USAA INCOME
STRATEGY FUND
PROSPECTUS
OCTOBER 1, 1998
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy?...... 2
Main Risks of Investing in This Fund............................ 2
Is This Fund for You?........................................... 3
Could the Value of Your Investment in This Fund Fluctuate?...... 3
Fees and Expenses............................................... 5
Fund Investments................................................ 7
Fund Management.................................................12
Using Mutual Funds in an Asset Allocation Program...............14
How to Invest...................................................16
Important Information About Purchases and Redemptions...........19
Exchanges.......................................................20
Shareholder Information.........................................20
Financial Highlights............................................24
Appendix A .....................................................25
Appendix B .....................................................29
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is to seek high current return, with reduced
risk over time, through an asset allocation strategy which emphasizes income
and gives secondary emphasis to long-term growth of capital. Using pre-set
target ranges, we will invest the Fund's assets mostly in bonds, and to a
lesser extent, stocks and money market instruments.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objective will be achieved. See FUND INVESTMENTS on
page 6 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risks of investing in this Fund are credit risk, interest rate
risk, and market risk.
o CREDIT RISK involves the possibility that a borrower cannot make timely
interest and principal payments on its securities.
o INTEREST RATE RISK involves the possibility that the value of the Fund's
investments will decline because of an increase in interest rates.
IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
o MARKET RISK involves the possibility that the Fund's investments in stocks
will decline because of falls in the stock market, reducing the value of
individual company's stocks, regardless of the success or failure of an
individual company's operations.
Other risks of the Fund described later in the Prospectus include rebalancing
risk, the risks of foreign investing, and the risks of investing in real estate
investment trusts (REITs). As with other mutual funds, losing money is an
additional risk associated with investing in this Fund.
2
<PAGE>
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
|X| You are seeking a fund that will diversify your holdings among a wide
variety of investment categories.
|X| You are looking for current income.
|X| You are willing to accept low to moderate risk.
|X| You are willing to take some exposure to the stock market.
|X| You are seeking an appropriate investment for an IRA, through a 401(k) plan
or 403(b) plan, or other tax-sheltered account.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
|X| You are unable or reluctant to invest for a period of four years or more.
|X| You are unwilling to take greater risk for long-term goals.
|X| You need an investment that provides tax-free income.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment in the Fund will likely
increase or decrease. The bar chart shown on the next page illustrates the
Fund's volatility and performance from year to year over the life of the Fund.
3
<PAGE>
TOTAL RETURN
All mutual funds must use the same formula to calculate total return.
TOTAL RETURN
MEASURES THE
PRICE CHANGE
IN A SHARE
ASSUMING THE
REINVESTMENT
OF ALL DIVIDEND
INCOME AND
CAPITAL GAIN
DISTRIBUTIONS.
[BAR CHART]
CALENDAR TOTAL RETURN
YEAR PERCENTAGE
1996* 3.00
1997 15.20
*FUND BEGAN OPERATIONS ON SEPTEMBER 1, 1995.
THE FUND'S TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998, WAS
6.47%.
During the periods shown in the bar chart, the highest total return for a
quarter was 7.05% (quarter ending June 30, 1997) and the lowest total return
for a quarter was -4.99% (quarter ending March 31, 1996).
The table below shows how the Fund's average annual returns for the one-year
period as well as the life of the Fund compared to those of a broad-based
securities market index. Remember, historical performance does not necessarily
indicate what will happen in the future.
==========================================================================
Average Annual Total Returns Since Fund's
(for the periods ending Past Inception on
December 31, 1997) 1 Year September 1, 1995
==========================================================================
Income Strategy Fund 15.20% 12.02%
--------------------------------------------------------------------------
Lehman Brothers
Aggregate Bond Index* 9.65% 7.98%
==========================================================================
* 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.
4
<PAGE>
YIELD
YIELD IS THE
ANNUALIZED NET
INCOME OF THE
FUND DURING A
SPECIFIED PERIOD
AS A PERCENTAGE
OF THE FUND'S
SHARE PRICE.
All mutual funds must use the same formula to calculate yield. The Fund may
advertise performance in terms of a 30-day yield quotation. The Fund's 30-day
yield for the period ended December 31, 1997, was 4.45%.
[TELEPHONE GRAPHIC]
TOUCHLINE (R)
1-800-531-8777
PRESS
1
THEN
1
THEN
4 8 #
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
Again, you must remember that historical performance does not necessarily
indicate what will happen in the future. The value of your shares may go up or
down. For the most current price, yield, and return information for this Fund,
you may call TouchLINE(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu,
press 1 again for prices, yields, and returns. Then, press 48# when asked for
the Fund Code.
NEWSPAPER
SYMBOL
IncStr
TICKER
SYMBOL
USICX
You can also find the most current price of your shares in the business section
of your newspaper in the mutual fund section under the heading "USAA Group" and
the symbol "IncStr." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "USICX."
FEES AND EXPENSES
This summary shows what it will cost you directly or indirectly to invest in
the Fund.
Shareholder Transaction Expenses -- Fees You Pay Directly
There are no fees or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is a $10 fee. (Your bank may also charge a fee for receiving
wires.)
Annual Fund Operating Expenses -- Fees You Pay Indirectly
Fund expenses come out of the Fund's assets and are reflected in the Fund's
share price and dividends. "Other Expenses" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses before waivers
during the past fiscal year ended May 31, 1998, and are calculated as a
percentage of average net assets (ANA).
12B-1 FEES -
SOME MUTUAL
FUNDS CHARGE
THESE FEES
TO PAY FOR
ADVERTISING
AND OTHER
COSTS OF SELLING
FUND SHARES.
Management Fees .50%
Distribution (12b-1) Fees None
Other Expenses .71%
-----
Total Annual Fund Operating Expenses* 1.21%
=====
5
<PAGE>
- --------------
* During the year, we voluntarily limited the Total Annual Fund Operating
Expenses to 1.00% as follows:
Total Annual Fund Operating Expenses 1.21%
Reimbursement from USAA Investment
Management Company (.21%)
-----
Actual Fund Operating Expenses
After Reimbursement 1.00%
=====
We have voluntarily agreed to limit the Fund's annual expenses to 1.00% of
its ANA and will reimburse the Fund for all expenses in excess of that
amount until October 1, 1999.
Example of Effect of the Fund's Operating Expenses
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
(before any applicable reimbursement) remain the same, and (3) you redeem all
of your shares at the end of the periods shown.
1 year....... $ 123
3 years....... 384
5 years....... 665
10 years....... 1,466
6
<PAGE>
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal investment strategy is to provide a diversified
investment program within one mutual fund by allocating the Fund's
assets in each of the following investment categories according to the
following targeted ranges. Securities are classified by category at the
time of purchase.
[PIE CHART]
PERCENTAGE TARGET RANGE OF NET ASSETS
INVESTMENT CATEGORY
BONDS 75-85%
STOCKS 15-25%
MONEY MARKET INSTRUMENTS 0-10%
The ranges allow for a variance within each investment category. The Board of
Trustees may revise the target ranges upon 60 days' prior written notice to
shareholders. However, we may go outside the ranges on a temporary defensive
basis without shareholder notification whenever we believe it is in the best
interest of the Fund and its shareholders.
Q Why are stocks and bonds mixed in the same Fund?
A From time to time the stock and bond markets may fluctuate
independently of each other. In other words, a decline in the stock
market may, in certain instances, be offset by a rise in the bond
market, or vice versa. As a result, the Fund, with its mix of stocks
and bonds, is expected in the long run to entail less market risk (and
potentially less return) than a mutual fund investing exclusively in
stocks.
7
<PAGE>
Q How are the investment categories and target ranges selected?
A The investment categories and the target ranges were selected to
provide investors with a diversified investment in a single mutual
fund. Bonds provide a high current return while stocks provide the
potential for long-term capital growth. Money market instruments
provide a means for temporary investment of cash balances arising in
the normal course of business. Primary emphasis for this Fund is
income.
However, as a temporary defensive measure because of market, economic,
political, or other conditions, we may invest up to 100% of the Fund's
assets in investment-grade, short-term debt instruments, which may
result in the Fund not achieving its investment objective during the
time it is in this temporary defensive posture.
Q What actions are taken to keep the Fund's asset allocations within the
target ranges?
A If market action causes the actual assets of the Fund in one or more
investment categories to move outside the ranges, we will make
adjustments to rebalance the portfolio. In general, we will rebalance
the portfolio at least once during each quarter. In rebalancing the
Fund's portfolio, we will buy or sell securities to return the actual
allocation of the Fund's assets to within its target ranges. For
example, the Fund's portfolio could begin a quarter with its assets
allocated 80% in the Bonds category, 15% in the Stocks category, and 5%
in the Money Market Instruments category. During the quarter, due to
market returns, the Fund's portfolio could hold 90% in the Bonds
category, 5% in the Stocks category, and 5% in the Money Market
Instruments category. In this case, we would sell bonds and use the
proceeds to buy stocks to bring bonds and stocks back to within their
target ranges.
[CAUTION LIGHT]
REBALANCING RISKS. In purchasing and selling securities in order to rebalance
its portfolio, the Fund will pay more in brokerage commissions than it would
without a rebalancing policy. As a result of the need to rebalance, the Fund
also has less flexibility in the timing of purchases and sales of securities
than it would otherwise. While we will attempt to minimize any adverse impact
to the Fund or its shareholders, the Fund may have a higher proportion of
capital gains and a lower return than a fund that does not have a rebalancing
policy.
8
<PAGE>
Bonds and Money Market Instruments
Q What types of bonds are included in the Fund's portfolio?
A Bonds must be investment grade at the time of purchase and may include
any of the following:
o obligations of the U.S. Government, its
agencies, and instrumentalities;
o mortgage-backed securities;
asset-backed securities;
o corporate debt securities, such as notes and bonds;
o debt securities of real estate investment trusts;
o obligations of state and local governments, and their agencies and
instrumentalities;
o Eurodollar obligations;
o Yankee obligations; and
o other debt securities.
Further description of these securities is found in APPENDIX A on page
25.
[CAUTION LIGHT]
INTEREST RATE RISK. As a mutual fund investing in bonds, the Fund is subject to
the risk that the market value of the bonds will decline because of rising
interest rates. Bond prices are linked to the prevailing market interest rates.
In general, when interest rates rise, the prices of bonds fall and when
interest rates fall, bond prices generally rise. The price volatility of a bond
also depends on its maturity. Generally, the longer the maturity of a bond, the
greater its sensitivity to interest rates. To compensate investors for this
higher risk, bonds with longer maturities generally offer higher yields than
bonds with shorter maturities.
Q What are considered investment-grade securities?
A Investment-grade securities include securities issued or guaranteed by
the U.S. Government, its agencies, and instrumentalities, as well as
securities rated within the categories listed by the following rating
agencies:
9
<PAGE>
=================================================================
LONG-TERM SHORT-TERM
RATING AGENCY DEBT SECURITIES DEBT SECURITIES
=================================================================
Moody's Investors At least Prime-3 or
Services, Inc. At least Baa MIG 4/VMIG 4
-----------------------------------------------------------------
Standard & Poor's
Ratings Group At least BBB At least A-3 or SP-2
-----------------------------------------------------------------
Fitch IBCA, Inc. At least BBB At least F-3
-----------------------------------------------------------------
Duff and Phelps At least BBB At least D-3
=================================================================
or if unrated by these agencies, we must determine that these
securities are of equivalent investment quality.
You will find a complete description of the above debt ratings in the
Fund's Statement of Additional Information.
[CAUTION LIGHT]
CREDIT RISK. The bonds in the Fund's portfolio are subject to credit risk.
Credit risk is the possibility that an issuer of a fixed income instrument such
as a bond or repurchase agreement will fail to make timely payments of interest
or principal. We attempt to minimize the Fund's credit risk by investing in
securities considered investment grade at the time of purchase. When evaluating
potential investments for the Fund, our analysts also assess credit risk and
its impact on the Fund's portfolio. Nevertheless, even investment-grade
securities are subject to some credit risk. Securities in the lowest-rated,
investment-grade category have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to a weakened
capability to make principal and interest payments on these securities than is
the case for higher-rated securities. In addition, the ratings of securities
are estimates by the rating agencies of the credit quality of the securities.
The ratings may not take into account every risk related to whether interest or
principal will be repaid on a timely basis.
Q What happens if the rating of a security is downgraded below investment
grade?
A We will determine whether it is in the best interest of the Fund's
shareholders to continue to hold the security in the Fund's portfolio.
If downgrades result in more than 5% of the Fund's net assets being
invested in securities that are less than investment-grade quality, we
will take immediate action to reduce the Fund's holdings in such
securities to 5% or less of the Fund's net assets, unless otherwise
directed by the Board of Trustees.
10
<PAGE>
Q How are the decisions to buy and sell bonds made?
A We buy bonds that represent value in current market conditions. Value
is a combination of yield, credit quality, structure (maturity, coupon,
redemption features) and liquidity. Recognizing value is the result of
simultaneously analyzing the interaction of these factors among the
securities available in the market. We will sell a security if we
become concerned about its credit risk, we are forced by market factors
to raise money, or an attractive replacement security is available.
Q What types of money market instruments are included in the Fund's
portfolio?
A The money market instruments included in the Fund's portfolio will
consist of investment-grade, U.S. dollar denominated debt securities
that have remaining maturities of one year or less. They may carry
either fixed or variable interest rates and may include any of the
following:
o obligations of the U.S. Government, its
agencies, and instrumentalities;
o repurchase agreements collateralized by the same;
o commercial paper or other short-term corporate obligations;
o certificates of deposit;
o bankers' acceptances; and
o other suitable obligations.
Stocks
Q What types of stocks are included in the Fund's portfolio?
A We will invest this portion of the Fund's portfolio primarily in
domestic common stocks, and we may include some foreign stocks and real
estate investment trusts (REITs).
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in stocks, it is subject to stock market
risk. Stock prices in general may decline over short or even extended periods,
regardless of the success or failure of an individual company's operations.
Stock markets tend to run in cycles, with periods when stock prices generally
go up, known as "bull" markets and periods when stock prices generally go down,
referred to as "bear" markets. Stocks tend to go up and down more than bonds.
11
<PAGE>
[CAUTION LIGHT]
FOREIGN INVESTING. Investing in foreign securities, including American
Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs), poses unique
risks: currency exchange rate fluctuations; foreign market illiquidity;
increased price volatility; exchange control regulations; foreign ownership
limits; different accounting, reporting, and disclosure requirements; political
instability; and difficulties in obtaining legal judgments. In the past, equity
and debt instruments of foreign markets have been more volatile than equity and
debt instruments of U.S. securities markets.
Q How are the decisions to buy and sell stocks made?
A We generally invest in companies that are, or have the prospect of
becoming, dominant in their industry. We expect the sales and earnings
of these companies to grow faster than those of their industry peers. We
consider a number of factors such as:
o a company's strategic position in its industry,
o sales and earnings growth,
o cash flow,
o book value, and
o dividend yield.
We will sell a security when we perceive that our original investment
thesis no longer holds.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 25.
FUND MANAGEMENT
The Trust has retained us, USAA Investment Management Company, to serve as the
manager and distributor for the Trust. We are an affiliate of United Services
Automobile Association (USAA), a large, diversified financial services
institution. As of the date of this Prospectus, we had approximately $37
billion in total assets under management. Our mailing address is 9800
Fredericksburg Road, San Antonio, TX 78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Board of Trustees. For our services, the Fund pays us an
annual fee. The fee is computed at one-half of one percent (.50%) of average
net assets. The fee we received for the fiscal year ended May 31, 1998, after
reimbursements we made to the Fund, was equal to .29% of average net assets. We
also provide services related to selling the Fund's shares and receive no
compensation for those services.
12
<PAGE>
Although our officers and employees, as well as those of the Trust, may engage
in personal securities transactions, they are restricted by the procedures in a
Joint Code of Ethics adopted by the Trust and us.
Portfolio Transactions
USAA Brokerage Services, our discount brokerage service, may execute purchases
and sales of equity securities for the Fund's portfolio. The Board of Trustees
has adopted procedures to ensure that any commissions paid to USAA Brokerage
Services are reasonable and fair.
Portfolio Managers
The following individuals are primarily responsible for managing the Fund:
BONDS
[PHOTOGRAPH OF PORTFOLIO MANAGER]
JOHN W. SAUNDERS, JR.
John W. Saunders, Jr., Senior Vice President of Fixed Income Investments, is
the asset allocation manager of the Fund and has managed the Bonds investment
category since September 1995. He has 29 years investment management experience
and has worked for us for 28 years. Mr. Saunders earned the Chartered Financial
Analyst (CFA) designation in 1976 and is a member of the Association for
Investment Management and Research (AIMR) and the San Antonio Financial
Analysts Society, Inc. (SAFAS). He holds a BS from Portland State University,
Oregon.
STOCKS
[PHOTOGRAPH OF PORTFOLIO MANAGER]
PATRICK O'HARE
Patrick O'Hare, Assistant Vice President of Equity Investments, has managed the
Stocks investment category since October 1998. He has five years investment
management experience and has worked for us for five years. Mr. O'Hare earned
the CFA designation in 1996 and is a member of AIMR and SAFAS. He holds an MBA
from the Wharton School, University of Pennsylvania and a BBA from the
University of Oklahoma.
MONEY MARKET INSTRUMENTS
[PHOTOGRAPH OF PORTFOLIO MANAGER]
PAMELA K. BLEDSOE
Pamela K. Bledsoe, Assistant Vice President of Money Market Funds, has managed
the Money Market Instruments investment category since May 1996. She has ten
years investment management experience and has worked for us for seven years.
Ms. Bledsoe earned the CFA designation in 1992 and is a member of AIMR and
SAFAS. She holds an MBA from Texas Christian University and a BS from Louisiana
Tech University.
13
<PAGE>
USING MUTUAL FUNDS IN AN ASSET ALLOCATION PROGRAM
I. The Idea Behind Asset Allocation
If you have money to invest and hear that stocks may be a good investment, is
it a wise idea to use your entire savings to buy one stock? Most people
wouldn't -- it would be fortunate if it works, but this strategy holds a great
deal of risk. Surprising news could be reported tomorrow on your stock, and its
price could soar or plummet.
Careful investors understand this concept of risk and lower that risk by
diversifying their holdings among a number of securities. That way bad news for
one security may be counterbalanced by good news regarding other securities.
But there is still a question of risk here. History tells us that stocks are
generally more volatile than bonds and that long-term bonds are generally more
volatile than short-term bonds. History also tells us that over many years
investments having higher risks tend to have higher returns than investments
that carry lower risks. From these observations comes the idea of asset
allocation.
Asset allocation is a concept that involves dividing your money among several
different types of investments -- for example, stocks, bonds, and short-term
investments such as money market instruments -- and keeping that allocation
until your objectives or the financial markets significantly change. That way
you're not pinning all your financial success on the fortunes of one kind of
investment. Money spread across different investment categories can help you
reduce market risk and likely will provide more stability to your total return.
Asset allocation can work because different kinds of investments generally
follow different up-and-down cycles. With a variety of investments in your
portfolio, some are probably doing well, even when others are struggling.
II. Using Asset Allocation in an Investment Program
Most investors understand the concept of diversification, but asset allocation
goes beyond diversifying your portfolio; it's much more of an active process.
You must evaluate your lifestyle, finances, circumstances, long- and short-term
financial goals, and tolerance for investment risk. Once you have structured
your allocation, you'll need to review it regularly since your objectives will
change over time. Even though we do not charge sales loads or commissions, our
sales representatives are always available to assist you in structuring and
reviewing your investment portfolio.
14
<PAGE>
III. USAA's Series of Asset Strategy Funds
USAA's series of asset allocation funds, our Asset Strategy Funds, are designed
for the long-term investor and are in line with our investment philosophy for
investors, specifically "buy and hold for the long-term," and "don't try to
time the market." As shown below, each of USAA's Asset Strategy Funds has its
own different mix of assets and objectives.
===============================================================================
Fund Investment Objective Invests In
===============================================================================
Income Seek high current return, with bonds and stocks
Strategy reduced risk over time, through an
Fund asset allocation strategy which
emphasizes income and gives
secondary emphasis to long-term
growth of capital.
Growth and Tax Seek a conservative balance between tax exempt bonds and
Strategy Fund income, the majority of which is tax- blue chip stocks
exempt, and the potential for long-term
growth of capital to preserve purchasing
power.
Balanced Seek high total return, with reduced stocks and bonds
Strategy risk over time, through an asset
Fund allocation strategy that seeks a
combination of long-term growth of
capital and current income.
Cornerstone Achieve a positive inflation-adjusted basic value stocks,
Strategy rate of return and a reasonably stable international stocks,
Fund value of Fund shares, thereby government
preserving purchasing power of securities, real
shareholders' capital. estate securities,
and gold securities
Growth Seek high total return, with reduced small and large cap
Strategy risk over time, through an asset stocks, bonds, and
Fund allocation strategy which emphasizes international stocks
capital appreciation and gives
secondary emphasis to income.
===============================================================================
For more complete information about the other USAA Asset Strategy Funds,
including charges and expenses, call us for a Prospectus. Read it carefully
before you invest or send money.
15
<PAGE>
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required for each new account. However, after you open
your initial account with us, you will not need to fill out another application
unless the registration is different.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number or
tax identification number to avoid possible withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after we receive your request in proper form. The
Fund's NAV is determined at the close of the regular trading session (generally
4:00 p.m. Eastern Time) of the New York Stock Exchange (NYSE) each day the NYSE
is open. If we receive your request and payment prior to that time, your
purchase price will be the NAV per share determined for that day. If we receive
your request or payment after the NAV per share is calculated, the purchase
will be effective on the next business day. If you plan to purchase Fund shares
with a foreign check, we suggest you convert your foreign check to U.S. dollars
prior to investment in the Fund. This will avoid a potential delay in the
effective date of your purchase of up to four to six weeks. Furthermore, a bank
charge may be assessed in the clearing process, which will be deducted from the
amount of the purchase.
MINIMUM INVESTMENTS
INITIAL PURCHASE
[MONEY GRAPHIC]
o $3,000 [$500 Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) accounts and
$250 for IRAs] or no initial investment if you elect to have monthly
electronic investments of at least $50 each. We may periodically offer
programs that reduce the minimum amounts for monthly electronic
investments. Employees of USAA and its affiliated companies may open an
account through payroll deduction for as little as $25 per pay period with
no initial investment.
ADDITIONAL PURCHASES
o $50
16
<PAGE>
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288
o To add to your account, send your check and the "Invest by Mail" stub that
accompanies your Fund's transaction confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
BANK WIRE
[WIRE GRAPHIC]
o Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA Income Strategy Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)________________________________________
Shareholder(s) Mutual Fund Account Number_____________________
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
o Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
[TELEPHONE GRAPHIC]
PHONE 1-800-531-8448
o If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To
open an account by phone, the new account must have the same registration
as your existing account.
17
<PAGE>
Redemption of Shares
You may redeem Fund shares by any of the methods described below on any day the
NAV per share is calculated. Redemptions are effective on the day instructions
are received in a manner as described below. However, if instructions are
received after the NAV per share calculation (generally 4:00 p.m. Eastern
Time), redemption will be effective on the next business day.
We will send you your money within seven days after the effective date of
redemption. Payment for redemption of shares purchased by EFT or check is sent
after the EFT or check has cleared, which could take up to 15 days from the
purchase date. If you are considering redeeming shares soon after purchase, you
should purchase by bank wire or certified check to avoid delay. Redemptions are
subject to taxes based on the difference between the cost of shares when
purchased and the price received upon redemption.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment in limited circumstances.
HOW TO REDEEM
WRITTEN, FAX, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
o Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption privileges are automatically established when you complete
your application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions. Before
any discussion regarding your account, the following information is obtained:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
18
<PAGE>
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to help you in
your role as an investor. In the INVESTOR'S GUIDE, you will find additional
information on purchases, redemptions, and methods of payment. You will also
find in-depth information on automatic investment plans, shareholder statements
and reports, and other useful information.
Account Balance
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually a small balance account fee of $12 to each shareholder account with a
balance, at the time of assessment, of less than $2,000. The fee will reduce
total transfer agency fees paid by the Fund to SAS. Accounts exempt from the
fee include: (1) any account regularly purchasing additional shares each month
through an automatic investment plan; (2) any account registered under the
Uniform Gifts/Transfers to Minors Act (UGMA/UTMA); (3) all (non-IRA) money
market fund accounts; (4) any account whose registered owner has an aggregate
balance of $50,000 or more invested in USAA mutual funds; and (5) all IRA
accounts (for the first year the account is open).
Trust Rights
The Trust reserves the right to:
o reject purchase or exchange orders when in the best interest of the Trust;
o limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
o require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question. The Statement of Additional Information
contains information on acceptable guarantors;
o redeem an account with less than $900, with certain limitations.
19
<PAGE>
EXCHANGES
Exchange Privilege
The exchange privilege is automatic when you complete your application. You may
exchange shares among Funds in the USAA Family of Funds, provided you do not
hold these shares in stock certificate form and the shares to be acquired are
offered in your state of residence. After the exchange order is received, the
Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between the cost of shares when purchased and the price received
upon exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 18.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA Family of Funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA Family of Funds).
SHAREHOLDER INFORMATION
Share Price Calculation
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4:00 p.m. Eastern Time.
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.
Securities trading in various foreign markets may take place on days when the
NYSE is closed. Further, when the NYSE is open, the foreign markets may be
closed. Therefore, the calculation of the Fund's NAV may not take place at the
20
<PAGE>
same time the prices of certain securities held by the Fund are determined. In
most cases, 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 the Fund's NAV is calculated will not be reflected in the
Fund's NAV. If, however, we determine that a particular event would materially
affect the Fund's NAV, then we, under the general supervision of the Board of
Trustees, will use all relevant, available information to determine a fair
value for the affected portfolio securities.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Board of Trustees. Securities which cannot be
valued by these methods, and all other assets, are valued in good faith at fair
value using methods we have determined under the general supervision of the
Board of Trustees.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's Statement of Additional Information.
Dividends and Distributions
The Fund pays net investment income dividends quarterly. Any net capital gain
distribution usually occurs within 45 days of the May 31 fiscal year end, which
would be somewhere around the middle of July. The Fund will make additional
payments to shareholders, if necessary, to avoid the imposition of any federal
income or excise tax.
We will automatically reinvest all income dividends and capital gain
distributions unless we receive different instructions from you. The share
price will be the NAV of the Fund shares computed on the ex-dividend date. Any
income dividends or capital gain distributions paid by the Fund will reduce the
NAV per share by the amount of the dividend or distribution. These dividends
and distributions are subject to taxes.
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
Federal Taxes
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this Prospectus. Note that the Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
21
<PAGE>
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. We urge you to
consult your tax adviser about the status of distributions from the Fund in
your own state and locality.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you as ordinary income, whether
received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends-received deduction available to
corporations.
Regardless of the length of time you have held Fund shares, distributions of
net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable investment.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
o fails to furnish the Fund with a correct tax identification number,
o underreports dividend or interest income, or
o fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify on your application, or
on a separate Form W-9 supplied by the Fund's transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
REPORTING - The Fund will report information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
22
<PAGE>
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
23
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance since inception. Certain information reflects financial
results for a single Fund share. The total returns in the table represent the
rate that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by KPMG Peat Marwick LLP, whose report, along with the Fund's
financial statements, are included in the Annual Report, which is available
upon request.
NINE-MONTH
PERIOD ENDED
YEAR ENDED MAY 31, MAY 31,
-----------------------------------------
1998 1997 1996*
-----------------------------------------
Net asset value at
beginning of period $ 10.84 $ 10.06 $ 10.00
Net investment income .46 .50 .39(b)
Net realized and
unrealized gain (loss) 1.31 .83 (.06)
Distributions from net
investment income (.46) (.50) (.22)
Distributions of realized
capital gains (.04) (.05) (.05)
-----------------------------------------
Net asset value at
end of period $ 12.11 $ 10.84 $ 10.06
=========================================
Total return (%)** 16.72 13.59 3.23
Net assets at end of
period (000) $ 39,161 $ 13,878 $ 12,173
Ratio of expenses to
average net assets (%) 1.00 1.00 1.00(a)
Ratio of expenses
to average net
assets excluding
reimbursements (%) 1.21 1.51 1.78(a)
Ratio of net investment
income to average net
assets (%) 4.35 4.80 4.71(a)
Portfolio turnover (%) 7.15 64.71 78.60
- --------------
* Fund commenced operations September 1, 1995.
** Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
24
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES IN WHICH WE MAY
INVEST THE FUND'S ASSETS:
REPURCHASE AGREEMENTS
We may invest the Fund's assets in repurchase agreements which are
collateralized by obligations issued or guaranteed as to both principal and
interest by the U.S. Government, its agencies, and instrumentalities. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell it back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on an agreed upon date.
This date is usually not more than seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest, which is unrelated to the coupon rate or maturity of the purchased
security.
WHEN-ISSUED SECURITIES
We may invest the Fund's assets in new issues of debt securities offered on a
when-issued basis.
o Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed
at the time of commitment.
o The Fund does not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
o Such securities can be sold before settlement date.
VARIABLE RATE SECURITIES
We may invest the Fund's assets in securities that bear interest at rates which
are adjusted periodically to market rates.
o These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on
the income earned by the Fund depending on the proportion of such
securities held.
o The value of variable rate securities is less affected than fixed-coupon
securities by changes in prevailing interest rates because of the periodic
adjustment of their coupons to a market rate. The shorter the period
between adjustments, the smaller the impact of interest rate fluctuations
on the value of these securities.
o The market value of a variable rate security usually tends toward par (100%
of face value) at interest rate adjustment time.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
We may invest the Fund's assets in mortgage-backed and asset-backed securities.
Mortgage-backed securities include, but are not limited to, securities issued
by the Government National Mortgage Association (Ginnie Mae), the Federal
National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage
Corporation (Freddie Mac). These securities represent ownership in a pool of
mortgage loans. They differ from conventional bonds in that principal is paid
back to the investor as payments are made on the underlying mortgages in the
pool. Accordingly, the Fund receives monthly scheduled payments of
25
<PAGE>
principal and interest along with any unscheduled principal prepayments on the
underlying mortgages. Because these scheduled and unscheduled principal
payments must be reinvested at prevailing interest rates, mortgage-backed
securities do not provide an effective means of locking in long-term interest
rates for the investor. Like other fixed income securities, when interest rates
rise, the value of a mortgage-backed security generally will decline; however,
when interest rates are declining, the value of mortgage-backed securities with
prepayment features may not increase as much as other fixed income securities.
Mortgage-backed securities also include collateralized mortgage obligations
(CMOs). CMOs are obligations fully collateralized by a portfolio of mortgages
or mortgage-related securities. CMOs are divided into pieces (tranches) with
varying maturities. The cash flow from the underlying mortgages is used to pay
off each tranche separately. CMOs are designed to provide investors with more
predictable maturities than regular mortgage securities but such maturities can
be difficult to predict because of the effect of prepayments. Failure to
accurately predict prepayments can adversely affect the Fund's return on these
investments. CMOs may also be less marketable than other securities.
Asset-backed securities represent a participation in, or are secured by and
payable from, a stream of payments generated by particular assets, such as
credit card, motor vehicle, or trade receivables. They may be pass-through
certificates, which have characteristics very similar to mortgage-backed
securities, discussed above. They may also be in the form of asset-backed
commercial paper, which is issued by a special purpose entity, organized solely
to issue the commercial paper and to purchase interests in the assets. The
credit quality of these securities depends primarily upon the quality of the
underlying assets and the level of credit support and enhancement provided.
The weighted average life of such securities is likely to be substantially
shorter than their stated final maturity as a result of scheduled principal
payments and unscheduled principal prepayments.
MUNICIPAL LEASE OBLIGATIONS
We may invest the Fund's assets in a variety of instruments commonly referred
to as municipal lease obligations, including:
o Leases,
o Installment purchase contracts, and
o Certificates of participation in such leases and contracts.
MASTER DEMAND NOTES
We may invest the Fund's assets in master demand notes, which are obligations
that permit the investment of fluctuating amounts by the Fund, at varying rates
of interest using direct arrangements between the Fund, as lender, and the
borrower. These notes permit daily changes in the amounts borrowed. The Fund
has the right to increase the amount under the note at any time up to the full
amount provided by the note agreement, or to decrease the amount, and the
borrower may repay up to the full amount of the note without penalty.
Frequently, such obligations are secured by letters of credit or other credit
support
26
<PAGE>
arrangements provided by banks. Because master demand notes are direct lending
arrangements between the lender and borrower, these instruments generally will
not be traded, and there generally is no secondary market for these notes,
although they are redeemable (and immediately repayable by the borrower) at
face value, plus accrued interest, at any time. We will invest the Fund's
assets in master demand notes only if the Board of Trustees or its delegate has
determined that they are of credit quality comparable to the debt securities in
which the Fund generally may invest.
EURODOLLAR AND YANKEE OBLIGATIONS
We may invest a portion of the Fund's assets in dollar-denominated instruments
that have been issued outside the U.S. capital markets by foreign corporations
and financial institutions and by foreign branches of U.S. corporations and
financial institutions (Eurodollar) as well as dollar-denominated instruments
that have been issued by foreign issuers in the U.S. capital markets (Yankee).
In addition, we may invest a portion of the Fund's assets in Eurodollar and
Yankee obligations of investment-grade emerging market countries.
PUT BONDS
We may invest the Fund's assets in securities (including securities with
variable interest rates) which may be redeemed or sold back (put) to the issuer
of the security or a third party prior to stated maturity (put bonds).
o Such securities will normally trade as if maturity is the earlier put date,
even though stated maturity is longer. Under the Fund's portfolio
allocation procedure, maturity for put bonds is deemed to be the date on
which the put becomes exercisable.
FORWARD CURRENCY CONTRACTS
The Fund may hold securities denominated in foreign currencies. As a result,
the value of the securities will be affected by changes in the exchange rate
between the dollar and foreign currencies. In managing currency exposure, the
Fund may enter into forward currency contracts. A forward currency contract
involves an agreement to purchase or sell a specified currency at a specified
future date or over a specified time period at a price set at the time of the
contract. The Fund may only enter into forward currency contracts. When the
Fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it desires to "lock in" the U.S. dollar price of the
security.
ILLIQUID SECURITIES
We may invest up to 15% of the Fund's net assets in securities which are
illiquid. Illiquid securities are those securities that cannot be disposed of
in the ordinary course of business, seven days or less, at approximately the
value at which the Fund has valued the securities.
REAL ESTATE INVESTMENT TRUSTS (REITs)
We may invest the Fund's assets in (REITs) which may subject the Fund to many
of the same risks associated with the direct ownership of real estate.
Additionally, REITs are dependent upon the capabilities of the REIT manager(s),
have limited diversification, and could be significantly impacted by changes in
tax laws.
27
<PAGE>
AMERICAN DEPOSITARY RECEIPTS (ADRS)
We may invest the Fund's assets in ADRs which are foreign shares held by a U.S.
bank which issues a receipt evidencing ownership. Dividends are paid in U.S.
dollars.
GLOBAL DEPOSITARY RECEIPTS (GDRS)
We may invest the Fund's assets in GDRs which are foreign shares held by a U.S.
or foreign bank which issues a receipt evidencing ownership. Dividends are paid
in U.S. dollars.
28
<PAGE>
APPENDIX B
USAA Family of No-Load Mutual Funds
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide you with the opportunity to formulate your own investment program. You
may exchange any shares you hold in any one USAA Fund for shares in any other
USAA Fund. For more complete information about other Funds in the USAA Family
of Funds, including charges and expenses, call us for a Prospectus. Read it
carefully before you invest or send money.
FUND
TYPE/NAME VOLATILITY
=================================================
CAPITAL APPRECIATION
Aggressive Growth Very high
Emerging Markets (1) Very high
First Start Growth Moderate to high
Gold (1) Very high
Growth Moderate to high
Growth & Income Moderate
International (1) Moderate to high
S&P 500 Index (2) Moderate
Science & Technology Very high
World Growth (1) Moderate to high
=================================================
ASSET ALLOCATION
Balanced Strategy (1) Moderate
Cornerstone Strategy (1) Moderate
Growth and Tax Strategy Moderate
Growth Strategy (1) Moderate to high
Income Strategy Low to moderate
=================================================
INCOME -- TAXABLE
GNMA Low to moderate
Income Moderate
Income Stock Moderate
Short-Term Bond Low
=================================================
INCOME -- TAX EXEMPT
Long-Term (3) Moderate
Intermediate-Term (3) Low to moderate
Short-Term (3) Low
State Bond/Income (3, 4) Moderate
=================================================
MONEY MARKET
Money Market (5) Very low
Tax Exempt Money Market (3, 5) Very low
Treasury Money Market Trust (5) Very low
State Money Market (3, 4, 5) Very low
=================================================
1 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
2 S&P(R) IS A TRADEMARK OF THE MCGRAW-HILL COMPANIES, INC., AND HAS BEEN
LICENSED FOR USE. THE PRODUCT IS NOT SPONSORED, SOLD OR PROMOTED BY STANDARD
& POOR'S, AND STANDARD & POOR'S MAKES NO REPRESENTATION REGARDING THE
ADVISABILITY OF INVESTING IN THE PRODUCT.
3 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
4 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY
TO RESIDENTS OF THOSE STATES.
5 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.
29
<PAGE>
NOTES
<PAGE>
NOTES
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's Statement of Additional Information (SAI),
Annual or Semiannual Report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of the Prospectus. In the Fund's Annual Report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally, copies
of this information can be obtained, for a duplicating fee, by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
------------------------------
TELEPHONE ASSISTANCE 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 (R)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
Investment Company Act File No. 811-4019
<PAGE>
USAA GROWTH AND
TAX STRATEGY FUND
PROSPECTUS
OCTOBER 1, 1998
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy?..... 2
Main Risks of Investing in This Fund........................... 2
Is This Fund for You?.......................................... 3
Could the Value of Your Investment in This Fund Fluctuate?..... 3
Fees and Expenses.............................................. 5
Fund Investments............................................... 6
Fund Management................................................13
Using Mutual Funds in an Asset Allocation Program..............15
How to Invest..................................................17
Important Information About Purchases and Redemptions..........20
Exchanges......................................................20
Shareholder Information........................................21
Financial Highlights...........................................24
Appendix A ....................................................25
Appendix B ....................................................27
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is to seek a conservative balance for the
investor between income, the majority of which is exempt from federal income
tax, and the potential for long-term growth of capital to preserve purchasing
power. Using pre-set target ranges, we will invest a majority of the Fund's
assets in tax-exempt bonds and money market instruments and the remainder in
blue chip stocks. We manage the Fund with the goal of minimizing the impact of
federal income taxes to shareholders.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objective will be achieved. See FUND INVESTMENTS on
page 6 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risks of investing in this Fund are interest rate risk, credit
risk, and market risk.
o INTEREST RATE RISK involves the possibility that the value of the Fund's
investments will decline because of an increase in interest rates.
IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
o CREDIT RISK involves the possibility that a borrower cannot make timely
interest and principal payments on its securities.
o MARKET RISK involves the possibility that the Fund's investments in stocks
will decline because of falls in the stock market, reducing the value of
individual company's stocks, regardless of the success or failure of an
individual company's operations.
Other risks of the Fund described later in the Prospectus include rebalancing
risks and the risks of changes in tax laws impacting the Fund's dividends and
distributions. As with other mutual funds, losing money is an additional risk
associated with investing in this Fund.
2
<PAGE>
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
|X| You are seeking a fund with both tax relief and inflation hedging
characteristics.
|X| You are willing to accept moderate risk.
|X| You are willing to take some exposure to the stock market.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
|X| You need an investment that provides only tax free income.
|X| You are unable or reluctant to invest for a period of four years or more.
|X| You are seeking an appropriate investment for an IRA, through a 401(k) plan
or 403(b) plan, or other tax-sheltered account.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment in the Fund will likely
increase or decrease. The bar chart shown on the next page illustrates the
Fund's volatility and performance from year to year over the life of the Fund.
3
<PAGE>
TOTAL RETURN
All mutual funds must use the same formula to calculate total return.
TOTAL RETURN
MEASURES THE
PRICE CHANGE
IN A SHARE
ASSUMING THE
REINVESTMENT
OF ALL DIVIDEND
INCOME AND
CAPITAL GAIN
DISTRIBUTIONS.
[BAR CHART]
CALENDAR TOTAL RETURN
YEAR PERCENTAGE
1990* 1.36
1991 14.68
1992 4.93
1993 13.72
1994 -2.62
1995 22.70
1996 11.12
1997 16.16
*FUND BEGAN OPERATIONS ON JANUARY 11, 1989.
THE FUND'S TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998, WAS
6.90%.
During the periods shown in the bar chart, the highest total return for a
quarter was 8.42% (quarter ending June 30, 1997) and the lowest total return
for a quarter was -3.47% (quarter ending March 31, 1994).
The table below shows how the Fund's average annual returns for the one- and
five-year periods as well as the life of the Fund compared to those of a
broad-based securities market index. Remember, historical performance does not
necessarily indicate what will happen in the future.
==============================================================================
Average Annual Total Returns Since Fund's
(for the periods ending Past Past Inception on
December 31, 1997) 1 Year 5 Years January 11, 1989
==============================================================================
Growth and Tax Strategy Fund 16.16% 11.89% 10.64%
------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index* 9.19% 7.36% 8.36%
==============================================================================
* THE LEHMAN BROTHERS MUNICIPAL BOND INDEX IS AN UNMANAGED BENCHMARK OF
TOTAL RETURN PERFORMANCE FOR THE LONG-TERM, INVESTMENT-GRADE, TAX-EXEMPT
BOND MARKET.
4
<PAGE>
YIELD
YIELD IS THE
ANNUALIZED NET
INCOME OF THE
FUND DURING A
SPECIFIED PERIOD
AS A PERCENTAGE
OF THE FUND'S
SHARE PRICE.
All mutual funds must use the same formula to calculate yield. The Fund may
advertise performance in terms of a 30-day yield quotation. The Fund's 30-day
yield for the period ended December 31, 1997, was 3.21%.
[TELEPHONE GRAPHIC]
TOUCHLINE (R)
1-800-531-8777
PRESS
1
THEN
1
THEN
5 3 #
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
Again, you must remember that historical performance does not necessarily
indicate what will happen in the future. The value of your shares may go up or
down. For the most current price, yield, and return information for this Fund,
you may call TouchLINE(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu,
press 1 again for prices, yields, and returns. Then, press 53# when asked for
the Fund Code.
NEWSPAPER
SYMBOL
Gr&TxStr
TICKER
SYMBOL
USBLX
You can also find the most current price of your shares in the business section
of your newspaper in the mutual fund section under the heading "USAA Group" and
the symbol "Gr&TxStr." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "USBLX."
FEES AND EXPENSES
This summary shows what it will cost you directly or indirectly to invest in
the Fund.
Shareholder Transaction Expenses -- Fees You Pay Directly
There are no fees or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is a $10 fee. (Your bank may also charge a fee for receiving
wires.)
Annual Fund Operating Expenses -- Fees You Pay Indirectly
Fund expenses come out of the Fund's assets and are reflected in the Fund's
share price and dividends. "Other Expenses" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses during the past
fiscal year ended May 31, 1998, and are calculated as a percentage of average
net assets.
12B-1 FEES -
SOME MUTUAL
FUNDS CHARGE
THESE FEES
TO PAY FOR
ADVERTISING
AND OTHER
COSTS OF SELLING
FUND SHARES.
Management Fees .50%
Distribution (12b-1) Fees None
Other Expenses .21%
----
Total Annual Fund Operating Expenses .71%
====
5
<PAGE>
Example of Effect of the Fund's Operating Expenses
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
remain the same, and (3) you redeem all of your shares at the end of the
periods shown.
1 year......... $ 73
3 years........ 227
5 years........ 395
10 years........ 883
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal investment strategy is to provide a diversified
investment program within one mutual fund by allocating the Fund's
assets in each of the following investment categories according to the
following targeted ranges. Securities are classified by category at the
time of purchase.
[PIE CHART]
PERCENTAGE TARGET RANGE OF NET ASSETS
INVESTMENT CATEGORY
TAX-EXEMPT BONDS 41-59%
BLUE CHIP STOCKS 41-49%
TAX-EXEMPT MONEY
MARKET INSTRUMENTS 0-10%
(MATURITIES OF ONE
YEAR OR LESS)
The ranges allow for a variance within each investment category. The
Board of Trustees may revise the target ranges upon 60 days' prior
written notice to shareholders. However, we may go outside the ranges
on a temporary defensive basis without shareholder notification
whenever we believe it is in the best interest of the Fund and its
shareholders.
6
<PAGE>
Q Why are stocks and bonds mixed in the same Fund?
A From time to time the stock and bond markets may fluctuate
independently of each other. In other words, a decline in the stock
market may, in certain instances, be offset by a rise in the bond
market, or vice versa. As a result, the Fund, with its mix of stocks
and bonds, is expected in the long run to entail less market risk (and
potentially less return) than a mutual fund investing exclusively in
stocks.
Q How are the investment categories and target ranges selected?
A The investment categories and the target ranges were selected to
provide investors with a diversified investment in a single mutual
fund. Tax-exempt bonds provide income exempt from federal income tax.
Blue chip stocks provide the potential for long-term capital growth.
Tax-exempt money market instruments provide a means for temporary
investment of cash balances arising in the normal course of business.
During normal market conditions, the Fund's assets will be invested so
that at least 50% of the Fund's annual income will be exempt from
federal personal income tax and excluded from the calculation of
federal alternative minimum taxes for individual taxpayers. This policy
may only be changed by a shareholder vote.
As a temporary defensive measure because of market, economic,
political, or other conditions, we may invest up to 100% of the Fund's
assets in investment-grade, short-term taxable or tax-exempt debt
instruments, which may result in the Fund not achieving its investment
objective during the time it is in this temporary defensive posture.
Q How will the impact of federal income taxes be minimized on the Fund's
shareholders?
A We intend to use various techniques to minimize the impact of federal
income taxes on the Fund's shareholders while maximizing capital
appreciation, including:
o investing in bonds and similar instruments that provide income which
is exempt from federal income tax;
o investing in a portfolio of blue chip stocks with a low dividend
yield;
7
<PAGE>
o selecting blue chip stocks that we expect to hold for relatively long
periods to minimize the cost of trading and the receipt of capital
gains;
o when selling securities, considering the sale of those with the
highest tax cost basis to minimize the receipt of capital gains; and
o offsetting capital gains with capital losses, if available and
appropriate.
Although the Fund seeks to minimize taxable income and the realization
of capital gains, the Fund may nevertheless receive taxable income and
capital gains from time to time. Additionally, you may owe taxes on
realized capital gains, if any, when you redeem your Fund shares.
[CAUTION LIGHT]
CHANGES IN LAWS. Actual or anticipated changes in federal tax laws that
restrict or eliminate the tax-exempt status of securities of the type held by
the Fund could result in increased price volatility of these securities. These
changes in laws could also reduce the tax-exempt securities available for
investment by the Fund. Changes in laws affecting the taxing and spending
authority of a municipality that issued a tax-exempt security held by the Fund
could affect the ability of the municipality to make payments of principal and
interest on the security.
Q What actions are taken to keep the Fund's asset allocations within the
target ranges?
A If market action causes the actual assets of the Fund in one or more
investment categories to move outside the ranges, we will make
adjustments to rebalance the portfolio. In general, we will rebalance
the portfolio at least once during each quarter. In rebalancing the
Fund's portfolio, we will buy or sell securities to return the actual
allocation of the Fund's assets to within its target ranges. For
example, the Fund's portfolio could begin a quarter with its assets
allocated 50% in the Tax-Exempt Bonds category, 45% in the Blue Chip
Stocks category, and 5% in the Tax-Exempt Money Market Instruments
category. During the quarter, a strong stock market coupled with a weak
bond market could leave the portfolio with 40% in the Tax-Exempt Bonds
category, 55% in the Blue Chip Stocks category, and 5% in the
Tax-Exempt Money Market Instruments category. In this case, we would
sell blue chip stocks and use the proceeds to buy tax-exempt securities
to bring the blue chip stocks and tax-exempt bonds back to within their
target ranges.
8
<PAGE>
[CAUTION LIGHT]
REBALANCING RISKS. In purchasing and selling securities in order to rebalance
its portfolio, the Fund will pay more in brokerage commissions than it would
without a rebalancing policy. As a result of the need to rebalance, the Fund
also has less flexibility in the timing of purchases and sales of securities
than it would otherwise. Although we intend to manage the Fund in a
tax-advantaged manner, the Fund may have a higher proportion of capital gains
and a lower return than a fund that does not have a rebalancing policy.
Tax-Exempt Bonds and Tax-Exempt Money Market Instruments
Q What are tax-exempt securities?
A Tax-exempt securities include municipal debt obligations that have been
issued by states and their political subdivisions, and duly constituted
state and local authorities and corporations as well as securities
issued by certain U.S. territories or possessions, such as Puerto Rico,
the Virgin Islands, and Guam. They are issued to fund public
infrastructure projects such as streets and highways, schools, water
and sewer systems, hospitals, and airports. 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.
Because the projects benefit the public, Congress has granted exemption
from federal income taxes for the interest income arising from these
securities.
Q What types of tax-exempt securities are included in the Fund's
portfolio?
A The Fund's portfolio may be invested in any of the following tax-exempt
securities.
o general obligation bonds which are secured by the issuer's pledge of
its faith, credit, and taxing power for the payment of principal and
interest;
o revenue bonds which are payable from the revenue derived from a
particular facility or class of facilities or, in some cases, from
proceeds of a special excise tax or other specific revenue source,
but not from the general taxing power; or
o industrial development bonds which are issued by or on behalf of
public authorities to obtain funds for privately-operated facilities.
9
<PAGE>
Q What is the average maturity of the securities in the Tax-Exempt Bonds
category and how is it calculated?
A The Tax-Exempt Bonds category includes tax-exempt securities which will
have a remaining maturity at the time of purchase of more than one
year. Although the average maturity of the securities in this category
is not restricted, we expect it to exceed ten years. In determining a
security's maturity for purposes of calculating the Fund's average
maturity, we may use estimates of the expected time for its principal
to be paid. This can be substantially shorter than its stated final
maturity. For a discussion on the method of calculating the average
weighted maturity of the Fund's portfolio, see INVESTMENT POLICIES in
the Statement of Additional Information.
[CAUTION LIGHT]
INTEREST RATE RISK. As a mutual fund investing in bonds, the Fund is subject to
the risk that the market value of the bonds will decline because of rising
interest rates. Bond prices are linked to the prevailing market interest rates.
In general, when interest rates rise, the prices of bonds fall and when
interest rates fall, bond prices generally rise. The price volatility of a bond
also depends on its maturity. Generally, the longer the maturity of a bond, the
greater its sensitivity to interest rates. To compensate investors for this
higher risk, bonds with longer maturities generally offer higher yields than
bonds with shorter maturities.
Q What types of tax-exempt money market instruments are included in the
Fund's portfolio?
A The tax-exempt money market instruments in the portfolio are tax-exempt
debt securities like the type included in the Tax-Exempt Bonds
category. They have remaining stated maturities at the time of purchase
of one year or less, or are subject to puts or similar demand features
resulting in an effective maturity of one year or less.
Q What are the credit ratings of these securities?
A First, we will only purchase tax-exempt securities that are considered
investment grade. For a security to be considered investment grade, it
must be:
o rated by one or more rating agencies at least in the fourth highest
rating category for long-term securities;
o rated by one or more rating agencies at least within the second
highest rating category for short-term securities;
10
<PAGE>
o or, if not rated by those rating agencies, we must determine it to be
of equivalent investment quality.
And second, at least 50% of the combined total market values of the
tax-exempt bonds and tax-exempt money market instruments will be rated
within the three highest long-term rating categories by:
o Moody's Investors Service, Inc. (Moody's),
o Standard & Poor's Ratings Group (S&P), or
o Fitch Investors Service, Inc. (Fitch);
or in the highest short-term rating category by:
o Moody's, S&P, or Fitch; or if unrated by those three agencies, we
must determine that these securities are of equivalent investment
quality.
[CAUTION LIGHT]
CREDIT RISK. The bonds in the Fund's portfolio are subject to credit risk.
Credit risk is the possibility that an issuer of a fixed income instrument such
as a bond or repurchase agreement will fail to make timely payments of interest
or principal. We attempt to minimize the Fund's credit risk by investing in
securities considered investment grade at the time of purchase. When evaluating
potential investments for the Fund, our analysts also assess credit risk and
its impact on the Fund's portfolio. Nevertheless, even investment-grade
securities are subject to some credit risk. Securities in the lowest-rated,
investment-grade category have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to a weakened
capability to make principal and interest payments on these securities than is
the case for higher-rated securities. In addition, the ratings of securities
are estimates by the rating agencies of the credit quality of the securities.
The ratings may not take into account every risk related to whether interest or
principal will be repaid on a timely basis.
Q What happens if the rating of a security is downgraded to below
investment grade?
A We will determine whether it is in the best interest of the Fund's
shareholders to continue to hold the security in the Fund's portfolio.
If downgrades result in more than 5% of the Fund's net assets being
invested in securities that are less than investment-grade quality, we
will take immediate action to reduce the Fund's holdings in such
securities to 5% or less of the Fund's net assets, unless otherwise
directed by the Board of Trustees.
11
<PAGE>
Q How are the decisions to buy and sell tax-exempt securities made?
A We will buy securities that offer an attractive balance of tax-exempt
income against credit risk and price volatility. We will sell a security
if we become concerned about its credit risk, we are forced by market
factors to raise money, or an attractive replacement security is
available.
Blue Chip Stocks
Q What types of stocks are included in the Fund's portfolio?
A We will invest in common stocks of blue chip companies for long-term
growth. A blue chip company is one that has a market capitalization of:
o at least $500 million and is included in the list of companies that
make up the Standard & Poor's 500 Composite Stock Price Index or the
Dow Jones Industrial Average; or
o at least $1 billion.
We may invest up to 5% of the Fund's total assets in blue chip stocks
of foreign issuers or in American Depositary Receipts (ADRs), Global
Depositary Receipts (GDRs), or similar forms of ownership interest in
securities of foreign issuers that are traded on U.S. securities
exchanges or in U.S. over-the-counter markets.
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in stocks, it is subject to stock market
risk. Stock prices in general may decline over short or even extended periods,
regardless of the success or failure of an individual company's operations.
Stock markets tend to run in cycles, with periods when stock prices generally
go up, known as "bull" markets, and periods when stock prices generally go
down, referred to as "bear" markets. Stocks tend to go up and down more than
bonds.
Q How are the decisions to buy and sell stocks made?
A We generally invest in companies that are, or have the prospect of
becoming, dominant in their industry. We expect the sales and
12
<PAGE>
earnings of these companies to grow faster than those of their industry
peers. We consider a number of factors such as:
o a company's strategic position in its industry,
o sales and earnings growth,
o cash flow,
o book value, and
o dividend yield.
We will sell a security when we perceive that our original investment
thesis no longer holds.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 25.
FUND MANAGEMENT
The Trust has retained us, USAA Investment Management Company, to serve as the
manager and distributor for the Trust. We are an affiliate of United Services
Automobile Association (USAA), a large, diversified financial services
institution. As of the date of this Prospectus, we had approximately $37
billion in total assets under management. Our mailing address is 9800
Fredericksburg Road, San Antonio, TX 78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Board of Trustees. For our services, the Fund pays us an
annual fee. This fee was computed and paid at one-half of one percent (.50%) of
average net assets for the fiscal year ended May 31, 1998. We also provide
services related to selling the Fund's shares and receive no compensation for
those services.
Although our officers and employees, as well as those of the Trust, may engage
in personal securities transactions, they are restricted by the procedures in a
Joint Code of Ethics adopted by the Trust and us.
Portfolio Transactions
USAA Brokerage Services, our discount brokerage service, may execute purchases
and sales of equity securities for the Fund's portfolio. The Board of Trustees
has adopted procedures to ensure that any commissions paid to USAA Brokerage
Services are reasonable and fair.
13
<PAGE>
Portfolio Managers
The following individuals are primarily responsible for managing the Fund:
ASSET ALLOCATION MANAGER
[PHOTOGRAPH OF PORTFOLIO MANAGER]
JOHN W. SAUNDERS, JR.
John W. Saunders, Jr., Senior Vice President of Fixed Income Investments, has
been asset allocation manager of the Fund since its inception in January 1989.
He has 29 years investment management experience and has worked for us for 28
years. Mr. Saunders earned the Chartered Financial Analyst (CFA) designation in
1976 and is a member of the Association for Investment Management and Research
(AIMR) and the San Antonio Financial Analysts Society, Inc. (SAFAS). He holds a
BS from Portland State University, Oregon.
BLUE CHIP STOCKS
[PHOTOGRAPH OF PORTFOLIO MANAGER]
PATRICK O'HARE
Patrick O'Hare, Assistant Vice President of Equity Investments, has managed the
Fund's Blue Chip Stocks investment category since August 1998. He has five
years investment management experience and has worked for us for five years.
Mr. O'Hare earned the CFA designation in 1996 and is a member of AIMR and
SAFAS. He holds an MBA from the Wharton School, University of Pennsylvania and
a BBA from the University of Oklahoma.
TAX-EXEMPT BONDS AND TAX-EXEMPT MONEY MARKET INSTRUMENTS
[PHOTOGRAPH OF PORTFOLIO MANAGER]
KENNETH E. WILLMANN
Kenneth E. Willmann, Vice President of Fixed Income Investments, has been a
co-manager of the Fund since January 1989 and currently manages the Tax-Exempt
Bonds and Tax-Exempt Money Market Instruments investment categories. He has 24
years investment management experience and has worked for us for 21 years. Mr.
Willmann earned the CFA designation in 1978 and is a member of AIMR, SAFAS, and
the National Federation of Municipal Analysts (NFMA). He holds an MBA and a BA
from the University of Texas.
14
<PAGE>
USING MUTUAL FUNDS IN AN ASSET ALLOCATION PROGRAM
I. The Idea Behind Asset Allocation
If you have money to invest and hear that stocks may be a good investment, is
it a wise idea to use your entire savings to buy one stock? Most people
wouldn't -- it would be fortunate if it works, but this strategy holds a great
deal of risk. Surprising news could be reported tomorrow on your stock, and its
price could soar or plummet.
Careful investors understand this concept of risk and lower that risk by
diversifying their holdings among a number of securities. That way bad news for
one security may be counterbalanced by good news regarding other securities.
But there is still a question of risk here. History tells us that stocks are
generally more volatile than bonds and that long-term bonds are generally more
volatile than short-term bonds. History also tells us that over many years
investments having higher risks tend to have higher returns than investments
that carry lower risks. From these observations comes the idea of asset
allocation.
Asset allocation is a concept that involves dividing your money among several
different types of investments -- for example, stocks, bonds, and short-term
investments such as money market instruments -- and keeping that allocation
until your objectives or the financial markets significantly change. That way
you're not pinning all your financial success on the fortunes of one kind of
investment. Money spread across different investment categories can help you
reduce market risk and likely will provide more stability to your total return.
Asset allocation can work because different kinds of investments generally
follow different up-and-down cycles. With a variety of investments in your
portfolio, some are probably doing well, even when others are struggling.
II. Using Asset Allocation in an Investment Program
Most investors understand the concept of diversification, but asset allocation
goes beyond diversifying your portfolio; it's much more of an active process.
You must evaluate your lifestyle, finances, circumstances, long- and short-term
financial goals, and tolerance for investment risk. Once you have structured
your allocation, you'll need to review it regularly since your objectives will
change over time. Even though we do not charge sales loads or commissions, our
sales representatives are always available to assist you in structuring and
reviewing your investment portfolio.
15
<PAGE>
III. USAA's Series of Asset Strategy Funds
USAA's series of asset allocation funds, our Asset Strategy Funds, are designed
for the long-term investor and are in line with our investment philosophy for
investors, specifically "buy and hold for the long-term," and "don't try to
time the market." As shown below, each of USAA's Asset Strategy Funds has its
own different mix of assets and objectives.
===============================================================================
Fund Investment Objective Invests In
===============================================================================
Income Seek high current return, with bonds and stocks
Strategy reduced risk over time, through an
Fund asset allocation strategy which
emphasizes income and gives
secondary emphasis to long-term
growth of capital.
Growth and Tax Seek a conservative balance between tax exempt bonds and
Strategy Fund income, the majority of which is tax- blue chip stocks
exempt, and the potential for long-term
growth of capital to preserve purchasing
power.
Balanced Seek high total return, with reduced stocks and bonds
Strategy risk over time, through an asset
Fund allocation strategy that seeks a
combination of long-term growth of
capital and current income.
Cornerstone Achieve a positive inflation-adjusted basic value stocks,
Strategy rate of return and a reasonably stable international stocks,
Fund value of Fund shares, thereby government
preserving purchasing power of securities, real
shareholders' capital. estate securities,
and gold securities
Growth Seek high total return, with reduced small and large cap
Strategy risk over time, through an asset stocks, bonds, and
Fund allocation strategy which emphasizes international stocks
capital appreciation and gives
secondary emphasis to income.
===============================================================================
For more complete information about the other USAA Asset Strategy Funds,
including charges and expenses, call us for a Prospectus. Read it carefully
before you invest or send money.
16
<PAGE>
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required for each new account. However, after you open
your initial account with us, you will not need to fill out another application
unless the registration is different.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number or
tax identification number to avoid possible withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after we receive your request in proper form. The
Fund's NAV is determined at the close of the regular trading session (generally
4:00 p.m. Eastern Time) of the New York Stock Exchange (NYSE) each day the NYSE
is open. If we receive your request and payment prior to that time, your
purchase price will be the NAV per share determined for that day. If we receive
your request or payment after the NAV per share is calculated, the purchase
will be effective on the next business day. If you plan to purchase Fund shares
with a foreign check, we suggest you convert your foreign check to U.S. dollars
prior to investment in the Fund. This will avoid a potential delay in the
effective date of your purchase of up to four to six weeks. Furthermore, a bank
charge may be assessed in the clearing process, which will be deducted from the
amount of the purchase.
MINIMUM INVESTMENTS
INITIAL PURCHASE
[MONEY GRAPHIC]
o $3,000 or no initial investment if you elect to have monthly electronic
investments of at least $50 each. We may periodically offer programs that
reduce the minimum amounts for monthly electronic investments. Employees of
USAA and its affiliated companies may open an account through payroll
deduction for as little as $25 per pay period with no initial investment.
ADDITIONAL PURCHASES
o $50
NOTE: This Fund is not available for an IRA because the majority of its income
is tax-exempt.
17
<PAGE>
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288
o To add to your account, send your check and the "Invest by Mail" stub that
accompanies your Fund's transaction confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
BANK WIRE
[WIRE GRAPHIC]
o Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA Growth and Tax Strategy Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)______________________________________
Shareholder(s) Mutual Fund Account Number___________________
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
o Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448
[TELEPHONE GRAPHIC]
o If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To
open an account by phone, the new account must have the same registration
as your existing account.
18
<PAGE>
Redemption of Shares
You may redeem Fund shares by any of the methods described below on any day the
NAV per share is calculated. Redemptions are effective on the day instructions
are received in a manner as described below. However, if instructions are
received after the NAV per share calculation (generally 4:00 p.m. Eastern
Time), redemption will be effective on the next business day.
We will send you your money within seven days after the effective date of
redemption. Payment for redemption of shares purchased by EFT or check is sent
after the EFT or check has cleared, which could take up to 15 days from the
purchase date. If you are considering redeeming shares soon after purchase, you
should purchase by bank wire or certified check to avoid delay. Redemptions are
subject to taxes based on the difference between the cost of shares when
purchased and the price received upon redemption.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment in limited circumstances.
HOW TO REDEEM
WRITTEN, FAX, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
o Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption privileges are automatically established when you complete
your application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions. Before
any discussion regarding your account, the following information is obtained:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
19
<PAGE>
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to help you in
your role as an investor. In the INVESTOR'S GUIDE, you will find additional
information on purchases, redemptions, and methods of payment. You will also
find in-depth information on automatic investment plans, shareholder statements
and reports, and other useful information.
Account Balance
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually a small balance account fee of $12 to each shareholder account with a
balance, at the time of assessment, of less than $2,000. The fee will reduce
total transfer agency fees paid by the Fund to SAS. Accounts exempt from the
fee include: (1) any account regularly purchasing additional shares each month
through an automatic investment plan; (2) any account registered under the
Uniform Gifts/Transfers to Minors Act (UGMA/UTMA); (3) all (non-IRA) money
market fund accounts; (4) any account whose registered owner has an aggregate
balance of $50,000 or more invested in USAA mutual funds; and (5) all IRA
accounts (for the first year the account is open).
Trust Rights
The Trust reserves the right to:
o reject purchase or exchange orders when in the best interest of the Trust;
o limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
o require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question. The Statement of Additional Information
contains information on acceptable guarantors;
o redeem an account with less than $900, with certain limitations.
EXCHANGES
Exchange Privilege
The exchange privilege is automatic when you complete your application. You may
exchange shares among Funds in the USAA Family of Funds, provided you do not
hold these shares in stock certificate form and the shares to be acquired
20
<PAGE>
are offered in your state of residence. After the exchange order is received,
the Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between the cost of shares when purchased and the price received
upon exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 19.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA Family of Funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA Family of Funds).
SHAREHOLDER INFORMATION
Share Price Calculation
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4:00 p.m. Eastern Time.
Portfolio securities, except as otherwise noted, traded primarily on a domestic
securities exchange are valued at the last sales price on that exchange. If no
sale is reported, the average of the bid and asked prices is generally used.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Board of Trustees. Securities which cannot be
valued by these methods, and all other assets, are valued in good faith at fair
value using methods we have determined under the general supervision of the
Board of Trustees.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's Statement of Additional Information.
21
<PAGE>
Dividends and Distributions
The Fund pays net investment income dividends quarterly. Any net capital gain
distribution usually occurs within 45 days of the May 31 fiscal year end, which
would be somewhere around the middle of July. The Fund will make additional
payments to shareholders, if necessary, to avoid the imposition of any federal
income or excise tax.
We will automatically reinvest all income dividends and capital gain
distributions unless we receive different instructions from you. The share
price will be the NAV of the Fund shares computed on the ex-dividend date. Any
income dividends or capital gain distributions paid by the Fund will reduce the
NAV per share by the amount of the dividend or distribution. These dividends
and distributions are subject to taxes.
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
Federal Taxes
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this Prospectus. Note that the Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. We urge you to
consult your own tax adviser about the status of distributions from the Fund in
your own state and locality.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you as ordinary income, whether
received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends-received deduction available to
corporations.
Regardless of the length of time you have held the Fund shares, distributions
of net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable investment.
Distributions to shareholders derived from tax-exempt interest received by the
Fund will be excluded from a shareholder's gross income for federal income tax
purposes, provided the Fund meets certain requirements.
IN CERTAIN INSTANCES, TAX-EXEMPT INTEREST HAS TAX IMPLICATIONS.
22
<PAGE>
For corporations, all tax-exempt interest will be considered in calculating the
alternative minimum tax as part of the adjusted current earnings.
Distributions of tax-exempt income are considered in computing the portion, if
any, of Social Security and railroad retirement benefits subject to federal
and, in some cases, state taxes.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
o fails to furnish the Fund with a correct tax identification number,
o underreports dividend or interest income, or
o fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify on your application, or
on a separate Form W-9 supplied by the Fund's transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
REPORTING - The Fund will report information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes,
including the portion of the dividends constituting interest on private
activity bonds; and the percentage and source, on a state-by-state basis, of
interest income earned on the tax-exempt securities, if any, held by the Fund
during the preceding year.
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
23
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five-year period. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG Peat Marwick LLP,
whose report, along with the Fund's financial statements, are included in the
Annual Report, which is available upon request.
EIGHT-MONTH
YEAR ENDED MAY 31, PERIOD ENDED
-------------------------------------------------------
1998 1997 1996 1995 MAY 31, 1994
-------------------------------------------------------
Net asset value at
beginning of period $ 15.14 $ 14.11 $ 12.82 $ 12.32 $ 13.00
Net investment income .50 .52 .51 .49 .29
Net realized and
unrealized gain (loss) 1.72 1.39 1.32 .76 (.27)
Distributions from net
investment income (.51) (.52) (.51) (.48) (.33)
Distributions of realized
capital gains (.54) (.36) (.03) (.27) (.37)
-------------------------------------------------------
Net asset value at
end of period $ 16.31 $ 15.14 $ 14.11 $ 12.82 $ 12.32
=======================================================
Total return (%)* 15.26 14.21 14.61 10.73 .13
Net assets at end of
period (000) $229,404 $185,504 $160,390 $134,538 $128,077
Ratio of expenses to
average net assets (%) .71 .74 .82 .80 .84(a)
Ratio of net investment
income to average net
assets (%) 3.22 3.66 3.79 4.02 3.56(a)
Portfolio turnover (%) 65.58(b) 194.21(b) 202.55(b) 265.52(b) 171.35(b)
- --------------
* Assumes reinvestment of all dividend income and capital gain
distributions during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) At times, the Fund has simultaneously purchased and sold the same
securities. These transactions sometimes were high in volume and were
dissimilar to other trade activity within the Fund. If these
transactions were excluded from the calculation, the portfolio turnover
rate would have been:
EIGHT-MONTH
YEAR ENDED MAY 31, PERIOD ENDED
-------------------------------------------------------
1998 1997 1996 1995 MAY 31, 1994
-------------------------------------------------------
Portfolio turnover (%) 31.58 52.97 61.98 131.28 93.56
Purchases and sales of this type are as follows:
Purchases (000) $68,958 $220,402 $192,239 $234,367 $98,639
Sales (000) $69,044 $220,683 $192,490 $234,669 $98,761
24
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES IN WHICH WE MAY
INVEST THE FUND'S ASSETS:
WHEN-ISSUED SECURITIES
We may invest the Fund's assets in new issues of debt securities offered on a
when-issued basis.
o Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed
at the time of commitment.
o The Fund does not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
o Such securities can be sold before settlement date.
VARIABLE RATE SECURITIES
We may invest the Fund's assets in securities that bear interest at rates which
are adjusted periodically to market rates.
o These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on
the income earned by the Fund depending on the proportion of such
securities held.
o The value of variable rate securities is less affected than fixed-coupon
securities by changes in prevailing interest rates because of the periodic
adjustment of their coupons to a market rate. The shorter the period
between adjustments, the smaller the impact of interest rate fluctuations
on the value of these securities.
o The market value of a variable rate security usually tends toward par (100%
of face value) at interest rate adjustment time.
PUT BONDS
We may invest the Fund's assets in tax-exempt securities (including securities
with variable interest rates) which may be redeemed or sold back (put) to the
issuer of the security or a third party prior to stated maturity (put bonds).
o Such securities will normally trade as if maturity is the earlier put date,
even though stated maturity is longer. Under the Fund's portfolio
allocation procedure, maturity for put bonds is deemed to be the date on
which the put becomes exercisable.
ZERO COUPON BONDS
We may invest the Fund's assets in zero coupon bonds.
o A zero coupon bond is a security that is sold at a deep discount from its
face value, makes no periodic interest payments, and is redeemed at face
value when it matures.
o The lump sum payment at maturity increases the price volatility of the zero
coupon bond to changes in interest rates when compared to a bond that
distributes a semiannual coupon payment.
o In calculating its dividend, the Fund records as income the daily
amortization of the purchase discount.
25
<PAGE>
MUNICIPAL LEASE OBLIGATIONS
We may invest the Fund's assets in a variety of instruments commonly referred
to as municipal lease obligations, including:
o Leases,
o Installment purchase contracts, and
o Certificates of participation in such leases and contracts.
ILLIQUID SECURITIES
We may invest up to 15% of the Fund's net assets in securities which are
illiquid. Illiquid securities are those securities that cannot be disposed of
in the ordinary course of business, seven days or less, at approximately the
value at which the Fund has valued the securities.
AMERICAN DEPOSITARY RECEIPTS (ADRs)
We may invest the Fund's assets in ADRs which are foreign shares held by a U.S.
bank which issues a receipt evidencing ownership. Dividends are paid in U.S.
dollars.
GLOBAL DEPOSITARY RECEIPTS (GDRs)
We may invest the Fund's assets in GDRs which are foreign shares held by a U.S.
or foreign bank which issues a receipt evidencing ownership. Dividends are paid
in U.S. dollars.
26
<PAGE>
APPENDIX B
USAA Family of No-Load Mutual Funds
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide you with the opportunity to formulate your own investment program. You
may exchange any shares you hold in any one USAA Fund for shares in any other
USAA Fund. For more complete information about other Funds in the USAA Family
of Funds, including charges and expenses, call us for a Prospectus. Read it
carefully before you invest or send money.
FUND
TYPE/NAME VOLATILITY
=================================================
CAPITAL APPRECIATION
Aggressive Growth Very high
Emerging Markets (1) Very high
First Start Growth Moderate to high
Gold (1) Very high
Growth Moderate to high
Growth & Income Moderate
International (1) Moderate to high
S&P 500 Index (2) Moderate
Science & Technology Very high
World Growth (1) Moderate to high
=================================================
ASSET ALLOCATION
Balanced Strategy (1) Moderate
Cornerstone Strategy (1) Moderate
Growth and Tax Strategy Moderate
Growth Strategy (1) Moderate to high
Income Strategy Low to moderate
=================================================
INCOME -- TAXABLE
GNMA Low to moderate
Income Moderate
Income Stock Moderate
Short-Term Bond Low
=================================================
INCOME -- TAX EXEMPT
Long-Term (3) Moderate
Intermediate-Term (3) Low to moderate
Short-Term (3) Low
State Bond/Income (3, 4) Moderate
=================================================
MONEY MARKET
Money Market (5) Very low
Tax Exempt Money Market (3, 5) Very low
Treasury Money Market Trust (5) Very low
State Money Market (3, 4, 5) Very low
=================================================
1 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
2 S&P(R) IS A TRADEMARK OF THE MCGRAW-HILL COMPANIES, INC., AND HAS BEEN
LICENSED FOR USE. THE PRODUCT IS NOT SPONSORED, SOLD OR PROMOTED BY STANDARD
& POOR'S, AND STANDARD & POOR'S MAKES NO REPRESENTATION REGARDING THE
ADVISABILITY OF INVESTING IN THE PRODUCT.
3 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
4 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY
TO RESIDENTS OF THOSE STATES.
5 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.
27
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's Statement of Additional Information (SAI),
Annual or Semiannual Report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of the Prospectus. In the Fund's Annual Report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally, copies
of this information can be obtained, for a duplicating fee, by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
------------------------------
TELEPHONE ASSISTANCE 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 (R)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
Investment Company Act File No. 811-4019
<PAGE>
USAA BALANCED
STRATEGY FUND
PROSPECTUS
OCTOBER 1, 1998
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy?...... 2
Main Risks of Investing in This Fund............................ 2
Is This Fund for You?........................................... 3
Could the Value of Your Investment in This Fund Fluctuate?...... 3
Fees and Expenses............................................... 5
Fund Investments................................................ 6
Fund Management.................................................12
Using Mutual Funds in an Asset Allocation Program...............13
How to Invest...................................................15
Important Information About Purchases and Redemptions...........18
Exchanges.......................................................19
Shareholder Information.........................................20
Financial Highlights............................................23
Appendix A .....................................................24
Appendix B .....................................................27
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is to seek 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. Using pre-set target ranges, we
will invest the Fund's assets in a combination of stocks on the one hand and
bonds and money market instruments on the other.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objective will be achieved. See FUND INVESTMENTS on
page 6 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risks of investing in this Fund are market risk, credit risk, and
interest rate risk.
o MARKET RISK involves the possibility that the Fund's investments in stocks
will decline because of falls in the stock market, reducing the value of
individual company's stocks, regardless of the success or failure of an
individual company's operations.
o CREDIT RISK involves the possibility that a borrower cannot make timely
interest and principal payments on its securities.
o INTEREST RATE RISK involves the possibility that the value of the Fund's
investments will decline because of an increase in interest rates.
IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
Other risks of the Fund described later in the Prospectus include rebalancing
risk, the risks of foreign investing, and the risks of investing in real estate
investment trusts (REITs). As with other mutual funds, losing money is an
additional risk associated with investing in this Fund.
2
<PAGE>
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
[CAUTION LIGHT
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
|X| You are seeking a fund that will diversify your holdings among a number of
stocks and bonds.
|X| You are willing to accept moderate risk.
|X| You are looking for current income.
|X| You are seeking an appropriate investment for an IRA, through a 401(k) plan
or 403(b) plan, or other tax-sheltered account.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
|X| You are unable or reluctant to invest for a period of five years or more.
|X| You are unwilling to take greater risk for long-term goals.
|X| You need an investment that provides tax-free income.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment in the Fund will likely
increase or decrease. The bar chart shown on the next page illustrates the
Fund's volatility and performance from year to year over the life of the Fund.
3
<PAGE>
TOTAL RETURN
All mutual funds must use the same formula to calculate total return.
TOTAL RETURN
MEASURES THE
PRICE CHANGE
IN A SHARE
ASSUMING THE
REINVESTMENT
OF ALL DIVIDEND
INCOME AND
CAPITAL GAIN
DISTRIBUTIONS.
[BAR CHART]
CALENDAR TOTAL RETURN
YEAR PERCENTAGE
1996* 13.45
1997 19.05
*FUND BEGAN OPERATIONS ON SEPTEMBER 1, 1995.
THE FUND'S TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998, WAS
6.33%.
During the periods shown in the bar chart, the highest total return for a
quarter was 9.80% (quarter ending June 30, 1997) and the lowest total return
for a quarter was .65% (quarter ending December 31, 1997).
The table below shows how the Fund's average annual returns for the one-year
period as well as the life of the Fund compared to those of a broad-based
securities market index. Remember, historical performance does not necessarily
indicate what will happen in the future.
====================================================================
Average Annual Total Returns Since Fund's
(for the periods ending Past Inception on
December 31, 1997) 1 Year September 1, 1995
====================================================================
Balanced Strategy Fund 19.05% 15.23%
--------------------------------------------------------------------
S&P 500 Index* 33.35% 29.00%
====================================================================
* THE S&P 500 INDEX IS A BROAD-BASED COMPOSITE UNMANAGED INDEX THAT
REPRESENTS THE AVERAGE PERFORMANCE OF A GROUP OF 500 WIDELY-HELD,
PUBLICLY-TRADED STOCKS.
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time
4
<PAGE>
periods. Again, you must remember that historical performance does not
necessarily indicate what will happen in the future. The value of your shares
may go up or down. For the most current price and return information for this
Fund, you may call TouchLINE(R) at 1-800-531-8777. Press 1 for the Mutual Fund
Menu, press 1 again for prices and returns. Then, press 47# when asked for the
Fund Code.
[TELEPHONE GRAPHIC]
TOUCHLINE (R)
1-800-531-8777
PRESS
1
THEN
1
THEN
4 7 #
NEWSPAPER
SYMBOL
BalStra
TICKER
SYMBOL
USBSX
You can also find the most current price of your shares in the business section
of your newspaper in the mutual fund section under the heading "USAA Group" and
the symbol "BalStra." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "USBSX."
FEES AND EXPENSES
This summary shows what it will cost you directly or indirectly to invest in
the Fund.
Shareholder Transaction Expenses -- Fees You Pay Directly
There are no fees or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is a $10 fee. (Your bank may also charge a fee for receiving
wires.)
Annual Fund Operating Expenses -- Fees You Pay Indirectly
Fund expenses come out of the Fund's assets and are reflected in the Fund's
share price and dividends. "Other Expenses" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses before waivers
during the past fiscal year ended May 31, 1998, and are calculated as a
percentage of average net assets (ANA).
12B-1 FEES -
SOME MUTUAL
FUNDS CHARGE
THESE FEES
TO PAY FOR
ADVERTISING
AND OTHER
COSTS OF SELLING
FUND SHARES.
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .56%
-----
Total Annual Fund Operating Expenses* 1.31%
=====
- --------------
* During the year, we voluntarily limited the Total Annual Fund Operating
Expenses to 1.25% as follows:
Total Annual Fund Operating Expenses 1.31%
Reimbursement from USAA Investment
Management Company (.06%)
-----
Actual Fund Operating Expenses
After Reimbursement 1.25%
=====
5
<PAGE>
We have voluntarily agreed to limit the Fund's annual expenses to 1.25% of
its ANA and will reimburse the Fund for all expenses in excess of that
amount until October 1, 1999.
Example of Effect of the Fund's Operating Expenses
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
(before any applicable reimbursement) remain the same, and (3) you redeem all
of your shares at the end of the periods shown.
1 year ......... $ 133
3 years........ 415
5 years........ 718
10 years........ 1,579
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal investment strategy is to provide a diversified
investment program within one mutual fund by allocating the Fund's
assets in each of the following investment categories according to the
following targeted ranges. Securities are classified by category at the
time of purchase.
[PIE CHART]
PERCENTAGE TARGET RANGE OF NET ASSETS
INVESTMENT CATEGORY
STOCKS 50-70%
BONDS 30-50%
MONEY MARKET INSTRUMENTS 0-10%
The ranges allow for a variance within each investment category. The Board of
Trustees may revise the target ranges upon 60 days' prior written notice to
shareholders. However, we may go outside the ranges on a temporary defensive
basis without shareholder notification whenever we believe it is in the best
interest of the Fund and its shareholders.
6
<PAGE>
Q Why are stocks and bonds mixed in the same Fund?
A From time to time the stock and bond markets may fluctuate
independently of each other. In other words, a decline in the stock
market may, in certain instances, be offset by a rise in the bond
market, or vice versa. As a result, the Fund, with its mix of stocks
and bonds, is expected in the long run to entail less market risk (and
potentially less return) than a mutual fund investing exclusively in
stocks.
Q How are the investment categories and target ranges selected?
A The investment categories and the target ranges were selected to
provide investors with a diversified investment in a single mutual
fund. Stocks provide the potential for long-term capital growth while
bonds provide a high current return. Money market instruments provide a
means for temporary investment of cash balances arising in the normal
course of business.
However, as a temporary defensive measure because of market, economic,
political, or other conditions, we may invest up to 100% of the Fund's
assets in investment-grade, short-term debt instruments, which may
result in the Fund not achieving its investment objective during the
time it is in this temporary defensive posture.
Q What actions are taken to keep the Fund's asset allocations within the
target ranges?
A If market action causes the actual assets of the Fund in one or more
investment categories to move outside the ranges, we will make
adjustments to rebalance the portfolio. In general, we will rebalance
the portfolio at least once during each quarter. In rebalancing the
Fund's portfolio, we will buy or sell securities to return the actual
allocation of the Fund's assets to within its target ranges. For
example, the Fund's portfolio could begin a quarter with its assets
allocated 65% in stocks, 30% in bonds, and 5% in money market
instruments. During the quarter, due to market returns, the Fund's
portfolio could hold 75% in stocks, 20% in bonds, and 5% in money
market instruments. In this case, we would sell stocks and use the
proceeds to buy bonds to bring the stocks and bonds back to within
their target ranges.
[CAUTION LIGHT]
REBALANCING RISKS. In purchasing and selling securities in order to rebalance
its portfolio, the Fund will pay more in brokerage commissions than it would
without a rebalancing policy. As a result of the need to
7
<PAGE>
rebalance, the Fund also has less flexibility in the timing of purchases and
sales of securities than it would otherwise. While we will attempt to minimize
any adverse impact to the Fund or its shareholders, the Fund may have a higher
proportion of capital gains and a lower return than a fund that does not have a
rebalancing policy.
Stocks
Q What types of stocks are included in the Fund's portfolio?
A We will invest this portion of the Fund's portfolio primarily in
domestic common stocks, and we may include some foreign stocks and real
estate investment trusts (REITs).
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in stocks, it is subject to stock market
risk. Stock prices in general may decline over short or even extended periods,
regardless of the success or failure of an individual company's operations.
Stock markets tend to run in cycles, with periods when stock prices generally
go up, known as "bull" markets, and periods when stock prices generally go
down, referred to as "bear" markets. Stocks tend to go up and down more than
bonds.
[CAUTION LIGHT]
FOREIGN INVESTING. Investing in foreign securities, including American
Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs), poses unique
risks: currency exchange rate fluctuations; foreign market illiquidity;
increased price volatility; exchange control regulations; foreign ownership
limits; different accounting, reporting, and disclosure requirements; political
instability; and difficulties in obtaining legal judgments. In the past, equity
and debt instruments of foreign markets have been more volatile than equity and
debt instruments of U.S. securities markets.
[CAUTION LIGHT]
REITS. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. Additionally, REITs are
dependent upon the capabilities of the REIT manager(s), have limited
diversification, and could be significantly impacted by changes in tax laws.
8
<PAGE>
Q How are the decisions to buy and sell stocks made?
A We generally invest in companies that are, or have the prospect of
becoming, dominant in their industry. We expect the sales and earnings
of these companies to grow faster than those of their industry peers.
We consider a number of factors such as:
o a company's strategic position in its industry,
o sales and earnings growth,
o cash flow,
o book value, and
o dividend yield.
We will sell a security when we perceive that our original investment
thesis no longer holds.
Bonds and Money Market Instruments
Q What types of bonds are included in the Fund's portfolio?
A Bonds must be investment grade at the time of purchase and may include
any of the following:
o obligations of the U.S. Government, its
agencies, and instrumentalities;
o mortgage-backed securities;
o asset-backed securities;
o corporate debt securities, such as notes and bonds;
o debt securities of real estate investment trusts;
o obligations of state and local governments and their agencies and
instrumentalities;
o Eurodollar obligations;
o Yankee obligations; and
o other debt securities.
Further description of these securities is found in APPENDIX A on page
24.
9
<PAGE>
[CAUTION LIGHT]
INTEREST RATE RISK. As a mutual fund investing in bonds, the Fund is subject to
the risk that the market value of the bonds will decline because of rising
interest rates. Bond prices are linked to the prevailing market interest rates.
In general, when interest rates rise, the prices of bonds fall and when
interest rates fall, bond prices generally rise. The price volatility of a bond
also depends on its maturity. Generally, the longer the maturity of a bond, the
greater its sensitivity to interest rates. To compensate investors for this
higher risk, bonds with longer maturities generally offer higher yields than
bonds with shorter maturities.
Q What are considered investment-grade securities?
A Investment-grade securities include securities issued or guaranteed by
the U.S. Government, its agencies, and instrumentalities, as well as
securities rated within the categories listed by the following rating
agencies:
================================================================
LONG-TERM SHORT-TERM
RATING AGENCY DEBT SECURITIES DEBT SECURITIES
===============================================================
Moody's Investors At least Baa At least Prime-3 or
Services Inc. MIG 4/VMIG 4
---------------------------------------------------------------
Standard & Poor's At least BBB At least A-3 or
Ratings Group SP-2
---------------------------------------------------------------
Fitch IBCA, Inc. At least BBB At least F-3
---------------------------------------------------------------
Duff and Phelps At least BBB At least D-3
===============================================================
or if unrated by these agencies, we must determine that these
securities are of equivalent investment quality.
You will find a complete description of the above debt ratings in the
Fund's Statement of Additional Information.
[CAUTION LIGHT]
CREDIT RISK. The bonds in the Fund's portfolio are subject to credit risk.
Credit risk is the possibility that an issuer of a fixed income instrument such
as a bond or repurchase agreement will fail to make timely payments of interest
or principal. We attempt to minimize the Fund's credit risk by investing in
securities considered investment grade at the time of purchase. When evaluating
potential investments for the Fund, our analysts also assess credit risk and
its impact on the Fund's portfolio. Nevertheless, even investment-grade
securities are subject to some credit risk. Securities in the lowest-rated,
investment-grade category have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to
10
<PAGE>
lead to a weakened capability to make principal and interest payments on these
securities than is the case for higher-rated securities. In addition, the
ratings of securities are estimates by the rating agencies of the credit
quality of the securities. The ratings may not take into account every risk
related to whether interest or principal will be repaid on a timely basis.
Q What happens if the rating of a security is downgraded below investment
grade?
A We will determine whether it is in the best interest of the Fund's
shareholders to continue to hold the security in the Fund's portfolio.
If downgrades result in more than 5% of the Fund's net assets being
invested in securities that are less than investment-grade quality, we
will take immediate action to reduce the Fund's holdings in such
securities to 5% or less of the Fund's net assets, unless otherwise
directed by the Board of Trustees.
Q How are the decisions to buy and sell bonds made?
A We buy bonds that represent value in current market conditions. Value
is a combination of yield, credit quality, structure (maturity, coupon,
redemption features) and liquidity. Recognizing value is the result of
simultaneously analyzing the interaction of these factors among the
securities available in the market. We will sell a security if we
become concerned about its credit risk, we are forced by market factors
to raise money, or an attractive replacement security is available.
Q What types of money market instruments are included in the Fund's
portfolio?
A The money market instruments included in the Fund's portfolio will
consist of investment-grade, U.S. dollar denominated debt securities
that have remaining maturities of one year or less. They may carry
either fixed or variable interest rates and may include any of the
following:
o obligations of the U.S. Government, its
agencies, and instrumentalities;
o repurchase agreements collateralized by the same;
o commercial paper or other short-term corporate obligations;
o certificates of deposit;
o bankers' acceptances; and
o other suitable obligations.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 24.
11
<PAGE>
FUND MANAGEMENT
The Trust has retained us, USAA Investment Management Company, to serve as the
manager and distributor for the Trust. We are an affiliate of United Services
Automobile Association (USAA), a large, diversified financial services
institution. As of the date of this Prospectus, we had approximately $37
billion in total assets under management. Our mailing address is 9800
Fredericksburg Road, San Antonio, TX 78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Board of Trustees. For our services, the Fund pays us an
annual fee. The fee is computed at three-fourths of one percent (.75%) of
average net assets. The fee we received for the fiscal year ended May 31, 1998,
after reimbursements we made to the Fund, was equal to .69% of average net
assets. We also provide services related to selling the Fund's shares and
receive no compensation for those services.
Although our officers and employees, as well as those of the Trust, may engage
in personal securities transactions, they are restricted by the procedures in a
Joint Code of Ethics adopted by the Trust and us.
Portfolio Transactions
USAA Brokerage Services, our discount brokerage service, may execute purchases
and sales of equity securities for the Fund's portfolio. The Board of Trustees
has adopted procedures to ensure that any commissions paid to USAA Brokerage
Services are reasonable and fair.
Portfolio Managers
The following individuals are primarily responsible for managing the Fund:
STOCKS
[PHOTOGRAPH OF PORTFOLIO MANAGER]
PATRICK O'HARE
Patrick O'Hare, Assistant Vice President of Equity Investments, is the asset
allocation manager and has managed the Stocks investment category since October
1998. He has five years investment management experience and has worked for us
for five years. Mr. O'Hare earned the Chartered Financial Analyst (CFA)
designation in 1996 and is a member of the Association for Investment
Management and Research (AIMR) and the San Antonio Financial Analysts Society,
Inc. (SAFAS). He holds an MBA from the Wharton School, University of
Pennsylvania and a BBA from the University of Oklahoma.
12
<PAGE>
BONDS
[PHOTOGRAPH OF PORTFOLIO MANAGER]
PAUL H. LUNDMARK
Paul H. Lundmark, Assistant Vice President of Fixed Income Investments, has
managed the Bonds investment category since September 1995. He has 12 years
investment management experience and has worked for us for six years. Mr.
Lundmark earned the CFA designation in 1989 and is a member of AIMR and SAFAS.
He holds an MBA and BSB from the University of Minnesota.
MONEY MARKET INSTRUMENTS
[PHOTOGRAPH OF PORTFOLIO MANAGER]
PAMELA K. BLEDSOE
Pamela K. Bledsoe, Assistant Vice President of Money Market Funds, has managed
the Money Market Instruments category since May 1996. She has ten years
investment management experience and has worked for us for seven years. Ms.
Bledsoe earned the CFA designation in 1992 and is a member of AIMR and SAFAS.
She holds an MBA from Texas Christian University and a BS from Louisiana Tech
University.
USING MUTUAL FUNDS IN AN ASSET ALLOCATION PROGRAM
I. The Idea Behind Asset Allocation
If you have money to invest and hear that stocks may be a good investment, is
it a wise idea to use your entire savings to buy one stock? Most people
wouldn't -- it would be fortunate if it works, but this strategy holds a great
deal of risk. Surprising news could be reported tomorrow on your stock, and its
price could soar or plummet.
Careful investors understand this concept of risk and lower that risk by
diversifying their holdings among a number of securities. That way bad news for
one security may be counterbalanced by good news regarding other securities.
But there is still a question of risk here. History tells us that stocks are
generally more volatile than bonds and that long-term bonds are generally more
volatile than short-term bonds. History also tells us that over many years
investments having higher risks tend to have higher returns than investments
that carry lower risks. From these observations comes the idea of asset
allocation.
13
<PAGE>
Asset allocation is a concept that involves dividing your money among several
different types of investments -- for example, stocks, bonds, and short-term
investments such as money market instruments -- and keeping that allocation
until your objectives or the financial markets significantly change. That way
you're not pinning all your financial success on the fortunes of one kind of
investment. Money spread across different investment categories can help you
reduce market risk and likely will provide more stability to your total return.
Asset allocation can work because different kinds of investments generally
follow different up-and-down cycles. With a variety of investments in your
portfolio, some are probably doing well, even when others are struggling.
II. Using Asset Allocation in an Investment Program
Most investors understand the concept of diversification, but asset allocation
goes beyond diversifying your portfolio; it's much more of an active process.
You must evaluate your lifestyle, finances, circumstances, long- and short-term
financial goals, and tolerance for investment risk. Once you have structured
your allocation, you'll need to review it regularly since your objectives will
change over time. Even though we do not charge sales loads or commissions, our
sales representatives are always available to assist you in structuring and
reviewing your investment portfolio.
III. USAA's Series of Asset Strategy Funds
USAA's series of asset allocation funds, our Asset Strategy Funds, are designed
for the long-term investor and are in line with our investment philosophy for
investors, specifically "buy and hold for the long-term," and "don't try to
time the market." As shown below, each of USAA's Asset Strategy Funds has its
own different mix of assets and objectives.
===============================================================================
Fund Investment Objective Invests In
===============================================================================
Income Seek high current return, with bonds and stocks
Strategy reduced risk over time, through an
Fund asset allocation strategy which
emphasizes income and gives
secondary emphasis to long-term
growth of capital.
Growth and Tax Seek a conservative balance between tax exempt bonds and
Strategy Fund income, the majority of which is tax- blue chip stocks
exempt, and the potential for long-term
growth of capital to preserve purchasing
power.
14
<PAGE>
CONTINUED
===============================================================================
Fund Investment Objective Invests In
===============================================================================
Balanced Seek high total return, with reduced stocks and bonds
Strategy risk over time, through an asset
Fund allocation strategy that seeks a
combination of long-term growth of
capital and current income.
Cornerstone Achieve a positive inflation-adjusted basic value stocks,
Strategy rate of return and a reasonably stable international stocks,
Fund value of Fund shares, thereby government
preserving purchasing power of securities, real
shareholders' capital. estate securities,
and gold securities
Growth Seek high total return, with reduced small and large cap
Strategy risk over time, through an asset stocks, bonds, and
Fund allocation strategy which emphasizes international stocks
capital appreciation and gives
secondary emphasis to income.
===============================================================================
For more complete information about the other USAA Asset Strategy Funds,
including charges and expenses, call us for a Prospectus. Read it carefully
before you invest or send money.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required for each new account. However, after you open
your initial account with us, you will not need to fill out another application
unless the registration is different.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number or
tax identification number to avoid possible withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after we receive your request in proper form. The
Fund's NAV is determined at the close of the regular trading session
15
<PAGE>
(generally 4:00 p.m. Eastern Time) of the New York Stock Exchange (NYSE) each
day the NYSE is open. If we receive your request and payment prior to that
time, your purchase price will be the NAV per share determined for that day. If
we receive your request or payment after the NAV per share is calculated, the
purchase will be effective on the next business day. If you plan to purchase
Fund shares with a foreign check, we suggest you convert your foreign check to
U.S. dollars prior to investment in the Fund. This will avoid a potential delay
in the effective date of your purchase of up to four to six weeks. Furthermore,
a bank charge may be assessed in the clearing process, which will be deducted
from the amount of the purchase.
MINIMUM INVESTMENTS
INITIAL PURCHASE
[MONEY GRAPHIC]
o $3,000 [$500 Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) accounts and
$250 for IRAs] or no initial investment if you elect to have monthly
electronic investments of at least $50 each. We may periodically offer
programs that reduce the minimum amounts for monthly electronic
investments. Employees of USAA and its affiliated companies may open an
account through payroll deduction for as little as $25 per pay period with
no initial investment.
ADDITIONAL PURCHASES
o $50
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288
o To add to your account, send your check and the "Invest by Mail" stub that
accompanies your Fund's transaction confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
16
<PAGE>
BANK WIRE
[WIRE GRAPHIC]
o Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA Balanced Strategy Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)______________________________________
Shareholder(s) Mutual Fund Account Number___________________
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
o Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448
[TELEPHONE GRAPHIC]
o If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To
open an account by phone, the new account must have the same registration
as your existing account.
Redemption of Shares
You may redeem Fund shares by any of the methods described below on any day the
NAV per share is calculated. Redemptions are effective on the day instructions
are received in a manner as described below. However, if instructions are
received after the NAV per share calculation (generally 4:00 p.m. Eastern
Time), redemption will be effective on the next business day.
We will send you your money within seven days after the effective date of
redemption. Payment for redemption of shares purchased by EFT or check is sent
after the EFT or check has cleared, which could take up to 15 days from the
purchase date. If you are considering redeeming shares soon after purchase, you
should purchase by bank wire or certified check to avoid delay. Redemptions are
subject to taxes based on the difference between the cost of shares when
purchased and the price received upon redemption.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment in limited circumstances.
17
<PAGE>
HOW TO REDEEM
WRITTEN, FAX, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
o Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption privileges are automatically established when you complete
your application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions. Before
any discussion regarding your account, the following information is obtained:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to help you in
your role as an investor. In the INVESTOR'S GUIDE, you will find additional
information on purchases, redemptions, and methods of payment. You will also
find in-depth information on automatic investment plans, shareholder statements
and reports, and other useful information.
Account Balance
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually a small balance account fee of $12 to each shareholder account with a
balance, at the time of assessment, of less than $2,000. The fee will reduce
total transfer agency fees paid by the Fund to SAS. Accounts exempt from the
fee include: (1) any account regularly purchasing additional shares each month
through an automatic investment plan; (2) any account registered under the
Uniform Gifts/Transfers to Minors Act (UGMA/UTMA); (3) all (non-IRA) money
market fund accounts; (4) any account whose
18
<PAGE>
registered owner has an aggregate balance of $50,000 or more invested in USAA
mutual funds; and (5) all IRA accounts (for the first year the account is
open).
Trust Rights
The Trust reserves the right to:
o reject purchase or exchange orders when in the best interest of the Trust;
o limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
o require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question. The Statement of Additional Information
contains information on acceptable guarantors;
o redeem an account with less than $900, with certain limitations.
EXCHANGES
Exchange Privilege
The exchange privilege is automatic when you complete your application. You may
exchange shares among Funds in the USAA Family of Funds, provided you do not
hold these shares in stock certificate form and the shares to be acquired are
offered in your state of residence. After the exchange order is received, the
Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between the cost of shares when purchased and the price received
upon exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 18.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA Family of Funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA Family of Funds).
19
<PAGE>
SHAREHOLDER INFORMATION
Share Price Calculation
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4:00 p.m. Eastern Time.
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.
Securities trading in various foreign markets may take place on days when the
NYSE is closed. Further, when the NYSE is open, the foreign markets may be
closed. Therefore, the calculation of the Fund's NAV may not take place at the
same time the prices of certain securities held by the Fund are determined. In
most cases, 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 the Fund's NAV is calculated will not be reflected in the
Fund's NAV. If, however, we determine that a particular event would materially
affect the Fund's NAV, then we, under the general supervision of the Board of
Trustees, will use all relevant, available information to determine a fair
value for the affected portfolio securities.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Board of Trustees. Securities which cannot be
valued by these methods, and all other assets, are valued in good faith at fair
value using methods we have determined under the general supervision of the
Board of Trustees.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's Statement of Additional Information.
Dividends and Distributions
The Fund pays net investment income dividends quarterly. Any net capital gain
distribution usually occurs within 45 days of the May 31 fiscal year end, which
would be somewhere around the middle of July. The Fund will make
20
<PAGE>
additional payments to shareholders, if necessary, to avoid the imposition of
any federal income or excise tax.
We will automatically reinvest all income dividends and capital gain
distributions unless we receive different instructions from you. The share
price will be the NAV of the Fund shares computed on the ex-dividend date. Any
capital gain distributions paid by the Fund will reduce the NAV per share by
the amount of the dividend or distribution. These dividends and distributions
are subject to taxes.
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
Federal Taxes
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this Prospectus. Note that the Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. We urge you to
consult your tax adviser about the status of distributions from the Fund in
your own state and locality.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you as ordinary income, whether
received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends-received deduction available to
corporations.
Regardless of the length of time you have held Fund shares, distributions of
net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable investment.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
o fails to furnish the Fund with a correct tax identification number,
o underreports dividend or interest income, or
o fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify on your application, or
on a separate Form W-9 supplied by the Fund's transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
21
<PAGE>
REPORTING - The Fund will report information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
22
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance since inception. Certain information reflects financial
results for a single Fund share. The total returns in the table represent the
rate that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by KPMG Peat Marwick LLP, whose report, along with the Fund's
financial statements, are included in the Annual Report, which is available
upon request.
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
- --------------
* Fund commenced operations September 1, 1995.
** Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
23
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES IN WHICH WE MAY
INVEST THE FUND'S ASSETS:
FORWARD CURRENCY CONTRACTS
The Fund may hold securities denominated in foreign currencies. As a result,
the value of the securities will be affected by changes in the exchange rate
between the dollar and foreign currencies. In managing currency exposure, the
Fund may enter into forward currency contracts. A forward currency contract
involves an agreement to purchase or sell a specified currency at a specified
future date or over a specified time period at a price set at the time of the
contract. The Fund may only enter into forward currency contracts. When the
Fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it desires to "lock in" the U.S. dollar price of the
security.
REPURCHASE AGREEMENTS
We may invest the Fund's assets in repurchase agreements which are
collateralized by obligations issued or guaranteed as to both principal and
interest by the U.S. Government, its agencies, and instrumentalities. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell it back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on an agreed upon date.
This date is usually not more than seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest, which is unrelated to the coupon rate or maturity of the purchased
security.
WHEN-ISSUED SECURITIES
We may invest the Fund's assets in new issues of debt securities offered on a
when-issued basis.
o Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed
at the time of commitment.
o The Fund does not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
o Such securities can be sold before settlement date.
VARIABLE RATE SECURITIES
We may invest the Fund's assets in securities that bear interest at rates which
are adjusted periodically to market rates.
o These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on
the income earned by the Fund depending on the proportion of such
securities held.
o The value of variable rate securities is less affected than fixed-coupon
securities by changes in prevailing interest rates because of the periodic
adjustment of their coupons to a market rate. The shorter the period
between adjustments, the smaller the impact of interest rate fluctuations
on the value of these securities.
24
<PAGE>
o The market value of a variable rate security usually tends toward par (100%
of face value) at interest rate adjustment time.
PUT BONDS
We may invest the Fund's assets in securities (including securities with
variable interest rates) which may be redeemed or sold back (put) to the issuer
of the security or a third party prior to stated maturity (put bonds).
o Such securities will normally trade as if maturity is the earlier put date,
even though stated maturity is longer. Under the Fund's portfolio
allocation procedure, maturity for put bonds is deemed to be the date on
which the put becomes exercisable.
MUNICIPAL LEASE OBLIGATIONS
We may invest the Fund's assets in a variety of instruments commonly referred
to as municipal lease obligations, including:
o Leases,
o Installment purchase contracts, and
o Certificates of participation in such leases and contracts.
EURODOLLAR AND YANKEE OBLIGATIONS
We may invest a portion of the Fund's assets in dollar-denominated instruments
that have been issued outside the U.S. capital markets by foreign corporations
and financial institutions and by foreign branches of U.S. corporations and
financial institutions (Eurodollar) as well as dollar-denominated instruments
that have been issued by foreign issuers in the U.S. capital markets (Yankee).
In addition, we may invest a portion of the Fund's assets in Eurodollar and
Yankee obligations of investment-grade emerging market countries.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
We may invest the Fund's assets in mortgage-backed and asset-backed securities.
Mortgage-backed securities include, but are not limited to, securities issued
by the Government National Mortgage Association (Ginnie Mae), the Federal
National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage
Corporation (Freddie Mac). These securities represent ownership in a pool of
mortgage loans. They differ from conventional bonds in that principal is paid
back to the investor as payments are made on the underlying mortgages in the
pool. Accordingly, the Fund receives monthly scheduled payments of principal
and interest along with any unscheduled principal prepayments on the underlying
mortgages. Because these scheduled and unscheduled principal payments must be
reinvested at prevailing interest rates, mortgage-backed securities do not
provide an effective means of locking in long-term interest rates for the
investor. Like other fixed income securities, when interest rates rise, the
value of a mortgage-backed security generally will decline; however, when
interest rates are declining, the value of mortgage-backed securities with
prepayment features may not increase as much as other fixed income securities.
Mortgage-backed securities also include collateralized mortgage obligations
(CMOs). CMOs are obligations fully collateralized by a portfolio of mortgages
or mortgage-related securities. CMOs are divided into pieces (tranches) with
varying maturities. The cash flow from the
25
<PAGE>
underlying mortgages is used to pay off each tranche separately. CMOs are
designed to provide investors with more predictable maturities than regular
mortgage securities but such maturities can be difficult to predict because of
the effect of prepayments. Failure to accurately predict prepayments can
adversely affect the Fund's return on these investments. CMOs may also be less
marketable than other securities.
Asset-backed securities represent a participation in, or are secured by and
payable from, a stream of payments generated by particular assets, such as
credit card, motor vehicle, or trade receivables. They may be pass-through
certificates, which have characteristics very similar to mortgage-backed
securities, discussed above. They may also be in the form of asset-backed
commercial paper, which is issued by a special purpose entity, organized solely
to issue the commercial paper and to purchase interests in the assets. The
credit quality of these securities depends primarily upon the quality of the
underlying assets and the level of credit support and enhancement provided.
MASTER DEMAND NOTES
We may invest the Fund's assets in master demand notes, which are obligations
that permit the investment of fluctuating amounts by the Fund, at varying rates
of interest using direct arrangements between the Fund, as lender, and the
borrower. These notes permit daily changes in the amounts borrowed. The Fund
has the right to increase the amount under the note at any time up to the full
amount provided by the note agreement, or to decrease the amount, and the
borrower may repay up to the full amount of the note without penalty.
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. Because master demand notes are direct
lending arrangements between the lender and borrower, these instruments
generally will not be traded, and there generally is no secondary market for
these notes, although they are redeemable (and immediately repayable by the
borrower) at face value, plus accrued interest, at any time. We will invest the
Fund's assets in master demand notes only if the Board of Trustees or its
delegate has determined that they are of credit quality comparable to the debt
securities in which the Fund generally may invest.
ILLIQUID SECURITIES
We may invest up to 15% of the Fund's net assets in securities which are
illiquid. Illiquid securities are those securities that cannot be disposed of
in the ordinary course of business, seven days or less, at approximately the
value at which the Fund has valued the securities.
AMERICAN DEPOSITARY RECEIPTS (ADRS)
We may invest the Fund's assets in ADRs which are foreign shares held by a U.S.
bank which issues a receipt evidencing ownership. Dividends are paid in U.S.
dollars.
GLOBAL DEPOSITARY RECEIPTS (GDRS)
We may invest the Fund's assets in GDRs which are foreign shares held by a U.S.
or foreign bank which issues a receipt evidencing ownership. Dividends are paid
in U.S. dollars.
26
<PAGE>
APPENDIX B
USAA Family of No-Load Mutual Funds
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide you with the opportunity to formulate your own investment program. You
may exchange any shares you hold in any one USAA Fund for shares in any other
USAA Fund. For more complete information about other Funds in the USAA Family
of Funds, including charges and expenses, call us for a Prospectus. Read it
carefully before you invest or send money.
FUND
TYPE/NAME VOLATILITY
=================================================
CAPITAL APPRECIATION
Aggressive Growth Very high
Emerging Markets (1) Very high
First Start Growth Moderate to high
Gold (1) Very high
Growth Moderate to high
Growth & Income Moderate
International (1) Moderate to high
S&P 500 Index (2) Moderate
Science & Technology Very high
World Growth (1) Moderate to high
=================================================
ASSET ALLOCATION
Balanced Strategy (1) Moderate
Cornerstone Strategy (1) Moderate
Growth and Tax Strategy Moderate
Growth Strategy (1) Moderate to high
Income Strategy Low to moderate
=================================================
INCOME -- TAXABLE
GNMA Low to moderate
Income Moderate
Income Stock Moderate
Short-Term Bond Low
=================================================
INCOME -- TAX EXEMPT
Long-Term (3) Moderate
Intermediate-Term (3) Low to moderate
Short-Term (3) Low
State Bond/Income (3, 4) Moderate
=================================================
MONEY MARKET
Money Market (5) Very low
Tax Exempt Money Market (3, 5) Very low
Treasury Money Market Trust (5) Very low
State Money Market (3, 4, 5) Very low
=================================================
1 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
2 S&P(R) IS A TRADEMARK OF THE MCGRAW-HILL COMPANIES, INC., AND HAS BEEN
LICENSED FOR USE. THE PRODUCT IS NOT SPONSORED, SOLD OR PROMOTED BY STANDARD
& POOR'S, AND STANDARD & POOR'S MAKES NO REPRESENTATION REGARDING THE
ADVISABILITY OF INVESTING IN THE PRODUCT.
3 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
4 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY
TO RESIDENTS OF THOSE STATES.
5 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.
27
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's Statement of Additional Information (SAI),
Annual or Semiannual Report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of the Prospectus. In the Fund's Annual Report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally, copies
of this information can be obtained, for a duplicating fee, by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
------------------------------
TELEPHONE ASSISTANCE 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 (R)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
Investment Company Act File No. 811-4019
<PAGE>
USAA CORNERSTONE
STRATEGY FUND
Prospectus
October 1, 1998
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy?...... 2
Main Risks of Investing in This Fund............................ 2
Is This Fund for You?........................................... 3
Could the Value of Your Investment In This Fund Fluctuate?...... 3
Fees and Expenses............................................... 5
Fund Investments................................................ 6
Fund Management.................................................13
Using Mutual Funds in an Asset Allocation Program...............15
How to Invest...................................................18
Important Information About Purchases and Redemptions...........21
Exchanges.......................................................21
Shareholder Information.........................................22
Financial Highlights............................................25
Appendix A .....................................................26
Appendix B .....................................................28
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is to achieve a positive, inflation-adjusted
rate of return and a reasonably stable value of Fund shares, thereby preserving
purchasing power of shareholders' capital. Using pre-set target ranges, we will
invest the Fund's assets mostly in stocks, divided into the categories of basic
value, international, foreign, real estate, and gold, and to a much lesser
extent in U.S. Government securities.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objective will be achieved. See FUND INVESTMENTS on
page 6 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risks of investing in this Fund are market risk, interest rate
risk, and the unique risks of investing in foreign stocks, real estate
investment trusts (REITs), and gold mining companies.
o MARKET RISK involves the possibility that the Fund's investments in stocks
will decline because of falls in the stock market, reducing the value of
individual company's stocks, regardless of the success or failure of an
individual company's operations.
o INTEREST RATE RISK involves the possibility that the value of the Fund's
investments in U.S. Government securities will decline because of an
increase in interest rates.
IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
o FOREIGN INVESTING RISK involves the possibility that the Fund's investments
in foreign stock will decrease because of currency exchange rate
fluctuations, increased price volatility, uncertain political conditions,
and other factors.
o REIT RISK involves the possibility that the Fund's investments in REITs
will decrease because of a decline in real estate values.
2
<PAGE>
o GOLD MINING RISK involves the risk that the value of the Fund's investments
in gold mining securities will decrease because of a decrease in the value
of gold.
Another risk of the Fund described later in the Prospectus is rebalancing risk.
As with other mutual funds, losing money is an additional risk associated with
investing in this Fund.
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
|X| You are seeking a fund that will diversify your holdings among a wide
variety of investment categories.
|X| You are willing to accept moderate risk.
|X| You are willing to take some exposure to the stock market.
|X| You are seeking an appropriate investment for an IRA, through a 401(k) plan
or 403(b) plan, or other tax-sheltered account.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
|X| You need steady income.
|X| You are unable or reluctant to invest for a period of five years or more.
|X| You are unwilling to take greater risk for long-term goals.
|X| You need an investment that provides tax free income.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment in the Fund will likely
increase or decrease. The bar chart shown on the next page illustrates the
Fund's volatility and performance from year to year for the past ten years.
3
<PAGE>
TOTAL RETURN
All mutual funds must use the same formula to calculate total return.
TOTAL RETURN
MEASURES THE
PRICE CHANGE
IN A SHARE
ASSUMING THE
REINVESTMENT
OF ALL DIVIDEND
INCOME AND
CAPITAL GAIN
DISTRIBUTIONS.
[BAR CHART]
CALENDAR TOTAL RETURN
YEAR PERCENTAGE
1988 8.38
1989 21.94
1990 -9.20
1991 16.23
1992 6.35
1993 23.73
1994 -1.05
1995 18.40
1996 17.87
1997 15.64
THE FUND'S TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998, WAS
5.92%.
During the periods shown in the bar chart, the highest total return for a
quarter was 10.06% (quarter ending March 31, 1993) and the lowest total return
for a quarter was -7.08% (quarter ending September 30, 1990).
The table below shows how the Fund's average annual returns for the one-,
five-, and ten-year periods as well as the life of the Fund compared to those
of a broad-based securities market index. Remember, historical performance does
not necessarily indicate what will happen in the future.
===========================================================================
Average Annual Total Returns
(for the periods ending Past Past Past Life of
December 31, 1997) 1 Year 5 Years 10 Years Fund
===========================================================================
Cornerstone Strategy Fund 15.64% 14.59% 11.35% 12.96%
---------------------------------------------------------------------------
S&P 500 Index* 33.35% 20.25% 18.02% 18.10%
===========================================================================
* THE S&P 500 INDEX IS A BROAD-BASED COMPOSITE UNMANAGED INDEX THAT
REPRESENTS THE AVERAGE PERFORMANCE OF A GROUP OF 500 WIDELY-HELD,
PUBLICLY-TRADED STOCKS.
[TELEPHONE GRAPHIC]
TOUCHLINE (R)
1-800-531-8777
PRESS
1
THEN
1
THEN
5 1 #
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
Again, you must remember that historical performance does not necessarily
indicate what will happen in the future. The value of your shares may go up or
down. For the most current price and return information for this Fund, you may
call TouchLine(R) at 1-800-531-8777. Press 1 for the
4
<PAGE>
Mutual Fund Menu, press 1 again for prices and returns. Then, press 51# when
asked for the Fund Code.
NEWSPAPER
SYMBOL
CrnstStr
TICKER
SYMBOL
USCRX
You can also find the most current price of your shares in the business section
of your newspaper in the mutual fund section under the heading "USAA Group" and
the symbol "CrnstStr." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "USCRX."
FEES AND EXPENSES
This summary shows what it will cost you directly or indirectly to invest in
the Fund.
Shareholder Transaction Expenses -- Fees You Pay Directly
There are no fees or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is a $10 fee. (Your bank may also charge a fee for receiving
wires.)
Annual Fund Operating Expenses -- Fees You Pay Indirectly
Fund expenses come out of the Fund's assets and are reflected in the Fund's
share price and dividends. "Other Expenses" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses during the past
fiscal year ended May 31, 1998, and are calculated as a percentage of average
net assets.
12B-1 FEES -
SOME MUTUAL
FUNDS CHARGE
THESE FEES
TO PAY FOR
ADVERTISING
AND OTHER
COSTS OF SELLING
FUND SHARES.
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .26%
-----
Total Annual Fund Operating Expenses 1.01%
=====
Example of Effect of the Fund's Operating Expenses
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
remain the same, and (3) you redeem all of your shares at the end of the
periods shown.
1 year........... $ 103
3 years.......... 322
5 years.......... 558
10 years.......... 1,236
5
<PAGE>
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal investment strategy is to provide a diversified
investment program within one mutual fund by allocating the Fund's
assets in each of the following investment categories according to the
following targeted ranges. Securities are classified by category at the
time of purchase.
[PIE CHART]
PERCENTAGE TARGET RANGE OF NET ASSETS
INVESTMENT CATEGORY
BASIC VALUE STOCKS 22-28%
U.S. GOVERNMENT SECURITIES 22-28%
INTERNATIONAL STOCKS 22-28%
REAL ESTATE SECURITIES 22-28%
GOLD SECURITIES 0-10%
The ranges allow for a variance within each investment category. The Board of
Trustees may revise the target ranges upon 60 days' prior written notice to
shareholders. However, we may go outside the ranges on a temporary defensive
basis without shareholder notification whenever we believe it is in the best
interest of the Fund and its shareholders.
Q Why are stocks and bonds mixed in the same Fund?
A From time to time the stock and bond markets may fluctuate
independently of each other. In other words, a decline in the stock
market may, in certain instances, be offset by a rise in the bond
market, or vice versa. As a result, the Fund, with its mix of stocks
and bonds, is expected in the long run to entail less market risk (and
potentially less return) than a mutual fund investing exclusively in
stocks.
Q How are the investment categories and target ranges selected?
A The investment categories and the target ranges were selected to
provide investors with a diversified investment in a single mutual
fund. The Basic Value Stocks category was selected to provide
6
<PAGE>
appreciation during rising stock market conditions and to stabilize the
value of the Fund during adverse market conditions. The U.S. Government
Securities category was selected to provide safety of principal in
periods of deflation. The International Stocks category was selected to
provide the potential for appreciation during periods of adverse
economic and market conditions in the United States. The Real Estate
and Gold Securities categories were selected to provide a positive
total return during inflationary periods.
However, as a temporary defensive measure because of market, economic,
political, or other conditions, we may invest up to 100% of the Fund's
assets in investment-grade, short-term debt instruments, which may
result in the Fund not achieving its investment objective during the
time it is in this temporary defensive posture.
Q What actions are taken to keep the Fund's asset allocations within the
target ranges?
A If market action causes the actual assets of the Fund in one or more
investment categories to move outside the ranges, we will make
adjustments to rebalance the portfolio. In general, we will rebalance
the portfolio at least once during each quarter. In rebalancing the
Fund's portfolio, we will buy or sell securities to return the actual
allocation of the Fund's assets to within its target ranges. For
example, the Fund's portfolio could begin a quarter with its assets
allocated 25% in the Basic Value Stocks category, 25% in the U.S.
Government Securities category, 22% in the International Stocks
category, 22% in the Real Estate Securities category, and 6% in the
Gold Securities category. During the quarter, a strong stock market
coupled with a weak real estate market could leave the portfolio with
30% in the Basic Value Stocks category, 25% in the U.S. Government
Securities category, 25% in the International Stocks category, 10% in
the Real Estate Securities category, and 10% in the Gold Securities
category. In this case, we would sell Basic Value Stocks and use the
proceeds to buy more real estate securities in order to bring the Basic
Value Stocks and the Real Estate Securities back to within their target
ranges.
[CAUTION LIGHT]
REBALANCING RISKS. In purchasing and selling securities in order to rebalance
its portfolio, the Fund will pay more in brokerage commissions than it would
without a rebalancing policy. As a result of the need to rebalance, the Fund
also has less flexibility in the timing of purchases and sales of securities
than it would otherwise. While we attempt to minimize any adverse impact to the
Fund or its shareholders, the Fund may have a higher
7
<PAGE>
proportion of capital gains and a lower return than a fund that does not have a
rebalancing policy.
Basic Value Stocks
Q What defines Basic Value Stocks?
A Basic Value Stocks will include common stocks of U.S. companies with
one or more of the following characteristics when purchased:
o the price earnings ratio is lower than the price earnings ratio of
the S&P 500;
o the price per share is lower than the book value per share;
o the dividend yield is higher than the dividend yield of the S&P 500;
or
o the company has assets with a perceived market value in excess of
book value.
Loss of these characteristics will not necessarily result in the sale
of securities in this investment category.
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in stocks, it is subject to stock market
risk. Stock prices in general may decline over short or even extended periods,
regardless of the success or failure of an individual company's operations.
Stock markets tend to run in cycles, with periods when stock prices generally
go up, known as "bull" markets, and periods when stock prices generally go
down, referred to as "bear" markets. Stocks tend to go up and down more than
bonds.
Q How are the decisions to buy and sell Basic Value Stocks made?
A We appraise a stock's price in relation to the company's earnings, cash
flow, book value, and yield. We also consider various qualitative
factors such as the number of shares the company's management owns, the
attitude of investors in general toward the company, and the quality of
management.
We use the same criteria in deciding which securities to sell. For
example, when a company's shares sell well above their relative
historical levels, we may decide to sell the stock.
8
<PAGE>
U.S. Government Securities
Q What role do U.S Government Securities play in the Fund's portfolio?
A The U.S. Government Securities investment category is intended to
provide both liquidity and interest income with limited credit risk.
[CAUTION LIGHT]
INTEREST RATE RISK. As a mutual fund investing in bonds, the Fund is subject to
the risk that the market value of the bonds will decline because of rising
interest rates. Bond prices are linked to the prevailing market interest rates.
In general, when interest rates rise, the prices of bonds fall and when
interest rates fall, bond prices generally rise. The price volatility of a bond
also depends on its maturity. Generally, the longer the maturity of a bond, the
greater its sensitivity to interest rates. To compensate investors for this
higher risk, bonds with longer maturities generally offer higher yields than
bonds with shorter maturities.
Q What types of U.S. Government Securities are included in the Fund's
portfolio?
A The U.S. Government Securities in the Fund's portfolio will consist of
securities, without specific maturity requirements or limits, issued or
guaranteed as to both principal and interest by the U.S. Government,
its agencies, or instrumentalities. Examples of these securities are
U.S. Treasury bills, notes and bonds, and securities issued by the
Federal Farm Credit Banks, Federal Home Loan Mortgage Corporation,
Federal National Mortgage Association, and Government National Mortgage
Association.
Additionally, the Fund may invest the Fund's assets in repurchase
agreements collateralized by securities of the U.S. Government or by
its agencies or instrumentalities.
Q How are the decisions to buy and sell U.S. Government Securities made?
A We search for securities which represent value at the time given
current market conditions. Since credit quality is not an issue with
Government Securities, we determine value by weighing current return
with risk of principal due to potential changes in interest rates.
Generally speaking, the longer the maturity of a bond, the greater the
value will change with changes in interest rates, either up or down. We
will sell securities as needed to provide liquidity
9
<PAGE>
for the Fund or to change the potential return characteristics of this
investment category.
International Stocks
Q What role do International stocks play in the Fund's portfolio?
A From time to time, the U.S. and foreign stock markets may fluctuate
independently of each other. In other words, a decline in one market
may, in certain circumstances, be offset by a rise in the other market.
In addition, foreign equity markets may provide attractive returns not
otherwise available in the U.S. markets.
Q What is considered to be a "foreign company?"
A A foreign company is one organized under the laws of a foreign country;
and it must also have one of the following additional characteristics:
o the principal trading market for the stock is in a foreign country;
or
o at least 50% of its revenues or profits are derived from operations
within foreign countries; or
o at least 50% of its assets are located within foreign countries.
ADR - FOREIGN
SHARES HELD BY
A U.S. BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
GDR - FOREIGN
SHARES HELD BY
A U.S. OR
FOREIGN BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
[CAUTION LIGHT]
FOREIGN INVESTING. Investing in foreign securities, including American
Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs), poses unique
risks: currency exchange rate fluctuations; foreign market illiquidity;
increased price volatility; exchange control regulations; foreign ownership
limits; different accounting, reporting, and disclosure requirements; political
instability; and difficulties in obtaining legal judgments. In the past, equity
and debt instruments of foreign markets have been more volatile than equity and
debt instruments of U.S. securities markets.
o EMERGING MARKETS RISK. A country that is in the initial stages of its
industrial cycle is considered to be an emerging markets country.
Investments in developing countries involve exposure to economic structures
that are generally less diverse and mature than in the United States and to
political systems which may be less stable. In the past, markets of
developing countries have been more volatile than the markets of developed
countries.
o POLITICAL RISK. Political risk includes a greater potential for coups
d'etat, revolts, and expropriation by governmental organizations. For
example, we may invest the Fund's assets in Eastern Europe and former
10
<PAGE>
states of the Soviet Union (also known as the Commonwealth of Independent
States or CIS). These countries were under communist systems which had
nationalized private industry. There is no guarantee that nationalization may
not occur again in this region or others in which we may invest the Fund's
assets, in which case, we may lose all or part of the Fund's investment in that
country's issuers.
Q How are the decisions to buy and sell International Stocks made?
A We review countries and regions for economic and political stability as
well as future prospects. Then we research individual companies looking
for favorable valuations, growth prospects, quality of management, and
industry outlook. Securities are sold if we believe they are overvalued
or if the economic or political outlook significantly deteriorates.
Real Estate Securities
Q What role do Real Estate Securities play in the Fund's portfolio?
A We believe that diversified investments linked to real estate are a
good hedge during an inflationary environment.
Q What types of real estate securities are included in the Fund's
portfolio?
A Investments in this category will consist primarily of common stocks of
real estate investment trusts (REITs) and U.S. companies which operate
as real estate corporations or which have a significant portion of
their assets in real estate. We will evaluate the nature of a company's
real estate holdings to determine whether the Fund's investment in the
company's common stock will be included in this category. In addition,
we may also invest in preferred stocks, securities convertible into
common stocks, and securities which carry the right to buy common
stocks of REITs and real estate companies. The Fund will not acquire
any direct ownership of real estate.
[CAUTION LIGHT]
REITs. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. Additionally, REITs are
dependent upon the capabilities of the REIT manager(s), have limited
diversification, and could be significantly impacted by changes in tax laws.
11
<PAGE>
Q How are the decisions to buy and sell Real Estate Securities made?
A We look for well-managed and prudently financed companies that own high
quality properties, have the potential to grow per share cash flow at
an above average rate, and that sell at reasonable valuation levels. We
will sell these securities when they no longer meet these criteria.
Gold Securities
Q What role do Gold Securities play in the Fund's portfolio?
A Gold Securities have been selected for their perceived potential to
increase in value during inflationary periods.
Q What types of gold securities are included in the Fund's portfolio?
A In this category, we will invest at least 80% of the assets in equity
securities of companies principally engaged in gold exploration,
mining, or processing. The remaining investments in this category will
consist of equity securities of companies similarly engaged in other
precious metals and minerals. These securities may consist of common
stocks, preferred stocks, securities convertible into common stocks,
and securities which carry the right to buy common stocks.
GOLD MINING RISK. Gold mining securities involve additional risk because of
gold's price volatility and the increased impact such volatility has on the
profitability of gold mining companies. However, since the market action of
such securities has tended to move independently of the broader financial
markets, the addition of gold mining securities to an investor's portfolio may
reduce overall fluctuations in portfolio value.
Q How are the decisions to buy and sell Gold Securities made?
A We look for well-managed and prudently financed low-cost producers with
good production or reserve growth potential that sell at reasonable
valuations on a risk-adjusted basis. We will sell these securities when
they no longer meet these criteria.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 26.
12
<PAGE>
FUND MANAGEMENT
The Trust has retained us, USAA Investment Management Company, to serve as the
manager and distributor for the Trust. We are an affiliate of United Services
Automobile Association (USAA), a large, diversified financial services
institution. As of the date of this Prospectus, we had approximately $37
billion in total assets under management. Our mailing address is 9800
Fredericksburg Road, San Antonio, TX 78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Board of Trustees. For our services, the Fund pays us an
annual fee. This fee was computed and paid at three-fourths of one percent
(.75%) of average net assets for the fiscal year ended May 31, 1998. We also
provide services related to selling the Fund's shares and receive no
compensation for those services.
Although our officers and employees, as well as those of the Trust, may engage
in personal securities transactions, they are restricted by the procedures in a
Joint Code of Ethics adopted by the Trust and us.
Portfolio Transactions
USAA Brokerage Services, our discount brokerage service, may execute purchases
and sales of equity securities for the Fund's portfolio. The Board of Trustees
has adopted procedures to ensure that any commissions paid to USAA Brokerage
Services are reasonable and fair.
Portfolio Managers
The following individuals are primarily responsible for managing the Fund:
Basic Value Stocks
[PHOTOGRAPH OF PORTFOLIO MANAGER]
R. DAVID ULLOM
R. David Ullom, Assistant Vice President of Equity Investments, is the Fund's
asset allocation manager and has managed the Basic Value Stocks investment
category since August 1998. He has 23 years investment management experience
and has worked for us for 12 years. Mr. Ullom earned the Chartered Financial
Analyst (CFA) designation in 1980 and is a member of the Association for
Investment Management and Research (AIMR) and the San Antonio Financial
Analysts Society, Inc. (SAFAS). He holds an MBA from Washington University,
Missouri, and a BS from Oklahoma State University.
13
<PAGE>
U.S. Government Securities
[PHOTOGRAPH OF PORTFOLIO MANAGER]
JOHN W. SAUNDERS, JR.
John W. Saunders, Jr., Senior Vice President of Fixed Income Investments, has
managed the U.S. Government Securities investment category since October 1985.
He has 29 years investment management experience and has worked for us for 28
years. Mr. Saunders earned the Chartered Financial Analyst (CFA) designation in
1976 and is a member of AIMR and SAFAS. He holds a BS from Portland State
University, Oregon.
International Stocks
[PHOTOGRAPH OF PORTFOLIO MANAGERS]
FROM L TO R: ALBERT C. SEBASTIAN, DAVID G. PEEBLES,
AND W. TRAVIS SELMIER, II
David G. Peebles, Vice President of Equity Investments, has managed or
co-managed the International Stocks investment category since December 1994. He
has 32 years investment management experience and has worked for us for 14
years. Mr. Peebles earned the CFA designation in 1971 and is a member of AIMR,
SAFAS, and the International Society of Financial Analysts (ISFA). He holds an
MBA and BS from Texas Christian University.
Albert C. Sebastian and W. Travis Selmier, II, co-manage the International
Stocks investment category with Mr. Peebles. Mr. Peebles coordinates the
activities of the managers.
14
<PAGE>
Albert C. Sebastian, Assistant Vice President of Equity Investments, has
co-managed the International Stocks investment category since October 1996. He
has 14 years investment management experience and has worked for us for seven
years. Mr. Sebastian earned the CFA designation in 1989 and is a member of
AIMR, SAFAS, and ISFA. He holds an MBA from the University of Michigan and a BA
from Holy Cross College, Massachusetts.
W. Travis Selmier, II, Assistant Vice President of Equity Investments, has
co-managed the International Stocks investment category since October 1996. He
has 11 years investment management experience and has worked for us for seven
years. Mr. Selmier earned the CFA designation in 1990 and is a member of AIMR,
SAFAS, and ISFA. He holds an MBA from Indiana University, a Certificate of
Proficiency from Sophia University Japanese Language Institute, Japan, and a BA
from the University of California at Santa Barbara.
GOLD AND REAL ESTATE SECURITIES
[PHOTOGRAPH OF PORTFOLIO MANAGER]
MARK W. JOHNSON
Mark W. Johnson, Assistant Vice President of Equity Investments, has managed
the Gold Securities and Real Estate Securities investment categories since
January 1994. He has 24 years investment management experience and has worked
for us for ten years. Mr. Johnson earned the CFA designation in 1978 and is a
member of AIMR and SAFAS. He holds an MBA and a BBA from the University of
Michigan.
USING MUTUAL FUNDS IN AN ASSET ALLOCATION PROGRAM
I. The Idea Behind Asset Allocation
If you have money to invest and hear that stocks may be a good investment, is
it a wise idea to use your entire savings to buy one stock? Most people
wouldn't -- it would be fortunate if it works, but this strategy holds a great
deal of risk. Surprising news could be reported tomorrow on your stock, and its
price could soar or plummet.
Careful investors understand this concept of risk and lower that risk by
diversifying their holdings among a number of securities. That way bad news for
one security may be counterbalanced by good news regarding other securities.
But there is still a question of risk here. History tells us that stocks are
generally more volatile than bonds and that long-term bonds are generally more
volatile than short-term bonds. History also tells us that over many years
investments having higher risks tend to have higher returns than investments
that carry lower risks. From these observations comes the idea of asset
allocation.
15
<PAGE>
Asset allocation is a concept that involves dividing your money among several
different types of investments -- for example, stocks, bonds, and short-term
investments such as money market instruments -- and keeping that allocation
until your objectives or the financial markets significantly change. That way
you're not pinning all your financial success on the fortunes of one kind of
investment. Money spread across different investment categories can help you
reduce market risk and likely will provide more stability to your total return.
Asset allocation can work because different kinds of investments generally
follow different up-and-down cycles. With a variety of investments in your
portfolio, some are probably doing well, even when others are struggling.
II. Using Asset Allocation in an Investment Program
Most investors understand the concept of diversification, but asset allocation
goes beyond diversifying your portfolio; it's much more of an active process.
You must evaluate your lifestyle, finances, circumstances, long- and short-term
financial goals, and tolerance for investment risk. Once you have structured
your allocation, you'll need to review it regularly since your objectives will
change over time. Even though we do not charge sales loads or commissions, our
sales representatives are always available to assist you in structuring and
reviewing your investment portfolio.
III. USAA's Series of Asset Strategy Funds
USAA's series of asset allocation funds, our Asset Strategy Funds, are designed
for the long-term investor and are in line with our investment philosophy for
investors, specifically "buy and hold for the long-term," and "don't try to
time the market." As shown on the next page, each of USAA's Asset Strategy
Funds has its own different mix of assets and objectives.
16
<PAGE>
===============================================================================
Fund Investment Objective Invests In
===============================================================================
Income Seek high current return, with bonds and stocks
Strategy reduced risk over time, through an
Fund asset allocation strategy which
emphasizes income and gives
secondary emphasis to long-term
growth of capital.
Growth and Tax Seek a conservative balance between tax exempt bonds and
Strategy Fund income, the majority of which is tax- blue chip stocks
exempt, and the potential for long-term
growth of capital to preserve purchasing
power.
Balanced Seek high total return, with reduced stocks and bonds
Strategy risk over time, through an asset
Fund allocation strategy that seeks a
combination of long-term growth of
capital and current income.
Cornerstone Achieve a positive inflation-adjusted basic value stocks,
Strategy rate of return and a reasonably stable international stocks,
Fund value of Fund shares, thereby government
preserving purchasing power of securities, real
shareholders' capital. estate securities,
and gold securities
Growth Seek high total return, with reduced small and large cap
Strategy risk over time, through an asset stocks, bonds, and
Fund allocation strategy which emphasizes international stocks
capital appreciation and gives
secondary emphasis to income.
===============================================================================
For more complete information about the other USAA Asset Strategy Funds,
including charges and expenses, call us for a Prospectus. Read it carefully
before you invest or send money.
17
<PAGE>
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required for each new account. However, after you open
your initial account with us, you will not need to fill out another application
unless the registration is different.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number or
tax identification number to avoid possible withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after we receive your request in proper form. The
Fund's NAV is determined at the close of the regular trading session (generally
4:00 p.m. Eastern Time) of the New York Stock Exchange (NYSE) each day the NYSE
is open. If we receive your request and payment prior to that time, your
purchase price will be the NAV per share determined for that day. If we receive
your request or payment after the NAV per share is calculated, the purchase
will be effective on the next business day. If you plan to purchase Fund shares
with a foreign check, we suggest you convert your foreign check to U.S. dollars
prior to investment in the Fund. This will avoid a potential delay in the
effective date of your purchase of up to four to six weeks. Furthermore, a bank
charge may be assessed in the clearing process, which will be deducted from the
amount of the purchase.
MINIMUM INVESTMENTS
INITIAL PURCHASE
[MONEY GRAPHIC]
o $3,000 [$500 Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) accounts and
$250 for IRAs] or no initial investment if you elect to have monthly
electronic investments of at least $50 each. We may periodically offer
programs that reduce the minimum amounts for monthly electronic
investments. Employees of USAA and its affiliated companies may open an
account through payroll deduction for as little as $25 per pay period with
no initial investment.
ADDITIONAL PURCHASES
o $50
18
<PAGE>
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288
o To add to your account, send your check and the "Invest by Mail" stub that
accompanies your Fund's transaction confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
BANK WIRE
[WIRE GRAPHIC]
o Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA Cornerstone Strategy Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)______________________________________
Shareholder(s) Mutual Fund Account Number___________________
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
o Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448
[TELEPHONE GRAPHIC]
o If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To
open an account by phone, the new account must have the same registration
as your existing account.
19
<PAGE>
Redemption of Shares
You may redeem Fund shares by any of the methods described below on any day the
NAV per share is calculated. Redemptions are effective on the day instructions
are received in a manner as described below. However, if instructions are
received after the NAV per share calculation (generally 4:00 p.m. Eastern
Time), redemption will be effective on the next business day.
We will send you your money within seven days after the effective date of
redemption. Payment for redemption of shares purchased by EFT or check is sent
after the EFT or check has cleared, which could take up to 15 days from the
purchase date. If you are considering redeeming shares soon after purchase, you
should purchase by bank wire or certified check to avoid delay. Redemptions are
subject to taxes based on the difference between the cost of shares when
purchased and the price received upon redemption.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment in limited circumstances.
HOW TO REDEEM
WRITTEN, FAX, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
o Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption privileges are automatically established when you complete
your application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions. Before
any discussion regarding your account, the following information is obtained:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
20
<PAGE>
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to help you in
your role as an investor. In the INVESTOR'S GUIDE, you will find additional
information on purchases, redemptions, and methods of payment. You will also
find in-depth information on automatic investment plans, shareholder statements
and reports, and other useful information.
Account Balance
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually a small balance account fee of $12 to each shareholder account with a
balance, at the time of assessment, of less than $2,000. The fee will reduce
total transfer agency fees paid by the Fund to SAS. Accounts exempt from the
fee include: (1) any account regularly purchasing additional shares each month
through an automatic investment plan; (2) any account registered under the
Uniform Gifts/Transfers to Minors Act (UGMA/UTMA); (3) all (non-IRA) money
market fund accounts; (4) any account whose registered owner has an aggregate
balance of $50,000 or more invested in USAA mutual funds; and (5) all IRA
accounts (for the first year the account is open).
Trust Rights
The Trust reserves the right to:
o reject purchase or exchange orders when in the best interest of the Trust;
o limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
o require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question. The Statement of Additional Information
contains information on acceptable guarantors;
o redeem an account with less than $900, with certain limitations.
EXCHANGES
Exchange Privilege
The exchange privilege is automatic when you complete your application. You may
exchange shares among Funds in the USAA Family of Funds, provided you do not
hold these shares in stock certificate form and the shares to be acquired
21
<PAGE>
are offered in your state of residence. After the exchange order is received,
the Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between the cost of shares when purchased and the price received
upon exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 20.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA Family of Funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA Family of Funds).
SHAREHOLDER INFORMATION
Share Price Calculation
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4:00 p.m. Eastern Time.
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.
Securities trading in various foreign markets may take place on days when the
NYSE is closed. Further, when the NYSE is open, the foreign markets may be
closed. Therefore, the calculation of the Fund's NAV may not take place at the
same time the prices of certain securities held by the Fund are determined. In
most cases, 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 the Fund's NAV is calculated will not be reflected in the
Fund's NAV. If, however, we determine that a particular event would materially
affect the Fund's NAV, then we, under the general supervision of
22
<PAGE>
the Board of Trustees, will use all relevant, available information to
determine a fair value for the affected portfolio securities.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Board of Trustees. Securities which cannot be
valued by these methods, and all other assets, are valued in good faith at fair
value using methods we have determined under the general supervision of the
Board of Trustees.
For additional information on how securities are valued, see Valuation of
Securities in the Fund's Statement of Additional Information.
Dividends and Distributions
The Fund pays net investment income dividends yearly. Any net capital gain
distribution usually occurs within 45 days of the May 31 fiscal year end, which
would be somewhere around the middle of July. The Fund will make additional
payments to shareholders, if necessary, to avoid the imposition of any federal
income or excise tax.
We will automatically reinvest all income dividends and capital gain
distributions are automatically reinvested, unless we receive different
instructions from you. The share price will be the NAV of the Fund shares
computed on the ex-dividend date. Any income dividends or capital gain
distributions paid by the Fund will reduce the NAV per share by the amount of
the dividend or distribution. These dividends and distributions are subject to
taxes.
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
Federal Taxes
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this Prospectus. Note that the Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. We urge you to
consult your tax adviser about the status of distributions from the Fund in
your own state and locality.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you as ordinary
23
<PAGE>
income, whether received in cash or reinvested in additional shares. A portion
of these dividends may qualify for the 70% dividends-received deduction
available to corporations.
Regardless of the length of time you have held Fund shares, distributions of
net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable investment.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
o fails to furnish the Fund with a correct tax identification number,
o underreports dividend or interest income, or
o fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify on your application, or
on a separate Form W-9 supplied by the Fund's transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
REPORTING - The Fund will report information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
24
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five-year period. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG Peat Marwick LLP,
whose report, along with the Fund's financial statements, are included in the
Annual Report, which is available upon request.
EIGHT-MONTH
PERIOD ENDED
YEAR ENDED MAY 31, MAY 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------
Net asset value at
beginning of period $ 27.96 $ 25.47 $ 22.63 $ 23.24 $ 23.43
Net investment income .77 .74 .73 .68 .40
Net realized and
unrealized gain 3.78 3.37 3.18 .67 .29
Distributions from net
investment income (.72) (.78) (.74) (.58) (.59)
Distributions of realized
capital gains (1.90) (.84) (.33) (1.38) (.29)
--------------------------------------------------------
Net asset value at
end of period $ 29.89 $ 27.96 $ 25.47 $ 22.63 $ 23.24
========================================================
Total return (%)* 17.15 16.94 17.79 6.43 3.00
Net assets at end of
period (000) $1,500,258 $1,263,355 $1,035,844 $874,587 $814,869
Ratio of expenses to
average net assets (%) 1.01 1.06 1.15 1.13 1.11(a)
Ratio of net investment
income to average net
assets (%) 2.64 2.88 3.06 3.16 2.68(a)
Portfolio turnover (%) 32.73 35.14 36.15 33.17 30.87
- --------------
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
25
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES IN WHICH WE MAY
INVEST THE FUND'S ASSETS:
FORWARD CURRENCY CONTRACTS
The Fund may hold securities denominated in foreign currencies. As a result,
the value of the securities will be affected by changes in the exchange rate
between the dollar and foreign currencies. In managing currency exposure, the
Fund may enter into forward currency contracts. A forward currency contract
involves an agreement to purchase or sell a specified currency at a specified
future date or over a specified time period at a price set at the time of the
contract. The Fund may only enter into forward currency contracts. When the
Fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it desires to "lock in" the U.S. dollar price of the
security.
REPURCHASE AGREEMENTS
We may invest the Fund's assets in repurchase agreements which are
collateralized by obligations issued or guaranteed as to both principal and
interest by the U.S. Government, its agencies, and instrumentalities. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell it back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on an agreed upon date.
This date is usually not more than seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest, which is unrelated to the coupon rate or maturity of the purchased
security.
WHEN-ISSUED SECURITIES
We may invest the Fund's assets in new issues of debt securities offered on a
when-issued basis.
o Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed
at the time of commitment.
o The Fund does not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
o Such securities can be sold before settlement date.
26
<PAGE>
VARIABLE RATE SECURITIES
We may invest the Fund's assets in securities that bear interest at rates which
are adjusted periodically to market rates.
o These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on
the income earned by the Fund depending on the proportion of such
securities held.
o The value of variable rate securities is less affected than fixed-coupon
securities by changes in prevailing interest rates because of the periodic
adjustment of their coupons to a market rate. The shorter the period
between adjustments, the smaller the impact of interest rate fluctuations
on the value of these securities.
o The market value of a variable rate security usually tends toward par (100%
of face value) at interest rate adjustment time.
CONVERTIBLE SECURITIES
Within the Real Estate and Gold Securities categories, we may invest in
convertible securities, which are bonds, preferred stocks, and other securities
that pay interest or dividends and offer the buyer the ability to convert the
security into common stock. The value of convertible securities depends
partially on interest rate changes and the credit quality of the issuer.
Because a convertible security affords an investor the opportunity, through its
conversion feature, to participate in the capital appreciation of the
underlying common stock, the value of convertible securities also depends on
the price of the underlying common stock.
ILLIQUID SECURITIES
We may invest up to 15% of the Fund's net assets in securities which are
illiquid. Illiquid securities are those securities that cannot be disposed of
in the ordinary course of business, seven days or less, at approximately the
value at which the Fund has valued the securities.
27
<PAGE>
APPENDIX B
USAA Family of No-Load Mutual Funds
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide you with the opportunity to formulate your own investment program. You
may exchange any shares you hold in any one USAA Fund for shares in any other
USAA Fund. For more complete information about other Funds in the USAA Family
of Funds, including charges and expenses, call us for a Prospectus. Read it
carefully before you invest or send money.
FUND
TYPE/NAME VOLATILITY
=================================================
CAPITAL APPRECIATION
Aggressive Growth Very high
Emerging Markets (1) Very high
First Start Growth Moderate to high
Gold (1) Very high
Growth Moderate to high
Growth & Income Moderate
International (1) Moderate to high
S&P 500 Index (2) Moderate
Science & Technology Very high
World Growth (1) Moderate to high
=================================================
ASSET ALLOCATION
Balanced Strategy (1) Moderate
Cornerstone Strategy (1) Moderate
Growth and Tax Strategy Moderate
Growth Strategy (1) Moderate to high
Income Strategy Low to moderate
=================================================
INCOME -- TAXABLE
GNMA Low to moderate
Income Moderate
Income Stock Moderate
Short-Term Bond Low
=================================================
INCOME -- TAX EXEMPT
Long-Term (3) Moderate
Intermediate-Term (3) Low to moderate
Short-Term (3) Low
State Bond/Income (3, 4) Moderate
=================================================
MONEY MARKET
Money Market (5) Very low
Tax Exempt Money Market (3, 5) Very low
Treasury Money Market Trust (5) Very low
State Money Market (3, 4, 5) Very low
=================================================
1 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
2 S&P(R) IS A TRADEMARK OF THE MCGRAW-HILL COMPANIES, INC., AND HAS BEEN
LICENSED FOR USE. THE PRODUCT IS NOT SPONSORED, SOLD OR PROMOTED BY STANDARD
& POOR'S, AND STANDARD & POOR'S MAKES NO REPRESENTATION REGARDING THE
ADVISABILITY OF INVESTING IN THE PRODUCT.
3 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
4 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY
TO RESIDENTS OF THOSE STATES.
5 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.
28
<PAGE>
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the Fund's Statement of Additional
Information (SAI), Annual or Semiannual Report, or to ask other questions
about the Fund. The SAI has been filed with the Securities and Exchange
Commission (SEC) and is legally a part of the Prospectus. In the Fund's
Annual Report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance
during the last fiscal year.
To view these documents, along with other related documents, you can visit
the SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally,
copies of this information can be obtained, for a duplicating fee, by writing
the Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
------------------------------
TELEPHONE ASSISTANCE 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 (R)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
Investment Company Act File No. 811-4019
<PAGE>
USAA GROWTH
STRATEGY FUND
Prospectus
October 1, 1998
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy?..... 2
Main Risks of Investing in This Fund........................... 2
Is This Fund for You?.......................................... 3
Could the Value of Your Investment in This Fund Fluctuate?..... 3
Fees and Expenses.............................................. 5
Fund Investments............................................... 6
Fund Management................................................14
Using Mutual Funds in an Asset Allocation Program..............17
How to Invest..................................................19
Important Information About Purchases and Redemptions..........22
Exchanges......................................................22
Shareholder Information........................................23
Financial Highlights...........................................26
Appendix A ....................................................27
Appendix B ....................................................30
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is to seek high total return, with reduced risk
over time, through an asset allocation strategy which emphasizes capital
appreciation and gives secondary emphasis to income. Using pre-set target
ranges, we will invest the Fund's assets mostly in stocks, and to a lesser
extent, bonds and money market instruments.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objective will be achieved. See FUND INVESTMENTS on
page 6 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risks of investing in this Fund are market risk, the unique risks
of investing in foreign stocks, interest rate risk, and credit risk.
o MARKET RISK involves the possibility that the Fund's investments in stocks
will decline due to falls in the stock market, reducing the value of
individual company's stocks, regardless of the success or failure of an
individual company's operations.
o FOREIGN INVESTING RISK involves the possibility that the Fund's investments
in foreign stock will decrease because of currency exchange rate
fluctuations, increased price volatility, uncertain political conditions,
and other factors.
o INTEREST RATE RISK involves the possibility that the value of the Fund's
investments will decline because of an increase in interest rates.
IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
o CREDIT RISK involves the possibility that a borrower cannot make timely
interest and principal payments on its securities.
2
<PAGE>
Other risks of the Fund described later in the Prospectus include rebalancing
risks and the risks of investing in REITs. As with other mutual funds, losing
money is an additional risk associated with investing in this Fund.
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
|X| You are seeking a fund that will diversify your holdings among a wide
variety of investment categories.
|X| You are willing to accept moderate to high risk.
|X| You are willing to take some exposure to the stock market.
|X| You are seeking an appropriate investment for an IRA, through a 401(k) plan
or 403(b) plan, or other tax-sheltered account.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
|X| You are unable or reluctant to invest for a period of five years or more.
|X| You are unwilling to take greater risk for long-term goals.
|X| You need an investment that provides tax-free income.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment in the Fund will likely
increase or decrease. The bar chart shown on the next page illustrates the
Fund's volatility and performance from year to year over the life of the Fund.
3
<PAGE>
TOTAL RETURN
All mutual funds must use the same formula to calculate total return.
TOTAL RETURN
MEASURES THE
PRICE CHANGE
IN A SHARE
ASSUMING THE
REINVESTMENT
OF ALL DIVIDEND
INCOME AND
CAPITAL GAIN
DISTRIBUTIONS.
[BAR CHART]
CALENDAR TOTAL RETURN
YEAR PERCENTAGE
1996* 22.13
1997 9.10
*FUND BEGAN OPERATIONS ON SEPTEMBER 1, 1995.
THE FUND'S TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998, WAS
10.65%.
During the periods shown in the bar chart, the highest total return for a
quarter was 12.58% (quarter ending June 30, 1997) and the lowest total return
for a quarter was -10.82% (quarter ending December 31, 1997).
The table below shows how the Fund's average annual returns for the one-year
period as well as the life of the Fund compared to those of a broad-based
securities market index. Remember, historical performance does not necessarily
indicate what will happen in the future.
=====================================================================
Average Annual Total Returns Since Fund's
(for the periods ending Past Inception on
December 31, 1997) 1 Year September 1, 1995
---------------------------------------------------------------------
Growth Strategy Fund 9.10% 16.08%
---------------------------------------------------------------------
S&P 500 Index* 33.35% 29.00%
=====================================================================
* THE S&P 500 INDEX IS A BROAD-BASED COMPOSITE UNMANAGED INDEX THAT
REPRESENTS THE AVERAGE PERFORMANCE OF A GROUP OF 500 WIDELY-HELD,
PUBLICLY-TRADED STOCKS.
4
<PAGE>
[TELEPHONE GRAPHIC]
TOUCHLINE (R)
1-800-531-8777
PRESS
1
THEN
1
THEN
4 9 #
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
Again, you must remember that historical performance does not necessarily
indicate what will happen in the future. The value of your shares may go up or
down. For the most current price and return information for this Fund, you may
call TouchLine(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1
again for prices and returns. Then, press 49# when asked for the Fund Code.
NEWSPAPER
SYMBOL
GrStr
TICKER
SYMBOL
USGSX
You can also find the most current price of your shares in the business section
of your newspaper in the mutual fund section under the heading "USAA Group" and
the symbol "GrStr." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "USGSX."
FEES AND EXPENSES
This summary shows what it will cost you directly or indirectly to invest in
the Fund.
Shareholder Transaction Expenses -- Fees You Pay Directly
There are no fees or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is a $10 fee. (Your bank may also charge a fee for receiving
wires.)
Annual Fund Operating Expenses -- Fees You Pay Indirectly
Fund expenses come out of the Fund's assets and are reflected in the Fund's
share price and dividends. "Other Expenses" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses during the past
fiscal year ended May 31, 1998, and are calculated as a percentage of average
net assets.
12B-1 FEES -
SOME MUTUAL
FUNDS CHARGE
THESE FEES
TO PAY FOR
ADVERTISING
AND OTHER
COSTS OF SELLING
FUND SHARES.
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .50%
-----
Total Annual Fund Operating Expenses 1.25%
=====
Example of Effect of the Fund's Operating Expenses
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's
5
<PAGE>
operating expenses remain the same, and (3) you redeem all of your shares at
the end of the periods shown.
1 year.............. $ 127
3 years............. 397
5 years............. 686
10 years............. 1,511
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal investment strategy is to provide a diversified
investment program within one mutual fund by allocating the Fund's
assets in each of the following investment categories according to the
following targeted ranges. Securities are classified by category at the
time of purchase.
[PIE CHART]
PERCENTAGE TARGET RANGE OF NET ASSETS
INVESTMENT CATEGORY
LARGE CAP STOCKS 25-35%
SMALL CAP STOCKS 25-35%
INTERNATIONAL STOCKS 15-25%
BONDS 15-25%
MONEY MARKET INSTRUMENTS 0-10%
The ranges allow for a variance within each investment category. The Board of
Trustees may revise the target ranges upon 60 days' prior written notice to
shareholders. However, we may go outside the ranges on a temporary defensive
basis without shareholder notification whenever we believe it is in the best
interest of the Fund and its shareholders.
Q Why are stocks and bonds mixed in the same Fund?
A From time to time the stock and bond markets may fluctuate
independently of each other. In other words, a decline in the stock
market may, in certain instances, be offset by a rise in the bond
market, or vice versa. As a result, the Fund, with its mix of stocks
6
<PAGE>
and bonds, is expected in the long run to entail less market risk (and
potentially less return) than a mutual fund investing exclusively in
stocks.
Q How are the investment categories and target ranges selected?
A The investment categories and the target ranges were selected to
provide investors with a diversified investment in a single mutual
fund. Stocks provide the potential for long-term capital growth while
bonds provide a high current return. Money market instruments provide a
means for temporary investment of cash balances arising in the normal
course of business.
However, as a temporary defensive measure because of market, economic,
political, or other conditions, we may invest up to 100% of the Fund's
assets in investment-grade, short-term debt instruments, which may
result in the Fund not achieving its investment objective during the
time it is in this temporary defensive posture.
Q What actions are taken to keep the Fund's asset allocations within the
target ranges?
A If market action causes the actual assets of the Fund in one or more
investment categories to move outside the ranges, we will make
adjustments to rebalance the portfolio. In general, we will rebalance
the portfolio at least once during each quarter. In rebalancing the
Fund's portfolio, we will buy or sell securities to return the actual
allocation of the Fund's assets to within its target ranges. For
example, the Fund's portfolio could begin a quarter with its assets
allocated 30% in large cap stocks, 30% in small cap stocks, 20% in
foreign stocks, 15% in bonds, and 5% in money market instruments.
During the quarter, due to market returns, the Fund's portfolio could
hold 40% in large cap stocks, 30% in small cap stocks, 20% in foreign
stocks, 5% in bonds, and 5% in money market instruments. In this case,
we would sell large cap stocks and use the proceeds to buy bonds to
bring stocks and bonds back to within their target ranges.
[CAUTION LIGHT]
REBALANCING RISKS. In purchasing and selling securities in order to rebalance
its portfolio, the Fund will pay more in brokerage commissions than it would
without a rebalancing policy. As a result of the need to rebalance, the Fund
also has less flexibility in the timing of purchases and sales of securities
than it would otherwise. While we will attempt to minimize
7
<PAGE>
any adverse impact to the Fund or its shareholders, the Fund may have a higher
proportion of capital gains and a lower return than a fund that does not have a
rebalancing policy.
Large Cap Stocks
Q What defines Large Cap Stocks?
A Large Cap Stocks are those of companies that have a market
capitalization of at least $1 billion at the time of purchase. They may
include real estate investment trusts (REITs).
MARKET
CAPITALIZATION
IS THE TOTAL
MARKET VALUE
OF A COMPANY'S
OUTSTANDING
SHARES OF
COMMON STOCK.
[CAUTION LIGHT]
REITs. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. Additionally, REITs are
dependent upon the capabilities of the REIT manager(s), have limited
diversification, and could be significantly impacted by changes in tax laws.
Q Will the Fund continue to hold such securities if their market
capitalization falls below $1 billion?
A The Fund may continue to hold or purchase more of a security of a
company whose market capitalization has declined below $1 billion.
Ordinarily, we would continue to treat the security as a large cap
stock; although we may, in our discretion, reclassify the security as a
small cap stock or limit the Fund's holdings in such security if we
determine it to be in the best interest of the Fund.
Q How are the decisions to buy and sell Large Cap Stocks made?
A We will invest this category's assets in a diversified group of large
cap growth stocks. We consider a number of factors in that decision
such as:
o a company's strategic position in its industry,
o sales and earnings growth,
o cash flow,
o book value, and
o dividend yield.
Stocks are sold when we believe they are overvalued.
8
<PAGE>
Small Cap Stocks
Q What defines Small Cap Stocks?
A Small Cap Stocks are those of companies that have a market
capitalization of less than $1 billion at the time of purchase. They
may include real estate investment trusts (REITs).
Q Will the Fund continue to hold these securities if their market
capitalization increases above $1 billion?
A Similar to the Large Cap Stocks category, the Fund may continue to hold
or purchase more of a security of a company whose market capitalization
has increased above $1 billion. Ordinarily, we would continue to treat
the security as a small cap stock; although we may, in our discretion,
reclassify the security as a large cap stock or limit the Fund's
holdings in such security if we determine it to be in the best interest
of the Fund.
Q Is there a greater risk in investing in smaller companies?
A Yes. Investing in smaller companies, especially those that have a
narrow product line or are traded infrequently, often involves greater
risk than investing in established companies with proven track records.
These securities may be subject to more price volatility than
securities of larger companies.
Q How are the decisions to buy and sell Small Cap Stocks made?
A We tend to invest in small capitalization companies that have rapid
sales and earnings growth potential. We seek companies that are well
positioned to take advantage of emerging, long-term social and economic
trends and have ample financial resources to sustain their growth. We
may reduce or sell investments in companies if their market
capitalizations grow to the point that they are clearly no longer small
capitalization stocks or if their stock prices appreciate excessively
in relation to fundamental prospects. Companies will also be sold if
they fail to realize their growth potential or if there are more
attractive opportunities elsewhere.
9
<PAGE>
International Stocks
Q What role do International Stocks play in the Fund's portfolio?
A From time to time, the U.S. and foreign stock markets may fluctuate
independently of each other. In other words, a decline in one market
may, in certain circumstances, be offset by a rise in the other market.
In addition, foreign equity markets may provide attractive returns not
otherwise available in the U.S. markets.
Q What is considered to be a "foreign company?"
A A foreign company is one organized under the laws of a foreign country;
and it must also have one of the following additional characteristics:
o the principal trading market for the stock is in a foreign country;
or
o at least 50% of its revenues or profits are derived from operations
within foreign countries; or
o at least 50% of its assets are located within foreign countries.
[CAUTION LIGHT]
FOREIGN INVESTING. Investing in foreign securities, including American
Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs), poses unique
risks: currency exchange rate fluctuations; foreign market illiquidity;
increased price volatility; exchange control regulations; foreign ownership
limits; different accounting, reporting, and disclosure requirements; and
difficulties in obtaining legal judgments. In the past, equity and debt
instruments of foreign markets have been more volatile than equity and debt
instruments of U.S. securities markets.
ADR - FOREIGN
SHARES HELD BY
A U.S. BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
GDR - FOREIGN
SHARES HELD BY
A U.S. OR
FOREIGN BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
o EMERGING MARKETS RISK. A country that is in the initial stages of its
industrial cycle is considered to be an emerging markets country.
Investments in developing countries involve exposure to economic structures
that are generally less diverse and mature than in the United States and to
political systems which may be less stable. In the past, markets of
developing countries have been more volatile than the markets of developed
countries.
o POLITICAL RISK. Political risk includes a greater potential for coups
d'etat, revolts, and expropriation by governmental organizations. For
example, we may invest the Fund's assets in Eastern Europe and former states
of the Soviet Union (also known as the Commonwealth of Independent States or
CIS). These countries were under communist systems which had nationalized
private industry. There is no guarantee
10
<PAGE>
that nationalization may not occur again in this region or others in which
we may invest the Fund's assets, in which case, we may lose all or part of
the Fund's investment in that country's issuers.
Q How are the decisions to buy and sell International Stocks made?
A We review countries and regions for economic and political stability as
well as future prospects. Then we research individual companies looking
for favorable valuations, growth prospects, quality of management, and
industry outlook. Securities are sold if we believe they are overvalued
or if the economic or political outlook significantly deteriorates.
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in stocks, it is subject to stock market
risk. Stock prices in general may decline over short or even extended periods,
regardless of the success or failure of an individual company's operations.
Stock markets tend to run in cycles, with periods when stock prices generally
go up, known as "bull" markets, and periods when stock prices generally go
down, referred to as "bear" markets. Stocks tend to go up and down more than
bonds.
Bonds and Money Market Instruments
Q What types of the bonds are included in the Fund's portfolio?
A Bonds must be investment grade at the time of purchase and may include
any of the following:
o obligations of the U.S. Government, its
agencies, and instrumentalities;
o mortgage-backed securities;
o asset-backed securities;
o corporate debt securities, such as notes and bonds;
o debt securities of real estate investment trusts;
o obligations of state and local governments and their agencies and
instrumentalities;
o Eurodollar obligations;
o Yankee obligations; and
o other debt securities.
Further description of these securities is found in APPENDIX A on page
27.
11
<PAGE>
[CAUTION LIGHT]
INTEREST RATE RISK. As a mutual fund investing in bonds, the Fund is subject to
the risk that the market value of the bonds will decline because of rising
interest rates. Bond prices are linked to the prevailing market interest rates.
In general, when interest rates rise, the prices of bonds fall and when
interest rates fall, bond prices generally rise. The price volatility of a bond
also depends on its maturity. Generally, the longer the maturity of a bond, the
greater its sensitivity to interest rates. To compensate investors for this
higher risk, bonds with longer maturities generally offer higher yields than
bonds with shorter maturities.
Q What are considered investment-grade securities?
A Investment-grade securities include securities issued or guaranteed by
the U.S. Government, its agencies, and instrumentalities, as well as
securities rated within the categories listed by the following rating
agencies:
=========================================================
Long-term Short-term
Rating Agency debt securities debt securities
=========================================================
Moody's Investors At least Prime-3 or
Services, Inc. At least Baa MIG 4/VMIG 4
---------------------------------------------------------
Standard & Poor's
Ratings Group At least BBB At least A-3 or SP-2
---------------------------------------------------------
Fitch IBCA, Inc. At least BBB At least F-3
---------------------------------------------------------
Duff and Phelps At least BBB At least D-3
=========================================================
or if unrated by these agencies, we must determine that these
securities are of equivalent investment quality.
You will find a complete description of the above debt ratings in the
Fund's Statement of Additional Information.
[CAUTION LIGHT]
CREDIT RISK. The bonds in the Fund's portfolio are subject to credit risk.
Credit risk is the possibility that an issuer of a bond will fail to make
timely payments of interest or principal. We attempt to minimize the Fund's
credit risk by investing in securities considered investment grade at the time
of purchase. When evaluating potential investments for the Fund, our analysts
also assess credit risk and its impact on the Fund's portfolio. Nevertheless,
even
12
<PAGE>
investment-grade securities are subject to some credit risk. Bonds in the
lowest-rated investment grade category have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to lead
to a weakened capability to make principal and interest payments on these bonds
than is the case for higher-rated bonds. In addition, the ratings of securities
are estimates by the rating agencies of the credit quality of the securities.
The ratings may not take into account every risk related to whether interest or
principal will be repaid on a timely basis.
Q What happens if the rating of a security is downgraded below investment
grade?
A We will determine whether it is in the best interest of the Fund's
shareholders to continue to hold the security in the Fund's portfolio.
If downgrades result in more than 5% of the Fund's net assets being
invested in securities that are less than investment-grade quality, we
will take immediate action to reduce the Fund's holdings in such
securities to 5% or less of the Fund's net assets, unless otherwise
directed by the Board of Trustees.
Q How are the decisions to buy and sell Bonds made?
A We buy bonds that represent value in current market conditions. Value
is a combination of yield, credit quality, structure (maturity, coupon,
redemption features) and liquidity. Recognizing value is the result of
simultaneously analyzing the interaction of these factors among the
securities available in the market. We will sell a security if we
become concerned about its credit risk, we are forced by market factors
to raise money, or an attractive replacement security is available.
Q What types of money market instruments are included in the Fund's
portfolio?
A The money market instruments included in the Fund's portfolio will
consist of investment-grade, U.S. dollar denominated debt securities
that have remaining maturities of one year or less. They may carry
either fixed or variable interest rates and may include any of the
following:
o obligations of the U.S. Government, its
agencies, and instrumentalities;
o repurchase agreements collateralized by the same;
o commercial paper or other short-term corporate obligations;
13
<PAGE>
o certificates of deposit;
o bankers' acceptances; and
o other suitable obligations.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 27.
FUND MANAGEMENT
The Trust has retained us, USAA Investment Management Company, to serve as the
manager and distributor for the Trust. We are an affiliate of United Services
Automobile Association (USAA), a large, diversified financial services
institution. As of the date of this Prospectus, we had approximately $37
billion in total assets under management. Our mailing address is 9800
Fredericksburg Road, San Antonio, TX 78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Board of Trustees. For our services, the Fund pays us an
annual fee. This fee was computed and paid at three-fourths of one percent
(.75%) of average net assets for the fiscal year ended May 31, 1998. We also
provide services related to selling the Fund's shares and receive no
compensation for those services.
Although our officers and employees, as well as those of the Trust, may engage
in personal securities transactions, they are restricted by the procedures in a
Joint Code of Ethics adopted by the Trust and us.
Portfolio Transactions
USAA Brokerage Services, our discount brokerage service, may execute purchases
and sales of equity securities for the Fund's portfolio. The Board of Trustees
has adopted procedures to ensure that any commissions paid to USAA Brokerage
Services are reasonable and fair.
14
<PAGE>
Portfolio Managers
The following individuals are primarily responsible for managing the Fund:
[PHOTOGRAPH OF PORTFOLIO MANAGERS]
SEATED L TO R: DAVID G. PEEBLES. W. TRAVIS SELMIER, II, DAVID G. PARSONS.
STANDING L TO R: JOHN K. CABELL, JR., PAUL H. LUNDMARK, PAMELA K. BLEDSOE,
ERIC M. EFRON, AND ALBERT C. SEBASTIAN.
LARGE CAP STOCKS
David G. Parsons, Assistant Vice President of Equity Investments, is the asset
allocation manager of the Fund and has managed the Large Cap Stocks investment
category since September 1995. He has 15 years investment management experience
working for us. Mr. Parsons earned the Chartered Financial Analyst (CFA)
designation in 1986 and is a member of the Association for Investment
Management and Research (AIMR) and the San Antonio Financial Analysts Society,
Inc. (SAFAS). He holds an MBA from the University of Texas, an MA from Southern
Illinois University, and a BA from Austin College, Texas.
SMALL CAP STOCKS
John K. Cabell, Jr. and Eric M. Efron, Assistant Vice Presidents of Equity
Investments, have managed the Small Cap Stocks investment category since
September 1995.
Mr. Cabell has 20 years investment management experience and has worked for us
for nine years. He served as Chief Economist for Retirement Systems of Alabama
from March 1991 to March 1994. Mr. Cabell earned the CFA designation in 1982
and is a member of AIMR and SAFAS. He holds an MA and a BS from the University
of Alabama.
15
<PAGE>
Mr. Efron has 23 years investment management experience and has worked for us
for six years. Mr. Efron earned the CFA designation in 1983 and is also a
member of AIMR and SAFAS. He holds an MBA from New York University, an MA from
the University of Michigan, and a BA from Oberlin College, Ohio.
INTERNATIONAL STOCKS
Albert C. Sebastian, Assistant Vice President of Equity Investments, has
managed and co-managed the International Stocks investment category since
September 1995. He has 14 years investment management experience and has worked
for us for seven years. Mr. Sebastian earned the CFA designation in 1989 and is
a member of AIMR, SAFAS, and the International Society of Financial Analysts
(ISFA). He holds an MBA from the University of Michigan and a BA from Holy
Cross College, Massachusetts.
David G. Peebles and W. Travis Selmier, II, co-manage the International Stocks
investment category with Mr. Sebastian. Mr. Sebastian coordinates the
activities of the Managers.
David G. Peebles, Vice President of Equity Investments, has co-managed the
International Stocks investment category since October 1996. He has 32 years
investment management experience and has worked for us for 14 years. Mr.
Peebles earned the CFA designation in 1971 and is a member of AIMR, SAFAS, and
ISFA. He holds an MBA and a BS from Texas Christian University.
W. Travis Selmier, II, Assistant Vice President of Equity Investments, has
co-managed the International Stocks investment category since October 1996. He
has 11 years investment management experience and has worked for us for seven
years. Mr. Selmier earned the CFA designation in 1990 and is a member of AIMR,
SAFAS, and ISFA. He holds an MBA from Indiana University, a Certificate of
Proficiency from Sophia University Japanese Language Institute, Japan, and a BA
from the University of California at Santa Barbara.
BONDS
Paul H. Lundmark, Assistant Vice President of Fixed Income Investments, has
managed the Bonds investment category since September 1995. He has 12 years
investment management experience and has worked for us for six years. Mr.
Lundmark earned the CFA designation in 1989 and is a member of AIMR and SAFAS.
He holds an MBA and BSB from the University of Minnesota.
MONEY MARKET INSTRUMENTS
Pamela K. Bledsoe, Assistant Vice President of Money Market Funds, has managed
the Money Market Instruments investment category since May 1996. She has ten
years investment management experience and has worked for us for seven years.
Ms. Bledsoe earned the CFA designation in 1992 and is a member of AIMR and
SAFAS. She holds an MBA from Texas Christian University and a BS from Louisiana
Tech University.
16
<PAGE>
USING MUTUAL FUNDS IN AN ASSET ALLOCATION PROGRAM
I. The Idea Behind Asset Allocation
If you have money to invest and hear that stocks may be a good investment, is
it a wise idea to use your entire savings to buy one stock? Most people
wouldn't -- it would be fortunate if it works, but this strategy holds a great
deal of risk. Surprising news could be reported tomorrow on your stock, and its
price could soar or plummet.
Careful investors understand this concept of risk and lower that risk by
diversifying their holdings among a number of securities. That way bad news for
one security may be counterbalanced by good news regarding other securities.
But there is still a question of risk here. History tells us that stocks are
generally more volatile than bonds and that long-term bonds are generally more
volatile than short-term bonds. History also tells us that over many years
investments having higher risks tend to have higher returns than investments
that carry lower risks. From these observations comes the idea of asset
allocation.
Asset allocation is a concept that involves dividing your money among several
different types of investments -- for example, stocks, bonds, and short-term
investments such as money market instruments -- and keeping that allocation
until your objectives or the financial markets significantly change. That way
you're not pinning all your financial success on the fortunes of one kind of
investment. Money spread across different investment categories can help you
reduce market risk and likely will provide more stability to your total return.
Asset allocation can work because different kinds of investments generally
follow different up-and-down cycles. With a variety of investments in your
portfolio, some are probably doing well, even when others are struggling.
II. Using Asset Allocation in an Investment Program
Most investors understand the concept of diversification, but asset allocation
goes beyond diversifying your portfolio; it's much more of an active process.
You must evaluate your lifestyle, finances, circumstances, long- and short-term
financial goals, and tolerance for investment risk. Once you have structured
your allocation, you'll need to review it regularly since your objectives will
change over time. Even though we do not charge sales loads or commissions, our
sales representatives are always available to assist you in structuring and
reviewing your investment portfolio.
17
<PAGE>
III. USAA's Series of Asset Strategy Funds
USAA's series of asset allocation funds, our Asset Strategy Funds, are designed
for the long-term investor and are in line with our investment philosophy for
investors, specifically "buy and hold for the long-term," and "don't try to
time the market." As shown below, each of USAA's Asset Strategy Funds has its
own different mix of assets and objectives.
===============================================================================
Fund Investment Objective Invests In
===============================================================================
Income Seek high current return, with bonds and stocks
Strategy reduced risk over time, through an
Fund asset allocation strategy which
emphasizes income and gives
secondary emphasis to long-term
growth of capital.
Growth and Tax Seek a conservative balance between tax exempt bonds and
Strategy Fund income, the majority of which is tax- blue chip stocks
exempt, and the potential for long-term
growth of capital to preserve purchasing
power.
Balanced Seek high total return, with reduced stocks and bonds
Strategy risk over time, through an asset
Fund allocation strategy that seeks a
combination of long-term growth of
capital and current income.
Cornerstone Achieve a positive inflation-adjusted basic value stocks,
Strategy rate of return and a reasonably stable international stocks,
Fund value of Fund shares, thereby government
preserving purchasing power of securities, real
shareholders' capital. estate securities,
and gold securities
Growth Seek high total return, with reduced small and large cap
Strategy risk over time, through an asset stocks, bonds, and
Fund allocation strategy which emphasizes international stocks
capital appreciation and gives
secondary emphasis to income.
===============================================================================
For more complete information about the other USAA Asset Strategy Funds,
including charges and expenses, call us for a Prospectus. Read it carefully
before you invest or send money.
18
<PAGE>
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required for each new account. However, after you open
your initial account with us, you will not need to fill out another application
unless the registration is different.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number or
tax identification number to avoid possible withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after we receive your request in proper form. The
Fund's NAV is determined at the close of the regular trading session (generally
4:00 p.m. Eastern Time) of the New York Stock Exchange (NYSE) each day the NYSE
is open. If we receive your request and payment prior to that time, your
purchase price will be the NAV per share determined for that day. If we receive
your request or payment after the NAV per share is calculated, the purchase
will be effective on the next business day. If you plan to purchase Fund shares
with a foreign check, we suggest you convert your foreign check to U.S. dollars
prior to investment in the Fund. This will avoid a potential delay in the
effective date of your purchase of up to four to six weeks. Furthermore, a bank
charge may be assessed in the clearing process, which will be deducted from the
amount of the purchase.
MINIMUM INVESTMENTS
INITIAL PURCHASE
[MONEY GRAPHIC]
o $3,000 [$500 Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) accounts and
$250 for IRAs] or no initial investment if you elect to have monthly
electronic investments of at least $50 each. We may periodically offer
programs that reduce the minimum amounts for monthly electronic
investments. Employees of USAA and its affiliated companies may open an
account through payroll deduction for as little as $25 per pay period with
no initial investment.
ADDITIONAL PURCHASES
o $50
19
<PAGE>
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288
o To add to your account, send your check and the "Invest by Mail" stub that
accompanies your Fund's transaction confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
BANK WIRE
[WIRE GRAPHIC]
o Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA Growth Strategy Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)______________________________________
Shareholder(s) Mutual Fund Account Number___________________
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
o Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448
[TELEPHONE GRAPHIC]
o If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To
open an account by phone, the new account must have the same registration
as your existing account.
20
<PAGE>
Redemption of Shares
You may redeem Fund shares by any of the methods described below on any day the
NAV per share is calculated. Redemptions are effective on the day instructions
are received in a manner as described below. However, if instructions are
received after the NAV per share calculation (generally 4:00 p.m. Eastern
Time), redemption will be effective on the next business day.
We will send you your money within seven days after the effective date of
redemption. Payment for redemption of shares purchased by EFT or check is sent
after the EFT or check has cleared, which could take up to 15 days from the
purchase date. If you are considering redeeming shares soon after purchase, you
should purchase by bank wire or certified check to avoid delay. Redemptions are
subject to taxes based on the difference between the cost of shares when
purchased and the price received upon redemption.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment in limited circumstances.
HOW TO REDEEM
WRITTEN, FAX, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
o Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption privileges are automatically established when you complete
your application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions. Before
any discussion regarding your account, the following information is obtained:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
21
<PAGE>
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to help you in
your role as an investor. In the INVESTOR'S GUIDE, you will find additional
information on purchases, redemptions, and methods of payment. You will also
find in-depth information on automatic investment plans, shareholder statements
and reports, and other useful information.
Account Balance
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually a small balance account fee of $12 to each shareholder account with a
balance, at the time of assessment, of less than $2,000. The fee will reduce
total transfer agency fees paid by the Fund to SAS. Accounts exempt from the
fee include: (1) any account regularly purchasing additional shares each month
through an automatic investment plan; (2) any account registered under the
Uniform Gifts/Transfers to Minors Act (UGMA/UTMA); (3) all (non-IRA) money
market fund accounts; (4) any account whose registered owner has an aggregate
balance of $50,000 or more invested in USAA mutual funds; and (5) all IRA
accounts (for the first year the account is open).
Trust Rights
The Trust reserves the right to:
o reject purchase or exchange orders when in the best interest of the Trust;
o limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
o require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question. The Statement of Additional Information
contains information on acceptable guarantors;
o redeem an account with less than $900, with certain limitations.
EXCHANGES
Exchange Privilege
The exchange privilege is automatic when you complete your application. You may
exchange shares among Funds in the USAA Family of Funds, provided you do not
hold these shares in stock certificate form and the shares to be acquired
22
<PAGE>
are offered in your state of residence. After the exchange order is received,
the Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between the cost of shares when purchased and the price received
upon exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 21.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA Family of Funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA Family of Funds).
SHAREHOLDER INFORMATION
Share Price Calculation
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4:00 p.m. Eastern Time.
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.
Securities trading in various foreign markets may take place on days when the
NYSE is closed. Further, when the NYSE is open, the foreign markets may be
closed. Therefore, the calculation of the Fund's NAV may not take place at the
same time the prices of certain securities held by the Fund are determined. In
most cases, 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 the Fund's NAV is calculated will not be reflected in the
Fund's NAV. If, however, we determine that a particular event would materially
affect the Fund's NAV, then we, under the general supervision of the Board of
23
<PAGE>
Trustees, will use all relevant, available information to determine a fair
value for the affected portfolio securities.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Board of Trustees. Securities which cannot be
valued by these methods, and all other assets, are valued in good faith at fair
value using methods we have determined under the general supervision of the
Board of Trustees.
For additional information on how securities are valued, see Valuation of
Securities in the Fund's Statement of Additional Information.
Dividends and Distributions
The Fund pays net investment income dividends yearly. Any net capital gain
distribution usually occurs within 45 days of the May 31 fiscal year end, which
would be somewhere around the middle of July. The Fund will make additional
payments to shareholders, if necessary, to avoid the imposition of any federal
income or excise tax.
We will automatically reinvest all income dividends and capital gain
distributions unless we receive different instructions from you. The share
price will be the NAV of the Fund shares computed on the ex-dividend date. Any
income dividends or capital gain distributions paid by the Fund will reduce the
NAV per share by the amount of the dividend or distribution. These dividends
and distributions are subject to taxes.
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
Federal Taxes
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this Prospectus. Note that the Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. We urge you to
consult your tax adviser about the status of distributions from the Fund in
your own state and locality.
24
<PAGE>
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you as ordinary income, whether
received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends-received deduction available to
corporations.
Regardless of the length of time you have held Fund shares, distributions of
net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable investment.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
o fails to furnish the Fund with a correct tax identification number,
o underreports dividend or interest income, or
o fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify on your application, or
on a separate Form W-9 supplied by the Fund's transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
REPORTING - The Fund will report information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
25
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance since inception. Certain information reflects financial
results for a single Fund share. The total returns in the table represent the
rate that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by KPMG Peat Marwick LLP, whose report, along with the Fund's
financial statements, are included in the Annual Report, which is available
upon request.
NINE-MONTH
PERIOD ENDED
YEAR ENDED MAY 31, MAY 31,
------------------------------------------
1998 1997 1996*
------------------------------------------
Net asset value at
beginning of period $ 13.10 $ 12.74 $ 10.00
Net investment income .13 .15 .11(b)
Net realized and
unrealized gain 1.43 .77 2.66
Distributions from net
investment income (.13) (.12) (.03)
Distributions of realized
capital gains (.23) (.44) -
------------------------------------------
Net asset value at
end of period $ 14.30 $ 13.10 $ 12.74
==========================================
Total return (%)** 12.12 7.73 27.76
Net assets at end of
period (000) $ 249,412 $ 193,921 $ 87,188
Ratio of expenses to
average net assets (%) 1.25 1.31 1.66(a)
Ratio of net investment
income to average net
assets (%) 0.97 1.46 1.34(a)
Portfolio turnover (%) 69.42 62.50 40.21
- --------------
* Fund commenced operations September 1, 1995.
** Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
26
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES IN WHICH WE MAY
INVEST THE FUND'S ASSETS:
REPURCHASE AGREEMENTS
We may invest the Fund's assets in repurchase agreements which are
collateralized by obligations issued or guaranteed as to both principal and
interest by the U.S. Government, its agencies, and instrumentalities. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell it back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on an agreed upon date.
This date is usually not more than seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest, which is unrelated to the coupon rate or maturity of the purchased
security.
WHEN-ISSUED SECURITIES
We may invest the Fund's assets in new issues of debt securities offered on a
when-issued basis.
o Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed
at the time of commitment.
o The Fund does not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
o Such securities can be sold before settlement date.
VARIABLE RATE SECURITIES
We may invest the Fund's assets in securities that bear interest at rates which
are adjusted periodically to market rates.
o These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on
the income earned by the Fund depending on the proportion of such
securities held.
o The value of variable rate securities is less affected than fixed-coupon
securities by changes in prevailing interest rates because of the periodic
adjustment of their coupons to a market rate. The shorter the period
between adjustments, the smaller the impact of interest rate fluctuations
on the value of these securities.
o The market value of a variable rate security usually tends toward par (100%
of face value) at interest rate adjustment time.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
We may invest the Fund's assets in mortgage-backed and asset-backed securities.
Mortgage-backed securities include, but are not limited to, securities issued
by the Government National Mortgage Association (Ginnie Mae), the Federal
National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage
Corporation (Freddie Mac). These securities represent ownership in a pool of
mortgage loans. They differ from conventional bonds in that principal is paid
back to the investor as payments are made on the underlying
27
<PAGE>
mortgages in the pool. Accordingly, the Fund receives monthly scheduled
payments of principal and interest along with any unscheduled principal
prepayments on the underlying mortgages. Because these scheduled and
unscheduled principal payments must be reinvested at prevailing interest rates,
mortgage-backed securities do not provide an effective means of locking in
long-term interest rates for the investor. Like other fixed income securities,
when interest rates rise, the value of a mortgage-backed security generally
will decline; however, when interest rates are declining, the value of
mortgage-backed securities with prepayment features may not increase as much as
other fixed income securities.
Mortgage-backed securities also include collateralized mortgage obligations
(CMOs). CMOs are obligations fully collateralized by a portfolio of mortgages
or mortgage-related securities. CMOs are divided into pieces (tranches) with
varying maturities. The cash flow from the underlying mortgages is used to pay
off each tranche separately. CMOs are designed to provide investors with more
predictable maturities than regular mortgage securities but such maturities can
be difficult to predict because of the effect of prepayments. Failure to
accurately predict prepayments can adversely affect the Fund's return on these
investments. CMOs may also be less marketable than other securities.
Asset-backed securities represent a participation in, or are secured by and
payable from, a stream of payments generated by particular assets, such as
credit card, motor vehicle, or trade receivables. They may be pass-through
certificates, which have characteristics very similar to mortgage-backed
securities, discussed above. They may also be in the form of asset-backed
commercial paper, which is issued by a special purpose entity, organized solely
to issue the commercial paper and to purchase interests in the assets. The
credit quality of these securities depends primarily upon the quality of the
underlying assets and the level of credit support and enhancement provided.
The weighted average life of such securities is likely to be substantially
shorter than their stated final maturity as a result of scheduled principal
payments and unscheduled principal prepayments.
MUNICIPAL LEASE OBLIGATIONS
We may invest the Fund's assets in a variety of instruments commonly referred
to as municipal lease obligations, including:
o Leases,
o Installment purchase contracts, and
o Certificates of participation in such leases and contracts.
MASTER DEMAND NOTES
We may invest the Fund's assets in master demand notes, which are obligations
that permit the investment of fluctuating amounts by the Fund, at varying rates
of interest using direct arrangements between the Fund, as lender, and the
borrower. These notes permit daily changes in the amounts borrowed. The Fund
has the right to increase the amount under the
28
<PAGE>
note at any time up to the full amount provided by the note agreement, or to
decrease the amount, and the borrower may repay up to the full amount of the
note without penalty. Frequently, such obligations are secured by letters of
credit or other credit support arrangements provided by banks. Because master
demand notes are direct lending arrangements between the lender and borrower,
these instruments generally will not be traded, and there generally is no
secondary market for these notes, although they are redeemable (and immediately
repayable by the borrower) at face value, plus accrued interest, at any time.
We will invest the Fund's assets in master demand notes only if the Board of
Trustees or its delegate has determined that they are of credit quality
comparable to the debt securities in which the Fund generally may invest.
EURODOLLAR AND YANKEE OBLIGATIONS
We may invest a portion of the Fund's assets in dollar-denominated instruments
that have been issued outside the U.S. capital markets by foreign corporations
and financial institutions and by foreign branches of U.S. corporations and
financial institutions (Eurodollar) as well as dollar-denominated instruments
that have been issued by foreign issuers in the U.S. capital markets (Yankee).
In addition, we may invest a portion of the Fund's assets in Eurodollar and
Yankee obligations of investment-grade emerging market countries.
PUT BONDS
We may invest the Fund's assets in securities (including securities with
variable interest rates) which may be redeemed or sold back (put) to the issuer
of the security or a third party prior to stated maturity (put bonds).
o Such securities will normally trade as if maturity is the earlier put date,
even though stated maturity is longer. Under the Fund's portfolio
allocation procedure, maturity for put bonds is deemed to be the date on
which the put becomes exercisable.
FORWARD CURRENCY CONTRACTS
The Fund may hold securities denominated in foreign currencies. As a result,
the value of the securities will be affected by changes in the exchange rate
between the dollar and foreign currencies. In managing currency exposure, the
Fund may enter into forward currency contracts. A forward currency contract
involves an agreement to purchase or sell a specified currency at a specified
future date or over a specified time period at a price set at the time of the
contract. The Fund may only enter into forward currency contracts. When the
Fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it desires to "lock in" the U.S. dollar price of the
security.
ILLIQUID SECURITIES
We may invest up to 15% of the Fund's net assets in securities which are
illiquid. Illiquid securities are those securities that cannot be disposed of
in the ordinary course of business, seven days or less, at approximately the
value at which the Fund has valued the securities.
29
<PAGE>
APPENDIX B
USAA Family of No-Load Mutual Funds
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide you with the opportunity to formulate your own investment program. You
may exchange any shares you hold in any one USAA Fund for shares in any other
USAA Fund. For more complete information about other Funds in the USAA Family
of Funds, including charges and expenses, call us for a Prospectus. Read it
carefully before you invest or send money.
FUND
TYPE/NAME VOLATILITY
=================================================
CAPITAL APPRECIATION
Aggressive Growth Very high
Emerging Markets (1) Very high
First Start Growth Moderate to high
Gold (1) Very high
Growth Moderate to high
Growth & Income Moderate
International (1) Moderate to high
S&P 500 Index (2) Moderate
Science & Technology Very high
World Growth (1) Moderate to high
=================================================
ASSET ALLOCATION
Balanced Strategy (1) Moderate
Cornerstone Strategy (1) Moderate
Growth and Tax Strategy Moderate
Growth Strategy (1) Moderate to high
Income Strategy Low to moderate
=================================================
INCOME -- TAXABLE
GNMA Low to moderate
Income Moderate
Income Stock Moderate
Short-Term Bond Low
=================================================
INCOME -- TAX EXEMPT
Long-Term (3) Moderate
Intermediate-Term (3) Low to moderate
Short-Term (3) Low
State Bond/Income (3, 4) Moderate
=================================================
MONEY MARKET
Money Market (5) Very low
Tax Exempt Money Market (3, 5) Very low
Treasury Money Market Trust (5) Very low
State Money Market (3, 4, 5) Very low
=================================================
1 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
2 S&P(R) IS A TRADEMARK OF THE MCGRAW-HILL COMPANIES, INC., AND HAS BEEN
LICENSED FOR USE. THE PRODUCT IS NOT SPONSORED, SOLD OR PROMOTED BY STANDARD
& POOR'S, AND STANDARD & POOR'S MAKES NO REPRESENTATION REGARDING THE
ADVISABILITY OF INVESTING IN THE PRODUCT.
3 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
4 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY
TO RESIDENTS OF THOSE STATES.
5 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.
30
<PAGE>
NOTES
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's Statement of Additional Information (SAI),
Annual or Semiannual Report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of the Prospectus. In the Fund's Annual Report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally, copies
of this information can be obtained, for a duplicating fee, by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
------------------------------
TELEPHONE ASSISTANCE 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 (R)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
Investment Company Act File No. 811-4019
<PAGE>
USAA EMERGING
MARKETS FUND
PROSPECTUS
OCTOBER 1, 1998
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy?...... 2
Main Risks of Investing in This Fund............................ 2
Is This Fund for You?........................................... 3
Could the Value of Your Investment in This Fund Fluctuate?...... 3
Fees and Expenses............................................... 5
Fund Investments................................................ 6
Fund Management.................................................10
Using Mutual Funds in an Investment Program.....................11
How to Invest...................................................12
Important Information About Purchases and Redemptions...........15
Exchanges.......................................................16
Shareholder Information.........................................17
Financial Highlights............................................20
Appendix A .....................................................21
Appendix B .....................................................23
Appendix C......................................................25
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund has an objective of capital appreciation. We will attempt to achieve
this objective by investing the Fund's assets mostly in equity securities of
emerging market companies.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objective will be achieved. See FUND INVESTMENTS on
page 6 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risks of investing in this Fund are market risk and the risks of
foreign investing.
o MARKET RISK involves the possibility that the Fund's investments in equity
securities will decline because of falls in the stock market, reducing the
value of individual company's stocks, regardless of the success or failure
of an individual company's operations.
o FOREIGN INVESTING RISK involves the possibility that the Fund's investments
in foreign stock will decrease because of currency exchange rate
fluctuations, increased price volatility, uncertain political conditions,
and other factors.
Those risks are particularly heightened in this Fund due to the fact that
within the universe of foreign investing, investments in emerging market
countries are most volatile. Emerging market countries are less diverse and
mature than other countries and tend to be politically less stable. As with
other mutual funds, losing money is an additional risk associated with
investing in this Fund.
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
2
<PAGE>
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
|X| You are looking for an investment in foreign securities to balance your
domestic securities portfolio.
|X| You are willing to give up current income for long-term growth.
|X| You are willing to accept very high risk.
|X| You are seeking an appropriate investment for an IRA, through a 401(k) plan
or 403(b) plan, or other tax-sheltered account.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
|X| You are unable or reluctant to invest for a period of seven years or more.
|X| You need an investment that provides steady income.
|X| You need an investment that provides tax-free income.
|X| You are unwilling to take high risk for long-term growth.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment in the Fund will likely
increase or decrease. Because the risks are higher in emerging markets than
developed international markets or the United States, the Fund is expected to
be significantly more volatile than the average equity mutual fund. The bar
chart shown on the next page illustrates the Fund's volatility and performance
from year to year over the life of the Fund.
3
<PAGE>
TOTAL RETURN
All mutual funds must use the same formula to calculate total return.
TOTAL RETURN
MEASURES THE
PRICE CHANGE
IN A SHARE
ASSUMING THE
REINVESTMENT
OF ALL DIVIDEND
INCOME AND
CAPITAL GAIN
DISTRIBUTIONS.
[BAR CHART]
CALENDAR TOTAL RETURN
YEAR PERCENTAGE
1995* 3.65
1996 16.59
1997 -3.46
*FUND BEGAN OPERATIONS ON NOVEMBER 7, 1994.
THE FUND'S TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998, WAS
-17.16%.
During the periods shown in the bar chart, the highest total return for a
quarter was 14.11% (quarter ending June 30, 1995) and the lowest total return
for a quarter was -17.24% (quarter ending December 31, 1997).
The table below shows how the Fund's average annual returns for the one-year
period as well as the life of the Fund compared to those of a broad-based
securities market index. Remember, historical performance does not necessarily
indicate what will happen in the future.
=======================================================================
Average Annual Total Returns Since Fund's
(for the periods ending Past Inception on
December 31, 1997) 1 Year November 7, 1994
=======================================================================
Emerging Markets Fund -3.46% 2.15%
-----------------------------------------------------------------------
International Financial
Corporation (IFC) Global
Composite Index* -14.54% -10.21%
=======================================================================
*INTERNATIONAL FINANCIAL CORPORATION (IFC) GLOBAL COMPOSITE INDEX IS AN
UNMANAGED BROAD-BASED INDEX OF EMERGING MARKETS PER THE WORLD BANK GNP PER
CAPITAL DEFINITION.
4
<PAGE>
[TELEPHONE GRAPHIC]
TOUCHLINE (R)
1-800-531-8777
PRESS
1
THEN
1
THEN
5 6 #
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
Again, you must remember that historical performance does not necessarily
indicate what will happen in the future. The value of your shares may go up or
down. For the most current price and return information for this Fund, you may
call TouchLINE(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1
again for prices and returns. Then, press 56# when asked for the Fund Code.
NEWSPAPER
SYMBOL
EmgMkt
TICKER
SYMBOL
USEMX
You can also find the most current price of your shares in the business section
of your newspaper in the mutual fund section under the heading "USAA Group" and
the symbol "EmgMkt." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "USEMX."
FEES AND EXPENSES
This summary shows what it will cost you directly or indirectly to invest in
the Fund.
Shareholder Transaction Expenses -- Fees You Pay Directly
There are no fees or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is a $10 fee. (Your bank may also charge a fee for receiving
wires.)
Annual Fund Operating Expenses -- Fees You Pay Indirectly
Fund expenses come out of the Fund's assets and are reflected in the Fund's
share price and dividends. "Other Expenses" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses during the past
fiscal year ended May 31, 1998, and are calculated as a percentage of average
net assets.
12B-1 FEES -
SOME MUTUAL
FUNDS CHARGE
THESE FEES
TO PAY FOR
ADVERTISING
AND OTHER
COSTS OF SELLING
FUND SHARES.
Management Fees 1.00%
Distribution (12b-1) Fees None
Other Expenses .31%
-----
Total Annual Fund Operating Expenses 1.31%
=====
Example of Effect of the Fund's Operating Expenses
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's
5
<PAGE>
operating expenses remain the same, and (3) you redeem all of your shares at
the end of the periods shown.
1 year.......... $ 133
3 years......... 415
5 years......... 718
10 years......... 1,579
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal investment strategy is to invest the Fund's total
assets primarily in equity securities of emerging market companies. We
use the term "equity securities" to include common stocks, preferred
stocks, securities convertible into common stocks, and securities which
carry the right to buy common stocks.
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in equity securities, it is subject to
stock market risk. Stock prices in general may decline over short or even
extended periods, regardless of the success or failure of an individual
company's operations. Stock markets tend to run in cycles, with periods when
stock prices generally go up, known as "bull" markets, and periods when stock
prices generally go down, referred to as "bear" markets. Equity securities tend
to go up and down more than bonds.
Q What is an emerging market company?
A An issuer is an emerging market company if:
o it is organized under the laws of an emerging market country (as
defined below);
o the principal trading market for its stock is in an emerging market
country; or
o at least 50% of its revenues or profits are derived from operations
within emerging market countries or at least 50% of its assets are
located within emerging market countries.
6
<PAGE>
Q What countries are considered as emerging markets?
A For our purposes, emerging market countries are all countries of the
world excluding the following, which are referred to as developed
countries:
ASIA: Australia, Japan, New Zealand
AMERICAS: Canada, the United States
EUROPE: Austria, Belgium, Denmark, Finland, France, Germany, Holland,
Italy, Luxembourg, Norway, Spain, Sweden, Switzerland, the
United Kingdom
Q What are the characteristics of the economic and political systems of
emerging market countries?
A The economic and political systems of emerging market countries can be
described as possessing two or more of the following characteristics:
o The countries in which these stock markets are found have a
less-developed economy than the developed countries.
o Economies of these countries are likely to be undergoing rapid growth
or some major structural change, such as a change in economic
systems, rapid development of an industrial or value-added economic
sector, or attainment of significantly better terms of trade for
primary goods, to name a few examples.
o Sustainable economic growth rates are higher, or potentially higher,
than developed countries.
o Economies of these countries may be benefitting from the rapid growth
of neighboring countries and/or may be significantly influenced by
growth of demand in the developed markets.
o Personal income levels and consumption are generally lower than those
in developed countries, but may be growing at a faster rate.
o The political system is likely to be, or appear to be, in greater
flux than the developed countries listed above.
7
<PAGE>
Q In what emerging market countries does the Fund intend to invest?
A Some of the countries in which we expect to invest or may invest the
Fund's assets include, but are not limited to:
ASIA: China, Hong Kong, India, Indonesia, Korea, Malaysia,
Pakistan, Philippines, Singapore, Taiwan, Thailand
AMERICAS: Argentina, Brazil, Chile, Columbia, Ecuador, Mexico, Peru,
Venezuela
AFRICA/MIDDLE EAST: Egypt, Ghana, Israel, Morocco, South Africa,
Turkey, Zimbabwe
EUROPE/OTHER: Czech Republic, Greece, Hungary, Poland, Portugal,
Russia, Slovakia
[CAUTION LIGHT]
FOREIGN INVESTING. Investing in foreign securities, including American
Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs), poses unique
risks: currency exchange rate fluctuations; foreign market illiquidity;
increased price volatility; exchange control regulations; foreign ownership
limits; different accounting, reporting, and disclosure requirements; and
difficulties in obtaining legal judgments. In the past, equity and debt
instruments of foreign markets have been more volatile than equity and debt
instruments of U.S. securities markets.
ADR - FOREIGN
SHARES HELD BY
A U.S. BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
GDR - FOREIGN
SHARES HELD BY
A U.S. OR
FOREIGN BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
o EMERGING MARKETS RISK. A country that is in the initial stages of its
industrial cycle is considered to be an emerging markets country.
Investments in developing countries involve exposure to economic structures
that are generally less diverse and mature than in the United States and to
political systems which may be less stable. In the past, markets of
developing countries have been more volatile than the markets of developed
countries.
o POLITICAL RISK. Political risk includes a greater potential for coups
d'etat, revolts, and expropriation by governmental organizations. For
example, we may invest the Fund's assets in Eastern Europe and former
states of the Soviet Union (also known as the Commonwealth of Independent
States or CIS). These countries were under communist systems which had
nationalized private industry. There is no guarantee that nationalization
may not occur again in this region or others in which we may invest the
Fund's assets, in which case, we may lose all or part of the Fund's
investment in that country's issuers.
8
<PAGE>
Q Will the Fund's assets be invested in any other securities?
A We may invest the remainder of the Fund's assets in investment-grade,
short-term debt instruments having the following characteristics:
o remaining maturities of less than one year that have been issued or
guaranteed as to both principal and interest by the U.S. Government
or its agencies or instrumentalities, and
o repurchase agreements collateralized by such securities.
The Fund may also invest part of its cash position in short-term
sovereign debt securities of emerging market countries for the purpose
of obtaining a higher yield. Additionally, we may invest the Fund's
assets in stocks of selected issuers which have favorable growth
prospects, but may not be organized or otherwise situated in emerging
markets.
We may also invest the Fund's assets in public and private sector debt
and fixed income instruments of emerging market issuers, including
Brady Bonds of selected countries, which we believe have the potential
for significant capital appreciation (due, for example, to our
assessment of prospects for the issuer or its domicile country),
without regard to any interest or dividend yields payable pursuant to
such securities. These latter investments may be considered to be
speculative in nature.
As a temporary defensive measure because of market, economic,
political, or other conditions, we may invest up to 100% of the Fund's
assets in investment-grade, short-term debt instruments, which may
result in the Fund not achieving its investment objective during the
time it is in this temporary defensive posture.
Q Are there any restrictions as to the types of business or operations of
companies in which the Fund's assets may be invested?
A No, there are no restrictions except that we may not invest 25% or more
of the Fund's total assets in one industry. The Fund's investments will
be diversified in four or more countries.
We believe that attractive investment opportunities exist in many
emerging markets. While investing a person's assets solely in an
emerging market fund may not be suitable, for those willing to accept
higher volatility, including the Emerging Markets Fund in a
well-diversified portfolio could significantly enhance returns. The
Fund combines the advantages of diversified investment in emerging
markets with the convenience and liquidity of a mutual fund based in
the United States.
9
<PAGE>
Q How are the decisions to buy and sell securities made?
A We review countries and regions for economic and political stability as
well as future prospects. Then we research individual companies looking
for favorable valuations, growth prospects, quality of management, and
industry outlook. Securities are sold if we believe they are overvalued
or if the political environment significantly deteriorates.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX B on page 23.
FUND MANAGEMENT
The Trust has retained us, USAA Investment Management Company, to serve as the
manager and distributor for the Trust. We are an affiliate of United Services
Automobile Association (USAA), a large, diversified financial services
institution. As of the date of this Prospectus, we had approximately $37
billion in total assets under management. Our mailing address is 9800
Fredericksburg Road, San Antonio, TX 78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Board of Trustees. For our services, the Fund pays us an
annual fee. This fee was computed and paid at one percent (1%) of average net
assets for the fiscal year ended May 31, 1998. We also provide services related
to selling the Fund's shares and receive no compensation for those services.
Although our officers and employees, as well as those of the Trust, may engage
in personal securities transactions, they are restricted by the procedures in a
Joint Code of Ethics adopted by the Trust and us.
Portfolio Transactions
USAA Brokerage Services, our discount brokerage service, may execute purchases
and sales of equity securities for the Fund's portfolio. The Board of Trustees
has adopted procedures to ensure that any commissions paid to USAA Brokerage
Services are reasonable and fair.
10
<PAGE>
Portfolio Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER]
W. TRAVIS SELMIER
W. Travis Selmier, II, Assistant Vice President of Equity Investments, has
managed the Fund since November 1994. He has 11 years investment management
experience and has worked for us for seven years. Mr. Selmier earned the
Chartered Financial Analyst designation in 1990 and is a member of the
Association for Investment Management and Research, San Antonio Financial
Analysts Society, Inc., and the International Society of Financial Analysts. He
holds an MBA from Indiana University, a Certificate of Proficiency from Sophia
University Japanese Language Institute, Japan, and a BA from the University of
California at Santa Barbara.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. The Idea Behind Mutual Funds
Mutual funds provide small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment can buy part of a diversified
portfolio. That portfolio is managed by investment professionals, relieving you
of the need to make individual stock or bond selections. You also enjoy
conveniences, such as daily pricing, liquidity, and in the case of the USAA
Family of Funds, no sales charge. The portfolio, because of its size, has lower
transaction costs on its trades than most individuals would have. As a result,
you own an investment that in earlier times would have been available only to
very wealthy people.
II. Using Funds in an Investment Program
In choosing a mutual fund as an investment vehicle, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will perform
that function. In addition, we will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily valuation of the Fund, as
well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that balances your investment goals with your tolerance for risk. It is
likely that this decision may include the use of more than one fund of the USAA
Family of Funds.
For example, assume you wish to diversify internationally. You could divide
your investments between the Emerging Markets, Gold, International, or
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<PAGE>
World Growth Funds and holdings in domestic funds. This would give you exposure
to the opportunities of investments in many foreign countries and to currency
changes. This is just one way you could combine funds to fit your own risk and
reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX C under asset allocation on page 25. These unique mutual funds provide
a professionally-managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves diversification
across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use a USAA Asset
Strategy Fund, the USAA Family of Funds provides a broad range of choices
covering just about any investor's investment objectives. Our sales
representatives stand ready to assist you with your choices and to help you
craft a portfolio to meet your needs. Refer to APPENDIX C on page 25 for a
complete list of the USAA Family of No-Load Mutual Funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required for each new account. However, after you open
your initial account with us, you will not need to fill out another application
unless the registration is different.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number or
tax identification number to avoid possible withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after we receive your request in proper form. The
Fund's NAV is determined at the close of the regular trading session (generally
4:00 p.m. Eastern Time) of the New York Stock Exchange (NYSE) each day the NYSE
is open. If we receive your request and payment prior to that time, your
purchase price will be the NAV per share determined for that
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<PAGE>
day. If we receive your request or payment after the NAV per share is
calculated, the purchase will be effective on the next business day. If you
plan to purchase Fund shares with a foreign check, we suggest you convert your
foreign check to U.S. dollars prior to investment in the Fund. This will avoid
a potential delay in the effective date of your purchase of up to four to six
weeks. Furthermore, a bank charge may be assessed in the clearing process,
which will be deducted from the amount of the purchase.
MINIMUM INVESTMENTS
INITIAL PURCHASE
[MONEY GRAPHIC]
o $3,000. [$500 Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) accounts
and $250 for IRAs] or no initial investment if you elect to have monthly
electronic investments of at least $50 each. We may periodically offer
programs that reduce the minimum amounts for monthly electronic
investments. Employees of USAA and its affiliated companies may open an
account through payroll deduction for as little as $25 per pay period with
no initial investment.
ADDITIONAL PURCHASES
o $50
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288
o To add to your account, send your check and the "Invest by Mail" stub that
accompanies your Fund's transaction confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
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BANK WIRE
[WIRE GRAPHIC]
o Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA Emerging Markets Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)______________________________________
Shareholder(s) Mutual Fund Account Number___________________
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
o Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448
[TELEPHONE GRAPHIC]
o If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To
open an account by phone, the new account must have the same registration
as your existing account.
Redemption of Shares
You may redeem Fund shares by any of the methods described below on any day the
NAV per share is calculated. Redemptions are effective on the day instructions
are received in a manner as described below. However, if instructions are
received after the NAV per share calculation (generally 4:00 p.m. Eastern
Time), redemption will be effective on the next business day.
We will send you your money within seven days after the effective date of
redemption. Payment for redemption of shares purchased by EFT or check is sent
after the EFT or check has cleared, which could take up to 15 days from the
purchase date. If you are considering redeeming shares soon after purchase, you
should purchase by bank wire or certified check to avoid delay. Redemptions are
subject to taxes based on the difference between the cost of shares when
purchased and the price received upon redemption.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment in limited circumstances.
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<PAGE>
HOW TO REDEEM
WRITTEN, FAX, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
o Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption privileges are automatically established when you complete
your application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions. Before
any discussion regarding your account, the following information is obtained:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to help you in
your role as an investor. In the INVESTOR'S GUIDE, you will find additional
information on purchases, redemptions, and methods of payment. You will also
find in-depth information on automatic investment plans, shareholder statements
and reports, and other useful information.
Account Balance
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually a small balance account fee of $12 to each shareholder account with a
balance, at the time of assessment, of less than $2,000. The fee will reduce
total transfer agency fees paid by the Fund to SAS. Accounts exempt from the
fee include: (1) any account regularly purchasing additional shares each month
through an automatic investment plan; (2) any account registered under the
Uniform Gifts/Transfers to Minors Act (UGMA/UTMA);
15
<PAGE>
(3) all (non-IRA) money market fund accounts; (4) any account whose registered
owner has an aggregate balance of $50,000 or more invested in USAA mutual
funds; and (5) all IRA accounts (for the first year the account is open).
Trust Rights
The Trust reserves the right to:
o reject purchase or exchange orders when in the best interest of the Trust;
o limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
o require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question. The Statement of Additional Information
contains information on acceptable guarantors;
o redeem an account with less than $900, with certain limitations.
EXCHANGES
Exchange Privilege
The exchange privilege is automatic when you complete your application. You may
exchange shares among Funds in the USAA Family of Funds, provided you do not
hold these shares in stock certificate form and the shares to be acquired are
offered in your state of residence. After the exchange order is received, the
Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between the cost of shares when purchased and the price received
upon exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 15.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA Family of Funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA Family of Funds).
16
<PAGE>
SHAREHOLDER INFORMATION
Share Price Calculation
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4:00 p.m. Eastern Time.
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.
Securities trading in various foreign markets may take place on days when the
NYSE is closed. Further, when the NYSE is open, the foreign markets may be
closed. Therefore, the calculation of the Fund's NAV may not take place at the
same time the prices of certain securities held by the Fund are determined. In
most cases, 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 the Fund's NAV is calculated will not be reflected in the
Fund's NAV. If, however, we determine that a particular event would materially
affect the Fund's NAV, then we, under the general supervision of the Board of
Trustees, will use all relevant, available information to determine a fair
value for the affected portfolio securities.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Board of Trustees. Securities which cannot be
valued by these methods, and all other assets, are valued in good faith at fair
value using methods we have determined under the general supervision of the
Board of Trustees.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's Statement of Additional Information.
Dividends and Distributions
The Fund pays net investment income dividends yearly. Any net capital gain
distribution usually occurs within 45 days of the May 31 fiscal year end,
17
<PAGE>
which would be somewhere around the middle of July. The Fund will make
additional payments to shareholders, if necessary, to avoid the imposition of
any federal income or excise tax.
We will automatically reinvest all income dividends and capital gain
distributions unless we receive different instructions from you. The share
price will be the NAV of the Fund shares computed on the ex-dividend date. Any
income dividends or capital gain distributions paid by the Fund will reduce the
NAV per share by the amount of the dividend or distribution. These dividends
and distributions are subject to taxes.
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
Taxes
FEDERAL
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this Prospectus. Note that the Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. We urge you to
consult your tax adviser about the status of distributions from the Fund in
your own state and locality.
FOREIGN
The Fund may be subject to foreign withholding or other taxes. If more than 50%
of the value of the Fund's total assets at the close of any taxable year
consists of securities of foreign corporations, the Fund may file an election
with the Internal Revenue Service (the Foreign Election) that would permit you
to take a credit (or a deduction) for foreign income taxes paid by the Fund. If
the Foreign Election is made, you would include in your gross income both
dividends received from the Fund and foreign income taxes paid by the Fund. As
a shareholder of the Fund, you would be entitled to treat the foreign income
taxes withheld as a credit against your U.S. federal income taxes, subject to
the limitations set forth in the Code with respect to the foreign tax credit
generally. Alternatively, you could, if it were to your advantage, treat the
foreign income taxes withheld as an itemized deduction in computing taxable
income rather than as a tax credit. You will not be entitled to a foreign tax
credit for taxes paid to certain countries; however, if the Fund otherwise
qualifies for the Foreign Election, a deduction for such taxes will be
available to shareholders of the Fund. It is anticipated that the Fund will
make the Foreign Election.
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<PAGE>
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you as ordinary income, whether
received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends received deduction available to
corporations.
Regardless of the length of time you have held Fund shares, distributions of
net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable investment.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
o fails to furnish the Fund with a correct tax identification number,
o underreports dividend or interest income, or
o fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify on your application, or
on a separate Form W-9 supplied by the Fund's transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
REPORTING - The Fund will report information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
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<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance since inception. Certain information reflects financial
results for a single Fund share. The total returns in the table represent the
rate that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by KPMG Peat Marwick LLP, whose report, along with the Fund's
financial statements, are included in the Annual Report, which is available
upon request.
SEVEN-MONTH
PERIOD ENDED
YEAR ENDED MAY 31, MAY 31,
-------------------------------------------------
1998 1997 1996 1995*
-------------------------------------------------
Net asset value at
beginning of period $ 11.53 $ 11.13 $ 9.77 $ 10.00
Net investment
income (loss) .07 .01 (.01)(b) .03(b)
Net realized and
unrealized gain (loss) (2.44) .89 1.60 (.26)
Distributions from net
investment income - - (.01) -
Distributions of realized
capital gains (.18) (.50) (.22) -
-------------------------------------------------
Net asset value at
end of period $ 8.98 $ 11.53 $ 11.13 $ 9.77
=================================================
Total return (%)** (20.97) 8.69 16.93 (2.30)
Net assets at end of
period (000) $ 294,888 $ 95,644 $ 51,315 $ 22,914
Ratio of expenses to
average net assets (%) 1.31 1.81 2.27 2.50(a)
Ratio of expenses to average
net assets excluding
reimbursements (%) - - - 2.60(a)
Ratio of net investment
income (loss) to
average net assets (%) .88 .03 (.08) .53(a)
Portfolio turnover (%) 41.23 61.21 87.98 34.87
- -----------
* Fund commenced operations November 7, 1994.
** Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
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<PAGE>
APPENDIX A
MOODY'S CORPORATE RATINGS
Baa Bonds which are rated Baa are considered as medium-grade obligations
(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 lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
S&P CORPORATE RATINGS
BBB An obligation rated "BBB" exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC," and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB An obligation rated "BB" is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated "B" is MORE VULNERABLE to nonpayment than obligations
rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC An obligation rated "CCC" is CURRENTLY VULNERABLE to nonpayment and is
dependent upon favorable business, financial, and economic conditions for
the obligor
21
<PAGE>
to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not
likely to have the capacity to meet its financial commitment on the
obligation.
CC An obligation rated "CC" is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on
this obligation are being continued.
D An obligation rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-): THE RATINGS FROM "AA" TO "CCC" 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 "A" or better assigned to debt obligations by Moody's
and S&P is included in APPENDIX A of the Statement of Additional Information.
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<PAGE>
APPENDIX B
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES IN WHICH WE MAY
INVEST THE FUND'S ASSETS:
FORWARD CURRENCY CONTRACTS
The Fund may hold securities denominated in foreign currencies. As a result,
the value of the securities will be affected by changes in the exchange rate
between the dollar and foreign currencies. In managing currency exposure, the
Fund may enter into forward currency contracts. A forward currency contract
involves an agreement to purchase or sell a specified currency at a specified
future date or over a specified time period at a price set at the time of the
contract. The Fund may only enter into forward currency contracts. When the
Fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it desires to "lock in" the U.S. dollar price of the
security.
REPURCHASE AGREEMENTS
We may invest the Fund's assets in repurchase agreements which are
collateralized by obligations issued or guaranteed as to both principal and
interest by the U.S. Government, its agencies, and instrumentalities. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell it back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on an agreed upon date.
This date is usually not more than seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest, which is unrelated to the coupon rate or maturity of the purchased
security.
WHEN-ISSUED SECURITIES
We may invest the Fund's assets in new issues of debt securities offered on a
when-issued basis.
o Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed
at the time of commitment.
o The Funds do not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
o Such securities can be sold before settlement date.
BRADY BONDS AND EMERGING MARKET DEBT
We may invest the Fund's assets in Brady Bonds and public and private sector
debt and fixed income instruments of emerging market issuers. Brady Bonds are
securities created through a restructuring plan introduced by former U.S.
Treasury Secretary Nicholas Brady. The Brady Plan made provisions whereby
existing commercial bank loans to both public and private entities in selected
developing countries are exchanged for Brady Bonds. These bonds may be
denominated in other currencies, but are usually denominated in U.S. dollars.
Brady Bonds are actively traded in over-the-counter markets. As the markets for
these securities are relatively new, however, and since they have from time to
time been subject to disruption, we will monitor, on a continuous basis, the
liquidity of Brady Bonds held in the Fund's portfolio.
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<PAGE>
ILLIQUID SECURITIES
We may invest up to 15% of the Fund's net assets in securities which are
illiquid. Illiquid securities are those securities that cannot be disposed of
in the ordinary course of business, seven days or less, at approximately the
value at which the Fund has valued the securities.
CONVERTIBLE SECURITIES
We may invest the Fund's assets in convertible securities, which are bonds,
preferred stocks, and other securities that pay interest or dividends and offer
the buyer the ability to convert the security into common stock. The value of
convertible securities depends partially on interest rate changes and the
credit quality of the issuer. Because a convertible security affords an
investor the opportunity, through its conversion feature, to participate in the
capital appreciation of the underlying common stock, the value of convertible
securities also depends on the price of the underlying common stock.
24
<PAGE>
APPENDIX C
USAA Family of No-Load Mutual Funds
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide you with the opportunity to formulate your own investment program. You
may exchange any shares you hold in any one USAA Fund for shares in any other
USAA Fund. For more complete information about other Funds in the USAA Family
of Funds, including charges and expenses, call us for a Prospectus. Read it
carefully before you invest or send money.
FUND
TYPE/NAME VOLATILITY
=================================================
CAPITAL APPRECIATION
Aggressive Growth Very high
Emerging Markets (1) Very high
First Start Growth Moderate to high
Gold (1) Very high
Growth Moderate to high
Growth & Income Moderate
International (1) Moderate to high
S&P 500 Index (2) Moderate
Science & Technology Very high
World Growth (1) Moderate to high
=================================================
ASSET ALLOCATION
Balanced Strategy (1) Moderate
Cornerstone Strategy (1) Moderate
Growth and Tax Strategy Moderate
Growth Strategy (1) Moderate to high
Income Strategy Low to moderate
=================================================
INCOME -- TAXABLE
GNMA Low to moderate
Income Moderate
Income Stock Moderate
Short-Term Bond Low
=================================================
INCOME -- TAX EXEMPT
Long-Term (3) Moderate
Intermediate-Term (3) Low to moderate
Short-Term (3) Low
State Bond/Income (3, 4) Moderate
=================================================
MONEY MARKET
Money Market (5) Very low
Tax Exempt Money Market (3, 5) Very low
Treasury Money Market Trust (5) Very low
State Money Market (3, 4, 5) Very low
=================================================
1 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
2 S&P(R) IS A TRADEMARK OF THE MCGRAW-HILL COMPANIES, INC., AND HAS BEEN
LICENSED FOR USE. THE PRODUCT IS NOT SPONSORED, SOLD OR PROMOTED BY STANDARD
& POOR'S, AND STANDARD & POOR'S MAKES NO REPRESENTATION REGARDING THE
ADVISABILITY OF INVESTING IN THE PRODUCT.
3 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
4 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY
TO RESIDENTS OF THOSE STATES.
5 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.
25
<PAGE>
NOTES
<PAGE>
NOTES
<PAGE>
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the Fund's Statement of Additional
Information (SAI), Annual or Semiannual Report, or to ask other questions
about the Fund. The SAI has been filed with the Securities and Exchange
Commission (SEC) and is legally a part of the Prospectus. In the Fund's
Annual Report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance
during the last fiscal year.
To view these documents, along with other related documents, you can visit
the SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally,
copies of this information can be obtained, for a duplicating fee, by writing
the Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
------------------------------
TELEPHONE ASSISTANCE 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 (R)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
Investment Company Act File No. 811-4019
<PAGE>
USAA GOLD FUND
Prospectus
October 1, 1998
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy?...... 2
Main Risks of Investing in This Fund............................ 2
Is This Fund for You?........................................... 3
Could the Value of Your Investment in This Fund Fluctuate?...... 3
Fees and Expenses............................................... 5
Fund Investments................................................ 6
Fund Management................................................. 8
Using Mutual Funds in an Investment Program..................... 9
How to Invest...................................................10
Important Information About Purchases and Redemptions...........13
Exchanges.......................................................14
Shareholder Information.........................................15
Financial Highlights............................................19
Appendix A .....................................................20
Appendix B .....................................................21
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund has an objective to seek long-term capital appreciation and to protect
the purchasing power of your capital against inflation. Current income is a
secondary objective. We will attempt to achieve the Fund's objectives by
investing the great majority of the Fund's assets in equity securities of
domestic and foreign gold exploration, mining, or processing companies.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objectives will be achieved. See FUND INVESTMENTS on
page 6 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risks of investing in this Fund are the increased volatility of
mining stocks, market risk, and the risks of foreign investing.
o GOLD MINING RISK involves additional risk because of gold's price
volatility and the increased impact such volatility has on the
profitability of gold mining companies.
o MARKET RISK involves the possibility that the Fund's investments in equity
securities will decline because of falls in the stock market, reducing the
value of individual company's stocks, regardless of the success or failure
of an individual company's operations.
o FOREIGN INVESTING RISK involves the possibility that the Fund's investments
in foreign stock will decrease because of currency exchange rate
fluctuations, increased price volatility, uncertain political conditions,
and other factors.
As with other mutual funds, losing money is an additional risk associated with
investing in this Fund.
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
2
<PAGE>
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
|X| You are willing to give up current income for long-term growth.
|X| You are willing to accept very high risk.
|X| You are seeking an appropriate investment for an IRA, through a 401(k) plan
or 403(b) plan, or other tax-sheltered account.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
|X| You are unable or reluctant to invest for a period of seven years or more.
|X| You need an investment that provides steady income.
|X| You need an investment that provides tax-free income.
|X| You are unwilling to take very high risk for long-term growth.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment in the Fund will likely
increase or decrease. Because the Fund will invest in companies principally
engaged in gold exploration, mining, or processing, the Fund may be subject to
greater risks and greater market fluctuations than other funds with a portfolio
of securities representing a broader range of industries. The bar chart shown
on the next page illustrates the Fund's volatility and performance from year to
year for the past ten years.
3
<PAGE>
TOTAL RETURN
All mutual funds must use the same formula to calculate total return.
TOTAL RETURN
MEASURES THE
PRICE CHANGE
IN A SHARE
ASSUMING THE
REINVESTMENT
OF ALL DIVIDEND
INCOME AND
CAPITAL GAIN
DISTRIBUTIONS.
[BAR CHART]
CALENDAR TOTAL RETURN
YEAR PERCENTAGE
1988 -17.11
1989 18.03
1990 -26.51
1991 -4.45
1992 -7.95
1993 58.43
1994 -9.38
1995 4.04
1996 0.00
1997 -38.19
THE FUND'S TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998, WAS
-3.26%.
During the periods shown in the bar chart, the highest total return for a
quarter was 30.64% (quarter ending June 30, 1993) and the lowest total return
for a quarter was -29.05% (quarter ending December 31, 1997).
The table below shows how the Fund's average annual returns for the one-,
five-, and ten-year periods as well as the life of the Fund compared to those
of broad-based securities market indexes. Remember, historical performance does
not necessarily indicate what will happen in the future.
==========================================================================
Average Annual
Total Returns
(for the periods ending Past Past Past Life of
December 31, 1997) 1 Year 5 Years 10 Years Fund
==========================================================================
Gold Fund -38.19% -1.59% -5.24% -3.21%
--------------------------------------------------------------------------
S&P 500 Index* 33.35% 20.25% 18.02% 18.10%
--------------------------------------------------------------------------
Philadelphia Gold &
Silver Index* -36.45% .80% -3.84% -1.87%
--------------------------------------------------------------------------
London Gold* -21.41% -2.71% -5.04% -1.41%
==========================================================================
*THE S&P 500 INDEX IS A BROAD-BASED COMPOSITE UNMANAGED INDEX THAT
REPRESENTS THE AVERAGE PERFORMANCE OF A GROUP OF 500 WIDELY-HELD,
PUBLICLY-TRADED STOCKS. THE PHILADELPHIA GOLD & SILVER INDEX IS AN INDEX
REPRESENTING NINE HOLDINGS IN THE GOLD AND SILVER SECTOR, TYPICALLY REFERRED
TO AS THE XAU. LONDON GOLD IS A TRADITIONAL GOLD BULLION INDEX THAT IS
READILY AVAILABLE.
4
<PAGE>
[TELEPHONE GRAPHIC]
TOUCHLINE (R)
1-800-531-8777
PRESS
1
THEN
1
THEN
5 0 #
Please consider performance information in light of the Fund's investment
objectives and policies and market conditions during the reported time periods.
Again, you must remember that historical performance does not necessarily
indicate what will happen in the future. The value of your shares may go up or
down. For the most current price and return information for this Fund, you may
call TouchLine(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1
again for prices and returns. Then, press 50# when asked for the Fund Code.
NEWSPAPER
SYMBOL
Gold
TICKER
SYMBOL
USAGX
You can also find the most current price of your shares in the business section
of your newspaper in the mutual fund section under the heading "USAA Group" and
the symbol "Gold." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "USAGX."
FEES AND EXPENSES
This summary shows what it will cost you directly or indirectly to invest in
the Fund.
Shareholder Transaction Expenses -- Fees You Pay Directly
There are no fees or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is a $10 fee. (Your bank may also charge a fee for receiving
wires.)
Annual Fund Operating Expenses -- Fees You Pay Indirectly
Fund expenses come out of the Fund's assets and are reflected in the Fund's
share price and dividends. "Other Expenses" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses during the past
fiscal year ended May 31, 1998, and are calculated as a percentage of average
net assets.
12B-1 FEES -
SOME MUTUAL
FUNDS CHARGE
THESE FEES
TO PAY FOR
ADVERTISING
AND OTHER
COSTS OF SELLING
FUND SHARES.
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .71%
-----
Total Annual Fund Operating Expenses 1.46%
=====
Example of Effect of the Fund's Operating Expenses
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
remain the same, and (3) you redeem all of your shares at the end of the
periods shown.
5
<PAGE>
1 year.............. $ 149
3 years............. 462
5 years............. 797
10 years............. 1,746
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal investment strategy is to invest at least 80% of
the Fund's assets during normal market conditions in equity securities
of companies principally engaged in gold exploration, mining, or
processing. We use the term "equity securities" to include common
stocks, preferred stocks, securities convertible into common stocks,
and securities which carry the right to buy common stocks.
Since the majority of the Fund's assets will be invested in companies
principally engaged in gold exploration, mining, or processing, the
Fund may be subject to greater risks and greater market fluctuations
than other funds with a portfolio of securities representing a broader
range of investment objectives. An investment in the Fund, by itself,
should not be considered a balanced investment program.
[CAUTION LIGHT]
VOLATILITY OF GOLD MINING SECURITIES. Gold mining securities involve additional
risk because of gold's price volatility and the increased impact such
volatility has on the profitability of gold mining companies. However, since
the market action of such securities has tended to move independently of the
broader financial markets, the addition of gold mining securities to your
portfolio may reduce overall fluctuations in portfolio value.
Q Will the Fund's assets be invested in any other securities?
A We may invest the remainder of the Fund's assets in equity securities
of companies similarly engaged in other precious metals and minerals
and in investment-grade, short-term debt instruments having the
following characteristics:
o maturities of less than one year that have been issued or guaranteed
as to both principal and interest by the U.S. Government or its
agencies or instrumentalities, and
6
<PAGE>
o repurchase agreements collateralized by such securities.
If we believe the outlook for gold is unattractive, as a temporary
defensive measure, we may invest up to 100% of the Fund's assets in
investment-grade, short-term debt instruments, which may result in the
Fund not achieving its investment objective during the time it is in
this temporary defensive posture.
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in equity securities, it is subject to
stock market risk. Stock prices in general may decline over short or even
extended periods, regardless of the success or failure of an individual
company's operations. Stock markets tend to run in cycles, with periods when
stock prices generally go up, known as "bull" markets, and periods when stock
prices generally go down, referred to as "bear" markets. Equity securities tend
to go up and down more than bonds.
Q Will the Fund's assets be invested in foreign securities?
A We may invest the Fund's assets in foreign securities purchased in
either foreign or U.S. markets. Additionally, we may invest the Fund's
assets in the securities of South African issuers. The market prices of
these securities and the ability of the Fund to hold such investments
in the future could be affected by the unstable political and social
conditions in South Africa and its neighboring countries.
[CAUTION LIGHT]
FOREIGN INVESTING. Investing in foreign securities, including American
Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs), poses unique
risks: currency exchange rate fluctuations; foreign market illiquidity;
increased price volatility; exchange control regulations; foreign ownership
limits; different accounting, reporting, and disclosure requirements; and
difficulties in obtaining legal judgments. In the past, equity and debt
instruments of foreign markets have been more volatile than equity and debt
instruments of U.S. securities markets.
ADR - FOREIGN
SHARES HELD BY
A U.S. BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
GDR - FOREIGN
SHARES HELD BY
A U.S. OR
FOREIGN BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
o EMERGING MARKETS RISK. A country that is in the initial stages of its
industrial cycle is considered to be an emerging markets country.
Investments in developing countries involve exposure to economic structures
that are generally less diverse and mature than in the United States and to
political systems which may be less stable. In the past, markets of
developing countries have been more volatile than the markets of developed
countries.
7
<PAGE>
o POLITICAL RISK. Political risk includes a greater potential for coups
d'etat, revolts, and expropriation by governmental organizations. For
example, we may invest the Fund's assets in Eastern Europe and former states
of the Soviet Union (also known as the Commonwealth of Independent States or
CIS). These countries were under communist systems which had nationalized
private industry. There is no guarantee that nationalization may not occur
again in this region or others in which we may invest the Fund's assets, in
which case, we may lose all or part of the Fund's investment in that
country's issuers.
Q How are the decisions to buy and sell securities made?
A We look for well-managed and prudently financed low-cost producers with
good production or reserve growth potential that sell at a reasonable
valuation on a risk-adjusted basis. We will sell these securities when
they no longer meet these criteria.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 20.
FUND MANAGEMENT
The Trust has retained us, USAA Investment Management Company, to serve as the
manager and distributor for the Trust. We are an affiliate of United Services
Automobile Association (USAA), a large, diversified financial services
institution. As of the date of this Prospectus, we had approximately $37
billion in total assets under management. Our mailing address is 9800
Fredericksburg Road, San Antonio, TX 78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Board of Trustees. For our services, the Fund pays us an
annual fee. This fee was computed and paid at three-fourths of one percent
(.75%) of average net assets for the fiscal year ended May 31, 1998. We also
provide services related to selling the Fund's shares and receive no
compensation for those services.
Although our officers and employees, as well as those of the Trust, may engage
in personal securities transactions, they are restricted by the procedures in a
Joint Code of Ethics adopted by the Trust and us.
8
<PAGE>
Portfolio Transactions
USAA Brokerage Services, our discount brokerage service, may execute purchases
and sales of equity securities for the Fund's portfolio. The Board of Trustees
has adopted procedures to ensure that any commissions paid to USAA Brokerage
Services are reasonable and fair.
Portfolio Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER]
MARK W. JOHNSON
Mark W. Johnson, Assistant Vice President of Equity Investments, has managed
the Fund since January 1994. He has 24 years investment management experience
and has worked for us for 10 years. Mr. Johnson earned the Chartered Financial
Analyst designation in 1978 and is a member of the Association for Investment
Management and Research and the San Antonio Financial Analysts Society, Inc. He
holds an MBA and a BBA from the University of Michigan.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. The Idea Behind Mutual Funds
Mutual funds provide small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment can buy part of a diversified
portfolio. That portfolio is managed by investment professionals, relieving you
of the need to make individual stock or bond selections. You also enjoy
conveniences, such as daily pricing, liquidity, and in the case of the USAA
Family of Funds, no sales charge. The portfolio, because of its size, has lower
transaction costs on its trades than most individuals would have. As a result,
you own an investment that in earlier times would have been available only to
very wealthy people.
II. Using Funds in an Investment Program
In choosing a mutual fund as an investment vehicle, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will perform
that function. In addition, we will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily valuation of the Fund, as
well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that
9
<PAGE>
balances your investment goals with your tolerance for risk. It is likely
that this decision may include the use of more than one fund of the USAA Family
of Funds.
For example, assume you wish to diversify internationally. You could divide
your investments between the Gold and International Funds and holdings in
domestic funds. This would give you exposure to the opportunities of
investments in many foreign countries and to currency changes. This is just one
way you could combine funds to fit your own risk and reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 21. These unique mutual funds provide
a professionally-managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves diversification
across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use a USAA Asset
Strategy Fund, the USAA Family of Funds provides a broad range of choices
covering just about any investor's investment objectives. Our sales
representatives stand ready to assist you with your choices and to help you
craft a portfolio to meet your needs. Refer to APPENDIX B on page 21 for a
complete list of the USAA Family of No-Load Mutual Funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required for each new account. However, after you open
your initial account with us, you will not need to fill out another application
unless the registration is different.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number or
tax identification number to avoid possible withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after we receive your request in proper form. The
Fund's NAV is determined at the close of the regular trading session (generally
4:00 p.m. Eastern Time) of the New York Stock Exchange (NYSE) each day the NYSE
is open. If we receive your request and payment prior to
10
<PAGE>
that time, your purchase price will be the NAV per share determined for that
day. If we receive your request or payment after the NAV per share is
calculated, the purchase will be effective on the next business day. If you
plan to purchase Fund shares with a foreign check, we suggest you convert your
foreign check to U.S. dollars prior to investment in the Fund. This will avoid
a potential delay in the effective date of your purchase of up to four to six
weeks. Furthermore, a bank charge may be assessed in the clearing process,
which will be deducted from the amount of the purchase.
MINIMUM INVESTMENTS
INITIAL PURCHASE
[MONEY GRAPHIC]
o $3,000. [$500 Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) accounts
and $250 for IRAs] or no initial investment if you elect to have monthly
electronic investments of at least $50 each. We may periodically offer
programs that reduce the minimum amounts for monthly electronic
investments. Employees of USAA and its affiliated companies may open an
account through payroll deduction for as little as $25 per pay period with
no initial investment.
ADDITIONAL PURCHASES
o $50
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288
o To add to your account, send your check and the "Invest by Mail" stub that
accompanies your Fund's transaction confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
11
<PAGE>
BANK WIRE
[WIRE GRAPHIC]
o Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA Gold Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)______________________________________
Shareholder(s) Mutual Fund Account Number___________________
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
o Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448
[TELEPHONE GRAPHIC]
o If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To
open an account by phone, the new account must have the same registration
as your existing account.
Redemption of Shares
You may redeem Fund shares by any of the methods described below on any day the
NAV per share is calculated. Redemptions are effective on the day instructions
are received in a manner as described below. However, if instructions are
received after the NAV per share calculation (generally 4:00 p.m. Eastern
Time), redemption will be effective on the next business day.
We will send you your money within seven days after the effective date of
redemption. Payment for redemption of shares purchased by EFT or check is sent
after the EFT or check has cleared, which could take up to 15 days from the
purchase date. If you are considering redeeming shares soon after purchase, you
should purchase by bank wire or certified check to avoid delay. Redemptions are
subject to taxes based on the difference between the cost of shares when
purchased and the price received upon redemption.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment in limited circumstances.
12
<PAGE>
HOW TO REDEEM
WRITTEN, FAX, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
o Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption privileges are automatically established when you complete
your application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions. Before
any discussion regarding your account, the following information is obtained:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to help you in
your role as an investor. In the INVESTOR'S GUIDE, you will find additional
information on purchases, redemptions, and methods of payment. You will also
find in-depth information on automatic investment plans, shareholder statements
and reports, and other useful information.
Account Balance
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually a small balance account fee of $12 to each shareholder account with a
balance, at the time of assessment, of less than $2,000. The fee will reduce
total transfer agency fees paid by the Fund to SAS. Accounts exempt from the
fee include: (1) any account regularly purchasing additional shares each month
through an automatic investment plan; (2) any account registered under the
Uniform Gifts/Transfers to Minors Act (UGMA/UTMA); (3) all (non-IRA) money
market fund accounts; (4) any account whose
13
<PAGE>
registered owner has an aggregate balance of $50,000 or more invested in USAA
mutual funds; and (5) all IRA accounts (for the first year the account is
open).
Trust Rights
The Trust reserves the right to:
o reject purchase or exchange orders when in the best interest of the Trust;
o limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
o require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question. The Statement of Additional Information
contains information on acceptable guarantors;
o redeem an account with less than $900, with certain limitations.
EXCHANGES
Exchange Privilege
The exchange privilege is automatic when you complete your application. You may
exchange shares among Funds in the USAA Family of Funds, provided you do not
hold these shares in stock certificate form and the shares to be acquired are
offered in your state of residence. After the exchange order is received, the
Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between the cost of shares when purchased and the price received
upon exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 13.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA Family of Funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA Family of Funds).
14
<PAGE>
SHAREHOLDER INFORMATION
Share Price Calculation
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4:00 p.m. Eastern Time.
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.
Securities trading in various foreign markets may take place on days when the
NYSE is closed. Further, when the NYSE is open, the foreign markets may be
closed. Therefore, the calculation of the Fund's NAV may not take place at the
same time the prices of certain securities held by the Fund are determined. In
most cases, 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 the Fund's NAV is calculated will not be reflected in the
Fund's NAV. If, however, we determine that a particular event would materially
affect the Fund's NAV, then we, under the general supervision of the Board of
Trustees, will use all relevant, available information to determine a fair
value for the affected portfolio securities.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Board of Trustees. Securities which cannot be
valued by these methods, and all other assets, are valued in good faith at fair
value using methods we have determined under the general supervision of the
Board of Trustees.
For additional information on how securities are valued, see Valuation of
Securities in the Fund's Statement of Additional Information.
Dividends and Distributions
The Fund pays net investment income dividends yearly. Any net capital gain
distribution usually occurs within 45 days of the May 31 fiscal year end, which
would be somewhere around the middle of July. The Fund will make
15
<PAGE>
additional payments to shareholders, if necessary, to avoid the imposition of
any federal income or excise tax.
We will automatically reinvest all income dividends and capital gain
distributions unless we receive different instructions from you. The share
price will be the NAV of the Fund shares computed on the ex-dividend date. Any
income dividends or capital gain distributions paid by the Fund will reduce the
NAV per share by the amount of the dividend or distribution. These dividends
and distributions are subject to taxes.
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
Taxes
FEDERAL
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this Prospectus. Note that the Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. We urge you to
consult your tax adviser about the status of distributions from the Fund in
your own state and locality.
FOREIGN
The Fund may be subject to foreign withholding or other taxes. If more than 50%
of the value of the Fund's total assets at the close of any taxable year
consists of securities of foreign corporations, the Fund may file an election
with the Internal Revenue Service (the Foreign Election) that would permit you
to take a credit (or a deduction) for foreign income taxes paid by the Fund. If
the Foreign Election is made, you would include in your gross income both
dividends received from the Fund and foreign income taxes paid by the Fund. As
a shareholder of the Fund, you would be entitled to treat the foreign income
taxes withheld as a credit against your U.S. federal income taxes, subject to
the limitations set forth in the Code with respect to the foreign tax credit
generally. Alternatively, you could, if it were to your advantage, treat the
foreign income taxes withheld as an itemized deduction in computing taxable
income rather than as a tax credit. You will not be entitled to a foreign tax
credit for taxes paid to certain countries; however, if the Fund otherwise
qualifies for the Foreign Election, a deduction for such taxes will be
available to shareholders of the Fund. It is anticipated that the Fund will
make the Foreign Election.
16
<PAGE>
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you as ordinary income, whether
received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends received deduction available to
corporations.
Regardless of the length of time you have held Fund shares, distributions of
net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable investment.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
o fails to furnish the Fund with a correct tax identification number,
o underreports dividend or interest income, or
o fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify on your application, or
on a separate Form W-9 supplied by the Fund's transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
REPORTING - The Fund will report information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
17
<PAGE>
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
18
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five-year period. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG Peat Marwick LLP,
whose report, along with the Fund's financial statements, are included in the
Annual Report, which is available upon request.
EIGHT-MONTH
PERIOD ENDED
YEAR ENDED MAY 31, MAY 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------
Net asset value at
beginning of period $ 8.09 $ 11.12 $ 9.00 $ 8.83 $ 7.95
Net investment
income (loss) (.03)(b) (.01)(b) (.02) .01 .01
Net realized and
unrealized gain (loss) (2.19) (3.02) 2.15 .17 .88
Distributions from net
investment income - - (.01) (.01) (.01)
--------------------------------------------------------
Net asset value at
end of period $ 5.87 $ 8.09 $ 11.12 $ 9.00 $ 8.83
========================================================
Total return (%)* (27.44) (27.25) 23.66 2.05 11.19
Net assets at end of
period (000) $ 93,226 $121,169 $167,067 $160,223 $176,527
Ratio of expenses to
average net assets (%) 1.46 1.31 1.33 1.28 1.26(a)
Ratio of net investment
income (loss) to
average net assets (%) (.42) (.11) (.14) .10 .15(a)
Portfolio turnover (%) 19.62 26.40 16.48 34.76 34.75
- ------------
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
19
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES IN WHICH WE MAY
INVEST THE FUND'S ASSETS:
FORWARD CURRENCY CONTRACTS
The Fund may hold securities denominated in foreign currencies. As a result,
the value of the securities will be affected by changes in the exchange rate
between the dollar and foreign currencies. In managing currency exposure, the
Fund may enter into forward currency contracts. A forward currency contract
involves an agreement to purchase or sell a specified currency at a specified
future date or over a specified time period at a price set at the time of the
contract. The Fund may only enter into forward currency contracts. When the
Fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it desires to "lock in" the U.S. dollar price of the
security.
REPURCHASE AGREEMENTS
We may invest the Fund's assets in repurchase agreements which are
collateralized by obligations issued or guaranteed as to both principal and
interest by the U.S. Government, its agencies, and instrumentalities. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell it back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on an agreed upon date.
This date is usually not more than seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest, which is unrelated to the coupon rate or maturity of the purchased
security.
WHEN-ISSUED SECURITIES
We may invest the Fund's assets in new issues of debt securities offered on a
when-issued basis.
o Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed
at the time of commitment.
o The Funds do not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
o Such securities can be sold before settlement date.
ILLIQUID SECURITIES
We may invest up to 15% of the Fund's net assets in securities which are
illiquid. Illiquid securities are those securities that cannot be disposed of
in the ordinary course of business, seven days or less, at approximately the
value at which the Fund has valued the securities.
CONVERTIBLE SECURITIES
We may invest the Fund's assets in convertible securities, which are bonds,
preferred stocks, and other securities that pay interest or dividends and offer
the buyer the ability to convert the security into common stock. The value of
convertible securities depends partially on interest rate changes and the
credit quality of the issuer. Because a convertible security affords an
investor the opportunity, through its conversion feature, to participate in the
capital appreciation of the underlying common stock, the value of convertible
securities also depends on the price of the underlying common stock.
20
<PAGE>
APPENDIX B
USAA Family of No-Load Mutual Funds
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide you with the opportunity to formulate your own investment program. You
may exchange any shares you hold in any one USAA Fund for shares in any other
USAA Fund. For more complete information about other Funds in the USAA Family
of Funds, including charges and expenses, call us for a Prospectus. Read it
carefully before you invest or send money.
FUND
TYPE/NAME VOLATILITY
=================================================
CAPITAL APPRECIATION
Aggressive Growth Very high
Emerging Markets (1) Very high
First Start Growth Moderate to high
Gold (1) Very high
Growth Moderate to high
Growth & Income Moderate
International (1) Moderate to high
S&P 500 Index (2) Moderate
Science & Technology Very high
World Growth (1) Moderate to high
=================================================
ASSET ALLOCATION
Balanced Strategy (1) Moderate
Cornerstone Strategy (1) Moderate
Growth and Tax Strategy Moderate
Growth Strategy (1) Moderate to high
Income Strategy Low to moderate
=================================================
INCOME -- TAXABLE
GNMA Low to moderate
Income Moderate
Income Stock Moderate
Short-Term Bond Low
=================================================
INCOME -- TAX EXEMPT
Long-Term (3) Moderate
Intermediate-Term (3) Low to moderate
Short-Term (3) Low
State Bond/Income (3, 4) Moderate
=================================================
MONEY MARKET
Money Market (5) Very low
Tax Exempt Money Market (3, 5) Very low
Treasury Money Market Trust (5) Very low
State Money Market (3, 4, 5) Very low
=================================================
1 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
2 S&P(R) IS A TRADEMARK OF THE MCGRAW-HILL COMPANIES, INC., AND HAS BEEN
LICENSED FOR USE. THE PRODUCT IS NOT SPONSORED, SOLD OR PROMOTED BY STANDARD
& POOR'S, AND STANDARD & POOR'S MAKES NO REPRESENTATION REGARDING THE
ADVISABILITY OF INVESTING IN THE PRODUCT.
3 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
4 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY
TO RESIDENTS OF THOSE STATES.
5 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.
21
<PAGE>
NOTES
<PAGE>
NOTES
<PAGE>
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the Fund's Statement of Additional
Information (SAI), Annual or Semiannual Report, or to ask other questions
about the Fund. The SAI has been filed with the Securities and Exchange
Commission (SEC) and is legally a part of the Prospectus. In the Fund's
Annual Report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance
during the last fiscal year.
To view these documents, along with other related documents, you can visit
the SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally,
copies of this information can be obtained, for a duplicating fee, by writing
the Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
------------------------------
TELEPHONE ASSISTANCE 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 (R)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
Investment Company Act File No. 811-4019
<PAGE>
USAA INTERNATIONAL FUND
PROSPECTUS
OCTOBER 1, 1998
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy?..... 2
Main Risks of Investing in This Fund........................... 2
Is This Fund for You?.......................................... 2
Could the Value of Your Investment in This Fund Fluctuate?..... 3
Fees and Expenses.............................................. 4
Fund Investments............................................... 5
Fund Management................................................ 8
Using Mutual Funds in an Investment Program.................... 9
How to Invest..................................................10
Important Information About Purchases and Redemptions..........13
Exchanges......................................................14
Shareholder Information........................................14
Financial Highlights...........................................18
Appendix A ....................................................19
Appendix B ....................................................21
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund has an objective of capital appreciation with current income as a
secondary objective. We will attempt to achieve the Fund's objectives by
investing the great majority of the Fund's assets in equity securities of
foreign companies.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objectives will be achieved. See FUND INVESTMENTS on
page 5 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risks of investing in this Fund are market risk and the risk of
foreign investing.
o MARKET RISK involves the possibility that the Fund's investments in equity
securities will decline because of falls in the stock market, reducing the
value of individual company's stocks, regardless of the success or failure
of an individual company's operations.
o FOREIGN INVESTING RISK involves the possibility that the Fund's investments
in foreign stock will decrease because of currency exchange rate
fluctuations, increased price volatility, uncertain political conditions,
and other factors.
As with other mutual funds, losing money is an additional risk associated with
investing in this Fund.
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
|X| You are looking for long-term growth.
2
<PAGE>
|X| You are willing to accept moderate to high risk.
|X| You are seeking an appropriate investment for an IRA, through a 401(k) plan
or 403(b) plan, or other tax-sheltered account.
|X| You are looking for an investment in foreign securities to balance your
domestic securities portfolio.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
|X| You are unable or reluctant to invest for a period of five years or more.
|X| You are unwilling to take greater risk for long-term goals.
|X| You need an investment that provides tax-free income.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment in the Fund will likely
increase or decrease. Because the risks in international markets as a whole
tend to be higher than in the United States, the Fund is expected to be more
volatile than the average domestic equity mutual fund. The bar chart shown
below illustrates the Fund's volatility and performance from year to year over
the life of the Fund.
TOTAL RETURN
All mutual funds must use the same formula to calculate total return.
TOTAL RETURN
MEASURES THE
PRICE CHANGE
IN A SHARE
ASSUMING THE
REINVESTMENT
OF ALL DIVIDEND
INCOME AND
CAPITAL GAIN
DISTRIBUTIONS.
[BAR CHART]
CALENDAR TOTAL RETURN
YEAR PERCENTAGE
1989* 17.36
1990 -9.30
1991 13.40
1992 -0.15
1993 39.81
1994 2.69
1995 8.29
1996 19.15
1997 9.04
*FUND BEGAN OPERATIONS ON JULY 11, 1988.
THE FUND'S TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998, WAS
11.54%.
3
<PAGE>
During the periods shown in the bar chart, the highest total return for a
quarter was 13.84% (quarter ending December 31, 1993) and the lowest total
return for a quarter was -18.80% (quarter ending September 30, 1990).
The table below shows how the Fund's average annual returns for the one- and
five-year periods as well as the life of the Fund compared to those of a
broad-based securities market index. Remember, historical performance does not
necessarily indicate what will happen in the future.
==========================================================================
Average Annual Total Returns Since Fund's
(for the periods ending Past Past Inception on
December 31, 1997) 1 Year 5 Years July 11, 1988
==========================================================================
International Fund 9.04% 15.10% 10.44%
--------------------------------------------------------------------------
Morgan Stanley Capital
Index (MSCI) EAFE* 1.78% 11.39% 5.41%
==========================================================================
* MORGAN STANLEY CAPITAL INDEX (MSCI) EAFE IS 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.
[TELEPHONE GRAPHIC]
TOUCHLINE (R)
1-800-531-8777
PRESS
1
THEN
1
THEN
5 2 #
Please consider performance information in light of the Fund's investment
objectives and policies and market conditions during the reported time periods.
Again, you must remember that historical performance does not necessarily
indicate what will happen in the future. The value of your shares may go up or
down. For the most current price and return information for this Fund, you may
call TouchLINE(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1
again for prices and returns. Then, press 52# when asked for the Fund Code.
NEWSPAPER
SYMBOL
Intl
TICKER
SYMBOL
USIFX
You can also find the most current price of your shares in the business section
of your newspaper in the mutual fund section under the heading "USAA Group" and
the symbol "Intl." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "USIFX."
FEES AND EXPENSES
This summary shows what it will cost you directly or indirectly to invest in
the Fund.
Shareholder Transaction Expenses -- Fees You Pay Directly
There are no fees or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is a $10 fee. (Your bank may also charge a fee for receiving
wires.)
4
<PAGE>
Annual Fund Operating Expenses -- Fees You Pay Indirectly
Fund expenses come out of the Fund's assets and are reflected in the Fund's
share price and dividends. "Other Expenses" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses during the past
fiscal year ended May 31, 1998, and are calculated as a percentage of average
net assets.
12B-1 FEES -
SOME MUTUAL
FUNDS CHARGE
THESE FEES
TO PAY FOR
ADVERTISING
AND OTHER
COSTS OF SELLING
FUND SHARES.
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .30%
_____
Total Annual Fund Operating Expenses 1.05%
=====
Example of Effect of the Fund's Operating Expenses
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
remain the same, and (3) you redeem all of your shares at the end of the
periods shown.
1 year............... $ 107
3 years.............. 334
5 years.............. 579
10 years.............. 1,283
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal investment strategy is to invest at least 80% of
the Fund's assets in equity securities of foreign companies. We use the
term "equity securities" to include common stocks, preferred stocks,
securities convertible into common stocks, and securities which carry
the right to buy common stocks.
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in equity securities, it is subject to
stock market risk. Stock prices in general may decline over short or even
extended periods, regardless of the success or failure of an individual
company's operations. Stock markets tend to run in cycles, with periods when
stock prices generally go up, known as "bull" markets, and periods when stock
prices generally go down, referred to as "bear" markets. Equity securities tend
to go up and down more than bonds.
5
<PAGE>
Q What is considered to be a "foreign company?"
A A foreign company is one organized under the laws of a foreign country,
and it must also have one of the following additional characteristics:
o the principal trading market for the stock is in a foreign country;
or
o at least 50% of its revenues or profits are derived from operations
within foreign countries; or
o at least 50% of its assets are located within foreign countries.
[CAUTION LIGHT]
FOREIGN INVESTING. Investing in foreign securities, including American
Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs), poses unique
risks: currency exchange rate fluctuations; foreign market illiquidity;
increased price volatility; exchange control regulations; foreign ownership
limits; different accounting, reporting, and disclosure requirements; and
difficulties in obtaining legal judgments. In the past, equity and debt
instruments of foreign markets have been more volatile than equity and debt
instruments of U.S. securities markets.
ADR - FOREIGN
SHARES HELD BY
A U.S. BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
GDR - FOREIGN
SHARES HELD BY
A U.S. OR
FOREIGN BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
o EMERGING MARKETS RISK. A country that is in the initial stages of its
industrial cycle is considered to be an emerging markets country.
Investments in developing countries involve exposure to economic structures
that are generally less diverse and mature than in the United States and to
political systems which may be less stable. In the past, markets of
developing countries have been more volatile than the markets of developed
countries.
o POLITICAL RISK. Political risk includes a greater potential for coups
d'etat, revolts, and expropriation by governmental organizations. For
example, we may invest the Fund's assets in Eastern Europe and former states
of the Soviet Union (also known as the Commonwealth of Independent States or
CIS). These countries were under communist systems which had nationalized
private industry. There is no guarantee that nationalization may not occur
again in this region or others in which we may invest the Fund's assets, in
which case, we may lose all or part of the Fund's investment in that
country's issuers.
o EURO CONVERSION RISK. Beginning January 1, 1999, countries participating in
the European Monetary Union will begin converting their currencies into a
new currency unit called the Euro. The conversion to the Euro, which will
continue in stages through 2002, is expected to reshape the financial
markets, banking systems, and monetary policies
6
<PAGE>
in Europe and other parts of the world and could adversely affect the
Fund's investments in these markets. In addition, a failure of the clearing
and settlement systems in these markets to handle the Euro conversion could
adversely affect the Fund.
Q Will the Fund's assets be invested in any other securities?
A We may invest the remainder of the Fund's assets in equity securities
of companies that meet any of the criteria as described in the
definition of a foreign company and in investment-grade, short-term
debt instruments having the following characteristics:
o remaining maturities of less than one year that have been issued or
guaranteed as to both principal and interest by the U.S. Government
or its agencies or instrumentalities, and
o repurchase agreements collateralized by such securities.
As a temporary defensive measure because of market, economic,
political, or other conditions, we may invest up to 100% of the Fund's
assets in investment-grade, short-term debt instruments, which may
result in the Fund not achieving its investment objective during the
time it is in this temporary defensive posture.
Q Are there any restrictions as to the types of businesses or operations
of companies in which the Fund's assets may be invested?
A No, there are no restrictions except that we may not invest more than
25% of the Fund's total assets in one industry. The Fund's investments
will be diversified in at least four or more countries.
We believe the Fund combines the advantages of investment in
diversified international markets with the convenience and liquidity of
a mutual fund based in the United States.
Q How are the decisions to buy and sell securities made?
A We review countries and regions for economic and political stability as
well as future prospects. Then we research individual companies looking
for favorable valuations, growth prospects, quality of management, and
industry outlook. Securities are sold if we believe they are overvalued
or if the economic or political outlook significantly deteriorates.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 20.
7
<PAGE>
FUND MANAGEMENT
The Trust has retained us, USAA Investment Management Company, to serve as the
manager and distributor for the Trust. We are an affiliate of United Services
Automobile Association (USAA), a large, diversified financial services
institution. As of the date of this Prospectus, we had approximately $37
billion in total assets under management. Our mailing address is 9800
Fredericksburg Road, San Antonio, TX 78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Board of Trustees. For our services, the Fund pays us an
annual fee. This fee was computed and paid at three-fourths of one percent
(.75%) of average net assets for the fiscal year ended May 31, 1998. We also
provide services related to selling the Fund's shares and receive no
compensation for those services.
Although our officers and employees, as well as those of the Trust, may engage
in personal securities transactions, they are restricted by the procedures in a
Joint Code of Ethics adopted by the Trust and us.
Portfolio Transactions
USAA Brokerage Services, our discount brokerage service, may execute purchases
and sales of equity securities for the Fund's portfolio. The Board of Trustees
has adopted procedures to ensure that any commissions paid to USAA Brokerage
Services are reasonable and fair.
Portfolio Managers
The following individuals are primarily responsible for managing the Fund:
[PHOTOGRAPH OF PORTFOLIO MANAGERS]
FROM L TO R: ALBERT C. SEBASTIAN,
DAVID G. PEEBLES, AND W. TRAVIS SELMIER, II
8
<PAGE>
David G. Peebles, Vice President of Equity Investments, has managed or
co-managed the Fund since its inception in July 1988. He has 32 years
investment management experience and has worked for us for 14 years. Mr.
Peebles earned the Chartered Financial Analyst (CFA) designation in 1971 and is
a member of the Association for Investment Management and Research (AIMR), the
San Antonio Financial Analysts Society, Inc. (SAFAS), and the International
Society of Financial Analysts (ISFA). He holds an MBA and a BS from Texas
Christian University.
Albert C. Sebastian and W. Travis Selmier, II, co-manage the Fund with Mr.
Peebles. Mr. Peebles coordinates the activities of the Managers.
Albert C. Sebastian, Assistant Vice President of Equity Investments, has
co-managed the Fund since October 1996. He has 14 years investment management
experience and has worked for us for seven years. Mr. Sebastian earned the CFA
designation in 1989 and is a member of AIMR, SAFAS, and ISFA. He holds an MBA
from the University of Michigan and a BA from Holy Cross College,
Massachusetts.
W. Travis Selmier, II, Assistant Vice President of Equity Investments, has
co-managed the Fund since October 1996. He has 11 years investment management
experience and has worked for us for seven years. Mr. Selmier earned the CFA
designation in 1990 and is a member of AIMR, SAFAS, and ISFA. He holds an MBA
from Indiana University, a Certificate of Proficiency from Sophia University
Japanese Language Institute, Japan, and a BA from the University of California
at Santa Barbara.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. The Idea Behind Mutual Funds
Mutual funds provide small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment can buy part of a diversified
portfolio. That portfolio is managed by investment professionals, relieving you
of the need to make individual stock or bond selections. You also enjoy
conveniences, such as daily pricing, liquidity, and in the case of the USAA
Family of Funds, no sales charge. The portfolio, because of its size, has lower
transaction costs on its trades than most individuals would have. As a result,
you own an investment that in earlier times would have been available only to
very wealthy people.
II. Using Funds in an Investment Program
In choosing a mutual fund as an investment vehicle, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will
9
<PAGE>
perform that function. In addition, we will arrange for the safekeeping of
securities, auditing the annual financial statements, and daily valuation of
the Fund, as well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that balances your investment goals with your tolerance for risk. It is
likely that this decision may include the use of more than one fund of the USAA
Family of Funds.
For example, assume you wish to diversify internationally. You could divide
your investments between the Emerging Markets, Gold, International, or World
Growth Funds and holdings in domestic funds. This would give you exposure to
the opportunities of investments in many foreign countries and to currency
changes. This is just one way you could combine funds to fit your own risk and
reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 21. These unique mutual funds provide
a professionally-managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves diversification
across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use a USAA Asset
Strategy Fund, the USAA Family of Funds provides a broad range of choices
covering just about any investor's investment objectives. Our sales
representatives stand ready to assist you with your choices and to help you
craft a portfolio to meet your needs. Refer to APPENDIX B on page 21 for a
complete list of the USAA Family of No-Load Mutual Funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required for each new account. However, after you open
your initial account with us, you will not need to fill out another application
unless the registration is different.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number or
tax identification number to avoid possible withholding requirements.
10
<PAGE>
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after we receive your request in proper form. The
Fund's NAV is determined at the close of the regular trading session (generally
4:00 p.m. Eastern Time) of the New York Stock Exchange (NYSE) each day the NYSE
is open. If we receive your request and payment prior to that time, your
purchase price will be the NAV per share determined for that day. If we receive
your request or payment after the NAV per share is calculated, the purchase
will be effective on the next business day. If you plan to purchase Fund shares
with a foreign check, we suggest you convert your foreign check to U.S. dollars
prior to investment in the Fund. This will avoid a potential delay in the
effective date of your purchase of up to four to six weeks. Furthermore, a bank
charge may be assessed in the clearing process, which will be deducted from the
amount of the purchase.
MINIMUM INVESTMENTS
INITIAL PURCHASE
[MONEY GRAPHIC]
o $3,000. [$500 Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) accounts
and $250 for IRAs] or no initial investment if you elect to have monthly
electronic investments of at least $50 each. We may periodically offer
programs that reduce the minimum amounts for monthly electronic
investments. Employees of USAA and its affiliated companies may open an
account through payroll deduction for as little as $25 per pay period with
no initial investment.
ADDITIONAL PURCHASES
o $50
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288
o To add to your account, send your check and the "Invest by Mail" stub that
accompanies your Fund's transaction confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
11
<PAGE>
IN PERSON
[HANDSHAKE GRAPHIC]
o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
BANK WIRE
[WIRE GRAPHIC]
o Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA International Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)______________________________________
Shareholder(s) Mutual Fund Account Number___________________
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
o Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448
[TELEPHONE GRAPHIC]
o If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To
open an account by phone, the new account must have the same registration
as your existing account.
Redemption of Shares
You may redeem Fund shares by any of the methods described below on any day the
NAV per share is calculated. Redemptions are effective on the day instructions
are received in a manner as described below. However, if instructions are
received after the NAV per share calculation (generally 4:00 p.m. Eastern
Time), redemption will be effective on the next business day.
We will send you your money within seven days after the effective date of
redemption. Payment for redemption of shares purchased by EFT or check is sent
after the EFT or check has cleared, which could take up to 15 days from the
purchase date. If you are considering redeeming shares soon after purchase, you
should purchase by bank wire or certified check to avoid delay. Redemptions are
subject to taxes based on the difference between the cost of shares when
purchased and the price received upon redemption.
12
<PAGE>
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment in limited circumstances.
HOW TO REDEEM
WRITTEN, FAX, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
o Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption privileges are automatically established when you complete
your application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions. Before
any discussion regarding your account, the following information is obtained:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to help you in
your role as an investor. In the INVESTOR'S GUIDE, you will find additional
information on purchases, redemptions, and methods of payment. You will also
find in-depth information on automatic investment plans, shareholder statements
and reports, and other useful information.
Account Balance
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually a small balance account fee of $12 to each shareholder account with a
balance, at the time of assessment, of less than $2,000. The fee will reduce
total transfer agency fees paid by the Fund to SAS. Accounts exempt from the
fee include: (1) any account regularly purchasing additional shares each month
through an automatic investment plan; (2) any account
13
<PAGE>
registered under the Uniform Gifts/Transfers to Minors Act (UGMA/UTMA); (3) all
(non-IRA) money market fund accounts; (4) any account whose registered owner
has an aggregate balance of $50,000 or more invested in USAA mutual funds; and
(5) all IRA accounts (for the first year the account is open).
Trust Rights
The Trust reserves the right to:
o reject purchase or exchange orders when in the best interest of the Trust;
o limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
o require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question. The Statement of Additional Information
contains information on acceptable guarantors;
o redeem an account with less than $900, with certain limitations.
EXCHANGES
Exchange Privilege
The exchange privilege is automatic when you complete your application. You may
exchange shares among Funds in the USAA Family of Funds, provided you do not
hold these shares in stock certificate form and the shares to be acquired are
offered in your state of residence. After the exchange order is received, the
Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between the cost of shares when purchased and the price received
upon exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 13.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA Family of Funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA Family of Funds).
14
<PAGE>
SHAREHOLDER INFORMATION
Share Price Calculation
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4:00 p.m. Eastern Time.
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.
Securities trading in various foreign markets may take place on days when the
NYSE is closed. Further, when the NYSE is open, the foreign markets may be
closed. Therefore, the calculation of the Fund's NAV may not take place at the
same time the prices of certain securities held by the Fund are determined. In
most cases, 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 the Fund's NAV is calculated will not be reflected in the
Fund's NAV. If, however, we determine that a particular event would materially
affect the Fund's NAV, then we, under the general supervision of the Board of
Trustees, will use all relevant, available information to determine a fair
value for the affected portfolio securities.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Board of Trustees. Securities which cannot be
valued by these methods, and all other assets, are valued in good faith at fair
value using methods we have determined under the general supervision of the
Board of Trustees.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's Statement of Additional Information.
15
<PAGE>
Dividends and Distributions
The Fund pays net investment income dividends yearly. Any net capital gain
distribution usually occurs within 45 days of the May 31 fiscal year end, which
would be somewhere around the middle of July. The Fund will make additional
payments to shareholders, if necessary, to avoid the imposition of any federal
income or excise tax.
We will automatically reinvest all income dividends and capital gain
distributions unless we receive different instructions from you. The share
price will be the NAV of the Fund shares computed on the ex-dividend date. Any
income dividends or capital gain distributions paid by the Fund will reduce the
NAV per share by the amount of the dividend or distribution. These dividends
and distributions are subject to taxes.
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
Taxes
FEDERAL
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this Prospectus. Note that the Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. We urge you to
consult your tax adviser about the status of distributions from the Fund in
your own state and locality.
FOREIGN
The Fund may be subject to foreign withholding or other taxes. If more than 50%
of the value of the Fund's total assets at the close of any taxable year
consists of securities of foreign corporations, the Fund may file an election
with the Internal Revenue Service (the Foreign Election) that would permit you
to take a credit (or a deduction) for foreign income taxes paid by the Fund. If
the Foreign Election is made, you would include in your gross income both
dividends received from the Fund and foreign income taxes paid by the Fund. As
a shareholder of the Fund, you would be entitled to treat the foreign income
taxes withheld as a credit against your U.S. federal income taxes, subject to
the limitations set forth in the Code with respect to the foreign tax credit
generally. Alternatively, you could, if it were to your advantage, treat the
foreign income taxes withheld as an itemized deduction
16
<PAGE>
in computing taxable income rather than as a tax credit. You will not be
entitled to a foreign tax credit for taxes paid to certain countries; however,
if the Fund otherwise qualifies for the Foreign Election, a deduction for such
taxes will be available to shareholders of the Fund. It is anticipated that the
Fund will make the Foreign Election.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you as ordinary income, whether
received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends received deduction available to
corporations.
Regardless of the length of time you have held Fund shares, distributions of
net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable investment.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
o fails to furnish the Fund with a correct tax identification number,
o underreports dividend or interest income, or
o fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify on your application, or
on a separate Form W-9 supplied by the Fund's transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
REPORTING - The Fund will report information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
17
<PAGE>
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
18
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five-year period. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG Peat Marwick LLP,
whose report, along with the Fund's financial statements, are included in the
Annual Report, which is available upon request.
EIGHT-MONTH
PERIOD ENDED
YEAR ENDED MAY 31, MAY 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------
Net asset value at
beginning of period $ 21.03 $ 18.71 $ 15.78 $ 16.36 $ 14.48
Net investment income .19 .15 .17 .10 -
Net realized and
unrealized gain 2.41 2.87 2.92 .29 2.23
Distributions from net
investment income (.12) (.20) (.07) - -
Distributions of realized
capital gains (1.57) (.50) (.09) (.97) (.35)
---------------------------------------------------------
Net asset value at
end of period $ 21.94 $ 21.03 $ 18.71 $ 15.78 $ 16.36
=========================================================
Total return (%)* 13.29 16.72 19.71 2.49 15.67
Net assets at end of
period (000) $628,655 $616,576 $417,995 $346,033 $184,792
Ratio of expenses to
average net assets (%) 1.05 1.09 1.19 1.17 1.31(a)
Ratio of net investment
income to average net
assets (%) .87 .79 1.04 .81 .04(a)
Portfolio turnover (%) 42.97 46.03 70.01 64.30 44.39
- ------------
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
19
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES IN WHICH WE MAY
INVEST THE FUND'S ASSETS:
FORWARD CURRENCY CONTRACTS
The Fund may hold securities denominated in foreign currencies. As a result,
the value of the securities will be affected by changes in the exchange rate
between the dollar and foreign currencies. In managing currency exposure, the
Fund may enter into forward currency contracts. A forward currency contract
involves an agreement to purchase or sell a specified currency at a specified
future date or over a specified time period at a price set at the time of the
contract. The Fund may only enter into forward currency contracts. When the
Fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it desires to "lock in" the U.S. dollar price of the
security.
REPURCHASE AGREEMENTS
We may invest the Fund's assets in repurchase agreements which are
collateralized by obligations issued or guaranteed as to both principal and
interest by the U.S. Government, its agencies, and instrumentalities. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell it back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on an agreed upon date.
This date is usually not more than seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest, which is unrelated to the coupon rate or maturity of the purchased
security.
WHEN-ISSUED SECURITIES
We may invest the Fund's assets in new issues of debt securities offered on a
when-issued basis.
o Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed
at the time of commitment.
o The Funds do not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
o Such securities can be sold before settlement date.
ILLIQUID SECURITIES
We may invest up to 15% of the Fund's net assets in securities which are
illiquid. Illiquid securities are those securities that cannot be disposed of
in the ordinary course of business, seven days or less, at approximately the
value at which the Fund has valued the securities.
CONVERTIBLE SECURITIES
We may invest the Fund's assets in convertible securities, which are bonds,
preferred stocks, and other securities that pay interest or dividends and offer
the buyer the ability to convert the security into common stock. The value of
convertible securities depends partially on interest rate changes and the
credit quality of the issuer. Because a convertible security affords an
investor the opportunity, through its conversion feature, to participate in the
capital appreciation of the underlying common stock, the value of convertible
securities also depends on the price of the underlying common stock.
20
<PAGE>
APPENDIX B
USAA Family of No-Load Mutual Funds
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide you with the opportunity to formulate your own investment program. You
may exchange any shares you hold in any one USAA Fund for shares in any other
USAA Fund. For more complete information about other Funds in the USAA Family
of Funds, including charges and expenses, call us for a Prospectus. Read it
carefully before you invest or send money
FUND
TYPE/NAME VOLATILITY
=================================================
CAPITAL APPRECIATION
Aggressive Growth Very high
Emerging Markets (1) Very high
First Start Growth Moderate to high
Gold (1) Very high
Growth Moderate to high
Growth & Income Moderate
International (1) Moderate to high
S&P 500 Index (2) Moderate
Science & Technology Very high
World Growth (1) Moderate to high
=================================================
ASSET ALLOCATION
Balanced Strategy (1) Moderate
Cornerstone Strategy (1) Moderate
Growth and Tax Strategy Moderate
Growth Strategy (1) Moderate to high
Income Strategy Low to moderate
=================================================
INCOME -- TAXABLE
GNMA Low to moderate
Income Moderate
Income Stock Moderate
Short-Term Bond Low
=================================================
INCOME -- TAX EXEMPT
Long-Term (3) Moderate
Intermediate-Term (3) Low to moderate
Short-Term (3) Low
State Bond/Income (3, 4) Moderate
=================================================
MONEY MARKET
Money Market (5) Very low
Tax Exempt Money Market (3, 5) Very low
Treasury Money Market Trust (5) Very low
State Money Market (3, 4, 5) Very low
=================================================
1 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
2 S&P(R) IS A TRADEMARK OF THE MCGRAW-HILL COMPANIES, INC., AND HAS BEEN
LICENSED FOR USE. THE PRODUCT IS NOT SPONSORED, SOLD OR PROMOTED BY STANDARD
& POOR'S, AND STANDARD & POOR'S MAKES NO REPRESENTATION REGARDING THE
ADVISABILITY OF INVESTING IN THE PRODUCT.
3 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
4 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY
TO RESIDENTS OF THOSE STATES.
5 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.
21
<PAGE>
NOTES
<PAGE>
NOTES
<PAGE>
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the Fund's Statement of Additional
Information (SAI), Annual or Semiannual Report, or to ask other questions
about the Fund. The SAI has been filed with the Securities and Exchange
Commission (SEC) and is legally a part of the Prospectus. In the Fund's
Annual Report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance
during the last fiscal year.
To view these documents, along with other related documents, you can visit
the SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally,
copies of this information can be obtained, for a duplicating fee, by writing
the Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
------------------------------
TELEPHONE ASSISTANCE 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 (R)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
Investment Company Act File No. 811-4019
<PAGE>
USAA WORLD GROWTH FUND
PROSPECTUS
OCTOBER 1, 1998
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy?....... 2
Main Risks of Investing in This Fund............................. 2
Is This Fund for You?............................................ 3
Could the Value of Your Investment in This Fund Fluctuate?....... 3
Fees and Expenses................................................ 4
Fund Investments................................................. 5
Fund Management.................................................. 8
Using Mutual Funds in an Investment Program......................10
How to Invest....................................................11
Important Information About Purchases and Redemptions............14
Exchanges........................................................15
Shareholder Information..........................................16
Financial Highlights.............................................20
Appendix A ......................................................21
Appendix B ......................................................23
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund has an objective of capital appreciation. We will attempt to achieve
the Fund's objective by investing the Fund's assets mostly in a mix of foreign
and domestic equity securities.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objective will be achieved. See FUND INVESTMENTS on
page 5 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risks of investing in this Fund are market risk and the risks of
foreign investing.
o MARKET RISK involves the possibility that the Fund's investments in equity
securities will decline because of falls in the stock market, reducing the
value of individual company's stocks, regardless of the success or failure
of an individual company's operations.
o FOREIGN INVESTING RISK involves the possibility that the Fund's investments
in foreign stock will decrease because of currency exchange rate
fluctuations, increased price volatility, uncertain political conditions,
and other factors.
Another risk of the Fund described later in the Prospectus is the risk of
investing in real estate investment trusts. As with other mutual funds, losing
money is an additional risk associated with investing in this Fund.
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
2
<PAGE>
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
|X| You are looking for long-term growth.
|X| You are willing to accept moderate to high risk.
|X| You are seeking an appropriate investment for an IRA, through a 401(k) plan
or 403(b) plan, or other tax-sheltered account.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
|X| You are unable or reluctant to invest for a period of five years or more.
|X| You are unwilling to take greater risk for long-term goals.
|X| You need an investment that provides tax-free income.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment in the Fund will likely
increase or decrease. Because the Fund invests in foreign markets, the Fund is
expected to be more volatile than the average equity mutual fund. The bar chart
shown below illustrates the Fund's volatility and performance from year to year
over the life of the Fund.
TOTAL RETURN
All mutual funds must use the same formula to calculate total return.
TOTAL RETURN
MEASURES THE
PRICE CHANGE
IN A SHARE
ASSUMING THE
REINVESTMENT
OF ALL DIVIDEND
INCOME AND
CAPITAL GAIN
DISTRIBUTIONS.
[BAR CHART]
CALENDAR TOTAL RETURN
YEAR PERCENTAGE
1993* 24.03
1994 .64
1995 12.85
1996 19.08
1997 12.87
*FUND BEGAN OPERATIONS ON OCTOBER 1, 1992.
THE FUND'S TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998, WAS
12.91%.
3
<PAGE>
During the periods shown in the bar chart, the highest total return for a
quarter was 12.02% (quarter ending June 30, 1997) and the lowest total return
for a quarter was -6.99% (quarter ending December 31, 1997).
The table below shows how the Fund's average annual returns for the one- and
five-year periods as well as the life of the Fund compared to those of a
broad-based securities market index. Remember, historical performance does not
necessarily indicate what will happen in the future.
==========================================================================
Average Annual Total Returns Since Fund's
(for the periods ending Past Past Inception on
December 31, 1997) 1 Year 5 Years October 1, 1992
==========================================================================
World Growth Fund 12.87% 13.62% 13.51%
--------------------------------------------------------------------------
Morgan Stanley Capital
Index (MSCI) World * 15.76% 15.34% 14.50%
==========================================================================
* MORGAN STANLEY CAPITAL INDEX (MSCI) WORLD IS AN UNMANAGED INDEX WHICH
REFLECTS THE MOVEMENTS OF WORLD STOCK MARKETS BY REPRESENTING A BROAD
SELECTION OF DOMESTICALLY LISTED COMPANIES WITHIN EACH MARKET.
[TELEPHONE GRAPHIC]
TOUCHLINE (R)
1-800-531-8777
PRESS
1
THEN
1
THEN
5 4 #
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
Again, you must remember that historical performance does not necessarily
indicate what will happen in the future. The value of your shares may go up or
down. For the most current price and return information for this Fund, you may
call TouchLINE(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1
again for prices and returns. Then, press 54# when asked for the Fund Code.
NEWSPAPER
SYMBOL
WldGr
TICKER
SYMBOL
USAWX
You can also find the most current price of your shares in the business section
of your newspaper in the mutual fund section under the heading "USAA Group" and
the symbol "WldGr." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "USAWX."
FEES AND EXPENSES
This summary shows what it will cost you directly or indirectly to invest in
the Fund.
Shareholder Transaction Expenses -- Fees You Pay Directly
There are no fees or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is a $10 fee. (Your bank may also charge a fee for receiving
wires.)
4
<PAGE>
Annual Fund Operating Expenses -- Fees You Pay Indirectly
Fund expenses come out of the Fund's assets and are reflected in the Fund's
share price and dividends. "Other Expenses" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses during the past
fiscal year ended May 31, 1998, and are calculated as a percentage of average
net assets.
12B-1 FEES -
SOME MUTUAL
FUNDS CHARGE
THESE FEES
TO PAY FOR
ADVERTISING
AND OTHER
COSTS OF SELLING
FUND SHARES.
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .38%
-----
Total Annual Fund Operating Expenses 1.13%
=====
Example of Effect of the Fund's Operating Expenses
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
remain the same, and (3) you redeem all of your shares at the end of the
periods shown.
1 year............ $ 115
3 years........... 359
5 years........... 622
10 years........... 1,375
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal investment strategy is to invest the Fund's assets
primarily in equity securities of both foreign and domestic issuers and
in real estate investment trusts (REITs). We use the term "equity
securities" to include common stocks, preferred stocks, securities
convertible into common stocks, and securities which carry the right to
buy common stocks.
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in equity securities, it is subject to
stock market risk. Stock prices in general may decline over short or even
extended periods, regardless of the success or failure of an individual
company's operations. Stock markets tend to run in cycles, with periods
5
<PAGE>
when stock prices generally go up, known as "bull" markets, and periods when
stock prices generally go down, referred to as "bear" markets. Equity
securities tend to go up and down more than bonds.
[CAUTION LIGHT]
REITS. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. Additionally, REITs are
dependent upon the capabilities of the REIT manager(s), have limited
diversification, and could be significantly impacted by changes in tax laws.
Q Why are foreign and domestic stocks combined in the Fund's portfolio?
A We believe that international diversification may have a balancing
impact with regard to domestic investments during periods of adverse
economic and market conditions in the United States. Therefore, the
Fund combines the advantages of investing in a diversified
international market and domestic market, with the convenience and
liquidity of a mutual fund based in the United States.
[CAUTION LIGHT]
FOREIGN INVESTING. Investing in foreign securities, including American
Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs), poses unique
risks: currency exchange rate fluctuations; foreign market illiquidity;
increased price volatility; exchange control regulations; foreign ownership
limits; different accounting, reporting, and disclosure requirements; and
difficulties in obtaining legal judgments. In the past, equity and debt
instruments of foreign markets have been more volatile than equity and debt
instruments of U.S. securities markets.
ADR - FOREIGN
SHARES HELD BY
A U.S. BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
GDR - FOREIGN
SHARES HELD BY
A U.S. OR
FOREIGN BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
o EMERGING MARKETS RISK. A country that is in the initial stages of its
industrial cycle is considered to be an emerging markets country.
Investments in developing countries involve exposure to economic structures
that are generally less diverse and mature than in the United States and to
political systems which may be less stable. In the past, markets of
developing countries have been more volatile than the markets of developed
countries.
o POLITICAL RISK. Political risk includes a greater potential for coups
d'etat, revolts, and expropriation by governmental organizations. For
example, we may invest the Fund's assets in Eastern Europe and former
states of the Soviet Union (also known as the Commonwealth of Independent
States or CIS). These countries were under communist systems which had
nationalized private industry. There is no guarantee that nationalization
may not occur again in this region or others in which we may invest the
Fund's assets, in which case, we may lose all or part of the Fund's
investment in that country's issuers.
6
<PAGE>
o EURO CONVERSION RISK. Beginning January 1, 1999, countries participating in
the European Monetary Union will begin converting their currencies into a
new currency unit called the Euro. The conversion to the Euro, which will
continue in stages through 2002, is expected to reshape the financial
markets, banking systems, and monetary policies in Europe and other parts
of the world and could adversely affect the Fund's investments in these
markets. In addition, a failure of the clearing and settlement systems in
these markets to handle the Euro conversion could adversely affect the
Fund.
Q Will the Fund's assets be invested in any other securities?
A We may invest the remainder of the Fund's assets in investment-grade,
short-term debt instruments having the following characteristics:
o remaining maturities of less than one year that have been issued or
guaranteed as to both principal and interest by the U.S. Government
or its agencies or instrumentalities, and
o repurchase agreements collateralized by such securities.
As a temporary defensive measure because of market, economic,
political, or other conditions, we may invest up to 100% of the Fund's
assets in investment-grade, short-term debt instruments, which may
result in the Fund not achieving its investment objective during the
time it is in this temporary defensive posture.
Q Are there any restrictions as to the types of business or operations of
companies in which the Fund's assets may be invested?
A No, there are no restrictions except that we may not invest more than
25% of the Fund's total assets in one industry. Under normal market
conditions, the Fund's investments will be diversified in at least
three countries.
Q How are the decisions to buy and sell foreign securities made?
A We review countries and regions for economic and political stability as
well as future prospects. Then we research individual companies looking
for favorable valuations, growth prospects, quality of management, and
industry outlook. Securities are sold if we believe they are overvalued
or if the economic or political outlook significantly deteriorates.
7
<PAGE>
Q How are the decisions to buy and sell domestic securities made?
A We generally invest in companies that are, or have the prospect of
becoming, dominant in their industry. We expect the sales and earnings
of these companies to grow faster than those of their industry peers.
We consider a number of factors such as:
o a company's strategic position in its industry,
o sales and earnings growth,
o cash flow,
o book value, and
o dividend yield.
We will sell a security when we perceive that our original investment
thesis no longer holds.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 21.
FUND MANAGEMENT
The Trust has retained us, USAA Investment Management Company, to serve as the
manager and distributor for the Trust. We are an affiliate of United Services
Automobile Association (USAA), a large, diversified financial services
institution. As of the date of this Prospectus, we had approximately $37
billion in total assets under management. Our mailing address is 9800
Fredericksburg Road, San Antonio, TX 78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Board of Trustees. For our services, the Fund pays us an
annual fee. This fee was computed and paid at three-fourths of one percent
(.75%) of average net assets for the fiscal year ended May 31, 1998. We also
provide services related to selling the Fund's shares and receive no
compensation for those services.
Although our officers and employees, as well as those of the Trust, may engage
in personal securities transactions, they are restricted by the procedures in a
Joint Code of Ethics adopted by the Trust and us.
Portfolio Transactions
USAA Brokerage Services, our discount brokerage service, may execute purchases
and sales of equity securities for the Fund's portfolio. The Board of Trustees
has adopted procedures to ensure that any commissions paid to USAA Brokerage
Services are reasonable and fair.
8
<PAGE>
Portfolio Managers
The following individuals are primarily responsible for managing the Fund:
FOREIGN SECURITIES
[PHOTOGRAPH OF PORTFOLIO MANAGERS]
FROM L TO R: ALBERT C. SEBASTIAN,
DAVID G. PEEBLES, AND W. TRAVIS SELMIER, II
David G. Peebles, Vice President of Equity Investments, is the asset allocation
manager. He has managed or co-managed the Fund since its inception in October
1992. He has 32 years investment management experience and has worked for us
for 14 years. Mr. Peebles earned the Chartered Financial Analyst (CFA)
designation in 1971 and is a member of the Association for Investment
Management and Research (AIMR), the San Antonio Financial Analysts Society,
Inc. (SAFAS), and the International Society of Financial Analysts (ISFA). He
holds an MBA and a BS from Texas Christian University.
Albert C. Sebastian and W. Travis Selmier, II, co-manage the Fund's investments
in foreign securities with Mr. Peebles. Mr. Peebles coordinates the activities
of the Managers.
Albert C. Sebastian, Assistant Vice President of Equity Investments, has
co-managed the Fund since October 1996. He has 14 years investment management
experience and has worked for us for seven years. Mr. Sebastian earned the CFA
designation in 1989 and is a member of AIMR, SAFAS, and ISFA. He holds an MBA
from the University of Michigan and a BA from Holy Cross College,
Massachusetts.
W. Travis Selmier, II, Assistant Vice President of Equity Investments, has
co-managed the Fund since October 1996. He has 11 years investment management
experience and has worked for us for seven years. Mr. Selmier earned the CFA
designation in 1990 and is a member of AIMR, SAFAS, and ISFA. He holds an MBA
from Indiana University, a Certificate of Proficiency from Sophia University
Japanese Language Institute, Japan, and a BA from the University of California
at Santa Barbara.
9
<PAGE>
DOMESTIC SECURITIES
[PHOTOGRAPH OF PORTFOLIO MANAGER]
CURT ROHRMAN
Curt Rohrman, Assistant Vice President of Equity Investments, has managed the
Fund's investments in domestic securities since October 1998. He has 10 years
investment management experience and has worked for us for three years. Prior
to joining us, Mr. Rohrman worked for CS First Boston Corporation from June
1988 to March 1995. He earned the CFA designation in 1991 and is a member of
AIMR and SAFAS. He holds an MBA from the University of Texas at Austin and a
BBA from Texas Christian University.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. The Idea Behind Mutual Funds
Mutual funds provide small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment can buy part of a diversified
portfolio. That portfolio is managed by investment professionals, relieving you
of the need to make individual stock or bond selections. You also enjoy
conveniences, such as daily pricing, liquidity, and in the case of the USAA
Family of Funds, no sales charge. The portfolio, because of its size, has lower
transaction costs on its trades than most individuals would have. As a result,
you own an investment that in earlier times would have been available only to
very wealthy people.
II. Using Funds in an Investment Program
In choosing a mutual fund as an investment vehicle, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will perform
that function. In addition, we will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily valuation of the Fund, as
well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that balances your investment goals with your tolerance for risk. It is
likely that this decision may include the use of more than one fund of the USAA
Family of Funds.
For example, assume you wish to diversify internationally. You could divide
your investments between the Emerging Markets, International, or World Growth
Funds and holdings in domestic funds. This would give you exposure to the
opportunities of investments in many foreign countries and to currency
10
<PAGE>
changes. This is just one way you could combine funds to fit your own risk and
reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 23. These unique mutual funds provide
a professionally-managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves diversification
across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use a USAA Asset
Strategy Fund, the USAA Family of Funds provides a broad range of choices
covering just about any investor's investment objectives. Our sales
representatives stand ready to assist you with your choices and to help you
craft a portfolio to meet your needs. Refer to APPENDIX B on page 23 for a
complete list of the USAA Family of No-Load Mutual Funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required for each new account. However, after you open
your initial account with us, you will not need to fill out another application
unless the registration is different.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number or
tax identification number to avoid possible withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after we receive your request in proper form. The
Fund's NAV is determined at the close of the regular trading session (generally
4:00 p.m. Eastern Time) of the New York Stock Exchange (NYSE) each day the NYSE
is open. If we receive your request and payment prior to that time, your
purchase price will be the NAV per share determined for that day. If we receive
your request or payment after the NAV per share is calculated, the purchase
will be effective on the next business day. If you plan to purchase Fund shares
with a foreign check, we suggest you convert your foreign check to U.S. dollars
prior to investment in the Fund. This will avoid a potential delay in the
effective date of your purchase of up to four to six weeks.
11
<PAGE>
Furthermore, a bank charge may be assessed in the clearing process, which will
be deducted from the amount of the purchase.
MINIMUM INVESTMENTS
INITIAL PURCHASE
[MONEY GRAPHIC]
o $3,000. [$500 Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) accounts
and $250 for IRAs] or no initial investment if you elect to have monthly
electronic investments of at least $50 each. We may periodically offer
programs that reduce the minimum amounts for monthly electronic
investments. Employees of USAA and its affiliated companies may open an
account through payroll deduction for as little as $25 per pay period with
no initial investment.
ADDITIONAL PURCHASES
o $50
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288
o To add to your account, send your check and the "Invest by Mail" stub that
accompanies your Fund's transaction confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
12
<PAGE>
BANK WIRE
[WIRE GRAPHIC]
o Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA World Growth Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)______________________________________
Shareholder(s) Mutual Fund Account Number___________________
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
o Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448
[TELEPHONE GRAPHIC]
o If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To
open an account by phone, the new account must have the same registration
as your existing account.
Redemption of Shares
You may redeem Fund shares by any of the methods described below on any day the
NAV per share is calculated. Redemptions are effective on the day instructions
are received in a manner as described below. However, if instructions are
received after the NAV per share calculation (generally 4:00 p.m. Eastern
Time), redemption will be effective on the next business day.
We will send you your money within seven days after the effective date of
redemption. Payment for redemption of shares purchased by EFT or check is sent
after the EFT or check has cleared, which could take up to 15 days from the
purchase date. If you are considering redeeming shares soon after purchase, you
should purchase by bank wire or certified check to avoid delay. Redemptions are
subject to taxes based on the difference between the cost of shares when
purchased and the price received upon redemption.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment in limited circumstances.
13
<PAGE>
HOW TO REDEEM
WRITTEN, FAX, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
o Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption privileges are automatically established when you complete
your application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions. Before
any discussion regarding your account, the following information is obtained:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to help you in
your role as an investor. In the INVESTOR'S GUIDE, you will find additional
information on purchases, redemptions, and methods of payment. You will also
find in-depth information on automatic investment plans, shareholder statements
and reports, and other useful information.
Account Balance
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually a small balance account fee of $12 to each shareholder account with a
balance, at the time of assessment, of less than $2,000. The fee will reduce
total transfer agency fees paid by the Fund to SAS. Accounts exempt from the
fee include: (1) any account regularly purchasing additional shares each month
through an automatic investment plan; (2) any account registered under the
Uniform Gifts/Transfers to Minors Act (UGMA/UTMA);
14
<PAGE>
(3) all (non-IRA) money market fund accounts; (4) any account whose registered
owner has an aggregate balance of $50,000 or more invested in USAA mutual
funds; and (5) all IRA accounts (for the first year the account is open).
Trust Rights
The Trust reserves the right to:
o reject purchase or exchange orders when in the best interest of the Trust;
o limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
o require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question. The Statement of Additional Information
contains information on acceptable guarantors;
o redeem an account with less than $900, with certain limitations.
EXCHANGES
Exchange Privilege
The exchange privilege is automatic when you complete your application. You may
exchange shares among Funds in the USAA Family of Funds, provided you do not
hold these shares in stock certificate form and the shares to be acquired are
offered in your state of residence. After the exchange order is received, the
Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between the cost of shares when purchased and the price received
upon exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 14.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA Family of Funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA Family of Funds).
15
<PAGE>
SHAREHOLDER INFORMATION
Share Price Calculation
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4:00 p.m. Eastern Time.
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.
Securities trading in various foreign markets may take place on days when the
NYSE is closed. Further, when the NYSE is open, the foreign markets may be
closed. Therefore, the calculation of the Fund's NAV may not take place at the
same time the prices of certain securities held by the Fund are determined. In
most cases, 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 the Fund's NAV is calculated will not be reflected in the
Fund's NAV. If, however, we determine that a particular event would materially
affect the Fund's NAV, then we, under the general supervision of the Board of
Trustees, will use all relevant, available information to determine a fair
value for the affected portfolio securities.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Board of Trustees. Securities which cannot be
valued by these methods, and all other assets, are valued in good faith at fair
value using methods we have determined under the general supervision of the
Board of Trustees.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's Statement of Additional Information.
Dividends and Distributions
The Fund pays net investment income dividends yearly. Any net capital gain
distribution usually occurs within 45 days of the May 31 fiscal year end, which
would be somewhere around the middle of July. The Fund will make
16
<PAGE>
additional payments to shareholders, if necessary, to avoid the imposition of
any federal income or excise tax.
We will automatically reinvest all income dividends and capital gain
distributions unless we receive different instructions from you. The share
price will be the NAV of the Fund shares computed on the ex-dividend date. Any
income dividends or capital gain distributions paid by the Fund will reduce the
NAV per share by the amount of the dividend or distribution. These dividends
and distributions are subject to taxes.
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
Taxes
FEDERAL
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this Prospectus. Note that the Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. We urge you to
consult your tax adviser about the status of distributions from the Fund in
your own state and locality.
FOREIGN
The Fund may be subject to foreign withholding or other taxes. If more than 50%
of the value of the Fund's total assets at the close of any taxable year
consists of securities of foreign corporations, the Fund may file an election
with the Internal Revenue Service (the Foreign Election) that would permit you
to take a credit (or a deduction) for foreign income taxes paid by the Fund. If
the Foreign Election is made, you would include in your gross income both
dividends received from the Fund and foreign income taxes paid by the Fund. As
a shareholder of the Fund, you would be entitled to treat the foreign income
taxes withheld as a credit against your U.S. federal income taxes, subject to
the limitations set forth in the Code with respect to the foreign tax credit
generally. Alternatively, you could, if it were to your advantage, treat the
foreign income taxes withheld as an itemized deduction in computing taxable
income rather than as a tax credit. You will not be entitled to a foreign tax
credit for taxes paid to certain countries; however, if the Fund otherwise
qualifies for the Foreign Election, a deduction for such taxes will be
available to shareholders of the Fund. It is anticipated that the Fund will
make the Foreign Election.
17
<PAGE>
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you as ordinary income, whether
received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends received deduction available to
corporations.
Regardless of the length of time you have held Fund shares, distributions of
net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable investment.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
o fails to furnish the Fund with a correct tax identification number,
o underreports dividend or interest income, or
o fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify on your application, or
on a separate Form W-9 supplied by the Fund's transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
REPORTING - The Fund will report information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
18
<PAGE>
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
19
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five-year period. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG Peat Marwick LLP,
whose report, along with the Fund's financial statements, are included in the
Annual Report, which is available upon request.
EIGHT-MONTH
PERIOD ENDED
YEAR ENDED MAY 31, MAY 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------
Net asset value at
beginning of period $ 16.84 $ 15.50 $ 12.96 $ 12.71 $ 11.80
Net investment income .11 .11 .12 .07 .04(b)
Net realized and
unrealized gain 2.51 2.28 2.73 .46 .93
Distributions from net
investment income (.08) (.14) (.08) - (.01)
Distributions of realized
capital gains (1.02) (.91) (.23) (.28) (.05)
--------------------------------------------------------
Net asset value at
end of period $ 18.36 $ 16.84 $ 15.50 $ 12.96 $ 12.71
========================================================
Total return (%)* 16.29 16.52 22.43 4.26 8.25
Net assets at end of
period (000) $356,880 $306,799 $267,192 $200,745 $143,367
Ratio of expenses to
average net assets (%) 1.13 1.20 1.27 1.28 1.28(a)
Ratio of net investment
income to average net
assets (%) .64 .63 .96 .69 .42(a)
Portfolio turnover (%) 5.04 50.02 60.97 58.88 37.64
- -----------------
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
20
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES IN WHICH WE MAY
INVEST THE FUND'S ASSETS:
FORWARD CURRENCY CONTRACTS
The Fund may hold securities denominated in foreign currencies. As a result,
the value of the securities will be affected by changes in the exchange rate
between the dollar and foreign currencies. In managing currency exposure, the
Fund may enter into forward currency contracts. A forward currency contract
involves an agreement to purchase or sell a specified currency at a specified
future date or over a specified time period at a price set at the time of the
contract. The Fund may only enter into forward currency contracts. When the
Fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it desires to "lock in" the U.S. dollar price of the
security.
REPURCHASE AGREEMENTS
We may invest the Fund's assets in repurchase agreements which are
collateralized by obligations issued or guaranteed as to both principal and
interest by the U.S. Government, its agencies, and instrumentalities. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell it back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on an agreed upon date.
This date is usually not more than seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest, which is unrelated to the coupon rate or maturity of the purchased
security.
WHEN-ISSUED SECURITIES
We may invest the Fund's assets in new issues of debt securities offered on a
when-issued basis.
o Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed
at the time of commitment.
o The Funds do not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
o Such securities can be sold before settlement date.
ILLIQUID SECURITIES
We may invest up to 15% of the Fund's net assets in securities which are
illiquid. Illiquid securities are those securities that cannot be disposed of
in the ordinary course of business, seven days or less, at approximately the
value at which the Fund has valued the securities.
21
<PAGE>
CONVERTIBLE SECURITIES
We may invest the Fund's assets in convertible securities, which are bonds,
preferred stocks, and other securities that pay interest or dividends and offer
the buyer the ability to convert the security into common stock. The value of
convertible securities depends partially on interest rate changes and the
credit quality of the issuer. Because a convertible security affords an
investor the opportunity, through its conversion feature, to participate in the
capital appreciation of the underlying common stock, the value of convertible
securities also depends on the price of the underlying common stock.
22
<PAGE>
APPENDIX B
USAA Family of No-Load Mutual Funds
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide you with the opportunity to formulate your own investment program. You
may exchange any shares you hold in any one USAA Fund for shares in any other
USAA Fund. For more complete information about other Funds in the USAA Family
of Funds, including charges and expenses, call us for a Prospectus. Read it
carefully before you invest or send money.
FUND
TYPE/NAME VOLATILITY
=================================================
CAPITAL APPRECIATION
Aggressive Growth Very high
Emerging Markets (1) Very high
First Start Growth Moderate to high
Gold (1) Very high
Growth Moderate to high
Growth & Income Moderate
International (1) Moderate to high
S&P 500 Index (2) Moderate
Science & Technology Very high
World Growth (1) Moderate to high
=================================================
ASSET ALLOCATION
Balanced Strategy (1) Moderate
Cornerstone Strategy (1) Moderate
Growth and Tax Strategy Moderate
Growth Strategy (1) Moderate to high
Income Strategy Low to moderate
=================================================
INCOME -- TAXABLE
GNMA Low to moderate
Income Moderate
Income Stock Moderate
Short-Term Bond Low
=================================================
INCOME -- TAX EXEMPT
Long-Term (3) Moderate
Intermediate-Term (3) Low to moderate
Short-Term (3) Low
State Bond/Income (3, 4) Moderate
=================================================
MONEY MARKET
Money Market (5) Very low
Tax Exempt Money Market (3, 5) Very low
Treasury Money Market Trust (5) Very low
State Money Market (3, 4, 5) Very low
=================================================
1 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
2 S&P(R) IS A TRADEMARK OF THE MCGRAW-HILL COMPANIES, INC., AND HAS BEEN
LICENSED FOR USE. THE PRODUCT IS NOT SPONSORED, SOLD OR PROMOTED BY STANDARD
& POOR'S, AND STANDARD & POOR'S MAKES NO REPRESENTATION REGARDING THE
ADVISABILITY OF INVESTING IN THE PRODUCT.
3 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
4 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY
TO RESIDENTS OF THOSE STATES.
5 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.
23
<PAGE>
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the Fund's Statement of Additional
Information (SAI), Annual or Semiannual Report, or to ask other questions
about the Fund. The SAI has been filed with the Securities and Exchange
Commission (SEC) and is legally a part of the Prospectus. In the Fund's
Annual Report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance
during the last fiscal year.
To view these documents, along with other related documents, you can visit
the SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally,
copies of this information can be obtained, for a duplicating fee, by writing
the Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
------------------------------
TELEPHONE ASSISTANCE 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 (R)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
Investment Company Act File No. 811-4019
<PAGE>
USAA GNMA TRUST
PROSPECTUS
OCTOBER 1, 1998
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy?...... 2
Main Risks of Investing in This Fund............................ 2
Is This Fund for You?........................................... 3
Could the Value of Your Investment in This Fund Fluctuate?...... 3
Fees and Expenses............................................... 5
Fund Investments................................................ 6
Fund Management................................................. 9
Using Mutual Funds in an Investment Program.....................10
How to Invest...................................................11
Important Information About Purchases and Redemptions...........14
Exchanges.......................................................14
Shareholder Information.........................................15
Financial Highlights............................................18
Appendix A .....................................................19
Appendix B .....................................................21
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund has an objective of providing investors a high level of current income
consistent with preservation of principal. We will attempt to achieve the
Fund's objective by investing the Fund's assets in securities backed by the
full faith and credit of the U.S. Government. Most of the Fund's investments
will consist of Government National Mortgage Association (GNMA) pass-through
certificates, which represent ownership in a pool of mortgage loans or a single
mortgage loan.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objective will be achieved. See FUND INVESTMENTS on
page 6 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risks of investing in this Fund are interest rate risk and
prepayment risk.
o INTEREST RATE RISK involves the possibility that the value of the Fund's
investments will decline because of an increase in interest rates.
IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
o PREPAYMENT RISK involves the possibility that prepayments of mortgages in
the Fund's portfolio will require reinvestment at lower interest rates,
resulting in less interest income to the Fund.
As with other mutual funds, losing money is an additional risk associated with
investing in this Fund.
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
2
<PAGE>
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
|X| You are looking for current income.
|X| You are willing to accept low to moderate risk.
|X| You are seeking an appropriate investment for an IRA, through a 401(k) plan
or 403(b) plan, or other tax-sheltered account.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
|X| You are unable or reluctant to invest for a period of three years or more.
|X| You need an investment that provides tax-free income.
|X| Your primary goal is to maximize long-term growth.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment in the GNMA Trust will
likely increase or decrease. While the value of the securities in which the
GNMA Trust invests have historically involved little credit risk, the market
value of these securities is not guaranteed and will fluctuate inversely with
changes in the general level of interest rates. The value of these securities
will increase when interest rates decline and decrease when interest rates
rise. The bar chart shown on the next page illustrates the Fund's volatility
and performance from year to year over the life of the Fund.
3
<PAGE>
TOTAL RETURN
All mutual funds must use the same formula to calculate total return.
TOTAL RETURN
MEASURES THE
PRICE CHANGE
IN A SHARE
ASSUMING THE
REINVESTMENT
OF ALL DIVIDEND
INCOME AND
CAPITAL GAIN
DISTRIBUTIONS.
[BAR CHART]
CALENDAR TOTAL RETURN
YEAR PERCENTAGE
1992* 6.09
1993 7.11
1994 -.02
1995 16.76
1996 2.94
1997 9.51
*FUND BEGAN OPERATIONS ON FEBRUARY 1, 1991.
THE FUND'S TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998, WAS
4.53%.
During the periods shown in the bar chart, the highest total return for a
quarter was 5.19% (quarter ending June 30, 1995) and the lowest total return
for a quarter was -2.42% (quarter ending March 31, 1996).
The table below shows how the Fund's average annual returns for the one- and
five-year periods as well as the life of the Fund compared to those of a
broad-based securities market index. Remember, historical performance does not
necessarily indicate what will happen in the future.
===========================================================================
Average Annual Total Returns Since Fund's
(for the periods ending Past Past Inception on
December 31, 1997) 1 Year 5 Years February 1, 1991
===========================================================================
GNMA Trust 9.51% 7.10% 7.92%
---------------------------------------------------------------------------
Lehman Brothers
GNMA 30-Year Index* 9.59% 7.27% 8.38%
===========================================================================
* LEHMAN BROTHERS GNMA 30-YEAR INDEX IS AN UNMANAGED INDEX OF FUNDS SIMILAR TO
THE TRUST.
4
<PAGE>
YIELD
YIELD IS THE
ANNUALIZED NET
INCOME OF THE
FUND DURING A
SPECIFIED PERIOD
AS A PERCENTAGE
OF THE FUND'S
SHARE PRICE.
All mutual funds must use the same formula to calculate yield. The Fund may
advertise performance in terms of a 30-day yield quotation. The Fund's 30-day
yield for the period ended December 31, 1997, was 6.52%.
[TELEPHONE GRAPHIC]
TOUCHLINE (R)
1-800-531-8777
PRESS
1
THEN
1
THEN
5 8 #
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
Again, you must remember that historical performance does not necessarily
indicate what will happen in the future. The value of your shares may go up or
down. For the most current price, yield, and return information for this Fund,
you may call TouchLINE(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu,
press 1 again for prices, yields, and returns. Then, press 58# when asked for
the Fund Code.
NEWSPAPER
SYMBOL
GNMA
TICKER
SYMBOL
USGNX
You can also find the most current price of your shares in the business section
of your newspaper in the mutual fund section under the heading "USAA Group" and
the symbol "GNMA." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "USGNX."
FEES AND EXPENSES
This summary shows what it will cost you directly or indirectly to invest in
the Fund.
Shareholder Transaction Expenses -- Fees You Pay Directly
There are no fees or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is a $10 fee. (Your bank may also charge a fee for receiving
wires.)
Annual Fund Operating Expenses -- Fees You Pay Indirectly
Fund expenses come out of the Fund's assets and are reflected in the Fund's
share price and dividends. "Other Expenses" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses during the past
fiscal year ended May 31, 1998, and are calculated as a percentage of average
net assets.
12B-1 FEES -
SOME MUTUAL
FUNDS CHARGE
THESE FEES
TO PAY FOR
ADVERTISING
AND OTHER
COSTS OF SELLING
FUND SHARES.
Management Fees .125%
Distribution (12b-1) Fees None
Other Expenses .177%
-----
Total Annual Fund Operating Expenses .302%
=====
5
<PAGE>
Example of Effect of the Fund's Operating Expenses
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
remain the same, and (3) you redeem all of your shares at the end of the
periods shown.
1 year.............. $ 31
3 years............. 97
5 years............. 170
10 years............. 383
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal investment strategy is to invest the Fund's total
assets primarily in GNMA pass-through certificates.
Q What are GNMA certificates?
A GNMA certificates represent ownership in a pool of mortgage loans or a
single mortgage loan. Each mortgage loan is either insured by the
Federal Housing Administration or guaranteed by the Veterans
Administration. Once approved by GNMA, each mortgage or pool of
mortgages is additionally guaranteed by GNMA as to the timely payment
of principal and interest (regardless of whether the mortgagors
actually make their payments). The guarantee represents a general
obligation of the U.S. Treasury. Therefore, GNMA certificates are
guaranteed by the full faith and credit of the U.S. Government.
Q What is the credit quality of these securities?
A Securities which are backed by the full faith and credit of the U.S.
Government (meaning that the payment of principal and interest is
guaranteed by the U.S. Treasury) are considered to be of the highest
credit quality available.
6
<PAGE>
Q How do GNMA securities differ from conventional bonds?
A GNMA securities differ from conventional bonds in that principal is
paid back to the certificate holders over the life of the loan rather
than at maturity. As a result, the Fund will receive monthly scheduled
payments of principal and interest. Additionally, the Fund may receive
unscheduled principal payments, which represent prepayments on the
underlying mortgages.
Because the Fund will reinvest these scheduled and unscheduled
principal payments at a time when the current interest rate may be
higher or lower than the Fund's current yield, an investment in the
Fund may not be an effective means of "locking in" long-term interest
rates.
[CAUTION LIGHT]
INTEREST RATE RISK. As a mutual fund investing in bonds, the Fund is subject to
the risk that the market value of the bonds will decline because of rising
interest rates. Bond prices are linked to the prevailing market interest rates.
In general, when interest rates rise, the prices of bonds fall and when
interest rates fall, bond prices generally rise. The price volatility of a bond
also depends on its maturity. Generally, the longer the maturity of a bond, the
greater its sensitivity to interest rates. To compensate investors for this
higher risk, bonds with longer maturities generally offer higher yields than
bonds with shorter maturities.
Q What is the average maturity of a GNMA certificate?
A GNMA certificates evidence interest in a pool of underlying mortgages
(or a single mortgage), which generally have maximum lives of either
15, 20, 30, or 40 years. However, due to both scheduled and unscheduled
principal payments, GNMA certificates have a shorter average life and,
therefore, have less principal volatility than a bond of comparable
maturity.
Since the prepayment rates will vary widely, it is not possible to
accurately predict the average life of a particular GNMA pool, though
it will be shorter than the stated final maturity. Because the expected
average life is a better indicator of the maturity characteristics of
GNMA certificates, principal volatility and yield may be more
comparable to 10-year Treasury bonds.
[CAUTION LIGHT]
PREPAYMENT RISK. Mortgagors may generally pay off mortgages without penalty
before the due date. When mortgaged property is sold, which can occur at any
time for a variety of reasons, the old mortgage is usually prepaid. Also, when
mortgage interest rates fall far enough to make refinancing
7
<PAGE>
attractive, prepayments tend to accelerate. Prepayments require reinvestment of
the principal at the then-current level of interest rates, which are often at a
lower level than when the mortgages were originally issued. Reinvestment at
lower rates tends to reduce the interest payments received by the Fund and,
therefore, the size of the dividend payments available to shareholders. If
reinvestment occurs at a higher level of interest rates, the opposite effect is
true.
Q Will the Fund's assets be invested in any other types of U.S.
Government securities?
A Yes. We may invest up to 35% of the Fund's total assets in other
obligations that have been backed by the full faith and credit of the
U.S. Government, including U.S. Treasury bills, notes and bonds, and
securities issued by U.S. Government agencies and instrumentalities
such as, but not limited to:
o Federal Housing Administration,
o Department of Housing and Urban Development,
o Export-Import Bank,
o Farmer's Home Administration,
o General Services Administration,
o Maritime Administration,
o Small Business Administration, and
o repurchase agreements collateralized by such obligations.
We will not invest the Fund's assets in any U.S. Government securities
which do not carry the full faith and credit of the U.S. Government,
such as Fannie Mae (FNMA) or Freddie Mac (FHLMC) securities.
As a temporary defensive measure because of market, economic,
political, or other conditions, we may invest up to 100% of the Fund's
assets in investment-grade, short-term debt instruments which may
result in the Fund not achieving its investment objective during the
time it is in this temporary defensive posture.
Q How are the decisions to buy and sell securities made?
A We manage the Fund to generate high total return with strong emphasis
on current income. Since all the securities the Fund may own are backed
by the full faith and credit of the United States, credit quality is
not a concern. Of particular importance for
8
<PAGE>
mortgage securities is prepayment risk. We generally try to diversify
this risk by buying different kinds of mortgage securities which should
have different prepayment characteristics. When weighing our decision
to buy or sell a security, we strive to balance the value of the level
of income, the prepayment risk, and the price volatility, both for the
individual security and its relationship with the rest of the
portfolio.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 19.
FUND MANAGEMENT
The Trust has retained us, USAA Investment Management Company, to serve as the
manager and distributor for the Trust. We are an affiliate of United Services
Automobile Association (USAA), a large, diversified financial services
institution. As of the date of this Prospectus, we had approximately $37
billion in total assets under management. Our mailing address is 9800
Fredericksburg Road, San Antonio, TX 78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Board of Trustees. For our services, the Fund pays us an
annual fee. This fee was computed and paid at one-eighth of one percent (.125%)
of average net assets for the fiscal year ended May 31, 1998. We also provide
services related to selling the Fund's shares and receive no compensation for
those services.
Although our officers and employees, as well as those of the Trust, may engage
in personal securities transactions, they are restricted by the procedures in a
Joint Code of Ethics adopted by the Trust and us.
Portfolio Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER]
KENNETH E. WILLMANN
Kenneth E. Willmann, Vice President of Fixed Income Investments, has managed
the Fund since February 1995. He has 24 years investment management experience
and has worked for us for 21 years. Mr. Willmann earned the Chartered Financial
Analyst designation in 1978 and is a member of the Association for Investment
Management and Research, the San Antonio Financial Analysts Society, Inc., and
the National Federation of Municipal Analysts. He holds an MBA and a BA from
the University of Texas.
9
<PAGE>
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. The Idea Behind Mutual Funds
Mutual funds provide small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment can buy part of a diversified
portfolio. That portfolio is managed by investment professionals, relieving you
of the need to make individual stock or bond selections. You also enjoy
conveniences, such as daily pricing, liquidity, and in the case of the USAA
Family of Funds, no sales charge. The portfolio, because of its size, has lower
transaction costs on its trades than most individuals would have. As a result,
you own an investment that in earlier times would have been available only to
very wealthy people.
II. Using Funds in an Investment Program
In choosing a mutual fund as an investment vehicle, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will perform
that function. In addition, we will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily valuation of the Fund, as
well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that balances your investment goals with your tolerance for risk. It is
likely that this decision may include the use of more than one fund of the USAA
Family of Funds.
For example, assume you wish to invest in a widely-diversified portfolio. You
could combine an investment in the GNMA Trust with investments in other mutual
funds that invest in stocks of large and small companies and high-dividend
stocks. This is just one way you could combine funds to fit your own risk and
reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 21. These unique mutual funds provide
a professionally-managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves diversification
across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use a USAA Asset
Strategy Fund, the USAA Family of Funds provides a broad range of
10
<PAGE>
choices covering just about any investor's investment objectives. Our sales
representatives stand ready to assist you with your choices and to help you
craft a portfolio to meet your needs. Refer to APPENDIX B on page 21 for a
complete list of the USAA Family of No-Load Mutual Funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required for each new account. However, after you open
your initial account with us, you will not need to fill out another application
unless the registration is different.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number or
tax identification number to avoid possible withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after we receive your request in proper form. The
Fund's NAV is determined at the close of the regular trading session (generally
4:00 p.m. Eastern Time) of the New York Stock Exchange (NYSE) each day the NYSE
is open. If we receive your request and payment prior to that time, your
purchase price will be the NAV per share determined for that day. If we receive
your request or payment after the NAV per share is calculated, the purchase
will be effective on the next business day. If you plan to purchase Fund shares
with a foreign check, we suggest you convert your foreign check to U.S. dollars
prior to investment in the Fund. This will avoid a potential delay in the
effective date of your purchase of up to four to six weeks. Furthermore, a bank
charge may be assessed in the clearing process, which will be deducted from the
amount of the purchase.
MINIMUM INVESTMENTS
INITIAL PURCHASE
[MONEY GRAPHIC]
o $3,000. [$500 Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) accounts
and $250 for IRAs] or no initial investment if you elect to have monthly
electronic investments of at least $50 each. We may periodically offer
programs that reduce the minimum amounts for monthly electronic
investments. Employees of USAA and its affiliated companies may open an
account through payroll deduction for as little as $25 per pay period with
no initial investment.
11
<PAGE>
ADDITIONAL PURCHASES
o $50
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288
o To add to your account, send your check and the "Invest by Mail" stub that
accompanies your Fund's transaction confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
BANK WIRE
[WIRE GRAPHIC]
o Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA GNMA Trust
USAA Account Number: 69384998
Shareholder(s) Name(s)______________________________________
Shareholder(s) Mutual Fund Account Number___________________
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
o Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448
[TELEPHONE GRAPHIC]
o If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To
open an account by phone, the new account must have the same registration
as your existing account.
12
<PAGE>
Redemption of Shares
You may redeem Fund shares by any of the methods described below on any day the
NAV per share is calculated. Redemptions are effective on the day instructions
are received in a manner as described below. However, if instructions are
received after the NAV per share calculation (generally 4:00 p.m. Eastern
Time), redemption will be effective on the next business day.
We will send you your money within seven days after the effective date of
redemption. Payment for redemption of shares purchased by EFT or check is sent
after the EFT or check has cleared, which could take up to 15 days from the
purchase date. If you are considering redeeming shares soon after purchase, you
should purchase by bank wire or certified check to avoid delay. Redemptions are
subject to taxes based on the difference between the cost of shares when
purchased and the price received upon redemption.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment in limited circumstances.
HOW TO REDEEM
WRITTEN, FAX, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
o Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption privileges are automatically established when you complete
your application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions. Before
any discussion regarding your account, the following information is obtained:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
13
<PAGE>
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to help you in
your role as an investor. In the INVESTOR'S GUIDE, you will find additional
information on purchases, redemptions, and methods of payment. You will also
find in-depth information on automatic investment plans, shareholder statements
and reports, and other useful information.
Account Balance
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually a small balance account fee of $12 to each shareholder account with a
balance, at the time of assessment, of less than $2,000. The fee will reduce
total transfer agency fees paid by the Fund to SAS. Accounts exempt from the
fee include: (1) any account regularly purchasing additional shares each month
through an automatic investment plan; (2) any account registered under the
Uniform Gifts/Transfers to Minors Act (UGMA/UTMA); (3) all (non-IRA) money
market fund accounts; (4) any account whose registered owner has an aggregate
balance of $50,000 or more invested in USAA mutual funds; and (5) all IRA
accounts (for the first year the account is open).
Trust Rights
The Trust reserves the right to:
o reject purchase or exchange orders when in the best interest of the Trust;
o limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
o require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question. The Statement of Additional Information
contains information on acceptable guarantors;
o redeem an account with less than $900, with certain limitations.
EXCHANGES
Exchange Privilege
The exchange privilege is automatic when you complete your application. You may
exchange shares among Funds in the USAA Family of Funds, provided you do not
hold these shares in stock certificate form and the shares to be acquired
14
<PAGE>
are offered in your state of residence. After the exchange order is received,
the Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between the cost of shares when purchased and the price received
upon exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 13.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA Family of Funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA Family of Funds).
SHAREHOLDER INFORMATION
Share Price Calculation
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4:00 p.m. Eastern Time.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Board of Trustees. Securities which cannot be
valued by these methods, and all other assets, are valued in good faith at fair
value using methods we have determined under the general supervision of the
Board of Trustees.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's Statement of Additional Information.
Dividends and Distributions
Net investment income of the Fund is accrued daily and paid on the last
business day of the month. Dividends shall begin accruing on shares purchased
the day following the effective date and shall continue to accrue to the
effective date of redemption. Any net capital gain distribution usually
15
<PAGE>
occurs within 45 days of the May 31 fiscal year end, which would be somewhere
around the middle of July. The Fund will make additional payments to
shareholders, if necessary, to avoid the imposition of any federal income or
excise tax.
We will automatically reinvest all income dividends and capital gain
distributions unless we receive different instructions from you. The share
price will be the NAV of the Fund shares computed on the ex-dividend date. Any
capital gain distribution paid by the Fund will reduce the NAV per share by the
amount of the distribution. These dividends and distributions are subject to
taxes.
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
Federal Taxes
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this Prospectus. Note that the Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. We urge you to
consult your tax adviser about the status of distributions from the Fund in
your own state and locality.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you as ordinary income, whether
received in cash or reinvested in additional shares.
Regardless of the length of time you have held Fund shares, distributions of
net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable investment.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
o fails to furnish the Fund with a correct tax identification number,
o underreports dividend or interest income, or
o fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify on your application, or
on a separate Form W-9 supplied by the Fund's transfer agent, that your
16
<PAGE>
tax identification number is correct and you are not currently subject to
backup withholding.
REPORTING - The Fund will report information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
17
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five-year period. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG Peat Marwick LLP,
whose report, along with the Fund's financial statements, are included in the
Annual Report, which is available upon request.
EIGHT-MONTH
PERIOD ENDED
YEAR ENDED MAY 31, MAY 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------
Net asset value at
beginning of period $ 9.95 $ 9.76 $ 10.09 $ 9.82 $ 10.37
Net investment income .66 .69 .70 .72 .49
Net realized and
unrealized gain (loss) .37 .19 (.33) .27 (.55)
Distributions from net
investment income (.66) (.69) (.70) (.72) (.49)
-----------------------------------------------------
Net asset value at
end of period $ 10.32 $ 9.95 $ 9.76 $ 10.09 $ 9.82
=====================================================
Total return (%)* 10.65 9.23 3.65 10.54 (.66)
Net assets at end of
period (000) $377,528 $308,798 $301,589 $ 265,571 $261,251
Ratio of expenses to
average net assets (%) .30 .30 .32 .32 .31(a)
Ratio of net investment
income to average net
assets (%) 6.48 6.93 6.90 7.34 7.20(a)
Portfolio turnover (%) 60.85 77.82 127.77 93.78 90.05
- -----------------
* Assumes reinvestment of all dividend income distributions during the
period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
18
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES IN WHICH WE MAY
INVEST THE FUND'S ASSETS:
REPURCHASE AGREEMENTS
We may invest the Fund's assets in repurchase agreements which are exclusively
collateralized by obligations issued or guaranteed as to both principal and
interest by the U.S. Government, its agencies, or instrumentalities. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell it back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on an agreed upon date.
This date is usually not more than seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest, which is unrelated to the coupon rate or maturity of the purchased
security.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)
CMOs are obligations fully collateralized by a portfolio of mortgages or
mortgage-related securities. CMOs are divided into pieces (tranches) with
varying maturities. The cash flow from the underlying mortgages is used to pay
off each tranche separately. CMOs are designed to provide investors with more
predictable maturities than regular mortgage securities but such maturities can
be difficult to predict because of the effect of prepayments. Failure to
accurately predict prepayments can adversely affect the Fund's return on these
investments. CMOs may also be less marketable than other securities.
WHEN-ISSUED SECURITIES
We may invest the Fund's assets in new issues of debt securities offered on a
when-issued basis.
o Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed
at the time of commitment.
o The Funds do not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
o Such securities can be sold before settlement date.
VARIABLE RATE SECURITIES
We may invest the Fund's assets in securities that bear interest at rates which
are adjusted periodically to market rates.
o These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on
the income earned by the Fund depending on the proportion of such
securities held.
o The value of variable rate securities is less affected than fixed-coupon
securities by changes in prevailing interest rates because of the periodic
adjustment of their coupons to a market rate. The shorter the period
between adjustments, the smaller the impact of interest rate fluctuations
on the value of these securities.
o The market value of a variable rate security usually tends toward par (100%
of face value) at interest rate adjustment time.
19
<PAGE>
ILLIQUID SECURITIES
We may invest up to 15% of the Fund's net assets in securities which are
illiquid. Illiquid securities are those securities that cannot be disposed of
in the ordinary course of business, seven days or less, at approximately the
value at which the Fund has valued the securities.
20
<PAGE>
APPENDIX B
USAA Family of No-Load Mutual Funds
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide you with the opportunity to formulate your own investment program. You
may exchange any shares you hold in any one USAA Fund for shares in any other
USAA Fund. For more complete information about other Funds in the USAA Family
of Funds, including charges and expenses, call us for a Prospectus. Read it
carefully before you invest or send money.
FUND
TYPE/NAME VOLATILITY
=================================================
CAPITAL APPRECIATION
Aggressive Growth Very high
Emerging Markets (1) Very high
First Start Growth Moderate to high
Gold (1) Very high
Growth Moderate to high
Growth & Income Moderate
International (1) Moderate to high
S&P 500 Index (2) Moderate
Science & Technology Very high
World Growth (1) Moderate to high
=================================================
ASSET ALLOCATION
Balanced Strategy (1) Moderate
Cornerstone Strategy (1) Moderate
Growth and Tax Strategy Moderate
Growth Strategy (1) Moderate to high
Income Strategy Low to moderate
=================================================
INCOME -- TAXABLE
GNMA Low to moderate
Income Moderate
Income Stock Moderate
Short-Term Bond Low
=================================================
INCOME -- TAX EXEMPT
Long-Term (3) Moderate
Intermediate-Term (3) Low to moderate
Short-Term (3) Low
State Bond/Income (3, 4) Moderate
=================================================
MONEY MARKET
Money Market (5) Very low
Tax Exempt Money Market (3, 5) Very low
Treasury Money Market Trust (5) Very low
State Money Market (3, 4, 5) Very low
=================================================
1 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
2 S&P(R) IS A TRADEMARK OF THE MCGRAW-HILL COMPANIES, INC., AND HAS BEEN
LICENSED FOR USE. THE PRODUCT IS NOT SPONSORED, SOLD OR PROMOTED BY STANDARD
& POOR'S, AND STANDARD & POOR'S MAKES NO REPRESENTATION REGARDING THE
ADVISABILITY OF INVESTING IN THE PRODUCT.
3 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
4 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY
TO RESIDENTS OF THOSE STATES.
5 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.
21
<PAGE>
NOTES
<PAGE>
NOTES
<PAGE>
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the Fund's Statement of Additional
Information (SAI), Annual or Semiannual Report, or to ask other questions
about the Fund. The SAI has been filed with the Securities and Exchange
Commission (SEC) and is legally a part of the Prospectus. In the Fund's
Annual Report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance
during the last fiscal year.
To view these documents, along with other related documents, you can visit
the SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally,
copies of this information can be obtained, for a duplicating fee, by writing
the Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
------------------------------
TELEPHONE ASSISTANCE 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 (R)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
Investment Company Act File No. 811-4019
<PAGE>
USAA TREASURY MONEY
MARKET TRUST
PROSPECTUS
OCTOBER 1, 1998
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy?....... 2
Main Risks of Investing in This Fund............................. 2
Is This Fund for You?............................................ 3
Could the Value of Your Investment in This Fund Fluctuate?....... 3
Fees and Expenses................................................ 5
Fund Investments................................................. 6
Fund Management.................................................. 8
Using Mutual Funds in an Investment Program...................... 9
How to Invest....................................................10
Important Information About Purchases and Redemptions............13
Exchanges........................................................14
Shareholder Information..........................................15
Financial Highlights.............................................18
Appendix A ......................................................19
Appendix B ......................................................20
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund has an objective of providing investors maximum current income while
maintaining the highest degree of safety and liquidity. We will attempt to
achieve the Fund's objective by investing the Fund's assets in U.S. Government
securities with maturities of 397 days or less. Most of the Fund's investments
will be in U.S. Treasury bills, notes and bonds, and repurchase agreements
collateralized by these instruments.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objective will be achieved. See FUND INVESTMENTS on
page 6 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risk of investing in this Fund is interest rate risk.
o INTEREST RATE RISK involves the possibility that the value of the Fund's
investments in U.S. Government securities will decline because of an
increase in interest rates.
IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
Money market funds are sometimes confused with savings accounts. A savings
account is a deposit with a bank. The bank is obligated to return the amount
deposited and to pay you interest for the use of your money. Up to a certain
amount, the Federal Deposit Insurance Corporation (FDIC) will insure that the
bank meets its obligations.
The Fund is not a savings account but, rather, is a money market mutual fund
that issues and redeems its shares at the Fund's per share net asset value
(NAV). The Fund always seeks to maintain a constant NAV of $1 per share.
2
<PAGE>
Just as a savings account pays interest on the amount deposited, the Fund pays
dividends on the shares you own. If these dividends are reinvested in the Fund,
the value of your account will grow over time.
Unlike a savings account, however, an investment in this Fund is not a deposit
of USAA Federal Savings Bank, or any other bank, and is not insured or
guaranteed by the FDIC or any other government agency. Although the Fund seeks
to preserve the value of your investment at $1 per share, it is possible to
lose money by investing in the Fund.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
|X| You need your money back within a short period.
|X| You need to preserve principal.
|X| You want a low-risk investment.
|X| You would like checkwriting privileges on the account.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
|X| You need a high total return to achieve your goals.
|X| Your primary goal is long-term growth.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. We manage the Fund with strict Securities and Exchange
Commission guidelines designed to preserve the Fund's value at $1 per share,
although, of course, we cannot guarantee that the value will remain at $1 per
share. The value of your investment typically will grow through reinvested
dividends. The bar chart shown on the next page illustrates the Fund's
volatility and performance from year to year over the life of the Fund.
3
<PAGE>
TOTAL RETURN
All mutual funds must use the same formula to calculate total return.
TOTAL RETURN
MEASURES THE
PRICE CHANGE
IN A SHARE
ASSUMING THE
REINVESTMENT
OF ALL DIVIDEND
INCOME AND
CAPITAL GAIN
DISTRIBUTIONS.
[BAR CHART]
CALENDAR TOTAL RETURN
YEAR PERCENTAGE
1992* 3.54
1993 2.82
1994 3.79
1995 5.59
1996 5.10
1997 5.21
*FUND BEGAN OPERATIONS ON FEBRUARY 1, 1991.
THE FUND'S TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998, WAS
2.56%.
During the periods shown in the bar chart, the highest total return for a
quarter was 1.42% (quarter ending June 30, 1995) and the lowest total return
for a quarter was .69% (quarter ending June 30, 1993).
YIELD
YIELD IS THE
ANNUALIZED NET
INCOME OF THE
FUND DURING A
SPECIFIED PERIOD
AS A PERCENTAGE
OF THE FUND'S
SHARE PRICE.
EFFECTIVE YIELD
IS CALCULATED
SIMILAR TO
THE YIELD,
HOWEVER, WHEN
ANNUALIZED,
THE INCOME
EARNED IS
ASSUMED TO BE
REINVESTED.
All mutual funds must use the same formulas to calculate yield and effective
yield. The Fund typically advertises performance in terms of a 7-day yield and
effective yield and may advertise total return. The 7-day yield quotation more
closely reflects current earnings of the Fund than the total return quotation.
The effective yield will be slightly higher than the yield because of the
compounding effect of the assumed reinvestment. Current yields 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.
The Fund's 7-day yield for the period ended December 31, 1997, was 5.15%.
You may obtain the most current yield information for the Fund by calling
1-800-531-8777.
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
Again, you must remember that historical performance does not
4
<PAGE>
[TELEPHONE GRAPHIC]
TOUCHLINE (R)
1-800-531-8777
PRESS
1
THEN
1
THEN
5 9 #
necessarily indicate what will happen in the future. The value of your shares
may go up or down. For the most current price, yield, and return information
for this Fund, you may call TouchLINE(R) at 1-800-531-8777. Press 1 for the
Mutual Fund Menu, press 1 again for prices, yields, and returns. Then, press
59# when asked for the Fund Code.
TICKER
SYMBOL
UATXX
If you prefer to obtain this information from an on-line computer service, you
can do so by using the ticker symbol "UATXX."
FEES AND EXPENSES
This summary shows what it will cost you directly or indirectly to invest in
the Fund.
Shareholder Transaction Expenses -- Fees You Pay Directly
There are no fees or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is a $10 fee. (Your bank may also charge a fee for receiving
wires.)
Annual Fund Operating Expenses -- Fees You Pay Indirectly
Fund expenses come out of the Fund's assets and are reflected in the Fund's
share price and dividends. "Other Expenses" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses before waivers
during the past fiscal year ended May 31, 1998, and are calculated as a
percentage of average net assets (ANA).
12B-1 FEES -
SOME MUTUAL
FUNDS CHARGE
THESE FEES
TO PAY FOR
ADVERTISING
AND OTHER
COSTS OF SELLING
FUND SHARES.
Management Fees .125%
Distribution (12b-1) Fees None
Other Expenses .267%
-----
Total Annual Fund Operating Expenses* .392%
=====
- --------------
* During the year, we voluntarily limited the Total Annual Fund Operating
Expenses to .375% as follows:
Total Annual Fund Operating Expenses .392%
Reimbursement from USAA Investment
Management Company (.017%)
-----
Actual Fund Operating Expenses
After Reimbursement .375%
=====
We have voluntarily agreed to limit the Fund's annual expenses to .375% of
its ANA and will reimburse the Fund for all expenses in excess of that
amount until October 1, 1999.
5
<PAGE>
Example of Effect of the Fund's Operating Expenses
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
(before any applicable reimbursement) remain the same, and (3) you redeem all
of your shares at the end of the periods shown.
1 year............... $ 40
3 years.............. 127
5 years.............. 220
10 years.............. 495
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal investment strategy is to invest the Fund's assets
exclusively in securities with maturities of 397 days or less that are
backed by the full faith and credit of the U.S. Government and
repurchase agreements collateralized by such securities.
Q What types of U.S. Government securities will the Fund's assets be
invested in?
A Under normal market conditions, we will invest the Fund's total assets
primarily in U.S. Treasury bills, notes and bonds, and repurchase
agreements collateralized by such obligations.
Q May the Fund's assets be invested in any other types of U.S. Government
securities?
A Yes. We may invest up to 35% of the Fund's total assets in other
obligations that have been backed by the full faith and credit of the
U.S. Government, including securities issued by any of the following
agencies and instrumentalities:
o General Services Administration,
o Government National Mortgage Association,
o Overseas Private Investment Corporation,
o Rural Electrification Administration,
o Small Business Administration,
6
<PAGE>
o Federal Financing Bank, and
o repurchase agreements collateralized by such obligations.
Q Will the Fund always maintain a net asset value of $1 per share?
A While we will endeavor to maintain a constant Fund net asset value of
$1 per share, there is no assurance that we will be able to do so.
Remember, the shares are neither insured nor guaranteed by the U.S.
Government. As such, the Fund carries some risk.
There is also a risk that rising interest rates will cause the value of
the Fund's securities to decline. We attempt to minimize this interest
risk by limiting the maturity of each security to 397 days or less and
maintaining a dollar-weighted average portfolio maturity for the Fund
of 90 days or less.
DOLLAR-
WEIGHTED
AVERAGE
PORTFOLIO
MATURITY IS
OBTAINED BY
MULTIPLYING
THE DOLLAR
VALUE OF EACH
INVESTMENT
BY THE NUMBER
OF DAYS LEFT TO
ITS MATURITY,
THEN ADDING
THOSE FIGURES
TOGETHER AND
DIVIDING THE
TOTAL BY THE
DOLLAR VALUE
OF THE FUND'S
PORTFOLIO.
Q Will any portion of the Fund's dividends be exempt from state personal
income taxes?
A Possibly. Under federal law, the income received from obligations
issued by the U.S. Government and certain of its agencies and
instrumentalities is exempt from state personal income taxes. Many
states that impose a personal income tax permit mutual funds to
pass-through this tax exemption to you as a shareholder of the Fund.
We anticipate that some portion of the dividends paid to shareholders
residing in these states will qualify for this exemption from state
taxation. We urge you to consult your own tax adviser about the status
of distributions from the Fund in your own state and locality.
Q How are the decisions to buy and sell securities made?
A We evaluate securities in the marketplace based on the Fund's
objective of maximizing current income while maintaining the highest
degree of safety and liquidity. Furthermore, regulations governing
money market funds limit purchases of a security to a maximum of 397
days and limit the Fund to a maximum average maturity of 90 days. For
the Treasury Money Market Trust this process is facilitated by only
purchasing full faith and credit obligations of the U.S. Government or
repurchase agreements collateralized by such securities. On any given
day, we evaluate the government securities market compared to the
repurchase agreement market to decide which provides the most value to
the shareholder.
7
<PAGE>
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 19.
FUND MANAGEMENT
The Trust has retained us, USAA Investment Management Company, to serve as the
manager and distributor for the Trust. We are an affiliate of United Services
Automobile Association (USAA), a large, diversified financial services
institution. As of the date of this Prospectus, we had approximately $37
billion in total assets under management. Our mailing address is 9800
Fredericksburg Road, San Antonio, TX 78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Board of Trustees. For our services, the Fund pays us an
annual fee. The fee is computed at one-eighth of one percent (.125%) of average
net assets. The fee we received for the fiscal year ended May 31, 1998, after
reimbursements we made to the Fund, was equal to .108% of average net assets.
We also provide services related to selling the Fund's shares and receive no
compensation for those services.
Although our officers and employees, as well as those of the Trust, may engage
in personal securities transactions, they are restricted by the procedures in a
Joint Code of Ethics adopted by the Trust and us.
Portfolio Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER]
PAMELA K. BLEDSOE
Pamela K. Bledsoe, Assistant Vice President of Money Market Funds, has managed
the Fund since May 1996. She has 10 years investment management experience and
has worked for us for seven years. Ms. Bledsoe earned the Chartered Financial
Analyst designation in 1992 and is a member of the Association for Investment
Management and Research and the San Antonio Financial Analysts Society, Inc.
She holds an MBA from Texas Christian University and a BS from Louisiana Tech
University.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. The Idea Behind Mutual Funds
Mutual funds provide small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment can buy part of a diversified
portfolio. That portfolio is managed by investment professionals, relieving you
of the need to make individual stock or bond selections. You also enjoy
8
<PAGE>
conveniences, such as daily pricing, liquidity, and in the case of the USAA
Family of Funds, no sales charge. The portfolio, because of its size, has lower
transaction costs on its trades than most individuals would have. As a result,
you own an investment that in earlier times would have been available only to
very wealthy people.
II. Using Funds in an Investment Program
In choosing a mutual fund as an investment vehicle, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will perform
that function. In addition, we will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily valuation of the Fund, as
well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that balances your investment goals with your tolerance for risk. It is
likely that this decision may include the use of more than one fund of the USAA
Family of Funds.
For example, assume you wish to invest in a widely-diversified portfolio. You
could combine an investment in the Treasury Money Market Trust with investments
in other mutual funds that invest in stocks of large and small companies and
high-dividend stocks. This is just one way you could combine funds to fit your
own risk and reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 20. These unique mutual funds provide
a professionally-managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves diversification
across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use a USAA Asset
Strategy Fund, the USAA Family of Funds provides a broad range of choices
covering just about any investor's investment objectives. Our sales
representatives stand ready to assist you with your choices and to help you
craft a portfolio to meet your needs. Refer to APPENDIX B on page 20 for a
complete list of the USAA Family of No-Load Mutual Funds.
9
<PAGE>
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required for each new account. However, after you open
your initial account with us, you will not need to fill out another application
unless the registration is different.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number or
tax identification number to avoid possible withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after we receive your request in proper form. The
Fund's NAV is determined at the close of the regular trading session (generally
4:00 p.m. Eastern Time) of the New York Stock Exchange (NYSE) each day the NYSE
is open. If we receive your request and payment prior to that time, your
purchase price will be the NAV per share determined for that day. If we receive
your request or payment after the NAV per share is calculated, the purchase
will be effective on the next business day. If you plan to purchase Fund shares
with a foreign check, we suggest you convert your foreign check to U.S. dollars
prior to investment in the Fund. This will avoid a potential delay in the
effective date of your purchase of up to four to six weeks. Furthermore, a bank
charge may be assessed in the clearing process, which will be deducted from the
amount of the purchase.
MINIMUM INVESTMENTS
INITIAL PURCHASE
[MONEY GRAPHIC]
o $3,000. [$500 Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) accounts
and $250 for IRAs] or no initial investment if you elect to have monthly
electronic investments of at least $50 each. We may periodically offer
programs that reduce the minimum amounts for monthly electronic
investments. Employees of USAA and its affiliated companies may open an
account through payroll deduction for as little as $25 per pay period with
no initial investment.
ADDITIONAL PURCHASES
o $50 (Except transfers from brokerage accounts, which are exempt from the
minimum).
10
<PAGE>
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288
o To add to your account, send your check and the "Invest by Mail" stub that
accompanies your Fund's transaction confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
BANK WIRE
[WIRE GRAPHIC]
o Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA Treasury Money Market Trust
USAA Account Number: 69384998
Shareholder(s) Name(s)______________________________________
Shareholder(s) Mutual Fund Account Number___________________
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
o Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448
[TELEPHONE GRAPHIC]
o If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To
open an account by phone, the new account must have the same registration
as your existing account.
11
<PAGE>
Redemption of Shares
You may redeem Fund shares by any of the methods described below on any day the
NAV per share is calculated. Redemptions are effective on the day instructions
are received in a manner as described below. However, if instructions are
received after the NAV per share calculation (generally 4:00 p.m. Eastern
Time), redemption will be effective on the next business day.
We will send you your money within seven days after the effective date of
redemption. Payment for redemption of shares purchased by EFT or check is sent
after the EFT or check has cleared, which could take up to 15 days from the
purchase date. If you are considering redeeming shares soon after purchase, you
should purchase by bank wire or certified check to avoid delay. Redemptions are
subject to taxes based on the difference between the cost of shares when
purchased and the price received upon redemption.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment in limited circumstances.
HOW TO REDEEM
WRITTEN, FAX, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
o Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption privileges are automatically established when you complete
your application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions. Before
any discussion regarding your account, the following information is obtained:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
12
<PAGE>
CHECKWRITING
[CHECKBOOK GRAPHIC]
o Return a signed signature card, which accompanies your application, or
request a signature card separately and return to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
You will not be charged for the use of checks or any subsequent reorders. Your
checkwriting privilege is subject to State Street Bank and Trust Company's
rules and regulations governing checking accounts. You may write checks in the
amount of $250 or more. Checks written for less than $250 will be returned
unpaid. Because the value of your account changes daily as dividends accrue,
you may not write a check to close your account.
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to help you in
your role as an investor. In the INVESTOR'S GUIDE, you will find additional
information on purchases, redemptions, and methods of payment. You will also
find in-depth information on automatic investment plans, shareholder statements
and reports, and other useful information.
Account Balance
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually a small balance account fee of $12 to each shareholder account with a
balance, at the time of assessment, of less than $2,000. The fee will reduce
total transfer agency fees paid by the Fund to SAS. Accounts exempt from the
fee include: (1) any account regularly purchasing additional shares each month
through an automatic investment plan; (2) any account registered under the
Uniform Gifts/Transfers to Minors Act (UGMA/UTMA); (3) all (non-IRA) money
market fund accounts; (4) any account whose registered owner has an aggregate
balance of $50,000 or more invested in USAA mutual funds; and (5) all IRA
accounts (for the first year the account is open).
13
<PAGE>
Trust Rights
The Trust reserves the right to:
o reject purchase or exchange orders when in the best interest of the Trust;
o limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
o require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question. The Statement of Additional Information
contains information on acceptable guarantors;
o redeem an account with less than $900, with certain limitations.
EXCHANGES
Exchange Privilege
The exchange privilege is automatic when you complete your application. You may
exchange shares among Funds in the USAA Family of Funds, provided you do not
hold these shares in stock certificate form and the shares to be acquired are
offered in your state of residence. After the exchange order is received, the
Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between the cost of shares when purchased and the price received
upon exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 12.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA Family of Funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA Family of Funds).
14
<PAGE>
SHAREHOLDER INFORMATION
Share Price Calculation
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4:00 p.m. Eastern Time.
Securities are stated at amortized cost, which approximates market value.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's Statement of Additional Information.
Dividends and Distributions
Net investment income of the Fund is accrued daily and paid on the last
business day of the month. Dividends shall begin accruing on shares purchased
the day following the effective date and shall continue to accrue to the
effective date of redemption. Any net capital gain distribution usually occurs
within 45 days of the May 31 fiscal year end, which would be somewhere around
the middle of July. The Fund will make additional payments to shareholders, if
necessary, to avoid the imposition of any federal income or excise tax.
We will automatically reinvest all income dividends and capital gain
distributions unless we receive different instructions from you. The share
price will be the NAV of the Fund shares computed on the ex-dividend date.
These dividends and distributions are subject to taxes.
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
Federal Taxes
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this Prospectus. Note that the Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. We urge you to
consult your tax adviser about the status of distributions from the Fund in
your own state and locality.
15
<PAGE>
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you as ordinary income, whether
received in cash or reinvested in additional shares.
Regardless of the length of time you have held Fund shares, distributions of
net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable investment.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
o fails to furnish the Fund with a correct tax identification number,
o underreports dividend or interest income, or
o fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify on your application, or
on a separate Form W-9 supplied by the Fund's transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
REPORTING - The Fund will report information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
16
<PAGE>
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
17
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five-year period. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG Peat Marwick LLP,
whose report, along with the Fund's financial statements, are included in the
Annual Report, which is available upon request.
EIGHT-MONTH
PERIOD ENDED
YEAR ENDED MAY 31, MAY 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .05 .05 .05 .05 .02
Distributions from net
investment income (.05) (.05) (.05) (.05) (.02)
--------------------------------------------------------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========================================================
Total return (%)* 5.24 5.06 5.38 4.88 1.96
Net assets at end of
period (000) $106,679 $88,612 $76,777 $67,876 $37,984
Ratio of expenses to
average net assets (%) .375 .375 .375 .375 .375(a)
Ratio of expenses
to average net
assets excluding
reimbursements (%) .392 .394 .403 .488 .620(a)
Ratio of net investment
income to average net
assets (%) 5.11 4.95 5.23 4.91 2.94(a)
- ------------
* Assumes reinvestment of all dividend income distributions during the
period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
18
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES IN WHICH WE MAY
INVEST THE FUND'S ASSETS:
REPURCHASE AGREEMENTS
We may invest the Fund's assets in repurchase agreements which are exclusively
collateralized by obligations issued or guaranteed as to both principal and
interest by the U.S. Government, its agencies, or instrumentalities. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell it back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on an agreed upon date.
This date is usually not more than seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest, which is unrelated to the coupon rate or maturity of the purchased
security.
WHEN-ISSUED SECURITIES
We may invest the Fund's assets in new issues of debt securities offered on a
when-issued basis.
o Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed
at the time of commitment.
o The Funds do not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
o Such securities can be sold before settlement date.
VARIABLE RATE SECURITIES
We may invest the Fund's assets in securities that bear interest at rates which
are adjusted periodically to market rates.
o These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on
the income earned by the Fund depending on the proportion of such
securities held.
o The value of variable rate securities is less affected than fixed-coupon
securities by changes in prevailing interest rates because of the periodic
adjustment of their coupons to a market rate. The shorter the period
between adjustments, the smaller the impact of interest rate fluctuations
on the value of these securities.
o The market value of a variable rate security usually tends toward par (100%
of face value) at interest rate adjustment time.
ILLIQUID SECURITIES
We may invest up to 10% of the Fund's net assets in securities which are
illiquid. Illiquid securities are those securities that cannot be disposed of
in the ordinary course of business, seven days or less, at approximately the
value at which the Fund has valued the securities.
19
<PAGE>
APPENDIX B
USAA Family of No-Load Mutual Funds
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide you with the opportunity to formulate your own investment program. You
may exchange any shares you hold in any one USAA Fund for shares in any other
USAA Fund. For more complete information about other Funds in the USAA Family
of Funds, including charges and expenses, call us for a Prospectus. Read it
carefully before you invest or send money.
FUND
TYPE/NAME VOLATILITY
=================================================
CAPITAL APPRECIATION
Aggressive Growth Very high
Emerging Markets (1) Very high
First Start Growth Moderate to high
Gold (1) Very high
Growth Moderate to high
Growth & Income Moderate
International (1) Moderate to high
S&P 500 Index (2) Moderate
Science & Technology Very high
World Growth (1) Moderate to high
=================================================
ASSET ALLOCATION
Balanced Strategy (1) Moderate
Cornerstone Strategy (1) Moderate
Growth and Tax Strategy Moderate
Growth Strategy (1) Moderate to high
Income Strategy Low to moderate
=================================================
INCOME -- TAXABLE
GNMA Low to moderate
Income Moderate
Income Stock Moderate
Short-Term Bond Low
=================================================
INCOME -- TAX EXEMPT
Long-Term (3) Moderate
Intermediate-Term (3) Low to moderate
Short-Term (3) Low
State Bond/Income (3, 4) Moderate
=================================================
MONEY MARKET
Money Market (5) Very low
Tax Exempt Money Market (3, 5) Very low
Treasury Money Market Trust (5) Very low
State Money Market (3, 4, 5) Very low
=================================================
1 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
2 S&P(R) IS A TRADEMARK OF THE MCGRAW-HILL COMPANIES, INC., AND HAS BEEN
LICENSED FOR USE. THE PRODUCT IS NOT SPONSORED, SOLD OR PROMOTED BY STANDARD
& POOR'S, AND STANDARD & POOR'S MAKES NO REPRESENTATION REGARDING THE
ADVISABILITY OF INVESTING IN THE PRODUCT.
3 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
4 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY
TO RESIDENTS OF THOSE STATES.
5 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.
20
<PAGE>
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the Fund's Statement of Additional
Information (SAI), Annual or Semiannual Report, or to ask other questions
about the Fund. The SAI has been filed with the Securities and Exchange
Commission (SEC) and is legally a part of the Prospectus. In the Fund's
Annual Report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance
during the last fiscal year.
To view these documents, along with other related documents, you can visit
the SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally,
copies of this information can be obtained, for a duplicating fee, by writing
the Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
------------------------------
TELEPHONE ASSISTANCE 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 (R)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
Investment Company Act File No. 811-4019
<PAGE>
USAA USAA STATEMENT OF
EAGLE INVESTMENT ADDITIONAL INFORMATION
LOGO TRUST October 1, 1998
- -------------------------------------------------------------------------------
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.
You may obtain a free copy of a Prospectus dated October 1, 1998, for each Fund
by writing to USAA Investment Trust, 9800 Fredericksburg Road, 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.
The financial statements of the Funds and the Independent Auditors' Report
thereon for the fiscal year ended May 31, 1998, are included in the
accompanying Annual Report to Shareholders of that date and are incorporated
herein by reference.
- -------------------------------------------------------------------------------
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
9 Special Risk Considerations
9 Investment Restrictions
11 Portfolio Transactions
13 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
24 Appendix B - Comparison of Portfolio Performance
27 Appendix C - Dollar-Cost Averaging
<PAGE>
VALUATION OF SECURITIES
Shares of each Fund are offered on a continuing best efforts basis through USAA
Investment Management Company (IMCO or the Manager). The offering price for
shares of each Fund is equal to the current net asset value (NAV) per share.
The NAV per share of each Fund is calculated by adding the value of all its
portfolio securities and other assets, deducting its liabilities, and dividing
by the number of shares outstanding.
A Fund's NAV per share is calculated each day, Monday through Friday,
except days on which the New York Stock Exchange (NYSE) is closed. The NYSE is
currently scheduled to be closed on New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas, and on the preceding Friday or subsequent Monday
when one of these holidays falls on a Saturday or Sunday, respectively.
The value of securities of each Fund (except Treasury Money Market 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.
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. There can be no assurance, however, that the Fund
will at all times be able to maintain a constant $1 NAV per share. Such
procedures include review of the Fund's holdings at such intervals as is deemed
appropriate to determine whether the Fund's NAV calculated by using available
market quotations deviates from $1 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, among other options,
selling portfolio instruments prior to maturity to the Manager or another
party, withholding dividends, or establishing a NAV per share by using
available market quotations.
2
<PAGE>
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is canceled due to nonpayment or if the Trust
does not receive good funds either by check or electronic funds transfer, USAA
Shareholder Account Services (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 accounts 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 the 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 your 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 you. 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 your last known address.
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 amounts 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. You will continue to earn dividends until
the shares are redeemed by the presentation of a check.
When a check is presented to the Transfer Agent for payment, a sufficient
number of full and fractional shares from your account will be redeemed to
cover the amount of a check. If the account balance 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.
3
<PAGE>
The checkwriting privilege is 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 you for the use
of the checks or for subsequent reorders of checks.
The Trust reserves the right to assess a processing fee against your
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.
You may request that the Transfer Agent stop payment on a check. The
Transfer Agent will use its best efforts to execute stop payment instructions,
but does not guarantee that such efforts will be effective. The Transfer Agent
will charge you $10 for each stop payment you request.
INVESTMENT PLANS
The Trust makes available the following investment plans 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 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 a non-governmental employer, an income-producing
investment, or an account with a participating financial institution.
DIRECT DEPOSIT PROGRAM -- The monthly transfer of certain federal benefits to
directly purchase shares of a USAA mutual fund. Eligible federal benefits
include: Social Security, Supplemental Security Income, Veterans Compensation
and Pension, Civil Service Retirement Annuity, and Civil Service Survivor
Annuity.
GOVERNMENT ALLOTMENT -- The transfer of military pay by the U.S. Government
Finance Center for the purchase of USAA mutual fund shares.
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. You may
initiate a "buy" or "sell" whenever you choose.
DIRECTED DIVIDENDS -- If you own shares in more than one of the Funds in the
USAA Family of Funds, you may direct that dividends and/or capital gain
distributions earned in one fund be used to purchase shares automatically in
another fund.
Participation in these systematic purchase plans allows you to engage in
dollar-cost averaging. For additional information concerning the benefits of
dollar-cost averaging, see APPENDIX C.
SYSTEMATIC WITHDRAWAL PLAN
If you own shares having a NAV of $5,000 or more in a single investment account
(accounts in different Funds cannot be aggregated for this purpose) you 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, you may choose to have
withdrawals electronically deposited at your bank or other financial
institution. You may also elect to have checks mailed to a designated address.
This 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. You may terminate participation in the
plan at any time. You are not charged 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.
4
<PAGE>
Withdrawals will be made by redeeming full and fractional shares on the
date you select at the time the plan is established. Withdrawal payments made
under this plan may exceed dividends and distributions and, to this extent,
will involve the use of principal and could reduce the dollar value of your
investment and eventually exhaust the account. Reinvesting dividends and
distributions helps replenish the account. Because share values and net
investment income can fluctuate, you 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 your income tax return. Therefore, you 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 you qualify for certain
types of retirement programs. For your convenience, the Manager offers
403(b)(7) accounts and various forms of IRAs. You may make investments 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 Road,
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 money sent to you after
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 you 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. You may
obtain detailed information about the plans from the Manager.
INVESTMENT POLICIES
The sections captioned WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN
STRATEGY? and FUND INVESTMENTS in each Fund's Prospectus describe the
fundamental investment objective(s) and the investment policies applicable to
each Fund. Each Fund's objective(s) cannot be changed without shareholder
approval. 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. In evaluating a potential investment in such a lease
obligation, the Manager will consider: (1) the credit quality of the obligor;
(2) whether the underlying property is essential to a governmental function;
and (3) whether the lease obligation contains covenants prohibiting the obligor
from substituting similar property if the obligor fails to make appropriations
for the lease obligation.
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LIQUIDITY DETERMINATIONS
The Board of Trustees has established guidelines pursuant to which Municipal
Lease Obligations, Section 4(2) Commercial Paper and Rule 144A Securities, and
certain restricted debt securities that are subject to unconditional put or
demand features exercisable within seven days (Restricted Put Bonds) may be
determined to be liquid for purposes of complying with SEC limitations
applicable to each Fund's investments in illiquid securities. In determining
the liquidity of Municipal Lease Obligations, Section 4(2) Commercial Paper and
Rule 144A Securities, the Manager will consider the following factors, among
others, established by the Board of Trustees: (1) the frequency of trades and
quotes for the security, (2) the number of dealers willing to purchase or sell
the security and the number of other potential purchasers, (3) dealer
undertakings to make a market in the security, and (4) the nature of the
security and the nature of the marketplace trades, including the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
transfer. Additional factors considered by the Manager in determining the
liquidity of a municipal lease obligation are: (1) whether the lease obligation
is of a size that will be attractive to institutional investors, (2) whether
the lease obligation contains a non-appropriation clause and the likelihood
that the obligor will fail to make an appropriation therefor, and (3) such
other factors as the Manager may determine to be relevant to such
determination. In determining the liquidity of Restricted Put Bonds, the
Manager will evaluate the credit quality of the party (the Put Provider)
issuing (or unconditionally guaranteeing performance on) the unconditional put
or demand feature of the Restricted Put Bond. In evaluating the credit quality
of the Put Provider, the Manager will consider all factors that it deems
indicative of the capacity of the Put Provider to meet its obligations under
the Restricted Put Bond based upon a review of the Put Provider's outstanding
debt and financial statements and general economic conditions.
Certain foreign securities (including Eurodollar obligations) may be
eligible for resale pursuant to Rule 144A in the United States and may also
trade without restriction in one or more foreign markets. Such securities may
be determined to be liquid based upon these foreign markets without regard to
their eligibility for resale pursuant to Rule 144A. In such cases, these
securities will not be treated as Rule 144A securities for purposes of the
liquidity guidelines established by the Board of Trustees.
CALCULATION OF MATURITY FOR FIXED INCOME SECURITIES
A fixed income security's maturity is typically determined on a stated final
maturity basis, although there are some exceptions to the rule.
If the issuer of the security has committed to take advantage of a
maturity shortening device, such as a call, refunding, or redemption provision,
the date on which the instrument will be called, refunded, or redeemed will be
considered to be its maturity date. Also, the maturities of mortgage-backed
securities, some asset-backed securities, and securities subject to sinking
fund arrangements are determined on a weighted average life basis, which is the
average time for principal to be repaid. For mortgage-backed and some
asset-backed securities, this average time is calculated by assuming a constant
prepayment rate (CPR) for the life of the mortgages or assets backing the
security. The CPR for a security can vary depending upon the level and
volatility of interest rates. This, in turn, can affect the weighted average
life of the security. 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 Fund, 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.
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The Funds may enter into forward currency contracts under two
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock
in" the U.S. dollar price of the security. By entering into such a contract, a
Fund will be able to protect itself against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar and the foreign
currency from the date the security is purchased or sold to the date on which
payment is made or received. Second, when management of a Fund believes that
the currency of a specific country may deteriorate relative to the U.S. dollar,
it may enter into a forward contract to sell that currency. A Fund may not
hedge with respect to a particular currency for an amount greater than the
aggregate market value (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.
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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.
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 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 IBCA, 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.
REPURCHASE AGREEMENTS
Each Fund, except the Growth and Tax Strategy Fund, may invest in repurchase
agreements which are collateralized by obligations issued or guaranteed as to
both principal and interest by the U.S. Government, its agencies, or
instrumentalities. A repurchase agreement is a transaction in which a security
is purchased with a simultaneous commitment to sell it back to the seller (a
commercial bank or recognized securities dealer) at an agreed upon price on an
agreed upon date. This date is usually not more than seven days from the date
of purchase. The resale price reflects the purchase price plus an agreed upon
market rate of interest, which is unrelated to the coupon rate or maturity of
the purchased security. The obligation of the seller to pay the agreed upon
price is in effect secured by the value of the underlying security. In these
transactions, the securities purchased by a Fund will have a total value equal
to or in excess of the amount of the repurchase obligation and will be held by
the Fund's custodian until repurchased. If the seller defaults and the value of
the underlying security declines, the Fund may incur a loss and may incur
expenses in selling the collateral. If the seller seeks relief under the
bankruptcy laws, the disposition of the collateral may be delayed or limited.
TEMPORARY DEFENSIVE POLICY
Each Fund, except the Treasury Money Market Trust, may on a temporary basis
because of market, economic, political, or other conditions, invest up to 100%
of its assets in investment-grade, short-term debt instruments. Such securities
may consist of obligations of the U.S. Government, its agencies or
instrumentalities, and repurchase agreements secured by such instruments;
certificates of deposit of domestic banks having capital, surplus, and
undivided profits in excess of $100 million; banker's acceptances of similar
banks; commercial paper and other corporate debt obligations.
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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 each
Fund. 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.
(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.
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(13) Issue senior securities as defined in the 1940 Act, except as permitted
by Section 18(f)(2) and rules thereunder.
(14) Invest more than 25% of its total assets in one industry.
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 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).
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(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, 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.
ADDITIONAL RESTRICTION
The following restriction is not considered to be a fundamental policy of the
Funds. The Board of Trustees may change this additional restriction without
notice to or approval by the shareholders.
Each Fund may not 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
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Manager determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such broker,
viewed in terms of either that particular transaction or of the overall
responsibility of the Manager to the Funds and its other clients. The Manager
continuously reviews the performance of the broker-dealers with whom it places
orders for transactions. The receipt of research from broker-dealers that
execute transactions on behalf of the Trust may be useful to the Manager in
rendering investment management services to other clients (including affiliates
of the Manager), and conversely, such research provided by broker-dealers who
have executed transaction orders on behalf of other clients may be useful to
the Manager in carrying out its obligations to the Trust. While such research
is available to and may be used by the Manager in providing investment advice
to all its clients (including affiliates of the Manager), not all of such
research may be used by the Manager for the benefit of the Trust. Such research
and services will be in addition to and not in lieu of research and services
provided by the Manager, and the expenses of the Manager will not necessarily
be reduced by the receipt of such supplemental research. See THE TRUST'S
MANAGER.
Securities of the same issuer may be purchased, held, or sold at the same
time by the Trust for any or all of its Funds, or other accounts or companies
for which the Manager acts as the investment adviser (including affiliates of
the Manager). On occasions when the Manager deems the purchase or sale of a
security to be in the best interest of the Trust, as well as the Manager's
other clients, the Manager, to the extent permitted by applicable laws and
regulations, may aggregate such securities to be sold or purchased for the
Trust with those to be sold or purchased for other customers in order to obtain
best execution and lower brokerage commissions, if any. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Manager in the manner it
considers to be most equitable and consistent with its fiduciary obligations to
all such customers, including the Trust. In some instances, this procedure may
impact the price and size of the position obtainable for the Trust.
The Trust pays no brokerage commissions as such for debt securities. The
market for such securities is typically a "dealer" market in which investment
dealers buy and sell the securities for their own accounts, rather than for
customers, and the price may reflect a dealer's mark-up or mark-down. In
addition, some securities may be purchased directly from issuers.
BROKERAGE COMMISSION
During the last three fiscal years, the Funds paid the following brokerage
fees:
FUND 1996 1997 1998
---- ---- ---- ----
Income Strategy $ 3,434* $ 2,820 $ 7,690
Growth and Tax Strategy $ 58,596 $ 81,456 $ 50,508
Balanced Strategy $ 16,908* $ 13,006 $ 29,977
Cornerstone Strategy $1,560,138 $1,428,772 $1,466,734
Growth Strategy $ 104,911* $ 230,440 $ 247,249
Emerging Markets $ 394,696 $ 484,792 $1,578,101
Gold $ 224,458 $ 225,284 $ 165,197
International $1,551,078 $1,362,389 $1,317,048
World Growth $ 709,486 $ 558,990 $ 586,870
- ---------------------
*For the nine-month period ended May 31, 1996.
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 1996 1997 1998**
---- ---- ---- ------
Income Strategy $ 216* $ 454 $ 802
Growth and Tax Strategy $ 400 $15,356 $3,976
Balanced Strategy $ 632* $ 1,132 $2,168
Cornerstone Strategy $4,000 $11,878 $6,200
Growth Strategy $ 556* $10,580 $8,951
Emerging Markets - $ 240 -
World Growth $ 928 $ 2,380 $2,800
- ---------------------
* For the nine-month period ended May 31, 1996.
** These amounts are 10.43%, 7.87%, 7.23%, .42%, 3.62%, 0%, and .48%,
respectively, of brokerage fees paid by each Fund.
For the year ended May 31, 1998, 14.53%, 13.54%, 11.58%, 1.69%, 6.42%, and
1.40%, 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, and World Growth Funds, respectively,
were effected through USAA Brokerage Services.
12
<PAGE>
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 $1,714,402, $17,397,006,
$5,270,781, $14,635,132, $14,253,575, $2,101,794, $5,109,536, and $5,462,113,
and the related brokerage commissions or underwriting commissions were $1,820,
$29,263, $5,663, $22,625, $17,785, $4,505, $14,730, and $10,327 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, 1998.
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.
For the last two fiscal years, the Funds' portfolio turnover rates were as
follows:
FUND 1997 1998
---- ---- ----
Income Strategy 64.71% 7.15%
Growth and Tax Strategy 1 194.21% 65.58%
Balanced Strategy 28.06% 22.18%
Cornerstone Strategy 35.14% 32.73%
Growth Strategy 62.50% 69.42%
Emerging Markets 61.21% 41.23%
Gold 26.40% 19.62%
International 46.03% 42.97%
World Growth 50.02% 45.04%
GNMA Trust 77.82% 60.85%
- -----------
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,
------------------
1997 1998
---- ----
Portfolio turnover 52.97% 31.58%
Purchases and sales of this type are as follows:
Purchases (000) $220,402 $68,958
Sales (000) $220,683 $69,044
DESCRIPTION OF SHARES
The Funds are series of the Trust and are diversified. The Trust is an open-end
management investment company established under the laws of the Commonwealth of
Massachusetts pursuant to the First Amended and Restated Master Trust Agreement
(Master Trust Agreement), dated June 2, 1995, as amended. 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 Master Trust Agreement, 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.
13
<PAGE>
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. The Trust may fill
vacancies on the Board or appoint new Trustees if the result is that at least
two-thirds of the Trustees have still been elected by shareholders. 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.
The Trust will assist in communicating to other shareholders about the meeting.
On any matter submitted to the shareholders, the holder of any share is
entitled to one vote per share (with proportionate voting for fractional
shares) regardless 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) and (2) 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, and the distribution requirements of the
Code, and by provisions of the Code
14
<PAGE>
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.
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 who supervise the
business affairs of the Trust. 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 Road, San Antonio, TX 78288.
Robert G. Davis 1, 2
Trustee and Chairman of the Board of Trustees
Age: 51
Deputy Chief Executive Officer for Capital Management of United Services
Automobile Association (USAA) (6/98-present); 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);
President, Chief Executive Officer, Director, and Chairman of the Board of
Directors of USAA Financial Planning Network, Inc. (1/97-present); Executive
Vice President, Chief Operating Officer, Director, and Vice Chairman of the
Board of Directors of USAA Financial Planning Network, Inc. (6/96-12/96);
Special Assistant to Chairman, 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.
15
<PAGE>
Davis serves as a Trustee/Director and Chairman of the Boards of
Trustees/Directors of each of the remaining funds within the USAA Family of
Funds; Director and Chairman of the Boards of Directors of USAA Investment
Management Company (IMCO), 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: 57
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/Director, and Vice Chairman of the Boards of
Trustees/Directors of each of the remaining funds within the USAA Family of
Funds and USAA Shareholder Account Services; Director of USAA Life Insurance
Company; and Trustee and Vice Chairman of USAA Life Investment Trust.
John W. Saunders, Jr. 1, 2, 4
Trustee and Vice President
Age: 63
Senior Vice President, Fixed Income Investments, IMCO (10/85-present). Mr.
Saunders serves as a Trustee/Director of each of the remaining funds within the
USAA Family of Funds; Director of IMCO; Senior Vice President of USAA
Shareholder Account Services; and Vice President of USAA Life Investment Trust.
Barbara B. Dreeben 3, 4, 5
200 Patterson #1008
San Antonio, TX 78209
Trustee
Age: 53
President, Postal Addvantage (7/92-present); Consultant, Nancy Harkins
Stationer (8/91-12/95). Mrs. Dreeben serves as a Trustee/Director of each of
the remaining funds within the USAA Family of Funds.
Howard L. Freeman, Jr. 2, 3, 4, 5
2710 Hopeton
San Antonio, TX 78230
Trustee
Age: 63
Retired. Assistant General Manager for Finance, San Antonio City Public Service
Board (1976-1996). Mr. Freeman serves as a Trustee/Director of each of the
remaining funds within the USAA Family of Funds.
Robert L. Mason, Ph.D. 3, 4, 5
12823 Queens Forest
San Antonio, TX 78230
Trustee
Age: 52
Manager, Statistical Analysis Section, Southwest Research Institute
(8/75-present). Dr. Mason serves as a Trustee/Director of each of the remaining
funds within the USAA Family of Funds.
Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Trustee
Age: 55
Vice President, Beldon Roofing and Remodeling (1985-present). Mr. Zucker serves
as a Trustee/Director of each of the remaining funds within the USAA Family of
Funds.
Michael D. Wagner 1
Secretary
Age: 50
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 of each of the remaining funds within the USAA Family of Funds; and
Vice President, Corporate Counsel, for various other USAA subsidiaries and
affiliates.
16
<PAGE>
Alex M. Ciccone 1
Assistant Secretary
Age: 48
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 each of the remaining funds within the USAA Family of Funds.
Mark S. Howard 1
Assistant Secretary
Age: 34
Assistant Vice President, Securities Counsel, USAA (2/98-present); Executive
Director, Securities Counsel, USAA (9/96-2/98); Senior Associate Counsel,
Securities Counsel, USAA (5/95-8/96); Attorney, Kirkpatrick & Lockhart LLP
(9/90-4/95). Mr. Howard serves as Assistant Vice President and Assistant
Secretary, IMCO and USAA Shareholder Account Services; Assistant Secretary of
each of the remaining funds within the USAA Family of Funds; and Assistant Vice
President, Securities Counsel for various other USAA subsidiaries and
affiliates.
Sherron A. Kirk 1
Treasurer
Age: 53
Vice President, Senior Financial Officer, IMCO (8/98-present); Vice President,
Controller, IMCO (10/92-8/98). Mrs. Kirk serves as Treasurer of each of the
remaining funds within the USAA Family of Funds; and Vice President, Senior
Financial Officer of USAA Shareholder Account Services.
Caryl Swann 1
Assistant Treasurer
Age: 50
Director, Mutual Fund Portfolio Analysis & Support, IMCO (2/98-present);
Manager, Mutual Fund Accounting, IMCO (7/92-2/98). Ms. Swann serves as
Assistant Treasurer for each of the remaining funds within the USAA Family of
Funds.
- -----------
1 Indicates those Trustees and officers who are employees of the Manager or
affiliated companies and are considered "interested persons" under the 1940
Act.
2 Member of Executive Committee
3 Member of Audit Committee
4 Member of Pricing and Investment Committee
5 Member of Corporate Governance Committee
Between the meetings of the Board of Trustees and while the Board is not
in session, the Executive Committee of the Board of Trustees has all the powers
and may exercise all the duties of the Board of Trustees in the management of
the business of the Trust which may be delegated to it by the Board. The
Pricing and Investment Committee of the Board of Trustees acts upon various
investment-related issues and other matters which have been delegated to it by
the Board. The Audit Committee of the Board of Trustees reviews the financial
statements and the auditor's reports and undertakes certain studies and
analyses as directed by the Board. The Corporate Governance Committee of the
Board of Trustees maintains oversight of the organization, performance, and
effectiveness of the Board and independent Trustees.
In addition to the previously listed Trustees and/or officers of the Trust
who also serve as Directors and/or officers of the Manager, the following
individuals are Directors and/or executive officers of the Manager: Carl W.
Shirley, Senior Vice President, Insurance Company Portfolios, and John J.
Dallahan, Senior Vice President, Investment Services. There are no family
relationships among the Trustees, officers and managerial level employees of
the Trust, or its Manager.
17
<PAGE>
The following table sets forth information describing the compensation of
the current Trustees of the Trust for their services as Trustees for the fiscal
year ended March 31, 1998.
NAME AGGREGATE TOTAL COMPENSATION
OF COMPENSATION FROM THE USAA
TRUSTEE FROM THE TRUST FAMILY OF FUNDS (b)
------- -------------- -------------------
Robert G. Davis None (a) None (a)
Barbara B. Dreeben $9,940 $35,500
Howard L. Freeman, Jr. $9,940 $35,500
Robert L. Mason $9,940 $35,500
Michael J.C. Roth None (a) None (a)
John W. Saunders, Jr. None (a) None (a)
Richard A. Zucker $9,940 $35,500
- --------------
(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, 1998, the USAA Family of Funds consisted of four registered
investment companies offering 35 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
within the USAA Family of Funds. 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 reimburses certain expenses of the Trustees who are not
affiliated with the investment adviser. As of June 30, 1998, 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 June 30, 1998, USAA and its affiliates owned 502,387 shares (14%) of
the Income Strategy Fund, 26,961,428 shares (82%) of the Emerging Markets Fund,
1,534,435 shares (5.3%) of the International Fund, 421,541 shares (1.1%) of the
GNMA Trust, and no shares of the Growth and Tax Strategy Fund, Balanced
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 June 30, 1998, 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, an affiliate of United Services Automobile Association
(USAA), a large, diversified financial services institution, was 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 $37 billion, of which
approximately $23 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 FUND MANAGEMENT in its Prospectus.
Management fees are computed and accrued daily and are payable monthly.
18
<PAGE>
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 (if any); 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 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, 1999, 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%, the Income Strategy Fund
to 1.00%, and the Balanced Strategy Fund to 1.25% of the Fund's ANA,
respectively, until October 1, 1999, and will reimburse the Funds for all
expenses in excess of such limitation. After October 1, 1999, 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 1996 1997 1998
---- ---- ---- ----
Income Strategy $ 34,662* $ 65,023 $ 118,050
Growth and Tax Strategy $ 728,915 $ 852,055 $ 1,048,344
Balanced Strategy $ 66,393* $ 190,093 $ 360,127
Cornerstone Strategy $7,072,915 $8,496,435 $10,594,219
Growth Strategy $ 219,751* $ 990,525 $ 1,754,693
Emerging Markets $ 308,963 $ 600,181 $ 2,598,294
Gold $1,170,207 $ 996,721 $ 744,517
International $2,730,374 $3,805,999 $ 4,650,798
World Growth $1,708,489 $1,994,809 $ 2,524,040
GNMA Trust $ 361,221 $ 381,390 $ 427,196
Treasury Money Market Trust $ 94,427 $ 105,420 $ 118,804
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 1996 1997 1998
---- ---- ---- ----
Income Strategy $ 34,662* $ 66,382 $ 51,777
Balanced Strategy $ 66,393* $ 37,577 $ 34,811
Treasury Money Market Trust $ 21,001 $ 15,808 $ 17,721
- --------------
*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 of $23.50 to
$26 per account. The fee is subject to change at any time.
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, each Fund pays all out-of-pocket expenses of
the Transfer Agent and other expenses which are incurred at the specific
direction of the Trust.
19
<PAGE>
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.
CALCULATION OF PERFORMANCE DATA
Information regarding the total return and yield of each Fund is provided under
COULD THE VALUE OF YOUR INVESTMENT IN THE FUND FLUCTUATE? 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 and income other than
investment income, 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 May 31, 1998, was 5.07%.
Effective Yield For 7-day Period ended May 31, 1998, was 5.20%.
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[((a-b)/(cd)+1)^6 -1]
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, 1998, for the Income Strategy
Fund, Growth and Tax Strategy Fund, and GNMA Trust were 4.15%, 3.13% and 6.48%,
respectively.
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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, 1998, was
4.44%.
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.
Average Annual Total Returns
For Periods Ended May 31, 1998
1 5 10 FROM
FUND YEAR YEARS YEARS INCEPTION*
---- ---- ----- ----- ----------
Income Strategy 16.72% - - 12.04%
Growth and Tax Strategy 15.26% 11.62% - 10.81%
Balanced Strategy 16.82% - - 15.30%
Cornerstone Strategy 17.15% 13.18% 11.34% -
Growth Strategy 12.12% - - 16.99%
Emerging Markets (20.97%) - - (.52%)
Gold (27.44%) (8.34%) (3.62%) -
International 13.29% 14.46% - 11.45%
World Growth 16.29% 14.43% - 14.96%
GNMA Trust 10.65% 6.87% - 7.97%
- ---------------------
* 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.
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APPENDIX A -- LONG-TERM AND SHORT-TERM DEBT RATINGS
1. LONG-TERM DEBT RATINGS:
MOODY'S INVESTOR SERVICES, INC.
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 risk 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 obligations
(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 lacking or 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: MOODY'S APPLIES NUMERICAL MODIFIERS 1, 2, AND 3 IN EACH GENERIC RATING
CLASSIFICATION. THE MODIFIER 1 INDICATES THAT THE OBLIGATION RANKS IN THE
HIGHER END OF ITS GENERIC RATING CATEGORY, THE MODIFIER 2 INDICATES A MID-RANGE
RANKING, AND THE MODIFIER 3 INDICATES A RANKING IN THE LOWER END OF THAT
GENERIC RATING CATEGORY.
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.
STANDARD & POOR'S RATINGS GROUP
AAA An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA An obligation rated AA differs from the highest rated issues only in
small degree. The obligor's capacity to meet its financial commitment
on the obligation is VERY STRONG.
A An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's
capacity to meet its financial commitment on the obligation is still
STRONG.
BBB An obligation rated BBB exhibits ADEQUATE capacity to pay interest and
repay principal. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
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.
FITCH IBCA, INC.
AAA Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low expectation
of credit risk. They indicate very strong capacity for timely payment
of financial commitments. This capacity is not significantly
vulnerable to foreseeable events.
A High credit quality. "A" ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
BBB Good credit quality. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair
this capacity. This is the lowest investment-grade category.
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.
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DUFF & PHELPS, INC.
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
may vary slightly from time to time because of economic conditions.
A Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic
cycles.
2. SHORT-TERM DEBT RATINGS:
MOODY'S MUNICIPAL
MIG-1/VMIG1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
MIG-2/VMIG2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MOODY'S CORPORATE AND GOVERNMENT
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the
following characteristics:
* Leading market positions in well-established industries.
* High rates of return on funds employed.
* Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
* Broad margins in earning coverage of fixed financial charges and
high internal cash generation.
* Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term promissory 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, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
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.
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.
FITCH
F1 Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit features.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in
the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
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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 quality issues as
to investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
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 also 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 PLANNING, a monthly magazine that periodically features companies in
the mutual fund industry.
FINANCIAL SERVICES WEEK, a weekly newspaper which covers financial news.
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'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.
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INVESTMENT COMPANY INSTITUTE, a 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 EQUITY FUND PERFORMANCE ANALYSIS, a weekly
and monthly publication of industry-wide mutual fund performance averages by
type of fund.
LIPPER ANALYTICAL SERVICES, INC.'S FIXED INCOME FUND PERFORMANCE ANALYSIS, a
monthly 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.
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 industry-wide mutual
fund averages 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 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 towards 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'S MONEY FUND REPORT, a weekly publication of the IBC Financial Data, 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 Taxable Money Fund Averages: "100% U.S. Treasury."
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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.
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 broad-based 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.
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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.
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06088-1098
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