USAA GROWTH AND TAX
STRATEGY FUND
PROSPECTUS
OCTOBER 1, 1997
The Fund is a no-load mutual fund offered by USAA Investment Management
Company. Using a tax-advantaged asset allocation strategy, USAA invests the
Fund's assets in bonds that produce income, the majority of which is exempt
from federal income tax, and stocks that provide the potential for long-term
growth of capital. USAA manages the Fund with the goal of minimizing the impact
of federal income taxes to shareholders.
SHARES OF THIS FUND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY,
THE USAA FEDERAL SAVINGS BANK, ARE NOT INSURED BY THE FDIC OR ANY OTHER
GOVERNMENT AGENCY, ARE SUBJECT TO INVESTMENT RISKS, AND MAY LOSE VALUE.
AS WITH OTHER MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) NOR HAS THE SEC
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Who Manages the Fund?................................ 2
What is the Investment Objective?.................... 2
Is This Fund for You?................................ 2
How Do You Buy?...................................... 2
Fees and Expenses.................................... 3
Financial Highlights................................. 3
Performance Information.............................. 4
Will the Value of Your Investment Fluctuate?......... 4
A Word About Risk.................................... 5
Investment Policies and Risks........................ 6
Fund Management...................................... 12
Using Mutual Funds in an Asset Allocation Program.... 13
How to Invest........................................ 15
Important Information About Purchases and Redemptions 17
Exchanges............................................ 18
Shareholder Information.............................. 19
Description of Shares................................ 21
Appendix A........................................... 22
USAA Family of No-Load Mutual Funds.................. 23
<PAGE>
THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD KNOW BEFORE YOU INVEST IN THE
FUND. PLEASE READ IT AND KEEP IT FOR FUTURE REFERENCE.
WHO MANAGES THE FUND?
USAA Investment Management Company manages the Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" throughout the
Prospectus.
WHAT IS THE INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek a conservative balance for the
investor between income, the majority of which is exempt from federal income
tax, and the potential for long-term growth of capital to preserve purchasing
power. We will use an asset allocation strategy to achieve the Fund's
objective. See INVESTMENT POLICIES AND RISKS on page 6 for more information.
IS THIS FUND FOR YOU?
THIS FUND MIGHT BE APPROPRIATE AS PART OF YOUR INVESTMENT PORTFOLIO IF . . .
X You are seeking a fund with both tax relief and inflation hedging
characteristics.
X You are willing to accept moderate risk.
X You are willing to take some exposure to the stock market.
THIS FUND MAY NOT BE APPROPRIATE AS PART OF YOUR INVESTMENT PORTFOLIO IF . . .
X You need an investment that provides only tax free income.
X You are seeking an appropriate investment for an IRA, through a 401(k)
plan or 403(b) plan, or other tax-sheltered account.
X You are unable or reluctant to invest for a period of four years or more.
If you feel this fund is not the one for you, refer to page 23 for a complete
list of the USAA Family of No-Load Mutual Funds.
HOW DO YOU BUY?
You may make your initial investment directly by mail, in person or, in certain
instances, by telephone. Generally, the minimum initial investment is $3,000
and can be made by check or by wire. If you participate in one of our automatic
investment plans, your minimum initial investment may be less. There is more
information about how to purchase Fund shares on page 15.
2
<PAGE>
FEES AND EXPENSES
This summary shows what it will cost you directly or indirectly to invest in
the Fund.
Shareholder Transaction Expenses -- Fees You Pay Directly
There are no fees charged to your account when you buy, sell, or hold Fund
shares. However, if you sell shares and request your money by wire transfer,
you will pay a $10 fee. (Your bank may also charge a fee for receiving wires.)
Annual Fund Operating Expenses -- Fees You Pay Indirectly
Fund expenses come out of the Fund's assets and are reflected in the Fund's
share price and dividends. "Other Expenses" include expenses such as custodian
and transfer agent fees. The figures below show actual expenditures during the
past fiscal year ended May 31, 1997, and are calculated as a percentage of
average net assets.
Management Fees ..................... .50%
12b-1 Fees .......................... None
Other Expenses ...................... .24%
---
Total Fund Operating Expenses ....... .74%
===
o 12b-1 Fees - Some mutual funds charge these fees to pay for the costs of
selling fund shares.
Example of Effect of Fund Operating Expenses
You would pay the following expenses on a $1,000 investment in the Fund,
assuming (1) 5% annual return and (2) redemption at the end of the periods
shown.
1 year................................... $ 8
3 years.................................. 24
5 years.................................. 41
10 years................................. 92
THIS EXAMPLE IS NOT A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
Please read the Fund's Annual Report furnished with this Prospectus. The Annual
Report includes the Fund's financial statements and financial highlights
audited by KPMG Peat Marwick LLP, which are legally a part of this Prospectus.
The Annual Report includes messages from the President and the Fund's portfolio
managers, a listing of the Fund's investments, and additional performance
information that you may wish to review.
3
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(TEL)
TouchLINE(R)
1-800-531-8777
PRESS
(1)
then
(1)
then
(5) (3) (#)
Gr&TxStr.
o Yield is the annualized net income of the Fund during a specified 30-day
period as a percentage of the Fund's share price.
o Total Return measures the price change in a share assuming the reinvestment
of all dividend income and capital gain distributions.
PERFORMANCE INFORMATION
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
Remember, historical performance may not be repeated in the future. The value
of your shares may go up or down. For the most current price, yield, and return
information for this Fund, you may call TouchLINE(R) at 1-800-531-8777. Press 1
for the Mutual Fund Menu, press 1 again for prices, yields, and returns. Then,
press 53 followed by the pound sign when asked for a Fund Code.
You also may obtain the most current price of your shares in the business
section of your newspaper in the mutual fund section under the heading "USAA
Group" and the symbol "Gr&TxStr."
You may see the Fund's yield or total return quoted in advertisements and
reports. All mutual funds must use the same formulas to calculate yield and
total return. You may also see a comparison of the Fund's performance to that
of other mutual funds with similar investment objectives. For the following
periods ended May 31, 1997, the Fund's average annual total returns have been:
1 Year................................... 14.21%
5 Years.................................. 10.89%
Since Inception (1/11/89)................ 10.29%
Figures on page 5 are different because they are for periods which ended on
December 31, 1996.
WILL THE VALUE OF YOUR INVESTMENT FLUCTUATE?
Yes, it will. The value of your investment could increase or decrease. The bar
chart and table shown on the next page illustrate the Growth and Tax Strategy
Fund's risks and performance from year to year over the life of the Fund and
shows how the Fund's average annual returns for one and five years and the life
of the Fund compare to those of a broad-based securities market index. Remember
that this historical information may not be repeated in the future.
4
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[BAR CHART]
TOTAL RETURN
CALENDAR PERCENTAGE
1989 16.18
1990 1.36
1991 14.68
1992 4.93
1993 13.73
1994 -2.62
1995 22.70
1996 11.12
===============================================================================
Average Annual Total Returns Past Past Since inception on
(for the periods ending 1 Year 5 Years January 11, 1989
December 31, 1996)
- -------------------------------------------------------------------------------
Growth and Tax Strategy Fund 11.12% 9.64% 9.97%
- -------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index 4.43% 7.28% 8.12%
===============================================================================
The Lehman Brothers Municipal Bond Index is an unmanaged benchmark of total
return performance for the long-term, investment-grade, tax-exempt bond market.
A WORD ABOUT RISK
Portions of this Prospectus describe the risks you will face as an investor in
the Fund. Keep in mind that generally investments with a higher potential
reward also have a higher risk of losing money. The reverse is also generally
true: the lower the risk, the lower the potential reward. However, as you
consider an investment in the Fund, you should also take into account your
tolerance for the daily fluctuations of the financial markets and whether you
can afford to leave your money in this investment for long periods of time to
ride out down periods.
[CAUTION SYMBOL]
Look for this symbol throughout the Prospectus. We use it to mark detailed
information about the main risks that you will face as a Fund shareholder.
5
<PAGE>
INVESTMENT POLICIES AND RISKS
Asset Allocation Strategy
Q How do we pursue the Fund's investment objective?
A The Fund provides a professionally managed, diversified investment
program within one mutual fund. We pursue the Fund's objective by
allocating its assets in each of the following investment categories
according to the following targeted ranges. Securities are classified by
category at the time of purchase.
PERCENTAGE TARGET RANGE OF NET ASSETS
[PIE CHART]
INVESTMENT CATEGORY
TAX-EXEMPT BONDS 41-59%
BLUE CHIP STOCKS 41-59%
TAX-EXEMPT MONEY
MARKET INSTRUMENTS
MATURITIES OF ONE
YEAR OR LESS) 0-10%
The ranges allow for a variance within each investment category. The Board of
Trustees may revise the target ranges upon 60 days' prior written notice to
shareholders. However, we reserve the right to revise the ranges on a temporary
defensive basis without shareholder notification whenever we believe such
changes to be in the best interest of the Fund and its shareholders.
Q Why do we mix stocks and bonds in the same Fund?
A From time to time, the stock and bond markets may fluctuate
independently of each other. In other words, a decline in the stock
market may in certain instances be offset by a rise in the bond market,
or vice versa. As a result, the Fund, with its mix of stocks and bonds,
is expected in the long run to entail less market risk (and potentially
less return) than a mutual fund investing exclusively in stocks.
6
<PAGE>
Q What actions do we take to keep the Fund's asset allocations within the
target ranges?
A If market action causes the actual assets of the Fund in one or more
investment categories to move outside the ranges, we will make
adjustments to rebalance the portfolio. In general, we will rebalance
the portfolio at least once during each quarter. In rebalancing the
Fund's portfolio, we will buy or sell securities to return the actual
allocation of the Fund's assets to within its target ranges. For
example, the Fund's portfolio could begin a quarter with its assets
allocated 50% in the Tax-Exempt Bonds category, 45% in the Blue Chip
Stocks category, and 5% in the Tax-Exempt Money Market Instruments
category. During the quarter, a strong stock market coupled with a weak
bond market could leave the portfolio with 40% in the Tax-Exempt Bonds
category, 55% in the Blue Chip Stocks category, and 5% in the Tax-Exempt
Money Market Instruments category. In this case we would sell blue chip
stocks and use the proceeds to buy tax-exempt securities in order to
bring the blue chip stocks and tax-exempt bonds back to within their
target ranges.
[CAUTION LIGHT]
REBALANCING RISKS. In purchasing and selling securities in order to rebalance
its portfolio, the Fund will pay more in brokerage commissions than it would
without a rebalancing policy. As a result of the need to rebalance, the Fund
also has less flexibility in the timing of purchases and sales of securities
than it would otherwise. Although we intend to manage the Fund in a
tax-advantaged manner, the Fund may have a higher proportion of capital gains
and a lower return than a fund that does not have a rebalancing policy.
Q How did we select the investment categories and target ranges?
A We have specifically selected the investment categories and the target
ranges to provide investors with a diversified investment in a single
mutual fund. Tax-exempt bonds provide income exempt from federal income
tax. Blue chip stocks provide the potential for long-term capital
growth. Tax-exempt money market instruments provide a means for
temporary investment of cash balances arising in the normal course of
business.
It is a fundamental policy of the Fund that during normal market
conditions, the Fund's assets will be invested so that at least 50% of
the Fund's annual income will be exempt from federal personal income tax
and excluded from the calculation of federal alternative minimum taxes
for individual taxpayers.
7
<PAGE>
Tax-Exempt Bonds and Tax-Exempt Money Market Instruments
Q What kind of municipal obligations are included in the portfolio?
A Typical issuers of municipal obligations may include cities and
counties, municipally-owned utilities, school districts, colleges and
universities, and hospitals.
GENERAL OBLIGATION BONDS - Secured by the issuer's pledge of its faith,
credit and taxing power for the payment of principal and interest.
REVENUE BONDS - Payable from the revenue derived from a particular
facility or class of facilities or, in some cases, from proceeds of a
special excise tax or other specific revenue source, but not from the
general taxing power.
INDUSTRIAL DEVELOPMENT BONDS - Issued by or on behalf of public
authorities to obtain funds for privately-operated facilities, provided
that the interest paid on such securities qualifies as exempt from
federal income taxes.
Q What tax-exempt bonds are included in the portfolio?
A The Tax-Exempt Bonds category includes municipal obligations which will
have a remaining maturity at the time of purchase in excess of one year.
Although the average portfolio maturity of the securities in this
category is not restricted, we expect it to exceed ten years. In
determining a security's maturity for purposes of calculating the Fund's
average maturity, we may use estimates of the expected time for its
principal to be paid. This can be substantially shorter than its stated
final maturity.
[CAUTION LIGHT]
INTEREST RATE RISK. As a mutual fund investing in bonds, the Fund is subject to
the risk that the market value of the bonds will decline due to rising interest
rates. Bond prices are linked to the prevailing market interest rates. In
general, when interest rates rise, the prices of bonds fall and when interest
rates fall, bond prices generally rise. The price volatility of a bond also
depends on its maturity. Generally, the longer the maturity of a bond, the
greater its sensitivity to interest rates. To compensate investors for this
higher risk, bonds with longer maturity generally offer higher yields than
bonds with shorter maturity.
8
<PAGE>
Q What tax-exempt money market instruments are included in the portfolio?
A The tax-exempt money market instruments in the portfolio consist of
tax-exempt debt securities of the type included in the Tax-Exempt Bonds
category and have remaining stated maturities at the time of purchase of
one year or less or are subject to puts or similar demand features that
result in an effective maturity of one year or less.
Q What are the credit ratings of these securities?
A First, we will only purchase tax-exempt securities that are considered
investment grade. For a security to be considered investment grade, it
must be:
X rated by one or more rating agencies at least in the fourth highest
rating category for long-term securities;
X rated by one or more rating agencies at least within the second
highest rating category for short-term securities;
X or, if not rated by those rating agencies, determined by us to be of
equivalent investment quality.
And second, at least 50% of the combined total market values of the
tax-exempt bonds and tax-exempt money market instruments will be rated
within the three highest long-term rating categories by:
X Moody's Investors Service, Inc. (Moody's),
X Standard & Poor's Ratings Group (S&P), or
X Fitch Investors Service, Inc. (Fitch);
or in the highest short-term rating category by:
X Moody's, S&P, or Fitch; or . . . if unrated by those three agencies,
we must determine that these securities are of equivalent investment
quality.
[CAUTION LIGHT]
CREDIT RISK. The bonds in the Fund's portfolio are subject to credit risk.
Credit risk is the possibility that an issuer of a bond will fail to make
timely payments of interest or principal. We attempt to minimize the Fund's
credit risk by investing in tax-exempt securities considered investment grade
at the time of purchase. When evaluating potential investments for the Fund,
our analysts also assess credit risk and its impact on the Fund's portfolio.
Nevertheless, even investment-grade tax-exempt securities are subject to some
credit risk. Bonds in the lowest-rated investment grade category have
speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capability to make
principal and interest payments on these bonds than is the case for
higher-rated bonds. In addition, the ratings of securities are estimates by the
rating agencies of the credit quality of the securities. The ratings may not
take into account every risk that interest or principal will be repaid on a
timely basis.
9
<PAGE>
Q What happens if the rating of a security is downgraded?
A If the rating of a security is downgraded, we will determine whether it
is in the best interest of the Fund's shareholders to continue to hold
the security in the Fund's portfolio. If downgrades result in more than
5% of the Fund's net assets being invested in securities that are less
than investment-grade quality, we will take immediate action to reduce
the Fund's holdings in such securities to 5% or less of the Fund's net
assets, unless otherwise directed by the Board of Trustees.
Q May the Fund hold any taxable debt securities?
A We may, on a temporary basis due to market or other conditions, invest
the Fund's assets without limitation in money market instruments which
are subject to federal income tax. These securities may consist of
obligations of the U.S. Government and its agencies or
instrumentalities, and repurchase agreements secured by such
instruments; certificates of deposit of domestic banks; banker's
acceptances; commercial paper; and other corporate debt obligations.
Q How do we intend to minimize the impact of federal income taxes on the
Fund's shareholders?
A We intend to use various techniques to minimize the impact of federal
income taxes on the Fund's shareholders while maximizing capital
appreciation, including:
X investing in bonds and similar instruments that provide income which
is exempt from federal income tax;
X investing in blue chip stocks with low dividend yields;
X selecting blue chip stocks that we expect to hold for relatively long
periods to minimize the cost of trading and the receipt of capital
gains;
X when selling blue chip stocks, considering the sale of stocks with
the highest tax cost basis to minimize the receipt of capital gains;
and
X offsetting capital gains with capital losses, if available and
appropriate.
[CAUTION LIGHT]
TAXABLE INCOME. Although the Fund seeks to minimize taxable income and the
realization of capital gains, the Fund may nevertheless receive taxable income
and capital gains from time to time. Additionally, shareholders may owe taxes
on capital gains realized, if any, upon redemption of Fund shares.
[CAUTION LIGHT]
CHANGES IN LAWS. Actual or anticipated changes in federal tax laws that
restrict or eliminate the tax-exempt status of securities of the type held by
the Fund could result in increased price volatility of these securities. These
changes in law could also reduce the tax-exempt securities available for
investment by the Fund. Changes in law affecting the
10
<PAGE>
taxing and spending authority of a municipality that issued a tax-exempt
security held by the Fund could affect the ability of the municipality to make
payments of principal and interest on the security.
Blue Chip Stocks
We will invest 41-49% of the Fund's assets in equity securities (common or
preferred stocks) or securities convertible into equity securities for
long-term growth.
Q What are the characteristics of the equity securities in this category?
A A blue chip stock is an equity security of a company that has a market
capitalization of:
X at least $500 million and is included in the list of companies that
make up the Standard & Poor's 500 Composite Stock Price Index or the
Dow Jones Industrial Average; or
X at least $1 billion.
We may invest up to 5% of the Fund's total assets in blue chip stocks of
foreign issuers or in American Depositary Receipts (ADRs), Global
Depositary Receipts (GDRs), or similar forms of ownership interest in
securities of foreign issuers that are traded on U.S. securities
exchanges or in U.S. over-the-counter markets.
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in equity securities, it is subject to
market risk. Stock prices in general may decline over short or even extended
periods, regardless of the success or failure of an individual company's
operations. The stock market tends to run in cycles, with periods when stock
prices generally go up and periods when stock prices generally go down. Equity
securities tend to go up and down more than bonds.
For additional information about other investments in which we may invest the
Fund's assets, see Appendix A on page 22.
Investment Restrictions
The following restrictions may only be changed with shareholder approval:
X The Fund may not invest more than 25% of its total assets in one industry.
X The Fund may not invest more than 5% of its total assets in any one issuer
or own more than 10% of the outstanding voting securities of any one
issuer. This limitation does not apply to U.S. Government securities, and
only applies to 75% of the Fund's total assets.
X The Fund may borrow only for temporary or emergency purposes in an amount
not exceeding 33 1/3% of its total assets.
11
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You will find a complete listing of the precise investment restrictions in the
Fund's Statement of Additional Information.
FUND MANAGEMENT
The Board of Trustees of USAA Investment Trust (Trust) of which the Fund is a
series, supervises the business affairs of the Trust. The Trust has retained
us, USAA Investment Management Company, to serve as the manager and distributor
of the Trust.
We are an affiliate of United Services Automobile Association (USAA), a large,
diversified financial services institution. As of the date of this Prospectus,
we had approximately $36 billion in total assets under management. Our mailing
address is 9800 Fredericksburg Road, San Antonio, TX 78288.
We provide management services to the Fund. We are responsible for managing the
Fund's portfolio (including placement of brokerage orders) and its business
affairs, subject to the authority of and supervision by the Board of Trustees.
For our services, the Fund pays us an annual fee. This fee was computed and
paid at one-half of one percent (.50%) of average net assets for the fiscal
year ended May 31, 1997.
We also provide services related to selling the Fund's shares and receive no
compensation for those services.
Although our officers and employees, as well as those of the Trust, may engage
in personal securities transactions, they are restricted by the procedures in a
Joint Code of Ethics adopted by the Trust and us.
Portfolio Transactions
USAA Brokerage Services, our discount brokerage service, may execute purchases
and sales of equity securities for the Fund's portfolio. The Board of Trustees
has adopted procedures to ensure that any commissions paid to USAA Brokerage
Services are reasonable and fair.
Portfolio Managers
The following individuals are primarily responsible for managing the Fund:
John W. Saunders, Jr., Senior Vice President of Fixed Income Investments since
October 1985, has been the Fund's asset allocation manager since its inception
in January 1989. He has 28 years investment management experience and has
worked for us for 27 years. Mr. Saunders earned the Chartered Financial Analyst
(CFA) designation in 1976 and is a member of the Association for Investment
Management and Research (AIMR) and the San Antonio Financial Analysts Society,
Inc. (SAFAS). He holds a BS from Portland State University, Oregon.
[PHOTOGRAPH OF
PORTFOILIO MANAGER]
John W. Saunders, Jr.
Asset Allocation Manager
12
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Harry W. Miller, Senior Vice President of Equity Investments since October
1987, has been a co-manager of the Fund since February 1995 and currently
manages the Blue Chip Stocks category. Mr. Miller has 40 years of experience in
investment management and has worked for us for 23 years. Mr. Miller earned the
CFA designation in 1968 and is a member of AIMR and SAFAS. He holds an MBA from
the University of Southern California and a BS from Rider University, New
Jersey.
[PHOTOGRAPH OF
PORTFOLIO MANAGER]
Harry W. Miller
Blue Chip Stocks
Kenneth E. Willmann, Vice President of Fixed Income Investments since December
1986, has been a co-manager of the Fund since January 1989 and currently
manages the Tax-Exempt Bonds and Tax-Exempt Money Market Instruments
categories. He has 23 years investment management experience and has worked for
us for 20 years. Mr. Willmann earned the CFA designation in 1978 and is a
member of AIMR, SAFAS, and the National Federation of Municipal Analysts. He
holds an MBA and a BA from the University of Texas.
[PHOTOGRAPH OF
PORTFOLIO MANAGER]
Kenneth E. Willmann
Tax-Exempt Bonds
and Tax-Exempt
Money Market
Instruments
USING MUTUAL FUNDS IN AN ASSET ALLOCATION PROGRAM
I. The Idea Behind Asset Allocation
If you have money to invest and hear that stocks may be a good investment, is
it a wise idea to use your entire savings to buy one stock? Most people
wouldn't -- it would be fortunate if it works, but this strategy holds a great
deal of risk. Surprising news could be reported tomorrow on your stock, and its
price could soar or plummet.
Careful investors understand this concept of risk and lower that risk by
diversifying their holdings among a number of securities. That way bad news for
one security may be counterbalanced by good news regarding other securities.
But there is still a question of risk here. History tells us that stocks are
generally more volatile than bonds and that long-term bonds are generally more
volatile than short-term bonds. History also tells us that over many years
investments having higher risks tend to have higher returns than investments
that carry lower risks. From these observations comes the idea of asset
allocation.
Asset allocation is a concept that involves dividing your money among several
different types of investments -- for example, stocks, bonds, and short-term
investments such as money market instruments -- and keeping that allocation
until your objectives or the financial markets significantly change. That way
you're not pinning all your financial success on the fortunes of one kind of
investment. Money spread across different investment categories can help you
reduce market risk and likely will provide more stability to your total return.
13
<PAGE>
Asset allocation can work because different kinds of investments generally
follow different up-and-down cycles. With a variety of investments in your
portfolio, some are probably doing well, even when others are struggling.
II. Using Asset Allocation in an Investment Program
Most investors understand the concept of diversification, but asset allocation
goes beyond diversifying your portfolio; it's much more of an active process.
You must evaluate your lifestyle, finances, circumstances, long- and short-term
financial goals, and tolerance for investment risk. Once you have structured
your allocation, you'll need to review it regularly since your objectives will
change over time. Even though we do not charge sales loads or commissions, our
sales representatives are always available to assist you in structuring and
reviewing your investment portfolio.
III. USAA's Series of Asset Strategy Funds
USAA's series of asset allocation funds, our Asset Strategy Funds, are designed
for the long-term investor and are in line with our investment philosophy for
investors, specifically "buy and hold for the long-term," and "don't try to
time the market." As shown below, each of USAA's Asset Strategy Funds has its
own different mix of assets and objectives.
FUND INVESTMENT OBJECTIVE INVESTS IN
- -------------------------------------------------------------------------------
Income Seek high current return with reduced Bonds and stocks
Strategy risk over time, through an asset
Fund allocation strategy which emphasizes
income and gives secondary emphasis to
long-term growth of capital.
Growth and Seek a conservative balance between Tax-exempt bonds
Tax Strategy income, the majority of which is tax- and blue chip
Fund exempt, and the potential for long-term stocks
growth of capital to preserve purchasing
power.
Balanced Seek high total return, with reduced Stocks and bonds
Strategy risk over time, through an asset
Fund allocation strategy that seeks a
combination of long-term growth of
capital and current income.
Cornerstone Achieve a positive inflation-adjusted Foreign & basic
Strategy rate of return and a reasonably stable value stocks,
Fund value of Fund shares, thereby preserving government
purchasing power of shareholders' capital. securities, real
estate stocks and
gold stocks
Growth Seek high total return, with reduced risk Small & large cap
Strategy over time, through an asset allocation stocks, bonds, and
Fund strategy which emphasizes capital international
appreciation and gives secondary emphasis stocks
to income.
- -------------------------------------------------------------------------------
14
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For more complete information about the other USAA Asset Strategy Funds,
including charges and expenses, call us for a Prospectus. Read it carefully
before you invest for send money.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, bank
wire, electronic funds transfer (EFT), phone, or in person. A complete, signed
application is required for each new account.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number or
tax identification number to avoid possible withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after we receive your request in proper form as
described below. The Fund's NAV is determined at the close of the regular
trading session (generally 4:00 p.m. Eastern Time) of the New York Stock
Exchange (NYSE) each day the NYSE is open. If we receive your request prior to
that time, your purchase price will be the NAV per share determined for that
day. If we receive your request after the NAV per share is calculated, the
purchase will be effective on the next business day. If you plan to purchase
Fund shares with a foreign check, we suggest you convert your foreign check to
U.S. dollars prior to investment in the Fund to avoid a potential delay in the
effective date of your purchase of up to four to six weeks. Furthermore, a bank
charge may be assessed in the clearing process, which will be deducted from the
amount of the purchase.
MINIMUM INVESTMENTS
INITIAL PURCHASE * $3,000 or no initial investment if you elect to have monthly
[MONEY] electronic investments of at least $50 each. We may
periodically offer programs that reduce the minimum amounts
for monthly electronic investments. Employees of USAA and
its affiliated companies may open an account payroll
deduction for as little as $25 per pay period with no
initial investment.
ADDITIONAL
PURCHASES * $50
NOTE: This fund is not available for an IRA because the majority of its income
is tax-exempt.
15
<PAGE>
HOW TO PURCHASE
MAIL * To open an account, send your application and
[ENVELOPE] check to:
USAA Investment Management Company
9800 Fredericksburg Road, San Antonio, TX 78288
* To add to your account, send your check and the
"Invest by Mail" stub that accompanies your Fund's
transaction confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Road, San Antonio, TX 78288
IN PERSON * To open an account, bring your application and
[MAN AND WOMAN] check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
BANK WIRE * Instruct your bank (which may charge a fee for the
[ELECTRONIC service) to wire the specified amount to the Fund as
ENVELOPE] follows:
State Street Bank and Trust Company, Boston,
MA 02101
ABA#011000028
Attn: USAA Growth and Tax Strategy Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
ELECTRONIC * Addtional purchases on a regular basis can be deducted
FUNDS from a bank account, paycheck, income-producing
TRANSFER investment, or USAA money market fund account. Sign
[CALENDAR] up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE
1-800-531-8448 * If you have an existing USAA account and would like to
[PHONE] open a new account or exchange to another USAA fund,
call for instructions. To open an account by phone,
the new account must have the same registration as
your existing account.
Redemption of Shares
You may redeem Fund shares by any of the methods described below on any day the
NAV per share is calculated. Redemptions are effective on the day instructions
are received in a manner as described below. However, if instructions are
received after the NAV per share calculation (generally 4:00 p.m. Eastern
Time), redemption will be effective on the next business day.
16
<PAGE>
Within seven days after the effective date of redemption, we will send you your
money. Payment for redemption of shares purchased by EFT or check is sent after
the EFT or check has cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after purchase, you should
purchase by bank wire or certified check to avoid delay.
In addition, the Company may elect to suspend the redemption of shares or
postpone the date of payment in limited circumstances.
HOW TO REDEEM
WRITTEN, FAX, * Send your written instructions to:
TELEGRAPH, OR USAA Shareholder Account Services
TELEPHONE 9800 Fredericksburg Road, San Antonio, TX 78288
[FAX MACHINE]
* Send a signed fax to 1-800-292-8177, or send a
telegraph to USAA Shareholder Account Services.
* Call toll free 1-800-531-8448, in San Antonio,
456-7202.
Telephone redemption privileges are automatically established when you complete
your application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions. Before
any discussion regarding your account, we obtain the following information: (1)
USAA number or account number, (2) the name(s) on the account registration, and
(3) social security number or tax identification number for the account
registration. In addition, we record all telephone communications with you and
send confirmations of account transactions to the address of record. Redemption
by telephone, fax, or telegraph is not available for shares represented by
stock certificates.
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to help you in
your role as an investor. In the INVESTOR'S GUIDE, you will find additional
information on purchases, redemptions, and methods of payment. You will also
find in-depth information on automatic investment plans, shareholder statements
and reports, and other useful information.
17
<PAGE>
Account Balance
Beginning in September 1998, and occurring each September thereafter, USAA
Shareholder Account Services (SAS), the Fund's transfer agent, will assess a
small balance account fee of $12 to each shareholder account with a balance, at
the time of assessment, of less than $2,000. The fee will reduce total transfer
agency fees paid by the Fund to SAS. Accounts exempt from the fee include: (1)
any account regularly purchasing additional shares each month through an
automatic investment plan; (2) any account registered under the Uniform
Gifts/Transfers to Minors Act (UGMA/UTMA); (3) all (non-IRA) money market fund
accounts; (4) any account whose registered owner has an aggregate balance of
$50,000 or more invested in USAA mutual funds; and (5) all IRA accounts (for
the first year the account is open).
Trust Rights
The Trust reserves the right to:
X reject purchase or exchange orders when in the best interest of the Trust;
X limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
X require a signature guarantee for purchases, redemptions, or changes in
account information in those instances where the appropriateness of a
signature authorization is in question. The Statement of Additional
Information contains information on acceptable guarantors;
X redeem an account with less than $900, with certain limitations.
EXCHANGES
Exchange Privilege
The exchange privilege is automatic when you complete your application. You may
exchange shares among Funds in the USAA Family of Funds, provided you do not
hold these shares in stock certificate form and that the shares to be acquired
are offered in your state of residence. The Fund's transfer agent will
simultaneously process exchange redemptions and purchases at the share prices
next determined after the exchange order is received. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. The Fund has undertaken certain procedures
regarding telephone transactions as described on page 17.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA Family of Funds for each account is six
per calendar year (except
18
<PAGE>
there is no limitation on exchanges out of the Tax Exempt Short-Term Fund,
Short-Term Bond Fund, or any of the money market funds in the USAA Family of
Funds).
SHAREHOLDER INFORMATION
Share Price Calculation
The price at which shareholders purchase and redeem fund shares is equal to the
net asset value (NAV) per share determined on the effective date of the
purchase or redemption. You may buy and sell Fund shares at the NAV per share
without a sales charge.
When
The Fund's NAV per share is calculated at the close of the regular trading
session of the NYSE, which is usually 4:00 p.m. Eastern Time.
How
The NAV per share is calculated by adding the value of all securities and other
assets in the Fund, deducting liabilities, and dividing by the number of shares
outstanding.
Dividends and Distributions
The Fund pays net investment income dividends quarterly. Any net capital gains
distribution usually occurs within 45 days of the May 31 fiscal year end which
would be somewhere around the middle of July. The Fund will make additional
payments to shareholders, if necessary, to avoid the imposition of any federal
income or excise tax.
All income dividends and capital gain distributions are automatically
reinvested, unless we receive different instructions from you. The share price
will be the NAV of the Fund shares computed on the ex-dividend date which is
two business days before the quarter end. Any income dividends or capital gain
distributions paid by the Fund will reduce the NAV per share by the amount of
the dividend or distribution. These dividends and distributions are subject to
taxes.
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
Federal Taxes
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this Prospectus. Note that the recently
enacted Taxpayer Relief Act of 1997 and regulations that will likely be created
to implement the Act may affect the status and treatment of certain
distributions shareholders receive from the Fund. We urge you to consult your
own tax adviser about the status of distributions from the Fund in your own
state and locality.
19
<PAGE>
FUND - The Fund intends to qualify as a regulated investment company (RIC)
under Subchapter M of the Internal Revenue Code of 1986, as amended. As a RIC,
the Fund will not be subject to federal income tax on its net investment income
and net capital gains distributed to shareholders. Net capital gains are those
gains in excess of capital losses.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to shareholders as ordinary income,
whether received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends received deduction available to
corporations.
Regardless of the length of time the investor has held the Fund shares,
distributions of net long-term capital gains are taxable as long-term capital
gains whether received in cash or reinvested in additional shares.
Redemptions, including exchanges, are subject to income tax, based on the
difference between the cost of shares when purchased and the price received
upon redemption or exchange.
Distributions to shareholders derived from tax-exempt interest received by the
Fund will be excluded from a shareholder's gross income for federal income tax
purposes, provided the Fund meets certain requirements.
IN CERTAIN INSTANCES, TAX-EXEMPT INTEREST HAS TAX IMPLICATIONS.
Although otherwise exempt from federal tax, tax-exempt interest from private
activity bonds (for example, industrial development revenue bonds) issued after
August 7, 1986, is treated as a tax preference item for purposes of the
alternative minimum tax.
For corporations, all tax-exempt interest will be considered in calculating the
alternative minimum tax as part of the adjusted current earnings.
Distributions of tax-exempt income are considered in computing the portion, if
any, of Social Security and railroad retirement benefits subject to federal
and, in some cases, state taxes.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
X fails to furnish the Fund with a correct tax identification number,
X underreports dividend or interest income, or
X fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify on your application, or
on a separate Form W-9 supplied by the Fund's transfer agent, that your tax
identification number is correct and that you are not currently subject to
backup withholding.
20
<PAGE>
REPORTING - The Fund will report annually to its shareholders the federal tax
status of dividends and distributions paid or declared by the Fund during the
preceding calendar year including:
X the portion of the dividends constituting interest on private activity
bonds; and
X the percentage and source, on a state-by-state basis, of interest income
earned on the tax-exempt securities, if any, held by the Fund during the
preceding year.
DESCRIPTION OF SHARES
The Fund is a series of USAA Investment Trust (Trust) and is diversified. The
Trust is an open-end management investment company established as a business
trust under the laws of the Commonwealth of Massachusetts. The Trust is
authorized to issue an unlimited number of shares of beneficial interest of
separate portfolios, each of which is commonly referred to as a mutual fund.
There are 11 mutual funds in the Trust, including this Fund.
The Trust does not hold annual or regular meetings of shareholders and holds
special meetings only as required by the Investment Company Act of 1940. The
Trustees may fill vacancies on the Board or appoint new Trustees if the result
is that at least two-thirds of the Trustees have still been elected by
shareholders. Shareholders have one vote per share (with proportionate voting
for fractional shares) regardless of the relative net asset value of the
shares. If a matter affects an individual fund in the Trust, there will be a
separate vote of the shareholders of that specific fund. Shareholders
collectively holding at least 10% of the outstanding shares of the Trust may
request a shareholder meeting at any time for the purpose of voting to remove
one or more of the Trustees. The Trust will assist communicating to other
shareholders about the meeting.
21
<PAGE>
APPENDIX A
The following are descriptions of certain types of securities in which we may
invest the Fund's assets:
WHEN-ISSUED SECURITIES
We may invest in new issues of debt securities offered on a when-issued basis.
X Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed at
the time of commitment.
X The Fund does not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
X Such securities can be sold before settlement date.
VARIABLE RATE SECURITIES
We may invest in securities that bear interest at rates which are adjusted
periodically to market rates.
X These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on
the income earned by the Fund depending on the proportion of such
securities held.
X The value of variable rate securities is less affected than fixed-coupon
securities by changes in prevailing interest rates because of the periodic
adjustment of their coupons to a market rate. The shorter the period
between adjustments, the smaller the impact of interest rate fluctuations
on the value of these securities.
X The market value of a variable rate security usually tends toward par (100%
of face value) at interest rate adjustment time.
PUT BONDS
We may invest in tax-exempt securities (including securities with variable
interest rates) which may be redeemed or sold back (put) to the issuer of the
security or a third party prior to stated maturity (put bonds).
X Such securities will normally trade as if maturity is the earlier put date,
even though stated maturity is longer. Under the Fund's portfolio
allocation procedure, maturity for put bonds is deemed to be the date on
which the put becomes exercisable.
ZERO COUPON BONDS
We may invest in zero coupon bonds.
X A zero coupon bond is a security that is sold at a deep discount from its
face value, makes no periodic interest payments, and is redeemed at face
value when it matures.
X The lump sum payment at maturity increases the price volatility of the zero
coupon bond to changes in interest rates when compared to a bond that
distributes a semiannual coupon payment.
X In calculating its dividend, the Fund records as income the daily
amortization of the purchase discount.
MUNICIPAL LEASE OBLIGATIONS
We may invest in a variety of instruments commonly referred to as municipal
lease obligations, including:
X Leases,
X Installment purchase contracts, and
X Certificates of participation in such leases and contracts.
ILLIQUID SECURITIES
We may not invest more than 15% of the market value of the Fund's net assets in
securities which are illiquid. Illiquid securities are those securities that
cannot be disposed of in the ordinary course of business in seven days or less
at approximately the value at which the Fund has valued the securities.
22
<PAGE>
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide you with the opportunity to formulate your own investment program. You
may exchange any shares you hold in any one USAA Fund for shares in any other
USAA Fund. For more complete information about other Funds in the USAA Family
of Funds, including charges and expenses, call us for a Prospectus. Read it
carefully before you invest or send money.
===============================================================================
FUND
TYPE/NAME VOLATILITY
===============================================================================
CAPITAL APPRECIATION
Aggressive Growth Very high
Emerging Markets 5 Very high
First Start Growth Moderate to high
Gold 5 Very high
Growth Moderate to high
Growth & Income Moderate
International 5 Moderate to high
S&P 500 Index 1 Moderate
Science & Technology Very high
World Growth 5 Moderate to high
===============================================================================
ASSET ALLOCATION
Balanced Strategy Moderate
Cornerstone Strategy 5 Moderate
Growth and Tax Strategy 2 Moderate
Growth Strategy 5 Moderate to high
Income Strategy Low to moderate
===============================================================================
INCOME -- TAXABLE
GNMA Low to moderate
Income Moderate
Income Stock Moderate
Short-Term Bond Low
===============================================================================
INCOME -- TAX EXEMPT
Long-Term 2 Moderate
Intermediate-Term 2 Low to moderate
Short-Term 2 Low
State Bond/Income 2,3 Moderate
===============================================================================
MONEY MARKET
Money Market 4 Very low
Tax Exempt Money Market 2,4 Very low
Treasury Money Market Trust 4 Very low
State Money Market 2,3,4 Very low
===============================================================================
1 S&P(R) 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.
2 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
3 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY TO
RESIDENTS OF THOSE STATES.
4 AN INVESTMENT IN A MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT ANY OF THE FUNDS WILL BE ABLE
TO MAINTAIN A STABLE NET ASSET VALUE OF $1 PER SHARE.
5 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
23
<PAGE>
NOTES
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's Statement of Additional Information (SAI),
dated October 1, 1997, or the Fund's Annual Report for the year ended May 31,
1997. The SAI and the financial statements contained with the Fund's Annual
Report have been filed with the SEC and are legally a part of this Prospectus.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
-----------------------------
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
-----------------------------
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
--------------------------
TELEPHONE ASSISTANCE
Call toll free - Central Time
Monday - Friday 8:00 a.m. to 8:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
FOR ADDITIONAL INFORMATION ON MUTUAL FUNDS
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges or redemptions
1-800-531-8448, (in San Antonio) 456-7202
RECORDED MUTUAL FUND PRICE QUOTES
24-Hour Service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
MUTUAL FUND TOUCHLINE(R)
(from Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777, (in San Antonio) 498-8777
[USAA EAGLE LOGO]
USAA INVESTMENT MANAGEMENT COMPANY
9800 FREDERICKSBURG ROAD
SAN ANTONIO, TEXAS
78288
(recycled)
23444-1097 (C) 1997, USAA. All rights reserved. RECYCLED PAPER
<PAGE>
[USAA EAGLE LOGO]
USAA STATEMENT OF
INVESTMENT ADDITIONAL INFORMATION
TRUST October 1, 1997
- --------------------------------------------------------------------------------
USAA INVESTMENT TRUST
USAA INVESTMENT TRUST (the Trust) is a registered investment company offering
shares of eleven no-load mutual funds which are described in this Statement of
Additional Information (SAI): the Income Strategy Fund, Growth and Tax Strategy
Fund, Balanced Strategy Fund, Cornerstone Strategy Fund, Growth Strategy Fund,
Emerging Markets Fund, Gold Fund, International Fund, World Growth Fund, GNMA
Trust, and Treasury Money Market Trust (collectively, the Funds). Each Fund is
classified as diversified and has its own investment objective designed to meet
different investment goals.
You may obtain a free copy of a Prospectus for each Fund dated October 1, 1997,
by writing to USAA Investment Trust, 9800 Fredericksburg Rd., San Antonio, TX
78288, or by calling toll free 1-800-531-8181. The Prospectus provides the basic
information you should know before investing in the Funds. This SAI is not a
Prospectus and contains information in addition to and more detailed than that
set forth in each Fund's Prospectus. It is intended to provide you with
additional information regarding the activities and operations of the Trust and
the Funds, and should be read in conjunction with each Fund's Prospectus.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
2 Valuation of Securities
3 Conditions of Purchase and Redemption
3 Additional Information Regarding Redemption of Shares
4 Investment Plans
5 Investment Policies
8 Special Risk Considerations
8 Investment Restrictions
11 Portfolio Transactions
13 Further Description of Shares
14 Tax Considerations
15 Trustees and Officers of the Trust
18 The Trust's Manager
20 General Information
20 Calculation of Performance Data
22 Appendix A - Long-Term and Short-Term Debt Ratings
25 Appendix B - Comparison of Portfolio Performance
28 Appendix C - Dollar-Cost Averaging
<PAGE>
VALUATION OF SECURITIES
Shares of each Fund are offered on a continuing best efforts basis through USAA
Investment Management Company (IMCO or the Manager). The offering price for
shares of each Fund is equal to the current net asset value (NAV) per share. The
NAV per share of each Fund is calculated by adding the value of all its
portfolio securities and other assets, deducting its liabilities, and dividing
by the number of shares outstanding.
A Fund's NAV per share is calculated each day, Monday through Friday,
except days on which the New York Stock Exchange (NYSE) is closed. The NYSE is
currently scheduled to be closed on New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas, and on the preceding Friday or subsequent Monday
when one of these holidays falls on a Saturday or Sunday, respectively.
The value of securities of the Income Strategy, Growth and Tax Strategy,
Balanced Strategy, Cornerstone Strategy, Growth Strategy, Emerging Markets,
Gold, International, and World Growth Funds and the GNMA Trust is determined by
one or more of the following methods:
(1) Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities
exchanges are generally valued at the closing values of such securities on
the exchange where primarily traded. If no sale is reported, the average
of the bid and asked prices is generally used depending upon local custom
or regulation.
(2) Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices at the time trading
closes on the NYSE.
(3) Debt securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value. Repurchase agreements are
valued at cost.
(4) Other debt and government securities are valued each business day by a
pricing service (the Service) approved by the Board of Trustees. The
Service uses the mean between quoted bid and asked prices or the last
sales price to price securities when, in the Service's judgment, these
prices are readily available and are representative of the securities'
market values. For many securities, such prices are not readily available.
The Service generally prices those securities based on methods which
include consideration of yields or prices of securities of comparable
quality, coupon, maturity and type, indications as to values from dealers
in securities, and general market conditions.
(5) Securities which cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value using methods
determined by the Manager under the general supervision of the Board of
Trustees.
Securities trading in foreign markets may not take place on all days on
which the NYSE is open. Further, trading takes place in various foreign markets
on days on which the NYSE is not open. The calculation of a Fund's NAV therefore
may not take place contemporaneously with the determination of the prices of
securities held by a Fund. Events affecting the values of portfolio securities
that occur between the time their prices are determined and the close of normal
trading on the NYSE on a day a Fund's NAV is calculated will not be reflected in
a Fund's NAV, unless the Manager determines that the particular event would
materially affect NAV. In such a case, the Fund's Manager, under the supervision
of the Board of Trustees, will use all relevant available information to
determine a fair value for the affected portfolio securities.
The value of the Treasury Money Market Trust's securities is stated at
amortized cost which approximates market value. This involves valuing a security
at its cost and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates.
While this method provides certainty in valuation, it may result in periods
during which the value of an instrument, as determined by amortized cost, is
higher or lower than the price the Trust would receive upon the sale of the
instrument.
The valuation of the Treasury Money Market Trust's portfolio instruments
based upon their amortized cost is subject to the Fund's adherence to certain
procedures and conditions. Consistent with regulatory requirements, the Manager
will only purchase securities with remaining maturities of 397 days or less and
will maintain a dollar-weighted average portfolio maturity of no more than 90
days. The Manager will invest only in securities that have been determined to
present minimal credit risk and that satisfy the quality and diversification
requirements of applicable rules and regulations of the Securities and Exchange
Commission (SEC).
The Board of Trustees has established procedures designed to stabilize the
Treasury Money Market Trust's price per share, as computed for the purpose of
sales and redemptions, at $1.00. There can be no assurance, however, that the
Fund will at all times be able to maintain a constant $1.00 NAV per share. Such
procedures include review of the Fund's holdings at such intervals as is deemed
appropriate to determine whether the Fund's NAV calculated by using available
market quotations deviates from $1.00 per share and,
2
<PAGE>
if so, whether such deviation may result in material dilution or is otherwise
unfair to existing shareholders. In the event that it is determined that such a
deviation exists, the Board of Trustees will take such corrective action as it
regards as necessary and appropriate. Such action may include selling portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity, withholding dividends, or establishing a NAV per
share by using available market quotations.
CONDITIONS OF PURCHASE AND REDEMPTION
Nonpayment
If any order to purchase shares is cancelled due to nonpayment or if the Trust
does not receive good funds either by check or electronic funds transfer, the
Transfer Agent will treat the cancellation as a redemption of shares purchased,
and you will be responsible for any resulting loss incurred by the Fund or the
Manager. If you are a shareholder, the Transfer Agent can redeem shares from any
of your account(s) as reimbursement for all losses. In addition, you may be
prohibited or restricted from making future purchases in any of the USAA Family
of Funds. A $15 fee is charged for all returned items, including checks and
electronic funds transfers.
Transfer of Shares
You may transfer Fund shares to another person by sending written instructions
to USAA Shareholder Account Services (Transfer Agent). The account must be
clearly identified, and you must include the number of shares to be transferred,
the signatures of all registered owners, and all stock certificates, if any,
which are the subject of transfer. You also need to send written instructions
signed by all registered owners and supporting documents to change an account
registration due to events such as divorce, marriage, or death. If a new account
needs to be established, you must complete and return an application to the
Transfer Agent.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
The value of a shareholder's investment at the time of redemption may be more or
less than the cost at purchase, depending on the value of the securities held in
each Fund's portfolio. Requests for redemption which are subject to any special
conditions, or which specify an effective date other than as provided herein,
cannot be accepted. A gain or loss for tax purposes may be realized on the sale
of shares, depending upon the price when redeemed.
The Board of Trustees may cause the redemption of an account with a
balance of less than $900, provided that (1) the value of such account has been
reduced below the minimum initial investment required in such Fund at the time
of the establishment of the account to less than $900 entirely for reasons other
than market action, (2) the account has remained below the minimum initial
investment for six months, and (3) 60 days' prior written notice of the proposed
redemption has been sent to the shareholder. Shares will be redeemed at the NAV
on the date fixed for redemption by the Board of Trustees. Prompt payment will
be made by mail to the last known address of the shareholder.
The Trust reserves the right to suspend the right of redemption or
postpone the date of payment (1) for any periods during which the NYSE is
closed, (2) when trading in the markets the Trust normally utilizes is
restricted, or an emergency exists as determined by the SEC so that disposal of
the Trust's investments or determination of its NAV is not reasonably
practicable, or (3) for such other periods as the SEC by order may permit for
protection of the Trust's shareholders.
For the mutual protection of the investor and the Funds, the Trust may
require a signature guarantee. If required, each signature on the account
registration must be guaranteed. Signature guarantees are acceptable from FDIC
member banks, brokers, dealers, municipal securities dealers, municipal
securities brokers, government securities dealers, government securities
brokers, credit unions, national securities exchanges, registered securities
associations, clearing agencies and savings associations. A signature guarantee
for active duty military personnel stationed abroad may be provided by an
officer of the United States Embassy or Consulate, a staff officer of the Judge
Advocate General, or an individual's commanding officer.
Redemption By Check
Shareholders in the Treasury Money Market Trust may request that checks be
issued for their accounts. Checks must be written in the amount of at least
$250.
Checks issued to shareholders of the Treasury Money Market Trust will be
sent only to the person in whose name the account is registered and only to the
address of record. The checks must be manually signed by the registered owner(s)
exactly as the account is registered. For joint accounts the signature of either
or both joint owners will be required on the check, according to the election
made on the signature card. Dividends will continue to be earned by the
shareholder until the shares are redeemed by the presentation of a check.
3
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When a check is presented to USAA Shareholder Account Services (Transfer
Agent) for payment, a sufficient number of full and fractional shares in the
investor's account will be redeemed to cover the amount of a check. If an
investor's account is not adequate to cover the amount of a check, the check
will be returned unpaid. Because the value of the account changes as dividends
are accrued on a daily basis, checks may not be used to close an account.
The checkwriting privilege will be subject to the customary rules and
regulations of State Street Bank and Trust Company (State Street Bank or the
Custodian) governing checking accounts. There is no charge to the shareholder
for the use of the checks or for subsequent reorders of checks.
The Trust reserves the right to assess a processing fee against a
shareholder's account for any redemption check not honored by a clearing or
paying agent. Currently, this fee is $15 and is subject to change at any time.
Some examples of such dishonor are improper endorsement, checks written for an
amount less than the minimum check amount, and insufficient or uncollectible
funds.
The Trust, the Transfer Agent, and State Street Bank each reserve the
right to change or suspend the checkwriting privilege upon 30 days' written
notice to participating shareholders.
INVESTMENT PLANS
The following investment plans are made available by the Trust to shareholders
of all the Funds. At the time you sign up for any of the following investment
plans that utilize the electronic funds transfer service, you will choose the
day of the month (the effective date) on which you would like to regularly
purchase shares. When this day falls on a weekend or holiday, the electronic
transfer will take place on the last business day before the effective date. You
may terminate your participation in a plan at any time. Please call the Manager
for details and necessary forms or applications.
AUTOMATIC PURCHASE OF SHARES
INVESTART(R) - a no initial investment purchase plan. With this plan the regular
minimum initial investment amount is waived if you make monthly additions of at
least $50 through electronic funds transfer from a checking or savings account.
INVESTRONIC(R) - the regular purchase of additional shares through electronic
funds transfer from a checking or savings account. You may invest as little as
$50 per month.
DIRECT PURCHASE SERVICE - the periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), an
income-producing investment, or an account with a participating financial
institution.
AUTOMATIC PURCHASE PLAN - the periodic transfer of funds from a USAA money
market fund to purchase shares in another non-money market USAA mutual fund.
There is a minimum investment required for this program of $5,000 in the money
market fund, with a monthly transaction minimum of $50.
BUY/SELL SERVICE - the intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.
Participation in these automatic purchase plans will permit a shareholder
to engage in dollar-cost averaging. For additional information concerning the
benefits of dollar-cost averaging, see Appendix C.
SYSTEMATIC WITHDRAWAL PLAN
If a shareholder in a single investment account (accounts in different Funds
cannot be aggregated for this purpose) owns shares having a NAV of $5,000 or
more, the shareholder may request that enough shares to produce a fixed amount
of money be liquidated from the account monthly or quarterly. The amount of each
withdrawal must be at least $50. Using the electronic funds transfer service,
shareholders may choose to have withdrawals electronically deposited at their
bank or other financial institution. They may also elect to have checks mailed
to a designated address.
Such a plan may be initiated by depositing shares worth at least $5,000
with the Transfer Agent and by completing a Systematic Withdrawal Plan
application, which may be requested from the Manager. The shareholder may
terminate participation in the plan at any time. There is no charge to the
shareholder for withdrawals under the Systematic Withdrawal Plan. The Trust will
not bear any expenses in administering the plan beyond the regular transfer
agent and custodian costs of issuing and redeeming shares. The Manager will bear
any additional expenses of administering the plan.
Withdrawals will be made by redeeming full and fractional shares on the
date selected by the shareholder at the time the plan is established. Withdrawal
payments made under this plan may exceed dividends and distributions and, to
this extent, will involve the use of principal and could reduce the dollar value
of a shareholder's investment and eventually exhaust the account. Reinvesting
dividends and
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distributions helps replenish the account. Because share values and net
investment income can fluctuate, shareholders should not expect withdrawals to
be offset by rising income or share value gains.
Each redemption of shares may result in a gain or loss, which must be
reported on the shareholder's income tax return. Therefore, a shareholder should
keep an accurate record of any gain or loss on each withdrawal.
TAX-DEFERRED RETIREMENT PLANS (NOT AVAILABLE IN THE GROWTH AND TAX STRATEGY
FUND)
Federal taxes on current income may be deferred if an investor qualifies for
certain types of retirement programs. For the convenience of the investor, the
Manager offers 403(b)(7) accounts and various forms of IRAs. The minimum initial
investment in each of these plans is $250, or no minimum is required with a
minimum $50 monthly electronic investment. Subsequent investments of $50 or more
per account may be made at any time. Investments may be made in one or any
combination of the portfolios described in the Prospectus of each Fund of USAA
Investment Trust and USAA Mutual Fund, Inc.
Retirement plan applications for the IRA and 403(b)(7) programs should be
sent directly to USAA Shareholder Account Services, 9800 Fredericksburg Rd., San
Antonio, TX 78288. USAA Federal Savings Bank serves as Custodian of these
tax-deferred retirement plans under the programs made available by the Manager.
Applications for these retirement plans received by the Manager will be
forwarded to the Custodian for acceptance.
An administrative fee of $20 is deducted from the proceeds of a
distribution closing an account. Exceptions to the fee are: partial
distributions, total transfer within USAA, and distributions due to disability
or death. This charge is subject to change as provided in the various
agreements. There may be additional charges, as mutually agreed upon between the
investor and the Custodian, for further services requested of the Custodian.
Each employer or individual establishing a tax-deferred retirement plan is
advised to consult with a tax adviser before establishing the plan. Detailed
information about the plans may be obtained from the Manager.
INVESTMENT POLICIES
The section captioned Investment Objective and Policies in each Fund's
Prospectus (Investment Policies and Risks in the Growth and Tax Strategy Fund
Prospectus) describes the fundamental investment objective and the investment
policies applicable to each Fund and the following is provided as additional
information.
SECTION 4(2) COMMERCIAL PAPER AND RULE 144A SECURITIES
The Income Strategy, Balanced Strategy and Growth Strategy Funds may invest in
commercial paper issued in reliance on the "private placement" exemption from
registration afforded by Section 4(2) of the Securities Act of 1933 (Section
4(2) Commercial Paper). Section 4(2) Commercial Paper is restricted as to
disposition under the federal securities laws; therefore, any resale of Section
4(2) Commercial Paper must be effected in a transaction exempt from registration
under the Securities Act of 1933. Section 4(2) Commercial Paper is normally
resold to other investors through or with the assistance of the issuer or
investment dealers who make a market in Section 4(2) Commercial Paper, thus
providing liquidity.
Each Fund, except the GNMA Trust and the Treasury Money Market Trust, may
also purchase restricted securities eligible for resale to "qualified
institutional buyers" pursuant to Rule 144A under the Securities Act of 1933
(Rule 144A Securities). Rule 144A provides a non-exclusive safe harbor from the
registration requirements of the Securities Act of 1933 for resales of certain
securities to institutional investors.
MUNICIPAL LEASE OBLIGATIONS
The Income Strategy, Balanced Strategy, Growth Strategy and Growth and Tax
Strategy Funds may invest in municipal lease obligations, installment purchase
contract obligations, and certificates of participation in such obligations
(collectively, lease obligations). A lease obligation does not constitute a
general obligation of the municipality for which the municipality's taxing power
is pledged, although the lease obligation is ordinarily backed by the
municipality's covenant to budget for the payments due under the lease
obligation.
Certain lease obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease obligation
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult.
LIQUIDITY DETERMINATIONS
The Board of Trustees has established guidelines pursuant to which Municipal
Lease Obligations, Section 4(2) Commercial Paper and Rule 144A Securities, and
certain restricted debt securities that are subject to unconditional put or
demand features exercisable within seven days (Restricted Put Bonds) may be
determined to be liquid for purposes of complying with the Funds' investment
restriction applicable to
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investments in illiquid securities. In determining the liquidity of Municipal
Lease Obligations, Section 4(2) Commercial Paper and Rule 144A Securities, the
Manager will consider the following factors, among others, established by the
Board of Trustees: (1) the frequency of trades and quotes for the security, (2)
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers, (3) dealer undertakings to make a market in the
security, and (4) the nature of the security and the nature of the marketplace
trades, including the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer. Additional factors considered
by the Manager in determining the liquidity of a municipal lease obligation are:
(1) whether the lease obligation is of a size that will be attractive to
institutional investors, (2) whether the lease obligation contains a
non-appropriation clause and the likelihood that the obligor will fail to make
an appropriation therefor, and (3) such other factors as the Manager may
determine to be relevant to such determination. In determining the liquidity of
Restricted Put Bonds, the Manager will evaluate the credit quality of the party
(the Put Provider) issuing (or unconditionally guaranteeing performance on) the
unconditional put or demand feature of the Restricted Put Bond. In evaluating
the credit quality of the Put Provider, the Manager will consider all factors
that it deems indicative of the capacity of the Put Provider to meet its
obligations under the Restricted Put Bond based upon a review of the Put
Provider's outstanding debt and financial statements and general economic
conditions.
Certain foreign securities (including Eurodollar obligations) may be
eligible for resale pursuant to Rule 144A in the United States and may also
trade without restriction in one or more foreign markets. Such securities may be
determined to be liquid based upon these foreign markets without regard to their
eligibility for resale pursuant to Rule 144A. In such cases, these securities
will not be treated as Rule 144A securities for purposes of the liquidity
guidelines established by the Board of Trustees.
CALCULATION OF MATURITY FOR FIXED INCOME SECURITIES
A fixed income security's maturity is typically determined on a stated final
maturity basis, although there are some exceptions to the rule.
If the issuer of the security has committed to take advantage of a
maturity shortening device, such as a call, refunding, or redemption provision,
the date on which the instrument will be called, refunded, or redeemed will be
considered to be its maturity date. Maturities of securities subject to sinking
fund arrangements are determined on a weighted average life basis, which is the
average time for principal to be repaid. The weighted average lives of these
securities will be shorter than their stated final maturities. A security will
be treated as having a maturity earlier than its stated maturity date if the
security has technical features, such as a put or demand feature which, in the
judgment of the Manager, will result in the security being valued in the market
as though it has the earlier maturity.
LENDING OF SECURITIES
Each Fund may lend its securities. A lending policy may be authorized by the
Trust's Board of Trustees and implemented by the Manager, but securities may be
loaned only to qualified broker-dealers or institutional investors that agree to
maintain cash collateral with the Trust equal at all times to at least 100% of
the value of the loaned securities. The Trustees will establish procedures and
monitor the creditworthiness of any institution or broker-dealer during such
times as any loan is outstanding. The Trust will continue to receive interest on
the loaned securities and will invest the cash collateral in short-term
obligations of the U.S. Government or of its agencies or instrumentalities or in
repurchase agreements, thereby earning additional interest.
No loan of securities will be made if, as a result, the aggregate of such
loans would exceed 33 1/3% of the value of a Fund's total assets. The Trust
may terminate such loans at any time.
FORWARD CURRENCY CONTRACTS
Each Fund, except the Growth and Tax Strategy, GNMA and Treasury Money Market
Trusts, may enter into forward currency contracts in order to protect against
uncertainty in the level of future foreign exchange rates. A forward contract
involves an agreement to purchase or sell a specific currency at a specified
future date or over a specified time period at a price set at the time of the
contract. These contracts are usually traded directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirements, and no commissions are charged.
The Funds may enter into forward currency contracts under two
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security. By entering into such a contract, a Fund
will be able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the foreign currency from
the date the security is purchased or sold to the date on which payment is made
or received. Second, when management of a Fund believes that the currency of a
specific country may deteriorate relative to the U.S. dollar, it may enter into
a forward contract to sell that currency. A Fund may not hedge with respect to a
particular currency for an amount greater than the aggregate market value
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(determined at the time of making any sale of forward currency) of the
securities held in its portfolio denominated or quoted in, or bearing a
substantial correlation to, such currency.
The use of forward contracts involves certain risks. The precise matching
of contract amounts and the value of securities involved generally will not be
possible since the future value of such securities in currencies more than
likely will change between the date the contract is entered into and the date it
matures. The projection of short-term currency market movements is extremely
difficult and successful execution of a short-term hedging strategy is
uncertain. Under normal circumstances, consideration of the prospect for
currency parities will be incorporated into the longer term investment
strategies. The Manager believes it is important, however, to have the
flexibility to enter into such contracts when it determines it is in the best
interest of the Funds to do so. It is impossible to forecast what the market
value of portfolio securities will be at the expiration of a contract.
Accordingly, it may be necessary for the Funds to purchase additional currency
(and bear the expense of such purchase) if the market value of the security is
less than the amount of currency the Funds are obligated to deliver, and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell some of the foreign currency received on
the sale of the portfolio security if its market value exceeds the amount of
currency the Funds are obligated to deliver. The Funds are not required to enter
into such transactions and will not do so unless deemed appropriate by the
Manager.
Although the Funds value their assets each business day in terms of U.S.
dollars, they do not intend to convert their foreign currencies into U.S.
dollars on a daily basis. They will do so from time to time, and shareholders
should be aware of currency conversion costs. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (spread) between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
WHEN-ISSUED SECURITIES
Each Fund may invest in new issues of debt securities offered on a when-issued
basis; that is, delivery of and payment for the securities take place after the
date of the commitment to purchase, normally within 45 days. The payment
obligation and the interest rate that will be received on the securities are
each fixed at the time the buyer enters into the commitment. A Fund may sell
these securities before the settlement date if it is deemed advisable.
Debt securities purchased on a when-issued basis are subject to changes in
value in the same way that other debt securities held in the Funds' portfolios
are; that is, both generally experience appreciation when interest rates decline
and depreciation when interest rates rise. The value of such securities will
also be affected by the public's perception of the creditworthiness of the
issuer and anticipated changes in the level of interest rates. Purchasing
securities on a when-issued basis involves a risk that the yields available in
the market when the delivery takes place may actually be higher than those
obtained in the transaction itself. Cash or high-quality, liquid-debt securities
equal to the amount of the when-issued commitments are segregated at the Fund's
custodian bank. The segregated securities are valued at market, and daily
adjustments are made to keep the value of the cash and segregated securities at
least equal to the amount of such commitments by the Fund.
On the settlement date of the when-issued securities, the Fund will meet
its obligations from then available cash, sale of segregated securities, sale of
other securities, or from sale of the when-issued securities themselves (which
may have a value greater or less than the Trust's payment obligations). Sale of
securities to meet such obligations carries with it a greater potential for the
realization of capital gains.
INVESTMENTS IN REAL ESTATE INVESTMENT TRUSTS (REITS)
Because the Income Strategy, Balanced Strategy, Cornerstone Strategy, Growth
Strategy, and World Growth Funds may invest a portion of their assets in REITs,
the Funds may also be subject to certain risks associated with direct
investments in REITs. REITs may be affected by changes in the value of their
underlying properties and by defaults by borrowers or tenants. Furthermore,
REITs are dependent upon specialized management skills of their managers and may
have limited geographic diversification, thereby, subjecting them to risks
inherent in financing a limited number of projects. REITs depend generally on
their ability to generate cash flow to make distributions to shareholders, and
certain REITs have self-liquidation provisions by which mortgages held may be
paid in full and distributions of capital returns may be made at any time.
PUT AND CALL OPTIONS, FINANCIAL FUTURES CONTRACTS, OPTIONS ON FINANCIAL FUTURES
CONTRACTS
Although the GNMA Trust, Income Strategy, Balanced Strategy, Growth Strategy,
and Emerging Markets Funds are permitted to purchase and sell these contracts or
options, the Funds have no current intention of doing so in the coming year and
will not engage in such transactions without first notifying shareholders and
supplying further information in each Fund's Prospectus.
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TAX-EXEMPT SECURITIES
Tax-exempt securities generally include debt obligations issued by states and
their political subdivisions, and duly constituted authorities and corporations,
to obtain funds to construct, repair, or improve various public facilities such
as airports, bridges, highways, hospitals, housing, schools, streets, and water
and sewer works. Tax-exempt securities may also be issued to refinance
outstanding obligations as well as to obtain funds for general operating
expenses and for loans to other public institutions and facilities.
The two principal classifications of tax-exempt securities are "general
obligations" and "revenue" or "special tax" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise or other tax, but not
from general tax revenues. The Funds may also invest in tax-exempt private
activity bonds, which in most cases are revenue bonds and generally do not have
the pledge of the credit of the issuer. The payment of the principal and
interest on such industrial revenue bonds is dependent solely on the ability of
the user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment. There are, of course, many variations in the terms
of, and the security underlying tax-exempt securities. Short-term obligations
issued by states, cities, municipalities or municipal agencies, include Tax
Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes,
Construction Loan Notes, and Short-Term Discount Notes.
The yields of tax-exempt securities depend on, among other things, general
money market conditions, conditions of the tax-exempt bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's Investors Service, Inc. (Moody's), Standard &
Poor's Ratings Group (S&P), Fitch Investors Service, Inc. (Fitch), and Duff &
Phelps Inc. represent their opinions of the quality of the securities rated by
them, see Appendix A. It should be emphasized that such ratings are general and
are not absolute standards of quality. Consequently, securities with the same
maturity, coupon, and rating may have different yields, while securities of the
same maturity and coupon but with different ratings may have the same yield. It
will be the responsibility of the Manager to appraise independently the
fundamental quality of the tax-exempt securities included in a Fund's portfolio.
SPECIAL RISK CONSIDERATIONS
CURRENCY EXCHANGE RATE FLUCTUATIONS
The Income Strategy, Balanced Strategy, Cornerstone Strategy, Growth Strategy,
Emerging Markets, Gold, International, and World Growth Funds' assets may be
invested in securities of foreign issuers. Any such investments will be made in
compliance with U.S. and foreign currency restrictions, tax laws, and laws
limiting the amount and types of foreign investments. Pursuit of the Funds'
investment objectives will involve currencies of the United States and of
foreign countries. Consequently, changes in exchange rates, currency
convertibility, and repatriation requirements may favorably or adversely affect
the Funds.
UNPREDICTABLE POLITICAL, ECONOMIC AND SOCIAL CONDITIONS
For the Income Strategy, Balanced Strategy, Cornerstone Strategy, Growth
Strategy, Emerging Markets, Gold, International, and World Growth Funds,
investing in securities of foreign issuers presents certain other risks not
present in domestic investments, including different accounting, reporting, and
disclosure requirements for foreign issuers, possible political or social
instability, including policies of foreign governments which may affect their
respective equity markets, and foreign taxation requirements including
withholding taxes.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Trust for and are
applicable to each Fund as stated. These restrictions may not be changed for any
given Fund without approval by the lesser of (1) 67% or more of the voting
securities present at a meeting of the Fund if more than 50% of the outstanding
voting securities of the Fund are present or represented by proxy or (2) more
than 50% of that Fund's outstanding voting securities. The investment
restrictions of one Fund may thus be changed without affecting those of any
other Fund.
Under the restrictions, each of the Growth and Tax Strategy, Cornerstone
Strategy, Gold, International, and World Growth Funds may not:
(1) With respect to 75% of its total assets, purchase the securities of any
issuer (except U.S. Government Securities, as such term is defined in the
Investment Company Act of 1940, as amended (1940 Act)) if, as a result,
the Fund would own more than 10% of the outstanding voting securities of
such issuer or the Fund would have more than 5% of the value of its total
assets invested in the securities of such issuer.
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(2) Borrow money, except for temporary or emergency purposes in an amount not
exceeding 33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings).
(3) Lend any securities or make any loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties, except that this
limitation does not apply to purchases of debt securities or to repurchase
agreements.
(4) Underwrite securities of other issuers, except to the extent that it may
be deemed to act as a statutory underwriter in the distribution of any
restricted securities or not readily marketable securities.
(5) Purchase securities on margin or sell securities short, except that it may
obtain such short-term credits as are necessary for the clearance of
securities transactions.
(6) Invest in put, call, straddle, or spread options or interests in oil, gas
or other mineral exploration or development programs, except that it may
purchase securities of issuers whose principal business activities fall
within such areas in accordance with its investment objectives and
policies.
(7) Invest more than 2% of the market value of its total assets in marketable
warrants to purchase common stock. Warrants initially attached to
securities and acquired by a Fund upon original issuance thereof shall be
deemed to be without value.
(8) Purchase or sell real estate or partnership interests therein, except that
the Cornerstone Strategy Fund may purchase securities secured by real
estate interests or interests therein, or issued by companies or
investment trusts which invest in real estate or interests therein.
(9) Purchase or sell commodities or commodity contracts.
(10) Purchase securities of other open-end investment companies, except a Fund
may invest up to 10% of the market value of its total assets in such
securities through purchases in the open market involving only customary
broker's commissions or in connection with a merger, consolidation,
reorganization, or acquisition of assets approved by the shareholders.
(11) Invest more than 5% of the market value of its total assets in any
closed-end investment company and will not hold more than 3% of the
outstanding voting stock of any closed-end investment company.
(12) Change the nature of its business so as to cease to be an investment
company.
(13) Issue senior securities as defined in the 1940 Act, except as permitted by
Section 18(f)(2) and rules thereunder.
For purposes of restriction 8 above, interests in publicly traded Real
Estate Investment Trusts (REITs) are not deemed to be real estate or partnership
interests therein.
Each of the GNMA and Treasury Money Market Trusts may not:
(1) With respect to 75% of its total assets, purchase the securities of any
issuer (except U.S. Government Securities, as such term is defined in the
1940 Act) if, as a result, the Fund would own more than 10% of the
outstanding voting securities of such issuer or the Fund would have more
than 5% of the value of its total assets invested in the securities of
such issuer.
(2) Borrow money, except for temporary or emergency purposes in an amount not
exceeding 33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings).
(3) Lend any securities or make any loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties, except that this
limitation does not apply to purchases of debt securities or to repurchase
agreements.
(4) Underwrite securities of other issuers, except to the extent that it may
be deemed to act as a statutory underwriter in the distribution of any
restricted securities or not readily marketable securities.
(5) Change the nature of its business so as to cease to be an investment
company.
(6) Issue senior securities as defined in the 1940 Act, except as permitted
by Section 18(f)(2) and rules thereunder.
(7) Purchase or sell real estate, commodities or commodity contracts, except
that the GNMA Trust may invest in financial futures contracts and options
thereon.
(8) Purchase any security if immediately after the purchase 25% or more of the
value of its total assets will be invested in securities of issuers
principally engaged in a particular industry (except that such limitation
does not apply to obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities).
The Emerging Markets Fund may not:
(1) With respect to 75% of its total assets, purchase the securities of any
issuer (except U.S. Government Securities, as such term is defined in the
1940 Act) if, as a result, it would own more than 10% of the
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outstanding voting securities of such issuer or it would have more than 5%
of the value of its total assets invested in the securities of such
issuer.
(2) Borrow money, except that it may borrow money for temporary or emergency
purposes in an amount not exceeding 33 1/3% of its total assets (including
the amount borrowed) less liabilities (other than borrowings), nor will it
purchase securities when its borrowings exceed 5% of its total assets.
(3) Concentrate its investments in any one industry although it may invest up
to 25% of the value of its total assets in any one industry; provided,
this limitation does not apply to securities issued or guaranteed by the
U.S. Government or its corporate instrumentalities.
(4) Issue senior securities, except as permitted under the 1940 Act.
(5) Underwrite securities of other issuers, except to the extent that it may
be deemed to act as a statutory underwriter in the distribution of any
restricted securities or not readily marketable securities.
(6) Lend any securities or make any loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties, except that this
limitation does not apply to purchases of debt securities or to repurchase
agreements.
(7) Purchase or sell commodities, except that the Fund may invest in financial
futures contracts, options thereon, and similar instruments.
(8) Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments, except that the Fund may invest in
securities or other instruments backed by real estate or securities of
companies that deal in real estate or are engaged in the real estate
business.
Each of the Income Strategy, Balanced Strategy, and Growth Strategy Funds may
not:
(1) With respect to 75% of its total assets, purchase the securities of any
issuer (except U.S. Government Securities, as such term is defined in the
1940 Act) if, as a result, it would own more than 10% of the outstanding
voting securities of such issuer or it would have more than 5% of the
value of its total assets invested in the securities of such issuer.
(2) Borrow money, except for temporary or emergency purposes in an amount not
exceeding 33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings).
(3) Concentrate its investments in any one industry although it may invest up
to 25% of the value of its total assets in any one industry; provided,
this limitation does not apply to securities issued or guaranteed by the
U.S. Government and its agencies or instrumentalities.
(4) Issue senior securities, except as permitted under the 1940 Act.
(5) Underwrite securities of other issuers, except to the extent that it may
be deemed to act as a statutory underwriter in the distribution of any
restricted securities or not readily marketable securities.
(6) Lend any securities or make any loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties, except that this
limitation does not apply to purchases of debt securities or to repurchase
agreements.
(7) Purchase or sell commodities, except that each Fund may invest in
financial futures contracts, options thereon, and similar instruments.
(8) Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments, except that each Fund may invest in
securities or other instruments backed by real estate or securities of
companies that deal in real estate or are engaged in the real estate
business.
With respect to each Fund's concentration policies as described above and in its
Prospectus, the Manager uses industry classifications for industries based on
categories established by Standard & Poor's Corporation (S&P) for the Standard &
Poor's 500 Composite Index, with certain modifications. Because the Manager has
determined that certain categories within, or in addition to, those set forth by
S&P have unique investment characteristics, additional industries are included
as industry classifications. The Manager classifies municipal obligations by
projects with similar characteristics, such as toll road revenue bonds, housing
revenue bonds or higher education revenue bonds. In addition, the Cornerstone
Strategy Fund may not concentrate investments in any one industry, although it
may invest up to 25% of the value of its total assets in one industry; the Basic
Value Stocks, Foreign Stocks, and U.S. Government Securities investment
categories are not considered industries for this purpose.
10
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ADDITIONAL RESTRICTION
The following restriction is not considered to be a fundamental policy of the
Funds. The Trust's Board of Trustees may change this additional restriction
without notice to or approval by the shareholders.
Under the additional restriction, each of the Funds may not:
(1) Purchase any security while borrowings representing more than 5% of the
Fund's total assets are outstanding.
PORTFOLIO TRANSACTIONS
The Manager, pursuant to the Advisory Agreement dated September 21, 1990, and
subject to the general control of the Trust's Board of Trustees, places all
orders for the purchase and sale of Fund securities. In executing portfolio
transactions and selecting brokers and dealers, it is the Trust's policy to seek
the best overall terms available. The Manager shall consider such factors as it
deems relevant, including the breadth of the market in the security, the
financial condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any, for the specific transaction or on a
continuing basis. Securities purchased or sold in the over-the-counter market
will be executed through principal market makers, except when, in the opinion of
the Manager, better prices and execution are available elsewhere.
In the allocation of brokerage business used to purchase securities for
the Income Strategy, Growth and Tax Strategy, Balanced Strategy, Cornerstone
Strategy, Growth Strategy, Emerging Markets, Gold, International, and World
Growth Funds, preference may be given to those broker-dealers who provide
research or other services to the Manager as long as there is no sacrifice in
obtaining the best overall terms available. Such research and other services may
include, for example: advice concerning the value of securities, the
advisability of investing in, purchasing, or selling securities, and the
availability of securities or the purchasers or sellers of securities; analyses
and reports concerning issuers, industries, securities, economic factors and
trends, portfolio strategy, and performance of accounts; and various functions
incidental to effecting securities transactions, such as clearance and
settlement. In return for such services, a Fund may pay to a broker a higher
commission than may be charged by other brokers, provided that the Manager
determines in good faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such broker, viewed in
terms of either that particular transaction or of the overall responsibility of
the Manager to the Funds and its other clients. The Manager continuously reviews
the performance of the broker-dealers with whom it places orders for
transactions. The receipt of research from broker-dealers that execute
transactions on behalf of the Trust may be useful to the Manager in rendering
investment management services to other clients (including affiliates of the
Manager), and conversely, such research provided by broker-dealers who have
executed transaction orders on behalf of other clients may be useful to the
Manager in carrying out its obligations to the Trust. While such research is
available to and may be used by the Manager in providing investment advice to
all its clients (including affiliates of the Manager), not all of such research
may be used by the Manager for the benefit of the Trust. Such research and
services will be in addition to and not in lieu of research and services
provided by the Manager, and the expenses of the Manager will not necessarily be
reduced by the receipt of such supplemental research. See The Trust's Manager.
Securities of the same issuer may be purchased, held, or sold at the same
time by the Trust for any or all of its Funds, or other accounts or companies
for which the Manager acts as the investment adviser (including affiliates of
the Manager). On occasions when the Manager deems the purchase or sale of a
security to be in the best interest of the Trust, as well as the Manager's other
clients, the Manager, to the extent permitted by applicable laws and
regulations, may aggregate such securities to be sold or purchased for the Trust
with those to be sold or purchased for other customers in order to obtain best
execution and lower brokerage commissions, if any. In such event, allocation of
the securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Manager in the manner it considers to be most
equitable and consistent with its fiduciary obligations to all such customers,
including the Trust. In some instances, this procedure may impact the price and
size of the position obtainable for the Trust.
The Trust pays no brokerage commissions as such for debt securities. The
market for such securities is typically a "dealer" market in which investment
dealers buy and sell the securities for their own accounts, rather than for
customers, and the price may reflect a dealer's mark-up or mark-down. In
addition, some securities may be purchased directly from issuers.
11
<PAGE>
BROKERAGE COMMISSION
During the last three fiscal years, the Funds paid the following brokerage fees:
FUND 1995 1996 1997
----------- ------------ -----------
Income Strategy - $ 3,434* $ 2,820
Growth and Tax Strategy $ 30,774 $ 58,596 $ 81,456
Balanced Strategy - $ 16,908* $ 13,006
Cornerstone Strategy $ 1,278,398 $ 1,560,138 $ 1,428,772
Growth Strategy - $ 104,911* $ 230,440
Emerging Markets $ 140,877** $ 394,696 $ 484,792
Gold $ 299,874 $ 224,458 $ 225,284
International $ 1,422,707 $ 1,551,078 $ 1,362,389
World Growth $ 599,043 $ 709,486 $ 558,990
- ---------------------
* For the nine-month period ended May 31, 1996.
** For the seven-month period ended May 31, 1995.
During the last three fiscal years, the Funds paid the following brokerage fees
to USAA Brokerage Services, a discount brokerage service of the Manager:
FUND 1995 1996 1997**
-------- --------- ----------
Income Strategy - $ 216* $ 454
Growth and Tax Strategy $ 1,400 $ 400 $ 15,356
Balanced Strategy - $ 632* $ 1,132
Cornerstone Strategy $ 2,120 $ 4,000 $ 11,878
Growth Strategy - $ 556* $ 10,580
Emerging Markets - - $ 240
World Growth $ 7,576 $ 928 $ 2,380
- ---------------------
* For the nine-month period ended May 31, 1996.
** These amounts are 16.10%, 18.85%, 8.7%, .83%, 4.59%, .05%, and .43%,
respectively, of brokerage fees paid by each Fund.
For the year ended May 31, 1997, 16.07%, 11.57%, 7.97%, 2.36%, 7.59%, .22%, and
1.58%, of the aggregate dollar amounts of transactions involving the payment of
commissions by the Income Strategy, Growth and Tax Strategy, Balanced Strategy,
Cornerstone Strategy, Growth Strategy, Emerging Markets, and World Growth Funds,
respectively, were effected through USAA Brokerage Services.
The Manager directed a portion of the Funds' brokerage transactions to
certain broker-dealers that provided the Manager with research, statistical and
other information. Such transactions amounted to $755,255, $33,359,021,
$3,768,476, $65,579,532, $25,198,552, $283,516, $2,154,238, and $12,833,895, and
the related brokerage commissions or underwriting commissions were $1,154,
$46,750, $5,267, $87,403, $46,990, $850, $2,850 and $13,902 for the Income
Strategy, Growth and Tax Strategy, Balanced Strategy, Cornerstone Strategy,
Growth Strategy, Emerging Markets, International and World Growth Funds,
respectively, for the year ended May 31, 1997.
PORTFOLIO TURNOVER RATES
The rate of portfolio turnover in any of the Funds (other than the Treasury
Money Market Trust) will not be a limiting factor when the Manager deems changes
in a Fund's portfolio appropriate in view of its investment objective. Although
no Fund will purchase or sell securities solely to achieve short-term trading
profits, a Fund may sell portfolio securities without regard to the length of
time held if consistent with the Fund's investment objective. A higher degree of
equity portfolio activity will increase brokerage costs to a Fund. It is not
anticipated that the portfolio turnover rates of the Income Strategy, Growth and
Tax Strategy, Balanced Strategy, Cornerstone Strategy, Growth Strategy, Emerging
Markets, Gold, International, and World Growth Funds or the GNMA Trust will
exceed 100%.
The portfolio turnover rate is computed by dividing the dollar amount of
securities purchased or sold (whichever is smaller) by the average value of
securities owned during the year. Short-term investments such as commercial
paper and short-term U.S. Government securities are not considered when
computing the turnover rate.
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For the last two fiscal years, the Funds' portfolio turnover rates were as
follows:
FUND 1996 1997
-------- -------
Income Strategy 78.60%* 64.71%
Growth and Tax Strategy 1 202.55% 194.21%
Balanced Strategy 26.53%* 28.06%
Cornerstone Strategy 36.15% 35.14%
Growth Strategy 40.21%* 62.50%
Emerging Markets 87.98% 61.21%
Gold 16.48% 26.40%
International 70.01% 46.03%
World Growth 60.97% 50.02%
GNMA Trust 127.77%** 77.82%
- --------------------
* For the nine-month period ended May 31, 1996.
** The turnover rate was higher because the assets in the portfolio were
repositioned in response to changing market conditions.
1 The Fund has simultaneously purchased and sold the same securities. These
transactions have at times been high in volume and dissimilar to other
trade activity within the Fund. If these transactions were excluded from
the calculation, the portfolio turnover rate would have been as follows:
YEAR ENDED MAY 31,
------------------
1996 1997
---- ----
Portfolio turnover(%) 61.98 52.97
Purchases and sales of this type are
as follows:
Purchases (000) $192,239 $220,402
Sales (000) $192,490 $220,683
FURTHER DESCRIPTION OF SHARES
The Trust is authorized to issue shares of beneficial interest in separate
portfolios. Eleven such portfolios have been established which are described in
this SAI. Under the First Amended and Restated Master Trust Agreement (Master
Trust Agreement), dated June 2, 1995, as amended, the Board of Trustees is
authorized to create new portfolios in addition to those already existing
without the approval of the shareholders of the Trust. The Cornerstone Strategy
and Gold Funds were established May 9, 1984, by the Board of Trustees and
commenced public offering of their shares on August 15, 1984. The International
Fund, established on November 4, 1987, commenced public offering of its shares
on July 11, 1988. The Growth and Tax Strategy Fund was established on November
3, 1988, and commenced public offering of its shares on January 11, 1989. On
November 7, 1990, the Board of Trustees established the GNMA Trust and Treasury
Money Market Trust and commenced public offering of their shares on February 1,
1991. The World Growth Fund was established on July 21, 1992, and commenced
public offering of its shares on October 1, 1992. The Emerging Markets Fund was
established on September 7, 1994, and commenced public offering of its shares on
November 7, 1994. The Income Strategy, Balanced Strategy, and Growth Strategy
Funds were established on June 2, 1995, and commenced public offering of their
shares on September 1, 1995.
Each Fund's assets, and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors, are specifically allocated to
each Fund. They constitute the underlying assets of each Fund, are required to
be segregated on the books of account, and are to be charged with the expenses
of such Fund. Any general expenses of the Trust not readily identifiable as
belonging to a particular Fund are allocated on the basis of the Funds' relative
net assets during the fiscal year or in such other manner as the Trustees
determine to be fair and equitable. Each share of each Fund represents an equal
proportionate interest in that Fund with every other share and is entitled to
such dividends and distributions out of the net income and capital gains
belonging to that Fund when declared by the Trustees. Upon liquidation of that
Fund, shareholders are entitled to share pro rata in the net assets belonging to
such Fund available for distribution.
Under the Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there will ordinarily be no shareholder meeting
unless otherwise required by the 1940 Act. Under certain circumstances, however,
shareholders may apply to the Trustees for shareholder information in order to
obtain signatures to request a shareholder meeting. Moreover, pursuant to the
Master Trust Agreement, any Trustee may be removed by the vote of two-thirds of
the outstanding Trust shares and holders of 10% or more of the outstanding
shares of the Trust can require Trustees to call a meeting of shareholders for
the purpose of voting on the removal of one or more Trustees. On any matter
submitted to the shareholders, the holder of any share is entitled to one vote
per share (with proportionate voting for fractional shares) regardless
13
<PAGE>
of the relative net asset values of the Funds' shares. However, on matters
affecting an individual Fund, a separate vote of the shareholders of that Fund
is required. For example, the Advisory Agreement must be approved separately by
each Fund and only becomes effective with respect to a Fund when a majority of
the outstanding voting securities of that Fund approves it. Shareholders of a
Fund are not entitled to vote on any matter which does not affect that Fund but
which requires a separate vote of another Fund. For example, a proposed change
in the investment objectives of a particular Fund would require the affirmative
vote of a majority of the outstanding voting securities of only that Fund.
Shares do not have cumulative voting rights, which means that in
situations in which shareholders elect Trustees, holders of more than 50% of the
shares voting for the election of Trustees can elect 100% of the Board of
Trustees, and the holders of less than 50% of the shares voting for the election
of Trustees will not be able to elect any person as a Trustee.
When issued, each Fund's shares are fully paid and nonassessable by the
Trust, have no preemptive or subscription rights, and are fully transferable.
There are no conversion rights.
TAX CONSIDERATIONS
TAXATION OF THE FUNDS
Each Fund intends to qualify as a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended (the Code). Accordingly, each
Fund will not be liable for federal income taxes on its taxable net investment
income and net capital gains (capital gains in excess of capital losses) that
are distributed to shareholders, provided that each Fund distributes at least
90% of its net investment income and net short-term capital gain for the taxable
year.
To qualify as a regulated investment company, a Fund must, among other
things, (1) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies (the 90% test); (2) derive in each taxable year less
than 30% of its gross income from the sale or other disposition of stock or
securities, and certain options, futures contracts, forward contracts, and
foreign currencies held for less than three months (the 30% test); and (3)
satisfy certain diversification requirements, at the close of each quarter of
the Fund's taxable year. In the case of the Growth and Tax Strategy Fund, in
order to be entitled to pay exempt-interest dividends to shareholders, at the
close of each quarter of its taxable year, at least 50% of the value of the
Fund's total assets must consist of obligations the interest of which is exempt
from federal income tax. The Growth and Tax Strategy Fund intends to satisfy
this requirement.
The Code imposes a nondeductible 4% excise tax on a regulated investment
company that fails to distribute during each calendar year an amount at least
equal to the sum of (1) 98% of its taxable net investment income for the
calendar year, (2) 98% of its capital gain net income for the twelve month
period ending on October 31, and (3) any prior amounts not distributed. Each
Fund intends to make such distributions as are necessary to avoid imposition of
excise tax.
The Income Strategy, Balanced Strategy, Cornerstone Strategy, Growth
Strategy, Emerging Markets, Gold, International, and World Growth Funds' ability
to make certain investments may be limited by provisions of the Code that
require inclusion of certain unrealized gains or losses in the Fund's income for
purposes of the 90% test, the 30% test, and the distribution requirements of the
Code, and by provisions of the Code that characterize certain income or loss as
ordinary income or loss rather than capital gain or loss. Such recognition,
characterization and timing rules generally apply to investments in certain
forward currency contracts, foreign currencies and debt securities denominated
in foreign currencies, as well as certain other investments.
If the Income Strategy, Balanced Strategy, Cornerstone Strategy, Growth
Strategy, Emerging Markets, Gold, International, or World Growth Funds invest in
an entity that is classified as a "passive foreign investment company" (PFIC)
for federal income tax purposes, the application of certain provisions of the
Code applying to PFICs could result in the imposition of certain federal income
taxes on the Fund. It is anticipated that any taxes on a Fund with respect to
investments in PFICs would be insignificant.
TAXATION OF THE SHAREHOLDERS
Taxable distributions are generally included in a shareholder's gross income for
the taxable year in which they are received. Dividends declared in October,
November, or December and made payable to shareholders of record in such a month
will be deemed to have been received on December 31, if a Fund pays the dividend
during the following January. If a shareholder of a Fund receives a distribution
taxable as long-term capital gain with respect to shares of a Fund and redeems
or exchanges the shares before he has held them for more than six months, any
loss on the redemption or exchange that is less than or equal to the amount of
the distribution will be treated as long-term capital loss, except as noted
below.
14
<PAGE>
In the case of the Growth and Tax Strategy Fund, if a shareholder receives
an exempt-interest dividend with respect to any share and such share has been
held for six months or less, any loss on the sale or exchange of such share will
be disallowed to the extent of such exempt-interest dividend. Shareholders who
are recipients of Social Security benefits should be aware that exempt-interest
dividends received from the Growth and Tax Strategy Fund are includible in their
"modified adjusted gross income" for purposes of determining the amount of such
Social Security benefits, if any, that are required to be included in their
gross income.
The Growth and Tax Strategy Fund may invest in private activity bonds.
Interest on certain private activity bonds issued after August 7, 1986, is an
item of tax preference for purposes of the Federal Alternative Minimum Tax
(AMT), although the interest continues to be excludable from gross income for
other purposes. AMT is a supplemental tax designed to ensure that taxpayers pay
at least a minimum amount of tax on their income, even if they make substantial
use of certain tax deductions and exclusions (referred to as tax preference
items). Interest from private activity bonds is one of the tax preference items
that is added to income from other sources for the purposes of determining
whether a taxpayer is subject to AMT and the amount of any tax to be paid.
Opinions relating to the validity of the tax-exempt securities purchased
for the Growth and Tax Strategy Fund and the exemption of interest thereon from
federal income tax are rendered by recognized bond counsel to the issuers.
Neither the Manager's nor the Fund's counsel makes any review of the basis of
such opinions.
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of any state
or local taxing authority. Shareholders of a Fund may be exempt from state and
local taxes on distributions of tax-exempt interest income derived from
obligations of the state and/or municipalities of the state in which they are a
resident, but generally are subject to tax on income derived from obligations of
other jurisdictions. Shareholders should consult their tax advisers about the
status of distributions from a Fund in their own states and localities.
TRUSTEES AND OFFICERS OF THE TRUST
The Board of Trustees of the Trust consists of seven Trustees. Set forth below
are the Trustees and officers of the Trust, and their respective offices and
principal occupations during the last five years. Unless otherwise indicated,
the business address of each is 9800 Fredericksburg Rd., San Antonio, TX 78288.
Robert G. Davis 1, 2
Trustee and Chairman of the Board of Trustees
Age: 50
President, Chief Executive Officer, Director and Vice Chairman of the Board of
Directors of USAA Capital Corporation and several of its subsidiaries and
affiliates (1/97-present); Director, Chairman, President, and Chief Executive
Officer, USAA Financial Planning Network, Inc. (1/97-present); Director, Vice
Chairman, Executive Vice President, and Chief Operating Officer, USAA Financial
Planning Network, Inc. (9/96-1/97); Special Assistant to Chairman, United
Services Automobile Association (USAA) (6/96-12/96); President and Chief
Executive Officer, Banc One Credit Corporation (12/95-6/96); and President and
Chief Executive Officer, Banc One Columbus, (8/91-12/95). Mr. Davis also serves
as a Trustee and Chairman of the Board of Trustees of USAA State Tax-Free Trust
and as a Director and Chairman of the Boards of Directors of USAA Investment
Management Company (IMCO), USAA Mutual Fund, Inc., USAA Tax Exempt Fund, Inc.,
USAA Shareholder Account Services, USAA Federal Savings Bank and USAA Real
Estate Company.
Michael J. C. Roth 1, 2
Trustee, President and Vice Chairman of the Board of Trustees
Age: 56
Chief Executive Officer, IMCO (10/93-present); President, Director and Vice
Chairman of the Board of Directors, IMCO (1/90-present). Mr. Roth serves as
President, Trustee and Vice Chairman of the Board of Trustees of USAA State
Tax-Free Trust, as President, Director and Vice Chairman of the Boards of
Directors of USAA Mutual Fund, Inc., USAA Tax Exempt Fund, Inc. and USAA
Shareholder Account Services, as Director of USAA Life Insurance Company and as
Trustee and Vice Chairman of USAA Life Investment Trust.
15
<PAGE>
John W. Saunders, Jr. 1, 2, 4
Trustee and Vice President
Age: 62
Senior Vice President, Fixed Income Investments, IMCO (10/85-present). Mr.
Saunders serves as a Trustee and Vice President of USAA State Tax-Free Trust, as
a Director of IMCO, Director and Vice President of USAA Mutual Fund, Inc., and
USAA Tax Exempt Fund, Inc., as Senior Vice President of USAA Shareholder Account
Services, and as Vice President of USAA Life Investment Trust.
Barbara B. Dreeben 3, 4, 5
200 Patterson #1008
San Antonio, TX 78209
Trustee
Age: 52
President, Postal Addvantage (7/92-present); Consultant, Nancy Harkins Stationer
(8/91-12/95). Mrs. Dreeben serves as a Trustee of USAA State Tax-Free Trust and
as a Director of USAA Mutual Fund, Inc. and USAA Tax Exempt Fund, Inc.
Howard L. Freeman, Jr. 2, 3, 4, 5
2710 Hopeton
San Antonio, TX 78230
Trustee
Age: 62
Retired. Assistant General Manager for Finance, San Antonio City Public Service
Board (1976-1996). Mr. Freeman serves as a Trustee of USAA State Tax-Free Trust
and as a Director of USAA Mutual Fund, Inc. and USAA Tax Exempt Fund, Inc.
Robert L. Mason, Ph.D. 3, 4, 5
12823 Queens Forest
San Antonio, TX 78230
Trustee
Age: 51
Manager, Statistical Analysis Section, Southwest Research Institute
(8/75-present). Dr. Mason serves as a Trustee of USAA State Tax-Free Trust and
as a Director of USAA Mutual Fund, Inc. and USAA Tax Exempt Fund, Inc.
Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Trustee
Age: 54
Vice President, Beldon Roofing and Remodeling (1985-present). Mr. Zucker serves
as a Trustee of USAA State Tax-Free Trust and as a Director of USAA Mutual Fund,
Inc. and USAA Tax Exempt Fund, Inc.
Michael D. Wagner 1
Secretary
Age: 49
Vice President, Corporate Counsel, USAA (1982-present). Mr. Wagner has held
various positions in the legal department of USAA since 1970 and serves as Vice
President, Secretary and Counsel, IMCO and USAA Shareholder Account Services;
Secretary, USAA State Tax-Free Trust, USAA Mutual Fund, Inc., and USAA Tax
Exempt Fund, Inc.; and as Vice President, Corporate Counsel, for various other
USAA subsidiaries and affiliates.
16
<PAGE>
Alex M. Ciccone 1
Assistant Secretary
Age: 47
Vice President, Compliance, IMCO (12/94-present); Vice President and Chief
Operating Officer, Commonwealth Shareholder Services (6/94-11/94); and Vice
President, Compliance, IMCO (12/91-5/94). Mr. Ciccone serves as Assistant
Secretary of USAA State Tax-Free Trust, USAA Mutual Fund, Inc. and USAA Tax
Exempt Fund, Inc.
Mark S. Howard 1
Assistant Secretary
Age: 33
Executive Director, Securities Counsel, USAA (9/96-present); Senior Associate
Counsel, Securities Counsel, USAA (5/95 to 8/96); Attorney, Kirkpatrick &
Lockhart LLP (9/90-4/95). Mr. Howard serves as Assistant Secretary of USAA State
Tax-Free Trust, USAA Mutual Fund, Inc., and USAA Tax Exempt Fund, Inc., and as
Executive Director, Securities Counsel for various other USAA subsidiaries and
affiliates.
Sherron A. Kirk 1
Treasurer
Age: 52
Vice President, Controller, IMCO (10/92-present); Vice President, Corporate
Financial Analysis, USAA (9/92- 10/92); Assistant Vice President, Financial
Plans and Support, USAA (8/91-9/92). Mrs. Kirk serves as Treasurer of USAA State
Tax-Free Trust, USAA Mutual Fund, Inc., and USAA Tax Exempt Fund, Inc., and as
Vice President, Controller of USAA Shareholder Account Services.
Dean R. Pantzar 1
Assistant Treasurer
Age: 38
Executive Director, Mutual Fund Accounting, IMCO (10/95-present); Director,
Mutual Fund Accounting, IMCO (12/94-10/95); Senior Manager, KPMG Peat Marwick
LLP (7/88-12/94). Mr. Pantzar serves as Assistant Treasurer of USAA Mutual Fund,
Inc., USAA State Tax-Free Trust, and USAA Tax Exempt Fund, Inc.
- -------------
1 Indicates those Trustees and officers who are employees of the Manager or
affiliated companies and are considered "interested persons" under the 1940
Act.
2 Member of Executive Committee
3 Member of Audit Committee
4 Member of Pricing and Investment Committee
5 Member of Corporate Governance Committee
Between the meetings of the Board of Trustees and while the Board is not
in session, the Executive Committee of the Board of Trustees has all the powers
and may exercise all the duties of the Board of Trustees in the management of
the business of the Trust which may be delegated to it by the Board. The Pricing
and Investment Committee of the Board of Trustees acts upon various
investment-related issues and other matters which have been delegated to it by
the Board. The Audit Committee of the Board of Trustees reviews the financial
statements and the auditor's reports and undertakes certain studies and analyses
as directed by the Board. The Corporate Governance Committee of the Board of
Trustees maintains oversight of the organization, performance, and effectiveness
of the Board and independent Trustees.
In addition to the previously listed Trustees and/or officers of the Trust
who also serve as Directors and/or officers of the Manager, the following
individuals are Directors and/or executive officers of the Manager: Harry W.
Miller, Senior Vice President, Investments (Equity); Carl W. Shirley, Senior
Vice President, Insurance Company Portfolios; and John J. Dallahan, Senior Vice
President, Investment Services. There are no family relationships among the
Trustees, officers and managerial level employees of the Trust or its Manager.
17
<PAGE>
The following table sets forth information describing the compensation of
the current Trustees of the Trust for their services as Trustees for the fiscal
year ended May 31, 1997.
Name Aggregate Total Compensation
of Compensation from the USAA
Trustee from the Trust Family of Funds (b)
- -------- --------------- -------------------
George E. Brown* $ 5,484 $19,600
Robert G. Davis None (a) None (a)
Barbara B. Dreeben $10,275 $36,600
Howard L. Freeman, Jr. $10,275 $36,600
Robert L. Mason $ 4,791 $17,000
Michael J.C. Roth None (a) None (a)
John W. Saunders, Jr. None (a) None (a)
Richard A. Zucker $10,275 $36,600
- ----------------
* Effective December 31, 1996, George E. Brown retired as a Trustee from the
Board of Trustees.
(a) Robert G. Davis, Michael J.C. Roth, and John W. Saunders, Jr. are
affiliated with the Trust's investment adviser, IMCO, and, accordingly,
receive no remuneration from the Trust or any other Fund of the USAA
Family of Funds.
(b) At May 31, 1997, the USAA Family of Funds consisted of four registered
investment companies offering 33 individual funds. Each Trustee presently
serves as a Trustee or Director of each investment company in the USAA
Family of Funds. In addition, Michael J.C. Roth presently serves as a
Trustee of USAA Life Investment Trust, a registered investment company
advised by IMCO, consisting of seven funds offered to investors in a fixed
and variable annuity contract with USAA Life Insurance Company. Mr. Roth
receives no compensation as Trustee of USAA Life Investment Trust.
All of the above Trustees are also Trustees/Directors of the other funds
for which IMCO serves as investment adviser. No compensation is paid by any fund
to any Trustee/Director who is a director, officer, or employee of IMCO or its
affiliates. No pension or retirement benefits are accrued as part of fund
expenses. The Trust also reimburses certain expenses of the Trustees who are not
affiliated with the investment adviser. As of August 31, 1997, the officers and
Trustees of the Trust and their families as a group owned beneficially or of
record less than 1% of the outstanding shares of the Trust.
As of August 31, 1997, USAA and its affiliates owned 502,387 shares
(32.2%) of the Income Strategy Fund, 143,603 shares (4.8%) of the Balanced
Strategy Fund, 12,337,246 shares (64.1%) of the Emerging Markets Fund, 5,480,218
shares (18.1%) of the of the International Fund, 399,593 shares (1.2%) of the
GNMA Trust and no shares of the Growth and Tax Strategy Fund, Cornerstone
Strategy Fund, Growth Strategy Fund, Gold Fund, World Growth Fund, and Treasury
Money Market Trust.
The Trust knows of no other persons who, as of August 31, 1997, held of
record or owned beneficially 5% or more of the voting stock of any Fund's
shares.
THE TRUST'S MANAGER
As described in each Fund's Prospectus, USAA Investment Management Company is
the Manager and investment adviser, providing the services under the Advisory
Agreement. The Manager, organized in May 1970, has served as investment adviser
and underwriter for USAA Investment Trust from its inception.
In addition to managing the Trust's assets, the Manager advises and
manages the investments for USAA and its affiliated companies as well as those
of USAA Mutual Fund, Inc., USAA Tax Exempt Fund, Inc., USAA State Tax-Free
Trust, and USAA Life Investment Trust. As of the date of this SAI, total assets
under management by the Manager were approximately $36 billion, of which
approximately $21 billion were in mutual fund portfolios.
ADVISORY AGREEMENT
Under the Advisory Agreement, the Manager provides an investment program,
carries out the investment policy and manages the portfolio assets for each
Fund. The Manager is authorized, subject to the control of the Board of Trustees
of the Trust, to determine the selection, amount, and time to buy or sell
securities for each Fund. In addition to providing investment services, the
Manager pays for office space, facilities, business equipment, and accounting
services (in addition to those provided by the Custodian) for the Trust. The
Manager compensates all personnel, officers, and Trustees of the Trust if such
persons are also employees of the Manager or its affiliates. For these services
under the Advisory Agreement, each Fund has agreed to pay the Manager a fee
computed as described under Management of the Trust in its Prospectus (Fund
Management in the Growth and Tax Strategy Fund Prospectus). Management fees are
computed and accrued daily and are payable monthly.
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Except for the services and facilities provided by the Manager, the Funds
pay all other expenses incurred in their operations. Expenses for which the
Funds are responsible include taxes (if any), brokerage commissions on portfolio
transactions, expenses of issuance and redemption of shares, charges of transfer
agents, custodians and dividend disbursing agents, costs of preparing and
distributing proxy material, costs of printing and engraving stock certificates,
auditing and legal expenses, certain expenses of registering and qualifying
shares for sale, fees of Trustees who are not interested (not affiliated)
persons of the Manager, costs of typesetting, printing and mailing the
Prospectus, SAI and periodic reports to existing shareholders, and any other
charges or fees not specifically enumerated. The Manager pays the cost of
printing and mailing copies of the Prospectus, the SAI and reports to
prospective shareholders.
The Advisory Agreement will remain in effect until June 30, 1998, for each
Fund and will continue in effect from year to year thereafter for each Fund as
long as it is approved at least annually by a vote of the outstanding voting
securities of such Fund (as defined by the 1940 Act) or by the Board of Trustees
(on behalf of such Fund) including a majority of the Trustees who are not
interested persons of the Manager or (otherwise than as Trustees) of the Trust,
at a meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated at any time by either the Trust or the Manager on 60
days' written notice. It will automatically terminate in the event of its
assignment (as defined by the 1940 Act).
From time to time the Manager may, without prior notice to shareholders,
waive all or any portion of fees or agree to reimburse expenses incurred by a
Fund. The Manager has voluntarily agreed to continue to limit the annual
expenses of the Treasury Money Market Trust to .375% and the Income Strategy and
Balanced Strategy Funds to 1.00% and 1.25%, respectively, of its ANA until
October 1, 1998, and will reimburse the Funds for all expenses in excess of such
limitation. After October 1, 1998, any such waiver or reimbursement may be
terminated by the Manager at any time without prior notice to the shareholders.
For the last three fiscal years, management fees were as follows:
FUND 1995 1996 1997
---------- ------------- ------------
Income Strategy - $ 34,662** $ 65,023
Growth and Tax Strategy 646,528 $ 728,915 $ 852,055
Balanced Strategy - $ 66,393** $ 190,093
Cornerstone Strategy 6,268,976 $ 7,072,915 $ 8,496,435
Growth Strategy - $ 219,751** $ 990,525
Emerging Markets 80,503* $ 308,963 $ 600,181
Gold 1,224,603 $ 1,170,207 $ 996,721
International 2,171,329 $ 2,730,374 $ 3,805,999
World Growth 1,310,951 $ 1,708,489 $ 1,994,809
GNMA Trust 318,921 $ 361,221 $ 381,390
Treasury Money Market Trust 59,980 $ 94,427 $ 105,420
As a result of the Funds' actual expenses exceeding an expense limitation, the
Manager did not receive fees to which it would have been entitled as follows:
FUND 1995 1996 1997
---------- ------------ ---------
Income Strategy - $ 34,662** $ 66,382
Balanced Strategy - $ 66,393** $ 37,577
Emerging Markets $ 8,091* - -
Treasury Money Market Trust $ 54,428 $ 21,001 $ 15,808
- -------------
* For the seven-month period ended May 31, 1995.
** For the nine-month period ended May 31, 1996.
UNDERWRITER
The Trust has an agreement with the Manager for exclusive underwriting and
distribution of the Funds' shares on a continuing best efforts basis. This
agreement provides that the Manager will receive no fee or other compensation
for such distribution services.
TRANSFER AGENT
The Transfer Agent performs transfer agent services for the Trust under a
Transfer Agency Agreement. Services include maintenance of shareholder account
records, handling of communications with shareholders, distribution of Fund
dividends, and production of reports with respect to account activity for
shareholders and the Trust. For its services under the Transfer Agency
Agreement, each Fund pays the Transfer Agent an annual fixed fee ranging from
$23.50 to $26.00 per account. This fee is subject to change at any time.
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The fee to the Transfer Agent includes processing of all transactions and
correspondence. Fees are billed on a monthly basis at the rate of one-twelfth of
the annual fee. In addition, the Funds pay all out-of-pocket expenses of the
Transfer Agent and other expenses which are incurred at the specific direction
of the Trust.
GENERAL INFORMATION
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 1713, Boston, MA 02105, is the
Trust's Custodian. The Custodian is responsible for, among other things,
safeguarding and controlling the Trust's cash and securities, handling the
receipt and delivery of securities, and collecting interest on the Trust's
investments. In addition, assets of the Income Strategy, Balanced Strategy,
Cornerstone Strategy, Growth Strategy, Emerging Markets, Gold, International,
and World Growth Funds may be held by certain foreign banks and foreign
securities depositories as agents of the Custodian in accordance with the rules
and regulations established by the SEC.
COUNSEL
Goodwin, Procter & Hoar LLP, Exchange Place, Boston, MA 02109, will review
certain legal matters for the Trust in connection with the shares offered by the
Prospectus.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 112 East Pecan, Suite 2400, San Antonio, TX 78205, is the
Trust's independent auditor. In this capacity, the firm is responsible for
auditing the annual financial statements of the Funds and reporting thereon.
FINANCIAL STATEMENTS
The financial statements for each of the Funds of USAA Investment Trust and the
Independent Auditors' Reports thereon for the fiscal year ended May 31, 1997,
are included in the Annual Reports to Shareholders of that date and are
incorporated herein by reference. The Manager will deliver a copy of the Fund's
Annual Report free of charge with each SAI requested.
CALCULATION OF PERFORMANCE DATA
Information regarding the total return and yield of each Fund is provided under
PERFORMANCE INFORMATION in its Prospectus. See VALUATION OF SECURITIES herein
for a discussion of the manner in which each Fund's price per share is
calculated.
YIELD - TREASURY MONEY MARKET TRUST
When the Treasury Money Market Trust quotes a "current annualized" yield, it is
based on a specified recent seven-calendar-day period. It is computed by (1)
determining the net change, exclusive of capital changes, in the value of a
hypothetical preexisting account having a balance of one share at the beginning
of the period, (2) dividing the net change in account value by the value of the
account at the beginning of the base period to obtain the base return, then (3)
multiplying the base period return by 52.14 (365/7). The resulting yield figure
is carried to the nearest hundredth of one percent.
The calculation includes (1) the value of additional shares purchased with
dividends on the original share, and dividends declared on both the original
share and any such additional shares, and (2) any fees charged to all
shareholder accounts, in proportion to the length of the base period and the
Trust's average account size.
The capital changes excluded from the calculation are realized capital
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The Trust's effective (compounded) yield will be computed by
dividing the seven-day annualized yield as defined above by 365, adding 1 to the
quotient, raising the sum to the 365th power, and subtracting 1 from the result.
Current and effective yields fluctuate daily and will vary with factors
such as interest rates and the quality, length of maturities, and type of
investments in the portfolio.
Yield For 7-day Period ended 5/31/97 . . . . . 5.10%
Effective Yield For 7-day Period ended 5/31/97 . . . . . 5.23%
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YIELD - INCOME STRATEGY FUND, GROWTH AND TAX STRATEGY FUND AND GNMA TRUST
These Funds may advertise performance in terms of 30-day yield quotation. The
30-day yield quotation is computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
YIELD = 2 left [ left ({a-b} over cd + 1 right)^6 - 1 right]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
The 30-day yields for the period ended May 31, 1997, for the Income Strategy
Fund, Growth and Tax Strategy Fund and GNMA Trust were 5.00%, 3.66% and 6.89%,
respectively.
TAX EQUIVALENT YIELD
A tax-exempt mutual fund may provide more "take-home" income than a fully
taxable mutual fund after paying taxes. Calculating a "tax equivalent yield"
means converting a tax-exempt yield to a pretax equivalent so that a meaningful
comparison can be made between a tax-exempt municipal fund and a fully taxable
fund. Because the Growth and Tax Strategy Fund invests a significant percentage
of its assets in tax-exempt securities, it may advertise performance in terms of
a 30-day tax equivalent yield.
To calculate a tax equivalent yield, an investor must know his federal
marginal income tax rate. The tax equivalent yield for the Growth and Tax
Strategy Fund is then computed by dividing that portion of the yield which is
tax-exempt by the complement of the federal marginal tax rate and adding the
product to that portion of the yield which is taxable. The complement, for
example, of a federal marginal tax rate of 36.0% is 64.0%, that is
(1.00-0.36=0.64).
Tax Equivalent Yield =
(% Tax Exempt Income x 30-day Yield/ (1-Federal Marginal Tax Rate))
+ (% Taxable Income x 30-day Yield)
Based on a federal marginal tax rate of 36.0%, the tax equivalent yield
for the Growth and Tax Strategy Fund for the period ended May 31, 1997, was
5.06%.
TOTAL RETURN
The Funds may advertise performance in terms of average annual total return for
1-, 5-, and 10-year periods, or for such lesser periods as any of such Funds
have been in existence. Average annual total return is computed by finding the
average annual compounded rates of return over the periods that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1-, 5-, or 10-year periods at
the end of the year or period
The calculation assumes any charges are deducted from the initial $1,000 payment
and assumes all dividends and distributions by such Fund are reinvested at the
price stated in the Prospectus on the reinvestment dates during the period, and
includes all recurring fees that are charged to all shareholder accounts.
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Average Annual Total Returns
For Periods Ended 5/31/97
1 5 10 From
Fund year years years Inception*
------ ----- ----- ----- ----------
Income Strategy 13.59% - - 9.47%
Growth and Tax Strategy 14.21% 10.89% - 10.29%
Balanced Strategy 19.26% - - 14.45%
Cornerstone Strategy 16.94% 13.38% 8.88% -
Growth Strategy 7.73% - - 19.82%
Emerging Markets 8.69% - - 8.72%
Gold (27.25%) 5.70% (4.95%) -
International 16.72% 13.94% - 11.25%
World Growth 16.52% - - 14.68%
GNMA Trust 9.23% 6.87% - 7.55%
* Data from inception is shown for Funds that are less than ten years old.
Income Strategy, Balanced Strategy, and Growth Strategy Funds commenced
operations on September 1, 1995. Growth and Tax Strategy Fund commenced
operations on January 11, 1989. Emerging Markets Fund commenced operations
on November 7, 1994. International Fund commenced operations on July 11,
1988. World Growth Fund commenced operations on October 1, 1992. GNMA Trust
commenced operations on February 1, 1991.
APPENDIX A - LONG-TERM AND SHORT TERM DEBT RATINGS
1. LONG-TERM DEBT RATINGS
MOODY'S:
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligation
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
NOTE: THOSE BONDS IN THE AA, A, AND BAA GROUPS WHICH MOODY'S BELIEVES POSSESS
THE STRONGEST INVESTMENT ATTRIBUTES ARE DESIGNATED BY THE SYMBOLS AA1, A1, AND
BAA1.
A description of ratings Ba and below assigned to debt obligations by Moody's is
included in Appendix A of the Emerging Markets Fund Prospectus.
S&P:
AAA Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
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A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
PLUS (+) OR MINUS (-): THE RATINGS FROM AA TO BBB MAY BE MODIFIED BY THE
ADDITION OF A PLUS OR MINUS SIGN TO SHOW RELATIVE STANDING WITHIN THE MAJOR
RATING CATEGORIES.
A description of ratings BB and below assigned to debt obligations by S&P is
included in Appendix A of the Emerging Markets Fund Prospectus.
FITCH:
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because
bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than
for bonds with higher ratings.
PLUS (+) AND MINUS (-): PLUS AND MINUS SIGNS ARE USED WITH A RATING SYMBOL TO
INDICATE THE RELATIVE POSITION OF A CREDIT WITHIN THE RATING CATEGORY. PLUS AND
MINUS SIGNS, HOWEVER, ARE NOT USED IN THE AAA CATEGORY.
DUFF & PHELPS:
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. Risk is modest but
AA may vary slightly from time to time because of economic conditions.
AA-
A+ Protection factors are average but adequate. However, risk factors are
A more variable and greater in periods of economic stress.
A-
BBB+ Below-average protection factors but still considered sufficient for
BBB prudent investment. Considerable variability in risk during economic
BBB- cycles.
2. SHORT-TERM DEBT RATINGS
MOODY'S CORPORATE AND GOVERNMENT:
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
o Well-established access to a range of financial markets and
assured sources of alternate liquidity.
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Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
MOODY'S MUNICIPAl:
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support
or demonstrated broadbased access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All Security elements
are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less
well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is
specific risk.
S&P CORPORATE AND GOVERNMENT:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated A-1.
S&P MUNICIPAL:
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.
FITCH:
F-1+ Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1 Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2 Good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not
as great as for issuers assigned F-1+ and F-1 ratings.
F-3 Fair credit quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate,
however, near-term adverse changes could cause these securities to be
rated below investment grade.
DUFF & PHELPS:
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are
minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very
small.
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good.
Risk factors are small.
D-3 Satisfactory liquidity and other protection factors qualify issues as
to investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
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APPENDIX B - COMPARISON OF PORTFOLIO PERFORMANCE
Occasionally, we may make comparisons in advertising and sales literature
between the Funds contained in this SAI and other Funds in the USAA Family of
Funds. These comparisons may include such topics as risk and reward, investment
objectives, investment strategies, and performance.
Fund performance may be compared to the performance of broad groups of
mutual funds with similar investment goals or unmanaged indexes of comparable
securities. Evaluations of Fund performance made by independent sources may also
be used in advertisements concerning the Fund, including reprints of, or
selections from, editorials or articles about the Fund. The Fund or its
performance may also be compared to products and services not constituting
securities subject to registration under the Securities Act of 1933 such as, but
not limited to, certificates of deposit and money market accounts. Sources for
performance information and articles about the Fund may include but are not
restricted to the following:
AAII JOURNAL, a monthly association magazine for members of the American
Association of Individual Investors.
ARIZONA REPUBLIC, a newspaper which may cover financial and investment news.
AUSTIN AMERICAN-STATESMAN, a newspaper which may cover financial news.
BARRON'S, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
BUSINESS WEEK, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds.
CHICAGO TRIBUNE, a newspaper which may cover financial news.
CONSUMER REPORTS, a monthly magazine which from time to time reports on
companies in the mutual fund industry.
DALLAS MORNING NEWS, a newspaper which may cover financial news.
DENVER POST, a newspaper which may quote financial news.
FINANCIAL SERVICES WEEK, a weekly newspaper which covers financial news.
FINANCIAL PLANNING, a monthly magazine that periodically features companies in
the mutual fund industry.
FINANCIAL WORLD, a monthly magazine which may periodically review mutual fund
companies.
FORBES, a national business publication that periodically reports the
performance of companies in the mutual fund industry.
FORTUNE, a national business publication that periodically rates the performance
of a variety of mutual funds.
FUND ACTION, a mutual fund news report.
HOUSTON CHRONICLE, a newspaper which may cover financial news.
HOUSTON POST, a newspaper which may cover financial news.
IBC/DONOGHUE'S MONEYLETTER, a biweekly newsletter which covers financial news
and from time to time rates specific mutual funds.
INCOME AND SAFETY, a monthly newsletter that rates mutual funds.
INVESTECH, a bimonthly investment newsletter.
INVESTMENT ADVISOR, a monthly publication directed primarily to the advisor
community; includes ranking of mutual funds using a proprietary methodology.
INVESTMENT COMPANY INSTITUTE, the national association of the American
investment company industry.
INVESTOR'S BUSINESS DAILY, a newspaper which covers financial news.
KIPLINGER'S PERSONAL FINANCE MAGAZINE, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
LIPPER ANALYTICAL SERVICES, INC.'S FIXED INCOME FUND PERFORMANCE ANALYSIS, a
monthly publication of industry-wide mutual fund performance averages by type of
fund.
LIPPER ANALYTICAL SERVICES, INC.'S MUTUAL FUND PERFORMANCE ANALYSIS, a weekly
and quarterly publication of industry-wide mutual fund performance averages by
type of fund.
LOS ANGELES TIMES, a newspaper which may cover financial news.
LOUIS RUKEYSER'S WALL STREET, a publication for investors.
MEDICAL ECONOMICS, a monthly magazine providing information to the medical
profession.
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MONEY, a monthly magazine that features the performance of both specific funds
and the mutual fund industry as a whole.
MORNINGSTAR 5 STAR INVESTOR, a monthly newsletter which covers financial news
and rates mutual funds produced by Morningstar, Inc. (a data service which
tracks open-end mutual funds).
MUTUAL FUND FORECASTER, a monthly newsletter that ranks mutual funds.
MUTUAL FUND INVESTING, a newsletter covering mutual funds.
MUTUAL FUND PERFORMANCE REPORT, a monthly publication of mutual fund performance
and rankings, produced by Morningstar, Inc.
MUTUAL FUNDS MAGAZINE, a monthly publication reporting on mutual fund investing.
MUTUAL FUND SOURCE BOOK, an annual publication produced by Morningstar, Inc.
which describes and rates mutual funds.
MUTUAL FUND VALUES, a biweekly guidebook to mutual funds, produced by
Morningstar, Inc.
NEWSWEEK, a national business weekly.
NEW YORK TIMES, a newspaper which may cover financial news.
NO LOAD FUND INVESTOR, a newsletter covering companies in the mutual fund
industry.
ORLANDO SENTINEL, a newspaper which may cover financial news.
PERSONAL INVESTOR, a monthly magazine which from time to time features mutual
fund companies and the mutual fund industry.
SAN ANTONIO BUSINESS JOURNAL, a weekly newspaper that periodically covers mutual
fund companies as well as financial news.
SAN ANTONIO EXPRESS-NEWS, a newspaper which may cover financial news.
SAN FRANCISCO CHRONICLE, a newspaper which may cover financial news.
SMART MONEY, a monthly magazine featuring news and articles on investing and
mutual funds.
USA TODAY, a newspaper which may cover financial news.
U.S. NEWS AND WORLD REPORT, a national business weekly that periodically reports
on mutual fund performance data.
WALL STREET JOURNAL, a Dow Jones and Company, Inc. newspaper which covers
financial news.
WASHINGTON POST, a newspaper which may cover financial news.
WEISENBERGER MUTUAL FUNDS INVESTMENT REPORT, a monthly newsletter that reports
on both specific mutual fund companies and the mutual fund industry as a whole.
WORLD MONITOR, The Christian Science Monitor Monthly.
WORTH, a magazine which covers financial and investment subjects including
mutual funds.
YOUR MONEY, a monthly magazine directed toward the novice investor.
In addition, the Cornerstone Strategy, Growth Strategy, Emerging Markets,
Gold, International, and World Growth Funds may be cited for performance
information and articles in International Reports, a publication providing
insights on world financial markets and economics.
The GNMA and Treasury Money Market Trusts may be cited in:
THE BOND BUYER, a daily newspaper which covers bond market news.
IBC/DONOGHUE'S MONEY FUND REPORT, a weekly publication of the Donoghue
Organization, Inc., reporting on the performance of the nation's money market
funds, summarizing money market fund activity, and including certain averages as
performance benchmarks, specifically "Donoghue's Taxable 100% U.S. Treasury
Money Fund Average."
IBC'S MONEY MARKET INSIGHT, a monthly money market industry analysis prepared by
IBC USA, Inc.
In addition to the sources above, performance of our Funds may also be
tracked by Lipper Analytical Services, Inc. and Morningstar, Inc. A Fund will be
compared to Lipper's or Morningstar's appropriate fund category according to its
objective and portfolio holdings. Footnotes in advertisements and other sales
literature will include the time period applicable for any rankings used.
26
<PAGE>
For comparative purposes, unmanaged indexes of comparable securities or
economic data may be cited. Examples include the following:
- Bond Buyer Indices, indices of debt of varying maturities including revenue
bonds, general obligation bonds, and U.S. Treasury bonds which can be found in
THE BOND BUYER.
- Consumer Price Index, a measure of U.S. inflation in prices on consumer
goods.
- Financial Times Gold Mines Index, an index that includes gold mining
companies if they: a) have sustainable, attributable gold production of at least
300,000 ounces a year; b) draw at least 75% of revenue from mined gold sales;
and c) have at least 10% of their capital available to the investing public.
- Ibbotson Associates, Inc., Stocks, Bonds, Bills, and Inflation Yearbook.
- IFC Investable Index (IFCI) and IFC Global Index (IFCG), premier benchmarks
for international investors. Both index series cover 25 discrete markets,
regional indexes, and a composite index, providing the most accurate
representation of the emerging markets universe available.
- Lehman Brothers Inc. GNMA 30 Year Index.
- Lehman Brothers Municipal Bond Index, a total return performance benchmark
for the long-term investment grade tax-exempt bond market.
- London Gold, a traditional index that prices London gold.
- London Gold PM Fix Price, the evening gold prices as set by London dealers.
- Morgan Stanley Capital Index (MSCI) - EAFE, an unmanaged index which reflects
the movements of stock markets in Europe, Australia, and the Far East by
representing a broad selection of domestically listed companies within each
market.
- Morgan Stanley Capital Index (MSCI) - World, an unmanaged index which
reflects the movements of world stock markets by representing a broad selection
of domestically listed companies within each market.
- NAREIT Equity Index (National Association of Real Estate Investment Trusts,
Inc.), a broad based listing of all tax-qualified REITs (only common shares
issued by the REIT) listed on the NYSE, American Stock Exchange and NASDAQ.
- Philadelphia Gold/Silver Index (XAU), an index representing nine holdings in
the gold and silver sector.
- S&P 500 Index, a broadbased composite unmanaged index that represents the
average performance of a group of 500 widely held, publicly traded stocks.
- Shearson Lehman Hutton Bond Indices - indices of fixed-rate debt issues rated
investment grade or higher which can be found in the BOND MARKET REPORT.
Other sources for total return and other performance data which may be
used by a Fund or by those publications listed previously are Schabaker
Investment Management, and Investment Company Data, Inc. These are services that
collect and compile data on mutual fund companies.
27
<PAGE>
APPENDIX C - DOLLAR-COST AVERAGING
Dollar-cost averaging is a systematic investing method which can be used by
investors as a disciplined technique for investing. A fixed amount of money is
invested in a security (such as a stock or mutual fund) on a regular basis over
a period of time, regardless of whether securities markets are moving up or
down.
This practice reduces average share costs to the investor who acquires
more shares in periods of lower securities prices and fewer shares in periods of
higher prices.
While dollar-cost averaging does not assure a profit or protect against
loss in declining markets, this investment strategy is an effective way to help
calm the effect of fluctuations in the financial markets. Systematic investing
involves continuous investment in securities regardless of fluctuating price
levels of such securities. Investors should consider their financial ability to
continue purchases through periods of low and high price levels.
As the following chart illustrates, dollar-cost averaging tends to keep
the overall cost of shares lower. This example is for illustration only, and
different trends would result in different average costs.
HOW DOLLAR-COST AVERAGING WORKS
$100 Invested Regularly for 5 Periods
Market Trend
------------------------------------------------------------
Down Up Mixed
---------------- ------------------ -------------------
Share Shares Share Shares Share Shares
Investment Price Purchased Price Purchased Price Purchased
---------------- ------------------ -------------------
$100 10 10 6 16.67 10 10
100 9 11.1 7 14.29 9 11.1
100 8 12.5 7 14.29 8 12.5
100 8 12.5 9 11.1 9 11.1
100 6 16.67 10 10 10 10
---- -- ----- -- ----- --- ----
$500 ***41 62.77 ***39 66.35 ***46 54.7
*Avg. Cost: $7.97 *Avg. Cost: $7.54 *Avg. Cost: $9.14
----- ----- -----
**Avg. Price: $8.20 **Avg. Price:$7.80 **Avg. Price $9.20
----- ----- -----
* Average Cost is the total amount invested divided by number of
shares purchased.
** Average Price is the sum of the prices paid divided by number of
purchases.
*** Cumulative total of share prices used to compute average prices.
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