TABLE OF CONTENTS
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Managers 5
Financial Information:
Distributions to Shareholders 8
Independent Auditors' Report 9
Statement of Assets and Liabilities 10
Portfolio of Investments in Securities 11
Notes to Portfolio of Investments in Securities 13
Statement of Operations 14
Statements of Changes in Net Assets 15
Notes to Financial Statements 16
IMPORTANT INFORMATION
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA Income
Strategy Fund, managed by USAA Investment Management Company (IMCO). It may be
used as sales literature only when preceded or accompanied by a current
prospectus which gives further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)1997, USAA. All rights reserved.
<TABLE>
USAA Family of Funds Performance Summary
If you own only one or two USAA funds, you may not be aware of the performance
of our other funds. This summary is a snapshot of the performance of all 33
funds by investment objective as of June 30, 1997.
<CAPTION>
Average Annual Total Return(%)*
Investment Inception Since
Objective Date 1 yr 5 yrs 10 yrs Inception
--------- ---- ---- ----- ------ ---------
<S> <C> <C> <C> <C> <C>
Capital Appreciation
====================
Aggressive Growth 10/19/81 -1.72 18.38 10.88 -
Emerging Markets(1) 11/7/94 15.35 - - 10.25
Gold(1) 8/15/84 -22.26 3.54 -4.75 -
Growth 4/5/71 21.60 16.94 11.97 -
Growth & Income 6/1/93 31.29 - - 18.53
International(1) 7/11/88 21.81 15.39 - 11.77
S&P 500 Index(4)(+) 5/1/96 34.59 - - 33.24
World Growth(1) 10/1/92 21.85 - - 15.50
Asset Allocation
=================
Balanced Strategy(1) 9/1/95 22.38 - - 15.48
Cornerstone Strategy(1) 8/15/84 20.45 14.33 9.22 -
Growth and Tax Strategy(2)** 1/11/89 15.72 11.23 - 10.45
Growth Strategy(1) 9/1/95 15.37 - - 21.37
Income Strategy 9/1/95 14.48 - - 10.36
Income - Taxable
================
GNMA 2/1/91 9.37 6.85 - 7.67
Income 3/4/74 8.21 7.44 9.45 -
Income Stock 5/4/87 20.77 14.21 12.89 -
Short-Term Bond 6/1/93 7.71 - - 5.69
Income - Tax Exempt
===================
Long-Term(2)** 3/19/82 9.22 6.71 8.09 -
Intermediate-Term(2)** 3/19/82 8.20 6.76 7.54 -
Short-Term(2)** 3/19/82 5.50 4.80 5.59 -
California Bond(2)** 8/1/89 8.90 7.13 - 7.58
Florida Tax-Free Income(2)** 10/1/93 9.79 - - 4.29
New York Bond(2)** 10/15/90 8.86 6.46 - 8.31
Texas Tax-Free Income(2)** 8/1/94 10.37 - - 9.24
Virginia Bond(2)** 10/15/90 8.50 6.93 - 8.08
Money Market
============
Money Market(3) 2/2/81 5.28 4.48 5.80 -
Tax Exempt Money Market(2),(3)** 2/6/84 3.36 3.04 4.15 -
Treasury Money Market Trust(3) 2/1/91 5.13 4.28 - 4.38
California Money Market(2),(3)** 8/1/89 3.29 2.94 - 3.62
Florida Tax-Free Money Market(2),(3)** 10/1/93 3.26 - - 3.04
New York Money Market(2),(3)** 10/15/90 3.21 2.82 - 3.08
Texas Tax-Free Money Market(2),(3)** 8/1/94 3.31 - - 3.33
Virginia Money Market(2),(3)** 10/15/90 3.22 2.87 - 3.20
</TABLE>
Non-deposit investment products offered by USAA Investment Management Company
are not insured by the FDIC, are not deposits or other obligations of, or
guaranteed by, USAA Federal Savings Bank, and are subject to investment risks,
including possible loss of the principal amount invested.
For more complete information about the mutual funds managed and
distributed by USAA IMCO, including charges and expenses, please call
1-800-531-8181 for a prospectus. Read it carefully before you invest.
(1) Foreign investing is subject to additional risks, which are discussed in the
funds' prospectuses.
(2) Some income may be subject to state or local taxes or the federal
alternative minimum tax.
(3) An investment in a money market fund is neither insured nor guaranteed by
the U.S. government and there is no assurance that any of the funds will be
able to maintain a stable net asset value of $1 per share.
(4) S&P 500(Registered Trademark) is a trademark of The McGraw-Hill
Companies, Inc., and has been licensed for use. The product is not
sponsored, sold or promoted by Standard & Poor's, and Standard & Poor's
makes no representation regarding the advisability of investing in the
product.
* Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment
has been made for taxes payable by shareholders on their reinvested dividends
and capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return
and principal value of an investment will fluctuate, and an investor's
shares, when redeemed, may be worth more or less than their original cost.
** IRAs are not available for tax-exempt funds. The Growth and Tax Strategy Fund
is not available as an investment for your IRA because the majority of its
income is tax-exempt. California, Florida, New York, Texas, and Virginia
funds available to residents only.
+ Includes account maintenance fee through December 31, 1996.
MESSAGE FROM THE PRESIDENT
I HAVE A FEELING
THAT WE WILL REMEMBER 1997
[Photograph of President, Michael J.C. Roth is here]
The year began with an atmosphere of looking over your shoulder. The market had
risen about 61% in two years and all history told us that was unusual. Then it
advanced another 10% in January and February, before it encountered a loss of
confidence. By April it had lost all of the advance for this year(1) and it felt
so shaky that I sent shareholders a letter encouraging them to remember how
important we think asset allocation is in establishing your level of risk. But
by the time that letter arrived in early May the market was again setting record
highs. Indeed, one shareholder wrote me asking, "Why did you send this letter?"
The market has now driven upward to a return of 20% for the year, but
as I write this, it has fallen 192 points on the Dow; its second worst one-day
decline in points.
It would not be unusual if the market were to finish 1997 with a return well
below that of '95 and '96. We believe that the long-term return on the stock
market is around 10% to 12%.(2) Years such as '95 and '96 are necessary to
achieve such a long-term record, but by themselves they are exceptional. It is
important that investors have a position in stocks, but the risk that such a
position carries should, for most people, be offset by holding some different
assets including fixed income securities. Most of the funds in the USAA
Investment Trust are structured like that.
The Roth family will remember 1997 for another reason. We have a new
granddaughter, Katharine Sophia Broyles, who was born on January 3. She now has
an InveStart(Registered Trademark) account in the Cornerstone Strategy Fund, our
oldest asset strategy fund. I am confident that our monthly additions to that
account has the potential to build a meaningful college fund for her, regardless
of what 1997 serves up.
Sincerely,
Michael J.C. Roth
PRESIDENT AND
VICE CHAIRMAN OF THE BOARD
Past performance is no guarantee of future results.
A systematic plan, such as InveStart, does not assure a profit or protect
against loss in declining markets. Since such a plan involves continuous
investment in securities regardless of fluctuating price levels, you should
consider your financial ability to continue purchases through periods of low and
high price levels.
(1) S&P 500 Index is an unmanaged index representing the average performance of
a group of 500 widely held publicly traded stocks. It is not possible to
invest directly in the S&P 500 Index.
(2) Source: (Copyright) Computed using data from Stocks, Bonds, Bills &
Inflation 1997 Yearbook(TM), Ibbotson Associates, Chicago (annually updates
work by Roger G. Ibbotson and Rex Sinquefield). Used with permission. All
rights reserved.
For more complete information about the mutual funds managed and distributed by
USAA IMCO, including charges and expenses please call for a prospectus. Read it
carefully before you invest.
INVESTMENT REVIEW
INCOME STRATEGY FUND
OBJECTIVE: To seek high current return, with reduced risk over time, through an
asset allocation strategy which emphasizes income and gives secondary emphasis
to long-term growth of capital.
5/31/97 5/31/96
Net Assets................................ $13.9 MILLION $12.2 MILLION
Net Asset Value Per Share................. $10.84 $10.06
AVERAGE ANNUAL TOTAL RETURN AS OF 5/31/97
1 Year.......................................................... 13.59%
Since inception on September 1, 1995............................ 9.47%
30-Day SEC Yield on May 31, 1997.................................... 5.00%*
*Calculated as prescribed by the Securities and Exchange Commission.
[A graph is shown here which is a comparison of the change in value of a $10,000
investment, for the period of 9/1/95 to 5/31/97, with dividends and capital
gains reinvested. The ending value of each item graphed is as follows: USAA
Income Strategy Fund - $11,725, Lehman Brothers Aggregate Bond Index - $11,115
and the Lipper General Bond Funds Average - $11,450.]
The Lehman Brothers Aggregate Bond Index is an unmanaged index made up of the
government/corporate index, the mortgage-backed securities index, and the
asset-backed securities index. The Lipper General Bond Funds Average is the
average performance level of all general bond funds, as reported by Lipper
Analytical Services, an independent organization that monitors the performance
of mutual funds. The graph compares a $10,000 hypothetical investment in the
USAA Income Strategy Fund to the Index and the Lipper Average.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment has
been made for taxes payable by shareholders on their reinvested income dividends
and capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return and
principal value of an investment will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
MESSAGE FROM THE MANAGERS
[Photograph of Portfolio Managers appears here:
Standing: R. David Ullom, CFA (Stocks) and Pamela K. Bledsoe, CFA (Money Market
Instruments); Seated: John W. Saunders, Jr., CFA (Allocation Manager, Bonds).]
Fund Overview
Record highs in the stock market have been mentioned in each Fund shareholder
report starting with its first semiannual report a year and a half ago. This
second annual report is no exception with more new highs being posted for the
broad stock market averages. Meanwhile, bond market volatility continues as
interest rates move up and down in response to economic reports. The fluctuating
path of long-term interest rates in the past year can be seen in the chart below
showing yields for the 30-year U.S. Treasury Bond.(1)The low point in yield was
6.35% on November 29, 1996, the end of the Fund's last reporting period.
Long-term interest rates moved upward again and on May 30, 1997, were slightly
below the level a year ago.
Declining bond values this past six months produced negative returns in the bond
portfolio segment. Having a portion of your Fund in common stocks has been
profitable both for the last six months and for the fiscal year ended May 31,
1997. The Fund's total returns for these periods were 1.55% and 13.59%,
respectively.
[A graph is shown here for the 30-Year U.S. Treasury Bond Yield from 5/31/96 to
5/31/97. The vertical axis shows the yield and the horizontal axis shows the
time period. The ending value on 5/31/97 for the 30 Year U.S. Treasury Bond
is 6.91%.]
(1) The 30-year U.S. Treasury Bond is generally considered the benchmark for
the long-term interest rates in the U.S.
The Fund's investment categories were rebalanced within their respective ranges
at the end of May. Current portfolio mix as of May 31, 1997, was 75.6% in bonds
and 23.1% in common stocks.
Bonds
Following the low point in yields at the beginning of this six-month reporting
period, significant changes were made in the bond portfolio to reduce volatility
yet retain high current income.
The portfolio has been reoriented to approximately one-third in long Treasury
bonds, one-third in high-quality corporate bonds (rated at least A) with
intermediate maturities (8-9 years), and one-third in GNMA mortgage pass-through
securities which are pools of mortgages backed by the full faith and credit of
the U.S. Government. GNMAs have average lives of 8-10 years and yields which are
competitive with long-term A rated corporate bonds. Thus, the portfolio has
about the same yield as before but duration (a measure of sensitivity to
interest rate changes) has been reduced since November 30, 1996, from 11.5 years
to 7.6 years.
Stocks
Over the last six months, the stock market, as measured by the S&P 500 Index,(2)
has continued to appreciate beyond our expectations. Within the Fund's equity
portion, performance was aided by the weightings in Healthcare (pharmaceuticals
and managed care), Tobacco (Philip Morris and Universal Corp.),(3) Machinery
(BW/IP and Deere & Co.), Manufacturing (Hillenbrand Industries), Truckers
(Aeroquip Vickers), and selected positions in Technology. More specifically for
this period, the Fund's investments in Communication Equipment (Lucent
Technologies) and Semiconductor Equipment (Applied Materials and Silicon Valley
Group) have shown strong appreciation. We continue to believe that these sectors
offer attractive values.
Investments that had a detrimental impact on performance included Chemicals (Dow
Chemical), Metals (Inco and Titanium Metals), Pollution Control (Waste
Management), Electric Utilities (Houston Industries and Pacific Gas & Electric),
and Retail Department Stores (J.C. Penney).
We have increased our positions in Foods (Ralston Purina), Healthcare (Pharmacia
& Upjohn), and Real Estate Investment Trusts (REITs) (Storage USA). Although
REITs have been relatively poor performing stocks, they have the potential to
provide high income (yields of 5% plus) and share price stability in times of
volatile markets.
(2) The S&P 500 Index is an unmanaged index representing the average
performance of a group of 500 widely held publicly traded stocks. It is
not possible to invest directly in the S&P 500 Index.
(3) Sold out prior to end of the reporting period.
As stated in previous communications, we continue to adhere to our value
strategy for the equity allocation of the Fund. This value strategy is based on
purchasing stocks that meet our criteria of low relative price-to-earnings
ratios, low relative price-to-cash flow ratios, low relative price-to-book value
ratios, and low price-to-normalized earning ratios. All of our current stock
holdings meet at least one of these criteria.
Money Market Instruments
With the Fund's emphasis on income, this investment category is used for the
temporary investment of cash prior to transitioning into more permanent
investments in bonds and stocks. It can also serve as a liquidity reserve when
needed. Investments are made in the highest quality money market instruments,
usually U.S. Government Agencies' obligations.
[A pie chart is shown here depicting the Asset Allocation as of May 31, 1997
for the USAA Income Strategy Fund to be: Stocks - 23.1%* and Bonds - 75.6%*.]
*Percentages are of the Net Assets in the Portfolio and may or may not equal
100%.
Top 5 Equity Holdings
(% of Net Assets)
Boeing .8
B.F. Goodrich .7
Aluminum Co. of America .5
Schlumberger .5
Sonat .5
See page 11 for a complete listing of the Portfolio of Investments in
Securities.
DISTRIBUTIONS TO SHAREHOLDERS
The following per share information describes the federal tax treatment of
distributions made during the fiscal year ended May 31, 1997. These figures are
provided for information purposes only and should not be used for reporting to
federal or state revenue agencies. Distributions for the calendar year will be
reported to you on Form 1099-DIV in January 1998.
Ordinary income $.54*
Long-term capital gains .01
----
Total $.55
====
11.03% of ordinary income distributions qualify for deduction by corporations.
* Includes distribution of short-term capital gains, if any, which are taxable
as ordinary income.
INDEPENDENT AUDITORS' REPORT
The Shareholders and the Board of Trustees
USAA INVESTMENT TRUST:
We have audited the accompanying statement of assets and liabilities and
portfolio of investments in securities of the Income Strategy Fund of USAA
Investment Trust as of May 31, 1997, the related statement of operations for the
year then ended, the statements of changes in net assets for the year ended May
31, 1997 and the nine-month period ended May 31, 1996, and the financial
highlights information presented in note 7 to the financial statements for the
year ended May 31, 1997 and the nine-month period ended May 31, 1996. These
financial statements and the financial highlights information are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights information
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of May 31, 1997, by correspondence with the custodian and brokers. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and the financial highlights
information referred to above present fairly, in all material respects, the
financial position of the Income Strategy Fund of USAA Investment Trust as of
May 31, 1997, the results of its operations for the year then ended, the changes
in its net assets for the year ended May 31, 1997 and the nine-month period
ended May 31, 1996, and the financial highlights information for the year ended
May 31, 1997 and the nine-month period ended May 31, 1996, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
July 9, 1997
<TABLE>
<CAPTION>
Income Strategy Fund
Statement of Assets and Liabilities
(In Thousands)
May 31, 1997
<S> <C>
Assets
Investments in securities, at market value (identified cost of $13,105) $ 13,699
Cash 10
Receivables:
Capital shares sold 60
Dividends and interest 154
----------
Total assets 13,923
----------
Liabilities
USAA Transfer Agency Company 2
Accounts payable and accrued expenses 43
----------
Total liabilities 45
----------
Net assets applicable to capital shares outstanding $ 13,878
==========
Represented by:
Paid-in capital $ 13,170
Accumulated undistributed net investment income 113
Accumulated net realized gain on investments 1
Net unrealized appreciation of investments 594
----------
Net assets applicable to capital shares outstanding $ 13,878
==========
Capital shares outstanding, unlimited number of shares authorized,
no par value 1,280
==========
Net asset value, redemption price, and offering price per share $ 10.84
==========
</TABLE>
See accompanying notes to financial statements.
Income Strategy Fund
Portfolio of Investments in Securities
May 31, 1997
Market
Number Value
of Shares Security (000)
--------- -------- -----
Stocks (23.1%)
Aerospace/Defense (1.4%)
2,100 B.F. Goodrich Co. $ 90
1,025 Boeing Co. 108
- ---------------------------------------------------
198
- ---------------------------------------------------
Aluminum (0.5%)
1,000 Aluminum Co. of America 74
- ---------------------------------------------------
Auto Parts (0.4%)
1,400 Lear Corp.* 54
- ---------------------------------------------------
Automobiles (0.4%)
1,400 Ford Motor Co. 52
- ---------------------------------------------------
Bank Holding Companies -
Major Regional (0.4%)
1,400 PNC Bank Corp. 59
- ---------------------------------------------------
Bank Holding Companies -
Money Center (0.4%)
700 Bankers Trust New York Corp. 59
- ---------------------------------------------------
Brokerage Firms (0.5%)
1,600 Dean Witter, Discover & Co. 66
- ---------------------------------------------------
Chemicals (0.5%)
800 Dow Chemical Co. 67
264 Millennium Chemicals, Inc. 5
- ---------------------------------------------------
72
- ---------------------------------------------------
Communication - Equipment
Manufacturers (0.5%)
1,000 Lucent Technologies, Inc. 64
- ---------------------------------------------------
Containers - Metals & Glass (0.3%)
1,600 Ball Corp. 47
- ---------------------------------------------------
Distribution & Pipelines (0.9%)
1,400 NICOR, Inc. 48
1,300 Sonat, Inc. 75
- ---------------------------------------------------
123
- ---------------------------------------------------
Drugs (0.1%)
400 Pharmacia & Upjohn, Inc. 14
- ---------------------------------------------------
Electric Power (0.6%)
1,600 Houston Industries, Inc. 33
2,300 PG & E Corp. 53
- ---------------------------------------------------
86
- ---------------------------------------------------
Electrical Equipment (0.3%)
600 Rockwell International Corp. 39
- ---------------------------------------------------
Electronics - Semiconductors (1.0%)
700 Applied Materials, Inc.* 45
1,600 National Semiconductor Corp.* 45
1,700 Silicon Valley Group, Inc.* 41
- ---------------------------------------------------
131
- ---------------------------------------------------
Finance - Consumer (0.5%)
1,400 Associates First Capital Corp. 66
- ---------------------------------------------------
Foods (0.5%)
1,200 Dean Foods Co. 46
200 Ralston Purina Group 17
- ---------------------------------------------------
63
- ---------------------------------------------------
Healthcare - HMOs (0.4%)
2,500 Humana, Inc.* 57
- ---------------------------------------------------
Heavy Duty Trucks & Parts (0.5%)
1,500 Aeroquip Vickers, Inc. 65
- ---------------------------------------------------
Household Products (0.5%)
500 Procter & Gamble Co. 69
- ---------------------------------------------------
Insurance - Multi-Line
Companies (0.4%)
600 Aetna, Inc. 61
- ---------------------------------------------------
Insurance - Property/Casualty (1.2%)
450 American International Group, Inc. 61
2,000 Everest Reinsurance Holdings, Inc. 68
2,000 Highlands Insurance Group, Inc.* 40
- ---------------------------------------------------
169
- ---------------------------------------------------
Leisure Time (0.4%)
1,900 Brunswick Corp. 58
- ---------------------------------------------------
Machinery - Diversified (0.8%)
2,700 BW/IP, Inc. 52
1,200 Deere & Co. 61
- ---------------------------------------------------
113
- ---------------------------------------------------
Manufacturing -
Diversified Industries (0.5%)
400 Avery Dennison Corp. 15
1,300 Hillenbrand Industries, Inc. 61
- ---------------------------------------------------
76
- ---------------------------------------------------
Metals - Miscellaneous (0.6%)
1,500 Inco Ltd. 50
1,200 Titanium Metals Corp.* 36
- ---------------------------------------------------
86
- ---------------------------------------------------
Office Equipment & Supplies (0.4%)
800 Xerox Corp. 54
- ---------------------------------------------------
Oil - Domestic (0.3%)
2,000 Occidental Petroleum Corp. 47
- ---------------------------------------------------
Oil - Exploration & Production (0.8%)
1,700 Apache Corp. 58
5,500 Gulf Canada Resources Ltd.* 50
- ---------------------------------------------------
108
- ---------------------------------------------------
Oil - International (0.5%)
600 Texaco, Inc. 65
- ---------------------------------------------------
Oil Well Equipment & Service (0.5%)
600 Schlumberger Ltd. 71
- ---------------------------------------------------
Paper & Forest Products (1.3%)
3,000 Jefferson Smurfit Corp.* 54
1,200 Kimberly-Clark Corp. 60
1,200 Weyerhaeuser Co. 60
- ---------------------------------------------------
174
- ---------------------------------------------------
Pollution Control (0.4%)
1,900 Waste Management, Inc. 60
- ---------------------------------------------------
Publishing (0.9%)
1,200 American Greetings Corp. 41
1,400 Dun & Bradstreet Corp. 37
900 Houghton Mifflin Co. 53
- ---------------------------------------------------
131
- ---------------------------------------------------
Railroads (0.5%)
700 Norfolk Southern Corp. 68
- ---------------------------------------------------
Real Estate Investment Trusts (0.5%)
1,200 Kimco Realty Corp. 38
800 Storage USA, Inc. 30
- ---------------------------------------------------
68
- ---------------------------------------------------
Retail - General Merchandising (0.6%)
1,000 J.C. Penney Company, Inc. 51
500 Sears, Roebuck & Co. 25
- ---------------------------------------------------
76
- ---------------------------------------------------
Retail - Specialty (0.3%)
2,800 Phillips-Van Heusen Corp. 39
- ---------------------------------------------------
Specialty Printing (0.1%)
500 Deluxe Corp. 16
- ---------------------------------------------------
Telephones (1.2%)
1,500 AT&T 55
1,300 GTE Corp. 57
1,100 Sprint Corp. 54
- ---------------------------------------------------
166
- ---------------------------------------------------
Tobacco (0.3%)
1,300 RJR Nabisco Holdings Corp. 42
- ---------------------------------------------------
Total stocks (cost: $2,434) 3,206
- ---------------------------------------------------
Principal Market
Amount Coupon Value
(000) Security Rate Maturity (000)
----- -------- ---- -------- -----
Bonds (75.6%)
$ 500 Central Power & Light Co. 6.63% 7/01/05 $ 482
500 Citicorp 6.38 1/15/06 473
500 Ford Motor Credit Co. 6.13 1/09/06 463
500 Hydro Quebec (Canada) 6.98 2/28/05 492
500 Pacific Bell 5.88 2/15/06 462
500 Sara Lee Corp. 6.30 11/07/05 476
500 WMX Technologies, Inc. 7.00 10/15/06 492
1,834 Government National Mortgage Association 7.00 3/15/26 1,785
99 Government National Mortgage Association 7.50 8/15/26 99
1,486 Government National Mortgage Association 7.50 11/15/26 1,482
500 Government National Mortgage Association 7.50 5/15/27 499
309 U.S. Treasury Bonds 6.50 11/15/26 291
2,728 U.S. Treasury Bonds 7.88 2/15/21 2,997
- -------------------------------------------------------------------------------
Total bonds (cost: $10,671) 10,493
- -------------------------------------------------------------------------------
Total investments (cost: $13,105) $13,699
===============================================================================
- ---------------------
*Non-income producing.
Notes to Portfolio of Investments in Securities
General Notes
Market values of securities are determined by procedures and practices discussed
in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
Investments in foreign securities were 4.8% of net assets at May 31, 1997.
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
Income Strategy Fund
Statement of Operations
(in Thousands)
Year ended May 31, 1997
<S> <C>
Net investment income:
Income:
Dividends $ 69
Interest 685
-------
Total income 754
-------
Expenses:
Management fees 65
Transfer agent's fees 17
Custodian's fees 50
Postage 4
Shareholder reporting fees 3
Trustees' fees 4
Registration fees 28
Audit fees 20
Legal fees 2
Other 3
-------
Total expenses before reimbursement 196
Expenses reimbursed (66)
-------
Total expenses after reimbursement 130
-------
Net investment income 624
-------
Net realized and unrealized gain on investments:
Net realized gain on investments 52
Change in net unrealized appreciation/depreciation of investments 998
-------
Net realized and unrealized gain 1,050
-------
Increase in net assets resulting from operations $ 1,674
=======
</TABLE>
See accompanying notes to financial statements.
<TABLE>
Income Strategy Fund
Statements of Changes in Net Assets
(In Thousands)
Year ended May 31, 1997
and Nine-month period ended May 31, 1996*
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
From operations:
Net investment income $ 624 $ 324
Net realized gain on investments 52 42
Change in net unrealized appreciation/depreciation of investments 998 (404)
--------- ---------
Increase (decrease) in net assets resulting from operations 1,674 (38)
--------- ---------
Distributions to shareholders from:
Net investment income (620) (215)
--------- ---------
Net realized gains (58) (35)
--------- ---------
From capital share transactions:
Proceeds from shares sold 3,824 17,119
Shares issued for dividends reinvested 378 132
Cost of shares redeemed (3,493) (4,790)
--------- ---------
Increase in net assets from capital share transactions 709 12,461
--------- ---------
Net increase in net assets 1,705 12,173
Net assets:
Beginning of period 12,173 -
--------- ---------
End of period $ 13,878 $ 12,173
========= =========
Undistributed net investment income included in net assets:
Beginning of period $ 109 $ -
========= =========
End of period $ 113 $ 109
========= =========
Change in shares outstanding:
Shares sold 366 1,658
Shares issued for dividends reinvested 37 13
Shares redeemed (333) (461)
--------- ---------
Increase in shares outstanding 70 1,210
========= =========
*Fund commenced operations September 1, 1995.
See accompanying notes to financial statements.
</TABLE>
Income Strategy Fund
Notes to Financial Statements
May 31, 1997
(1) Summary of Significant Accounting Policies
USAA INVESTMENT TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended, is a diversified, open-end management investment company
organized as a Massachusetts business trust consisting of eleven separate funds.
The information presented in this annual report pertains only to the Income
Strategy Fund (the Fund). The Fund's investment objective is to seek a high
current return, with reduced risk over time, through an asset allocation
strategy which emphasizes income and gives secondary emphasis to long-term
growth of capital.
A. Security valuation -- The value of each security is determined (as of the
close of trading on the New York Stock Exchange on each business day the
Exchange is open) as set forth below:
1. Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities exchanges
are generally valued at the closing values of such securities on the exchange
where primarily traded. If no sale is reported, the latest bid price is
generally used depending upon local custom or regulation.
2. Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices.
3. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value.
4. Other debt and government securities are valued each business day by a
pricing service (the Service) approved by the Fund's Board of Trustees. The
Service uses the mean between quoted bid and asked prices or the last sale price
to price securities when, in the Service's judgement, these prices are readily
available and are representative of the securities' market values. For many
securities, such prices are not readily available. The Service generally prices
these securities based on methods which include consideration of yields or
prices of securities of comparable quality, coupon, maturity and type,
indications as to values from dealers in securities, and general market
conditions.
5. Securities which cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value, using methods determined
by the Manager under the general supervision of the Board of Trustees.
B. Federal taxes -- The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities -- Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Dividend
income is recorded on the ex-dividend date; interest income is recorded on the
accrual basis. Discounts and premiums on securities are amortized over the life
of the respective securities.
D. Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the financial
statements.
(2) Lines of Credit
The Fund participates with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million through January 13, 1998, one with USAA
Capital Corporation (CAPCO), an affiliate of the Manager ($750 million
uncommitted), and one with an unaffiliated bank ($100 million committed). The
purpose of the agreements is to meet temporary or emergency cash needs,
including redemption requests that might otherwise require the untimely
disposition of securities. Subject to availability under these agreements, the
Fund may borrow up to a maximum of 25% of its total assets, of which only 5% may
be borrowed from CAPCO, at the lending institution's borrowing rate plus a
markup. The Fund had no borrowings under either of these agreements during the
year ended May 31, 1997.
(3) Distributions
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are made
in the succeeding fiscal year or as otherwise required to avoid the payment of
federal taxes. A distribution of net investment income of $.12 per share,
declared and paid in June 1997, is not reflected in the accompanying financial
statements.
(4) Investment Transactions
Purchases and sales/maturities of securities, excluding short-term securities,
for the year ended May 31, 1997 were $9,462,231 and $8,264,261, respectively.
Gross unrealized appreciation and depreciation of investments at May 31, 1997
was $781,680 and $187,851, respectively.
(5) Transactions with Manager
A. Management fees -- The investment policies of the Fund and management of the
Fund's portfolio are carried out by USAA Investment Management Company (the
Manager). The Fund's management fees are computed at .50% of its annual average
net assets.
The Manager has voluntarily agreed to limit the annual expenses of the Fund to
1.0% of its annual average net assets.
B. Transfer agent's fees -- USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Fund based on an annual charge per shareholder account plus out-of-pocket
expenses.
C. Underwriting services -- The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing best efforts basis. The
Manager receives no commissions or fees for this service.
(6) Transactions with Affiliates
USAA Investment Management Company is indirectly wholly owned by United Services
Automobile Association (the Association), a large, diversified financial
services institution. At May 31, 1997, the Association and its affiliates owned
502,387 shares (39.3%) of the Fund.
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
(7) Financial Highlights
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Nine-month
Year Ended Period Ended
May 31, May 31,
1997 1996*
---- ----
<S> <C> <C>
Net asset value at
beginning of period $ 10.06 $ 10.00
Net investment income .50 .39(b)
Net realized and
unrealized gain (loss) .83 (.06)
Distributions from net
investment income (.50) (.22)
Distributions of realized
capital gains (.05) (.05)
-------- --------
Net asset value at
end of period $ 10.84 $ 10.06
======== ========
Total return (%) ** 13.59 3.23
Net assets at end
of period (000) $ 13,878 $ 12,173
Ratio of expenses to
average net assets (%) 1.00(c) 1.00(a,c)
Ratio of net investment
income to average
net assets (%) 4.80(c) 4.71(a,c)
Portfolio turnover (%) 64.71 78.60
Average commission rate
paid per share + $ .0478 $ .0496
</TABLE>
* Fund commenced operations September 1, 1995.
** Assumes reinvestment of all dividend income and capital gain distributions
during the period.
+ Calculated by aggregating all commissions paid on the purchase and sale of
securities and dividing by the actual number of shares purchased or sold for
which commissions were charged.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
(c) The information contained in the preceding table is based on actual
expenses for the period, after giving effect to reimbursements of expenses
by the Manager. Absent such reimbursements the Fund's ratios would have
been:
Nine-month
Year Ended Period Ended
May 31, May 31,
1997 1996*
---- ----
Ratio of expenses to
average net assets (%) 1.51 1.78(a)
Ratio of net investment income
to average net assets (%) 4.29 3.93(a)
*Fund commenced operations September 1, 1995.
