USAA BALANCED STRATEGY FUND
September 1, 1995 PROSPECTUS
USAA Balanced Strategy Fund (the Fund) is one of eleven
no-load mutual funds offered by USAA Investment Trust
(the Trust). The Fund is managed by USAA Investment
Management Company (the Manager).
WHAT IS THE INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek high total return,
with reduced risk over time, through an asset allocation strategy
that seeks a combination of long-term growth of capital and
current income. Page 8.
HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the net asset
value per share without a sales charge. Make your initial
investment directly with the Manager by mail or in person. Page 14.
HOW DO YOU SELL?
You may redeem shares of the Fund by mail, telephone, fax,
or telegraph on any day that the net asset value is calculated.
Page 16.
This Prospectus, which should be read and retained
for future reference, provides information regarding the
Trust and the Fund that you should know before investing.
Shares of the USAA Balanced Strategy Fund are not
deposits or other obligations of, or guaranteed by the
USAA Federal Savings Bank, are not insured by the FDIC or
any other Government Agency, and are subject to market
risks. Because this Fund may invest in foreign
securities it involves a higher degree of risk and may
not be appropriate for some investors. See Special Risk
Considerations, page 13.
If you would like more information, a STATEMENT OF
ADDITIONAL INFORMATION (SAI) of the Fund, dated September
1, 1995, is available upon request and without charge by
writing to USAA INVESTMENT TRUST, 9800 Fredericksburg
Rd., San Antonio, TX 78288, or by calling 1-800-531-8181.
The SAI has been filed with the Securities and Exchange
Commission and is incorporated by reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
SUMMARY DATA
Fees and Expenses 3
Performance Information 4
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds 5
Using Mutual Funds in an Asset Allocation Program 6
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies 8
SHAREHOLDER INFORMATION
Purchase of Shares 14
Redemption of Shares 16
Conditions of Purchase and Redemption 17
Exchanges 18
Other Services 19
Share Price Calculation 20
Dividends, Distributions and Taxes 21
Management of the Trust 22
Description of Shares 23
Service Providers 24
Telephone Assistance Numbers 24
FEES AND EXPENSES
The following summary is provided to assist you in understanding the
expenses you will bear directly or indirectly.
Shareholder Transaction Expenses
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Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee* None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net assets (ANA))
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Management Fees, net of reimbursements .00%
12b-1 Fees None
Other Expenses (estimated)
Transfer Agent Fees** .50%
Custodian Fees .55%
All Other Expenses .20%
----
Total Other Expenses 1.25%
----
Total Fund Operating Expenses, net of reimbursements 1.25%
=====
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* A shareholder who requests delivery of redemption proceeds by wire transfer
will be subject to a $10 fee. See Redemption of Shares - Bank Wire.
** The Fund pays USAA Shareholder Account Services an annual fixed fee
per account for its services. See Transfer Agent in the SAI, page 15.
The Manager has voluntarily agreed to limit the
Fund's annual expenses until October 1, 1996, to 1.25% of
its ANA and will reimburse the Fund for all expenses in
excess of the limitation. The Management Fees, Other
Expenses, and Total Fund Operating Expenses reflect all
such expense reimbursements by the Manager. Absent such
reimbursements, the amount of the Management Fees, Other
Expenses, and Total Fund Operating Expenses as a
percentage of the Fund's ANA would be .75%, 1.51%, and
2.26%, respectively.
Example of Effect of Fund Expenses
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An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of the periods shown.
1 year - $ 13 3 years - $ 40
The above example should not be considered a representation of past or
future expenses and actual expenses may be greater or less than those shown.
PERFORMANCE INFORMATION
Performance information should be considered in light of
the Fund's investment objective and policies and market
conditions during the time periods for which it is reported.
Historical performance should not be considered as
representative of the future performance of the Fund.
The Trust may quote the Fund's total return in
advertisements and reports to shareholders or prospective
investors. The Fund's performance may also be compared
to that of other mutual funds with a similar investment
objective and to stock or relevant indexes that are
referenced in Appendix B to the SAI. Standard total
return results reported by the Fund do not take into
account recurring and nonrecurring charges for optional
services which only certain shareholders elect and which
involve nominal fees, such as the $10 fee for a delivery
of redemption proceeds by wire transfer.
The Fund's average annual total return is computed
by determining the average annual compounded rate of
return for a specified period which, when applied to a
hypothetical $1,000 investment in the Fund at the
beginning of the period, would produce the redeemable
value of that investment at the end of the period,
assuming reinvestment of all dividends and distributions
during the period.
Further information concerning the Fund's total
return is included in the SAI.
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a
variety of Funds, each with different objectives and
policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their
own investment program. You may exchange any shares you
hold in any one USAA Fund for shares in any other USAA
Fund. For more complete information about the Funds in
the USAA Family of Funds, including charges and expenses,
call the Manager for a Prospectus. Be sure to read it
carefully before you invest or send money.
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Growth Fund
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Available for sale only to residents of these specific states.
USING MUTUAL FUNDS IN AN ASSET ALLOCATION PROGRAM
I. THE IDEA BEHIND ASSET ALLOCATION
If you have money to invest and hear that stocks may be a
good investment, is it a wise idea to use your entire
savings to buy one stock? Most people wouldn't - it
would be fortunate if it works, but this strategy holds a
great deal of risk. Surprising news could be reported
tomorrow on your stock, and its price could soar or plummet.
Careful investors understand this concept of risk
and lower that risk by diversifying their holdings among
a number of securities. That way bad news for one
security may be counterbalanced by good news regarding
other securities. But there is still a question of risk
here. History tells us that stocks are generally more
volatile than bonds and that long-term bonds are
generally more volatile than short-term bonds. History
also tells us that over many years investments having
higher risks tend to have higher returns than investments
that carry lower risks. And past performance doesn't
necessarily guarantee future results. From these
observations comes the idea of asset allocation.
Asset allocation is a straightforward concept that
involves dividing your money among several different
types of investments - for example, stocks, bonds and
short-term investments such as money market instruments -
and keeping that allocation until your objectives or the
financial markets significantly change. That way you're
not pinning all your financial success on the fortunes of
one kind of investment. Money spread across different
investment categories can help you reduce market risk and
likely will provide more stability to your total return.
Asset allocation can work because different kinds of
investments generally follow different up-and-down
cycles. With a variety of investments in
your portfolio, some are probably doing well, even when
others are struggling.
II. USING ASSET ALLOCATION IN AN INVESTMENT PROGRAM
Most investors understand the concept of diversification,
but asset allocation goes beyond diversifying your
portfolio; it's much more of an active process. You must
evaluate your lifestyle, finances, circumstances, long-
and short-term financial goals and tolerance for
investment risk. Once you have structured your
allocation, you'll need to review it regularly since your
objectives will change over time.
III. USAA'S SERIES OF ASSET STRATEGY FUNDS
USAA's series of asset allocation funds, our Asset
Strategy Funds, are designed for the long-term investor
and are in line with the Manager's investment philosophy
for its customers, specifically "don't try to time the
market," and "buy and hold for the long-term." As shown
on the next page, each of USAA's Asset Strategy Funds has
its own different mix of assets and objectives.
Fund Investment Objective Invests In
============================================================================
Income Seek high current return, with Bonds and stocks
Strategy reduced risk over time, through
Fund an asset allocation strategy
which emphasizes income and
gives secondary emphasis to
long-term growth of capital.
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Growth and Tax Seek a conservative balance Short- and long-term
Strategy Fund between income, the majority tax exempt bonds and
of which is tax-exempt, and basic value stocks
the potential for long-term
growth of capital to preserve
purchasing power. This
objective is to be achieved
through an asset allocation
strategy.
----------------------------------------------------------------------------
Balanced Seek high total return, with Stocks and bonds
Strategy reduced risk over time, through
Fund an asset allocation strategy
that seeks a combination of
long-term growth of capital
and current income.
----------------------------------------------------------------------------
Cornerstone Achieve a positive inflation- Foreign & basic value
Strategy adjusted rate of return and stocks, government
Fund a reasonably stable value of securities, real estate
Fund shares. This stocks and gold stocks
objective is to be achieved
through an asset allocation
strategy.
----------------------------------------------------------------------------
Growth Seek high total return, Small & large cap stocks,
Strategy with reduced risk over time, bonds, and international
Fund through an asset allocation stocks
strategy which emphasizes
capital appreciation and gives
secondary emphasis to income.
============================================================================
An important feature of USAA's Asset Strategy Funds is
the quarterly rebalancing of each portfolio. In this
asset allocation technique, the Funds' Managers buy or
sell securities each quarter so that the investment
categories of each Fund are brought within their target
ranges. For example, if a portfolio holds 65% of its
securities in stocks, 30% in bonds, and 5% in money
market instruments at the beginning of a quarter, then
due to market returns holds 75% of its securities in
stocks, 20% in bonds, and 5% in money market instruments
at the end of a quarter, the Manager would rebalance the
portfolio by reducing its holdings of stocks and
increasing its holdings of bonds to return the
portfolio's investments in stocks and bonds into the
target ranges. See Investment Objective and Policies -
Investment Policies, Techniques and Risk Factors for
further information on the Fund's target ranges.
For more complete information about the other USAA Asset
Strategy Funds, including charges and expenses, call the
Manager for a Prospectus. Be sure to read it carefully
before you invest or send money.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek high total
return, with reduced risk over time, through an asset
allocation strategy that seeks a combination of long-term
growth of capital and current income.
The investment objective of the Fund cannot be
changed without shareholder approval. In view of the
risks inherent in all investments in securities, there is
no assurance that this objective will be achieved.
The investment policies and techniques used to
pursue the Fund's objective may be changed without
shareholder approval, except as otherwise noted. Further
information regarding the Fund's investment policies,
restrictions and risks is provided in the SAI.
INVESTMENT POLICIES,
TECHNIQUES AND RISK FACTORS
The Fund provides a professionally managed, diversified
investment program within one mutual fund. The Manager
seeks to attain the objective by allocating the Fund's
assets in each of the following investment categories
within the indicated ranges:
Percentage
Target Range
Investment Category of Net Assets
------------------- -------------
Stocks 50 - 70%
Bonds 30 - 50%
Money Market Instruments 0 - 10%
The target ranges may be revised by the Board of
Trustees upon 60 days' prior written notice to
shareholders. However, the Manager reserves the right,
without shareholder notification, to revise the ranges on
a temporary defensive basis when, in its opinion, such
changes are believed to be in the best interest of the
Fund and its shareholders.
The ranges allow for a variance in each investment
category. Should market action cause investment categories
to move outside the ranges, the Manager will make adjustments
to rebalance the portfolio. In general, the Manager will rebalance
the portfolio at least once during each calendar quarter to
bring each category within its range. These portfolio
adjustments may cause the Fund to sell securities in
investment categories which have appreciated in value and
to buy securities in investment categories which have
depreciated in value. Such adjustments may also cause
the Fund to incur a higher proportion of short-term
capital gains than a fund that does not have a similar policy.
As a temporary defensive measure, the Manager may
invest up to 100% of the Fund's assets in high quality,
short-term debt instruments.
The Fund's portfolio turnover rate is not expected
to exceed 100%, however, it will not be a limiting factor
when the Manager deems changes in the Fund's portfolio
appropriate in view of its investment objective.
Characteristics and associated risks of each investment
category are as follows:
Stocks - In this category, investments will consist primarily
of common stocks or securities convertible into common stocks
or securities which carry the right to buy common stocks.
Investments may also include foreign securities. For a
discussion of the risks associated with investments in foreign
issuers, see Special Risk Considerations.
The Fund may also invest in U.S. Real Estate
Investment Trusts (REITs). The Fund's investments in
REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. In
addition, REITs are dependent upon the capabilities of
the REIT manager(s) and have limited diversification.
Bonds - In this category, investments will consist of
U.S. dollar-denominated securities selected for their
high yields relative to the risk involved. Consistent
with this policy, in periods of rising interest rates, a
greater portion of the portfolio may be invested in
securities the value of which is believed to be less
sensitive to interest rate changes.
Investments in this category may consist of
obligations of the U.S. Government, its agencies and
instrumentalities; mortgage-backed securities; corporate
debt securities such as notes and bonds; obligations of state
and local governments and their agencies and instrumentalities;
asset-backed securities; master demand notes; eurodollar
obligations; yankee obligations; and other debt securities.
The debt securities in the Fund must be investment
grade at the time of purchase. Investment grade
securities are those issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, those
rated at least Baa by Moody's Investors Service
(Moody's), BBB by Standard & Poor's Ratings Group (S&P),
BBB by Fitch Investors Service (Fitch), or BBB by Duff
and Phelps (D&P), or those judged to be of equivalent
quality by the Manager if not rated. Securities rated in
the lowest level of investment grade have some
speculative characteristics since adverse economic
conditions and changing circumstances are more likely to
have an adverse impact on such securities. If the rating
of a security is downgraded below investment grade, the
Manager will determine whether it is in the best interest
of the Fund's shareholders to continue to hold such
security in the Fund's portfolio. For a more complete
description of debt ratings, see Appendix A to the SAI.
Money Market Instruments - In this category, investments
will consist of high quality U.S. dollar-denominated debt
securities that have remaining maturities of one year or less.
Such securities may include U.S. government obligations,
commercial paper and other short-term corporate
obligations, and certificates of deposit, bankers'
acceptances, bank deposits, and other financial
institution obligations. These securities may carry
fixed or variable interest rates.
Convertible Securities - As stated earlier, the Fund may
invest in convertible securities. Convertible securities
are bonds, preferred stocks, and other securities that
pay interest or dividends and offer the buyer the option
of converting the security into common stock. The value
of convertible securities depends partially on interest
rate changes and the credit quality of the issuer.
Because a convertible security affords an investor the
opportunity, through its conversion feature, to
participate in the capital appreciation of the underlying
common stock, the value of convertible securities may
also change based on the price of the common stock.
Forward Currency Contracts - The Fund may hold securities
denominated in foreign currencies. As a result, the
value of the securities will be affected by changes in
the exchange rate between the dollar and foreign
currencies. In managing the currency exposure, the Fund
may enter into forward currency contracts. A forward
currency contract involves an agreement to purchase or
sell a specified currency at a specified future date or
over a specified time period at a price set at the time
of the contract.
The Fund may enter into forward currency contracts
under two circumstances. First, when the Fund enters
into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock
in" the U.S. dollar price of the security. Second, when
management of the Fund believes that the currency of a
specific country may deteriorate relative to the U.S. dollar,
it may enter into a forward contract to sell that currency.
The Fund may not hedge with respect to a particular currency
for an amount greater than the aggregate market value
(determined at the time of making any sale of forward
currency) of the securities held in its portfolio
denominated or quoted in, or bearing a substantial
correlation to, such currency.
The use of forward currency contracts to protect the
value of the Fund's assets against a decline in the value
of a currency does not eliminate fluctuations in the
value of the Fund's underlying security holdings. In
addition, although the use of forward currency contracts
can minimize the risk of loss due to a decline in value
of the foreign currency, the use of such contracts will
tend to limit any potential gain resulting from an
increase in the relative value of the foreign currency to
the U.S. dollar. Under certain circumstances, a fund
that has entered into forward currency contracts to hedge
its currency risks may be in a less favorable position
than a fund that had not entered into such contracts.
The projection of short-term currency market movements is
extremely difficult and successful execution of a short-
term hedging strategy is highly uncertain.
Repurchase Agreements - The Fund may invest in repurchase
agreements which are collateralized by obligations backed
by the full faith and credit of the U.S. Government or by
its agencies or instrumentalities. A repurchase
agreement is a transaction in which a security is
purchased with a simultaneous commitment to sell the
security back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on
an agreed upon date, usually not more than 7 days from
the date of purchase. The resale price reflects the purchase
price plus an agreed upon market rate of interest which
is unrelated to the coupon rate or maturity of the
purchased security. The obligation of the seller to pay
the agreed upon price is in effect secured by the value
of the underlying security. In these transactions, the
securities purchased by the Fund will have a total value
equal to or in excess of the amount of the repurchase
obligation and will be held by the Fund's custodian until
repurchased. If the seller defaults and the value of the
underlying security declines, the Fund may incur a loss
and may incur expenses in selling the collateral. If the
seller seeks relief under the bankruptcy laws, the
disposition of the collateral may be delayed or limited.
When-Issued Securities - The Fund may invest in new
issues of debt securities offered on a when-issued basis;
that is, delivery and payment take place after the date
of the commitment to purchase, normally within 45 days.
Both price and interest rate are fixed at the time of
commitment. The Fund does not earn interest on the
securities until settlement, and the market value of the
securities may fluctuate between purchase and settlement.
Such securities can be sold before settlement date.
Cash or high quality liquid debt securities equal to
the amount of the when-issued commitments are segregated
at the Fund's custodian bank. The segregated securities
are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at
least equal to the amount of such commitments by the
Fund. On the settlement date, the Fund will meet its
obligations from then available cash, sale of segregated
securities, sale of other securities, or sale of the
when-issued securities themselves.
Variable Rate Securities - The Fund may invest in
securities that bear interest at rates (coupons) which
are adjusted periodically to market rates. These
interest rate adjustments can both raise and lower the
income generated by such securities. These changes will
have the same effect on the income earned by a Fund
depending on the proportion of such securities held.
The market value of fixed coupon securities
fluctuates with changes in prevailing interest rates,
increasing in value when interest rates decline and
decreasing in value when interest rates rise. The value
of variable rate securities, however, is less affected by
changes in prevailing interest rates because of the
periodic adjustment of their coupons to a market rate.
The shorter the period between adjustments, the smaller
the impact of interest rate fluctuations on the value of
these securities. The market value of variable rate
securities usually tends toward par (100% of face value)
at interest rate adjustment time.
Mortgage-Backed and Asset-Backed Securities - The Fund
may invest in mortgage-backed and asset-backed
securities. Mortgage-backed securities include, but are
not limited to, securities issued by the Government
National Mortgage Association (Ginnie Mae), the Federal
National Mortgage Association (Fannie Mae) and the
Federal Home Loan Mortgage Corporation (Freddie Mac).
These securities represent ownership in a pool of
mortgage loans. They differ from conventional bonds in
that principal is paid back to the investor as payments
are made on the underlying mortgages in the pool.
Accordingly, the Fund receives monthly scheduled payments
of principal and interest along with any unscheduled
principal prepayments on the underlying mortgages.
Because these scheduled and unscheduled principal
payments must be reinvested at prevailing interest rates,
mortgage-backed securities do not provide an effective means
of locking in long-term interest rates for the investor.
Like other fixed income securities, when interest rates rise,
the value of a mortgage-backed security generally will decline;
however, when interest rates are declining, the value of
mortgage-backed securities with prepayment features may not
increase as much as other fixed income securities.
Mortgage-backed securities also include
collateralized mortgage obligations (CMOs). CMOs are
obligations fully collateralized by a portfolio of
mortgages or mortgage-related securities. CMOs are
divided into pieces (tranches) with varying maturities
and the cash flow from the underlying mortgages are used
to pay off each tranche separately. CMOs are designed to
provide investors with more predictable maturities than
regular mortgage securities but such maturities can be
difficult to predict because of the effect of
prepayments. Failure to accurately predict prepayments
can adversely affect the Fund's return on these investments.
CMOs may also be less marketable than other securities.
Asset-backed securities represent a participation
in, or are secured by and payable from, a stream of
payments generated by particular assets, such as credit
card, motor vehicle, or trade receivables. They may be
pass-through certificates, which have characteristics
very similar to mortgage-backed securities, discussed
above. They may also be in the form of asset-backed
commercial paper, which is issued by a special purpose
entity, organized solely to issue the commercial paper
and to purchase interests in the assets. The credit
quality of these securities depends primarily upon the
quality of the underlying assets and the level of credit
support and enhancement provided.
The weighted average life of such securities is
likely to be substantially shorter than their stated
final maturity as a result of scheduled principal
payments and unscheduled principal prepayments.
Master Demand Notes - The Fund may invest in variable
rate master demand notes (Master Demand Notes). Master
Demand Notes are obligations that permit the investment
of fluctuating amounts by the Fund, at varying rates of
interest using direct arrangements between the Fund, as
lender, and the borrower. These notes permit daily
changes in the amounts borrowed. The Fund has the right
to increase the amount under the note at any time up to
the full amount provided by the note agreement, or to
decrease the amount, and the borrower may repay up to the
full amount of the note without penalty. Frequently,
such obligations are secured by letters of credit or
other credit support arrangements provided by banks.
Because Master Demand Notes are direct lending
arrangements between the lender and borrower, these
instruments generally will not be traded, and there
generally is no secondary market for these notes,
although they are redeemable (and immediately repayable
by the borrower) at face value, plus accrued interest, at
any time. Therefore, where Master Demand Notes are not
secured by bank letters of credit or other credit support
arrangements, the Fund's right to redeem depends on the
ability of the borrower to pay principal and interest on
demand. In connection with Master Demand Note
arrangements, the Fund will continuously monitor the
earning power, cash flow, and other liquidity ratios of
the issuer, and the borrower's ability to pay principal
and interest on demand. Master Demand Notes, as such,
are not typically rated by credit rating agencies. The
Fund will invest in Master Demand Notes only if the Board
of Trustees or its delegate has determined that they are
of credit quality comparable to the debt securities in
which the Fund generally may invest.
Eurodollar and Yankee Obligations - The Fund may invest
in Eurodollar and Yankee Obligations. Eurodollar
obligations are dollar-denominated instruments 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 issued by
foreign issuers in the U.S. capital markets. While
investments in Eurodollar and Yankee obligations are
intended to reduce risk by providing further
diversification, such investments involve sovereign risk
in addition to credit and market risk. Sovereign risk
includes local political or economic developments,
potential nationalization, and withholding taxes on
dividend or interest payments.
In addition, the Fund may invest in Eurodollar and
Yankee obligations of investment-grade emerging market
countries. An emerging market country can be considered
to be a country which is in the initial stages of its
industrial cycle. Investments in emerging market
countries involve exposure to economic structures that
are generally less diverse and mature than in the United
States, and to political systems which may be less stable.
In the past, markets of emerging market countries have
been more volatile than the markets of developed countries.
See Special Risk Considerations for a discussion of other
risks associated with foreign investments.
Put Bonds - The Fund may invest in securities (including
securities with variable interest rates) which may be
redeemed or sold back (put) to the issuer of the security
or a third party at face value prior to stated maturity
(Put Bonds). Such securities will normally trade as if
maturity is the earlier put date, even though stated
maturity is longer.
Liquidity - The Fund may not invest more than 15% of the
market value of its net assets in securities which are
illiquid or not readily marketable. Commercial paper and
certain Put Bonds that are subject to restrictions on
transfer and other securities that may be resold pursuant
to Rule 144A under the Securities Act of 1933 may be
determined to be liquid in accordance with guidelines
established by the Board of Trustees for purposes of
complying with the Fund's investment restriction
applicable to investments in illiquid securities.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
shareholder approval:
a. With respect to 75% of its total assets, the Fund
may not purchase securities of any issuer (except
U.S. Government Securities, as such term is defined
in the Investment Company Act of 1940, as amended
(1940 Act)) if, as a result, it would own more than
10% of the outstanding voting securities of such
issuer or it would have more than 5% of the value of
its total assets invested in the securities of such issuer.
b. The Fund may not borrow money, except for temporary
or emergency purposes in an amount not exceeding 33
1/3% of its total assets (including the amount
borrowed) less liabilities (other than borrowings).
c. The Fund may not concentrate its investments in any
one industry although it may invest up to 25% of the
value of its total assets in any one industry;
provided, this limitation does not apply to
securities issued or guaranteed by the U.S.
Government and its agencies or instrumentalities.
d. The Fund may not lend any securities or make any loan if, as
a result, more than 33 1/3% of its total assets would be lent
to other parties, except that this limitation does not apply
to purchases of debt securities or to repurchase agreements.
SPECIAL RISK CONSIDERATIONS
Investment in Foreign Securities - The Fund may purchase
foreign securities in foreign or U.S. markets or it may
purchase American Depositary Receipts (ADRs), Global
Depositary Receipts (GDRs), or similar forms of ownership
interests in securities of foreign issuers deposited with
a depositary. Investing in foreign securities presents
certain risks not present in domestic investments. Such
risks may include currency exchange rate fluctuations,
foreign market illiquidity, increased price volatility,
exchange control regulations, different accounting,
reporting and disclosure requirements, political or
social instability, and difficulties in obtaining
judgments or effecting collections thereon. Brokerage
commissions and custodial services may be more costly,
and stock trade settlements may be more lengthy, more
costly and more difficult than in domestic markets. These
investments may be subject to foreign withholding taxes
which may reduce the effective rates of return. The Fund
values its securities and other assets in U.S. dollars.
Information which may impact the market value of
securities of a foreign issuer may not be available to
the Manager on a timely basis. The Manager will endeavor
to ascertain such information on as timely a basis as is
practicable, however, any impact on the net asset value will
be deemed to have occurred upon authentication by the Manager.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of
the following methods. A complete, signed application
is required together with a check for each new account.
TAX ID NUMBER
We require that each shareholder named on the account provide
the Trust with a social security number or tax identification
number to avoid possible tax withholding requirements.
EFFECTIVE DATE
Generally, when you make a purchase, your purchase price
will be the net asset value (NAV) per share next
determined after the Fund receives your request in proper
form. If the Fund receives your request prior to
the close of the New York Stock Exchange on a day on
which the Exchange is open, your purchase price will be
the NAV per share determined for that day. If the Fund
receives your request after the time at which the NAV per
share is calculated, the purchase will be effective on
the next business day. A check drawn on a foreign bank
will not be deemed received for the purchase of shares
until such time as the check has cleared and the Manager
has received good funds, which may take up to 4 to 6
weeks. Furthermore, a bank charge may be assessed in the
clearing process, which will be deducted from the amount
of the purchase. To avoid a delay in the effectiveness
of your purchase, the Manager suggests that you convert your
foreign check to U.S. dollars prior to investment in the Fund.
Purchase of Shares
Minimum Investments
Initial Purchase (non-IRA): $3,000
Initial Purchase -- IRA: $1,000
$250 for spousal account
Additional Purchases: $50
How to Purchase:
Mail * To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
* To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
* To exchange by mail, call 1-800-531-8448 for instructions.
In Person * To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
Phone * If you have an existing USAA account and would like to
open a new account, call 1-800-531-8448. New accounts
by phone must have the same registration as your existing
account.
* To exchange to another USAA fund, call 1-800-531-8448.
The new account must have the same registration as the
account from which you are exchanging.
* To add to an account, intermittent (as-needed) purchases
can be deducted from your bank account through our
Buy/Sell Service. Call 1-800-531-8448.
Automatically * Additional purchases on a regular basis can be deducted
via from a bank account, paycheck, income-producing investment
Electronic or from a USAA money market account. Sign up for these
Funds services when opening an account or call 1-800-531-8448
Transfer to add these services.
(EFT) * Purchases through payroll deduction ($25 minimum each pay
period with no initial investment) can be made by any
employee of USAA, its subsidiaries or affiliated companies.
Bank Wire * To add to an account, instruct your bank (which may charge
a fee for the service) to wire the specified amount to the
Fund as follows:
State Street Bank and Trust Company, Boston, MA 02101
ABA#011000028
Attn: USAA Balanced Strategy Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
Through a * To open a new account through your USAA Asset Management
USAA AMA Account, call USAA Brokerage Services at 1-800-531-8343.
REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following methods
on any day the NAV per share is calculated. Redemptions will be
effective on the day on which instructions are received in accordance
with the requirements set forth below. However, if
instructions are received after the NAV per share calculation,
redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days
after the effective date of redemption. Payment for
redemption of shares purchased by check or electronic
funds transfer will not be disbursed until the purchase
check or electronic funds transfer has cleared, which
could take up to 15 days from the purchase date. If you
are considering redeeming shares soon after purchase, you
should purchase by bank wire or certified check to avoid delay.
In addition, the Trust may elect to suspend the
redemption of shares or postpone the date of payment
during any period that the New York Stock Exchange is
closed, or trading in the markets the Trust normally
utilizes is restricted, or during any period that
redemption is otherwise permitted to be suspended by the
Securities and Exchange Commission.
How to Redeem:
-------------
Written, * Send your written instructions to:
Fax, or USAA Shareholder Account Services
Telegraph 9800 Fredericksburg Rd., San Antonio, TX 78288
* Send a signed fax to 210-498-2889, or send a telegraph
to USAA Shareholder Account Services.
Written redemption requests must include the following: (1) a letter
of instruction or stock assignment, and stock certificate (if issued),
specifying the Fund and the number of shares or dollar amount to be redeemed;
(2) signatures of all owners of the shares exactly as their names appear on
the account; (3) other supporting legal documents, if required, as in the
case of estates, trusts, guardianships, custodianships, partnerships,
corporations, and pension and profit-sharing plans; and (4) method of payment.
Phone * Call toll free 1-800-531-8448, in San Antonio, 210-456-7202.
The Fund will employ reasonable procedures to
confirm that instructions communicated by telephone are
genuine, and if it does not, it may be liable for any
losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding
an account including: (1) USAA number or account number,
(2) the name(s) on the account registration, and (3)
social security number or tax identification number for
the account registration. In addition, all telephone
communications with a shareholder are recorded and
confirmations of all account transactions are sent to the
address of record.
Redemption by telephone, fax, or telegraph is not
available for shares represented by stock certificates.
Through a * Call USAA Brokerage Services at 1-800-531-8343 for more
USAA AMA information.
Methods of Payment:
------------------
Bank Wire * Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your
account, or later upon request. If your account is at a
savings bank, savings and loan association, or credit
union, please obtain precise wiring instructions from
your institution. Specifically, include the name of the
correspondent bank and your institution's account number
at that bank. The Transfer Agent deducts a wire fee from
the account for the redemption by wire. The fee as of the
date of this Prospectus is $10 ($25 for wires to a foreign
bank) and is subject to change at any time. The fee is
paid to State Street Bank and Trust Company and the Transfer
Agent for their services in connection with the wire redemption.
Your bank may also charge a fee for receiving funds by wire.
Automatically * Systematic (regular) or intermittent (as-needed)
via EFT redemptions can be credited to your bank account.
Establish any of our electronic investing services
when you apply for your account, or later upon request.
Check * A check payable to the registered shareholder(s)
Redemption will be mailed to the address of record.
This check redemption privilege is automatically established when
your application is completed and accepted. There is a 15-day waiting
period before a check redemption can be processed following a telephone
address change.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to
nonpayment or if the Trust does not receive good funds
either by check or electronic funds transfer, the
cancellation may be treated as a redemption of shares
purchased and you will be responsible for any resulting
loss incurred by the Fund or the Manager. If you are a
shareholder, shares can be redeemed from any of your
account(s) as reimbursement for all losses. In addition,
you may be prohibited or restricted from making future
purchases in any of the USAA Family of Funds. A $15 fee
is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
Fund shares may be transferred to another person by
sending written instructions to the Transfer Agent. The
account must be clearly identified and the shareholder
must include the number of shares to be transferred, the
signatures of all registered owners, and all stock
certificates, if any, which are the subject of transfer.
You also need to send written instructions and supporting
documents to change an account registration due to events
such as divorce, marriage, or death. If a new account
needs to be established, an application must be completed
and returned to the Transfer Agent.
ACCOUNT BALANCE
The Board of Trustees may cause the redemption of an
account with less than $900, subject to certain
limitations described in Additional Information Regarding
Redemption of Shares in the SAI.
TRUST RIGHTS
The Trust reserves the right to:
(1) reject purchase or exchange orders when in the best
interest of the Trust;
(2) limit or discontinue the offering of shares of any
portfolio of the Trust without notice to the shareholders;
(3) require a signature guarantee when deemed
appropriate by the Manager for purchases,
redemptions, or changes in account information. The
section Additional Information Regarding Redemption
of Shares in the SAI contains information on
acceptable guarantors.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established when
you complete your application. You may exchange shares
among Funds in the USAA Family of Funds, provided
you do not hold these shares in stock certificate form
and that the shares to be acquired are offered in your
state of residence. Exchange redemptions and purchases
will be processed simultaneously at the share prices next
determined after the exchange order is received. For
federal income tax purposes, an exchange between
Funds is a taxable event. Accordingly, a capital
gain or loss may be realized.
The Fund has undertaken certain procedures regarding
telephone transactions. See Redemption of Shares - Phone.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the Funds and
their shareholders from unfair expense burdens, the Funds
restrict excessive exchanges. Exchanges out of any
Fund in the USAA Family of Funds are limited for
each account to six per calendar year except that there
is no limitation on exchanges out of the Tax Exempt
Short-Term Fund, Short-Term Bond Fund, or any of the
money market funds in the USAA Family of Funds.
OTHER SERVICES
INVESTMENT PLANS
You may establish a systematic investment plan by
completing the appropriate forms. At the time you sign
up for any of the following investment plans that utilize
the electronic funds transfer service, you will choose
the day of the month (the effective date) on which you
would like to regularly purchase shares. When this day
falls on a weekend or holiday, the electronic transfer
will take place on the last business day before the
effective date. Call the Manager to obtain instructions.
More information about these preauthorized plans is
contained in the SAI.
InvesTronic(registered trademark) - the periodic purchase
of shares through electronic funds transfer from a
checking or savings account.
Direct Purchase Service - the periodic purchase of shares
through electronic funds transfer from a non-governmental
employer, an income-producing investment, or an account
with a participating financial institution.
Automatic Purchase Plan - the periodic transfer of funds
from a USAA money market fund to purchase shares in
another non-money market USAA mutual fund.
Buy/Sell Service - the intermittent purchase or
redemption of shares through electronic funds transfer to
or from a checking or savings account.
Systematic Withdrawal Plan - the periodic redemption of
shares from one of your accounts permitting you to
receive a fixed amount of money monthly or quarterly.
Retirement Plans - plans are available for IRA (including
SEP/IRA) and 403(b)(7) accounts. Federal taxes on
current income may be deferred if an investor qualifies.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each account
transaction except reinvested dividends. At the end of
each quarter you will receive a consolidated statement
for all of your mutual fund accounts, regardless of
account activity. The fourth quarter consolidated
statement will reflect all account activity for the prior
tax year. There will be a $10 fee charged for copies of
historical statements for other than the prior tax year
for any one account. You will receive the Fund's
financial statements with a summary of its investments
and performance at least semiannually.
In an effort to reduce expenses and respond to
shareholders' requests to reduce mail, the Trust intends
to consolidate mailings of Annual and Semiannual Reports
to households having multiple accounts with the same
address of record. One copy of each report will be
furnished to that address. You may request additional
reports by notifying the Trust.
DIRECTED DIVIDENDS
If you own shares in more than one of the Funds in the
USAA Family of Funds, you may direct that dividends
and/or capital gain distributions earned in one fund be
used to automatically purchase shares in another fund.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms,
a copy of the SAI, the most recent Annual Report and/or
Semiannual Report, or if you have any questions
concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Fund are purchased and
redeemed by shareholders is equal to the net asset value
(NAV) per share determined on the effective date of the
purchase or redemption.
WHEN
The NAV per share for the Fund is calculated at the close
of the regular trading session of the New York Stock
Exchange, which is usually 4:00 p.m. Eastern time. You
may buy and sell Fund shares at the NAV per share without
a sales charge.
HOW
The NAV per share is calculated by adding the value of
all securities and other assets in the Fund, deducting
liabilities, and dividing by the number of shares
outstanding. Portfolio securities, except as otherwise
noted, traded primarily on a domestic securities exchange
are valued at the last sales price on that exchange.
Portfolio securities traded primarily on foreign
securities exchanges are generally valued at the closing
values of such securities on the exchange where primarily
traded. If no sale is reported, the latest bid price is
generally used.
Over-the-counter securities are generally priced at
the last sales price or, if not available, at the average
of the bid and asked prices.
Debt securities purchased with maturities of 60 days
or less are stated at amortized cost which approximates
market value. Other debt securities are valued each
business day at their current market value as determined
by a pricing service approved by the Board of Trustees.
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 Trustees.
For additional information, see Valuation of Securities
in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income will be distributed to shareholders
quarterly. Net capital gain, if any, generally
will be distributed at least annually. The Fund intends
to make such additional distributions as may be necessary
to avoid the imposition of any federal income or excise tax.
All income dividends and capital gain distributions
are automatically reinvested, unless the shareholder
specifies otherwise. The share price will be the net
asset value of the Fund shares computed on the ex-
dividend date. Any income dividend or capital gain
distributions paid by the Fund will reduce the per share
net asset value by the amount of the dividend or
distribution. An investor should consider carefully the
effects of purchasing shares of the Fund shortly before
any dividend or distribution. Although in effect a return
of capital, these distributions are subject to taxes.
Any dividend or distribution payment returned to the
Manager as not deliverable will be invested in the
shareholder's Fund account at the then-current net asset
value. If any check for the payment of dividends or
distributions is not cashed within six months from the
date on the check, it becomes void. The amount of the
check will then be invested in the shareholder's account
at the then-current net asset value.
FEDERAL TAXES
The following discussion relates only to generally
applicable federal income tax provisions in effect as of
the date of this Prospectus. Therefore, shareholders are
urged to consult their own tax advisers about the status
of distributions from the Fund in their own states and localities.
Fund - The Fund intends to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986,
as amended (the Code). By complying with the applicable
provisions of the Code, the Fund will not besubject to federal
income tax on its net investment income and net capital gains
(capital gains in excess of capital losses) distributed to shareholders.
Shareholder - Dividends from taxable net investment
income and distributions of net short-term capital gains
are taxable to shareholders as ordinary income, whether
received in cash or reinvested in additional shares. A
portion of these dividends may qualify for the 70%
dividends received deduction available to corporations.
Distributions of net long-term capital gains are
taxable as long-term capital gains whether received in
cash or reinvested in additional shares, and regardless
of the length of time the investor has held the shares of
the Fund.
Withholding - The Fund is required by federal law to
withhold and remit to the U.S. Treasury a portion of the
income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate
shareholder who fails to furnish the Fund with a correct
tax identification number, who underreports dividend or
interest income, or who fails to certify that he is not
subject to withholding. To avoid this withholding
requirement, you must certify on your application, or on
a separate Form W-9 supplied by the Transfer Agent, that
your tax identification number is correct and that you
are not currently subject to backup withholding.
Reporting - Information concerning the status of
dividends and distributions for federal income tax
purposes will be mailed to shareholders annually.
MANAGEMENT OF THE TRUST
The business affairs of the Trust are subject to the
supervision of the Board of Trustees.
The Manager, USAA Investment Management Company
(IMCO), was organized in May 1970 and is an affiliate of
United Services Automobile Association (USAA), a large
diversified financial services institution. As of the date
of this Prospectus, the Manager had approximately $27 billion
in total assets under management. The Manager's mailing address
is 9800 Fredericksburg Rd., San Antonio, TX 78288.
Officers and employees of the Manager are permitted
to engage in personal securities transactions subject to
restrictions and procedures set forth in the Joint Code
of Ethics adopted by the Trust and the Manager. Such
restrictions and procedures include substantially all of
the recommendations of the Advisory Group of the
Investment Company Institute and comply with Securities
and Exchange Commission rules and regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser
of the Trust, providing services under an Advisory
Agreement. Under the Advisory Agreement, the Manager is
responsible for the management of the Funds, business
affairs, and placement of brokerage orders, subject to
the authority of and supervision by the Board of Trustees.
For its services under the Advisory Agreement, the
Fund pays the Manager an annual fee which is computed as
a percentage of the Fund's average net assets (ANA),
accrued daily, and paid monthly. The Fund's management
fees are computed and paid at three-fourths of one percent
(.75%) of ANA. This fee is higher than that charged to most
other mutual funds, but in the opinion of the Manager is
comparable to fees charged to other mutual funds with similar
investment objectives and policies.
PORTFOLIO MANAGERS
The following individuals are primarily responsible for
managing the Fund.
R. David Ullom, Assistant Vice President of Equity
Investments since September of 1994, is the asset
allocation manager for the Fund and portfolio manager for
the Stocks investment category. Mr. Ullom has 21 years
investment management experience and has worked for IMCO
ten years where he has held various positions in Equity
Investments. Mr. Ullom earned the Chartered Financial
Analyst (CFA) designation in 1980 and is a member of the
Association for Investment Management and Research (AIMR)
and the San Antonio Financial Analysts Society, Inc.
(SAFAS). He holds an MBA from Washington University,
Missouri and a BS from Oklahoma State University.
Paul H. Lundmark, Executive Director of Fixed Income
Investments since November of 1994, is portfolio manager
for the Bonds investment category. Mr. Lundmark has nine
years investment management experience and has worked for
IMCO four years. He has held various positions in Fixed
Income Investments since January 1992. From May 1990 to
July 1991 he was employed as an Associate with Raymond
James & Associates, Inc., St. Petersburg, Florida. Mr.
Lundmark earned the CFA designation in 1989 and also is a
member of the AIMR and SAFAS. He holds an MBA and BSB
from the University of Minnesota.
J. Eric Thorderson, Executive Director of Fixed Income
Investments since March of 1994, is portfolio manager for
the Money Market Instruments investment category. Mr.
Thorderson has eight years investment management
experience and has worked for IMCO five years where he
has held various positions in Fixed Income Investments.
Mr. Thorderson earned the CFA designation in
1989 and is a member of the AIMR and SAFAS. He holds an
MBA from the University of Illinois and a BA from Wayne
State University of Michigan.
PORTFOLIO TRANSACTIONS
Purchases and sales of equity securities for the Fund's
portfolio may be accomplished through USAA Brokerage
Services, a discount brokerage service of the Manager.
The Board of Trustees has adopted procedures to ensure that
any commissions paid to USAA Brokerage Services are
reasonable and fair.
DESCRIPTION OF SHARES
MASTER TRUST AGREEMENT
The Trust is an open-end management investment company
established as a business trust under the laws of the
Commonwealth of Massachusetts pursuant to the First
Amended and Restated Master Trust Agreement (Master Trust
Agreement) dated June 2, 1995, as amended. The Trust is
authorized to issue an unlimited number of shares of
beneficial interest of separate series or Funds, without
par value. The Fund described in this Prospectus is
being offered to the public. The Fund is classified as a
diversified investment company. Under the Master Trust
Agreement, the Trustees are authorized to create new
Funds in addition to those already existing without
shareholder approval.
Under the Master Trust Agreement, no annual or
regular meeting of shareholders is required. Ordinarily,
no shareholder meeting will be held unless required by
the 1940 Act. The Trustees may fill vacancies on the
Board or appoint new Trustees provided that immediately
after such action at least two-thirds of the Trustees
have been elected by shareholders. Shareholders are
entitled to one vote per share (with proportionate voting
for fractional shares) irrespective of the relative net
asset value of the shares. For matters affecting an
individual Fund, a separate vote of the shareholders of
that Fund is required. Shareholders holding an aggregate
of at least 10% of the outstanding shares of the Trust may
request a meeting of shareholders at any time for the purpose
of voting to remove one or more of the Trustees, and the
Trust will assist shareholders in communicating with other
shareholders in connection with such a meeting.
Under Massachusetts law, shareholders of any Fund
could, under certain circumstances, be held personally
liable for the obligations of the Trust. However, the
Master Trust Agreement disclaims shareholder liability
for acts or obligations of the Trust and requires that
notice of such disclaimer be given in each agreement,
obligation, or instrument entered into or executed by the
Trust or the Trustees. The Master Trust Agreement
provides for indemnification out of the Trust's property
for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust.
Thus, the possibility of a shareholder incurring financial
loss on account of shareholder liability is remote.
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 210-456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 210-456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE(registered trademark)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
USAA GROWTH STRATEGY FUND
September 1, 1995 PROSPECTUS
USAA Growth Strategy Fund (the Fund) is one of eleven no-
load mutual funds offered by USAA Investment Trust (the
Trust). The Fund is managed by USAA Investment
Management Company (the Manager).
WHAT IS THE INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek high total return,
with reduced risk over time, through an asset allocation strategy
which emphasizes capital appreciation and gives secondary emphasis
to income. Page 8.
HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the
net asset value per share without a sales charge. Make
your initial investment directly with the Manager by mail
or in person. Page 14.
HOW DO YOU SELL?
You may redeem shares of the Fund by mail,
telephone, fax, or telegraph on any day that the net
asset value is calculated. Page 16.
This Prospectus, which should be read and retained
for future reference, provides information regarding the
Trust and the Fund that you should know before investing.
Shares of the USAA Growth Strategy Fund are not
deposits or other obligations of, or guaranteed by the
USAA Federal Savings Bank, are not insured by the FDIC or
any other Government Agency, and are subject to market
risks. Because this Fund invests in foreign securities
it involves a higher degree of risk and may not be
appropriate for some investors. See Special Risk
Considerations, page 13.
If you would like more information, a STATEMENT OF
ADDITIONAL INFORMATION (SAI) of the Fund, dated September
1, 1995, is available upon request and without charge by
writing to USAA INVESTMENT TRUST, 9800 Fredericksburg
Rd., San Antonio, TX 78288, or by calling 1-800-531-8181.
The SAI has been filed with the Securities and Exchange
Commission and is incorporated by reference into this
Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
SUMMARY DATA
Fees and Expenses 3
Performance Information 4
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds 5
Using Mutual Funds in an Asset Allocation Program 6
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies 8
SHAREHOLDER INFORMATION
Purchase of Shares 14
Redemption of Shares 16
Conditions of Purchase and Redemption 17
Exchanges 18
Other Services 19
Share Price Calculation 20
Dividends, Distributions and Taxes 21
Management of the Trust 22
Service Providers 23
Description of Shares 24
Telephone Assistance Numbers 24
FEES AND EXPENSES
The following summary is provided to assist you in understanding the
expenses you will bear directly or indirectly.
Shareholder Transaction Expenses
------------------------------------------------------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee* None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net assets (ANA))
------------------------------------------------------------------------------
Management Fees .75%
12b-1 Fees None
Other Expenses (estimated)
Transfer Agent Fees** .35%
Custodian Fees .21%
All Other Expenses .45%
----
Total Other Expenses 1.01%
----
Total Fund Operating Expenses 1.76%
====
------------------------------------------------------------------------------
* A shareholder who requests delivery of redemption proceeds by wire transfer
will be subject to a $10 fee. See Redemption of Shares - Bank Wire.
** The Fund pays USAA Shareholder Account Services an annual fixed fee per
account for its services. See Transfer Agent in the SAI, page 15.
Example of Effect of Fund Expenses
------------------------------------------------------------------------------
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of the periods shown.
1 year - $ 18 3 years - $ 55
The above example should not be considered a representation of past or
future expenses and actual expenses may be greater or less than those shown.
PERFORMANCE INFORMATION
Performance information should be considered in light of
the Fund's investment objective and policies and market
conditions during the time periods for which it is reported.
Historical performance should not be considered as representative of
the future performance of the Fund.
The Trust may quote the Fund's total return in
advertisements and reports to shareholders or prospective
investors. The Fund's performance may also be compared
to that of other mutual funds with a similar investment
objective and to stock or relevant indexes that are
referenced in Appendix B to the SAI. Standard total
return results reported by the Fund do not take into
account recurring and nonrecurring charges for optional
services which only certain shareholders elect and which
involve nominal fees, such as the $10 fee for a delivery
of redemption proceeds by wire transfer.
The Fund's average annual total return is computed
by determining the average annual compounded rate of
return for a specified period which, when applied to a
hypothetical $1,000 investment in the Fund at the
beginning of the period, would produce the redeemable
value of that investment at the end of the period,
assuming reinvestment of all dividends and distributions
during the period.
Further information concerning the Fund's total
return is included in the SAI.
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a
variety of Funds, each with different objectives and
policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their
own investment program. You may exchange any shares you
hold in any one USAA Fund for shares in any other USAA
Fund. For more complete information about the Funds in
the USAA Family of Funds, including charges and expenses,
call the Manager for a Prospectus. Be sure to read it
carefully before you invest or send money.
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Growth Fund
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Available for sale only to residents of these specific states.
USING MUTUAL FUNDS IN AN ASSET ALLOCATION PROGRAM
I. THE IDEA BEHIND ASSET ALLOCATION
If you have money to invest and hear that stocks may be a
good investment, is it a wise idea to use your entire
savings to buy one stock? Most people wouldn't - it
would be fortunate if it works, but this strategy holds a
great deal of risk. Surprising news could be reported
tomorrow on your stock, and its price could soar or plummet.
Careful investors understand this concept of risk
and lower that risk by diversifying their holdings among
a number of securities. That way bad news for one
security may be counterbalanced by good news regarding
other securities. But there is still a question of risk
here. History tells us that stocks are generally more
volatile than bonds and that long-term bonds are
generally more volatile than short-term bonds. History
also tells us that over many years investments having
higher risks tend to have higher returns than investments
that carry lower risks. And past performance doesn't
necessarily guarantee future results. From these
observations comes the idea of asset allocation.
Asset allocation is a straightforward concept that
involves dividing your money among several different
types of investments - for example, stocks, bonds and
short-term investments such as money market instruments -
and keeping that allocation until your objectives or the
financial markets significantly change. That way you're
not pinning all your financial success on the fortunes of
one kind of investment. Money spread across different
investment categories can help you reduce market risk and
likely will provide more stability to your total return.
Asset allocation can work because different kinds of
investments generally follow different up-and-down
cycles. With a variety of investments in your portfolio,
some are probably doing well, even when others are struggling.
II. USING ASSET ALLOCATION IN AN INVESTMENT PROGRAM
Most investors understand the concept of diversification,
but asset allocation goes beyond diversifying your
portfolio; it's much more of an active process. You must
evaluate your lifestyle, finances, circumstances, long-
and short-term financial goals and tolerance for
investment risk. Once you have structured your
allocation, you'll need to review it regularly since your
objectives will change over time.
III. USAA'S SERIES OF ASSET STRATEGY FUNDS
USAA's series of asset allocation funds, our Asset
Strategy Funds, are designed for the long-term investor
and are in line with the Manager's investment philosophy
for its customers, specifically "don't try to time the
market," and "buy and hold for the long-term." As shown
on the next page, each of USAA's Asset Strategy Funds has
its own different mix of assets and objectives.
Fund Investment Objective Invests In
============================================================================
Income Seek high current return, with Bonds and stocks
Strategy reduced risk over time, through
Fund an asset allocation strategy
which emphasizes income and
gives secondary emphasis to
long-term growth of capital.
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Growth and Tax Seek a conservative balance Short- and long-term
Strategy Fund between income, the majority tax exempt bonds and
of which is tax-exempt, and basic value stocks
the potential for long-term
growth of capital to preserve
purchasing power. This
objective is to be achieved
through an asset allocation
strategy.
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Balanced Seek high total return, with Stocks and bonds
Strategy reduced risk over time, through
Fund an asset allocation strategy
that seeks a combination of
long-term growth of capital
and current income.
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Cornerstone Achieve a positive inflation- Foreign & basic value
Strategy adjusted rate of return and stocks, government
Fund a reasonably stable value of securities, real estate
Fund shares. This stocks and gold stocks
objective is to be achieved
through an asset allocation
strategy.
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Growth Seek high total return, Small & large cap stocks,
Strategy with reduced risk over time, bonds, and international
Fund through an asset allocation stocks
strategy which emphasizes
capital appreciation and gives
secondary emphasis to income.
============================================================================
An important feature of USAA's Asset Strategy Funds is
the quarterly rebalancing of each portfolio. In this
asset allocation technique, the Funds' Managers buy or
sell securities each quarter so that the investment
categories of each Fund are brought within their target
ranges. For example, if a portfolio holds 65% of its
securities in stocks, 30% in bonds, and 5% in money
market instruments at the beginning of a quarter, then
due to market returns holds 75% of its securities in
stocks, 20% in bonds, and 5% in money market instruments
at the end of a quarter, the Manager would rebalance the
portfolio by reducing its holdings of stocks and
increasing its holdings of bonds to return the
portfolio's investments in stocks and bonds into the
target ranges. See Investment Objective and Policies -
Investment Policies, Techniques and Risk Factors for
further information on the Fund's target ranges.
For more complete information about the other USAA Asset
Strategy Funds, including charges and expenses, call the
Manager for a Prospectus. Be sure to read it carefully
before you invest or send money.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek high total
return, with reduced risk over time, through an asset
allocation strategy which emphasizes capital appreciation
and gives secondary emphasis to income.
The investment objective of the Fund cannot be
changed without shareholder approval. In view of the
risks inherent in all investments in securities, there is
no assurance that this objective will be achieved.
The investment policies and techniques used to
pursue the Fund's objective may be changed without
shareholder approval, except as otherwise noted. Further
information regarding the Fund's investment policies,
restrictions and risks is provided in the SAI.
INVESTMENT POLICIES,
TECHNIQUES AND RISK FACTORS
The Fund provides a professionally managed, diversified
investment program within one mutual fund. The Manager
seeks to attain the objective by allocating the Fund's
assets in each of the following investment categories
within the indicated ranges:
Percentage
Target Range
Investment Category of Net Assets
------------------- -------------
Large Cap Stocks 25 - 35%
Small Cap Stocks 25 - 35%
International Stocks 15 - 25%
Bonds 15 - 25%
Money Market Instruments 0 - 10%
The target ranges may be revised by the Board of
Trustees upon 60 days' prior written notice to
shareholders. However, the Manager reserves the right,
without shareholder notification, to revise the ranges on
a temporary defensive basis when, in its opinion, such
changes are believed to be in the best interest of the
Fund and its shareholders.
The ranges allow for a variance in each investment
category. Should market action cause investment
categories to move outside the ranges, the Manager will
make adjustments to rebalance the portfolio. In general,
the Manager will rebalance the portfolio at least once
during each calendar quarter to bring each category
within its range. These portfolio adjustments may cause
the Fund to sell securities in investment categories
which have appreciated in value and to buy securities in
investment categories which have depreciated in value.
Such adjustments may also cause the Fund to incur a
higher proportion of short-term capital gains than a fund
that does not have a similar policy.
As a temporary defensive measure, the Manager may
invest up to 100% of the Fund's assets in high quality,
short-term debt instruments.
The Fund's portfolio turnover rate is not expected
to exceed 100%, however, it will not be a limiting factor
when the Manager deems changes in the Fund's portfolio
appropriate in view of its investment objective.
Characteristics and associated risks of each investment
category are as follows:
Large Cap Stocks - In this category, investments will
consist of common stocks of companies that have market
capitalizations of $1 billion or more, at the time of
purchase. Investments may also include securities
convertible into common stocks or securities which carry
the right to buy common stocks. The Fund may continue
to hold securities in the Large Cap Stocks investment
category that qualified when purchased as Large Cap
Stocks, but whose market capitalizations have
subsequently declined below $1 billion.
Small Cap Stocks - In this category, investments will
consist of common stocks of companies that have market
capitalizations of less than $1 billion, at the time of
purchase. Investments may also include securities
convertible into common stocks or securities which carry
the right to buy common stocks.
The Fund may continue to hold securities in the Small
Cap Stocks investment category that qualified when purchased
as Small Cap Stocks, but whose market capitalizations
have subsequently increased above $1 billion.
Investing in smaller companies, especially those
that have a narrow product line or are thinly traded,
often involves greater risk than investing in established
companies with proven track records. These securities
may be subject to more price volatility than securities
of larger companies.
International Stocks - In this category, investments will
consist of common stocks or securities which are
convertible into or which carry the right to buy common
stocks of companies organized and operating principally
outside the United States. A company is deemed to be
operating principally outside the U.S. if at least 50% of
its revenues are derived from operations outside the U.S.
or if its primary production or operating facilities are
located outside the U.S.
The Manager believes that international
diversification may have a balancing impact with regard
to investments in the United States. For a discussion of
the risks associated with investments in foreign issuers,
see Special Risk Considerations.
Bonds - In this category, investments will consist of
U.S. dollar-denominated securities selected for their
high yields relative to the risk involved. Consistent
with this policy, in periods of rising interest rates, a
greater portion of the portfolio may be invested in
securities the value of which is believed to be less
sensitive to interest rate changes.
Investments in this category may consist of
obligations of the U.S. Government, its agencies and
instrumentalities; mortgage-backed securities; corporate
debt securities such as notes and bonds; obligations of state
and local governments and their agencies and instrumentalities;
asset-backed securities; master demand notes; eurodollar
obligations; yankee obligations; and other debt securities.
The debt securities in the Fund must be investment
grade at the time of purchase. Investment grade
securities are those issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, those
rated at least Baa by Moody's Investors Service
(Moody's), BBB by Standard & Poor's Ratings Group (S&P),
BBB by Fitch Investors Service (Fitch), or BBB by Duff
and Phelps (D&P), or those judged to be of equivalent
quality by the Manager if not rated. Securities rated in
the lowest level of investment grade have some
speculative characteristics since adverse economic
conditions and changing circumstances are more likely to
have an adverse impact on such securities. If the rating
of a security is downgraded below investment grade, the
Manager will determine whether it is in the best interest
of the Fund's shareholders to continue to hold such
security in the Fund's portfolio. For a more complete
description of debt ratings, see Appendix A to the SAI.
Money Market Instruments - In this category, investments
will consist of high quality U.S. dollar-denominated debt
securities that have remaining maturities of one year or less.
Such securities may include U.S. government obligations,
commercial paper and other short-term corporate
obligations, and certificates of deposit, bankers'
acceptances, bank deposits, and other financial
institution obligations. These securities may carry
fixed or variable interest rates.
Convertible Securities - As stated earlier, the Fund may
invest in convertible securities. Convertible securities
are bonds, preferred stocks, and other securities that
pay interest or dividends and offer the buyer the option
of converting the security into common stock. The value
of convertible securities depends partially on interest
rate changes and the credit quality of the issuer.
Because a convertible security affords an investor the
opportunity, through its conversion feature, to
participate in the capital appreciation of the underlying
common stock, the value of convertible securities may
also change based on the price of the common stock.
Forward Currency Contracts - The Fund may hold securities
denominated in foreign currencies. As a result, the
value of the securities will be affected by changes in
the exchange rate between the dollar and foreign
currencies. In managing the currency exposure, the Fund
may enter into forward currency contracts. A forward
currency contract involves an agreement to purchase or
sell a specified currency at a specified future date or
over a specified time period at a price set at the time
of the contract.
The Fund may enter into forward currency contracts
under two circumstances. First, when the Fund enters into
a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock
in" the U.S. dollar price of the security. Second, when
management of the Fund believes that the currency of a
specific country may deteriorate relative to the U.S.
dollar, it may enter into a forward contract to sell that
currency. The Fund may not hedge with respect to a
particular currency for an amount greater than the
aggregate market value (determined at the time of making
any sale of forward currency) of the securities held in
its portfolio denominated or quoted in, or bearing a
substantial correlation to, such currency.
The use of forward currency contracts to protect the
value of the Fund's assets against a decline in the value
of a currency does not eliminate fluctuations in the
value of the Fund's underlying security holdings. In
addition, although the use of forward currency contracts
can minimize the risk of loss due to a decline in value
of the foreign currency, the use of such contracts will
tend to limit any potential gain resulting from an
increase in the relative value of the foreign currency to
the U.S. dollar. Under certain circumstances, a fund
that has entered into forward currency contracts to hedge
its currency risks may be in a less favorable position
than a fund that had not entered into such contracts.
The projection of short-term currency market movements is
extremely difficult and successful execution of a short-
term hedging strategy is highly uncertain.
Repurchase Agreements - The Fund may invest in repurchase
agreements which are collateralized by obligations backed
by the full faith and credit of the U.S. Government or by
its agencies or instrumentalities. A repurchase
agreement is a transaction in which a security is
purchased with a simultaneous commitment to sell the
security back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on
an agreed upon date, usually not more than 7 days from
the date of purchase. The resale price reflects the
purchase price plus an agreed upon market rate of
interest which is unrelated to the coupon rate or
maturity of the purchased security. The obligation of
the seller to pay the agreed upon price is in effect
secured by the value of the underlying security. In
these transactions, the securities purchased by the Fund
will have a total value equal to or in excess of the
amount of the repurchase obligation and will be held by
the Fund's custodian until repurchased. If the seller
defaults and the value of the underlying security
declines, the Fund may incur a loss and may incur
expenses in selling the collateral. If the seller seeks
relief under the bankruptcy laws, the disposition of the
collateral may be delayed or limited.
When-Issued Securities - The Fund may invest in new
issues of debt securities offered on a when-issued basis;
that is, delivery and payment take place after the date
of the commitment to purchase, normally within 45 days.
Both price and interest rate are fixed at the time of
commitment. The Fund does not earn interest on the
securities until settlement, and the market value of the
securities may fluctuate between purchase and settlement.
Such securities can be sold before settlement date.
Cash or high quality liquid debt securities equal to
the amount of the when-issued commitments are segregated
at the Fund's custodian bank. The segregated securities
are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at
least equal to the amount of such commitments by the
Fund. On the settlement date, the Fund will meet its
obligations from then available cash, sale of segregated
securities, sale of other securities, or sale of the
when-issued securities themselves.
Variable Rate Securities - The Fund may invest in
securities that bear interest at rates (coupons) which
are adjusted periodically to market rates. These
interest rate adjustments can both raise and lower the
income generated by such securities. These changes will
have the same effect on the income earned by a Fund
depending on the proportion of such securities held.
The market value of fixed coupon securities
fluctuates with changes in prevailing interest rates,
increasing in value when interest rates decline and
decreasing in value when interest rates rise. The value
of variable rate securities, however, is less affected by
changes in prevailing interest rates because of the
periodic adjustment of their coupons to a market rate.
The shorter the period between adjustments, the smaller
the impact of interest rate fluctuations on the value of
these securities. The market value of variable rate
securities usually tends toward par (100% of face value)
at interest rate adjustment time.
Mortgage-Backed and Asset-Backed Securities - The Fund
may invest in mortgage-backed and asset-backed
securities. Mortgage-backed securities include, but are
not limited to, securities issued by the Government
National Mortgage Association (Ginnie Mae), the Federal
National Mortgage Association (Fannie Mae) and the
Federal Home Loan Mortgage Corporation (Freddie Mac).
These securities represent ownership in a pool of
mortgage loans. They differ from conventional bonds in
that principal is paid back to the investor as payments
are made on the underlying mortgages in the pool.
Accordingly, the Fund receives monthly scheduled payments
of principal and interest along with any unscheduled
principal prepayments on the underlying mortgages.
Because these scheduled and unscheduled principal
payments must be reinvested at prevailing interest rates,
mortgage-backed securities do not provide an effective
means of locking in long-term interest rates for the
investor. Like other fixed income securities, when
interest rates rise, the value of a mortgage-backed
security generally will decline; however, when interest
rates are declining, the value of mortgage-backed
securities with prepayment features may not increase as
much as other fixed income securities.
Mortgage-backed securities also include
collateralized mortgage obligations (CMOs). CMOs are
obligations fully collateralized by a portfolio of
mortgages or mortgage-related securities. CMOs are
divided into pieces (tranches) with varying maturities
and the cash flow from the underlying mortgages are used
to pay off each tranche separately. CMOs are designed to
provide investors with more predictable maturities than
regular mortgage securities but such maturities can be
difficult to predict because of the effect of prepayments.
Failure to accurately predict prepayments can adversely
affect the Fund's return on these investments. CMOs may
also be less marketable than other securities.
Asset-backed securities represent a participation
in, or are secured by and payable from, a stream of
payments generated by particular assets, such as credit
card, motor vehicle, or trade receivables. They may be
pass-through certificates, which have characteristics
very similar to mortgage-backed securities, discussed
above. They may also be in the form of asset-backed
commercial paper, which is issued by a special purpose
entity, organized solely to issue the commercial paper
and to purchase interests in the assets. The credit
quality of these securities depends primarily upon the
quality of the underlying assets and the level of credit
support and enhancement provided.
The weighted average life of such securities is
likely to be substantially shorter than their stated
final maturity as a result of scheduled principal
payments and unscheduled principal prepayments.
Master Demand Notes - The Fund may invest in variable
rate master demand notes (Master Demand Notes). Master
Demand Notes are obligations that permit the investment
of fluctuating amounts by the Fund, at varying rates of
interest using direct arrangements between the Fund, as
lender, and the borrower. These notes permit daily
changes in the amounts borrowed. The Fund has the right
to increase the amount under the note at any time up to
the full amount provided by the note agreement, or to
decrease the amount, and the borrower may repay up to the
full amount of the note without penalty. Frequently,
such obligations are secured by letters of credit or
other credit support arrangements provided by banks.
Because Master Demand Notes are direct lending
arrangements between the lender and borrower, these
instruments generally will not be traded, and there
generally is no secondary market for these notes,
although they are redeemable (and immediately repayable
by the borrower) at face value, plus accrued interest, at
any time. Therefore, where Master Demand Notes are not
secured by bank letters of credit or other credit support
arrangements, the Fund's right to redeem depends on the
ability of the borrower to pay principal and interest on
demand. In connection with Master Demand Note
arrangements, the Fund will continuously monitor the
earning power, cash flow, and other liquidity ratios of
the issuer, and the borrower's ability to pay principal
and interest on demand. Master Demand Notes, as such,
are not typically rated by credit rating agencies. The
Fund will invest in Master Demand Notes only if the Board
of Trustees or its delegate has determined that they are
of credit quality comparable to the debt securities in
which the Fund generally may invest.
Eurodollar and Yankee Obligations - The Fund may invest
in Eurodollar and Yankee obligations. Eurodollar
obligations are dollar-denominated instruments 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 issued by
foreign issuers in the U.S. capital markets. While
investments in Eurodollar and Yankee obligations are
intended to reduce risk by providing further
diversification, such investments involve sovereign risk
in addition to credit and market risk. Sovereign risk
includes local political or economic developments,
potential nationalization, and withholding taxes on
dividend or interest payments.
In addition, the Fund may invest in Eurodollar and
Yankee obligations of investment-grade emerging market
countries. See Special Risk Considerations for a
discussion of other risks associated with foreign investments.
Put Bonds - The Fund may invest in securities (including
securities with variable interest rates) which may be
redeemed or sold back (put) to the issuer of the security
or a third party at face value prior to stated maturity
(Put Bonds). Such securities will normally trade as if
maturity is the earlier put date, even though stated
maturity is longer.
Liquidity - The Fund may not invest more than 15% of the
market value of its net assets in securities which are
illiquid or not readily marketable. Commercial paper and
certain Put Bonds that are subject to restrictions on
transfer and other securities that may be resold pursuant
to Rule 144A under the Securities Act of 1933 may be
determined to be liquid in accordance with guidelines
established by the Board of Trustees for purposes of
complying with the Fund's investment restriction
applicable to investments in illiquid securities.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
shareholder approval:
a. With respect to 75% of its total assets, the Fund
may not purchase securities of any issuer (except
U.S. Government Securities, as such term is defined
in the Investment Company Act of 1940, as amended
(1940 Act)) if, as a result, it would own more than
10% of the outstanding voting securities of such
issuer or it would have more than 5% of the value of
its total assets invested in the securities of such issuer.
b. The Fund may not borrow money, except for temporary
or emergency purposes in an amount not exceeding 33
1/3% of its total assets (including the amount
borrowed) less liabilities (other than borrowings).
c. The Fund may not concentrate its investments in any
one industry although it may invest up to 25% of the
value of its total assets in any one industry;
provided, this limitation does not apply to
securities issued or guaranteed by the U.S.
Government and its agencies or instrumentalities.
d. The Fund may not lend any securities or make any loan if, as
a result, more than 33 1/3% of its total assets would be lent
to other parties, except that this limitation does not apply
to purchases of debt securities or to repurchase agreements.
SPECIAL RISK CONSIDERATIONS
Investment in Foreign Securities - The Fund may purchase
foreign securities in foreign or U.S. markets or it may
purchase American Depositary Receipts (ADRs), Global
Depositary Receipts (GDRs), or similar forms of ownership
interests in securities of foreign issuers deposited with
a depositary. Investing in foreign securities presents
certain risks not present in domestic investments. Such
risks may include currency exchange rate fluctuations,
foreign market illiquidity, increased price volatility,
exchange control regulations, different accounting,
reporting and disclosure requirements, political or
social instability, and difficulties in obtaining
judgments or effecting collections thereon. Brokerage
commissions and custodial services may be more costly,
and stock trade settlements may be more lengthy, more
costly and more difficult than in domestic markets.
These investments may be subject to foreign withholding
taxes which may reduce the effective rates of return. The
Fund values its securities and other assets in U.S. dollars.
Information which may impact the market value of
securities of a foreign issuer may not be available to
the Manager on a timely basis. The Manager will endeavor
to ascertain such information on as timely a basis as is
practicable, however, any impact on the net asset value
will be deemed to have occurred upon authentication by
the Manager.
A developing country can be considered to be a
country which is in the initial stages of its
industrialization cycle. Investments in developing
countries involve exposure to economic structures that
are generally less diverse and mature than in the United
States, and to political systems which may be less
stable. Due to illiquidity and lack of hedging
instruments, it is presently difficult or in some cases
impossible to hedge the currency risk in these markets.
In the past, markets of developing countries have been
more volatile than the markets of developed countries.
Political risk includes a greater potential for coup
d'etats, insurrections and expropriation by governmental
organizations. For example, the Fund may invest in Eastern
Europe and former states of the Soviet Union (also known
as the CIS or the Commonwealth of Independent States).
These countries were under communist systems which had
nationalized private industry. There is no guarantee
that nationalization may not occur again in this region
or others in which the Fund invests, in which case the
Fund may lose all or part of its investment in that
country's issuers.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of
the following methods. A complete, signed application is
required together with a check for each new account.
TAX ID NUMBER
We require that each shareholder named on the account provide
the Trust with a social security number or tax identification
number to avoid possible tax withholding requirements.
EFFECTIVE DATE
Generally, when you make a purchase, your purchase price
will be the net asset value (NAV) per share next
determined after the Fund receives your request in proper
form. If the Fund receives your request prior to
the close of the New York Stock Exchange on a day on
which the Exchange is open, your purchase price will be
the NAV per share determined for that day. If the Fund
receives your request after the time at which the NAV per
share is calculated, the purchase will be effective on
the next business day. A check drawn on a foreign bank
will not be deemed received for the purchase of shares
until such time as the check has cleared and the Manager
has received good funds, which may take up to 4 to 6
weeks. Furthermore, a bank charge may be assessed in the
clearing process, which will be deducted from the amount
of the purchase. To avoid a delay in the effectiveness
of your purchase, the Manager suggests that you convert
your foreign check to U.S. dollars prior to investment in
the Fund.
Purchase of Shares
Minimum Investments
Initial Purchase (non-IRA): $3,000
Initial Purchase -- IRA: $1,000
$250 for spousal account
Additional Purchases: $50
How to Purchase:
Mail * To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
* To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
* To exchange by mail, call 1-800-531-8448 for instructions.
In Person * To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
Phone * If you have an existing USAA account and would like to
open a new account, call 1-800-531-8448. New accounts
by phone must have the same registration as your existing
account.
* To exchange to another USAA fund, call 1-800-531-8448.
The new account must have the same registration as the
account from which you are exchanging.
* To add to an account, intermittent (as-needed) purchases
can be deducted from your bank account through our
Buy/Sell Service. Call 1-800-531-8448.
Automatically * Additional purchases on a regular basis can be deducted
via from a bank account, paycheck, income-producing investment
Electronic or from a USAA money market account. Sign up for these
Funds services when opening an account or call 1-800-531-8448
Transfer to add these services.
(EFT) * Purchases through payroll deduction ($25 minimum each pay
period with no initial investment) can be made by any
employee of USAA, its subsidiaries or affiliated companies.
Bank Wire * To add to an account, instruct your bank (which may charge
a fee for the service) to wire the specified amount to the
Fund as follows:
State Street Bank and Trust Company, Boston, MA 02101
ABA#011000028
Attn: USAA Growth Strategy Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
Through a * To open a new account through your USAA Asset Management
USAA AMA Account, call USAA Brokerage Services at 1-800-531-8343.
REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following methods
on any day the NAV per share is calculated. Redemptions will be effective
on the day on which instructions are received in accordance
with the requirements set forth below. However, if
instructions are received after the NAV per share calculation,
redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days
after the effective date of redemption. Payment for
redemption of shares purchased by check or electronic
funds transfer will not be disbursed until the purchase
check or electronic funds transfer has cleared, which
could take up to 15 days from the purchase date. If you
are considering redeeming shares soon after purchase, you
should purchase by bank wire or certified check to avoid delay.
In addition, the Trust may elect to suspend the
redemption of shares or postpone the date of payment
during any period that the New York Stock Exchange is
closed, or trading in the markets the Trust normally
utilizes is restricted, or during any period that
redemption is otherwise permitted to be suspended by the
Securities and Exchange Commission.
How to Redeem:
-------------
Written, * Send your written instructions to:
Fax, or USAA Shareholder Account Services
Telegraph 9800 Fredericksburg Rd., San Antonio, TX 78288
* Send a signed fax to 210-498-2889, or send a telegraph
to USAA Shareholder Account Services.
Written redemption requests must include the following: (1) a letter
of instruction or stock assignment, and stock certificate (if issued),
specifying the Fund and the number of shares or dollar amount to be redeemed;
(2) signatures of all owners of the shares exactly as their names appear on
the account; (3) other supporting legal documents, if required, as in the
case of estates, trusts, guardianships, custodianships, partnerships,
corporations, and pension and profit-sharing plans; and (4) method of payment.
Phone * Call toll free 1-800-531-8448, in San Antonio, 210-456-7202.
The Fund will employ reasonable procedures to
confirm that instructions communicated by telephone are
genuine, and if it does not, it may be liable for any
losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding
an account including: (1) USAA number or account number,
(2) the name(s) on the account registration, and (3)
social security number or tax identification number for
the account registration. In addition, all telephone
communications with a shareholder are recorded and
confirmations of all account transactions are sent to the
address of record.
Redemption by telephone, fax, or telegraph is not
available for shares represented by stock certificates.
Through a * Call USAA Brokerage Services at 1-800-531-8343 for more
USAA AMA information.
Methods of Payment:
------------------
Bank Wire * Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your
account, or later upon request. If your account is at a
savings bank, savings and loan association, or credit
union, please obtain precise wiring instructions from
your institution. Specifically, include the name of the
correspondent bank and your institution's account number
at that bank. The Transfer Agent deducts a wire fee from
the account for the redemption by wire. The fee as of the
date of this Prospectus is $10 ($25 for wires to a foreign
bank) and is subject to change at any time. The fee is paid
to State Street Bank and Trust Company and the Transfer Agent
for their services in connection with the wire redemption.
Your bank may also charge a fee for receiving funds by wire.
Automatically * Systematic (regular) or intermittent (as-needed)
via EFT redemptions can be credited to your bank account.
Establish any of our electronic investing services
when you apply for your account, or later upon request.
Check * A check payable to the registered shareholder(s)
Redemption will be mailed to the address of record.
This check redemption privilege is automatically established when
your application is completed and accepted. There is a 15-day waiting
period before a check redemption can be processed following a telephone
address change.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to
nonpayment or if the Trust does not receive good funds
either by check or electronic funds transfer, the
cancellation may be treated as a redemption of shares
purchased and you will be responsible for any resulting
loss incurred by the Fund or the Manager. If you are a
shareholder, shares can be redeemed from any of your
account(s) as reimbursement for all losses. In addition,
you may be prohibited or restricted from making future
purchases in any of the USAA Family of Funds. A $15 fee
is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
Fund shares may be transferred to another person by
sending written instructions to the Transfer Agent. The
account must be clearly identified and the shareholder
must include the number of shares to be transferred, the
signatures of all registered owners, and all stock
certificates, if any, which are the subject of transfer.
You also need to send written instructions and supporting
documents to change an account registration due to events
such as divorce, marriage, or death. If a new account
needs to be established, an application must be completed
and returned to the Transfer Agent.
ACCOUNT BALANCE
The Board of Trustees may cause the redemption of an
account with less than $900, subject to certain
limitations described in Additional Information Regarding
Redemption of Shares in the SAI.
TRUST RIGHTS
The Trust reserves the right to:
(1) reject purchase or exchange orders when in the best
interest of the Trust;
(2) limit or discontinue the offering of shares of any
portfolio of the Trust without notice to the
shareholders;
(3) require a signature guarantee when deemed
appropriate by the Manager for purchases,
redemptions, or changes in account information. The
section Additional Information Regarding Redemption
of Shares in the SAI contains information on
acceptable guarantors.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established when
you complete your application. You may exchange shares
among Funds in the USAA Family of Funds, provided
you do not hold these shares in stock certificate form
and that the shares to be acquired are offered in your
state of residence. Exchange redemptions and purchases
will be processed simultaneously at the share prices next
determined after the exchange order is received. For
federal income tax purposes, an exchange between
Funds is a taxable event. Accordingly, a capital
gain or loss may be realized.
The Fund has undertaken certain procedures regarding
telephone transactions. See Redemption of Shares - Phone.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the Funds and
their shareholders from unfair expense burdens, the Funds
restrict excessive exchanges. Exchanges out of any
Fund in the USAA Family of Funds are limited for
each account to six per calendar year except that there
is no limitation on exchanges out of the Tax Exempt
Short-Term Fund, Short-Term Bond Fund, or any of the
money market funds in the USAA Family of Funds.
OTHER SERVICES
INVESTMENT PLANS
You may establish a systematic investment plan by
completing the appropriate forms. At the time you sign
up for any of the following investment plans that utilize
the electronic funds transfer service, you will choose
the day of the month (the effective date) on which you
would like to regularly purchase shares. When this day
falls on a weekend or holiday, the electronic transfer
will take place on the last business day before the
effective date. Call the Manager to obtain instructions.
More information about these preauthorized plans is
contained in the SAI.
InvesTronic(registered trademark) - the periodic purchase
of shares through electronic funds transfer from a
checking or savings account.
Direct Purchase Service - the periodic purchase of shares
through electronic funds transfer from a non-governmental
employer, an income-producing investment, or an account
with a participating financial institution.
Automatic Purchase Plan - the periodic transfer of funds
from a USAA money market fund to purchase shares in
another non-money market USAA mutual fund.
Buy/Sell Service - the intermittent purchase or
redemption of shares through electronic funds transfer to
or from a checking or savings account.
Systematic Withdrawal Plan - the periodic redemption of
shares from one of your accounts permitting you to
receive a fixed amount of money monthly or quarterly.
Retirement Plans - plans are available for IRA (including
SEP/IRA) and 403(b)(7) accounts. Federal taxes on
current income may be deferred if an investor qualifies.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each account
transaction. At the end of each quarter you will receive
a consolidated statement for all of your mutual fund accounts,
regardless of account activity. The fourth quarter consolidated
statement will reflect all account activity for the prior
tax year. There will be a $10 fee charged for copies of
historical statements for other than the prior tax year
for any one account. You will receive the Fund's
financial statements with a summary of its investments
and performance at least semiannually.
In an effort to reduce expenses and respond to
shareholders' requests to reduce mail, the Trust intends
to consolidate mailings of Annual and Semiannual Reports
to households having multiple accounts with the same
address of record. One copy of each report will be
furnished to that address. You may request additional
reports by notifying the Trust.
DIRECTED DIVIDENDS
If you own shares in more than one of the Funds in the
USAA Family of Funds, you may direct that dividends
and/or capital gain distributions earned in one fund be
used to automatically purchase shares in another fund.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms,
a copy of the SAI, the most recent Annual Report and/or
Semiannual Report, or if you have any questions
concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Fund are purchased and
redeemed by shareholders is equal to the net asset value
(NAV) per share determined on the effective date of the
purchase or redemption.
WHEN
The NAV per share for the Fund is calculated at the close
of the regular trading session of the New York Stock
Exchange, which is usually 4:00 p.m. Eastern time. You
may buy and sell Fund shares at the NAV per share without
a sales charge.
HOW
The NAV per share is calculated by adding the value of
all securities and other assets in the Fund, deducting
liabilities, and dividing by the number of shares
outstanding. Portfolio securities, except as otherwise
noted, traded primarily on a domestic securities exchange
are valued at the last sales price on that exchange.
Portfolio securities traded primarily on foreign
securities exchanges are generally valued at the closing
values of such securities on the exchange where primarily
traded. If no sale is reported, the latest bid price is
generally used.
Over-the-counter securities are generally priced at
the last sales price or, if not available, at the average
of the bid and asked prices.
Debt securities purchased with maturities of 60 days
or less are stated at amortized cost which approximates
market value. Other debt securities are valued each
business day at their current market value as determined
by a pricing service approved by the Board of Trustees.
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 Trustees.
For additional information, see Valuation of Securities
in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income will be distributed to shareholders
annually. Net capital gain, if any, generally will be
distributed at least annually. The Fund intends to make
such additional distributions as may be necessary to avoid
the imposition of any federal income or excise tax.
All income dividends and capital gain distributions
are automatically reinvested, unless the shareholder
specifies otherwise. The share price will be the net
asset value of the Fund shares computed on the ex-
dividend date. Any income dividend or capital gain
distributions paid by the Fund will reduce the per share
net asset value by the amount of the dividend or
distribution. An investor should consider carefully the
effects of purchasing shares of the Fund shortly before
any dividend or distribution. Although in effect a return
of capital, these distributions are subject to taxes.
Any dividend or distribution payment returned to the
Manager as not deliverable will be invested in the
shareholder's Fund account at the then-current net asset
value. If any check for the payment of dividends or
distributions is not cashed within six months from the
date on the check, it becomes void. The amount of the
check will then be invested in the shareholder's account
at the then-current net asset value.
FEDERAL TAXES
The following discussion relates only to generally
applicable federal income tax provisions in effect as of
the date of this Prospectus. Therefore, shareholders are
urged to consult their own tax advisers about the status
of distributions from the Fund in their own states and localities.
Fund - The Fund intends to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code
of 1986, as amended (the Code). By complying with the
applicable provisions of the Code, the Fund will not be
subject to federal income tax on its net investment
income and net capital gains (capital gains in excess of
capital losses) distributed to shareholders.
Shareholder - Dividends from taxable net investment
income and distributions of net short-term capital gains
are taxable to shareholders as ordinary income, whether
received in cash or reinvested in additional shares. A
portion of these dividends may qualify for the 70%
dividends received deduction available to corporations.
Distributions of net long-term capital gains are
taxable as long-term capital gains whether received in
cash or reinvested in additional shares, and regardless
of the length of time the investor has held the shares of
the Fund.
Withholding - The Fund is required by federal law to
withhold and remit to the U.S. Treasury a portion of the
income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate
shareholder who fails to furnish the Fund with a correct
tax identification number, who underreports dividend or
interest income, or who fails to certify that he is not
subject to withholding. To avoid this withholding
requirement, you must certify on your application, or on
a separate Form W-9 supplied by the Transfer Agent, that
your tax identification number is correct and that you
are not currently subject to backup withholding.
Reporting - Information concerning the status of
dividends and distributions for federal income tax
purposes will be mailed to shareholders annually.
MANAGEMENT OF THE TRUST
The business affairs of the Trust are subject to the
supervision of the Board of Trustees.
The Manager, USAA Investment Management Company
(IMCO), was organized in May 1970 and is an affiliate of
United Services Automobile Association (USAA), a large
diversified financial services institution. As of the date of
this Prospectus, the Manager had approximately $27 billion
in total assets under management. The Manager's mailing
address is 9800 Fredericksburg Rd., San Antonio, TX 78288.
Officers and employees of the Manager are permitted
to engage in personal securities transactions subject to
restrictions and procedures set forth in the Joint Code
of Ethics adopted by the Trust and the Manager. Such
restrictions and procedures include substantially all of
the recommendations of the Advisory Group of the
Investment Company Institute and comply with Securities
and Exchange Commission rules and regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser
of the Trust, providing services under an Advisory
Agreement. Under the Advisory Agreement, the Manager is
responsible for the management of the Funds, business
affairs, and placement of brokerage orders, subject to
the authority of and supervision by the Board of Trustees.
For its services under the Advisory Agreement, the
Fund pays the Manager an annual fee which is computed as
a percentage of the Fund's average net assets (ANA),
accrued daily, and paid monthly. The Fund's management fees
are computed and paid at three-fourths of one percent (.75%)
of ANA. This fee is higher than that charged to most other
mutual funds, but in the opinion of the Manager is comparable
to fees charged to other mutual funds with similar investment
objectives and policies.
PORTFOLIO MANAGERS
The following individuals are primarily responsible for
managing the Fund.
David G. Parsons, Assistant Vice President of Equity
Investments since March of 1995, is the asset allocation
manager of the Fund and portfolio manager for the Large
Cap Stocks investment category. Mr. Parsons has 12 years
investment management experience working for IMCO where
he has held various positions in Equity Investments. Mr.
Parsons earned the Chartered Financial Analyst (CFA)
designation in 1986 and is a member of the Association
for Investment Management and Research (AIMR) and the San
Antonio Financial Analysts Society, Inc. (SAFAS). He holds
an MBA from the University of Texas, an MA from Southern
Illinois University and a BA from Austin College, Texas.
John K. Cabell, Jr. and Eric M. Efron, Associate
Portfolio Managers of Equity Investments since March of
1995, are co-portfolio managers for the Small Cap Stocks
investment category. Mr. Cabell has 17 years investment
management experience and has worked six years as a
Senior Securities Analyst in Equity Investments for IMCO.
His business experience during the past five years also
included the following positions: Chief Economist for
Retirement Systems of Alabama from March 1991 to March
1994 and Senior Investment Analyst for Seidler Amdec from
October 1990 to February 1991. Mr. Cabell earned the CFA
designation in 1982 and is a member of the AIMR and
SAFAS. He holds an MA and BS from the University of
Alabama. Mr. Efron has 20 years investment management
experience and has worked four years as a Senior
Securities Analyst in Equity Investments for IMCO. Prior
to joining IMCO, he held various investment positions
with C&S/Sovran Bank of Atlanta, Georgia from September
1984 to December 1991. Mr. Efron earned the CFA
designation in 1983 and is also a member of the AIMR and
SAFAS. He holds an MBA from New York University, an MA
from the University of Michigan, and a BA from Oberlin
College, Ohio.
Albert C. Sebastian, Associate Portfolio Manager of
Equity Investments since March of 1995, is the portfolio
manager for the International Stocks investment category.
Mr. Sebastian has eleven years investment management
experience and has worked four years as a Senior
Securities Analyst in Equity Investments for IMCO. Prior
to joining IMCO, he was President of Prospect Investment
Advisors. Mr. Sebastian earned the CFA designation in
1989 and is a member of the AIMR, SAFAS and the
International Society of Financial Analysts. He holds an
MBA from the University of Michigan and a BA from Holy
Cross College, Massachusetts.
Paul H. Lundmark, Executive Director of Fixed Income
Investments since November of 1994, is portfolio manager
for the Bonds investment category. Mr. Lundmark has nine
years investment management experience and has worked for
IMCO four years. He has held various positions in
Fixed Income Investments since January 1992. From May
1990 to July 1991 he was employed as an Associate with
Raymond James & Associates, Inc., St. Petersburg,
Florida. Mr. Lundmark earned the CFA designation in
1989 and is a member of the AIMR and SAFAS. He holds an
MBA and BSB from the University of Minnesota.
J. Eric Thorderson, Executive Director of Fixed Income
Investments since March of 1994, is portfolio manager for
the Money Market Instruments investment category. Mr.
Thorderson has eight years investment management
experience and has worked for IMCO five years where he
has held various positions in Fixed Income Investments.
Mr. Thorderson earned the CFA designation in 1989 and is
a member of the AIMR and SAFAS. He holds an MBA from the
University of Illinois and a BA from Wayne State
University of Michigan.
PORTFOLIO TRANSACTIONS
Purchases and sales of equity securities for the Fund's
portfolio may be accomplished through USAA Brokerage
Services, a discount brokerage service of the Manager.
The Board of Trustees has adopted procedures to ensure
that any commissions paid to USAA Brokerage Services are
reasonable and fair.
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
DESCRIPTION OF SHARES
MASTER TRUST AGREEMENT
The Trust is an open-end management investment company
established as a business trust under the laws of the
Commonwealth of Massachusetts pursuant to the First
Amended and Restated Master Trust Agreement (Master Trust
Agreement) dated June 2, 1995, as amended. The Trust is
authorized to issue an unlimited number of shares of
beneficial interest of separate series or Funds, without
par value. The Fund described in this Prospectus is
being offered to the public. The Fund is classified as a
diversified investment company. Under the Master Trust
Agreement, the Trustees are authorized to create new
Funds in addition to those already existing without
shareholder approval.
Under the Master Trust Agreement, no annual or
regular meeting of shareholders is required. Ordinarily,
no shareholder meeting will be held unless required by
the 1940 Act. The Trustees may fill vacancies on the
Board or appoint new Trustees provided that immediately
after such action at least two-thirds of the Trustees
have been elected by shareholders. Shareholders are
entitled to one vote per share (with proportionate voting
for fractional shares) irrespective of the relative net
asset value of the shares. For matters affecting an individual
Fund, a separate vote of the shareholders of that Fund is
required. Shareholders holding an aggregate of at least
10% of the outstanding shares of the Trust may request a
meeting of shareholders at any time for the purpose of
voting to remove one or more of the Trustees, and the
Trust will assist shareholders in communicating with
other shareholders in connection with such a meeting.
Under Massachusetts law, shareholders of any Fund
could, under certain circumstances, be held personally
liable for the obligations of the Trust. However, the
Master Trust Agreement disclaims shareholder liability
for acts or obligations of the Trust and requires that
notice of such disclaimer be given in each agreement,
obligation, or instrument entered into or executed by the
Trust or the Trustees. The Master Trust Agreement
provides for indemnification out of the Trust's property
for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust.
Thus, the possibility of a shareholder incurring financial
loss on account of shareholder liability is remote.
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 210-456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 210-456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE(registered trademark)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
USAA INCOME STRATEGY FUND
September 1, 1995 PROSPECTUS
USAA Income Strategy Fund (the Fund) is one of eleven no-
load mutual funds offered by USAA Investment Trust (the
Trust). The Fund is managed by USAA Investment
Management Company (the Manager).
WHAT IS THE INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek high current
return, with reduced risk over time, through an asset
allocation strategy which emphasizes income and gives
secondary emphasis to long-term growth of capital. Page 8.
HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the
net asset value per share without a sales charge. Make
your initial investment directly with the Manager by mail
or in person. Page 14.
HOW DO YOU SELL?
You may redeem shares of the Fund by mail,
telephone, fax, or telegraph on any day that the net
asset value is calculated. Page 16.
This Prospectus, which should be read and retained
for future reference, provides information regarding the
Trust and the Fund that you should know before investing.
Shares of the USAA Income Strategy Fund are not
deposits or other obligations of, or guaranteed by the
USAA Federal Savings Bank, are not insured by the FDIC or
any other Government Agency, and are subject to market risks.
If you would like more information, a STATEMENT OF
ADDITIONAL INFORMATION (SAI) of the Fund, dated September
1, 1995, is available upon request and without charge by
writing to USAA INVESTMENT TRUST, 9800 Fredericksburg
Rd., San Antonio, TX 78288, or by calling 1-800-531-8181.
The SAI has been filed with the Securities and Exchange
Commission and is incorporated by reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
SUMMARY DATA
Fees and Expenses 3
Performance Information 4
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds 5
Using Mutual Funds in an Asset Allocation Program 6
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies 8
SHAREHOLDER INFORMATION
Purchase of Shares 14
Redemption of Shares 16
Conditions of Purchase and Redemption 17
Exchanges 18
Other Services 19
Share Price Calculation 20
Dividends, Distributions and Taxes 21
Management of the Trust 22
Description of Shares 23
Service Providers 24
Telephone Assistance Numbers 24
FEES AND EXPENSES
The following summary is provided to assist you in understanding
the expenses you will bear directly or indirectly.
Shareholder Transaction Expenses
------------------------------------------------------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee* None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net assets (ANA))
------------------------------------------------------------------------------
Management Fees, net of reimbursements .00%
12b-1 Fees None
Other Expenses (estimated)
Transfer Agent Fees** .40%
Custodian Fees .57%
All Other Expenses .03%
----
Total Other Expenses 1.00%
----
Total Fund Operating Expenses, net of reimbursements 1.00%
====
------------------------------------------------------------------------------
* A shareholder who requests delivery of redemption proceeds by wire
transfer will be subject to a $10 fee. See Redemption of Shares - Bank
Wire.
** The Fund pays USAA Shareholder Account Services an annual fixed fee per
account for its services. See Transfer Agent in the SAI, page 15.
The Manager has voluntarily agreed to limit the
Fund's annual expenses until October 1, 1996, to 1.00% of
its ANA and will reimburse the Fund for all expenses in
excess of the limitation. The Management Fees, Other
Expenses, and Total Fund Operating Expenses reflect all
such expense reimbursements by the Manager. Absent such
reimbursements, the amount of the Management Fees, Other
Expenses, and Total Fund Operating Expenses as a
percentage of the Fund's ANA would be .50%, 1.78%, and
2.28%, respectively.
Example of Effect of Fund Expenses
------------------------------------------------------------------------------
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of the periods shown.
1 year - $ 10 3 years - $ 32
The above example should not be considered a representation of past or
future expenses and actual expenses may be greater or less than those shown.
PERFORMANCE INFORMATION
Performance information should be considered in light of
the Fund's investment objective and policies and market
conditions during the time periods for which it is
reported. Historical performance should not be considered
as representative of the future performance of the Fund.
The Trust may quote the Fund's total return or yield
in advertisements and reports to shareholders or
prospective investors. The Fund's performance may also
be compared to that of other mutual funds with a similar
investment objective and to stock or relevant indexes
that are referenced in Appendix B to the SAI. Standard
total return and yield results reported by the Fund do
not take into account recurring and nonrecurring charges
for optional services which only certain shareholders
elect and which involve nominal fees, such as the $10 fee
for a delivery of redemption proceeds by wire transfer.
The Fund's average annual total return is computed
by determining the average annual compounded rate of
return for a specific period which, when applied to a
hypothetical $1,000 investment in the Fund at the
beginning of the period, would produce the redeemable
value of that investment at the end of the period,
assuming reinvestment of all dividends and distributions
during the period.
The Fund may advertise performance in terms of a 30-
day yield quotation. The yield quotation is computed by
dividing the net investment income per share earned
during the period by the offering price per share on the
last day of the period. This income is then annualized.
Further information concerning the Fund's yield and
total return is included in the SAI.
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a
variety of Funds, each with different objectives and
policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their
own investment program. You may exchange any shares you
hold in any one USAA Fund for shares in any other USAA
Fund. For more complete information about the Funds in
the USAA Family of Funds, including charges and expenses,
call the Manager for a Prospectus. Be sure to read it
carefully before you invest or send money.
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Growth Fund
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Available for sale only to residents of these specific states.
USING MUTUAL FUNDS IN AN ASSET ALLOCATION PROGRAM
I. THE IDEA BEHIND ASSET ALLOCATION
If you have money to invest and hear that stocks may be a
good investment, is it a wise idea to use your entire
savings to buy one stock? Most people wouldn't - it
would be fortunate if it works, but this strategy holds a
great deal of risk. Surprising news could be reported
tomorrow on your stock, and its price could soar or plummet.
Careful investors understand this concept of risk
and lower that risk by diversifying their holdings among
a number of securities. That way bad news for one
security may be counterbalanced by good news regarding
other securities. But there is still a question of risk
here. History tells us that stocks are generally more
volatile than bonds and that long-term bonds are
generally more volatile than short-term bonds. History
also tells us that over many years investments having
higher risks tend to have higher returns than investments
that carry lower risks. And past performance doesn't
necessarily guarantee future results. From these
observations comes the idea of asset allocation.
Asset allocation is a straightforward concept that
involves dividing your money among several different
types of investments - for example, stocks, bonds and
short-term investments such as money market instruments -
and keeping that allocation until your objectives or the
financial markets significantly change. That way you're
not pinning all your financial success on the fortunes of
one kind of investment. Money spread across different
investment categories can help you reduce market risk and
likely will provide more stability to your total return.
Asset allocation can work because different kinds of
investments generally follow different up-and-down
cycles. With a variety of investments in your portfolio,
some are probably doing well, even when others are struggling.
II. USING ASSET ALLOCATION IN AN INVESTMENT PROGRAM
Most investors understand the concept of diversification,
but asset allocation goes beyond diversifying your
portfolio; it's much more of an active process. You must
evaluate your lifestyle, finances, circumstances, long-
and short-term financial goals and tolerance for
investment risk. Once you have structured your
allocation, you'll need to review it regularly since your
objectives will change over time.
III. USAA'S SERIES OF ASSET STRATEGY FUNDS
USAA's series of asset allocation funds, our Asset
Strategy Funds, are designed for the long-term investor
and are in line with the Manager's investment philosophy
for its customers, specifically "don't try to time the
market," and "buy and hold for the long-term." As shown
on the next page, each of USAA's Asset Strategy Funds has
its own different mix of assets and objectives.
Fund Investment Objective Invests In
============================================================================
Income Seek high current return, with Bonds and stocks
Strategy reduced risk over time, through
Fund an asset allocation strategy
which emphasizes income and
gives secondary emphasis to
long-term growth of capital.
----------------------------------------------------------------------------
Growth and Tax Seek a conservative balance Short- and long-term
Strategy Fund between income, the majority tax exempt bonds and
of which is tax-exempt, and basic value stocks
the potential for long-term
growth of capital to preserve
purchasing power. This
objective is to be achieved
through an asset allocation
strategy.
----------------------------------------------------------------------------
Balanced Seek high total return, with Stocks and bonds
Strategy reduced risk over time, through
Fund an asset allocation strategy
that seeks a combination of
long-term growth of capital
and current income.
----------------------------------------------------------------------------
Cornerstone Achieve a positive inflation- Foreign & basic value
Strategy adjusted rate of return and stocks, government
Fund a reasonably stable value of securities, real estate
Fund shares. This stocks and gold stocks
objective is to be achieved
through an asset allocation
strategy.
----------------------------------------------------------------------------
Growth Seek high total return, Small & large cap stocks,
Strategy with reduced risk over time, bonds, and international
Fund through an asset allocation stocks
strategy which emphasizes
capital appreciation and gives
secondary emphasis to income.
============================================================================
An important feature of USAA's Asset Strategy Funds is
the quarterly rebalancing of each portfolio. In this
asset allocation technique, the Funds' Managers buy or
sell securities each quarter so that the investment
categories of each Fund are brought within their target
ranges. For example, if a portfolio holds 65% of its
securities in stocks, 30% in bonds, and 5% in money
market instruments at the beginning of a quarter, then
due to market returns holds 75% of its securities in
stocks, 20% in bonds, and 5% in money market instruments
at the end of a quarter, the Manager would rebalance the
portfolio by reducing its holdings of stocks and
increasing its holdings of bonds to return the
portfolio's investments in stocks and bonds into the
target ranges. See Investment Objective and Policies -
Investment Policies, Techniques and Risk Factors for
further information on the Fund's target ranges.
For more complete information about the other USAA Asset
Strategy Funds, including charges and expenses, call the
Manager for a Prospectus. Be sure to read it carefully
before you invest or send money.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek high current
return, with reduced risk over time, through an asset
allocation strategy which emphasizes income and gives
secondary emphasis to long-term growth of capital.
The investment objective of the Fund cannot be
changed without shareholder approval. In view of the
risks inherent in all investments in securities, there is
no assurance that this objective will be achieved.
The investment policies and techniques used to
pursue the Fund's objective may be changed without
shareholder approval, except as otherwise noted. Further
information regarding the Fund's investment policies,
restrictions and risks is provided in the SAI.
INVESTMENT POLICIES,
TECHNIQUES AND RISK FACTORS
The Fund provides a professionally managed, diversified
investment program within one mutual fund. The Manager
seeks to attain the objective by investing the Fund's
assets in each of the following investment categories
within the indicated ranges:
Percentage
Target Range
Investment Category of Net Assets
------------------- -------------
Bonds 75 - 85%
Stocks 15 - 25%
Money Market Instruments 0 - 10%
The target ranges may be revised by the Board of
Trustees upon 60 days' prior written notice to
shareholders. However, the Manager reserves the right,
without shareholder notification, to revise the ranges on
a temporary defensive basis when, in its opinion, such
changes are believed to be in the best interest of the
Fund and its shareholders.
The ranges allow for a variance in each investment
category. Should market action cause investment
categories to move outside the ranges, the Manager will
make adjustments to rebalance the portfolio. In general,
the Manager will rebalance the portfolio at least once
during each calendar quarter to bring each category
within its range. These portfolio adjustments may cause
the Fund to sell securities in investment categories
which have appreciated in value and to buy securities in
investment categories which have depreciated in value.
Such adjustments may also cause the Fund to incur a
higher proportion of short-term capital gains than a fund
that does not have a similar policy.
As a temporary defensive measure, the Manager may
invest up to 100% of the Fund's assets in high quality,
short-term debt instruments.
The Fund's portfolio turnover rate is not expected
to exceed 100%, however, it will not be a limiting factor
when the Manager deems changes in the Fund's portfolio
appropriate in view of its investment objective.
Characteristics and associated risks of each investment
category are as follows:
Bonds - In this category, investments will consist of
U.S. dollar-denominated securities selected for their
high yields relative to the risk involved. Consistent
with this policy, in periods of rising interest rates, a
greater portion of the portfolio may be invested in
securities the value of which is believed to be less
sensitive to interest rate changes. Generally, the longer
a bond's maturity, the higher the yield and the greater the
price volatility due to increased interest rate risk.
Investments in this category may consist of
obligations of the U.S. Government, its agencies and
instrumentalities; mortgage-backed securities; corporate
debt securities such as notes and bonds; obligations of state
and local governments and their agencies and instrumentalities;
asset-backed securities; master demand notes; eurodollar
obligations; yankee obligations; and other debt securities.
The debt securities in the Fund must be investment
grade at the time of purchase. Investment grade
securities are those issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, those
rated at least Baa by Moody's Investors Service
(Moody's), BBB by Standard & Poor's Ratings Group (S&P),
BBB by Fitch Investors Service (Fitch), or BBB by Duff
and Phelps (D&P), or those judged to be of equivalent
quality by the Manager if not rated. Securities rated in
the lowest level of investment grade have some
speculative characteristics since adverse economic
conditions and changing circumstances are more likely to
have an adverse impact on such securities. If the rating
of a security is downgraded below investment grade, the
Manager will determine whether it is in the best interest
of the Fund's shareholders to continue to hold such
security in the Fund's portfolio. For a more complete
description of debt ratings, see Appendix A to the SAI.
Stocks - In this category, investments will consist
primarily of dividend paying common stocks or securities
convertible into common stocks or securities which carry
the right to buy common stocks. Investments may also
include foreign securities. For a discussion of the
risks associated with investments in foreign issuers, see
Special Risk Considerations.
The Fund may also invest in U.S. Real Estate
Investment Trusts (REITs). The Fund's investments in
REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. In
addition, REITs are dependent upon the capabilities of
the REIT manager(s) and have limited diversification.
Money Market Instruments - In this category, investments
will consist of high quality U.S. dollar-denominated debt
securities that have remaining maturities of one year or
less. Such securities may include U.S. government
obligations, commercial paper and other short-term corporate
obligations, and certificates of deposit, bankers'
acceptances, bank deposits, and other financial
institution obligations. These securities may carry
fixed or variable interest rates.
Repurchase Agreements - The Fund may invest in repurchase
agreements which are collateralized by obligations backed
by the full faith and credit of the U.S. Government or by
its agencies or instrumentalities. A repurchase
agreement is a transaction in which a security is
purchased with a simultaneous commitment to sell the
security back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on
an agreed upon date, usually not more than 7 days from
the date of purchase. The resale price reflects the
purchase price plus an agreed upon market rate of
interest which is unrelated to the coupon rate or
maturity of the purchased security. The obligation of
the seller to pay the agreed upon price is in effect
secured by the value of the underlying security. In
these transactions, the securities purchased by the Fund
will have a total value equal to or in excess of the
amount of the repurchase obligation and will be held by
the Fund's custodian until repurchased. If the seller
defaults and the value of the underlying security
declines, the Fund may incur a loss and may incur
expenses in selling the collateral. If the seller seeks
relief under the bankruptcy laws, the disposition of the
collateral may be delayed or limited.
When-Issued Securities - The Fund may invest in new
issues of debt securities offered on a when-issued basis;
that is, delivery and payment take place after the date
of the commitment to purchase, normally within 45 days.
Both price and interest rate are fixed at the time of
commitment. The Fund does not earn interest on the
securities until settlement, and the market value of the
securities may fluctuate between purchase and settlement.
Such securities can be sold before settlement date.
Cash or high quality liquid debt securities equal to
the amount of the when-issued commitments are segregated
at the Fund's custodian bank. The segregated securities
are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at
least equal to the amount of such commitments by the
Fund. On the settlement date, the Fund will meet its
obligations from then available cash, sale of segregated
securities, sale of other securities, or sale of the
when-issued securities themselves.
Variable Rate Securities - The Fund may invest in
securities that bear interest at rates (coupons) which
are adjusted periodically to market rates. These
interest rate adjustments can both raise and lower the
income generated by such securities. These changes will
have the same effect on the income earned by the Fund
depending on the proportion of such securities held.
The market value of fixed coupon securities
fluctuates with changes in prevailing interest rates,
increasing in value when interest rates decline and
decreasing in value when interest rates rise. The value
of variable rate securities, however, is less affected by
changes in prevailing interest rates because of the
periodic adjustment of their coupons to a market rate.
The shorter the period between adjustments, the smaller
the impact of interest rate fluctuations on the value of
these securities. The market value of variable rate
securities usually tends toward par (100% of face value)
at interest rate adjustment time.
Mortgage-Backed and Asset-Backed Securities - The Fund
may invest in mortgage-backed and asset-backed
securities. Mortgage-backed securities include, but are
not limited to, securities issued by the Government
National Mortgage Association (Ginnie Mae), the Federal
National Mortgage Association (Fannie Mae) and the
Federal Home Loan Mortgage Corporation (Freddie Mac).
These securities represent ownership in a pool of
mortgage loans. They differ from conventional bonds in
that principal is paid back to the investor as payments
are made on the underlying mortgages in the pool.
Accordingly, the Fund receives monthly scheduled payments
of principal and interest along with any unscheduled
principal prepayments on the underlying mortgages.
Because these scheduled and unscheduled principal
payments must be reinvested at prevailing interest rates,
mortgage-backed securities do not provide an effective
means of locking in long-term interest rates for the
investor. Like other fixed income securities, when
interest rates rise, the value of a mortgage-backed
security generally will decline; however, when interest
rates are declining, the value of mortgage-backed
securities with prepayment features may not increase as
much as other fixed income securities.
Mortgage-backed securities also include
collateralized mortgage obligations (CMOs). CMOs are
obligations fully collateralized by a portfolio of
mortgages or mortgage-related securities. CMOs are
divided into pieces (tranches) with varying maturities
and the cash flow from the underlying mortgages are used
to pay off each tranche separately. CMOs are designed to
provide investors with more predictable maturities than
regular mortgage securities but such maturities can be
difficult to predict because of the effect of prepayments.
Failure to accurately predict prepayments can adversely
affect the Fund's return on these investments. CMOs may
also be less marketable than other securities.
Asset-backed securities represent a participation
in, or are secured by and payable from, a stream of
payments generated by particular assets, such as credit
card, motor vehicle, or trade receivables. They may be
pass-through certificates, which have characteristics
very similar to mortgage-backed securities, discussed
above. They may also be in the form of asset-backed
commercial paper, which is issued by a special purpose
entity, organized solely to issue the commercial paper
and to purchase interests in the assets. The credit
quality of these securities depends primarily upon the
quality of the underlying assets and the level of credit
support and enhancement provided.
The weighted average life of such securities is
likely to be substantially shorter than their stated
final maturity as a result of scheduled principal
payments and unscheduled principal prepayments.
Master Demand Notes - The Fund may invest in variable
rate master demand notes (Master Demand Notes). Master
Demand Notes are obligations that permit the investment
of fluctuating amounts by the Fund, at varying rates of
interest using direct arrangements between the Fund, as
lender, and the borrower. These notes permit daily
changes in the amounts borrowed. The Fund has the right
to increase the amount under the note at any time up to
the full amount provided by the note agreement, or to
decrease the amount, and the borrower may repay up to the
full amount of the note without penalty. Frequently,
such obligations are secured by letters of credit or
other credit support arrangements provided by banks.
Because Master Demand Notes are direct lending
arrangements between the lender and borrower, these
instruments generally will not be traded, and there
generally is no secondary market for these notes,
although they are redeemable (and immediately repayable
by the borrower) at face value, plus accrued interest, at
any time. Therefore, where Master Demand Notes are not
secured by bank letters of credit or other credit support
arrangements, the Fund's right to redeem depends on the
ability of the borrower to pay principal and interest on
demand. In connection with Master Demand Note
arrangements, the Fund will continuously monitor the
earning power, cash flow, and other liquidity ratios of
the issuer, and the borrower's ability to pay principal
and interest on demand. Master Demand Notes, as such,
are not typically rated by credit rating agencies. The
Fund will invest in Master Demand Notes only if the Board
of Trustees or its delegate has determined that they are
of credit quality comparable to the debt securities in
which the Fund generally may invest.
Eurodollar and Yankee Obligations - The Fund may invest
in Eurodollar and Yankee obligations. Eurodollar
obligations are dollar-denominated instruments 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 issued by
foreign issuers in the U.S. capital markets. While
investments in Eurodollar and Yankee obligations are
intended to reduce risk by providing further
diversification, such investments involve sovereign risk
in addition to credit and market risk. Sovereign risk
includes local political or economic developments,
potential nationalization, and withholding taxes on
dividend or interest payments.
In addition, the Fund may invest in Eurodollar and
Yankee obligations of investment-grade emerging market
countries. An emerging market country can be considered
to be a country which is in the initial stages of its
industrial cycle. Investments in emerging market countries
involve exposure to economic structures that are generally
less diverse and mature than in the United States, and to
political systems which may be less stable. In the past,
markets of emerging market countries have been more volatile
than the markets of developed countries. See Special Risk
Considerations for a discussion of other risks associated
with foreign investments.
Put Bonds - The Fund may invest in securities (including
securities with variable interest rates) which may be
redeemed or sold back (put) to the issuer of the security
or a third party at face value prior to stated maturity
(Put Bonds). Such securities will normally trade as if
maturity is the earlier put date, even though stated
maturity is longer.
Convertible Securities - As stated earlier, the Fund may
invest in convertible securities. Convertible securities
are bonds, preferred stocks, and other securities that
pay interest or dividends and offer the buyer the option
of converting the security into common stock. The value
of convertible securities depends partially on interest
rate changes and the credit quality of the issuer.
Because a convertible security affords an investor the
opportunity, through its conversion feature, to
participate in the capital appreciation of the underlying
common stock, the value of convertible securities may
also change based on the price of the common stock.
Forward Currency Contracts - The Fund may hold securities
denominated in foreign currencies. As a result, the
value of the securities will be affected by changes in
the exchange rate between the dollar and foreign
currencies. In managing the currency exposure, the Fund
may enter into forward currency contracts. A forward
currency contract involves an agreement to purchase or
sell a specified currency at a specified future date or
over a specified time period at a price set at the time
of the contract.
The Fund may enter into forward currency contracts
under two circumstances. First, when the Fund enters
into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock
in" the U.S. dollar price of the security. Second, when
management of the Fund believes that the currency of a
specific country may deteriorate relative to the U.S.
dollar, it may enter into a forward contract to sell that
currency. The Fund may not hedge with respect to a
particular currency for an amount greater than the
aggregate market value (determined at the time of making
any sale of forward currency) of the securities held in
its portfolio denominated or quoted in, or bearing a
substantial correlation to, such currency.
The use of forward currency contracts to protect the
value of the Fund's assets against a decline in the value
of a currency does not eliminate fluctuations in the
value of the Fund's underlying security holdings. In
addition, although the use of forward currency contracts
can minimize the risk of loss due to a decline in value
of the foreign currency, the use of such contracts will
tend to limit any potential gain resulting from an
increase in the relative value of the foreign currency to
the U.S. dollar. Under certain circumstances, a fund
that has entered into forward currency contracts to hedge
its currency risks may be in a less favorable position
than a fund that had not entered into such contracts.
The projection of short-term currency market movements is
extremely difficult and successful execution of a short-
term hedging strategy is highly uncertain.
Liquidity - The Fund may not invest more than 15% of the
market value of its net assets in securities which are
illiquid or not readily marketable. Commercial paper and
certain Put Bonds that are subject to restrictions on
transfer and other securities that may be resold pursuant
to Rule 144A under the Securities Act of 1933 may be
determined to be liquid in accordance with guidelines
established by the Board of Trustees for purposes of
complying with the Fund's investment restriction
applicable to investments in illiquid securities.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
shareholder approval:
a. With respect to 75% of its total assets, the Fund
may not purchase securities of any issuer (except
U.S. Government Securities, as such term is defined
in the Investment Company Act of 1940, as amended
(1940 Act)) if, as a result, it would own more than
10% of the outstanding voting securities of such
issuer or it would have more than 5% of the value of
its total assets invested in the securities of such
issuer.
b. The Fund may not borrow money, except for temporary
or emergency purposes in an amount not exceeding 33
1/3% of its total assets (including the amount
borrowed) less liabilities (other than borrowings).
c. The Fund may not concentrate its investments in any
one industry although it may invest up to 25% of the
value of its total assets in any one industry;
provided, this limitation does not apply to
securities issued or guaranteed by the U.S.
Government and its agencies or instrumentalities.
d. The Fund may not lend any securities or make any
loan if, as a result, more than 33 1/3% of its total
assets would be lent to other parties, except that
this limitation does not apply to purchases of debt
securities or to repurchase agreements.
SPECIAL RISK CONSIDERATIONS
Investment in Foreign Securities - The Fund may purchase
foreign securities in foreign or U.S. markets or it may
purchase American Depositary Receipts (ADRs), Global
Depositary Receipts (GDRs), or similar forms of ownership
interests in securities of foreign issuers deposited with
a depositary. Investing in foreign securities presents
certain risks not present in domestic investments. Such
risks may include currency exchange rate fluctuations,
foreign market illiquidity, increased price volatility,
exchange control regulations, different accounting,
reporting and disclosure requirements, political or
social instability, and difficulties in obtaining
judgments or effecting collections thereon.
Brokerage commissions and custodial services may be more
costly, and stock trade settlements may be more lengthy,
more costly and more difficult than in domestic markets.
These investments may be subject to foreign withholding
taxes which may reduce the effective rates of return.
The Fund values its securities and other assets in U.S. dollars.
Information which may impact the market value of
securities of a foreign issuer may not be available to
the Manager on a timely basis. The Manager will endeavor
to ascertain such information on as timely a basis as is
practicable, however, any impact on the net asset value
will be deemed to have occurred upon authentication by
the Manager.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of
the following methods. A complete, signed application is
required together with a check for each new account.
TAX ID NUMBER
We require that each shareholder named on the account
provide the Trust with a social security number or tax
identification number to avoid possible tax withholding
requirements.
EFFECTIVE DATE
Generally, when you make a purchase, your purchase price
will be the net asset value (NAV) per share next
determined after the Fund receives your request in proper
form. If the Fund receives your request prior to
the close of the New York Stock Exchange on a day on
which the Exchange is open, your purchase price will be
the NAV per share determined for that day. If the Fund
receives your request after the time at which the NAV per
share is calculated, the purchase will be effective on
the next business day. A check drawn on a foreign bank
will not be deemed received for the purchase of shares
until such time as the check has cleared and the Manager
has received good funds, which may take up to 4 to 6
weeks. Furthermore, a bank charge may be assessed in the
clearing process, which will be deducted from the amount
of the purchase. To avoid a delay in the effectiveness
of your purchase, the Manager suggests that you convert
your foreign check to U.S. dollars prior to investment in
the Fund.
Purchase of Shares
Minimum Investments
Initial Purchase (non-IRA): $3,000
Initial Purchase -- IRA: $1,000
$250 for spousal account
Additional Purchases: $50
How to Purchase:
Mail * To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
* To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
* To exchange by mail, call 1-800-531-8448 for instructions.
In Person * To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
Phone * If you have an existing USAA account and would like to
open a new account, call 1-800-531-8448. New accounts
by phone must have the same registration as your existing
account.
* To exchange to another USAA fund, call 1-800-531-8448.
The new account must have the same registration as the
account from which you are exchanging.
* To add to an account, intermittent (as-needed) purchases
can be deducted from your bank account through our
Buy/Sell Service. Call 1-800-531-8448.
Automatically * Additional purchases on a regular basis can be deducted
via from a bank account, paycheck, income-producing investment
Electronic or from a USAA money market account. Sign up for these
Funds services when opening an account or call 1-800-531-8448
Transfer to add these services.
(EFT) * Purchases through payroll deduction ($25 minimum each pay
period with no initial investment) can be made by any
employee of USAA, its subsidiaries or affiliated companies.
Bank Wire * To add to an account, instruct your bank (which may charge
a fee for the service) to wire the specified amount to the
Fund as follows:
State Street Bank and Trust Company, Boston, MA 02101
ABA#011000028
Attn: USAA Income Strategy Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
Through a * To open a new account through your USAA Asset Management
USAA AMA Account, call USAA Brokerage Services at 1-800-531-8343.
REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following
methods on any day the NAV per share is calculated.
Redemptions will be effective on the day on which instructions
are received in accordance with the requirements set forth
below. However, if instructions are received after the NAV per
share calculation, redemption will be effective on the next
business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days
after the effective date of redemption. Payment for
redemption of shares purchased by check or electronic
funds transfer will not be disbursed until the purchase
check or electronic funds transfer has cleared, which
could take up to 15 days from the purchase date. If you
are considering redeeming shares soon after purchase, you
should purchase by bank wire or certified check to avoid delay.
In addition, the Trust may elect to suspend the
redemption of shares or postpone the date of payment
during any period that the New York Stock Exchange is
closed, or trading in the markets the Trust normally
utilizes is restricted, or during any period that
redemption is otherwise permitted to be suspended by the
Securities and Exchange Commission.
How to Redeem:
-------------
Written, * Send your written instructions to:
Fax, or USAA Shareholder Account Services
Telegraph 9800 Fredericksburg Rd., San Antonio, TX 78288
* Send a signed fax to 210-498-2889, or send a telegraph
to USAA Shareholder Account Services.
Written redemption requests must include the following: (1) a letter
of instruction or stock assignment, and stock certificate (if issued),
specifying the Fund and the number of shares or dollar amount to be redeemed;
(2) signatures of all owners of the shares exactly as their names appear on
the account; (3) other supporting legal documents, if required, as in the
case of estates, trusts, guardianships, custodianships, partnerships,
corporations, and pension and profit-sharing plans; and (4) method of payment.
Phone * Call toll free 1-800-531-8448, in San Antonio, 210-456-7202.
The Fund will employ reasonable procedures to
confirm that instructions communicated by telephone are
genuine, and if it does not, it may be liable for any
losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding
an account including: (1) USAA number or account number,
(2) the name(s) on the account registration, and (3)
social security number or tax identification number for
the account registration. In addition, all telephone
communications with a shareholder are recorded and
confirmations of all account transactions are sent to the
address of record.
Redemption by telephone, fax, or telegraph is not
available for shares represented by stock certificates.
Through a * Call USAA Brokerage Services at 1-800-531-8343 for more
USAA AMA information.
Methods of Payment:
------------------
Bank Wire * Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your
account, or later upon request. If your account is at a
savings bank, savings and loan association, or credit
union, please obtain precise wiring instructions from
your institution. Specifically, include the name of the
correspondent bank and your institution's account number
at that bank. The Transfer Agent deducts a wire fee from
the account for the redemption by wire. The fee as of the
date of this Prospectus is $10 ($25 for wires to a foreign
bank) and is subject to change at any time. The fee is
paid to State Street Bank and Trust Company and the
Transfer Agent for their services in connection with the
wire redemption. Your bank may also charge a fee for
receiving funds by wire.
Automatically * Systematic (regular) or intermittent (as-needed)
via EFT redemptions can be credited to your bank account.
Establish any of our electronic investing services
when you apply for your account, or later upon request.
Check * A check payable to the registered shareholder(s)
Redemption will be mailed to the address of record.
This check redemption privilege is automatically established when
your application is completed and accepted. There is a 15-day waiting
period before a check redemption can be processed following a telephone
address change.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to
nonpayment or if the Trust does not receive good funds
either by check or electronic funds transfer, the
cancellation may be treated as a redemption of shares
purchased and you will be responsible for any resulting
loss incurred by the Fund or the Manager. If you are a
shareholder, shares can be redeemed from any of your
account(s) as reimbursement for all losses. In addition,
you may be prohibited or restricted from making future
purchases in any of the USAA Family of Funds. A $15 fee
is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
Fund shares may be transferred to another person by
sending written instructions to the Transfer Agent. The
account must be clearly identified and the shareholder
must include the number of shares to be transferred, the
signatures of all registered owners, and all stock
certificates, if any, which are the subject of transfer.
You also need to send written instructions and supporting
documents to change an account registration due to events
such as divorce, marriage, or death. If a new account
needs to be established, an application must be completed
and returned to the Transfer Agent.
ACCOUNT BALANCE
The Board of Trustees may cause the redemption of an
account with less than $900, subject to certain
limitations described in Additional Information Regarding
Redemption of Shares in the SAI.
TRUST RIGHTS
The Trust reserves the right to:
(1) reject purchase or exchange orders when in the best
interest of the Trust;
(2) limit or discontinue the offering of shares of any
portfolio of the Trust without notice to the
shareholders;
(3) require a signature guarantee when deemed
appropriate by the Manager for purchases,
redemptions, or changes in account information. The
section Additional Information Regarding Redemption
of Shares in the SAI contains information on
acceptable guarantors.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established when
you complete your application. You may exchange shares
among Funds in the USAA Family of Funds, provided
you do not hold these shares in stock certificate form
and that the shares to be acquired are offered in your
state of residence. Exchange redemptions and purchases
will be processed simultaneously at the share prices next
determined after the exchange order is received. For
federal income tax purposes, an exchange between Funds
is a taxable event. Accordingly, a capital gain or loss
may be realized.
The Fund has undertaken certain procedures regarding
telephone transactions. See Redemption of Shares - Phone.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the Funds and
their shareholders from unfair expense burdens, the Funds
restrict excessive exchanges. Exchanges out of any
Fund in the USAA Family of Funds are limited for
each account to six per calendar year except that there
is no limitation on exchanges out of the Tax Exempt
Short-Term Fund, Short-Term Bond Fund, or any of the
money market funds in the USAA Family of Funds.
OTHER SERVICES
INVESTMENT PLANS
You may establish a systematic investment plan by
completing the appropriate forms. At the time you sign
up for any of the following investment plans that utilize
the electronic funds transfer service, you will choose
the day of the month (the effective date) on which you
would like to regularly purchase shares. When this day
falls on a weekend or holiday, the electronic transfer
will take place on the last business day before the
effective date. Call the Manager to obtain instructions.
More information about these preauthorized plans is
contained in the SAI.
InvesTronic(registered trademark) - the periodic purchase
of shares through electronic funds transfer from a
checking or savings account.
Direct Purchase Service - the periodic purchase of shares
through electronic funds transfer from a non-governmental
employer, an income-producing investment, or an account
with a participating financial institution.
Automatic Purchase Plan - the periodic transfer of funds
from a USAA money market fund to purchase shares in
another non-money market USAA mutual fund.
Buy/Sell Service - the intermittent purchase or
redemption of shares through electronic funds transfer to
or from a checking or savings account.
Systematic Withdrawal Plan - the periodic redemption of
shares from one of your accounts permitting you to
receive a fixed amount of money monthly or quarterly.
Retirement Plans - plans are available for IRA (including
SEP/IRA) and 403(b)(7) accounts. Federal taxes on
current income may be deferred if an investor qualifies.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each account
transaction except reinvested dividends. At the end of
each quarter you will receive a consolidated statement
for all of your mutual fund accounts, regardless of
account activity. The fourth quarter consolidated
statement will reflect all account activity for the prior
tax year. There will be a $10 fee charged for copies of
historical statements for other than the prior tax year
for any one account. You will receive the Fund's
financial statements with a summary of its investments
and performance at least semiannually.
In an effort to reduce expenses and respond to
shareholders' requests to reduce mail, the Trust intends
to consolidate mailings of Annual and Semiannual Reports
to households having multiple accounts with the same
address of record. One copy of each report will be
furnished to that address. You may request additional
reports by notifying the Trust.
DIRECTED DIVIDENDS
If you own shares in more than one of the Funds in the
USAA Family of Funds, you may direct that dividends
and/or capital gain distributions earned in one fund be
used to automatically purchase shares in another fund.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms,
a copy of the SAI, the most recent Annual Report and/or
Semiannual Report, or if you have any questions
concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Fund are purchased and
redeemed by shareholders is equal to the net asset value
(NAV) per share determined on the effective date of the
purchase or redemption.
WHEN
The NAV per share for the Fund is calculated at the close
of the regular trading session of the New York Stock
Exchange, which is usually 4:00 p.m. Eastern time. You
may buy and sell Fund shares at the NAV per share without
a sales charge.
HOW
The NAV per share is calculated by adding the value of
all securities and other assets in the Fund, deducting
liabilities, and dividing by the number of shares
outstanding. Portfolio securities, except as otherwise
noted, traded primarily on a domestic securities exchange
are valued at the last sales price on that exchange.
Portfolio securities traded primarily on foreign
securities exchanges are generally valued at the closing
values of such securities on the exchange where primarily
traded. If no sale is reported, the latest bid price is
generally used.
Over-the-counter securities are generally priced at
the last sales price or, if not available, at the average
of the bid and asked prices.
Debt securities purchased with maturities of 60 days
or less are stated at amortized cost which approximates
market value. Other debt securities are valued each
business day at their current market value as determined
by a pricing service approved by the Board of Trustees.
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 Trustees.
For additional information, see Valuation of Securities
in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income will be distributed to shareholders
quarterly. Net capital gain, if any, generally will be
distributed at least annually. The Fund intends to make
such additional distributions as may be necessary to
avoid the imposition of any federal income or excise tax.
All income dividends and capital gain distributions
are automatically reinvested, unless the shareholder
specifies otherwise. The share price will be the net
asset value of the Fund shares computed on the ex-
dividend date. Any income dividend or capital gain
distributions paid by the Fund will reduce the per share
net asset value by the amount of the dividend or
distribution. An investor should consider carefully the
effects of purchasing shares of the Fund shortly before
any dividend or distribution. Although in effect a
return of capital, these distributions are subject to taxes.
Any dividend or distribution payment returned to the
Manager as not deliverable will be invested in the
shareholder's Fund account at the then-current net asset
value. If any check for the payment of dividends or
distributions is not cashed within six months from the
date on the check, it becomes void. The amount of the
check will then be invested in the shareholder's account
at the then-current net asset value.
FEDERAL TAXES
The following discussion relates only to generally
applicable federal income tax provisions in effect as of
the date of this Prospectus. Therefore, shareholders are
urged to consult their own tax advisers about the status
of distributions from the Fund in their own states and localities.
Fund - The Fund intends to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code
of 1986, as amended (the Code). By complying with the
applicable provisions of the Code, the Fund will not be
subject to federal income tax on its net investment
income and net capital gains (capital gains in excess of
capital losses) distributed to shareholders.
Shareholder - Dividends from taxable net investment
income and distributions of net short-term capital gains
are taxable to shareholders as ordinary income, whether
received in cash or reinvested in additional shares. A
portion of these dividends may qualify for the 70%
dividends received deduction available to corporations.
Distributions of net long-term capital gains are
taxable as long-term capital gains whether received in
cash or reinvested in additional shares, and regardless
of the length of time the investor has held the shares of
the Fund.
Withholding - The Fund is required by federal law to
withhold and remit to the U.S. Treasury a portion of the
income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate
shareholder who fails to furnish the Fund with a correct
tax identification number, who underreports dividend or
interest income, or who fails to certify that he is not
subject to withholding. To avoid this withholding
requirement, you must certify on your application, or on
a separate Form W-9 supplied by the Transfer Agent, that
your tax identification number is correct and that you
are not currently subject to backup withholding.
Reporting - Information concerning the status of
dividends and distributions for federal income tax
purposes will be mailed to shareholders annually.
MANAGEMENT OF THE TRUST
The business affairs of the Trust are subject to the
supervision of the Board of Trustees.
The Manager, USAA Investment Management Company
(IMCO), was organized in May 1970 and is an affiliate of
United Services Automobile Association (USAA), a large
diversified financial services institution. As of the
date of this Prospectus, the Manager had approximately
$27 billion in total assets under management. The
Manager's mailing address is 9800 Fredericksburg Rd., San
Antonio, TX 78288.
Officers and employees of the Manager are permitted
to engage in personal securities transactions subject to
restrictions and procedures set forth in the Joint Code
of Ethics adopted by the Trust and the Manager. Such
restrictions and procedures include substantially all of
the recommendations of the Advisory Group of the
Investment Company Institute and comply with Securities
and Exchange Commission rules and regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser
of the Trust, providing services under an Advisory
Agreement. Under the Advisory Agreement, the Manager is
responsible for the management of the Funds, business
affairs, and placement of brokerage orders, subject to
the authority of and supervision by the Board of Trustees.
For its services under the Advisory Agreement, the
Fund pays the Manager an annual fee which is computed as
a percentage of the Fund's average net assets (ANA),
accrued daily, and paid monthly. The Fund's management fees
are computed and paid at one-half of one percent (.50%) of ANA.
PORTFOLIO MANAGERS
The following individuals are primarily responsible for
managing the Fund.
John W. Saunders, Jr., Senior Vice President of Fixed
Income Investments since October of 1985, is the asset
allocation manager of the Fund and portfolio manager for
the Bonds investment category. Mr. Saunders has 26 years
investment management experience and has worked for IMCO
25 years. Mr. Saunders earned the Chartered Financial
Analyst (CFA) designation in 1976 and is a member of the
Association for Investment Management and Research (AIMR)
and the San Antonio Financial Analysts Society, Inc. (SAFAS).
He holds a BS from Portland State University, Oregon.
R. David Ullom, Assistant Vice President of Equity
Investments since September of 1994, is portfolio manager
for the Stocks investment category. Mr. Ullom has 21
years investment management experience and has worked for
IMCO ten years where he has held various positions in
Equity Investments. Mr. Ullom earned the CFA designation
in 1980 and also is a member of the AIMR and SAFAS. He
holds an MBA from Washington University, Missouri and a
BS from Oklahoma State University.
J. Eric Thorderson, Executive Director of Fixed Income
Investments since March of 1994, is portfolio manager for
the Money Market Instruments investment category. Mr.
Thorderson has eight years investment management
experience and has worked for IMCO five years where he
has held various positions in Fixed Income Investments.
Mr. Thorderson earned the CFA designation in 1989 and is
a member of the AIMR and SAFAS. He holds an MBA from the
University of Illinois and a BA from Wayne State
University of Michigan.
PORTFOLIO TRANSACTIONS
Purchases and sales of equity securities for the Fund's
portfolio may be accomplished through USAA Brokerage
Services, a discount brokerage service of the Manager.
The Board of Trustees has adopted procedures to ensure
that any commissions paid to USAA Brokerage Services are
reasonable and fair.
DESCRIPTION OF SHARES
MASTER TRUST AGREEMENT
The Trust is an open-end management investment company
established as a business trust under the laws of the
Commonwealth of Massachusetts pursuant to the First
Amended and Restated Master Trust Agreement (Master Trust
Agreement) dated June 2, 1995, as amended. The Trust is
authorized to issue an unlimited number of shares of
beneficial interest of separate series or Funds, without
par value. The Fund described in this Prospectus is
being offered to the public. The Fund is classified as a
diversified investment company. Under the Master Trust
Agreement, the Trustees are authorized to create new
Funds in addition to those already existing without
shareholder approval.
Under the Master Trust Agreement, no annual or
regular meeting of shareholders is required. Ordinarily,
no shareholder meeting will be held unless required by
the 1940 Act. The Trustees may fill vacancies on the
Board or appoint new Trustees provided that immediately
after such action at least two-thirds of the Trustees
have been elected by shareholders. Shareholders are
entitled to one vote per share (with proportionate voting
for fractional shares) irrespective of the relative net
asset value of the shares. For matters affecting an
individual Fund, a separate vote of the shareholders of
that Fund is required. Shareholders holding an aggregate
of at least 10% of the outstanding shares of the Trust may
request a meeting of shareholders at any time for the purpose
of voting to remove one or more of the Trustees, and the
Trust will assist shareholders in communicating with other
shareholders in connection with such a meeting.
Under Massachusetts law, shareholders of any Fund
could, under certain circumstances, be held personally
liable for the obligations of the Trust. However, the
Master Trust Agreement disclaims shareholder liability
for acts or obligations of the Trust and requires that
notice of such disclaimer be given in each agreement,
obligation, or instrument entered into or executed by the
Trust or the Trustees. The Master Trust Agreement
provides for indemnification out of the Trust's property
for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust.
Thus, the possibility of a shareholder incurring financial
loss on account of shareholder liability is remote.
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 210-456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 210-456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE(registered trademark)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
(Logo of USAA STATEMENT OF
the USAA INVESTMENT ADDITIONAL INFORMATION
Eagle TRUST September 1, 1995
is here)
----------------------------------------------------------------------------
USAA INCOME STRATEGY FUND
USAA BALANCED STRATEGY FUND
USAA GROWTH STRATEGY FUND
USAA INVESTMENT TRUST (the Trust) is a registered investment
company offering shares of eleven no-load mutual funds, three of
which are described in this Statement of Additional Information
(SAI): the Income Strategy Fund, Balanced Strategy Fund, and
Growth Strategy Fund (collectively, the Funds). Each Fund is
classified as a diversified investment company and has its own
investment objective designed to meet different investment goals.
A Prospectus for each Fund dated September 1, 1995, which
provides the basic information you should know before investing
in the Funds, may be obtained without charge upon written request
to USAA Investment Trust, 9800 Fredericksburg Rd., San Antonio,
TX 78288, or by calling toll free 1-800-531-8181. This SAI is
not a Prospectus and contains information in addition to and more
detailed than that set forth in each Fund's Prospectus. It is
intended to provide you with additional information regarding the
activities and operations of the Trust and the Funds, and should
be read in conjunction with each Fund's Prospectus.
----------------------------------------------------------------------
TABLE OF CONTENTS
Page
2 Valuation of Securities
2 Additional Information Regarding Redemption of Shares
3 Investment Plans
4 Investment Policies
6 Special Risk Considerations
7 Investment Restrictions
8 Portfolio Transactions
9 Further Description of Shares
10 Tax Considerations
11 Trustees and Officers of the Trust
14 The Trust's Manager
15 General Information
15 Calculation of Performance Data
16 Appendix A - Long-Term and Short-Term Debt Ratings
19 Appendix B - Comparison of Portfolio Performance
22 Appendix C - Dollar-Cost Averaging
VALUATION OF SECURITIES
Shares of each Fund are offered on a continuing best efforts
basis through USAA Investment Management Company (IMCO or the
Manager). The offering price for shares of each Fund is equal to
the current net asset value per share. The net asset value per
share of each Fund is calculated by adding the value of all its
portfolio securities and other assets, deducting its liabilities,
and dividing by the number of shares outstanding.
A Fund's net asset value per share is calculated each day,
Monday through Friday, except days on which the New York Stock
Exchange (NYSE) is closed. The NYSE is currently scheduled to be
closed on New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving, and Christmas,
and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively.
The value of securities of each Fund is determined by one or more
of the following methods:
(1) Portfolio securities, except as otherwise noted, traded
primarily on a domestic securities exchange are valued at
the last sales price on that exchange. Portfolio securities
traded primarily on foreign securities exchanges are
generally valued at the closing values of such securities on
the exchange where primarily traded. If no sale is
reported, the latest bid price is generally used depending
upon local custom or regulation.
(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 at the time trading closes on the New York
Stock Exchange.
(3) Debt securities purchased with maturities of 60 days or less
are stated at amortized cost which approximates market
value. Repurchase agreements are valued at cost.
(4) Other debt and government securities are valued each
business day by a pricing service (the Service) approved by
the Board of Trustees. The Service uses the mean between
quoted bid and asked prices or the last sales price to price
securities when, in the Service's judgment, these prices are
readily available and are representative of the securities'
market values. For many securities, such prices are not
readily available. The Service generally prices 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.
(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 Trustees.
Securities trading in foreign markets may not take place on all
days on which the NYSE is open. Further, trading takes place in
various foreign markets on days on which the NYSE is not open.
The calculation of a Fund's net asset value therefore may not
take place contemporaneously with the determination of the prices
of securities held by a Fund. Events affecting the values of
portfolio securities that occur between the time their prices are
determined and the close of normal trading on the NYSE on a day a
Fund's net asset value is calculated will not be reflected in a
Fund's net asset value, unless the Manager determines that the
particular event would materially affect net asset value. In
such a case, the Fund's Manager, under the supervision of the
Board of Trustees, will use all relevant available information to
determine a fair value for the affected portfolio securities.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
The value of a shareholder's investment at the time of redemption
may be more or less than the cost at purchase, depending on the
value of the securities held in each Fund's portfolio. Requests
for redemption which are subject to any special conditions, or
which specify an effective date other than as provided herein,
cannot be accepted. A gain or loss for tax purposes may be
realized on the sale of shares, depending upon the price when redeemed.
The Board of Trustees may cause the redemption of an account
with a balance of less than $900, provided that (1) the value of
such account has been reduced below the minimum initial
investment required in such Fund at the time of the establishment
of the account to less than $900 entirely for reasons other than
market action, (2) the account has remained below the minimum
initial investment for six months, and (3) 60 days' prior written
notice of the proposed redemption has been sent to the shareholder.
Shares will be redeemed at the net asset value on the date fixed
for redemption by the Board of Trustees. Prompt payment will be
made by mail to the last known address of the shareholder.
The Trust reserves the right to suspend the right of
redemption or postpone the date of payment (1) for any periods
during which the NYSE is closed, (2) when trading in the markets
the Trust normally utilizes is restricted, or an emergency exists
as determined by the Securities and Exchange Commission (SEC) so
that disposal of the Trust's investments or determination of its
net asset value is not reasonably practicable, or (3) for such
other periods as the SEC by order may permit for protection of
the Trust's shareholders.
For the mutual protection of the investor and the Funds, a
guarantee of signature may be required by the Trust. If
required, each signature on the account registration must be
guaranteed. Signature guarantees are acceptable from FDIC member
banks, brokers, dealers, municipal securities dealers, municipal
securities brokers, government securities dealers, government
securities brokers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings
associations. A signature guarantee for active duty military
personnel stationed abroad may be provided by an officer of the
United States Embassy or Consulate, a staff officer of the Judge
Advocate General, or an individual's commanding officer.
INVESTMENT PLANS
The following investment plans are made available by the Trust to
shareholders of all the Funds. At the time you sign up for any
of the following investment plans that utilize the electronic
funds transfer service, you will choose the day of the month (the
effective date) on which you would like to regularly purchase
shares. When this day falls on a weekend or holiday, the
electronic transfer will take place on the last business day
before the effective date. You may terminate your participation
in a plan at any time. Please call the Manager for details and
necessary forms or applications.
Systematic Purchase of Shares
InvesTronic(registered trademark) - the periodic purchase of
shares through electronic funds transfer from a checking or
savings account. By completing an application, which may be
obtained from the Manager, you invest a specific amount each
month ($50 minimum) in any of your accounts.
Direct Purchase Service - the periodic purchase of shares through
electronic funds transfer from a non-governmental employer, an
income-producing investment, or an account with a participating
financial institution.
Automatic Purchase Plan - the periodic transfer of funds from a
USAA money market fund to purchase shares in another non-money
market USAA mutual fund. There is a minimum investment required
for this program of $5,000, with a monthly transaction minimum of
$50. The minimum initial investment requirement for the other
USAA mutual fund must be satisfied before the first transfer.
Buy/Sell Service - the intermittent purchase or redemption of
shares through electronic funds transfer to or from a checking or
savings account.
Participation in these systematic purchase plans will permit
a shareholder to engage in dollar-cost averaging. For additional
information concerning the benefits of dollar-cost averaging, see
Appendix C.
Systematic Withdrawal Plan
If a shareholder in a single investment account (accounts in
different Funds cannot be aggregated for this purpose) owns
shares having a net asset value of $5,000 or more, the
shareholder may request that enough shares to produce a fixed
amount of money be liquidated from the account monthly or
quarterly. The amount of each withdrawal must be at least $50.
Using the electronic funds transfer service, shareholders may
choose to have withdrawals electronically deposited at their bank
or other financial institution. They may also elect to have
checks mailed to a designated address.
Such a plan may be initiated by depositing shares worth at
least $5,000 with the Transfer Agent and by completing a
Systematic Withdrawal Plan application, which may be requested
from the Manager. The shareholder may terminate participation in
the plan at any time. There is no charge to the shareholder for
withdrawals under the Systematic Withdrawal Plan. The Trust will
not bear any expenses in administering the plan beyond the
regular transfer agent and custodian costs of issuing and
redeeming shares. Any additional expenses of administering the
plan will be borne by the Manager.
Withdrawals will be made by redeeming full and fractional
shares on the date selected by the shareholder at the time the
plan is established. Withdrawal payments made under this plan
may exceed dividends and distributions and, to this extent, will
involve the use of principal and could reduce the dollar value of
a shareholder's investment and eventually exhaust the account.
Reinvesting dividends and distributions helps replenish the
account. Because share values and net investment income can
fluctuate, shareholders should not expect withdrawals to be
offset by rising income or share value gains.
Each redemption of shares may result in a gain or loss,
which must be reported on the shareholder's income tax return.
Therefore, a shareholder should keep an accurate record of any
gain or loss on each withdrawal.
Investment Plans, cont.
Tax-Deferred Retirement Plans
Federal taxes on current income may be deferred if an investor
qualifies for certain types of retirement programs. For the
convenience of the investor, the following plans are made
available by the Manager: IRA (including SEP/IRA) and 403(b)(7)
accounts. The minimum initial investment in each of these plans
is $1,000 for each Fund with the exception of spousal IRAs for
which the minimum investment is $250. Subsequent investments of
$50 or more per account may be made at any time. Investments may
be made in one or any combination of the portfolios described in
the Prospectus of each Fund of USAA Mutual Fund, Inc. and USAA
Investment Trust (not available in the Growth and Tax Strategy Fund).
Retirement plan applications for the IRA and 403(b)(7)
programs should be sent directly to USAA Shareholder Account
Services, 9800 Fredericksburg Rd., San Antonio, TX 78288. State
Street Bank serves as Custodian of these tax-deferred retirement
plans under the programs made available by the Manager.
Applications for these retirement plans received by the Manager
will be forwarded to the Custodian for acceptance.
An administrative fee of $20 is deducted from the proceeds
of a distribution closing an account. Exceptions to the fee are:
partial distributions, total transfer within USAA, and
distributions due to disability or death. This charge is subject
to change as provided in the various agreements. There may be
additional charges, as mutually agreed upon between the investor
and the Custodian, for further services requested of the Custodian.
Each employer or individual establishing a tax-deferred
retirement plan is advised to consult with a tax adviser before
establishing the plan. Detailed information about the plans may
be obtained from the Manager.
INVESTMENT POLICIES
The section captioned Investment Objective and Policies in each
Fund's Prospectus describes the fundamental investment objective
and the investment policies applicable to each Fund and the
following is provided as additional information.
Section 4(2) Commercial Paper and Rule 144A Securities
Each Fund may invest in commercial paper issued in reliance on
the "private placement" exemption from registration afforded by
Section 4(2) of the Securities Act of 1933 (Section 4(2)
Commercial Paper). Section 4(2) Commercial Paper is restricted
as to disposition under the federal securities laws; therefore,
any resale of Section 4(2) Commercial Paper must be effected in a
transaction exempt from registration under the Securities Act of
1933. Section 4(2) Commercial Paper is normally resold to other
investors through or with the assistance of the issuer or
investment dealers who make a market in Section 4(2) Commercial
Paper, thus providing liquidity.
Each Fund may also purchase restricted securities eligible
for resale to "qualified institutional buyers" pursuant to Rule
144A under the Securities Act of 1933 (Rule 144A Securities).
Rule 144A provides a non-exclusive safe harbor from the
registration requirements of the Securities Act of 1933 for
resales of certain securities to institutional investors.
Liquidity Determinations
The Board of Trustees has established guidelines pursuant to
which Section 4(2) Commercial Paper, Rule 144A Securities, and
certain restricted debt securities that are subject to
unconditional put or demand features exercisable within seven
days ("Restricted Put Bonds") may be determined to be liquid for
purposes of complying with the Funds' investment restrictions
applicable to investments in illiquid securities. In determining
the liquidity of Section 4(2) Commercial Paper and Rule 144A
Securities, the Manager will consider the following factors,
among others, established by the Board of Trustees: (1) the
frequency of trades and quotes for the security, (2) the number
of dealers willing to purchase or sell the security and the
number of other potential purchasers, (3) dealer undertakings to
make a market in the security, and (4) the nature of the security
and the nature of the marketplace trades, including the time
needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer. In determining the
liquidity of Restricted Put Bonds, the Manager will evaluate the
credit quality of the party (the "Put Provider") issuing (or
unconditionally guaranteeing performance on) the unconditional
put or demand feature of the Restricted Put Bond. In evaluating
the credit quality of the Put Provider, the Manager will consider
all factors that it deems indicative of the capacity of the Put
Provider to meet its obligations under the Restricted Put Bond
based upon a review of the Put Provider's outstanding debt and
financial statements and general economic conditions.
Certain foreign securities (including Eurodollar
obligations) may be eligible for resale pursuant to Rule 144A in
the United States and may also trade without restriction in one
or more foreign markets. Such securities may be determined to be
liquid based upon these foreign markets without regard to their
eligibility for resale pursuant to Rule 144A. In such cases,
these securities will not be treated as Rule 144A securities for
purposes of the liquidity guidelines established by the Board of
Trustees and will not be considered "restricted securities" for
purposes of a Fund's investment restriction.
Lending of Securities
Each Fund may lend its securities. A lending policy may be
authorized by the Trust's Board of Trustees and implemented by
the Manager, but securities may be loaned only to qualified
broker-dealers or institutional investors that agree to maintain
cash collateral with the Trust equal at all times to at least
100% of the value of the loaned securities. The Trustees will
establish procedures and monitor the creditworthiness of any
institution or broker-dealer during such times as any loan is
outstanding. The Trust will continue to receive interest on the
loaned securities and will invest the cash collateral in short-
term obligations of the U.S. Government or of its agencies or
instrumentalities or in repurchase agreements, thereby earning
additional interest.
No loan of securities will be made if, as a result, the aggregate
of such loans would exceed 33 1/3% of the value of a Fund's total
assets. The Trust may terminate such loans at any time.
Forward Currency Contracts
Each Fund may enter into forward currency contracts in order to
protect against uncertainty in the level of future foreign
exchange rates. A forward contract involves an agreement to
purchase or sell a specific currency at a specified future date
or over a specified time period at a price set at the time of the
contract. These contracts are usually traded directly between
currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit
requirements, and no commissions are charged.
The Funds may enter into forward currency contracts under
two circumstances. First, when a Fund enters into a contract for
the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the
security. By entering into such a contract, a Fund will be able
to protect itself against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar and
the foreign currency from the date the security is purchased or
sold to the date on which payment is made or received. Second,
when management of a Fund believes that the currency of a
specific country may deteriorate relative to the U.S. dollar, it
may enter into a forward contract to sell that currency. A Fund
may not hedge with respect to a particular currency for an amount
greater than the aggregate market value (determined at the time
of making any sale of forward currency) of the securities held in
its portfolio denominated or quoted in, or bearing a substantial
correlation to, such currency.
The use of forward contracts involves certain risks. The
precise matching of contract amounts and the value of securities
involved generally will not be possible since the future value of
such securities in currencies more than likely will change
between the date the contract is entered into and the date it
matures. The projection of short-term currency market movements
is extremely difficult and successful execution of a short-term
hedging strategy is uncertain. Under normal circumstances,
consideration of the prospect for currency parities will be
incorporated into the longer term investment strategies. The
Manager believes it is important, however, to have the
flexibility to enter into such contracts when it determines it is
in the best interest of the Funds to do so. It is impossible to
forecast what the market value of portfolio securities will be at
the expiration of a contract. Accordingly, it may be necessary
for a Fund to purchase additional currency (and bear the expense
of such purchase) if the market value of the security is less
than the amount of currency the Funds are obligated to deliver,
and if a decision is made to sell the security and make delivery
of the currency. Conversely, it may be necessary to sell some of
the foreign currency received on the sale of the portfolio
security if its market value exceeds the amount of currency the
Funds are obligated to deliver. The Funds are not required to
enter into such transactions and will not do so unless deemed
appropriate by the Manager.
Although the Funds value their assets each business day in
terms of U.S. dollars, they do not intend to convert their
foreign currencies into U.S. dollars on a daily basis. They will
do so from time to time, and shareholders should be aware of
currency conversion costs. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based
on the difference (spread) between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer
to sell a foreign currency to the Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
Investment Policies, cont.
When-Issued Securities
Each Fund may invest in new issues of debt securities offered on
a when-issued basis; that is, delivery of and payment for the
securities take place after the date of the commitment to
purchase, normally within 45 days. The payment obligation and
the interest rate that will be received on the securities are
each fixed at the time the buyer enters into the commitment. A
Fund may sell these securities before the settlement date if it
is deemed advisable.
Debt securities purchased on a when-issued basis are subject
to changes in value in the same way that other debt securities
held in the Funds' portfolios are; that is, both generally
experience appreciation when interest rates decline and
depreciation when interest rates rise. The value of such
securities will also be affected by the public's perception of
the creditworthiness of the issuer and anticipated changes in the
level of interest rates. Purchasing securities on a when-issued
basis involves a risk that the yields available in the market
when the delivery takes place may actually be higher than those
obtained in the transaction itself. Cash or high quality liquid
debt securities equal to the amount of the when-issued
commitments are segregated at the Fund's custodian bank. The
segregated securities are valued at market, and daily adjustments
are made to keep the value of the cash and segregated securities
at least equal to the amount of such commitments by the Fund.
On the settlement date of the when-issued securities, the
Fund will meet its obligations from then available cash, sale of
segregated securities, sale of other securities, or from sale of
the when-issued securities themselves (which may have a value
greater or less than the Trust's payment obligations). Sale of
securities to meet such obligations carries with it a greater
potential for the realization of capital gains.
Investments in Real Estate Investment Trusts (REITs)
Certain risks are associated with direct investments in REITs.
REITs may be affected by changes in the value of their underlying
properties and by defaults by borrowers or tenants. Furthermore,
REITs are dependent upon specialized management skills of their
managers and may have limited geographic diversification, thereby
subjecting them to risks inherent in financing a limited number
of projects. REITs depend generally on their ability to generate
cash flow to make distributions to shareholders, and certain
REITs have self-liquidation provisions by which mortgages held
may be paid in full and distributions of capital returns may be
made at any time.
Put and Call Options, Financial Futures Contracts,
Options on Financial Futures Contracts
Although the Funds are permitted to purchase and sell these
contracts or options, the Funds have no current intention of
doing so in the coming year and will not engage in such
transactions without first notifying shareholders and supplying
further information in the Prospectus.
SPECIAL RISK CONSIDERATIONS
Currency Exchange Rate Fluctuations
A portion of each Funds' assets may be invested in securities of
foreign issuers. Any such investments will be made in compliance
with U.S. and foreign currency restrictions, tax laws, and laws
limiting the amount and types of foreign investments. Pursuit of
the Funds' investment objectives will involve currencies of the
United States and of foreign countries. Consequently, changes in
exchange rates, currency convertibility, and repatriation
requirements may favorably or adversely affect the Funds.
Unpredictable Political, Economic and Social Conditions
Investing in securities of foreign issuers presents certain other
risks not present in domestic investments, including different
accounting, reporting, and disclosure requirements for foreign
issuers, possible political or social instability, including
policies of foreign governments which may affect their respective
equity markets, and foreign taxation requirements including
withholding taxes.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the
Trust for and are applicable to each Fund as stated. These
restrictions may not be changed for any given Fund without
approval by the lesser of (1) 67% or more of the voting securities
present at a meeting of the Fund if more than 50% of the outstanding
voting securities of the Fund are present or represented by proxy
or (2) more than 50% of that Fund's outstanding voting securities.
The investment restrictions of one Fund may thus be changed without
affecting those of any other Fund.
Under the restrictions, each Fund may not:
(1) With respect to 75% of its total assets, purchase the
securities of any issuer (except U.S. Government Securities,
as such term is defined in the Investment Company Act of
1940, as amended (1940 Act)) if, as a result, it would own
more than 10% of the outstanding voting securities of such
issuer or it would have more than 5% of the value of its
total assets invested in the securities of such issuer.
(2) Borrow money, except for temporary or emergency purposes in
an amount not exceeding 33 1/3% of its total assets (including
the amount borrowed) less liabilities (other than borrowings).
(3) Concentrate its investments in any one industry although it
may invest up to 25% of the value of its total assets in any
one industry; provided, this limitation does not apply to
securities issued or guaranteed by the U.S. Government and
its agencies or instrumentalities.
(4) Issue senior securities, except as permitted under the 1940 Act.
(5) Underwrite securities of other issuers, except to the extent
that it may be deemed to act as a statutory underwriter in
the distribution of any restricted securities or not readily
marketable securities.
(6) Lend any securities or make any loan if, as a result, more
than 33 1/3% of its total assets would be lent to other
parties, except that this limitation does not apply to
purchases of debt securities or to repurchase agreements.
Additional Restrictions
The following restrictions are not considered to be fundamental
policies of the Funds. Nevertheless, the Trust and each Fund
will comply with them as long as they are required by any state
where the Funds' shares are offered for sale. These additional
restrictions may be changed by the Board of Trustees of the Trust
without notice to or approval by the shareholders.
Under the additional restrictions, each Fund may not:
(1) Pledge, mortgage or hypothecate its assets to any extent
greater than 33 1/3% of the value of its total assets.
(2) Purchase or retain securities of any issuer if any officer
or Trustee of the Trust or its Manager owns individually
more than one-half of one percent ( 1/2%) of the securities
of that issuer, and collectively the officers and Trustees
of the Trust and Manager together own more than 5% of the
securities of that issuer.
(3) Invest more than 15% of the value of its net assets in
illiquid securities (including repurchase agreements
maturing in more than seven days).
(4) Purchase securities on margin or sell securities short
except that it may obtain short-term credits necessary for
the clearance of securities transactions and make short
sales against the box; for purposes of the restriction the
deposit or repayment of initial or variation margin in
connection with financial futures contracts or related
options will not be deemed to be a purchase of securities on
margin by a Fund.
(5) Purchase securities of other investment companies except to
the extent permitted by applicable law.
(6) Purchase or sell puts, calls, straddles or spreads or any
combination thereof, except to the extent permitted by
applicable law.
(7) Purchase interests in oil, gas, or other mineral exploration
or development programs, except that it may purchase
securities of issuers whose principal business activities
fall within such areas.
(8) Purchase warrants, valued at the lower of cost or market
value, in excess of 5% of the Fund's net assets. Included
in that amount, but not to exceed 2% of the Fund's net
assets, may be warrants that are not listed on the New York
or American Stock Exchanges (for this purpose, warrants
attached to securities will be deemed to have no value).
Investment Restrictions, cont.
(9) Invest more than 5% of the value of its assets in securities
of companies having a record of less than three years'
continuous operations except (a) securities guaranteed or
backed by an affiliate of the issuer with three years of
continuous operations, (b) securities issued or guaranteed
as to principal or interest by the U.S. Government, or its
agencies or instrumentalities, or a mixed-ownership
Government corporation and (c) securities issued by a
holding company with at least 50% of its assets invested in
companies with three years of continuous operations
including predecessors.
(10) Purchase or sell commodities or commodity contracts, except
that the Fund may invest in financial futures contracts,
options thereon and similar instruments.
(11) Purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall
not prevent investments in securities secured by real estate
or interests therein).
(12) Purchase any security while borrowings representing more
than 5% of the Fund's total assets are outstanding.
PORTFOLIO TRANSACTIONS
The Manager, pursuant to the Advisory Agreement dated September
21, 1990 and subject to the general control of the Trust's Board
of Trustees, places all orders for the purchase and sale of Fund
securities. In executing portfolio transactions and selecting
brokers and dealers, it is the Trust's policy to seek the best
overall terms available. The Manager shall consider such factors
as it deems relevant, including the breadth of the market in the
security, the financial condition and execution capability of the
broker or dealer, and the reasonableness of the commission, if any,
for the specific transaction or on a continuing basis. Securities
purchased or sold in the over-the-counter market will be executed
through principal market makers, except when, in the opinion of the
Manager, better prices and execution are available elsewhere.
In the allocation of brokerage business used to purchase
securities for the Funds, preference may be given to those
broker-dealers who provide research or other services to the
Manager as long as there is no sacrifice in obtaining the best
overall terms available. Such research and other services may
include, for example: advice concerning the value of securities,
the advisability of investing in, purchasing, or selling
securities, and the availability of securities or the purchasers
or sellers of securities; analyses and reports concerning
issuers, industries, securities, economic factors and trends,
portfolio strategy, and performance of accounts; and various
functions incidental to effecting securities transactions, such
as clearance and settlement. The Manager continuously reviews
the performance of the broker-dealers with whom it places orders
for transactions. The receipt of research from broker-dealers
that execute transactions on behalf of the Trust may be useful to
the Manager in rendering investment management services to other
clients (including affiliates of the Manager), and conversely,
such research provided by broker-dealers who have executed
transaction orders on behalf of other clients may be useful to
the Manager in carrying out its obligations to the Trust. While
such research is available to and may be used by the Manager in
providing investment advice to all its clients (including
affiliates of the Manager), not all of such research may be used
by the Manager for the benefit of the Trust. Such research and
services will be in addition to and not in lieu of research and
services provided by the Manager, and the expenses of the Manager
will not necessarily be reduced by the receipt of such
supplemental research. See The Trust's Manager.
Securities of the same issuer may be purchased, held, or
sold at the same time by the Trust for any or all of its Funds,
or other accounts or companies for which the Manager acts as the
investment adviser (including affiliates of the Manager). On
occasions when the Manager deems the purchase or sale of a
security to be in the best interest of the Trust, as well as the
Manager's other clients, the Manager, to the extent permitted by
applicable laws and regulations, may aggregate such securities to
be sold or purchased for the Trust with those to be sold or
purchased for other customers in order to obtain best execution
and lower brokerage commissions, if any. In such event,
allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Manager
in the manner it considers to be most equitable and consistent
with its fiduciary obligations to all such customers, including
the Trust. In some instances, this procedure may impact the
price and size of the position obtainable for the Trust. The
Trust pays no brokerage commissions as such for debt securities.
The market for such securities is typically a "dealer" market in
which investment dealers buy and sell the securities for their
own accounts, rather than for customers, and the price may
reflect a dealer's mark-up or mark-down. In addition, some
securities may be purchased directly from issuers.
Portfolio Turnover Rates
The rate of portfolio turnover in any of the Funds will not be a
limiting factor when the Manager deems changes in a Fund's
portfolio appropriate in view of its investment objective.
Although no Fund will purchase or sell securities solely to
achieve short-term trading profits, a Fund may sell portfolio
securities without regard to the length of time held if
consistent with the Fund's investment objective. A higher degree
of equity portfolio activity will increase brokerage costs to a
Fund. It is not anticipated however, that the portfolio turnover
rates of the Funds will exceed 100%.
The portfolio turnover rate is computed by dividing the
dollar amount of securities purchased or sold (whichever is
smaller) by the average value of securities owned during the
year. Short-term investments such as commercial paper and short-
term U.S. Government securities are not considered when computing
the turnover rate.
FURTHER DESCRIPTION OF SHARES
The Trust is authorized to issue shares of beneficial interest in
separate series or Funds. Eleven such Funds have been
established, three of which are described in this SAI. Under the
First Amended and Restated Master Trust Agreement (Master Trust
Agreement) dated June 2, 1995, as amended, the Board of Trustees
is authorized to create new Funds in addition to those already
existing without the approval of the shareholders of the Trust.
The assets of each Fund, and all income, earnings, profits
and proceeds thereof, subject only to the rights of creditors,
are specifically allocated to each Fund. They constitute the
underlying assets of each Fund, are required to be segregated on
the books of account, and are to be charged with the expenses of
such Fund. Any general expenses of the Trust not readily
identifiable as belonging to a particular Fund are allocated on
the basis of the Funds' relative net assets during the fiscal
year or in such other manner as the Trustees determine to be fair
and equitable. Each share of each Fund represents an equal
proportionate interest in that Fund with every other share and is
entitled to such dividends and distributions out of the net
income and capital gains belonging to that Fund when declared by
the Trustees. Upon liquidation of that Fund, shareholders are
entitled to share pro rata in the net assets belonging to such
Fund available for distribution.
Under the Trust's Master Trust Agreement, no annual or
regular meeting of shareholders is required. Thus, there will
ordinarily be no shareholder meeting unless otherwise required by
the 1940 Act. Under certain circumstances, however, shareholders
may apply to the Trustees for shareholder information in order to
obtain signatures to request a shareholder meeting. Moreover,
pursuant to the Master Trust Agreement, any Trustee may be
removed by the vote of two-thirds of the outstanding Trust shares
and holders of 10% or more of the outstanding shares of the Trust
can require Trustees to call a meeting of shareholders for the
purpose of voting on the removal of one or more Trustees. On any
matter submitted to the shareholders, the holder of any share is
entitled to one vote per share (with proportionate voting for
fractional shares) regardless of the relative net asset values of
the Funds' shares. However, on matters affecting an individual
Fund, a separate vote of the shareholders of that Fund is
required. For example, the Advisory Agreement must be approved
separately by each Fund and only becomes effective with respect
to a Fund when a majority of the outstanding voting securities of
that Fund approves it. Shareholders of a Fund are not entitled
to vote on any matter which does not affect that Fund but which
requires a separate vote of another Fund. For example, a
proposed change in the investment objectives of a particular Fund
would require the affirmative vote of a majority of the
outstanding voting securities of only that Fund.
Shares do not have cumulative voting rights, which means
that in situations in which shareholders elect Trustees, holders
of more than 50% of the shares voting for the election of
Trustees can elect 100% of the Board of Trustees, and the holders
of less than 50% of the shares voting for the election of
Trustees will not be able to elect any person as a Trustee.
When issued, each Fund's shares are fully paid and nonassessable
by the Trust, have no preemptive or subscription rights, and are
fully transferable. There are no conversion rights.
TAX CONSIDERATIONS
Taxation of the Funds
Each Fund intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as
amended (the Code). Accordingly, each Fund will not be liable
for federal income taxes on its taxable net investment income and
net capital gains (capital gains in excess of capital losses)
that are distributed to shareholders, provided that each Fund
distributes at least 90% of its net investment income and net
short-term capital gain for the taxable year.
To qualify as a regulated investment company, a Fund must,
among other things, (1) derive in each taxable year at least 90%
of its gross income from dividends, interest, payments with
respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such
stock, securities, or currencies (the 90% test); (2) derive in
each taxable year less than 30% of its gross income from the sale
or other disposition of stock or securities, and certain options,
futures contracts, forward contracts, and foreign currencies held
for less than three months (the 30% test); and (3) satisfy
certain diversification requirements at the close of each quarter
of the Fund's taxable year.
The Code imposes a nondeductible 4% excise tax on a
regulated investment company that fails to distribute during each
calendar year an amount at least equal to the sum of (1) 98% of
its taxable net investment income for the calendar year, (2) 98%
of its capital gain net income for the twelve month period ending
on October 31, and (3) any prior amounts not distributed. Each
Fund intends to make such distributions as are necessary to avoid
imposition of excise tax.
The Funds' ability to make certain investments may be
limited by provisions of the Code that require inclusion of
certain unrealized gains or losses in the Fund's income for
purposes of the 90% test, the 30% test, and the distribution
requirements of the Code, and by provisions of the Code that
characterize certain income or loss as ordinary income or loss
rather than capital gain or loss. Such recognition,
characterization and timing rules generally apply to investments
in certain forward currency contracts, foreign currencies and
debt securities denominated in foreign currencies, as well as
certain other investments.
If the Funds invest in an entity that is classified as a
"passive foreign investment company" (PFIC) for federal income
tax purposes, the application of certain provisions of the Code
applying to PFICs could result in the imposition of certain
federal income taxes on the Fund. It is anticipated that any
taxes on a Fund with respect to investments in PFICs would be
insignificant.
Taxation of the Shareholders
Taxable distributions are generally included in a shareholder's
gross income for the taxable year in which they are received.
Dividends declared in October, November, or December and made
payable to shareholders of record in such a month will be deemed
to have been received on December 31, if a Fund pays the dividend
during the following January. If a shareholder of a Fund
receives a distribution taxable as long-term capital gain with
respect to shares of a Fund and redeems or exchanges the shares
before he has held them for more than six months, any loss on the
redemption or exchange that is less than or equal to the amount
of the distribution will be treated as long-term capital loss.
TRUSTEES AND OFFICERS OF THE TRUST
The Board of Trustees of the Trust consists of eight Trustees.
Set forth below are the Trustees and officers of the Trust, and
their respective offices and principal occupations during the
last five years. Unless otherwise indicated, the business
address of each is 9800 Fredericksburg Rd., San Antonio, TX 78288.
Hansford T. Johnson 1, 2
Trustee and Chairman of the Board of Trustees
Age: 59
Director, Vice Chairman and Deputy Attorney-in-Fact, United
Services Automobile Association (USAA) and President, Chief
Executive Officer, Director and Vice Chairman of the Board of
Directors of USAA Capital Corporation and of its various
subsidiaries and affiliates (9/93-present); Chief of Staff, USAA
(1/93-8/93); Executive Vice President, USAA (10/92-12/92);
Commander-in-Chief, CINCTRANS, Department of Defense -Pentagon
(9/89-9/92). Mr. Johnson currently serves as a Trustee and
Chairman of the Board of Trustees of USAA State Tax-Free Trust
and as Director and Chairman of the Boards of Directors of USAA
Investment Management Company (IMCO), USAA Mutual Fund, Inc.,
USAA Tax Exempt Fund, Inc., USAA Shareholder Account Services,
USAA Federal Savings Bank and USAA Real Estate Company.
Michael J. C. Roth 1, 2
Trustee, President and Vice Chairman of the Board of Trustees
Age: 53
Chief Executive Officer, IMCO (10/93-present); President,
Director and Vice Chairman of the Board of Directors, IMCO (1/90-
present); Director, USAA Federal Savings Bank (12/83-8/91). Mr.
Roth currently serves as President, Trustee and Vice Chairman of
the Board of Trustees of USAA State Tax-Free Trust, as President,
Director and Vice Chairman of the Boards of Directors of USAA
Mutual Fund, Inc., USAA Tax Exempt Fund, Inc. and USAA Shareholder
Account Services, as Director of USAA Life Insurance Company and
as Trustee and Vice Chairman of USAA Life Investment Trust.
John W. Saunders, Jr. 1, 2, 4
Trustee and Vice President
Age: 60
Senior Vice President, Investments, IMCO (10/85-present); Director,
BHC Financial, Inc. and BHC Securities, Inc. (1/87-present). Mr.
Saunders currently serves as a Trustee and Vice President of USAA
State Tax-Free Trust, as a Director of IMCO, Director and Vice
President of USAA Mutual Fund, Inc., and USAA Tax Exempt Fund, Inc.,
as Senior Vice President of USAA Shareholder Account Services, and
as Vice President of USAA Life Investment Trust.
C. Dale Briscoe 4, 5
7829 Timber Top Drive
Boerne, TX 78006
Trustee
Age: 74
Retired. Mr. Briscoe currently serves as a Trustee of USAA State
Tax-Free Trust and as a Director of USAA Mutual Fund, Inc. and
USAA Tax Exempt Fund, Inc.
George E. Brown 3, 4, 5
5829 Northgap Drive
San Antonio, TX 78239
Trustee
Age: 77
Retired. Mr. Brown currently serves as a Trustee of USAA State
Tax-Free Trust and as a Director of USAA Mutual Fund, Inc. and
USAA Tax Exempt Fund, Inc.
Howard L. Freeman, Jr. 2, 3, 5
2710 Hopeton
San Antonio, TX 78230
Trustee
Age: 60
Assistant General Manager for Finance, San Antonio City Public
Service Board (1976-present). Mr. Freeman currently serves as a
Trustee of USAA State Tax-Free Trust and as a Director of USAA
Mutual Fund, Inc. and USAA Tax Exempt Fund, Inc.
Trustees and Officers of the Trust, cont.
Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Trustee
Age: 52
Vice President, Beldon Roofing and Remodeling (1985-present).
Mr. Zucker currently serves as a Trustee of USAA State Tax-Free
Trust and as a Director of USAA Mutual Fund, Inc. and USAA Tax
Exempt Fund, Inc.
Barbara B. Dreeben 3, 5
200 Patterson #1008
San Antonio, TX 78209
Trustee
Age: 50
President, Postal Addvantage (7/92-present); Consultant, Nancy
Harkins Stationer (8/91-present); Merchandise Manager, Nancy
Harkins Stationer (7/82-8/91). Mrs. Dreeben currently serves as
a Trustee of USAA State Tax-Free Trust and as a Director of USAA
Mutual Fund, Inc. and USAA Tax Exempt Fund, Inc.
Michael D. Wagner 1
Secretary
Age: 47
Vice President, Corporate Counsel, USAA (1982-present). Mr.
Wagner has held various positions in the legal department of USAA
since 1970 and currently serves as Vice President, Secretary and
Counsel, IMCO and USAA Shareholder Account Services; Secretary,
USAA State Tax-Free Trust, USAA Mutual Fund, Inc., and USAA Tax
Exempt Fund, Inc.; and as Vice President, Corporate Counsel, for
various other USAA subsidiaries and affiliates.
Alex M. Ciccone 1
Assistant Secretary
Age: 45
Vice President, Compliance, IMCO (12/94-present); Vice President
and Chief Operating Officer, Commonwealth Shareholder Services
(6/94-11/94); Vice President, Compliance, IMCO (12/91-5/94); Vice
President, Compliance, Fund Management Co. (10/89-11/91); and
Vice President, Compliance, AIM Distributors, Inc. (4/82-11/91).
Mr. Ciccone currently serves as Assistant Secretary of USAA State
Tax-Free Trust, USAA Mutual Fund, Inc. and USAA Tax Exempt Fund, Inc.
Sherron A. Kirk 1
Treasurer
Age: 50
Vice President, Controller, IMCO (10/92-present); Vice President,
Corporate Financial Analysis, USAA (9/92-10/92); Assistant Vice
President, Financial Plans and Support, USAA (8/91-9/92);
Assistant Vice President, Real Estate Accounting, USAA Real
Estate Company (5/90-7/91). Mrs. Kirk currently serves as
Treasurer of USAA State Tax-Free Trust, USAA Mutual Fund, Inc.,
and USAA Tax Exempt Fund, Inc., and as Vice President, Controller
of USAA Shareholder Account Services.
Dean R. Pantzar 1
Assistant Treasurer
Age: 36
Director, Mutual Fund Accounting, IMCO (12/94-present); Senior
Manager, KPMG Peat Marwick LLP (7/88-12/94). Mr. Pantzar
currently serves as Assistant Treasurer of USAA Mutual Fund,
Inc., USAA State Tax-Free Trust, and USAA Tax Exempt Fund, Inc.
----------
1 Indicates those Trustees and officers who are employees of
the Manager or affiliated companies and are considered
"interested persons" under the 1940 Act.
2 Member of Executive Committee
3 Member of Audit Committee
4 Member of Pricing and Investment Committee
5 Member of Corporate Governance Committee
Between the meetings of the Board of Trustees and while the
Board is not in session, the Executive Committee of the Board of
Trustees has all the powers and may exercise all the duties of
the Board of Trustees in the management of the business of the
Trust which may be delegated to it by the Board. The Pricing and
Investment Committee of the Board of Trustees acts upon various
investment-related issues and other matters which have been
delegated to it by the Board. The Audit Committee of the Board
of Trustees reviews the financial statements and the auditor's
reports and undertakes certain studies and analyses as directed
by the Board. The Corporate Governance Committee of the Board of
Trustees maintains oversight of the organization, performance,
and effectiveness of the Board and independent Trustees.
In addition to the previously listed Trustees and/or
officers of the Trust who also serve as Directors and/or officers
of the Manager, the following individuals are Directors and/or
executive officers of the Manager: Josue Robles, Jr., Senior
Vice President, Chief Financial Officer/Controller, USAA; William
McCrae, Senior Vice President, General Counsel and Secretary,
USAA; Harry W. Miller, Senior Vice President, Investments
(Equity); and John J. Dallahan, Senior Vice President, Investment
Services. There are no family relationships among the Trustees,
officers and managerial level employees of the Trust or its Manager.
The following table sets forth information describing the
compensation of the current Trustees of the Trust for their
services as Trustees for the fiscal year ended May 31, 1995.
Name Aggregate Total Compensation
of Compensation from the USAA
Trustee from the Trust Family of Funds (c)
------- --------------- -------------------
C. Dale Briscoe $4,660 $18,500
George E. Brown (a) 4,660 18,500
Barbara B. Dreeben 4,660 18,500
Howard L. Freeman, Jr. 4,660 18,500
Hansford T. Johnson None (b) None (b)
Michael J.C. Roth None (b) None (b)
John W. Saunders, Jr. None (b) None (b)
Richard A. Zucker 4,660 18,500
----------------
(a) The USAA Family of Funds has accrued deferred compensation
for Mr. Brown in an amount (plus earnings thereon) of
$20,395. The compensation was deferred by Mr. Brown
pursuant to a non-qualified Deferred Compensation Plan,
under which deferred amounts accumulate interest quarterly
based on the annualized U.S. Treasury Bill rate in effect on
the last day of the quarter. Amounts deferred and
accumulated earnings thereon are not funded and are general
unsecured liabilities of the USAA Funds until paid. The
Deferred Compensation Plan was terminated in 1988 and no
compensation has been deferred by any Trustee/Director of
the USAA Family of Funds since the Plan was terminated.
(b) Hansford T. Johnson, Michael J.C. Roth, and John W.
Saunders, Jr. are affiliated with the Trust's investment
adviser, IMCO, and, accordingly, receive no remuneration
from the Trust or any other Fund of the USAA Family of Funds.
(c) At May 31, 1995, the USAA Family of Funds consisted of 4
registered investment companies offering 29 individual
funds. Each Trustee presently serves as a Trustee or
Director of each investment company in the USAA Family of
Funds. In addition, Michael J.C. Roth presently serves as a
Trustee of USAA Life Investment Trust, a registered
investment company advised by IMCO, consisting of five funds
offered to investors in a fixed and variable annuity
contract with USAA Life Insurance Company. Mr Roth receives
no compensation as Trustee of USAA Life Investment Trust.
All of the above Trustees are also Trustees/Directors of the
other funds for which IMCO serves as investment adviser. No
compensation is paid by any fund to any Trustee/Director who is a
director, officer, or employee of IMCO or its affiliates. No
pension or retirement benefits are accrued as part of fund
expenses. The Trust also reimburses certain expenses of the
Trustees who are not affiliated with the investment adviser. As
of May 31, 1995, the officers and Trustees of the Trust and their
families as a group owned beneficially or of record less than 1%
of the outstanding shares of the Trust.
As of May 31, 1995, USAA and its affiliates (including
related employee benefit plans) owned 13,612 shares (.13%) of the
Balanced Portfolio Fund, 500,010 shares (21.33%) of the Emerging
Markets Fund, 5,938,052 shares (27.07%) of the International
Fund, 615,320 shares (3.97%) of the World Growth Fund, and
342,228 shares (1.3%) of the GNMA Trust, for an aggregate total
of 7,409,222 shares (3.69%) of the Trust.
The Trust knows of no other persons who, as of May 31, 1995,
held of record or owned beneficially 5% or more of any Fund's
shares.
THE TRUST'S MANAGER
As described in each Fund's Prospectus, USAA Investment
Management Company is the Manager and investment adviser,
providing the services under the Advisory Agreement. The
Manager, organized in May 1970, has served as investment adviser
and underwriter for USAA Investment Trust from its inception.
In addition to managing the Trust's assets, the Manager
advises and manages the investments for USAA and its affiliated
companies as well as those of USAA Mutual Fund, Inc., USAA Tax
Exempt Fund, Inc., and USAA State Tax-Free Trust. As of the date
of this SAI, total assets under management by the Manager were
approximately $27 billion, of which approximately $15 billion
were in mutual fund portfolios.
Advisory Agreement
Under the Advisory Agreement, the Manager provides an investment
program, carries out the investment policy and manages the
portfolio assets for each Fund. The Manager is authorized,
subject to the control of the Board of Trustees of the Trust, to
determine the selection, amount, and time to buy or sell
securities for each Fund. In addition to providing investment
services, the Manager pays for office space, facilities, business
equipment, and accounting services (in addition to those provided
by the Custodian) for the Trust. The Manager compensates all
personnel, officers, and Trustees of the Trust if such persons
are also employees of the Manager or its affiliates. For these
services under the Advisory Agreement, each Fund has agreed to
pay the Manager a fee computed as described under Management of
the Trust in its Prospectus. Management fees are computed and
accrued daily and are payable monthly.
Except for the services and facilities provided by the
Manager, the Funds pay all other expenses incurred in their
operations. Expenses for which the Funds are responsible include
taxes (if any), brokerage commissions on portfolio transactions,
expenses of issuance and redemption of shares, charges of
transfer agents, custodians and dividend disbursing agents, costs
of preparing and distributing proxy material, costs of printing
and engraving stock certificates, auditing and legal expenses,
certain expenses of registering and qualifying shares for sale,
fees of Trustees who are not interested (not affiliated) persons
of the Manager, costs of typesetting, printing and mailing the
Prospectus, SAI and periodic reports to existing shareholders,
and any other charges or fees not specifically enumerated. The
Manager pays the cost of printing and mailing copies of the
Prospectus, the SAI and reports to prospective shareholders.
The Advisory Agreement will remain in effect until June 30,
1997 for each Fund and will continue in effect from year to year
thereafter for each Fund as long as it is approved at least
annually by a vote of the outstanding voting securities of such
Fund (as defined by the 1940 Act) or by the Board of Trustees (on
behalf of such Fund) including a majority of the Trustees who are
not interested persons of the Manager or (otherwise than as
Trustees) of the Trust, at a meeting called for the purpose of
voting on such approval. The Advisory Agreement may be
terminated at any time by either the Trust or the Manager on 60
days' written notice. It will automatically terminate in the
event of its assignment (as defined by the 1940 Act).
Under the terms of the Advisory Agreement, the Manager is
required to reimburse each Fund in the event that the total annual
expenses, inclusive of the management fees, but exclusive of the
interest, taxes, brokerage fees and extraordinary items, incurred
by that Fund exceeds any applicable state expense limitation. At
the current time, the most restrictive expense limitation is 2.5%
of the first $30,000,000 of average net assets (ANA), 2% of the
next $70,000,000 ANA, and 1.5% of the remaining ANA.
From time to time the Manager may, without prior notice to
shareholders, waive all or any portion of fees or agree to reimburse
expenses incurred by a Fund. The Manager has voluntarily agreed to limit
the annual expenses of the Income Strategy and Balanced Strategy Funds
to 1.00% and 1.25%, respectively, of each Fund's ANA until October 1, 1996
and will reimburse each Fund for all expenses in excess of such limitation.
After October 1, 1996, any such waiver or reimbursement may be terminated
by the Manager at any time without prior notice to the shareholders.
Underwriter
The Trust has an agreement with the Manager for exclusive
underwriting and distribution of the Funds' shares on a
continuing best efforts basis. This agreement provides that the
Manager will receive no fee or other compensation for such
distribution services.
Transfer Agent
USAA Shareholder Account Services performs transfer agent
services for the Trust under a Transfer Agency Agreement.
Services include maintenance of shareholder account records,
handling of communications with shareholders, distribution of
Fund dividends, and production of reports with respect to account
activity for shareholders and the Trust. For its services under
the Transfer Agency Agreement, USAA Shareholder Account Services
is paid an annual fixed fee per account of $23.50 by the Balanced
Strategy and Growth Strategy Funds and $26.00 by the Income
Strategy Fund. This fee is subject to change at any time.
The fee to the Transfer Agent includes processing of all
transactions and correspondence. Fees are billed on a monthly
basis at the rate of one-twelfth of the annual fee. In addition,
the Funds pay all out-of-pocket expenses of the Transfer Agent
and other expenses which are incurred at the specific direction
of the Trust.
GENERAL INFORMATION
Custodian
State Street Bank and Trust Company, P.O. Box 1713, Boston, MA
02105, is the Trust's Custodian. The Custodian is responsible
for, among other things, safeguarding and controlling the Trust's
cash and securities, handling the receipt and delivery of
securities, and collecting interest on the Trust's investments.
In addition, assets of the Funds may be held by certain foreign
banks and foreign securities depositories as agents of the
Custodian in accordance with the rules and regulations
established by the SEC.
Counsel
Goodwin, Procter & Hoar, Exchange Place, Boston, MA 02109, will
review certain legal matters for the Trust in connection with the
shares offered by the Prospectus.
Independent Auditors
KPMG Peat Marwick LLP, 112 East Pecan, Suite 2400, San Antonio,
TX 78205, is the Trust's independent auditor. In this capacity
the firm is responsible for auditing the annual financial
statements of the Funds and reporting thereon.
CALCULATION OF PERFORMANCE DATA
Information regarding the total return and yield of each Fund is
provided under Performance Information in its Prospectus. See
Valuation of Securities herein for a discussion of the manner in
which each Fund's price per share is calculated.
Yield - Income Strategy Fund
This Fund may advertise performance in terms of 30-day yield
quotation. The 30-day yield quotation is computed by dividing
the net investment income per share earned during the period by
the maximum offering price per share on the last day of the
period, according to the following formula:
YIELD = 2((((a-b)/(cd)+1 ^6) -1)
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day
of the period
Total Return
The Funds may each advertise performance in terms of average
annual total return for 1, 5 and 10 year periods, or for such
lesser periods as any of such Funds have been in existence.
Average annual total return is computed by finding the average
annual compounded rates of return over the periods that would
equate the initial amount invested to the ending redeemable
value, according to the following formula:
P(1 + T)^n = ERV
Calculation of Performance Data, cont.
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
year periods at the end of the year or period
The calculation assumes any charges are deducted from the initial
$1,000 payment and assumes all dividends and distributions by
such Fund are reinvested at the price stated in the Prospectus on
the reinvestment dates during the period, and includes all
recurring fees that are charged to all shareholder accounts.
APPENDIX A - LONG-TERM AND SHORT-TERM DEBT RATINGS
Long-Term Debt Ratings
Moody's:
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edge." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and
interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Note: Those bonds in the Aa, A, and Baa groups which Moody's
believes possess the strongest investment attributes are
designated by the symbols Aa1, A1, and Baa1.
S&P:
AAA Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues
only in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
Plus (+) or Minus (-): The ratings from AA to BBB may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Fitch:
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is
generally rated F-1+.
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse
changes in economic conditions and circumstances, however,
are more likely to have adverse impact on these bonds, and
therefore, impair timely payment.
Plus (+) and Minus (-): Plus and Minus signs are used with a
rating symbol to indicate the relative position of a credit
within the rating category. Plus and minus signs, however, are
not used in the AAA category.
Duff & Phelps:
AAA Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury debt.
AA High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A Protection factors are average but adequate. However, risk
factors are variable and greater in periods of economic stress.
BBB Below average protection factors but still considered
sufficient for prudent investment. Considerable variability
in risk during economic cycles.
Short-Term Debt Ratings
Moody's Corporate and Government
Prime-1 Issuers have a superior ability for repayment of senior
short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- Well-established access to a range of financial markets
and assured sources of alternate liquidity.
Prime-2 Issuers have a strong ability for repayment of senior
short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still
appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers (or supporting institutions) have an acceptable
capacity for repayment of short-term promissory
obligations. The effect of industry characteristics
and market composition may be more pronounced.
Variability in earnings and profitability may result in
changes in the level of debt protection measurements
and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Moody's Municipal
MIG 1/VMIG 1 This designation denotes best quality. There is
present strong protection by established cash
flows, superior liquidity support or demonstrated
broadbased access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of
protection are ample although not so large as in
the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All
security elements are accounted for but there is
lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely
to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality.
Protection commonly regarded as required of an
investment security is present and although not
distinctly or predominantly speculative, there is
specific risk.
S&P Corporate and Government
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are
denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation
is satisfactory. However, the relative degree of safety is
not as high as for issues designated A-1.
A-3 Designation indicates a satisfactory capacity for timely
payment. Issues with this designation, however, are
somewhat more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
S&P Municipal
SP-1 Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are given
a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse financial and economic changes
over the term of the notes.
Fitch
F-1+ Exceptionally strong credit quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very strong credit quality. Issues assigned this rating
reflect an assurance for timely payment only slightly less
in degree than issues rated F-1+.
F-2 Good credit quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payments, but
the margin of safety is not as great as the F-1+ and F-1 ratings.
F-3 Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate, however, near-term adverse
change is likely to cause these securities to be rated below
investment grade.
Duff & Phelps Inc.
Duff 1+ Highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or
ready access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental
protection factors. Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection
factors. Risk factors are very small.
Duff 2 Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing requirements,
access to capital markets is good. Risk factors are small.
Duff 3 Satisfactory liquidity and other protection factors
qualify issue as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless,
timely payment is expected.
APPENDIX B - COMPARISON OF PORTFOLIO PERFORMANCE
Occasionally, we may make comparisons in advertising and sales
literature between the Funds contained in this SAI and other
Funds in the USAA Family of Funds. These comparisons may include
such topics as risk and reward, investment objectives, investment
strategies, and performance.
Fund performance may be compared to the performance of broad
groups of mutual funds with similar investment goals or unmanaged
indexes of comparable securities. Evaluations of Fund
performance made by independent sources may also be used in
advertisements concerning the Fund, including reprints of, or
selections from, editorials or articles about the Fund. The Fund
or its performance may also be compared to products and services
not constituting securities subject to registration under the
Securities Act of 1933 such as, but not limited to, certificates
of deposit and money market accounts. Sources for performance
information and articles about the Fund may include the following:
AAII Journal, a monthly association magazine for members of the
American Association of Individual Investors.
Arizona Republic, a newspaper which may cover financial and investment news.
Austin American-Statesman, a newspaper which may cover financial news.
Barron's, a Dow Jones and Company, Inc. business and financial
weekly that periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds.
Chicago Tribune, a newspaper which may cover financial news.
Consumer Reports, a monthly magazine which from time to time
reports on companies in the mutual fund industry.
Dallas Morning News, a newspaper which may cover financial news.
Appendix B, cont.
Denver Post, a newspaper which may quote financial news.
Financial Planning, a monthly magazine that periodically features
companies in the mutual fund industry.
Financial Services Week, a weekly newspaper which covers financial news.
Financial World, a monthly magazine which may periodically review
mutual fund companies.
Forbes, a national business publication that periodically reports
the performance of companies in the mutual fund industry.
Fortune, a national business publication that periodically rates
the performance of a variety of mutual funds.
Fund Action, a mutual fund news report.
Houston Chronicle, a newspaper which may cover financial news.
Houston Post, a newspaper which may cover financial news.
IBC/Donoghue's Moneyletter, a biweekly newsletter which covers
financial news and from time to time rates specific mutual funds.
Income and Safety, a monthly newsletter that rates mutual funds.
InvesTech, a bimonthly investment newsletter.
Investment Advisor, a monthly publication directed primarily to the advisor
community; includes ranking of mutual funds using a proprietary methodology.
Investment Company Institute, the national association of the
American investment company industry.
Investor's Business Daily, a newspaper which covers financial news.
Kiplinger's Personal Finance Magazine, a monthly investment
advisory publication that periodically features the performance
of a variety of securities.
Lipper Analytical Services, Inc.'s Fixed Income Fund Performance
Analysis, a monthly publication of industry-wide mutual fund
performance averages by type of fund.
Lipper Analytical Services, Inc.'s Mutual Fund Performance
Analysis, a weekly and quarterly publication of industry-wide
mutual fund performance averages by type of fund.
Los Angeles Times, a newspaper which may cover financial news.
Louis Rukeyser's Wall Street, a publication for investors.
Medical Economics, a monthly magazine providing information to
the medical profession.
Money, a monthly magazine that features the performance of both
specific funds and the mutual fund industry as a whole.
Morningstar 5 Star Investor, a monthly newsletter by Morningstar,
Inc. which covers financial news and rates mutual funds.
Mutual Fund Forecaster, a monthly newsletter that ranks mutual funds.
Mutual Fund Investing, a newsletter covering mutual funds.
Mutual Fund Performance Report, a monthly publication of mutual
fund performance and rankings, produced by Morningstar, Inc.
Mutual Funds Magazine, a monthly publication reporting on mutual
fund investing.
Mutual Fund Source Book, an annual publication produced by
Morningstar, Inc. which describes and rates mutual funds.
Mutual Fund Values, a biweekly guidebook to mutual funds, produced by
Morningstar, Inc. (a data service which tracks open-end mutual funds).
Newsweek, a national business weekly.
New York Times, a newspaper which may cover financial news.
No Load Fund Investor, a newsletter covering companies in the
mutual fund industry.
Personal Investor, a monthly magazine which from time to time
features mutual fund companies and the mutual fund industry.
San Antonio Business Journal, a weekly newspaper that periodically
covers mutual fund companies as well as financial news.
San Antonio Express-News, a newspaper which may cover financial news.
San Francisco Chronicle, a newspaper which may cover financial news.
Smart Money, a monthly magazine featuring news and articles on
investing and mutual funds.
USA Today, a newspaper which may cover financial news.
U.S. News and World Report, a national business weekly that
periodically reports on mutual fund performance data.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper
which covers financial news.
Washington Post, a newspaper which may cover financial news.
Weisenberger Mutual Funds Investment Report, a monthly newsletter
that reports on both specific mutual fund companies and the
mutual fund industry as a whole.
World Monitor, The Christian Science Monitor Monthly.
Worth, a magazine which covers financial and investment subjects
including mutual funds.
Your Money, a monthly magazine directed towards the novice investor.
In addition, the Growth Strategy Fund may be cited for performance
information and articles in International Reports, a publication providing
insights on world financial markets and economics.
Among the organizations cited above, Lipper Analytical
Services, Inc.'s and Morningstar, Inc.'s tracking results may be
used. A Fund will be compared to Lipper's or Morningstar's
appropriate fund category according to its objective and
portfolio holdings. The Balanced Strategy Fund will be compared
to funds in Lipper's and Morningstar's balanced fund categories,
the Growth Strategy Fund to Lipper's flexible portfolio fund
category and to Morningstar's asset allocation fund category,
and the Income Strategy Fund to Lipper's Corporate Debt Funds BBB
Rated fund categories and to Morningstar's income fund category.
Footnotes in advertisements and other sales literature will include
the time period applicable for any rankings used.
For comparative purposes, unmanaged indexes of comparable securities
or economic data may be cited. Examples include the following:
- Bond Buyer Indices, indices of debt of varying maturities including
revenue bonds, general obligation bonds, and U.S. Treasury bonds which can
be found in The Bond Buyer.
- Consumer Price Index, a measure of U.S. inflation in prices on consumer
goods.
- Ibbotson Associates, Inc., Stocks, Bonds, Bills, and Inflation Yearbook.
- IFC Investable Index (IFCI) and IFC Global Index (IFCG), premier
benchmarks for international investors. Both index series cover 25 discrete
markets, regional indexes, and a composite index, providing the most accurate
representation of the emerging markets universe available.
- Morgan Stanley Capital Index (MSCI) - EAFE, an unmanaged index which
reflects the movements of stock markets in Europe, Australia, and the Far
East by representing a broad selection of domestically listed companies
within each market.
- Morgan Stanley Capital Index (MSCI) - World, an unmanaged index which
reflects the movements of world stock markets by representing a broad
selection of domestically listed companies within each market.
- NAREIT Equity Index (National Association of Real Estate Investment
Trusts, Inc.), a broad based listing of all tax-qualified REITs (only common
shares issued by the REIT) listed on the New York Stock Exchange, American
Stock Exchange and NASDAQ.
- S&P 500 Index, a broadbased composite unmanaged index that represents
the average performance of a group of 500 widely held, publicly traded stocks.
- Shearson Lehman Hutton Bond Indices - indices of fixed-rate debt issues
rated investment grade or higher which can be found in the Bond Market Report.
Other sources for total return and other performance data which may be
used by a Fund or by those publications listed previously are Schabaker
Investment Management, and Investment Company Data, Inc. These are services
that collect and compile data on mutual fund companies.
APPENDIX C - DOLLAR-COST AVERAGING
Dollar-cost averaging is a systematic investing method which can
be used by investors as a disciplined technique for investing. A
fixed amount of money is invested in a security (such as a stock
or mutual fund) on a regular basis over a period of time,
regardless of whether securities markets are moving up or down.
This practice reduces average share costs to the investor
who acquires more shares in periods of lower securities prices
and fewer shares in periods of higher prices.
While dollar-cost averaging does not assure a profit or
protect against loss in declining markets, this investment
strategy is an effective way to help calm the effect of
fluctuations in the financial markets. Systematic investing
involves continuous investment in securities regardless of
fluctuating price levels of such securities. Investors should
consider their financial ability to continue purchases through
periods of low and high price levels.
As the following chart illustrates, dollar-cost averaging
tends to keep the overall cost of shares lower. This example is
for illustration only, and different trends would result in
different average costs.
HOW DOLLAR-COST AVERAGING WORKS
$100 Invested Regularly for 5 Periods
Market Trend
---------------------------------------------------------------
Down Up Mixed
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Share Shares Share Shares Share Shares
Investment Price Purchased Price Purchased Price Purchased
------------------ ------------------ -------------------
$100 10 10 6 16.67 10 10
100 9 11.1 7 14.29 9 11.1
100 8 12.5 7 14.29 8 12.5
100 8 12.5 9 11.1 9 11.1
100 6 16.67 10 10 10 10
--- -- ----- -- ----- -- -----
$500 ***41 62.77 ***39 66.35 ***46 54.7
*Avg. Cost: $7.97 *Avg. Cost: $7.54 *Avg. Cost: $9.14
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**Avg. Price: $8.20 **Avg. Price: $7.80 **Avg. Price: $9.20
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* Average Cost is the total amount invested divided by shares purchased.
** Average Price is the sum of the prices paid divided by number of purchases.
*** Cumulative total of share prices used to compute average prices.
26533-0995
