=========================================================================
TABLE OF CONTENTS
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Manager 5
Financial Information:
Statement of Assets and Liabilities 8
Portfolio of Investments in Securities 9
Notes to Portfolio of Investments in Securities 10
Statement of Operations 11
Statements of Changes in Net Assets 12
Notes to Financial Statements 13
==========================================================================
IMPORTANT INFORMATION
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA Gold Fund,
managed by USAA Investment Management Company (IMCO). It may be used as sales
literature only when preceded or accompanied by a current prospectus which gives
further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)1998, USAA. All rights reserved.
USAA FAMILY OF FUNDS SUMMARY
Fund Minimum
Type/Name Volatility Investment*
CAPITAL APPRECIATION
Aggressive Growth Very high $3,000
Emerging Markets(1) Very high $3,000
First Start Growth Moderate to high $3,000
Gold(1) Very high $3,000
Growth Moderate to high $3,000
Growth & Income Moderate $3,000
International(1) Moderate to high $3,000
S&P 500 Index(2) Moderate $3,000
Science
& Technology(5) Very high $3,000
World Growth(1) Moderate to high $3,000
ASSET ALLOCATION
Balanced Strategy(1) Moderate $3,000
Cornerstone Strategy(1) Moderate $3,000
Growth and Tax
Strategy(3) Moderate $3,000
Growth Strategy(1) Moderate to high $3,000
Income Strategy Low to moderate $3,000
INCOME -- TAXABLE
GNMA Low to moderate $3,000
Income Moderate $3,000
Income Stock Moderate $3,000
Short-Term Bond Low $3,000
INCOME -- TAX EXEMPT
Long-Term(3) Moderate $3,000
Intermediate-Term(3) Low to moderate $3,000
Short-Term(3) Low $3,000
State Bond Income(3)** Moderate $3,000
MONEY MARKET
Money Market(4) Very low $3,000
Tax Exempt
Money Market(3),(4) Very low $3,000
Treasury Money
Market Trust(4) Very low $3,000
State Money Market(3),(4)** Very low $3,000
(1)Foreign investing is subject to additional risks, which are discussed in
the funds' prospectuses.
(2)S&P 500(Registered Trademark) is a trademark of The McGraw-Hill Companies,
Inc. and has been licensed for use. The product is not sponsored, sold or
promoted by Standard & Poor's, and Standard & Poor's makes no representation
regarding the advisability of investing in the product.
(3)Some income may be subject to state or local taxes or the federal alternative
minimum tax.
(4)An investment in a money market fund is neither insured nor guaranteed by the
U.S. government, and there is no assurance that any of the funds will be able
to maintain a stable net asset value of $1 per share.
(5)This Fund may be more volatile than a fund that diversifies across many
industries.
* The InveStart(Registered Trademark) program is available for investors without
the $3,000 initial investment required to open an IMCO mutual fund account. A
mutual fund account can be opened with no initial investment if you elect to
have monthly automatic investments of at least $50 from a bank account.
InveStart is not available on tax-exempt funds or the S&P 500 Index Fund.
The minimum initial investment for IRAs is $250, except for the $2,000 minimum
required for the S&P 500 Index Fund. IRAs are not available for tax-exempt
funds. The Growth and Tax Strategy Fund is not available as an investment for
your IRA because the majority of its income is tax exempt.
** California, Florida, New York, Texas, and Virginia funds available to
residents only.
Non-deposit investment products offered by USAA Investment Management Company
are not insured by the FDIC, are not deposits or other obligations of, or
guaranteed by, USAA Federal Savings Bank, and are subject to investment risks,
and may lose value.
For more complete information about the mutual funds managed and distributed by
USAA IMCO, including charges and expenses, please call 1-800-531-8181 for a
prospectus. Read it carefully before you invest.
MESSAGE FROM THE PRESIDENT
Every week I get a report which summarizes all of the feedback we have gotten,
by mail and phone, from our shareholders and brokerage customers. We get
suggestions, complaints and also some compliments each week. We look for trends
which point out problems and we are always sure to respond to every one of these
contacts. One in particular caught my eye on the report for the week of December
11, 1997. It said, "Shareholder notes that Mr. Roth established Income Stock
Fund for grandchild born in 1995; in 1997 another grandchild was born and Mr.
Roth established a Cornerstone Strategy Fund; why was investment not made in the
same fund?" Fair question.
The best answer is that I think both of these funds are great vehicles for
investing for a child's future, and I like variety.
The Income Stock Fund and the Cornerstone Strategy Fund both offer an investor
an equity product with less volatility than the stock market alone. In the case
of the Income Stock Fund, the decreased volatility comes from a heavy emphasis
on companies that pay high dividends or whose dividends tend to grow. For the
Cornerstone Strategy Fund, the decrease in volatility comes from a combination
of domestic value stocks, real estate stocks, foreign stocks and U.S. government
bonds. In any given year either of these funds could be more volatile than the
S&P 500 Index,(1) but both have long-term records(2) which indicate those will
be unusual occurrences.
This combination of risk and reward appeals to me. I have friends who argue
pursuasively that a more aggressive fund would be better for a long-term
investment like this. If you only consider return, I suspect they are correct,
but I am doing what I advise our customers to do. I am asking myself, "What are
you comfortable with?" My answer is either of these two funds is appropriate. So
far, Karl Joseph Marbach and Katharine Sophia Broyles are doing just fine. Maybe
their parents will only have to worry about the last two or three years of
college.
Sincerely,
Michael J.C. Roth, CFA
PRESIDENT AND
VICE CHAIRMAN OF THE BOARD
(Photograph of the President, Michael J. C. Roth, CFA, appears here.)
(1)The S&P 500 Index is an unmanaged index representing the average performance
of a group of 500 widely held, publicly traded stocks. It is not possible
to invest directly in the S&P 500 Index.
(2)Past performance is no guarantee of future results and the value of your
investment may vary according to the Fund's performance.
For more complete information about the mutual funds managed and distributed by
USAA IMCO, including charges and expenses please call for a prospectus. Read it
carefully before you invest.
INVESTMENT REVIEW
GOLD FUND
OBJECTIVE: Long-term capital appreciation for the purpose of protecting the
purchasing power of capital from inflation. Current
income is a secondary objective.
TYPES OF INVESTMENTS: At least 80 percent of the Fund's assets are invested in
gold stocks. The remainder may be invested in common stocks of companies engaged
in other precious metal and mineral mining.
______________________________________________________________________________
5/31/97 11/30/97
- ------------------------------------------------------------------------------
Net Assets............................... $121.2 Million $79.5 Million
Net Asset Value Per Share................ $8.09 $5.25
- ------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 11/30/97
May 31, 1997 to November 30, 1997............................. -35.11% **
1 Year........................................................ -41.47%
5 Years....................................................... -1.61%
10 Years...................................................... -6.44%
** Total returns for periods of less than one year are not annualized.
This six-month return is cumulative.
______________________________________________________________________________
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment has
been made for taxes payable by shareholders on their reinvested income dividends
and capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return and
principal value of an investment will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
COMPARISON OF CHANGE IN VALUE OF A 10,000 INVESTMENT
A chart in the form of a line graph appears here, illustrating the comparison
of a $10,000 hypothetical investment in the USAA Gold Fund to the S&P 500
Index, the Philadelphia Gold & Silver Index; and London Gold from 11/30/87
to 11/30/97. The data points from the graph are as follows:
USAA GOLD S&P GOLD PHILADELPHIA
FUND 500 BULLION INDEX
------- --- ------- -----
11/30/87 10,000 10,000 10,000 10,000
12/87 9,263 10,761 9,878 9,699
6/88 8,453 12,127 8,864 9,126
12/88 7,678 12,543 8,328 7,692
6/89 7,557 14,615 7,574 8,172
12/89 9,063 16,510 8,142 10,602
6/90 7,020 17,019 7,151 8,968
12/90 6,660 15,997 7,842 8,578
6/91 6,555 18,273 7,479 7,970
12/91 6,364 20,860 7,170 7,142
6/92 6,180 20,720 6,972 6,941
12/92 5,859 22,447 6,759 6,303
6/93 8,993 23,539 7,684 10,293
12/93 9,276 24,705 7,954 11,661
6/94 8,250 23,869 7,883 10,188
12/94 8,407 25,029 7,782 9,665
6/95 8,818 30,082 7,870 10,625
12/95 8,747 34,424 7,858 10,645
6/96 9,462 37,897 7,756 10,940
12/96 8,747 42,322 7,497 10,321
6/97 7,356 51,039 6,793 8,451
11/97 5,142 55,485 6,026 6,261
The graph illustrates the comparison of a $10,000 hypothetical investment in
the USAA Gold Fund; the S&P 500 Index, which is an unmanaged index representing
the average performance of a group of 500 widely held, publicly traded stocks
(it is not possible to invest directly in the S&P 500 Index); the Philadelphia
Gold & Silver Index, representing nine holdings in the gold & silver sector,
typically referred to as the XAU; and London Gold, a traditional Gold Bullion
index that is readily available.
MESSAGE FROM THE MANAGER
(Photo of the Portfolio Manager, Mark W. Johnson, CFA, appears here)
The Gold Market
Gold prices fell 14.1% from $345.60 to $296.80 during the six months ended
November 30, 1997, marking the lowest price since March 1985. For the same
period, the cumulative return for the USAA Gold Fund was -35.11%. Prices of
gold mining common stocks suffered a more dramatic fall than the gold price
itself because of the high degree of operating leverage at the mining
companies. This leverage cuts both ways. For example, in fiscal 1996 the Fund
had a total return of 23.66%(1) on a 1.6% increase in the gold price.(2)
Most of the price weakness during this reporting period can be attributed to
central bank developments, short selling(3) by speculators, the strength of the
U.S. dollar, and the risk of economic collapse in Asia. The Asian mess has been
negative for gold for several reasons. First, it raised the specter of
deflation - clearly bad news for an investment perceived in popular lore as an
inflation hedge. Second, it led to a collapse in many Asian currencies. Gold is
priced all over the world in dollars per ounce. Thus, if an Asian currency
weakens against the dollar, it takes more units of that currency to purchase
an ounce of gold. For many Asian buyers this means the price of gold has
actually risen despite the decline in the U.S. dollar price of gold.
Third, Asian demand for gold dropped 22% in the third calendar quarter,
both because Asian demand tends to be price sensitive and because Asian
consumers are reining in their spending in the face of economic hard times.
Also, there appears to be distress selling of investment positions in Asia.
Although the situation in Asia and the strength of the dollar hurt gold, both
factors pale in comparison to the devastating developments within the central
banking community. The last six months can best be characterized as a series
of body blows. However, two announcements in particular led to major price
drops. First, in July, Australia announced the sale of two-thirds of its gold
reserves. Because Australia is a major gold producer and could not justify
sales as a simple repositioning for the European Monetary Union (as European
banks that have been sellers have claimed), this announcement was poorly
received by the market. Second, in October, a "group of experts" appointed by
the Swiss Finance Ministry and the Swiss National Bank recommended the
conditional sale of more than half of Switzerland's gold reserves. This too
was poorly received by the market. If the gnomes of Zurich no longer love
gold, then who does? The standard response to that question is usually the
Germans, the French, and the Americans. Unfortunately, the Germans
indicated in November that over the past year they began lending their gold
reserves to the market (a precursor to possible sales), and the U.S. Federal
Reserve Board released a study in June purporting to analyze the price
impact of truly massive sales of gold. This led to speculation (probably
unfounded) that the Fed was exploring alternatives regarding its own huge
gold position. All of these negative developments within the official sector
were compounded by waves of short selling(3) by speculators on the back of
each announcement.
How low can gold go, and what, if anything, might cause gold to rally?
In answer to the first question, we frankly do not know. However, below $300
per ounce more than 50% of South African and about 35% of Western
World production is uneconomic as this price cannot even cover the cash cost
of production. At $250 per ounce these percentages rise to more than 80%
and about 50%, respectively. This implies that if prices remain below $300
per ounce for a sustained period, many mines could be shut, leading to a
decline in supply. Furthermore, very few new projects can be justified at
these low prices. Interestingly, an old rule of thumb in commodity investing
is to buy the stocks when the commodity price drops below the cash cost of
the marginal producers. That condition clearly has been met. Finally,
assuming currency stability, physical demand should eventually rebound.
Regarding the second question, delays or hiccups in the consummation of the
European Monetary Union (EMU) would help sentiment, as would any weakness in
the U.S. dollar. Ironically, a successful and strong EMU might be a long-term
positive for gold if central bank sales became better coordinated. This would
reduce uncertainty and could discourage short selling. Also, should the
current Asian malaise spread to such an extent that global financial stability
came into question, gold probably would rally.
Fund Performance and Strategy
In managing the Fund, Lindsey Falconer, the Fund's Senior Securities Analyst,
and I will focus on low-cost producers that have good production or reserve
growth potential. We anticipate that all of the mining companies held in the
Fund will have a cash cost of production in calendar 1998 below $265 per ounce.
Moreover, many of these companies have locked in 1998 selling prices
substantially above the current spot price due to hedging programs. In recent
months, we have placed a somewhat greater emphasis on non-gold precious metals
through the addition of shares of Aber Resources (diamonds) and Gencor Ltd.
(gold and platinum). These strategies, in our view, are the ones most likely to
yield acceptable results in the context of a difficult environment.
(1) Average Annual Total Returns as of 11/30/97 and 12/31/97 were: 1 year . . .
- -41.47% and -38.19%; 5 years . . . -1.61% and -1.59%; 10 years . . . -6.44% and
- -5.24%, respectively.
(2) Past performance is no guarantee of future results and the value of your
investment may vary according to the Fund's performance.
(3) Short selling is the technique used to take advantage of an anticipated
decline in the price when selling a security not owned by the seller.
TOP 10 EQUITY HOLDINGS
(% OF NET ASSETS)
Freeport-McMoRan
Copper & Gold "A" 7.5
Barrick Gold 7.3
Pioneer Group 6.9
Stillwater Mining 5.7
Gold Fields
of South Africa ADR 4.9
Newmont Mining 4.7
Placer Dome 4.6
Franco Nevada Mining 4.4
Ashanti Goldfields GDS 4.3
Getchell Gold 4.1
Foreign investing is subject to additional risks which are discussed in the
Fund's prospectus. Gold mining stocks involve additional risk because of gold's
price volatility.
See page 9 for a complete listing of the Portfolio of Investments in Securities.
GOLD FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
November 30, 1997
(Unaudited)
<TABLE>
<S> <C>
Assets
Investments in securities, at market value (identified cost of $120,089) $ 80,298
Cash 27
Receivables:
Capital shares sold 27
Dividends and interest 60
-------
Total assets 80,412
-------
Liabilities
Securities purchased 472
Capital shares redeemed 348
USAA Investment Management Company 57
USAA Transfer Agency Company 42
Accounts payable and accrued expenses 43
--------
Total liabilities 962
--------
Net assets applicable to capital shares outstanding $ 79,450
========
Represented by:
Paid-in capital $ 199,630
Accumulated undistributed net investment income 89
Accumulated net realized loss on investments (80,478)
Net unrealized depreciation of investments (39,791)
---------
Net assets applicable to capital shares outstanding $ 79,450
=========
Capital shares outstanding, unlimited number of shares authorized,
no par value 15,138
=======
Net asset value, redemption price, and offering price per share $ 5.25
=======
See accompanying notes to financial statements.
</TABLE>
GOLD FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES
November 30, 1997
(Unaudited)
Market
Number Value
of Shares Security (000)
--------- -------- ------
Common Stocks (95.8%)
African Gold Companies (10.8%)
475,000 Ashanti Goldfields Co. Ltd. GDS $ 3,414
800,000 Gencor Ltd. 1,243
275,000 Gold Fields of South Africa
Ltd. ADR 3,919
--------
8,576
--------
Australian Gold Companies (9.4%)
2,500,000 Acacia Resources Ltd. * 1,792
2,000,000 Lihir Gold Ltd. * 1,980
600,000 Plutonic Resources Ltd. 873
975,000 Ranger Minerals NL * 1,997
1,150,000 Resolute Ltd. 809
------
7,451
------
North American
Gold Companies (62.2%)
625,000 Agnico-Eagle Mines Ltd. 2,969
350,000 Barrick Gold Corp. 5,797
400,000 Dayton Mining Corp. * 725
300,000 Euro Nevada Mining Corp. Ltd. 3,222
200,000 Franco Nevada Mining Corp. Ltd. 3,517
300,000 Freeport-McMoRan
Copper & Gold, Inc. "A" 5,981
125,000 Getchell Gold Corp. * 3,281
450,000 Goldcorp, Inc. "A" * 1,390
500,000 Golden Knight Resources, Inc. * 1,071
125,000 Greenstone Resources Ltd. * 562
100,000 Newmont Gold Co. 3,031
125,000 Newmont Mining Corp. 3,758
175,000 Pioneer Group, Inc. 5,491
300,000 Placer Dome, Inc. 3,675
465,000 Rio Narcea Gold Mines Ltd. * 898
350,000 SAMAX Gold, Inc. * 1,093
925,000 TVX Gold, Inc. * 2,428
525,000 Vengold, Inc. * 498
-------
49,387
-------
North American Precious Metals
and Minerals Companies (9.4%)
100,000 Aber Resources Ltd. * 975
125,000 Dia Met Minerals Ltd. "A" * 1,953
250,000 Stillwater Mining Co. * 4,562
-------
7,490
-------
South American
Gold Companies (4.0%)
200,000 Compania de Minas
Buenaventura ADR 3,225
-------
Total common stocks
(cost: $115,920) 76,129
-------
Principal
Amount
(000)
--------
U.S. GOVERNMENT & AGENCY ISSUE
Discount Note (5.3%)
$ 4,170 Federal Home Loan Bank,
5.60%, 12/01/97 (cost: $4,169) 4,169
-------
Total investments
(cost: $120,089) $ 80,298
========
______________________
*Non-income producing.
Gold Fund
Notes to Portfolio of Investments in Securities
November 30, 1997
(Unaudited)
General Notes
Market values of securities are determined by procedures and practices discussed
in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
ADR -- American Depositary Receipts are foreign shares held by a U.S. bank
which issues a receipt evidencing ownership. Dividends are paid in U.S.
dollars.
GDS -- Global Depositary Shares are foreign shares held by a non-U.S. bank
which issues a receipt evidencing ownership. Dividends are paid in U.S.
dollars.
See accompanying notes to financial statements.
Gold Fund
Statement of Operations
(In Thousands)
Six-month period ended November 30, 1997
(Unaudited)
<TABLE>
<S> <C>
Net investment income:
Income (net of foreign taxes withheld of $17):
Dividends $ 484
Interest 86
--------
Total income 570
--------
Expenses:
Management fees 379
Transfer agent's fees 249
Custodian's fees 33
Postage 14
Shareholder reporting fees 9
Trustees' fees 2
Registration fees 35
Professional fees 14
Other 2
---------
Total expenses 737
---------
Net investment loss (167)
---------
Net realized and unrealized loss on investments:
Net realized loss on investments (5,171)
Change in net unrealized appreciation/depreciation of investments (36,859)
---------
Net realized and unrealized loss (42,030)
---------
Decrease in net assets resulting from operations $ (42,197)
===========
See accompanying notes to financial statements.
</TABLE>
Gold Fund
Statements of Changes in Net Assets
(In Thousands)
Six-month period ended November 30, 1997
and Year ended May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
11/30/97 5/31/97
-------- --------
<S> <C> <C>
From operations:
Net investment loss $ (167) $ (150)
Net realized loss on investments (5,171) (8,394)
Net realized loss on foreign currency transactions - (5)
Change in net unrealized appreciation/depreciation of investments (36,859) (35,962)
-------- --------
Decrease in net assets resulting from operations (42,197) (44,511)
-------- --------
From capital share transactions:
Proceeds from shares sold 53,363 95,026
Cost of shares redeemed (52,885) (96,413)
------- ------
Increase (decrease) in net assets from
capital share transactions 478 (1,387)
------- ------
Net decrease in net assets (41,719) (45,898)
------- ------
Net assets:
Beginning of period 121,169 167,067
------- -------
End of period $ 79,450 $ 121,169
======= =======
Undistributed net investment income (loss) included in net assets:
Beginning of period $ 256 $ (5)
======= =======
End of period $ 89 $ 256
======= =======
Change in shares outstanding:
Shares sold 7,512 10,594
Shares redeemed (7,356) (10,630)
------- ------
Increase (decrease) in shares outstanding 156 (36)
======= ======
See accompanying notes to financial statements.
</TABLE>
Gold Fund
Notes to Financial Statements
November 30, 1997
(Unaudited)
(1) Summary of Significant Accounting Policies
USAA INVESTMENT TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended, is a diversified, open-end management investment company
organized as a Massachusetts business trust consisting of eleven separate funds.
The information presented in this semiannual report pertains only to the Gold
Fund (the Fund). The Fund's primary investment objective is to seek long-term
capital appreciation and to protect the purchasing power of shareholders'
capital against inflation. Current income is a secondary objective. The Fund
concentrates its investments in securities of companies principally engaged in
gold exploration, mining, or processing and therefore may be exposed to more
risk than portfolios with a broader industry diversification.
A. Security valuation -- The value of each security is determined (as of the
close of trading on the New York Stock Exchange on each business day the
Exchange is open) as set forth below:
1. Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities exchanges
are generally valued at the closing values of such securities on the exchange
where primarily traded. If no sale is reported, the 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.
3. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value.
4. Securities which cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value, using methods determined
by the Manager under the general supervision of the Board of Trustees.
B. Federal taxes -- The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required. As a result of certain
permanent differences between book and tax basis accounting, reclassifications
were made to the statement of assets and liabilities at May 31, 1997 to decrease
accumulated undistributed net investment loss and to increase accumulated net
realized loss on investments by $416,401. Additionally, a reclassification was
made to reflect the expiration of capital loss carryovers at May 31, 1997 - see
note 3.
C. Investments in securities -- Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Dividend
income, less foreign taxes, if any, is recorded on the ex-dividend date. If the
ex-dividend date has passed, certain dividends from foreign securities are
recorded upon notification. Interest income is recorded on the accrual basis.
Discounts and premiums on short-term securities are amortized over the life of
the respective securities.
D. Foreign currency translations -- The assets of the Fund may be invested in
the securities of foreign issuers. Since the accounting records of the Fund are
maintained in U.S. dollars, foreign currency amounts are translated into U.S.
dollars on the following basis:
1. Market value of securities, other assets, and liabilities at the mean between
the bid and asked translation rates of such currencies against U.S. dollars.
2. Purchases and sales of securities, income, and expenses at the rate of
exchange obtained from an independent pricing service on the respective dates of
such transactions.
Net realized and unrealized foreign currency gains/losses occurring during the
holding period of investments are a component of realized gain/loss on
investments and unrealized appreciation/depreciation on investments,
respectively.
Net realized foreign currency gains/losses arise from sales of foreign currency,
currency gains/losses realized between the trade and settlement dates on
security transactions, and the difference between amounts of dividends,
interest, and foreign withholding taxes recorded on the Fund's books and the
U.S. dollar equivalent of the amounts received. Net realized foreign currency
gains/losses have been reclassified from accumulated net realized gain/loss to
accumulated undistributed net investment income on the statement of assets and
liabilities as such amounts are treated as ordinary income/loss for tax
purposes. Net unrealized foreign currency exchange gains/losses arise from
changes in the value of assets and liabilities other than investments in
securities resulting from changes in the exchange rate.
E. Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the financial
statements.
(2) Lines of Credit
The Fund participates with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million, one with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($750 million uncommitted), and one with
NationsBank of Texas, N.A. ($100 million committed). The purpose of the
agreements is to meet temporary or emergency cash needs, including redemption
requests that might otherwise require the untimely disposition of securities.
Subject to availability under its agreement with CAPCO, the Fund may borrow from
CAPCO an amount up to 5% of its total assets at CAPCO's borrowing rate with no
markup. Subject to availability under its agreement with NationsBank, the Fund
may borrow from NationsBank an amount which, when added to outstanding
borrowings under the CAPCO agreement, does not exceed 25% of its total assets at
NationsBank's borrowing rate plus a markup. During the six-month period ended
November 30, 1997, the Fund had no borrowings under either of these agreements.
(3) Distributions
Distributions of net investment income and realized gains from security
transactions not offset by capital losses are made in the succeeding fiscal year
or as otherwise required to avoid the payment of federal taxes. At May 31, 1997,
the Fund had capital loss carryovers for federal income tax purposes of
approximately $75,307,000 which will expire in 1998 - 2005. It is unlikely that
the Fund's Board of Trustees will authorize a distribution of capital gains
realized in the future until the capital loss carryovers have been utilized or
expire. Capital loss carryovers of $7,492,356 expired on May 31, 1997, and have
been charged against paid-in capital on the accompanying statement of assets and
liabilities. Additionally, approximately $41,000,000 of capital loss carryovers
will expire on May 31, 1998, if not offset by capital gains.
(4) Investment Transactions
Cost of purchases and proceeds from sales of securities, excluding short-term
securities, for the six-month period ended November 30, 1997 were $10,693,067
and $11,604,585, respectively.
Gross unrealized appreciation and depreciation of investments at November 30,
1997 was $3,914,442 and $43,704,844, respectively.
(5) Foreign Currency Contracts
A forward currency contract (currency contract) is a commitment to purchase or
sell a foreign currency at a specified date, at a negotiated price. The Fund
currently enters into currency contracts only in connection with the purchase or
sale of a security denominated in a foreign currency. These contracts allow the
Fund to "lock in" the U.S. dollar price of the security. Currency contracts are
valued on a daily basis using foreign currency exchange rates obtained from an
independent pricing service. Risks of entering into currency contracts include
the potential inability of the counterparty to meet the terms of the contract
and the Fund giving up the opportunity for potential profit. There were no open
foreign currency contracts as of November 30, 1997.
(6) Transactions with Manager
A. Management fees -- The investment policies of the Fund and management of the
Fund's portfolio are carried out by USAA Investment Management Company (the
Manager). The Fund's management fees are computed at .75% of its annual average
net assets.
B. Transfer agent's fees -- USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Fund based on an annual charge of $23.50 per shareholder account plus
out-of-pocket expenses.
C. Underwriting services -- The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing best efforts basis. The
Manager receives no commissions or fees for this service.
(7) Transactions with Affiliates
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
<TABLE>
(8) Financial highlights
Per share operating performance for a share outstanding throughout each period
is as follows:
<CAPTION>
Six-month Eight-month
Period Ended Period Ended Year Ended
November 30, Year Ended May 31, May 31, September 30,
------------------
1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 8.09 $ 11.12 $ 9.00 $ 8.83 $ 7.95 $ 6.53
Net investment
income (loss) (.01)(b) (.01)(b) (.02) .01 .01 .02
Net realized and
unrealized gain (loss) (2.83) (3.02) 2.15 .17 .88 1.44
Distributions from net
investment income _ _ (.01) (.01) (.01) (.04)
------ ------ ------ ------- ------- ------
Net asset value at
end of period $ 5.25 $ 8.09 $ 11.12 $ 9.00 $ 8.83 $ 7.95
====== ====== ====== ======= ======= ======
Total return (%) * (35.11) (27.25) 23.66 2.05 11.19 22.53
Net assets at end of
period (000) $ 79,450 $ 121,169 $ 167,067 $ 160,223 $ 176,527 $ 150,793
Ratio of expenses to
average net assets (%) 1.37(a) 1.31 1.33 1.28 1.26(a) 1.41
Ratio of net investment
income (loss) to
average net assets (%) (.31)(a) (.11) (.14) .10 .15(a) .25
Portfolio turnover (%) 10.32 26.40 16.48 34.76 34.75 81.08
Average commission
rate paid per share ++ $ .0122 $ .0195 $ .0292
* Assumes reinvestment of all dividend income and capital gain distributions during the period.
++ Calculated by aggregating all commissions paid on the purchase and sale of securities and
dividing by the actual number of shares purchased or sold for which commissions were charged.
(a) Annualized. The ratio is not necessarily indicative of 12 months of operations.
(b) Calculated using weighted average shares.
</TABLE>
