20/2031 2,973
================================================================================
18 | USAA SHORT-TERM BOND FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
$ 6,750 Madison Park Funding Ltd. (1 mo. LIBOR + 1.16%)(a) 3.42%(c) 7/23/2029 $ 6,754
10,500 Oaktree EIF Ltd. (3 mo. LIBOR + 2.00%)(a) 4.28(c) 10/20/2027 10,524
3,641 Palmer Square Loan Funding 2018-2 Ltd.
(1 mo. LIBOR + 0.65%)(a) 2.95(c) 7/15/2026 3,619
1,970 Palmer Square Loan Funding 2018-2 Ltd.
(1 mo. LIBOR + 1.05%) 3.35(c) 7/15/2026 1,929
4,482 Palmer Square Loan Funding 2018-5 Ltd.
(3 mo. LIBOR + 0.85%)(a) 3.13(c) 1/20/2027 4,468
3,000 Palmer Square Loan Funding 2019-2 Ltd.
(3 mo. LIBOR + 0.97%)(a) 3.49(c) 4/20/2027 2,999
4,500 Race Point Ltd. (1 mo. LIBOR + 1.10%) 3.38(c) 7/25/2031 4,458
2,500 TIAA Ltd. (3 mo. LIBOR + 1.28%)(a) 3.56(c) 4/20/2029 2,496
3,250 Trinitas Ltd. (3 mo. LIBOR + 1.39%)(a) 3.67(c) 10/25/2028 3,254
5,000 Trinitas Ltd. (3 mo. LIBOR + 1.32%)(a) 3.60(c) 7/25/2029 4,998
----------
Total Asset Backed Securities 49,970
----------
Total Collateralized Loan Obligations (cost: $50,068) 49,970
----------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.1%)
MORTGAGE SECURITIES (0.1%)
--------------------------
WHOLE LOAN COLLATERAL CMO (0.1%)
2,555 Sequoia Mortgage Trust(a) (cost: $2,588) 3.00(f) 5/25/2043 2,563
----------
COMMERCIAL MORTGAGE SECURITIES (2.9%)
MORTGAGE SECURITIES (2.9%)
--------------------------
COMMERCIAL MBS (2.9%)
3,705 Aventura Mall Trust(a) 3.74(f) 12/05/2032 3,749
7,383 Bear Stearns Deutsche Bank Trust(a) 5.01 9/15/2027 7,389
4,000 BTH-21 Mortgage-Backed Securities Trust
(1 mo. LIBOR + 2.50%)(a) 4.90(c) 10/07/2021 4,002
2,827 Caesars Palace Las Vegas Trust(a) 4.14 10/15/2034 2,939
3,588 Citigroup Commercial Mortgage Trust 3.34 5/10/2036 3,698
7,600 Citigroup Commercial Mortgage Trust(a) 4.38 1/10/2024 8,096
1,777 Commercial Mortgage Trust 5.64(f) 7/10/2038 1,788
60,075 Commercial Mortgage Trust(g) 1.64(f) 8/15/2045 2,416
59,832 Commercial Mortgage Trust(g) 1.76(f) 10/15/2045 2,511
4,730 GS Mortgage Securities Corp.(a) 3.42 10/10/2032 4,859
10,000 GS Mortgage Securities Corp.(a) 2.86 5/10/2034 10,017
5,297 GS Mortgage Securities Trust(a) 4.95 1/10/2045 5,575
23,370 GS Mortgage Securities Trust(g) 2.17(f) 5/10/2045 881
23,106 GS Mortgage Securities Trust(g) 1.95(f) 11/10/2045 1,233
20,729 J.P. Morgan Chase Commercial Mortgage
Securities Trust(g) 1.77(f) 10/15/2045 911
================================================================================
PORTFOLIO OF INVESTMENTS | 19
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
$ 2,450 JP Morgan Chase Commercial Mortgage
Securities Trust(a) 5.63% 12/05/2027 $ 2,455
932 LSTAR Commercial Mortgage Trust(a) 2.42 3/10/2050 931
19,485 Morgan Stanley Bank of America Merrill
Lynch Trust(a),(g) 1.62(f) 11/15/2045 811
89,258 UBS Commercial Mortgage Trust(a),(g) 2.06(f) 5/10/2045 4,003
23,908 UBS-Barclays Commercial Mortgage Trust(a),(g) 1.83(f) 8/10/2049 1,156
829 UBS-Barclays Commercial Mortgage Trust 2.73 8/10/2049 829
25,959 Wells Fargo Commercial Mortgage Trust(a),(g) 1.77(f) 10/15/2045 1,182
15,000 WFRBS Commercial Mortgage Trust(a) 4.90(f) 6/15/2044 15,572
----------
Total Mortgage Securities 87,003
----------
Total Commercial Mortgage Securities (cost: $77,502) 87,003
----------
CORPORATE OBLIGATIONS (47.8%)
BASIC MATERIALS (2.0%)
----------------------
CHEMICALS (1.4%)
1,750 CF Industries, Inc. 7.13 5/01/2020 1,801
5,000 CF Industries, Inc.(a) 3.40 12/01/2021 5,057
5,000 DowDuPont, Inc. 3.77 11/15/2020 5,084
20,185 INVISTA Finance, LLC(a) 4.25 10/15/2019 20,223
5,000 Mosaic Co. 3.25 11/15/2022 5,086
5,000 Sherwin-Williams Co. 2.75 6/01/2022 5,033
----------
42,284
----------
IRON/STEEL (0.6%)
9,350 Carpenter Technology Corp. 5.20 7/15/2021 9,615
8,403 Reliance Steel & Aluminum Co. 4.50 4/15/2023 8,816
----------
18,431
----------
Total Basic Materials 60,715
----------
COMMUNICATIONS (3.1%)
---------------------
MEDIA (1.3%)
18,000 Charter Communications Operating, LLC/Charter
Communications Operating Capital 3.58 7/23/2020 18,155
5,000 Comcast Corp. 3.30 10/01/2020 5,058
6,473 DISH DBS Corp. 7.88 9/01/2019 6,495
5,000 Fox Corp.(a) 3.67 1/25/2022 5,153
3,447 Mediacom Broadband, LLC/Mediacom
Broadband Corp. 5.50 4/15/2021 3,447
1,041 Time Warner Cable, LLC 5.00 2/01/2020 1,053
----------
39,361
----------
================================================================================
20 | USAA SHORT-TERM BOND FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (1.8%)
$ 15,000 AT&T, Inc. 2.45% 6/30/2020 $ 15,000
10,000 AT&T, Inc. 3.20 3/01/2022 10,191
5,000 Centel Capital Corp. 9.00 10/15/2019 5,052
3,600 CenturyLink, Inc. 6.45 6/15/2021 3,781
5,000 CommScope, Inc.(a) 5.50 3/01/2024 5,085
8,775 Sprint Spectrum Co., LLC/Sprint Spectrum Co. II,
LLC/Sprint Spectrum Co. III, LLC(a) 3.36 9/20/2021 8,815
5,000 T-Mobile USA, Inc. 6.50 1/15/2024 5,180
----------
53,104
----------
Total Communications 92,465
----------
CONSUMER, CYCLICAL (3.7%)
-------------------------
AIRLINES (1.7%)
4,250 American Airlines, Inc. Pass-Through Trust 4.38 10/01/2022 4,333
7,994 American Airlines, Inc. Pass-Through Trust 4.40 9/22/2023 8,100
2,839 Continental Airlines, Inc. Pass-Through Trust 7.25 11/10/2019 2,871
1,342 Continental Airlines, Inc. Pass-Through Trust 6.25 4/11/2020 1,363
7,026 Continental Airlines, Inc. Pass-Through Trust 5.50 10/29/2020 7,196
10,000 Delta Air Lines, Inc. 2.88 3/13/2020 10,000
2,935 United Airlines, Inc. Pass-Through Trust 5.38 8/15/2021 3,029
1,056 United Airlines, Inc. Pass-Through Trust 4.63 9/03/2022 1,078
261 US Airways Group, Inc. Pass-Through Trust
(INS - MBIA Insurance Corp.) 7.08 3/20/2021 275
10,352 US Airways Group, Inc. Pass-Through Trust 5.38 11/15/2021 10,751
----------
48,996
----------
AUTO MANUFACTURERS (0.7%)
3,800 Ford Motor Credit Co., LLC 2.60 11/04/2019 3,798
3,928 Ford Motor Credit Co., LLC 8.13 1/15/2020 4,021
4,000 Ford Motor Credit Co., LLC 3.20 1/15/2021 4,012
5,000 Ford Motor Credit Co., LLC(b) 3.35 11/01/2022 4,995
5,000 Hyundai Capital America(a) 2.75 9/18/2020 5,003
----------
21,829
----------
HOME BUILDERS (0.4%)
10,000 Lennar Corp. 2.95 11/29/2020 9,996
2,000 MDC Holdings, Inc. 5.63 2/01/2020 2,025
----------
12,021
----------
LEISURE TIME (0.4%)
10,750 Silversea Cruise Finance Ltd.(a) 7.25 2/01/2025 11,524
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 21
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
RETAIL (0.5%)
$ 5,000 McDonald's Corp. 3.35% 4/01/2023 $ 5,179
5,000 Walmart, Inc. 2.85 7/08/2024 5,141
5,000 Walmart, Inc. 3.55 6/26/2025 5,326
----------
15,646
----------
Total Consumer, Cyclical 110,016
----------
CONSUMER, NON-CYCLICAL (6.8%)
-----------------------------
AGRICULTURE (0.6%)
2,500 Cargill, Inc.(a) 3.25 3/01/2023 2,567
10,000 Philip Morris International, Inc. 2.63 2/18/2022 10,050
5,000 Philip Morris International, Inc. 2.38 8/17/2022 4,992
----------
17,609
----------
BEVERAGES (0.6%)
2,600 Constellation Brands, Inc. 2.70 5/09/2022 2,608
7,896 Constellation Brands, Inc. 2.65 11/07/2022 7,925
3,000 Constellation Brands, Inc. 3.20 2/15/2023 3,065
5,000 Molson Coors Brewing Co. 2.10 7/15/2021 4,966
----------
18,564
----------
BIOTECHNOLOGY (0.7%)
5,000 Amgen, Inc. 2.25 8/19/2023 4,968
10,000 Celgene Corp. 2.75 2/15/2023 10,082
5,000 Celgene Corp. 3.25 2/20/2023 5,117
----------
20,167
----------
COMMERCIAL SERVICES (0.2%)
2,500 Horace Mann School 2.48 7/01/2022 2,492
4,020 Prime Security Services Borrower, LLC/Prime
Finance, Inc.(a) 9.25 5/15/2023 4,221
----------
6,713
----------
FOOD (2.2%)
5,000 Conagra Brands, Inc. (3 mo. LIBOR + 0.75%) 3.03(c) 10/22/2020 5,009
600 Kraft Heinz Foods Co. (3 mo. LIBOR + 0.42%) 2.98(c) 8/09/2019 600
20,000 Kraft Heinz Foods Co.(a) 4.88 2/15/2025 20,632
5,000 McCormick & Co., Inc. 2.70 8/15/2022 5,028
3,000 Mondelez International Holdings Netherlands B.V.(a) 1.63 10/28/2019 2,993
11,792 Mondelez International Holdings Netherlands B.V.(a) 2.00 10/28/2021 11,672
5,000 Nestle Holdings, Inc.(a) 3.35 9/24/2023 5,191
13,425 Smithfield Foods, Inc.(a) 2.65 10/03/2021 13,264
2,605 Tyson Foods, Inc. 4.50 6/15/2022 2,746
----------
67,135
----------
================================================================================
22 | USAA SHORT-TERM BOND FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
HEALTHCARE PRODUCTS (0.4%)
$ 8,300 Becton Dickinson & Co. 2.40% 6/05/2020 $ 8,290
3,750 Becton Dickinson & Co. (3 mo. LIBOR + 0.88%) 3.19(c) 12/29/2020 3,750
----------
12,040
----------
HEALTHCARE-SERVICES (0.7%)
750 ACTS Retirement-Life Communities, Inc.(h) 2.47 11/16/2019 748
5,655 Centene Corp. 5.63 2/15/2021 5,739
8,200 Laboratory Corp. of America Holdings 3.20 2/01/2022 8,339
750 Orlando Health Obligated Group 2.72 10/01/2019 750
4,330 SSM Health Care Corp. 3.69 6/01/2023 4,507
----------
20,083
----------
PHARMACEUTICALS (1.4%)
10,000 AbbVie, Inc. 2.30 5/14/2021 9,979
5,000 CVS Health Corp. 2.13 6/01/2021 4,966
10,000 CVS Health Corp. 3.70 3/09/2023 10,321
5,000 Express Scripts Holding Co. 3.00 7/15/2023 5,060
5,000 Mead Johnson Nutrition Co. 3.00 11/15/2020 5,032
8,135 Zoetis, Inc. 3.25 2/01/2023 8,319
----------
43,677
----------
Total Consumer, Non-cyclical 205,988
----------
ENERGY (6.8%)
-------------
OIL & GAS (1.8%)
5,000 Chevron Corp. 2.42 11/17/2020 5,021
10,000 Citgo Holding, Inc.(a) 10.75 2/15/2020 10,401
11,998 Continental Resources, Inc. 5.00 9/15/2022 12,106
2,000 EQT Corp. (3 mo. LIBOR + 0.77%) 3.09(c) 10/01/2020 1,999
5,000 EQT Corp. 3.00 10/01/2022 4,855
1,500 Exxon Mobil Corp. 2.40 3/06/2022 1,509
5,105 Marathon Petroleum Corp. 5.38 10/01/2022 5,177
5,000 Marathon Petroleum Corp. 5.13 4/01/2024 5,119
5,000 Range Resources Corp. 5.00 3/15/2023 4,414
5,000 Whiting Petroleum Corp. 1.25 4/01/2020 4,863
----------
55,464
----------
OIL & GAS SERVICES (0.1%)
3,215 Weatherford International, Ltd.(i) 5.13 9/15/2020 1,430
----------
PIPELINES (4.9%)
65 Alliance Pipeline, LP(a) 7.00 12/31/2019 66
11,500 Andeavor Logistics, LP/Tesoro Logistics Finance Corp. 5.50 10/15/2019 11,534
4,607 Andeavor Logistics, LP/Tesoro Logistics Finance Corp. 6.25 10/15/2022 4,713
5,691 Andeavor Logistics, LP/Tesoro Logistics Finance Corp. 3.50 12/01/2022 5,812
================================================================================
PORTFOLIO OF INVESTMENTS | 23
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
$ 5,040 Boardwalk Pipelines, LP 5.75% 9/15/2019 $ 5,055
5,000 Buckeye Partners, LP 4.15 7/01/2023 4,913
5,000 DCP Midstream Operating, LP(a) 5.35 3/15/2020 5,075
5,000 DCP Midstream Operating, LP(a) 4.75 9/30/2021 5,136
9,306 Enable Oklahoma Intrastate Transmission, LLC(a) 6.25 3/15/2020 9,450
5,000 Energy Transfer Operating, LP 4.15 10/01/2020 5,076
17,975 Energy Transfer Operating, LP 7.50 10/15/2020 18,987
5,000 Energy Transfer Operating, LP 4.20 9/15/2023 5,243
5,000 Enterprise Products Operating, LLC 2.80 2/15/2021 5,026
5,000 EQM Midstream Partners, LP 4.75 7/15/2023 5,131
5,000 EQM Midstream Partners, LP 4.00 8/01/2024 4,913
10,000 Midwest Connector Capital Co., LLC(a) 3.63 4/01/2022 10,204
3,713 NuStar Logistics, LP 4.80 9/01/2020 3,770
5,000 ONEOK Partners, LP 3.80 3/15/2020 5,031
10,000 Plains All American Pipeline, LP/PAA Finance Corp. 2.60 12/15/2019 9,995
13,556 Rockies Express Pipeline, LLC(a) 5.63 4/15/2020 13,803
4,700 Sabine Pass Liquefaction, LLC 5.63 2/01/2021 4,869
5,000 Western Midstream Operating, LP 4.00 7/01/2022 5,097
----------
148,899
----------
Total Energy 205,793
----------
FINANCIAL (16.2%)
-----------------
BANKS (7.5%)
8,000 Allfirst Preferred Capital Trust (3 mo. LIBOR + 1.50%) 3.80(c) 7/15/2029 7,585
13,000 Associated Banc-Corp. 2.75 11/15/2019 12,989
5,000 Associated Bank, N.A. 3.50 8/13/2021 5,076
3,000 Bank of America Corp. 2.15 11/09/2020 2,994
10,000 Bank of America Corp. 5.00 5/13/2021 10,442
5,000 Bank of America Corp. (3 mo. LIBOR + 0.66%) 2.37(j) 7/21/2021 4,994
5,000 Bank of America Corp. (3 mo. LIBOR + 0.63%) 2.33(j) 10/01/2021 4,990
5,000 Bank of America Corp. (3 mo. LIBOR + 1.16%) 3.12(j) 1/20/2023 5,071
1,955 BB&T Corp. 4.25 9/30/2024 2,089
2,874 BBVA USA 5.50 4/01/2020 2,928
3,750 BBVA USA 2.88 6/29/2022 3,773
5,000 Citigroup, Inc. (1 mo. LIBOR + 0.72%) 3.14(j) 1/24/2023 5,068
15,000 Citizens Bank, N.A. 2.55 5/13/2021 15,019
1,283 Citizens Financial Group, Inc.(a) 4.15 9/28/2022 1,324
2,000 City National Bank of Los Angeles 5.38 7/15/2022 2,144
5,000 Discover Bank 3.10 6/04/2020 5,022
500 Flagstar Bancorp., Inc. 6.13 7/15/2021 516
9,750 Fulton Financial Corp. 3.60 3/16/2022 9,852
5,000 Huntington National Bank 2.38 3/10/2020 4,999
5,000 J.P.Morgan Chase & Co. (3 mo. LIBOR + 0.94%) 2.78(j) 4/25/2023 5,032
================================================================================
24 | USAA SHORT-TERM BOND FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
$ 5,000 KeyBank, N.A. 2.30% 9/14/2022 $ 4,983
5,000 Manufacturers & Traders Trust Co. 2.05 8/17/2020 4,987
15,000 PNC Bank, N.A. 2.63 2/17/2022 15,114
5,000 Regions Bank 2.75 4/01/2021 5,014
5,000 Regions Financial Corp. 3.20 2/08/2021 5,050
9,500 Santander Holdings USA, Inc. 4.45 12/03/2021 9,839
15,000 Santander Holdings USA, Inc. 3.70 3/28/2022 15,321
10,000 SunTrust Bank 3.00 2/02/2023 10,168
5,000 SunTrust Bank 3.20 4/01/2024 5,145
5,000 SunTrust Banks, Inc. 2.90 3/03/2021 5,033
4,000 TCF National Bank (3 mo. LIBOR + 2.38%) 4.13(j) 7/02/2029 3,973
10,000 U.S. Bank, N.A. 2.85 1/23/2023 10,177
10,000 Wells Fargo & Co. 3.07 1/24/2023 10,143
5,000 Wells Fargo Bank, N.A. 2.60 1/15/2021 5,019
3,900 Zions Bancorp N.A. 3.35 3/04/2022 3,956
----------
225,829
----------
DIVERSIFIED FINANCIAL SERVICES (2.0%)
5,000 Air Lease Corp. 2.13 1/15/2020 4,991
5,000 Air Lease Corp. 3.50 1/15/2022 5,109
5,000 Aircastle Ltd. 4.40 9/25/2023 5,196
5,000 Aircastle Ltd. 4.25 6/15/2026 5,066
5,000 Alliance Data Systems Corp.(a) 5.38 8/01/2022 5,067
2,000 Ally Financial, Inc. 3.75 11/18/2019 2,006
6,600 Ally Financial, Inc. 4.13 3/30/2020 6,647
5,000 Capital One Financial Corp. 2.50 5/12/2020 5,002
5,000 Capital One Financial Corp. 3.05 3/09/2022 5,061
5,307 HSBC Finance Corp. 6.68 1/15/2021 5,563
4,500 Navient Corp. 8.00 3/25/2020 4,639
5,000 Synchrony Financial 2.70 2/03/2020 5,001
2,500 Synchrony Financial 2.85 7/25/2022 2,501
----------
61,849
----------
INSURANCE (1.8%)
5,000 Assurant, Inc. (3 mo. LIBOR + 1.25%) 3.58(c) 3/26/2021 4,978
5,000 Assurant, Inc. 4.20 9/27/2023 5,192
5,000 Berkshire Hathaway, Inc. 2.20 3/15/2021 5,006
17,955 Infinity Property & Casualty Corp. 5.00 9/19/2022 18,868
5,000 Metropolitan Life Global Funding I(a) 3.45 10/09/2021 5,107
5,000 Protective Life Global Funding(a) 3.10 4/15/2024 5,117
5,000 Reliance Standard Life Global Funding II(a) 3.85 9/19/2023 5,154
5,366 StanCorp Financial Group, Inc. 5.00 8/15/2022 5,621
----------
55,043
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 25
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANIES (0.9%)
$ 11,000 Ares Capital Corp. 3.88% 1/15/2020 $ 11,045
9,084 FS KKR Capital Corp. 4.25 1/15/2020 9,119
5,200 Main Street Capital Corp. 5.20 5/01/2024 5,551
----------
25,715
----------
REITS (3.0%)
14,782 CoreCivic, Inc. 4.13 4/01/2020 14,715
1,507 GLP Capital, LP/GLP Financing II, Inc. 4.88 11/01/2020 1,535
5,000 Healthcare Trust of America Holdings, LP 2.95 7/01/2022 5,028
2,950 Nationwide Health Properties, Inc.
(Put Date 10/01/2027)(k) 6.90 10/01/2037 3,737
20,850 Office Properties Income Trust 3.60 2/01/2020 20,878
10,000 Realty Income Corp. 3.25 10/15/2022 10,239
8,000 Sabra Health Care, LP / Sabra Capital Corp. 5.38 6/01/2023 8,139
5,369 Senior Housing Properties Trust 6.75 4/15/2020 5,404
6,890 Senior Housing Properties Trust 6.75 12/15/2021 7,334
2,612 SL Green Operating Partnership, LP 3.25 10/15/2022 2,641
5,000 SL Green Realty Corp. 4.50 12/01/2022 5,210
6,250 Starwood Property Trust, Inc. 3.63 2/01/2021 6,266
----------
91,126
----------
SAVINGS & LOANS (1.0%)
5,000 First Niagara Financial Group, Inc. 6.75 3/19/2020 5,130
9,500 People's United Financial, Inc. 3.65 12/06/2022 9,729
14,700 Sterling Bancorp. 3.50 6/08/2020 14,598
----------
29,457
----------
Total Financial 489,019
----------
INDUSTRIAL (2.4%)
-----------------
AEROSPACE/DEFENSE (0.5%)
4,984 Arconic, Inc. 6.15 8/15/2020 5,150
4,000 Arconic, Inc. 5.40 4/15/2021 4,140
5,000 General Dynamics Corp. 1.88 8/15/2023 4,932
----------
14,222
----------
ELECTRICAL COMPONENTS & EQUIPMENT (0.4%)
11,892 Molex Electronics Technologies, LLC(a) 2.88 4/15/2020 11,893
----------
Electronics (0.2%)
5,000 FLIR Systems, Inc. 3.13 6/15/2021 5,038
1,700 Jabil, Inc. 5.63 12/15/2020 1,761
----------
6,799
----------
MACHINERY-DIVERSIFIED (0.3%)
7,417 Wabtec Corp. (3 mo. LIBOR + 1.30%) 3.71(c) 9/15/2021 7,404
----------
================================================================================
26 | USAA SHORT-TERM BOND FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
MISCELLANEOUS MANUFACTURERS (0.3%)
$ 5,000 General Electric Co. 2.20% 1/09/2020 $ 4,992
5,000 Ingersoll-Rand Global Holding Co. Ltd. 2.90 2/21/2021 5,029
----------
10,021
----------
TRANSPORTATION (0.7%)
1,266 Ryder System, Inc. 2.50 5/11/2020 1,266
4,500 Ryder System, Inc. 2.25 9/01/2021 4,475
5,000 Ryder System, Inc. 2.80 3/01/2022 5,028
5,000 Ryder System, Inc. 2.50 9/01/2022 4,991
4,706 Ryder System, Inc. 3.40 3/01/2023 4,829
----------
20,589
----------
Total Industrial 70,928
----------
TECHNOLOGY (1.0%)
-----------------
SEMICONDUCTORS (0.5%)
10,000 Broadcom Corp./Broadcom Cayman Finance Ltd. 2.38 1/15/2020 9,986
5,000 Broadcom,Inc.(a) 3.13 4/15/2021 5,027
----------
15,013
----------
SOFTWARE (0.5%)
5,000 First Data Corp.(a) 5.38 8/15/2023 5,134
10,000 Oracle Corp. 2.40 9/15/2023 10,036
----------
15,170
----------
Total Technology 30,183
----------
UTILITIES (5.8%)
----------------
ELECTRIC (4.5%)
9,167 AEP Texas, Inc. 2.40 10/01/2022 9,157
1,601 AES Corp. 4.00 3/15/2021 1,627
5,000 Alliant Energy Finance, LLC(a) 3.75 6/15/2023 5,170
3,000 CenterPoint Energy, Inc. 2.50 9/01/2022 3,001
5,858 Delmarva Power & Light Co. 3.50 11/15/2023 6,116
5,000 Dominion Energy, Inc. 2.58 7/01/2020 5,004
8,080 DPL, Inc. 7.25 10/15/2021 8,665
5,000 Duke Energy Corp. 2.40 8/15/2022 4,997
2,600 Eversource Energy 2.75 3/15/2022 2,625
10,000 Exelon Generation Co., LLC 2.95 1/15/2020 10,017
7,975 Exelon Generation Co., LLC 4.00 10/01/2020 8,078
5,000 Georgia Power Co. 2.00 9/08/2020 4,971
8,496 IPALCO Enterprises, Inc. 3.45 7/15/2020 8,544
7,143 ITC Holdings Corp. 2.70 11/15/2022 7,142
5,833 Mississippi Power Co. (3 mo. LIBOR + 0.65%) 2.96(c) 3/27/2020 5,823
3,333 NextEra Energy Capital Holdings, Inc. 3.34 9/01/2020 3,365
5,000 Public Service Electric & Gas Co. 3.25 9/01/2023 5,179
================================================================================
PORTFOLIO OF INVESTMENTS | 27
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
$ 10,000 Sempra Energy 2.40% 3/15/2020 $ 9,988
3,600 Sempra Energy 2.90 2/01/2023 3,623
4,299 Sierra Pacific Power Co. 3.38 8/15/2023 4,429
10,000 Southern Power Co. 2.38 6/01/2020 9,996
3,630 System Energy Resources, Inc. 4.10 4/01/2023 3,800
5,000 Virginia Electric & Power Co. 2.75 3/15/2023 5,061
----------
136,378
----------
GAS (1.3%)
5,000 National Fuel Gas Co. 4.90 12/01/2021 5,184
3,400 National Grid, N.A., Inc. , acquired 9/13/2018;
cost $3,319(l) 2.38 9/30/2020 3,382
10,000 Southern Co. Gas Capital Corp. 2.45 10/01/2023 9,938
19,073 WGL Holdings, Inc.(h) 2.25 11/01/2019 19,012
----------
37,516
----------
Total Utilities 173,894
----------
Total Corporate Obligations (cost: $1,426,427) 1,439,001
----------
EURODOLLAR AND YANKEE OBLIGATIONS (14.5%)
BASIC MATERIALS (1.0%)
----------------------
CHEMICALS (0.8%)
5,000 Braskem Finance Ltd.(a) 5.75 4/15/2021 5,220
5,000 Braskem Netherlands Finance B.V.(a) 3.50 1/10/2023 5,020
7,932 Methanex Corp. 3.25 12/15/2019 7,923
5,000 Syngenta Finance N.V.(a) 3.70 4/24/2020 5,029
----------
23,192
----------
IRON/STEEL (0.0%)
2,000 Vale Overseas Ltd. 5.88 6/10/2021 2,105
----------
MINING (0.2%)
5,000 Fresnillo plc(a) 5.50 11/13/2023 5,416
----------
Total Basic Materials 30,713
----------
COMMUNICATIONS (0.2%)
---------------------
TELECOMMUNICATIONS (0.2%)
5,000 Deutsche Telekom International Finance BV(a) 2.82 1/19/2022 5,046
----------
CONSUMER, CYCLICAL (1.6%)
-------------------------
AIRLINES (1.0%)
15,350 Air Canada Pass-Through Trust(a) 5.00 3/15/2020 15,469
2,887 Air Canada Pass-Through Trust(a) 5.38 5/15/2021 2,954
5,550 British Airways Pass-Through Trust(a),(h) 5.63 6/20/2020 5,629
6,000 WestJet Airlines Ltd.(a) 3.50 6/16/2021 6,019
----------
30,071
----------
================================================================================
28 | USAA SHORT-TERM BOND FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
AUTO MANUFACTURERS (0.4%)
$ 2,873 Fiat Chrysler Automobiles N.V. 4.50% 4/15/2020 $ 2,902
5,000 Hyundai Capital America(a) 3.00 6/20/2022 5,012
2,330 Jaguar Land Rover Automotive plc(a) 4.25 11/15/2019 2,327
3,560 Nissan Motor Acceptance Corp.(a) 1.55 9/13/2019 3,555
----------
13,796
----------
RETAIL (0.2%)
5,000 Alimentation Couche-Tard, Inc.(a) 2.70 7/26/2022 5,004
----------
Total Consumer, Cyclical 48,871
----------
CONSUMER, NON-CYCLICAL (3.7%)
-----------------------------
AGRICULTURE (1.0%)
5,000 BAT Capital Corp. 2.30 8/14/2020 4,988
10,000 BAT Capital Corp. 2.76 8/15/2022 10,012
5,000 BAT International Finance plc 1.63 9/09/2019 4,994
10,000 Imperial Brands Finance plc(a) 2.95 7/21/2020 10,032
----------
30,026
----------
BEVERAGES (0.2%)
5,000 Anheuser-Busch InBev Worldwide, Inc. 4.15 1/23/2025 5,381
----------
COSMETICS/PERSONAL CARE (0.2%)
5,000 Avon International Capital plc(a) 6.50 8/15/2022 5,093
----------
FOOD (0.7%)
18,588 Grupo Bimbo SAB de CV(a) 4.50 1/25/2022 19,239
2,140 Smithfield Foods, Inc.(a) 2.70 1/31/2020 2,135
----------
21,374
----------
HEALTHCARE-SERVICES (0.2%)
5,326 Fresenius Medical Care U.S. Finance II, Inc.(a) 4.13 10/15/2020 5,400
----------
HOUSEHOLD PRODUCTS/WARES (0.5%)
15,000 Reckitt Benckiser Treasury Services plc(a) 2.38 6/24/2022 14,970
----------
PHARMACEUTICALS (0.9%)
4,500 Elanco Animal Health, Inc. 3.91 8/27/2021 4,592
1,667 Elanco Animal Health, Inc. 4.27 8/28/2023 1,753
7,669 Hikma Pharmaceuticals plc , acquired
1/03/2019-7/11/2019; cost $7,663(l) 4.25 4/10/2020 7,694
15,105 Teva Pharmaceutical Finance Co., LLC
(Put Date 2/01/2021)(k) 0.25 2/01/2026 13,865
----------
27,904
----------
Total Consumer, Non-cyclical 110,148
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 29
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
DIVERSIFIED (0.7%)
------------------
HOLDING COMPANIES-DIVERSIFIED (0.7%)
$ 5,000 CK Hutchison International II Ltd.(a) 2.25% 9/29/2020 $ 4,981
10,000 CK Hutchison International Ltd.(a) 1.88 10/03/2021 9,844
5,000 CK Hutchison International Ltd.(a) 2.88 4/05/2022 5,026
----------
Total Diversified 19,851
----------
ENERGY (0.9%)
-------------
OIL & GAS (0.9%)
4,000 Aker BP ASA(a) 6.00 7/01/2022 4,118
9,758 Cenovus Energy, Inc. 5.70 10/15/2019 9,805
2,000 Petroleos Mexicanos 3.50 7/23/2020 2,001
6,000 Petroleos Mexicanos 6.38 2/04/2021 6,193
3,000 Petroleos Mexicanos 5.38 3/13/2022 3,046
3,100 Ras Laffan Liquefied Natural Gas Co. Ltd.(a) 6.75 9/30/2019 3,118
----------
Total Energy 28,281
----------
FINANCIAL (4.3%)
----------------
BANKS (2.5%)
10,000 Banco Santander Chile(a) 2.50 12/15/2020 9,996
15,000 BBVA Bancomer S.A.(a) 6.50 3/10/2021 15,739
3,000 BBVA Bancomer S.A. 6.50 3/10/2021 3,148
4,167 Cadence BanCorp (3 mo. LIBOR + 3.03%) 4.75(j) 6/30/2029 3,983
10,000 Lloyds Banking Group plc (1 mo. LIBOR + 0.81%) 2.91(j) 11/07/2023 9,944
13,000 Royal Bank of Scotland Group plc 6.13 12/15/2022 14,026
5,000 Santander UK Group Holdings plc 3.57 1/10/2023 5,055
5,000 Santander UK Group Holdings plc
(1 mo. LIBOR + 1.08%) 3.37(j) 1/05/2024 5,027
5,000 Santander UK plc 2.35 9/10/2019 4,999
5,000 Standard Chartered plc(a) 2.25 4/17/2020 4,989
----------
76,906
----------
DIVERSIFIED FINANCIAL SERVICES (1.0%)
5,000 Avolon Holdings Funding Ltd.(a) 3.95 7/01/2024 5,122
10,000 ORIX Corp. 2.90 7/18/2022 10,134
2,000 Park Aerospace Holdings Ltd.(a) 3.63 3/15/2021 2,017
13,000 Park Aerospace Holdings Ltd.(a) 5.25 8/15/2022 13,737
----------
31,010
----------
INSURANCE (0.3%)
10,216 XLIT Ltd. (3 mo. LIBOR + 2.46%) 4.76(c) -(m) 10,157
----------
REAL ESTATE (0.2%)
5,000 WEA Finance, LLC(a) 3.15 4/05/2022 5,074
----------
================================================================================
30 | USAA SHORT-TERM BOND FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
REITS (0.3%)
$ 7,995 Scentre Group Trust(a) 2.38% 4/28/2021 $ 7,958
----------
Total Financial 131,105
----------
INDUSTRIAL (1.1%)
-----------------
BUILDING MATERIALS (0.2%)
5,000 Holcim U.S. Finance Sarl & Cie SCS(a) 6.00 12/30/2019 5,058
----------
ELECTRONICS (0.2%)
5,000 Tyco Electronics Group S.A. (3 mo. LIBOR + 0.45%) 2.93(c) 6/05/2020 5,005
----------
MISCELLANEOUS MANUFACTURERS (0.2%)
7,306 Smiths Group plc(a) 3.63 10/12/2022 7,393
----------
TRUCKING & LEASING (0.5%)
8,062 DAE Funding, LLC(a) 4.00 8/01/2020 8,134
5,000 DAE Funding, LLC(a) 5.25 11/15/2021 5,223
2,370 DAE Funding, LLC(a) 4.50 8/01/2022 2,413
----------
15,770
----------
Total Industrial 33,226
----------
TECHNOLOGY (0.2%)
-----------------
SOFTWARE (0.2%)
5,000 Fiserv, Inc. 2.75 7/01/2024 5,035
----------
UTILITIES (0.8%)
----------------
ELECTRIC (0.8%)
10,000 Comision Federal de Electricidad 4.88 5/26/2021 10,335
5,000 Comision Federal de Electricidad(a) 4.88 5/26/2021 5,168
5,000 Dominion Energy, Inc. 2.72 8/15/2021 5,007
5,000 Emera U.S. Finance, LP 2.70 6/15/2021 5,007
----------
Total Utilities 25,517
----------
Total Eurodollar and Yankee Obligations (cost: $434,375) 437,793
----------
FOREIGN GOVERNMENT OBLIGATIONS (1.0%)
10,000 Province of Alberta(a),(h) 1.75 8/26/2020 9,958
5,000 Province of Alberta 3.35 11/01/2023 5,250
10,000 Province of Ontario(h) 2.45 6/29/2022 10,111
5,000 Province of Quebec(h) 2.63 2/13/2023 5,098
----------
Total Foreign Government Obligations (cost: $29,995) 30,417
----------
MUNICIPAL OBLIGATIONS (4.5%)
CALIFORNIA (0.2%)
4,750 San Jose Redev. Agency Successor Agency 2.63 8/01/2022 4,829
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 31
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
COLORADO (0.2%)
$ 2,280 City of Loveland Electric & Communications
Enterprise Revenue 2.97% 12/01/2024 $ 2,331
2,500 University of Colorado(b) 2.35 6/01/2025 2,508
----------
4,839
----------
CONNECTICUT (0.4%)
3,700 State 3.75 9/15/2020 3,747
3,900 State 3.67 8/15/2022 4,040
3,185 State Health & Educational Facilities Auth. 3.32 7/01/2020 3,194
----------
10,981
----------
FLORIDA (0.1%)
1,375 Municipal Power Agency 2.20 10/01/2020 1,367
2,500 Municipal Power Agency 2.38 10/01/2021 2,489
----------
3,856
----------
ILLINOIS (0.1%)
2,520 City of Chicago Wastewater Transmission(h) 4.31 1/01/2021 2,560
760 Village of Channahon 4.00 1/01/2020 763
----------
3,323
----------
KENTUCKY (0.0%)
1,060 State Property & Building Commission 2.56 5/01/2021 1,059
250 State Property & Building Commission 2.76 5/01/2022 251
----------
1,310
----------
MARYLAND (0.4%)
3,625 EDC 2.80 6/01/2020 3,607
3,670 EDC 3.05 6/01/2021 3,657
3,795 EDC 3.30 6/01/2022 3,805
----------
11,069
----------
MASSACHUSETTS (0.0%)
750 Dev. Finance Agency 4.00 6/01/2024 765
----------
MICHIGAN (0.4%)
5,395 Clintondale Community Schools 2.61 5/01/2021 5,428
4,000 Clintondale Community Schools 2.84 5/01/2022 4,063
3,635 Mount Clemens Community School District 2.46 5/01/2020 3,637
----------
13,128
----------
NEW JERSEY (0.8%)
850 EDA 3.50 6/15/2020 855
12,500 EDA 4.45 6/15/2020 12,684
625 EDA 3.52 7/01/2020 627
550 EDA 3.70 6/15/2021 560
================================================================================
32 | USAA SHORT-TERM BOND FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
$ 495 EDA 3.65% 7/01/2021 $ 501
2,615 Educational Facilities Auth. 2.25 9/01/2020 2,602
7,450 Educational Facilities Auth. 2.47 9/01/2021 7,434
----------
25,263
----------
NEW YORK (0.4%)
1,270 Dormitory Auth. 2.24 7/01/2020 1,265
5,125 Dormitory Auth. 2.57 7/01/2020 5,076
1,550 Dormitory Auth. 2.44 7/01/2021 1,550
2,000 Dormitory Auth. 3.18 3/15/2022 2,048
1,830 Town of Oyster Bay 3.80 2/01/2020 1,836
----------
11,775
----------
PENNSYLVANIA (0.3%)
3,265 IDA 2.97 7/01/2021 3,280
405 Luzerne County IDA (INS - Assured Guaranty
Municipal Corp.) 3.85 12/15/2019 404
2,805 Scranton School District (Put Date 6/15/2024)(k) 3.15 6/15/2034 2,800
1,415 Scranton School District (Put Date 6/15/2024)(k) 3.15 6/15/2034 1,413
----------
7,897
----------
RHODE ISLAND (0.1%)
2,065 Commerce Corp. 2.86 5/01/2024 2,113
----------
TENNESSEE (0.1%)
2,835 Metropolitan Nashville Airport Auth.
(Put Date 8/07/2019) (LOC - Regions Bank)(n) 2.46 4/01/2030 2,835
----------
TEXAS (0.5%)
5,000 A&M University 2.89 5/15/2022 5,109
1,585 A&M University 2.95 5/15/2023 1,633
3,845 A&M University(b) 2.12 5/15/2024 3,836
1,690 City of Houston 2.62 3/01/2021 1,701
1,240 City of Houston 2.77 3/01/2022 1,258
1,900 City of Houston 2.98 3/01/2023 1,946
----------
15,483
----------
VIRGINIA (0.1%)
3,000 Small Business Financing Auth.
(Put Date 12/31/2019)(a),(k) 4.20 7/01/2050 3,001
----------
Wisconsin (0.4%)
5,400 Public Finance Auth. (LOC - Citizens Financial Group) 2.75 6/01/2020 5,382
6,500 Public Finance Auth. (LOC - Citizens Financial Group) 3.75 2/01/2022 6,527
----------
11,909
----------
Total Municipal Obligations (cost: $133,469) 134,376
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 33
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY ISSUES (1.1%)(o)
AGENCY COLLATERAL CMO (0.1%)
$ 2,900 Fannie Mae(+) 1.25% 9/25/2027 $ 2,815
----------
COMMERCIAL MBS (0.3%)
51,577 Fannie Mae(+)(g) 0.54(f) 8/25/2022 640
60,655 Fannie Mae(+)(g) 0.64(f) 5/25/2022 841
66,786 Freddie Mac(+)(g) 1.25(f) 8/25/2022 2,165
611 Freddie Mac(+) 1.78 10/25/2020 608
4,130 FREMF Mortgage Trust(a) 3.04(f) 10/25/2047 4,125
----------
8,379
----------
FGLMC Collateral (0.0%)
29 Freddie Mac(+) 5.00 5/01/2020 29
42 Freddie Mac(+) 5.00 9/01/2020 42
93 Freddie Mac(+) 5.50 4/01/2021 95
----------
166
----------
FHLMC Collateral (0.0%)
539 Freddie Mac(+) (12 mo. LIBOR + 1.63%) 4.67(c) 4/01/2035 558
----------
FNMA Collateral (0.7%)
2,781 Fannie Mae(+) 2.50 4/01/2027 2,800
8,131 Fannie Mae(+) 2.50 5/01/2027 8,186
4,896 Fannie Mae(+) 2.50 8/01/2027 4,929
3,808 Fannie Mae(+) 2.50 8/01/2027 3,834
84 Fannie Mae(+) 4.50 5/01/2023 86
43 Fannie Mae(+) 4.50 2/01/2024 45
31 Fannie Mae(+) 5.00 12/01/2021 31
103 Fannie Mae(+) 5.00 6/01/2023 107
14 Fannie Mae(+) 5.00 9/01/2023 14
147 Fannie Mae(+) 5.00 2/01/2024 153
48 Fannie Mae(+) 5.50 12/01/2020 48
102 Fannie Mae(+) 5.50 2/01/2023 106
275 Fannie Mae(+) 5.50 6/01/2023 286
73 Fannie Mae(+) 5.50 9/01/2023 76
267 Fannie Mae(+) 5.50 6/01/2024 277
131 Fannie Mae(+) 6.00 10/01/2022 136
158 Fannie Mae(+) 6.00 1/01/2023 164
295 Fannie Mae(+) 6.00 1/01/2023 307
102 Fannie Mae(+) 6.00 7/01/2023 107
----------
21,692
----------
Total U.S. Government Agency Issues (cost: $32,712) 33,610
----------
================================================================================
34 | USAA SHORT-TERM BOND FUND
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
U.S. TREASURY SECURITIES (5.9%)
NOTES (5.9%)
$ 5,000 U.S. Treasury Note 1.13% 2/28/2021 $ 4,935
15,000 U.S. Treasury Note 1.38 2/29/2020 14,933
43,000 U.S. Treasury Note 1.38 3/31/2020 42,792
45,000 U.S. Treasury Note(p) 1.38 9/30/2020 44,666
5,000 U.S. Treasury Note 1.38 1/31/2021 4,956
16,500 U.S. Treasury Note 1.38 6/30/2023 16,205
25,000 U.S. Treasury Note 1.63 11/30/2020 24,881
5,000 U.S. Treasury Note 1.75 6/30/2024 4,976
15,000 U.S. Treasury Note 1.88 11/30/2021 15,000
5,000 U.S. Treasury Note 1.88 8/31/2022 5,003
----------
Total U.S. Treasury Securities (cost: $178,958) 178,347
----------
Total Bonds (cost: $2,857,674) 2,887,555
----------
-----------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
-----------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (1.2%)
PREFERRED STOCKS (1.2%)
COMMUNICATIONS (0.8%)
---------------------
TELECOMMUNICATIONS (0.8%)
23,029 Centaur Funding Corp., 9.08%(a),(h) 24,296
----------
FINANCIAL (0.4%)
----------------
BANKS (0.2%)
200,000 Citigroup Capital XIII, 8.64%, (3 mo. LIBOR + 6.37%)(c) 5,440
----------
REITS (0.2%)
50 SunTrust Real Estate Investment Corp., 9.00%(h),(m),(q),(r) 5,512
----------
Total Financial 10,952
----------
Total Preferred Stocks (cost: $35,640) 35,248
----------
Total Equity Securities (cost: $35,640) 35,248
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 35
================================================================================
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (2.6%)
COMMERCIAL PAPER (2.5%)
$ 8,000 Albemarle Corp. 2.45% 8/19/2019 $ 7,990
15,000 CSLB Holdings, Inc.(a) 2.45 8/05/2019 14,996
5,000 Enable Midstream(a) 3.50 9/17/2019 4,977
5,000 Glencore Funding, LLC(a) 3.41 9/12/2019 4,980
8,700 Glencore Funding, LLC 2.55 8/05/2019 8,697
30,000 Mylan N.V. 2.65 8/02/2019 29,998
4,000 Sherwin Williams Co. 2.47 8/06/2019 3,999
----------
Total Commercial Paper (cost: $75,637) 75,637
----------
-----------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
-----------------------------------------------------------------------------------------------------------------
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (0.1%)
3,487,418 State Street Institutional Treasury Money Market Fund
Premier Class, 2.09%(s) (cost: $3,488) 3,488
----------
Total Money Market Instruments (cost: $79,125) 79,125
----------
TOTAL INVESTMENTS (COST: $2,972,439) $3,001,928
==========
================================================================================
36 | USAA SHORT-TERM BOND FUND
================================================================================
------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------------------------------------------------------------------------------------------------------
Bonds:
Asset-Backed Securities $ - $ 445,584 $ - $ 445,584
Bank Loans - 48,891 - 48,891
Collateralized Loan Obligations - 49,970 - 49,970
Collateralized Mortgage Obligations - 2,563 - 2,563
Commercial Mortgage Securities - 87,003 - 87,003
Corporate Obligations - 1,439,001 - 1,439,001
Eurodollar and Yankee Obligations - 437,793 - 437,793
Foreign Government Obligations - 30,417 - 30,417
Municipal Obligations - 134,376 - 134,376
U.S. Government Agency Issues - 33,610 - 33,610
U.S. Treasury Securities 178,347 - - 178,347
Equity Securities:
Preferred Stocks - 29,736 5,512 35,248
Money Market Instruments:
Commercial Paper - 75,637 - 75,637
Government & U.S. Treasury Money
Market Funds 3,488 - - 3,488
------------------------------------------------------------------------------------------------------------
Total $181,835 $2,814,581 $5,512 $3,001,928
------------------------------------------------------------------------------------------------------------
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 July 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
PORTFOLIO OF INVESTMENTS | 37
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
July 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 20.3% of net assets at July 31, 2019.
o CATEGORIES AND DEFINITIONS
EURODOLLAR ANDYANKEE OBLIGATIONS - Eurodollar obligations are U.S.
dollar-denominated instruments that are issued outside the U.S. capital
markets by foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions. Yankee obligations
are dollar-denominated instruments that are issued by foreign issuers in the
U.S. capital markets.
ASSET-BACKED AND COMMERCIAL MORTGAGE-BACKED SECURITIES - Asset-backed
securities represent a participation in, or are secured by and payable from,
a stream of payments generated by particular assets. Commercial
mortgage-backed securities reflect an interest in, and are secured by,
mortgage loans on commercial real property. These securities represent
ownership in a pool of loans and are divided into pieces (tranches) with
varying maturities. The stated final maturity of such securities represents
the date the final principal payment will be made for the last outstanding
loans in the pool. The weighted average life is the average time for
principal to be repaid, which is calculated by assuming prepayment rates
================================================================================
38 | USAA SHORT-TERM BOND FUND
================================================================================
of the underlying loans. The weighted average life is likely to be
substantially shorter than the stated final maturity as a result of
scheduled principal payments and unscheduled principal prepayments. Stated
interest rates on commercial mortgage-backed securities may change slightly
over time as underlying mortgages paydown.
COLLATERALIZED LOAN OBLIGATIONS (CLOs) - Collateralized loan obligations are
securities issued by entities that are collateralized by a pool of loans.
CLOs are issued in multiple classes (tranches), and can be equity or debt
with specific adjustable or fixed interest rates, and varying maturities.
The cash flow from the underlying loans is used to pay off each tranche
separately within the debt, or senior tranches. Equity, or subordinated
tranches, typically are not paid a cash flow but do offer ownership in the
CLO itself in the event of a sale.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs) - Collateralized mortgage
obligations are debt obligations of a legal entity that are fully
collateralized by a portfolio of mortgages or mortgage-related securities.
CMOs are issued in multiple classes (tranches), with specific adjustable or
fixed interest rates, varying maturities, and must be fully retired no later
than its final distribution date. The cash flow from the underlying
mortgages is used to pay off each tranche separately. CMOs are designed to
provide investors with more predictable cash flows than regular mortgage
securities, but such cash flows can be difficult to predict because of the
effect of prepayments.
COMMERCIAL PAPER - Consists of short-term unsecured promissory notes with
maturities ranging from one to 270 days, issued mainly by corporations.
Commercial paper is usually purchased at a discount and matures at par
value; however, it also may be interest-bearing. Rate represents an
annualized yield at time of purchase or coupon rate, if applicable.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
EDA Economic Development Authority
EDC Economic Development Corp.
IDA Industrial Development Authority/Agency
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 39
================================================================================
LIBOR London Interbank Offered Rate
REITS Real estate investment trusts - Dividend distributions from REITS
may be recorded as income and later characterized by the REIT at
the end of the fiscal year as capital gains or a return of capital.
Thus, the Fund will estimate the components of distributions from
these securities and revise when actual distributions are known.
CREDIT ENHANCEMENTS - Adds the financial strength of the provider of the
enhancement to support the issuer's ability to repay the principal and
interest payments when due. The enhancement may be provided by a
high-quality bank, insurance company or other corporation, or a collateral
trust. The enhancements do not guarantee the market values of the
securities.
INS Principal and interest payments are insured by the name listed.
Although bond insurance reduces the risk of loss due to default by
an issuer, such bonds remain subject to the risk that value may
fluctuate for other reasons, and there is no assurance that the
insurance company will meet its obligations.
LOC Principal and interest payments are guaranteed by a bank letter of
credit or other bank credit agreement.
o SPECIFIC NOTES
(a) Restricted security that is not registered under the Securities Act of
1933. A resale of this security in the United States may occur in an
exempt transaction to a qualified institutional buyer as defined by Rule
144A, and as such has been deemed liquid by Victory Capital under
liquidity guidelines approved by USAA Mutual Funds Trust's Board of
Trustees, unless otherwise noted as illiquid.
(b) Security or a portion of the security purchased on a delayed-delivery
and/or when-issued basis.
(c) Variable-rate security - interest rate is adjusted periodically. The
interest rate disclosed represents the rate at July 31, 2019.
================================================================================
40 | USAA SHORT-TERM BOND FUND
================================================================================
(d) Bank loans (loans) - are not registered under the Securities Act of
1933. The loans contain certain restrictions on resale and cannot be
sold publicly. The stated interest rates represent the all in interest
rate of all contracts within the loan facilities. The interest rates are
adjusted periodically, and the rates disclosed represent the current
rate at July 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 Victory Capital,
under liquidity guidelines approved by USAA Mutual Funds Trust's Board
of Trustees, unless otherwise noted as illiquid.
(e) The bank loan will settle after July 31, 2019, at which time the
interest rate will be determined.
(f) Stated interest rates may change slightly over time as underlying
mortgages paydown.
(g) Security is interest only. Interest-only commercial mortgage-backed
securities (CMBS IOs) represent the right to receive only the interest
payments on an underlying pool of commercial mortgage loans. The
purchase yield reflects an anticipated yield based upon interest rates
at the time of purchase and the estimated timing and amount of future
cash flows. Coupon rates after purchase vary from period to period. The
principal amount represents the notional amount of the underlying pool
on which current interest is calculated. CMBS IOs are backed by loans
that have various forms of prepayment protection, which include lock-out
provisions, yield maintenance provisions, and prepayment penalties. This
serves to moderate their prepayment risk. CMBS IOs are subject to
default-related prepayments that may have a negative impact on yield.
(h) Security deemed illiquid by Victory Capital, under liquidity guidelines
approved by USAA Mutual Funds Trust's Board of Trustees.
(i) At July 31, 2019, the issuer was in default with respect to interest
and/or principal payments.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 41
================================================================================
(j) 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.
(k) Put bond - provides the right to sell the bond at face value at specific
tender dates prior to final maturity. The put feature shortens the
effective maturity of the security.
(l) Restricted security that is not registered under the Securities Act of
1933. The aggregate market value of these securities at July 31, 2019,
was $11,076,000, which represented 0.4% of the Fund's net assets.
(m) Security is perpetual and has no final maturity date but may be subject
to calls at various dates in the future.
(n) Variable-rate demand notes (VRDNs) - Provide the right to sell the
security at face value on either that day or within the rate-reset
period. VRDNs will normally trade as if the maturity is the earlier put
date, even though stated maturity is longer. The interest rate is reset
on the put date at a stipulated daily, weekly, monthly, quarterly, or
other specified time interval to reflect current market conditions.
These securities do not indicate a reference rate and spread in their
description.
(o) U.S. government agency issues - Mortgage-backed securities issued by
certain U.S. Government Sponsored Enterprises (GSEs) such as the
Government National Mortgage Association (GNMA or Ginnie Mae) and
certain other U.S. government guaranteed securities are supported by the
full faith and credit of the U.S. government. Securities issued by
other GSEs, such as Federal Home Loan Mortgage Corporation (Freddie Mac
or FHLMC) and Federal National Mortgage Association (Fannie Mae or
FNMA), indicated with a "+", are supported only by the right of the GSE
to borrow from the U.S. Treasury, the discretionary authority of the
U.S. government to purchase the GSEs' obligations, or only by the
credit 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
================================================================================
42 | USAA SHORT-TERM BOND FUND
================================================================================
conservatorship and appointed the Federal Housing Finance Agency (FHFA)
to act as conservator and oversee their daily operations. In addition,
the U.S. Treasury entered into purchase agreements with Fannie Mae and
Freddie Mac to provide them with capital in exchange for senior
preferred stock. While these arrangements are intended to ensure that
Fannie Mae and Freddie Mac can continue to meet their obligations, it is
possible that actions by the U.S. Treasury, FHFA, or others could
adversely impact the value of the Fund's investments in securities
issued by Fannie Mae and Freddie Mac.
(p) At July 31, 2019, the security, or a portion thereof, was segregated to
cover delayed-delivery and/or when-issued purchases.
(q) Security was fair valued at July 31, 2019, by Victory Capital in
accordance with valuation procedures approved by USAA Mutual Funds
Trust's Board of Trustees. For the USAA Short-Term Bond Fund, the total
value of all such securities was $5,512,000, which represented 0.2% of
the Fund's net assets.
(r) Security was classified as Level 3.
(s) Rate represents the money market fund annualized seven-day yield at
July 31, 2019.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 43
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
July 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $2,972,439) $3,001,928
Cash 7,384
Receivables:
Capital shares sold 1,217
Victory Capital (Note 8) 5
Interest 22,805
Securities sold 9,624
----------
Total assets 3,042,963
----------
LIABILITIES
Payables:
Securities purchased 27,747
Capital shares redeemed 2,174
Dividends on capital shares 292
Accrued administration and servicing fees 308
Accrued management fees 517
Accrued transfer agent's fees 295
Other accrued expenses and payables 223
----------
Total liabilities 31,556
----------
Net assets applicable to capital shares outstanding $3,011,407
==========
NET ASSETS CONSIST OF:
Paid-in capital $2,982,220
Distributable earnings 29,187
----------
Net assets applicable to capital shares outstanding $3,011,407
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $1,167,973/126,841 capital shares
outstanding, no par value) $ 9.21
==========
Institutional Shares (net assets of $1,822,756/198,050 capital shares
outstanding, no par value) $ 9.20
==========
Adviser Shares (net assets of $15,222/1,653 capital shares
outstanding, no par value) $ 9.21
==========
R6 Shares (net assets of $5,456/592 capital shares outstanding,
no par value) $ 9.21
==========
See accompanying notes to financial statements.
================================================================================
44 | USAA SHORT-TERM BOND FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended July 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 1,806
Interest 103,220
Securities lending (net) 61
--------
Total income 105,087
--------
EXPENSES
Management fees 7,790
Administration and servicing fees:
Fund Shares 1,751
Institutional Shares 2,040
Adviser Shares 26
R6 Shares 3
Transfer agent's fees:
Fund Shares 1,724
Institutional Shares 2,040
Adviser Shares 7
R6 Shares 1
Distribution and service fees (Note 8):
Adviser Shares 43
Custody and accounting fees:
Fund Shares 172
Institutional Shares 292
Adviser Shares 2
R6 Shares 1
Postage:
Fund Shares 80
Institutional Shares 134
Shareholder reporting fees:
Fund Shares 38
Institutional Shares 16
Trustees' fees 37
Registration fees:
Fund Shares 40
Institutional Shares 50
Adviser Shares 21
R6 Shares 20
================================================================================
FINANCIAL STATEMENTS | 45
================================================================================
Professional fees $ 103
Other 43
--------
Total expenses 16,474
--------
Expenses reimbursed:
R6 Shares (17)
--------
Net expenses 16,457
--------
NET INVESTMENT INCOME 88,630
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss (354)
Change in net unrealized appreciation/(depreciation) 51,945
--------
Net realized and unrealized gain 51,591
--------
Increase in net assets resulting from operations $140,221
========
See accompanying notes to financial statements.
================================================================================
46 | USAA SHORT-TERM BOND FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended July 31,
---------------------------------------------------------------------------------------------------
2019 2018
---------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 88,630 $ 73,096
Net realized gain (loss) on investments (354) 3,633
Change in net unrealized appreciation/(depreciation)
of investments 51,945 (56,420)
------------------------
Increase in net assets resulting from operations 140,221 20,309
------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (31,432) (27,523)
Institutional Shares (57,077) (44,960)
Adviser Shares (417) (488)
R6 Shares (150) (121)
------------------------
Distributions to shareholders (89,076) (73,092)
------------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 7)
Fund Shares (38,685) (92,473)
Institutional Shares (235,303) 102,957
Adviser Shares (8,063) 1,889
R6 Shares 231 96
------------------------
Total net increase (decrease) in net assets from
capital share transactions (281,820) 12,469
------------------------
Net decrease in net assets (230,675) (40,314)
NET ASSETS
Beginning of year 3,242,082 3,282,396
------------------------
End of year $3,011,407 $3,242,082
========================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 47
================================================================================
NOTES TO FINANCIAL STATEMENTS
July 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 Short-Term Bond 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
high current income consistent with preservation of principal.
The Fund consists of four classes of shares: Short-Term Bond Fund Shares (Fund
Shares), Short-Term Bond Fund Institutional Shares (Institutional Shares),
Short-Term Bond Fund Adviser Shares (Adviser Shares), and Short-Term Bond Fund
R6 Shares (R6 Shares). Each class of shares has equal rights to assets and
earnings, except that each class bears certain class- related expenses specific
to the particular class. These expenses include administration and servicing
fees, transfer agent fees, postage, shareholder reporting fees, distribution and
service (12b-1) fees, and certain registration and custodian fees. Expenses not
attributable to a specific class, income, and realized gains or losses on
investments are allocated to each class of shares based on each class' relative
net assets. Each class has exclusive voting rights on matters related solely to
that class and separate voting rights on matters that relate to all classes. The
Institutional Shares are available for investment through a USAA discretionary
managed account program and certain advisory programs sponsored by financial
intermediaries, such as brokerage firms, investment advisors, financial
planners, third-party administrators, and insurance companies. Institutional
Shares also are available to
================================================================================
48 | USAA SHORT-TERM BOND FUND
================================================================================
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 an affiliate fund
participating in a fund-of-funds investment strategy (affiliated 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), the investment adviser to the
Fund, and USAA Transfer Agency Company, d/b/a USAA Shareholder Account Services
(SAS), the transfer agent to the Fund, announced that AMCO and SAS would be
acquired by Victory Capital Holdings Inc., a global investment management firm
headquartered in Cleveland, Ohio (the Transaction) on July 1, 2019. Effective
August 5, 2019, Citibank, N.A. is the new custodian for the USAA Mutual Funds. 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. 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.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Pricing 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 | 49
================================================================================
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 bid 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.
Effective July 1, 2019, the valuation methodology applied to certain
debt securities changed. Securities that were previously valued at an
evaluated mean are now valued at the evaluated bid or the last sales
price.
2. Equity securities, including exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange or
the over-the-counter markets, are valued at the last sales price or
official closing price on the exchange or primary market on which they
trade. Securities traded primarily on foreign securities exchanges or
markets are valued at the last quoted sale price, or the most recently
determined official closing price calculated according to local market
convention, available at the time the Fund is valued. If no last sale
or official closing price is reported or available, the closing bid
price generally is used for U.S. listed equities and the average of the
bid and asked prices is used for foreign listed equities. 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.
================================================================================
50 | USAA SHORT-TERM BOND FUND
================================================================================
3. Equity securities trading in various foreign markets may take place on
days when the NYSE is closed. Further, when the NYSE is open, the
foreign markets may be closed. Therefore, the calculation of the Fund's
net asset value (NAV) may not take place at the same time the
prices of certain foreign securities held by the Fund are determined.
In many cases, events affecting the values of foreign securities that
occur between the time of their last quoted sale or official closing
price and the close of normal trading on the NYSE on a day the Fund's
NAV is calculated will not need to be reflected in the value of the
Fund's foreign securities. However, the Manager will monitor for events
that would materially affect the value of the Fund's foreign securities
and the Committee will consider such available information that it deems
relevant and will determine a fair value for the affected foreign
securities in accordance with valuation procedures. In addition,
information from an external vendor or other sources may be used to
adjust the foreign market closing prices of foreign equity securities to
reflect what the Committee believes to be the fair value of the
securities as of the close of the NYSE. Fair valuation of affected
foreign equity securities may occur frequently based on an assessment
that events which occur on a fairly regular basis (such as U.S. market
movements) are significant. Such securities are categorized in Level 2
of the fair value hierarchy.
4. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value hierarchy.
5. Short-term debt securities with original or remaining maturities of 60
days or less generally are priced but may be valued at amortized cost,
provided that amortized cost represents the fair value of such
securities.
6. Repurchase agreements are valued at cost.
7. Futures are valued at the settlement price at the close of market on the
principal exchange on which they are traded or, in the absence of any
transactions that day, the last sale on the prior trading date.
8. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has
================================================================================
NOTES TO FINANCIAL STATEMENTS | 51
================================================================================
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.
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.
================================================================================
52 | USAA SHORT-TERM BOND FUND
================================================================================
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 July 31, 2019, the Fund did not incur any income tax,
interest, or penalties, and has recorded no liability for net unrecognized
tax benefits relating to uncertain income tax positions. On an ongoing
basis, the Manager will monitor the Fund's tax basis to determine if
adjustments to this conclusion are necessary. The statute of limitations on
the Fund's tax return filings generally remain open for the three preceding
fiscal reporting year ends and remain subject to examination by the Internal
Revenue Service and state taxing authorities.
E. SECURITIES PURCHASED ON A DELAYED-DELIVERY OR WHEN-ISSUED BASIS - Delivery
and payment for securities that have been purchased by the Fund on a
delayed-delivery or when-issued basis or for delayed draws on loans can take
place a month or more after the trade date. During the period prior to
settlement, these securities do not earn interest, are subject to market
fluctuation, and may increase or decrease in value prior to their delivery.
The Fund receives a commitment fee for delayed draws on loans. The Fund
maintains segregated assets with a market value equal to or greater than the
amount of its purchase commitments. The purchase of securities on a
delayed-delivery or when-issued basis and delayed-draw loan commitments may
increase the volatility of the Fund's NAV to the extent that the Fund makes
such purchases and commitments while remaining substantially fully invested.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 53
================================================================================
F. INDEMNIFICATIONS - Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities arising out of the
performance of their duties to the Trust. In addition, in the normal course
of business, the Trust enters into contracts that contain a variety of
representations and warranties that provide general indemnifications. The
Trust's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Trust that have not yet
occurred. However, the Trust expects the risk of loss to be remote.
G. USE OF ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINE OF CREDIT
The Fund participates, along with other funds of the Trust and 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. 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.
For the period July 1, 2019 to July 31, 2019, the Fund paid Citibank facility
fees of less than $500, which represents 0.2% of the total fees paid to Citibank
by the funds of the Trusts. The Fund had no borrowings under this agreement
during the period July 1, 2019 to July 31, 2019. Effective July 1, 2019, the
line of credit among the Trust, with respect to its funds, and USAA Capital
Corporation (CAPCO) terminated. For the period from August 1, 2018 to June 30,
2019, the Fund paid CAPCO facility fees of $26,000, which represents 3.9% of the
total fees paid to CAPCO by the funds of the Trusts. The Fund had no borrowings
under this agreement during the period from August 1, 2018 to June 30, 2019.
================================================================================
54 | USAA SHORT-TERM BOND FUND
================================================================================
(3) INTERFUND LENDING
Effective July 1, 2019, the Trust relies on an exemptive order granted to
Victory Capital and its affiliated funds by the U.S. Securities and Exchange
Commission (SEC) in March 2017 (the 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 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 Order, by averaging the current repurchase
agreement rate and the current bank loan rate. For the period July 1, 2019 to
July 31, 2019, the Fund did not lend.
(4) 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 July 31, 2019,
and 2018, was as follows:
2019 2018
--------------------------------------
Ordinary income* $88,600,000 $73,084,000
Long-term realized capital gains 476,000 8,000
----------- -----------
Total distributions paid $89,076,000 $73,092,000
=========== ===========
As of July 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 255,000
Accumulated capital and other losses (336,000)
Unrealized appreciation of investments 29,521,000
*Includes short-term realized capital gains, if any, which are taxable as
ordinary income.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 55
================================================================================
The difference between book-basis and tax-basis unrealized appreciation of
investments is attributable to the tax deferral of losses on wash sales,
dividends payable, passive foreign investment company, defaulted bond income,
and hybrid interest accrual adjustments.
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. Distributions of realized gains from security transactions
not offset by capital losses are made annually in the succeeding fiscal year or
as otherwise required to avoid the payment of federal taxes.
At July 31, 2019, the Fund had net capital loss carryforwards of $(336,000), for
federal income tax purposes. It is unlikely that the Board will authorize a
distribution of capital gains realized in the future until the capital loss
carryforwards have been used.
CAPITAL LOSS CARRYFORWARDS
----------------------------------------
TAX CHARACTER
----------------------------------------
(NO EXPIRATION) BALANCE
--------------- ---------
Short-Term $ -
Long-Term (336,000)
---------
Total $(336,000)
=========
TAX BASIS OF INVESTMENTS - At July 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 Short-Term
Bond Fund $2,972,407,000 $34,880,000 $(5,359,000) $29,521,000
(5) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended July 31, 2019, were $1,457,308,000 and
$1,593,141,000, respectively.
In accordance with affiliated transaction procedures approved by the Board,
purchases and sales of security transactions were executed between the Fund and
================================================================================
56 | USAA SHORT-TERM BOND FUND
================================================================================
affiliated 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 July 31, 2019 were as follows:
PURCHASES SALES NET REALIZED GAIN (LOSS)
--------------------------------------------------------------------------------
$3,625,000 $- $-
(6) 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 July 31,
2019, the Fund had no securities on loan.
(7) CAPITAL SHARE TRANSACTIONS
At July 31, 2019, there were an unlimited number of shares of capital stock at
no par value authorized for the Fund.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 57
================================================================================
Capital share transactions for the Institutional Shares resulted from purchases
and sales by the affiliated 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
JULY 31, 2019 JULY 31, 2018
----------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------
FUND SHARES:
Shares sold 25,391 $ 231,270 27,583 $ 252,252
Shares issued from
reinvested dividends 3,351 30,563 2,930 26,728
Shares redeemed (33,004) (300,518) (40,697) (371,453)
-----------------------------------------------
Net decrease from
capital share transactions (4,262) $ (38,685) (10,184) $ (92,473)
===============================================
INSTITUTIONAL SHARES:
Shares sold 46,093 $ 419,712 49,960 $ 455,625
Shares issued from
reinvested dividends 5,894 53,713 4,718 43,023
Shares redeemed (77,547) (708,728) (43,344) (395,691)
-----------------------------------------------
Net increase (decrease) from
capital share transactions (25,560) $(235,303) 11,334 $ 102,957
===============================================
ADVISER SHARES:
Shares sold 296 $ 2,697 1,774 $ 16,258
Shares issued from
reinvested dividends 23 212 20 177
Shares redeemed (1,207) (10,972) (1,590) (14,546)
-----------------------------------------------
Net increase (decrease) from
capital share transactions (888) $ (8,063) 204 $ 1,889
===============================================
R6 SHARES:
Shares sold 24 $ 226 11 $ 98
Shares issued from
reinvested dividends 1 6 -* 3
Shares redeemed (-)* (1) (1) (5)
-----------------------------------------------
Net increase from capital
share transactions 25 $ 231 10 $ 96
===============================================
*Represents less than 500 shares.
================================================================================
58 | USAA SHORT-TERM BOND FUND
================================================================================
(8) TRANSACTIONS WITH MANAGER
MANAGEMENT FEES - The Manager provides investment management services to the
Fund pursuant to an Advisory Agreement. Effective July 1, 2019, the Trust relies
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. For the year ended July 31, 2019, the
Fund had no subadviser(s).
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee is accrued daily and paid monthly at
an annualized rate of 0.20% of the Fund's average daily net assets.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Short Investment Grade Bond Funds Index. The Lipper Short
Investment Grade Bond Funds Index tracks the total return performance of funds
within the Lipper Short Investment Grade Debt Funds category.
The performance period for each class consists of the current month plus the
previous 35 months. The performance period for the R6 Shares commenced on
December 1, 2016, and includes the performance of the Fund Shares for periods
prior to December 1, 2016. The following table is utilized to determine the
extent of the performance adjustment:
OVER/UNDER PERFORMANCE
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
--------------------------------------------------------------------
+/- 20 to 50 +/-4
+/- 51 to 100 +/-5
+/- 101 and greater +/-6
(1)Based on the difference between average annual performance of the relevant
share class of the Fund and its relevant Lipper index, rounded to the nearest
basis point. Average daily net assets of the share class are calculated over
a rolling 36-month period.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 59
================================================================================
Each class' annual performance adjustment rate is multiplied by the average
daily net assets of each respective class over the entire performance period,
which is then multiplied by a fraction, the numerator of which is the number of
days in the month and the denominator of which is 365 (366 in leap years). The
resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper Short Investment Grade Funds Index over that period, even
if the class had overall negative returns during the performance period.
Under the investment advisory agreement with the Manager that took effect on
July 1, 2019, no performance adjustments will be made for the period beginning
July 1, 2019, through June 30, 2020. Only performance beginning as of July 1,
2019, and thereafter will be utilized in calculating future performance
adjustments.
For the period from August 1, 2018 to June 30, 2019, the Fund incurred
management fees, paid or payable to AMCO, of $7,273,000, which included a
performance adjustment for the Fund Shares, Institutional Shares, Adviser
Shares, and R6 Shares of $491,000, $833,000, $4,000, and $2,000, respectively.
For the Fund Shares, Institutional Shares, Adviser Shares, and R6 Shares the
performance adjustments were 0.04%, 0.04%, 0.03%, and 0.03%, respectively. For
the period July 1, 2019 to July 31, 2019 the Fund incurred management fees, paid
or payable to Victory Capital of $517,000, which included no performance
adjustments.
ADMINISTRATION AND SERVICING FEES - Effective July 1, 2019, Victory Capital is
obligated on a continuous basis to provide administrative services to the Fund.
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 period from August 1, 2018 to June 30, 2019, the Fund Shares,
Institutional Shares, Adviser Shares, and R6 Shares incurred administration and
servicing fees, paid or payable to AMCO, of $1,602,000, $1,883,000,
================================================================================
60 | USAA SHORT-TERM BOND FUND
================================================================================
$24,000, and $2,000, respectively. For the period July 1, 2019 to July 31, 2019,
the Fund Shares, Institutional Shares, Adviser Shares, and R6 Shares incurred
administration and servicing fees, paid or payable to Victory Capital of
$149,000, $157,000, $2,000, and $1,000, respectively.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, AMCO also provided certain compliance and legal
services for the benefit of the Fund. The Board approved the reimbursement of a
portion of these expenses incurred by AMCO.
Effective July 1, 2019, these services are covered under a Compliance Services
Agreement between the Trust and Victory Capital. For the period from August 1,
2018 to June 30, 2019, the Fund reimbursed AMCO $10,000 for these compliance and
legal services. For the period July 1, 2019 to July 31, 2019, the Fund's portion
of fees paid to Victory Capital under the Compliance Service Agreement was less
than $500. These expenses are included in the professional fees on the Fund's
Statement of Operations.
EXPENSE LIMITATION - Effective July 1, 2019, the Manager has contractually
agreed to waive its management fee and/or reimburse expenses so that the total
annual operating expenses (excluding certain items such as interest, taxes and
brokerage commissions) do not exceed 0.53% of the Fund Shares, 0.43% of the
Institutional Shares, 0.73% of the Adviser Shares, and 0.39% of the R6 Shares,
through at least June 30, 2021. The Manager is permitted 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 limits in effect at the time of: (a) the original waiver or
expense reimbursement; or (b) the recoupment, after giving effect to the
recoupment amount. The amount of any waivers or reimbursements and the amount of
any recoupment is calculated without regard to the impact of any performance
adjustment to the Fund's management fee. This waiver agreement may only be
terminated by the Fund's Board of Trustees. Prior to July 1, 2019, AMCO agreed
to limit the total annual operating expenses of the R6 Shares to 0.39% of their
average daily net assets, excluding extraordinary expenses and before reductions
of any expenses paid indirectly, and to reimburse the R6 Shares for all expenses
in excess of those amounts. For the period from August 1, 2018 to June 30, 2019,
================================================================================
NOTES TO FINANCIAL STATEMENTS | 61
================================================================================
the R6 Shares incurred reimbursable expenses from AMCO of $11,000. For the
period July 1, 2019 to July 31, 2019, the R6 Shares incurred reimbursable
expenses of $5,000, all of which was receivable from the Manager.
TRANSFER AGENT'S FEES - Victory Capital Transfer Agency, Inc. (VCTA), (formerly,
USAA Shareholder Account Services (SAS)) provides transfer agency services to
the Fund. VCTA, 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. VCTA 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 July 31, 2019, the Fund Shares, Institutional Shares, Adviser
Shares and R6 Shares incurred transfer agent's fees, paid or payable to VCTA, of
$1,724,000, $2,040,000, $7,000, and $1,000, respectively.
DISTRIBUTION AND SERVICE (12b-1) FEES - Effective July 1, 2019, the Trust has an
agreement with Victory Capital Advisers, Inc. (VCA), an affiliate of the Manager
for exclusive distribution of the Fund's shares on a continuing best effort
basis. Prior to July 1, 2019, the Fund 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. Prior to July 1, 2019,
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 period from August
1, 2018 to June 30, 2019, the Adviser Shares incurred distribution and service
(12b-1) fees, of $40,000. For the period July 1, 2019 to July 31, 2019, the
Adviser Shares incurred distribution and service (12b-1) fees, of $3,000.
================================================================================
62 | USAA SHORT-TERM BOND FUND
================================================================================
UNDERWRITING SERVICES - Effective July 1, 2019, the Trust has an agreement with
Victory Capital Advisers, Inc. (VCA), an affiliate of the Manager for exclusive
underwriting and distribution of the Fund's shares on a continuing best effort
basis. This agreement provides that VCA receive no fee or other compensation for
such distribution services, but may receive 12b-1 fees with respect to Adviser
Shares. Prior to July 1, 2019, IMCO provided exclusive underwriting and
distribution of the Fund's shares on a continuing best-efforts basis and
received no fee or other compensation for these services, but may receive 12b-1
fees as described above, with respect to Adviser Shares.
(9) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other affiliated
Funds in which the affiliated fund-of-funds invest. The fund-of-funds do not
invest in the underlying affiliated 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 July 31, 2019, the fund-of-funds owned
the following percentages of the total outstanding shares of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
--------------------------------------------------------------------------------
Cornerstone Conservative 0.2
Target Retirement Income 1.6
Target Retirement 2020 1.7
Target Retirement 2030 1.7
Target Retirement 2040 0.8
Target Retirement 2050 0.3
Target Retirement 2060 0.0*
*Represents less than 0.1%.
Effective July 1, 2019, Victory Capital replaced AMCO as the Fund's investment
adviser and began managing the Fund. Prior to July 1, 2019, AMCO was 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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 63
================================================================================
(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. The Manager has determined there is no significant
impact on the Fund's financial statements and various filings.
(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.
================================================================================
64 | USAA SHORT-TERM BOND 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 is effective for funds
with fiscal years beginning after December 15, 2018. The Manager has determined
the adoption of this standard will have no significant impact on the financial
statements and reporting disclosures of the Fund.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 65
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each
period is as follows:
YEAR ENDED JULY 31,
---------------------------------------------------------------------------
2019 2018 2017 2016 2015
---------------------------------------------------------------------------
Net asset value at
beginning of period $ 9.06 $ 9.21 $ 9.20 $ 9.15 $ 9.23
---------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .24 .20 .17 .16 .15
Net realized and
unrealized gain (loss) .15 (.15) .01 .05 (.08)
---------------------------------------------------------------------------
Total from investment
operations .39 .05 .18 .21 .07
---------------------------------------------------------------------------
Less distributions from:
Net investment income (.24) (.20) (.17) (.16) (.15)
Realized capital gains (.00)(a) (.00)(a) - - (.00)(a)
---------------------------------------------------------------------------
Total distributions (.24) (.20) (.17) (.16) (.15)
---------------------------------------------------------------------------
Net asset value at
end of period $ 9.21 $ 9.06 $ 9.21 $ 9.20 $ 9.15
===========================================================================
Total return (%)* 4.43 .54 2.02 2.34 .83
Net assets at
end of period (000) $1,167,973 $1,188,259 $1,301,428 $1,400,054 $1,823,922
Ratios to average daily
net assets:**
Expenses (%)(b) .57(c) .59 .63 .61 .62
Expenses, excluding
reimbursements (%)(b) .57 .59 .63 .61 .62
Net investment
income (%) 2.68 2.18 1.90 1.76 1.65
Portfolio turnover (%) 48 39 31 22 31
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the year ended July 31, 2019, average daily net assets were
$1,166,978,000.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Fund Shares to 0.53% of the Fund Shares' average
daily net assets.
================================================================================
66 | USAA SHORT-TERM BOND FUND
================================================================================
INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each
period is as follows:
YEAR ENDED JULY 31,
---------------------------------------------------------------------------
2019 2018 2017 2016 2015
---------------------------------------------------------------------------
Net asset value at
beginning of period $ 9.06 $ 9.21 $ 9.20 $ 9.15 $ 9.23
---------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .25 .21 .18 .17 .16
Net realized and
unrealized gain (loss) .14 (.15) .01 .05 (.08)
---------------------------------------------------------------------------
Total from investment
operations .39 .06 .19 .22 .08
---------------------------------------------------------------------------
Less distributions from:
Net investment income (.25) (.21) (.18) (.17) (.16)
Realized capital gains (.00)(a) (.00)(a) - - (.00)(a)
---------------------------------------------------------------------------
Total distributions (.25) (.21) (.18) (.17) (.16)
---------------------------------------------------------------------------
Net asset value at
end of period $ 9.20 $ 9.06 $ 9.21 $ 9.20 $ 9.15
===========================================================================
Total return (%)* 4.42 .65 2.13 2.44 .95
Net assets at end
of period (000) $1,822,756 $2,025,651 $1,954,307 $1,942,385 $2,237,771
Ratios to average
daily net assets:**
Expenses (%)(b) .47(c) .48 .53 .51 .50
Expenses, excluding
reimbursements (%)(b) .47 .48 .53 .51 .50
Net investment
income (%) 2.78 2.29 2.00 1.87 1.76
Portfolio turnover (%) 48 39 31 22 31
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the year ended July 31, 2019, average daily net assets were
$2,040,048,000.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Institutional Shares to 0.43% of the Institutional
Shares' average daily net assets.
================================================================================
FINANCIAL HIGHLIGHTS | 67
================================================================================
ADVISER SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each
period is as follows:
YEAR ENDED JULY 31,
------------------------------------------------------------------------
2019 2018 2017 2016 2015
------------------------------------------------------------------------
Net asset value at
beginning of period $ 9.06 $ 9.21 $ 9.20 $ 9.15 $ 9.23
------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .22 .18 .16 .14 .13
Net realized and
unrealized gain (loss) .15 (.15) .01 .05 (.08)
------------------------------------------------------------------------
Total from investment
operations .37 .03 .17 .19 .05
------------------------------------------------------------------------
Less distributions from:
Net investment income (.22) (.18) (.16) (.14) (.13)
Realized capital gains (.00)(a) (.00)(a) (.00)(a)
------------------------------------------------------------------------
Total distributions (.22) (.18) (.16) (.14) (.13)
------------------------------------------------------------------------
Net asset value at
end of period $ 9.21 $ 9.06 $ 9.21 $ 9.20 $ 9.15
========================================================================
Total return (%)* 4.17 .38 1.82 2.08 .59
Net assets at end
of period (000) $15,222 $23,030 $21,532 $12,747 $13,304
Ratios to average
daily net assets:**
Expenses (%)(b) .82(d) .74 .82 .86 .85(c)
Expenses, excluding
reimbursements (%)(b) .82 .74 .82 .86 .85
Net investment
income (%) 2.43 2.02 1.70 1.52 1.41
Portfolio turnover (%) 48 39 31 22 31
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the year ended July 31, 2019, average daily net assets were $17,051,000.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Prior to December 1, 2014, AMCO had voluntarily agreed to limit the annual
expenses of the Adviser Shares to 0.90% of the Adviser Shares' average daily
net assets.
(d) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Adviser Shares to 0.73% of the Adviser Shares'
average daily net assets.
================================================================================
68 | USAA SHORT-TERM BOND FUND
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R6 SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each
period is as follows:
PERIOD ENDED
YEAR ENDED JULY 31, JULY 31,
------------------------------------------
2019 2018 2017***
------------------------------------------
Net asset value at beginning of period $ 9.07 $ 9.21 $ 9.12
---------------------------------------
Income (loss) from investment operations:
Net investment income .26 .22 .13
Net realized and unrealized gain (loss) .14 (.14) .09
---------------------------------------
Total from investment operations .40 .08 .22
---------------------------------------
Less distributions from:
Net investment income (.26) (.22) (.13)
Realized capital gains (.00)(a) (.00)(a) -
---------------------------------------
Total distributions (.26) (.22) (.13)
---------------------------------------
Net asset value at end of period $ 9.21 $ 9.07 $ 9.21
=======================================
Total return (%)* 4.50 .85 2.43
Net assets at end of period (000) $5,456 $5,142 $5,129
Ratios to average daily net assets:**
Expenses (%)(b) .39(d) .39 .39(c)
Expenses, excluding reimbursements (%)(b) .71 .67 1.02(c)
Net investment income (%) 2.86 2.38 2.14(c)
Portfolio turnover (%) 48 39 31
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the year ended July 31, 2019, average daily net assets were $5,214,000.
*** R6 Shares commenced operations on December 1, 2016.
(a) Represents less than $0.01 per share.
(b) Does not include acquired fund fees, if any.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the R6 Shares to 0.39% of the R6 Shares' average daily
net assets.
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FINANCIAL HIGHLIGHTS | 69
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EXPENSE EXAMPLE
July 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 February 1, 2019, through
July 31, 2019.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table provides
information about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested at the beginning
of the period, to estimate the expenses that you paid over the period. Simply
divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number for your share
class in the "actual" line under the heading "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class and an assumed rate of return of
5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the
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70 | USAA SHORT-TERM BOND FUND
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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 FEBRUARY 1, 2019 -
FEBRUARY 1, 2019 JULY 31, 2019 JULY 31, 2019
-----------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,026.10** $2.81**
Hypothetical
(5% return before expenses) 1,000.00 1,022.02** 2.81**
INSTITUTIONAL SHARES
Actual 1,000.00 1,026.60** 2.36**
Hypothetical
(5% return before expenses) 1,000.00 1,022.46** 2.36**
ADVISER SHARES
Actual 1,000.00 1,024.90** 4.02**
Hypothetical
(5% return before expenses) 1,000.00 1,020.83** 4.01**
R6 SHARES
Actual 1,000.00 1,027.00 1.96
Hypothetical
(5% return before expenses) 1,000.00 1,022.86 1.96
*Expenses are equal to the annualized expense ratio of 0.56% for Fund Shares,
0.47% for Institutional Shares, 0.80% for Adviser Shares, and 0.39% for R6
Shares, which are net of any reimbursements and expenses paid indirectly,
multiplied by the average account value over the period, multipliedby 181 days/
365 days for Fund Shares, Institutional Shares, Adviser Shares, and R6 Shares
(to reflect the one-half-year period). The Fund's actual ending account values
are based on its actual total returns of 2.61% for Fund Shares, 2.66% for
Institutional Shares, 2.49% for Adviser Shares, and 2.70% for R6 Shares, for
the six-month period of February 1, 2019, through July 31, 2019.
================================================================================
EXPENSE EXAMPLE | 71
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**The Fund's annualized expense ratio of 0.56% for Fund shares, 0.47% for
Institutional Shares and 0.80% for Adviser shares above reflects a change
effective July 1, 2019, to implement the Manager's expense limitation of 0.53%
of the Fund shares' average annual net assets, 0.43% for the Institutional
Shares's average annual net assets 0.73% of the Adviser shares' average annual
net assets. Had the expense limitation of 0.53% for the Fund Shares, 0.43% for
the Institutional Shares and 0.73% for the Adviser Shares, which is net of
expenses paid indirectly, been in effect for the entire six-month period of
February 1, 2019, through July 31, 2019, the values in the table above would
be as shown below.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE FEBRUARY 1, 2019 -
FEBRUARY 1, 2019 JULY 31, 2019 JULY 31, 2019
-----------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,026.10 $2.66
Hypothetical
(5% return before expenses) 1,000.00 1,022.17 2.66
INSTITUTIONAL SHARES
Actual 1,000.00 1,026.60 2.16
Hypothetical
(5% return before expenses) 1,000.00 1,022.66 2.16
ADVISER SHARES
Actual 1,000.00 1,024.90 3.67
Hypothetical
(5% return before expenses) 1,000.00 1,021.17 3.66
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72 | USAA SHORT-TERM BOND FUND
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
July 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.
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with
================================================================================
ADVISORY AGREEMENT(S) | 73
================================================================================
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 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
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74 | USAA SHORT-TERM BOND FUND
================================================================================
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.
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
================================================================================
ADVISORY AGREEMENT(S) | 75
================================================================================
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).
For at least two years after the Transaction closes, Victory Capital
has agreed to waive fees and/or reimburse expenses so that each Fund's
annual expense ratio (excluding certain customary items) does not
exceed the levels reflected in each Fund's most recent audited
financial statements at the time the Transaction closes (or the levels
of AMCO's then-current expense caps, if applicable), excluding the
impact of any performance adjustment to the Fund's advisory fee.
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76 | USAA SHORT-TERM BOND FUND
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o The portfolio managers at AMCO that manage the Fixed Income Funds(1)
as well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be
advised by Victory Capital through its Victory Solutions platform,
Victory Capital proposes that the same subadvisers be retained
Post-Transaction, although Victory Capital may change the allocation to
a particular subadviser Post-Transaction. No changes are expected to
the portfolio managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's businesses to
Victory Capital. Victory Capital and USAA expect to
(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) | 77
================================================================================
enter into a transition services agreement under which USAA will
continue to provide Victory Capital with certain services that are
currently provided by USAA to AMCO and the USAA Transfer Agent for a
specified period of time after the closing of the Transaction to assist
Victory Capital in transitioning the USAA member distribution channel
and member support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital is capable of providing
the same level of investment management services
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78 | USAA SHORT-TERM BOND FUND
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currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund,
Growth & Income Fund, Income Stock Fund, Global Equity Income Fund, and
Precious Metals and Minerals Fund.
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ADVISORY AGREEMENT(S) | 79
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The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored
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80 | USAA SHORT-TERM BOND FUND
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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 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
================================================================================
ADVISORY AGREEMENT(S) | 81
================================================================================
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.
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
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82 | USAA SHORT-TERM BOND FUND
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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.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
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ADVISORY AGREEMENT(S) | 83
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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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84 | USAA SHORT-TERM BOND FUND
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND AMCO)
July 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.
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 AMCO 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 AMCO, 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 AMCO's revenues
and costs of providing services to the Fund and
(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"). Effective July 1, 2019, upon the closing of the
transaction whereby AMCO acquired by Victory Capital Holdings, Inc., the
parent company of Victory Capital, the Advisory Agreement between the Trust
and AMCO and the Sub-advisory Agreement with the Subadviser terminated and
the new investment advisory agreement between the Trust and Victory Capital
went into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are discussed above.
Effective June 30, 2019, the Subadviser no longer manages any portion of the
Fund.
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ADVISORY AGREEMENT(S) | 85
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compensation paid to affiliates of AMCO; and (iii) information about AMCO's
operations and personnel. Prior to voting, the Independent Trustees reviewed the
proposed continuance of the Advisory Agreement with management and with
experienced 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 AMCO. 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 AMCO's profitability with respect to the
Fund. However, the Board noted that the evaluation process with respect to AMCO
is an ongoing one. In this regard, the Board's and its committees' consideration
of the Advisory Agreement included 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 AMCO under the Advisory Agreement, the Board
reviewed information provided by AMCO relating to its operations and personnel.
The Board also took into account its knowledge of AMCO's management and the
quality of the performance of AMCO's duties through
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86 | USAA SHORT-TERM BOND FUND
================================================================================
Board meetings, discussions, and reports during the preceding year. The Board
considered the fees paid to AMCO and the services provided to the Fund by AMCO
under the Advisory Agreement, as well as other services provided by AMCO and its
affiliates under other agreements, and the personnel who provide these services.
In addition to the investment advisory services provided to the Fund, AMCO 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
AMCO in connection with the services provided to the Fund, including investment,
operational, enterprise, litigation, regulatory and compliance risks.
The Board considered AMCO's management style and the performance of AMCO's
duties under the Advisory Agreement. The Board considered the level and depth of
experience of AMCO, 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 AMCO's process for monitoring
"best execution," also was considered. AMCO's role in coordinating the
activities of the Fund's other service providers also was considered. The Board
also considered AMCO's risk management processes. The Board considered AMCO'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 AMCO 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 AMCO and its affiliate, including AMCO's oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust,
also focused on the quality of AMCO'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) | 87
================================================================================
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
adjustment - was below the median of its expense group and its expense universe.
The data indicated that the Fund's total expenses were above the median of its
expense group and below the median of its expense universe. The Board took into
account management's discussion of the Fund's expenses. The Board also took into
account 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 AMCO
and its affiliates. The Board also noted the level and method of computing the
management fee, including any performance adjustment to such fee. In considering
the Fund's performance, the Board noted that it reviews at its regularly
scheduled meetings information about the Fund's performance results. The
Trustees also reviewed various comparative data provided to them in connection
with their consideration of the renewal of the Advisory Agreement, including,
among other information, a comparison of the Fund's average annual total return
with its Lipper index and with that of other mutual funds deemed to be in its
peer group by the independent third party in its report (the performance
universe). The Fund's performance universe consisted of the Fund and all retail
and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or primary channel
of distribution. This comparison indicated that, among other data, the Fund's
performance was above the average of its performance universe
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88 | USAA SHORT-TERM BOND FUND
================================================================================
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 40% of its performance universe for the one-year period
ended December 31, 2018, and was in the top 20% of its performance universe for
the 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 management fee. The information considered by the Board
included operating profit margin information for AMCO'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 AMCO'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 AMCO, the Board
also considered the fact that AMCO 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 AMCO from its relationship with the Trust, including that AMCO may
derive reputational and other benefits from its association with the Fund. The
Trustees recognized that AMCO 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 - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussion of
the current advisory fee structure. The Board also considered the effect of
Fund's growth and size on its performance and fees, noting that the Fund may
realize other economies of scale if assets increase proportionately more than
some expenses. The Board determined that the current investment management fee
structure was reasonable.
================================================================================
ADVISORY AGREEMENT(S) | 89
================================================================================
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with AMCO, among others: (i) AMCO has demonstrated that it
possesses the capability and resources to perform the duties required of it
under the Advisory Agreement; (ii) AMCO maintains an appropriate compliance
program; (iii) the performance of the Fund is reasonable in relation to the
performance of funds with similar investment objectives and to relevant indices;
(iv) the Fund's advisory expenses are reasonable in relation to those of similar
funds and to the services to be provided by AMCO; and (v) AMCO's 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 AMCO
and the type of fund. Based on its conclusions, the Board determined that the
continuation of the Advisory Agreement would be in the best interests of the
Fund and its shareholders.
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90 | USAA SHORT-TERM BOND FUND
================================================================================
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 | 91
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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 of 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), (08/11-06/19); Director of USAA Investment
Management Company (IMCO) (09/09-present); Chairman of Board of IMCO
(4/13-present); President and Director of USAA Shareholder Account Services
(SAS) (10/09-06/19); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director and Vice Chairman of FPS
(12/13-present); President and Director of USAA Investment Corporation (ICORP)
(03/10-present); Chairman of Board of ICORP (12/31-present); Director of USAA
Financial Advisors, Inc. (FAI) (12/13-present); Chairman of Board of FAI
(3/15-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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92 | USAA SHORT-TERM BOND 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
--------------------------------------------------------------------------------
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
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 93
================================================================================
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.
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.
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
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94 | USAA SHORT-TERM BOND FUND
================================================================================
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 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.
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TRUSTEES' AND OFFICERS' INFORMATION | 95
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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 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.
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96 | USAA SHORT-TERM BOND FUND
================================================================================
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 was 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 | 97
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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).
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Executive Director, Victory Capital Management Inc. (7/1/19-present); Treasurer,
USAA ETF Trust (09/18-06/19); Executive Director, Investment and Financial
Administration, USAA (04/12-06/30/19); Assistant Treasurer,
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98 | USAA SHORT-TERM BOND FUND
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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
Director, Accounting and Finance, Victory Capital Management Inc.
(7/1/19-present); Assistant Treasurer, USAA ETF Trust (09/18-06/19);
Accounting/Financial Director, USAA (12/13-06/30/19).
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).
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).
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TRUSTEES' AND OFFICERS' INFORMATION | 99
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TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Richard Y. Newton III
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
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 111 West Houston St., Suite 1901
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
Copies of the Victory Capital Management Inc.'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
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July 31, 2019
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ANNUAL REPORT
USAA Small Cap Stock Fund
FUND INSTITUTIONAL
SHARES SHARES
USCAX UISCX
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
". . . NOW MAY BE AN OPPORTUNE TIME FOR
INVESTORS TO ENSURE THAT THEIR PORTFOLIOS ARE WELL [PHOTO OF BROOKS ENGLEHARDT]
DIVERSIFIED AND THAT THEIR OVERALL ALLOCATION IS
APPROPRIATE FOR THEIR PARTICULAR RISK APPETITE."
--------------------------------------------------------------------------------
SEPTEMBER 2019
Although the bull market in equities has continued running, it was not without a
few missteps. Trade turmoil, questions surrounding global economic growth,
changing monetary policy, and geopolitical disputes have all led to increased
volatility. But through it all, domestic stocks, as measured by the S&P 500(R)
Index, still managed an annual return of approximately 8% for the 12-month
period ended July 31, 2019.
Given the sometimes dire news flow and ample cross-currents, it's no surprise
that volatility returned to the market. On one hand, the U.S. economy continues
to look good. The unprecedented streak of job creation has continued
uninterrupted, and unemployment is bouncing along historic lows at 3.7%. The
consumer remains resilient and inflation is tepid. On the flip side, however,
U.S. trade policy seems to be evolving, with new tariffs threatened and
implemented. The markets generally dislike this type of trade turmoil and
uncertainty, and the ongoing tensions between the United States and China (and
other trading partners) threaten to upend global supply chains and hinder
economic growth.
It's not just the stock market that has been dealing with volatility. The bond
market also has experienced volatility, due largely to the U.S. Federal
Reserve's (the "Fed") famous "pivot" in late 2018. Against the backdrop of
rapidly falling equities in the fourth quarter of 2018, the Fed signaled that
its next policy move would be to lower--not increase--short-term interest rates.
This immediately altered the yield environment.
Meanwhile, the U.S. Treasury yield curve continued to flatten and, in fact,
inverted--whereby shorter-term yields became higher than longer-term
================================================================================
================================================================================
yields. Such a yield-curve inversion is a worrying sign as it sometimes, but not
always, portends to a recession.
Although we are not predicting a recession, we must acknowledge that risks have
increased for an economic slowdown. Given that the current run in stocks is more
than a decade old, it's important for investors to keep perspective that the
bull market cannot continue forever. Therefore, now may be an opportune time for
investors to ensure that their portfolios are well diversified and that their
overall allocation is appropriate for their particular risk appetite.
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,
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. On the following pages, you will find information
relating to your USAA Investments, which is now a Victory Capital Investment
Franchise. If you have any questions about your investments, we encourage you to
engage your financial advisor or else contact us directly at 800-235-8396 or
visit usaa.com.
My colleagues and I sincerely appreciate the confidence you have placed in us,
and we value the opportunity to help you meet your investment goals.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGERS' COMMENTARY ON THE FUND 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 30
Financial Statements 32
Notes to Financial Statements 36
Financial Highlights 54
EXPENSE EXAMPLE 56
ADVISORY AGREEMENT(S) 58
TRUSTEES' AND OFFICERS' INFORMATION 79
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
VICTORY CAPITAL MANAGEMENT INC. 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
Wellington Management Company LLP ClariVest Asset Management LLC
TIMOTHY J. McCORMACK, CFA TODD WOLTER, CFA
SHAUN F. PEDERSEN MICHAEL WATERMAN, CFA
Granahan Investment Management, Inc. Munder Capital Management
GARY C. HATTON, CFA TONY Y. DONG
JENNIFER M. PAWLOSKI ROBERT E. CROSBY
ANDREW L. BEJA, CFA ROBERT GLISE
DAVID ROSE, CFA GAVIN HAYMAN
JEFF HARRISON, CFA BRIAN S. MATUSZAK
SEAN D. WRIGHT
VictoryShares and Solutions
MANNIK S. DHILLON, CFA, CAIA
WASIF A. LATIF
--------------------------------------------------------------------------------
o HOW DID THE SMALL-CAP MARKET PERFORM DURING THE 12-MONTH REPORTING PERIOD
ENDED JULY 31, 2019?
In a period that saw significant volatility for the broader equity markets,
small-cap stocks as measured by the iShares Russell 2000(R) Index posted
negative returns. Against a backdrop of slowing global growth, for much of
the period markets responded primarily to headlines surrounding U.S.
monetary and trade policies. Entering the 12-month reporting period, the
U.S. Federal Reserve (the "Fed") was on a credit tightening trajectory,
which the markets interpreted as confirming a relatively favorable outlook
for the U.S. economy. The fourth quarter of 2018 saw a sharp reversal in
investor risk appetite, however, as softening economic data from Europe and
China raised concerns that the Fed would increase interest rates too
quickly even as a global recession possibly loomed. Uncertainty regarding
U.S. trade policy and corporate earnings also weighed on sentiment toward
the end of 2018. While the Fed followed through on its previously
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
signaled December interest rate increase, it pivoted to a much more dovish
stance entering 2019, leading to a rebound in risk asset valuations.
Escalating rhetoric between the United States and China regarding trade and
tariffs generated concerns throughout the 12-month reporting period. May
2019 saw markets decline as President Trump announced plans to impose 25%
tariffs on $200 billion in Chinese imports. However, the market
subsequently recovered its lost ground as the Fed indicated that it was
prepared to cut its benchmark interest rate, if needed, to help offset any
drag on economic growth stemming from trade frictions. Corporate earnings
reports that generally were in line with expectations also served to
bolster sentiment.
o HOW DID THE USAA SMALL CAP STOCK FUND (THE "FUND") PERFORM DURING THE
REPORTING PERIOD?
The Fund has two share classes: Fund Shares and Institutional Shares.
For the reporting period ended July 31, 2019, the Fund Shares and
Institutional Shares had total returns of -2.07% and -1.98%, respectively.
This compares to returns of -4.42% for the Russell 2000 Index (the
"Index"), -6.75% for the S&P SmallCap 600(R) Index, and -2.55% for the
Lipper Small-Cap Core Funds Index.
Victory Capital Management Inc. (the "Manager" or "Victory Capital") is the
Fund's investment adviser. As the investment adviser, the Manager employs
dedicated resources to support the research, selection, and monitoring of
the Fund's subadvisers. Wellington Management Company LLP ("Wellington
Management"), Granahan Investment Management, Inc., ("GIMI"), and ClariVest
Asset Management LLC ("ClariVest") are subadvisers to the Fund. The
subadvisers each provide day-to-day discretionary management for a portion
of the Fund's assets.
Refer to page 5 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
2 | USAA SMALL CAP STOCK FUND
================================================================================
o WHAT WERE YOUR STRATEGIES IN THIS ENVIRONMENT?
In a difficult period for small stocks, in terms of the Fund overall, stock
selection had a positive effect on relative performance, while sector
allocation detracted somewhat. Stock selection within the industrials,
energy, and healthcare sectors contributed to relative return, while
selection within real estate, financials, and consumer discretionary
detracted. In terms of sector allocation, an overweight to energy and an
underweight in utilities constrained performance, while overweights to
healthcare and real estate contributed to returns.
Wellington Management's small-cap value portion of the Fund outperformed the
Russell 2000(R) Value Index during the trailing 12-month reporting period,
as security selection drove positive performance. Strong stock selection
within industrials, energy, and healthcare contributed to relative results,
while selection in information technology and financials detracted. During
the reporting period, sector allocation, a residual of Wellington
Management's stock-by-stock selection process, modestly weighed on
performance. Underweights to utilities, information technology, and
financials sectors were the largest detractors, while an underweight to the
energy sector and an overweight to the industrials sector partially offset
these negative results. Top contributors to relative performance within the
Wellington Management portion of the Fund included ESCO Technologies, Inc.
(industrials), a producer of engineered products and systems; WNS Holdings
Ltd. ADR (information technology), a global business process management
company; and Huron Consulting Group, Inc. (industrials), a specialty
consulting company. The largest individual detractors were Orion Engineered
Carbons S.A. (materials), a specialty and rubber carbon black manufacturer;
Tyman plc (industrials), a supplier of engineered door and window components
and access solutions to the construction industry; and Belden, Inc.
(information technology), a manufacturer of electronic cables and
connectivity products.
The GIMI portion of the Fund meaningfully outperformed for the reporting
period. Broadly favorable stock selection drove performance, as selection
was positive within nine of eleven market sectors. Performance within the
GIMI strategy was led by selection in information technology, industrials,
healthcare, and consumer staples sectors. Positioning with respect to
materials benefited from both positive selection and an
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
underweight to the sector. Conversely, positive selection within energy was
more than offset by an overweight to the sector versus the benchmark, while
selection within consumer discretionary weighed on performance. In terms of
individual holdings, Exact Sciences Corp., within the healthcare sector was
the top contributor for the reporting period. Also included in the top
contributors were Enphase Energy, Inc. in information technology, and
industrial holding Kornit Digital Ltd. Conversely, a position in Weight
Watchers International, Inc.*, within the consumer discretionary sector was
the largest detractor, while the energy companies Carrizo Oil & Gas, Inc.
and Ring Energy, Inc., were also among the biggest laggards.
ClariVest's portion of the Fund performed essentially in line with the
benchmark for the reporting period. ClariVest's positioning within the
consumer discretionary and energy sectors contributed to returns, while
their holdings in real estate and materials detracted overall. In terms of
individual holdings, positions in for-profit education company K12, Inc.
and personal installment lender OneMain Holdings, Inc.* were among the
leading contributors to performance, while positions in the specialty
pharmaceutical company Mallinckrodt plc and the real estate investment
trust Ashford Hospitality Trust, Inc. were notable detractors.
Thank you for allowing us to help you with your investment needs.
*Weight Watchers International, Inc. and OneMain Holdings, Inc. were sold
out of the Fund prior to July 31, 2019.
Small-cap investing is subject to the risk that small-cap companies may be
more vulnerable to adverse business or economic developments. Such
securities may be less liquid and more volatile.
================================================================================
4 | USAA SMALL CAP STOCK FUND
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 7/31/19 o
--------------------------------------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
--------------------------------------------------------------------------------
Fund Shares -2.07% 7.46% 11.87%
Institutional Shares -1.98% 7.61% 12.13%
Russell 2000(R) Index*
(reflects no deduction for fees,
expenses, or taxes) -4.42% 8.53% 12.47%
S&P SmallCap 600 Index**
(reflects no deduction for fees,
expenses, or taxes) -6.75% 9.89% 13.99%
Lipper Small-Cap Core Funds
Index*** (reflects no deduction
for taxes) -2.55% 8.25% 12.24%
*The unmanaged Russell 2000 Index measures the performance of the 2,000 smallest
companies in the Russell 3000 Index, which represents approximately 10% of the
total market capitalization of the Russell 3000 Index.
**The unmanaged S&P SmallCap 600 Index is a market-value-weighted index
consisting of 600 domestic stocks chosen for market size, liquidity, and
industry group representation.
***The unmanaged Lipper Small-Cap Core Funds Index tracks the total return
performance of funds within the Lipper Small-Cap Core 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]
LIPPER SMALL USAA SMALL-CAP
S&P SMALLCAP RUSSELL 2000 CAP STOCK CORE FUNDS
600 INDEX INDEX FUND SHARES INDEX
7/31/2009 $10,000.00 $10,000.00 $10,000.00 $10,000.00
8/31/2009 10,228.82 10,286.75 10,306.83 10,285.00
9/30/2009 10,755.34 10,880.05 10,928.04 10,843.00
10/31/2009 10,142.69 10,141.35 10,326.85 10,327.00
11/30/2009 10,407.33 10,459.69 10,684.64 10,611.00
12/31/2009 11,305.63 11,301.64 11,418.46 11,338.00
1/31/2010 10,923.06 10,885.61 11,012.14 11,149.00
2/28/2010 11,392.39 11,375.96 11,508.40 11,528.00
3/31/2010 12,278.87 12,301.83 12,290.17 12,403.00
4/30/2010 12,996.98 12,998.04 12,905.21 12,972.00
5/31/2010 12,058.66 12,012.10 11,962.62 12,160.00
6/30/2010 11,206.43 11,081.23 11,179.73 11,338.00
7/31/2010 11,917.15 11,842.73 11,893.54 12,023.00
8/31/2010 11,027.55 10,965.92 11,188.73 11,180.00
9/30/2010 12,284.70 12,332.23 12,438.86 12,466.00
10/31/2010 12,807.43 12,836.88 12,887.77 12,993.00
11/30/2010 13,263.93 13,281.98 13,324.92 13,488.00
12/31/2010 14,279.89 14,336.68 14,353.78 14,458.00
1/31/2011 14,301.56 14,299.74 14,365.78 14,405.00
2/28/2011 14,931.87 15,083.95 15,077.98 15,028.00
3/31/2011 15,381.16 15,474.87 15,451.35 15,429.00
4/30/2011 15,780.92 15,883.50 15,829.06 15,967.00
5/31/2011 15,638.75 15,585.70 15,533.90 15,693.00
6/30/2011 15,355.94 15,226.36 15,240.37 15,429.00
7/31/2011 14,863.24 14,676.00 14,780.47 14,954.00
8/31/2011 13,722.83 13,399.16 13,642.47 13,688.00
9/30/2011 12,310.89 11,897.08 12,123.10 12,126.00
10/31/2011 14,157.01 13,697.80 13,899.38 14,036.00
11/30/2011 14,246.42 13,647.87 13,846.87 14,036.00
12/31/2011 14,424.96 13,738.03 13,807.31 14,147.00
1/31/2012 15,373.83 14,708.63 14,730.44 15,087.00
2/29/2012 15,699.04 15,060.64 15,177.73 15,393.00
3/31/2012 16,154.15 15,446.53 15,452.98 15,742.00
4/30/2012 15,950.31 15,207.93 15,289.85 15,467.00
5/31/2012 14,950.15 14,201.32 14,232.50 14,401.00
6/30/2012 15,575.61 14,909.97 14,669.40 15,055.00
7/31/2012 15,456.26 14,703.93 14,607.70 14,939.00
8/31/2012 16,041.87 15,194.26 15,089.51 15,309.00
9/30/2012 16,416.02 15,693.21 15,524.88 15,752.00
10/31/2012 16,082.74 15,352.75 15,350.57 15,425.00
11/30/2012 16,243.28 15,434.32 15,528.12 15,647.00
12/31/2012 16,779.88 15,984.17 16,007.81 16,248.00
1/31/2013 17,749.51 16,984.67 16,967.48 17,208.00
2/28/2013 17,999.36 17,172.03 17,160.09 17,435.00
3/31/2013 18,761.76 17,964.93 17,904.56 18,114.00
4/30/2013 18,711.89 17,898.91 17,809.27 17,823.00
5/31/2013 19,525.43 18,614.30 18,467.66 18,675.00
6/30/2013 19,496.95 18,519.07 18,320.52 18,611.00
7/31/2013 20,831.44 19,815.10 19,497.89 19,711.00
8/31/2013 20,323.94 19,185.73 18,914.62 19,139.00
9/30/2013 21,589.43 20,409.85 20,028.17 20,240.00
10/31/2013 22,368.28 20,923.07 20,665.19 20,984.00
11/30/2013 23,373.88 21,761.34 21,395.64 21,847.00
12/31/2013 23,712.17 22,189.60 21,790.67 22,366.00
1/31/2014 22,797.63 21,575.39 21,006.90 21,587.00
2/28/2014 23,813.65 22,591.84 21,964.57 22,437.00
3/31/2014 23,979.87 22,437.85 22,056.71 22,496.00
4/30/2014 23,310.58 21,567.69 21,499.45 21,611.00
5/31/2014 23,373.50 21,740.51 21,636.80 21,741.00
6/30/2014 24,475.50 22,897.26 22,624.63 22,638.00
7/31/2014 23,130.65 21,511.31 21,361.00 21,422.00
8/31/2014 24,124.11 22,577.96 22,297.82 22,319.00
9/30/2014 22,829.19 21,212.12 21,065.05 21,197.00
10/31/2014 24,447.33 22,610.41 22,217.03 22,307.00
11/30/2014 24,380.14 22,630.67 22,248.48 22,449.00
12/31/2014 25,076.85 23,275.64 22,682.72 22,964.00
1/31/2015 24,200.52 22,526.96 21,867.23 22,025.00
2/28/2015 25,659.67 23,864.30 23,173.54 23,677.00
3/31/2015 26,070.86 24,280.05 23,533.60 23,889.00
4/30/2015 25,464.65 23,660.84 23,079.87 23,519.00
5/31/2015 25,854.77 24,201.02 23,396.79 23,876.00
6/30/2015 26,120.85 24,382.25 23,505.73 24,167.00
7/31/2015 25,899.54 24,098.88 23,266.13 23,479.00
8/31/2015 24,558.79 22,584.49 22,049.74 22,170.00
9/30/2015 23,699.52 21,476.42 21,131.51 20,994.00
10/31/2015 25,144.17 22,686.41 22,371.33 22,369.00
11/30/2015 25,817.63 23,424.37 22,908.79 22,897.00
12/31/2015 24,582.19 22,248.24 21,724.23 21,745.00
1/31/2016 23,066.00 20,291.85 20,264.37 20,058.00
2/29/2016 23,323.71 20,290.94 20,413.19 20,217.00
3/31/2016 25,235.62 21,910.40 22,055.10 21,846.00
4/30/2016 25,531.95 22,254.27 22,334.53 22,062.00
5/31/2016 25,955.39 22,755.54 22,743.41 22,308.00
6/30/2016 26,112.98 22,741.20 22,677.34 21,962.00
7/31/2016 27,442.28 24,099.00 23,789.28 23,317.00
8/31/2016 27,814.53 24,525.17 24,129.11 23,721.00
9/30/2016 27,993.40 24,798.34 24,229.15 23,692.00
10/31/2016 26,740.51 23,619.43 23,368.43 22,610.00
11/30/2016 30,096.32 26,253.28 25,875.93 25,076.00
12/31/2016 31,110.17 26,988.89 26,620.29 25,851.00
1/31/2017 30,986.41 27,095.34 26,733.14 26,012.00
2/28/2017 31,479.68 27,618.25 27,194.82 26,158.00
3/31/2017 31,441.16 27,654.39 27,193.10 26,056.00
4/30/2017 31,724.86 27,957.66 27,459.82 26,202.00
5/31/2017 31,050.46 27,388.89 26,993.79 25,632.00
6/30/2017 31,979.38 28,335.68 27,658.13 26,158.00
7/31/2017 32,289.13 28,546.20 27,883.72 26,304.00
8/31/2017 31,460.84 28,183.03 27,456.27 25,749.00
9/30/2017 33,886.07 29,941.91 29,117.01 27,501.00
10/31/2017 34,207.53 30,197.14 29,495.02 27,836.00
11/30/2017 35,411.58 31,067.40 30,358.47 28,785.00
12/31/2017 35,227.43 30,942.01 30,332.77 28,469.00
1/31/2018 36,118.65 31,750.66 31,088.40 29,183.00
2/28/2018 34,720.07 30,521.22 29,811.81 27,998.00
3/31/2018 35,426.87 30,915.97 30,118.84 28,323.00
4/30/2018 35,792.13 31,183.25 30,258.33 28,745.00
5/31/2018 38,103.91 33,076.10 31,739.77 30,594.00
6/30/2018 38,534.74 33,313.11 31,930.16 30,788.00
7/31/2018 39,751.55 33,893.71 32,590.37 31,356.00
8/31/2018 41,673.45 35,354.86 33,879.88 32,751.00
9/30/2018 40,350.69 34,504.50 33,179.62 31,956.00
10/31/2018 36,122.23 30,756.74 29,900.15 28,615.00
11/30/2018 36,665.66 31,245.62 30,452.92 29,118.00
12/31/2018 32,239.53 27,534.08 26,938.99 25,644.00
1/31/2019 35,668.41 30,631.62 29,849.55 28,578.00
2/28/2019 37,221.28 32,224.09 31,264.10 30,046.00
3/31/2019 35,981.45 31,549.66 30,610.18 29,220.00
4/30/2019 37,375.27 32,621.42 31,895.52 30,615.00
5/31/2019 34,113.06 30,084.37 29,330.78 28,523.00
6/30/2019 36,653.29 32,210.65 31,430.76 30,468.00
7/31/2019 37,069.92 32,396.10 31,759.94 30,706.00
[END CHART]
Data from 7/31/09 through 7/31/19.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Small Cap Stock Fund Shares 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 Small-Cap Core Funds Index reflects the fees and expenses of the
underlying funds included in the index.
================================================================================
6 | USAA SMALL CAP STOCK FUND
================================================================================
o TOP 10 HOLDINGS* - 7/31/19 o
(% of Net Assets)
WNS Holdings Ltd. ADR .................................................... 1.2%
Exact Sciences Corp. ..................................................... 0.8%
Portland General Electric Co. ............................................ 0.7%
Radian Group, Inc. ....................................................... 0.7%
First Midwest Bancorp, Inc. .............................................. 0.7%
Repligen Corp. ........................................................... 0.7%
ACCO Brands Corp. ........................................................ 0.7%
Insulet Corp. ............................................................ 0.7%
International Bancshares Corp. ........................................... 0.6%
iShares Russell 2000 ETF ................................................. 0.6%
o SECTOR ALLOCATION** - 7/31/19 o
(% of Net Assets)
[PIE CHART OF SECTOR ALLOCATION]
FINANCIAL 27.3%
CONSUMER, NON-CYCLICAL 19.6%
INDUSTRIAL 13.6%
TECHNOLOGY 13.1%
CONSUMER, CYCLICAL 9.0%
COMMUNICATIONS 5.1%
ENERGY 4.2%
UTILITIES 3.2%
BASIC MATERIALS 2.1%
GOVERNMENT 0.0%
[END CHART]
*Does not include money market instruments.
**Does not include exchange traded funds and money market instruments.
Percentages are of the net assets of the Fund and may not equal 100%.
Refer to the Portfolio of Investments for a complete list of securities.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification
================================================================================
INVESTMENT OVERVIEW | 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 Management Inc. ("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 USAA Asset Management Company ("AMCO")
was acquired by Victory Capital Holdings, Inc., the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
--------------------------------------------------------------------------------
76,111,300 2,758,465 1,670,107
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
person" as defined in the Investment Company Act of 1940, as amended
(1940 Act) ("Interested Trustee"); 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 SMALL CAP STOCK FUND
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
July 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 July 31, 2019:
DIVIDEND RECEIVED LONG-TERM
DEDUCTION (CORPORATE CAPITAL GAIN QUALIFIED INTEREST
SHAREHOLDERS)(1) DISTRIBUTIONS(2) INCOME
--------------------------------------------------------------------------------
48.25% $132,650,000 $316,000
--------------------------------------------------------------------------------
(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 July 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 SMALL CAP STOCK FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Small Cap Stock Fund (the "Fund") (one of the funds constituting the USAA Mutual
Funds Trust (the "Trust")), including the portfolio of investments, as of July
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 the USAA Mutual Funds Trust) at July 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 July 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
September 20, 2019
================================================================================
10 | USAA SMALL CAP STOCK FUND
================================================================================
PORTFOLIO OF INVESTMENTS
July 31, 2019
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
EQUITY SECURITIES (98.3%)
COMMON STOCKS (97.2%)
BASIC MATERIALS (2.1%)
----------------------
CHEMICALS (1.4%)
96,600 Ferro Corp.(a) $ 1,423
27,300 FMC Corp. 2,359
41,747 Materion Corp. 2,594
42,400 Minerals Technologies, Inc. 2,258
259,874 Orion Engineered Carbons S.A. 5,062
73,400 PolyOne Corp. 2,405
31,582 Sensient Technologies Corp. 2,153
36,630 Stepan Co. 3,632
----------
21,886
----------
FOREST PRODUCTS & PAPER (0.3%)
36,076 Neenah, Inc. 2,371
78,600 Resolute Forest Products, Inc. 480
16,241 Schweitzer-Mauduit International, Inc. 559
102,474 Verso Corp. "A"(a) 1,658
----------
5,068
----------
IRON/STEEL (0.4%)
177,518 Cleveland-Cliffs, Inc. 1,892
222,200 Commercial Metals Co. 3,891
----------
5,783
----------
Total Basic Materials 32,737
----------
COMMUNICATIONS (5.1%)
---------------------
ADVERTISING (0.1%)
34,202 SharpSpring, Inc.(a) 326
3,169 Trade Desk, Inc. "A"(a) 834
----------
1,160
----------
INTERNET (2.8%)
30,276 ANGI Homeservices, Inc. "A"(a) 419
67,300 Chewy, Inc. "A"(a) 2,259
26,384 Cogent Communications Holdings, Inc. 1,662
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
67,232 Etsy, Inc.(a) $ 4,506
27,200 GoDaddy, Inc. "A"(a) 1,996
25,374 HeadHunter Group plc ADR 461
1,319,822 Limelight Networks, Inc.(a) 3,577
8,497 Match Group, Inc. 640
70,978 Mimecast Ltd.(a) 3,378
24,305 Okta, Inc.(a) 3,180
123,460 Perficient, Inc.(a) 4,219
32,796 Proofpoint, Inc.(a) 4,139
647,576 Rubicon Project, Inc.(a) 4,928
97,600 RumbleON, Inc. "B"(a) 456
92,660 TechTarget, Inc.(a) 2,133
52,300 Yelp, Inc.(a) 1,833
19,800 Zendesk, Inc.(a) 1,654
367,468 Zix Corp.(a) 3,348
----------
44,788
----------
MEDIA (1.1%)
54,900 EW Scripps Co. "A" 842
199,744 Gray Television, Inc.(a) 3,545
19,194 Liberty Broadband Corp. "A"(a) 1,885
87,109 MSG Networks, Inc. "A"(a) 1,654
109,000 Sinclair Broadcast Group, Inc. "A" 5,477
209,853 TEGNA, Inc. 3,188
25,600 World Wrestling Entertainment, Inc. "A" 1,863
----------
18,454
----------
TELECOMMUNICATIONS (1.1%)
46,200 CommScope Holding Co., Inc.(a) 660
115,200 Finisar Corp.(a) 2,711
59,197 GTT Communications, Inc.(a) 716
42,978 InterDigital, Inc. 2,769
96,000 Viavi Solutions, Inc.(a) 1,408
760,946 Vonage Holdings Corp.(a) 9,436
----------
17,700
----------
Total Communications 82,102
----------
CONSUMER, CYCLICAL (9.0%)
-------------------------
AIRLINES (0.3%)
87,400 Hawaiian Holdings, Inc. 2,272
72,300 Mesa Air Group, Inc.(a) 740
19,700 SkyWest, Inc. 1,196
----------
4,208
----------
================================================================================
12 | USAA SMALL CAP STOCK FUND
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
APPAREL (0.7%)
21,500 Deckers Outdoor Corp.(a) $ 3,360
30,240 Kontoor Brands, Inc.(a) 887
209,800 Levi Strauss & Co. "A"(a) 3,999
76,100 Steven Madden Ltd. 2,626
----------
10,872
----------
AUTO MANUFACTURERS (0.0%)
44,148 Wabash National Corp. 699
----------
AUTO PARTS & EQUIPMENT (1.9%)
235,700 American Axle & Manufacturing Holdings, Inc.(a) 2,845
57,100 Commercial Vehicle Group, Inc.(a) 464
91,720 Cooper Tire & Rubber Co. 2,469
273,200 Dana, Inc. 4,565
65,351 Douglas Dynamics, Inc. 2,686
212,213 Gentherm, Inc.(a) 8,682
103,100 Meritor, Inc.(a) 2,550
37,500 Methode Electronics, Inc. 1,123
213,306 Modine Manufacturing Co.(a) 2,926
80,217 Motorcar Parts of America, Inc.(a) 1,434
----------
29,744
----------
DISTRIBUTION/WHOLESALE (0.5%)
11,698 Anixter International, Inc.(a) 753
33,800 G-III Apparel Group Ltd.(a) 969
185,438 Hudson Technologies, Inc.(a) 114
49,768 ScanSource, Inc.(a) 1,689
185,778 Titan Machinery, Inc.(a) 3,853
34,092 Triton International Ltd. 1,128
----------
8,506
----------
ENTERTAINMENT (0.2%)
5,542 Live Nation Entertainment, Inc.(a) 399
8,570 Vail Resorts, Inc. 2,113
----------
2,512
----------
HOME BUILDERS (1.3%)
7,509 Cavco Industries, Inc.(a) 1,332
76,400 Green Brick Partners, Inc.(a) 719
206,892 KB Home 5,435
70,600 M/I Homes, Inc.(a) 2,497
8,900 MDC Holdings, Inc. 322
107,531 Skyline Champion Corp.(a) 3,064
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
249,726 Taylor Morrison Home Corp.(a) $ 5,624
158,046 TRI Pointe Group, Inc.(a) 2,164
----------
21,157
----------
LEISURE TIME (0.4%)
46,000 Clarus Corp. 661
125,405 Liberty TripAdvisor Holdings, Inc. "A"(a) 1,448
94,409 OneSpaWorld Holdings Ltd.(a) 1,478
32,500 Planet Fitness, Inc. "A"(a) 2,557
----------
6,144
----------
OFFICE FURNISHINGS (0.1%)
109,836 Steelcase, Inc. "A" 1,857
----------
RETAIL (3.4%)
145,200 American Eagle Outfitters, Inc. 2,569
176,800 At Home Group, Inc.(a) 1,059
43,506 Beacon Roofing Supply, Inc.(a) 1,576
289,000 Bed Bath & Beyond, Inc. 2,806
71,900 Big Lots, Inc. 1,841
13,800 Burlington Stores, Inc.(a) 2,494
78,481 Cato Corp. "A" 1,128
40,400 Cheesecake Factory, Inc. 1,740
11,400 Cracker Barrel Old Country Store, Inc. 1,980
58,200 Dave & Buster's Entertainment, Inc. 2,366
29,600 Dillard's, Inc. "A" 2,154
19,600 Five Below, Inc.(a) 2,302
65,400 GMS, Inc.(a) 1,472
80,700 Group 1 Automotive, Inc. 6,776
20,700 Jack in the Box, Inc. 1,487
14,800 Lithia Motors, Inc. "A" 1,952
528,009 Office Depot, Inc. 1,077
47,947 PC Connection, Inc. 1,568
14,100 RH(a) 1,966
173,264 Rush Enterprises, Inc. "A" 6,525
142,100 Sally Beauty Holdings, Inc.(a) 1,952
127,900 Signet Jewelers Ltd. 2,320
42,000 Texas Roadhouse, Inc. 2,320
43,900 World Fuel Services Corp. 1,714
----------
55,144
----------
STORAGE/WAREHOUSING (0.2%)
72,519 Mobile Mini, Inc. 2,463
----------
Total Consumer, Cyclical 143,306
----------
================================================================================
14 | USAA SMALL CAP STOCK FUND
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
CONSUMER, NON-CYCLICAL (19.6%)
------------------------------
AGRICULTURE (0.1%)
13,369 Universal Corp. $ 795
----------
BEVERAGES (0.6%)
5,500 Boston Beer Co., Inc. "A"(a) 2,158
646,640 C&C Group plc(b) 2,943
166,800 Luckin Coffee, Inc. ADR(a) 4,051
----------
9,152
----------
BIOTECHNOLOGY (4.3%)
54,159 Acceleron Pharma, Inc.(a) 2,365
40,991 Argenx SE ADR(a) 5,758
213,900 ArQule, Inc.(a) 2,158
81,800 Arrowhead Pharmaceuticals, Inc.(a) 2,377
7,600 Bluebird Bio, Inc.(a) 997
50,400 Cara Therapeutics, Inc.(a) 1,207
14,815 Cellectis S.A. ADR(a) 216
9,500 CRISPR Therapeutics AG(a) 481
75,700 Cymabay Therapeutics, Inc.(a) 468
27,923 CytomX Therapeutics, Inc.(a) 288
31,300 Deciphera Pharmaceuticals, Inc.(a) 692
10,100 Esperion Therapeutics, Inc.(a) 401
108,650 Exact Sciences Corp.(a) 12,507
30,258 Genfit ADR(a) 530
19,100 Guardant Health, Inc.(a) 1,795
236,079 Immunomedics, Inc.(a) 3,482
87,476 Insmed, Inc.(a) 1,920
10,517 Intercept Pharmaceuticals, Inc.(a) 661
2,564 Ionis Pharmaceuticals, Inc.(a) 169
57,600 Iovance Biotherapeutics, Inc.(a) 1,416
48,700 Lexicon Pharmaceuticals, Inc.(a) 66
15,123 Ligand Pharmaceuticals, Inc.(a) 1,384
39,068 MacroGenics, Inc.(a) 562
200,608 Medicines Co.(a) 7,190
180,188 NeoGenomics, Inc.(a) 4,391
35,319 NGM Biopharmaceuticals, Inc.(a) 497
91,226 Orchard Therapeutics plc ADR(a) 1,286
59,387 Stemline Therapeutics, Inc.(a) 788
38,799 Twist Bioscience Corp.(a) 1,308
181,267 Veracyte, Inc.(a) 5,142
210,707 Vericel Corp.(a) 4,029
141,900 Viking Therapeutics, Inc.(a) 1,091
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
84,019 Xenon Pharmaceuticals, Inc.(a) $ 808
26,300 Zai Lab Ltd. ADR(a) 845
----------
69,275
----------
COMMERCIAL SERVICES (5.6%)
40,541 2U, Inc.(a) 519
24,393 AMN Healthcare Services, Inc.(a) 1,302
50,148 ASGN, Inc.(a) 3,162
56,077 CAI International, Inc.(a) 1,278
92,700 Cardtronics plc "A"(a) 2,640
25,500 CBIZ, Inc.(a) 596
48,004 Chegg, Inc.(a) 2,156
2,774 CorVel Corp.(a) 236
9,371 CoStar Group, Inc.(a) 5,767
43,606 Euronet Worldwide, Inc.(a) 6,799
38,344 EVERTEC, Inc. 1,228
188,313 Forrester Research, Inc. 8,913
35,010 FTI Consulting, Inc.(a) 3,657
3,791 Grand Canyon Education, Inc.(a) 412
97,621 Hackett Group, Inc. 1,603
59,863 HealthEquity, Inc.(a) 4,908
48,700 HMS Holdings Corp.(a) 1,700
77,150 Huron Consulting Group, Inc.(a) 4,704
23,329 ICF International, Inc. 1,987
35,394 K12, Inc.(a) 1,056
152,200 Kelly Services, Inc. "A" 4,236
94,636 Matthews International Corp. "A" 3,232
11,000 Medifast, Inc. 1,228
21,514 Morningstar, Inc. 3,270
251,412 Navigant Consulting, Inc. 6,124
30,000 Paylocity Holding Corp.(a) 3,063
225,114 SEACOR Marine Holdings, Inc.(a) 3,170
17,450 ShotSpotter, Inc.(a) 656
220,542 SP Plus Corp.(a) 7,615
4,277 Strategic Education, Inc. 761
100,890 TrueBlue, Inc.(a) 1,995
----------
89,973
----------
COSMETICS/PERSONAL CARE (0.2%)
101,200 Edgewell Personal Care Co.(a) 3,080
----------
FOOD (0.9%)
77,900 B&G Foods, Inc. 1,424
34,000 Cal-Maine Foods, Inc. 1,352
61,261 Cranswick plc(b) 1,982
================================================================================
16 | USAA SMALL CAP STOCK FUND
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
71,600 Grocery Outlet Holding Corp.(a) $ 2,789
98,075 Hostess Brands, Inc.(a) 1,385
63,716 Performance Food Group Co.(a) 2,794
9,100 Sanderson Farms, Inc. 1,192
80,900 Simply Good Foods Co.(a) 2,203
----------
15,121
----------
HEALTHCARE PRODUCTS (4.3%)
22,556 ABIOMED, Inc.(a) 6,283
24,400 Adaptive Biotechnologies Corp.(a) 941
52,300 AxoGen, Inc.(a) 940
68,435 Cardiovascular Systems, Inc.(a) 3,136
40,898 CONMED Corp. 3,572
293,715 CytoSorbents Corp.(a) 2,062
24,402 Genomic Health, Inc.(a) 1,781
19,828 Globus Medical, Inc. "A"(a) 904
19,562 Inogen, Inc.(a) 1,203
38,400 Inspire Medical Systems, Inc.(a) 2,597
86,095 Insulet Corp.(a) 10,585
114,809 Invacare Corp. 614
43,100 LivaNova plc(a) 3,321
87,685 Merit Medical Systems, Inc.(a) 3,460
33,935 Natus Medical, Inc.(a) 1,054
35,800 Novocure Ltd.(a) 2,979
121,100 OPKO Health, Inc.(a) 256
58,741 OrthoPediatrics Corp.(a) 2,074
124,967 Oxford Immunotec Global plc(a) 1,612
117,766 Repligen Corp.(a) 11,116
596,523 Sientra, Inc.(a) 3,639
29,829 West Pharmaceutical Services, Inc. 4,095
----------
68,224
----------
HEALTHCARE-SERVICES (1.2%)
32,000 Amedisys, Inc.(a) 4,413
25,700 Encompass Health Corp. 1,641
74,562 Ensign Group, Inc. 4,493
88,695 Natera, Inc.(a) 2,446
108,029 Neuronetics, Inc.(a) 1,287
20,600 Syneos Health, Inc.(a) 1,052
25,329 Teladoc Health, Inc.(a) 1,728
96,642 Triple-S Management Corp. "B"(a) 2,317
----------
19,377
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS/WARES (1.1%)
1,129,911 ACCO Brands Corp. $ 11,050
25,900 Central Garden & Pet Co. "A"(a) 714
23,953 Helen of Troy Ltd.(a) 3,552
30,940 Spectrum Brands Holdings, Inc. 1,550
----------
16,866
----------
PHARMACEUTICALS (1.3%)
70,251 Aerie Pharmaceuticals, Inc.(a) 1,522
42,800 Athenex, Inc.(a) 770
182,523 Aurinia Pharmaceuticals, Inc.(a) 1,161
136,700 BioDelivery Sciences International, Inc.(a) 507
142,591 Collegium Pharmaceutical, Inc.(a) 1,564
31,746 DexCom, Inc.(a) 4,980
32,646 Enanta Pharmaceuticals, Inc.(a) 2,449
73,000 Endo International plc(a) 232
193,481 Fennec Pharmaceuticals, Inc.(a) 906
22,512 Jounce Therapeutics, Inc.(a) 108
52,600 Mallinckrodt plc(a) 358
59,000 Portola Pharmaceuticals, Inc.(a) 1,574
24,637 Principia Biopharma, Inc.(a) 915
22,500 Reata Pharmaceuticals, Inc. "A"(a) 2,040
54,500 TG Therapeutics, Inc.(a) 408
28,800 UroGen Pharma Ltd.(a) 982
22,400 Xencor, Inc.(a) 986
----------
21,462
----------
Total Consumer, Non-cyclical 313,325
----------
ENERGY (4.2%)
-------------
COAL (0.4%)
26,776 Arch Coal, Inc. "A" 2,387
32,386 CONSOL Energy, Inc.(a) 696
121,417 Peabody Energy Corp. 2,557
54,800 Warrior Met Coal, Inc. 1,356
----------
6,996
----------
ENERGY-ALTERNATE SOURCES (0.8%)
319,744 Enphase Energy, Inc.(a) 9,001
131,100 Renewable Energy Group, Inc.(a) 1,782
9,257 REX American Resources Corp.(a) 690
84,800 TerraForm Power, Inc. "A" 1,307
----------
12,780
----------
================================================================================
18 | USAA SMALL CAP STOCK FUND
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
OIL & GAS (1.3%)
50,500 Bonanza Creek Energy, Inc.(a) $ 1,101
71,038 Carrizo Oil & Gas, Inc.(a) 677
35,200 CVR Energy, Inc. 1,868
159,300 Delek U.S. Holdings, Inc. 6,863
234,560 Kosmos Energy Ltd. 1,410
250,640 Magnolia Oil & Gas Corp. "A"(a) 2,802
86,300 Montage Resources Corp.(a) 288
189,334 Northern Oil and Gas, Inc.(a) 307
84,300 Parsley Energy, Inc. "A"(a) 1,398
1,360,988 Ring Energy, Inc.(a) 3,334
112,200 SRC Energy, Inc.(a) 458
42,357 Talos Energy, Inc.(a) 872
39,800 Transocean Ltd.(a) 242
----------
21,620
----------
OIL & GAS SERVICES (1.7%)
64,500 Archrock, Inc. 708
90,026 DMC Global, Inc. 4,703
61,200 Dril-Quip, Inc.(a) 3,220
297,267 Era Group, Inc.(a) 3,068
346,229 ProPetro Holding Corp.(a) 6,277
334,315 Thermon Group Holdings, Inc.(a) 8,472
----------
26,448
----------
Total Energy 67,844
----------
FINANCIAL (27.3%)
-----------------
BANKS (9.3%)
184,797 1st Source Corp. 8,676
63,825 Amerant Bancorp, Inc.(a) 1,173
195,334 Atlantic Union Bankshares Corp. 7,429
35,600 Bancorp, Inc.(a) 345
70,640 Bank of NT Butterfield & Son Ltd 2,220
128,800 Bank OZK 3,939
224,100 Cathay General Bancorp 8,341
73,200 CenterState Bank Corp. 1,780
31,199 Central Pacific Financial Corp. 919
41,170 Community Bank System, Inc. 2,717
80,604 ConnectOne Bancorp, Inc. 1,843
136,644 Customers Bancorp, Inc.(a) 2,818
74,112 Enterprise Financial Services Corp. 3,089
13,900 Financial Institutions, Inc. 428
303,300 First BanCorp. 3,263
================================================================================
PORTFOLIO OF INVESTMENTS | 19
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
277,272 First Busey Corp. $ 7,495
22,984 First Financial Corp. 998
64,600 First Merchants Corp. 2,546
526,517 First Midwest Bancorp, Inc. 11,389
14,900 First of Long Island Corp. 330
32,700 Flagstar Bancorp, Inc. 1,127
440,308 Fulton Financial Corp. 7,485
183,240 Great Western Bancorp, Inc. 6,197
124,900 Hancock Whitney Corp. 5,186
31,574 Hanmi Financial Corp. 678
208,018 Hope Bancorp, Inc. 3,068
274,185 International Bancshares Corp. 10,318
54,000 Lakeland Financial Corp. 2,483
66,300 Luther Burbank Corp. 740
7,400 Metropolitan Bank Holding Corp.(a) 311
17,500 Mid Penn Bancorp, Inc. 456
18,125 NBT Bancorp, Inc. 701
136,500 OFG Bancorp 3,089
11,038 Park National Corp. 1,044
29,100 Popular, Inc. 1,675
20,078 Preferred Bank 1,088
36,000 Renasant Corp. 1,292
24,533 S&T Bancorp, Inc. 934
30,448 ServisFirst Bancshares, Inc. 1,037
18,241 Southside Bancshares, Inc. 631
8,718 Stock Yards Bancorp, Inc. 333
112,024 Synovus Financial Corp. 4,276
30,300 TCF Finanacial Corp.(a),(c) 1,274
69,147 Texas Capital Bancshares, Inc.(a) 4,351
12,647 Tompkins Financial Corp. 1,037
110,852 TrustCo Bank Corp. 898
86,515 Trustmark Corp. 3,075
53,589 UMB Financial Corp. 3,658
53,200 United Community Banks, Inc. 1,527
154,100 Valley National Bancorp 1,720
85,750 Walker & Dunlop, Inc. 5,003
5,582 Washington Trust Bancorp, Inc. 280
----------
148,710
----------
DIVERSIFIED FINANCIAL SERVICES (3.0%)
332,129 BGC Partners, Inc. "A" 1,830
82,601 Boston Private Financial Holdings, Inc. 953
221,700 Brightsphere Investment Group, Inc.(a) 2,372
118,300 Deluxe Corp. 5,279
================================================================================
20 | USAA SMALL CAP STOCK FUND
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
54,003 Encore Capital Group, Inc.(a) $ 1,943
66,147 Enova International, Inc.(a) 1,783
27,878 Federal Agricultural Mortgage Corp. "C" 2,154
23,700 Hannon Armstrong Sustainable Infrastructure Capital, Inc. 651
77,600 Navient Corp. 1,098
53,300 OneMain Holdings, Inc. 2,209
26,741 Oppenheimer Holdings, Inc. "A" 779
87,800 PennyMac Financial Services, Inc. 2,108
40,628 Piper Jaffray Companies 3,140
308,700 SLM Corp. 2,812
138,600 Stifel Financial Corp. 8,290
19,100 Virtus Investment Partners, Inc. 2,047
267,190 Waddell & Reed Financial, Inc. "A" 4,676
39,530 WageWorks, Inc.(a) 2,023
20,100 World Acceptance Corp.(a) 2,547
----------
48,694
----------
INSURANCE (4.2%)
206,600 American Equity Investment Life Holding Co. 5,330
18,224 AMERISAFE, Inc. 1,186
250,600 CNO Financial Group, Inc. 4,238
25,029 eHealth, Inc.(a) 2,597
129,700 Essent Group Ltd.(a) 5,987
3,164 FBL Financial Group, Inc. "A" 198
433,700 FGL Holdings 3,535
85,700 Hallmark Financial Services, Inc.(a) 1,328
30,507 James River Group Holdings Ltd. 1,459
25,843 Kemper Corp. 2,275
46,518 Kinsale Capital Group, Inc. 4,180
639,200 MGIC Investment Corp.(a) 8,214
62,516 National General Holdings Corp. 1,546
48,000 Primerica, Inc. 5,889
74,800 ProAssurance Corp. 2,924
505,600 Radian Group, Inc. 11,528
38,103 Trupanion, Inc.(a) 1,225
53,200 Universal Insurance Holdings, Inc. 1,320
1,270 White Mountains Insurance Group Ltd. 1,366
----------
66,325
----------
INVESTMENT COMPANIES (0.4%)
39,478 Ellington Financial, Inc. 690
293,948 Solar Capital Ltd. 6,103
----------
6,793
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 21
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
REAL ESTATE (0.7%)
116,800 Alexander & Baldwin, Inc. $ 2,746
27,187 FirstService Corp. 2,851
510,147 Newmark Group, Inc. "A" 5,030
----------
10,627
----------
REITS (8.0%)
33,600 AG Mortgage Investment Trust, Inc. 550
5,000 Alexander's, Inc. 1,872
81,800 American Assets Trust, Inc. 3,796
310,200 Ashford Hospitality Trust, Inc. 841
132,144 Braemar Hotels & Resorts, Inc. 1,205
140,610 Brandywine Realty Trust 2,074
75,600 CareTrust REIT, Inc. 1,756
54,823 Chatham Lodging Trust 979
418,300 CoreCivic, Inc. 7,099
24,553 CorEnergy Infrastructure Trust, Inc. 994
95,805 Corporate Office Properties Trust 2,675
18,374 Cousins Properties, Inc. 646
623,090 DiamondRock Hospitality Co. 6,274
62,500 Essential Properties Realty Trust, Inc. 1,320
195,800 GEO Group, Inc. 3,487
150,190 Global Medical REIT, Inc. 1,551
236,800 Industrial Logistics Properties Trust 5,063
11,636 Innovative Industrial Properties, Inc. 1,230
81,600 Invesco Mortgage Capital, Inc. 1,345
7,854 Investors Real Estate Trust 501
831,100 Lexington Realty Trust 8,203
56,200 National Health Investors, Inc. 4,461
14,300 NexPoint Residential Trust, Inc. 617
95,500 NorthStar Realty Europe Corp. 1,623
77,300 Office Properties Income Trust 2,178
71,700 Outfront Media, Inc. 1,949
49,200 PennyMac Mortgage Investment Trust 1,084
168,540 Physicians Realty Trust 2,901
180,979 Piedmont Office Realty Trust, Inc. "A" 3,766
127,585 PotlatchDeltic Corp. 4,698
24,400 PS Business Parks, Inc. 4,270
78,304 QTS Realty Trust, Inc. "A" 3,624
35,300 Ready Capital Corp. 543
94,900 Retail Opportunity Investments Corp. 1,721
93,100 Rexford Industrial Realty, Inc. 3,854
362,500 RLJ Lodging Trust 6,264
218,537 RPT Realty 2,677
================================================================================
22 | USAA SMALL CAP STOCK FUND
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
422,964 Summit Hotel Properties, Inc. $ 4,699
22,100 Sun Communities, Inc. 2,935
462,400 Sunstone Hotel Investors, Inc. 6,108
336,400 Tanger Factory Outlet Centers, Inc. 5,342
30,500 Universal Health Realty Income Trust 2,811
55,800 Western Asset Mortgage Capital Corp. 567
61,600 Whitestone REIT 785
236,600 Xenia Hotels & Resorts, Inc. 5,070
----------
128,008
----------
SAVINGS & LOANS (1.7%)
157,264 Banc of California, Inc. 2,458
58,290 Dime Community Bancshares, Inc. 1,176
379,993 Flushing Financial Corp. 7,737
42,976 Meridian Bancorp, Inc. 788
545,265 Northwest Bancshares, Inc. 9,351
38,395 Provident Financial Services, Inc. 928
132,600 Washington Federal, Inc. 4,851
----------
27,289
----------
Total Financial 436,446
----------
GOVERNMENT (0.0%)
-----------------
MULTI-NATIONAL (0.0%)
19,001 Banco Latinoamericano de Comercio Exterior S.A. 399
----------
INDUSTRIAL (13.6%)
------------------
AEROSPACE/DEFENSE (0.5%)
55,700 Aerojet Rocketdyne Holdings, Inc.(a) 2,379
42,558 Astronics Corp.(a) 1,568
122,592 Kratos Defense & Security Solutions, Inc.(a) 3,022
52,800 Wesco Aircraft Holdings, Inc.(a) 556
----------
7,525
----------
BUILDING MATERIALS (2.0%)
69,418 American Woodmark Corp.(a) 5,890
23,115 Apogee Enterprises, Inc. 938
94,575 Builders FirstSource, Inc.(a) 1,625
11,410 Continental Building Products, Inc.(a) 280
128,000 Louisiana-Pacific Corp. 3,346
72,600 Masonite International Corp.(a) 3,870
38,000 Owens Corning 2,204
125,107 PGT Innovations, Inc.(a) 2,017
30,300 Simpson Manufacturing Co., Inc. 1,871
122,400 Summit Materials, Inc. "A"(a) 2,257
19,100 Trex Co., Inc.(a) 1,561
================================================================================
PORTFOLIO OF INVESTMENTS | 23
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
684,618 Tyman plc(b) $ 1,813
42,100 Universal Forest Products, Inc. 1,702
16,300 Vulcan Materials Co. 2,255
----------
31,629
----------
ELECTRICAL COMPONENTS & EQUIPMENT (0.5%)
167,177 Belden, Inc. 7,600
----------
ELECTRONICS (2.0%)
42,100 Advanced Energy Industries, Inc.(a) 2,459
21,568 Atkore International Group, Inc.(a) 589
14,171 Badger Meter, Inc. 758
43,413 Benchmark Electronics, Inc. 1,175
21,198 Brady Corp. "A" 1,097
8,970 Coherent, Inc.(a) 1,246
28,400 Jabil, Inc. 877
85,669 Napco Security Technologies, Inc.(a) 2,480
37,343 OSI Systems, Inc.(a) 4,203
22,616 Plexus Corp.(a) 1,350
119,800 Sanmina Corp.(a) 3,804
24,361 Stoneridge, Inc.(a) 793
62,000 SYNNEX Corp. 6,109
37,551 Tech Data Corp.(a) 3,805
11,008 Watts Water Technologies, Inc. "A" 1,022
----------
31,767
----------
ENGINEERING & CONSTRUCTION (1.3%)
32,100 AECOM(a) 1,154
87,817 BrightView Holdings, Inc.(a) 1,735
41,716 Comfort Systems USA, Inc. 1,752
133,431 Construction Partners, Inc. "A"(a) 2,086
32,900 Dycom Industries, Inc.(a) 1,815
27,600 EMCOR Group, Inc. 2,329
160,000 Great Lakes Dredge & Dock Corp.(a) 1,717
200,136 Mistras Group, Inc.(a) 3,034
188,606 Primoris Services Corp. 3,953
79,224 Tutor Perini Corp.(a) 1,035
24,615 VSE Corp. 737
----------
21,347
----------
ENVIRONMENTAL CONTROL (0.7%)
193,851 Casella Waste Systems, Inc. "A"(a) 8,452
36,300 Tetra Tech, Inc. 2,875
----------
11,327
----------
================================================================================
24 | USAA SMALL CAP STOCK FUND
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
HAND/MACHINE TOOLS (0.8%)
20,929 Franklin Electric Co., Inc. $ 981
474,337 Luxfer Holdings plc 9,401
19,411 Milacron Holdings Corp.(a) 327
12,194 MSA Safety, Inc. 1,285
----------
11,994
----------
MACHINERY-CONSTRUCTION & MINING (0.1%)
33,900 BWX Technologies, Inc. 1,828
----------
MACHINERY-DIVERSIFIED (1.0%)
46,025 Albany International Corp. "A" 3,958
68,400 Cactus, Inc. "A"(a) 2,009
79,231 Chart Industries, Inc.(a) 5,984
90,201 Columbus McKinnon Corp. 3,467
29,990 Gardner Denver Holdings, Inc.(a) 989
3,830 SPX FLOW, Inc.(a) 155
----------
16,562
----------
METAL FABRICATION/HARDWARE (1.6%)
16,800 CIRCOR International, Inc.(a) 638
199,481 Mueller Industries, Inc. 6,022
27,400 Olympic Steel, Inc. 345
49,919 RBC Bearings, Inc.(a) 8,121
40,200 Ryerson Holding Corp.(a) 328
38,000 Timken Co. 1,737
176,963 TriMas Corp.(a) 5,307
16,210 Valmont Industries, Inc. 2,231
30,236 Worthington Industries, Inc. 1,216
----------
25,945
----------
MISCELLANEOUS MANUFACTURERS (1.4%)
73,984 Axon Enterprise, Inc.(a) 5,195
35,011 EnPro Industries, Inc. 2,487
83,809 ESCO Technologies, Inc. 7,003
30,900 Hillenbrand, Inc. 1,041
23,737 John Bean Technologies Corp. 2,817
17,683 Proto Labs, Inc.(a) 1,841
58,061 Trinseo S.A. 2,253
----------
22,637
----------
PACKAGING & CONTAINERS (0.0%)
30,800 Owens-Illinois, Inc. 523
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 25
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
TRANSPORTATION (1.4%)
68,500 DHT Holdings, Inc. $ 387
301,702 Dorian LPG Ltd.(a) 2,761
87,760 Forward Air Corp. 5,529
42,688 Knight-Swift Transportation Holdings, Inc. 1,530
69,977 Marten Transport Ltd. 1,404
187,200 Nordic American Tankers Ltd. 378
12,950 Saia, Inc.(a) 988
106,689 Scorpio Tankers, Inc. 2,796
136,709 SEACOR Holdings, Inc.(a) 6,513
----------
22,286
----------
TRUCKING & LEASING (0.3%)
28,088 GATX Corp. 2,159
61,900 Greenbrier Companies, Inc. 1,789
----------
3,948
----------
Total Industrial 216,918
----------
TECHNOLOGY (13.1%)
------------------
COMPUTERS (5.4%)
21,800 CACI International, Inc. "A"(a) 4,690
129,600 Carbon Black, Inc.(a) 2,412
39,762 Carbonite, Inc.(a) 713
21,841 CyberArk Software Ltd.(a) 3,033
23,300 Elastic N.V.(a) 2,303
24,600 EPAM Systems, Inc.(a) 4,767
39,652 Globant S.A.(a) 4,203
72,200 Insight Enterprises, Inc.(a) 3,973
253,148 Kornit Digital Ltd.(a) 7,898
22,100 Lumentum Holdings, Inc.(a) 1,252
28,171 MAXIMUS, Inc. 2,071
54,040 NetScout Systems, Inc.(a) 1,407
82,129 Nutanix, Inc. "A"(a) 1,864
89,500 Parsons Corp.(a) 3,286
258,823 Perspecta, Inc. 6,038
206,368 Pure Storage, Inc. "A"(a) 3,124
31,600 Qualys, Inc.(a) 2,735
58,790 Rapid7, Inc.(a) 3,566
63,000 Sykes Enterprises, Inc.(a) 1,782
21,913 TransAct Technologies, Inc. 262
103,128 Virtusa Corp.(a) 4,608
293,369 WNS Holdings Ltd. ADR(a) 18,488
26,792 Zscaler, Inc.(a) 2,258
----------
86,733
----------
================================================================================
26 | USAA SMALL CAP STOCK FUND
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
SEMICONDUCTORS (3.1%)
381,365 Adesto Technologies Corp.(a) $ 3,249
73,025 Amkor Technology, Inc.(a) 674
168,951 Brooks Automation, Inc. 6,555
35,190 CEVA, Inc.(a) 978
81,910 Cirrus Logic, Inc.(a) 4,018
253,610 CTS Corp. 7,994
51,700 Diodes, Inc.(a) 2,202
45,000 Inphi Corp.(a) 2,709
76,800 Lattice Semiconductor Corp.(a) 1,485
38,500 Marvell Technology Group Ltd. 1,011
11,636 Monolithic Power Systems, Inc. 1,724
157,300 ON Semiconductor Corp.(a) 3,384
16,194 Power Integrations, Inc. 1,475
42,647 Rambus, Inc.(a) 531
147,576 Rudolph Technologies, Inc.(a) 3,973
47,000 Semtech Corp.(a) 2,485
16,724 Silicon Laboratories, Inc.(a) 1,877
39,500 Teradyne, Inc. 2,201
41,500 Xperi Corp. 886
----------
49,411
----------
SOFTWARE (4.6%)
19,108 Akamai Technologies, Inc.(a) 1,684
336,333 Allscripts Healthcare Solutions, Inc.(a) 3,464
21,400 Alteryx, Inc. "A"(a) 2,515
27,042 Blackbaud, Inc. 2,461
614,236 Cloudera, Inc.(a) 3,673
76,560 Cornerstone OnDemand, Inc.(a) 4,532
24,921 Coupa Software, Inc.(a) 3,382
21,445 CSG Systems International, Inc. 1,099
747,349 Digital Turbine, Inc.(a) 4,058
47,400 DocuSign, Inc.(a) 2,452
159,161 Dropbox, Inc. "A"(a) 3,750
33,100 Ebix, Inc. 1,524
231,442 Evolent Health, Inc. "A"(a) 1,578
32,600 j2 Global, Inc. 2,904
104,425 LivePerson, Inc.(a) 3,466
30,314 MiX Telematics Ltd. ADR 454
36,499 New Relic, Inc.(a) 3,401
8,664 Paycom Software, Inc.(a) 2,086
37,555 Progress Software Corp. 1,626
53,880 PROS Holdings, Inc.(a) 3,899
26,486 PTC, Inc.(a) 1,795
================================================================================
PORTFOLIO OF INVESTMENTS | 27
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
32,497 QAD, Inc. "A" $ 1,402
136,749 Radware Ltd.(a) 3,607
24,323 RealPage, Inc.(a) 1,520
92,405 Smartsheet, Inc. "A"(a) 4,612
11,073 SPS Commerce, Inc.(a) 1,238
29,740 Twilio, Inc. "A"(a) 4,137
11,050 Upland Software, Inc.(a) 486
6,000 Veeva Systems, Inc. "A"(a) 995
----------
73,800
----------
Total Technology 209,944
----------
UTILITIES (3.2%)
----------------
ELECTRIC (2.6%)
110,200 ALLETE, Inc. 9,582
83,043 Avista Corp. 3,822
23,700 Black Hills Corp. 1,876
70,657 Clearway Energy, Inc. "A" 1,213
81,600 IDACORP, Inc. 8,328
43,604 NorthWestern Corp. 3,049
11,888 Otter Tail Corp. 634
24,700 PNM Resources, Inc. 1,227
220,800 Portland General Electric Co. 12,111
----------
41,842
----------
GAS (0.6%)
28,968 New Jersey Resources Corp. 1,445
3,900 ONE Gas, Inc. 355
14,100 Southwest Gas Holdings, Inc. 1,254
85,097 Spire, Inc. 7,013
----------
10,067
----------
Total Utilities 51,909
----------
Total Common Stocks (cost: $1,326,853) 1,554,930
----------
EXCHANGE-TRADED FUNDS (1.1%)
61,518 iShares Russell 2000 ETF 9,632
27,078 iShares Russell 2000 Growth ETF 5,510
14,926 Vanguard Small-Cap Value ETF 1,963
----------
Total Exchange-Traded Funds (cost: $17,032) 17,105
----------
================================================================================
28 | USAA SMALL CAP STOCK FUND
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
RIGHTS (0.0%)
CONSUMER, NON-CYCLICAL (0.0%)
-----------------------------
BIOTECHNOLOGY (0.0%)
133,709 NuPathe, Inc.(a),(c),(d),(e) (cost: $80) $ -
----------
Total Equity Securities (cost: $1,343,965) 1,572,035
----------
MONEY MARKET INSTRUMENTS (1.2%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (1.2%)
18,865,209 State Street Institutional Treasury Money Market Fund Premier
Class, 2.09%(f) (cost: $18,865) 18,865
----------
TOTAL INVESTMENTS (COST: $1,362,830) $1,590,900
==========
---------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
---------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
---------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $1,548,192 $6,738 $- $1,554,930
Exchange-Traded Funds 17,105 - - 17,105
Rights - - - -
Money Market Instruments:
Government & U.S. Treasury
Money Market Funds 18,865 - - 18,865
---------------------------------------------------------------------------------------------------
Total $1,584,162 $6,738 $- $1,590,900
---------------------------------------------------------------------------------------------------
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 July 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
PORTFOLIO OF INVESTMENTS | 29
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
July 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 6.2% of net assets at July
31, 2019.
o CATEGORIES AND DEFINITIONS
RIGHTS - Enable the holder to buy a specified number of shares of new issues
of a common stock before it is offered to the public.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
ADR American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in
U.S. dollars.
REITS Real estate investment trusts - Dividend distributions from REITS
may be recorded as income and later characterized by the REIT at
the end of the fiscal year as capital gains or a return of
capital. Thus, the Fund will estimate the components of
distributions from these securities and revise when actual
distributions are known.
================================================================================
30 | USAA SMALL CAP STOCK FUND
================================================================================
o SPECIFIC NOTES
(a) Non-income-producing security.
(b) Securities with a value of $6,738,000, which represented 0.4% of the
Fund's net assets, were classified as Level 2 at July 31, 2019, due to
the prices being adjusted to take into account significant market
movements following the close of local trading.
(c) Security deemed illiquid by Victory Capital, under liquidity
guidelines approved by USAA Mutual Funds Trust's Board of
Trustees.
(d) Security was fair valued at July 31, 2019, by Victory Capital in
accordance with valuation procedures approved by USAA Mutual
Funds Trust's Board of Trustees.
(e) Security was classified as Level 3.
(f) Rate represents the money market fund annualized seven-day yield at
July 31, 2019.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 31
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
July 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $1,362,830) $1,590,900
Receivables:
Capital shares sold 308
Dividends and interest 675
Securities sold 23,814
Other 51
----------
Total assets 1,615,748
----------
LIABILITIES
Payables:
Securities purchased 14,095
Capital shares redeemed 662
Bank overdraft 510
Accrued administration and servicing fees 165
Accrued management fees 1,017
Accrued transfer agent's fees 159
Other accrued expenses and payables 144
----------
Total liabilities 16,752
----------
Net assets applicable to capital shares outstanding $1,598,996
==========
NET ASSETS CONSIST OF:
Paid-in capital $1,269,783
Distributable earnings 329,213
----------
Net assets applicable to capital shares outstanding $1,598,996
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $694,015/41,458
capital shares outstanding, no par value) $ 16.74
==========
Institutional Shares (net assets of $904,981/53,515
capital shares outstanding, no par value) $ 16.91
==========
See accompanying notes to financial statements.
================================================================================
32 | USAA SMALL CAP STOCK FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended July 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $73) $ 24,453
Interest 816
Securities lending (net) 798
---------
Total income 26,067
---------
EXPENSES
Management fees 11,498
Administration and servicing fees:
Fund Shares 1,043
Institutional Shares 896
Transfer agent's fees:
Fund Shares 1,023
Institutional Shares 896
Custody and accounting fees:
Fund Shares 118
Institutional Shares 149
Postage:
Fund Shares 60
Institutional Shares 67
Shareholder reporting fees:
Fund Shares 31
Institutional Shares 8
Trustees' fees 39
Registration fees:
Fund Shares 32
Institutional Shares 30
Professional fees 99
Other 28
---------
Total expenses 16,017
---------
================================================================================
FINANCIAL STATEMENTS | 33
================================================================================
Expense paid indirectly:
Fund Shares $ (1)
---------
Net expenses 16,016
---------
10,051
---------
NET INVESTMENT INCOME
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments 137,848
Foreign currency transactions (16)
Change in net unrealized appreciation/(depreciation) of:
Investments (184,254)
Foreign currency translations (2)
---------
Net realized and unrealized loss (46,424)
---------
Decrease in net assets resulting from operations $ (36,373)
=========
See accompanying notes to financial statements.
================================================================================
34 | USAA SMALL CAP STOCK FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended July 31,
-----------------------------------------------------------------------------------------
2019 2018
-----------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 10,051 $ 6,224
Net realized gain on investments 137,848 157,798
Net realized loss on foreign currency transactions (16) (19)
Change in net unrealized appreciation/(depreciation) of:
Investments (184,254) 130,430
Foreign currency translations (2) -
--------------------------
Increase (decrease) in net assets resulting
from operations (36,373) 294,433
--------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (75,659) (70,001)
Institutional Shares (95,199) (94,530)
--------------------------
Distributions to shareholders (170,858) (164,531)
--------------------------
NET INCREASE IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (NOTE 7)
Fund Shares 30,158 47,029
Institutional Shares 21,611 26,798
--------------------------
Total net increase in net assets from capital
share transactions 51,769 73,827
--------------------------
Net increase (decrease) in net assets (155,462) 203,729
NET ASSETS
Beginning of year 1,754,458 1,550,729
--------------------------
End of year $1,598,996 $1,754,458
==========================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 35
================================================================================
NOTES TO FINANCIAL STATEMENTS
July 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 Small Cap Stock 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
long-term growth of capital.
The Fund consists of two classes of shares: Small Cap Stock Fund Shares (Fund
Shares) and Small Cap Stock Fund Institutional Shares (Institutional Shares).
Each class of shares has equal rights to assets and earnings, except that each
class bears certain class-related expenses specific to the particular class.
These expenses include administration and servicing fees, transfer agent fees,
postage, shareholder reporting fees, and certain registration and custodian
fees. Expenses not attributable to a specific class, income, and realized gains
or losses on investments are allocated to each class of shares based on each
class' relative net assets. Each class has exclusive voting rights on matters
related solely to that class and separate voting rights on matters that relate
to all classes. The Institutional Shares are available for investment through a
USAA discretionary managed account program, and certain advisory programs
sponsored by financial intermediaries, such as brokerage firms, investment
advisors, financial planners, third-party administrators, and insurance
companies. Institutional Shares also are available to institutional investors,
which include retirement plans, endowments, foundations, and bank trusts, as
well as other persons or legal entities that the Fund may approve from time to
time, or for purchase by an affiliate fund participating in a fund-of-funds
investment strategy (affiliated funds).
================================================================================
36 | USAA SMALL CAP STOCK FUND
================================================================================
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of USAA Asset Management Company (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 Capital Holdings, Inc., a global investment management firm
headquartered in Cleveland, Ohio (the Transaction) on July 1, 2019. Effective
August 5, 2019, Citibank, N.A. is the new custodian for the USAA Mutual Funds. 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. 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.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Pricing 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 closing bid price
generally is used for U.S. listed equities and the average of the bid
================================================================================
NOTES TO FINANCIAL STATEMENTS | 37
================================================================================
and asked prices is used for foreign listed equities. Actively traded
equity securities listed on a domestic exchange generally are
categorized in Level 1 of the fair value hierarchy. Certain preferred
and equity securities traded in inactive markets generally are
categorized in Level 2 of the fair value hierarchy.
2. Equity securities trading in various foreign markets may take place
on days when the NYSE is closed. Further, when the NYSE is open, the
foreign markets may be closed. Therefore, the calculation of the Fund's
net asset value (NAV) may not take place at the same time the prices of
certain foreign securities held by the Fund are determined. In many
cases, events affecting the values of foreign securities that occur
between the time of their last quoted sale or official closing price and
the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not need to be reflected in the value of the Fund's
foreign securities. However, the Manager and the Fund's subadviser(s)
will monitor for events that would materially affect the value of the
Fund's foreign securities. The Fund's subadviser(s) have agreed to
notify the Manager of significant events they identify that would
materially affect the value of the Fund's foreign securities. If the
Manager determines that a particular event would materially affect the
value of the Fund's foreign securities, then the Committee will consider
such available information that it deems relevant and will determine a
fair value for the affected foreign securities in accordance with
valuation procedures. In addition, information from an external vendor
or other sources may be used to adjust the foreign market closing prices
of foreign equity securities to reflect what the Committee believes to
be the fair value of the securities as of the close of the NYSE. Fair
valuation of affected foreign equity securities may occur frequently
based on an assessment that events which occur on a fairly regular basis
(such as U.S. market movements) are significant. Such securities are
categorized in Level 2 of the fair value hierarchy.
3. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value hierarchy.
================================================================================
38 | USAA SMALL CAP STOCK FUND
================================================================================
4. Short-term debt securities with original or remaining maturities of
60 days or less generally are priced but may be valued at amortized
cost, provided that amortized cost represents the fair value of such
securities.
5. Repurchase agreements are valued at cost.
6. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has been recognized in relation to a security or class of securities,
the securities are valued in good faith by the Committee in accordance
with valuation procedures approved by the Board. The effect of fair
value pricing is that securities may not be priced on the basis of
quotations from the primary market in which they are traded and the
actual price realized from the sale of a security may differ materially
from the fair value price. Valuing these securities at fair value is
intended to cause the Fund's NAV to be more reliable than it otherwise
would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
broker-dealers, other pricing services, or widely used quotation
systems. General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and duration
of any restrictions on disposition of the securities, evaluation of
credit quality, and an evaluation of the forces that influenced the
market in which the securities are purchased and sold.
B. FAIR VALUE MEASUREMENTS - Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the Portfolio of Investments
is based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted)
in active markets for identical securities.
Level 2 - inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
================================================================================
NOTES TO FINANCIAL STATEMENTS | 39
================================================================================
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 July 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
================================================================================
40 | USAA SMALL CAP STOCK FUND
================================================================================
upon the sale of these securities. Foreign taxes have been provided for in
accordance with the Fund's understanding of the applicable countries'
prevailing tax rules and rates.
F. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the exchange
rate obtained from an independent pricing service on the respective
dates of such transactions.
2. Market value of securities, other assets, and liabilities at the exchange
rate obtained from an independent pricing service on a daily basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held.
Such fluctuations are included with the net realized and unrealized gain or
loss from investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the amounts received. At
the end of the Fund's fiscal year, net realized foreign currency
gains/losses are reclassified from accumulated net realized gains/losses to
accumulated undistributed net investment income on the Statement of Assets
and Liabilities, as such amounts are treated as ordinary income/loss for
federal income tax purposes. Net unrealized foreign currency exchange
gains/losses arise from changes in the value of assets and liabilities,
other than investments in securities, resulting from changes in the
exchange rate.
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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 41
================================================================================
year ended July 31, 2019, brokerage commission recapture credits reduced
the expenses of the Fund Shares by $1,000.
H. INDEMNIFICATIONS - Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities arising out of the
performance of their duties to the Trust. In addition, in the normal course
of business, the Trust enters into contracts that contain a variety of
representations and warranties that provide general indemnifications. The
Trust's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Trust that have not yet
occurred. However, the Trust expects the risk of loss to be remote.
I. USE OF ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINE OF CREDIT
The Fund participates, along with other funds of the Trust and 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. 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.
For the period July 1, 2019 to July 31, 2019, the Fund paid Citibank facility
fees of less than $500, which represents 1.1% of the total fees paid to Citibank
by the funds of the Trusts. The Fund had no borrowings under this agreement
during the period July 1, 2019 to July 31, 2019. Effective July 1, 2019, the
line of credit among the Trust, with respect to its funds, and USAA Capital
================================================================================
42 | USAA SMALL CAP STOCK FUND
================================================================================
Corporation (CAPCO) terminated. For the period from August 1, 2018 to June 30,
2019, the Fund paid CAPCO facility fees of $13,000, which represents 1.9% of the
total fees paid to CAPCO by the funds of the Trusts. The Fund had no borrowings
under this agreement during the period from August 1, 2018 to June 30, 2019.
(3) INTERFUND LENDING
Effective July 1, 2019, the Trust relies on an exemptive order granted to
Victory Capital and its affiliated funds by the U.S. Securities and Exchange
Commission (SEC) in March 2017 (the 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 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 Order, by averaging the current repurchase
agreement rate and the current bank loan rate. For the period July 1, 2019 to
July 31, 2019, the Fund did not lend.
(4) 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, REIT return of capital dividend, REIT
capital gain dividend, non-REIT return of capital dividend, equalization,
distribution re-designations, passive foreign investment company, and additional
adjustments resulted in reclassifications to the Statement of Assets and
Liabilities to decrease distributable earnings by $340,000, and increase in paid
in capital by $340,000. These reclassifications had no effect on net assets.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 43
================================================================================
The tax character of distributions paid during the years ended July 31, 2019,
and 2018, was as follows:
2019 2018
-----------------------------------
Ordinary income* $ 38,548,000 $ 51,261,000
Long-term realized capital gains 132,310,000 113,270,000
------------ ------------
Total distributions paid $170,858,000 $164,531,000
============ ============
As of July 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 3,428,000
Accumulated capital and other losses (18,705,000)
Undistributed long-term capital gains 145,015,000
Unrealized appreciation of investments 199,475,000
*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, passive foreign
investment company, 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 July 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 July 31, 2019, the Fund deferred to August 1,
2019, post October capital losses of $18,705,000.
TAX BASIS OF INVESTMENTS - At July 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 Small Cap
Stock Fund $1,391,424,000 $244,515,000 $(45,039,000) $199,476,000
================================================================================
44 | USAA SMALL CAP STOCK FUND
================================================================================
(5) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended July 31, 2019, were $1,306,181,000 and
$1,376,583,000, respectively.
(6) 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 July 31,
2019, the Fund had no securities on loan.
(7) CAPITAL SHARE TRANSACTIONS
At July 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 fund-of-funds as well as other persons or legal
================================================================================
NOTES TO FINANCIAL STATEMENTS | 45
================================================================================
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
JULY 31, 2019 JULY 31, 2018
---------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------
FUND SHARES:
Shares sold 4,681 $ 79,969 5,164 $ 94,551
Shares issued from
reinvested dividends 5,005 74,755 3,951 69,134
Shares redeemed (7,448) (124,566) (6,412) (116,656)
----------------------------------------------------
Net increase from
capital share transactions 2,238 $ 30,158 2,703 $ 47,029
====================================================
INSTITUTIONAL SHARES:
Shares sold 6,605 $ 111,029 7,215 $ 131,299
Shares issued from
reinvested dividends 6,312 95,182 5,352 94,513
Shares redeemed (10,506) (184,600) (10,615) (199,014)
----------------------------------------------------
Net increase from
capital share transactions 2,411 $ 21,611 1,952 $ 26,798
====================================================
(8) TRANSACTIONS WITH MANAGER
MANAGEMENT FEES - The Manager provides investment management services to the
Fund pursuant to an Advisory Agreement. Effective July 1, 2019, the Trust relies
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.
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.
================================================================================
46 | USAA SMALL CAP STOCK FUND
================================================================================
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee is accrued daily and paid monthly at
an annualized rate of 0.75% of the Fund's average daily net assets.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Small-Cap Core Funds Index. The Lipper Small-Cap Core
Funds Index tracks the total return performance of funds within the Lipper
Small-Cap Core Funds category.
The performance period for each share class consists of the current month
plus the previous 35 months. The following table is utilized to determine the
extent of the performance adjustment:
OVER/UNDER PERFORMANCE
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
-------------------------------------------------------------------
+/- 100 to 400 +/- 4
+/- 401 to 700 +/- 5
+/- 701 and greater +/- 6
(1)Based on the difference between average annual performance of the relevant
share class of the Fund and its relevant Lipper index, rounded to the nearest
basis point. Average daily net assets of the share class are calculated over
a rolling 36-month period.
Each class' annual performance adjustment rate is multiplied by the average
daily net assets of each respective class over the entire performance period,
which is then multiplied by a fraction, the numerator of which is the number of
days in the month and the denominator of which is 365 (366 in leap years). The
resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper Small-Cap Core Funds Index over that period, even if the
class had overall negative returns during the performance period.
Under the investment advisory agreement with the Manager that took effect on
July 1, 2019, no performance adjustments will be made for the period beginning
July 1, 2019, through June 30, 2020. Only performance beginning
================================================================================
NOTES TO FINANCIAL STATEMENTS | 47
================================================================================
as of July 1, 2019, and thereafter will be utilized in calculating future
performance adjustments.
For the period from August 1, 2018 to June 30, 2019, the Fund incurred
management fees, paid or payable to AMCO, of $10,481,000, which included a
performance adjustment for the Fund Shares and Institutional Shares of
$(197,000) and $(236,000), respectively. For the Fund Shares and Institutional
Shares, the performance adjustments were (0.03)% and (0.03)%, respectively. For
the period July 1, 2019 to July 31, 2019, the Fund incurred management fees,
paid or payable to Victory Capital of $1,017,000, which included no performance
adjustments.
SUBADVISORY ARRANGEMENT(S) - Effective July 1, 2019, Victory Capital entered
into a Subadvisory Agreement with ClariVest Asset Management LLC (ClariVest),
Granahan Investment Management, Inc. (GIMI), and Wellington Management Company
LLP (Wellington Management) under which ClariVest, GIMI, and Wellington
Management, each direct the investment and reinvestment of a portion of the
Fund's assets (as allocated from time to time by the Manager). These
arrangements provide for monthly fees that are paid by the Manager. The Manager
(not the Fund) pays the subadviser fees. For the period July 1, 2019, to July
31, 2019, Victory Capital incurred subadvisory fees with respect to the Fund,
paid or payable to the applicable subadvisers of $240,000.
Prior to July 1, 2019, AMCO had entered into an Investment Subadvisory Agreement
with ClariVest, GIMI, and Wellington Management, under which ClariVest, GIMI,
and Wellington Management, each directed 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 AMCO.
AMCO (not the Fund) pays ClariVest a subadvisory fee in the annual amount of
0.47% of the Fund's average daily net assets for the first $125 million in
assets that ClariVest manages; 0.45% of the Fund's average daily net assets on
the next $125 million in assets that ClariVest manages; and 0.43% of the Fund's
average daily net assets over $250 million that ClariVest manages. Prior to
October 1, 2018, AMCO (not the Fund) paid ClariVest a subadvisory fee in the
annual amount of 0.48% of the Fund's average daily
================================================================================
48 | USAA SMALL CAP STOCK FUND
================================================================================
net assets for the first $125 million in assets that ClariVest manages; 0.46% of
the Fund's average daily net assets on the next $125 million in assets that
ClariVest manages; and 0.44% of the Fund's average daily net assets over $250
million that ClariVest manages. For the period from August 1, 2018 to June 30,
2019, AMCO incurred subadvisory fees with respect to the Fund, paid or payable
to ClariVest of $1,508,000.
AMCO (not the Fund) pays GIMI a subadvisory fee in the annual amount of 0.55% of
the Fund's average daily net assets for the first $250 million in assets that
GIMI manages, plus 0.52% of the Fund's average daily net assets over $250
million that GIMI manages, plus 0.45% of the Fund's average daily net assets
over $500 million that GIMI manages. Prior to September 25, 2018, AMCO (not the
Fund) paid GIMI a subadvisory fee in the annual amount of 0.55% of the Fund's
average daily net assets for the first $300 million in assets that GIMI manages,
plus 0.52% of the Fund's average daily net assets over $300 million that GIMI
manages. For the period from August 1, 2018 to June 30, 2019, AMCO incurred
subadvisory fees with respect to the Fund, paid or payable to GIMI of
$2,532,000.
AMCO (not the Fund) pays Wellington Management a subadvisory fee in the annual
amount of 0.60% of the Fund's average daily net assets for the first $250
million in assets that Wellington Management manages, plus 0.55% of the Fund's
average daily net assets over $250 million that Wellington Management manages.
Prior to October 1, 2018, AMCO (not the Fund) paid Wellington Management a
subadvisory fee in the annual amount of 0.70% of the Fund's average daily net
assets for the first $300 million in assets that Wellington Management manages,
plus 0.65% of the Fund's average daily net assets over $300 million that
Wellington Management manages. For the period from August 1, 2018 to June 30,
2019, AMCO incurred subadvisory fees with respect to the Fund, paid or payable
to Wellington Management of $3,812,000.
ADMINISTRATION AND SERVICING FEES - Effective July 1, 2019, Victory Capital is
obligated on a continuous basis to provide administrative services to the Fund.
The Manager provides certain administration and servicing functions for the
Fund. For such services, the Manager receives a fee accrued daily and paid
monthly at an annualized rate of 0.15% and 0.10% of average daily net
================================================================================
NOTES TO FINANCIAL STATEMENTS | 49
================================================================================
assets of the Fund Shares and Institutional Shares, respectively. For the period
from August 1, 2018 to June 30, 2019, the Fund Shares and Institutional Shares,
incurred administration and servicing fees, paid or payable to AMCO, of $955,000
and $819,000 respectively. For the period July 1, 2019 to July 31, 2019 the Fund
Shares and Institutional Shares incurred administration and servicing fees, paid
or payable to Victory Capital of $88,000 and $77,000 respectively.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, AMCO also provided certain compliance and legal
services for the benefit of the Fund. The Board approved the reimbursement of a
portion of these expenses incurred by AMCO.
Effective July 1, 2019, these services are covered under a Compliance Services
Agreement between the Trust and Victory Capital. For the period from August 1,
2018 to June 30, 2019, the Fund reimbursed AMCO $6,000 for these compliance and
legal services. For the period July 1, 2019 to July 31, 2019, the Fund's portion
of fees paid to Victory Capital under the Compliance Service Agreement was
$1,000. These expenses are included in the professional fees on the Fund's
Statement of Operations.
EXPENSE LIMITATION - Effective July 1, 2019, the Manager has contractually
agreed to waive its management fee and/or reimburse expenses so that the total
annual operating expenses (excluding certain items such as interest, taxes and
brokerage commissions) do not exceed 1.10% of the Fund Shares and 0.98% of the
Institutional Shares through at least June 30, 2021. The Manager is permitted
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 limits in effect at the time of: (a) the
original waiver or expense reimbursement; or (b) the recoupment, after giving
effect to the recoupment amount. The amount of any waivers or reimbursements and
the amount of any recoupment is calculated without regard to the impact of any
performance adjustment to the Fund's management fee. This waiver agreement may
only be terminated by the Fund's Board of Trustees.
TRANSFER AGENT'S FEES - Victory Capital Transfer Agency, Inc. (VCTA), (formerly,
USAA Shareholder Account Services (SAS)) provides transfer agency services to
the Fund. VCTA, an affiliate of the Manager, provides
================================================================================
50 | USAA SMALL CAP STOCK FUND
================================================================================
transfer agent services to the Fund Shares based on an annual charge of $23 per
shareholder account plus out-of-pocket expenses. VCTA 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 July 31, 2019, the Fund Shares and Institutional
Shares incurred transfer agent's fees, paid or payable to VCTA, of $1,023,000
and $896,000, respectively.
UNDERWRITING SERVICES - Effective July 1, 2019, the Trust has an agreement with
Victory Capital Advisers, Inc. (VCA), an affiliate of the Manager for exclusive
underwriting and distribution of the Fund's shares on a continuing best effort
basis. This agreement provides that VCA receive no fee or other compensation for
such distribution services. Prior to July 1, 2019, USAA Investment Management
Company (IMCO) provided exclusive underwriting and distribution of the Fund's
shares on a continuing best-efforts basis and received no fee or other
compensation for these services.
(9) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other affiliated
funds in which the affiliated fund-of-funds invest. The fund-of-funds do not
invest in the underlying affiliated 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 July 31, 2019, the fund-of-funds owned
the following percentages of the total outstanding shares of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
--------------------------------------------------------------------------------
Cornerstone Conservative 0.1
Cornerstone Equity 0.4
Target Retirement Income 0.1
Target Retirement 2020 0.3
Target Retirement 2030 1.1
Target Retirement 2040 1.5
Target Retirement 2050 0.9
Target Retirement 2060 0.1
================================================================================
NOTES TO FINANCIAL STATEMENTS | 51
================================================================================
Effective July 1, 2019, Victory Capital replaced AMCO as the Fund's investment
adviser and began managing the Fund. Prior to July 1, 2019, AMCO was 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.
(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. The Manager has determined there is no significant
impact on the Fund's financial statements and various filings.
(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
================================================================================
52 | USAA SMALL CAP STOCK FUND
================================================================================
entire standard or certain provisions that exclude or amend disclosures.
Management has elected to early adopt ASU 2018-13 effective with the current
reporting period. The adoption of ASU 2018-13 guidance is limited to changes in
the Fund's notes to financial statement disclosures regarding valuation method,
fair value, and transfers between levels of the fair value hierarchy.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 53
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 31,
--------------------------------------------------------------------
2019 2018 2017 2016 2015
--------------------------------------------------------------------
Net asset value at beginning
of period $ 19.33 $ 18.02 $ 16.17 $ 17.77 $ 18.14
--------------------------------------------------------------------
Income (loss) from investment
operations:
Net investment income .07 .05 .08 .02 .02
Net realized and unrealized
gain (loss) (.71) 3.19 1.99 (.22) 1.63
--------------------------------------------------------------------
Total from investment
operations (.64) 3.24 2.07 (.20) 1.65
--------------------------------------------------------------------
Less distributions from:
Net investment income (.04) (.07) (.03) (.05) (.02)
Realized capital gains (1.91) (1.86) (.19) (1.35) (2.00)
--------------------------------------------------------------------
Total distributions (1.95) (1.93) (.22) (1.40) (2.02)
--------------------------------------------------------------------
Net asset value
at end of period $ 16.74 $ 19.33 $ 18.02 $ 16.17 $ 17.77
====================================================================
Total return (%)* (2.07) 19.21 12.81 (.75) 9.67
Net assets at end of
period (000) $694,015 $758,065 $658,038 $586,438 $835,256
Ratios to average daily
net assets:**
Expenses (%)(a),(b) 1.06(c) 1.06 1.09 1.15 1.15
Expenses, excluding
reimbursements (%)(a),(b) 1.06 1.06 1.09 1.15 1.15
Net investment income (%) .58 .31 .42 .18 .06
Portfolio turnover (%) 84 68 53 52 45
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the year ended July 31, 2019, average daily net assets were
$694,938,000.
(a) Reflects total annual operating expenses of the Fund Shares before
reductions of any expenses paid indirectly. The Fund's expenses paid
indirectly decreased the expense ratios by less than 0.01%.
(b) Does not include acquired fund fees, if any.
(c) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Fund Shares to 1.10% of the Fund Shares' average
daily net assets.
================================================================================
54 | USAA SMALL CAP STOCK FUND
================================================================================
INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 31,
--------------------------------------------------------------------
2019 2018 2017 2016 2015
--------------------------------------------------------------------
Net asset value at
beginning of period $ 19.50 $ 18.16 $ 16.30 $ 17.89 $ 18.24
--------------------------------------------------------------------
Income (loss) from investment
operations:
Net investment income .08 .07 .09 .07 .05
Net realized and
unrealized gain (loss) (.71) 3.22 2.02 (.24) 1.65
--------------------------------------------------------------------
Total from investment
operations (.63) 3.29 2.11 (.17) 1.70
--------------------------------------------------------------------
Less distributions from:
Net investment income (.05) (.09) (.06) (.07) (.05)
Realized capital gains (1.91) (1.86) (.19) (1.35) (2.00)
--------------------------------------------------------------------
Total distributions (1.96) (1.95) (.25) (1.42) (2.05)
--------------------------------------------------------------------
Net asset value at
end of period $ 16.91 $ 19.50 $ 18.16 $ 16.30 $ 17.89
====================================================================
Total return (%)* (1.98) 19.36 12.92 (.55) 9.85
Net assets at end of
period (000) $904,981 $996,393 $892,691 $884,187 $676,490
Ratios to average daily
net assets:**
Expenses (%)(a),(b) .96(c) .95 .97 .99 .99
Expenses, excluding
reimbursements (%)(a),(b) .96 .95 .97 .99 .99
Net investment income (%) .67 .42 .52 .35 .22
Portfolio turnover (%) 84 68 53 52 45
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the year ended July 31, 2019, average daily net assets were
$895,647,000.
(a) Does not include acquired fund fees, if any.
(b) Reflects total annual operating expenses of the Institutional Shares before
reductions of any expenses paid indirectly. The Institutional Shares'
expenses paid indirectly decreased the expense ratios by less than 0.01%.
(c) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Institutional Shares to 0.98% of the Institutional
Shares' average daily net assets.
================================================================================
FINANCIAL HIGHLIGHTS | 55
================================================================================
EXPENSE EXAMPLE
July 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 February 1, 2019, through
July 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
================================================================================
56 | USAA SMALL CAP STOCK FUND
================================================================================
use this information to compare the ongoing costs of investing in the Fund and
other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled "hypothetical"
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if these direct
costs were included, your costs would have been higher.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE FEBRUARY 1, 2019 -
FEBRUARY 1, 2019 JULY 31, 2019 JULY 31, 2019
------------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,074.50 $5.50
Hypothetical
(5% return before expenses) 1,000.00 1,019.49 5.36
INSTITUTIONAL SHARES
Actual 1,000.00 1,075.00 4.99
Hypothetical
(5% return before expenses) 1,000.00 1,019.98 4.86
*Expenses are equal to the annualized expense ratio of 1.07% for Fund Shares
and 0.97% for Institutional Shares, which are net of any reimbursements and
expenses paid indirectly, multiplied by the average account value over the
period, multiplied by 181 days/365 days (to reflect the one-half-year
period). The Fund's actual ending account values are based on its actual
total returns of 7.45% for Fund Shares and 7.50% for Institutional Shares for
the six-month period of February 1, 2019, through July 31, 2019.
================================================================================
EXPENSE EXAMPLE | 57
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
July 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.
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with
================================================================================
58 | USAA SMALL CAP STOCK FUND
================================================================================
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 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
================================================================================
ADVISORY AGREEMENT(S) | 59
================================================================================
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.
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
================================================================================
60 | USAA SMALL CAP STOCK FUND
================================================================================
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).
For at least two years after the Transaction closes, Victory Capital
has agreed to waive fees and/or reimburse expenses so that each Fund's
annual expense ratio (excluding certain customary items) does not
exceed the levels reflected in each Fund's most recent audited
financial statements at the time the Transaction closes (or the levels
of AMCO's then-current expense caps, if applicable), excluding the
impact of any performance adjustment to the Fund's advisory fee.
================================================================================
ADVISORY AGREEMENT(S) | 61
================================================================================
o The portfolio managers at AMCO that manage the Fixed Income Funds(1)
as well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended Market
Index Fund, and USAA Nasdaq-100 Index Fund, which will be advised by
Victory Capital through its Victory Solutions platform, Victory Capital
proposes that the same subadvisers be retained Post-Transaction, although
Victory Capital may change the allocation to a particular subadviser
Post-Transaction. No changes are expected to the portfolio managers of
the subadvisers who will serve as subadvisers Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's businesses to
Victory Capital. Victory Capital and USAA expect to
(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.
================================================================================
62 | USAA SMALL CAP STOCK FUND
================================================================================
enter into a transition services agreement under which USAA will
continue to provide Victory Capital with certain services that are
currently provided by USAA to AMCO and the USAA Transfer Agent for a
specified period of time after the closing of the Transaction to assist
Victory Capital in transitioning the USAA member distribution channel
and member support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital is capable of providing
the same level of investment management services
================================================================================
ADVISORY AGREEMENT(S) | 63
================================================================================
currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund,
Growth & Income Fund, Income Stock Fund, Global Equity Income Fund, and
Precious Metals and Minerals Fund.
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64 | USAA SMALL CAP STOCK FUND
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The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored
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ADVISORY AGREEMENT(S) | 65
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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 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
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66 | USAA SMALL CAP STOCK FUND
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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.
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
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ADVISORY AGREEMENT(S) | 67
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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.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
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68 | USAA SMALL CAP STOCK FUND
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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) | 69
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND AMCO)
July 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.
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 AMCO and the
Subadvisory Agreements between AMCO and Wellington Management Company LLP,
ClariVest Asset Management LLC (ClariVest), and Granahan Investment Management,
Inc. (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
AMCO 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 report prepared by an
independent third party, which provided a statistical analysis comparing the
Fund's investment performance, expenses, and fees to
(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"). Effective July 1, 2019, upon the closing of the
transaction whereby AMCO acquired by Victory Capital Holdings, Inc., the
parent company of Victory Capital, the Advisory Agreement between the Trust
and AMCO and the Sub-advisory Agreement with the Subadviser terminated and
the new investment advisory agreement between the Trust and Victory Capital
went into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are discussed above.
Effective June 30, 2019, the Subadviser no longer manages any portion of the
Fund.
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70 | USAA SMALL CAP STOCK FUND
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comparable investment companies; (ii) information concerning the services
rendered to the Fund, as well as information regarding AMCO's revenues and costs
of providing services to the Fund and compensation paid to affiliates of AMCO;
and (iii) information about AMCO's and each Subadviser's 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 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 AMCO 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 AMCO 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 AMCO's profitability with respect to the Fund. However, the Board
noted that the evaluation process with respect to AMCO 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 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
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ADVISORY AGREEMENT(S) | 71
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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 AMCO under the Advisory Agreement, the Board
reviewed information provided by AMCO relating to its operations and personnel.
The Board also took into account its knowledge of AMCO's management and the
quality of the performance of AMCO's duties through Board meetings, discussions,
and reports during the preceding year. The Board considered the fees paid to
AMCO and the services provided to the Fund by AMCO under the Advisory Agreement,
as well as other services provided by AMCO and its affiliates under other
agreements, and the personnel who provide these services. In addition to the
investment advisory services provided to the Fund, AMCO 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 AMCO in
connection with the services provided to the Fund, including investment,
operational, enterprise, litigation, regulatory and compliance risks.
The Board considered AMCO's management style and the performance of AMCO's
duties under the Advisory Agreement. The Board considered the level and depth of
experience of AMCO, including the professional experience and qualifications of
its senior personnel, as well as current staffing levels. The Board considered
AMCO's effectiveness in monitoring the performance of the Subadvisers and AMCO's
timeliness in responding to performance issues. The allocation of the Fund's
brokerage, including AMCO's process for monitoring "best execution" and the
utilization of "soft dollars," also was considered. AMCO's role in coordinating
the activities of the Fund's other service providers also was considered. The
Board also considered AMCO's risk management processes. The Board considered
AMCO'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
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72 | USAA SMALL CAP STOCK FUND
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strengths of AMCO and its affiliates in managing the Fund, as well as other
funds in the Trust.
The Board also reviewed the compliance and administrative services provided to
the Fund by AMCO and its affiliates, including AMCO's oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust,
also focused on the quality of AMCO'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
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 expense universe. The Board took into
account the various services provided to the Fund by AMCO and its affiliates,
including the high quality of services received by the Fund from AMCO. The
Board also noted the level and method of computing the management fee,
including the performance adjustment to such fee.
The Board also took into account that the subadvisory fees under the Subadvisory
Agreements are paid by AMCO. The Board also considered and discussed information
about the Subadvisers' fees, including the amount of management fees retained by
AMCO after payment of the subadvisory fees.
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ADVISORY AGREEMENT(S) | 73
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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-year period ended December 31, 2018, and was lower than the
average of its performance universe and its Lipper index for the 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 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, including the Fund's more recent improved performance.
The Board also took into account that it approved the addition of ClariVest as a
new subadviser to the Fund in 2017 and the termination of another subadviser to
the Fund in 2018.
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 AMCO'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 AMCO
pays the subadvisory fees. The Trustees reviewed the profitability of AMCO's
relationship with the Fund before tax expenses. The Board was also provided with
an Investment Management Profitability Analysis prepared by an independent
information
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74 | USAA SMALL CAP STOCK FUND
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service. In reviewing the overall profitability of the management fee to AMCO,
the Board also considered the fact that AMCO 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 AMCO from its relationship with the Trust, including that AMCO may
derive reputational and other benefits from its association with the Fund. The
Trustees recognized that AMCO should be entitled to earn a reasonable level of
profits in exchange for the level of services it provides to the Fund and the
entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussion of
the current advisory fee structure. The Board also noted that AMCO also pays the
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
advisory fee structure was reasonable.
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with AMCO, among others: (i) AMCO has demonstrated that it
possesses the capability and resources to perform the duties required of it
under the Advisory Agreement; (ii) AMCO maintains an appropriate compliance
program; (iii) the performance of the Fund is reasonable in relation to the
performance of funds with similar investment objectives and to relevant indices;
(iv) the Fund's advisory expenses are reasonable in relation to those of similar
funds and to the services to be provided by AMCO; and (v) AMCO's 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 AMCO
and the type of fund. Based on its conclusions, the Board determined that the
continuation of the Advisory Agreement would be in the best interests of the
Fund and its shareholders.
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ADVISORY AGREEMENT(S) | 75
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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
benefits derived from the subadvisory relationship; (ii) 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 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 AMCO'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 the 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
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76 | USAA SMALL CAP STOCK FUND
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relationship with the Fund, the Trustees noted that the fees under the
Subadvisory Agreements were paid by AMCO. The Trustees also relied on the
ability of AMCO 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 was not a
material factor in its deliberations with respect to the consideration of the
approval of the Subadvisory Agreement, although the Board noted that each
Subadviser's subadvisory fees were 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 AMCO
and that, in turn, AMCO 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 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 each Subadviser. The Board noted AMCO's
experience and resources in monitoring the performance, investment style, and
risk-adjusted performance of each Subadviser. The Board was mindful of AMCO's
focus on each Subadviser's performance and the discussion of management
regarding the factors that contributed to 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 objectives and policies;
(ii) each Subadviser 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; and
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ADVISORY AGREEMENT(S) | 77
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(iv) the Fund's advisory expenses are reasonable in relation to those of similar
funds and to the services to be provided by AMCO 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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78 | USAA SMALL CAP STOCK 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 | 79
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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 of 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), (08/11-06/19); Director of USAA Investment
Management Company (IMCO) (09/09-present); Chairman of Board of IMCO
(4/13-present); President and Director of USAA Shareholder Account Services
(SAS) (10/09-06/19); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director and Vice Chairman of FPS
(12/13-present); President and Director of USAA Investment Corporation (ICORP)
(03/10-present); Chairman of Board of ICORP (12/31-present); Director of USAA
Financial Advisors, Inc. (FAI) (12/13-present); Chairman of Board of FAI
(3/15-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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80 | USAA SMALL CAP STOCK 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
--------------------------------------------------------------------------------
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
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 81
================================================================================
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.
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.
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
================================================================================
82 | USAA SMALL CAP STOCK FUND
================================================================================
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 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.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 83
================================================================================
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 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.
================================================================================
84 | USAA SMALL CAP STOCK FUND
================================================================================
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 was 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 | 85
================================================================================
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).
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Executive Director, Victory Capital Management Inc. (7/1/19-present); Treasurer,
USAA ETF Trust (09/18-06/19); Executive Director, Investment and Financial
Administration, USAA (04/12-06/30/19); Assistant Treasurer,
================================================================================
86 | USAA SMALL CAP STOCK FUND
================================================================================
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
Director, Accounting and Finance, Victory Capital Management Inc.
(7/1/19-present); Assistant Treasurer, USAA ETF Trust (09/18-06/19);
Accounting/Financial Director, USAA (12/13-06/30/19).
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).
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).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 87
================================================================================
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 111 West Houston St., Suite 1901
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
Copies of the Victory Capital Management Inc.'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
--------------------------------------------------------------------------------
July 31, 2019
--------------------------------------------------------------------------------
ANNUAL REPORT
USAA Science & Technology Fund
FUND ADVISER
SHARES SHARES
USSCX USTCX
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
". . . NOW MAY BE AN OPPORTUNE TIME FOR
INVESTORS TO ENSURE THAT THEIR PORTFOLIOS ARE WELL [PHOTO OF BROOKS ENGLEHARDT]
DIVERSIFIED AND THAT THEIR OVERALL ALLOCATION IS
APPROPRIATE FOR THEIR PARTICULAR RISK APPETITE."
--------------------------------------------------------------------------------
SEPTEMBER 2019
Although the bull market in equities has continued running, it was not without a
few missteps. Trade turmoil, questions surrounding global economic growth,
changing monetary policy, and geopolitical disputes have all led to increased
volatility. But through it all, domestic stocks, as measured by the S&P 500(R)
Index, still managed an annual return of approximately 8% for the 12-month
period ended July 31, 2019.
Given the sometimes dire news flow and ample cross-currents, it's no surprise
that volatility returned to the market. On one hand, the U.S. economy continues
to look good. The unprecedented streak of job creation has continued
uninterrupted, and unemployment is bouncing along historic lows at 3.7%. The
consumer remains resilient and inflation is tepid. On the flip side, however,
U.S. trade policy seems to be evolving, with new tariffs threatened and
implemented. The markets generally dislike this type of trade turmoil and
uncertainty, and the ongoing tensions between the United States and China (and
other trading partners) threaten to upend global supply chains and hinder
economic growth.
It's not just the stock market that has been dealing with volatility. The bond
market also has experienced volatility, due largely to the U.S. Federal
Reserve's (the "Fed") famous "pivot" in late 2018. Against the backdrop of
rapidly falling equities in the fourth quarter of 2018, the Fed signaled that
its next policy move would be to lower--not increase--short-term interest rates.
This immediately altered the yield environment.
Meanwhile, the U.S. Treasury yield curve continued to flatten and, in fact,
inverted--whereby shorter-term yields became higher than longer-term
================================================================================
================================================================================
yields. Such a yield-curve inversion is a worrying sign as it sometimes, but not
always, portends to a recession.
Although we are not predicting a recession, we must acknowledge that risks have
increased for an economic slowdown. Given that the current run in stocks is more
than a decade old, it's important for investors to keep perspective that the
bull market cannot continue forever. Therefore, now may be an opportune time for
investors to ensure that their portfolios are well diversified and that their
overall allocation is appropriate for their particular risk appetite.
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,
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. On the following pages, you will find information
relating to your USAA Investments, which is now a Victory Capital Investment
Franchise. If you have any questions about your investments, we encourage you to
engage your financial advisor or else contact us directly at 800-235-8396 or
visit usaa.com.
My colleagues and I sincerely appreciate the confidence you have placed in us,
and we value the opportunity to help you meet your investment goals.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
MANAGERS' COMMENTARY ON THE FUND 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 18
Financial Statements 20
Notes to Financial Statements 24
Financial Highlights 41
EXPENSE EXAMPLE 43
ADVISORY AGREEMENT(S) 45
TRUSTEES' AND OFFICERS' INFORMATION 65
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
VICTORY CAPITAL MANAGEMENT INC. 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
RS Investments Growth Wellington Management Company LLP
STEPHEN J. BISHOP ROBERT L. DERESIEWICZ
CHRISTOPHER CLARK, CFA JOHN F. AVERILL, CFA
PAUL LEUNG, CFA ANN C. GALLO
JEAN M. HYNES, CFA
VictoryShares and Solutions BRUCE L. GLAZER
ANITA M. KILLIAN, CFA
MANNIK S. DHILLON, CFA, CAIA BRIAN BARBETTA
WASIF A. LATIF
--------------------------------------------------------------------------------
o PLEASE CHARACTERIZE THE PERFORMANCE OF THE MARKET OVER THE 12-MONTH
REPORTING PERIOD ENDED JULY 31, 2019.
While domestic stocks ended the 12-month reporting period in positive
territory, there was significant volatility along the way. Against a
backdrop of slowing global growth, for much of the period, markets responded
primarily to headlines surrounding U.S. monetary and trade policies.
Entering the period, the U.S. Federal Reserve (the "Fed") was on a credit
tightening trajectory, which market participants interpreted as confirming a
relatively favorable outlook for the U.S. economy. The fourth quarter of
2018 saw a sharp reversal in investor risk appetite, however, as softening
economic data from Europe and China raised concerns that the Fed would
increase interest rates too quickly even as a global recession possibly
loomed. Uncertainty regarding U.S. trade policy and corporate earnings also
weighed on sentiment toward the end of 2018. While the Fed followed through
on its previously signaled December interest rate increase, it pivoted to a
much more dovish stance entering 2019, leading to a rebound in risk asset
valuations.
Escalating rhetoric between the United States and China regarding trade and
tariffs generated uncertainty throughout the 12-month reporting period. May
2019 saw markets decline as President Trump announced
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
plans to impose 25% tariffs on $200 billion in Chinese imports. However, the
market subsequently recovered its lost ground as the Fed indicated that it
was prepared to cut its benchmark interest rate, if needed, to help offset
any drag on economic growth stemming from trade frictions. Corporate
earnings reports that generally were in line with expectations also served
to bolster sentiment. Most major equity indices ended July 2019 near their
all-time highs.
o HOW DID THE USAA SCIENCE & TECHNOLOGY FUND (THE "FUND") PERFORM DURING THE
REPORTING PERIOD?
The Fund has two share classes: Fund Shares and Adviser Shares. For the
reporting period ended July 31, 2019, the Fund Shares and Adviser Shares had
total returns of 12.75% and 12.48%, respectively. This compares to returns
of 7.99% for the S&P 500(R) Index, 14.79% for the S&P North American
Technology Index, 3.76% for the S&P Composite 1500 Health Care Index, and
11.47% for the Lipper Science & Technology Funds Index.
Victory Capital Management Inc. (the "Manager" or "Victory Capital") is the
Fund's investment adviser. As the investment adviser, the Manager employs
dedicated resources to support the research, selection, and monitoring of
the Fund's subadviser. Wellington Management Company LLP ("Wellington
Management") is the subadviser to the Fund. The subadviser provides
day-to-day discretionary management for the Fund's assets.
o WHAT WERE YOUR STRATEGIES IN THIS ENVIRONMENT?
For the Fund overall, stock selection in the information technology sector
had by far the largest positive effect on relative performance, while
selection within healthcare detracted slightly. Allocation across industries
within information technology detracted modestly from relative performance.
Refer to page 4 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
2 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
Wellington Management's technology allocation outperformed the S&P North
American Technology Index during the period, with positive security
selection driving relative return. Contributions to relative performance
were led by selection within semiconductors & semiconductor equipment, IT
services, software, and entertainment. This was partially offset by weak
security selection in the electronic equipment, instruments & components and
technology hardware, storage & peripherals industries. Top individual
contributors to relative performance included Advanced Micro Devices, Inc.
(semiconductors & semiconductor equipment), Global Payments, Inc. (IT
services), and Workday, Inc. "A" (software). Non-benchmark positions in
Sunny Optical Technology* (electronic equipment, instruments & components),
Alibaba Group Holding Ltd. ADR (Internet & direct marketing retail), and
Flex Ltd. (electronic equipment, instruments & components) were among the
largest detractors from relative performance.
Wellington Management's healthcare allocation underperformed the S&P
Composite 1500 Health Care Index, as overweight allocations to mid- and
small-cap biopharmaceutical companies weighed on returns. Partially
offsetting these negative results was strong security selection within
small-and mid-cap biopharmaceutical and medical technology companies. In
terms of individual positions, the largest detractors were a lack of
exposure to Merck* (biopharmaceutical large cap) and non-benchmark positions
in mid-cap biopharmaceutical companies Alkermes plc and Eisai Co. Ltd. A
lack of exposure to the large-cap biopharmaceutical company AbbVie* and
non-benchmark positions in Loxo Oncology, Inc.* and Spark Therapeutics,
Inc.* (both biopharmaceutical mid caps) were among the top contributors to
relative performance.
Thank you for allowing us to help you with your investment needs.
*Sunny Optical Technology, Merck, AbbVie, Loxo Oncology, Inc., and Spark
Therapeutics, Inc. were sold out of the Fund prior to July 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.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
INVESTMENT OVERVIEW
o AVERAGE ANNUAL TOTAL RETURNS AS OF 7/31/19 o
--------------------------------------------------------------------------------------------------------
SINCE INCEPTION
1 YEAR 5 YEAR 10 YEAR INCEPTION* DATE
--------------------------------------------------------------------------------------------------------
Fund Shares 12.75% 16.16% 17.70% - -
Adviser Shares 12.48% 15.87% - 17.73% 8/01/10
S&P 500(R) Index** (reflects
no deduction for fees,
expenses, or taxes) 7.99% 11.33% 14.02% - -
S&P North American
Technology Index***
(reflects no deduction for
fees, expenses, or taxes) 14.79% 19.90% 18.50% - -
S&P Composite 1500
Health Care Index****
(reflects no deduction for
fees, expenses, or taxes) 3.76% 10.71% 15.16% - -
Lipper Science & Technology
Funds Index***** (reflects
no deduction for taxes) 11.47% 16.26% 16.31% - -
*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, broad-based composite S&P 500 Index represents the weighted
average performance of a group of 500 widely held, publicly traded stocks.
***The unmanaged S&P North American Technology Index provides investors with a
benchmark that represents U.S. securities classified under the Global Industry
Classification System (GICS(R)) technology sector and internet retail
sub-industry.
****The unmanaged S&P Composite 1500 Health Care Index comprises U.S. traded
stocks that are members of either the S&P Total Market Index (TMI) or the
S&P/TSX Composite Index, and are classified within the health care sector of the
GICS(R).
*****The unmanaged Lipper Science & Technology Funds Index tracks the total
return performance of funds within the Lipper Science & Technology Funds
category.
HIGH DOUBLE-DIGIT RETURNS ARE ATTRIBUTABLE, IN PART, TO UNUSUALLY FAVORABLE
MARKET CONDITIONS AND MAY NOT BE REPEATED OR CONSISTENTLY ACHIEVED IN THE
FUTURE.
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 SCIENCE & TECHNOLOGY FUND
================================================================================
o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
S&P NORTH USAA LIPPER S&P
AMERICAN SCIENCE & SCIENCE & COMPOSITE
TECHNOLOGY TECHNOLOGY TECHNOLOGY 1500 HEALTH S&P
INDEX FUND SHARES FUNDS INDEX CARE INDEX 500 INDEX
7/31/2009 $10,000.00 $10,000.00 $10,000.00 $10,000.00 $10,000.00
8/31/2009 10,245.89 10,287.00 10,247.57 10,232.08 10,361.04
9/30/2009 10,715.59 10,775.00 10,867.32 10,389.08 10,747.67
10/31/2009 10,626.24 10,425.00 10,498.94 10,135.77 10,548.01
11/30/2009 11,180.84 11,093.00 11,016.31 11,018.27 11,180.71
12/31/2009 11,852.29 11,730.00 11,717.74 11,302.72 11,396.67
1/31/2010 10,873.47 11,019.00 10,884.01 11,336.11 10,986.69
2/28/2010 11,344.89 11,369.00 11,324.95 11,408.59 11,327.03
3/31/2010 12,137.73 12,102.00 12,103.76 11,787.78 12,010.56
4/30/2010 12,346.65 12,208.00 12,374.47 11,419.20 12,200.18
5/31/2010 11,363.73 11,295.00 11,527.29 10,677.92 11,225.98
6/30/2010 10,620.28 10,669.00 10,836.59 10,481.71 10,638.32
7/31/2010 11,423.99 11,306.00 11,522.00 10,583.93 11,383.68
8/31/2010 10,665.34 10,722.00 10,935.27 10,390.61 10,869.77
9/30/2010 12,016.58 12,123.00 12,337.34 11,376.73 11,839.84
10/31/2010 12,764.54 12,611.00 13,036.41 11,608.11 12,290.33
11/30/2010 12,703.19 12,601.00 13,094.86 11,320.24 12,291.91
12/31/2010 13,351.98 13,323.00 13,809.58 11,890.34 13,113.40
1/31/2011 13,873.36 13,800.00 14,277.54 11,969.65 13,424.20
2/28/2011 14,196.89 14,246.00 14,781.53 12,390.52 13,884.10
3/31/2011 13,921.37 14,246.00 14,669.63 12,658.92 13,889.63
4/30/2011 14,351.38 14,873.00 15,200.08 13,491.94 14,300.97
5/31/2011 14,122.03 14,894.00 14,991.18 13,764.64 14,139.09
6/30/2011 13,755.51 14,533.00 14,500.00 13,578.07 13,903.41
7/31/2011 13,740.20 14,076.00 14,089.67 13,053.98 13,620.69
8/31/2011 12,874.96 13,110.00 13,033.31 12,711.28 12,880.78
9/30/2011 12,293.48 12,452.00 12,179.81 12,110.55 11,975.28
10/31/2011 13,749.85 13,758.00 13,690.03 12,833.48 13,284.10
11/30/2011 13,481.80 13,450.00 13,319.75 12,951.03 13,254.74
12/31/2011 13,235.09 13,248.00 13,007.24 13,303.39 13,390.32
1/31/2012 14,276.03 14,098.00 14,097.19 13,778.43 13,990.41
2/29/2012 15,129.04 14,830.00 15,013.78 14,002.03 14,595.39
3/31/2012 15,824.04 15,573.00 15,679.82 14,588.52 15,075.71
4/30/2012 15,613.64 15,531.00 15,255.92 14,548.30 14,981.08
5/31/2012 14,255.22 14,427.00 13,908.04 14,039.39 14,080.71
6/30/2012 14,713.17 15,053.00 14,350.72 14,831.39 14,660.86
7/31/2012 14,736.61 15,117.00 14,240.60 14,943.78 14,864.49
8/31/2012 15,387.77 15,648.00 14,899.37 15,165.41 15,199.28
9/30/2012 15,580.72 15,998.00 15,163.55 15,766.66 15,592.05
10/31/2012 14,688.44 15,042.00 14,263.46 15,625.90 15,304.16
11/30/2012 15,011.97 15,531.00 14,622.52 15,756.93 15,392.94
12/31/2012 15,251.38 15,648.00 14,896.16 15,744.79 15,533.24
1/31/2013 15,884.57 16,624.00 15,532.87 16,926.31 16,337.78
2/28/2013 16,017.14 16,815.00 15,577.46 17,147.00 16,559.57
3/31/2013 16,459.93 17,346.00 15,977.61 18,226.56 17,180.61
4/30/2013 16,542.70 17,463.00 15,854.18 18,764.92 17,511.62
5/31/2013 17,310.48 18,004.00 16,593.07 19,110.46 17,921.25
6/30/2013 16,869.45 17,686.00 16,400.25 18,990.07 17,680.59
7/31/2013 17,644.35 18,875.00 17,507.14 20,371.98 18,580.25
8/31/2013 17,470.25 18,652.00 17,431.73 19,684.90 18,042.14
9/30/2013 18,209.33 20,021.00 18,470.67 20,325.56 18,607.93
10/31/2013 18,940.86 20,456.00 18,848.40 21,195.74 19,463.29
11/30/2013 19,650.78 21,231.00 19,409.79 22,216.71 20,056.42
12/31/2013 20,524.16 22,086.00 20,376.85 22,387.78 20,564.17
1/31/2014 20,117.38 22,720.00 20,293.39 22,583.57 19,853.18
2/28/2014 21,124.83 24,171.00 21,450.37 23,905.21 20,761.34
3/31/2014 20,915.48 23,146.00 20,876.96 23,593.62 20,935.85
4/30/2014 20,599.62 22,558.00 20,095.68 23,442.33 21,090.61
5/31/2014 21,344.81 23,480.00 20,785.89 24,119.80 21,585.70
6/30/2014 21,962.38 24,448.00 21,663.09 24,672.42 22,031.60
7/31/2014 22,035.75 24,148.00 21,338.31 24,679.04 21,727.77
8/31/2014 22,951.98 25,197.00 22,218.21 25,870.43 22,596.99
9/30/2014 22,606.43 24,724.00 21,774.18 25,909.00 22,280.09
10/31/2014 22,888.08 25,508.00 22,246.01 27,314.48 22,824.29
11/30/2014 23,917.04 26,717.00 22,983.89 28,205.34 23,438.14
12/31/2014 23,660.71 26,491.00 22,874.23 27,938.11 23,379.10
1/31/2015 22,807.66 26,504.00 22,289.08 28,301.55 22,677.28
2/28/2015 24,718.80 28,093.00 24,039.09 29,590.49 23,980.57
3/31/2015 24,012.25 27,964.00 23,688.03 29,927.94 23,601.33
4/30/2015 24,608.78 28,132.00 23,791.59 29,465.93 23,827.75
5/31/2015 25,118.40 29,308.00 24,563.72 30,817.23 24,134.15
6/30/2015 24,204.40 28,843.00 23,794.57 30,787.84 23,666.96
7/31/2015 25,165.75 29,812.00 24,113.74 31,651.56 24,162.82
8/31/2015 23,806.74 27,835.00 22,595.62 29,202.92 22,704.98
9/30/2015 23,527.08 26,736.00 22,020.76 27,521.39 22,143.18
10/31/2015 26,148.00 29,334.00 24,036.57 29,547.95 24,011.05
11/30/2015 26,486.59 29,657.00 24,490.62 29,541.43 24,082.45
12/31/2015 26,004.83 29,407.00 23,966.60 30,008.73 23,702.63
1/31/2016 24,313.57 27,121.00 21,902.78 27,717.64 22,526.41
2/29/2016 24,086.85 26,639.00 21,702.96 27,567.81 22,496.01
3/31/2016 26,123.48 28,264.00 23,332.64 28,405.24 24,022.10
4/30/2016 25,295.83 28,181.00 22,940.03 29,228.75 24,115.23
5/31/2016 26,667.44 29,186.00 24,081.08 29,874.35 24,548.29
6/30/2016 26,066.08 28,567.00 23,565.66 30,184.16 24,611.90
7/31/2016 28,004.11 30,329.00 25,311.66 31,683.05 25,519.31
8/31/2016 28,608.94 30,659.00 25,864.74 30,687.20 25,555.14
9/30/2016 29,411.64 31,499.00 26,635.97 30,551.59 25,559.97
10/31/2016 29,226.96 30,535.00 26,064.33 28,514.90 25,093.72
11/30/2016 29,233.12 30,370.00 26,236.72 29,132.29 26,023.07
12/31/2016 29,530.10 30,179.00 26,312.60 29,392.62 26,537.44
1/31/2017 30,980.14 32,085.00 27,652.19 30,066.16 27,040.76
2/28/2017 32,352.61 33,547.00 28,833.52 31,974.65 28,114.44
3/31/2017 33,107.95 34,306.00 29,569.25 31,877.45 28,147.24
4/30/2017 33,983.21 34,980.00 30,286.96 32,407.29 28,436.31
5/31/2017 35,506.88 36,699.00 31,645.11 32,694.92 28,836.48
6/30/2017 34,697.09 36,914.00 31,199.09 34,232.55 29,016.47
7/31/2017 36,201.62 38,533.00 32,503.18 34,425.79 29,613.13
8/31/2017 36,982.01 39,150.00 33,342.43 35,030.75 29,703.78
9/30/2017 37,374.46 39,293.00 33,929.79 35,421.49 30,316.51
10/31/2017 40,201.64 40,812.00 35,795.65 35,167.39 31,023.96
11/30/2017 40,691.34 41,442.00 36,399.00 36,219.58 31,975.46
12/31/2017 40,687.10 41,044.00 36,308.68 35,996.91 32,330.98
1/31/2018 44,592.05 44,582.00 39,087.74 38,466.41 34,182.06
2/28/2018 44,790.12 43,651.00 39,013.69 36,795.39 32,922.21
3/31/2018 43,409.49 42,782.00 38,046.17 35,815.65 32,085.54
4/30/2018 43,766.65 42,083.00 38,006.05 36,259.96 32,208.66
5/31/2018 46,645.12 44,706.00 40,349.69 36,548.10 32,984.31
6/30/2018 46,774.73 44,582.00 40,219.29 37,176.62 33,187.32
7/31/2018 47,570.69 45,311.00 40,680.43 39,578.46 34,422.34
8/31/2018 51,077.79 47,375.00 43,034.47 41,390.69 35,544.01
9/30/2018 50,933.26 47,189.00 42,558.49 42,488.41 35,746.32
10/31/2018 45,714.33 41,013.00 38,164.74 39,491.12 33,303.05
11/30/2018 45,568.71 42,735.00 38,188.79 42,212.12 33,981.72
12/31/2018 41,858.52 39,265.00 35,064.03 38,410.57 30,913.48
1/31/2019 46,009.35 44,051.00 38,929.39 40,378.87 33,390.76
2/28/2019 48,194.47 46,175.00 41,111.87 40,905.94 34,462.87
3/31/2019 50,225.27 47,381.00 42,171.34 41,055.37 35,132.55
4/30/2019 53,513.29 49,684.00 44,781.28 39,995.69 36,555.05
5/31/2019 49,031.95 46,661.00 41,011.45 38,978.70 34,232.04
6/30/2019 52,729.59 50,008.00 44,160.90 41,638.42 36,644.59
7/31/2019 54,606.33 51,087.00 45,346.56 41,065.45 37,171.25
[END CHART]
Data from 7/31/09 through 7/31/19.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Science & Technology Fund Shares 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 Science & Technology Funds Index reflects the fees and expenses
of the underlying funds included in the index.
================================================================================
INVESTMENT OVERVIEW | 5
================================================================================
o TOP 10 HOLDINGS* - 7/31/19 o
(% of Net Assets)
Amazon.com, Inc. .......................................................... 4.6%
RingCentral, Inc. "A" ..................................................... 2.9%
Netflix, Inc. ............................................................. 2.9%
Visa, Inc. "A" ............................................................ 2.9%
Marvell Technology Group Ltd. ............................................. 2.8%
Facebook, Inc. "A" ........................................................ 2.8%
Global Payments, Inc. ..................................................... 2.3%
Alphabet, Inc. "A" ........................................................ 2.2%
ServiceNow, Inc. .......................................................... 2.1%
KLA Corp. ................................................................. 1.7%
o SECTOR ALLOCATION* - 7/31/19 o
(% of Net Assets)
[PIE CHART OF SECTOR ALLOCATION]
TECHNOLOGY 35.3%
CONSUMER, NON-CYCLICAL 29.7%
COMMUNICATIONS 25.4%
FINANCIAL 3.4%
INDUSTRIAL 2.8%
CONSUMER, CYCLICAL 0.2%
[END CHART]
*Does not include money market instruments.
Percentages are of the net assets of the Fund and may not equal 100%.
Refer to the Portfolio of Investments for a complete list of securities.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
================================================================================
6 | USAA SCIENCE & TECHNOLOGY 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 Management Inc. ("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 USAA Asset Management Company ("AMCO")
was acquired by Victory Capital Holdings, Inc., the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
--------------------------------------------------------------------------
FOR AGAINST ABSTAIN
--------------------------------------------------------------------------
23,193,868 3,103,798 1,695,757
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
person" as defined in the Investment Company Act of 1940, as amended (1940 Act)
("Interested Trustee"); 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
July 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 July 31, 2019:
DIVIDEND RECEIVED LONG-TERM
DEDUCTION (CORPORATE CAPITAL GAIN
SHAREHOLDERS)(1) DISTRIBUTIONS(2)
----------------------------------------------------------------------------
20.36% $164,320,000
----------------------------------------------------------------------------
(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 July 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 SCIENCE & TECHNOLOGY FUND
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA SCIENCE & TECHNOLOGY FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Science & Technology Fund (the "Fund") (one of the funds constituting the USAA
Mutual Funds Trust (the "Trust")), including the portfolio of investments, as of
July 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 the USAA Mutual Funds Trust) at July 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. f ederal
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 July 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
September 20, 2019
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 9
================================================================================
PORTFOLIO OF INVESTMENTS
July 31, 2019
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
EQUITY SECURITIES (96.8%)
COMMON STOCKS (96.6%)
COMMUNICATIONS (25.2%)
----------------------
INTERNET (24.4%)
28,973 Alibaba Group Holding Ltd. ADR(a) $ 5,015
27,711 Alphabet, Inc. "A"(a) 33,758
36,459 Amazon.com, Inc.(a) 68,061
1,008,900 Boingo Wireless, Inc.(a) 15,154
34,375 Expedia Group, Inc. 4,563
213,537 Facebook, Inc. "A"(a) 41,475
227,070 GoDaddy, Inc. "A"(a) 16,662
211,000 Match Group, Inc. 15,886
192,562 Meituan Dianping "B"(a),(b) 1,557
3,201 MercadoLibre, Inc.(a) 1,989
132,514 Netflix, Inc.(a) 42,801
114,200 Proofpoint, Inc.(a) 14,412
304,513 RingCentral, Inc. "A"(a) 43,235
11,551 Spotify Technology S.A.(a) 1,790
105,802 Tencent Holdings Ltd.(b) 4,930
150,500 Wix.com Ltd.(a) 22,352
110,646 Yandex N.V. "A"(a) 4,340
335,695 Yelp, Inc.(a) 11,766
160,500 Zendesk, Inc.(a) 13,411
----------
363,157
----------
TELECOMMUNICATIONS (0.8%)
24,102 Airgain, Inc.(a) 313
847,900 Viavi Solutions, Inc.(a) 12,439
----------
12,752
----------
Total Communications 375,909
----------
CONSUMER, CYCLICAL (0.2%)
-------------------------
RETAIL (0.2%)
574,600 Waitr Holdings, Inc.(a) 2,638
----------
CONSUMER, NON-CYCLICAL (29.7%)
------------------------------
AGRICULTURE (0.0%)
5,761 Genus plc(b) 185
----------
================================================================================
10 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
BIOTECHNOLOGY (14.7%)
366,900 Adverum Biotechnologies, Inc.(a) $ 4,920
115,400 Albireo Pharma, Inc.(a) 2,988
24,708 Alder Biopharmaceuticals, Inc.(a) 250
115,100 Allakos, Inc.(a) 4,002
3,834 Alnylam Pharmaceuticals, Inc.(a) 298
719,659 Amicus Therapeutics, Inc.(a) 8,924
385,100 Apellis Pharmaceuticals, Inc.(a) 10,756
108,211 Arena Pharmaceuticals, Inc.(a) 6,783
5,375 Assembly Biosciences, Inc.(a) 67
206,700 Atreca, Inc. "A"(a) 2,615
197,858 Audentes Therapeutics, Inc.(a) 7,701
198,600 Autolus Therapeutics plc ADR(a) 3,062
319,291 Avrobio, Inc.(a) 6,775
53,300 BeiGene Ltd. ADR(a) 7,320
142,098 Bluebird Bio, Inc.(a) 18,648
110,622 Blueprint Medicines Corp.(a) 11,079
5,154 Calithera Biosciences, Inc.(a) 22
143,046 Crinetics Pharmaceuticals, Inc.(a) 2,901
501,174 CytomX Therapeutics, Inc.(a) 5,167
193,104 Eidos Therapeutics, Inc.(a) 6,291
380,300 Epizyme, Inc.(a) 5,043
387,102 Equillium, Inc.(a) 1,587
29,954 Evelo Biosciences, Inc.(a) 183
97,000 Exact Sciences Corp.(a) 11,166
989,266 Fate Therapeutics, Inc.(a) 21,813
7,685 Forty Seven, Inc.(a) 68
24,000 Frontage Holdings Corp.(a),(c) 10
140,600 Genfit ADR(a) 2,463
1,730 Genmab A/S(a),(b) 320
12,427 GlycoMimetics, Inc.(a) 115
146,973 Gossamer Bio, Inc.(a) 2,917
245,800 Homology Medicines, Inc.(a) 4,370
2,985 Hutchison China MediTech Ltd.(a) 63
16,600 Illumina, Inc.(a) 4,970
3,174 Incyte Corp.(a) 270
343,900 Iovance Biotherapeutics, Inc.(a) 8,457
41,784 Kaleido Biosciences, Inc.(a) 321
6,460 Karyopharm Therapeutics, Inc.(a) 57
157,200 Kiniksa Pharmaceuticals Ltd. "A"(a) 1,855
41,300 Ligand Pharmaceuticals, Inc.(a) 3,779
200 Livongo Health, Inc.(a) 9
213,500 MacroGenics, Inc.(a) 3,072
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
8,485 Medicines Co.(a) $ 304
231,200 NeoGenomics, Inc.(a) 5,634
4,945 Neon Therapeutics, Inc.(a) 14
184,310 NGM Biopharmaceuticals, Inc.(a) 2,593
133,461 Precision BioSciences, Inc.(a) 1,718
4,246 Radius Health, Inc.(a) 91
79,400 REGENXBIO, Inc.(a) 3,526
130,914 Replimune Group, Inc.(a) 1,626
40,222 Rigel Pharmaceuticals, Inc.(a) 92
63,600 Sage Therapeutics, Inc.(a) 10,198
82,997 Scholar Rock Holding Corp.(a) 1,020
7,425 Seattle Genetics, Inc.(a) 562
83,669 Surface Oncology, Inc.(a) 185
13,167 Syndax Pharmaceuticals, Inc.(a) 126
217,355 Twist Bioscience Corp.(a) 7,329
2,538 Ultragenyx Pharmaceutical, Inc.(a) 153
5,037 Vertex Pharmaceuticals, Inc.(a) 839
4,495 WaVe Life Sciences Ltd.(a) 96
7,045 Zai Lab Ltd. ADR(a) 226
----------
219,809
----------
COMMERCIAL SERVICES (7.0%)
35,816 Equifax, Inc. 4,982
63,400 Euronet Worldwide, Inc.(a) 9,885
45,261 FleetCor Technologies, Inc.(a) 12,862
204,608 Global Payments, Inc. 34,358
9,658 HMS Holdings Corp.(a) 337
97,442 PayPal Holdings, Inc.(a) 10,757
122,671 Total System Services, Inc. 16,649
63,131 TransUnion 5,226
41,522 WEX, Inc.(a) 9,055
----------
104,111
----------
HEALTHCARE PRODUCTS (1.1%)
24,794 Abbott Laboratories 2,160
570 Alcon, Inc.(a),(b) 33
3,280 Asahi Intecc Co. Ltd.(b) 86
5,738 AtriCure, Inc.(a) 184
11,260 Avantor, Inc.(a) 198
5,957 Baxter International, Inc. 500
1,000 Bio-Techne Corp. 210
32,330 Boston Scientific Corp.(a) 1,373
7,697 Danaher Corp. 1,081
3,780 Edwards Lifesciences Corp.(a) 805
================================================================================
12 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
2,673 iRhythm Technologies, Inc.(a) $ 222
13,111 Medtronic plc 1,337
5,753 NuVasive, Inc.(a) 383
486,600 Quotient Ltd.(a) 5,138
11,191 Smith & Nephew plc(b) 253
569 Tecan Group AG(b) 145
4,632 Thermo Fisher Scientific, Inc. 1,286
3,576 Zimmer Biomet Holdings, Inc. 483
----------
15,877
----------
HEALTHCARE-SERVICES (0.9%)
9,305 Acadia Healthcare Co., Inc.(a) 297
900 Amedisys, Inc.(a) 124
5,776 Anthem, Inc. 1,702
1,874 Fresenius SE & Co. KGaA(b) 94
6,622 HCA Healthcare, Inc. 884
1,905 Humana, Inc. 565
1,380 ICON plc(a) 215
253,400 Invitae Corp.(a) 6,814
1,299 Molina Healthcare, Inc.(a) 172
9,005 NMC Health plc(b) 269
2,882 Teladoc Health, Inc.(a) 197
4,421 UnitedHealth Group, Inc. 1,101
1,969 WellCare Health Plans, Inc.(a) 566
28,960 WuXi AppTec Co. Ltd. "H"(b),(c) 268
----------
13,268
----------
PHARMACEUTICALS (6.0%)
300,392 Aimmune Therapeutics, Inc.(a) 5,783
18,774 Alkermes plc(a) 435
535 Allergan plc 86
14,963 Amneal Pharmaceuticals, Inc.(a) 55
77,066 Ascendis Pharma A/S(a) 8,921
23,557 AstraZeneca plc ADR 1,024
28,644 Bristol-Myers Squibb Co. 1,272
2,830 Chugai Pharmaceutical Co. Ltd.(b) 202
14,251 Clementia Pharmaceuticals, Inc.(a),(d),(e),(f) 15
22,762 Coherus Biosciences, Inc.(a) 383
2,130 Cyclerion Therapeutics, Inc.(a) 20
5,350 Daiichi Sankyo Co. Ltd.(b) 325
6,166 Dermira, Inc.(a) 54
6,715 Eisai Co. Ltd.(b) 363
4,793 Elanco Animal Health, Inc.(a) 158
11,101 Eli Lilly & Co. 1,209
9,696 G1 Therapeutics, Inc.(a) 241
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
67,100 Galapagos N.V.(a) $ 11,635
1,967 Galapagos N.V.(a) 344
6,154 Global Blood Therapeutics, Inc.(a) 337
90,674 Gritstone Oncology, Inc.(a) 952
103,454 GW Pharmaceuticals plc(a) 16,791
6,328 Heron Therapeutics, Inc.(a) 110
1,559 Hikma Pharmaceuticals plc(b) 34
21,979 Ironwood Pharmaceuticals, Inc.(a) 234
1,825 Kala Pharmaceuticals, Inc.(a) 11
583,956 Kura Oncology, Inc.(a) 11,165
4,689 Laboratorios Farmaceuticos Rovi S.A.(b) 108
200 Madrigal Pharmaceuticals, Inc.(a) 17
118,582 MediWound Ltd.(a) 335
85,100 Mirati Therapeutics, Inc.(a) 9,004
22,074 Momenta Pharmaceuticals, Inc.(a) 249
17,873 Mylan N.V.(a) 374
64,318 MyoKardia, Inc.(a) 3,501
310,840 Myovant Sciences Ltd.(a) 2,238
29,800 Neurocrine Biosciences, Inc.(a) 2,872
2,855 Novartis AG(b) 262
2,905 ObsEva S.A.(a) 26
8,930 Ono Pharmaceutical Co. Ltd.(b) 162
44,810 Pfizer, Inc. 1,740
11,439 PhaseBio Pharmaceuticals, Inc.(a) 89
12,424 Portola Pharmaceuticals, Inc.(a) 331
7,255 Ra Pharmaceuticals, Inc.(a) 247
8,452 Revance Therapeutics, Inc.(a) 106
39,600 Sinopharm Group Co. Ltd. "H"(b) 146
2,365 Takeda Pharmaceutical Co. Ltd.(b) 81
10,675 Teva Pharmaceutical Industries Ltd. ADR(a) 85
4,080 Tricida, Inc.(a) 129
3,552 UCB S.A.(b) 277
5,490 UroGen Pharma Ltd.(a) 187
101,000 Xencor, Inc.(a) 4,446
2,398 Zealand Pharma A/S ADR(a) 54
----------
89,225
----------
Total Consumer, Non-cyclical 442,475
----------
FINANCIAL (3.4%)
----------------
DIVERSIFIED FINANCIAL SERVICES (3.4%)
25,900 LendingTree, Inc.(a) 8,354
240,424 Visa, Inc. "A" 42,795
----------
Total Financial 51,149
----------
================================================================================
14 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
INDUSTRIAL (2.8%)
-----------------
AEROSPACE/DEFENSE (0.4%)
24,584 L3Harris Technologies, Inc.(a) $ 5,104
----------
ELECTRONICS (1.5%)
1,931,053 Flex Ltd.(a) 21,531
----------
MISCELLANEOUS MANUFACTURERS (0.5%)
149,813 Fabrinet(a) 8,042
----------
TRANSPORTATION (0.4%)
320,830 CryoPort, Inc.(a) 6,567
1 MTR Corp. Ltd. -
----------
6,567
----------
Total Industrial 41,244
----------
TECHNOLOGY (35.3%)
------------------
COMPUTERS (2.5%)
6,785 Accenture plc "A" 1,307
23,476 Apple, Inc. 5,001
272,711 Genpact Ltd. 10,821
257,034 Lumentum Holdings, Inc.(a) 14,556
106,807 Western Digital Corp. 5,756
----------
37,441
----------
SEMICONDUCTORS (16.3%)
454,458 Advanced Micro Devices, Inc.(a) 13,838
57,100 Broadcom, Inc. 16,558
893,900 Cohu, Inc. 13,552
172,700 Cree, Inc.(a) 10,739
265,645 Inphi Corp.(a) 15,995
186,159 KLA Corp. 25,377
74,800 Lam Research Corp. 15,604
987,267 Lattice Semiconductor Corp.(a) 19,094
996,000 MACOM Technology Solutions Holdings, Inc.(a) 19,542
1,596,131 Marvell Technology Group Ltd. 41,914
174,965 Micron Technology, Inc.(a) 7,854
143,900 MKS Instruments, Inc. 12,250
78,700 Monolithic Power Systems, Inc. 11,660
184,133 Semtech Corp.(a) 9,735
25,600 Tokyo Electron Ltd.(b) 4,336
267,598 Ultra Clean Holdings, Inc.(a) 3,904
----------
241,952
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
---------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
---------------------------------------------------------------------------------------------------
SOFTWARE (16.5%)
23,342 Adobe, Inc.(a) $ 6,976
212,100 Arco Platform Ltd. "A"(a) 9,362
334,500 Cornerstone OnDemand, Inc.(a) 19,802
104,200 Coupa Software, Inc.(a) 14,141
225,100 DocuSign, Inc.(a) 11,642
468,500 Dropbox, Inc. "A"(a) 11,038
22,267 Electronic Arts, Inc.(a) 2,060
30,500 Fair Isaac Corp.(a) 10,596
54,067 Guidewire Software, Inc.(a) 5,519
200 Health Catalyst, Inc.(a) 9
151,374 Microsoft Corp. 20,628
167,200 Nexon Co. Ltd.(a),(b) 2,647
75,000 Paycom Software, Inc.(a) 18,056
300 Phreesia, Inc.(a) 8
74,492 salesforce.com, Inc.(a) 11,509
221,978 Sciplay Corp. "A"(a) 2,315
111,418 ServiceNow, Inc.(a) 30,906
40,155 Splunk, Inc.(a) 5,433
281,882 SVMK, Inc.(a) 4,784
98,845 Take-Two Interactive Software, Inc.(a) 12,111
168,400 Twilio, Inc. "A"(a) 23,426
74,400 Veeva Systems, Inc. "A"(a) 12,343
53,472 Workday, Inc. "A"(a) 10,693
----------
246,004
----------
Total Technology 525,397
----------
Total Common Stocks (cost: $1,189,606) 1,438,812
----------
PREFERRED STOCKS (0.2%)
COMMUNICATIONS (0.2%)
---------------------
INTERNET (0.2%)
55,796 Uber Technologies, Inc.(a),(e) (cost: $865) 2,351
----------
Total Equity Securities (cost: $1,190,471) 1,441,163
----------
MONEY MARKET INSTRUMENTS (3.4%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (3.4%)
51,017,896 State Street Institutional Treasury Money Market Fund
Premier Class, 2.09%(g)
(cost: $51,018) 51,018
----------
TOTAL INVESTMENTS (COST: $1,241,489) $1,492,181
==========
================================================================================
16 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
---------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
---------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
---------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $1,421,714 $17,083 $15 $1,438,812
Preferred Stocks 2,351 - - 2,351
Money Market Instruments:
Government & U.S. Treasury
Money Market Funds 51,018 - - 51,018
---------------------------------------------------------------------------------------------------
Total $1,475,083 $17,083 $15 $1,492,181
---------------------------------------------------------------------------------------------------
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 July 31, 2019, the Fund had transfers into/out of Level 3 that were under
0.50% of net assets.
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
July 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 8.1% of net assets at July 31, 2019.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
ADR American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S.
dollars.
o SPECIFIC NOTES
(a) Non-income-producing security.
(b) Securities with a value of $17,083,000, which represented 1.1% of
the Fund's net assets, were classified as Level 2 as of July 31, 2019,
due to the prices being adjusted to take into account significant market
movements following the close of local trading.
(c) Restricted security that is not registered under the Securities Act
of 1933. A resale of this security in the United States may occur in an
exempt transaction to a qualified institutional buyer as defined by
================================================================================
18 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
Rule 144A, and as such has been deemed liquid by Victory Capital under
liquidity guidelines approved by USAA Mutual Funds Trust's Board of
Trustees, unless otherwise noted as illiquid.
(d) Security was fair valued at July 31, 2019, by Victory Capital in
accordance with valuation procedures approved by USAA Mutual Funds
Trust's Board of Trustees. The total value of all such securities was
$15,000, which represented less than 0.1% of the Fund's net assets.
(e) Security deemed illiquid by Victory Capital, under liquidity
guidelines approved by USAA Mutual Funds Trust's Board of Trustees.
(f) Security was classified as Level 3.
(g) Rate represents the money market fund annualized seven-day yield at
July 31, 2019.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 19
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
July 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $1,241,489) $1,492,181
Cash denominated in foreign currencies (identified cost of $7) 7
Receivables:
Capital shares sold 233
Dividends and interest 159
Securities sold 2,167
Other 4
----------
Total assets 1,494,751
----------
LIABILITIES
Payables:
Securities purchased 3,961
Capital shares redeemed 674
Accrued administration and servicing fees 191
Accrued management fees 956
Accrued transfer agent's fees 128
Other accrued expenses and payables 112
----------
Total liabilities 6,022
----------
Net assets applicable to capital shares outstanding $1,488,729
==========
NET ASSETS CONSIST OF:
Paid-in capital $ 926,866
Distributable earnings 561,863
----------
Net assets applicable to capital shares outstanding $1,488,729
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $1,383,956/48,741
capital shares outstanding, no par value) $ 28.39
==========
Adviser Shares (net assets of $104,773/3,806
capital shares outstanding, no par value) $ 27.53
==========
See accompanying notes to financial statements.
================================================================================
20 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended July 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $181) $ 8,099
Interest 466
Securities lending (net) 156
--------
Total income 8,721
--------
EXPENSES
Management fees 9,930
Administration and servicing fees:
Fund Shares 1,926
Adviser Shares 155
Transfer agent's fees:
Fund Shares 1,461
Adviser Shares 131
Distribution and service fees (Note 8):
Adviser Shares 259
Custody and accounting fees:
Fund Shares 221
Adviser Shares 17
Postage:
Fund Shares 69
Adviser Shares 7
Shareholder reporting fees:
Fund Shares 33
Adviser Shares 1
Trustees' fees 35
Registration fees:
Fund Shares 32
Adviser Shares 18
Professional fees 93
Other 23
--------
Total expenses 14,411
--------
================================================================================
FINANCIAL STATEMENTS | 21
================================================================================
Expense paid indirectly:
Fund Shares $ (1)
--------
Net expenses 14,410
--------
NET INVESTMENT LOSS (5,689)
--------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain on:
Unaffiliated transactions 368,845
Affiliated transactions (Note 5) 3
Foreign currency transactions 264
Change in net unrealized appreciation/(depreciation) of:
Investments (199,048)
Foreign currency translations 7
--------
Net realized and unrealized gain 170,071
========
Increase in net assets resulting from operations $164,382
========
See accompanying notes to financial statements.
================================================================================
22 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended July 31,
-----------------------------------------------------------------------------------------
2019 2018
-----------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment loss $ (5,689) $ (4,529)
Net realized gain on investments 368,848 166,058
Net realized gain (loss) on foreign currency transactions 264 (54)
Change in net unrealized appreciation/(depreciation) of:
Investments (199,048) 56,447
Foreign currency translations 7 (9)
------------------------
Increase in net assets resulting from operations 164,382 217,913
------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (162,096) (93,868)
Adviser Shares (13,848) (9,146)
------------------------
Distributions to shareholders (175,944) (103,014)
------------------------
NET INCREASE IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 7)
Fund Shares 64,204 85,311
Adviser Shares (7,222) (9,718)
------------------------
Total net increase in net assets
from capital share transactions 56,982 75,593
------------------------
Capital contribution from USAA Transfer
Agency Company - 2
------------------------
Net increase in net assets 45,420 190,494
NET ASSETS
Beginning of year 1,443,309 1,252,815
------------------------
End of year $1,488,729 $1,443,309
========================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 23
================================================================================
NOTES TO FINANCIAL STATEMENTS
July 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 Science & Technology 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
long-term capital appreciation.
The Fund consists of two classes of shares: Science & Technology Fund Shares
(Fund Shares) and Science & Technology Fund Adviser Shares (Adviser Shares).
Each class of shares has equal rights to assets and earnings, except that each
class bears certain class-related expenses specific to the particular class.
These expenses include administration and servicing fees, transfer agent fees,
postage, shareholder reporting fees, distribution and service (12b-1) fees, and
certain registration and custodian fees. Expenses not attributable to a specific
class, income, and realized gains or losses on investments are allocated to each
class of shares based on each class' relative net assets. Each class has
exclusive voting rights on matters related solely to that class and separate
voting rights on matters that relate to all classes. The Adviser Shares permit
investors to purchase shares through financial intermediaries, including banks,
broker-dealers, insurance companies, investment advisers, plan sponsors, and
financial professionals that provide various administrative and distribution
services.
On November 6, 2018, United Services Automobile Association (USAA), the parent
company of USAA Asset Management Company (AMCO), the investment adviser to the
Fund, and USAA Transfer Agency Company, d/b/a
================================================================================
24 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
USAA Shareholder Account Services (SAS), the transfer agent to the Fund,
announced that AMCO and SAS would be acquired by Victory Capital Holdings, Inc.,
a global investment management firm headquartered in Cleveland, Ohio (the
Transaction) on July 1, 2019. Effective August 5, 2019, Citibank, N.A. is the
new custodian for the USAA Mutual Funds. 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. 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.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Pricing 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 closing bid
price generally is used for U.S. listed equities and the average of the
bid and asked prices is used for foreign listed equities. Actively
traded equity securities listed on a domestic exchange
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
generally are categorized in Level 1 of the fair value hierarchy.
Certain preferred and equity securities traded in inactive markets
generally are categorized in Level 2 of the fair value hierarchy.
2. Equity securities trading in various foreign markets may take place
on days when the NYSE is closed. Further, when the NYSE is open, the
foreign markets may be closed. Therefore, the calculation of the Fund's
net asset value (NAV) may not take place at the same time the prices of
certain foreign securities held by the Fund are determined. In many
cases, events affecting the values of foreign securities that occur
between the time of their last quoted sale or official closing price and
the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not need to be reflected in the value of the Fund's
foreign securities. However, the Manager and the Fund's subadviser(s)
will monitor for events that would materially affect the value of the
Fund's foreign securities. The Fund's subadviser(s) have agreed to
notify the Manager of significant events they identify that would
materially affect the value of the Fund's foreign securities. If the
Manager determines that a particular event would materially affect the
value of the Fund's foreign securities, then the Committee will consider
such available information that it deems relevant and will determine a
fair value for the affected foreign securities in accordance with
valuation procedures. In addition, information from an external vendor
or other sources may be used to adjust the foreign market closing prices
of foreign equity securities to reflect what the Committee believes to
be the fair value of the securities as of the close of the NYSE. Fair
valuation of affected foreign equity securities may occur frequently
based on an assessment that events which occur on a fairly regular basis
(such as U.S. market movements) are significant. Such securities are
categorized in Level 2 of the fair value hierarchy.
3. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value hierarchy.
4. Short-term debt securities with original or remaining maturities of
60 days or less generally are priced but may be valued at amortized
================================================================================
26 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
cost, provided that amortized cost represents the fair value of such
securities.
5. Repurchase agreements are valued at cost.
6. Forward foreign currency contracts are valued on a daily basis using
forward foreign currency exchange rates obtained from an independent
pricing service and are categorized in Level 2 of the fair value
hierarchy.
7. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has been recognized in relation to a security or class of securities,
the securities are valued in good faith by the Committee in accordance
with valuation procedures approved by the Board. The effect of fair
value pricing is that securities may not be priced on the basis of
quotations from the primary market in which they are traded and the
actual price realized from the sale of a security may differ materially
from the fair value price. Valuing these securities at fair value is
intended to cause the Fund's NAV to be more reliable than it otherwise
would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
broker-dealers, other pricing services, or widely used quotation
systems. General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and duration
of any restrictions on disposition of the securities, evaluation of
credit quality, and an evaluation of the forces that influenced the
market in which the securities are purchased and sold.
B. FAIR VALUE MEASUREMENTS - Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the Portfolio of Investments 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 | 27
================================================================================
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 July 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.
================================================================================
28 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
E. FOREIGN TAXATION - Foreign income and capital gains on some foreign
securities may be subject to foreign taxes, which are reflected as a
reduction to such income and realized gains. The Fund records a liability
based on unrealized gains to provide for potential foreign taxes payable
upon the sale of these securities. Foreign taxes have been provided for in
accordance with the Fund's understanding of the applicable countries'
prevailing tax rules and rates.
F. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the
exchange rate obtained from an independent pricing service on the
respective dates of such transactions.
2. Market value of securities, other assets, and liabilities at the
exchange rate obtained from an independent pricing service on a daily
basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the amounts received. At
the end of the Fund's fiscal year, net realized foreign currency gains/
losses are reclassified from accumulated net realized gains/losses to
accumulated undistributed net investment income on the Statement of Assets
and Liabilities, as such amounts are treated as ordinary income/loss for
federal income tax purposes. Net unrealized foreign currency exchange
gains/losses arise from changes in the value of assets and liabilities,
other than investments in securities, resulting from changes in the exchange
rate.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
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 July
31, 2019, brokerage commission recapture credits reduced the expenses of the
Fund Shares by $1,000.
H. INDEMNIFICATIONS - Under the Trust's organizational documents, its
officers and trustees are indemnified against certain liabilities arising
out of the performance of their duties to the Trust. In addition, in the
normal course of business, the Trust enters into contracts that contain a
variety of representations and warranties that provide general
indemnifications. The Trust's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the
Trust that have not yet occurred. However, the Trust expects the risk of
loss to be remote.
I. USE OF ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINE OF CREDIT
The Fund participates, along with other funds of the Trust and 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. 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.
For the period July 1, 2019 to July 31, 2019, the Fund paid Citibank facility
fees of less than $500, which represents 1.0% of the total fees paid
================================================================================
30 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
to Citibank by the funds of the Trusts. The Fund had no borrowings under this
agreement during the period July 1, 2019 to July 31, 2019. Effective July 1,
2019, the line of credit among the Trust, with respect to its funds, and USAA
Capital Corporation (CAPCO) terminated. For the period from August 1, 2018 to
June 30, 2019, the Fund paid CAPCO facility fees of $11,000, which represents
1.7% of the total fees paid to CAPCO by the funds of the Trusts. The Fund had no
borrowings under this agreement during the period August 1, 2018 to June 30,
2019.
(3) INTERFUND LENDING
Effective July 1, 2019, the Trust relies on an exemptive order granted to
Victory Capital and its affiliated funds by the U.S. Securities and Exchange
Commission (SEC) in March 2017 (the 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 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 Order, by averaging the current repurchase
agreement rate and the current bank loan rate. For the period July 1, 2019 to
July 31, 2019, the Fund did not lend.
(4) 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, passive foreign investment company,
ordinary loss netting to reduce short term capital gains and equalization
adjustments resulted in reclassifications to the Statement of Assets and
Liabilities to decrease distributable earnings by $2,959,000, and
================================================================================
NOTES TO FINANCIAL STATEMENTS | 31
================================================================================
increase paid in capital by $2,959,000. These reclassifications had no effect on
net assets.
The tax character of distributions paid during the years ended July 31, 2019,
and 2018, was as follows:
2019 2018
------------------------------------
Ordinary income* $ 14,583,000 $ 34,479,000
Long-term realized capital gains 161,361,000 68,535,000
------------ ------------
Total distributions paid $175,944,000 $103,014,000
============ ============
As of July 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 5,194,000
Undistributed long-term capital gains 312,305,000
Unrealized appreciation of investments 244,364,000
*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 passive foreign investment company
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 July 31, 2019, the Fund had no capital loss carryforwards, for federal income
tax purposes.
TAX BASIS OF INVESTMENTS - At July 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 Science &
Technology Fund $1,247,817,000 $275,716,000 $(31,352,000) $244,364,000
================================================================================
32 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
(5) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended July 31, 2019, were $1,497,860,000 and
$1,654,495,000, respectively.
In accordance with affiliated transaction procedures approved by the Board,
purchases and sales of security transactions were executed between the Fund and
affiliated 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 July 31, 2019 were as follows:
NET REALIZED
PURCHASES SALES GAIN (LOSS)
--------------------------------------------------------------------------------
$1,022,000 $753,000 $3,000
(6) 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 33
================================================================================
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 July 31, 2019, the Fund had no securities on
loan.
(7) CAPITAL SHARE TRANSACTIONS
At July 31, 2019, there were an unlimited number of shares of capital stock at
no par value authorized for the Fund.
Capital share transactions for all classes were as follows, in thousands:
YEAR ENDED YEAR ENDED
JULY 31, 2019 JULY 31, 2018
-------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------
FUND SHARES:
Shares sold 4,641 $ 123,560 7,012 $ 196,505
Shares issued from
reinvested dividends 6,997 159,454 3,464 91,940
Shares redeemed (8,391) (218,810) (7,270) (203,134)
-------------------------------------------------------
Net increase from capital
share transactions 3,247 $ 64,204 3,206 $ 85,311
=======================================================
ADVISER SHARES:
Shares sold 425 $ 10,908 537 $ 14,724
Shares issued from
reinvested dividends 609 13,485 344 8,928
Shares redeemed (1,272) (31,615) (1,220) (33,370)
-------------------------------------------------------
Net decrease from capital
share transactions (238) $ (7,222) (339) $ (9,718)
=======================================================
(8) TRANSACTIONS WITH MANAGER
MANAGEMENT FEES - The Manager provides investment management services to the
Fund pursuant to an Advisory Agreement. Effective July 1, 2019, the Trust relies
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
================================================================================
34 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
shareholder approval) one or more subadvisers to manage the day-to-day
investment of a fund's assets.
The Manager monitors each subadviser's performance through quantitative and
qualitative analysis and periodically reports to the Board as to whether each
subadviser's agreement should be renewed, terminated, or modified. The Manager
is also responsible for determining the asset allocation for the subadviser(s).
The allocation for each subadviser could range from 0% to 100% of the Fund's
assets, and the Manager could change the allocations without shareholder
approval.
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee is accrued daily and paid monthly at
an annualized rate of 0.75% of the Fund's average daily net assets.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Science & Technology Funds Index. The Lipper Science &
Technology Funds Index tracks the total return performance of funds within the
Lipper Science & Technology Funds category.
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,
================================================================================
NOTES TO FINANCIAL STATEMENTS | 35
================================================================================
which is then multiplied by a fraction, the numerator of which is the number of
days in the month and the denominator of which is 365 (366 in leap years). The
resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper Science & Technology Funds Index over that period, even
if the class had overall negative returns during the performance period.
Under the investment advisory agreement with the Manager that took effect on
July 1, 2019, no performance adjustments will be made for the period beginning
July 1, 2019, through June 30, 2020. Only performance beginning as of July 1,
2019, and thereafter will be utilized in calculating future performance
adjustments.
For the period from August 1, 2018 to June 30, 2019, the Fund incurred
management fees, paid or payable to AMCO, of $8,974,000, which included a
performance adjustment for the Fund Shares and Adviser Shares of $(430,000) and
$(45,000), respectively. For the Fund Shares and Adviser Shares, the performance
adjustments were (0.03)% and (0.04)%, respectively. For the period July 1, 2019
to July 31, 2019, the Fund incurred management fees, paid or payable to Victory
Capital of $956,000, which included no performance adjustments.
SUBADVISORY ARRANGEMENT(s) - Effective July 1, 2019, Victory Capital entered
into a Subadvisory Agreement with Wellington Management Company LLP (Wellington
Management). Under which Wellington Management directs the investment and
reinvestment of a portion 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 the subadviser fees. For the period
July 1, 2019 to July 31, 2019, Victory Capital incurred subadvisory fees with
respect to the Fund, paid or payable to the applicable subadvisers of $83,000.
Prior to July 1, 2019, AMCO had entered into an Investment Subadvisory Agreement
with Wellington Management, under which Wellington
================================================================================
36 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
Management, directed the investment and reinvestment of a portion of the Fund's
assets (as allocated from time to time by the Manager). This arrangement
provides monthly fees that are paid by AMCO.
AMCO (not the Fund) pays Wellington Management a subadvisory fee in the annual
amount of 0.45% of the Fund's average daily net assets for the first $100
million in assets that Wellington Management manages, plus 0.35% of the Fund's
average daily net assets for assets over $100 million that Wellington Management
manages. For the period from August 1, 2018 to June 30, 2019, AMCO incurred
subadvisory fees with respect to the Fund, paid or payable to Wellington
Management, of $4,502,000.
ADMINISTRATION AND SERVICING FEES - Effective July 1, 2019, Victory Capital is
obligated on a continuous basis to provide administrative services to the Fund.
The Manager provides certain administration and servicing functions for the
Fund. For such services, the Manager receives a fee accrued daily and paid
monthly at an annualized rate of 0.15% of average daily net assets for both the
Fund Shares and Adviser Shares. For the period from August 1, 2018 to June 30,
2019, the Fund Shares and Adviser Shares incurred administration and servicing
fees, paid or payable to AMCO, of $1,748,000 and $142,000, respectively. For the
period July 1, 2019 to July 31, 2019, the Fund Shares and Adviser Shares
incurred administration and servicing fees, paid or payable to Victory Capital
of $178,000, $13,000, respectively.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, AMCO also provided certain compliance and legal
services for the benefit of the Fund. The Board approved the reimbursement of a
portion of these expenses incurred by AMCO.
Effective July 1, 2019, these services are covered under a Compliance Services
Agreement between the Trust and Victory Capital. For the period from August 1,
2018 to June 30, 2019, the Fund reimbursed AMCO $5,000 for these compliance and
legal services. For the period July 1, 2019 to July 31, 2019, the Fund's portion
of fees paid to Victory Capital under the Compliance Service Agreement was
$1,000. These expenses are included in the professional fees on the Fund's
Statement of Operations.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 37
================================================================================
EXPENSE LIMITATION - Effective July 1, 2019, the Manager has contractually
agreed to waive its management fee and/or reimburse expenses so that the total
annual operating expenses (excluding certain items such as interest, taxes and
brokerage commissions) do not exceed 1.06% of the Fund Shares and 1.34% of the
Adviser Shares through at least June 30, 2021. The Manager is permitted 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 limits in effect at the time of: (a) the
original waiver or expense reimbursement; or (b) the recoupment, after giving
effect to the recoupment amount. The amount of any waivers or reimbursements and
the amount of any recoupment is calculated without regard to the impact of any
performance adjustment to the Fund's management fee. This waiver agreement may
only be terminated by the Fund's Board of Trustees. Prior to July 1, 2019, AMCO
agreed to limit the total annual operating expenses of the Adviser Shares to
1.35% of its average daily net assets, excluding extraordinary expenses and
before reductions of any expenses paid indirectly, and to reimburse the Adviser
Shares for all expenses in excess of that amount. For the period from August 1,
2018 to June 30, 2019, the fund did not incur any reimbursable expenses from
AMCO. For the period July 1, 2019 to July 31, 2019, the Fund did not incur any
reimbursable expenses.
TRANSFER AGENT'S FEES - Victory Capital Transfer Agency, Inc. (VCTA), (formerly,
USAA Shareholder Account Services (SAS)) provides transfer agency services to
the Fund. VCTA, 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. VCTA 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 July 31, 2019, the
Fund Shares and Adviser Shares incurred transfer agent's fees, paid or payable
to VCTA, of $1,461,000 and $131,000, respectively.
DISTRIBUTION AND SERVICE (12b-1) FEES - Effective July 1, 2019, the Trust has an
agreement with Victory Capital Advisers, Inc. (VCA), an affiliate of the Manager
for exclusive distribution of the Fund's shares on a continuing best effort
basis. Prior to July 1, 2019, the Fund adopted a plan pursuant to
================================================================================
38 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
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. Prior to July 1,
2019, 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 period from
August 1, 2018 to June 30, 2019, the Adviser Shares incurred distribution and
service (12b-1) fees, of $237,000. For the period July 1, 2019 to July 31, 2019,
the Adviser Shares incurred distribution and service (12b-1) fees, of $22,000.
UNDERWRITING SERVICES - Effective July 1, 2019, the Trust has an agreement with
Victory Capital Advisers, Inc. (VCA), an affiliate of the Manager for exclusive
underwriting and distribution of the Fund's shares on a continuing best effort
basis. This agreement provides that VCA receive no fee or other compensation for
such distribution services, but may receive 12b-1 fees with respect to Adviser
Shares. Prior to July 1, 2019, IMCO provided exclusive underwriting and
distribution of the Fund's shares on a continuing best-efforts basis and
received no fee or other compensation for these services, but may receive 12b-1
fees as described above, with respect to Adviser Shares.
(9) TRANSACTIONS WITH AFFILIATES
Effective July 1, 2019, Victory Capital replaced AMCO as the Fund's investment
adviser and began managing the Fund. Prior to July 1, 2019, AMCO was 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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 39
================================================================================
(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. The Manager has determined there is no significant
impact on the Fund's financial statements and various filings.
(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.
================================================================================
40 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 31,
------------------------------------------------------------------------------
2019 2018 2017 2016 2015
------------------------------------------------------------------------------
Net asset value at
beginning of period $ 29.19 $ 26.89 $ 22.03 $ 23.07 $ 20.96
------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment
income (loss) .01 .00(a) .05 (.01) .27
Net realized and
unrealized gain 2.83 4.50 5.68 .37 4.35
------------------------------------------------------------------------------
Total from investment
operations 2.84 4.50 5.73 .36 4.62
------------------------------------------------------------------------------
Less distributions from:
Net investment income - - - - (.31)
Realized capital gains (3.64) (2.20) (.87) (1.40) (2.20)
------------------------------------------------------------------------------
Total distributions (3.64) (2.20) (.87) (1.40) (2.51)
------------------------------------------------------------------------------
Net asset value at end
of period $ 28.39 $ 29.19 $ 26.89 $ 22.03 $ 23.07
==============================================================================
Total return (%)* 12.79 17.55 27.05 1.74 23.45
Net assets at end
of period (000) $1,383,956 $1,328,080 $1,137,256 $901,629 $853,755
Ratios to average daily
net assets:**
Expenses (%)(b),(c) 1.02(d) 1.04 1.14 1.17 1.18
Expenses, excluding
reimbursements (%)(b),(c) 1.02 1.04 1.14 1.17 1.18
Net investment
income(loss) (%) (.39) (.31) (.28) (.24) .52
Portfolio turnover (%) 109(e) 56 75 83 73
* 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 July 31, 2019, average daily net assets were
$1,284,148,000.
(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 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) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Fund Shares to 1.06% of the Fund Shares' average
daily net assets.
(e) Reflects increased trading activity due to current year transition or asset
allocation shift.
================================================================================
FINANCIAL HIGHLIGHTS | 41
================================================================================
ADVISER SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 31,
----------------------------------------------------------------------------
2019 2018 2017 2016 2015
----------------------------------------------------------------------------
Net asset value at
beginning of period $ 28.49 $ 26.36 $ 21.67 $ 22.77 $ 20.78
----------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income (loss) (.07) (.08) (.02) (.07) .13(a)
Net realized and
unrealized gain 2.75 4.41 5.58 .37 4.39(a)
----------------------------------------------------------------------------
Total from investment
operations 2.68 4.33 5.56 .30 4.52(a)
----------------------------------------------------------------------------
Less distributions from:
Net investment income - - - - (.33)
Realized capital gains (3.64) (2.20) (.87) (1.40) (2.20)
----------------------------------------------------------------------------
Total distributions (3.64) (2.20) (.87) (1.40) (2.53)
----------------------------------------------------------------------------
Net asset value at end
of period $ 27.53 $ 28.49 $ 26.36 $ 21.67 $ 22.77
============================================================================
Total return (%)* 12.52 17.24 26.71 1.48 23.18
Net assets at end of
period (000) $104,773 $115,229 $115,559 $122,430 $122,019
Ratios to average daily
net assets:**
Expenses (%)(b),(c) 1.29(d),(h) 1.31(e) 1.41(f) 1.42 1.42
Expenses, excluding
reimbursements (%)(b),(c) 1.29 1.31 1.42 1.42 1.42
Net investment
income (loss) (%) (.65) (.57) (.55) (.50) .59
Portfolio turnover (%) 109(g) 56 75 83 73
* 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 July 31, 2019, average daily net assets were
$103,414,000.
(a) Calculated using average shares.
(b) Does not include acquired fund fees, if any.
(c) Reflects total annual operating expenses of the Adviser Shares before
reductions of any expenses paid indirectly. The Adviser Shares'expenses paid
indirectly decreased the expense ratio by less than 0.01%.
(d) Prior to December 1, 2018, AMCO voluntarily agreed to limit the annual
expenses of the Adviser Shares to 1.35% of the Adviser Shares' average daily
net assets.
(e) Prior to December 1, 2017, AMCO voluntarily agreed to limit the annual
expenses of the Adviser Shares to 1.35% of the Adviser Shares' average daily
net assets.
(f) Prior to December 1, 2016, AMCO voluntarily agreed to limit the annual
expenses of the Adviser Shares to 1.40% of the Adviser Shares' average daily
net assets.
(g) Reflects increased trading activity due to current year transition or asset
allocation shift.
(h) Effective July 1, 2019, the Manager has voluntarily agreed to limit the
annual expenses of the Adviser Shares to 1.34% of the Adviser Shares'
average daily net assets.
================================================================================
42 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
EXPENSE EXAMPLE
July 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 February 1, 2019, through
July 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 | 43
================================================================================
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 FEBRUARY 1, 2019 -
FEBRUARY 1, 2019 JULY 31, 2019 JULY 31, 2019
----------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,159.70 $5.41
Hypothetical
(5% return before expenses) 1,000.00 1,019.79 5.06
ADVISER SHARES
Actual 1,000.00 1,158.70 6.90
Hypothetical
(5% return before expenses) 1,000.00 1,018.40 6.46
*Expenses are equal to the annualized expense ratio of 1.01% for Fund Shares and
1.29% for Adviser Shares, which are net of any reimbursements and expenses paid
indirectly, multiplied by the average account value over the period, multiplied
by 181 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 15.97% for Fund
Shares and 15.87% for Adviser Shares for the six-month period of
February 1, 2019, through July 31, 2019.
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44 | USAA SCIENCE & TECHNOLOGY FUND
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
July 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.
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with
================================================================================
ADVISORY AGREEMENT(S) | 45
================================================================================
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 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
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46 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
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.
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
================================================================================
ADVISORY AGREEMENT(S) | 47
================================================================================
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).
For at least two years after the Transaction closes, Victory Capital has
agreed to waive fees and/or reimburse expenses so that each Fund's
annual expense ratio (excluding certain customary items) does not exceed
the levels reflected in each Fund's most recent audited financial
statements at the time the Transaction closes (or the levels of AMCO's
then-current expense caps, if applicable), excluding the impact of any
performance adjustment to the Fund's advisory fee.
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48 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
o The portfolio managers at AMCO that manage the Fixed Income Funds(1) as
well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be advised
by Victory Capital through its Victory Solutions platform, Victory
Capital proposes that the same subadvisers be retained Post-Transaction,
although Victory Capital may change the allocation to a particular
subadviser Post-Transaction. No changes are expected to the portfolio
managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's businesses to
Victory Capital. Victory Capital and USAA expect to
(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
================================================================================
enter into a transition services agreement under which USAA will
continue to provide Victory Capital with certain services that are
currently provided by USAA to AMCO and the USAA Transfer Agent for a
specified period of time after the closing of the Transaction to assist
Victory Capital in transitioning the USAA member distribution channel
and member support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital is capable of providing
the same level of investment management services
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50 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
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 AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund, Growth
& Income Fund, Income Stock Fund, Global Equity Income Fund, and Precious
Metals and Minerals Fund.
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ADVISORY AGREEMENT(S) | 51
================================================================================
The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored
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52 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
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 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
================================================================================
ADVISORY AGREEMENT(S) | 53
================================================================================
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.
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
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54 | USAA SCIENCE & TECHNOLOGY FUND
================================================================================
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.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
================================================================================
ADVISORY AGREEMENT(S) | 55
================================================================================
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 SCIENCE & TECHNOLOGY FUND
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND AMCO)
July 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.
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 AMCO and the
Subadvisory Agreement between AMCO and Wellington Management Company LLP (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
AMCO 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 AMCO's revenues and costs of providing services to
the Fund and compensation paid to affiliates of
(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"). Eff ective July 1, 2019, upon the closing of the
transaction whereby AMCO acquired by Victory Capital Holdings, Inc., the
parent company of Victory Capital, the Advisory Agreement between the Trust
and AMCO and the Sub-advisory Agreement with the Subadviser terminated and
the new investment advisory agreement between the Trust and Victory Capital
went into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are discussed above.
Effective June 30, 2019, the Subadviser no longer manages any portion of the
Fund.
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ADVISORY AGREEMENT(S) | 57
================================================================================
AMCO; and (iii) information about AMCO'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 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 AMCO 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 AMCO 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 AMCO's profitability with respect to the Fund. However, the Board
noted that the evaluation process with respect to AMCO 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 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.
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58 | USAA SCIENCE & TECHNOLOGY FUND
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NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent, and
quality of the services provided by AMCO under the Advisory Agreement, the Board
reviewed information provided by AMCO relating to its operations and personnel.
The Board also took into account its knowledge of AMCO's management and the
quality of the performance of AMCO's duties through Board meetings, discussions,
and reports during the preceding year. The Board considered the fees paid to
AMCO and the services provided to the Fund by AMCO under the Advisory Agreement,
as well as other services provided by AMCO and its affiliates under other
agreements, and the personnel who provide these services. In addition to the
investment advisory services provided to the Fund, AMCO 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 AMCO 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 AMCO, including the
professional experience and qualifications of senior personnel, as well as
current staffing levels. The Board considered AMCO'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 AMCO's process for
monitoring "best execution" and the utilization of "soft dollars," also was
considered. AMCO's role in coordinating the activities of the Fund's other
service providers also was considered. The Board also considered AMCO's risk
management processes. The Board considered AMCO'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 AMCO
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 AMCO and its affiliates, including AMCO's oversight of the
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ADVISORY AGREEMENT(S) | 59
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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 AMCO'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
adjustment - was below the median of its expense group and its expense universe.
The data indicated that the Fund's total expenses were above the median of its
expense group and its expense universe. The Board took into account management's
discussion of the Fund's expenses. The Board took into account the various
services provided to the Fund by AMCO and its affiliates, including the high
quality of services provided by AMCO. The Board also noted the level and method
of computing the management fee, including any performance adjustment to such
fee. The Trustees also took into account that the subadvisory fees under the
Subadvisory Agreement are paid by AMCO. The Board also considered and discussed
information about the Subadviser's fees, including the amount of management fees
retained by AMCO after payment of the subadvisory 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
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60 | USAA SCIENCE & TECHNOLOGY FUND
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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 three-year periods ended December 31, 2018, and was above
the average of 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 bottom 50% of its performance universe
for the one- and three-year periods ended December 31, 2018, and was in the top
50% of its performance universe for the five- and ten-year periods ended
December 31, 2018.
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 AMCO'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 AMCO
pays the subadvisory fees. The Trustees reviewed the profitability of AMCO'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 AMCO, the Board also considered the fact that AMCO 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 AMCO from its relationship with the Trust, including that
AMCO may derive reputational and other benefits from its association with the
Fund. The Trustees recognized that AMCO 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.
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ADVISORY AGREEMENT(S) | 61
================================================================================
ECONOMIES OF SCALE - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussion of
the current advisory fee structure. The Board also noted that AMCO also pays the
subadvisory fee out of the management 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 AMCO, among others: (i) AMCO has demonstrated that it
possesses the capability and resources to perform the duties required of it
under the Advisory Agreement; (ii) AMCO 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 AMCO; and (v) AMCO's 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 AMCO
and the type of fund. Based on its conclusions, the Board determined that the
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 provided to
the Fund, 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
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62 | USAA SCIENCE & TECHNOLOGY FUND
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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 AMCO'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 AMCO. The Trustees also relied on the ability of AMCO to negotiate
the Subadvisory Agreement and the fees thereunder at arm's length. For the above
reasons, the Board 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 PERFORMANCE - The Board compared the subadvisory fees for
the Fund with the fees that the Subadviser charges to comparable
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ADVISORY AGREEMENT(S) | 63
================================================================================
clients, as applicable. The Board considered that the Fund pays a management fee
to AMCO and that, in turn, AMCO 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 AMCO's experience and resources in monitoring the performance,
investment style, and risk-adjusted performance of the Subadviser. The Board was
mindful of AMCO's focus on the Subadviser's performance and the explanations of
management regarding the factors that contributed to the performance of the
Fund. The Board also noted the Subadviser's 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 objectives and policies;
(ii) the Subadviser 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; and (iv) the
Fund's advisory expenses are reasonable in relation to those of similar funds
and to the services to be provided by AMCO 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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64 | USAA SCIENCE & TECHNOLOGY 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 | 65
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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 of 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), (08/11-06/19); Director of USAA Investment
Management Company (IMCO) (09/09-present); Chairman of Board of IMCO
(4/13-present); President and Director of USAA Shareholder Account Services
(SAS) (10/09-06/19); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director and Vice Chairman of FPS
(12/13-present); President and Director of USAA Investment Corporation (ICORP)
(03/10-present); Chairman of Board of ICORP (12/31-present); Director of USAA
Financial Advisors, Inc. (FAI) (12/13-present); Chairman of Board of FAI
(3/15-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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66 | USAA SCIENCE & TECHNOLOGY 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
--------------------------------------------------------------------------------
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
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TRUSTEES' AND OFFICERS' INFORMATION | 67
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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.
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.
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
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68 | USAA SCIENCE & TECHNOLOGY FUND
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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 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.
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TRUSTEES' AND OFFICERS' INFORMATION | 69
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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 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.
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70 | USAA SCIENCE & TECHNOLOGY FUND
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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 was 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 | 71
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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).
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Executive Director, Victory Capital Management Inc. (7/1/19-present); Treasurer,
USAA ETF Trust (09/18-06/19); Executive Director, Investment and Financial
Administration, USAA (04/12-06/30/19); Assistant Treasurer,
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72 | USAA SCIENCE & TECHNOLOGY FUND
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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
Director, Accounting and Finance, Victory Capital Management Inc.
(7/1/19-present); Assistant Treasurer, USAA ETF Trust (09/18-06/19);
Accounting/Financial Director, USAA (12/13-06/30/19).
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).
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).
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TRUSTEES' AND OFFICERS' INFORMATION | 73
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TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Richard Y. Newton III
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
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
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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
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INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 111 West Houston St., Suite 1901
ACCOUNTING FIRM San Antonio, Texas 78205
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Copies of the Victory Capital Management Inc.'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
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July 31, 2019
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ANNUAL REPORT
USAA Value Fund
FUND INSTITUTIONAL ADVISER
SHARES SHARES SHARES
UVALX UIVAX UAVAX
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
"... NOW MAY BE AN OPPORTUNE TIME FOR
INVESTORS TO ENSURE THAT THEIR PORTFOLIOS ARE WELL [PHOTO OF BROOKS ENGLEHARDT]
DIVERSIFIED AND THAT THEIR OVERALL ALLOCATION IS
APPROPRIATE FOR THEIR PARTICULAR RISK APPETITE."
--------------------------------------------------------------------------------
SEPTEMBER 2019
Although the bull market in equities has continued running, it was not without a
few missteps. Trade turmoil, questions surrounding global economic growth,
changing monetary policy, and geopolitical disputes have all led to increased
volatility. But through it all, domestic stocks, as measured by the S&P 500(R)
Index, still managed an annual return of approximately 8% for the 12-month
period ended July 31, 2019.
Given the sometimes dire news flow and ample cross-currents, it's no surprise
that volatility returned to the market. On one hand, the U.S. economy continues
to look good. The unprecedented streak of job creation has continued
uninterrupted, and unemployment is bouncing along historic lows at 3.7%. The
consumer remains resilient and inflation is tepid. On the flip side, however,
U.S. trade policy seems to be evolving, with new tariffs threatened and
implemented. The markets generally dislike this type of trade turmoil and
uncertainty, and the ongoing tensions between the United States and China (and
other trading partners) threaten to upend global supply chains and hinder
economic growth.
It's not just the stock market that has been dealing with volatility. The bond
market also has experienced volatility, due largely to the U.S. Federal
Reserve's (the "Fed") famous "pivot" in late 2018. Against the backdrop of
rapidly falling equities in the fourth quarter of 2018, the Fed signaled that
its next policy move would be to lower--not increase--short-term interest rates.
This immediately altered the yield environment.
Meanwhile, the U.S. Treasury yield curve continued to flatten and, in fact,
inverted--whereby shorter-term yields became higher than longer-term
================================================================================
================================================================================
yields. Such a yield-curve inversion is a worrying sign as it sometimes, but
not always, portends to a recession.
Although we are not predicting a recession, we must acknowledge that risks have
increased for an economic slowdown. Given that the current run in stocks is more
than a decade old, it's important for investors to keep perspective that the
bull market cannot continue forever. Therefore, now may be an opportune time for
investors to ensure that their portfolios are well diversified and that their
overall allocation is appropriate for their particular risk appetite.
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,
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. On the following pages, you will find information
relating to your USAA Investments, which is now a Victory Capital Investment
Franchise. If you have any questions about your investments, we encourage you to
engage your financial advisor or else contact us directly at 800-235-8396 or
visit usaa.com.
My colleagues and I sincerely appreciate the confidence you have placed in us,
and we value the opportunity to help you meet your investment goals.
Sincerely,
/s/ Brooks Englehardt
Brooks Englehardt
President
================================================================================
================================================================================
TABLE OF CONTENTS
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MANAGERS' COMMENTARY ON THE FUND 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 18
Financial Statements 20
Notes to Financial Statements 24
Financial Highlights 42
EXPENSE EXAMPLE 45
ADVISORY AGREEMENT(S) 47
TRUSTEES' AND OFFICERS' INFORMATION 67
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
VICTORY CAPITAL MANAGEMENT INC. 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
RS Investments Value VictoryShares and Solutions
DANIEL LANG* MANNIK S. DHILLON, CFA, CAIA
TYLER DAN II, CFA WASIF A. LATIF
ROBERT HARRIS
JOSEPH MAINELLI
--------------------------------------------------------------------------------
o PLEASE REVIEW MARKET CONDITIONS OVER THE 12-MONTH REPORTING PERIOD ENDED
JULY 31, 2019.
The U.S. stock market generated solid gains for the reporting period
overall. Growth stocks significantly outperformed value stocks, while
large-cap stocks outpaced small-cap stocks.
When the period began in August 2018, U.S. stock prices increased on
positive sentiment about the strength of the U.S. economy. A healthy job
market, characterized by rising wage growth and unemployment at multi-year
lows, supported consumer confidence, fueling increased discretionary
spending. Meanwhile, U.S. companies benefited from ongoing earnings growth.
Conditions changed early in the fourth quarter of 2018, as investors grew
pessimistic about the global economic outlook and concerned about the U.S.
Federal Reserve's (the "Fed") plan to continue raising short- term interest
rates. Other worries included the trade dispute between the United States
and China, uncertainty related to the United Kingdom's exit from the
European Union, the stronger U.S. dollar, and the possibility of a U.S.
government shutdown. Market volatility surged, and stocks broadly sold off
though cyclically sensitive, value-oriented stocks held up better than
growth-oriented stocks. Investors' concerns persisted into
*Effective August 31, 2019, Mr. Lang is no longer a portfolio manager with
RS Investments Value.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 1
================================================================================
December 2018, which also was notable for the beginning of a U.S.
government shutdown that lasted 35 days. Although Fed officials raised
short-term interest rates at the December policy meeting, their tone turned
more dovish.
After reaching lows in late December, U.S. stocks rallied during the first
quarter of 2019, recovering almost fully from the selloff they experienced
in late 2018. The rally was led by large-cap stocks and growth-oriented
stocks, which benefited from better-than-expected U.S. economic data and
signs the Fed might not raise interest rates during 2019. Fed officials
left short-term interest rates unchanged at both their January and March
2019 policy meetings. Higher crude oil prices and progress in U.S.-China
trade talks also bolstered stocks.
U.S. stocks recorded positive returns during the second quarter of 2019
and through the end of the reporting period. Optimism about U.S.-China
trade discussions and better-than-expected corporate earnings buoyed stock
prices in April 2019. In May 2019, however, market volatility increased as
U.S.-China trade tensions escalated, and stocks retreated amid fears of a
global economic slowdown. In June 2019, Fed policymakers remained on hold
but said an interest rate cut was possible if the U.S. economic outlook
deteriorated, reigniting the U.S. stock market's rise. The gains continued
into July 2019, as investors anticipated a Fed interest rate cut. On July
31, 2019, the Fed cut short-term interest rates and said it would end its
balance sheet reduction earlier than expected on August 1, 2019. (Since
October 2017, the Fed has been trimming its balance sheet by gradually
decreasing the reinvestment of maturing holdings of U.S. Treasury and
government-sponsored mortgage-backed securities.)
o HOW DID THE USAA VALUE 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 end July 31, 2019, the Fund
Refer to page 4 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
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2 | USAA VALUE FUND
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Shares, Institutional Shares, and Adviser Shares had a total return of
-0.11%, -0.02%, and -0.44%, respectively. This compares to returns of 4.23%
for the Russell 3000(R) Value Index (the "Index") and 0.75% for the Lipper
Multi-Cap Value Funds Index.
Victory Capital Management Inc. (the "Manager" or "Victory Capital") is
the Fund's investment adviser. The investment adviser provides day-to-day
discretionary management for the Fund's assets.
o WHAT WERE THE PRINCIPAL FACTORS IN THE FUND'S PERFORMANCE RELATIVE TO THE
INDEX?
The Fund earned a negative return and underperformed the Index during the
reporting period. Relative to the Index, the Fund was hurt primarily by
security selection, though sector allocations also dampened performance.
Selection in the industrials and financials sectors detracted most from the
Fund's relative returns. An overweight in industrials was a slight drag on
performance. Underweight positions in consumer staples and utilities
detracted further from results, as these less cyclically sensitive sectors
performed well during periods of market volatility. Selection in both
sectors also diminished relative returns.
On the positive side, the Fund benefited from security selection in the
consumer discretionary and materials sectors. An overweight position in
materials further bolstered relative performance. Finally, the Fund's
overweight in the information technology sector and its underweight in the
financials sector added to relative returns.
Thank you for allowing us to help you with your investment needs.
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 7/31/19 o
--------------------------------------------------------------------------------------------------------
SINCE INCEPTION
1 YEAR 5 YEAR 10 YEAR INCEPTION* DATE
--------------------------------------------------------------------------------------------------------
Fund Shares -0.11% 6.35% 11.14% - -
Institutional Shares -0.02% 6.46% 11.30%
Adviser Shares -0.44% 6.05% - 10.01% 8/01/10
Russell 3000 Value Index**
(reflects no deduction for
fees, expenses, or taxes) 4.23% 7.92% 12.31% - -
Lipper Multi-Cap Value
Funds Index*** (reflects
no deduction for taxes) 0.75% 6.28% 10.83% - -
*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 Russell 3000 Value Index measures the performance of those
Russell 3000 Index companies with lower price-to-book ratios and lower
forecasted growth values. The stocks in this index are also members of either
the unmanaged Russell 1000(R) Value or the unmanaged Russell 2000(R) Value
indexes.
***The unmanaged Lipper Multi-Cap Value Funds Index tracks the total return
performance of funds within the Lipper Multi-Cap Value 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 VALUE FUND
================================================================================
o GROWTH OF $10,000 INVESTMENT o
[CHART OF GROWTH OF $10,000 INVESTMENT]
LIPPER MULTI-CAP
RUSSELL 3000 USAA VALUE VALUE FUNDS
VALUE INDEX FUND SHARES INDEX
7/31/2009 $10,000.00 $10,000.00 $10,000.00
8/31/2009 10,519.14 10,436.00 10,431.56
9/30/2009 10,935.14 10,716.00 10,851.12
10/31/2009 10,568.87 10,474.00 10,579.43
11/30/2009 11,144.29 11,133.00 11,049.71
12/31/2009 11,390.99 11,455.00 11,335.65
1/31/2010 11,069.54 11,220.00 11,024.47
2/28/2010 11,432.25 11,631.00 11,382.10
3/31/2010 12,193.54 12,327.00 12,036.45
4/30/2010 12,554.29 12,592.00 12,324.59
5/31/2010 11,519.86 11,573.00 11,297.73
6/30/2010 10,841.25 10,779.00 10,598.64
7/31/2010 11,578.34 11,582.00 11,325.18
8/31/2010 11,053.38 10,877.00 10,779.72
9/30/2010 11,936.06 11,974.00 11,714.70
10/31/2010 12,302.42 12,278.00 12,111.95
11/30/2010 12,267.30 12,347.00 12,058.47
12/31/2010 13,239.41 13,300.00 12,983.91
1/31/2011 13,514.94 13,715.00 13,273.45
2/28/2011 14,028.59 14,151.00 13,751.18
3/31/2011 14,095.69 14,260.00 13,886.94
4/30/2011 14,458.83 14,665.00 14,256.50
5/31/2011 14,297.28 14,517.00 14,052.20
6/30/2011 13,999.21 14,279.00 13,754.50
7/31/2011 13,535.02 13,597.00 13,269.82
8/31/2011 12,661.61 12,666.00 12,236.84
9/30/2011 11,670.78 11,598.00 11,071.40
10/31/2011 13,033.60 13,042.00 12,455.48
11/30/2011 12,969.32 13,062.00 12,373.84
12/31/2011 13,226.05 13,244.00 12,449.44
1/31/2012 13,756.13 13,815.00 13,157.97
2/29/2012 14,276.88 14,426.00 13,774.26
3/31/2012 14,701.65 14,877.00 14,091.31
4/30/2012 14,546.76 14,606.00 13,917.31
5/31/2012 13,690.92 13,624.00 12,916.53
6/30/2012 14,368.90 14,145.00 13,429.99
7/31/2012 14,495.21 14,245.00 13,485.24
8/31/2012 14,819.84 14,586.00 13,891.40
9/30/2012 15,294.63 14,937.00 14,270.48
10/31/2012 15,210.68 14,867.00 14,218.17
11/30/2012 15,208.32 14,927.00 14,276.43
12/31/2012 15,546.94 15,164.00 14,594.97
1/31/2013 16,551.01 15,978.00 15,532.33
2/28/2013 16,784.87 16,181.00 15,728.68
3/31/2013 17,452.42 16,873.00 16,393.47
4/30/2013 17,694.59 17,168.00 16,599.79
5/31/2013 18,154.31 17,809.00 17,151.55
6/30/2013 18,000.88 17,687.00 16,931.72
7/31/2013 18,987.28 18,683.00 17,874.81
8/31/2013 18,257.58 18,114.00 17,331.05
9/30/2013 18,761.79 18,795.00 17,920.31
10/31/2013 19,566.35 19,487.00 18,697.76
11/30/2013 20,129.56 20,189.00 19,221.11
12/31/2013 20,628.81 20,601.00 19,671.74
1/31/2014 19,890.96 19,807.00 18,993.08
2/28/2014 20,755.12 20,706.00 19,820.71
3/31/2014 21,231.52 21,055.00 20,156.18
4/30/2014 21,373.46 20,897.00 20,207.02
5/31/2014 21,672.72 21,214.00 20,579.21
6/30/2014 22,269.29 21,722.00 21,116.88
7/31/2014 21,811.60 21,151.00 20,628.03
8/31/2014 22,624.66 21,891.00 21,388.88
9/30/2014 22,075.33 21,309.00 20,730.67
10/31/2014 22,649.68 21,849.00 21,097.22
11/30/2014 23,068.88 22,272.00 21,522.43
12/31/2014 23,247.81 22,332.00 21,617.07
1/31/2015 22,315.44 21,500.00 20,908.01
2/28/2015 23,391.87 22,853.00 22,065.54
3/31/2015 23,128.67 22,631.00 21,887.25
4/30/2015 23,288.30 22,808.00 22,048.45
5/31/2015 23,561.41 23,163.00 22,315.27
6/30/2015 23,129.36 22,831.00 21,884.22
7/31/2015 23,169.77 22,731.00 21,908.32
8/31/2015 21,809.11 21,544.00 20,688.10
9/30/2015 21,142.93 20,746.00 19,890.56
10/31/2015 22,705.15 22,210.00 21,317.86
11/30/2015 22,836.13 22,265.00 21,348.03
12/31/2015 22,287.60 21,553.00 20,637.77
1/31/2016 21,109.00 20,243.00 19,294.34
2/29/2016 21,115.11 20,161.00 19,391.68
3/31/2016 22,653.86 21,413.00 20,860.80
4/30/2016 23,129.99 21,927.00 21,355.18
5/31/2016 23,494.33 22,150.00 21,575.82
6/30/2016 23,688.48 21,892.00 21,434.12
7/31/2016 24,419.40 22,699.00 22,196.22
8/31/2016 24,638.90 22,956.00 22,374.30
9/30/2016 24,606.11 22,840.00 22,322.21
10/31/2016 24,192.61 22,582.00 22,041.34
11/30/2016 25,712.07 24,325.00 23,495.73
12/31/2016 26,388.42 24,647.00 24,009.41
1/31/2017 26,545.70 24,951.00 24,285.71
2/28/2017 27,453.73 25,634.00 24,979.04
3/31/2017 27,177.78 25,646.00 24,789.42
4/30/2017 27,139.15 25,670.00 24,870.04
5/31/2017 27,047.73 25,536.00 24,767.73
6/30/2017 27,527.85 26,146.00 25,080.69
7/31/2017 27,879.44 26,268.00 25,505.59
8/31/2017 27,528.06 25,963.00 25,188.02
9/30/2017 28,426.65 27,023.00 25,969.72
10/31/2017 28,620.18 27,499.00 26,143.33
11/30/2017 29,492.79 28,096.00 26,938.03
12/31/2017 29,869.79 28,381.00 27,384.66
1/31/2018 30,966.39 29,638.00 28,435.72
2/28/2018 29,482.68 28,041.00 27,084.52
3/31/2018 29,027.61 27,137.00 26,598.03
4/30/2018 29,153.78 27,150.00 26,677.60
5/31/2018 29,441.83 27,556.00 26,847.13
6/30/2018 29,523.98 27,740.00 26,872.69
7/31/2018 30,642.95 28,813.00 27,769.53
8/31/2018 31,116.67 29,258.00 28,028.08
9/30/2018 31,115.37 29,324.00 27,911.31
10/31/2018 29,417.18 26,849.00 26,037.91
11/30/2018 30,266.78 27,530.00 26,586.75
12/31/2018 27,307.94 24,744.00 23,919.04
1/31/2019 29,492.59 27,143.00 26,093.03
2/28/2019 30,449.31 28,007.00 26,793.27
3/31/2019 30,566.96 27,828.00 26,819.47
4/30/2019 31,656.20 29,079.00 27,877.11
5/31/2019 29,583.05 26,860.00 25,886.94
6/30/2019 31,690.54 28,767.00 27,690.91
7/31/2019 31,938.87 28,782.00 27,977.65
[END CHART]
Data from 7/31/09 to 7/31/19.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Value Fund Shares 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 Multi-Cap Value Funds Index reflects the fees and expenses of
the underlying funds included in the index.
================================================================================
INVESTMENT OVERVIEW | 5
================================================================================
o TOP 10 HOLDINGS* - 7/31/19 o
(% of Net Assets)
Citigroup, Inc. ......................................................... 2.7%
Facebook, Inc. "A" ...................................................... 2.6%
Alphabet, Inc. "A" ...................................................... 2.3%
J.P. Morgan Chase & Co. ................................................. 1.7%
Aflac, Inc. ............................................................. 1.7%
Visa, Inc. "A" .......................................................... 1.6%
Mondelez International, Inc. "A" ........................................ 1.6%
Chevron Corp. ........................................................... 1.6%
Cboe Global Markets, Inc. ............................................... 1.6%
Brown & Brown, Inc. ..................................................... 1.6%
o SECTOR ALLOCATION* - 7/31/19 o
(% of Net Assets)
[PIE CHART OF SECTOR ALLOCATION]
FINANCIAL 31.7%
CONSUMER, NON-CYCLICAL 18.3%
COMMUNICATIONS 10.2%
ENERGY 9.7%
CONSUMER, CYCLICAL 8.6%
INDUSTRIAL 6.8%
UTILITIES 5.7%
TECHNOLOGY 4.5%
BASIC MATERIALS 2.1%
[END CHART]
*Does not include money market instruments.
Percentages are of the net assets of the Fund and may not equal 100%.
Refer to the Portfolio of Investments for a complete list of securities.
The Portfolio of Investments uses the Bloomberg Industry Classification System
(BICS), which may differ from the Fund's compliance classification.
================================================================================
6 | USAA VALUE 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 Management Inc. ("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 USAA Asset Management Company ("AMCO")
was acquired by Victory Capital Holdings, Inc., the parent company of Victory
Capital.
NUMBER OF SHARES VOTING
------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
------------------------------------------------------------------------------
43,062,175 2,655,495 2,139,345
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
person" as defined in the Investment Company Act of 1940, as amended (1940 Act)
("Interested Trustee"); 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
July 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 July 31, 2019:
DIVIDEND RECEIVED LONG-TERM
DEDUCTION (CORPORATE CAPITAL GAIN QUALIFIED INTEREST
SHAREHOLDERS)(1) DISTRIBUTIONS(2) INCOME
----------------------------------------------------------------------
100% $167,276,000 $203,000
----------------------------------------------------------------------
(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 July 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 VALUE FUND
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA VALUE FUND:
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying statement of assets and liabilities of USAA
Value Fund (the "Fund") (one of the funds constituting the USAA Mutual Funds
Trust (the "Trust")), including the portfolio of investments, as of July 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 the USAA Mutual Funds Trust) at July 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 July 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
September 20, 2019
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 9
================================================================================
PORTFOLIO OF INVESTMENTS
July 31, 2019
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (98.1%)
COMMON STOCKS (97.6%)
BASIC MATERIALS (2.1%)
---------------------
CHEMICALS (1.1%)
83,900 Dow, Inc.(a) $ 4,064
195,300 Huntsman Corp. 4,013
62,800 LyondellBasell Industries N.V. "A" 5,256
----------
13,333
----------
MINING (1.0%)
1,004,741 Freeport-McMoRan, Inc. 11,113
----------
Total Basic Materials 24,446
----------
COMMUNICATIONS (10.2%)
---------------------
ADVERTISING (0.3%)
44,300 Omnicom Group, Inc. 3,554
----------
INTERNET (6.8%)
21,839 Alphabet, Inc. "A"(a) 26,604
6,830 Booking Holdings, Inc.(a) 12,885
44,000 Expedia Group, Inc. 5,841
158,700 Facebook, Inc. "A"(a) 30,824
88,100 TripAdvisor, Inc.(a) 3,890
----------
80,044
----------
MEDIA (2.4%)
65,429 AMC Networks, Inc. "A"(a) 3,493
216,000 Comcast Corp. "A" 9,325
113,700 Discovery, Inc. "A"(a) 3,446
94,500 DISH Network Corp. "A"(a) 3,200
56,900 Walt Disney Co. 8,137
----------
27,601
----------
TELECOMMUNICATIONS (0.7%)
45,100 AT&T, Inc. 1,535
348,300 CenturyLink, Inc. 4,211
46,800 Cisco Systems, Inc. 2,593
----------
8,339
----------
Total Communications 119,538
----------
================================================================================
10 | USAA VALUE FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
CONSUMER, CYCLICAL (8.6%)
------------------------
AIRLINES (1.9%)
260,968 Air Canada(a) $ 8,925
30,800 Alaska Air Group, Inc. 1,952
60,700 Delta Air Lines, Inc. 3,705
87,700 Southwest Airlines Co. 4,519
32,500 United Airlines Holdings, Inc.(a) 2,987
----------
22,088
----------
AUTO MANUFACTURERS (0.3%)
343,400 Ford Motor Co. 3,273
----------
DISTRIBUTION/WHOLESALE (1.0%)
433,624 LKQ Corp.(a) 11,677
----------
FOOD SERVICE (1.5%)
488,191 Aramark 17,668
----------
HOME BUILDERS (0.5%)
101,100 PulteGroup, Inc. 3,186
70,200 Toll Brothers, Inc. 2,525
----------
5,711
----------
LEISURE TIME (0.4%)
45,600 Carnival Corp. 2,153
87,700 Harley-Davidson, Inc. 3,138
----------
5,291
----------
LODGING (0.2%)
35,100 Las Vegas Sands Corp. 2,121
----------
RETAIL (2.8%)
30,300 Best Buy Co., Inc. 2,319
79,000 Dick's Sporting Goods, Inc. 2,936
68,700 Foot Locker, Inc. 2,821
20,500 Home Depot, Inc. 4,381
28,500 Lowe's Companies, Inc. 2,890
65,300 Nu Skin Enterprises, Inc. "A" 2,611
139,500 Walgreens Boots Alliance, Inc. 7,601
69,000 Walmart, Inc. 7,616
----------
33,175
----------
Total Consumer, Cyclical 101,004
----------
CONSUMER, NON-CYCLICAL (18.3%)
-----------------------------
BEVERAGES (1.1%)
42,200 Coca-Cola Co. 2,221
334,292 Keurig Dr Pepper, Inc. 9,407
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
10,100 PepsiCo, Inc. $ 1,291
----------
12,919
----------
BIOTECHNOLOGY (1.2%)
30,200 Amgen, Inc. 5,635
14,600 Biogen, Inc.(a) 3,472
82,900 Gilead Sciences, Inc. 5,431
----------
14,538
----------
COMMERCIAL SERVICES (1.8%)
63,780 FleetCor Technologies, Inc.(a) 18,125
29,100 ManpowerGroup, Inc. 2,658
----------
20,783
----------
COSMETICS/PERSONAL CARE (0.3%)
33,700 Colgate-Palmolive Co. 2,418
10,500 Procter & Gamble Co. 1,239
----------
3,657
----------
FOOD (3.2%)
61,200 Campbell Soup Co. 2,530
24,900 JM Smucker Co. 2,769
50,500 Kraft Heinz Co. 1,617
359,300 Mondelez International, Inc. "A" 19,219
113,357 Pilgrim's Pride Corp.(a) 3,067
92,700 Sprouts Farmers Market, Inc.(a) 1,569
39,600 Sysco Corp. 2,715
47,700 Tyson Foods, Inc. "A" 3,792
----------
37,278
----------
HEALTHCARE PRODUCTS (1.9%)
34,600 Abbott Laboratories 3,014
20,800 Medtronic plc 2,120
122,364 Zimmer Biomet Holdings, Inc. 16,535
----------
21,669
----------
HEALTHCARE-SERVICES (2.7%)
47,600 Humana, Inc. 14,125
16,600 Laboratory Corp. of America Holdings(a) 2,781
43,700 Quest Diagnostics, Inc. 4,461
30,800 UnitedHealth Group, Inc. 7,670
20,200 Universal Health Services, Inc. "B" 3,047
----------
32,084
----------
HOUSEHOLD PRODUCTS/WARES (0.3%)
62,300 Spectrum Brands Holdings, Inc. 3,122
----------
================================================================================
12 | USAA VALUE FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS (5.8%)
62,600 AbbVie, Inc. $ 4,170
48,900 AmerisourceBergen Corp. 4,262
168,000 AstraZeneca plc ADR 7,293
107,800 Cardinal Health, Inc. 4,930
95,500 CVS Health Corp. 5,336
27,800 Eli Lilly & Co. 3,029
17,700 Jazz Pharmaceuticals plc(a) 2,467
68,100 Johnson & Johnson 8,868
38,500 McKesson Corp. 5,349
87,300 Merck & Co., Inc. 7,245
390,200 Pfizer, Inc. 15,155
----------
68,104
----------
Total Consumer, Non-cyclical 214,154
----------
ENERGY (9.7%)
-------------
OIL & GAS (8.2%)
152,873 Chevron Corp. 18,820
37,200 Cimarex Energy Co. 1,885
53,200 ConocoPhillips 3,143
69,500 Continental Resources, Inc.(a) 2,583
202,700 Devon Energy Corp. 5,473
89,568 Diamondback Energy, Inc. 9,264
737,738 EQT Corp. 11,147
234,700 Exxon Mobil Corp. 17,452
66,900 HollyFrontier Corp. 3,330
50,800 Marathon Petroleum Corp. 2,865
219,400 Noble Energy, Inc. 4,844
62,800 Occidental Petroleum Corp. 3,226
89,600 PBF Energy, Inc. "A" 2,503
45,000 Phillips 66 4,615
51,600 Valero Energy Corp. 4,399
----------
95,549
----------
PIPELINES (1.5%)
595,424 Enterprise Products Partners, LP 17,928
----------
Total Energy 113,477
----------
FINANCIAL (31.7%)
----------------
BANKS (12.7%)
170,100 Bank of America Corp. 5,219
126,900 Bank OZK 3,881
439,193 Citigroup, Inc. 31,253
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
133,600 Citizens Financial Group, Inc. $ 4,978
176,800 Fifth Third Bancorp 5,249
8,300 First Citizens BancShares, Inc. "A" 3,876
340,000 Huntington Bancshares, Inc. 4,845
177,882 J.P. Morgan Chase & Co. 20,634
36,000 M&T Bank Corp. 5,913
88,500 PacWest Bancorp 3,419
121,794 PNC Financial Services Group, Inc. 17,404
338,400 Regions Financial Corp. 5,391
16,600 SVB Financial Group(a) 3,851
259,300 U.S. Bancorp. 14,819
263,800 Wells Fargo & Co. 12,770
112,500 Zions Bancorp, N.A. 5,070
----------
148,572
----------
DIVERSIFIED FINANCIAL SERVICES (7.3%)
16,400 American Express Co. 2,040
20,800 Ameriprise Financial, Inc. 3,027
51,300 Capital One Financial Corp. 4,741
168,872 Cboe Global Markets, Inc. 18,459
35,500 Discover Financial Services 3,186
299,164 E*TRADE Financial Corp. 14,596
110,600 Invesco Ltd. 2,123
37,400 LPL Financial Holdings, Inc. 3,137
11,600 Mastercard, Inc. "A" 3,158
55,400 OneMain Holdings, Inc. 2,296
206,700 Synchrony Financial 7,416
23,300 T. Rowe Price Group, Inc. 2,642
108,071 Visa, Inc. "A" 19,237
----------
86,058
----------
INSURANCE (6.7%)
370,918 Aflac, Inc. 19,525
8,300 Berkshire Hathaway, Inc. "B"(a) 1,705
511,234 Brown & Brown, Inc. 18,369
128,233 Cincinnati Financial Corp. 13,763
14,300 Everest Re Group Ltd. 3,527
38,600 Lincoln National Corp. 2,522
67,800 MetLife, Inc. 3,351
41,500 Principal Financial Group, Inc. 2,409
26,900 Progressive Corp. 2,178
63,898 RenaissanceRe Holdings Ltd. 11,575
----------
78,924
----------
================================================================================
14 | USAA VALUE FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
REAL ESTATE (0.6%)
78,500 CBRE Group, Inc. "A"(a) $ 4,161
22,600 Jones Lang LaSalle, Inc. 3,293
----------
7,454
----------
REITS (4.4%)
18,900 Crown Castle International Corp. 2,519
404,531 Equity Commonwealth 13,584
204,000 Host Hotels & Resorts, Inc. 3,547
586,773 Invitation Homes, Inc. 16,119
93,400 Macerich Co. 3,087
88,700 Park Hotels & Resorts, Inc. 2,342
37,700 Prologis, Inc. 3,039
9,300 Public Storage 2,258
29,100 Simon Property Group, Inc. 4,720
----------
51,215
----------
Total Financial 372,223
----------
INDUSTRIAL (6.8%)
-----------------
AEROSPACE/DEFENSE (0.2%)
17,800 United Technologies Corp. 2,378
----------
BUILDING MATERIALS (0.4%)
46,000 Fortune Brands Home & Security, Inc. 2,527
65,900 Masco Corp. 2,687
----------
5,214
----------
ELECTRONICS (0.4%)
27,200 Honeywell International, Inc. 4,691
----------
MACHINERY-CONSTRUCTION & MINING (0.2%)
17,900 Caterpillar, Inc. 2,357
----------
MACHINERY-DIVERSIFIED (0.3%)
21,900 Cummins, Inc. 3,592
----------
MISCELLANEOUS MANUFACTURERS (2.4%)
21,400 3M Co. 3,739
171,411 Eaton Corp. plc 14,088
56,100 Parker-Hannifin Corp. 9,822
----------
27,649
----------
PACKAGING & CONTAINERS (1.6%)
373,829 Sealed Air Corp. 15,622
79,200 WestRock Co. 2,855
----------
18,477
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
TRANSPORTATION (1.3%)
24,400 CH Robinson Worldwide, Inc. $ 2,043
25,200 CSX Corp. 1,774
10,300 Norfolk Southern Corp. 1,969
50,747 Union Pacific Corp. 9,132
----------
14,918
----------
Total Industrial 79,276
----------
TECHNOLOGY (4.5%)
----------------
COMPUTERS (1.6%)
18,700 Apple, Inc. 3,984
200,400 HP, Inc. 4,216
33,700 International Business Machines Corp. 4,996
67,800 NCR Corp.(a) 2,292
46,900 NetApp, Inc. 2,743
----------
18,231
----------
SEMICONDUCTORS (1.3%)
56,700 Applied Materials, Inc. 2,799
15,500 Lam Research Corp. 3,234
29,400 NXP Semiconductors N.V. 3,040
42,100 QUALCOMM, Inc. 3,080
25,000 Texas Instruments, Inc. 3,125
----------
15,278
----------
SOFTWARE (1.6%)
37,800 Cerner Corp. 2,708
28,800 Microsoft Corp. 3,925
146,400 Oracle Corp. 8,242
36,500 Take-Two Interactive Software, Inc.(a) 4,472
----------
19,347
----------
Total Technology 52,856
----------
UTILITIES (5.7%)
---------------
ELECTRIC (5.7%)
106,700 AES Corp. 1,792
63,200 Dominion Energy, Inc. 4,695
98,100 Duke Energy Corp. 8,507
333,200 Exelon Corp. 15,014
310,660 FirstEnergy Corp. 13,660
13,500 NextEra Energy, Inc. 2,797
177,400 PPL Corp. 5,256
21,200 Southern Co. 1,191
================================================================================
16 | USAA VALUE FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
671,386 Vistra Energy Corp. $ 14,408
----------
Total Utilities 67,320
----------
Total Common Stocks (cost: $1,098,223) 1,144,294
----------
EXCHANGE-TRADED FUNDS (0.5%)
45,400 iShares Russell 1000 Value ETF (cost: $5,826) 5,831
----------
RIGHTS (0.0%)
BASIC MATERIALS (0.0%)
---------------------
MINING (0.0%)
545,600 Ferroglobe Representation & Warranty Insurance Trust(a),(b),(c),(d)
(cost: $0) -
----------
Total Equity Securities (cost: $1,104,049) 1,150,125
----------
MONEY MARKET INSTRUMENTS (1.9%)
GOVERNMENT & U.S. TREASURY MONEY MARKET FUNDS (1.9%)
22,053,727 State Street Institutional Treasury Money Market Fund Premier
Class, 2.09%(e) (cost: $22,054) 22,054
----------
TOTAL INVESTMENTS (COST: $1,126,103) $1,172,179
==========
------------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
------------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $1,144,294 $- $- $1,144,294
Exchange-Traded Funds 5,831 - - 5,831
Rights - - - -
Money Market Instruments:
Government & U.S. Treasury
Money Market Funds 22,054 - - 22,054
------------------------------------------------------------------------------------------------------------------
Total $1,172,179 $- $- $1,172,179
------------------------------------------------------------------------------------------------------------------
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 July 31, 2019, the Fund did not have any transfers into/out of Level 3.
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
July 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
RIGHTS - Enable the holder to buy a specified number of shares of new
issues of a common stock before it is offered to the public.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
ADR American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S.
dollars.
REITS Real estate investment trusts - Dividend distributions from REITS
may be recorded as income and later characterized by the REIT at
the end of the fiscal year as capital gains or a return of capital.
Thus, the Fund will estimate the components of distributions from
these securities and revise when actual distributions are known.
================================================================================
18 | USAA VALUE FUND
================================================================================
o SPECIFIC NOTES
(a) Non-income-producing security.
(b) Security was fair valued at July 31, 2019, by Victory Capital in
accordance with valuation procedures approved by USAA Mutual Funds
Trust's Board of Trustees.
(c) Security deemed illiquid by Victory Capital, under liquidity guidelines
approved by USAA Mutual Funds Trust's Board of Trustees.
(d) Security was classified as Level 3.
(e) Rate represents the money market fund annualized seven-day yield at July
31, 2019.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 19
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
July 31, 2019
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $1,126,103) $1,172,179
Cash 69
Cash denominated in foreign currencies (identified cost of $1,063) 1,059
Receivables:
Capital shares sold 148
Victory Capital (Note 8) 3
Dividends and interest 1,140
Securities sold 5,188
Other 84
----------
Total assets 1,179,870
----------
LIABILITIES
Payables:
Securities purchased 6,458
Capital shares redeemed 521
Accrued administration and servicing fees 148
Accrued management fees 696
Accrued transfer agent's fees 119
Other accrued expenses and payables 99
----------
Total liabilities 8,041
----------
Net assets applicable to capital shares outstanding $1,171,829
==========
NET ASSETS CONSIST OF:
Paid-in capital $ 848,545
Distributable earnings 323,284
----------
Net assets applicable to capital shares outstanding $1,171,829
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $940,515/48,677
capital shares outstanding, no par value) $ 19.32
==========
Institutional Shares (net assets of $222,701/11,521
capital shares outstanding, no par value) $ 19.33
==========
Adviser Shares (net assets of $8,613/448
capital shares outstanding, no par value) $ 19.24
==========
See accompanying notes to financial statements.
================================================================================
20 | USAA VALUE FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended July 31, 2019
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $209) $ 31,117
Interest 342
Securities lending (net) 10
---------
Total income 31,469
---------
EXPENSES
Management fees 8,875
Administration and servicing fees:
Fund Shares 1,418
Institutional Shares 411
Adviser Shares 13
Transfer agent's fees:
Fund Shares 1,155
Institutional Shares 411
Adviser Shares 1
Distribution and service fees (Note 8):
Adviser Shares 22
Custody and accounting fees:
Fund Shares 128
Institutional Shares 54
Adviser Shares 1
Postage:
Fund Shares 58
Shareholder reporting fees:
Fund Shares 35
Institutional Shares 1
Trustees' fees 37
Registration fees:
Fund Shares 33
Institutional Shares 27
Adviser Shares 19
Professional fees 91
Other 25
---------
Total expenses 12,815
---------
================================================================================
FINANCIAL STATEMENTS | 21
================================================================================
Expenses reimbursed:
Adviser Shares $ (3)
---------
Net expenses 12,812
---------
NET INVESTMENT INCOME 18,657
---------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
Net realized gain on:
Investments 347,938
Foreign currency transactions 1
Change in net unrealized appreciation/(depreciation) of:
Investments (386,674)
Foreign currency translations (4)
---------
Net realized and unrealized loss (38,739)
---------
Decrease in net assets resulting from operations $ (20,082)
=========
See accompanying notes to financial statements.
================================================================================
22 | USAA VALUE FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended July 31,
---------------------------------------------------------------------------------------------------
2019 2018
---------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 18,657 $ 18,162
Net realized gain on investments 347,938 104,388
Net realized gain (loss) on foreign currency transactions 1 (2)
Change in net unrealized appreciation/(depreciation) of:
Investments (386,674) 25,409
Foreign currency translations (4) -
--------------------------------
Increase (decrease) in net assets resulting from
operations (20,082) 147,957
--------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
DISTRIBUTABLE EARNINGS:
Fund Shares (109,577) (69,470)
Institutional Shares (48,387) (44,214)
Adviser Shares (1,038) (688)
--------------------------------
Distributions to shareholders (159,002) (114,372)
--------------------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (NOTE 7)
Fund Shares 46,819 50,610
Institutional Shares (353,707) 35,983
Adviser Shares 1 (18)
--------------------------------
Total net increase (decrease) in net assets from
capital share transactions (306,887) 86,575
--------------------------------
Net increase (decrease) in net assets (485,971) 120,160
NET ASSETS
Beginning of year 1,657,800 1,537,640
--------------------------------
End of year $1,171,829 $1,657,800
================================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 23
================================================================================
NOTES TO FINANCIAL STATEMENTS
July 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 Value 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 long-term growth
of capital.
The Fund consists of three classes of shares: Value Fund Shares (Fund Shares),
Value Fund Institutional Shares (Institutional Shares), and Value Fund Adviser
Shares (Adviser Shares). Each class of shares has equal rights to assets and
earnings, except that each class bears certain class-related expenses specific
to the particular class. These expenses include administration and servicing
fees, transfer agent fees, postage, shareholder reporting fees, distribution and
service (12b-1) fees, and certain registration and custodian fees. Expenses not
attributable to a specific class, income, and realized gains or losses on
investments are allocated to each class of shares based on each class' relative
net assets. Each class has exclusive voting rights on matters related solely to
that class and separate voting rights on matters that relate to all classes. The
Institutional Shares are available for investment through a USAA discretionary
managed account program and certain advisory programs sponsored by financial
intermediaries, such as brokerage firms, investment advisors, financial
planners, third-party administrators, and insurance companies. Institutional
Shares also are available to institutional investors, which include 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
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24 | USAA VALUE FUND
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an affiliate fund participating in a fund-of-funds investment strategy
(affiliated 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), the investment adviser to the
Fund, and USAA Transfer Agency Company, d/b/a USAA Shareholder Account Services
(SAS), the transfer agent to the Fund, announced that AMCO and SAS would be
acquired by Victory Capital Holdings, Inc., a global investment management firm
headquartered in Cleveland, Ohio (the Transaction) on July 1, 2019. Effective
August 5, 2019, Citibank, N.A. is the new custodian for the USAA Mutual Funds. 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. 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.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Pricing 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
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NOTES TO FINANCIAL STATEMENTS | 25
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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 closing bid price
generally is used for U.S. listed equities and the average of the bid
and asked prices is used for foreign listed equities. 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. If
the Manager determines that a particular event would materially affect
the value of the Fund's foreign securities, then the Committee will
consider such available information that it deems relevant and will
determine a fair value for the affected foreign securities in accordance
with valuation procedures. In addition, information from an external
vendor or other sources may be used to adjust the foreign market closing
prices of foreign equity securities to reflect what the Committee
believes to be the fair value of the securities as of the close of the
NYSE. Fair valuation of affected foreign equity securities may occur
frequently based on an assessment that events which occur on a fairly
regular basis (such as U.S. market movements) are significant. Such
securities are categorized in Level 2 of the fair value hierarchy.
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26 | USAA VALUE FUND
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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 generally are priced but may be valued at amortized
cost, provided that amortized cost represents the fair value of such
securities.
5. Repurchase agreements are valued at cost.
6. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has been recognized in relation to a security or class of securities,
the securities are valued in good faith by the Committee in accordance
with valuation procedures approved by the Board. The effect of fair
value pricing is that securities may not be priced on the basis of
quotations from the primary market in which they are traded and the
actual price realized from the sale of a security may differ materially
from the fair value price. Valuing these securities at fair value is
intended to cause the Fund's NAV to be more reliable than it otherwise
would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
broker-dealers, other pricing services, or widely used quotation
systems. General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and duration
of any restrictions on disposition of the securities, evaluation of
credit quality, and an evaluation of the forces that influenced the
market in which the securities are purchased and sold.
B. FAIR VALUE MEASUREMENTS - Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the Portfolio of Investments
is based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 - inputs to the valuation methodology are quoted prices
(unadjusted) in active markets for identical securities.
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NOTES TO FINANCIAL STATEMENTS | 27
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Level 2 - inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
that are observable for the securities, either directly or indirectly, and
market-corroborated inputs such as market indexes.
Level 3 - inputs to the valuation methodology are unobservable and
significant to the fair value measurement, including the Manager's own
assumptions in determining the fair value.
The inputs or methodologies used for valuing securities are not
necessarily an indication of the risks associated with investing in those
securities.
C. INVESTMENTS IN SECURITIES - Securities transactions are accounted for
as of the date the securities are purchased or sold (trade date). Gains or
losses from sales of investment securities are computed on the identified
cost basis. Dividend income, less foreign taxes, if any, is recorded on the
ex-dividend date. If the ex-dividend date has passed, certain dividends
from foreign securities are recorded upon notification. Interest income is
recorded daily on the accrual basis. Premiums and discounts 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 July 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
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28 | USAA VALUE FUND
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to such income and realized gains. The Fund records a liability based
on unrealized gains to provide for potential foreign taxes payable upon the
sale of these securities. Foreign taxes have been provided for in accordance
with the Fund's understanding of the applicable countries' prevailing tax
rules and rates.
F. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the
exchange rate obtained from an independent pricing service on the
respective dates of such transactions.
2. Market value of securities, other assets, and liabilities at the
exchange rate obtained from an independent pricing service on a daily
basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Separately, net realized foreign currency gains/losses may arise from
sales of foreign currency, currency gains/losses realized between the trade
and settlement dates on security transactions, and from the difference
between amounts of dividends, interest, and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent of the amounts
received. At the end of the Fund's fiscal year, net realized foreign
currency gains/losses are reclassified from accumulated net realized
gains/losses to accumulated undistributed net investment income on the
Statement of Assets and Liabilities, as such amounts are treated as
ordinary income/loss for federal income tax purposes. Net unrealized
foreign currency exchange gains/losses arise from changes in the value of
assets and liabilities, other than investments in securities, resulting
from changes in the exchange rate.
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NOTES TO FINANCIAL STATEMENTS | 29
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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 July
31, 2019, the Fund did not receive any brokerage commission recapture
credits.
H. INDEMNIFICATIONS - Under the Trust's organizational documents, its
officers and trustees are indemnified against certain liabilities arising
out of the performance of their duties to the Trust. In addition, in the
normal course of business, the Trust enters into contracts that contain a
variety of representations and warranties that provide general
indemnifications. The Trust's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the
Trust that have not yet occurred. However, the Trust expects the risk of
loss to be remote.
I. USE OF ESTIMATES - The preparation of financial statements in
conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that may affect the reported
amounts in the financial statements.
(2) LINE OF CREDIT
The Fund participates, along with other funds of the Trust and 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. 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.
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30 | USAA VALUE FUND
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For the period July 1, 2019 to July 31, 2019, the Fund paid Citibank facility
fees of less than $500, which represents 0.8% of the total fees paid to Citibank
by the funds of the Trusts. The Fund had no borrowings under this agreement
during the period July 1 to July 31, 2019. Effective July 1, 2019, the line of
credit among the Trust, with respect to its funds, and USAA Capital Corporation
(CAPCO) terminated. For the period from August 1, 2018 to June 30, 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 period from August 1, 2018 to June 30, 2019.
(3) INTERFUND LENDING
Effective July 1, 2019, the Trust relies on an exemptive order granted to
Victory Capital and its affiliated funds by the U.S. Securities and Exchange
Commission (SEC) in March 2017 (the 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 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 Order, by averaging the current repurchase
agreement rate and the current bank loan rate. For the period July 1, 2019 to
July 31, 2019, the Fund did not lend.
(4) 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, REIT return of capital dividend, REIT
capital gain dividend, equalization, and additional adjustments resulted
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NOTES TO FINANCIAL STATEMENTS | 31
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in reclassifications to the Statement of Assets and Liabilities to decrease
distributable earnings by $25,455,000 and increase paid in capital by
$25,455,000. These reclassifications had no effect on net assets.
The tax character of distributions paid during the years ended July 31, 2019,
and 2018, was as follows:
2019 2018
--------------------------------------
Ordinary income* $ 17,180,000 $ 21,897,000
Long-term realized capital gains 141,822,000 92,475,000
------------ ------------
Total distributions paid $159,002,000 $114,372,000
============ ============
As of July 31, 2019, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income* $ 12,891,000
Undistributed long-term capital gains 264,567,000
Unrealized appreciation of investments 45,827,000
* 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.
Distributions of net investment income and realized gains from security
transactions not offset by capital losses are made annually in the succeeding
fiscal year or as otherwise required to avoid the payment of federal taxes.
At July 31, 2019, the Fund had no capital loss carryforwards, for federal income
tax purposes.
TAX BASIS OF INVESTMENTS - At July 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 Value Fund $1,126,348,000 $64,585,000 $(18,754,000) $45,831,000
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32 | USAA VALUE FUND
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(5) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended July 31, 2019, were $1,457,780,000 and
$1,878,650,000, respectively.
(6) 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 July 31,
2019, the Fund had no securities on loan.
(7) CAPITAL SHARE TRANSACTIONS
At July 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 fund-of-funds as well as other persons or legal
entities
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NOTES TO FINANCIAL STATEMENTS | 33
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that the Fund may approve from time to time. Capital share transactions for all
classes were as follows, in thousands:
YEAR ENDED YEAR ENDED
JULY 31, 2019 JULY 31, 2018
-------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------
FUND SHARES:
Shares sold 3,912 $ 77,101 5,478 $ 119,297
Shares issued from
reinvested dividends 6,172 108,344 3,176 68,754
Shares redeemed (7,186) (138,626) (6,340) (137,441)
--------------------------------------------
Net increase from capital
share transactions 2,898 $ 46,819 2,314 $ 50,610
============================================
INSTITUTIONAL SHARES:
Shares sold 2,071 $ 39,778 2,751 $ 59,818
Shares issued from
reinvested dividends 2,755 48,382 2,043 44,214
Shares redeemed (22,405) (441,867) (3,148) (68,049)
--------------------------------------------
Net increase (decrease) from
capital share transactions (17,579) $(353,707) 1,646 $ 35,983
============================================
ADVISER SHARES:
Shares sold 2 $ 35 1 $ 30
Shares issued from
reinvested dividends 1 14 1 11
Shares redeemed (3) (48) (3) (59)
--------------------------------------------
Net increase (decrease) from
capital share transactions -* $ 1 (1) $ (18)
============================================
*Represents less than 500 shares
(8) TRANSACTIONS WITH MANAGER
MANAGEMENT FEES - The Manager provides investment management services to the
Fund pursuant to an Advisory Agreement. Effective July 1, 2019, the Trust relies
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
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34 | USAA VALUE FUND
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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.
The Manager monitors each subadviser's performance through quantitative and
qualitative analysis and periodically reports to the Board as to whether each
subadviser's agreement should be renewed, terminated, or modified. The Manager
is also responsible for determining the asset allocation for the subadviser(s).
The allocation for each subadviser could range from 0% to 100% of the Fund's
assets, and the Manager could change the allocations without shareholder
approval.
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee is accrued daily and paid monthly at
an annualized rate of 0.65% of the Fund's average daily net assets.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Multi-Cap Value Funds Index. The Lipper Multi-Cap Value
Funds Index tracks the total return performance of funds within the Lipper
Multi-Cap Value Funds category.
The performance period for each share class consists of the current month plus
the previous 35 months. The following table is utilized to determine the extent
of the performance adjustment:
OVER/UNDER PERFORMANCE
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
---------------------------------------------------------------------
+/- 100 to 400 +/- 4
+/- 401 to 700 +/- 5
+/- 701 and greater +/- 6
(1)Based on the difference between average annual performance of the
relevant share class of the Fund and its relevant Lipper index, rounded
to the nearest basis point. Average daily net assets of the share class
are calculated over a rolling 36-month period.
Each class' annual performance adjustment rate is multiplied by the average
daily net assets of each respective class over the entire performance period,
which is then multiplied by a fraction, the numerator of which is the number of
days in the month and the denominator of which is 365 (366 in leap years).
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NOTES TO FINANCIAL STATEMENTS | 35
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The resulting amount is then added to (in the case of overperformance), or
subtracted from (in the case of underperformance) the base fee.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class' performance over the performance period
to that of the Lipper Multi-Cap Value Funds Index. The Lipper Multi-Cap Value
Funds Index tracks the total return performance of funds within the Lipper
Multi-Cap Value Funds category.
Under the investment advisory agreement with the Manager that took effect on
July 1, 2019, no performance adjustments will be made for the period beginning
July 1, 2019, through June 30, 2020. Only performance beginning as of July 1,
2019, and thereafter will be utilized in calculating future performance
adjustments.
For the period from August 1, 2018 to June 30, 2019, the Fund incurred
management fees, paid or payable to AMCO, of $8,179,000 which included no
performance adjustment for the Fund Shares, Institutional Shares and Adviser
Shares. For the period July 1, 2019 to July 31, 2019 the Fund incurred
management fees, paid or payable to Victory Capital of $696,000, which included
no performance adjustments.
SUBADVISORY ARRANGEMENT(S) - Effective July 1, 2019, Victory Capital terminated
an Investment Subadvisory Agreement with Barrow, Hanley, Mewhinney & Strauss,
LLC (BHMS). Prior to July 1, 2019, AMCO had entered into an Investment
Subadvisory Agreement with BHMS, under which BHMS directs the investment and
reinvestment of the Fund's assets (as allocated from time to time by the
Manager). This arrangement provides for monthly fees that are paid by AMCO.
AMCO (not the Fund) pays BHMS a subadvisory fee based on the aggregate average
daily net assets that BHMS manages in the USAA Value Fund and the USAA Growth &
Income Fund combined, in the annual amount of 0.75% on the first $15 million in
assets, 0.55% on assets over $15 million and up to $25 million, 0.45% on assets
over $25 million and up to $100 million, 0.35% on assets over $100 million and
up to $200 million, 0.25% on assets over $200 million and up to $1 billion, and
0.15% on assets over $1 billion. For the
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36 | USAA VALUE FUND
================================================================================
period from August 1, 2018 to June 30, 2019, AMCO incurred subadvisory fees with
respect to the Fund, paid or payable to BHMS, of $2,710,000.
ADMINISTRATION AND SERVICING FEES - Effective July 1, 2019, Victory Capital is
obligated on a continuous basis to provide administrative services to the Fund.
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 period from August 1, 2018 to June 30, 2019, the
Fund Shares, Institutional Shares, and Adviser Shares incurred administration
and servicing fees paid or payable to AMCO, of $1,297,000, $385,000, and
$12,000, respectively. For the period July 1, 2019 to July 31, 2019 the Fund
Shares, Institutional Shares and Adviser Shares incurred administration and
servicing fees by Victory Capital, paid or payable to Victory Capital of
$121,000, $26,000 and $1,000, respectively.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, AMCO also provided certain compliance and legal
services for the benefit of the Fund. The Board approved the reimbursement of a
portion of these expenses incurred by AMCO.
Effective July 1, 2019, these services are covered under a Compliance Services
Agreement between the Trust and Victory Capital. For the period from August 1,
2018 to June 30, 2019, the Fund reimbursed AMCO $5,000 for these compliance and
legal services. For the period July 1, 2019 to July 31, 2019, the Fund's portion
of fees paid to Victory Capital under the Compliance Service Agreement was
$1,000. These expenses are included in the professional fees on the Fund's
Statement of Operations.
EXPENSE LIMITATION - Effective July 1, 2019, the Manager has contractually
agreed to waive its management fee and/or reimburse expenses so that the total
annual operating expenses (excluding certain items such as interest, taxes and
brokerage commissions) do not exceed 0.96% of the Fund Shares, 0.88% of the
Institutional Shares and 1.27% of the Adviser Shares, through at least June 30,
2021. The Manager is permitted to recoup advisory fees waived and
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NOTES TO FINANCIAL STATEMENTS | 37
================================================================================
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 limits in effect at the time of: (a) the original waiver or expense
reimbursement; or (b) the recoupment, after giving effect to the recoupment
amount. The amount of any waivers or reimbursements and the amount of any
recoupment is calculated without regard to the impact of any performance
adjustment to the Fund's management fee. This waiver agreement may only be
terminated by the Fund's Board of Trustees. Prior to December 1, 2018, AMCO
agreed to limit the total annual operating expenses of the Adviser Shares to
1.30% of their average daily net assets, excluding extraordinary expenses and
before reductions of any expenses paid indirectly, and to reimburse the Adviser
Shares for all expenses in excess of those amounts. For the period from August
1, 2018 to June 30, 2019, the Adviser Shares did not incur any reimbursable
expenses from AMCO. For the period from July 1 to July 31, 2019, the Adviser
Shares incurred reimbursable expenses of $3,000, of which $3,000 was receivable
from the Manager.
TRANSFER AGENT'S FEES - Victory Capital Transfer Agency, Inc. (VCTA), (formerly,
USAA Shareholder Account Services (SAS)) provides transfer agency services to
the Fund. VCTA 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. VCTA 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 end July 31, 2019, the Fund Shares, Institutional Shares
and Adviser Shares incurred transfer agent's fees, paid or payable to VCTA of
$1,155,000, $411,000 and $1,000, respectively.
DISTRIBUTION AND SERVICE (12b-1) FEES - Effective July 1, 2019, the Trust has an
agreement with Victory Capital Advisers, Inc. (VCA), an affiliate of the Manager
for exclusive distribution of the Fund's shares on a continuing best effort
basis. Prior to July 1, 2019, the Fund adopted a plan pursuant to Rule 12b-1
under the 1940 Act with respect to the Adviser Shares. Under the
================================================================================
38 | USAA VALUE FUND
================================================================================
plan, the Adviser Shares paid fees to USAA Investment Management Company (IMCO),
the distributor, for distribution and shareholder services. Prior to July 1,
2019, IMCO paid 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 period from
August 1, 2018 to June 30, 2019, the Adviser Shares incurred distribution and
service (12b-1) fees, of $20,000. For the period July 1 to July 31, 2019, the
Adviser Shares incurred distribution and service (12b-1) fees, of $2,000.
UNDERWRITING SERVICES - Effective July 1, 2019, the Trust has an agreement with
Victory Capital Advisers, Inc. (VCA), an affiliate of the Manager for exclusive
underwriting and distribution of the Fund's shares on a continuing best effort
basis. This agreement provides that VCA receive no fee or other compensation for
such distribution services, but may receive 12b-1 fees with respect to Adviser
Shares. Prior to July 1, 2019, IMCO provided exclusive underwriting and
distribution of the Fund's shares on a continuing best-efforts basis and
received no fee or other compensation for these services, but may receive 12b-1
fees as described above, with respect to Adviser Shares.
(9) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other affiliated
funds in which the affiliated fund-of-funds invest. The fund-of-funds do not
invest in the underlying affiliated 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 July 31, 2019, the 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
Effective July 1, 2019, Victory Capital replaced AMCO as the Fund's investment
adviser and began managing the Fund. Prior to July 1, 2019,
================================================================================
NOTES TO FINANCIAL STATEMENTS | 39
================================================================================
AMCO was 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.
(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. The Manager has determined there is no significant
impact on the Fund's financial statements and various filings.
(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
================================================================================
40 | USAA VALUE FUND
================================================================================
entire standard or certain provisions that exclude or amend disclosures.
Management has elected to early adopt ASU 2018-13 effective with the current
reporting period. The adoption of ASU 2018-13 guidance is limited to changes in
the Fund's notes to financial statement disclosures regarding valuation method,
fair value, and transfers between levels of the fair value hierarchy.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 41
================================================================================
FINANCIAL HIGHLIGHTS
FUND SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 31,
-----------------------------------------------------------------------------------
2019 2018 2017 2016 2015
-----------------------------------------------------------------------------------
Net asset value at
beginning of period $ 22.01 $ 21.55 $ 19.41 $ 20.50 $ 20.00
-----------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .25 .21 .27 .23 .20
Net realized and
unrealized gain (loss) (.54) 1.84 2.74 (.31) 1.28
-----------------------------------------------------------------------------------
Total from investment
operations (.29) 2.05 3.01 (.08) 1.48
-----------------------------------------------------------------------------------
Less distributions from:
Net investment income (.24) (.21) (.29) (.23) (.25)
Realized capital gains (2.16) (1.38) (.58) (.78) (.73)
-----------------------------------------------------------------------------------
Total distributions (2.40) (1.59) (.87) (1.01) (.98)
-----------------------------------------------------------------------------------
Net asset value at end
of period $ 19.32 $ 22.01 $ 21.55 $ 19.41 $ 20.50
===================================================================================
Total Return (%)* (.11) 9.69 15.72 (.14) 7.47
Net assets at end of
period (000) $940,515 $1,007,712 $936,630 $807,052 $960,925
Ratios to average
daily net assets:**
Expenses (%)(a) .96(c) .99 1.08(b) 1.11(b) 1.09
Expenses, excluding
reimbursements (%) .96 .99 1.08(b) 1.11(b) 1.09
Net investment income (%) 1.35 1.10 1.37 1.28 1.06
Portfolio turnover (%) 108(d) 29 27 20 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 year ended July 31, 2019, average daily net assets were
$945,209,000.
(a) Does not include acquired fund fees, if any.
(b) Reflects total annual operating expenses of the Fund Shares before
reductions of any expenses paid indirectly. The Fund Shares' expenses paid
indirectly decreased the expense ratio by less than 0.01%.
(c) Effective July 1, 2019, the Manager had voluntarily agreed to limit the
annual expenses of the Fund Shares to 0.96% of the Fund Shares' average
daily net assets.
(d) Reflects increased trading activity due to current year transition or asset
allocation shift.
================================================================================
42 | USAA VALUE FUND
================================================================================
INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 31,
-----------------------------------------------------------------------------------
2019 2018 2017 2016 2015
-----------------------------------------------------------------------------------
Net asset value at
beginning of period $ 22.00 $ 21.54 $ 19.40 $ 20.49 $ 20.00
-----------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .28(a) .23 .30 .25 .26(a)
Net realized and
unrealized gain (loss) (.55)(a) 1.84 2.73 (.31) 1.24(a)
-----------------------------------------------------------------------------------
Total from investment
operations (.27)(a) 2.07 3.03 (.06) 1.50(a)
-----------------------------------------------------------------------------------
Less distributions from:
Net investment income (.24) (.23) (.31) (.25) (.28)
Realized capital gains (2.16) (1.38) (.58) (.78) (.73)
-----------------------------------------------------------------------------------
Total distributions (2.40) (1.61) (.89) (1.03) (1.01)
-----------------------------------------------------------------------------------
Net asset value at
end of period $ 19.33 $ 22.00 $ 21.54 $ 19.40 $ 20.49
===================================================================================
Total return (%)* (.02) 9.79 15.86 (.04) 7.57
Net assets at end of
period (000) $222,701 $640,281 $591,384 $522,721 $299,990
Ratios to average
daily net assets:**
Expenses (%)(b) .88(d) .91 .98(c) .98(c) .98
Expenses, excluding
reimbursements (%)(b) .88 .91 .98(c) .98(c) .98
Net investment income (%) 1.42 1.18 1.48 1.41 1.23
Portfolio turnover (%) 108(e) 29 27 20 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 year ended July 31, 2019, average daily net assets were
$409,071,000.
(a) Calculated using average shares. For the year ended July 31, 2019, average
shares were 20,550,000.
(b) Does not include acquired fund fees, if any.
(c) Reflects total annual operating expenses of the Institutional Shares before
reductions of any expenses paid indirectly. The Institutional Shares'
expenses paid indirectly decreased the expense ratios by less than 0.01%.
(d) Effective July 1, 2019, the Manager had voluntarily agreed to limit the
annual expenses of the Institutional Shares to 0.88% of the Institutional
Shares' average daily net assets.
(e) Reflects increased trading activity due to current year transition or asset
allocation shift.
================================================================================
FINANCIAL HIGHLIGHTS | 43
================================================================================
ADVISER SHARES
--------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED JULY 31,
---------------------------------------------------------------------------------
2019 2018 2017 2016 2015
---------------------------------------------------------------------------------
Net asset value at
beginning of period $21.91 $21.46 $19.32 $20.43 $19.94
---------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .20 .15 .23 .17 .17
Net realized and
unrealized gain (loss) (.55) 1.83 2.72 (.32) 1.26
---------------------------------------------------------------------------------
Total from investment
operations (.35) 1.98 2.95 (.15) 1.43
---------------------------------------------------------------------------------
Less distributions from:
Net investment income (.16) (.15) (.23) (.18) (.21)
Realized capital gains (2.16) (1.38) (.58) (.78) (.73)
---------------------------------------------------------------------------------
Total distributions (2.32) (1.53) (.81) (.96) (.94)
---------------------------------------------------------------------------------
Net asset value at
end of period $19.24 $21.91 $21.46 $19.32 $20.43
=================================================================================
Total return (%)* (.44) 9.41 15.46 (.52) 7.22
Net assets at end of
period (000) $8,613 $9,807 $9,626 $8,767 $9,269
Ratios to average
daily net assets:**
Expenses (%)(a) 1.27(b),(e) 1.30 1.33(c),(d) 1.42(d) 1.34
Expenses, excluding
reimbursements (%)(a) 1.31 1.30 1.38(d) 1.42(d) 1.34
Net investment income (%) 1.03 .79 1.13 .97 .82
Portfolio turnover (%) 108(f) 29 27 20 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 year ended July 31, 2019, average daily net assets were $8,751,000.
(a) Does not include acquired fund fees, if any.
(b) Prior to December 1, 2018, AMCO voluntarily agreed to limit the annual
expenses of the Adviser Shares to 1.30% of the Adviser Shares' average
daily net assets.
(c) Effective December 1, 2016, AMCO had voluntarily agreed to limit the annual
expenses of the Adviser Shares to 1.30% of the Adviser Shares' average daily
net assets.
(d) Reflects total annual operating expenses of the Adviser Shares before
reductions of any expenses paid indirectly. The Adviser Shares' expenses
paid indirectly decreased the expense ratio by 0.01%.
(e) Effective July 1, 2019, the Manager had voluntarily agreed to limit the
annual expenses of the Adviser Shares to 1.27% of the Adviser Shares'
average daily net assets.
(f) Reflects increased tracking activity due to current year transition or asset
allocation shift.
================================================================================
44 | USAA VALUE FUND
================================================================================
EXPENSE EXAMPLE
July 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 February 1, 2019, through
July 31, 2019.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table provides
information about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested at the beginning
of the period, to estimate the expenses that you paid over the period. Simply
divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number for your share
class in the "actual" line under the heading "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class and an assumed rate of return of
5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the
================================================================================
EXPENSE EXAMPLE | 45
================================================================================
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 FEBRUARY 1, 2019 -
FEBRUARY 1, 2019 JULY 31, 2019 JULY 31, 2019
----------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,060.40 $4.90
Hypothetical
(5% return before expenses) 1,000.00 1,020.03 4.81
INSTITUTIONAL SHARES
Actual 1,000.00 1,060.90 4.50
Hypothetical
(5% return before expenses) 1,000.00 1,020.43 4.41
ADVISER SHARES
Actual 1,000.00 1,058.90 6.48
Hypothetical
(5% return before expenses) 1,000.00 1,018.50 6.36
*Expenses are equal to the annualized expense ratio of 0.96% for Fund Shares,
0.88% for Institutional Shares, and 1.27% for Adviser Shares, which are net of
any reimbursements and expenses paid indirectly, multiplied by the average
account value over the period, multiplied by 181 days/365 days (to reflect the
one-half-year period). The Fund's actual ending account values are based on its
actual total returns of 6.04% for Fund Shares, 6.09% for Institutional Shares,
and 5.89% for Adviser Shares for the six-month period of February 1, 2019,
through July 31, 2019.
================================================================================
46 | USAA VALUE FUND
================================================================================
ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND VICTORY CAPITAL MANAGEMENT INC.)
July 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.
At an in-person meeting held on January 15, 2019, the USAA Mutual Funds Trust's
("Trust") Board of Trustees ("Board"), including those Trustees who are not
parties to any investment advisory or management agreement between USAA Asset
Management Company ("AMCO") and the Trust ("Existing Management Agreements") or
the new Investment Advisory Agreement between the Trust and Victory Capital
Management Inc. ("Victory Capital") (the "New Advisory Agreement") or
"interested persons" (as that term is defined in the Investment Company Act of
1940 Act, as amended ("1940 Act")) of such parties or the Trust (the
"Independent Trustees"), considered and unanimously approved the New Advisory
Agreement between the Trust, on behalf of each of its series (each a "Fund" and
together the "Funds"), and Victory Capital, and, as applicable, new Investment
Subadvisory Agreements between Victory Capital and each investment subadviser
("New Subadvisory Agreements," and together with the New Advisory Agreement, the
"New Agreements"), as listed below. The Board also determined to recommend that
shareholders of each Fund approve the New Advisory Agreement. Shareholder
approval is not required for the New Subadvisory Agreements. The Independent
Trustees reviewed the proposed approval of the New Agreements in private
sessions with their independent legal counsel at which no representatives of
Victory Capital or AMCO were present.
BACKGROUND FOR THE BOARD APPROVALS
At a telephonic meeting of the Board held on November 5, 2018, representatives
of USAA and AMCO informed the Board that USAA's subsidiary, USAA Investment
Corporation, would enter into a stock purchase agreement with
================================================================================
ADVISORY AGREEMENT(S) | 47
================================================================================
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 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
================================================================================
48 | USAA VALUE FUND
================================================================================
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.
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
================================================================================
ADVISORY AGREEMENT(S) | 49
================================================================================
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).
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.
================================================================================
50 | USAA VALUE FUND
================================================================================
o The portfolio managers at AMCO that manage the Fixed Income Funds(1)
as well as the USAA's Global Multi-Asset team servicing the Cornerstone
Funds(2), Target Retirement Funds(3), Global Managed Volatility Fund,
Managed Allocation Fund, and Target Managed Allocation Fund, are
expected to continue to do so Post-Transaction as employees of Victory
Capital, if they choose to become employees of Victory Capital.
Post-Transaction, the investment teams for the Funds, other than the
Fixed Income Funds, will be replaced or augmented.
o With the exception of the USAA S&P 500 Index Fund, USAA Extended
Market Index Fund, and USAA Nasdaq-100 Index Fund, which will be
advised by Victory Capital through its Victory Solutions platform,
Victory Capital proposes that the same subadvisers be retained
Post-Transaction, although Victory Capital may change the allocation to
a particular subadviser Post-Transaction. No changes are expected to
the portfolio managers of the subadvisers who will serve as subadvisers
Post-Transaction.
o VCA's distribution capabilities, including its significant network of
intermediary relationships, which may provide additional opportunities
for the Funds to grow assets and lower fees and expenses through
increased economies of scale.
o The experience of Victory Capital in acquiring and integrating
investments in investment management companies and its plans to
transition and integrate AMCO's and USAA Transfer Agent's businesses to
Victory Capital. Victory Capital and USAA expect to
(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) | 51
================================================================================
enter into a transition services agreement under which USAA will
continue to provide Victory Capital with certain services that are
currently provided by USAA to AMCO and the USAA Transfer Agent for a
specified period of time after the closing of the Transaction to assist
Victory Capital in transitioning the USAA member distribution channel
and member support services.
o Pursuant to a transitional trademark license agreement with USAA,
Victory Capital and the Funds will have a non-exclusive license, subject
to certain restrictions and limitations, to continue using certain
licensed marks including "USAA," "United Services Automobile
Association," and the USAA Logo in connection with their asset
management and transfer agency businesses for a period of three years
following the closing of the Transaction, which agreement may thereafter
be extended for an additional year.
o The support expressed by the current senior management team at AMCO
for the Transaction and AMCO's recommendation that the Board approve the
New Agreements.
o The commitments of Victory Capital and AMCO to bear all of the direct
expenses of the Transaction, including all legal costs and costs
associated with the proxy solicitation, regardless of whether the
Transaction is consummated.
In addition to the matters noted above, in their deliberations regarding
approval of the New Advisory Agreement, the Board considered the factors
discussed below, among others.
THE NATURE, EXTENT, AND QUALITY OF SERVICES EXPECTED TO BE PROVIDED BY VICTORY
CAPITAL - The Board considered information provided by Victory Capital regarding
its investment philosophy, investment management capabilities, business and
operating structure, scale of operations, leadership and reputation,
distribution capabilities, and financial condition. The Board also considered
the capabilities, resources, and personnel of Victory Capital, including senior
and other personnel of AMCO who had been extended offers to join Victory
Capital, in order to determine whether Victory Capital is capable of providing
the same level of investment management services
================================================================================
52 | USAA VALUE FUND
================================================================================
currently provided to each Fund, and also considered the transition and
integration plans to move management of the Funds to Victory Capital. The Board
recognized that the AMCO personnel who had been extended offers may not accept
such offers and personnel changes may occur in the future in the ordinary
course. The Board considered the resources and infrastructure that Victory
Capital intends to devote to its compliance program to ensure compliance with
applicable laws and regulations, as well as Victory Capital's commitment to
those programs. The Board also considered the resources that Victory Capital has
devoted to its risk management program and cybersecurity program. The Board also
reviewed information provided by Victory Capital related to its business, legal,
and regulatory affairs. This review considered the resources available to
Victory Capital to provide the services specified under the New Advisory
Agreement. The Board considered Victory Capital's financial condition, including
the financing of the Transaction, and noted that Victory Capital is expected to
be able to provide a high level of service to the Funds and continuously invest
and re-invest in its business.
The Board considered that, while it was proposed that Victory Capital would
become the investment adviser to the Funds, the same portfolio managers at AMCO
that manage the Fixed Income Funds, as well as USAA's Global Multi-Asset team
servicing the Cornerstone Funds, Target Retirement Funds (including Target
Managed Allocation Fund), Global Managed Volatility Fund, and Managed Allocation
Fund, are expected to continue to do so after the Transaction as employees of
Victory Capital, if they choose to become employees of Victory Capital. The
Board determined that it had considered the qualifications of the portfolio
managers at AMCO and the subadvisers at its 2018 15(c) Meeting. The Board
considered the professional experience, education, affiliations and/or other
credentials or qualifications of the anticipated portfolio managers at Victory
Capital that would manage the Equity Funds(4), Cornerstone Funds, and Target
Retirement Funds. The Board noted that the Equity Funds or portions of Equity
Funds currently managed by AMCO would be replaced with portfolio managers from
Victory Capital.
(4)The Equity Funds include the following Funds: Aggressive Growth Fund,
Growth & Income Fund, Income Stock Fund, Global Equity Income Fund, and
Precious Metals and Minerals Fund.
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ADVISORY AGREEMENT(S) | 53
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The Board considered that certain Funds would continue to operate in a
manager-of-managers structure Post-Transaction. The Board considered that
Victory Capital's experience in allocating assets to, and overseeing the
advisory services of, its investment franchises and the Victory Solutions
platform, was similar to AMCO's role in allocating assets to and overseeing the
advisory services provided by the subadvisers.
The Board considered that the terms and conditions of the New Advisory Agreement
are substantially similar to the terms and conditions of the Existing Management
Agreements. The Board also considered that the New Subadvisory Agreements are
substantially similar to the terms and conditions of the Existing Subadvisory
Agreements and that no changes were proposed to the allocation of
responsibilities as between Victory Capital and any subadviser, except to the
extent that under the New Subadvisory Agreements each subadviser would be
responsible for voting proxies with respect to assets allocated to that
subadviser, while AMCO currently votes all Fund proxies. The Board considered
that Victory Capital also would provide certain administrative, fund accounting,
and shareholder servicing services under a separate administration agreement
with the Funds. In this connection, the Board considered information on Victory
Capital's use of third-party service providers to provide certain
sub-administration and sub-accounting services to the Funds.
After review of these and other considerations, the Board concluded that Victory
Capital will be capable of providing investment advisory services of the same
high quality as the investment advisory services provided to the Funds by AMCO,
and that these services are appropriate in nature and extent in light of the
Funds' operations and investor needs.
PERFORMANCE OF THE FUNDS - With respect to the performance of the Funds, the
Board considered its review at the 2018 15(c) Meeting of peer group and
benchmark investment performance comparison data relating to each Fund and, if
applicable, each subadviser's performance record for similar accounts. The
Board considered that information reviewed at the 2018 15(c) Meeting may be more
relevant for those Funds that would retain their current portfolio managers or
subadvisers. With respect to the Funds whose portfolio managers would be
replaced, the Board considered the performance of funds sponsored
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54 | USAA VALUE FUND
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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 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
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ADVISORY AGREEMENT(S) | 55
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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.
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
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56 | USAA VALUE FUND
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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.
FALL-OUT AND OTHER BENEFITS TO VICTORY CAPITAL AND ITS AFFILIATES - The Board
considered the possible fall-out benefits and other types of benefits that may
accrue to Victory Capital and its affiliates. The Board noted that the
Transaction provides Victory Capital and its affiliates the opportunity to
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ADVISORY AGREEMENT(S) | 57
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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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58 | USAA VALUE FUND
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ADVISORY AGREEMENT(S)
(BETWEEN THE TRUST AND AMCO)
July 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.
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 AMCO
and the Subadvisory Agreement between AMCO and Barrow, Hanley, Mewhinney &
Strauss, 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 AMCO 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 AMCO's
revenues and
(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"). Effective July 1, 2019, upon the closing of the
transaction whereby AMCO acquired by Victory Capital Holdings, Inc., the
parent company of Victory Capital, the Advisory Agreement between the Trust
and AMCO and the Sub-advisory Agreement with the Subadviser terminated and
the new investment advisory agreement between the Trust and Victory Capital
went into effect. The factors the Board considered in approving the new
investment advisory agreement with Victory Capital are discussed above.
Effective June 30, 2019, the Subadviser no longer manages any portion of the
Fund.
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ADVISORY AGREEMENT(S) | 59
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costs of providing services to the Fund and compensation paid to affiliates of
AMCO; and (iii) information about AMCO'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 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 AMCO 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 AMCO 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 AMCO's profitability with respect to the Fund. However, the Board
noted that the evaluation process with respect to AMCO 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 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.
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60 | USAA VALUE FUND
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NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent, and
quality of the services provided by AMCO under the Advisory Agreement, the Board
reviewed information provided by AMCO relating to its operations and personnel.
The Board also took into account its knowledge of AMCO's management and the
quality of the performance of AMCO's duties through Board meetings, discussions,
and reports during the preceding year. The Board considered the fees paid to
AMCO and the services provided to the Fund by AMCO under the Advisory Agreement,
as well as other services provided by AMCO and its affiliates under other
agreements, and the personnel who provide these services. In addition to the
investment advisory services provided to the Fund, AMCO 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 AMCO 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 AMCO, including the
professional experience and qualifications of senior personnel, as well as
current staffing levels. The Board considered AMCO's process for monitoring the
performance of the Subadviser and AMCO's timeliness in responding to performance
issues. The allocation of the Fund's brokerage, including AMCO's process for
monitoring "best execution" and the utilization of "soft dollars," also was
considered. AMCO's role in coordinating the activities of the Fund's other
service providers also was considered. The Board also considered AMCO's risk
management processes. The Board considered AMCO'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 AMCO
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 AMCO and its affiliates, including AMCO's oversight of the
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ADVISORY AGREEMENT(S) | 61
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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 AMCO'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
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 - 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 the various services provided to the Fund
by AMCO and its affiliates, including the high quality of services received by
the Fund from AMCO. The Board also noted the level and method of computing the
management fee. The Board took into account management's discussion of the
Fund's expenses. The Board also noted that the Fund's management fee was reduced
effective December 1, 2017. The Board also took into account that the
subadvisory fees under the Subadvisory Agreement are paid by AMCO. The Board
also considered and discussed information about the Subadviser's fees, including
the amount of management fees retained by AMCO after payment of the subadvisory
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,
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62 | USAA VALUE FUND
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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- and five-year periods ended December 31, 2018, and
was above the average of its performance universe and 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 bottom 50% of its performance universe
for the one-, three- and five-year periods ended December 31, 2018, and was in
the top 50% 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 management fee. The information considered by the Board
included operating profit margin information for AMCO's business as a whole. The
Board also received and considered profitability information related to the
management revenues from the Fund. This 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 AMCO pays
the Fund's subadvisory fees. The Trustees reviewed the profitability of AMCO'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 AMCO, the Board also considered the fact that AMCO 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 AMCO from its relationship with the Trust, including that
AMCO may derive reputational and other benefits from its association with the
Fund. The Trustees recognized that AMCO 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) | 63
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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 discussion of
the current advisory fee structure. The Board also considered the fact that AMCO
also pays the Fund's subadvisory fee. The Board also considered the fact 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 AMCO, among others: (i) AMCO has demonstrated that it
possesses the capability and resources to perform the duties required of it
under the Advisory Agreement; (ii) AMCO 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 AMCO; and (v) AMCO's 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 AMCO
and the type of fund. Based on its conclusions, the Board determined that the
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 provided to
the Fund, 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 (ii) 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
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64 | USAA VALUE FUND
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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 AMCO'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 AMCO. The Trustees also relied on the ability of AMCO to negotiate
the Subadvisory Agreement and the fees thereunder at arm's length. For the above
reasons, the Board 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 PERFORMANCE - The Board compared the subadvisory fees for
the Fund with the fees that the Subadviser charges to comparable clients,
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ADVISORY AGREEMENT(S) | 65
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as applicable. The Board considered that the Fund pays a management fee to AMCO
and that, in turn, AMCO 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 AMCO's experience and resources in monitoring the performance, investment
style, and risk-adjusted performance of the Subadviser. The Board also noted the
Subadviser's 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 objectives and policies;
(ii) the Subadviser 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; and (iv) the
Fund's advisory expenses are reasonable in relation to those of similar funds
and to the services to be provided by AMCO and the Subadviser. Based on the
Board's conclusions, it 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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66 | USAA VALUE 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 | 67
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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 of 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), (08/11-06/19); Director of USAA Investment
Management Company (IMCO) (09/09-present); Chairman of Board of IMCO
(4/13-present); President and Director of USAA Shareholder Account Services
(SAS) (10/09-06/19); Senior Vice President of USAA Financial Planning Services
Insurance Agency, Inc. (FPS) (04/11-present); Director and Vice Chairman of FPS
(12/13-present); President and Director of USAA Investment Corporation (ICORP)
(03/10-present); Chairman of Board of ICORP (12/31-present); Director of USAA
Financial Advisors, Inc. (FAI) (12/13-present); Chairman of Board of FAI
(3/15-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
================================================================================
68 | USAA VALUE 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
--------------------------------------------------------------------------------
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
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 69
================================================================================
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.
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.
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
================================================================================
70 | USAA VALUE FUND
================================================================================
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 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.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 71
================================================================================
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 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.
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72 | USAA VALUE FUND
================================================================================
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 was 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 | 73
================================================================================
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).
JAMES K. De VRIES
Treasurer
Born: April 1969
Year of Appointment: 2018
Executive Director, Victory Capital Management Inc. (7/1/19-present); Treasurer,
USAA ETF Trust (09/18-06/19); Executive Director, Investment and Financial
Administration, USAA (04/12-06/30/19); Assistant Treasurer,
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74 | USAA VALUE FUND
================================================================================
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
Director, Accounting and Finance, Victory Capital Management Inc.
(7/1/19-present); Assistant Treasurer, USAA ETF Trust (09/18-06/19);
Accounting/Financial Director, USAA (12/13-06/30/19).
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).
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).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 75
================================================================================
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 111 West Houston St., Suite 1901
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
Copies of the Victory Capital Management Inc.'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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40846-0919
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 AND COMPLIANCE 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 and Compliance Committee, Investments
Committee, Product Management and Distribution 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 13 funds of the Registrant have a fiscal year end of July 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
July 31, 2019, and 2018 were $463,500 and $469,300, respectively.
(b) AUDIT RELATED FEE. Not applicable.
(c) TAX FEES. The aggregate fees billed by Ernst & Young LLP to the Registrant
for assistance with PFIC Analyzer Service for fiscal years ended July 31,
2019, and 2018 were $37,733 and $33,224, respectively.
(d) ALL OTHER FEES. No other fees were billed by Ernst & Young LLP for fiscal
years ended July 31, 2019, and 2018.
(e)(1) AUDIT AND COMPLIANCE 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 and Compliance Committee. The Audit and Compliance
Committee Charter also permits the Chair of the Audit and Compliance
Committee to pre-approve any permissible non-audit service that must be
commenced prior to a scheduled meeting of the Audit and Compliance Committee.
All non-audit services were pre-approved by the Audit and Compliance Committee
or its Chair, consistent with the Audit and Compliance 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 July 31, 2019, and 2018 were
$189,468 and $182,697, respectively, which includes aggregate fees accrued
or paid to Ernst & Young, LLP by USAA Shareholder Account Services (SAS)
for professional services rendered related to the annual study of
internal controls of the transfer agent for fiscal years ended July 31,
2019, and 2018. All services were preapproved by the Audit Committee.
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 and
Compliance 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.E Wagner review
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 July 31, 2019
By:* /s/ Christopher K. Dyer
--------------------------------------------------------------
Signature and Title: Christopher K. Dyer, President
Date: September 20, 2019
------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:* /s/ Christopher K. Dyer
-----------------------------------------------------
Signature and Title: Christopher K. Dyer, President
Date: September 20, 2019
------------------------------
By:* /s/ James K. De Vries
-----------------------------------------------------
Signature and Title: James K. De Vries, Treasurer
Date: September 20, 2019
-----------------------------
*Print the name and title of each signing officer under his or her signature.