Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Managers 5
Financial Information:
Portfolio of Investments 8
Notes to Portfolio of Investments 14
Statement of Assets and Liabilities 15
Statement of Operations 16
Statements of Changes in Net Assets 17
Notes to Financial Statements 18
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)1999, 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 (Registered
Trademark) 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 not insured or guaranteed by the
FDIC or any other government agency. Although the fund seeks to preserve
the value of your investment at $1 per share, it is possible to lose
money by investing in the fund.
(5) This Fund may be more volatile than a fund that diversifies across many
industries.
* The InveStart (Registered Trademark) program is available for investors
without the $3,000 initial investment required to open an IMCO mutual fund
account. A mutual fund account can be opened with no initial investment if
you elect to have monthly automatic investments of at least $50 from a bank
account. InveStart is not available on tax-exempt funds or the S&P 500
Index Fund. The minimum initial investment for IRAs is $250, except for the
$2,000 minimum required for the S&P 500 Index Fund. IRAs are not available
for tax-exempt funds. The Growth and Tax Strategy Fund is not available as
an investment for your IRA because the majority of its income is tax
exempt.
** California, Florida, New York, Texas, and Virginia funds available to
residents only.
Non-deposit investment products are not insured by the FDIC, are not deposits or
other obligations of, or guaranteed by, USAA Federal Savings Bank, and are
subject to investment risks, and may lose value.
For more complete information about the mutual funds managed and distributed by
USAA IMCO, including charges and expenses, please call 1-800-531-8181 for a
prospectus. Read it carefully before you invest.
Message from the President
[PHOTOGRAPH OF PRESIDENT AND VICE CHAIRMAN OF THE BOARD, MICHAEL J.C. ROTH, CFA
APPEARS HERE]
Since my last message to Investment Trust shareholders, the stock market has
reminded us that intense emotions are part of the investment process. In August,
the unraveling of markets around the world was downright scary. Huge daily
drops, the rampage into treasury bonds while other income markets dried up, and
the antics of huge hedge funds made for confusion and fear. At such times, it
becomes very hard for people to remember the long-term plans they have made for
their portfolios.
A scant three months later, stock markets have recouped losses and bond markets
have settled down. August looks like a momentary aberration. With the retreat of
fear, we are now seeing something the financial press has tagged "Internet
stocks." These are various companies, going public for the first time, whose
business is closely tied to Internet commerce. Some have soared to prices ten
times their initial offering, even though they have little or no earnings and
traditional analysts can detect little to support such lofty prices. In the
1600s, investors got the idea that tulip bulbs, which Dutch traders brought home
on their voyages, were highly valuable and bid their prices to incredible
levels. Those prices collapsed and the word "tulip" took on a special meaning
for investment professionals. The tulip craze became a classic example of
irrational investor behavior. When I watch the Internet IPOs, I think "Tulip."
This tells me that emotions can run both ways, from panic to euphoria, and make
people forget their long-term investment plans. But, you need those plans most
of all when the emotions are rampant. Trading in calm markets prepares you to
avoid trading during raging markets.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
For more complete information about mutual funds managed and distributed by USAA
IMCO, including charges and expenses, please call for a prospectus. Read it
carefully before investing.
Although none of the investments mentioned are guaranteed or insured, government
bonds are backed by the full faith and credit of the U.S. Government. Common
stocks are considered to have the most risk, followed by corporate bonds and
government bonds. All of these vehicles are subject to tax. If held to maturity,
bonds offer a fixed rate of return and fixed principal value. Return and
principal value of an investment in stocks will fluctuate.
Past performance is no guarantee of future results.
Investment Review
USAA 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.
- --------------------------------------------------------------------------------
11/30/98 5/31/98
- --------------------------------------------------------------------------------
Net Assets $59.0 Million $39.2 Million
Net Asset Value Per Share $12.34 $12.11
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AND 30-DAY SEC YIELD* AS OF 11/30/98
- --------------------------------------------------------------------------------
5/31/98 Since Inception 30-Day
to 11/30/98 (+) 1 Year on 9/1/95 SEC Yield
4.14% 10.91% 11.52% 3.55%
- --------------------------------------------------------------------------------
* Calculated as prescribed by the Securities and Exchange Commission.
+ 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 Income Strategy Fund, the Lehman
Brothers Aggregate Bond Index, and the Lipper General Bond Funds Average for the
period of 09/01/95 through 11/30/98. The data points from the graph are as
follows:
USAA Income Lehman Lipper
Strategy Fund Index Average
------------- ------- -------
09/01/95 $10,000 $10,000 $10,000
11/30/95 10,711 10,382 10,399
05/31/96 10,323 10,262 10,464
11/30/96 11,546 11,012 11,300
05/31/97 11,725 11,115 11,558
11/30/97 12,851 11,844 12,243
05/31/98 13,686 12,328 12,777
11/30/98 14,253 12,963 13,083
Data since inception on 09/01/95 through 11/30/98
The Lehman Brothers Aggregate Bond Index is an unmanaged index made up of the
government/corporate index, the mortgage-backed securities index, and the
asset-backed securities index. 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: From L to R: Pamela K. Bledsoe,
CFA (Money Market Instruments), John W. Saunders, Jr., CFA (Allocation Manager,
Bonds), and Patrick O'Hare, CFA (Stocks).]
FUND OVERVIEW
Positive market trends continue although not without some interim distress,
occurring especially in the stock market. The summer disturbance for stocks was
followed by a sharp rally to new highs on November 23. Thus, the pattern of new
stock market highs recorded in each shareholder report since the Fund's
inception on September 1, 1995, remains unbroken. For bonds, interest rates have
continued their downward trend, but the "flight to quality" in August and
September benefited U.S. Treasury bonds at the expense of corporate bonds and
mortgage securities. Your Fund has continued to perform well in this environment
and is ranked #2 out of 30 funds in the General Bond Funds category by Lipper
Analytical Services, Inc.,(1) for the one-year period ending November 30, 1998.
Although past performance does not guarantee future results, the Fund's total
return of 10.91% for the one-year period was well above the Lipper average of
6.73% for funds in the category.
The Fund's investment categories were rebalanced within their respective ranges
in November. On November 30, 1998, the end of this reporting period, portfolio
mix as a percentage of net assets was 76.2% in bonds and 22.7% in common stocks.
(1) Lipper Analytical Services is an independent organization that monitors the
performance of mutual funds. Lipper rankings are based on total returns.
BONDS
The bond market has been subject to high volatility because of adverse technical
factors during this reporting period. Beginning with the Russian government bond
default in mid-August, a "flight to quality" started a strong rally in U.S.
Treasury bonds which moved their interest rates lower. This rally accelerated
when some highly leveraged hedge funds (2) collapsed. The result was
unsustainably lower interest rates on U.S. Treasury bonds while liquidity in the
rest of the bond market vanished when bond dealers refused to bid for bonds.
This lack of liquidity caused interest rates in the rest of the bond market to
move sharply higher. Then, a rally in the Japanese yen in October caused several
hedge funds to sell U.S. Treasury bonds, thereby reversing the diverging trend
and forcing their interest rates higher. As the dust has settled, interest rates
are lower on balance but not as low as they were in early October. Average
maturities in the Fund's bond portfolio were shortened to reduce price
volatility in this turbulent period.
Meanwhile, the Federal Reserve has overtly announced an "easing" in monetary
policy with its three reductions in both the Fed Funds target rate and its own
discount window rate. Therefore, interest rates should stabilize around current
levels. We continue to focus on maintaining a high level of income in the bond
portfolio.
(2) A private investment pool for wealthy investors that, unlike a mutual fund,
is exempt from SEC regulation.
STOCKS
Concerns that the turmoil overseas would cause the U.S. to go into a recession
took a heavy toll on stocks during the summer. Since reaching lows in August,
stocks have rebounded sharply to set new highs at year end. Leading the recovery
were the sectors hardest hit in the sell-off, the financial and the technology
sectors.
On October 1, 1998, the portfolio manager of the equity portion of the Fund
changed, and a number of stocks were sold and replaced. We reduced the
weightings in the traditional value sectors such as basic materials, capital
goods, consumer cyclicals, and utilities. The weightings in faster growing
sectors such as consumer staples and technology were increased. We also
increased the weighting in the financial sector as we felt that the summer
sell-off was overdone.
MONEY MARKET INSTRUMENTS
Money market instruments are used to provide liquidity for withdrawals or to
provide a temporary investment until stock or bond purchases are made. U.S.
government discount notes are the most common instruments used for these
purposes.
- ----------------------------------------
TOP 5 EQUITY HOLDINGS
(% OF NET ASSETS)
- ----------------------------------------
Microsoft 1.1
Cisco Systems 0.9
General Electric 0.8
Texas Instruments 0.7
Pfizer 0.7
- ----------------------------------------
ASSET ALLOCATION
A pie chart is shown here depicting the Asset Allocation as of November 30, 1998
of the USAA Income Strategy Fund to be:
Bonds - 76.2%* and Stocks - 22.7%*.
* Percentages are of the Net Assets in the Portfolio and may or may not equal
100%.
See page 8 for a complete listing of the Portfolio of Investments.
USAA INCOME STRATEGY FUND
PORTFOLIO OF INVESTMENTS
November 30, 1998
(Unaudited)
Market
Number Value
of Shares Security (000)
- --------------------------------------------------------------------------------
STOCKS (22.7%)
Advertising/Marketing (0.1%)
1,400 Omnicom Group, Inc. $ 75
-----------
Aerospace/Defense (0.1%)
2,000 Boeing Co. 81
-----------
Aluminum (0.1%)
900 Aluminum Co. of America 67
-----------
Automobiles (0.4%)
3,900 Ford Motor Co. 215
-----------
Auto Parts (0.3%)
4,300 Lear Corp.* 166
-----------
Banks - Major Regional (0.8%)
3,200 Fleet Financial Group, Inc. 133
2,100 Mellon Bank Corp. 132
1,600 PNC Bank Corp. 83
2,000 State Street Corp. 137
-----------
485
-----------
Banks - Money Center (0.5%)
3,163 BankAmerica Corp. 206
1,100 J. P. Morgan & Co., Inc. 118
-----------
324
-----------
Beverages - Alcoholic (0.2%)
2,200 Anheuser-Busch Companies, Inc. 133
-----------
Beverages - Nonalcoholic (0.7%)
3,400 Coca-Cola Co. 238
1,900 Coca-Cola Enterprises, Inc. 72
2,000 PepsiCo, Inc. 77
-----------
387
-----------
Broadcasting - Radio & TV (0.3%)
5,300 CBS Corp.* 158
-----------
Chemicals (0.6%)
1,100 Dow Chemical Co. 107
4,000 Du Pont (E. I.) De Nemours & Co. 235
-----------
342
-----------
Communication Equipment (0.3%)
1,850 Lucent Technologies, Inc. 159
-----------
Computer - Hardware (0.4%)
1,400 IBM Corp. 231
-----------
Computer - Networking (0.9%)
6,750 Cisco Systems, Inc.* 509
-----------
Computer Software & Service (1.1%)
5,100 Microsoft Corp.* 622
-----------
Drugs (1.4%)
2,600 Merck & Co., Inc. 403
3,700 Pfizer, Inc. ` 413
-----------
816
-----------
Electrical Equipment (1.1%)
2,100 Emerson Electric Co. 136
5,400 General Electric Co. 489
-----------
625
-----------
Electronics - Semiconductors (1.4%)
3,800 Intel Corp. 409
5,600 Texas Instruments, Inc. 428
-----------
837
-----------
Entertainment (0.2%)
1,000 Time Warner, Inc. 106
-----------
Equipment - Semiconductors (0.6%)
6,900 Applied Materials, Inc.* 267
2,900 Teradyne, Inc.* 93
-----------
360
-----------
Finance - Diversified (1.5%)
1,200 American Express Co. 120
4,500 Citigroup, Inc. 226
5,500 Federal Home Loan Mortgage Corp. 333
3,200 Morgan Stanley, Dean Witter, Discover & Co. 223
-----------
902
-----------
Foods (0.6%)
3,700 Nabisco Holdings Corp. 147
4,300 Ralston Purina Group 150
900 Unilever N.V. - New York Shares 70
-----------
367
-----------
Healthcare - Diversified (1.4%)
6,900 American Home Products Corp. 367
1,500 Bristol-Myers Squibb Co. 184
3,200 Johnson & Johnson, Inc. 260
-----------
811
-----------
Hospitals (0.1%)
2,300 Tenet Healthcare Corp.* 68
-----------
Household Products (0.6%)
1,500 Colgate-Palmolive Co. 129
2,500 Procter & Gamble Co. 219
-----------
348
-----------
Housewares (0.2%)
3,000 Newell Co. ` 133
-----------
Insurance - Multi-Line Companies (0.6%)
3,950 American International Group, Inc. 371
-----------
Insurance - Property/Casualty (0.2%)
2,800 Allstate Corp. 114
-----------
Investment Banks / Brokerage (0.1%)
1,200 Merrill Lynch & Co., Inc. 90
-----------
Machinery - Diversified (0.1%)
1,500 Caterpillar, Inc. 74
-----------
Manufacturing - Diversified Industries (0.5%)
1,700 Minnesota Mining & Manufacturing Co. 136
1,500 United Technologies Corp. 161
-----------
297
Medical Products & Supplies (0.3%)
2,300 Medtronic, Inc. 156
-----------
Oil - Domestic Integrated (0.1%)
1,000 Atlantic Richfield Co. 67
-----------
Oil - International Integrated (1.2%)
4,300 Exxon Corp. 323
3,300 Royal Dutch Petroleum Co. 155
3,800 Texaco, Inc. 219
-----------
697
-----------
Oil & Gas - Drilling/Equipment (0.2%)
2,600 Schlumberger Ltd. 116
-----------
Paper & Forest Products (0.1%)
1,500 International Paper Co. 65
-----------
Retail - Building Supplies (0.2%)
3,000 Home Depot, Inc. 149
-----------
Retail - General Merchandising (0.7%)
3,300 Dayton Hudson Corp. 149
3,200 Wal-Mart Stores, Inc. 241
-----------
390
-----------
Retail - Specialty Apparel (0.1%)
1,200 Gap, Inc. 88
-----------
Services - Commercial & Consumer (0.2%)
3,700 Service Corp. International 138
-----------
Services - Data Processing (0.2%)
3,500 First Data Corp. 93
-----------
Telecommunications - Long Distance (0.6%)
2,400 MCI Worldcom, Inc.* 142
3,000 Sprint Corp. 218
-----------
360
-----------
Telephones (0.9%)
3,400 Bell Atlantic Corp. 189
1,300 BellSouth Corp. 114
4,800 SBC Communications Corp. 230
-----------
533
-----------
Tobacco (0.5%)
5,200 Philip Morris Companies, Inc. 291
-----------
Total stocks (cost: $11,021) 13,416
-----------
Principal Market
Amount Coupon Maturity Value
(000) Security Rate Date (000)
- --------------------------------------------------------------------------------
Bonds (76.2%)
$1,000 Aluminum Co. of America 5.75% 2/01/2001 $ 1,014
1,000 American General Finance Corp. 5.88% 7/01/2000 1,005
1,000 Associates Corp. of North America 5.90% 6/23/2000 1,006
1,000 Branch Banking and Trust Co. 5.70% 2/01/2001 1,000
1,000 Caterpillar Financial Services Corp., MTN 5.83% 10/16/2000 1,007
500 Central Power & Light Co. 6.63% 7/01/2005 529
1,000 Chrysler Financial Corp., MTN 6.05% 3/06/2001 1,011
500 Citicorp 6.38% 1/15/2006 516
1,000 Comdisco, Inc. 6.02% 6/26/2000 998
500 Dresser Industries, Inc. 6.25% 6/01/2000 507
500 Ford Motor Credit Co. 6.13% 1/09/2006 513
500 Ford Motor Credit Co., MTN 5.99% 2/27/2001 507
1,000 General Electric Credit Corp., MTN 5.73% 6/19/2000 1,008
1,000 General Motors Acceptance Corp., Notes 5.95% 4/20/2001 1,012
500 Heller Financial, Inc. 5.63% 3/15/2000 497
750 Heller Financial, Inc. MTN 5.93% 7/24/2000 750
175 Household Finance Corp. 6.88% 3/01/2007 185
500 Hydro-Quebec 6.98% 2/28/2005 535
500 IBM Corp. 5.76% 7/10/2000 506
1,000 John Deere Capital Corp. 5.85% 1/15/2001 1,004
1,000 Nationsbank Charlotte NC, N.A., Notes 5.86% 5/26/2000 1,005
500 Newell Co. 6.18% 7/11/2000 506
500 Pacific Bell 5.88% 2/15/2006 514
1,000 Provident Bank, Bank Notes 6.13% 12/15/2000 1,008
500 Sara Lee Corp. 6.30% 11/07/2005 522
1,000 The Cit Group Holdings, Inc. 6.20% 10/20/2000 1,012
1,000 Wal-Mart Stores, Inc. Notes 5.85% 6/01/2018 1,013
500 Waste Management, Inc. 7.00% 10/15/2006 528
500 Weingarten Realty Investors 6.00% 8/10/2001 498
2,000 Federal Home Loan Banks 5.58% 6/22/2000 2,020
500 Federal Home Loan Banks 5.66% 6/23/2000 505
1,100 Federal Home Loan Banks 5.50% 7/14/2000 1,110
2,000 Federal National Mortgage Assn., MTN 5.65% 6/12/2000 2,021
69 Government National Mortgage Association 7.50% 8/15/2026 72
85 Government National Mortgage Association 7.00% 3/15/2026 87
1,473 Government National Mortgage Association 7.00% 3/15/2026 1,511
1,135 Government National Mortgage Association 7.50% 11/15/2026 1,174
230 Government National Mortgage Association 7.00% 2/15/2027 236
407 Government National Mortgage Association 7.50% 5/15/2027 421
4,941 Government National Mortgage Association 6.00% 4/15/2028 4,904
988 Government National Mortgage Association 6.00% 7/15/2028 980
494 Government National Mortgage Association 6.00% 9/15/2028 490
1,046 Government National Mortgage Association 6.00% 9/15/2028 1,038
1,950 U.S. Treasury Bonds 7.88% 2/15/2021 2,588
4,061 U.S. Treasury Notes 4.75% 11/15/2008 4,069
--------
Total bonds (cost: $43,891) 44,942
--------
Total investments (cost: $54,912) $58,358
--------
- ------------------------
* Non-income producing.
USAA INCOME STRATEGY FUND
NOTES TO PORTFOLIO OF INVESTMENTS
November 30, 1998
(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 0.6% of net assets at November 30, 1998.
See accompanying notes to financial statements.
USAA INCOME STRATEGY FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
November 30, 1998
(Unaudited)
ASSETS
Investments in securities, at market value
(identified cost of $54,912) $ 58,358
Cash 103
Receivables:
Capital shares sold 43
Dividends and interest 609
----------
Total assets 59,113
----------
LIABILITIES
Capital shares redeemed 59
USAA Investment Management Company 14
USAA Transfer Agency Company 9
Accounts payable and accrued expenses 20
----------
Total liabilities 102
----------
Net assets applicable to capital shares outstanding $ 59,011
==========
REPRESENTED BY:
Paid-in capital $ 54,770
Accumulated undistributed net investment income 390
Accumulated net realized gain on investments 405
Net unrealized appreciation of investments 3,446
----------
Net assets applicable to capital shares outstanding $ 59,011
==========
Capital shares outstanding, unlimited number of shares
authorized, no par value 4,781
==========
Net asset value, redemption price, and offering price per share $ 12.34
==========
See accompanying notes to financial statements.
USAA INCOME STRATEGY FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended November 30, 1998
(Unaudited)
Net investment income:
Income:
Dividends $ 94
Interest 1,140
----------
Total income 1,234
----------
Expenses:
Management fees 125
Transfer agent's fees 49
Custodian's fees 34
Postage 2
Shareholder reporting fees 1
Trustees' fees 2
Registration fees 33
Professional fees 13
Other 2
----------
Total expenses before reimbursement 261
Expenses reimbursed (9)
----------
Total expenses after reimbursement 252
----------
Net investment income 982
----------
Net realized and unrealized gain on investments:
Net realized gain on investments 426
Change in net unrealized appreciation/depreciation
of investments 801
----------
Net realized and unrealized gain 1,227
----------
Increase in net assets resulting from operations $ 2,209
==========
See accompanying notes to financial statements.
USAA INCOME STRATEGY FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended November 30, 1998
and Year ended May 31, 1998
(Unaudited)
11/30/98 5/31/98
-----------------------
From operations:
Net investment income $ 982 $ 1,031
Net realized gain on investments 426 231
Change in net unrealized appreciation/depreciation
of investments 801 2,051
-----------------------
Increase in net assets resulting from operations 2,209 3,313
-----------------------
Distributions to shareholders from:
Net investment income (869) (867)
-----------------------
Net realized gains (161) (92)
-----------------------
From capital share transactions:
Proceeds from shares sold 24,244 26,233
Shares issued for dividends reinvested 849 663
Cost of shares redeemed (6,422) (3,967)
-----------------------
Increase in net assets from capital share
transactions 18,671 22,929
-----------------------
Net increase in net assets 19,850 25,283
Net assets:
Beginning of period 39,161 13,878
-----------------------
End of period $59,011 $39,161
=======================
Undistributed net investment income included in
net assets:
End of period $ 390 $ 277
=======================
Change in shares outstanding:
Shares sold 2,013 2,233
Shares issued for dividends reinvested 70 57
Shares redeemed (535) (337)
-----------------------
Increase in shares outstanding 1,548 1,953
=======================
See accompanying notes to financial statements.
USAA INCOME STRATEGY FUND
NOTES TO FINANCIAL STATEMENTS
November 30, 1998
(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 USAA
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 Trust's Board of Trustees. The
Service uses the mean between quoted bid and asked prices or the last sale price
to price securities when, in the Service's judgement, these prices are readily
available and are representative of the securities' market values. For many
securities, such prices are not readily available. The Service generally prices
these securities based on methods which include consideration of yields or
prices of securities of comparable quality, coupon, maturity and type,
indications as to values from dealers in securities, and general market
conditions.
5. Securities which cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value, using methods determined
by USAA Investment Management Company (the Manager) under the general
supervision of the Board of Trustees.
B. Federal taxes - The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Dividend
income is recorded on the ex-dividend date; interest income is recorded on the
accrual basis. Discounts and premiums on securities are amortized over the life
of the respective securities.
D. Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that may affect the reported amounts in the financial
statements.
(2) LINES OF CREDIT
The Fund participates with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million, one with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($750 million uncommitted), and one with
NationsBank of Texas, N.A. ($100 million committed). The purpose of the
agreements is to meet temporary or emergency cash needs, including redemption
requests that might otherwise require the untimely disposition of securities.
Subject to availability under its agreement with CAPCO, the Fund may borrow from
CAPCO an amount up to 5% of the Fund's total assets at CAPCO's borrowing rate
with no markup. Subject to availability under its agreement with NationsBank,
the Fund may borrow from NationsBank an amount which, when added to outstanding
borrowings under the CAPCO agreement, does not exceed 25% of the Fund's total
assets at NationsBank's borrowing rate plus a markup. The Fund had no borrowings
under either of these agreements during the six-month period ended November 30,
1998.
(3) DISTRIBUTIONS
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are made
in the succeeding fiscal year or as otherwise required to avoid the payment of
federal taxes.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended November 30, 1998 were
$48.5 million and $30.0 million, respectively.
Gross unrealized appreciation and depreciation of investments at November 30,
1998 was $3.5 million and $64,000, respectively.
(5) TRANSACTIONS WITH MANAGER
A. Management fees - USAA Investment Management Company carries out the Fund's
investment policies and manages the Fund's portfolio. 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, 1999, and accordingly
has waived a portion of its management fees.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Fund based on an annual charge of $26 per shareholder account plus
out-of-pocket expenses. Effective January 1, 1999, the annual charge will be
$28.50.
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, 1998, the Association and its affiliates
owned 502.4 thousand shares (10.5%) 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 Period Ended
November 30, Year Ended May 31, May 31,
----------------------------------------------------------
1998 1998 1997 1996*
----------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value at
beginning of period $ 12.11 $ 10.84 $ 10.06 $ 10.00
Net investment income .22 .46 .50 .39(b)
Net realized and
unrealized gain (loss) .27 1.31 .83 (.06)
Distributions from net
investment income (.22) (.46) (.50) (.22)
Distributions of realized
capital gains (.04) (.04) (.05) (.05)
----------------------------------------------------------
Net asset value at
end of period $ 12.34 $ 12.11 $ 10.84 $ 10.06
==========================================================
Total return (%) ** 4.14 16.72 13.59 3.23
Net assets at end of period (000) $59,011 $39,161 $13,878 $12,173
Ratio of expenses to
average net assets (%) 1.00(a) 1.00 1.00 1.00(a)
Ratio of expenses to
average net assets
excluding reimbursements (%) 1.04(a) 1.21 1.51 1.78(a)
Ratio of net investment income to
average net assets (%) 3.94(a) 4.35 4.80 4.71(a)
Portfolio turnover (%) 61.62 7.15 64.71 78.60
</TABLE>
* Fund commenced operations September 1, 1995.
** Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
TRUSTEES
Robert G. Davis, Chairman of the Board
Michael J.C. Roth, President and Vice Chairman of the Board
John W. Saunders, Jr., Vice President
Barbara B. Dreeben
Howard L. Freeman, Jr.
Robert L. Mason
Richard A. Zucker
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
Telephone Assistance Hours
Call toll free - Central Time
Monday - Friday 7:30 a.m. to 8:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
For Additional Information On Mutual Funds
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges or redemptions
1-800-531-8448, (in San Antonio) 456-7202
Recorded Mutual Fund Price Quotes
24-Hour Service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
Mutual Fund TouchLine(Registered Trademark)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
