Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Managers 5
Financial Information:
Distributions to Shareholders 8
Independent Auditors' Report 9
Portfolio of Investments 10
Notes to Portfolio of Investments 15
Statement of Assets and Liabilities 16
Statement of Operations 17
Statements of Changes in Net Assets 18
Notes to Financial Statements 19
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 Balanced
Strategy Fund, managed by USAA Investment Management Company (IMCO). It may be
used as sales literature only when preceded or accompanied by a current
prospectus which gives further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)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
USAA 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 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
A year ago my message to you sent a cautionary note about a market that had
risen very high for a long time:
"It would not be unusual if the market were to finish 1997 with a
return well below that of '95 and '96."
Of course, 1997's stock market did not perform poorly, and we are still
pondering when a correction might come. This situation is tailor-made for a
discussion of risk.
There has long been a difference between what most investors perceive as risk
and what academics mean by risk. To the individual investor risk means losing
money. To the student risk means variability of returns, both up and down. The
difference can be quite important.
To a person who perceives risk as only the possibility of loss, timing becomes a
rather attractive proposition. You know with certainty when the market has
provided an exceptional return for a given period. If your chief goal is to
avoid a loss, then a movement to safety following such a period could make
sense. But look at the experience of 1995, 1996 and 1997. Even 1998 is testimony
to the frailty of forecasting and also to an academic definition of risk.
If market risk means variability of return, and if that risk is describable in
scope but not in direction or timing of movement, then timing becomes dangerous.
That is because the variability of returns may help you as well as hurt you. To
put this plainly, a person who got out of the market in 1995 or 1996 is still
looking for a chance to come back in.
[PHOTOGRAPH OF PRESIDENT AND VICE CHAIRMAN OF THE BOARD, MICHAEL J.C. ROTH, CFA,
APPEARS HERE]
The Asset Strategy funds of the Investment Trust show a good way to confront
this real risk. They offer various asset allocations which are attuned to
different risk tolerances. And we keep those allocations for you. You will be
exposed to risk in a way that, hopefully, is tolerable and that exposure will be
there if the risk takes you down, or up.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
For more information about mutual funds managed and distributed by USAA IMCO,
including charges and expenses, please call for a prospectus. Read it carefully
before investing.
Investment Review
USAA BALANCED STRATEGY FUND
OBJECTIVE: To seek high total return, with a reduced risk over time, through an
asset allocation strategy which seeks a combination of long-term growth of
capital and current income.
- -------------------------------------------------------------------------------
5/31/98 5/31/97
===============================================================================
Net Assets $70.0 Million $34.6 Million
Net Asset Value Per Share $13.46 $12.11
===============================================================================
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/98
- -------------------------------------------------------------------------------
1 Year Since Inception on 9/1/95
16.82% 15.30%
- -------------------------------------------------------------------------------
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.
CUMULATIVE PERFORMANCE COMPARISON
A chart in the form of a line graph appears here, illustrating the comparison of
a $10,000 hypothetical investment in the USAA Balanced Strategy Fund, S&P 500
Index, the Lipper Balanced Funds Average, and the Lehman Brothers Aggregate Bond
Index for the period of 9/1/95 to 05/31/98. The data points from the graph are
as follows:
USAA Balanced S&P 500 Lehman Lipper
Strategy Fund Index Index Average
----------------- ---------- ------- --------
9/1/95 10,000 10,000 10,000 10,000
12/95 10,324 11,049 10,528 10,649
06/96 10,648 11,163 10,400 11,200
12/96 11,713 13,584 10,910 12,131
06/97 13,032 16,382 11,247 13,414
12/97 13,945 18,114 11,963 14,521
05/98 14,820 20,493 12,328 15,584
Data since inception on 9/1/95 through 5/31/98
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Balanced Strategy Fund to the S&P 500 Index, the Lipper Balanced Funds
Average, and the Lehman Brothers Aggregate Bond Index. 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. The Lipper Balanced Funds Average is the average of all balanced
funds, as reported by Lipper Analytical Services, an independent organization
that monitors the performance of mutual funds. The Lehman Brothers Aggregate
Bond Index is an unmanaged index made up of the government/corporate index, the
mortgage-backed securities index, and the asset-backed securities index.
Message from the Managers
[PHOTOGRAPHS OF THE FOLLOWING PORTFOLIO MANAGERS APPEARS HERE:
R. David Ullom, CFA (Allocation Manager, Stocks)
Pamela K. Bledsoe, CFA (Money Market Instruments) and
Paul H. Lundmark, CFA (Bonds).
FUND OVERVIEW
Since the Balanced Strategy Fund's inception on September 1, 1995, we have
maintained an allocation strategy of 55% - 60% equities and 35% - 40% bonds,
with a minimal allocation to cash. Over the latest reporting period, the
allocation to equities has moved slightly above the 60% level. Although this
change is minor, it does reflect a more positive attitude toward equities
relative to bonds.
Even though the Fund has generated a reasonable return over the latest fiscal
year, we are not satisfied with the results. In particular, the performance of
the equity sector of the Fund has not kept pace with the overall market
averages. As discussed below in the stock section, several of our equity
holdings have suffered from perceived or real exposure to the economies of
Southeast Asia. Our bond allocation performed in line with the major bond
averages, given our tiered approach to investing in bonds with different
maturities. A further discussion of results and our outlook for the allocation
sectors follows.
STOCKS
Performance within the equity allocation of the Fund continues to be constrained
by holdings with real or perceived exposure to the markets of Southeast Asia.
The economies of several Southeast Asian countries continue to exhibit
deteriorating economic growth and lower currency valuations relative to the U.S.
dollar. As a result, equity holdings in metals (aluminum and metals/mining) and
various capital goods industries (aerospace, electrical equipment, and
machinery) have suffered.
Other stocks that have hindered the performance of the equity sector of the
Balanced Strategy Fund include Brunswick and Weyerhaeuser, both of which have
some exposure to Asia, but in countries that appear to be more stable.
Weyerhaeuser exports logs to Japan, which is currently undergoing a downturn in
housing, while Brunswick sells selected leisure products to China. The drop in
crude oil prices over the past year has also hurt various energy holdings of the
Fund (Unocal, Helmerich & Payne, Apache, and Sonat). Finally, litigation and
congressional hearings have hurt our tobacco holdings. In the case of our energy
exposure, we believe the shares represent attractive values given the continued
economic growth in most developed countries throughout the world.
Our largest contributors to the appreciation of the Balanced Strategy Fund were
in the areas of retailing (Sears, J.C. Penney, and May*), financials (banks,
finance - diversified, and selected insurance companies), healthcare (American
Home Products), selected technology companies (Lucent, Cisco, and Xerox Corp.),
and telecommunication companies. If there has been one theme to stocks that have
outperformed the market, it has been that they have little or no earnings
exposure to Southeast Asia.
In keeping with our value orientation for selecting investments, we have added
to our holdings of companies with earnings exposure to Southeast Asia, where we
believe the shares have been unduly punished. Such companies include Fluor Corp.
(engineering and construction) and Intel (semiconductors). We believe that these
economies will recover.
We have also added to our holdings in drugs and healthcare in general as the
demographic trends in the developed countries of the world favor increased
consumption of pharmaceutical products. Finally, we have adjusted some of our
holdings in the financial area by lowering our exposure to insurance and
diversified financials while increasing our exposure to banks.
BONDS
The Fund's bond sector is included to lower volatility and provide current
income. There has been no dramatic change in the maturity of the Fund since the
last report. We believe that trying to predict where interest rates are going is
a futile effort. The emphasis remains on finding bonds that represent value in
terms of risk and reward.
Since the last report, we have increased the percentage of AAA-rated securities
that will perform potentially well if interest rates remain unchanged or go
higher. These instruments are defensive in nature and balance the other bonds in
the portfolio that will do well in a decreasing interest rate environment.
The best performing holdings were Health Care Property Investors,
Tele-Communications, and Kmart. Our investments in MacSaver Financial and Great
Atlantic & Pacific underperformed because of weakness in their operations.
However, we continue to hold these bonds because they are addressing their
financial problems and have a potentially bright outlook.
* Sold out prior to the end of the reporting period.
MONEY MARKET INSTRUMENTS
As a percentage of the Fund's net assets on May 31, 1998, money market
instruments, comprised of U.S. Government agency discount notes, totalled 2.7%.
These holdings are to provide liquidity to meet redemptions or fund the movement
into other stock or bond holdings.
ASSET ALLOCATION
A pie chart is shown here depicting the Asset Allocation as of May 31, 1998 of
the USAA Balanced Strategy Fund to be:
Stocks 60.3%*, Bonds 36.1%*, and Money Market Instruments 2.7%*.
* Percentages are of the Net Assets in the Portfolio and may or may not equal
100%.
- -------------------------------------
TOP 10 EQUITY HOLDINGS
(% OF NET ASSETS)
Sears, Roebuck 1.5
B.F. Goodrich 1.4
Boeing 1.4
Lear 1.3
Morgan Stanley, Dean Witter,
Discover & Company 1.3
Pharmacia & Upjohn 1.3
American Home Products 1.2
Bell Atlantic 1.2
Ball 1.1
Humana 1.1
- -------------------------------------
Foreign investing is subject to additional risks, which are discussed in the
Fund's prospectus. Since return on any investment is generally commensurate with
risk, investors should be aware of the potential volatility associated with
foreign markets.
See page 10 for a complete listing of the Portfolio of Investments in
Securities.
Distributions to Shareholders
The following per share information describes the federal tax treatment of
distributions made during the fiscal year ended May 31, 1998. These figures are
provided for information purposes only and should not be used for reporting to
federal or state revenue agencies. Distributions for the calendar year will be
reported to you on Form 1099-DIV in January 1999.
Ordinary income $ .43*
Long-term capital gains - 20% .08
Long-term capital gains - 28% .13
-----
Total $ .64
=====
33.01% of ordinary income distributions qualify for deduction by corporations.
* Includes distribution of short-term capital gains, if any, which are taxable
as ordinary income.
Independent Auditors' Report
The Shareholders and Board of Trustees
USAA BALANCED STRATEGY FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments of the USAA Balanced Strategy Fund, a series of the
USAA Investment Trust, as of May 31, 1998 and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the years in the two-year period then ended, and financial highlights,
presented in note 7 to the financial statements, for each of the years or
periods in the three-year period then ended. These financial statements and
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of May 31, 1998, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
USAA Balanced Strategy Fund as of May 31, 1998, the results of its operations
for the year then ended, the changes in its net assets for each of the years in
the two-year period then ended, and the financial highlights for each of the
years or periods in the three-year period then ended, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
San Antonio, Texas
July 2, 1998
USAA BALANCED STRATEGY FUND
PORTFOLIO OF INVESTMENTS
May 31, 1998
Market
Number Value
of Shares Security (000)
- -------------------------------------------------------------------------------
STOCKS (60.3%)
- -------------------------------------------------------------------------------
Aerospace/Defense (1.4%)
20,000 Boeing Co. $ 952
Airlines (0.7%)
3,000 AMR Corp.* 462
- -------------------------------------------------------------------------------
Aluminum (0.9%)
8,700 Aluminum Co. of America 604
- -------------------------------------------------------------------------------
Automobiles (0.9%)
12,000 Ford Motor Co. 622
- -------------------------------------------------------------------------------
Auto Parts (2.2%)
33,000 Intermet Corp. 644
17,000 Lear Corp.* 907
- -------------------------------------------------------------------------------
1,551
- -------------------------------------------------------------------------------
Banks - Major Regional (1.0%)
12,000 PNC Bank Corp. 693
- -------------------------------------------------------------------------------
Banks - Money Center (1.6%)
6,700 BankAmerica Corp. 554
4,500 Bankers Trust Corp. 556
- -------------------------------------------------------------------------------
1,110
- -------------------------------------------------------------------------------
Beverages - Alcoholic (0.9%)
14,000 Anheuser-Busch Companies, Inc. 643
- -------------------------------------------------------------------------------
Chemicals (1.8%)
7,000 Dow Chemical Co. 678
18,100 Millennium Chemicals, Inc. 573
- -------------------------------------------------------------------------------
1,251
- -------------------------------------------------------------------------------
Chemicals - Diversified (1.4%)
18,500 B.F. Goodrich Co. 948
- -------------------------------------------------------------------------------
Communication Equipment (0.8%)
8,014 Lucent Technologies, Inc. 568
- -------------------------------------------------------------------------------
Computer - Networking (0.9%)
8,000 Cisco Systems, Inc.* 605
- -------------------------------------------------------------------------------
Consumer Jewelry and Novelties - Miscellaneous (0.8%)
12,100 American Greetings Corp. 575
- -------------------------------------------------------------------------------
Containers - Metals & Glass (1.1%)
20,000 Ball Corp. 789
- -------------------------------------------------------------------------------
Drugs (1.3%)
20,000 Pharmacia & Upjohn, Inc. 884
- -------------------------------------------------------------------------------
Electric Utilities (1.3%)
17,000 Houston Industries, Inc. 487
14,000 PG & E Corp. 441
- -------------------------------------------------------------------------------
928
- -------------------------------------------------------------------------------
Electrical Equipment (0.8%)
10,000 Rockwell International Corp. 550
- -------------------------------------------------------------------------------
Electronics - Semiconductors (1.1%)
8,000 Intel Corp. 571
10,000 National Semiconductor Corp.* 163
- -------------------------------------------------------------------------------
734
- -------------------------------------------------------------------------------
Engineering & Construction (1.0%)
15,000 Fluor Corp. 715
- -------------------------------------------------------------------------------
Equipment - Semiconductors (0.6%)
13,500 Applied Materials, Inc.* 432
- -------------------------------------------------------------------------------
Finance - Consumer (1.0%)
9,344 Associates First Capital Corp. "A" 699
- -------------------------------------------------------------------------------
Finance - Diversified (1.9%)
11,200 Morgan Stanley, Dean Witter, Discover & Co. 874
6,400 PMI Group, Inc. 481
- -------------------------------------------------------------------------------
1,355
- -------------------------------------------------------------------------------
Foods (0.9%)
5,600 Ralston Purina Group 623
- -------------------------------------------------------------------------------
Healthcare - Diversified (1.2%)
18,000 American Home Products Corp. 870
- -------------------------------------------------------------------------------
Healthcare - HMOs (1.9%)
25,000 Humana, Inc.* 777
7,000 Pacificare Health Systems, Inc.* 564
- ------------------------------------------------------------------------------
1,341
- ------------------------------------------------------------------------------
Heavy Duty Trucks & Parts (0.8%)
9,000 Aeroquip Vickers, Inc. 556
- ------------------------------------------------------------------------------
Homebuilding (0.7%)
25,700 Walter Industries, Inc.* 492
- ------------------------------------------------------------------------------
Household Products (1.1%)
15,000 Kimberly-Clark Corp. 743
- ------------------------------------------------------------------------------
Insurance - Life/Health (0.7%)
6,000 Aetna, Inc. 469
- ------------------------------------------------------------------------------
Insurance - Multi-Line Companies (0.9%)
5,000 American International Group, Inc. 619
- ------------------------------------------------------------------------------
Insurance - Property/Casualty (2.1%)
4,000 Allstate Corp. 376
15,400 Everest Reinsurance Holdings, Inc. 599
9,100 Highlands Insurance Group, Inc.* 190
8,000 Travelers Property Casualty Corp. 333
- ------------------------------------------------------------------------------
1,498
- ------------------------------------------------------------------------------
Leisure Time (0.8%)
17,000 Brunswick Corp. 534
- ------------------------------------------------------------------------------
Machinery - Diversified (1.7%)
12,500 Deere & Co. 648
17,673 Flowserve Corp. 513
- ------------------------------------------------------------------------------
1,161
- ------------------------------------------------------------------------------
Manufacturing - Diversified Industries (0.8%)
8,500 Hillenbrand Industries, Inc. 525
- ------------------------------------------------------------------------------
Manufacturing - Specialized (0.9%)
12,800 Avery Dennison Corp. 663
- ------------------------------------------------------------------------------
Medical Products & Supplies (0.9%)
13,000 Bausch & Lomb, Inc. 648
- ------------------------------------------------------------------------------
Metals/Mining (0.5%)
18,000 Inco Ltd. 259
4,500 Titanium Metals Corp. 109
- ------------------------------------------------------------------------------
368
- ------------------------------------------------------------------------------
Natural Gas Utilities (0.8%)
13,500 Sonat, Inc. 529
- ------------------------------------------------------------------------------
Oil - Domestic Integrated (1.7%)
24,000 Occidental Petroleum Corp. 663
15,000 Unocal Corp. 534
- ------------------------------------------------------------------------------
1,197
- ------------------------------------------------------------------------------
Oil - International Integrated (0.8%)
10,000 Texaco, Inc. 578
- ------------------------------------------------------------------------------
Oil & Gas - Drilling/Equipment (1.1%)
22,000 Helmerich & Payne, Inc. 555
2,300 Schlumberger Ltd. 180
- ------------------------------------------------------------------------------
735
- ------------------------------------------------------------------------------
Oil & Gas - Exploration & Production (0.7%)
15,000 Apache Corp. 513
- ------------------------------------------------------------------------------
Paper & Forest Products (1.5%)
42,300 Unisource Worldwide, Inc. 542
10,500 Weyerhaeuser Co. 533
- ------------------------------------------------------------------------------
1,075
- ------------------------------------------------------------------------------
Photography - Imaging (0.9%)
6,000 Xerox Corp. 617
- ------------------------------------------------------------------------------
Publishing (0.8%)
16,500 Houghton Mifflin Co. 573
- ------------------------------------------------------------------------------
Railroads/Shipping (0.9%)
20,500 Norfolk Southern Corp. 642
- ------------------------------------------------------------------------------
Real Estate Investment Trusts (1.2%)
15,000 Felcor Suite Hotels, Inc. 517
9,500 Highwoods Properties, Inc. 313
- ------------------------------------------------------------------------------
830
- ------------------------------------------------------------------------------
Retail - Department Stores (0.9%)
9,000 J.C. Penney Company, Inc. 646
- ------------------------------------------------------------------------------
Retail - General Merchandising (1.5%)
17,500 Sears, Roebuck & Co. 1,082
- ------------------------------------------------------------------------------
Services - Commercial & Consumer (0.8%)
17,000 Dun & Bradstreet Corp. 574
- ------------------------------------------------------------------------------
Specialty Printing (0.2%)
4,600 Deluxe Corp. 154
- ------------------------------------------------------------------------------
Telecommunications - Long Distance (1.9%)
12,000 AT&T Corp. 730
9,700 Sprint Corp. 696
- ------------------------------------------------------------------------------
1,426
- ------------------------------------------------------------------------------
Telephones (1.9%)
8,800 Bell Atlantic Corp. 806
9,000 GTE Corp. 525
- ------------------------------------------------------------------------------
1,331
- ------------------------------------------------------------------------------
Tobacco (1.3%)
15,000 Philip Morris Companies, Inc. 561
9,000 Universal Corp. 338
- ------------------------------------------------------------------------------
899
- ------------------------------------------------------------------------------
Waste Management (0.1%)
500 Waste Management, Inc. 16
- ------------------------------------------------------------------------------
Total stocks (cost: $34,417) 42,197
- ------------------------------------------------------------------------------
<TABLE>
Principal
Amount
(000)
---------------
BONDS (36.1%)
<C> <S> <C>
$ 1,000 Corporacion Andina De Fomento (Venezuela), 7.38%, 7/21/00 1,020
2,000 First Union Commercial Mortgage Trust II, 6.60%, 11/18/29 2,050
1,000 FirstPlus Home Loan Owner Trust, Series 1997-4, Class A-5,
6.62%, 9/10/15 1,012
1,000 FirstPlus Home Loan Owner Trust, Series 1998-1, Class A-5,
6.25%, 11/10/16 1,001
1,000 Glenborough Realty Trust, Inc., 7.63%, 3/15/05 a 1,004
1,000 Great Atlantic & Pacific Tea, Inc., 7.70%, 1/15/04 1,017
1,000 Health & Retirement Property Trust, 6.70%, 2/23/05 997
1,000 Health Care Property Investors, Inc., 6.50%, 2/15/06 1,003
900 Kmart Corp., 7.95%, 2/01/23 915
1,000 MacSaver Financial Services, Inc., 7.40%, 2/15/02 973
1,000 Merita Bank Ltd. (Finland), 6.50%, 1/15/06 1,006
1,000 Nationwide Health Property Inc., 7.25%, 4/01/02 1,034
1,000 Tele-Communications, Inc., 8.25%, 1/15/03 1,076
1,000 Union Planters Bank National Association, 6.50%, 3/15/18 997
1,000 Washington Real Estate Investment Trust, 7.25%, 8/13/06 1,040
1,000 Waste Management, Inc., 6.38%, 12/01/03 1,001
1,000 WorldCom, Inc., 7.55%, 4/01/04 1,060
915 Federal National Mortgage Association, Series 1997-72 CB,
9.00%, 9/18/23 961
1,886 Federal National Mortgage Association, Series 97-79 U,
9.00%, 11/18/24 1,985
981 Federal Home Loan Mortgage Corp., Series 98-7 H, 9.00%, 3/18/25 1,055
972 Federal National Mortgage Association, Series 1997-89 N,
9.50%, 12/20/22 1,057
1,007 Federal National Mortgage Association, Series 1997-72 CA,
9.50%, 9/18/23 1,071
984 Government National Mortgage Assn., 6.50%, 9/20/27 978
- ----------------------------------------------------------------------------------------
Total bonds (cost: $25,018) 25,313
- ----------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (2.7%)
1,913 Federal Home Loan Bank, 5.38%, 6/01/98 (cost: $1,913) 1,913
- ----------------------------------------------------------------------------------------
Total investments (cost: $61,348) $69,423
========================================================================================
</TABLE>
- -----------------------
* Non-income producing.
USAA BALANCED STRATEGY FUND
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 1998
GENERAL NOTES
Market values of securities are determined by procedures and practices discussed
in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
Investments in foreign securities were 3.5% of net assets at May 31, 1998.
SPECIFIC NOTES
(a) Security is exempt from registration under the Securities Act of 1933 and
has been determined to be liquid by the Fund's investment manager. Any resale of
this security may occur in an exempt transaction in the United States to a
qualified institutional buyer as defined by Rule 144A.
See accompanying notes to financial statements.
USAA BALANCED STRATEGY FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 1998
ASSETS
Investments in securities, at market value (identified
cost of $61,348) $69,423
Cash 77
Receivables:
Capital shares sold 60
Dividends and interest 454
Securities sold 405
-------
Total assets 70,419
-------
LIABILITIES
Securities purchased 308
Capital shares redeemed 11
USAA Investment Management Company 8
USAA Transfer Agency Company 3
Accounts payable and accrued expenses 43
-------
Total liabilities 373
-------
Net assets applicable to capital shares outstanding $70,046
=======
REPRESENTED BY:
Paid-in capital $60,734
Accumulated undistributed net investment income 337
Accumulated net realized gain on investments 900
Net unrealized appreciation of investments 8,075
-------
Net assets applicable to capital shares outstanding $70,046
=======
Capital shares outstanding, unlimited number of shares authorized,
no par value 5,205
=======
Net asset value, redemption price, and offering price per share $ 13.46
=======
See accompanying notes to financial statements.
USAA BALANCED STRATEGY FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 1998
Net investment income:
Income (net of foreign taxes withheld of $2):
Dividends $ 547
Interest 1,420
------
Total income 1,967
------
Expenses:
Management fees 360
Transfer agent's fees 117
Custodian's fees 47
Postage 8
Shareholder reporting fees 6
Trustees' fees 4
Registration fees 58
Professional fees 25
Other 7
------
Total expenses before reimbursement 632
Expenses reimbursed (35)
------
Total expenses after reimbursement 597
------
Net investment income 1,370
------
Net realized and unrealized gain on investments:
Net realized gain on investments 1,470
Change in net unrealized appreciation/depreciation of investments 4,029
------
Net realized and unrealized gain 5,499
------
Increase in net assets resulting from operations $6,869
======
See accompanying notes to financial statements.
USAA BALANCED STRATEGY FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
1998 1997
----------------------
From operations:
Net investment income $ 1,370 $ 806
Net realized gain on investments 1,470 405
Change in net unrealized appreciation/depreciation
of investments 4,029 3,525
---------------------
Increase in net assets resulting from operations 6,869 4,736
---------------------
Distributions to shareholders from:
Net investment income (1,217) (733)
---------------------
Net realized gains (949) (58)
---------------------
From capital share transactions:
Proceeds from shares sold 44,462 14,680
Shares issued for dividends reinvested 2,019 596
Cost of shares redeemed (15,739) (3,878)
---------------------
Increase in net assets from capital share
transactions 30,742 11,398
---------------------
Net increase in net assets 35,445 15,343
Net assets:
Beginning of period 34,601 19,258
---------------------
End of period $70,046 $34,601
=====================
Undistributed net investment income included in
net assets:
Beginning of period $ 184 $ 111
=====================
End of period $ 337 $ 184
=====================
Change in shares outstanding:
Shares sold 3,408 1,316
Shares issued for dividends reinvested 159 54
Shares redeemed (1,219) (350)
---------------------
Increase in shares outstanding 2,348 1,020
=====================
See accompanying notes to financial statements.
USAA BALANCED STRATEGY FUND
NOTES TO FINANCIAL STATEMENTS
May 31, 1998
(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 annual report pertains only to the USAA
Balanced Strategy Fund (the Fund). The Fund's investment objective is to seek a
high total return, with reduced risk over time, through an asset allocation
strategy that seeks a combination of long-term growth of capital and current
income.
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. Other debt and government securities are valued each business day by a
pricing service (the Service) approved by the Trust's Board of Trustees. The
Service uses the mean between quoted bid and asked prices or the last sale price
to price securities when, in the Service's judgement, these prices are readily
available and are representative of the securities' market values. For many
securities, such prices are not readily available. The Service generally prices
these securities based on methods which include consideration of yields or
prices of securities of comparable quality, coupon, maturity and type,
indications as to values from dealers in securities, and general market
conditions.
5. Securities which cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value, using methods determined
by USAA Investment Management Company (the Manager) under the general
supervision of the Board of Trustees.
B. Federal taxes - The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Dividend
income is recorded on the ex-dividend date; interest income is recorded on the
accrual basis. Discounts and premiums on securities are amortized over the life
of the respective securities.
D. Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that may affect the reported amounts in the financial
statements.
(2) LINES OF CREDIT
The Fund participates with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million, 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 the Fund's 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 the Fund's total
assets at NationsBank's borrowing rate plus a markup. The Fund had no borrowings
under either of these agreements during the year ended May 31, 1998.
(3) DISTRIBUTIONS
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are made
in the succeeding fiscal year or as otherwise required to avoid the payment of
federal taxes.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended May 31, 1998 were $38.2 million and
$10.3 million, respectively.
Gross unrealized appreciation and depreciation of investments at May 31, 1998
was $9.0 million and $1.0 million, respectively.
(5) TRANSACTIONS WITH MANAGER
A. Management fees - The investment policies of the Fund and management of the
Fund's portfolio are carried out by USAA Investment Management Company. The
Fund's management fees are computed at .75% of its annual average net assets.
The Manager has voluntarily agreed to limit the annual expenses of the Fund to
1.25% of its annual average net assets through October 1, 1998, and accordingly
has waived a portion of its management fees.
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.
D. Brokerage services - USAA Brokerage Services, a discount brokerage service of
the Manager, may execute portfolio transactions for the Fund. The amount of
brokerage commissions paid to USAA Brokerage Services during the year ended May
31, 1998 was $2.2 thousand.
(6) 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.
(7) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
Nine-month
Period Ended
Year Ended May 31, May 31,
--------------------------------------------
1998 1997 1996*
--------------------------------------------
Net asset value at
beginning of period $ 12.11 $ 10.49 $ 10.00
Net investment income .35 .33 .26(b)
Net realized and
unrealized gain 1.64 1.65 .37
Distributions from net
investment income (.35) (.33) (.14)
Distributions of realized
capital gains (.29) (.03) -
----------------------------------------
Net asset value at
end of period $ 13.46 $ 12.11 $ 10.49
========================================
Total return (%) ** 16.82 19.26 6.37
Net assets at end of
period (000) $70,046 $34,601 $19,258
Ratio of expenses to
average net assets (%) 1.25 1.25 1.25(a)
Ratio of expenses
to average net assets
excluding reimbursements (%) 1.31 1.39 2.00(a)
Ratio of net investment income
to average net assets (%) 2.85 3.16 3.31(a)
Portfolio turnover (%) 22.18 28.06 26.53
Average commission rate
paid per share (+) $ .0491 $ .0486 $ .0489
* Fund commenced operations September 1, 1995.
** Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(+) Calculated by aggregating all commissions paid on the purchase and sale
of securities and dividing by the actual number of shares purchased or sold
for which commissions were charged.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
Trustees
Robert G. Davis, Chairman of the Board
Michael J.C. Roth, President and Vice Chairman of the Board
John W. Saunders, Jr., Vice President
Barbara B. Dreeben
Howard L. Freeman, Jr.
Robert L. Mason
Richard A. Zucker
Investment Adviser, Underwriter and Distributor
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
Transfer Agent
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
Custodian
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
Legal Counsel
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Independent Auditors
KPMG Peat Marwick LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
Telephone Assistance Hours
Call toll free - Central Time
Monday - Friday 8:00 a.m. to 8:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
For Additional Information On Mutual Funds
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges or redemptions
1-800-531-8448, (in San Antonio) 456-7202
Recorded Mutual Fund Price Quotes
24-Hour Service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
Mutual Fund TouchLine(Registered Trademark)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
