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 9
Portfolio of Investments in Securities 10
Notes to Portfolio of Investments in Securities 19
Statement of Operations 20
Statements of Changes in Net Assets 21
Notes to Financial Statements 22
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 Cornerstone
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
CORNERSTONE STRATEGY FUND
OBJECTIVE: Achieve a positive, inflation-adjusted rate of return and a
reasonably stable value of Fund shares, thereby preserving purchasing power of
shareholders' capital.
5/31/97 11/30/97
Net Assets............................. $1,263.4 MILLION $1,399.0 MILLION
Net Asset Value Per Share.............. $27.96 $29.28
AVERAGE ANNUAL TOTAL RETURNS AS OF 11/30/97
May 31, 1997 to November 30, 1997.......................... 8.84%+
1 Year..................................................... 16.56%
5 Years.................................................... 14.96%
10 Years................................................... 11.59%
+ Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment has
been made for taxes payable by shareholders on their reinvested income dividends
and capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return and
principal value of an investment will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
- ---------------------------------
CUMULATIVE PERFORMANCE COMPARISON
- ----------------------------------
A chart in the form of a line graph appears here, illustrating the comparison of
a $10,000 hypothetical investment in the USAA Cornerstone Strategy Fund to the
S&P 500 Index and the Lipper Global Flexible Portfolio Funds Average for the
period of 11/30/87 to 11/30/97. The data points from the graph are as follows:
Year USAA Cornerstone S&P 500 Lipper Global
- ---- Strategy Fund Index Flexible Portfolio
------------- ----- Funds Average
-------------
11/30/87 10,000 10,000 10,000
12/87 10,323 10,761 10,272
6/88 11,123 12,127 10,852
12/88 11,189 12,543 10,985
6/89 12,169 14,615 11,603
12/89 13,643 16,510 12,413
6/90 12,983 17,019 12,210
12/90 12,388 15,997 11,538
6/91 13,169 18,273 12,168
12/91 14,398 20,860 13,066
6/92 14,594 20,720 13,025
12/92 15,313 22,447 13,555
6/93 17,436 23,539 14,779
12/93 18,946 24,705 15,895
6/94 18,486 23,869 15,116
12/94 18,748 25,029 15,071
6/95 20,196 30,082 16,406
12/95 22,198 34,424 17,585
6/96 23,666 37,897 18,405
12/96 26,165 42,322 19,484
6/97 28,507 51,039 20,808
11/97 29,945 55,485 21,369
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Cornerstone Strategy Fund to the S&P 500 Index and the Lipper Global
Flexible Portfolio Funds Average, an average performance level of all global
flexible portfolio funds, as reported by Lipper Analytical Services, an
independent organization that monitors the performance of mutual funds. 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
MESSAGE FROM THE MANAGERS
[A PHOTOGRAPH OF THE FOLLOWING PORTFOLIO MANAGERS IS HERE:
Seated L to R: John W. Saunders, Jr., CFA (U.S. Government Securities)
Harry W. Miller, CFA (Allocation Manager, Basic Value Stocks)
Standing L to R: Albert C. Sebastian, CFA (Foreign Stocks)
David G. Peebles, CFA (Foreign Stocks)
W. Travis Selmier, II, CFA (Foreign Stocks)
Mark W. Johnson, CFA (Gold and Real Estate Stocks).]
The Cornerstone Strategy Fund is a widely-diversified portfolio with investments
in the following sectors: Basic Value Stocks (22-28%) of the Fund's net assets,
Foreign Stocks (22-28%), U.S. Government Securities (22-28%), Real Estate Stocks
(22-28%), and Gold Stocks (0-10%). The pie chart on page 8 shows the asset
allocation as of the end of November 30, 1997. Your Fund's 8.84% six-month total
return for the period outperformed the Lipper Global Flexible Portfolio Funds
Average(1) of 4.09% for the same period.(2)
Basic Value Category
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.
International markets experienced a greater decline, and during that period the
Basic Value category had no foreign exposure. 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. We remain optimistic on the U.S. stock
market but do not expect the same returns in 1998 as 1997.
Over the six-month period ending November 30, 1997, we have added some new names
in your portfolio: Meritor Automotive (Auto Parts), a spinoff from Rockwell
International, Intel (Electronics - Semiconductors), Bell Atlantic (Telephones)
through a merger with NYNEX, Bausch & Lomb (Medical Products & Supplies), and
PMI Group (Finance - Diversified). Eliminated names included: James River (Paper
& Forest Products), Universal (Tobacco), and NYNEX (Telephones) through a merger
with Bell Atlantic.
(1) The Lipper Global Flexible Portfolio Funds Average is an average
performance level of all global flexible portfolio funds, as reported by
Lipper Analytical Services, an independent organization that monitors the
performance of mutual funds.
(2) Past performance is no guarantee of future results and the value of your
investment may vary according to the Fund's performance.
Best performers for the period included: Bankers Trust, PNC Bank, and SouthTrust
(Banks), Ball (Containers), Bristol-Myers Squibb (Healthcare), J.C. Penney
(Retailing), Occidental Petroleum (Oil), and Bell Atlantic and SBC
Communications (Telephones). Worst Performers included: Monsanto (Chemicals),
American Home Products (Healthcare), Caterpillar (Machinery), Norfolk Southern
(Railroads), Sears (Retailing), Unocal (Oil), and Philip Morris (Tobacco).
As of November 30, 1997, the Basic Value category held 42 common stocks, broadly
diversified in 28 industries. We remain overweighted in Machinery - Diversified,
Banks, Healthcare/Drugs, and Telephones.
Foreign Category
European markets have continued to perform favorably for the six months ending
November 30, 1997, while emerging markets have been mixed. The underweighted
position in Japan has proved correct.
Europe - European markets provided favorable returns over the period
because of earnings growth, falling interest rates, and corporate
restructuring. Within Europe, we significantly increased our exposure to
the United Kingdom because of attractive valuations and a stable,
pro-business political environment. Our holdings in Italy, Portugal, and
the United Kingdom made significant contributions to our European
performance.
Emerging Markets - A series of currency devaluations in Asia has caused
turmoil and political disarray in the region. This situation has brought
about a reduction in forecasted economic growth. While we believe the
Brazilian economy will be affected by the Asian slowdown, Argentina, Peru,
and Mexico continue to recover, driven by improving domestic economies. In
Mexico's case, stronger economic ties with the U.S. are a driving force.
Political and economic reform have gained momentum in Russia and Hungary.
Falling inflation and interest rates in Israel have underpinned its market
rally while the prospect of economic reform has refueled Turkey's rise.
Japan - Asia's currency crisis, combined with problems within the banking
system, has begun to take a toll on the Japanese economy and stock market.
We continue to hold export-related stocks while looking for quality
domestic-related companies. We have not changed our underweighted position
in Japan and believe that decisive action on restructuring the tax and
financial system is needed.
Other Markets - Our overweighted position in Canada reflects the
attractiveness of the economy as well as our favorable outlook for
Canadian energy stocks. In Australia we have reduced equities to a neutral
position.
We will continue to favor European markets because of their economic and
political stability, favorable valuations, and more predictable earnings growth.
Divergence in emerging markets should continue as most Asian markets remain weak
while many Latin, Eastern European, and other markets are likely to recover
sooner. We remain negative on Japan and feel that it offers only selective
opportunities.
U.S. Government Category
Interest rates have generally declined in this six-month reporting period. As a
result, we have experienced the best bond market in the past two years. There
may be more to come. 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
strong demand versus smaller supply. In any event, the potential for rising
interest rates appears to be low for the time being. We increased the
longer-term U.S. Treasury bond holdings in this investment category to take
advantage of this more hospitable environment.
Real Estate Category
Real Estate securities were solid performers during the six months ended
November 30, 1997. Shares of Real Estate Investment Trusts (REITs), as measured
by the National Association of Real Estate Investment Trusts (NAREIT) equity
index, rose 16.55% on a total return basis. This was above the 13.54% return on
the S&P 500 Index.(3) However, REITs performed poorly relative to the S&P 500
Index on a three-year basis (25.26% vs. 31.03% annualized) despite solid cash
flow growth. As a general rule, REITs are less volatile than the S&P 500 Index
and consequently, would lag the Index during a powerful bull market. Also, to
some extent REIT managements have proven to be their own worst enemies by
repeatedly issuing large amounts of common stock to fund aggressive growth
plans. Real estate is a capital intensive industry, and REITs by law must
maintain high dividend payout ratios. Therefore, it is not surprising that REITs
must raise massive amounts of cash to fund one of the most important financial
trends of the last four years and probably the next decade - the securitization
of real estate. The problem is that the industry's enthusiasm for issuing stock
occasionally exceeds the market's ability to absorb it.
Compared to the NAREIT equity index, the Fund is overweighted in office and
industrial properties and full-service hotels. It is underweighted in apartments
and retail. A significant exposure to leisure-related real estate has been built
through the purchase of stocks focusing on ski resorts, golf courses, and
megaplex movie theaters.
(3) 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.
Gold Category
Gold prices fell 14.1% from $345.60 to $296.80 during the six months ended
November 30, 1997, marking the lowest price since March 1985. The common stocks
of gold mining companies did even worse. The Fund had no exposure to gold stocks
during this period.
ASSET ALLOCATIION
A pie chart is shown here depicting the Asset Allocation as of November 30, 1997
of the USAA Cornerstone Strategy Fund to be:
U.S. Government Securities - 23.0%*, Real Estate Stocks - 25.2%*, Foreign
Securities - 26.0%*, Basic Value Stocks - 25.5%*.
* Percentages are of the Net Assets in the Portfolio and may or may not
equal 100%.
Top 10 Industries
(% of Net Assets)
- --------------------------------------
Real Esate Investment Trusts 21.9
Telephones 3.8
Banks - Major Regional 3.1
Oil - International Integrated 3.0
Machinery - Diversified 2.5
Healthcare - Diversified 2.4
Lodging/Hotel 2.1
Drugs 1.6
Auto Parts 1.5
Banks - Money Center 1.4
Top 3 Holdings in Each Section
(% of Net Assets)
- -------------------------------------
Foreign
- -------
Akzo Nobel .5
Elf Aquitaine ADS .4
SGS Group AG .4
Real Estate
- -----------
Highwoods Properties 1.0
Host Marriott 1.0
Liberty Property Trust 1.0
U.S. Government
- ---------------
U.S. Treasury Bond @ 7.875% 8.0
U.S. Treasury Bond @ 7.625% 4.3
GNMA Pool #412608 @ 7.00% 2.5
Basic Value
- -----------
Bristol-Myers Squibb 1.3
Deere & Co. 1.2
Boeing 1.1
Foreign investing is subject to additional risks which are discussed in the
Fund's prospectus. Gold mining stocks involve additional risk because of gold's
price volatility. Since return on any investment is generally commensurate with
risk, investors should be aware of the potential volatility associated with
foreign markets.
See page 10 for a complete listing of the Portfolio of Investments in
Securities.
<TABLE>
Cornerstone 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 $1,083,634) $ 1,395,322
Cash 204
Cash denominated in foreign currencies (identified cost of $3,731) 3,267
Receivables:
Capital shares sold 269
Dividends and interest 5,703
Securities sold 8,670
Unrealized appreciation on foreign currency contracts held, at value 20
-----------
Total assets 1,413,455
-----------
Liabilities
Securities purchased 12,699
Unrealized depreciation on foreign currency contracts held, at value 17
Capital shares redeemed 519
USAA Investment Management Company 857
USAA Transfer Agency Company 222
Accounts payable and accrued expenses 129
-----------
Total liabilities 14,443
-----------
Net assets applicable to capital shares outstanding $ 1,399,012
===========
Represented by:
Paid-in capital $ 1,012,757
Accumulated undistributed net investment income 19,302
Accumulated net realized gain on investments 55,732
Net unrealized appreciation of investments 311,688
Net unrealized depreciation on foreign currency translations (467)
-----------
Net assets applicable to capital shares outstanding $ 1,399,012
===========
Capital shares outstanding, unlimited number of shares authorized,
no par value 47,786
===========
Net asset value, redemption price, and offering price per share $ 29.28
===========
</TABLE>
See accompanying notes to financial statements.
Cornerstone Strategy Fund
Portfolio of Investments in Securities
November 30, 1997
(Unaudited)
Market
Number Value
of Shares Security (000)
--------- -------- -----
Foreign Securities (26.0%)
Foreign Stocks (25.8%)
Argentina (0.2%)
51,900 Banco Rio de La Plata
S.A. ADR * $ 652
26,000 Disco S.A. ADS * 933
18,000 IRSA Inversiones y
Representaciones S.A. GDS 550
29,400 Telefonica de Argentina
S.A. ADR 972
- ------------------------------------------------
3,107
- ------------------------------------------------
Australia (0.7%)
330,000 Broken Hill Proprietary
Co. Ltd. 3,026
255,000 CSL Ltd. 1,672
400,000 Pasminco Ltd. 415
1,151,000 Telstra Corp. Ltd. * 2,162
370,784 Woodside Petroleum Ltd. 2,658
- ------------------------------------------------
9,933
- ------------------------------------------------
Austria (0.7%)
21,618 Austria Mikro Systeme
International AG 1,307
30,960 Boehler Uddeholm AG 2,091
80,711 VA Stahl AG 2,982
25,000 VA Technologie AG 3,765
- ------------------------------------------------
10,145
- ------------------------------------------------
Belgium (0.3%)
2,521 Colruyt S.A. 1,292
36,200 Union Miniere S.A. * 2,607
- ------------------------------------------------
3,899
- ------------------------------------------------
Brazil (0.7%)
26,000,000 Companhia Energetica
de Minas Gerais
(Cemig) (Preferred) 1,266
85,000 Multicanal Participacoes
S.A. ADS (Preferred) * 404
93,400 Panamerican Beverages,
Inc. "A" 3,199
7,000,000 Petroleo Brasileiro S.A.
(Preferred) 1,527
17,000,000 Telebras PN S.A. (Preferred) 1,771
38,000 Uniao de Bancos Brasileiros
S.A. (Unibanco) GDR * 1,092
97,000 Usinas Siderurgicas de Minas
Gerais S.A. (Preferred) 621
- ------------------------------------------------
9,880
- ------------------------------------------------
Canada (1.7%)
119,000 Alliance Forest
Products, Inc. * 1,913
244,300 Anderson Exploration Ltd. * 2,264
40,800 Cadillac Fairview Corp. * 966
71,000 Canadian National
Railway Co. 3,670
179,800 Canadian Occidental
Petroleum Ltd. 4,012
300,000 National Bank of Canada 4,402
104,000 OSF, Inc. * 730
26,500 St. Laurent Paperboard,
Inc. * 335
148,000 Suncor, Inc. 4,875
- ------------------------------------------------
23,167
- ------------------------------------------------
Chile (0.2%)
21,480 Compania de Telefonos
de Chile ADR 581
38,300 Distribucion y Servicio
D&S S.A. ADS 668
21,800 Sociedad Quimica y Minera
de Chile S.A. ADS 1,003
- ------------------------------------------------
2,252
- ------------------------------------------------
China (0.1%)
640,000 Cosco Pacific Ltd. 447
2,986,000 Jiangsu Expressway Co.
Ltd. * 583
375,000 New World
Infrastructure Ltd. * 740
- ------------------------------------------------
1,770
- ------------------------------------------------
Czech Republic (0.1%)
26,000 Komercni Banka A.S. GDR 325
9,000 SPT Telecom A.S. * 948
- ------------------------------------------------
1,273
- ------------------------------------------------
Denmark (1.1%)
45,000 Carli Gry International A/S 2,548
70,000 ISS International Service
System A/S "B" * 2,346
143,200 SAS Danmark A/S 2,176
32,600 Tele Danmark A/S "B" 1,948
100,300 Tele Danmark A/S ADS 2,996
50,000 Unidanmark A/S 3,531
- ------------------------------------------------
15,545
- ------------------------------------------------
Egypt (0.1%)
39,300 Suez Cement Co. S.A.E. GDS 795
- ------------------------------------------------
Finland (0.4%)
50,600 Nokia Corp. ADS 4,206
12,100 Raision Tehtaat * 1,392
27,200 Rauma OY 469
- ------------------------------------------------
6,067
- ------------------------------------------------
France (2.0%)
12,500 Accor S.A. 2,363
51,000 Bouygues Offshore S.A. ADR 1,147
89,800 Coflexip ADS 4,468
106,700 Elf Aquitaine ADS 6,109
29,000 Eramet Group 1,154
10,700 Essilor International 2,983
18,370 ISIS S.A. * 2,063
36,900 Louis Dreyfus Citrus 1,079
54,100 Renault S.A. * 1,515
24,500 Simco S.A. 1,743
43,000 Valeo S.A. 2,844
- ------------------------------------------------
27,468
- ------------------------------------------------
Germany (0.9%)
51,700 Bayer AG 1,914
50,000 Leica Camera AG 1,128
118,200 Rofin-Sinar
Technologies, Inc. * 1,744
6,300 SAP AG 1,833
5,350 SAP AG (Preferred) 1,647
3,900 Singulus Technologies AG * 171
71,000 Veba AG 4,219
- ------------------------------------------------
12,656
- ------------------------------------------------
Hong Kong (0.3%)
1,480,000 Amoy Properties Ltd. 1,273
59,000 Asia Satellite
Telecommunications
Holdings Ltd. ADR 1,250
244,000 CITIC Pacific Ltd. 972
123,000 Hutchison Whampoa Ltd. 820
- ------------------------------------------------
4,315
- ------------------------------------------------
Hungary (0.2%)
49,200 Magyar Tavkozlesi RT.
(MATAV) ADS * 996
100,000 Mol Magyar Olaj-Es
Gazipari GDS 2,098
13,500 OTP Bank GDR * 420
- ------------------------------------------------
3,514
- ------------------------------------------------
India (0.2%)
45,000 Hindalco Industries Ltd. GDR 1,013
78,800 Larsen & Toubro Ltd. GDR 768
63,300 Videsh Sanchar Nigam
Ltd. GDR 839
- ------------------------------------------------
2,620
- ------------------------------------------------
Indonesia (0.1%)
780,500 PT Astra International, Inc. 406
251,750 PT Bank Dagang Nasional
Indonesia Warrants * 4
400,000 PT HM Sampoerna 532
- ------------------------------------------------
942
- ------------------------------------------------
Israel (0.3%)
46,800 Blue Square - Israel
Ltd. ADS * 456
56,500 ECI Telecommunications Ltd. 1,536
43,000 Teva Pharmaceutical
Industries Ltd. ADR 2,129
- ------------------------------------------------
4,121
- ------------------------------------------------
Italy (1.3%)
86,200 ENI S.p.A. ADS 5,005
266,000 Erg S.p.A. * 1,009
60,500 Gucci Group N.V. * 2,462
80,000 Instrumentation Laboratory
S.p.A. ADS * 160
544,000 Italgas S.p.A. 2,099
32,900 SAES Getters S.p.A. ADR 341
3,664,000 SEAT S.p.A. * 1,453
3,800,000 SEAT S.p.A. Savings * 982
1,050,000 Telecom Italia S.p.A. * 4,139
- ------------------------------------------------
17,650
- ------------------------------------------------
Japan (3.1%)
110,000 Bridgestone Corp. 2,388
146,000 Canon, Inc. 3,523
95,000 Daibiru Corp. 931
310,000 Hitachi Ltd. 2,198
48,000 Hoya Corp. 1,467
55,000 Ito-Yokado Co. Ltd. 2,482
48,000 Justsystem Corp. 527
137,500 Laox Co. Ltd. 1,077
334,000 Minebea Co. Ltd. 3,716
341,000 Mitsubishi Heavy
Industries Ltd. 1,341
100,000 Namco 3,197
18,700 Nichiei Co. Ltd. 2,051
5,600 Nippon Television Network 1,808
640,000 NKK Corp. 647
200,000 Nomura Securities Co. Ltd. 2,476
67 NTT Data Communications
Systems Corp. 3,255
249,000 Sekisui Chemical Co. Ltd. 1,813
213,000 Shiseido Co. Ltd. 2,887
28,000 Sony Corp. 2,391
155,000 Terumo Corp. 2,429
107,000 Yamada Denki Co. 1,006
- ------------------------------------------------
43,610
- ------------------------------------------------
Malaysia (0.1%)
105,000 Edaran Otomobil
Nasional Bhd 243
- ------------------------------------------------
Mexico (0.4%)
700,000 Controladora Comercial
Mexicana, S.A. de C.V. 765
83,237 Desc, Sociedad de
Fomento Industrial,
S.A. de C.V. ADS 3,127
90,000 Tubos de Acero de Mexico,
S.A. ADS * 1,991
- ------------------------------------------------
5,883
- ------------------------------------------------
Netherlands (1.5%)
38,300 Akzo Nobel N.V. 6,737
41,400 Benckiser N.V. "B" ADR * 1,439
6,900 Brunel International N.V. * 126
33,000 EVC International N.V. 772
82,780 ING Group N.V. 3,366
19,500 Oce-van der Grinten N.V. 2,222
45,700 Philips Electronics N.V. 3,062
11,650 Simac Techniek N.V. * 1,328
120,000 Verenigd Besit VNU 2,874
- ------------------------------------------------
21,926
- ------------------------------------------------
Norway (0.7%)
759,000 Christiania Bank og
Kreditkasse 2,734
149,000 Nycomed ASA, Series A 3,864
53,500 Nycomed ASA, Series B 1,339
108,600 Schibsted ASA 1,842
- ------------------------------------------------
9,779
- ------------------------------------------------
Peru (0.1%)
36,600 Telefonica del Peru
S.A. "B" ADS 769
- ------------------------------------------------
Philippines (0.1%)
2,000,000 SM Prime Holdings, Inc. 315
- ------------------------------------------------
Poland (0.1%)
120,000 Elektrim S.A. 1,154
170,000 Polifarb Cieszyn-Wroclaw
S.A. 697
56,666 Polifarb Cieszyn-Wroclaw
S.A. "D" * 232
- ------------------------------------------------
2,083
- ------------------------------------------------
Portugal (0.7%)
101,000 Banco Totta E Acores S.A. 1,906
9,300 Brisa-Auto Estradas
de Portugal S.A. * 285
141,500 Cimentos de Portugal S.A. 3,584
101,700 Portugal Telecom S.A. ADS * 4,665
- ------------------------------------------------
10,440
- ------------------------------------------------
Russia (0.4%)
26,600 LUKoil ADR 2,143
44,600 Mosenergo ADR * 1,595 (a)
6,669,000 Unified Energy Systems * 1,509
- ------------------------------------------------
5,247
- ------------------------------------------------
Singapore (0.2%)
290,000 DBS Land Ltd. 493
330,000 Overseas Union Bank Ltd. 1,293
220,000 Singapore Land Ltd. 646
- ------------------------------------------------
2,432
- ------------------------------------------------
South Africa (0.1%)
47,500 South African
Breweries Ltd. 1,163
- ------------------------------------------------
Spain (0.6%)
45,400 Corporacion Bancaria
de Espana S.A. * 2,817
36,400 Corporacion Mapfre 1,777
52,800 Telefonica de Espana
S.A. ADR 4,567
- ------------------------------------------------
9,161
- ------------------------------------------------
Sweden (0.9%)
147,800 Autoliv, Inc. SDR 5,647
11,000 Munters AB * 105
139,200 NK Cityfastigheter AB * 1,018
27,200 Nordbanken AB 969
172,500 Swedish Match AB * 583
140,000 Volvo AB 3,735
- ------------------------------------------------
12,057
- ------------------------------------------------
Switzerland (1.2%)
2,920 Novartis AG 4,665
13,200 Selecta Group * 1,768
3,130 SGS Group AG 5,848
5,253 Sulzer AG P.C. 3,471
16,003 Tag Heuer
International S.A. * 1,555
108,300 Tag Heuer International
S.A. ADR * 1,069
- ------------------------------------------------
18,376
- ------------------------------------------------
Taiwan (0.2%)
2,050,000 China Steel Corp. 1,501
1,224,189 Far Eastern Department
Store, Ltd. 1,197
120,000 Microtek International,
Inc. * 133
- ------------------------------------------------
2,831
- ------------------------------------------------
Turkey (0.1%)
31,735,066 Yapi Ve Kredi Bankasi A.S. 989
- ------------------------------------------------
United Kingdom (3.5%)
919,000 Avis Europe plc 2,390
336,200 Billiton plc * 829
210,000 British Borneo Petroleum plc 1,568
270,000 Cadbury Schweppes plc 2,805
1,620,000 Cookson Group plc 5,609
910,000 Corporate Services Group plc 3,181
97,800 DFS Furniture Co. plc 963
35,500 Doncasters plc ADS * 923
385,100 EMI Group plc 2,901
332,500 Ionica Group plc * 674
1,340,000 LucasVarity plc 4,300
910,000 Medeva plc 3,074
315,000 National Westminster
Bank plc 4,777
241,000 Reuters Holdings plc 2,719
720,000 Safeway plc 3,940
943,500 Tomkins plc 4,796
988,000 WPP Group plc 4,405
- ------------------------------------------------
49,854
- ------------------------------------------------
Venezuela (0.1%)
34,400 Compania Anonima
Nacional Telefonos
de Venezuela ADS 1,359
- ------------------------------------------------
Other Holdings (0.1%)
1,800,000 Central European
Growth Fund plc * 1,824
- ------------------------------------------------
Total foreign stocks
(cost: $305,693) 361,460
- ------------------------------------------------
Principal
Amount
(000)
-----
Foreign Bond (0.2%)
Japan
$ 2,100 MBL International Finance
(Bermuda) Trust,
Convertible Notes,
3.00%, 11/30/02
(cost: $2,167) 2,226
- ------------------------------------------------
Total foreign securities
(cost: $307,860) 363,686
- ------------------------------------------------
Real Estate Stocks (25.2%)
Leisure Time (0.8%)
450,000 Vail Resorts, Inc. * 11,897
- ------------------------------------------------
Lodging/Hotel (1.9%)
400,000 Hilton Hotels Corp. 12,450
700,000 Host Marriott Corp. * 14,568
- ------------------------------------------------
27,018
- ------------------------------------------------
Paper & Forest Products (0.9%)
250,000 Rayonier, Inc. 12,219
- ------------------------------------------------
Real Estate Investment
Trusts (21.6%)
325,000 Alexandria Real Estate
Equities, Inc. 10,116
350,000 Avalon Properties, Inc. 10,763
125,000 Beacon Properties Corp. 5,625
400,000 Bradley Real Estate, Inc. 8,100
375,000 Brandywine Realty Trust 9,070
300,000 Cali Realty Corp. 11,906
275,000 Centerpoint Properties
Corp. 9,109
300,000 Chelsea GCA Realty, Inc. 11,400
175,000 Developers Diversified
Realty Corp. 6,814
601,500 Entertainment
Properties Trust * 11,579
350,000 Felcor Suite Hotels, Inc. 12,709
350,000 First Industrial Realty
Trust, Inc. 12,359
400,000 Gables Residential Trust 10,875
350,000 Golf Trust of America, Inc. 9,450
400,000 Highwoods Properties, Inc. 14,375
500,000 Liberty Property Trust 13,969
200,000 Mills Corp. 5,538
350,000 Pan Pacific Retail
Properties, Inc. 7,175
300,000 Parkway Properties, Inc. 9,881
425,000 Patriot American
Hospitality, Inc. 13,281
300,000 Post Properties, Inc. 11,588
500,000 Prentiss Properties Trust 12,938
600,000 Prime Group Realty Trust * 12,038
250,000 Sovran Self Storage, Inc. 7,625
250,000 Starwood Lodging Trust 13,406
225,000 Storage USA, Inc. 8,789
225,000 Sun Communities, Inc. 8,198
700,000 United Dominion Realty
Trust, Inc. 10,281
400,000 Weeks Corp. 12,800
- ------------------------------------------------
301,757
- ------------------------------------------------
Total real estate stocks
(cost: $271,687) 352,891
- ------------------------------------------------
Basic Value Stocks (25.5%)
Aerospace/Defense (1.1%)
289,660 Boeing Co. 15,388
- ------------------------------------------------
Automobiles (0.8%)
200,000 Chrysler Corp. 6,863
100,000 Ford Motor Co. 4,300
- ------------------------------------------------
11,163
- ------------------------------------------------
Auto Parts (0.1%)
38,333 Meritor Automotive, Inc. 858
- ------------------------------------------------
Banks - Major Regional (1.5%)
115,000 Fleet Financial Group, Inc. 7,597
150,000 PNC Bank Corp. 8,072
100,000 SouthTrust Corp. 5,450
- ------------------------------------------------
21,119
- ------------------------------------------------
Banks - Money Center (1.0%)
53,000 Bankers Trust
New York Corp. 6,284
68,000 Chase Manhattan Corp. 7,386
- ------------------------------------------------
13,670
- ------------------------------------------------
Chemicals (1.0%)
325,000 Monsanto Co. 14,198
- ------------------------------------------------
Chemicals - Diversified (1.0%)
300,000 B.F. Goodrich Co. 13,350
- ------------------------------------------------
Chemicals - Specialty (0.4%)
122,600 Olin Corp. 6,069
- ------------------------------------------------
Containers - Metals
& Glass (0.4%)
135,000 Ball Corp. 5,198
- ------------------------------------------------
Drugs (0.4%)
160,000 Pharmacia & Upjohn, Inc. 5,400
- ------------------------------------------------
Electrical Equipment (0.4%)
115,000 Rockwell International Corp. 5,606
- ------------------------------------------------
Electronics -
Semiconductors (1.0%)
175,000 Intel Corp. 13,584
- ------------------------------------------------
Finance - Diversified (0.5%)
100,000 PMI Group, Inc. 6,500
- ------------------------------------------------
Healthcare - Diversified (2.3%)
200,000 American Home
Products Corp. 13,975
200,000 Bristol-Myers Squibb Co. 18,725
- ------------------------------------------------
32,700
- ------------------------------------------------
Insurance -
Property/Casualty (1.2%)
150,000 Allstate Corp. 12,881
68,000 HSB Group, Inc. 3,532
- ------------------------------------------------
16,413
- ------------------------------------------------
Machinery - Diversified (2.2%)
290,000 Caterpillar, Inc. 13,902
300,000 Deere & Co. 16,444
- ------------------------------------------------
30,346
- ------------------------------------------------
Manufacturing - Diversified
Industries (0.7%)
100,000 Minnesota Mining &
Manufacturing Co. 9,744
- ------------------------------------------------
Medical Products
& Supplies (0.7%)
250,000 Bausch & Lomb, Inc. 9,906
- ------------------------------------------------
Natural Gas (0.3%)
120,000 NICOR, Inc. 4,830
- ------------------------------------------------
Oil - Domestic Integrated (0.8%)
125,000 Occidental Petroleum Corp. 3,711
200,000 Unocal Corp. 7,962
- ------------------------------------------------
11,673
- ------------------------------------------------
Oil - International
Integrated (1.8%)
70,000 Chevron Corp. 5,613
120,000 Mobil Corp. 8,633
200,000 Texaco, Inc. 11,300
- ------------------------------------------------
25,546
- ------------------------------------------------
Photography - Imaging (0.7%)
132,000 Xerox Corp. 10,255
- ------------------------------------------------
Railroads/Shipping (0.6%)
255,000 Norfolk Southern Corp. 8,112
- ------------------------------------------------
Retail - Department Stores (0.8%)
85,000 J.C. Penney Company, Inc. 5,461
120,000 May Department Stores Co. 6,450
- ------------------------------------------------
11,911
- ------------------------------------------------
Retail - General
Merchandising (0.3%)
90,000 Sears, Roebuck & Co. 4,123
- ------------------------------------------------
Telecommunications -
Long Distance (0.7%)
160,000 Sprint Corp. 9,370
- ------------------------------------------------
Telephones (2.0%)
128,256 Bell Atlantic Corp. 11,447
120,000 GTE Corp. 6,067
138,000 SBC Communications Corp. 10,048
- ------------------------------------------------
27,562
- ------------------------------------------------
Tobacco (0.8%)
120,000 Philip Morris
Companies, Inc. 5,220
180,000 RJR Nabisco Holdings Corp. 6,559
- ------------------------------------------------
11,779
- ------------------------------------------------
Total basic value stocks
(cost: $208,550) 356,373
- ------------------------------------------------
Principal
Amount
(000)
----
U.S. Government & Agency
Issues (23.0%)
Government National
Mortgage Assoc. (9.5%)
$ 67,235 6.50%,5/15/23 - 3/15/26 66,299
52,222 7.00%,8/15/23 - 5/15/26 52,492
2,712 7.50%,3/15/17 2,800
2,636 8.00%,6/15/16 - 3/15/17 2,769
3,476 8.50%,9/15/09 - 2/15/17 3,707
272 9.00%,6/15/16 - 10/15/16 295
3,825 9.50%,6/15/09 - 8/15/17 4,169
581 10.00%,11/15/09 - 4/15/16 637
64 11.50%,3/15/13 73
4 12.50%,8/15/14 5
- -------------------------------------------------
133,246
- -------------------------------------------------
U.S. Treasury (13.2%)
12,000 U.S. Treasury Bonds,
6.38%, 8/15/27 12,458
50,000 U.S. Treasury Bonds,
7.63%, 2/15/25 59,719
92,944 U.S. Treasury Bonds,
7.88%, 2/15/21 112,491
- -------------------------------------------------
184,668
- -------------------------------------------------
Discount Note (0.3%)
4,460 Federal Home Loan Bank,
5.60%, 12/01/97
(cost: $4,459) 4,458
- -------------------------------------------------
Total U.S. government
& agency issues
(cost: $295,537) 322,372
- -------------------------------------------------
Total investments
(cost: $1,083,634) 1,395,322
=================================================
- ----------------------
*Non-income producing.
Portfolio Summary By Industry
-------------------------------
U.S. Government & Agency Issues 23.0%
Real Estate Investment Trusts 21.9
Telephones 3.8
Banks - Major Regional 3.1
Oil - International Integrated 3.0
Machinery - Diversified 2.5
Healthcare - Diversified 2.3
Lodging/Hotel 2.1
Drugs 1.6
Auto Parts 1.5
Banks - Money Center 1.4
Manufacturing - Diversified Industries 1.4
Electronics - Semiconductors 1.2
Automobiles 1.2
Chemicals 1.2
Oil - Domestic Integrated 1.2
Insurance - Property/Casualty 1.2
Aerospace/Defense 1.1
Medical Products & Supplies 1.1
Chemicals - Diversified 1.1
Paper & Forest Products 1.0
Leisure Time 1.0
Services - Commercial & Consumer 1.0
Other 19.8
-----
99.7%
=====
Cornerstone 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.
ADS/ADR -- American Depositary Shares/Receipts are foreign shares held by a U.S.
bank which issues a receipt evidencing ownership. Dividends are paid in U.S.
dollars.
GDS/GDR -- Global Depositary Shares/Receipts are foreign shares held by a
non-U.S. bank which issues a receipt evidencing ownership. Dividends are paid in
U.S. dollars.
Specific Notes
(a) Security is exempt from registration under the Securities Act of 1933 and
has been determined to be liquid by the Manager. Any resale of this
security may occur in an exempt transaction in the United States to a
qualified institutional buyer as defined by Rule 144A.
See accompanying notes to financial statements.
<TABLE>
Cornerstone Strategy Fund
Statement of Operations
(in Thousands)
Six-month period ended November 30, 1997
(Unaudited)
<S> <C>
Net investment income:
Income (net of foreign taxes withheld of $275):
Dividends $ 15,315
Interest 11,102
----------
Total income 26,417
----------
Expenses:
Management fees 5,095
Transfer agent's fees 1,298
Custodian's fees 284
Postage 140
Shareholder reporting fees 78
Trustees' fees 2
Registration fees 53
Professional fees 14
Other 22
----------
Total expenses 6,986
----------
Net investment income 19,431
----------
Net realized and unrealized gain on investments and foreign currency:
Net realized gain (loss) on:
Investments 56,162
Foreign currency transactions (41)
Change in net unrealized appreciation/depreciation of:
Investments 36,528
Translation of assets and liabilities in foreign currencies (439)
----------
Net realized and unrealized gain 92,210
----------
Increase in net assets resulting from operations $ 111,641
==========
</TABLE>
See accompanying notes to financial statements.
<TABLE>
Cornerstone 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 $ 19,431 $ 32,590
Net realized gain on investments 56,162 48,746
Net realized loss on foreign currency transactions (41) (63)
Change in net unrealized appreciation/depreciation of:
Investments 36,528 98,175
Foreign currency translations (439) (26)
----------- -----------
Increase in net assets resulting from operations 111,641 179,422
----------- -----------
Distributions to shareholders from:
Net investment income (11,102) (33,061)
----------- -----------
Net realized gains (39,971) (34,550)
From capital share transactions:
Proceeds from shares sold 106,590 194,406
Shares issued for dividends reinvested 50,198 66,292
Cost of shares redeemed (81,699) (144,998)
----------- -----------
Increase in net assets from capital share transactions 75,089 115,700
----------- -----------
Net increase in net assets 135,657 227,511
Net assets:
Beginning of period 1,263,355 1,035,844
----------- -----------
End of period $ 1,399,012 $ 1,263,355
=========== ===========
Undistributed net investment income included in net assets:
Beginning of period $ 11,014 $ 11,354
=========== ===========
End of period $ 19,302 $ 11,014
=========== ===========
Change in shares outstanding:
Shares sold 3,660 7,427
Shares issued for dividends reinvested 1,752 2,628
Shares redeemed (2,805) (5,543)
----------- -----------
Increase in shares outstanding 2,607 4,512
=========== ===========
</TABLE>
See accompanying notes to financial statements.
Cornerstone 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
Cornerstone Strategy Fund (the Fund). 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 the purchasing power of shareholders'
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. As a result of certain
permanent differences between book and tax basis accounting for investments in
passive foreign investment companies, reclassifications were made to the
statement of assets and liabilities at May 31, 1997 to increase accumulated
undistributed net investment income and to decrease accumulated net realized
gain on investments by $194,122.
C. Investments in securities -- Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Dividend
income, less foreign taxes, if any, is recorded on the ex-dividend date. If the
ex-dividend date has passed, certain dividends from foreign securities are
recorded upon notification. Interest income is recorded on the accrual basis.
Discounts and premiums on short-term securities are amortized over the life of
the respective securities. 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. Foreign currency translations -- The assets of the Fund may be invested in
the securities of foreign issuers. Since the accounting records of the Fund are
maintained in U.S. dollars, foreign currency amounts are translated into U.S.
dollars on the following basis:
1. Market value of securities, other assets, and liabilities at the mean between
the bid and asked translation rates of such currencies against U.S. dollars.
2. Purchases and sales of securities, income, and expenses at the rate of
exchange obtained from an independent pricing service on the respective dates of
such transactions.
Net realized and unrealized foreign currency gains/losses occurring during the
holding period of investments are a component of realized gain/loss on
investments and unrealized appreciation/depreciation on investments,
respectively.
Net realized foreign currency gains/losses arise from sales of foreign currency,
currency gains/losses realized between the trade and settlement dates on
security transactions, and from the difference between amounts of dividends,
interest, and foreign withholding taxes recorded on the Fund's books and the
U.S. dollar equivalent of the amounts received. Net realized foreign currency
gains/losses have been reclassified from accumulated net realized gain/loss to
accumulated undistributed net investment income on the statement of assets and
liabilities as such amounts are treated as ordinary income/loss for tax
purposes. Net unrealized foreign currency exchange gains/losses arise from
changes in the value of assets and liabilities other than investments in
securities resulting from changes in the exchange rate.
E. Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the financial
statements.
(2) Lines of Credit
The Fund participates with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million, one with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($750 million uncommitted), and one with
NationsBank of Texas, N.A. ($100 million committed). The purpose of the
agreements is to meet temporary or emergency cash needs, including redemption
requests that might otherwise require the untimely disposition of securities.
Subject to availability under its agreement with CAPCO, the Fund may borrow from
CAPCO an amount up to 5% of its total assets at CAPCO's borrowing rate with no
markup. Subject to availability under its agreement with NationsBank, the Fund
may borrow from NationsBank an amount which, when added to outstanding
borrowings under the CAPCO agreement, does not exceed 25% of its total assets at
NationsBank's borrowing rate plus a markup. During the six-month period ended
November 30, 1997, the Fund had no borrowings under either of these agreements.
(3) Distributions
Distributions of net investment income and realized gains from security
transactions not offset by capital losses are made in the succeeding fiscal year
or as otherwise required to avoid the payment of federal taxes.
(4) Investment Transactions
Cost of purchases and proceeds from securities, excluding short-term securities,
for the six-month period ended November 30, 1997 were $427,400,331 and
$257,659,291, respectively.
Gross unrealized appreciation and depreciation of investments at November 30,
1997 was $343,588,073 and $31,899,601, respectively.
(5) Foreign Currency Contracts
A forward currency contract (currency contract) is a commitment to purchase or
sell a foreign currency at a specified date, at a negotiated price. The Fund
currently enters into currency contracts only in connection with the purchase or
sale of a security denominated in a foreign currency. These contracts allow the
Fund to "lock in" the U.S. dollar price of the security. Currency contracts are
valued on a daily basis using foreign currency exchange rates obtained from an
independent pricing service. Risks of entering into currency contracts include
the potential inability of the counterparty to meet the terms of the contract
and the Fund giving up the opportunity for potential profit.
<TABLE>
At November 30, 1997, the terms of open foreign currency contracts were as
follows (in thousands):
<CAPTION>
U.S. Dollar U.S. Dollar Unrealized
Exchange Currency to be Value as of Currency to be Value as of Appreciation
Date Delivered 11/30/97 Received 11/30/97 (Depreciation)
---- --------- -------- -------- -------- --------------
<C> <S> <C> <C> <C> <C>
12/01/97 11,717 Belgian Franc $ 322 325 U.S. Dollar $ 325 $ 3
12/01/97 25 Deutsche Mark 14 14 U.S. Dollar 14 -
12/01/97 244,788 Indonesian Rupiah 67 68 U.S. Dollar 68 1
12/01/97 429,540 Indonesian Rupiah 118 122 U.S. Dollar 122 4
12/01/97 91 Netherlands Guilder 46 46 U.S. Dollar 46 -
12/01/97 261 U.S. Dollar 262 371 Swiss Franc 260 (2)
12/01/97 69 U.S. Dollar 69 368 Finnish Markka 69 -
12/01/97 866 U.S. Dollar 866 1,713 Netherlands Guilder 862 (4)
12/01/97 368 U.S. Dollar 368 728 Netherlands Guilder 366 (2)
12/02/97 164 U.S. Dollar 164 29 Portuguese Escudo 162 (2)
12/02/97 329 U.S. Dollar 329 2,213 Danish Krone 330 1
12/02/97 289,999 Indonesian Rupiah 80 80 U.S. Dollar 80 -
12/02/97 6,876 Indonesian Rupiah 2 2 U.S. Dollar 2 -
12/03/97 6,507 Indonesian Rupiah 2 2 U.S. Dollar 2 -
12/03/97 62 Netherlands Guilder 31 31 U.S. Dollar 31 -
12/03/97 336 U.S. Dollar 336 492 Australian Dollar 336 -
12/03/97 351 U.S. Dollar 351 513 Australian Dollar 351 -
12/03/97 426 U.S. Dollar 426 255 British Pound 430 4
12/03/97 386 U.S. Dollar 386 231 British Pound 390 4
12/03/97 187 U.S. Dollar 187 267 Swiss Franc 187 -
12/03/97 2,697 U.S. Dollar 2,697 3,839 Swiss Franc 2,692 (5)
12/03/97 400 U.S. Dollar 400 2,132 Finnish Markka 400 -
12/04/97 5,863 Indonesian Rupiah 2 2 U.S. Dollar 2 -
12/04/97 333 U.S. Dollar 333 486 Australian Dollar 332 (1)
12/04/97 274 U.S. Dollar 274 163 British Pound 275 1
12/04/97 439 U.S. Dollar 439 261 British Pound 440 1
12/04/97 485 U.S. Dollar 485 288 British Pound 486 1
12/08/97 4,975 Indonesian Rupiah 1 1 U.S. Dollar 1 -
12/31/97 141 U.S. Dollar 141 827 French Franc 140 (1)
------- ------- -----
$ 9,198 $ 9,201 $ 3
======= ======= =====
</TABLE>
(6) Transactions with Manager
A. Management fees -- The investment policies of the Fund and management of the
Fund's portfolio are carried out by USAA Investment Management Company (the
Manager). The Fund's management fees are computed at .75% of its annual average
net assets.
B. Transfer agent's fees -- USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Fund based on an annual charge of $23.50 per shareholder account plus
out-of-pocket expenses.
C. Underwriting services -- The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing best efforts basis. The
Manager receives no commissions or fees for this service.
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 $4,600.
(7) Transactions with Affiliates
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated Trustees or Fund officers
received any compensation from the Fund.
<TABLE>
(8) Financial highlights
Per share operating performance for a share outstanding throughout each period
is as follows:
<CAPTION>
Six-month Eight-month
Period Ended Year Ended May 31, Period Ended Year Ended
November 30, ------------------ May 31, September 30,
1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 27.96 $ 25.47 $ 22.63 $ 23.24 $ 23.43 $ 19.94
Net investment income .40 .74 .73 .68 .40 .60
Net realized and
unrealized gain 2.05 3.37 3.18 .67 .29 3.52
Distributions from net
investment income (.25) (.78) (.74) (.58) (.59) (.63)
Distributions of realized
capital gains (.88) (.84) (.33) (1.38) (.29) -
---------- ---------- ---------- -------- -------- --------
Net asset value at
end of period $ 29.28 $ 27.96 $ 25.47 $ 22.63 $ 23.24 $ 23.43
========== ========== ========== ======== ======== ========
Total return (%) * 8.84 16.94 17.79 6.43 3.00 21.35
Net assets at end of
period (000) $1,399,012 $1,263,355 $1,035,844 $874,587 $814,869 $707,795
Ratio of expenses to
average net assets (%) 1.02(a) 1.06 1.15 1.13 1.11(a) 1.18
Ratio of net investment
income to average
net assets (%) 2.84(a) 2.88 3.06 3.16 2.68(a) 2.92
Portfolio turnover (%) 19.49 35.14 36.15 33.17 30.87 45.18
Average commission rate
paid per share + $ .0138 $ .0299 $ .0039
* 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.
</TABLE>
