TABLE OF CONTENTS
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Managers 5
Financial Information:
Statement of Assets and Liabilities 10
Portfolio of Investments in Securities 11
Notes to Portfolio of Investments in Securities 14
Statement of Operations 15
Statements of Changes in Net Assets 16
Notes to Financial Statements 17
IMPORTANT INFORMATION
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA Growth and Tax
Strategy Fund, managed by USAA Investment Management Company (IMCO). It may be
used as sales literature only when preceded or accompanied by a current
prospectus which gives further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)1998, USAA. All rights reserved.
USAA FAMILY OF FUNDS SUMMARY
Fund Minimum
Type/Name Volatility Investment*
CAPITAL APPRECIATION
Aggressive Growth Very high $3,000
Emerging Markets(1) Very high $3,000
First Start Growth Moderate to high $3,000
Gold(1) Very high $3,000
Growth Moderate to high $3,000
Growth & Income Moderate $3,000
International(1) Moderate to high $3,000
S&P 500 Index(2) Moderate $3,000
Science
& Technology(5) Very high $3,000
World Growth(1) Moderate to high $3,000
ASSET ALLOCATION
Balanced Strategy(1) Moderate $3,000
Cornerstone Strategy(1) Moderate $3,000
Growth and Tax
Strategy(3) Moderate $3,000
Growth Strategy(1) Moderate to high $3,000
Income Strategy Low to moderate $3,000
INCOME -- TAXABLE
GNMA Low to moderate $3,000
Income Moderate $3,000
Income Stock Moderate $3,000
Short-Term Bond Low $3,000
INCOME -- TAX EXEMPT
Long-Term(3) Moderate $3,000
Intermediate-Term(3) Low to moderate $3,000
Short-Term(3) Low $3,000
State Bond Income(3)** Moderate $3,000
MONEY MARKET
Money Market(4) Very low $3,000
Tax Exempt
Money Market(3),(4) Very low $3,000
Treasury Money
Market Trust(4) Very low $3,000
State Money Market(3),(4)** Very low $3,000
(1)Foreign investing is subject to additional risks, which are discussed in
the funds' prospectuses.
(2)S&P 500(Registered Trademark) is a trademark of The McGraw-Hill Companies,
Inc. and has been licensed for use. The product is not sponsored, sold or
promoted by Standard & Poor's, and Standard & Poor's makes no representation
regarding the advisability of investing in the product.
(3)Some income may be subject to state or local taxes or the federal alternative
minimum tax.
(4)An investment in a money market fund is neither insured nor guaranteed by the
U.S. government, and there is no assurance that any of the funds will be able
to maintain a stable net asset value of $1 per share.
(5)This Fund may be more volatile than a fund that diversifies across many
industries.
* The InveStart(Registered Trademark) program is available for investors without
the $3,000 initial investment required to open an IMCO mutual fund account. A
mutual fund account can be opened with no initial investment if you elect to
have monthly automatic investments of at least $50 from a bank account.
InveStart is not available on tax-exempt funds or the S&P 500 Index Fund.
The minimum initial investment for IRAs is $250, except for the $2,000 minimum
required for the S&P 500 Index Fund. IRAs are not available for tax-exempt
funds. The Growth and Tax Strategy Fund is not available as an investment for
your IRA because the majority of its income is tax exempt.
** California, Florida, New York, Texas, and Virginia funds available to
residents only.
Non-deposit investment products offered by USAA Investment Management Company
are not insured by the FDIC, are not deposits or other obligations of, or
guaranteed by, USAA Federal Savings Bank, and are subject to investment risks,
and may lose value.
For more complete information about the mutual funds managed and distributed by
USAA IMCO, including charges and expenses, please call 1-800-531-8181 for a
prospectus. Read it carefully before you invest.
MESSAGE FROM THE PRESIDENT
Every week I get a report which summarizes all of the feedback we have gotten,
by mail and phone, from our shareholders and brokerage customers. We get
suggestions, complaints and also some compliments each week. We look for trends
which point out problems and we are always sure to respond to every one of these
contacts. One in particular caught my eye on the report for the week of December
11, 1997. It said, "Shareholder notes that Mr. Roth established Income Stock
Fund for grandchild born in 1995; in 1997 another grandchild was born and Mr.
Roth established a Cornerstone Strategy Fund; why was investment not made in the
same fund?" Fair question.
The best answer is that I think both of these funds are great vehicles for
investing for a child's future, and I like variety.
The Income Stock Fund and the Cornerstone Strategy Fund both offer an investor
an equity product with less volatility than the stock market alone. In the case
of the Income Stock Fund, the decreased volatility comes from a heavy emphasis
on companies that pay high dividends or whose dividends tend to grow. For the
Cornerstone Strategy Fund, the decrease in volatility comes from a combination
of domestic value stocks, real estate stocks, foreign stocks and U.S. government
bonds. In any given year either of these funds could be more volatile than the
S&P 500 Index,(1) but both have long-term records(2) which indicate those will
be unusual occurrences.
This combination of risk and reward appeals to me. I have friends who argue
pursuasively that a more aggressive fund would be better for a long-term
investment like this. If you only consider return, I suspect they are correct,
but I am doing what I advise our customers to do. I am asking myself, "What are
you comfortable with?" My answer is either of these two funds is appropriate. So
far, Karl Joseph Marbach and Katharine Sophia Broyles are doing just fine. Maybe
their parents will only have to worry about the last two or three years of
college.
Sincerely,
Michael J.C. Roth, CFA
PRESIDENT AND
VICE CHAIRMAN OF THE BOARD
[Photograph of the President, Michael J. C. Roth, CFA, appears here.]
(1)The S&P 500 Index is an unmanaged index representing the average performance
of a group of 500 widely held, publicly traded stocks. It is not possible
to invest directly in the S&P 500 Index.
(2)Past performance is no guarantee of future results and the value of your
investment may vary according to the Fund's performance.
For more complete information about the mutual funds managed and distributed by
USAA IMCO, including charges and expenses please call for a prospectus. Read it
carefully before you invest.
INVESTMENT REVIEW
GROWTH AND TAX STRATEGY FUND
OBJECTIVE: A conservative balance 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.
5/31/97 11/30/97
Net Assets.............................. $185.5 MILLION $208.8 MILLION
Net Asset Value Per Share............... $15.14 $15.62
AVERAGE ANNUAL TOTAL RETURNS AS OF 11/30/97
May 31, 1997 to November 30, 1997............................. 7.59%+
1 Year........................................................ 13.78%
5 Years....................................................... 11.94%
Since inception on January 11, 1989........................... 10.60%
+ Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
30-Day SEC Yield on November 30, 1997......................... 3.19%*
*Calculated as prescribed by the Securities and Exchange Commission.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment has
been made for taxes payable by shareholders on their reinvested income dividends
and capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return and
principal value of an investment will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
CUMULATIVE PERFORMANCE COMPARISON
A chart in the form of a line graph appears here, comparing the cumulative
performance of the USAA Growth & Tax Strategy Fund and the Lehman Brothers
Municipal Bond Index. The data points from the graph are as follows:
USAA Growth & Tax Lehman Brothers Municipal
Strategy Fund Bond Index
------------- ----------
1/11/89 10,000 10,000
6/89 10,863 10,590
12/89 11,618 11,005
6/90 11,557 11,312
12/90 11,776 11,807
6/91 12,334 12,331
12/91 13,504 13,241
6/92 13,691 13,785
12/92 14,170 14,410
6/93 15,376 15,433
12/93 16,114 16,179
6/94 15,708 15,460
12/94 15,691 15,342
6/95 17,450 16,824
12/95 19,254 18,021
6/96 20,143 17,940
12/96 21,395 18,819
6/97 23,309 19,425
12/97 24,576 20,257
The graph illustrates how a $10,000 hypothetical investment in the USAA Growth
and Tax Strategy Fund outperforms its benchmark, the Lehman Brothers Municipal
Bond Index, an unmanaged benchmark of total return performance for the long-term
investment grade tax-exempt bond market.
MESSAGE FROM THE MANAGER
[PHOTOGRAPHS OF THE FOLLOWING PORTFOLIO MANAGERS IS HERE:
Harry W. Miller, CFA (Blue Chip Stocks)
Kenneth E. Willmann, CFA (Tax-Exempt Bonds
and Tax-Exempt Money Market Instruments)
John W. Saunders, Jr., CFA (Allocation Manager)]
Fund Overview
Tax-efficient mutual funds have been a topic of fascination for the financial
press. As we discussed in our May 1997 annual report, your Fund has been cited
in many of those articles. We have thought of ways to improve this Fund's tax
efficiency.
Effective October 1, 1997, the investment categories and target ranges were
modified to optimize tax efficiency. The Fund must maintain at least 50% of its
assets in tax-exempt securities in order to pass on the tax-exempt income to its
shareholders. So, we will keep 41-59% in tax-exempt bonds (plus 0-10% in
tax-exempt money market instruments). We increased the common stock category to
41-49%.
Maturity restrictions have been removed for the tax-exempt bonds category to
enable higher yield longer-maturity holdings when appropriate. Blue Chip stocks
have supplanted the Basic Value category in order to reduce portfolio turnover
with its attendant capital gains tax implications. Blue Chip stocks will be more
growth-oriented with less emphasis on dividends which are, of course, taxable.
Growth-oriented stocks are selected for longer term holding periods to reduce
turnover.
We believe that these changes in asset allocation strategy will increase both
the tax efficiency and the potential total investment returns for the USAA
Growth and Tax Strategy Fund. We also believe that this is what the Fund's
shareholders want.
The Fund was balanced within the new target ranges in November. At the end of
this reporting period November 30, 1997, the portfolio mix was 51% in tax-exempt
securities and 48.1% in Blue Chip stocks.
Tax-Exempt Bonds
The new guidelines assume the "Tax-Exempt Money Market Instruments" segment will
consist primarily of true cash equivalents. While this segment still comprised
5.1% of the Fund on November 30, 1997, we expect it to settle at 1% - 3% after
the transition is complete.
The interest rate on long-term tax-exempt bonds finished the six-month period at
5.36%, the lowest level of the period. The graph below shows the yield on the
Bond Buyer 40-Bond Index (BBI40), the industry standard for the long-term
tax-exempt bond market. The average maturity of the bonds in this segment stayed
near 20 years for the entire period. The long maturity, combined with declining
interest rates, resulted in a rise in bond values in this segment. We will
continue to concentrate on producing high levels of tax-exempt income while
investing exclusively in tax-exempt bonds.
BOND BUYER 40-BOND INDEX YIELD TO MATURITY
A chart in the form of a line graph appears here illustrating the yield to
maturity on the Bond Buyer 40-Bond Index (BBI40). The data points from the graph
are as follows:
5/30/97 5.74%
6/02/97 5.73%
6/16/97 5.59%
6/30/97 5.69%
7/15/97 5.54%
7/31/97 5.40%
8/15/97 5.56%
8/29/97 5.55%
9/15/97 5.48%
9/30/97 5.47%
10/15/97 5.50%
10/31/97 5.40%
11/14/97 5.40%
11/28/97 5.36%
Blue Chip Stocks
Changing the investment strategy to Blue Chip from Basic Value should reduce
current income and produce more long-term capital gains, giving you a lower tax
burden and a greater potential for capital appreciation.
The stock market has had a correction since our last report of May 31, 1997, but
has come back and is selling at a higher level than six months ago. The
international markets experienced a greater decline, and during that period the
Blue Chip segment had no foreign exposure. Interest rates and inflation remain
low, and although good for the stock market, we are seeing some earnings
disappointments. The Asian situation, expected to be with us for some time, will
affect our domestic markets. We remain optimistic on the U.S. stock market but
do not expect the same returns in 1998 as 1997.
New names added in the segment include: Rockwell International (Electrical
Equipment), Meritor Automotive (Auto Parts), Cooper Cameron (Oil & Gas -
Drilling), Fleet Financial (Banks), PMI Group (Finance - Diversified), Dura
Pharmaceuticals (Drugs), Bausch & Lomb (Medical Products & Supplies), Immunex
(Biotechnology), and Bell Atlantic (Telephones) through a merger with NYNEX.
Deleted names were: NICOR (Gas Pipelines), Unocal (Oil), Weyerhauser (Paper &
Forest Products), and Universal (Tobacco). NYNEX (Telephones) merged with Bell
Atlantic.
Your Fund's best performing stocks were from Banks (PNC Bank and Bankers Trust)
and Telephones (Bell Atlantic and SBC Communications). Other top performers
included Halliburton (Oil & Gas - Drilling), Occidental Petroleum (Oil),
Bristol-Myers Squibb (Healthcare). Poor performers were Monsanto (Chemicals),
Caterpillar (Machinery), Philip Morris (Tobacco), Pharmacia & UpJohn (Drugs),
American Home Products (Healthcare), and Norfolk Southern (Railroads).
The Blue Chip segment is broadly diversified in 24 industries and 34 issues. We
remain overweighted in Oil & Gas, Banks, Healthcare/Drugs/Biotechnology,
Telephones, and Machinery - Diversified.
ASSET ALLOCATION
A pie chart is shown here depicting the asset allocation as of 11/30/97 of the
Growth & Tax Strategy Fund to be: Tax-Exempt Money Market Instruments - 5.1%*,
Blue Chip Stocks - 48.1%*, Tax-Exempt Bonds 45.9%*
*Percentages are of the Net Assets in the Portfolio and may or may not equal
100%
Tax-Exempt Securities
Top 5 Holdings
(% of Net Assets)
New York State Medical Care Facilities Finance Agency RB,
Series 1995A 3.1
Illinois Health Facilities Auth. RB, Series 1996 2.8
Delaware County IDA RB, Series 1997A 2.7
Michigan Strategic Fund Limited Obligations RB, Series 1997A 2.7
Rhode Island Housing & Mortgage Finance Corp., SFH RB,
Series 15-A 2.7
Blue Chip Stocks
Top 5 Holdings
(% of Net Assets)
Halliburton 3.1
Bristol-Myers Squibb 2.2
Allstate 2.0
Minnesota Mining
& Manufacturing 1.9
SBC Communications 1.9
Top 10 Industries
(% of Net Assets)
Hospital 16.2
Nursing / CCRC 10.0
Single Family Housing 9.2
Telephones 5.1
Oil & Gas - Drilling/Equipment 4.1
Healthcare - Diversified 3.6
Oil - International Integrated 3.5
Banks - Major Regional 3.4
Machinery - Diversified 3.3
Education 3.2
Note: Income may be subject to federal, state or local taxes, or to the
alternative minimum tax.
See page 11 for a complete listing of the Portfolio of Investments in
Securities.
<TABLE>
Growth and Tax Strategy Fund
Statement of Assets and Liabilities
(In Thousands)
November 30, 1997
(Unaudited)
<S> <C>
Assets
Investments in securities, at market value (identified cost of $164,189) $ 206,944
Cash 24
Receivables:
Capital shares sold 65
Dividends and interest 1,968
----------
Total assets 209,001
----------
Liabilities
Capital shares redeemed 71
USAA Investment Management Company 84
USAA Transfer Agency Company 22
Accounts payable and accrued expenses 43
----------
Total liabilities 220
----------
Net assets applicable to capital shares outstanding $ 208,781
==========
Represented By:
Paid-in capital $ 162,979
Accumulated undistributed net investment income 1,329
Accumulated net realized gain on investments 1,718
Net unrealized appreciation of investments 42,755
----------
Net assets applicable to capital shares outstanding $ 208,781
==========
Capital shares outstanding, unlimited number of shares authorized,
no par value 13,363
==========
Net asset value, redemption price, and offering price per share $ 15.62
==========
</TABLE>
See accompanying notes to financial statements.
Growth and Tax Strategy Fund
Portfolio of Investments in Securities
November 30, 1997
(Unaudited)
Market
Number Value
of Shares Security (000)
--------- -------- ----
Blue Chip Stocks (48.1%)
Aerospace/Defense (1.8%)
70,000 Boeing Co. $ 3,719
- --------------------------------------------------
Automobiles (1.6%)
80,000 Ford Motor Co. 3,440
- --------------------------------------------------
Auto Parts (1.3%)
120,000 Meritor Automotive, Inc. 2,685
- --------------------------------------------------
Banks - Major Regional (3.4%)
55,000 Fleet Financial Group, Inc. 3,633
65,000 PNC Bank Corp. 3,498
- --------------------------------------------------
7,131
- --------------------------------------------------
Banks - Money Center (1.5%)
18,000 Bankers Trust New York Corp. 2,134
10,000 Chase Manhattan Corp. 1,087
- --------------------------------------------------
3,221
- --------------------------------------------------
Biotechnology (1.0%)
35,000 Immunex Corp. * 1,999
- --------------------------------------------------
Chemicals (1.7%)
80,000 Monsanto Co. 3,495
- --------------------------------------------------
Chemicals - Diversified (1.7%)
80,000 B.F. Goodrich Co. 3,560
- --------------------------------------------------
Drugs (2.2%)
50,000 Dura Pharmaceuticals, Inc. * 2,194
70,000 Pharmacia & Upjohn, Inc. 2,362
- --------------------------------------------------
4,556
- --------------------------------------------------
Electrical Equipment (0.9%)
40,000 Rockwell International Corp. 1,950
- --------------------------------------------------
Finance - Diversified (1.4%)
45,000 PMI Group, Inc. 2,925
- --------------------------------------------------
Healthcare - Diversified (3.6%)
40,000 American Home Products Corp. 2,795
50,000 Bristol-Myers Squibb Co. 4,681
- --------------------------------------------------
7,476
- --------------------------------------------------
Insurance - Property/Casualty (2.0%)
50,000 Allstate Corp. 4,294
- --------------------------------------------------
Machinery - Diversified (3.3%)
70,000 Caterpillar, Inc. 3,356
65,000 Deere & Co. 3,563
- --------------------------------------------------
6,919
- --------------------------------------------------
Manufacturing - Diversified
Industries (1.9%)
40,000 Minnesota Mining &
Manufacturing Co. 3,898
- --------------------------------------------------
Medical Products & Supplies (0.8%)
40,000 Bausch & Lomb, Inc. 1,585
- --------------------------------------------------
Oil - Domestic Integrated (0.7%)
50,000 Occidental Petroleum Corp. 1,484
- --------------------------------------------------
Oil - International Integrated (3.5%)
35,000 Chevron Corp. 2,807
30,000 Mobil Corp. 2,158
40,000 Texaco, Inc. 2,260
- --------------------------------------------------
7,225
- --------------------------------------------------
Oil & Gas - Drilling/Equipment (4.1%)
35,000 Cooper Cameron Corp. * 2,133
120,000 Halliburton Co. 6,472
- --------------------------------------------------
8,605
- --------------------------------------------------
Photography - Imaging (1.8%)
48,000 Xerox Corp. 3,729
- --------------------------------------------------
Railroads / Shipping (1.0%)
69,000 Norfolk Southern Corp. 2,195
- --------------------------------------------------
Telecommunications -
Long Distance (1.2%)
43,000 Sprint Corp. 2,518
- --------------------------------------------------
Telephones (5.1%)
33,792 Bell Atlantic Corp. 3,016
70,000 GTE Corp. 3,539
55,000 SBC Communications Corp. 4,005
- --------------------------------------------------
10,560
- --------------------------------------------------
Tobacco (0.6%)
30,000 Philip Morris Companies, Inc. 1,305
- --------------------------------------------------
Total blue chip stocks
(cost: $63,379) 100,474
- --------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----- -------- ---- -------- -----
Tax-Exempt Securities (51.0%)
Tax-Exempt Bonds (45.9%)
<C> <S> <C> <C> <C>
Connecticut (1.2%)
$ 2,500 Development Auth. First Mortgage RB, Series 1997 5.80% 4/01/21 $ 2,522
Illinois (2.8%)
5,500 Health Facilities Auth. RB, Series 1996 6.38 1/01/15 5,803
Indiana (3.7%)
4,890 Fifth Avenue Housing Development Corp. MFH RB,
Series 1993A 7.25 7/01/25 5,192
2,500 LaPorte County Hospital Auth. RB 6.00 3/01/23 2,556
Louisiana (1.5%)
3,080 Public Facilities Auth. SFM RB, Series 1997B 5.75 8/01/31 3,143
Maine (2.6%)
5,000 Housing Auth. SFH RB, Series 1994C-1 6.50 11/15/11 5,384
Massachusetts (2.4%)
5,000 Industrial Finance Agency RB, Series 1997B (CRE) 5.50 5/15/27 5,012
Michigan (4.7%)
4,000 Hospital Finance Auth. RB, Series 1996 6.25 10/01/27 4,215
5,460 Strategic Fund Limited Obligation RB, Series 1997A 5.75 8/01/19 5,563
Minnesota (1.5%)
3,000 Univ. of Minnesota Regents GO, Series 1996A 5.50 7/01/21 3,138
Missouri (1.5%)
3,000 Health and Educational Facilities Auth. RB, Series 1997 5.88 2/01/23 3,058
Montana (1.8%)
3,600 Health Facilities Auth. RB, Series 1996 6.38 6/01/18 3,828
New Jersey (1.8%)
3,750 Economic Development Auth. RB, Series 1997A 5.88 12/01/26 3,813
New York (3.1%)
5,850 Medical Care Facilities Finance Agency RB, Series 1995A 6.85 2/15/17 6,404
Oklahoma (1.3%)
2,695 Valley View Hospital Auth. RB, Series 1996 6.00 8/15/14 2,761
Oregon (1.7%)
3,420 Clackamas County Hospital Facility Auth. RB, Series 1997 6.30 11/01/21 3,530
Pennsylvania (4.7%)
4,500 Monroeville Hospital Auth. RB, Series 1995 6.25 10/01/15 4,771
4,785 Philadelphia Gas Works RB, 14th Series 6.38 7/01/26 5,029
Rhode Island (2.7%)
5,200 Housing and Mortgage Finance Corp. SFH RB, Series 15-A 6.85 10/01/24 5,650
Texas (4.5%)
3,410 Fort Worth Higher Education Finance Corp. RB,
Series 1997A 6.00 10/01/16 3,475
2,100 North Central Texas Health Facilities Development
Corp. RB, Series 1996 6.30 2/15/15 2,218
30,270 Northwest Texas Independent School District GO,
Series 1997 (CRE) 6.38(b) 8/15/32 3,683
Wisconsin (2.4%)
4,685 Housing and Economic Development Auth. SFH RB,
Series 1992A 7.10 3/01/23 5,015
- -----------------------------------------------------------------------------------------------------
Total tax-exempt bonds (cost: $90,126) 95,763
- -----------------------------------------------------------------------------------------------------
Tax-Exempt Money Market Instruments (5.1%)
California (0.1%)
300 Pollution Control Financing Auth. PCRB, Series 1996F (CRE) 3.65 11/01/26(a) 300
Indiana (1.5%)
3,000 Health Facility Financing Auth. RB, Series 1993 4.65 11/01/98 3,022
Louisiana (0.2%)
500 Public Facilities Auth. MFH RB, Series 1991 (CRE) 3.90 7/01/09(a) 500
Pennsylvania (2.7%)
5,605 Delaware County IDA RB, Series 1997A 5.50 1/01/98 5,610
Tennessee (0.2%)
500 Shelby County Hospital RB, Series 1993 4.50 11/01/98 500
Virginia (0.4%)
775 Henrico County IDA RB, Series 1994 (CRE) 3.95 5/01/24(a) 775
- -----------------------------------------------------------------------------------------------------
Total tax-exempt money market instruments (cost: $10,684) 10,707
- -----------------------------------------------------------------------------------------------------
Total tax-exempt securities (cost: $100,810) 106,470
- -----------------------------------------------------------------------------------------------------
Total investments (cost: $164,189) $ 206,944
=====================================================================================================
</TABLE>
- ----------------------
*Non-income producing.
Growth and Tax Strategy Fund
Notes to Portfolio of Investments in Securities
November 30, 1997
(Unaudited)
General Notes
Market values of securities are determined by procedures and practices discussed
in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
Portfolio Description Abbreviations
IDA Industrial Development Authority/Agency
GO General Obligation
MFH Multi-Family Housing
PCRB Pollution Control Revenue Bond
RB Revenue Bond
SFH Single-Family Housing
SFM Single-Family Mortgage
CRE -- Credit Enhancement -- adds the financial strength of the provider of the
enhancement to support the issuer's ability to repay the principal when due. The
enhancement may be provided by either a high quality bank, insurance company, or
other corporation, or a collateral trust. Typically, the rating agencies
evaluate the security based upon the credit standing of the provider of the
credit enhancement, rather than the credit standing of the issuer.
Specific Notes
(a) Variable rate demand notes (VRDN) -- provide the right, on any business day,
to sell the security at face value on either that day or in seven days. The
interest rate is adjusted at a stipulated daily, weekly, or monthly interval
to a rate that reflects current market conditions. In bond funds, the
effective maturity is the next put date. Most VRDNs possess a credit
enhancement.
(b) Zero coupon security -- the rate represents the effective yield at date of
purchase. This security represented 1.8% of the Fund's net assets.
See accompanying notes to financial statements.
<TABLE>
Growth and Tax Strategy Fund
Statement of Operations
(In Thousands)
Six-month period ended November 30, 1997
(Unaudited)
<S> <C>
Net investment income:
Income:
Dividends $ 1,057
Interest 2,964
--------
Total income 4,021
--------
Expenses:
Management fees 497
Transfer agent's fees 127
Custodian's fees 35
Postage 8
Shareholder reporting fees 9
Trustees' fees 2
Registration fees 24
Professional fees 14
Other 1
--------
Total expenses 717
--------
Net investment income 3,304
--------
Net realized and unrealized gain on investments:
Net realized gain on investments 1,800
Change in net unrealized appreciation/depreciation of investments 9,140
--------
Net realized and unrealized gain 10,940
--------
Increase in net assets resulting from operations $ 14,244
========
</TABLE>
See accompanying notes to financial statements.
<TABLE>
Growth and Tax Strategy Fund
Statements of Changes in Net Assets
(In Thousands)
Six-month period ended November 30, 1997
and Year ended May 31, 1997
(Unaudited)
<CAPTION>
11/30/97 5/31/97
-------- -------
<S> <C> <C>
From operations:
Net investment income $ 3,304 $ 6,228
Net realized gain on investments 1,800 5,127
Change in net unrealized appreciation/depreciation of investments 9,140 11,566
--------- ----------
Increase in net assets resulting from operations 14,244 22,921
--------- ----------
Distributions to shareholders from:
Net investment income (3,152) (6,142)
--------- ----------
Net realized gains (4,940) (4,105)
--------- ----------
From capital share transactions:
Proceeds from shares sold 19,447 25,306
Shares issued for dividends reinvested 7,479 9,415
Cost of shares redeemed (9,801) (22,281)
--------- ----------
Increase in net assets from capital share transactions 17,125 12,440
--------- ----------
Net increase in net assets 23,277 25,114
Net assets:
Beginning of period 185,504 160,390
--------- ----------
End of period $ 208,781 $ 185,504
========= ==========
Undistributed net investment income included in net assets:
Beginning of period $ 1,177 $ 1,091
========= ==========
End of period $ 1,329 $ 1,177
========= ==========
Change in shares outstanding:
Shares sold 1,260 1,771
Shares issued for dividends reinvested 488 676
Shares redeemed (636) (1,559)
--------- ----------
Increase in shares outstanding 1,112 888
========= ==========
</TABLE>
See accompanying notes to financial statements.
Growth and Tax Strategy Fund
Notes to Financial Statements
November 30, 1997
(Unaudited)
(1) Summary of Significant Accounting Policies
USAA INVESTMENT TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended, is a diversified, open-end management investment company
organized as a Massachusetts business trust consisting of eleven separate funds.
The information presented in this semiannual report pertains only to the Growth
and Tax Strategy Fund (the Fund). The Fund's investment objective is to seek a
conservative balance 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.
A. Security valuation -- The value of each security is determined (as of the
close of trading on the New York Stock Exchange on each business day the
Exchange is open) as set forth below:
1. Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange.
2. Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices.
3. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value.
4. Other debt and government securities are valued each business day by a
pricing service (the Service) approved by the Fund's Board of Trustees. The
Service uses the mean between quoted bid and asked prices or the last sale price
to price securities when, in the Service's judgement, these prices are readily
available and are representative of the securities' market values. For many
securities, such prices are not readily available. The Service generally prices
these securities based on methods which include consideration of yields or
prices of securities of comparable quality, coupon, maturity and type,
indications as to values from dealers in securities, and general market
conditions.
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.
B. Federal taxes -- The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities -- Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Dividend
income is recorded on the ex-dividend date; interest income is recorded on the
accrual basis. Discounts and premiums on short-term taxable securities, original
issue discounts on all securities, and premiums on long-term tax exempt
securities are amortized over the life of the respective securities.
Amortization of market discounts on long-term securities is recognized as
interest income upon disposition of the security to the extent there is a gain
on disposition.
D. Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that may affect the reported amounts in the financial
statements.
(2) Lines of Credit
The Fund participates with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million, one with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($750 million uncommitted), and one with
NationsBank of Texas, N.A. ($100 million committed). The purpose of the
agreements is to meet temporary or emergency cash needs, including redemption
requests that might otherwise require the untimely disposition of securities.
Subject to availability under its agreement with CAPCO, the Fund may borrow from
CAPCO an amount up to 5% of its total assets at CAPCO's borrowing rate with no
markup. Subject to availability under its agreement with NationsBank, the Fund
may borrow from NationsBank an amount which, when added to outstanding
borrowings under the CAPCO agreement, does not exceed 25% of its total assets at
NationsBank's borrowing rate plus a markup. During the six-month period ended
November 30, 1997, the Fund had one borrowing (for three days) and incurred $85
in interest expense.
(3) Distributions
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are made
in the succeeding fiscal year or as otherwise required to avoid the payment of
federal taxes.
(4) Investment Transactions
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended November 30, 1997 were
$136,075,759 and $102,728,216, respectively.
Gross unrealized appreciation and depreciation of investments at November 30,
1997 was $44,295,708 and $1,540,787, respectively.
(5) Transactions with Manager
A. Management fees -- The investment policies of the Fund and management of the
Fund's portfolio are carried out by USAA Investment Management Company (the
Manager). The Fund's management fees are computed at .50% of its annual average
net assets.
B. Transfer agent's fees -- USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Fund based on an annual charge of $26 per shareholder account plus
out-of-pocket expenses.
C. Underwriting services -- The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing best efforts basis. The
Manager receives no commissions or fees for this service.
D. Brokerage services -- USAA Brokerage Services, a discount brokerage service
of the Manager, may execute portfolio transactions for the Fund. The amount of
brokerage commissions paid to USAA Brokerage Services during the six-month
period ended November 30, 1997 was $2,576.
(6) Transactions with Affiliates
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
<TABLE>
(7) Financial highlights
Per share operating performance for a share outstanding throughout each period
is as follows:
<CAPTION>
Six-month
Period Ended Year Ended May 31,
November 30, -----------------------------------------------
1997 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value at
beginning of period $ 15.14 $ 14.11 $ 12.82 $ 12.32
Net investment income .25 .52 .51 .49
Net realized and
unrealized gain (loss) .88 1.39 1.32 .76
Distributions from net
investment income (.25) (.52) (.51) (.48)
Distributions of realized
capital gains (.40) (.36) (.03) (.27)
---------- ---------- ---------- ----------
Net asset value at
end of period $ 15.62 $ 15.14 $ 14.11 $ 12.82
========== ========== ========== ==========
Total return (%) ** 7.59 14.21 14.61 10.73
Net assets at end of
period (000) $ 208,781 $ 185,504 $ 160,390 $ 134,538
Ratio of expenses to
average net assets (%) .72(a) .74 .82 .80
Ratio of net investment
income to average
net assets (%) 3.32(a) 3.66 3.79 4.02
Portfolio turnover (%) 54.44(c) 194.21(c) 202.55(c) 265.52(c)
Average commission rate
paid per share + $ .0492 $ .0477 $ .0505
</TABLE>
<TABLE>
<CAPTION>
Eight-month
Period Ended Year Ended September 30,
May 31, --------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989*
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 13.00 $ 12.00 $ 11.51 $ 10.59 $ 11.08 $ 10.00
Net investment income .29 .46 .48 .53 .52 .27
Net realized and
unrealized gain (loss) (.27) 1.01 .50 .93 (.49) .96
Distributions from net
investment income (.33) (.46) (.49) (.54) (.50) (.15)
Distributions of realized
capital gains (.37) (.01) - - (.02) -
---------- ---------- ---------- ---------- -------- --------
Net asset value at
end of period $ 12.32 $ 13.00 $ 12.00 $ 11.51 $ 10.59 $ 11.08
========== ========== ========== ========== ======== ========
Total return (%) ** .13 12.57 8.74 14.19 .19 12.38
Net assets at end of
period (000) $ 128,077 $ 118,532 $ 82,840 $ 53,535 $ 37,599 $ 23,823
Ratio of expenses to
average net assets (%) .84(a) .86 .92 1.00(b) 1.00(b) 1.29(a,b)
Ratio of net investment
income to average
net assets (%) 3.56(a) 3.81 4.31 4.91(b) 5.05(b) 4.90(a,b)
Portfolio turnover (%) 171.35(c) 98.83 106.83 81.22 105.78 119.76
Average commission rate
paid per share +
</TABLE>
* Fund commenced operations January 11, 1989
** Assumes reinvestment of all dividend income and capital gain distributions
during the period.
+ Calculated by aggregating all commissions paid on the purchase and sale of
securities and dividing by the actual number of shares purchased or sold for
which commissions were charged.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) The information contained in this table is based on actual expenses for the
period, after giving effect to reimbursements of expenses by the Manager.
Absent such reimbursements the Fund's ratios would have been:
Year Ended September 30,
--------------------------------------
1991 1990 1989*
---- ---- ----
Ratio of expenses to
average net assets (%) 1.06 1.24 1.48(a)
Ratio of net investment income
to average net assets (%) 4.85 4.81 4.71(a)
(c) 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:
<TABLE>
<CAPTION>
Six-month Eight-month
Period Ended Period Ended
November 30, Year Ended May 31, May 31,
1997 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Portfolio turnover (%) 17.85 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
</TABLE>
