TABLE OF CONTENTS
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Manager 5
Financial Information:
Statement of Assets and Liabilities 8
Portfolio of Investments in Securities 9
Notes to Portfolio of Investments in Securities 10
Statement of Operations 11
Statements of Changes in Net Assets 12
Notes to Financial Statements 13
=======================================================================
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA GNMA Trust,
managed by USAA Investment Management Company (IMCO). It may be used as sales
literature only when preceded or accompanied by a current prospectus which gives
further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(copyright)1997, USAA. All rights reserved.
<TABLE>
USAA Family of Funds Performance Summary
If you own only one or two USAA funds, you may not be aware of the performance
of our other funds. This summary is a snapshot of the performance of all 33
funds by investment objective as of December 31, 1996.
<CAPTION>
Average Annual Total Return*
Investment Inception Since
Objective Date 1 yr 5 yrs 10 yrs Inception
========================================================================================================
<S> <C> <C> <C> <C> <C>
Capital Appreciation
Aggressive Growth 10/19/81 16.47 11.45 13.12 -
Emerging Markets(1) 11/7/94 16.59 - - 4.84
Gold(1) 8/15/84 0.00 6.57 .93 -
Growth 4/5/71 17.80 13.69 13.24 -
Growth & Income 6/1/93 23.04 - - 16.24
International(1) 7/11/88 19.15 13.09 - 10.60
S&P 500 Index(4) 5/1/96 - - - 16.83+
World Growth(1) 10/1/92 19.08 - - 13.66
Asset Allocation
Balanced Strategy 9/1/95 13.45 - - 12.49
Cornerstone Strategy(1) 8/15/84 17.87 12.69 10.70 -
Growth and Tax Strategy(2)** 1/11/89 11.12 9.64 - 9.97
Growth Strategy(1) 9/1/95 22.13 - - 21.47
Income Strategy 9/1/95 3.00 - - 9.72
Income - Taxable
GNMA 2/1/91 2.94 6.43 - 7.66
Income 3/4/74 1.33 7.33 9.25 -
Income Stock 5/4/87 18.70 12.76 - 12.78
Short-Term Bond 6/1/93 6.31 - - 5.60
Income - Tax Exempt
Long-Term(2)** 3/19/82 4.47 6.87 7.37 -
Intermediate-Term(2)** 3/19/82 4.49 6.89 7.09 -
Short-Term(2)** 3/19/82 4.44 4.94 5.45 -
California Bond(2) 8/1/89 5.39 7.29 - 7.65
Florida Tax-Free Income(2)** 10/1/93 4.38 - - 3.69
New York Bond(2)** 10/15/90 3.73 6.61 - 8.35
Texas Tax-Free Income(2)** 8/1/94 5.25 - - 9.44
Virginia Bond(2)** 10/15/90 5.06 7.09
Money Market
Money Market(3) 2/2/81 5.24 4.37 5.84 -
Tax Exempt Money Market(2,3)** 2/6/84 3.34 3.04 4.21 -
Treasury Money Market Trust(3) 2/1/91 5.10 4.16 - 4.32
California Money Market(2,3)** 8/1/89 3.27 2.93 - 3.64
Florida Tax-Free Money Market(2,3)** 10/1/93 3.24 - - 3.01
New York Money Market(2,3)** 10/15/90 3.20 2.79 - 3.07
Texas Tax-Free Money Market(2,3)** 8/1/94 3.25 - - 3.32
Virginia Money Market(2,3)** 10/15/90 3.17 2.87 - 3.20
</TABLE>
Non-deposit investment products offered by USAA Investment Management Company
are not insured by the FDIC, are not deposits or other obligations of, or
guaranteed by, USAA Federal Savings Bank, and are subject to investment risks,
including possible loss of the principal amount invested.
For more complete information about the mutual funds managed and dis-
tributed by USAA IMCO, including charges and expenses, please call
1-800-531-8181 for a prospectus. Read it carefully before you invest.
(1) Foreign investing is subject to additional risks, which are discussed
in the funds' prospectuses.
(2) Some income may be subject to state or local taxes or the federal alter-
native minimum tax.
(3) An investment in a money market fund is neither insured nor guaranteed
by the U.S. government and there is no assurance that any of the funds will be
able to maintain a stable net asset value of $1 per share.
(4) S&P 500(registered trademark) is a trademark of The McGraw-Hill Companies,
Inc., and has been licensed for use. The product is not sponsored, sold or
promoted by Standard & Poor's, and Standard & Poor's makes no
representation regarding the advisability of investing in the product.
* Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment
has been made for taxes payable by shareholders on their reinvested dividends
and capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return
and principal value of an investment will fluctuate, and an investor's
shares, when redeemed, may be worth more or less than their original cost.
** IRAs are not available for tax-exempt funds. The Growth and Tax Strategy Fund
is not available as an investment for your IRA because the majority of its
income is tax-exempt. California, Florida, New York, Texas, and Virginia
funds available to residents only.
+ Cumulative total return since inception.
MESSAGE FROM THE PRESIDENT
On January 29, 1995, my wife and I became grandparents. Karl Joseph Marbach
was born to Alexandra, my wife's daughter, and her husband Keith Marbach.
When my wife learned of the name Alexandra and Keith had chosen, she smiled.
She noted that my middle names are Joseph Carl, and she said, "I think this
kid's college education is secure." --
May 31, 1995 Annual Report
In the May 31, 1995, annual report, my message centered on regular,
systematic investing, and I told you I was going to practice something
I had preached for many years. I introduced you to my grandson, Karl
Joseph, and told you I had set up an InveStart(Registered Trademark) account
for his college expenses. This is a progress report.
By the time you read this message, Karl Joseph will be 24 months old -- a good
time for an update. As you might expect me to say, Karl Joseph is a very bright
guy. He is one of the few people whom our wire-haired dachshund, Brunhilde,
will tolerate. We have found that Bruni is a discerning judge of people!
One of Karl's favorite things is watching me toss grapes and catch them in my
mouth. He loves stuffed animals, swimming, and his grandmother's cooking. I'm
very pleased to say that his progress is just as I expected.
I'm also pleased to let you know that his education fund is progressing well
too. I opened an InveStart account for Karl on June 2, 1995, in the Income Stock
Fund. The NAV then was $14.77, and at this writing it is well over $16.00. In
addition to my $100 initial investment, there have now been 17 electronic
transfers of $50 into the account. That totals $950, and an interesting thing
has happened. The account is worth much more than $950 because, in addition to
dividends and appreciation, it has attracted other money. This is a college
account and a great cause. Karl is surprisingly well on his way.
There is a lesson here. Funding a college education is a challenge, but starting
early with an account like this is an excellent step. It provides a place for a
few extra dollars that show up on special occasions.
"Secure" may be an exaggeration, but I did decide to practice one thing I have
preached for many years ... I opened an InveStart (Registered Trademark)
account for Karl Joseph.
-- May 31, 1995 Annual Report
We originally intended it for young USAA members as a good way to start
investing. We found, however, that many grandparents were using it as I just
did.
-- May 31, 1995 Annual Report
I do practice what I preach. Systematic investing makes sense, and InveStart has
an expanded lineup of available funds. I encourage you to look at your
investment as you study the information in this report, and if you are not
investing regularly, please consider if it may be appropriate for you.
If you have any questions about our systematic investment plans or any of our
other mutual funds, please call. Your team of account representatives will be
glad to assist you with any questions you may have.
Sincerely,
Michael J.C. Roth
PRESIDENT AND
VICE CHAIRMAN OF THE BOARD
[Photograph of Michael J.C. Roth, President and Vice Chairman
of the Board appears here.]
A systematic plan, such as InveStart, does not assure a profit or protect
against loss in declining markets. Since such a plan involves continuous
investment in securities regardless of fluctuating price levels, you should
consider your financial ability to continue purchases through periods of
low and high price levels.
For more complete information about the mutual funds managed and distributed by
USAA IMCO, including charges and expenses please call for a prospectus. Read it
carefully before you invest.
The performance data quoted represents past performance and is no guarantee of
future results. The investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
Investment Review
GNMA Trust
OBJECTIVE: Provide investors with a high level of current income consistent
with preservation of principal by investing in securities backed by the full
faith and credit of the U.S. government. While the value of the Fund's shares
is not insured or guaranteed by the U.S. government, the Fund endeavors to
maintain low-to-moderate fluctuations of the share price.
TYPES OF INVESTMENTS: At least 65 percent of the Fund's total assets are
invested in Government National Mortgage Association (GNMA) pass-through
certificates. The remaining asets of the Fund are invested in other
obligations backed by the full faith and credit of the U.S. government.
5/31/96 11/30/96
Net Assets...............................$301.6% Million $312.1 Million
Net Asset Value Per Share................ $9.76 $10.11
Average Annual Total Returns as of 11/30/96
May 31, 1996 to November 30, 1996................................7.24%*
1 Year...........................................................5.11%
5 Years..........................................................7.34%
Since inception on February 1, 1991..............................7.89%
*Total returns for periods of less than on year are not annualized. This
six-month return is cumulative.
30-Day SEC Yield on November 30, 1996............................6.97%**
**Calculated as prescribed by the Securities and Exchange Commission
[A graph is shown here which is a comparison of the change in value of a
$10,000 investment, for the period of 2/1/91 to 11/30/96, with dividends
and capital gains reinvested. The ending value of each item graphed is
as follows: Lehman Brothers GNMA 30-Year Index - $16,040, USAA GNMA Trust -
$15,575 and the Lipper GNMA Funds Average - $15,222.]
The graph illustrates how a $10,000 hypothetical investment in the USAA GNMA
Trust closely tracks the broad-based unmanaged index of the Lehman Brothers
Inc. GNMA 30-Year Index and an unmanaged index of funds similar to the Trust
as represented by the Lipper GNMA Funds Average.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment
has been made for taxes payable by shareholders on their reinvested
income dividends and capital gain distributions. The performance data quoted
represent past performance and are not an indication of future results.
Investment return and principal value of an investment will fluctuate,
and an investor's shares, when redeemed, may be worth more or less than
their original cost.
MESSAGE FROM THE MANAGER
[Photograph of Kenneth E. Willmann appears here]
Market Overview
The six-month period ended November 30, 1996, witnessed a decline in interest
rates. This decline was far from steady. The yield on the 10-year U.S. Treasury
note, the standard against which most mortgage-related securities are measured,
began the period on May 31, 1996, at 6.85%. It rose briefly peaking at 7.06% on
June 12, 1996. There it began a fluctuating trend, culminating at 6.99% on
September 5, 1996. A steady decline followed, finishing on November 30 at 6.04%,
its low point of the six-month period.
Mortgage securities (many of which are pools of mortgages represented by "pass-
through certiticates") showed a remarkably similar pattern. After starting the
period on May 31, 1996, at 7.96%, the yield on the GNMA 7.5% 30-year pass-
through certificate peaked at 8.15% on June 12, fluctuated widely until
September 5, 1996, where it stood at 8.06%, then steadily declined to 7.32% on
November 30, 1996.
[A graph is shown here which is a comparison of GNMA Passthrough and U.S.
Treasury Note Yields from 5/31/96 to 11/30/96. The vertical axis shows the
yield and the horizontal axis shows the time period. The value on 11/30/96
for the GNMA 7.5% 30-Year Passthrough Certificate is 7.32% and the value
for the 10 Year U.S. Treasury Note is 6.04%.]
Besides describing interest rate movements, the chart above shows us two things.
First and most obvious, GNMA pass-through certificates yield substantially more
than U.S. Treasury securities. Both are backed by the full faith and credit of
Uncle Sam, so neither has the risk of default.
The difference is explained by the structures of the securities. As we all know,
mortgages pay principal monthly and can be paid off anytime without penalty.
Since mortgage securities are pools of mortgages, the timing of principal
repayment in the GNMA security is very uncertain. The investor in such a
security does not know when the principal will be returned or what the level of
interest rates will be should he reinvest. The uncertainty of the timing of cash
flows with GNMA securities compares to the absolute certainty of cash flows with
Treasury securities. The market demands higher yields on mortgage securities as
compensation for this uncertainty.
The second, and more subtle, observation of the graph follows this cash flow
uncertainty. By the end of the period, the yield of the GNMA 7.5% pass-through
certificate declines noticeably less than that of the 10-year U.S. Treasury
note. As interest rates decline, mortgagors are more likely to refinance their
mortgages at a lower interest rate or shorter maturity. When a mortgage is
refinanced, the original mortgage principal is prepaid. Of course, these
prepayments "pass through" the mortgage pass-through certificates to investors.
Prepayments of principal usually occur more often during a declining interest
rate environment. They probably will do so this time if interest rates continue
to decline. This second level of uncertainty causes the market to demand still
higher relative yields in a period of declining rates.
The foregoing reinforces our belief that a mutual fund remains the best way for
individuals to invest in mortgages. Let us deal with the timing issues and
reinvestment of unexpected principal payments. Let us deal with the complicated
accounting issues of principal, interest, capital gains, and losses. A managed
mutual fund can effectively deal with the subtleties of mortgages and may
increase the potential for successful investment in them.
The Portfolio
As of November 30, 1996, the breakdown by coupon of the mortgage pools held by
the Fund is illustrated below:
[A graph is shown here which shows the breakdown by coupon of the mortgage pools
held by the GNMA Trust as of November 30, 1996. The vertical axis shows the
coupon rate, and the horizontal axis shows the category percentage. The values
are:
Coupon Rate ARM 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0
Category % 27.3 5.9 20.9 14.7 8.3 10.0 4.6 5.6 1.6 1.1]
Our investments in Adjustable Rate Mortgage (ARM) pools are in the portfolio to
limit principal volatility. Their current coupon yield of 6.5% definitely
contributes to income, as well. All other pools contain thirty-year, fixed-rate
mortgages.
The Future
With the elections over and the status quo more or less retained, it is
difficult to see reasons for large changes in interest rates. What we do know is
that interest rates will change sometime. I believe the GNMA Trust is structured
to deal with any market fluctuation. We will continue to favor income over
capital gains while attempting to maximize the total return to the shareholders.
See page 9 for a complete listing of the Portfolio of Investments in Securities.
GNMA Trust
Statement of Assets and Liabilities
(In Thousands)
November 30, 1996
(Unaudited)
Assets
Investments in securities, at market value (identified
cost of $308,518) $ 316,366
Cash 43
Receivables:
Capital shares sold 102
Interest 1,760
----------
Total assets 318,271
----------
Liabilities
Securities purchased 4,927
Capital shares redeemed 588
USAA Investment Management Company 32
USAA Transfer Agency Company 31
Accounts payable and accrued expenses 58
Dividends on capital shares 516
----------
Total liabilities 6,152
----------
Net assets applicable to capital shares outstanding $ 312,119
==========
Represented by:
Paid-in capital $ 317,584
Accumulated net realized loss on investments (13,313)
Net unrealized appreciation of investments 7,848
----------
Net assets applicable to capital shares outstanding $ 312,119
==========
Capital shares outstanding, unlimited number of shares authorized,
no par value 30,876
==========
Net asset value, redemption price, and offering price per share $ 10.11
==========
See accompanying notes to financial statements.
<TABLE>
GNMA Trust
Portfolio of Investments in Securities
(In Thousands)
November 30, 1996
(Unaudited)
<CAPTION>
Principal Market
Amount Security Value
------ -------- -----
U.S. Government & Agency Issues (100.3%)
Government National Mortgage Assn. I (13.6%)
<S> <C> <C> <C>
$ 17,966 8.00%, 1/15/22 - 6/15/23 $ 18,613
9,578 8.50%, 6/15/21 - 7/15/22 10,089
8,046 9.00%, 11/15/16 - 7/15/21 8,622
4,669 9.50%, 2/15/17 - 12/15/19 5,113
- -----------------------------------------------------------------------------------------------------
42,437
- -----------------------------------------------------------------------------------------------------
Government National Mortgage Assn. II (59.3%)
19,440 6.00%, 10/20/23 - 4/20/26 18,399
67,223 6.50%, 1/20/24 - 9/20/25 65,355
46,371 7.00%, 5/20/24 - 8/20/26 46,067 (a)
25,597 7.50%, 10/20/23 - 5/20/25 25,981
12,398 8.00%, 12/20/22 - 9/20/26 12,757
4,180 8.50%, 1/20/20 - 6/20/22 4,374
8,301 9.00%, 1/20/20 - 5/20/25 8,783
3,125 10.00%, 9/20/19 3,418
- -----------------------------------------------------------------------------------------------------
185,134
- -----------------------------------------------------------------------------------------------------
Government National Mortgage Assn. II, Adjustable Rate (27.4%)
84,007 6.50%, 2/20/25 - 10/20/26 85,443
- -----------------------------------------------------------------------------------------------------
Total U.S. government & agency issues (cost: $305,166) 313,014
- -----------------------------------------------------------------------------------------------------
Repurchase Agreement (1.1%)
3,352 First Boston Corp., 5.60%, acquired on 11/29/96 and due 12/02/96
at $3,354 (collateralized by a $3,367 U.S. Treasury Note, due
3/31/97; market value of $3,421) (cost: $3,352) 3,352
- -----------------------------------------------------------------------------------------------------
Total investments (cost: $308,518) $ 316,366
=====================================================================================================
</TABLE>
GNMA Trust
Notes to Portfolio of Investments in Securities
(In Thousands)
November 30, 1996
(Unaudited)
General Notes
Market values of securities are determined by procedures and practices discussed
in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
Specific Notes
(a) At November 30, 1996, the cost of securities purchased on a delayed delivery
basis was $4,911.
See accompanying notes to financial statements.
GNMA Trust
Statement of Operations
(In Thousands)
Six-month period ended November 30, 1996 (Unaudited) Net investment income:
Interest income $ 11,070
---------
Expenses:
Management fees 191
Transfer agent's fees 180
Custodian's fees 46
Postage 14
Shareholder reporting fees 8
Trustees' fees 2
Registration fees 20
Audit fees 12
Legal fees 3
Other 4
---------
Total expenses 480
---------
Net investment income 10,590
---------
Net realized and unrealized gain on investments:
Net realized loss (2,242)
Change in net unrealized appreciation/depreciation 13,000
---------
Net realized and unrealized gain 10,758
---------
Increase in net assets resulting from operations $ 21,348
=========
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
GNMA Trust
Statements of Changes in Net Assets
(In Thousands)
Six-month period ended November 30, 1996 and Year ended May 31, 1996 (Unaudited)
11/30/96 5/31/96
-------- -------
<S> <C> <C>
From operations:
Net investment income $ 10,590 $ 19,954
Net realized loss on investments (2,242) (1,826)
Change in net unrealized appreciation/depreciation of
investments 13,000 (8,830)
---------- ----------
Increase in net assets resulting from operations 21,348 9,298
---------- ----------
Distributions to shareholders from:
Net investment income (10,590) (19,954)
---------- ----------
From capital share transactions:
Proceeds from shares sold 25,776 86,959
Shares issued for dividends reinvested 7,395 13,858
Cost of shares redeemed (33,399) (54,143)
---------- ----------
Increase (decrease) in net assets from capital share transactions (228) 46,674
---------- ----------
Net increase in net assets 10,530 36,018
Net assets:
Beginning of period 301,589 265,571
---------- ----------
End of period $ 312,119 $ 301,589
========== ==========
Change in shares outstanding:
Shares sold 2,607 8,560
Shares issued for dividends reinvested 748 1,370
Shares redeemed (3,382) (5,342)
---------- ----------
Increase (decrease) in shares outstanding (27) 4,588
========== ==========
</TABLE>
See accompanying notes to financial statements.
GNMA Trust
Notes to Financial Statements
November 30, 1996
(Unaudited)
(1) Summary of Significant Accounting Policies
USAA INVESTMENT TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended, is a diversified, open-end management investment company
organized as a Massachusetts business trust consisting of eleven separate funds.
The information presented in this semiannual report pertains only to the GNMA
Trust (the Fund). The Fund's investment objective is to provide a high level of
current income consistent with preservation of principal by investing in
securities backed by the full faith and credit of the U.S. Government.
A. Security valuation - The value of each security is determined (as of the
close of trading on the New York Stock Exchange on each business day the
Exchange is open) as set forth below:
1. Government securities are valued each business day by a pricing service (the
Service) approved by the Fund's Board of Trustees. The Service uses the mean
between quoted bid and asked prices or the last sale price to price securities
when, in the Service's judgement, these prices are readily available and are
representative of the securities' market values. For many securities, such
prices are not readily available. The Service generally prices these securities
based on methods which include consideration of yields or prices of securities
of comparable quality, coupon, maturity and type, indications as to values from
dealers in securities, and general market conditions.
2. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value. Repurchase agreements are valued
at cost.
3. Securities which cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value, using methods determined
by the Manager under the general supervision of the Board of Trustees.
B. Federal taxes - The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - As is common in the industry, security
transactions are accounted for on the date the securities are purchased or sold
(trade date). Gain or loss from sales of investment securities is computed on
the identified cost basis. Interest income is recorded on the accrual basis.
Discounts and premiums on short-term securities are amortized over the life of
the respective securities. Amortization of market discounts on long-term
securities is recognized as interest income upon disposition of the security to
the extent there is a gain on the disposition.
D. Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that may affect the reported amounts in the financial
statements.
(2) Lines of Credit
The Fund participates with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million through January 14, 1997, one with USAA
Capital Corporation (CAPCO), an affiliate of the Manager ($750 million
uncommitted), and one with an unaffiliated bank ($100 million committed). The
purpose of the agreements is to meet temporary or emergency cash needs,
including redemption requests that might otherwise require the untimely
disposition of securities. Subject to availability under these agreements, the
Fund may borrow up to a maximum of 25% of its total assets, of which only 5% may
be borrowed from CAPCO, at the lending institution's borrowing rate plus a
markup. The Fund had no borrowings under either of these agreements during the
six-month period ended November 30, 1996.
(3) Distributions
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. All net investment income available for distribution was
distributed as of November 30, 1996. Distributions of realized gains from
security transactions not offset by capital losses are made in the succeeding
fiscal year or as otherwise required to avoid the payment of federal taxes. At
November 30, 1996, the Fund had capital loss carryovers for federal income tax
purposes of approximately $13,313,000 which, if not offset by subsequent capital
gains, will expire in or before 2005. It is unlikely that the Fund's Board of
Trustees will authorize a distribution of capital gains realized in the future
until the capital loss carryovers have been utilized or expire.
(4) Investment Transactions
Purchases and sales/maturities of securities, excluding short-term securities,
for the six-month period ended November 30, 1996 were $120,007,206 and
$110,912,003, respectively.
Gross unrealized appreciation and depreciation of investments as of November 30,
1996 was $7,971,746 and $123,291, respectively.
(5) Transactions with Manager
A. Management fees - The investment policies of the Fund and management of the
Fund's portfolio are carried out by USAA Investment Management Company (the
Manager). The Fund's management fees are computed at .125% of its annual average
net assets.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Fund. Shareholder accounting service fees are based on an annual charge
per shareholder account plus out-of-pocket expenses.
C. Underwriting services - The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing best efforts basis. The
Manager receives no fee or other remuneration for such services.
(6) Transactions with Affiliates
USAA Investment Management Company is indirectly wholly owned by United Services
Automobile Association (the Association), a large, diversified financial
services institution. At November 30, 1996, the Association and its affiliates
owned 379,628 shares (1.2%) of the Fund.
(7) Repurchase Agreements
The Fund may enter into repurchase agreements with commercial banks or
recognized security dealers. These agreements are secured by obligations backed
by the full faith and credit of the U.S. Government. Obligations pledged as
collateral are required to maintain a value equal to or in excess of the resale
price of the repurchase agreement and are held by the Fund's custodian until
maturity of the repurchase agreement. The Fund's Manager monitors the
creditworthiness of sellers with which the Fund may enter into repurchase
agreements.
(8) Financial Highlights
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Six-month Eight-month
Period Ended Year Ended Period Ended Year Ended
November 30, May 31, May 31, September 30,
----------- ------ ------ ------------
1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 9.76 $ 10.09 $ 9.82 $ 10.37 $ 10.47 $ 10.19
Net investment income .34 .70 .72 .49 .79 .82
Net realized and
unrealized gain (loss) .35 (.33) .27 (.55) (.10) .28
Distributions from net
investment income (.34) (.70) (.72) (.49) (.79) (.82)
---------- ---------- ---------- --------- ---------- ----------
Net asset value at
end of period $ 10.11 $ 9.76 $ 10.09 $ 9.82 $ 10.37 $ 10.47
========== ========== ========== ========= ========== ==========
Total return (%) * 7.24 3.65 10.54 (.66) 6.79 11.18
Net assets at
end of period (000) $ 312,119 $ 301,589 $ 265,571 $ 261,251 $ 288,879 $ 218,544
Ratio of expenses to
average net assets (%) .31(a) .32 .32 .31(a) .32 .375
Ratio of net investment
income to average
net assets (%) 6.94(a) 6.90 7.34 7.20(a) 7.53 7.92
Portfolio turnover (%) 36.43 127.77 93.78 90.05 81.44 36.11
*Assumes reinvestment of all dividend income distributions during the period.
(a)Annualized. The ratio is not necessarily indicative of 12 months of operations.
</TABLE>
