[LOGO OF USAA STATEMENT OF
USAA EAGLE INVESTMENT ADDITIONAL INFORMATION
APPEARS HERE] TRUST October 1, 1996
As Supplemented December 2, 1996
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USAA INVESTMENT TRUST
USAA INVESTMENT TRUST (the Trust) is a registered investment company offering
shares of eleven no-load mutual funds which are described in this Statement of
Additional Information (SAI): the 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, and Treasury Money Market Trust (collectively, the
Funds). Each Fund is classified as a diversified investment company and has
its own investment objective designed to meet different investment goals.
You may obtain a free copy of a Prospectus for each Fund dated October 1,
1996, by writing to USAA Investment Trust, 9800 Fredericksburg Rd., San
Antonio, TX 78288, or by calling toll free 1-800-531-8181. The Prospectus
provides the basic information you should know before investing in the Funds.
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.
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TABLE OF CONTENTS
PAGE
2 Valuation of Securities
3 Additional Information Regarding Redemption of Shares
4 Investment Plans
5 Investment Policies
8 Special Risk Considerations
8 Investment Restrictions
13 Portfolio Transactions
15 Further Description of Shares
16 Tax Considerations
17 Trustees and Officers of the Trust
20 The Trust's Manager
22 General Information
22 Calculation of Performance Data
24 Appendix A - Tax-Exempt Securities and Their Ratings
27 Appendix B - Comparison of Portfolio Performance
30 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 (NAV) per
share. The NAV 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 NAV 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 the Income Strategy, Growth and Tax Strategy,
Balanced Strategy, Cornerstone Strategy, Growth Strategy, Emerging Markets,
Gold, International, and World Growth Funds and the GNMA Trust 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 NYSE.
(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 NAV 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 NAV is calculated will
not be reflected in a Fund's NAV, unless the Manager determines that the
particular event would materially affect NAV. 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.
The value of the Treasury Money Market Trust's securities is stated
at amortized cost which approximates market value. This involves valuing a
security at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates. While this method provides certainty in valuation, it may
result in periods during which the value of an instrument, as determined by
amortized cost, is higher or lower than the price the Trust would receive upon
the sale of the instrument.
The valuation of the Treasury Money Market Trust's portfolio
instruments based upon their amortized cost is subject to the Fund's adherence
to certain procedures and conditions. Consistent with regulatory
requirements, the Manager will only purchase securities with remaining
maturities of 397 days or less and will maintain a dollar-weighted average
portfolio maturity of no more than 90 days. The Manager will invest only in
securities that have been determined to present minimal credit risk and that
satisfy the quality and diversification requirements of applicable rules and
regulations of the Securities and Exchange Commission (SEC).
The Board of Trustees has established procedures designed to
stabilize the Treasury Money Market Trust's price per share, as computed for
the purpose of sales and redemptions, at $1.00. There can be no assurance,
however, that the Fund will at all times be able to maintain a constant $1.00
NAV per share. Such procedures include review of the Fund's holdings at such
intervals as is deemed appropriate to determine whether the Fund's NAV
calculated by using available market quotations deviates from $1.00 per share
and, if so, whether such deviation may result in material dilution or is
otherwise unfair to existing shareholders. In the event that it is determined
that such a deviation exists, the Board of Trustees will take such corrective
action as it regards as necessary and appropriate. Such action may include
selling portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity, withholding dividends, or
establishing a NAV per share by using available market quotations.
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 NAV 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 SEC so that disposal
of the Trust's investments or determination of its NAV 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.
Redemption By Check
Shareholders in the Treasury Money Market Trust may request that checks be
issued for their accounts. A one-time $5 checkwriting fee is charged to each
account by USAA Shareholder Account Services (Transfer Agent) for the use of
the privilege. Checks must be written in the amount of at least $250.
Checks issued to shareholders of the Treasury Money Market Trust
will be sent only to the person in whose name the account is registered and
only to the address of record. The checks must be manually signed by the
registered owner(s) exactly as the account is registered. For joint accounts
the signature of either or both joint owners will be required on the check,
according to the election made on the signature card. Dividends will continue
to be earned by the shareholder until the shares are redeemed by the
presentation of a check.
When a check is presented to the Transfer Agent for payment, a
sufficient number of full and fractional shares in the investor's account will
be redeemed to cover the amount of a check. If an investor's account is not
adequate to cover the amount of a check, the check will be returned unpaid.
Because the value of the account changes as dividends are accrued on a daily
basis, checks may not be used to close an account.
After clearance, checks paid during the month will be returned to
the shareholder by separate mail. The checkwriting privilege will be subject
to the customary rules and regulations of State Street Bank and Trust
Company (State Street Bank or the Custodian) governing checking accounts.
Other than the initial one-time fee, there is no charge to the shareholder for
the use of the checks or for subsequent reorders of checks.
The Trust reserves the right to assess a processing fee against a
shareholder's account for any redemption check not honored by a clearing or
paying agent. Currently, this fee is $15 and is subject to change at any
time. Some examples of such dishonor are improper endorsement, checks written
for an amount less than the minimum check amount, and insufficient or
uncollectible funds.
The Trust, the Transfer Agent, and State Street Bank each reserve
the right to change or suspend the checkwriting privilege upon 30 days'
written notice to participating shareholders.
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.
Automatic Purchase of Shares
InveStart (registered trademark) - a low initial investment purchase plan.
With this plan the regular minimum initial investment amount is waived if you
make an initial investment as low as $100 with subsequent monthly additions of
at least $50 through electronic funds transfer from a checking or savings
account.
InvesTronic (registered trademark) - the regular purchase of additional shares
through electronic funds transfer from a checking or savings account. You may
invest as little as $50 per month.
Direct Purchase Service - the periodic purchase of shares through electronic
funds transfer from an 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 in the money
market fund, with a monthly transaction minimum of $50.
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 automatic 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 NAV 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.
Tax-Deferred Retirement Plans (not available in the Growth and Tax Strategy
Fund)
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 $250 or minimum $100 with a minimum $50 monthly electronic
investment. 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 Investment Trust and USAA
Mutual Fund, Inc.
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
The Income Strategy, Balanced Strategy and Growth Strategy Funds 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, except the GNMA Trust and the Treasury Money Market
Trust, 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.
Municipal Lease Obligations
The Income Strategy, Balanced Strategy, Growth Strategy and Growth and Tax
Strategy Funds may invest in municipal lease obligations, installment purchase
contract obligations, and certificates of participation in such obligations
(collectively, lease obligations). A lease obligation does not constitute a
general obligation of the municipality for which the municipality's taxing
power is pledged, although the lease obligation is ordinarily backed by the
municipality's covenant to budget for the payments due under the lease
obligation.
Certain lease obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease obligation
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured by
the leased property, disposition of the property in the event of foreclosure
might prove difficult.
Liquidity Determinations
The Board of Trustees has established guidelines pursuant to which Municipal
Lease Obligations, Section 4(2) Commercial Paper and 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
restriction applicable to investments in illiquid securities. In determining
the liquidity of Municipal Lease Obligations, 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. Additional factors considered by the Manager in
determining the liquidity of a municipal lease obligation are: (1) whether
the lease obligation is of a size that will be attractive to institutional
investors, (2) whether the lease obligation contains a non-appropriation
clause and the likelihood that the obligor will fail to make an appropriation
therefor, and (3) such other factors as the Manager may determine to be
relevant to such determination. 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.
Calculation of Maturity for Fixed Income Securities
A fixed income security's maturity is typically determined on a stated final
maturity basis, although there are some exceptions to the rule.
If the issuer of the security has committed to take advantage of a
maturity shortening device, such as a call, refunding, or redemption
provision, the date on which the instrument will be called, refunded, or
redeemed will be considered to be its maturity date. Maturities of securities
subject to sinking fund arrangements are determined on a weighted average life
basis, which is the average time for principal to be repaid. The weighted
average lives of these securities will be shorter than their stated final
maturities. A security will be treated as having a maturity earlier than its
stated maturity date if the security has technical features, such as a put or
demand feature which, in the judgement of the Manager, will result in the
security being valued in the market as though it has the earlier maturity.
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, except the Growth and Tax Strategy, GNMA and Treasury Money Market
Trusts, 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 the Funds 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.
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)
Because the Income Strategy, Balanced Strategy, Cornerstone Strategy, Growth
Strategy, and World Growth Funds may invest a portion of their assets in
REITs, the Funds may also be subject to certain risks 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 GNMA Trust, Income Strategy, Balanced Strategy, Growth Strategy,
and Emerging 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 each Fund's Prospectus.
SPECIAL RISK CONSIDERATIONS
Currency Exchange Rate Fluctuations
The Income Strategy, Balanced Strategy, Cornerstone Strategy, Growth Strategy,
Emerging Markets, Gold, International, and World Growth 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
For the Income Strategy, Balanced Strategy, Cornerstone Strategy, Growth
Strategy, Emerging Markets, Gold, International, and World Growth Funds,
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 of the Growth and Tax Strategy,
Cornerstone Strategy, Gold, International, and World Growth Funds 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, the Fund would own more than 10% of the
outstanding voting securities of such issuer or the Fund 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) 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.
(4) 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.
(5) Purchase securities on margin or sell securities short, except that
it may obtain such short-term credits as are necessary for the
clearance of securities transactions.
(6) Invest in put, call, straddle, or spread options or 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 in accordance with its
investment objectives and policies.
(7) Invest more than 2% of the market value of its total assets in
marketable warrants to purchase common stock. Warrants initially
attached to securities and acquired by a Fund upon original issuance
thereof shall be deemed to be without value.
(8) Purchase or sell real estate or partnership interests therein,
except that the Cornerstone Strategy Fund may purchase securities
secured by real estate interests or interests therein, or issued by
companies or investment trusts which invest in real estate or
interests therein.
(9) Purchase or sell commodities or commodity contracts.
(10) Purchase securities of other open-end investment companies, except a
Fund may invest up to 10% of the market value of its total assets in
such securities through purchases in the open market involving only
customary broker's commissions or in connection with a merger,
consolidation, reorganization, or acquisition of assets approved by
the shareholders.
(11) Invest more than 5% of the market value of its total assets in any
closed-end investment company and will not hold more than 3% of the
outstanding voting stock of any closed-end investment company.
(12) Change the nature of its business so as to cease to be an investment
company.
(13) Issue senior securities as defined in the 1940 Act, except as
permitted by Section 18(f)(2) and rules thereunder.
For purposes of restriction 8 above, interests in publicly traded
Real Estate Investment Trusts (REITs) are not deemed to be real estate or
partnership interests therein.
Each of the GNMA and Treasury Money Market Trusts 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 1940 Act) if, as a result, the Fund would own more
than 10% of the outstanding voting securities of such issuer or the
Fund 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) 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.
(4) 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.
(5) Change the nature of its business so as to cease to be an investment
company.
(6) Issue senior securities as defined in the 1940 Act, except as
permitted by Section 18(f)(2) and rules thereunder.
(7) Purchase or sell real estate, commodities or commodity contracts,
except that the GNMA Trust may invest in financial futures contracts
and options thereon.
(8) Purchase any security if immediately after the purchase 25% or more
of the value of its total assets will be invested in securities of
issuers principally engaged in a particular industry (except that
such limitation does not apply to obligations issued or guaranteed
by the U.S. Government or its agencies or instrumentalities).
The Emerging Markets 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 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 that it may borrow money 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), nor will it purchase securities when its borrowings
exceed 5% of its total assets.
(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 or its corporate
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.
Each of the Income Strategy, Balanced Strategy, and Growth Strategy Funds 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 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.
With respect to each Fund's concentration policies as described above and in
its Prospectus, the Manager uses industry classifications for industries based
on categories established by Standard & Poor's Corporation (S&P) for the
Standard & Poor's 500 Composite Index, with certain modifications. Because
the Manager has determined that certain categories within, or in addition to,
those set forth by S&P have unique investment characteristics, additional
industries are included as industry classifications. The Manager classifies
municipal obligations by projects with similar characteristics, such as toll
road revenue bonds, housing bonds or higher education revenue bonds. In
addition, the Cornerstone Strategy Fund may not concentrate investments in any
one industry, although it may invest up to 25% of the value of its total
assets in one industry; the Basic Value Stocks, Foreign Stocks, and U.S.
Government Securities investment categories are not considered industries for
this purpose.
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 of the Growth and Tax
Strategy, Cornerstone Strategy, Gold, International, and World Growth Funds
may not:
(1) Invest more than 5% of the market value of its total assets in
securities of any issuer which, together with its predecessors, has
a record of less than three years' continuous operation.
(2) Purchase or retain the securities of any issuer if any officer of
the Manager or officer or Trustee of the Trust own individually more
than 1/2 of 1% of the outstanding securities of such issuer, and
together beneficially own more than 5% of such outstanding
securities.
(3) Pledge, mortgage, or hypothecate its assets to any extent greater
than 10% of the market value of its total assets.
(4) Invest more than 15% of the market value of its total assets in
securities which are illiquid or not readily marketable (including
repurchase agreements maturing in more than seven days).
(5) Invest in issuers for the purpose of exercising control or
management, except in connection with a merger, consolidation,
acquisition, or reorganization.
(6) Participate on a joint or joint and several basis in any trading
account in securities.
(7) Purchase any security while borrowings representing more than 5% of
the Fund's total assets are outstanding.
Each of the GNMA and Treasury Money Market Trusts may not:
(1) Purchase securities on margin or sell securities short, except that
it may obtain such short-term credits as are necessary for the
clearance of securities transactions.
(2) Invest in put, call, straddle, or spread options or interests in
oil, gas or other mineral exploration or development programs,
except that the GNMA Trust may write covered call and put options
and purchase call and put options.
(3) Invest more than 2% of the market value of its total assets in
marketable warrants to purchase common stock. Warrants initially
attached to securities and acquired by a Trust upon original
issuance thereof shall be deemed to be without value.
(4) Purchase securities of other open-end investment companies, except a
Trust may invest up to 10% of the market value of its total assets
in such securities through purchases in the open market involving
only customary broker's commissions or in connection with a merger,
consolidation, reorganization, or acquisition of assets approved by
the shareholders.
(5) Invest more than 5% of the market value of its total assets in any
closed-end investment company and will not hold more than 3% of the
outstanding voting stock of any closed-end investment company.
(6) Purchase or retain the securities of any issuer if any officer of
the Manager or officer or Trustee of the Trust own individually more
than 1/2 of 1% of the outstanding securities of such issuer, and
together beneficially own more than 5% of such outstanding
securities.
(7) Pledge, mortgage or hypothecate its assets to any extent greater
than 10% of the market value of its total assets. A security
covered by a call is not considered pledged.
(8) Invest more than 15% (10% with respect to the Treasury Money Market
Trust) of the market value of its net assets in securities which are
illiquid or not readily marketable (including repurchase agreements
maturing in more than seven days).
(9) Invest in issuers for the purpose of exercising control or
management, except in connection with a merger, consolidation,
acquisition, or reorganization.
(10) Purchase any security while borrowings representing more than 5% of
the Fund's total assets are outstanding.
The Emerging Markets 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 if as a result warrants taken at the lower of cost
or market value would represent more than 5% of the value of the
Fund's net assets or more than 2% of its net assets in 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).
(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) Invest more than 15% of its total assets in restricted securities of
all types (including not more than 5% of its total assets in
restricted securities which are not eligible for resale pursuant to
Rule 144A).
(13) Invest, at the time of acquisition, more than 10% of the value of
its assets in debt or fixed income securities in default of the
timely payment of interest or repayment of principal.
Each of the Balanced Strategy, Growth Strategy, and Income Strategy Funds 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).
(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 Income Strategy, Growth and Tax Strategy, Balanced Strategy,
Cornerstone Strategy, Growth Strategy, Emerging Markets, Gold, International,
and World Growth 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. In return for such services, a Fund may pay to a
broker a higher commission than may be charged by other brokers, provided that
the Manager determines in good faith that such commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker, viewed in terms of either that particular transaction or of the
overall responsibility of the Manager to the Funds and its other clients. 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.
Brokerage Commission
During the last three fiscal years, the Funds paid the following brokerage
fees:
FUND 1994* 1995 1996
---- ----- ---- ----
Income Strategy** - - $ 3,434
Growth and Tax Strategy $ 39,132 $ 30,774 $ 58,596
Balanced Strategy** - - $ 16,908
Cornerstone Strategy $1,109,515 $1,278,398 $1,560,138
Growth Strategy** - - $ 104,911
Emerging Markets - $ 140,877 *** $ 394,696
Gold $ 300,325 $ 299,874 $ 224,458
International $ 497,303 $1,422,707 $1,551,078
World Growth $ 301,922 $ 599,043 $ 709,486
During the last three fiscal years, the Funds paid the following brokerage
fees to USAA Brokerage Services, a discount brokerage service of the Manager:
FUND 1994* 1995 1996
---- ----- ---- ----
Income Strategy** - - $ 216
Growth and Tax Strategy - $ 1,400 $ 400
Balanced Strategy** - - $ 632
Cornerstone Strategy - $ 2,120 $ 4,000
Growth Strategy** - - $ 556
Emerging Markets - - $ -
Gold - - -
International - - -
World Growth $ 9,848 $ 7,576 $ 928
- ---------------------
* For the eight-month period ended May 31, 1994.
** For the nine-month period ended May 31, 1996.
*** For the seven-month period ended May 31, 1995.
**** These amounts are 6.29%, .68%, 3.74%, .26%, .53%, and
.13%, respectively, of brokerage fees paid by each Fund.
For the year ended May 31, 1996, 4.34%, 1.16%, 5.28%, 1.03%, .88%, and .40%,
of the aggregate dollar amounts of transactions involving the payment of
commissions by the Income Strategy, Growth and Tax Strategy, Balanced
Strategy, Cornerstone Strategy, Growth Strategy, and World Growth Funds,
respectively, were effected through USAA Brokerage Services.
The Manager directed a portion of the Funds' brokerage transactions
to certain broker-dealers that provided the Manager with research, statistical
and other information. Such transactions amounted to $1,726,750, $30,068,686,
$7,730,091, $35,264,431, $20,270,670, $77,423, $1,743,610 and $24,352,126, and
the related brokerage commissions were $2,462, $33,696, $11,006, $51,316,
$28,279, $135, $3,430 and $31,643 for the Income Strategy, Growth and Tax
Strategy, Balanced Strategy, Cornerstone Strategy, Growth Strategy, Emerging
Markets, International and World Growth Funds, respectively, for the year ended
May 31, 1996.
Portfolio Turnover Rates
The rate of portfolio turnover in any of the Funds (other than the Treasury
Money Market Trust) 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 (other than the Growth and Tax Strategy 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. The Growth and Tax Strategy
Fund may engage in riskless principal and similar transactions for the
purchase and sale of tax-exempt debt securities. A higher degree of equity
portfolio activity will increase brokerage costs to a Fund. The Growth and
Tax Strategy Fund may experience a portfolio turnover rate in excess of 100%.
It is not anticipated however, that the portfolio turnover rates of the Income
Strategy, Balanced Strategy, Cornerstone Strategy, Growth Strategy, Emerging
Markets, Gold, International, and World Growth Funds or the GNMA Trust 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.
For the last two fiscal years, the Funds' portfolio turnover rates were as
follows:
FUND 1995 1996
---- ---- ----
Income Strategy - 78.60**
Growth and Tax Strategy1 265.52% 202.55
Balanced Strategy - 26.53**
Cornerstone Strategy 33.17% 36.15
Growth Strategy - 40.21**
Emerging Markets 34.87%* 87.98
Gold 34.76% 16.48
International 64.30% 70.01
World Growth 58.88% 60.97
GNMA Trust 93.78% 127.77***
- --------------------
* For the seven-month period ended May 31, 1995.
** For the nine-month period ended May 31, 1996.
*** The turnover rate was higher because the assets
in the portfolio were repositioned in response to changing
market conditions.
1 The Fund may simultaneously purchase and sell the same
securities. These transactions can be high in volume and
dissimilar to other trade activity within the Fund. If these
transactions were excluded from the calculation, the portfolio
turnover rate would be as follows:
YEAR ENDED YEAR ENDED
MAY 31, 1995 MAY 31, 1996
------------ ------------
Portfolio turnover(%) 131.28 61.98
Purchases and sales of this type
are as follows:
Purchases (000) $234,367 $192,239
Sales (000) $234,669 $192,490
FURTHER DESCRIPTION OF SHARES
The Trust is authorized to issue shares of beneficial interest in separate
portfolios. Eleven such portfolios have been established 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 portfolios in addition to those already
existing without the approval of the shareholders of the Trust. The
Cornerstone Strategy and Gold Funds were established May 9, 1984, by the Board
of Trustees and commenced public offering of their shares on August 15, 1984.
The International Fund, established on November 4, 1987, commenced public
offering of its shares on July 11, 1988. The Growth and Tax Strategy Fund was
established on November 3, 1988, and commenced public offering of its shares
on January 11, 1989. On November 7, 1990, the Board of Trustees established
the GNMA Trust and Treasury Money Market Trust and commenced public offering
of their shares on February 1, 1991. The World Growth Fund was established on
July 21, 1992, and commenced public offering of its shares on October 1, 1992.
The Emerging Markets Fund was established on September 7, 1994, and commenced
public offering of its shares on November 7, 1994. The Income Strategy,
Balanced Strategy, and Growth Strategy Funds were established on June 2, 1995,
and commenced public offering of their shares on September 1, 1995.
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. In the case of the Growth and Tax
Strategy Fund, in order to be entitled to pay exempt-interest dividends to
shareholders, at the close of each quarter of its taxable year, at least 50%
of the value of the Fund's total assets must consist of obligations the
interest of which is exempt from federal income tax. The Growth and Tax
Strategy Fund intends to satisfy this requirement.
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 Income Strategy, Balanced Strategy, Cornerstone Strategy, Growth
Strategy, Emerging Markets, Gold, International, and World Growth 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 Income Strategy, Balanced Strategy, Cornerstone Strategy,
Growth Strategy, Emerging Markets, Gold, International, or World Growth 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, except as noted below.
In the case of the Growth and Tax Strategy Fund, if a shareholder
receives an exempt-interest dividend with respect to any share and such share
has been held for six months or less, any loss on the sale or exchange of such
share will be disallowed to the extent of such exempt-interest dividend.
Shareholders who are recipients of Social Security benefits should be aware
that exempt-interest dividends received from the Growth and Tax Strategy Fund
are includible in their "modified adjusted gross income" for purposes of
determining the amount of such Social Security benefits, if any, that are
required to be included in their gross income.
The Growth and Tax Strategy Fund may invest in private activity
bonds. Interest on certain private activity bonds issued after August 7,
1986, is an item of tax preference for purposes of the Federal Alternative
Minimum Tax (AMT), although the interest continues to be excludable from gross
income for other purposes. AMT is a supplemental tax designed to ensure that
taxpayers pay at least a minimum amount of tax on their income, even if they
make substantial use of certain tax deductions and exclusions (referred to as
tax preference items). Interest from private activity bonds is one of the tax
preference items that is added to income from other sources for the purposes
of determining whether a taxpayer is subject to AMT and the amount of any tax
to be paid.
Opinions relating to the validity of the tax-exempt securities
purchased for the Growth and Tax Strategy Fund and the exemption of interest
thereon from federal income tax are rendered by recognized bond counsel to the
issuers. Neither the Manager's nor the Fund's counsel makes any review of the
basis of such opinions.
The exemption of interest income for federal income tax purposes
does not necessarily result in exemption under the income or other tax laws of
any state or local taxing authority. Shareholders of a Fund may be exempt
from state and local taxes on distributions of tax-exempt interest income
derived from obligations of the state and/or municipalities of the state in
which they are a resident, but generally are subject to tax on income derived
from obligations of other jurisdictions. Shareholders should consult their
tax advisers about the status of distributions from a Fund in their own states
and localities.
TRUSTEES AND OFFICERS OF THE TRUST
The Board of Trustees of the Trust consists of seven 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. George E. Brown is retiring from the Board of Trustees on
December 31, 1996. Effective January 1, 1997, Robert L. Mason will replace
George E. Brown as a Trustee on the Board of Trustees.
Robert G. Davis 1, 2
Director and Chairman of the Board of Directors
Age: 50
President, Chief Executive Officer, Director and Vice Chairman of the Board of
Directors of USAA Capital Corporation and several of its subsidiaries and
affiliates (12/96-present); Director, Vice Chairman, Executive Vice President,
and Chief Operating Officer, USAA Financial Planning Network, Inc. (9/96-
present); Special Assistant to Chairman, United Services Automobile
Association (USAA) (6/96-12/96); President and Chief Executive Officer, Banc
One Credit Corporation (12/95-6/96); and President and Chief Executive
Officer, Banc One Columbus, (8/91-12/95). Mr. Davis also will serve as a
Trustee and Chairman of the Board of Trustees of USAA State Tax-Free Trust and
as a 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: 55
Chief Executive Officer, IMCO (10/93-present); President, Director and Vice
Chairman of the Board of Directors, IMCO (1/90-present). 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: 61
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.
George E. Brown 3, 4, 5
5829 Northgap Drive
San Antonio, TX 78239
Trustee
Age: 78
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.
Barbara B. Dreeben 3, 4, 5
200 Patterson #1008
San Antonio, TX 78209
Trustee
Age: 51
President, Postal Addvantage (7/92-present); Consultant, Nancy Harkins
Stationer (8/91-12/95). 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.
Howard L. Freeman, Jr. 2, 3, 4, 5
2710 Hopeton
San Antonio, TX 78230
Trustee
Age: 61
Retired. Assistant General Manager for Finance, San Antonio City Public
Service Board (1976-1996). 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.
Robert L. Mason, Ph.D. 3, 4, 5
12823 Queens Forest
San Antonio, TX 78230
Director
Age: 50
Manager, Statistical Analysis Section, Southwest Research Institute (8/75 -
present). Dr. Mason 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.
Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Trustee
Age: 53
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.
Michael D. Wagner 1
Secretary
Age: 48
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: 46
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: 51
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). 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: 37
Executive Director, Mutual Fund Accounting, IMCO (10/95-present); Director,
Mutual Fund Accounting, IMCO (12/94-10/95); 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:
Harry W. Miller, Senior Vice President, Investments (Equity); Carl W. Shirley,
Senior Vice President, Insurance Company Portfolios; 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, 1996.
Name Aggregate Total Compensation
of Compensation from the USAA
Trustee from the Trust Family of Funds (c)
- -------- --------------- -------------------
C. Dale Briscoe* $3,470 $13,400
George E. Brown (a) 6,647 25,400
Barbara B. Dreeben 6,647 25,400
Howard L. Freeman, Jr. 6,647 25,400
M. Staser Holcomb** None(b) None(b)
Michael J.C. Roth None(b) None(b)
John W. Saunders, Jr. None(b) None(b)
Richard A. Zucker 6,647 25,400
- ----------------
* Effective January 1, 1996, C. Dale Briscoe retired from the Board
of Trustees.
** Effective December 1, 1996, Robert Davis replaced S. Staser Holcomb
as Trustee and Chairman of the Board of Trustees.
(a) The USAA Family of Funds has accrued deferred compensation for Mr.
Brown in an amount (plus earnings thereon) of $21,302. 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) M. Staser Holcomb, 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, 1996, the USAA Family of Funds consisted of 4 registered
investment companies offering 33 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 June 30, 1996, 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 June 30, 1996, USAA and its affiliates owned 502,387 shares
(40.7%) of the Income Strategy Fund, 500,000 shares (26.1%) of the Balanced
Strategy Fund, 358,538 shares (5.3%) of the Growth Strategy Fund, 6,322,933
shares (27.4%) of the International Fund, 1,284,506 shares (7.6%) of the World
Growth Fund, 368,700 shares (1.2%) of the GNMA Trust and no shares of the
Growth and Tax Strategy Fund, Cornerstone Strategy Fund, Emerging Markets
Fund, Gold Fund, and Treasury Money Market Trust.
The Trust knows of no other persons who, as of June 30, 1996, held
of record or owned beneficially 5% or more of the voting stock 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., USAA State Tax-Free
Trust, and USAA Life Investment Trust. As of the date of this SAI, total
assets under management by the Manager were approximately $30.4 billion, of
which approximately $17.8 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,
excess custodian costs attributable to investments in foreign securities, 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 continue to limit
the annual expenses of the Treasury Money Market Trust to .375% and the Income
Strategy and Balanced Strategy Funds to 1.00% and 1.25%, respectively, of its
ANA until October 1, 1997, and will reimburse the Funds for all expenses in
excess of such limitation. After October 1, 1997, any such waiver or
reimbursement may be terminated by the Manager at any time without prior
notice to the shareholders.
For the last three fiscal years, management fees were as follows:
FUND 1994* 1995 1996
---- ---------- ---------- ----------
Income Strategy - - $ 34,662***
Growth and Tax Strategy $ 422,542 $ 646,528 $ 728,915
Balanced Strategy - - $ 66,393***
Cornerstone Strategy $3,858,194 $6,268,976 $7,072,915
Growth Strategy - - $ 219,751***
Emerging Markets - $ 80,503** $ 308,963
Gold $ 863,578 $1,224,603 $1,170,207
International $ 723,783 $2,171,329 $2,730,374
World Growth $ 539,899 $1,310,951 $1,708,489
GNMA Trust $ 229,184 $ 318,921 $ 361,221
Treasury Money Market Trust $ 26,970 $ 59,980 $ 94,427
As a result of the Funds' actual expenses exceeding an expense limitation, the
Manager did not receive fees to which it would have been entitled as follows:
FUND 1994* 1995 1996
---- ---------- ---------- ----------
Income Strategy - - $ 34,662***
Balanced Strategy - - $ 66,393***
Emerging Markets - $ 8,091** -
Treasury Money Market Trust $ 26,970 $ 54,428 $ 21,001
- -------------
* For the eight-month period ended May 31, 1994.
** For the seven-month period ended May 31, 1995.
*** For the nine-month period ended May 31, 1996.
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
The Transfer Agent 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, each Fund pays the Transfer Agent an annual fixed fee ranging from
$23.50 to $26.00 per account. 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 Income Strategy, Balanced Strategy,
Cornerstone Strategy, Growth Strategy, Emerging Markets, Gold, International,
and World Growth 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 LLP, 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.
Financial Statements
The financial statements for each of the Funds of USAA Investment Trust and
the Independent Auditors' Reports thereon for the fiscal year ended May 31,
1996, are included in the Annual Reports to Shareholders of that date and are
incorporated herein by reference. The Manager will deliver a copy of the
Fund's Annual Report free of charge with each SAI requested.
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 - Treasury Money Market Trust
When the Treasury Money Market Trust quotes a "current annualized" yield, it
is based on a specified recent seven-calendar-day period. It is computed by
(1) determining the net change, exclusive of capital changes, in the value of
a hypothetical preexisting account having a balance of one share at the
beginning of the period, (2) dividing the net change in account value by the
value of the account at the beginning of the base period to obtain the base
return, then (3) multiplying the base period return by 52.14 (365divided by7).
The resulting yield figure is carried to the nearest hundredth of one percent.
The calculation includes (1) the value of additional shares
purchased with dividends on the original share, and dividends declared on both
the original share and any such additional shares, and (2) any fees charged to
all shareholder accounts, in proportion to the length of the base period and
the Trust's average account size.
The capital changes excluded from the calculation are realized
capital gains and losses from the sale of securities and unrealized
appreciation and depreciation. The Trust's effective (compounded) yield will
be computed by dividing the seven-day annualized yield as defined above by
365, adding 1 to the quotient, raising the sum to the 365th power, and
subtracting 1 from the result.
Current and effective yields fluctuate daily and will vary with
factors such as interest rates and the quality, length of maturities, and type
of investments in the portfolio.
Yield For 7-day Period ended 5/31/96 . . . . . 4.85%
Effective Yield For 7-day Period ended 5/31/96 . . . . . 4.97%
Yield - Income Strategy Fund, Growth and Tax Strategy Fund and GNMA Trust
These Funds 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 expenses
b = 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
The 30-day yields for the period ended May 31, 1996 for the Income Strategy
Fund, Growth and Tax Strategy Fund and GNMA Trust were 5.18%, 3.71% and 6.70%,
respectively.
Tax Equivalent Yield
A tax-exempt mutual fund may provide more "take-home" income than a fully
taxable mutual fund after paying taxes. Calculating a "tax equivalent yield"
means converting a tax-exempt yield to a pretax equivalent so that a
meaningful comparison can be made between a tax-exempt municipal fund and a
fully taxable fund. Because the Growth and Tax Strategy Fund invests a
significant percentage of its assets in tax-exempt securities, it may
advertise performance in terms of a 30-day tax equivalent yield.
To calculate a tax equivalent yield, an investor must know his
federal marginal income tax rate. The tax equivalent yield for the Growth and
Tax Strategy Fund is then computed by dividing that portion of the yield which
is tax-exempt by the complement of the federal marginal tax rate and adding the
product to that portion of the yield which is taxable. The complement, for
example, of a federal marginal tax rate of 36.0% is 64.0%, that is
(1.00-0.36=0.64).
Tax Equivalent Yield = (% Tax Exempt Income x 30-day Yield/ (1-Federal
Marginal Tax Rate)) + (% Taxable Income x 30-day Yield)
Based on a federal marginal tax rate of 36.0%, the tax equivalent
yield for the Growth and Tax Strategy Fund for the period ended May 31, 1996,
was 5.1%.
Total Return
The Funds may 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
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.
Average Annual Total Returns
For Periods Ended 5/31/96
1 5 10 From
Fund year years years Inception*
---- ----- ----- ----- ----------
Income Strategy - - - 3.23%
Growth and Tax Strategy 14.61% 9.68% - 9.78%
Balanced Strategy - - - 6.37%
Cornerstone Strategy 17.79% 11.83% 11.84% -
Growth Strategy - - - 27.76%
Emerging Markets 16.93% - - 8.73%
Gold 23.66% 11.93% 7.80% -
International 19.71% 13.13% - 10.58%
World Growth 22.43% - - 14.19%
GNMA Trust 3.65% 7.31% - 7.24%
* Data from inception is shown for Funds that are less than ten years old.
Income Strategy, Balanced Strategy, and Growth Strategy Funds commenced
operations on September 1, 1995. Growth and Tax Strategy Fund commenced
operations on January 11, 1989. Emerging Markets Fund commenced
operations on November 7, 1994. International Fund commenced operations
on July 11, 1988. World Growth Fund commenced operations on October 1,
1992. GNMA Trust commenced operations on February 1, 1991.
APPENDIX A - TAX-EXEMPT SECURITIES AND THEIR RATINGS
Tax-Exempt Securities
Tax-exempt securities generally include debt obligations issued by states and
their political subdivisions, and duly constituted authorities and
corporations, to obtain funds to construct, repair, or improve various public
facilities such as airports, bridges, highways, hospitals, housing, schools,
streets, and water and sewer works. Tax-exempt securities may also be issued
to refinance outstanding obligations as well as to obtain funds for general
operating expenses and for loans to other public institutions and facilities.
The two principal classifications of tax-exempt securities are
"general obligations" and "revenue" or "special tax" bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue or
special tax bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other tax, but not from general tax revenues. The Funds may
also invest in tax-exempt private activity bonds, which in most cases are
revenue bonds and generally do not have the pledge of the credit of the
issuer. The payment of the principal and interest on such industrial revenue
bonds is dependent solely on the ability of the user of the facilities
financed by the bonds to meet its financial obligations and the pledge, if
any, of real and personal property so financed as security for such payment.
There are, of course, many variations in the terms of, and the security
underlying tax-exempt securities. Short-term obligations issued by states,
cities, municipalities or municipal agencies, include Tax Anticipation Notes,
Revenue Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes,
and Short-Term Discount Notes.
The yields of tax-exempt securities depend on, among other things,
general money market conditions, conditions of the tax-exempt bond market, the
size of a particular offering, the maturity of the obligation, and the rating
of the issue. The ratings of Moody's Investors Service, Inc. (Moody's),
Standard & Poor's Ratings Group (S&P), Fitch Investors Service, Inc. (Fitch),
and Duff & Phelps Inc. represent their opinions of the quality of the
securities rated by them. It should be emphasized that such ratings are
general and are not absolute standards of quality. Consequently, securities
with the same maturity, coupon, and rating may have different yields, while
securities of the same maturity and coupon but with different ratings may have
the same yield. It will be the responsibility of the Manager to appraise
independently the fundamental quality of the tax-exempt securities included in
a Fund's portfolio.
Ratings
Excerpts from Moody's Bond (Tax-Exempt Securities) Ratings:
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.
A description of ratings Ba and below assigned to debt obligations by Moody's
is included in Appendix A of the Emerging Markets Fund Prospectus.
Excerpts of Moody's Ratings of Short-Term Loans (State and Tax-Exempt Notes):
Moody's ratings for state and tax-exempt notes and other short-term
obligations are designated Moody's Investment Grade (MIG). Symbols used will
be as follows:
MIG-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 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
Excerpts of Moody's Rating of Commercial Paper:
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.
Excerpts from S&P's Bond Ratings:
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.
A description of ratings BB and below assigned to debt obligations by S&P is
included in Appendix A of the Emerging Markets Fund Prospectus.
Excerpts of S&P's Ratings of Tax-Exempt Notes:
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.
Excerpts of S&P's Rating of Commercial Paper:
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.
Excerpts of Fitch's Ratings of Bonds:
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.
Excerpts of Fitch's Ratings to Commercial Paper, Certificates of Deposit, and
Tax-Exempt Notes:
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 of 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.
Excerpts from Duff & Phelps Long-Term Rating Scale:
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
AA conditions.
AA-
A+ Protection factors are average but adequate. However, risk factors
A are variable and greater in periods of economic stress.
A-
BBB+ Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic
BBB cycles.
BBB-
Excerpts from Duff & Phelps Commercial Paper Rating Scale:
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.
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.
Denver Post, a newspaper which may quote financial news.
Financial Services Week, a weekly newspaper which covers financial news.
Financial Planning, a monthly magazine that periodically features companies in
the mutual fund industry.
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 which covers financial news
and rates mutual funds produced by Morningstar, Inc. (a data service which
tracks open-end 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.
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 toward the novice investor.
In addition, the Cornerstone Strategy, Growth Strategy, Emerging
Markets, Gold, International, and World Growth Funds may be cited for
performance information and articles in International Reports, a publication
providing insights on world financial markets and economics.
The GNMA and Treasury Money Market Trusts may be cited in:
The Bond Buyer, a daily newspaper which covers bond market news.
IBC/Donoghue's Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., reporting on the performance of the nation's money market
funds, summarizing money market fund activity, and including certain averages
as performance benchmarks, specifically "Donoghue's Taxable 100% U.S. Treasury
Money Fund Average."
IBC's Money Market Insight, a monthly money market industry analysis prepared
by IBC USA, Inc.
In addition to the sources above, performance of our Funds may also
be tracked by Lipper Analytical Services, Inc. and Morningstar, Inc. A Fund
will be compared to Lipper's or Morningstar's appropriate fund category
according to its objective and portfolio holdings. The Cornerstone Strategy
Fund will be compared to funds in Lipper's global flexible portfolio fund
category, the Gold Fund to funds in Lipper's gold oriented fund category, the
International Fund to Lipper's international fund category, the Growth and Tax
Strategy Fund and the Balanced Strategy Fund to 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,
the Income Strategy Fund to Lipper's general bond funds category and to
Morningstar's asset allocation fund category, the World Growth Fund to
Lipper's global fund category, the Treasury Money Market Trust to Lipper's
short-term U.S. Government funds category, the GNMA Trust to Lipper's GNMA
funds category, and the Emerging Markets Fund to Lipper's emerging markets
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.
- Financial Times Gold Mines Index, an index that includes gold mining
companies if they: a) have sustainable, attributable gold production of at
least 300,000 ounces a year; b) draw at least 75% of revenue from mined gold
sales; and c) have at least 10% of their capital available to the investing
public.
- 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.
- Lehman Brothers Inc. GNMA 30 Year Index.
- Lehman Brothers Municipal Bond Index, a total return performance
benchmark for the long-term investment grade tax-exempt bond market.
- London Gold, a traditional index that prices London gold.
- London Gold PM Fix Price, the evening gold prices as set by London
dealers.
- 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 NYSE, American Stock Exchange and
NASDAQ.
- Philadelphia Gold/Silver Index (XAU), an index representing nine
holdings in the gold and silver sector.
- 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
------------------- ---------------- ------------------
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
----- ----- -----
**Avg. Price: $8.20 **Avg. Price: $7.80 **Avg.Price: $9.20
----- ----- -----
* 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.
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