Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Managers 5
Financial Information:
Distributions to Shareholders 7
Independent Auditors' Report 8
Statement of Assets and Liabilities 9
Portfolio of Investments in Securities 10
Notes to Portfolio of Investments in Securities 15
Statement of Operations 16
Statement of Changes in Net Assets 17
Notes to Financial Statements 18
Important Information:
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are now "streamlined."
One copy of each report will be sent to each address, instead of our previous
practice of sending one report to every registered owner. For many
shareholders and their families, this eliminates duplicate copies, saving
paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report
per registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA Income
Strategy Fund, managed by USAA Investment Management Company (IMCO). It may be
used as sales literature only when preceded or accompanied by a current
prospectus which gives further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(copyright) 1996, USAA. All rights reserved.
USAA Family of Funds Performance Summary
If you own only one or two USAA funds, you may not be aware of the performance
of our other funds. This summary is a snapshot of the performance of all 33
funds by investment objective as of June 30, 1996. For more complete
information about the mutual funds managed and distributed by USAA IMCO,
including charges and expenses, please call 1-800-531-8181 for a prospectus.
Read it carefully before you invest.
<TABLE>
<CAPTION>
Average Annual Total Return* Yield
Investment Inception Since 7-Day 30-Day(1)
Objective Date 1 yr 5 yrs 10 yrs Inception Simple SEC
<S> <C> <C> <C> <C> <C> <C> <C>
CAPITAL APPRECIATION
Aggressive Growth 10/19/81 54.74 19.89 11.69 - - -
Emerging Markets(2) 11/7/94 13.17 - - 7.33 - -
Gold(2) 8/15/84 7.30 7.62 6.05 - - -
Growth 4/5/71 22.12 15.53 11.13 - - -
Growth & Income 6/1/93 23.95 - - 14.68 - -
International(2) 7/11/88 19.63 14.36 - 10.57 - -
S&P 500 Index(5) 5/1/96 - - - 4.58 - -
World Growth(2) 10/1/92 20.11 - - 13.87 - -
ASSET ALLOCATION
Balanced Strategy 9/1/95 - - - 6.48 - -
Cornerstone Strategy(2) 8/15/84 17.19 12.44 11.56 - - -
Growth and Tax Strategy(3)** 1/11/89 15.43 10.31 - 9.77 - 3.88
Growth Strategy(2) 9/1/95 - - - 23.85 - -
Income Strategy 9/1/95 - - - 4.68 - 5.31
INCOME - TAXABLE
GNMA 2/1/91 4.23 7.63 - 7.36 - 6.98
Income 3/4/74 6.13 8.92 9.42 - - 6.84
Income Stock 5/4/87 19.22 13.77 - 12.26 - -
Short-Term Bond 6/1/93 5.51 - - 5.05 - 6.64
INCOME - TAX EXEMPT
Long-Term(3)** 3/19/82 6.74 7.36 7.74 - - 5.86
Intermediate-Term(3)** 3/19/82 6.19 7.25 7.29 - - 5.40
Short-Term(3)** 3/19/82 5.19 5.18 5.55 - - 4.53
California Bond(3)** 8/1/89 8.36 7.59 - 7.39 - 5.64
Florida Tax-Free Income(3)** 10/1/93 6.48 - - 2.37 - 5.76
New York Bond(3)** 10/15/90 6.19 7.40 - 8.22 - 5.73
Texas Tax-Free Income(3)** 8/1/94 8.20 - - 8.65 - 5.56
Virginia Bond(3)** 10/15/90 6.55 7.65 - 8.00 - 5.60
MONEY MARKET
Money Market(4) 2/2/81 5.43 4.41 5.88 - 5.01 -
Tax Exempt Money Market(3,4)** 2/6/84 3.53 3.16 4.26 - 3.24 -
Treasury Money Market Trust(4) 2/1/91 5.27 4.17 - 4.24 4.86 -
California Money Market(3,4)** 8/1/89 3.45 3.04 - 3.67 3.12 -
Florida Tax-Free Money Market(3,4)** 10/1/93 3.39 - - 2.96 3.18 -
New York Money Market(3,4)** 10/15/90 3.44 2.87 - 3.06 3.11 -
Texas Tax-Free Money Market(3,4)** 8/1/94 3.35 - - 3.34 3.13 -
Virginia Money Market(3,4)** 10/15/90 3.29 2.98 - 3.20 3.06 -
(1) Calculated as prescribed by the Securities and Exchange Commission.
(2) Foreign investing is subject to additional risks, which are discussed in the
funds' prospectuses.
(3) Some income may be subject to state or local taxes or the federal
alternative minimum tax.
(4) An investment in a money market fund is neither insured nor guaranteed by
the U.S. government and there is no assurance that any of the funds will be
able to maintain a stable net asset value of $1 per share.
(5) S&P 500(registered trademark) is a trademark of The McGraw-Hill Companies, Inc.,
and has been licensed for use. The product is not sponsored, sold or promoted by
Standard & Poor's, and Standard & Poor's makes no representation regarding the
advisability of investing in the product.
* Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment
has been made for taxes payable by shareholders on their reinvested dividends
and capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return
and principal value of an investment will fluctuate, and an investor's shares,
when redeemed, may be worth more or less than their original cost.
** IRAs are not available for tax-exempt funds. The Growth and Tax Strategy
Fund is not available as an investment for your IRA because the majority of
its income is tax exempt. California, Florida, New York, Texas, and Virginia
funds available to residents only.
</TABLE>
Message from the President
Last August I sent investors a letter which began with a question I was
regularly hearing: "Should I get out of the Market?" My response reiterated
many of our basic beliefs:
* Get your emotions in check.
* Look at history.
* Acknowledge that no one forecasts markets very well.
* Build a portfolio that will help you pursue your goals,
but also allow you to sleep at night.
At that time we knew we were looking at a pretty good year in the market. We
can now look back and see it was better than pretty good; it was excellent.
That has raised a new concern for us. The predominant investor sentiment
seems to have shifted from, "Should I get out of the Market?" to "Should I put
everything in stocks?" I want to comment on this shift.
Financial markets are not bank accounts. No other investor is interested in,
much less willing to insure, your return. While past performance is no guaran-
tee of future results, if you invest in stocks, history tells us that you can
expect a better return than that of any fixed-income instrument, from a long-
term bond to a bank account, over time.(1) The return from stocks comes from
two sources: dividends and price changes. Dividends are the more predictable
of the two. Financial analysis can give a good indication of a company's
ability to pay, or raise, its dividend. However, price change is another
thing. For a stock to appreciate, someone must come along who is willing to
pay more for shares of your stock than you did. Again, history tells us that
if a business is prospering, that will likely happen. But history also tells
us that investors do not always eliminate their emotions. They can become
over-exuberant and bid up the price to the point that the next buyer thinks
the stock is expensive and refuses to pay the higher price. That new buyer
doesn't know and doesn't care what you paid. Then the price will fall. This
is where you must understand why you purchased that stock and not become
overwrought with emotion.
Many people today are mesmerized by the exceptional returns of the recent past.
Our Aggressive Growth Fund is an excellent example. Over the last 18 months
ending June 30, 1996, its return was 84.66%. *Unfortunately the financial
press unceasingly trumpets these kinds of returns until people lose sight
of the fact that they are extraordinary. One statement that makes me quiver
these days is, "So much money is coming into stocks from retirement accounts
that the stock market cannot go down." When the market gets too expensive,
all the retirement money in the world will not hold it up. Things could get
scary for a while.
I have come across only a few people whose tolerance for risk will allow them
to be 100% in stocks. If they could do that for twenty years, I am confident
they would realize exceptional returns. But they would have to endure times
like the 1973-74 market, and that would take exceptional courage.
The better course for most people is to allocate their assets among stocks
and fixed-income investments. The return will be less, but so will the
fluctuations.
I believe that in twenty years, when, my wife, Jutta and I are retired, we
will be happy that our portfolio has held both a large position in stocks, and
also in other investments that have been a counterbalance.
With this in mind, the old bond market adage, "Never stretch for yield," is a
good one for all investors. You are the master of your portfolio. Recognize the
nature of various investments and always invest in ways with which you are
comfortable. Helping you do that is our greatest goal.
One of the ways we can assist is with one of our five Asset Strategy Funds.
Each can be applied to an individual situation, an investment goal and a
tolerance for risk. They combine different asset classes in ways that affect
return and risk, and we do the job of keeping those assets in balance. They
are a way for you to pursue a complex goal with great ease. After speaking
with our sales representatives, we can guide you to a single fund that will
provide an asset allocation that suits your situation well. From there,
we do all the work.
[Photograph of Michael J.C. Roth, CFA, President appears here]
Sincerely,
Michael J.C. Roth, CFA
President
(1)Bank accounts are FDIC insured and provide a fixed-rate of return. The
other investment instruments mentioned do not. Government bonds are backed
by the full faith and credit of the U.S. government. Of these vehicles,
stocks are considered to have the most risk. Government bonds are exempt
from state taxes; otherwise, these vehicles are subject to tax. The
comparisons reflect changing conditions in regard to tax laws, inflationary
trends and general corporate policies and practices. Investors are
encouraged to closely monitor changes in any factor which may affect
their investments.
* Average annual total returns of the USAA Aggressive Growth Fund as of June
30, 1996, are 1 year - 54.74%; 5 years - 19.89%; and 10 years - 11.69%. The
performance data quoted represents past performance; the investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
For more complete information about the mutual funds managed and distributed
by USAA IMCO, including charges and expenses, please call for a prospectus.
Read it carefully before you invest.
Investment Review
Income Strategy Fund
OBJECTIVE: 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.
5/31/96
Net Assets $12.2 Million
Net Asset Value Per Share $10.06
Average Annual Total Return as of 5/31/96
Since inception on September 1, 1995 3.23% (1)
(1) Total return for periods of less than one year are not annualized.
This nine-month return is cumulative.
[A graph is shown here which is a comparison of the change in value of a
$10,000 investment, for the period of 9/1/95 to 5/31/96, with dividends
and capital gains reinvested. The ending value of each item graphed is as
follows: USAA Income Strategy- $10,323, Lipper Fixed Income Average -
$10,315 and Lehman Brothers Aggregate Bond Index - $10,262.]
The Lehman Brothers Aggregate Bond Index is an unmanaged index made up of
the government/corporate index, the mortgage-backed securities index, and the
asset-backed securities index. The Lipper Fixed Income Average is the average
performance level of all fixed-income funds, as reported by Lipper Analytical
Services, an independent organization that monitors the performance of mutual
funds. The chart compares a $10,000 hypothetical investment in the USAA Income
Strategy Fund to the Index and the Lipper Average.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment
has been made for taxes payable by shareholders on their reinvested income
dividends and capital gain distributions. The performance data quoted
represent past performance and are not an indication of future results.
Investment return and principal value of an investment will fluctuate, and an
investor's shares, when redeemed, may be worth more or less than their
original cost.
Message from the Managers
[A photo appears here of Portfolio Managers, John W. Saunders, Jr. (Allocation
Manager, Bonds); Pamela K. Bledsoe (Money Market Instruments); R. David Ullom
(Stocks).]
Fund Overview
This first annual report covers the Fund's nine months of operations since
inception on September 1, 1995, through May 31, 1996.
The favorable bond and stock markets we reported in the semiannual report
dated November 30, 1995, continued for two more months. Then, in February, a
surprisingly strong employment report abruptly reversed the bond market
upward trend, and interest rates started rising. Subsequent periodic reports
of economic strength and hints of potential inflation have sustained a rising
trend in interest rates. Meanwhile, we have seen the stock market continue to
do well, advancing to new highs in May for both the Dow Jones Industrials and
the S&P 500 Index.(1) This divergence has offset some of the declines in the
Fund's bond values in this period.
The Fund's investment categories have remained within their respective ranges
since our November 30, 1995, report; therefore, quarterly rebalancing has not
been required. The portfolio mix on May 31, 1996, was 75% bonds, 20% stocks,
and 3% money market instruments.
Bonds
The gains in bond values from a steady decline in interest rates during the
five months following the Fund's start on September 1, 1995, through January
1996 were quickly eroded in a swift turnaround in the interest rate trend in
February. Most of the damage was done in three trading days, one each in
February, March, and April. The magnitude of change in bond prices on these
days has not been seen in several years.
Interest rates do fluctuate. Bond price volatility has magnified with the
current hypersensitivity to economic reports showing any strength in the
economy or sign of inflation, either of which would put further upward
pressure on interest rates. We do not believe that inflation is on the rise,
so real interest rates (net of inflation) are still high. This should
eventually be recognized in the bond market once it stabilizes. In the
meantime, producing a high level of interest income continues to be our
primary emphasis.
(1) The S&P 500 Index is an unmanaged index representing the average
performance of a group of 500 widely held, publicly traded stocks. It is
not possible to invest directly in the S&P 500 Index.
Stocks
As we discussed in the semiannual report to shareholders, our approach to
managing the stock allocation of the Fund emphasizes a value-oriented
investment philosophy. This strategy leads us to invest in such industries as
Chemicals, Insurance, Paper & Forest Products, and Aerospace/Defense. Our
investments in these industries represent situations where we believe true
earning power of a company is not reflected in the price of the company's
shares.
The primary contributors to the performance of the stock portion of the Fund
were investments in Healthcare (American Home Products, C.R. Bard, and Johnson
& Johnson), Chemicals (Dow Chemical, Olin Corp., and Avery Dennison Corp.),
Aerospace/Defense (Boeing, B.F. Goodrich, and Rockwell International), and
Specialty Retail (Borders Group and Phillips-Van Heusen).
Going forward, we believe that shares of Chemical and Aerospace/Defense
companies will continue to outperform the major averages, and we will add to
these positions as opportunities present themselves. In turn, we have already
initiated a reduction in various Healthcare and Specialty Retail shares.
Money Market Instruments
With the Fund's emphasis on income, this investment category is used for the
temporary investment of cash prior to more permanent investments in bonds and
stocks. It can also serve as a liquidity reserve when needed. Investments are
made in the highest quality money market instruments, usually U. S. Government
Agencies' obligations.
See page 10 for a complete listing of the Portfolio of Investments in
Securities.
[A pie chart is shown here depicting the Asset Allocation as of May 31, 1996
for the USAA Income Strategy Fund to be: Stocks - 20%, Bonds - 75% and Money
Market Instruments - 3%. Percentages are of the Net Assets in the Portfolio
and may or may not equal 100%.]
Distributions to Shareholders
USAA Income Strategy Fund completed its fiscal year on May 31, 1996. As
required by Federal Law (Internal Revenue Code of 1986, as amended, and the
Regulations thereunder), the following sets forth per share data concerning
the portions of the dividend distributions which represent domestic dividend
income qualifying for the dividends received deduction, foreign dividend
income, taxable domestic, and short-term capital gains for the year ended
May 31, 1996.
The per share data on this schedule reflects distributions related to earnings
for the fiscal year ended May 31, 1996, including any distributions subsequent
to year end which relate to those earnings. Therefore, the per share data on
this table may not agree with other disclosures concerning distributions which
occurred during the fiscal year.
Dividend income - domestic (qualifying) $.0295
Dividend income - domestic (nonqualifying) .0014
Dividend income - foreign (net) .0010
Interest income - taxable .2764
Short-term capital gain (treated as ordinary income) .0496
---------
TOTAL DISTRIBUTIONS $.3579
=========
Independent Auditors' Report
The Shareholders and the Board of Trustees
USAA INVESTMENT TRUST:
We have audited the accompanying statement of assets and liabilities and
portfolio of investments in securities of the Income Strategy Fund of USAA
Investment Trust as of May 31, 1996, the related statements of operations
and changes in net assets for the nine-month period then ended, and the
financial highlights information presented in note 7 to the financial
statements for the nine-month period then ended. These financial statements
and the financial highlights information are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights information based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of May 31, 1996, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements and the financial highlights
information referred to above present fairly, in all material respects, the
financial position of the Income Strategy Fund of USAA Investment Trust as of
May 31, 1996, the results of its operations and the changes in its net assets
for the nine-month period then ended, and the financial highlights information
for the nine-month period then ended, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
July 10, 1996
<TABLE>
<CAPTION>
Income Strategy Fund
Statement of Assets and Liabilities
(In Thousands)
May 31, 1996
<S> <C>
Assets
Investments in securities, at market value (identified cost of $12,282) $11,878
Cash 127
Receivables:
Capital shares sold 8
Dividends and interest 201
---------
Total assets 12,214
---------
Liabilities
Capital shares redeemed 11
USAA Transfer Agency Company 1
Accounts payable and accrued expenses 29
---------
Total liabilities 41
---------
Net assets applicable to capital shares outstanding $12,173
=========
Represented by:
Paid-in capital $12,461
Accumulated undistributed net investment income 109
Accumulated net realized gain on investments 7
Net unrealized depreciation of investments (404)
---------
Net assets applicable to capital shares outstanding $12,173
========
Capital shares outstanding, unlimited number of shares authorized,
no par value 1,210
========
Net asset value, redemption price, and offering price per share $ 10.06
========
</TABLE>
See accompanying notes to financial statements.
Income Strategy Fund
Portfolio of Investments in Securities
May 31, 1996
Market
Number Value
of Shares Security (000)
Common Stocks (19.7%)
Aerospace/Defense (1.2%)
1,200 B.F. Goodrich Co. $ 47
700 Boeing Co. 60
600 Rockwell International Corp. 35
----------
142
----------
Aluminum (0.3%)
500 Aluminum Co. of America 31
----------
Automobiles (0.4%)
1,400 Ford Motor Co. 51
----------
Bank Holding Companies - Money Center (0.4%)
700 Bankers Trust New York Corp. 53
----------
Brokerage Firms (0.4%)
800 Dean Witter, Discover & Co. 47
----------
Chemicals (1.2%)
800 Avery Dennison Corp. 46
500 Dow Chemical Co. 42
600 Olin Corp. 55
----------
143
----------
Chemicals - Specialty (0.3%)
1,000 Morton International, Inc. 38
----------
Conglomerates (0.3%)
2,700 Hanson plc ADR 39
----------
Containers - Metals & Glass (0.4%)
1,600 Ball Corp. 44
----------
Distribution & Pipelines (0.8%)
1,400 NICOR, Inc. 39
1,300 Sonat, Inc. 55
----------
94
----------
Electric Power (0.3%)
1,600 Houston Industries, Inc. 35
----------
Electronics - Semi-Conductors (0.2%)
1,600 National Semiconductor Corp.* 26
----------
Entertainment (0.3%)
800 Time Warner, Inc. 32
----------
Finance - Consumer (0.3%)
1,000 Associates First Capital Corp.* 37
----------
Foods (0.3%)
1,700 Dean Foods Co. 41
----------
Healthcare - Diversified (0.4%)
600 American Home Products Corp. 32
200 Johnson & Johnson 20
----------
52
----------
Healthcare - HMO (0.3%)
1,500 Humana, Inc.* 33
----------
Heavy Duty Trucks & Parts (0.1%)
500 Trinova Corp. 16
----------
Household Products (0.7%)
500 Procter & Gamble Co. 44
2,500 Sunbeam Corp. 36
----------
80
----------
Insurance - Property/Casualty (1.0%)
900 Allstate Corp. 38
450 American International Group, Inc. 43
1,600 Everest Reinsurance Holdings 37
400 Highlands Insurance Group, Inc.* 8
----------
126
----------
Leisure Time (0.4%)
1,900 Brunswick Corp. 43
----------
Machinery - Diversified (0.7%)
1,700 BW/IP, Inc. 34
1,200 Deere & Co. 50
----------
84
----------
Manufacturing - Diversified Industries (0.4%)
1,300 Hillenbrand Industries, Inc. 49
----------
Medical Products & Supplies (0.3%)
1,200 C.R. Bard, Inc. 39
----------
Metals - Miscellaneous (0.3%)
1,200 Inco Ltd. 39
----------
Office Equipment & Supplies (0.5%)
350 Xerox Corp. 55
----------
Oil - Domestic (0.4%)
2,000 Occidental Petroleum Corp. 52
----------
Oil - Exploration & Production (0.5%)
1,200 Apache Corp. 34
6,000 Gulf Canada Resources, Ltd.* 31
----------
65
----------
Oil - International (0.3%)
500 Texaco, Inc. 42
----------
Oil Well Equipment & Service (0.3%)
500 Schlumberger Ltd. 42
----------
Paper & Forest Products (0.6%)
2,100 Jefferson Smurfit Corp.* 26
1,000 Weyerhaeuser Co. 46
----------
72
----------
Pollution Control (0.6%)
1,900 WMX Technologies, Inc. 67
----------
Publishing (0.7%)
600 Dun & Bradstreet Corp. 38
900 Houghton Mifflin Co. 43
----------
81
----------
Railroads (0.4%)
500 Norfolk Southern Corp. 43
----------
Real Estate Investment Trusts (0.5%)
800 Kimco Realty Corp. 22
2,100 Public Storage, Inc. 44
----------
66
----------
Restaurants (0.3%)
1,900 Brinker International, Inc.* 32
----------
Retail - General Merchandising (0.7%)
800 J.C. Penney Company, Inc. 41
800 Sears, Roebuck & Co. 41
----------
82
----------
Retail - Specialty (0.6%)
1,400 Borders Group, Inc.* 46
1,800 Phillips-Van Heusen Corp. 24
----------
70
----------
Savings & Loan Holding Companies (0.1%)
800 Great Western Financial Corp. 18
----------
Telephones (0.8%)
500 AT&T 31
800 GTE Corp. 34
800 Sprint Corp. 34
----------
99
----------
Tobacco (0.7%)
1,300 RJR Nabisco Holdings Corp. 43
1,900 Universal Corp. 48
----------
91
----------
Total common stocks (cost: $2,100) 2,391
----------
Principal Market
Amount Coupon Value
(000) Security Rate Maturity (000)
U.S. Government & Agency Issues (77.9%)
Discount Note (3.4%)
$ 415 Federal Home Loan Mortgage Corp. 5.30% 6/03/96 $ 415
-----------
U.S. Treasury (74.5%)
8,238 Bonds 7.88 2/15/21 8,897
179 Bonds 6.88 8/15/25 175
-----------
9,072
-----------
Total U.S. government & agency issues (cost: $10,182) 9,487
-----------
Total investments (cost: $12,282) $ 11,878
===========
*Non-income producing.
Income Strategy Fund
Notes to Portfolio of Investments in Securities
May 31, 1996
General Notes
Market values of securities are determined by procedures and practices
discussed in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the
same as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net
assets.
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
Income Strategy Fund
Statement of Operations
(in Thousands)
Nine-month period ended May 31, 1996*
<S> <C>
Net investment income:
Income:
Dividends $ 33
Interest 359
-----------
Total income 392
-----------
Expenses:
Management fees 35
Transfer agent's fees 6
Custodian's fees 36
Postage 2
Shareholder reporting fees 2
Trustees' fees 2
Registration fees 9
Audit fees 27
Legal fees 2
Other 1
-----------
Total expenses before reimbursement 122
Expenses reimbursed (54)
-----------
Total expenses after reimbursement 68
-----------
Net investment income 324
-----------
Net realized and unrealized loss on investments:
Net realized gain on investments 42
Change in net unrealized appreciation/depreciation of investments (404)
-----------
Net realized and unrealized loss (362)
-----------
Decrease in net assets resulting from operations $ (38)
===========
</TABLE>
* Fund commenced operations September 1, 1995.
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
Income Strategy Fund
Statement of Changes in Net Assets
(In Thousands)
Nine-month period ended May 31, 1996*
<S> <C>
From operations:
Net investment income $ 324
Net realized gain on investments 42
Change in net unrealized appreciation/depreciation of investments (404)
--------------
Decrease in net assets resulting from operations (38)
--------------
Distributions to shareholders from:
Net investment income (215)
--------------
Net realized gains (35)
--------------
From capital share transactions:
Shares sold 17,119
Shares issued for dividends reinvested 132
Shares redeemed (4,790)
--------------
Increase in net assets from capital share transactions 12,461
--------------
Net increase in net assets 12,173
Net assets:
Beginning of period -
--------------
End of period $ 12,173
==============
Undistributed net investment income included in net assets:
Beginning of period $ -
==============
End of period $ 109
==============
Change in shares outstanding:
Shares sold 1,658
Shares issued for dividends reinvested 13
Shares redeemed (461)
--------------
Increase in shares outstanding 1,210
==============
</TABLE>
* Fund commenced operations September 1, 1995.
See accompanying notes to financial statements.
Income Strategy Fund
Notes to Financial Statements
(In Thousands)
May 31, 1996
(1) Summary of Significant Accounting Policies
USAA INVESTMENT TRUST (the Trust), registered under the Investment Company Act
of 1940, is a diversified, open-end management investment company organized as
a Massachusetts business trust consisting of eleven separate funds. The
information presented in this annual report pertains only to the Income
Strategy Fund (the Fund), which commenced operations on September 1, 1995.
The Fund's investment objective is to seek a 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.
A. Security valuation - The value of each security is determined (as of the
close of trading on the New York Stock Exchange on each business day the
Exchange is open) as set forth below:
1. Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange. 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.
3. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value.
4. Other debt and government securities are valued each business day by a
pricing service (the Service) approved by the Fund's Board of Trustees. The
Service uses the mean between quoted bid and asked prices or the last sale
price to price securities when, in the Service's judgement, these prices are
readily available and are representative of the securities' market values.
For many securities, such prices are not readily available. The Service
generally prices these securities based on methods which include consideration
of yields or prices of securities of comparable quality, coupon, maturity and
type, indications as to values from dealers in securities, and general market
conditions.
5. Securities which cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value, using methods determined
by the Manager under the general supervision of the Board of Trustees.
B. Federal taxes - The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - As is common in the industry, security
transactions are accounted for on the date the securities are purchased or sold
(trade date). Gain or loss from sales of investment securities is computed on
the identified cost basis. Dividend income is recorded on the ex-dividend date;
interest income is recorded on the accrual basis. Discounts and premiums on
securities are amortized over the life of the respective securities.
D. Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) Lines of Credit
The Fund participates with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million through January 14, 1997, one with USAA
Capital Corporation, an affiliate of the Manager ($750 million uncommitted),
and one with an unaffiliated bank ($100 million committed). The purpose of
the agreements is to meet temporary or emergency cash needs, including
redemption requests that might otherwise require the untimely disposition of
securities. Subject to availability under these agreements, the Fund may borrow
up to a maximum of 25% of its total assets at the lending institution's
borrowing rate plus a markup. During the nine-month period ended May 31, 1996,
the Fund had no borrowings under either of these agreements.
(3) Distributions
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are
made in the succeeding fiscal year. A distribution of net investment income of
$.12 per share, declared and paid in June 1996, is not reflected in the
accompanying financial statements.
(4) Investment Transactions
Purchases and sales/maturities of securities, excluding short-term securities,
for the nine-month period ended May 31, 1996 were $18,578 and $6,741,
respectively.
Gross unrealized appreciation and depreciation of investments as of May 31,
1996 was $319 and $723, respectively.
(5) Transactions with Manager
A. Management fees - The investment policies of the Fund and management of the
Fund's portfolio are carried out by USAA Investment Management Company (the
Manager). The Fund's management fees are computed at .50% of its annual average
net assets.
The Manager has voluntarily agreed to limit the annual expenses of the Fund to
1.0% of its annual average net assets.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services, an affiliate of the Manager, provides transfer
agent services to the Fund. Shareholder accounting service fees are based on
an annual charge per shareholder account plus out-of-pocket expenses.
C. Underwriting agreement - The Trust has an agreement with the Manager for
exclusive underwriting and distribution of the Fund's shares on a continuing
best efforts basis. This agreement provides that the Manager will receive no
fee or other remuneration for such services.
(6) Transactions with Affiliates
USAA Investment Management Company is indirectly wholly owned by United
Services Automobile Association (the Association), a large, diversified
financial services institution. At May 31, 1996, the Association and its
affiliates owned 502 shares (41.5%) of the Fund.
Income Strategy Fund
Notes to Financial Statements (continued)
May 31, 1996
(7) Financial Highlights
Per share operating performance for a share outstanding throughout the period
is as follows:
Nine-month
Period Ended
May 31,
1996*
Net asset value at
beginning of period $ 10.00
Net investment income .39(b)
Net realized and
unrealized loss (.06)
Distributions from net
investment income (.22)
Distributions of realized
capital gains (.05)
--------------
Net asset value at end of period $ 10.06
==============
Total return (%) ** 3.23
Net assets at end of period (000) $ 12,173
Ratio of expenses to
average net assets (%) 1.00(a)(c)
Ratio of net investment
income to average net assets (%) 4.71(a)(c)
Portfolio turnover (%) 78.60
Average commission rate paid per share $ .0496
* Fund commenced operations September 1, 1995.
** Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
(c) The information contained in the above table is based on actual expenses
for the period, after giving effect to reimbursements of expenses by the
Manager. Absent such reimbursement the Fund's ratios would have been:
Ratio of expenses to average net assets (%) 1.78(a)
Ratio of net investment income to average net assets (%) 3.93 (a)
