Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Manager 5
Shareholder Voting Results 8
Financial Information:
Statement of Assets and Liabilities 10
Portfolio of Investments in Securities 11
Notes to Portfolio of Investments in Securities 13
Statement of Operations 14
Statements of Changes in Net Assets 15
Notes to Financial Statements 16
IMPORTANT INFORMATION:
Through our ongoing efforts to reduce expenses and respond to
shareholder requests, your annual and semiannual report mailings are
now "streamlined." One copy of each report will be sent to each
address, instead of our previous practice of sending one report to
every registered owner. For many shareholders and their families, this
eliminates duplicate copies, saving paper and postage costs to the
Fund.
If you are the primary shareholder on at least one account, prefer not
to participate in streamlining, and would like to continue receiving
one report per registered account owner, you may request this in
writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during
business hours.
This report is for the information of the shareholders and others who
have received a copy of the currently effective prospectus of the USAA
Income Fund, managed by USAA Investment Management Company (IMCO).
It may be used as sales literature only when preceded or accompanied
by a current prospectus which gives further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark
Office. (copyright)1996, USAA. All rights reserved.
<TABLE>
USAA Family of Funds Performance Summary
If you own only one or two USAA funds, you may not be aware of the
performance of our other funds. This summary is a snapshot of the
performance of all 32 funds by investment objective as of December 31,
1995. For more complete information about the mutual funds managed and
distributed by USAA IMCO, including charges and expenses, please call
1-800-531-8181 for a prospectus. Read it carefully before you invest.
Average Annual Total Return*
<CAPTION> Yield
Investment Inception Since 7-Day 30-Day(1)
Objective Date 1 yr 5 yrs 10 yrs Inception Simple SEC
<S> <C> <C> <C> <C> <C> <C> <C>
Capital Appreciation
Aggressive Growth 10/19/81 50.42 20.44 12.02 - - -
Emerging Markets(2) 11/7/94 3.65 - - (4.26) - -
Gold(2) 8/15/84 4.04 5.60 5.46 - - -
Growth 4/5/71 32.06 15.56 12.47 - - -
Growth & Income 6/1/93 31.57 - - 13.74 - -
International(2) 7/11/88 8.29 11.98 - 9.51 - -
World Growth(2) 10/1/92 12.85 - - 12.06 - -
Asset Allocation
Balanced Strategy 9/1/95 - - - 3.24 - -
Cornerstone Strategy(2)# 8/15/84 18.40 12.37 12.68 - - -
Growth and Tax Strategy(3)**# 1/11/89 22.70 10.33 - 9.81 - 3.61
Growth Strategy(2) 9/1/95 - - - 6.50 - -
Income Strategy 9/1/95 - - - 9.94 - 4.47
Income - Taxable
GNMA 2/1/91 16.76 - - 8.64 - 6.64
Income 3/4/74 24.47 10.91 10.43 - - 6.25
Income Stock 5/4/87 28.62 14.35 - 12.12 - -
Short-Term Bond 6/1/93 11.18 - - 5.33 - 6.43
Income - Tax Exempt
Long-Term(3)** 3/19/82 18.58 8.44 8.62 - - 5.40
Intermediate-Term(3)** 3/19/82 15.07 8.22 7.95 - - 4.93
Short-Term(3)** 3/19/82 8.11 5.59 5.87 - - 4.36
California Bond(3)** 8/1/89 21.85 8.39 - 8.01 - 5.23
Florida Tax-Free Income(3)** 10/1/93 18.90 - - 3.39 - 5.35
New York Bond(3)** 10/15/90 18.07 8.60 - 9.25 - 5.31
Texas Tax-Free Income(3)** 8/1/94 22.22 - - 12.43 - 5.18
Virginia Bond(3)** 10/15/90 17.08 8.42 - 8.79 - 5.22
Money Market
Money Market(4) 2/2/81 5.80 4.54 5.97 - 5.48 -
Tax Exempt Money Market(3),(4)** 2/6/84 3.70 3.32 4.36 - 4.33 -
Treasury Money Market Trust(4) 2/1/91 5.59 - - 4.17 5.26 -
California Money Market(3),(4)** 8/1/89 3.64 3.15 - 3.70 4.14 -
Florida Tax-Free Money
Market(3),(4)** 10/1/93 3.57 - - 2.90 4.28 -
New York Money Market(3),(4)** 10/15/90 3.59 2.98 - 3.04 4.27 -
Texas Tax-Free Money Market(3),(4)** 8/1/94 3.56 - - 3.36 4.08 -
Virginia Money Market(3),(4)** 10/15/90 3.52 3.13 - 3.21 4.07 -
(1) Calculated as prescribed by the Securities and Exchange Commission.
(2) Foreign investing is subject to additional risks, which are discussed in the funds' prospectuses.
(3) Some income may be subject to state or local taxes or the federal alternative minimum tax.
(4) An investment in a money market fund is neither insured nor guaranteed by the U.S. government and there
is no assurance that any of the funds will be able to maintain a stable net asset value of $1 per share.
* Total return equals income yield plus share price change and assumes reinvestment of all dividends and
capital gain distributions. No adjustment has been made for taxes payable by shareholders on their
reinvested dividends and capital gain distributions. The performance data quoted represents past performance
and is not an indication of future results. Investment return and principal value of an investment
will fluctuate, and an investor's shares, when redeemed, may be worth more or less than their original cost.
** IRAs are not available for tax-exempt funds. The Growth and Tax Strategy Fund is not available as an
investment for your IRA because the majority of its income is tax exempt. California, New York, Virginia,
Florida, and Texas funds available to residents only.
# Formerly known as Cornerstone Fund and Balanced Portfolio Fund, respectively.
</TABLE>
Message from the President
[A photo of Michael J.C. Roth, President and Vice Chairman of the Board,
appears here]
We regularly get letters and phone calls from our customers commenting on the
things we do and the services we provide. We value all of these communications,
whatever their tone. They let us know what we have done wrong and what we
have done right.
There have been two events in the past couple of years that generated lots
of letters. When I say "lots," I really mean dozens, which is small in
relation to our base of over 450,000 shareholders. But, those dozens are
meaningful to us as a signal that a chord has been struck, and we pay
attention. The first event was the changes we made to our statements,
consolidating information on multiple fund accounts into a single mailing.
Some of you were uncomfortable with the fact that each fund's activity was
no longer on an individual piece of paper in the statement. We hope that by
now all of you have noted that the annual statement we sent you in January
for the previous year does have separate pages that record all of the
transactions for each fund owned. These records can easily be filed by
fund.
This time last year when we held some meetings with shareholders
in ten cities around the country, we addressed the statement ourselves just
to get your feedback. At every meeting there was invariably one person who
stood up and said, "I like the new statement." However, there will be some
format changes to our statements beginning in April, which I hope all of you
will enjoy.
The second event occurred recently. In rushing to meet a deadline, we
managed to send out a piece that incorrectly described dollar-cost averaging.
In a way, it was good to know how many of you read our pieces carefully
because we sure did hear from several of you. It was terribly embarrassing
for us, but not altogether bad because we learned from it.
These events are part of a relationship with you that we enjoy. We enjoy it,
in large part, because you do not write or call only when something is amiss.
You also let us know when we have done well and helped you. For many years, we
have preserved your letters which compliment one of our people, and present
that letter to the person you have noted. We call this a "Laurel," and it has
been one of the most successful means of recognition for individuals we have
ever seen.
We look forward to hearing from you. It helps us serve you better.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
Investment Review
INCOME FUND
OBJECTIVE: Maximum current income without undue risk to principal.
Types of Investments: Income-producing securities selected for their
high yields relative to the risk involved.
7/31/95 1/31/96
--------- ---------
Net Assets $1,755.2 Million $1,902.3 Million
Net Asset Value Per Share $12.11 $13.01
Average Annual Total Returns as of 1/31/96
July 31, 1995 to January 31, 1996 11.06%+
1 Year 21.24%
5 Years 10.87%
10 Years 10.31%
+ Total returns for periods of less than one year are not annualized.
This six-month return is cumulative.
[A graph is shown here which is a comparison of the change in value of a
$10,000 investment, for the period of 1/31/86 to 1/31/96, with dividends
and capital gains reinvested. The ending value of each item graphed is
as follows: USAA Income Fund - $26,669 Lehman Brothers Aggregate Bond Index-
$25,106 and the Lipper Fixed Income Average - 23,562.]
The Lehman Brothers Aggregate Bond Index is an unmanaged index made up
of the government/corporate index, the mortgage-backed securities
index, and the asset-backed securities index. The Lipper Fixed Income
Average is the average performance level of all fixed-income funds, as
reported by Lipper Analytical Services, an independent organization that
monitors the performance of mutual funds.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No
adjustment has been made for taxes payable by shareholders on their
reinvested income dividends and capital gain distributions. The
performance data quoted represents past performance and is not an
indication of future results. Investment return and principal value of
an investment will fluctuate, and an investor's shares, when redeemed,
may be worth more or less than their original cost.
Message from the Manager
(Photo of J.W. Saunders, Jr., Portfolio Manager, appears here)
General Discussion
We noted in our July 31, 1995 annual report that we were in a strong
bull market for bonds although we had seen some weakness in July. We
viewed the bond market as an exceptional opportunity when that
weakness continued into August, so we restructured the portfolio to
take advantage of the anticipated resumption of rising bond prices
(and the corresponding decline in interest rates). We reduced our
mortgage pass-through position by one-third, tripled our long-term
Treasury bond position, and maintained our exposure in high-yield
common stocks. While past performance is not a guarantee of future
results, this strategy paid off handsomely, as evidenced by the Fund's
total return of 24.47% for the calendar year 1995. This is the best
calendar year total return for the Income Fund in the 10 years
I have managed it. For the record, total returns for the Fund place it
in the top 3% of all fixed-income funds for 1995 and in the top 11% of
all fixed-income funds for the 10 years ending December 31, 1995, as
measured by Lipper Analytical Services.(1)
Ranking Based on Average Annual Total Return
as of calendar year end 12/31/95
1 Year 5 Years 10 Years
------- ------- -------
Rank/No. of Funds (1) 39/1361 109/466 21/189
Average Annual Total Return 24.47% 10.91% 10.43%
(1) Source: Lipper Analytical Services, an independent organization that
monitors the performance of mutual funds. All data shown as of
12/31/95. Performance data quoted represents past performance.
Investment 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.
At January 31, 1996, the Fund's portfolio mix, as percentages of net
assets, was 39.4% in U.S Treasury bonds, 46.0% in agency mortgage
pass-through securities, 1.0% in corporate bonds and commercial paper,
and 12.1% in high-yield common stocks.
Outlook
Bond market volatility has increased while the protracted federal
budget talks yield little progress. Looking beyond this current uncertainty,
the picture looks favorable for bond investors.
Inflation, the scourge of interest rates, has averaged below 3% for
the past five years. Real interest rates (net of inflation) are still
high and may continue to move lower in an economic environment which
is beginning to show signs of slowing. We will continue to maintain
our current portfolio structure in this environment.
See page 11 for a complete listing of the Portfolio of Investments in
Securities.
Top 10 Securities
(% of Net Assets)
Coupon % of
Rate % Net Assets
------ ----------
U.S. Treasury Bond 7.9 21.1
U.S. Treasury Bond 6.9 15.7
FNMA 7.5 11.9
GNMA 7.5 11.1
GNMA 7.0 5.1
FNMA 7.0 4.6
GNMA 6.5 4.5
GNMA 8.0 3.4
FNMA 8.0 2.8
U.S. Treasury Bond 7.6 2.5
Shareholder Voting Results
On October 13, 1995, a special meeting of shareholders was held to
vote on the following proposals. All proposals were approved by the
shareholders. All shareholders of record on August 17, 1995 were
entitled to vote on each proposal. The number of votes shown below are
shown for the Income Fund only for proposal (2) and in the aggregate
for the entire USAA Mutual Fund, Inc. (the Company) for proposals (1)
and (3).
(1) Proposal to elect a Board of Directors as follows:
Votes Votes
Director For Withheld
-----------------------------------------------------------
Hansford T. Johnson* 958,654,342 22,342,020
Michael J.C. Roth 959,226,525 21,769,837
John W. Saunders, Jr. 958,343,963 22,652,399
George E. Brown 953,414,718 27,581,644
Howard L. Freeman, Jr. 959,776,745 21,219,617
Richard A. Zucker 947,484,789 33,511,573
Barbara B. Dreeben 945,379,515 35,616,847
Mr. C. Dale Briscoe did not stand for re-election to the Board. His
term of office terminated on December 31, 1995.
* On December 4, 1995, Hansford T. Johnson announced his departure
from the Board effective December 31, 1995. The Board elected M.
Staser Holcomb to succeed Mr. Johnson.
(2) Proposals to amend certain investment restrictions as follows:
Number of Shares Voting
For Against Abstain
--- ------- -------
Proposal to amend the 5% and 10% 79,226,070 4,878,572 2,764,886
issuer diversification restrictions
to apply to 75% of a Fund's total
assets rather than 100%.
Proposal to amend the restriction 76,909,097 6,796,200 3,164,232
relating to borrowing to allow a Fund
to borrow an amount not exceeding
33 1/3% of its total assets (including
the amount borrowed) less liabilities
(other than borrowings) for temporary
or emergency purposes.
Proposal to amend the restriction 77,186,054 6,395,597 3,287,878
relating to lending portfolio securities
to permit a Fund to lend up to 33 1/3%
of its total assets to other parties.
Proposal to reclassify the investment 77,358,810 6,123,362 3,387,357
restriction on illiquid securities from
fundamental to non-fundamental and amend
the restriction to permit investments in
illiquid securities, including repurchase
agreements maturing in more than seven days,
to no more than 15% of the value of a Fund's
net assets.
Proposal to reclassify the 5% 77,526,021 5,949,211 3,394,296
restriction on investment in new
issuers from fundamental to non-
fundamental.
Proposal to reclassify 78,463,927 4,876,928 3,528,673
the joint trading account restriction
from fundamental to non-fundamental.
(3) Proposal to ratify or reject the 919,046,882 22,848,992 39,100,482
selection by the Board of Directors
of KPMG Peat Marwick LLP as auditors
for the Company for the fiscal year
ending July 31, 1995.
Income Fund
Statement of Assets and Liabilities
(In Thousands)
January 31, 1996
(Unaudited)
Assets
Investments in securities, at market value
(identified cost of $1,757,061) $ 1,874,655
Cash 283
Receivables:
Capital shares sold 331
Dividends and interest 27,866
Securities sold 45,674
----------
Total assets 1,948,809
----------
Liabilities
Securities purchased 45,019
Capital shares redeemed 782
USAA Investment Management Company 385
USAA Transfer Agency Company 196
Accounts payable and accrued expenses 154
----------
Total liabilities 46,536
----------
Net assets applicable to capital shares outstanding $ 1,902,273
==========
Represented by:
Paid-in capital $ 1,780,529
Accumulated undistributed net investment income 662
Accumulated net realized gain on investments 3,488
Net unrealized appreciation of investments 117,594
----------
Net assets applicable to capital shares outstanding $ 1,902,273
==========
Capital shares outstanding 146,184
==========
Net asset value, redemption price, and offering price per
share $ 13.01
==========
See accompanying notes to financial statements.
Income Fund
Portfolio of Investments in Securities
January 31, 1996
(Unaudited)
Market
Number Value
of Shares Security (000)
- ---------- -------- -------
Common Stocks (12.1%)
1,200,000 Allegheny Power System, Inc. $ 36,300
800,000 American Electric Power Co., Inc. 35,400
1,100,000 CINergy Corp. 34,237
1,300,000 Houston Industries, Inc. 31,200
625,000 Long Island Lighting Co. 10,625
1,100,000 Northeast Utilities 25,988
480,000 Ohio Edison Co. 11,460
1,000,000 Public Service Enterprise Group, Inc. 31,250
400,000 Southwestern Public Service Co. 13,150
---------
Total common stocks (cost: $200,518) 229,610
---------
Corporate Obligations (0.8%)
Principal
Amount Coupon
(000) Rate Maturity
----- ----- --------
$ 17 Citibank, N.A. Mortgage Pass-Thru
Certificate, Series 1982A 14.00% 9/01/96 18
4,900 Consolidated Rail Corp. 9.75 6/15/20 6,562
2,000 Dial Corp. 10.50 5/15/06 2,583
1 Norwest Mortgage, Inc. 11.75 2/01/99 1
3,350 Texas Eastern Transmission Corp. 10.00 10/01/11(a) 3,543
2,500 Texas Eastern Transmission Corp. 10.13 9/01/11(a) 2,646
-----
Total corporate obligations (cost: $13,051) 15,353
------
U.S. Government & Agency Issues (85.4%)
Federal Home Loan Mortgage Corp. (2.7%)
6,491 7.50%, 10/01/19 6,640
43,195 8.00%, 3/01/17 - 1/01/21 44,679
------
51,319
------
Federal National Mortgage Assn. (19.3%)
87,109 7.00%, 9/01/22 - 9/01/23 88,122
220,025 7.50%, 2/01/22 - 2/01/23 225,934
51,379 8.00%, 5/01/21 - 12/01/22 53,438
-------
367,494
-------
Government National Mortgage Assn. (24.0%)
85,290 6.50%, 6/15/23 - 2/15/24 85,019
95,991 7.00%, 5/15/23 - 9/15/23 97,492
204,068 7.50%, 9/15/22 - 7/15/23 210,598
61,766 8.00%, 3/15/22 - 5/15/24 64,449
--------
457,558
--------
U.S. Treasury Bonds (39.4%)
267,695 6.875%, 8/15/25 298,815
40,000 7.625%, 2/15/25 48,462
327,615 7.875%, 2/15/21 401,840
--------
749,117
--------
Total U.S. Government & agency issues (cost:
$1,539,288) 1,625,488
--------
Short-Term (0.2%)
Commercial Paper
4,204 Ford Motor Credit Co., 5.67%, 2/01/96 (cost: $4,204) 4,204
----------
Total investments (cost: $1,757,061) $1,874,655
==========
Income Fund
Notes to Portfolio of Investments in Securities
January 31, 1996
(Unaudited)
General Notes
Market values of securities are determined by procedures and practices
discussed in note 1 to the financial statements.
The cost of securities for federal income tax purposes is
approximately the same as that reported in the financial statements.
The percentages shown represent the percentage of the investments to
net assets.
Specific Notes
(a) Security is a sinking fund debenture.
See accompanying notes to financial statements.
Income Fund
Statement of Operations
(In Thousands)
Six-month period ended January 31, 1996
(Unaudited)
Net investment income:
Income:
Dividends $ 7,437
Interest 55,538
-------
Total income 62,975
-------
Expenses:
Management fees 2,208
Transfer agent's fees 1,159
Custodian's fees 141
Postage 111
Shareholder reporting fees 42
Directors' fees 2
Registration fees 30
Audit fees 15
Legal fees 2
Other 32
-------
Total expenses 3,742
-------
Net investment income 59,233
-------
Net realized and unrealized gain on investments:
Net realized gain 3,643
Change in net unrealized appreciation/depreciation 128,672
-------
Net realized and unrealized gain 132,315
-------
Increase in net assets resulting from operations $ 191,548
========
See accompanying notes to financial statements.
Income Fund
Statements of Changes in Net Assets
(In Thousands)
Six- month period ended January 31, 1996
and Year ended July 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
1/31/96 7/31/95
--------- --------
<S> <C> <C>
From operations:
Net investment income $ 59,233 $ 122,111
Net realized gain (loss) on investments 3,643 (204)
Change in net unrealized appreciation/depreciation of
investments 128,672 62,076
--------- --------
Increase in net assets resulting from operations 191,548 183,983
--------- --------
Distributions to shareholders from:
Net investment income (60,791) (122,518)
--------- ---------
From capital share transactions:
Shares sold 88,952 200,959
Shares issued for dividends reinvested 49,470 99,380
Shares redeemed (122,077) (325,567)
--------- ---------
Increase (decrease) in net assets from capital
share transactions 16,345 ( 25,228)
Net increase in net assets 147,102 36,237
Net assets:
Beginning of period 1,755,171 1,718,934
---------- ----------
End of period $1,902,273 $1,755,171
========== ===========
Undistributed net investment income included in net
assets:
Beginning of period $ 2,021 $ 2,428
========== ===========
End of period $ 662 $ 2,021
========== ============
Change in shares outstanding:
Shares sold 7,025 17,308
Shares issued for dividends reinvested 3,922 8,577
Shares redeemed (9,677) (28,218)
---------- ----------
Increase (decrease) in shares outstanding 1,270 (2,333)
========== =========
Authorized shares of $.01 par value 200,000 200,000
========== =========
See accompanying notes to financial statements.
</TABLE>
Income Fund
Notes to Financial Statements
(In Thousands)
January 31, 1996
(Unaudited)
(1) Summary of Significant Accounting Policies
USAA MUTUAL FUND, INC. (the Company), registered under the Investment
Company Act of 1940, is a diversified, open-end management investment company
incorporated under the laws of Maryland consisting of seven separate funds.
The information presented in this semiannual report pertains only to the
Income Fund (the Fund). The Fund's investment objective is maximum
current income without undue risk to principal.
A. Security valuation - The value of each security is determined (as
of the close of trading on the New York Stock Exchange on each
business day the Exchange is open) as set forth below:
1. Portfolio securities, except as otherwise noted, traded primarily
on a domestic securities exchange are valued at the last sales price
on that exchange.
2. Over-the-counter securities are priced at the last sales price or,
if not available, at the average of the bid and asked prices.
3. Securities purchased with maturities of 60 days or less are stated
at amortized cost which approximates market value.
4. Other debt and government securities are valued each business day
by a pricing service (the Service) approved by the Fund's Board of
Directors. The Service uses the mean between quoted bid and asked
prices or the last sale price to price securities when, in the
Service's judgement, these prices are readily available and are
representative of the securities' market values. For many securities,
such prices are not readily available. The Service generally prices
these securities based on methods 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.
5. Securities which cannot be valued by the methods set forth above,
and all other assets, are valued in good faith at fair value, using
methods determined by the Manager under the general supervision of the
Board of Directors.
B. Federal taxes - The Fund's policy is to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its income
to its shareholders. Therefore, no federal income or excise tax
provision is required. As a result of certain differences between
book and tax basis accounting, reclassifications have been made on the
statement of assets and liabilities to increase accumulated
undistributed net investment income and decrease accumulated net
realized gain on investments by $199.
C. Investments in securities - As is common in the industry, security
transactions are accounted for on the date the securities are purchased
or sold (trade date). Gain or loss from sales of investment securities
is computed on the identified cost basis. Dividend income is recorded
on the ex-dividend date; interest income is recorded on the accrual basis.
Discounts and premiums on short-term securities are amortized over the
life of the respective securities. Amortization of market discounts
on long-term securities is recognized as interest income upon
disposition of the security to the extent there is a gain on
disposition.
(2) Lines of Credit
The Fund participates with other USAA funds in two joint short-term
revolving loan agreements totaling $850 million through January 14,
1997, one with USAA Capital Corporation, an affiliate of
the Manager ($750 million uncommitted), and one with an unaffiliated
bank ($100 million committed). The purpose of the agreements is to
meet temporary or emergency cash needs, including redemption requests
that might otherwise require the untimely disposition of securities.
Subject to availability under these agreements, the Fund may borrow up
to a maximum of 25% of its total assets at the lending institution's
borrowing rate plus a markup to cover costs. The Fund had no borrowings
under either of these agreements during the six-month period ended
January 31, 1996.
(3) Distributions
Distributions of net investment income are made monthly. Distributions
of realized gains from security transactions not offset by capital
losses are made in the succeeding fiscal year.
(4) Investment Transactions
Purchases and sales of securities, excluding short-term securities,
for the six-month period ended January 31, 1996 were $971,991 and
$961,515, respectively.
Gross unrealized appreciation and depreciation of investments as of
January 31, 1996 was $127,267 and $9,673, respectively.
(5) Transactions with Manager
A. Management fees - The investment policy of the Fund and the
management of the Fund's portfolio is carried out by USAA Investment
Management Company (the Manager). The Fund's management fees are
computed at .24% of its annual average net assets.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services, an affiliate of the Manager, provides
transfer agent services to the Fund. Shareholder accounting service
fees are based on an annual charge per shareholder account plus
out-of-pocket expenses.
C. Underwriting agreement - The Company has an agreement with the
Manager for exclusive underwriting and distribution of the Fund's
shares on a continuing best efforts basis. This agreement provides
that the Manager will receive no fee or other remuneration for such
services.
D. Brokerage services - USAA Brokerage Services, a discount brokerage
service of the Manager, may execute portfolio transactions for the Fund.
The amount of brokerage commissions paid to USAA Brokerage Services
during the six-month period ended January 31, 1996 was $21.
(6) Transactions with Affiliates
USAA Investment Management Company is indirectly wholly owned by
United Services Automobile Association (the Association), a large,
diversified financial services institution. At January 31, 1996,
the Association and its affiliates (including related employee benefit
plans) owned 16,122 shares (11.0%) of the Fund.
(7) Financial Highlights
Per share operating performance for a share outstanding throughout
each period is as follows:
<TABLE>
<CAPTION>
Six-month Year Ten-month
period ended ended period ended
January 31, July 31, July 31, Year ended September 30,
1996 1995 1994 1993 1992 1991
----- ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 12.11 $ 11.67 $ 13.28 $ 12.76 $ 12.11 $ 11.03
Net investment income .41 .84 .72 .90 .95 .98
Net realized and
unrealized gain (loss) .91 .45 (1.30) .52 .64 1.09
Distributions from net
investment income (.42) (.85) (.78) (.90) (.93) (.99)
Distributions of realized
capital gains - - (.25) - (.01) -
------- -------- -------- ------- ------ -------
Net asset value at
end of period $ 13.01 $ 12.11 $ 11.67 $ 13.28 $ 12.76 $ 12.11
========= ========== ========= ======== ======== =======
Total return (%) * 11.06 11.64 (4.52) 11.58 13.72 19.64
Net assets at end
of period (000) $1,902,273 $1,755,171 $1,718,934 $1,932,064 $1,359,721 $ 827,505
Ratio of expenses to
average net assets(%) .41(a) .41 .41(a) .41 .42 .47
Ratio of net investment
income to average
net assets (%) 6.44 (a) 7.27 6.98 (a) 7.00 7.78 8.61
Portfolio turnover (%) 53.29 (b) 30.86(b) 25.36 (b) 44.82 21.78 15.45
Average commission
rate paid per share $ .047
</TABLE>
* Assumes reinvestment of all dividend income and capital gain
distributions during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) The Fund may simultaneously purchase and sell the same securities.
These transactions can be high in volume and are dissimilar to other trade
activity within the Fund. If these transactions were excluded from the
calculation, the portfolio turnover rate would be as follows:
Six-month Year Ten-Month
period ended ended period ended
January 31, July 31, July 31,
1996 1995 1994
---- ---- ----
Portfolio turnover (%) 31.58 9.09 16.79
Purchases and sales of this type
are as follows:
Purchases (000) $391,211 $ 360,943 $155,322
Sales (000) $391,685 $ 361,366 $155,497
