USAA USAA STATEMENT OF
EAGLE INVESTMENT ADDITIONAL INFORMATION
LOGO TRUST October 1, 1997
As Supplemented on December 12, 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
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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
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whether the Fund's NAV calculated by using available market quotations deviates
from $1.00 per share and, 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.
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Dividends will continue to be earned by the shareholder until the shares are
redeemed by the presentation of a check.
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
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value of a shareholder's investment and eventually exhaust the account.
Reinvesting dividends and 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
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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 toinvestments 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
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not hedge with respect to a particular currency for an amount greater than the
aggregate market value(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.
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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.
The Funds will have no obligation to deal with any particular broker or
group of brokers in the execution of portfolio transactions. The Funds
contemplate that, consistent with obtaining the best overall terms available,
brokerage transactions may be effected through USAA Brokerage Services, a
discount brokerage service of the Manager. The Trust's Board of Trustees has
adopted procedures in conformity with Rule 17e-1 under the 1940 Act designed to
ensure that all brokerage commissions paid to USAA Brokerage Services are
reasonable and fair. The Trust's Board of Trustees has authorized the Manager,
as a member of the Chicago Stock Exchange, to effect portfolio transactions for
the Funds on such exchange and to retain compensation in connection with such
transactions. Any such transactions will be effected and related compensation
paid only in accordance with applicable SEC regulations.
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.
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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.
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)
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regardless 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.
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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.
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<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.
__________________________________________
(1) Indicates those Directors 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.
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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
- --------------------- ---------------- --------------------
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 Director from
the Board of Directors.
(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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<PAGE>
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.
25
<PAGE>
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
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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.
06088-1297
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