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 9
Independent Auditors' Report 10
Statement of Assets and Liabilities 11
Portfolio of Investments in Securities 12
Notes to Portfolio of Investments in Securities 20
Statement of Operations 21
Statements of Changes in Net Assets 22
Notes to Financial Statements 23
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 Cornerstone
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 appears 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
CORNERSTONE STRATEGY FUND
OBJECTIVE: Achieve a positive, inflation-adjusted rate of return and a
reasonably stable value of Fund shares, thereby preserving purchasing power of
shareholders' capital.
5/31/97 5/31/96
Net Assets...................... $1,263.4 MILLION $1,035.8 Million
Net Asset Value Per Share........ $27.96 $25.47
Average Annual Total Returns as of 5/31/97
1 Year.................................................... 16.94%
5 Years................................................... 13.38%
10 Years.................................................. 8.88%
[A graph is shown here which is a comparison of the change in value of a $10,000
investment, for the period of 5/31/87 to 5/31/97, with dividends and capital
gains reinvested. The ending value of each item graphed is as follows: S&P 500
Index - $39,399, USAA Cornerstone Strategy Fund - $23,416, and the Lipper Global
Flexible Portfolio Funds Average - $18,690.]
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Cornerstone Strategy Fund to the S&P 500 Index and the Lipper Global
Flexible Portfolio Funds Average, an average performance level of all global
flexible portfolio funds, as reported by Lipper Analytical Services, an
independent organization that monitors the performance of mutual funds. 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.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment has
been made for taxes payable by shareholders on their reinvested dividends and
capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return and
principal value of an investment will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
MESSAGE FROM THE MANAGERS
[A photograph of portfolio managers seated L to R: Harry W. Miller, CFA
(Allocation Manager, Basic Value Stocks), John W. Saunders, Jr., CFA (U.S.
Government Securities); Standing L to R: Mark W. Johnson, CFA (Gold and Real
Estate Stocks), W. Travis Selmier, II, CFA (Foreign Stocks), David G. Peebles,
CFA (Foreign Stocks) and Albert C. Sebastian, CFA (Foreign Stocks).]
The Cornerstone Strategy Fund is a widely-diversified portfolio with investments
in the following sectors: Basic Value Stocks (22-28%) of the Fund's net assets,
Foreign Stocks (22-28%), U.S. Government Securities (22-28%), Real Estate Stocks
(22-28%), and Gold Stocks (0-10%). The pie chart on page 8 shows the asset
allocation as of the end of this fiscal year, May 31, 1997. Your Fund's 16.94%
one-year total return for the period outperformed the Lipper Global Flexible
Fund Index(1) of 14.56% for the same period.(2)
Basic Value Category
The Standard and Poor's 500 Index(3) is up over 13% since our semiannual report
of November 30, 1996, despite the fact that the Federal Reserve raised interest
rates. Interest rates are still relatively low, inflation appears to be in
check, and overall corporate earnings have been favorable.
We currently hold 39 issues, the same number as six months ago. Five new issues
were added: PNC Bank, Southtrust, Chase Manhattan, Unocal, and Ford Motor. Five
issues were eliminated: American Brands, Dow Chemical, Nordstrom, APL, and
Houston Industries.
On a total return basis, a few exceptionally good performers during this
six-month period were Xerox, Bristol-Myers Squibb, Philip Morris, Universal
Corp., Caterpillar, and Allstate. A few stocks that underperformed were
Pharmacia & Upjohn, Chrysler, NICOR, and B.F. Goodrich.
The Basic Value sector is well-diversified in 22 industries. We are overweighted
in Healthcare/Drugs, Machinery, Oils, and Banks.
(1) Lipper Analytical Services is an independent organization that monitors
the performance of mutual funds.
(2) Past performance is no guarantee of future results and the value of
your investment may vary according to the Fund's performance.
(3) 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.
Foreign Category
The performance in most emerging markets and Europe has been favorable while the
Japanese equity market has continued to underperform.
Europe - The European markets provided favorable returns over the period
reflecting accelerating earnings growth and further corporate restructuring. We
increased our exposure to stocks which benefit from stronger economic growth as
well as from increased export opportunities due to a stronger U.S. dollar. Our
holdings in Spain, Portugal, the Netherlands, and Switzerland made significant
contributions to our European performance.
Japan - Since our last report, some political stability has returned and
economic growth has picked up. However, continued problems in the banking
system, rising interest rates, and higher equity valuation levels vis-a-vis
other developed markets lead us to maintain an underweighted position. We
continue to hold large capitalization stocks with an emphasis on export-related
companies.
Emerging Markets - Emerging markets have shown some rebound since the beginning
of the year, with Latin American and East European markets showing stronger
performance than Asian markets. Economic recovery in Argentina and Mexico and
economic structural reform in Brazil continue to support those markets. While
concerns about the Asian growth miracle have caused worries, we continue to
believe that Asian growth prospects are still bright. Hong Kong, China, Taiwan,
and Indonesia have remained strong performers, while Thailand, the Philippines,
and Korea have suffered because of concerns over currency weakness.
For the balance of 1997, we expect continuing economic improvement with
accelerating earnings growth in Europe. Japan is still a market with selective
opportunities. The continuation of low inflation and good economic growth
provides a favorable backdrop for most emerging markets. The portfolio continues
to be overweighted in emerging markets, Europe, and other developed markets at
the expense of Japan.
U.S. Government Category
Rising interest rates and bond market volatility have continued throughout this
reporting period. 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.4 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 year ago level.
(4) The 30-year Treasury Bond is generally considered the benchmark for
long-term interest rates in the U.S.
[A graph is shown here showing 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%.]
Continued strength in the economy plus the Federal Reserve's tightening action
in March are the causes of this continued weakness in the bond market.
Convincing evidence that the economy is slowing will be required before we can
expect lower interest rates. As we indicated in our semiannual report, we will
continue to maintain a mix of short, intermediate, and long-term maturities
within this portfolio segment to provide a high level of income with moderate
volatility in price.
Real Estate Category
Total return for the fiscal year ended May 31, 1997, for Real Estate Investment
Trusts (REITs), as measured by the National Association of Real Estate
Investment Trusts (NAREIT) equity index, was 29.31%. This was in line with the
S&P 500 Index at 29.44%. Many sectors and markets have seen improved occupancy,
rent growth greater than expense growth, and subdued new construction. Because
of these solid operating fundamentals, most REITs were able to raise their
dividends during the year. This led to good performance and provided the impetus
for full participation in the overall bull market in stocks.
As compared to the NAREIT equity index, the Fund is overweighted in office and
industrial properties, self-storage facilities, manufactured home communities,
and full-service hotels. It is underweighted in retail and apartments. Also, it
has no exposure to healthcare, REITs that do not specialize by property type, or
to REITs that focus on the long-term triple net lease business.
During the year we sold the Weyerhauser position in favor of doubling up on
Rayonier. We also liquidated the last of the healthcare REIT holdings. Lastly,
we significantly reduced the retail and apartment positions in favor of an
increased exposure to full-service hotels, resorts, and the office and
industrial sector.
Gold Category
This sector of the Fund was liquidated during the year and the proceeds
allocated to the other sectors. We find it extremely difficult to make a secular
positive case for gold stocks given that gold no longer occupies the central
role in monetary affairs that it once did. Consequently, in our opinion, the
Fund has the potential to achieve better long-term returns elsewhere. However,
we will continue to monitor the gold market and may reinvest at any time should
conditions change.
[A pie chart is shown here depicting the Asset Allocation as of May 31, 1997 for
the USAA Cornerstone Strategy Fund to be: Foreign Securities - 26.1%*,
U.S. Government Securities - 25.6%*, Basic Value Stocks - 24 .3%* and Real
Estate Stocks - 24.2%*.]
*Percentages are of the Net Assets in the Portfolio and may or may not equal
100%.
Top 10 Industries
(% of Net Assets)
Real Estate Investment Trusts 20.0
Oil Related 5.6
Telecommunications Related 4.7
Healthcare Related 4.5
Bank Related 4.1
Machinery Diversified 2.8
Hotel/Motel 2.7
Retail Related 2.5
Aerospace/Defense 2.2
Chemicals Related 1.9
Top 3 Holdings in Each Sector
(%of Net Assets)
Foreign
Elf Aquitaine ADS .5
Nokia ADS .4
Novartis AG .4
Real Estate
Developers Diversified 1.0
Host Marriott .9
Storage USA .9
U.S. Government
U.S. Treasury Bond @ 7.88% 5.2
U.S. Treasury Bond @7.63% 4.3
GNMA Pool #348947 @7.00% .8
Basic Value
American Home Products 1.2
Boeing 1.2
Deere & Co. 1.2
Foreign investing is subject to additional risks which are discussed in the
Fund's prospectus. Gold mining stocks involve additional risk because of gold's
price volatility. Since return on any investment is generally commensurate with
risk, investors should be aware of the potential volatility associated with
foreign markets.
See page 12 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 $1.00 *
Long-term capital gains .62
-----
Total $1.62
=====
45.74% 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 Cornerstone 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 each of the years
in the two-year period then ended, and the financial highlights information
presented in note 8 to the financial statements for each of the periods in the
five-year period then ended. These financial statements and the financial
highlights information are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights information based on our 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 Cornerstone 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 each of the years in the two-year period then
ended, and the financial highlights information for each of the periods in the
five-year period then ended, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
July 9, 1997
<TABLE>
Cornerstone Strategy Fund
Statement of Assets and Liabilities
(In Thousands)
May 31, 1997
<S> <C>
Assets
Investments in securities, at market value (identified cost of $990,229) $ 1,265,389
Cash 170
Cash denominated in foreign currencies (identified cost of $2,318) 2,294
Receivables:
Capital shares sold 1,147
Dividends and interest 4,707
Securities sold 4,855
Unrealized appreciation on foreign currency contracts held, at value 6
------------
Total assets 1,278,568
------------
Liabilities
Securities purchased 13,651
Unrealized depreciation on foreign currency contracts held, at value 10
Capital shares redeemed 414
USAA Investment Management Company 792
USAA Transfer Agency Company 195
Accounts payable and accrued expenses 151
-------------
Total liabilities 15,213
-------------
Net assets applicable to capital shares outstanding $ 1,263,355
=============
Represented by:
Paid-in capital $ 937,668
Accumulated undistributed net investment income 11,014
Accumulated net realized gain on investments 39,541
Net unrealized appreciation of investments 275,160
Net unrealized depreciation on foreign currency translations (28)
------------
Net assets applicable to capital shares outstanding $ 1,263,355
============
Capital shares outstanding, unlimited number of shares authorized,
no par value 45,179
============
Net asset value, redemption price, and offering price per share 27.96
============
</TABLE>
See accompanying notes to financial statements.
Cornerstone Strategy Fund
Portfolio of Investments in Securities
May 31, 1997
Market
Number Value
of Shares Security (000)
--------- -------- -----
Foreign Securities (26.1%)
Foreign Stocks (25.9%)
Argentina (0.3%)
50,700 Disco S.A. ADS * $ 1,711
18,000 IRSA Inversiones y
Representaciones S.A. GDS 704
120,000 Quilmes Industrial (Quinsa)
S.A. ADS 1,395
-----------
3,810
-----------
Australia (0.6%)
175,000 Broken Hill Proprietary Co. Ltd.2,514
365,000 CSL Ltd. 2,238
400,000 Pasminco Ltd. 813
334,100 Village Roadshow Ltd.
(Preferred) 852
210,200 Woodside Petroleum Ltd. 1,775
-----------
8,192
-----------
Austria (0.8%)
4,690 Austria Mikro Systeme
International AG 365
34,200 Boehler Uddeholm AG 2,588
66,711 VA Stahl AG 3,009
25,000 VA Technologie AG 4,418
-----------
10,380
-----------
Belgium (0.4%)
5,042 Colruyt S.A. 2,029
30,700 Union Miniere S.A. * 2,470
-----------
4,499
-----------
Brazil (0.9%)
55,500,000 Companhia Energetica de Minas
Gerais (Cemig) (Preferred) 2,540
85,000 Multicanal Participacoes S.A.
ADS (Preferred) * 994
10,000,000 Petroleo Brasileiro S.A.
(Preferred) 2,391
21,000,000 Telebras PN (Preferred) 2,897
64,100 Uniao de Bancos Brasileiros
S.A. (Unibanco) GDR * 2,212
-----------
11,034
-----------
Canada (1.8%)
69,000 Alliance Forest
Products, Inc. * 1,660
159,300 Anderson Exploration Ltd. * 2,110
585,000 Beau Canada
Exploration Ltd. * 1,448
86,100 Canadian National
Railway Co. 3,595
179,800 Canadian Occidental
Petroleum Ltd. 4,067
193,900 Gulf Canada Resources Ltd. * 1,754
270,000 National Bank of Canada 3,175
104,000 OSF, Inc.* 937
26,500 St. Laurent Paperboard, Inc. * 426
148,000 Suncor, Inc. 3,669
-----------
22,841
-----------
Chile (0.3%)
19,400 Madeco S.A. ADS 497
86,100 Maderas y Sinteticos
S.A. ADS 1,335
24,800 Sociedad Quimica y Minera
de Chile S.A. ADS 1,612
-----------
3,444
-----------
China (0.1%)
400,000 New World
Infrastructure Ltd. * 1,247
-----------
Colombia (0.1%)
118,000 Banco de Colombia GDS 708
-----------
Czech Republic (0.1%)
26,000 Komercni Banka A.S. GDR 631
9,000 SPT Telecom A.S. * 829
-----------
1,460
-----------
Denmark (0.9%)
10,000 Carli Gry International A/S 599
60,000 ISS International Service
System A/S "B" * 1,991
18,740 Novo Nordisk A/S "B" 2,007
130,000 SAS Danmark A/S 1,328
32,600 Tele Danmark A/S "B" 1,603
65,300 Tele Danmark A/S ADS 1,616
40,000 Unidanmark A/S 2,089
-----------
11,233
-----------
Egypt (0.1%)
39,300 Suez Cement Co. S.A.E. GDS* 721
-----------
Finland (0.4%)
80,000 Nokia Corp. ADS 5,280
-----------
France (1.6%)
11,700 Accor S.A. 1,621
51,000 Bouygues Offshore S.A. ADR* 637
89,800 Coflexip ADS * 2,554
110,700 Elf Aquitaine ADS 5,770
25,000 Eramet Group 1,251
10,700 Essilor International 2,713
26,900 Louis Dreyfus Citrus * 974
7,746 Pathe S.A. * 1,784
43,000 Valeo S.A. 2,552
-----------
19,856
-----------
Germany (0.9%)
36,000 Leica Camera AG * 969
62,000 Pfeiffer Vacuum Technology
AG ADS * 1,403
98,200 Rofin-Sinar
Technologies, Inc.* 1,522
6,300 SAP AG 1,123
10,700 SAP AG (Preferred) 1,947
71,000 Veba AG 4,013
-----------
10,977
-----------
Hong Kong (0.4%)
1,770,000 Amoy Properties Ltd. 2,010
71,000 Asia Satellite
Telecommunications
Holdings Ltd. ADR 1,961
762,000 Cosco Pacific Ltd. 1,092
-----------
5,063
-----------
Hungary (0.1%)
100,000 Mol Magyar Olay Es
Gazipari GDS 1,867
-----------
India (0.3%)
45,000 Hindalco Industries Ltd. GDR 1,485
110,000 Larsen & Toubro Ltd. GDR 1,455
53,300 Videsh Sanchar Nigam
Ltd. GDR * 1,098
-----------
4,038
-----------
Indonesia (0.4%)
209,000 PT Astra International, Inc. 799
1,805,625 PT Bank Dagang Nasional
Indonesia 1,949
379,375 PT Bank Dagang Nasional
Indonesia Warrants * 154
225,000 PT HM Sampoerna 909
460,000 PT Jaya Real Property 643
158,000 PT Modern Photo Film 575
-----------
5,029
-----------
Israel (0.4%)
46,800 Blue Square - Israel Ltd. ADS* 813
46,900 ECI Telecommunications Ltd. 1,084
12,900 Koor Industries Ltd. ADS 226
53,000 Teva Pharmaceutical
Industries Ltd. ADR 3,180
-----------
5,303
-----------
Italy (0.7%)
47,400 Eni S.p.A. ADS 2,406
20,400 Fila Holdings S.p.A. ADS 870
82,095 Instituto Bancario San Paulo
di Torino S.p.A. 516
80,000 Instrumentation Laboratory
S.p.A. ADS * 315
32,900 SAES Getters S.p.A. ADR 296
1,900,000 SEAT S.p.A. * 565
1,900,000 SEAT S.p.A. Savings * 365
1,050,000 STET S.p.A. 4,121
-----------
9,454
-----------
Japan (3.6%)
110,000 Bridgestone Corp. 2,484
144,000 Canon, Inc. 3,648
95,000 Daibiru Corp. 1,167
230,000 Hitachi Ltd. 2,449
80,000 Honda Motor Co. Ltd. 2,350
66,000 Hoya Corp. 2,998
50,000 Ito-Yokado Co. Ltd. 2,851
20,000 Kyocera Corp. 1,441
111,500 Laox Co. Ltd. 1,666
270,000 Minebea Co. Ltd. 2,643
303,000 Mitsubishi Heavy
Industries Ltd. 2,181
90,000 Namco 3,153
5,600 Nippon Television Network 2,236
954,000 NKK Corp. 1,876
200,000 Nomura Securities Co. Ltd. 2,370
60 NTT Data Communications
Systems Corp. 2,200
230,000 Shiseido Co. Ltd. 3,358
232,000 Terumo Corp. 4,084
42,000 Tostem Corp. 1,122
-----------
46,277
-----------
Korea (0.2%)
50,000 Korea Electric Power Corp. 1,542
17,298 Samsung Electronics Co. Ltd. 1,690
-----------
3,232
-----------
Malaysia (0.2%)
135,000 Edaran Otomobil
Nasional Bhd 1,177
170,000 Telekom Malaysia Bhd 1,258
------------
2,435
------------
Mexico (0.7%)
1,060,000 Controladora Comercial
Mexicana, S.A. de C.V. 842
19,400 Controladora Comercial
Mexicana, S.A. de C.V. GDR 308
99,237 Desc, Sociedad de Fomento
Industrial, S.A. de C.V. ADS 2,642
116,000 Panamerican Beverages,
Inc. "A" 3,364
130,000 Tubos de Acero de Mexico,
S.A. ADS * 2,275
------------
9,431
------------
Netherlands (1.1%)
24,300 Akzo Nobel N.V. 3,232
33,000 EVC International N.V. 927
73,780 ING Group N.V. 3,258
15,000 Oce-van der Grinten N.V. 1,955
33,500 Philips Electronics N.V. 1,876
120,000 Verenigd Besit VNU 2,709
------------
13,957
------------
Norway (0.5%)
759,000 Christiania Bank og
Kreditkasse 2,610
139,000 Nycomed ASA 1,902
74,600 Schibsted ASA 1,393
------------
5,905
------------
Peru (0.1%)
54,000 Telefonica del Peru S.A. "B"
ADS 1,370
------------
Philippines (0.1%)
32,075 Metropolitan Bank and
Trust Co. 723
2,000,000 SM Prime Holdings, Inc. 569
------------
1,292
------------
Poland (0.2%)
120,000 Elektrim S.A. 1,070
170,000 Polifarb-Cieszyn S.A. 960
------------
2,030
------------
Portugal (0.7%)
101,000 Banco Totta E Acores S.A. 1,439
121,000 Cimentos de Portugal S.A. 2,657
111,700 Portugal Telecom S.A. ADS 4,301
------------
8,397
------------
Russia (0.1%)
54,800 RAO Gazprom ADR 986
Singapore (0.2%)
275,000 Overseas Union Bank Ltd. 1,884
260,000 Singapore Land Ltd. 1,327
------------
3,211
------------
South Africa (0.4%)
41,891 Ellerine Holdings Ltd. 270
33,681 Foodcorp Ltd. 254
251,100 Gencor Ltd. 1,102
300,300 Malbak Ltd. 440
84,263 Nedcor Ltd. GDR 1,664
113,402 New Clicks Holdings Ltd. 127
47,500 South African Breweries Ltd. 1,334
49,519 South African Druggists Ltd. 372
------------
5,563
------------
Spain (0.9%)
93,538 Autopistas del Mare
Nostrum S.A. 1,352
58,900 Corporacion Bancaria
de Espana S.A. 2,934
16,400 Corporacion Mapfre 878
57,800 Telefonica de Espana
S.A. ADR 5,050
51,699 Vallehermoso S.A. 1,306
-------------
11,520
-------------
Sweden (0.8%)
125,000 Autoliv, Inc. SDR * 4,733
116,200 NK Cityfastigheter AB * 802
27,200 Nordbanken AB 842
140,000 Volvo AB 3,875
-------------
10,252
-------------
Switzerland (1.4%)
520 Ares-Serono Group S.A. 707
3,893 Novartis AG 5,277
18,900 Oerlikon Buhrle AG * 2,188
6,200 Selecta Group * 983
1,320 SGS Group AG 2,922
5,893 Sulzer AG P.C. 4,635
68,300 Tag Heuer International
S.A. ADR * 973
-------------
17,685
-------------
Taiwan (0.4%)
2,050,000 China Steel Corp. 2,162
961,658 Far East Department Store * 1,415
600,000 Microtek International, Inc. * 1,604
-------------
5,181
-------------
Thailand (0.1%)
61,400 Bank Of Ayudhya Public
Co. Ltd. 130
175,000 Finance One Public Co. * 48
-------------
178
-------------
Turkey (0.1%)
10,300,000 Olmuksa Mukavva Sanayi
Ve Ticaret A.S. 299
31,735,066 Yapi Ve Kredi Bankasi A.S. 753
-------------
1,052
-------------
United Kingdom (2.2%)
919,000 Avis Europe plc * 1,969
180,000 Cadbury Schweppes plc 1,614
525,000 Cookson Group plc 2,018
785,000 Corporate Services Group plc 2,318
97,800 DFS Furniture Co. plc 960
35,500 Doncasters plc ADS * 790
15,900 Dr. Solomon's Group plc ADR * 322
335,000 Medeva plc 1,502
315,000 National Westminster Bank plc 3,850
100,000 Northern Ireland Electricity plc 662
169,200 Reuters Holdings plc 1,899
272,000 Safeway plc 1,606
943,500 Tomkins plc 4,098
12,800 Vodafone Group plc ADR 571
988,000 WPP Group plc 3,871
-------------
28,050
-------------
Venezuela (0.1%)
31,900 Compania Anonima
Nacional Telefonos
De Venezuela ADS * 1,184
-------------
Other Holdings (0.2%)
1,800,000 Central European Growth
Fund plc 1,973
-------------
Total foreign stocks
(cost: $251,595) 327,597
-------------
Principal
Amount
(000)
-----
Foreign Bonds (0.2%)
Japan
$ 2,100 MBL International Finance
(Bermuda) Trust,
Convertible Notes, 3.00%,
11/30/02 (cost: $2,167) 2,208
----------
Total foreign securities
(cost: $253,762) 329,805
-----------
Number
of Shares
---------
Real Estate Stocks (24.2%)
Hotel/Motel (2.6%)
300,000 Capstar Hotel Co. * 9,000
400,000 Hilton Hotels Corp. 11,300
675,000 Host Marriott Corp. * 11,897
----------
32,197
----------
Leisure Time (0.9%)
450,000 Vail Resorts Inc. * 10,744
----------
Paper & Forest Products (0.7%)
200,000 Rayonier, Inc. 8,575
----------
Real Estate Investment
Trusts (20.0%)
261,100 Alexandria Real Estate
Equities, Inc. * 5,744
300,000 Arden Realty Group, Inc. 7,763
375,000 Avalon Properties, Inc. 10,313
300,000 Beacon Properties Corp. 9,300
600,000 Bradley Real Estate, Inc. 11,325
350,000 Cali Realty Corp. 10,369
275,000 Centerpoint Properties Corp. 8,250
325,000 Chateau Communities Inc. 8,531
300,000 Chelsea GCA Realty, Inc. 10,912
315,000 Columbus Realty Trust 6,930
325,000 Developers Diversified
Realty Corp. 12,106
400,000 Excel Realty Trust, Inc. 10,350
350,000 First Industrial Realty
Trust, Inc. 10,325
250,000 Gables Residential Trust 6,250
50,000 Great Lakes REIT, Inc. 775
350,000 Highwoods Properties, Inc. 10,587
225,000 Kimco Realty Corp. 7,088
425,000 Liberty Property Trust 10,200
400,000 Mills Corp. 10,150
475,000 Patriot American
Hospitality, Inc. 10,272
450,000 Prentiss Properties Trust 10,575
188,400 Reckson Associates
Realty Corp. 4,239
350,000 Shurgard Storage
Centers, Inc. 9,800
250,000 Sovran Self Storage, Inc. 7,250
285,000 Starwood Lodging Trust 10,616
300,000 Storage USA, Inc. 11,437
350,000 Sun Communities, Inc. 11,419
700,000 United Dominion Realty
Trust, Inc. 10,325
-----------
253,201
-----------
Total real estate stocks
(cost: $242,656) 304,717
-----------
Basic Value Stocks (24.3%)
Aerospace/Defense (2.2%)
300,000 B.F. Goodrich Co. 12,900
144,830 Boeing Co. 15,243
-----------
28,143
-----------
Automobiles (0.8%)
200,000 Chrysler Corp. 6,350
100,000 Ford Motor Co. 3,750
-----------
10,100
-----------
Bank Holding Companies -
Major Regional (0.8%)
150,000 PNC Bank Corp. 6,281
100,000 SouthTrust Corp. 3,888
-----------
10,169
-----------
Bank Holding Companies -
Money Center (0.9%)
53,000 Bankers Trust New York Corp. 4,485
68,000 Chase Manhattan Corp. 6,426
-----------
10,911
-----------
Chemicals (1.5%)
325,000 Monsanto Co. 14,300
122,600 Olin Corp. 5,027
-----------
19,327
-----------
Containers - Metals
& Glass (0.3%)
135,000 Ball Corp. 3,932
-----------
Distribution & Pipelines (0.3%)
120,000 NICOR, Inc. 4,125
-----------
Drugs (0.3%)
110,000 Pharmacia & Upjohn, Inc. 3,809
-----------
Electrical Equipment (0.6%)
115,000 Rockwell International Corp. 7,418
-----------
Healthcare - Diversified (2.4%)
200,000 American Home
Products Corp. 15,250
200,000 Bristol-Myers Squibb Co. 14,675
-----------
29,925
-----------
Insurance -
Property/Casualty (1.1%)
150,000 Allstate Corp. 11,006
68,000 Hartford Steam Boiler
Inspection & Insurance Co. 3,468
-----------
14,474
-----------
Machinery - Diversified (2.3%)
145,000 Caterpillar, Inc. 14,156
300,000 Deere & Co. 15,337
-----------
29,493
-----------
Manufacturing - Diversified
Industries (0.7%)
100,000 Minnesota Mining &
Manufacturing Co. 9,175
-----------
Office Equipment & Supplies (0.7%)
132,000 Xerox Corp. 8,943
-----------
Oil - Domestic (0.9%)
125,000 Occidental Petroleum Corp. 2,906
200,000 Unocal Corp. 8,525
-----------
11,431
-----------
Oil - International (1.9%)
70,000 Chevron Corp. 4,900
60,000 Mobil Corp. 8,393
100,000 Texaco, Inc. 10,912
-----------
24,205
-----------
Paper & Forest Products (0.8%)
275,000 James River Corp. 9,659
-----------
Railroads (0.7%)
85,000 Norfolk Southern Corp. 8,256
-----------
Retail - Department Stores (0.5%)
120,000 May Department Stores Co. 5,655
-----------
Retail - General
Merchandising (0.7%)
85,000 J.C. Penney Company, Inc. 4,378
90,000 Sears, Roebuck & Co. 4,421
------------
8,799
------------
Telephones (2.4%)
120,000 GTE Corp. 5,295
167,000 NYNEX Corp. 8,976
138,000 SBC Communications Corp. 8,073
160,000 Sprint Corp. 7,820
-----------
30,164
-----------
Tobacco (1.5%)
120,000 Philip Morris Co., Inc. 5,280
180,000 RJR Nabisco Holdings Corp. 5,828
220,000 Universal Corp. 8,002
-----------
19,110
-----------
Total basic value stocks
(cost: $177,885) 307,223
-----------
U.S. Government & Agency
Issues (25.6%)
Government National Mortgage
Assoc. (5.3%)
34,232 6.50%,5/15/23 - 4/15/24 32,701
18,888 7.00%,8/15/23 18,518
2,908 7.50%,3/15/17 2,944
2,768 8.00%,6/15/16 - 3/15/17 2,864
3,674 8.50%,9/15/09 - 2/15/17 3,869
302 9.00%,6/15/16 - 10/15/16 322
4,370 9.50%,6/15/09 - 8/15/17 4,731
641 10.00%,11/15/09 - 4/15/16 700
65 11.50%,3/15/13 74
4 12.50%,8/15/14 5
-----------
66,728
-----------
U.S. Treasury (9.5%)
50,000 U.S. Treasury Bonds, 7.63%,
2/15/25 53,922
60,000 U.S. Treasury Bonds, 7.88%,
2/15/21 65,906
-----------
119,828
-----------
Discount Note (10.8%)
137,130 Federal National Mortgage
Assn., 5.52%, 6/02/97 137,088
-----------
Total U.S. government
& agency issues
(cost: $315,926) 323,644
-----------
Total investments
(cost $990,229) $ 1,265,389
===========
- ----------------------
*Non-income producing.
Portfolio Summary By Industry
-----------------------------
U.S. Government & Agency Issues 25.6%
Real Estate Investment Trusts 20.0
Oil Related 5.6
Telecommunications Related 4.7
Healthcare Related 4.5
Bank Related 4.1
Machinery - Diversified 2.8
Hotel / Motel 2.7
Retail Related 2.5
Aerospace / Defense 2.2
Chemicals Related 1.9
Paper & Forest Products 1.6
Tobacco 1.6
Automobiles 1.4
Manufacturing - Diversified 1.3
Insurance - Property / Casualty 1.2
Computer Systems 1.1
Auto Parts 1.0
Electrical Equipment 1.0
Office Equipment & Supplies 1.0
Other 12.4
-----
100.2%
======
Cornerstone Strategy Fund
Notes to Portfolio of Investments in Securities
May 31, 1997
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.
ADS/ADR -- American Depositary Shares/Receipts are foreign shares held by a U.S.
bank which issues a receipt evidencing ownership. Dividends are paid in U.S.
dollars.
GDS/GDR -- Global Depositary Shares/Receipts are foreign shares held by a
non-U.S. bank which issues a receipt evidencing ownership. Dividends are paid in
U.S. dollars.
See accompanying notes to financial statements.
<TABLE>
Cornerstone Strategy Fund
Statement of Operations
(in Thousands)
Year ended May 31, 1997
<S> <C>
Net investment income:
Income (net of foreign taxes withheld of $717):
Dividends $ 27,012
Interest 17,626
----------
Total income 44,638
----------
Expenses:
Management fees 8,495
Transfer agent's fees 2,514
Custodian's fees 514
Postage 283
Shareholder reporting fees 91
Trustees' fees 4
Registration fees 77
Audit fees 19
Legal fees 4
Other 47
----------
Total expenses 12,048
----------
Net investment income 32,590
----------
Netrealized and unrealized gain on investments and foreign currency:
Net realized gain (loss) on:
Investments 48,746
Foreign currency transactions (63)
Change in net unrealized appreciation/depreciation of:
Investments 98,175
Translation of assets and liabilities in foreign currencies (26)
----------
Net realized and unrealized gain 146,832
----------
Increase in net assets resulting from operations $ 179,422
==========
</TABLE>
See accompanying notes to financial statements.
<TABLE>
Cornerstone Strategy Fund
Statements of Changes in Net Assets
(In Thousands)
Years ended May 31,
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
From operations:
Net investment income $ 32,590 $ 28,893
Net realized gain on investments 48,746 32,052
Net realized loss on foreign currency transactions (63) (35)
Change in net unrealized appreciation/depreciation of:
Investments 98,175 92,461
Foreign currency translations (26) (18)
------------ ------------
Increase in net assets resulting from operations 179,422 153,353
------------ ------------
Distributions to shareholders from:
Net investment income (33,061) (28,657)
------------ ------------
Net realized gains (34,550) (12,787)
------------ ------------
From capital share transactions:
Proceeds from shares sold 194,406 163,592
Shares issued for dividends reinvested 66,292 40,525
Cost of shares redeemed (144,998) (154,769)
------------ ------------
Increase in net assets from capital share transactions 115,700 49,348
------------ ------------
Net increase in net assets 227,511 161,257
Net assets:
Beginning of period 1,035,844 874,587
------------ ------------
End of period $ 1,263,355 $ 1,035,844
============ ============
Undistributed net investment income included in net assets:
Beginning of period $ 11,354 $ 10,933
============ ============
End of period $ 11,014 $ 11,354
============ ============
Change in shares outstanding:
Shares sold 7,427 6,770
Shares issued for dividends reinvested 2,628 1,731
Shares redeemed (5,543) (6,475)
------------ ------------
Increase in shares outstanding 4,512 2,026
============ ============
</TABLE>
See accompanying notes to financial statements.
Cornerstone 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 Cornerstone
Strategy Fund (the Fund). The Fund's investment objective is to achieve a
positive, inflation-adjusted rate of return and a reasonably stable value of
Fund shares, thereby preserving the purchasing power of shareholders' 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. As a result of certain
permanent differences between book and tax basis accounting for investments in
passive foreign investment companies, reclassifications were made to the
statement of assets and liabilities at May 31, 1997 to increase accumulated
undistributed net investment income by $194,122 and to decrease accumulated net
realized gain on investments by $194,122. A similar reclassification was made in
1996 in the amount of $220,310.
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, less foreign taxes, if any, is recorded on the ex-dividend date. If the
ex-dividend date has passed, certain dividends from foreign securities are
recorded upon notification. Interest income is recorded on the accrual basis.
Discounts and premiums on short-term securities are amortized over the life of
the respective securities. Amortization of market discounts on long-term
securities is recognized as interest income upon disposition of the security to
the extent there is a gain on disposition.
D. Foreign currency translations -- The assets of the Fund may be invested in
the securities of foreign issuers. Since the accounting records of the Fund are
maintained in U.S. dollars, foreign currency amounts are translated into U.S.
dollars on the following basis:
1. Market value of securities, other assets, and liabilities at the mean
between the bid and asked translation rates of such currencies against U.S.
dollars.
2. Purchases and sales of securities, income, and expenses at the rate of
exchange obtained from an independent pricing service on the respective dates of
such transactions.
Net realized and unrealized foreign currency gains/losses occurring during the
holding period of investments are a component of realized gain/loss on
investments and unrealized appreciation/depreciation on investments,
respectively.
Net realized foreign currency gains/losses arise from sales of foreign currency,
currency gains/losses realized between the trade and settlement dates on
security transactions, and from the difference between amounts of dividends,
interest, and foreign withholding taxes recorded on the Fund's books and the
U.S. dollar equivalent of the amounts received. Net realized foreign currency
gains/losses have been reclassified from accumulated net realized gain/loss to
accumulated undistributed net investment income on the statement of assets and
liabilities as such amounts are treated as ordinary income/loss for tax
purposes. Net unrealized foreign currency exchange gains/losses arise from
changes in the value of assets and liabilities other than investments in
securities resulting from changes in the exchange rate.
E. 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 and 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. Distributions of
net investment income of $.2449 per share, short-term capital gains of $.2743
per share, and long-term capital gains of $.6074 per share, declared and paid in
July 1997, are 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 $372,615,336 and $370,540,222,
respectively.
Gross unrealized appreciation and depreciation of investments at May 31, 1997
was $287,703,886 and $12,544,326, respectively.
(5) Foreign Currency Contracts
A forward currency contract (currency contract) is a commitment to purchase or
sell a foreign currency at a specified date, at a negotiated price. The Fund
currently enters into currency contracts only in connection with the purchase or
sale of a security denominated in a foreign currency. These contracts allow the
Fund to "lock in" the U.S. dollar price of the security. Currency contracts are
valued on a daily basis using foreign currency exchange rates obtained from an
independent pricing service. Risks of entering into currency contracts include
the potential inability of the counterparty to meet the terms of the contract
and the Fund giving up the opportunity for potential profit.
May 31, 1997
At May 31, 1997, the terms of open foreign currency contracts were as follows
(in thousands):
<TABLE>
<CAPTION>
U.S. Dollar U.S. Dollar Unrealized
Exchange Currency to be Value as of Currency to be Value as of Appreciation
Date Delivered 5/31/97 Received 5/31/97 (Depreciation)
---- --------- ------- -------- ------- ------------
<C> <C> <C> <C> <C> <C>
6/02/97 334 Australian Dollar $ 254 255 U.S. Dollar $ 255 $ 1
6/02/97 53,594 Japanese Yen 460 464 U.S. Dollar 464 4
6/03/97 23,991 Japanese Yen 206 206 U.S. Dollar 206 -
6/04/97 62,296 Japanese Yen 535 534 U.S. Dollar 534 (1)
6/09/97 39,351 Indonesian Rupiah 16 16 U.S. Dollar 16 -
6/02/97 605 U.S. Dollar 605 370 British Pound 605 -
6/03/97 272 U.S. Dollar 272 166 British Pound 272 -
6/03/97 795 U.S. Dollar 795 486 British Pound 796 1
6/03/97 51 U.S. Dollar 51 31 British Pound 51 -
6/03/97 256 U.S. Dollar 256 430,653 Italian Lira 254 (2)
6/03/97 264 U.S. Dollar 264 442,017 Italian Lira 261 (3)
6/04/97 52 U.S. Dollar 52 32 British Pound 52 -
6/04/97 797 U.S. Dollar 797 487 British Pound 796 (1)
6/06/97 56 U.S. Dollar 56 34 British Pound 56 -
6/06/97 410 U.S. Dollar 410 250 British Pound 409 (1)
6/09/97 87 U.S. Dollar 87 1,043 Austrian Schilling 87 -
6/09/97 86 U.S. Dollar 86 1,034 Austrian Schilling 86 -
6/09/97 55 U.S. Dollar 55 660 Austrian Schilling 55 -
6/09/97 147 U.S. Dollar 147 1,762 Austrian Schilling 147 -
6/30/97 523 U.S. Dollar 523 3,008 French Franc 521 (2)
------ ------ ---
$5,927 $5,923 $(4)
====== ====== ===
</TABLE>
(6) 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 .75% 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.
D. Brokerage services -- USAA Brokerage Services, a discount brokerage service
of the Manager, may execute portfolio transactions for the Fund. The amount of
brokerage commissions paid to USAA Brokerage Services during the year ended May
31, 1997 was $11,878.
(7) Transactions With Affiliates
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.
(8) Financial Highlights
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Eight-month
Period Ended Year Ended
Year Ended May 31, May 31, September 30,
------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 25.47 $ 22.63 $ 23.24 $ 23.43 $ 19.94
Net investment income .74 .73 .68 .40 .60
Net realized and
unrealized gain 3.37 3.18 .67 .29 3.52
Distributions from net
investment income (.78) (.74) (.58) (.59) (.63)
Distributions of realized
capital gains (.84) (.33) (1.38) (.29) -
---------- ---------- -------- -------- --------
Net asset value at
end of period $ 27.96 $ 25.47 $ 22.63 $ 23.24 $ 23.43
========== ========== ======== ======== ========
Total return (%) * 16.94 17.79 6.43 3.00 21.35
Net assets at end of
period (000) $1,263,355 $1,035,844 $874,587 $814,869 $707,795
Ratio of expenses to
average net assets (%) 1.06 1.15 1.13 1.11(a) 1.18
Ratio of net investment
income to average
net assets (%) 2.88 3.06 3.16 2.68(a) 2.92
Portfolio turnover (%) 35.14 36.15 33.17 30.87 45.18
Average commission
rate paid per share + $ .0299 $ .0039
</TABLE>
* 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.
