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 7
Portfolio of Investments in Securities 8
Notes to Portfolio of Investments in Securities 11
Statement of Operations 12
Statements of Changes in Net Assets 13
Notes to Financial Statements 14
================================================================================
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 Income
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
INCOME STRATEGY FUND
OBJECTIVE: 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.
5/31/97 11/30/97
Net Assets............................... $13.9 MILLION $22.4 MILLION
Net Asset Value Per Share................ $10.84 $11.63
AVERAGE ANNUAL TOTAL RETURNS AS OF 11/30/97
May 31, 1997 to November 30, 1997............................... 9.60%+
1 Year.......................................................... 11/30%
Since inception on September 1, 1995............................ 11.73%
+ 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........................... 4.51%*
*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 FOR A $10,000 INVESTMENT
A chart in the form of a line graph appears here, illustrating the comparison
of a $10,000 hypothetical investment in the USAA Income Strategy Fund, to the
Lehman Brothers Aggregate Bond Index and the Lipper General Bond Funds Average
from 9/1/95 to 11/30/97, The data points from the graph are as follows:
USAA LEHMAN BROTHERS LIPPER GENERAL
INCOME STRATEGY AGGREGATE BOND BOND FUNDS
FUND INDEX AVERAGE
09/01/95 10,000 10,000 10,000
12/95 10,995 10,527 10,563
06/96 10,468 10,400 10,539
12/96 11,324 10,910 11,225
06/97 11,985 11,247 11,710
11/97 12,851 11,844 12,206
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. The Lipper General Bond Funds Average is the
average performance level of all general bond funds, as reported by Lipper
Analytical Services, an independent organization that monitors the performance
of mutual funds. The graph illustrates the comparison of a $10,000 hypothetical
investment in the USAA Income Strategy Fund to the Index and the Lipper Average.
MESSAGE FROM THE MANAGERS
[Photograph of Portfolio Managers appears here: Pamela K. Bledsoe, CFA (Money
Market Instruments), R. David Ullom, CFA (Stocks), and John W. Saunders, Jr.,
CFA (Allocation Manager, Bonds).]
Fund Overview
Once again we are reporting that more record highs were seen in the stock market
during this six-month reporting period, a trend that we have reported since
the Fund began on September 1, 1995. Interest rates have generally declined
in this reporting period, producing the best bond market we have seen in the
past two years. Accordingly, your Fund has performed very well. In fact, it is
ranked number one among 27 funds for total return in the Lipper(1) General Bond
category for the latest twelve months ending November 30, 1997. Total returns
for the one-year period and since inception were 11.30% and 11.73%,
respectively.
The Fund's investment categories were rebalanced within their respective ranges
in November. At the end of this reporting period, November 30, 1997, the
portfolio mix was 74.7% in bonds and 23.7% in common stocks.
Bonds
The Federal Reserve appears comfortable with the outlook that inflation will
remain low, and this has calmed the bond market. Asian deflation, which is
expected to deepen the U.S. trade deficit, together with a shrinking U.S. budget
deficit produce an interesting supply/demand relationship for U.S. Treasury
securities. If there are more U.S. dollars in Asian hands, and less of a need by
the U.S. Treasury to issue securities, then this could cause prices for U.S.
Treasury securities to rise (declining interest rates) because of strong demand
versus smaller supply. In any event, the potential for rising interest rates
appears to be low for the time being. In this more hospitable environment, we
extended the average maturity of the portfolio.
Stocks
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. Interest
rates and inflation remain low, and although this is 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. However, we remain
optimistic on the U.S. stock market.
Our biggest winners over the period have been companies where our patience in
holding these shares is beginning to pay off (Retailing and Telephones) and
where the fundamentals remain strong (Banks, Finance, and Insurance). We
continue to have a positive outlook for these industries and continue to add to
these holdings.
Money Market Instruments
With the Fund's emphasis on income, this investment category is used for the
temporary investment of cash prior to transitioning into more permanent
investments in bonds and stocks. It can also serve as a liquidity reserve when
needed. Investments are made in the highest quality money market instruments,
usually U.S. Government Agencies' obligations.
ASSET ALLOCATION
A pie chart is shown here depicting the Asset Allocation as of November 30, 1997
of the USAA Income Strategy Fund to be: Stocks 23.7%* and Bonds 74.7%*
* Percentages are of the Net Assets in the Portfolio and may or may not equal
100%.
TOP 5 EQUITY HOLDINGS
(% OF NET ASSETS)
Boeing .6
Aetna .5
Lear .5
Morgan Stanley, Dean Witter,
Discover & Company .5
Dow Chemical .4
See page 8 for a complete listing of the Portfolio of Investments in Securities.
Income Strategy Fund
Statement of Assets and Liabilities
(In Thousands)
November 30, 1997
(Unaudited)
<TABLE>
<S> <C>
Assets
Investments in securities, at market value (identified cost of $20,473) $ 22,063
Cash 99
Receivables:
Capital shares sold 94
Dividends and interest 258
Securities sold 55
--------
Total assets 22,569
--------
Liabilities
Securities purchased 126
Capital shares redeemed 2
USAA Investment Management Company 5
USAA Transfer Agency Company 3
Accounts payable and accrued expenses 22
--------
Total liabilities 158
--------
Net assets applicable to capital shares outstanding $ 22,411
========
Represented by:
Paid-in capital $ 20,533
Accumulated undistributed net investment income 162
Accumulated net realized gain on investments 126
Net unrealized appreciation of investments 1,590
--------
Net assets applicable to capital shares outstanding $ 22,411
========
Capital shares outstanding, unlimited number of shares authorized,
no par value 1,927
========
Net asset value, redemption price, and offering price per share $ 11.63
========
</TABLE>
See accompanying notes to financial statements.
Income Strategy Fund
Portfolio of Investments in Securities
November 30, 1997
(Unaudited)
Market
Number Value
of Shares Security (000)
--------- -------- ---
Stocks (23.7%)
Aerospace/Defense (0.5%)
2,400 Boeing Co. $ 127
- ---------------------------------------------------
Aluminum (0.4%)
1,300 Aluminum Co. of America 87
- ---------------------------------------------------
Automobiles (0.3%)
1,600 Ford Motor Co. 69
- ---------------------------------------------------
Auto Parts (0.8%)
4,000 Intermet Corp. 74
2,200 Lear Corp. * 103
- ---------------------------------------------------
177
- ---------------------------------------------------
Banks - Major Regional (0.3%)
1,400 PNC Bank Corp. 75
- ---------------------------------------------------
Banks - Money Center (0.7%)
1,000 BankAmerica Corp. 73
700 Bankers Trust New York Corp. 83
- ---------------------------------------------------
156
- ---------------------------------------------------
Chemicals (0.7%)
1,000 Dow Chemical Co. 99
3,300 Millennium Chemicals, Inc. 76
- ---------------------------------------------------
175
- ---------------------------------------------------
Chemicals - Diversified (0.4%)
2,200 B.F. Goodrich Co. 98
- ---------------------------------------------------
Communication - Equipment
Manufacturers (0.4%)
1,000 Lucent Technologies, Inc. 80
- ---------------------------------------------------
Computer - Networking (0.4%)
900 Cisco Systems, Inc. * 78
- ---------------------------------------------------
Consumer Jewelry and Novelties
- Miscellaneous (0.4%)
2,300 American Greetings Corp. 85
- ---------------------------------------------------
Containers - Metals & Glass (0.4%)
2,000 Ball Corp. 77
- ---------------------------------------------------
Drugs (0.7%)
2,300 Pharmacia & Upjohn, Inc. 78
1,600 SmithKline Beecham plc ADR 79
- ---------------------------------------------------
157
- ---------------------------------------------------
Electric (0.6%)
2,400 Houston Industries, Inc. 57
2,800 PG & E Corp. 79
- ---------------------------------------------------
136
- ---------------------------------------------------
Electrical Equipment (0.3%)
1,500 Rockwell International Corp. 73
- ---------------------------------------------------
Electronics - Semiconductors (0.3%)
2,200 National Semiconductor Corp. * 73
- ---------------------------------------------------
Equipment - Semiconductors (0.3%)
2,000 Applied Materials, Inc. * 66
- ---------------------------------------------------
Finance - Consumer (0.4%)
1,400 Associates First Capital Corp. 90
- ---------------------------------------------------
Finance - Diversified (0.9%)
2,000 Morgan Stanley, Dean Witter,
Discover & Co. 109
1,500 PMI Group, Inc. 97
- ---------------------------------------------------
206
- ---------------------------------------------------
Foods (0.3%)
700 Ralston Purina Group 65
- ---------------------------------------------------
Healthcare - HMOs (0.5%)
2,500 Humana, Inc. * 55
1,100 Pacificare Health Systems, Inc. * 57
- ---------------------------------------------------
112
- ---------------------------------------------------
Heavy Duty Trucks & Parts (0.4%)
1,500 Aeroquip Vickers, Inc. 77
- ---------------------------------------------------
Household Products (0.5%)
1,600 Kimberly-Clark Corp. 83
500 Procter & Gamble Co. 38
- ---------------------------------------------------
121
- ---------------------------------------------------
Insurance - Life/Health (0.5%)
1,400 Aetna, Inc. 106
- ---------------------------------------------------
Insurance - Multi-Line Companies (0.3%)
675 American International Group, Inc. 68
- ---------------------------------------------------
Insurance - Property/Casualty (1.4%)
1,000 Allstate Corp. 86
2,400 Everest Reinsurance Holdings, Inc. 91
2,000 Highlands Insurance Group, Inc. * 56
2,000 Travelers Property Casualty Corp. 80
- ---------------------------------------------------
313
- ---------------------------------------------------
Leisure Time (0.4%)
2,300 Brunswick Corp. 77
- ---------------------------------------------------
Machinery - Diversified (0.7%)
1,600 Deere & Co. 88
2,581 Flowserve Corp. * 69
- ---------------------------------------------------
157
- ---------------------------------------------------
Manufacturing - Diversified
Industries (0.3%)
1,600 Hillenbrand Industries, Inc. 71
- ---------------------------------------------------
Manufacturing - Specialized (0.4%)
2,300 Avery Dennison Corp. 96
- ---------------------------------------------------
Medical Products & Supplies (0.4%)
2,000 Bausch & Lomb, Inc. 79
- ---------------------------------------------------
Metals/Mining (0.4%)
2,600 Inco Ltd. 50
1,200 Titanium Metals Corp. * 37
- ---------------------------------------------------
87
- ---------------------------------------------------
Natural Gas (0.5%)
800 NICOR, Inc. 32
1,700 Sonat, Inc. 74
- ---------------------------------------------------
106
- ---------------------------------------------------
Oil - Domestic Integrated (0.4%)
2,800 Occidental Petroleum Corp. 83
- ---------------------------------------------------
Oil - International Integrated (0.3%)
1,200 Texaco, Inc. 68
- ---------------------------------------------------
Oil & Gas - Drilling/Equipment (0.7%)
1,000 Helmerich & Payne, Inc. 76
1,000 Schlumberger Ltd. 82
- ---------------------------------------------------
158
- ---------------------------------------------------
Oil & Gas - Exploration
& Production (0.5%)
2,200 Apache Corp. 81
3,800 Gulf Canada Resources Ltd. * 26
- ---------------------------------------------------
107
- ---------------------------------------------------
Paper & Forest Products (0.7%)
800 Jefferson Smurfit Corp. * 13
4,700 Unisource Worldwide, Inc. 74
1,500 Weyerhaeuser Co. 79
- ---------------------------------------------------
166
- ---------------------------------------------------
Photography - Imaging (0.2%)
600 Xerox Corp. 47
- ---------------------------------------------------
Publishing (0.3%)
1,800 Houghton Mifflin Co. 67
- ---------------------------------------------------
Railroads / Shipping (0.3%)
2,100 Norfolk Southern Corp. 67
- ---------------------------------------------------
Real Estate Investment Trusts (0.5%)
2,000 Felcor Suite Hotels, Inc. 73
800 Storage USA, Inc. 31
- ---------------------------------------------------
104
- ---------------------------------------------------
Retail - Department Stores (0.3%)
1,200 J.C. Penney Company, Inc. 77
- ---------------------------------------------------
Retail - General Merchandising (0.4%)
2,000 Sears, Roebuck & Co. 92
- ---------------------------------------------------
Services - Commercial
& Consumer (0.4%)
2,800 Dun & Bradstreet Corp. 78
- ---------------------------------------------------
Specialty Printing (0.3%)
2,000 Deluxe Corp. 71
- ---------------------------------------------------
Telecommunications -
Long Distance (0.8%)
1,700 AT&T Corp. 95
1,500 Sprint Corp. 88
- ---------------------------------------------------
183
- ---------------------------------------------------
Telephones (0.7%)
914 Bell Atlantic Corp. 81
1,500 GTE Corp. 76
- ---------------------------------------------------
157
- ---------------------------------------------------
Tobacco (0.4%)
2,100 Philip Morris Companies, Inc. 91
- ---------------------------------------------------
Waste Management (0.3%)
3,000 Waste Management, Inc. 74
- ---------------------------------------------------
Total stocks (cost: $4,326) 5,310
- ---------------------------------------------------
Principal Market
Amount Value
(000) Security (000)
--- -------- -----
Bonds (74.7%)
$ 500 Central Power & Light Co.,
6.63%, 7/01/05 $ 503
500 Citicorp, 6.38%, 1/15/06 491
500 Ford Motor Credit Co.,
6.13%, 1/09/06 485
175 Household Finance Corp.,
6.88%, 3/01/07 177
500 Hydro Quebec (Canada),
6.98%, 2/28/05 515
500 Pacific Bell, 5.88%, 2/15/06 483
500 Sara Lee Corp., 6.30%, 11/07/05 500
500 Waste Management, Inc.,
7.00%, 10/15/06 498
96 Government National Mortgage
Association, 7.00%, 3/15/26 97
1,679 Government National Mortgage
Association, 7.00%, 3/15/26 1,686
262 Government National Mortgage
Association, 7.00%, 2/15/27 263
98 Government National Mortgage
Association, 7.50%, 8/15/26 100
1,464 Government National Mortgage
Association, 7.50%, 11/15/26 1,495
490 Government National Mortgage
Association, 7.50%, 5/15/27 500
304 U.S. Treasury Bonds,
6.50%, 11/15/26 320
7,139 U.S. Treasury Bonds,
7.88%, 2/15/21 8,640
--------
Total bonds (cost: $16,147) 16,753
--------
Total investments (cost: $20,473) $ 22,063
========
- ---------------------
*Non-income producing.
Income 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.
Investments in foreign securities were 3.4% of net assets at November 30, 1997.
See accompanying notes to financial statements.
Income Strategy Fund
Statement of Operations
(in Thousands)
Six-month period ended November 30, 1997
(Unaudited)
<TABLE>
<S> <C>
Net investment income:
Income:
Dividends $ 42
Interest 451
-------
Total income 493
-------
Expenses:
Management fees 44
Transfer agent's fees 14
Custodian's fees 20
Postage 1
Shareholder reporting fees 1
Trustees' fees 2
Registration fees 30
Professional fees 13
Other 2
-------
Total expenses before reimbursement 127
Expenses reimbursed (39)
-------
Total expenses after reimbursement 88
-------
Net investment income 405
-------
Net realized and unrealized gain on investments:
Net realized gain on investments 125
Change in net unrealized appreciation/depreciation of investments 996
-------
Net realized and unrealized gain 1,121
-------
Increase in net assets resulting from operations $ 1,526
=======
</TABLE>
See accompanying notes to financial statements.
Income Strategy Fund
Statements of Changes in Net Assets
(In Thousands)
Six-month period ended November 30, 1997
and Year ended May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
11/30/97 05/31/97
-------- --------
<S> <C> <C>
From operations:
Net investment income $ 405 $ 624
Net realized gain on investments 125 52
Change in net unrealized appreciation/depreciation of investments 996 998
--------- ---------
Increase in net assets resulting from operations 1,526 1,674
--------- ---------
Distributions to shareholders from:
Net investment income (356) (620)
--------- ---------
Net realized gains - (58)
--------- ---------
From capital share transactions:
Proceeds from shares sold 8,094 3,824
Shares issued for dividends reinvested 220 378
Cost of shares redeemed (951) (3,493)
--------- ---------
Increase in net assets from capital share transactions 7,363 709
--------- ---------
Net increase in net assets 8,533 1,705
Net assets:
Beginning of period 13,878 12,173
--------- ---------
End of period $ 22,411 $ 13,878
========= =========
Undistributed net investment income included in net assets:
Beginning of period $ 113 $ 109
========= =========
End of period $ 162 $ 113
========= =========
Change in shares outstanding:
Shares sold 711 366
Shares issued for dividends reinvested 20 37
Shares redeemed (84) (333)
--------- ---------
Increase in shares outstanding 647 70
========= =========
</TABLE>
See accompanying notes to financial statements.
Income 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 Income
Strategy Fund (the Fund). The Fund's investment objective is to seek a 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.
A. Security valuation -- The value of each security is determined (as of the
close of trading on the New York Stock Exchange on each business day the
Exchange is open) as set forth below:
1. Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities exchanges
are generally valued at the closing values of such securities on the exchange
where primarily traded. If no sale is reported, the average of the bid and asked
prices is generally used depending upon local custom or regulation.
2. Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices.
3. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value.
4. Other debt and government securities are valued each business day by a
pricing service (the Service) approved by the 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 securities are amortized over the
life of the respective securities.
D. Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the financial
statements.
(2) Lines of Credit
The Fund participates with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million, one with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($750 million uncommitted), and one with
NationsBank of Texas, N.A. ($100 million committed). The purpose of the
agreements is to meet temporary or emergency cash needs, including redemption
requests that might otherwise require the untimely disposition of securities.
Subject to availability under its agreement with CAPCO, the Fund may borrow from
CAPCO an amount up to 5% of its total assets at CAPCO's borrowing rate with no
markup. Subject to availability under its agreement with NationsBank, the Fund
may borrow from NationsBank an amount which, when added to outstanding
borrowings under the CAPCO agreement, does not exceed 25% of its total assets at
NationsBank's borrowing rate plus a markup. During the six-month period ended
November 30, 1997, the Fund had no borrowings under either of these agreements.
(3) Distributions
Distributions of net investment income 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
$7,738,003 and $494,950, respectively.
Gross unrealized appreciation and depreciation of investments at November 30,
1997 was $1,684,083 and $94,412, 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.
The Manager has voluntarily agreed to limit the annual expenses of the Fund to
1.0% of its annual average net assets through October 1, 1998.
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.
(6) Transactions with Affiliates
USAA Investment Management Company is indirectly wholly owned by United Services
Automobile Association (the Association), a large, diversified financial
services institution. At November 30, 1997, the Association and its affiliates
owned 502,387 shares (26.1%) of the Fund.
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
(7) Financial Highlights
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Six-Month Nine-Month
Period Ended Year Ended Period Ended
November 30, May 31, May 31,
1997 1997 1996*
---- ---- ----
<S> <C> <C> <C>
Net asset value at
beginning of period $ 10.84 $ 10.06 $ 10.00
Net investment income .24 .50 .39(b)
Net realized and
unrealized gain (loss) .79 .83 (.06)
Distributions from net
investment income (.24) (.50) (.22)
Distributions of realized
capital gains - (.05) (.05)
--------- --------- ---------
Net asset value at
end of period $ 11.63 $ 10.84 $ 10.06
========= ========= =========
Total return (%) ** 9.60 13.59 3.23
Net assets at end of period (000) $ 22,411 $ 13,878 $ 12,173
Ratio of expenses to
average net assets (%) 1.00(a,c) 1.00(c) 1.00(a,c)
Ratio of net investment
income to average
net assets (%) 4.55(a,c) 4.80(c) 4.71(a,c)
Portfolio turnover (%) 2.82 64.71 78.60
Average commission rate
paid per share + $ .0491 $ .0478 $ .0496
</TABLE>
* Fund commenced operations September 1, 1995.
** Assumes reinvestment of all dividend income and capital gain distributions
during the period.
+ Calculated by aggregating all commissions paid on the purchase and sale of
securities and dividing by the actual number of shares purchased or sold for
which commissions were charged.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
(c) The information contained in the preceding table is based on actual expenses
for the period, after giving effect to reimbursement of expenses by the
Manager. Absent such reimbursement the Fund's ratios would have been:
<TABLE>
<CAPTION>
Six-Month Nine-Month
Period Ended Year Ended Period Ended
November 30, May 31, May 31,
1997 1997 1996*
---- ---- ----
<S> <C> <C> <C>
Ratio of expenses to
average net assets (%) 1.43(a) 1.51 1.78(a)
Ratio of net investment income
to average net assets (%) 4.12(a) 4.29 3.93(a)
</TABLE>
