TABLE OF CONTENTS
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Managers 5
Financial Information:
Statement of Assets and Liabilities 8
Portfolio of Investments in Securities 9
Notes to Portfolio of Investments in Securities 14
Statement of Operations 15
Statements of Changes in Net Assets 16
Notes to Financial Statements 17
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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 December 31, 1996.
<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 16.47 11.45 13.12 -
Emerging Markets(1) 11/7/94 16.59 - - 4.84
Gold(1) 8/15/84 0.00 6.57 .93 -
Growth 4/5/71 17.80 13.69 13.24 -
Growth & Income 6/1/93 23.04 - - 16.24
International(1) 7/11/88 19.15 13.09 - 10.60
S&P 500 Index(4) 5/1/96 - - - 16.83+
World Growth(1) 10/1/92 19.08 - - 13.66
Asset Allocation
Balanced Strategy 9/1/95 13.45 - - 12.49
Cornerstone Strategy(1) 8/15/84 17.87 12.69 10.70 -
Growth and Tax Strategy(2)** 1/11/89 11.12 9.64 - 9.97
Growth Strategy(1) 9/1/95 22.13 - - 21.47
Income Strategy 9/1/95 3.00 - - 9.72
Income - Taxable
GNMA 2/1/91 2.94 6.43 - 7.66
Income 3/4/74 1.33 7.33 9.25 -
Income Stock 5/4/87 18.70 12.76 - 12.78
Short-Term Bond 6/1/93 6.31 - - 5.60
Income - Tax Exempt
Long-Term(2)** 3/19/82 4.47 6.87 7.37 -
Intermediate-Term(2)** 3/19/82 4.49 6.89 7.09 -
Short-Term(2)** 3/19/82 4.44 4.94 5.45 -
California Bond(2) 8/1/89 5.39 7.29 - 7.65
Florida Tax-Free Income(2)** 10/1/93 4.38 - - 3.69
New York Bond(2)** 10/15/90 3.73 6.61 - 8.35
Texas Tax-Free Income(2)** 8/1/94 5.25 - - 9.44
Virginia Bond(2)** 10/15/90 5.06 7.09
Money Market
Money Market(3) 2/2/81 5.24 4.37 5.84 -
Tax Exempt Money Market(2,3)** 2/6/84 3.34 3.04 4.21 -
Treasury Money Market Trust(3) 2/1/91 5.10 4.16 - 4.32
California Money Market(2,3)** 8/1/89 3.27 2.93 - 3.64
Florida Tax-Free Money Market(2,3)** 10/1/93 3.24 - - 3.01
New York Money Market(2,3)** 10/15/90 3.20 2.79 - 3.07
Texas Tax-Free Money Market(2,3)** 8/1/94 3.25 - - 3.32
Virginia Money Market(2,3)** 10/15/90 3.17 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 dis-
tributed 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 alter-
native 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 yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment
has been made for taxes payable by shareholders on their reinvested dividends
and capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return
and principal value of an investment will fluctuate, and an investor's
shares, when redeemed, may be worth more or less than their original cost.
** IRAs are not available for tax-exempt funds. The Growth and Tax Strategy Fund
is not available as an investment for your IRA because the majority of its
income is tax-exempt. California, Florida, New York, Texas, and Virginia
funds available to residents only.
+ Cumulative total return since inception.
MESSAGE FROM THE PRESIDENT
On January 29, 1995, my wife and I became grandparents. Karl Joseph Marbach
was born to Alexandra, my wife's daughter, and her husband Keith Marbach.
When my wife learned of the name Alexandra and Keith had chosen, she smiled.
She noted that my middle names are Joseph Carl, and she said, "I think this
kid's college education is secure." --
May 31, 1995 Annual Report
In the May 31, 1995, annual report, my message centered on regular,
systematic investing, and I told you I was going to practice something
I had preached for many years. I introduced you to my grandson, Karl
Joseph, and told you I had set up an InveStart(Registered Trademark) account
for his college expenses. This is a progress report.
By the time you read this message, Karl Joseph will be 24 months old -- a good
time for an update. As you might expect me to say, Karl Joseph is a very bright
guy. He is one of the few people whom our wire-haired dachshund, Brunhilde,
will tolerate. We have found that Bruni is a discerning judge of people!
One of Karl's favorite things is watching me toss grapes and catch them in my
mouth. He loves stuffed animals, swimming, and his grandmother's cooking. I'm
very pleased to say that his progress is just as I expected.
I'm also pleased to let you know that his education fund is progressing well
too. I opened an InveStart account for Karl on June 2, 1995, in the Income Stock
Fund. The NAV then was $14.77, and at this writing it is well over $16.00. In
addition to my $100 initial investment, there have now been 17 electronic
transfers of $50 into the account. That totals $950, and an interesting thing
has happened. The account is worth much more than $950 because, in addition to
dividends and appreciation, it has attracted other money. This is a college
account and a great cause. Karl is surprisingly well on his way.
There is a lesson here. Funding a college education is a challenge, but starting
early with an account like this is an excellent step. It provides a place for a
few extra dollars that show up on special occasions.
"Secure" may be an exaggeration, but I did decide to practice one thing I have
preached for many years ... I opened an InveStart (Registered Trademark)
account for Karl Joseph.
-- May 31, 1995 Annual Report
We originally intended it for young USAA members as a good way to start
investing. We found, however, that many grandparents were using it as I just
did.
-- May 31, 1995 Annual Report
I do practice what I preach. Systematic investing makes sense, and InveStart has
an expanded lineup of available funds. I encourage you to look at your
investment as you study the information in this report, and if you are not
investing regularly, please consider if it may be appropriate for you.
If you have any questions about our systematic investment plans or any of our
other mutual funds, please call. Your team of account representatives will be
glad to assist you with any questions you may have.
Sincerely,
Michael J.C. Roth
PRESIDENT AND
VICE CHAIRMAN OF THE BOARD
[Photograph of Michael J.C. Roth, President and Vice Chairman
of the Board appears here.]
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.
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.
The performance data quoted represents past performance and is no guarantee of
future results. The investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
INVESTMENT REVIEW
INCOME STRATEGY FUND
OBJECTIVE: To seek high current return, with reduced risk over time, through an
asset allocation strategy which emphasizes income and gives secondary emphasis
to long-term growth of capital.
5/31/96 11/30/96
Net Assets................................ $12.2 MILLION $13.6 MILLION
Net Asset Value Per Share................. $10.06 $10.94
Average Annual Total Returns as of 11/30/96
May 31, 1996 to November 30, 1996...............................11.85%+
1 Year.......................................................... 7.80%
Since inception on September 1, 1995............................12.08%
+ Total returns for periods of less than one year are not annualized.
This six-month return is cumulative.
[A graph is shown here which is a comparison of the change in value of a
$10,000 investment, for the period of 9/1/95 to 11/30/96, with dividends
and capital gains reinvested. The ending value of each item graphed is
as follows: USAA Income Strategy Fund - $11,546, Lehman Brothers Aggregate
Bond Index - $11,012 and the Lipper General Bond Funds Average - $11,267.]
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.
Note: Previously, the Fund was compared to the Lipper Fixed Income Average. As
of 10/23/96, Lipper no longer calculates this average.
Total return equals income yield plus share price change and assumes reinvest-
ment 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 John W. Saunders, Jr., Pamela K. Bledsoe and R. David Ullom
appears here]
Fund Overview
Record highs in the stock market were a topic of discussion in our first
semiannual report a year ago and again in the annual report last May. Little did
we expect to see spectacular new highs once more in this reporting period! In
this stock market euphoria of 1996, the rather dismal performance of the bond
market has been disappointing to holders of fixed-income securities. However,
having a segment of the Fund in common stocks mitigated the declines in the
Fund's bond values early in this reporting period.
The Fund's portfolio investment categories have been rebalanced within their
respective ranges. Current portfolio mix as of November 30, 1996, was 75.7%
bonds and 22.9% stocks.
Bonds
In contrast to the strong stock market, the bond market fell sharply in the
first half of 1996. From December 31, 1995, until June 12, 1996, the 30-year
Treasury Bond,(1) a standard measure of the bond market, had a total return
of -14.30%. By November 30, 1996, it had recouped much of that loss.
As discussed in the May annual report, economic reports have impacted both
interest rates and bond prices in a highly volatile manner. However, recent
reports have been more positive for bonds. Inflation has remained stable. In
fact, we are about to complete the sixth year of 3% or less increase in the
Consumer Price Index. There is indication that the economy may be slowing. These
factors, plus the Federal Reserve's steady course on interest rates, have
prompted the firming in bond prices. We continue to concentrate on pursuing a
high level of interest income.
Stocks
The last six months proved to be lucrative for the stock market. During this
period, the S&P 500 Index(2) appreciated over 13%. Most of the reported rise
was in the month of November alone. We have continued to adhere to our
strategy of purchasing stocks that meet our criteria for value. Such
criteria include comparisons to the S&P 500 of price-to-earnings,
price-to-cash-flows, price-to-book-value ratios, and dividend yields.
Contributors to performance in the Fund's stock allocation included holdings in
Household Products (Procter & Gamble and Sunbeam*), Energy (Schlumberger, Apache
Corp., Texaco and Gulf Canada Resources), Property & Casualty Insurance
(Allstate,* American International Group and Everest Reinsurance Holdings),
Natural Gas Distributors (NICOR and Sonat), and Aerospace (Boeing and B.F.
Goodrich).
Although the Fund's investments in the telephone industry proved to be a drag on
performance during the same period, our investments in this group continue to
meet our value criteria. In particular, these companies should continue to
generate earnings, cash flow, and dividend growth. Likewise, the Fund's chemical
investments represent attractive values as they offer above-average yields.
* Sold out prior to end of reporting period.
1)Treasury bonds are non-callable, extremely liquid, and settle on a cash basis.
You can buy and pay for them or sell and receive payment for them on the same
day.
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.
Money Market Instruments
With the Fund's emphasis on income, this investment category is used for the
temporary investment of cash prior to more permanent investments in bonds and
stocks. It can also serve as a liquidity reserve when needed. Investments are
made in the highest quality money market instruments, usually U. S. Government
Agencies' obligations.
[A pie chart is shown here depicting the Asset Allocation as of November 30,
1996 for the USAA Income Strategy Fund to be: Stocks - 22.9% and Bonds -75.7%.]
Top 5 Equity Holdings
(% of Net Assets)
Boeing .7
B.F. Goodrich .7
Kimberly-Clark .6
WMX Technologies .5
Associates First Capital .5
See page 9 for a complete listing of the Portfolio of Investments in Securities.
<TABLE>
Income Strategy Fund
<CAPTION>
Statement of Assets and Liabilities
(In Thousands)
November 30, 1996
(Unaudited)
<S> <C>
Assets
Investments in securities, at market value (identified cost of $12,787) $ 13,446
Cash 9
Receivables:
Capital shares sold 7
Dividends and interest 201
- -------------------------------------------------------------------------------------------------------
Total assets 13,663
- -------------------------------------------------------------------------------------------------------
Liabilities
Capital shares redeemed 1
USAA Investment Management Company 6
USAA Transfer Agency Company 2
Accounts payable and accrued expenses 21
- -------------------------------------------------------------------------------------------------------
Total liabilities 30
- -------------------------------------------------------------------------------------------------------
Net assets applicable to capital shares outstanding $ 13,633
=======================================================================================================
Represented by:
Paid-in capital $ 12,818
Accumulated undistributed net investment income 115
Accumulated net realized gain on investments 41
Net unrealized appreciation of investments 659
- -------------------------------------------------------------------------------------------------------
Net assets applicable to capital shares outstanding $ 13,633
=======================================================================================================
Capital shares outstanding, unlimited number of shares authorized,
no par value 1,246
=======================================================================================================
Net asset value, redemption price, and offering price per share $ 10.94
=======================================================================================================
See accompanying notes to financial statements.
</TABLE>
<TABLE>
Income Strategy Fund
Portfolio of Investments in Securities
November 30, 1996
(Unaudited)
Market
Number Value
of Shares Security (000)
--------- -------- -----
Stocks (22.9%)
<S> <C>
Aerospace/Defense (1.7%)
2,100 B.F. Goodrich Co. $ 94
1,000 Boeing Co. 99
600 Rockwell International Corp. 39
- -------------------------------------------------------------------------------------------------------
232
- -------------------------------------------------------------------------------------------------------
Aluminum (0.5%)
1,000 Aluminum Co. of America 64
- -------------------------------------------------------------------------------------------------------
Auto Parts (0.3%)
1,400 Lear Corp.* 50
- -------------------------------------------------------------------------------------------------------
Automobiles (0.3%)
1,400 Ford Motor Co. 46
- -------------------------------------------------------------------------------------------------------
Bank Holding Companies - Major Regional (0.4%)
1,400 PNC Bank Corp. 55
- -------------------------------------------------------------------------------------------------------
Bank Holding Companies - Money Center (0.4%)
700 Bankers Trust New York Corp. 61
- -------------------------------------------------------------------------------------------------------
Brokerage Firms (0.4%)
800 Dean Witter, Discover & Co. 55
- -------------------------------------------------------------------------------------------------------
Chemicals (0.6%)
200 Avery Dennison Corp. 14
800 Dow Chemical Co. 67
- -------------------------------------------------------------------------------------------------------
81
- -------------------------------------------------------------------------------------------------------
Chemicals - Specialty (0.1%)
264 Millenium Chemicals, Inc. 5
- -------------------------------------------------------------------------------------------------------
Communication - Equipment Manufacturers (0.5%)
1,262 Lucent Technologies, Inc. 65
- -------------------------------------------------------------------------------------------------------
Containers - Metals & Glass (0.3%)
1,600 Ball Corp. 39
- -------------------------------------------------------------------------------------------------------
Distribution & Pipelines (0.9%)
1,400 NICOR, Inc. 52
1,300 Sonat, Inc. 67
- -------------------------------------------------------------------------------------------------------
119
- -------------------------------------------------------------------------------------------------------
Electric Power (0.7%)
1,600 Houston Industries, Inc. 35
2,300 Pacific Gas & Electric Co. 56
- -------------------------------------------------------------------------------------------------------
91
- -------------------------------------------------------------------------------------------------------
Electronics - Semiconductors (0.9%)
1,400 Applied Materials, Inc.* 54
1,600 National Semiconductor Corp.* 39
1,700 Silicon Valley Group, Inc.* 36
- -------------------------------------------------------------------------------------------------------
129
- -------------------------------------------------------------------------------------------------------
Finance - Consumer (0.5%)
1,400 Associates First Capital Corp. 68
- -------------------------------------------------------------------------------------------------------
Foods (0.3%)
1,700 Dean Foods Co. 47
- -------------------------------------------------------------------------------------------------------
Healthcare - HMOs (0.3%)
2,500 Humana, Inc.* 47
- -------------------------------------------------------------------------------------------------------
Heavy Duty Trucks & Parts (0.4%)
1,500 Trinova Corp. 55
- -------------------------------------------------------------------------------------------------------
Household Products (0.4%)
500 Procter & Gamble Co. 54
- -------------------------------------------------------------------------------------------------------
Insurance - Multi-Line Companies (0.4%)
800 Aetna, Inc. 58
- -------------------------------------------------------------------------------------------------------
Insurance - Property/Casualty (1.0%)
450 American International Group, Inc. 52
1,900 Everest Reinsurance Holdings, Inc. 53
1,900 Highlands Insurance Group, Inc.* 37
- -------------------------------------------------------------------------------------------------------
142
- -------------------------------------------------------------------------------------------------------
Leisure Time (0.4%)
1,900 Brunswick Corp. 48
- -------------------------------------------------------------------------------------------------------
Machinery - Diversified (0.7%)
2,700 BW/IP, Inc. 41
1,200 Deere & Co. 54
- -------------------------------------------------------------------------------------------------------
95
- -------------------------------------------------------------------------------------------------------
Manufacturing - Diversified Industries (0.4%)
1,300 Hillenbrand Industries, Inc. 48
- -------------------------------------------------------------------------------------------------------
Metals - Miscellaneous (0.6%)
1,200 Inco Ltd. 42
1,200 Titanium Metals Corp.* 40
- -------------------------------------------------------------------------------------------------------
82
- -------------------------------------------------------------------------------------------------------
Office Equipment & Supplies (0.3%)
800 Xerox Corp. 39
- -------------------------------------------------------------------------------------------------------
Oil - Domestic (0.4%)
2,000 Occidental Petroleum Corp. 48
- -------------------------------------------------------------------------------------------------------
Oil - Exploration & Production (0.8%)
1,700 Apache Corp. 62
8,000 Gulf Canada Resources, Ltd.* 52
- -------------------------------------------------------------------------------------------------------
114
- -------------------------------------------------------------------------------------------------------
Oil - International (0.4%)
600 Texaco, Inc. 59
- -------------------------------------------------------------------------------------------------------
Oil Well Equipment & Service (0.5%)
600 Schlumberger Ltd. 62
- -------------------------------------------------------------------------------------------------------
Paper & Forest Products (1.4%)
4,100 Jefferson Smurfit Corp.* 56
800 Kimberly-Clark Corp. 78
1,200 Weyerhaeuser Co. 55
- -------------------------------------------------------------------------------------------------------
189
- -------------------------------------------------------------------------------------------------------
Pollution Control (0.5%)
1,900 WMX Technologies, Inc. 68
- -------------------------------------------------------------------------------------------------------
Publishing (0.8%)
1,200 American Greetings Corp. 34
1,400 Dun & Bradstreet Corp. 32
900 Houghton Mifflin Co. 47
- -------------------------------------------------------------------------------------------------------
113
- -------------------------------------------------------------------------------------------------------
Railroads (0.5%)
700 Norfolk Southern Corp. 63
- -------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts (0.6%)
1,200 Kimco Realty Corp. 35
2,100 Public Storage, Inc. 53
- -------------------------------------------------------------------------------------------------------
88
- -------------------------------------------------------------------------------------------------------
Retail - General Merchandising (0.7%)
1,000 J.C. Penney Company, Inc. 54
800 Sears, Roebuck & Co. 40
- -------------------------------------------------------------------------------------------------------
94
- -------------------------------------------------------------------------------------------------------
Retail - Specialty (0.3%)
2,800 Phillips-Van Heusen Corp. 36
- -------------------------------------------------------------------------------------------------------
Savings & Loan Holding Companies (0.4%)
1,800 Great Western Financial Corp. 56
- -------------------------------------------------------------------------------------------------------
Specialty Printing (0.1%)
500 Deluxe Corp. 16
- -------------------------------------------------------------------------------------------------------
Telephones (1.1%)
1,000 AT&T 39
1,300 GTE Corp. 59
1,100 Sprint Corp. 46
- -------------------------------------------------------------------------------------------------------
144
- -------------------------------------------------------------------------------------------------------
Tobacco (0.7%)
1,300 RJR Nabisco Holdings Corp. 41
1,900 Universal Corp. 55
- -------------------------------------------------------------------------------------------------------
96
- -------------------------------------------------------------------------------------------------------
Total common stocks (cost: $2,578) 3,121
- -------------------------------------------------------------------------------------------------------
Bonds (75.7%)
Principal Market
Amount Value
(000) Security Rate Maturity (000)
----- -------- ---- -------- -----
$ 100 Government National Mortgage Association 7.50% 8/15/26 $ 102
8,450 U.S. Treasury Bonds 7.88 2/15/21 9,881
335 U.S. Treasury Bonds 6.50 11/15/26 342
- -------------------------------------------------------------------------------------------------------
Total bonds (cost: $10,209) 10,325
- -------------------------------------------------------------------------------------------------------
Total investments (cost: $12,787) $ 13,446
=======================================================================================================
*Non-income producing.
</TABLE>
Income Strategy Fund
Notes to Portfolio of Investments in Securities
November 30, 1996
(Unaudited)
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 0.7% of net assets at November
30, 1996.
See accompanying notes to financial statements.
Income Strategy Fund
Statement of Operations
(in Thousands)
Six-month period ended November 30, 1996
(Unaudited)
Net investment income:
Income:
Dividends $ 33
Interest 333
-------
Total income 366
-------
Expenses:
Management fees 32
Transfer agent's fees 8
Custodian's fees 25
Postage 2
Shareholder reporting fees 1
Trustees' fees 2
Registration fees 4
Audit fees 12
Legal fees 2
Other 1
-------
Total expenses before reimbursement 89
Expenses reimbursed (26)
-------
Total expenses after reimbursement 63
-------
Net investment income 303
-------
Net realized and unrealized gain on investments:
Net realized gain on investments 92
Change in net unrealized appreciation/
depreciation of investments 1,063
-------
Net realized and unrealized gain 1,155
-------
Increase in net assets resulting from operations $ 1,458
=======
See accompanying notes to financial statements.
Income Strategy Fund
Statements of Changes in Net Assets
(In Thousands)
Six-month period ended November 30, 1996
and Nine-month period ended May 31, 1996
(Unaudited)
11/30/96 5/31/96*
From operations:
Net investment income $ 303 $ 324
Net realized gain on investments 92 42
Change in net unrealized appreciation/
depreciation of investments 1,063 (404)
-------- --------
Increase (decrease) in net assets
resulting from operations 1,458 (38)
-------- --------
Distributions to shareholders from:
Net investment income (297) (215)
-------- --------
Net realized gains (58) (35)
-------- --------
From capital share transactions:
Proceeds from shares sold 1,634 17,119
Shares issued for dividends reinvested 197 132
Cost of shares redeemed (1,474) (4,790)
-------- --------
Increase in net assets from
capital share transactions 357 12,461
-------- --------
Net increase in net assets 1,460 12,173
Net assets:
Beginning of period 12,173 -
-------- --------
End of period $ 13,633 $ 12,173
======== ========
Undistributed net investment income
included in net assets:
Beginning of period $ 109 $ -
======== ========
End of period $ 115 $ 109
======== ========
Change in shares outstanding:
Shares sold 161 1,658
Shares issued for dividends reinvested 19 13
Shares redeemed (144) (461)
-------- --------
Increase in shares outstanding 36 1,210
======== ========
* Fund commenced operations September 1, 1995.
See accompanying notes to financial statements.
Income Strategy Fund
Notes to Financial Statements
November 30, 1996
(Unaudited)
(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 semiannual 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 - As is common in the industry, security
transactions are accounted for on the date the securities are purchased
or sold (trade date). Gain or loss from sales of investment securities
is computed on the identified cost basis. Dividend income is recorded
on the ex-dividend date; interest income is recorded on the accrual basis.
Discounts and premiums on securities are amortized over the life of the
respective securities.
D. Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) Lines of Credit
The Fund participates with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million through January 14, 1997, one with USAA
Capital Corporation (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 six-month period ended November 30, 1996.
(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.
(4) Investment Transactions
Purchases and sales/maturities of securities, excluding short-term securities,
for the six-month period ended November 30, 1996 were $1,850,118 and
$1,011,607, respectively.
Gross unrealized appreciation and depreciation of investments as of November
30, 1996 was $680,646 and $21,166, respectively.
(5) Transactions with Manager
A. Management fees - The investment policies of the Fund and management of the
Fund's portfolio are carried out by USAA Investment Management Company (the
Manager). The Fund's management fees are computed at .50% of its annual
average net assets.
The Manager has voluntarily agreed to limit the annual expenses of the Fund to
1.0% of its annual average net assets.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services, an affiliate of the Manager, provides transfer
agent services to the Fund. Shareholder accounting service fees are based on
an annual charge per shareholder account plus out-of-pocket expenses.
C. Underwriting services - The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing best efforts basis. The
Manager receives no fee or other remuneration for such services.
(6) Transactions with Affiliates
USAA Investment Management Company is indirectly wholly owned by United
Services Automobile Association (the Association), a large, diversified
financial services institution. At November 30, 1996, the Association and its
affiliates owned 502,387 shares (40.3%) of the Fund.
(7) Financial Highlights
Per share operating performance for a share outstanding throughout each period
is as follows:
Six-month Nine-month
Period Ended Period Ended
November 30, May 31,
1996 1996*
---- ----
Net asset value at
beginning of period $ 10.06 $ 10.00
Net investment income .24 .39(b)
Net realized and
unrealized gain (loss) .93 (.06)
Distributions from net
investment income (.24) (.22)
Distributions of realized
capital gains (.05) (.05)
---------- ----------
Net asset value at
end of period $ 10.94 $ 10.06
========== ==========
Total return (%) ** 11.85 3.23
Net assets at end
of period (000) $ 13,633 $ 12,173
Ratio of expenses to
average net assets (%) 1.00(a)(c) 1.00(a)(c)
Ratio of net investment
income to average
net assets (%) 4.76(a)(c) 4.71(a)(c)
Portfolio turnover (%) 8.15 78.60
Average commission
rate paid per share+ $ .0482 $ .0496
* 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 above table is based on actual
expenses for the period, after giving effect to reimbursements
of expenses by the Manager. Absent such reimbursement the Fund's
ratios would have been:
Six-month Nine-month
Period Ended Period Ended
November 30, May 31,
1996 1996*
---- ----
Ratio of expenses to
average net assets (%) 1.40(a) 1.78(a)
Ratio of net investment
income to average
net assets (%) 4.36(a) 3.93(a)
