USAA CORNERSTONE
STRATEGY FUND
PROSPECTUS
OCTOBER 1, 1999
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy?............... 2
Main Risks of Investing in This Fund..................................... 2
Is This Fund for You?.................................................... 3
Could the Value of Your Investment in This Fund Fluctuate?............... 3
Fees and Expenses........................................................ 5
Fund Investments......................................................... 6
Fund Management.......................................................... 12
Using Mutual Funds in an Asset Allocation Program........................ 14
How to Invest............................................................ 16
Important Information About Purchases and Redemptions.................... 20
Exchanges................................................................ 21
Shareholder Information.................................................. 22
Financial Highlights..................................................... 25
Appendix A............................................................... 26
Appendix B.............................................................. 28
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is to achieve a positive, inflation-adjusted
rate of return and a reasonably stable value of Fund shares, thereby preserving
purchasing power of shareholders' capital. Using preset target ranges, we will
invest the Fund's assets mostly in stocks (divided into the categories of U.S.,
international, real estate, and gold) and to a much lesser extent in U.S.
government securities.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objective will be achieved. See FUND INVESTMENTS on
page 6 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risks of investing in this Fund are market risk, interest rate
risk, and the unique risks of investing in foreign stocks, real estate
investment trusts (REITs), and gold mining companies.
* MARKET RISK involves the possibility that the Fund's investments in stocks
will decline in a down stock market, reducing the value of a company's
stock, regardless of the success or failure of that company's operations.
* INTEREST RATE RISK involves the possibility that the value of the Fund's
investments in U.S. government securities will fluctuate because of changes
in interest rates.
IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
* FOREIGN INVESTING RISK involves the possibility that the Fund's investments
in foreign stock will decrease because of currency exchange rate
fluctuations, increased price volatility, uncertain political conditions,
and other factors.
* REIT RISK involves the possibility that the Fund's investments in REITs will
decrease because of a decline in real estate values.
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* GOLD MINING RISK involves the risk that the value of the Fund's investments
in gold mining securities will decrease because of a decrease in the value
of gold.
Another risk of the Fund described later in the Prospectus is rebalancing risk.
As with other mutual funds, losing money is also a risk of investing in this
Fund.
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the risks you will face as a Fund shareholder.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
* You are seeking a fund that will diversify your holdings among a wide
variety of investment categories.
* You are willing to accept moderate risk.
* You are willing to take some exposure to the stock market.
* You are seeking an appropriate investment for an IRA, through a 401(k)
plan or 403(b) plan, or other tax-sheltered account.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
* You need steady income.
* You are unwilling to take greater risk for long-term goals.
* You need an investment that provides tax-free income.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment in this Fund will
fluctuate with the changing market values of the investments in the Fund.
The bar chart, shown on the next page, illustrates the Fund's volatility and
performance from year to year for the past ten years.
3
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Total Return
All mutual funds must use the same formula to calculate total return.
[SIDE BAR]
TOTAL RETURN MEASURES THE PRICE CHANGE ASSUMING THE REINVESTMENT OF ALL
DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
[BAR CHART]
CALENDER TOTAL
YEAR RETURN
1989 21.94%
1990 -9.20%
1991 16.23%
1992 6.35%
1993 23.73%
1994 -1.05%
1995 18.40%
1996 17.87%
1997 15.64%
1998 2.01%
THE FUND'S TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999, WAS
5.39%.
During the periods shown in the bar chart, the highest total return for a
quarter was 10.06% (quarter ending March 31, 1993) and the lowest total return
for a quarter was -10.72% (quarter ending September 30, 1998).
The table below shows how the Fund's average annual total returns for the one-,
five-, and ten-year periods, as well as the life of the Fund, compared to those
of a broad-based securities market index. Remember, historical performance does
not necessarily indicate what will happen in the future.
===============================================================================
Average Annual
Total Returns
(for the periods ending Past Past Past Life of
December 31, 1998) 1 Year 5 Years 10 Years Fund
- -------------------------------------------------------------------------------
Cornerstone Strategy Fund 2.01% 10.25% 10.68% 12.18%
- -------------------------------------------------------------------------------
S&P 500 Index* 28.60% 24.05% 19.19% 18.80%
===============================================================================
*THE S&P 500 INDEX IS A BROAD-BASED COMPOSITE UNMANAGED INDEX THAT
REPRESENTS THE WEIGHTED AVERAGE PERFORMANCE OF A GROUP OF 500 WIDELY HELD,
PUBLICLY TRADED STOCKS.
[SIDE BAR]
[TELEPHONE GRAPHIC]
TOUCHLINE(R)
1-800-531-8777
PRESS
1
THEN
1
THEN
5 1 #
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
The value of your shares may go up or down. For the most current price and
return information for this Fund, you may call USAA TouchLine(R) at
1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1 again for prices and
returns. Then, press 51# when asked for the Fund Code.
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You may also find the most current price of your shares in the business section
of your newspaper in the mutual fund section under the heading "USAA Group" and
the symbol "CrnstStr." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "USCRX."
[SIDE BAR]
NEWSPAPER
SYMBOL
CrnstStr
TICKER
SYMBOL
USCRX
FEES AND EXPENSES
This summary shows what it will cost you, directly and indirectly, to invest in
this Fund.
Shareholder Transaction Expenses -- (Direct Costs)
There are no fees or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is a $10 fee. (Your bank may also charge a fee for receiving
wires.)
Annual Fund Operating Expenses -- (Indirect Costs)
Fund expenses come out of the Fund's assets and are reflected in the Fund's
share price and dividends. "Other Expenses" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses during the past
fiscal year ended May 31, 1999, and are calculated as a percentage of average
net assets.
[SIDE BAR]
12b-1 FEES-SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR ADVERTISING AND
OTHER COSTS OF SELLING FUND SHARES.
=============================================================
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .30%
-----
Total Annual Fund Operating Expenses 1.05%
=====
=============================================================
Example of Effect of the Fund's Operating Expenses
This example is intended to help you compare cost of investing in this Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
remain the same, and (3) you redeem all of your shares at the end of the
periods shown.
=============================================================
1 year................$ 107
3 years............... 334
5 years............... 579
10 years............... 1,283
=============================================================
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FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal strategy is to provide a diversified investment
program within one mutual fund by allocating its assets in each of the
following investment categories according to the following targeted
ranges. Securities are classified by category at the time of purchase.
[BAR CHART]
PERCENTAGE TARGET RANGE
OF NET ASSETS
INVESTMENT CATEGORY
U.S. STOCKS 25-55%
INTERNATIONAL STOCKS 25-35%
U.S. GOVERNMENT SECURITIES 15-30%
REAL ESTATE SECURITIES 5-20%
GOLD SECURITIES 0-10%
The ranges allow for a variance within each investment category. The Fund's
Board of Trustees may revise the target ranges upon 60 days' prior written
notice to shareholders. However, we may go outside the ranges on a temporary
defensive basis without shareholder notification whenever we believe it is in
the best interest of the Fund and its shareholders.
Q Why are stocks and bonds mixed in the same Fund?
A From time to time the stock and bond markets may fluctuate independently
of each other. In other words, a decline in the stock market may, in
certain instances, be offset by a rise in the bond market, or vice versa.
As a result, the Fund, with its mix of stocks and bonds, is expected in
the long run to entail less market risk (and potentially less return) than
a mutual fund investing exclusively in stocks.
Q Why were these investment categories and target ranges selected?
A The investment categories and target ranges were selected to provide
investors with a diversified investment in a single mutual fund. The U.S.
Stocks category was selected to provide
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appreciation. The International Stocks category was selected to provide
the potential for appreciation during periods of adverse economic and
market conditions in the United States. The U.S. Government Securities
category was selected to provide safety of principal in periods of
deflation. The Real Estate and Gold Securities categories were selected to
provide a positive total return during inflationary periods.
However, as a temporary defensive measure because of market, economic,
political, or other conditions, we may invest up to 100% of the Fund's
assets in investment-grade, short-term debt instruments. This may result
in the Fund not achieving its investment objective during the time it is
in this temporary defensive posture.
Q What actions are taken to keep the Fund's asset allocations within the
target ranges?
A If market action causes the actual assets of the Fund in one or more
investment categories to move outside the ranges, we will make adjustments
to rebalance the portfolio. In general, we will rebalance the portfolio at
least once during each quarter. In rebalancing the Fund's portfolio, we
will buy or sell securities to return the actual allocation of the Fund's
assets to within its target ranges. For example, the Fund's portfolio
could begin a quarter with its assets allocated 45% in U.S. stocks, 25% in
international stocks, 15% in U.S. government securities, 10% in real
estate securities, and 5% in gold securities. During the quarter, a strong
stock market coupled with weak real estate and gold markets could leave
the portfolio with 57% in U.S. stocks, 25% in international stocks, 15% in
U.S. government securities, 3% in real estate securities, and 0% in gold
securities. In this case, we would sell U.S. stocks and could use the
proceeds to buy more real estate securities in order to bring the U.S.
stocks and the real estate securities back to within their target ranges.
[CAUTION LIGHT]
REBALANCING RISK. In purchasing and selling securities in order to rebalance
its portfolio, the Fund will pay more in brokerage commissions than it would
without a rebalancing policy. As a result of the need to rebalance, the Fund
also has less flexibility in the timing of purchases and sales of securities
than it would otherwise. While we attempt to minimize any adverse impact to the
Fund or its shareholders, the Fund may have a
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higher proportion of capital gains and a lower return than a fund that does not
have a rebalancing policy.
U.S. Stocks
Q What types of U.S. stocks will be included in the Fund's portfolio?
A The Fund's portfolio will consist of a blend of growth and value stocks
of companies organized under the laws of a state or territory of the
United States.
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in stocks, it is subject to stock market
risk. Stock prices in general may decline over short or even extended periods,
regardless of the success or failure of a company's operations. Stock markets
tend to run in cycles, with periods when stock prices generally go up, known as
"bull" markets, and periods when stock prices generally go down, referred to as
"bear" markets. Stocks tend to go up and down more than bonds.
Q How are the decisions to buy and sell U.S. stocks made?
A The factors we evaluate to select stocks include:
* company's competitive position,
* management's abilities,
* company's growth prospects,
* company's financial position,
* above factors relative to the stock's current price.
The process of selling a stock begins when one or more of these factors
changes for the worse.
International Stocks
Q What role do international stocks play in the Fund's portfolio?
A From time to time, the U.S. and foreign stock markets may fluctuate
independently of each other. In other words, a decline in one market may,
in certain circumstances, be offset by a rise in the other market. In
addition, foreign equity markets may provide attractive returns not
otherwise available in the U.S. markets.
8
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Q What is considered to be a "foreign company?"
A A foreign company is one organized under the laws of a foreign country,
and it must also have one of the following additional characteristics:
* the principal trading market for the stock is in a foreign country;
* at least 50% of its revenues or profits are derived from operations
within foreign countries; or
* at least 50% of its assets are located within foreign countries.
[CAUTION LIGHT]
FOREIGN INVESTING RISK. Investing in foreign securities poses unique risks:
currency exchange rate fluctuations; foreign market illiquidity; increased
price volatility; exchange control regulations; foreign ownership limits;
different accounting, reporting, and disclosure requirements; difficulties in
obtaining legal judgments; and foreign withholding taxes. Two forms of foreign
investing risk are emerging markets risk and political risk.
* EMERGING MARKETS RISK. Investments in countries that are in the early
stages of their industrial development involve exposure to economic
structures that are generally less diverse and mature than in the United
States and to political systems which may be less stable.
* POLITICAL RISK. Political risk includes a greater potential for coups
d'etat, revolts, and expropriation by governmental organizations.
Q How are the decisions to buy and sell international stocks made?
A We review countries and regions for economic and political stability as
well as future prospects. Then we research individual companies looking
for favorable valuations, growth prospects, quality of management, and
industry outlook. Securities are sold if we believe they are overvalued or
if the economic or political outlook significantly deteriorates.
U.S. Government Securities
Q What role do U.S. government securities play in the Fund's portfolio?
A The U.S. Government Securities investment category is intended to
provide both liquidity and interest income with limited credit risk.
[CAUTION LIGHT]
INTEREST RATE RISK. As a mutual fund investing in bonds, the Fund is subject to
the risk that the market value of the bonds will decline because
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of rising interest rates. Bond prices are linked to the prevailing market
interest rates. In general, when interest rates rise, bond prices fall and when
interest rates fall, bond prices rise. The price volatility of a bond also
depends on its maturity. Generally, the longer the maturity of a bond, the
greater its sensitivity to interest rates. To compensate investors for this
higher risk, bonds with longer maturities generally offer higher yields than
bonds with shorter maturities.
Q What types of U.S. government securities are included in the Fund's
portfolio?
A The U.S. government securities in the Fund's portfolio will consist of
securities, without specific maturity requirements or limits, issued or
guaranteed as to both principal and interest by the U.S. government, its
agencies or instrumentalities. Examples of these securities are U.S.
Treasury bills, notes and bonds, and securities issued by the Federal Farm
Credit Banks, Federal Home Loan Mortgage Corporation, Federal National
Mortgage Association, and Government National Mortgage Association.
Additionally, we may invest the Fund's assets in repurchase agreements
collateralized by securities of the U.S. government or by its agencies or
instrumentalities.
Q How are the decisions to buy and sell U.S. government securities made?
A We search for securities that represent value at the time given current
market conditions. Since credit quality is not an issue with government
securities, we determine value by weighing current return with risk of
principal due to potential changes in interest rates. Generally speaking,
the longer the maturity of a bond, the greater the value will change with
changes in interest rates, either up or down. We will sell securities as
needed to provide liquidity for the Fund or to change the potential return
characteristics of this investment category.
Real Estate Securities
Q What role do real estate securities play in the Fund's portfolio?
A We believe that diversified investments linked to real estate are a good
hedge during an inflationary environment.
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Q What types of real estate securities are included in the Fund's portfolio?
A Investments in this category will consist primarily of common stocks of
real estate investment trusts (REITs) and U.S. companies that operate as
real estate corporations or which have a significant portion of their
assets in real estate. We will evaluate the nature of a company's real
estate holdings to determine whether the Fund's investment in the
company's common stock will be included in this category. In addition, we
may also invest in preferred stocks, securities convertible into common
stocks, and securities that carry the right to buy common stocks of REITs
and real estate companies. The Fund will not acquire any direct ownership
of real estate.
[CAUTION LIGHT]
REITS. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. Additionally, REITs are
dependent upon the capabilities of the REIT manager(s), have limited
diversification, and could be significantly impacted by changes in tax laws.
Q How are the decisions to buy and sell real estate securities made?
A We look for well-managed and prudently financed companies that own high
quality properties, have the potential to grow per share cash flow at an
above average rate, and that sell at reasonable valuation levels. We will
sell these securities when they no longer meet these criteria.
Gold Securities
Q What role do gold securities play in the Fund's portfolio?
A Gold securities have been selected for their perceived potential to
increase in value during inflationary periods.
Q What types of gold securities are included in the Fund's portfolio?
A We will invest at least 80% of the Fund's assets devoted to this category
in equity securities of companies principally engaged in gold exploration,
mining, or processing. The remaining investments in this category will
consist of equity securities of companies similarly engaged in other
precious metals and minerals. These securities may consist of common
stocks,
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preferred stocks, securities convertible into common stocks, and
securities that carry the right to buy common stocks.
[CAUTION LIGHT]
GOLD MINING RISK. Gold mining securities involve additional risk because of
gold's price volatility and the increased impact such volatility has on the
profitability of gold mining companies. However, since the market action of
such securities has tended to move independently of the broader financial
markets, the addition of gold mining securities to an investor's portfolio may
reduce overall fluctuations in portfolio value.
Q How are the decisions to buy and sell gold securities made?
A We look for well-managed and prudently financed low-cost producers with
good production or reserve growth potential that sell at reasonable
valuations on a risk-adjusted basis. We will sell these securities when
they no longer meet these criteria.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 26.
FUND MANAGEMENT
USAA Investment Management Company serves as the manager and distributor of
this Fund. We are an affiliate of United Services Automobile Association
(USAA), a large, diversified financial services institution. As of the date of
this Prospectus, we had approximately $40 billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio, TX
78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Fund's Board of Trustees. For our services, the Fund pays us
an annual fee. This fee was computed and paid at three-fourths of one percent
(.75%) of average net assets for the fiscal year ended May 31, 1999. We also
provide services related to selling the Fund's shares and receive no
compensation for those services.
Portfolio Transactions
USAA Brokerage Services, our discount brokerage service, may execute purchases
and sales of equity securities for the Fund's portfolio. The Fund's Board of
Trustees has adopted procedures to ensure that any commissions paid to USAA
Brokerage Services are reasonable and fair.
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Portfolio Managers
[PHOTOGRAPH PORTFOLIO MANAGER] R. DAVID ULLOM
U.S. STOCKS
R. David Ullom, Assistant Vice President of Equity Investments, is the Fund's
asset allocation manager and has managed the U.S. Stocks investment category
since August 1998. He has 24 years investment management experience and has
worked for us for 13 years. Mr. Ullom earned the Chartered Financial Analyst
(CFA) designation in 1980 and is a member of the Association for Investment
Management and Research (AIMR) and the San Antonio Financial Analysts Society,
Inc. (SAFAS). He holds an MBA from Washington University, Missouri, and a BS
from Oklahoma State University.
INTERNATIONAL STOCKS
[PHOTOGRAPH PORTFOLIO MANAGERS] FROM L TO R: ALBERT C. SEBASTIAN, DAVID G.
PEEBLES, AND W. TRAVIS SELMIER, II
David G. Peebles, Senior Vice President of Equity Investments, has managed or
co-managed the International Stocks investment category since December 1994. He
has 33 years investment management experience and has worked for us for 15
years. Mr. Peebles earned the CFA designation in 1971 and is a member of AIMR,
SAFAS, and the International Society of Financial Analysts (ISFA). He holds an
MBA and BS from Texas Christian University.
Albert C. Sebastian, Assistant Vice President of Equity Investments, has
co-managed the International Stocks investment category since October 1996. He
has 15 years investment management experience and has worked for us for eight
years. Mr. Sebastian earned the CFA designation in 1989 and is a member of
AIMR, SAFAS, and ISFA. He holds an MBA from the University of Michigan and a BA
from Holy Cross College, Massachusetts.
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W. Travis Selmier, II, Assistant Vice President of Equity Investments, has
co-managed the International Stocks investment category since October 1996. He
has 12 years investment management experience and has worked for us for eight
years. Mr. Selmier earned the CFA designation in 1990 and is a member of AIMR,
SAFAS, and ISFA. He holds an MBA from Indiana University, a Certificate of
Proficiency from Sophia University Japanese Language Institute, Japan, and a BA
from the University of California at Santa Barbara.
U.S. GOVERNMENT SECURITIES
[PHOTOGRAPH PORTFOLIO MANAGER] JOHN W. SAUNDERS, JR.
John W. Saunders, Jr., Senior Vice President of Fixed Income Investments, has
managed the U.S. Government Securities investment category since October 1985.
He has 30 years of investment management experience and has worked for us for
29 years. Mr. Saunders earned the CFA designation in 1976 and is a member of
AIMR and SAFAS. He holds a BS from Portland State University, Oregon.
GOLD AND REAL ESTATE SECURITIES
[PHOTOGRAPH PORTFOLIO MANAGER] MARK W. JOHNSON
Mark W. Johnson, Assistant Vice President of Equity Investments, has managed
the Gold Securities and Real Estate Securities investment categories since
January 1994. He has 25 years of investment management experience and has
worked for us for 11 years. Mr. Johnson earned the CFA designation in 1978 and
is a member of AIMR and SAFAS. He holds an MBA and a BBA from the University of
Michigan.
USING MUTUAL FUNDS IN AN ASSET ALLOCATION PROGRAM
I. The Idea Behind Asset Allocation
If you have money to invest and hear that stocks may be a good investment, is
it a wise idea to use your entire savings to buy one stock? Most people
wouldn't -- it would be fortunate if it works, but this strategy holds a great
deal of risk. Surprising news could be reported tomorrow on your stock, and its
price could soar or plummet.
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Careful investors understand this concept of risk and lower that risk by
diversifying their holdings among a number of securities. That way bad news for
one security may be counterbalanced by good news regarding other securities.
But there is still a question of risk here. History tells us that stocks are
generally more volatile than bonds and that long-term bonds are generally more
volatile than short-term bonds. History also tells us that over many years
investments having higher risks tend to have higher returns than investments
that carry lower risks. From these observations comes the idea of asset
allocation.
Asset allocation is a concept that involves dividing your money among several
different types of investments -- for example, stocks, bonds, and short-term
investments such as money market instruments -- and keeping that allocation
until your objectives or the financial markets significantly change. That way
you're not pinning all your financial success on the fortunes of one kind of
investment. Money spread across different investment categories can help you
reduce market risk and likely will provide more stability to your total return.
Asset allocation can work because different kinds of investments generally
follow different up-and-down cycles. With a variety of investments in your
portfolio, some are probably doing well, even when others are struggling.
II. Using Asset Allocation in an Investment Program
Most investors understand the concept of diversification, but asset allocation
goes beyond diversifying your portfolio; it's a much more active process. You
must evaluate your lifestyle, finances, circumstances, long- and short-term
financial goals, and tolerance for investment risk. Once you have structured
your allocation, you'll need to review it regularly since your objectives will
change over time. Even though we do not charge sales loads or commissions, our
member service representatives are always available to assist you in
structuring and reviewing your investment portfolio.
III. USAA's Series of Asset Strategy Funds
USAA's series of asset allocation funds, our Asset Strategy Funds, are designed
for the long-term investor and are in line with our investment philosophy for
investors, specifically "buy and hold for the long-term," and "don't try to
time the market." As shown on the next page, each of USAA's Asset Strategy
Funds has its own different mix of assets and objectives.
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===============================================================================
Fund Investment Objective Invests in
- -------------------------------------------------------------------------------
Income Seek high current return, with bonds and stocks
Strategy reduced risk over time, through
Fund an asset allocation strategy that
emphasizes income and gives
secondary emphasis to long-term
growth of capital.
Growth Seek a conservative balance tax-exempt bonds
and Tax between income, the majority of and blue chips
Strategy which is tax-exempt, and the stocks
Fund potential for long-term growth of
capital to preserve purchasing
power.
Balanced Seek high total return, with stocks and bonds
Strategy reduced risk over time, through an
Fund asset allocation strategy that seeks
a combination of long-term growth
a capital and current income.
Cornerstone Achieve a positive inflation- U.S. stocks,
Strategy adjusted rate of return and a International,
Fund reasonably stable value of Fund stocks, government
shares, thereby preserving securities, real
purchasing power of shareholders' estate securities,
capital. and gold securities
Growth Seek high total return, with small and large cap
Strategy reduced risk over time, through stocks, bonds, and
Fund an asset allocation strategy that international
emphasizes capital appreciation stocks
and gives secondary emphasis
to income.
===============================================================================
For more complete information about the other USAA Asset Strategy Funds,
including charges and operating expenses, call us for a Prospectus. Read it
carefully before you invest.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), phone, or Internet. A
complete, signed application is required to open your initial account. However,
after you open your initial
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account with us, you will not need to fill out another application to invest in
another Fund unless the registration is different.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number or
tax identification number to avoid possible withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after we receive your request in proper form. The
Fund's NAV is determined at the close of the regular trading session (generally
4:00 p.m. Eastern Time) of the New York Stock Exchange (NYSE) each day the NYSE
is open. If we receive your request and payment prior to that time, your
purchase price will be the NAV per share determined for that day. If we receive
your request or payment after the NAV per share is calculated, the purchase
will be effective on the next business day.
If you plan to purchase Fund shares with a foreign check, we suggest you
convert your foreign check to U.S. dollars prior to investment in the Fund.
This will avoid a potential four- to six-week delay in the effective date of
your purchase. Furthermore, a bank charge may be assessed in the clearing
process, which will be deducted from the amount of the purchase.
MINIMUM INVESTMENTS
INITIAL PURCHASE
[MONEY GRAPHIC]
* $3,000 [$500 Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) accounts and
$250 for IRAs] or no initial investment if you elect to have monthly
electronic investments of at least $50 each. We may periodically offer
programs that reduce the minimum amounts for monthly electronic investments.
Employees of USAA and its affiliated companies may open an account through
payroll deduction for as little as $25 per pay period with no initial
investment.
ADDITIONAL PURCHASES
* $50
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
* To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288
17
<PAGE>
* To add to your account, send your check and the "Invest by Mail" stub that
accompanies your Fund's transaction confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
* To open an account, bring your application and check to our San Antonio
investment sales and service office at:
USAA Federal Savings Bank 10750
Robert F. McDermott Freeway
San Antonio, TX 78288
BANK WIRE
[BANK WIRE GRAPHIC]
* To open or add to your account, instruct your bank (which may charge a fee
for the service) to wire the specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA Cornerstone Strategy Fund
USAA Account Number: 69384998
Shareholder(s) Name(s) ______________________________________________
Shareholder(s) Mutual Fund Account Number ___________________________
ELECTRONIC FUNDS TRANSFER
[CALENDER GRAPHIC]
* Additional purchases on a regular basis can be deducted from a bank account,
paycheck, income-producing investment, or USAA money market fund account.
Sign up for these services when opening an account or call 1-800-531-8448 to
add these services.
PHONE 1-800-531-8448 (IN SAN ANTONIO, 456-7202)
[TELEPHONE GRAPHIC]
* If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To open
an account by phone, the new account must have the same registration as your
existing account.
USAA TOUCHLINE(R) 1-800-531-8777 (IN SAN ANTONIO, 498-8777)
[TELEPHONE GRAPHIC] TOUCHLINE(R)
* In addition to obtaining account balance information, last transactions,
current fund prices, and return information for your Fund, you can use USAA
TouchLine(R) from any touch-tone phone to access your Fund account to make
selected purchases, exchange to another USAA Fund, or make redemptions. This
service is available with an Electronic Services Agreement (ESA) and EFT
Buy/Sell authorization on file.
18
<PAGE>
INTERNET ACCESS - WWW.USAA.COM
[COMPUTER GRAPHIC]
* You can use your personal computer to perform certain mutual fund
transactions by accessing our web site. To establish access to your account,
you will need to call 1-800-461-3507 to obtain a registration number and
personal identification number (PIN). Once you have established Internet
access to your account, you will be able to open a new mutual fund account
within an existing registration, exchange to another USAA Fund, make
redemptions, review account activity, check balances, and more. To place
orders by Internet, an ESA and EFT Buy/Sell authorization must be on file.
Redemption of Shares
You may redeem Fund shares by any of the methods described below on any day the
NAV per share is calculated. Redemptions are effective on the day instructions
are received in a manner as described below. However, if instructions are
received after the NAV per share calculation (generally 4:00 p.m. Eastern
Time), your redemption will be effective on the next business day.
We will send you your money within seven days after the effective date of
redemption. Payment for redemption of shares purchased by EFT or check is sent
after the EFT or check has cleared, which could take up to 15 days from the
purchase date. If you are considering redeeming shares soon after purchase, you
should purchase by bank wire or certified check to avoid delay. For federal
income tax purposes, a redemption is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on your
cost basis in the shares and the price received upon redemption.
In addition, the Fund may elect to suspend the redemption of shares or postpone
the date of payment in limited circumstances.
HOW TO REDEEM
MAIL, IN PERSON, FAX, TELEGRAM, TELEPHONE, OR INTERNET
[FAX MACHINE GRAPHIC]
* Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
* Visit a member service representative at our San Antonio investment sales
and service office at USAA Federal Savings Bank.
* Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
* Call toll free 1-800-531-8448 (in San Antonio, 456-7202) to speak with
a member service representative.
19
<PAGE>
* Call toll free 1-800-531-8777 (in San Antonio, 498-8777) to access our
24-hour USAA TouchLine(R) service.
* Access our Internet web site at www.usaa.com.
Telephone redemption privileges are automatically established when you complete
your application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions. Before
any discussion regarding your account, the following information is obtained:
(1) USAA number and/or account number, (2) the name(s) on the account
registration, and (3) social security/tax identification number or date of
birth of the registered account owner(s) for the account registration.
Additionally, all telephone communications with you are recorded and
confirmations of account transactions are sent to the address of record. If you
were issued stock certificates for your shares, redemption by telephone, fax,
telegram, or Internet is not available.
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to assist you in
your role as an investor. In the INVESTOR'S GUIDE, you will find additional
information on purchases, redemptions, and methods of payment. You will also
find in-depth information on automatic investment plans, shareholder statements
and reports, and other useful information.
Account Balance
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually a small balance account fee of $12 to each shareholder account with a
balance, at the time of assessment, of less than $2,000. The fee will reduce
total transfer agency fees paid by the Fund to SAS. Accounts exempt from the
fee include: (1) any account regularly purchasing additional shares each month
through an automatic investment plan; (2) any account registered under the
Uniform Gifts/Transfers to Minors Act (UGMA/UTMA); (3) all (non-IRA) money
market fund accounts; (4) any account whose registered owner has an aggregate
balance of $50,000 or more invested in USAA mutual funds; and (5) all IRA
accounts (for the first year the account is open).
20
<PAGE>
Fund Rights
The Fund reserves the right to:
* reject purchase or exchange orders when in the best interest of the Fund;
* limit or discontinue the offering of shares of the Fund without notice to
the shareholders;
* require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question (the Statement of Additional Information
contains information on acceptable guarantors);
* redeem an account with less than $900, with certain limitations.
EXCHANGES
Exchange Privilege
The exchange privilege is automatic when you complete your application. You may
exchange shares among Funds in the USAA Family of Funds, provided you do not
hold these shares in stock certificate form and the shares to be acquired are
offered in your state of residence. Exchanges made through USAA TouchLine(R)
and the Internet require an ESA and EFT Buy/Sell authorization on file. After
we receive the exchange orders, the Fund's transfer agent will simultaneously
process exchange redemptions and purchases at the share prices next determined.
The investment minimums applicable to share purchases also apply to exchanges.
For federal income tax purposes, an exchange between Funds is a taxable event;
and as such, you may realize a capital gain or loss. Such capital gains or
losses are based on the difference between your cost basis in the shares and
the price received upon exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 20.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA Family of Funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA Family of Funds).
21
<PAGE>
SHAREHOLDER INFORMATION
Share Price Calculation
[SIDE BAR]
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4:00 p.m. Eastern Time.
Portfolio securities, except as otherwise noted, traded primarily on a domestic
securities exchange are valued at the last sales price on that exchange.
Portfolio securities traded primarily on foreign securities exchanges are
valued at the last quoted sales price, or the most recently determined closing
price calculated according to local market convention, available at the time
the Fund is valued. If no sale is reported, the average of the bid and asked
prices is generally used.
Securities trading in various foreign markets may take place on days when the
NYSE is closed. Further, when the NYSE is open, the foreign markets may be
closed. Therefore, the calculation of the Fund's NAV may not take place at the
same time the prices of certain securities held by the Fund are determined. In
most cases, events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of normal trading on
the NYSE on a day the Fund's NAV is calculated will not be reflected in the
Fund's NAV. If, however, we determine that a particular event would materially
affect the Fund's NAV, then we, under the general supervision of the Fund's
Board of Trustees, will use all relevant, available information to determine a
fair value for the affected portfolio securities.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Fund's Board of Trustees. Securities that
cannot be valued by these methods, and all other assets, are valued in good
faith at fair value using methods we have determined under the general
supervision of the Fund's Board of Trustees.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's Statement of Additional Information.
22
<PAGE>
Dividends and Distributions
The Fund pays net investment income dividends yearly. Any net capital gain
distribution usually occurs within 60 days of the May 31 fiscal year end, which
would be somewhere around the end of July. The Fund will make additional
payments to shareholders, if necessary, to avoid the imposition of any federal
income or excise tax.
We will automatically reinvest all income dividends and capital gain
distributions in the Fund unless you instruct us differently. The share price
will be the NAV of the Fund shares computed on the ex-dividend date. Any income
dividends or capital gain distributions paid by the Fund will reduce the NAV
per share by the amount of the dividend or distribution on the ex-dividend
date. You should consider carefully the effects of purchasing shares of the
Fund shortly before any dividend or distribution. Some or all of these
dividends and distributions are subject to taxes.
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
Federal Taxes
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this Prospectus. Note that the Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. Because each
investor's tax circumstances are unique and because the tax laws are subject to
change, we recommend that you consult your tax adviser about your investment.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you as ordinary income, whether
received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends-received deduction available to
corporations.
Regardless of the length of time you have held Fund shares, distributions of
net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares.
23
<PAGE>
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
* fails to furnish the Fund with a correct tax identification number,
* underreports dividend or interest income, or
* fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify, on your application or
on a separate Form W-9 supplied by the Fund's transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
REPORTING - The Fund will report information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we are confident that our critical
systems are essentially prepared for the Year 2000. In addition, we are
actively assessing the Year 2000 readiness of our service providers, partners,
and companies in whose securities we invest. It is not possible for us to say
that you will experience no effect from this situation, but we can say that we
are making a large effort to avoid ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
24
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG LLP, whose report,
along with the Fund's financial statements, are included in the Annual Report,
which is available upon request.
Year Ended May 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------
Net asset value at
beginning of period $ 29.89 $ 27.96 $ 25.47 $ 22.63 $ 23.24
Net investment income .88 .77 .74 .73 .68
Net realized and
unrealized gain (loss) (1.14) 3.78 3.37 3.18 .67
Distributions from net
investment income (.81) (.72) (.78) (.74) (.58)
Distributions of realized
capital gains (1.53) (1.90) (.84) (.33) (1.38)
-----------------------------------------------------
Net asset value at
end of period $ 27.29 $ 29.89 $ 27.96 $ 25.47 $ 22.63
=====================================================
Total return (%)* (.74) 17.15 16.94 17.79 6.43
Net assets at end of
period (000) $1,257,817 $1,500,258 $1,263,355 $1,035,844 $ 874,587
Ratio of expenses to
average net assets (%) 1.05 1.01 1.06 1.15 1.13
Ratio of net investment
income to average net
assets (%) 3.12 2.64 2.88 3.06 3.16
Portfolio turnover (%) 46.27 32.73 35.14 36.15 33.17
- -------
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
25
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES IN WHICH WE MAY
INVEST THE FUND'S ASSETS:
FORWARD CURRENCY CONTRACTS
The Fund may hold securities denominated in foreign currencies. As a result,
the value of the securities will be affected by changes in the exchange rate
between the dollar and foreign currencies. In managing currency exposure, the
Fund may enter into forward currency contracts. A forward currency contract
involves an agreement to purchase or sell a specified currency at a specified
future date or over a specified time period at a price set at the time of the
contract. We only enter into forward currency contracts when the Fund enters
into a contract for the purchase or sale of a security denominated in a foreign
currency and desires to "lock in" the U.S. dollar price of the security until
settlement.
REPURCHASE AGREEMENTS
We may invest the Fund's assets in repurchase agreements that are
collateralized by obligations issued or guaranteed as to both principal and
interest by the U.S. government, its agencies and instrumentalities. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell it back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on an agreed upon date.
This date is usually not more than seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest, which is unrelated to the coupon rate or maturity of the purchased
security.
WHEN-ISSUED SECURITIES
We may invest the Fund's assets in new issues of debt securities offered on a
when-issued basis.
* Delivery and payment take place after the date of the commitment to purchase,
normally within 45 days. Both price and interest
rate are fixed at the time of commitment.
* The Fund does not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
* Such securities can be sold before settlement date.
VARIABLE RATE SECURITIES
We may invest the Fund's assets in securities that bear interest at rates which
are adjusted periodically to market rates.
* These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on
the income earned by the Fund depending on the proportion of such
securities held.
26
<PAGE>
* Because the interest rates of variable rate securities are periodically
adjusted to reflect current market rates, their market value is less
affected by changes in prevailing interest rates than the market value of
securities with fixed interest rates.
* The market value of a variable rate security usually tends toward par (100%
of face value) at interest rate adjustment time.
CONVERTIBLE SECURITIES
Within the real estate and gold securities categories, we may invest the Fund's
assets in convertible securities, which are bonds, preferred stocks, and other
securities that pay interest or dividends and offer the buyer the ability to
convert the security into common stock. The value of convertible securities
depends partially on interest rate changes and the credit quality of the
issuer. Because a convertible security affords an investor the opportunity,
through its conversion feature, to participate in the capital appreciation of
the underlying common stock, the value of convertible securities also depends
on the price of the underlying common stock.
ILLIQUID SECURITIES
We may invest up to 15% of the Fund's net assets in securities that are
illiquid. Illiquid securities are those securities which cannot be disposed of
in the ordinary course of business, seven days or less, at approximately the
same value at which the Fund has valued the securities.
AMERICAN DEPOSITARY RECEIPTS (ADRS)
We may invest the Fund's assets in ADRs, which are foreign shares held by a
U.S. bank that issues a receipt evidencing ownership. Dividends are paid in
U.S. dollars.
GLOBAL DEPOSITARY RECEIPTS (GDRS)
We may invest the Fund's assets in GDRs, which are foreign shares held by a
U.S. or foreign bank that issues a receipt evidencing ownership. Dividends are
paid in U.S. dollars.
27
<PAGE>
APPENDIX B
USAA Family of No-Load Mutual Funds
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide you with the opportunity to formulate your own investment program. You
may exchange any shares you hold in any one USAA Fund for shares in any other
USAA Fund. For more complete information about the mutual funds managed and
distributed by USAA Investment Management Company, including charges and
operating expenses, call us for a Prospectus. Read it carefully before you
invest. Mutual fund operating expenses apply and continue throughout the life
of the Fund.
FUND TYPE/NAME VOLATILITY
===============================================
CAPITAL APPRECIATION
-----------------------------------------------
Aggressive Growth Very high
Emerging Markets Very high
First Start Growth Moderate to high
Gold Very high
Growth Moderate to high
Growth & Income Moderate
International Moderate to high
S&P 500 Index Moderate
Science & Technology Very high
Small Cap Stock Very high
World Growth Moderate to high
-----------------------------------------------
ASSET ALLOCATION
-----------------------------------------------
Balanced Strategy Moderate
Cornerstone Strategy Moderate
Growth and Tax Strategy Moderate
Growth Strategy Moderate to high
Income Strategy Low to moderate
-----------------------------------------------
INCOME - TAXABLE
-----------------------------------------------
GNMA Low to moderate
High-Yield Opportunities High
Income Moderate
Income Stock Moderate
Intermediate-Term Bond Low to moderate
Short-Term Bond Low
-----------------------------------------------
INCOME - TAX EXEMPT
-----------------------------------------------
Long-Term Moderate
Intermediate-Term Low to moderate
Short-Term Low
State Bond/Income Moderate
-----------------------------------------------
MONEY MARKET
-----------------------------------------------
Money Market Very low
Tax Exempt Money Market Very low
Treasury Money Market Trust Very low
State Money Market Very low
===============================================
FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
S&P(R) IS A TRADEMARK OF THE MCGRAW-HILL COMPANIES, INC., AND HAS BEEN
LICENSED FOR USE. THE PRODUCT IS NOT SPONSORED, SOLD OR PROMOTED BY
STANDARD & POOR'S, AND STANDARD & POOR'S MAKES NO REPRESENTATION REGARDING
THE ADVISABILITY OF INVESTING IN THE PRODUCT.
SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY
TO RESIDENTS OF THOSE STATES.
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.
THE SCIENCE & TECHNOLOGY FUND MAY BE MORE VOLATILE THAN A FUND THAT
DIVERSIFIES ACROSS MANY INDUSTRIES
28
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's Statement of Additional Information (SAI),
Annual or Semiannual Report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of the Prospectus. In the Fund's Annual Report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally, copies
of this information can be obtained, for a duplicating fee, by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-6009.
================================================================================
Investment Adviser, Underwriter and Distributor
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
---------------------------------------------------------
Transfer Agent Custodian
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
---------------------------------------------------------
Telephone Assistance Hours
Call toll free - Central Time
Monday - Friday 7:00 a.m. to 9:00 p.m.
Saturday 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 USAA TouchLine(R)
(from touch-tone phones only)
For account balance, last transaction, fund prices,
or to exchange or redeem fund shares
1-800-531-8777, (in San Antonio) 498-8777
---------------------------------------------------------
Internet Access
www.usaa.com
================================================================================
Investment Company Act File No. 811-4019
<PAGE>
USAA GROWTH
STRATEGY FUND
PROSPECTUS
OCTOBER 1, 1999
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy?............... 2
Main Risks of Investing in This Fund..................................... 2
Is This Fund for You?.................................................... 3
Could the Value of Your Investment in This Fund Fluctuate?............... 3
Fees and Expenses........................................................ 5
Fund Investments......................................................... 6
Fund Management.......................................................... 13
Using Mutual Funds in an Asset Allocation Program........................ 16
How to Invest............................................................ 18
Important Information About Purchases and Redemptions.................... 22
Exchanges................................................................ 23
Shareholder Information.................................................. 23
Financial Highlights..................................................... 27
Appendix A .............................................................. 28
Appendix B .............................................................. 31
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is to seek high total return, with reduced risk
over time, through an asset allocation strategy that emphasizes capital
appreciation and gives secondary emphasis to income. Using preset target
ranges, we will invest the Fund's assets mostly in stocks (divided into the
categories of large cap, small cap, and international) and to a lesser extent,
bonds and money market instruments.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objective will be achieved. See FUND INVESTMENTS on
page 6 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risks of investing in this Fund are market risk, the unique risks
of investing in foreign stocks, interest rate risk, and credit risk.
* MARKET RISK involves the possibility that the Fund's investments in stocks
will decline in a down stock market, reducing the value of a company's
stock, regardless of the success or failure of that company's operations.
* FOREIGN INVESTING RISK involves the possibility that the Fund's investments
in foreign stock will decrease because of currency exchange rate
fluctuations, increased price volatility, uncertain political conditions,
and other factors.
* INTEREST RATE RISK involves the possibility that the value of the Fund's
investments will fluctuate because of changes in interest rates. IF
INTEREST RATES INCREASE: the yield of the Fund may increase and the market
value of the Fund's securities will likely decline, adversely affecting the
net asset value and total return.
IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
* CREDIT RISK involves the possibility that a borrower cannot make timely
interest and principal payments on its securities.
2
<PAGE>
Another risk of the Fund described later in the Prospectus includes rebalancing
risk. As with other mutual funds, losing money is also a risk of investing in
this Fund.
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the risks you will face as a Fund shareholder.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
* You are seeking a fund that will diversify your holdings among a wide
variety of investment categories.
* You are willing to accept moderate to high risk.
* You are willing to take some exposure to the stock market.
* You are seeking an appropriate investment for an IRA, through a 401(k)
plan or 403(b) plan, or other tax-sheltered account.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
* You are unwilling to take greater risk for long-term goals.
* You need an investment that provides tax-free income.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment in this Fund will
fluctuate with the changing market values of the investments in the Fund.
The bar chart, on the next page, illustrates the Fund's volatility and
performance from year to year over the life of the Fund.
3
<PAGE>
Total Return
[SIDE BAR]
TOTAL RETURN MEASURES THE PRICE CHANGE ASSUMING THE REINVESTMENT OF ALL
DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
All mutual funds must use the same formula to calculate total return.
[BAR CHART]
CALENDER TOTAL
YEAR RETURN
1996 22.13%
1997 9.10%
1998 14.98%
*FUND BEGAN OPERATIONS ON SEPTEMBER 1, 1995.
THE FUND'S TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999, WAS
8.65%.
During the periods shown in the bar chart, the highest total return for a
quarter was 20.93% (quarter ending December 31, 1998) and the lowest total
return for a quarter was -14.07% (quarter ending September 30, 1998).
The table below shows how the Fund's average annual returns for the one-year
period, as well as the life of the Fund, compared to those of a broad-based
securities market index. Remember, historical performance does not necessarily
indicate what will happen in the future.
===============================================================================
Average Annual Total Returns Since Fund's
(for the periods ending Past inception on
December 31, 1998) 1 Year September 1, 1998
- -------------------------------------------------------------------------------
Growth Strategy Fund 14.98% 15.82%
- -------------------------------------------------------------------------------
S&P 500 Index* 28.60% 28.88%
===============================================================================
* THE S&P 500 INDEX IS A BROAD-BASED COMPOSITE UNMANAGED INDEX THAT
REPRESENTS THE WEIGHTED AVERAGE PERFORMANCE OF A GROUP OF 500 WIDELY HELD,
PUBLICLY TRADED STOCKS.
4
<PAGE>
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
For the most current price and return information for this Fund, you may call
USAA TouchLine(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1
again for prices and returns. Then, press 49# when asked for the Fund Code.
[SIDE BAR]
[TELEPHONE GRAPHIC]
TOUCHLINE(R)
1-800-531-8777
PRESS
1
THEN
1
THEN
4 9 #
You may also find the most current price of your shares in the business section
of your newspaper in the mutual fund section under the heading "USAA Group" and
the symbol "GrStr." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "USGSX."
[SIDE BAR]
NEWSPAPER
SYMBOL
GrStr
TICKER
SYMBOL
USGXS
FEES AND EXPENSES
This summary shows what it will cost you, directly and indirectly, to invest in
this Fund.
Shareholder Transaction Expenses -- (Direct Costs)
There are no fees or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is a $10 fee. (Your bank may also charge a fee for receiving
wires.)
Annual Fund Operating Expenses -- (Indirect Costs)
[SIDE BAR]
12b-1 FEES-SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR ADVERTISING AND
OTHER COSTS OF SELLING FUND SHARES.
Fund expenses come out of the Fund's assets and are reflected in the Fund's
share price and dividends. "Other Expenses" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses during the past
fiscal year ended May 31, 1999, and are calculated as a percentage of average
net assets.
==================================================
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .53%
=====
Total Annual Fund Operating Expenses 1.28%
-----
===================================================
Example of Effect of the Fund's Operating Expenses
This example is intended to help you compare the cost of investing in this Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's
5
<PAGE>
operating expenses remain the same, and (3) you redeem all of your shares at
the end of the periods shown.
===================================================
1 year...............$ 130
3 years.............. 406
5 years.............. 702
10 years.............. 1,545
===================================================
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal strategy is to provide a diversified investment
program within one mutual fund by allocating its assets in each of the
following investment categories according to the following targeted
ranges. Securities are classified by category at the time of purchase.
[BAR CHART]
PERCENTAGE TARGET RANGE
OF NET ASSETS
INVESTMENT CATEGORY
LARGE CAP STOCKS 40-75%
SMALL CAP STOCKS 0-20%
INTERNATIONAL STOCKS 10-30%
BONDS 10-35%
MONEY MARKET INSTRUMENTS 0-20%
The ranges allow for a variance within each investment category. The Fund's
Board of Trustees may revise the target ranges upon 60 days' prior written
notice to shareholders. However, we may go outside the ranges on a temporary
defensive basis without shareholder notification whenever we believe it is in
the best interest of the Fund and its shareholders.
Q Why are stocks and bonds mixed in the same Fund?
A From time to time the stock and bond markets may fluctuate independently
of each other. In other words, a decline in the stock market may, in
certain instances, be offset by a rise in the bond market, or vice versa.
As a result, the Fund, with its mix of
6
<PAGE>
stocks and bonds, is expected in the long run to entail less market risk
(and potentially less return) than a mutual fund investing exclusively in
stocks.
Q Why were these investment categories and target ranges selected?
A The investment categories and target ranges were selected to provide
investors with a diversified investment in a single mutual fund. Stocks
provide the potential for long-term capital growth while bonds provide a
high current return. Money market instruments provide a means for
temporary investment of cash balances arising in the normal course of
business.
However, as a temporary defensive measure because of market, economic,
political, or other conditions, we may invest up to 100% of the Fund's
assets in investment-grade, short-term debt instruments. This may result
in the Fund not achieving its investment objective during the time it is
in this temporary defensive posture.
Q What actions are taken to keep the Fund's asset allocations within the
target ranges?
A If market action causes the actual assets of the Fund in one or more
investment categories to move outside the ranges, we will make adjustments
to rebalance the portfolio. In general, we will rebalance the portfolio at
least once during each quarter. In rebalancing the Fund's portfolio, we
will buy or sell securities to return the actual allocation of the Fund's
assets to within its target ranges. For example, the Fund's portfolio
could begin a quarter with its assets allocated 55% in large cap stocks,
15% in small cap stocks, 15% in international stocks, 10% in bonds, and 5%
in money market instruments. During the quarter, due to market returns,
the Fund's portfolio could hold 35% in large cap stocks, 40% in small cap
stocks, 15% in international stocks, 5% in bonds, and 5% in money market
instruments. In this case, we would sell small cap stocks and use the
proceeds to buy large cap stocks and bonds to bring the investment
categories back to within their target ranges.
[CAUTION LIGHT]
REBALANCING RISK. In purchasing and selling securities in order to rebalance
its portfolio, the Fund will pay more in brokerage commissions than it would
without a rebalancing policy. As a result of the need to rebalance, the Fund
also has less flexibility in the timing of purchases and sales of securities
than it would otherwise. While we will attempt to
7
<PAGE>
minimize any adverse impact to the Fund or its shareholders, the Fund may have
a higher proportion of capital gains and a lower return than a fund that does
not have a rebalancing policy.
Large Cap Stocks
Q What defines large cap stocks?
[SIDE BAR]
MARKET CAPITALIZATION IS THE TOTAL MARKET VALUE OF A COMPANY'S OUTSTANDING
SHARES OF COMMON STOCK.
A Large cap stocks are those of companies that have a market capitalization
larger than the largest market capitalization stock in the S&P SmallCap
600 Index at the time of purchase. As of June 30, 1999, the largest
company in the S&P SmallCap 600 Index had a market capitalization of $2.58
billion. Keep in mind that the market capitalization of the companies
listed in the index may change with market conditions and the composition
of the index. They may include real estate investment trusts (REITs).
Q Will the Fund continue to hold such securities if their market
capitalization falls below the benchmark?
A The Fund may continue to hold or purchase more of a security of a company
whose market capitalization has declined below the largest market
capitalization stock of the S&P SmallCap 600 Index. Ordinarily, we would
continue to treat the security as a large cap stock; although we may, in
our discretion, reclassify the security as a small cap stock or limit the
Fund's holdings in such security if we determine it to be in the best
interest of the Fund.
Q How are the decisions to buy and sell large cap stocks made?
A We will invest this category's assets in a diversified group of large cap
growth stocks. We consider a number of factors in that decision such as:
* a company's strategic position in its industry,
* sales and earnings growth,
* cash flow,
* book value, and
* dividend yield.
Stocks are sold when we believe they are overvalued.
8
<PAGE>
Small Cap Stocks
Q What defines small cap stocks?
A Small cap stocks are those of companies that have a market capitalization
equal to or lower than that of the largest market capitalization stock in
the S&P SmallCap 600 Index at the time of purchase. They may include real
estate investment trusts (REITs).
Q Will the Fund continue to hold these securities if their market
capitalization increases above the benchmark?
A Similar to the Large Cap Stocks category, the Fund may continue to hold or
purchase more of a security of a company whose market capitalization has
increased above the largest market capitalization stock in the S&P
SmallCap 600 Index. Ordinarily, we would continue to treat the security as
a small cap stock; although we may, in our discretion, reclassify the
security as a large cap stock or limit the Fund's holdings in such
security if we determine it to be in the best interest of the Fund.
Q Is there a greater risk in investing in smaller companies?
A Yes. Investing in smaller companies, especially those that have a narrow
product line or are traded infrequently, often involves greater risk than
investing in established companies with proven track records. These
securities may be subject to more price volatility than securities of
larger companies.
Q How are the decisions to buy and sell small cap stocks made?
A We tend to invest in small capitalization companies that have rapid sales
and earnings growth potential. We seek companies that are well positioned
to take advantage of emerging, long-term social and economic trends and
have ample financial resources to sustain their growth. We may reduce or
sell investments in companies if their market capitalizations grow to the
point that they are clearly no longer small capitalization stocks or if
their stock prices appreciate excessively in relation to fundamental
prospects. Companies will also be sold if they fail to realize their
growth potential or if there are more attractive opportunities elsewhere.
9
<PAGE>
International Stocks
Q What role do international stocks play in the Fund's portfolio?
A From time to time, the U.S. and foreign stock markets may fluctuate
independently of each other. In other words, a decline in one market may,
in certain circumstances, be offset by a rise in the other market. In
addition, foreign equity markets may provide attractive returns not
otherwise available in the U.S. markets.
Q What is considered to be a "foreign company?"
A A foreign company is one organized under the laws of a foreign country,
and it must also have one of the following additional characteristics:
* the principal trading market for the stock is in a foreign country;
* at least 50% of its revenues or profits are derived from operations
within foreign countries; or
* at least 50% of its assets are located within foreign countries.
[CAUTION LIGHT]
FOREIGN INVESTING RISK. Investing in foreign securities poses unique risks:
currency exchange rate fluctuations; foreign market illiquidity; increased
price volatility; exchange control regulations; foreign ownership limits;
different accounting, reporting, and disclosure requirements; difficulties in
obtaining legal judgments; and foreign withholding taxes. Two forms of foreign
investing risk are emerging markets risk and political risk.
* EMERGING MARKETS RISK. Investments in countries that are in the early stages
of their industrial development involve exposure to economic structures that
are generally less diverse and mature than in the United States and to
political systems which may be less stable.
* POLITICAL RISK. Political risk includes a greater potential for coups
d'etat, revolts, and expropriation by governmental organizations.
Q How are the decisions to buy and sell international stocks made?
A We review countries and regions for economic and political stability as
well as future prospects. Then we research individual companies looking
for favorable valuations, growth prospects, quality of management, and
industry outlook. Securities are sold
10
<PAGE>
if we believe they are overvalued or if the economic or political outlook
significantly deteriorates.
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in stocks, it is subject to stock market
risk. Stock prices in general may decline over short or even extended periods,
regardless of the success or failure of a company's operations. Stock markets
tend to run in cycles, with periods when stock prices generally go up, known as
"bull" markets, and periods when stock prices generally go down, referred to as
"bear" markets. Stocks tend to go up and down more than bonds.
Bonds and Money Market Instruments
Q What types of bonds are included in the Fund's portfolio?
A Bonds must be investment grade at the time of purchase and may include any
of the following:
* obligations of the U.S. government, its agencies and instrumentalities;
* mortgage-backed securities;
* asset-backed securities;
* corporate debt securities, such as notes and bonds;
* debt securities of real estate investment trusts;
* obligations of state and local governments and their agencies and
instrumentalities;
* Eurodollar obligations;
* Yankee obligations; and
* other debt securities.
For a further description of these securities, see APPENDIX A on page 28.
[CAUTION LIGHT]
INTEREST RATE RISK. As a mutual fund investing in bonds, the Fund is subject to
the risk that the market value of the bonds will decline because of rising
interest rates. Bond prices are linked to the prevailing market interest rates.
In general, when interest rates rise, bond prices fall and when interest rates
fall, bond prices rise. The price volatility of a bond also depends on its
maturity. Generally, the longer the maturity of a bond, the greater its
sensitivity to interest rates. To compensate investors for this higher risk,
bonds with longer maturities generally offer higher yields than bonds with
shorter maturities.
11
<PAGE>
Q What are considered investment-grade securities?
A Investment-grade securities include securities issued or guaranteed by the
U.S. government, its agencies and instrumentalities, as well as securities
rated within the categories listed by the following rating agencies:
===============================================================================
LONG-TERM SHORT-TERM
RATING AGENCY DEBT SECURITIES DEBT SECURITIES
- -------------------------------------------------------------------------------
Moody's Investors At least Prime-3 or
Services, Inc. At least Baa MIG 4/VMIG 4
- -------------------------------------------------------------------------------
Standard & Poor's
Ratings Group At least BBB At least A-3 or SP-2
- -------------------------------------------------------------------------------
Fitch IBCA,Inc. At least BBB At least F-3
- -------------------------------------------------------------------------------
Duff and Phelps At least BBB At least D-3
===============================================================================
If unrated by these agencies, we must determine that the securities are of
equivalent investment quality.
You will find a complete description of the above debt ratings in the
Fund's Statement of Additional Information.
[CAUTION LIGHT]
CREDIT RISK. The bonds in the Fund's portfolio are subject to credit risk.
Credit risk is the possibility that an issuer of a fixed income instrument such
as a bond or repurchase agreement will fail to make timely payments of interest
or principal. We attempt to minimize the Fund's credit risk by investing in
securities considered investment grade at the time of purchase. When evaluating
potential investments for the Fund, our analysts also assess credit risk and
its impact on the Fund's portfolio. Nevertheless, even investment-grade
securities are subject to some credit risk. Securities in the lowest-rated,
investment-grade category have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to a weakened
capability to make principal and interest payments on these securities than is
the case for higher-rated securities. In addition, the ratings of securities
are estimates by the rating agencies of the credit quality of the securities.
The ratings may not take into account every risk related to whether interest or
principal will be repaid on a timely basis.
Q What happens if the rating of a security is downgraded below investment
grade?
A We will determine whether it is in the best interest of the Fund's
shareholders to continue to hold the security in the Fund's
12
<PAGE>
portfolio. If downgrades result in more than 5% of the Fund's net assets
being invested in securities that are less than investment-grade quality,
we will take immediate action to reduce the Fund's holdings in such
securities to 5% or less of the Fund's net assets, unless otherwise
directed by the Fund's Board of Trustees.
Q How are the decisions to buy and sell bonds made?
A We buy bonds that represent value in current market conditions. Value is a
combination of yield, credit quality, structure (maturity, coupon,
redemption features), and liquidity. Recognizing value is the result of
simultaneously analyzing the interaction of these factors among the
securities available in the market. We will sell a security if we become
concerned about its credit risk, are forced by market factors to raise
money, or an attractive replacement security is available.
Q What types of money market instruments are included in the Fund's
portfolio?
A The money market instruments included in the Fund's portfolio are
investment-grade, U.S. dollar-denominated debt securities that have
remaining maturities of one year or less. They may carry either fixed or
variable interest rates and may include any of the following:
* obligations of the U.S. government, its agencies and instrumentalities;
* repurchase agreements collateralized by the same;
* commercial paper or other short-term corporate obligations;
* certificates of deposit;
* bankers' acceptances; and
* other suitable obligations.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 28.
FUND MANAGEMENT
USAA Investment Management Company serves as the manager and distributor of
this Fund. We are an affiliate of United Services Automobile Association
(USAA), a large, diversified financial services institution. As of the date of
this Prospectus, we had approximately $40 billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio, TX
78288.
13
<PAGE>
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Fund's Board of Trustees. For our services, the Fund pays us
an annual fee. This fee was computed and paid at three-fourths of one percent
(.75%) of average net assets for the fiscal year ended May 31, 1999. We also
provide services related to selling the Fund's shares and receive no
compensation for those services.
Portfolio Transactions
USAA Brokerage Services, our discount brokerage service, may execute purchases
and sales of equity securities for the Fund's portfolio. The Fund's Board of
Trustees has adopted procedures to ensure that any commissions paid to USAA
Brokerage Services are reasonable and fair.
Portfolio Managers
[PHOTOGRAPH PORTFOLIO MANAGERS]
SEATED L TO R: DAVID G. PEEBLES, W. TRAVIS SELMIER, II, DAVID G. PARSONS,
STANDING L TO R: JOHN K. CABELL, JR., PAUL LUNDMARK, PAMELA BLEDSOE NOBLE,
ERIC M. EFRON, AND ALBERT C. SEBASTIAN.
LARGE CAP STOCKS
David G. Parsons, Assistant Vice President of Equity Investments, is the asset
allocation manager of the Fund and has managed the Large Cap Stocks investment
category since September 1995. He has 16 years investment management experience
working for us. Mr. Parsons earned the Chartered Financial Analyst (CFA)
designation in 1986 and is a member
14
<PAGE>
of the Association for Investment Management and Research (AIMR) and the San
Antonio Financial Analysts Society, Inc. (SAFAS). He holds an MBA from the
University of Texas, an MA from Southern Illinois University, and a BA from
Austin College, Texas.
SMALL CAP STOCKS
John K. Cabell, Jr. and Eric M. Efron, Assistant Vice Presidents of Equity
Investments, have managed the Small Cap Stocks investment category since
September 1995.
Mr. Cabell has 21 years investment management experience and has worked for us
for ten years. Mr. Cabell earned the CFA designation in 1982 and is a member of
AIMR and SAFAS. He holds an MA and a BS from the University of Alabama.
Mr. Efron has 24 years investment management experience and has worked for us
for seven years. Mr. Efron earned the CFA designation in 1983 and is also a
member of AIMR and SAFAS. He holds an MBA from New York University, an MA from
the University of Michigan, and a BA from Oberlin College, Ohio.
INTERNATIONAL STOCKS
Albert C. Sebastian, Assistant Vice President of Equity Investments, has
managed and co-managed the International Stocks investment category since
September 1995. He has 15 years investment management experience and has worked
for us for eight years. Mr. Sebastian earned the CFA designation in 1989 and is
a member of AIMR, SAFAS, and the International Society of Financial Analysts
(ISFA). He holds an MBA from the University of Michigan and a BA from Holy
Cross College, Massachusetts.
David G. Peebles, Senior Vice President of Equity Investments, has co-managed
the International Stocks investment category since October 1996. He has 33
years investment management experience and has worked for us for 15 years. Mr.
Peebles earned the CFA designation in 1971 and is a member of AIMR, SAFAS, and
ISFA. He holds an MBA and a BS from Texas Christian University.
W. Travis Selmier, II, Assistant Vice President of Equity Investments, has
co-managed the International Stocks investment category since October 1996. He
has 12 years investment management experience and has worked for us for eight
years. Mr. Selmier earned the CFA designation in 1990 and is a member of AIMR,
SAFAS, and ISFA. He holds an MBA from Indiana University, a Certificate of
Proficiency from Sophia University Japanese Language Institute, Japan, and a BA
from the University of California at Santa Barbara.
15
<PAGE>
BONDS
Paul H. Lundmark, Assistant Vice President of Fixed Income Investments, has
managed the Bonds investment category since September 1995. He has 13 years
investment management experience and has worked for us for seven years. Mr.
Lundmark earned the CFA designation in 1989 and is a member of AIMR and SAFAS.
He holds an MBA and BSB from the University of Minnesota.
MONEY MARKET INSTRUMENTS
Pamela Bledsoe Noble, Assistant Vice President of Money Market Funds, has
managed the Money Market Instruments investment category since May 1996. She
has 11 years investment management experience and has worked for us for eight
years. Ms. Noble earned the CFA designation in 1992 and is a member of AIMR and
SAFAS. She holds an MBA from Texas Christian University and a BS from Louisiana
Tech University.
USING MUTUAL FUNDS IN AN ASSET ALLOCATION PROGRAM
I. The Idea Behind Asset Allocation
If you have money to invest and hear that stocks may be a good investment, is
it a wise idea to use your entire savings to buy one stock? Most people
wouldn't -- it would be fortunate if it works, but this strategy holds a great
deal of risk. Surprising news could be reported tomorrow on your stock, and its
price could soar or plummet.
Careful investors understand this concept of risk and lower that risk by
diversifying their holdings among a number of securities. That way bad news for
one security may be counterbalanced by good news regarding other securities.
But there is still a question of risk here. History tells us that stocks are
generally more volatile than bonds and that long-term bonds are generally more
volatile than short-term bonds. History also tells us that over many years
investments having higher risks tend to have higher returns than investments
that carry lower risks. From these observations comes the idea of asset
allocation.
Asset allocation is a concept that involves dividing your money among several
different types of investments -- for example, stocks, bonds, and short-term
investments such as money market instruments -- and keeping that allocation
until your objectives or the financial markets significantly change. That way
you're not pinning all your financial success on the fortunes of one kind of
investment. Money spread across different investment categories can help you
reduce market risk and likely will provide more stability to your total return.
16
<PAGE>
Asset allocation can work because different kinds of investments generally
follow different up-and-down cycles. With a variety of investments in your
portfolio, some are probably doing well, even when others are struggling.
II. Using Asset Allocation in an Investment Program
Most investors understand the concept of diversification, but asset allocation
goes beyond diversifying your portfolio; it's a much more active process. You
must evaluate your lifestyle, finances, circumstances, long- and short-term
financial goals, and tolerance for investment risk. Once you have structured
your allocation, you'll need to review it regularly since your objectives will
change over time. Even though we do not charge sales loads or commissions, our
member service representatives are always available to assist you in
structuring and reviewing your investment portfolio.
III. USAA's Series of Asset Strategy Funds
USAA's series of asset allocation funds, our Asset Strategy Funds, are designed
for the long-term investor and are in line with our investment philosophy for
investors, specifically "buy and hold for the long-term," and "don't try to
time the market." As shown below, each of USAA's Asset Strategy Funds has its
own different mix of assets and objectives.
===============================================================================
Fund Investment Objective Invests in
- -------------------------------------------------------------------------------
Income Seek high current return, with bonds and stocks
Strategy reduced risk over time, through
Fund an asset allocation strategy that
emphasizes income and gives
secondary emphasis to long-term
growth of capital.
Growth Seek a conservative balance tax-exempt bonds
and Tax between income, the majority of and blue chips
Strategy which is tax-exempt, and the stocks
Fund potential for long-term growth of
capital to preserve purchasing
power.
Balanced Seek high total return, with stocks and bonds
Strategy reduced risk over time, through an
Fund asset allocation strategy that seeks
a combination of long-term growth
a capital and current income.
17
<PAGE>
CONTINUED
- -------------------------------------------------------------------------------
Fund Investment Objective Invests in
- -------------------------------------------------------------------------------
Cornerstone Achieve a positive inflation- U.S. stocks,
Strategy adjusted rate of return and a International,
Fund reasonably stable value of Fund stocks, government
shares, thereby preserving securities, real
purchasing power of shareholders' estate securities,
capital. and gold securities
Growth Seek high total return, with small and large cap
Strategy reduced risk over time, through stocks, bonds, and
Fund an asset allocation strategy that international
emphasizes capital appreciation stocks
and gives secondary emphasis
to income.
===============================================================================
For more complete information about the other USAA Asset Strategy Funds,
including charges and operating expenses, call us for a Prospectus. Read it
carefully before you invest.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), phone, or Internet. A
complete, signed application is required to open your initial account. However,
after you open your initial account with us, you will not need to fill out
another application to invest in another Fund unless the registration is
different.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number or
tax identification number to avoid possible withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after we receive your request in proper form. The
Fund's NAV is determined at the close of the regular trading session (generally
4:00 p.m. Eastern Time) of the New York Stock Exchange
18
<PAGE>
(NYSE) each day the NYSE is open. If we receive your request and payment prior
to that time, your purchase price will be the NAV per share determined for that
day. If we receive your request or payment after the NAV per share is
calculated, the purchase will be effective on the next business day.
If you plan to purchase Fund shares with a foreign check, we suggest you
convert your foreign check to U.S. dollars prior to investment in the Fund.
This will avoid a potential four- to six-week delay in the effective date of
your purchase. Furthermore, a bank charge may be assessed in the clearing
process, which will be deducted from the amount of the purchase.
MINIMUM INVESTMENTS
INITIAL PURCHASE
[MONEY GRAPHIC]
* $3,000 [$500 Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) accounts and
$250 for IRAs] or no initial investment if you elect to have monthly
electronic investments of at least $50 each. We may periodically offer
programs that reduce the minimum amounts for monthly electronic investments.
Employees of USAA and its affiliated companies may open an account through
payroll deduction for as little as $25 per pay period with no initial
investment.
ADDITIONAL PURCHASES
* $50
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
* To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288
* To add to your account, send your check and the "Invest by Mail" stub that
accompanies your Fund's transaction confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
* To open an account, bring your application and check to our San Antonio
investment sales and service office at:
USAA Federal Savings Bank 10750
Robert F. McDermott Freeway
San Antonio, TX 78288
19
<PAGE>
BANK WIRE
[BANK WIRE GRAPHIC]
* To open or add to your account, instruct your bank (which may charge a fee
for the service) to wire the specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA Growth Strategy Fund
USAA Account Number: 69384998
Shareholder(s) Name(s) _____________________________________________
Shareholder(s) Mutual Fund Account Number __________________________
ELECTRONIC FUNDS TRANSFER
[CALENDER GRAPHIC]
* Additional purchases on a regular basis can be deducted from a bank account,
paycheck, income-producing investment, or USAA money market fund account.
Sign up for these services when opening an account or call 1-800-531-8448 to
add these services.
PHONE 1-800-531-8448 (IN SAN ANTONIO, 456-7202)
[TELEPHONE GRAPHIC]
* If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To open
an account by phone, the new account must have the same registration as your
existing account.
USAA TOUCHLINE(R) 1-800-531-8777 (IN SAN ANTONIO, 498-8777)
[TELEPHONE GRAPHIC] TOUCHLINE(R)
* In addition to obtaining account balance information, last transactions,
current fund prices, and return information for your Fund, you can use USAA
TouchLine(R) from any touch-tone phone to access your Fund account to make
selected purchases, exchange to another USAA Fund, or make redemptions. This
service is available with an Electronic Services Agreement (ESA) and EFT
Buy/Sell authorization on file.
INTERNET ACCESS - WWW.USAA.COM
[COMPUTER GRAPHIC]
* You can use your personal computer to perform certain mutual fund
transactions by accessing our web site. To establish access to your account,
you will need to call 1-800-461-3507 to obtain a registration number and
personal identification number (PIN). Once you have established Internet
access to your account, you will be able to open a new mutual fund account
within an existing registration, exchange to another USAA Fund, make
redemptions, review account activity, check balances, and more. To place
orders by Internet, an ESA and EFT Buy/Sell authorization must be on file.
20
<PAGE>
Redemption of Shares
You may redeem Fund shares by any of the methods described below on any day the
NAV per share is calculated. Redemptions are effective on the day instructions
are received in a manner as described below. However, if instructions are
received after the NAV per share calculation (generally 4:00 p.m. Eastern
Time), your redemption will be effective on the next business day.
We will send you your money within seven days after the effective date of
redemption. Payment for redemption of shares purchased by EFT or check is sent
after the EFT or check has cleared, which could take up to 15 days from the
purchase date. If you are considering redeeming shares soon after purchase, you
should purchase by bank wire or certified check to avoid delay. For federal
income tax purposes, a redemption is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on your
cost basis in the shares and the price received upon redemption.
In addition, the Fund may elect to suspend the redemption of shares or postpone
the date of payment in limited circumstances.
HOW TO REDEEM
MAIL, IN PERSON, FAX, TELEGRAM, TELEPHONE, OR INTERNET
[FAX MACHINE GRAPHIC]
* Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
* Visit a member service representative at our San Antonio investment sales and
service office at USAA Federal Savings Bank.
* Send a signed fax to 1-800-292-8177, or send a telegram to USAA
Shareholder Account Services.
* all toll free 1-800-531-8448 (in San Antonio, 456-7202) to speak with a
member service representative.
* Call toll free 1-800-531-8777 (in San Antonio, 498-8777) to access our
24-hour USAA TouchLine(R) service.
* Access our Internet web site at www.usaa.com.
Telephone redemption privileges are automatically established when you complete
your application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions. Before
any discussion regarding your account, the following information is obtained:
(1) USAA number and/or account number, (2) the name(s) on the account
registration, and (3) social security/tax identification number or date of
birth of the registered account owner(s)
21
<PAGE>
for the account registration. Additionally, all telephone communications with
you are recorded and confirmations of account transactions are sent to the
address of record. If you were issued stock certificates for your shares,
redemption by telephone, fax, telegram, or Internet is not available.
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTER'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to assist you in
your role as an investor. In the INVESTOR'S GUIDE, you will find additional
information on purchases, redemptions, and methods of payment. You will also
find in-depth information on automatic investment plans, shareholder statements
and reports, and other useful information.
Account Balance
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually a small balance account fee of $12 to each shareholder account with a
balance, at the time of assessment, of less than $2,000. The fee will reduce
total transfer agency fees paid by the Fund to SAS. Accounts exempt from the
fee include: (1) any account regularly purchasing additional shares each month
through an automatic investment plan; (2) any account registered under the
Uniform Gifts/Transfers to Minors Act (UGMA/UTMA); (3) all (non-IRA) money
market fund accounts; (4) any account whose registered owner has an aggregate
balance of $50,000 or more invested in USAA mutual funds; and (5) all IRA
accounts (for the first year the account is open).
Fund Rights
The Fund reserves the right to:
* reject purchase or exchange orders when in the best interest of the Fund;
* limit or discontinue the offering of shares of the Fund without notice to the
shareholders;
* require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question (the Statement of Additional Information
contains information on acceptable guarantors);
* redeem an account with less than $900, with certain limitations.
22
<PAGE>
EXCHANGES
Exchange Privilege
The exchange privilege is automatic when you complete your application. You may
exchange shares among Funds in the USAA Family of Funds, provided you do not
hold these shares in stock certificate form and the shares to be acquired are
offered in your state of residence. Exchanges made through USAA TouchLine(R)
and the Internet require an ESA and EFT Buy/Sell authorization on file. After
we receive the exchange orders, the Fund's transfer agent will simultaneously
process exchange redemptions and purchases at the share prices next determined.
The investment minimums applicable to share purchases also apply to exchanges.
For federal income tax purposes, an exchange between Funds is a taxable event;
and as such, you may realize a capital gain or loss. Such capital gains or
losses are based on the difference between your cost basis in the shares and
the price received upon exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 21.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA Family of Funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA Family of Funds).
SHAREHOLDER INFORMATION
Share Price Calculation
[SIDE BAR]
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4:00 p.m. Eastern Time.
Portfolio securities, except as otherwise noted, traded primarily on a domestic
securities exchange are valued at the last sales price on that exchange.
Portfolio securities traded primarily on foreign securities exchanges are
valued at the last quoted sales price, or the most recently determined closing
price calculated according to local market convention,
23
<PAGE>
available at the time the Fund is valued. If no sale is reported, the average
of the bid and asked prices is generally used.
Securities trading in various foreign markets may take place on days when the
NYSE is closed. Further, when the NYSE is open, the foreign markets may be
closed. Therefore, the calculation of the Fund's NAV may not take place at the
same time the prices of certain securities held by the Fund are determined. In
most cases, events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of normal trading on
the NYSE on a day the Fund's NAV is calculated will not be reflected in the
Fund's NAV. If, however, we determine that a particular event would materially
affect the Fund's NAV, then we, under the general supervision of the Fund's
Board of Trustees, will use all relevant, available information to determine a
fair value for the affected portfolio securities.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Fund's Board of Trustees. Securities that
cannot be valued by these methods, and all other assets, are valued in good
faith at fair value using methods we have determined under the general
supervision of the Fund's Board of Trustees.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's Statement of Additional Information.
Dividends and Distributions
The Fund pays net investment income dividends yearly. Any net capital gain
distribution usually occurs within 60 days of the May 31 fiscal year end, which
would be somewhere around the end of July. The Fund will make additional
payments to shareholders, if necessary, to avoid the imposition of any federal
income or excise tax.
We will automatically reinvest all income dividends and capital gain
distributions in the Fund unless you instruct us differently. The share price
will be the NAV of the Fund shares computed on the ex-dividend date. Any income
dividends or capital gain distributions paid by the Fund will reduce the NAV
per share by the amount of the dividend or distribution on the ex-dividend
date. You should consider carefully the effects of purchasing shares of the
Fund shortly before any dividend or distribution. Some or all of these
dividends and distributions are subject to taxes.
24
<PAGE>
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
Federal Taxes
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this Prospectus. Note that the Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. Because each
investor's tax circumstances are unique and because the tax laws are subject to
change, we recommend that you consult your tax adviser about your investment.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you as ordinary income, whether
received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends-received deduction available to
corporations.
Regardless of the length of time you have held Fund shares, distributions of
net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
* fails to furnish the Fund with a correct tax identification number,
* underreports dividend or interest income, or
* fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify, on your application or
on a separate Form W-9 supplied by the Fund's transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
REPORTING - The Fund will report information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
25
<PAGE>
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we are confident that our critical
systems are essentially prepared for the Year 2000. In addition, we are
actively assessing the Year 2000 readiness of our service providers, partners,
and companies in whose securities we invest. It is not possible for us to say
that you will experience no effect from this situation, but we can say that we
are making a large effort to avoid ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
26
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance since inception. Certain information reflects financial
results for a single Fund share. The total returns in the table represent the
rate that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by KPMG LLP, whose report, along with the Fund's financial
statements, are included in the Annual Report, which is available upon request.
Nine-Month
Period Ended
Year Ended May 31, May 31,
-----------------------------------------------------
1999 1998 1997 1996*
-----------------------------------------------------
Net asset value at
beginning of period $ 14.30 $ 13.10 $ 12.74 $ 10.00
Net investment income .12 .13 .15 .11b
Net realized and
unrealized gain 1.05 1.43 .77 2.66
Distributions from net
investment income (.08) (.13) (.12) (.03)
Distributions of realized
capital gains (.69) (.23) (.44) -
-----------------------------------------------------
Net asset value at
end of period $ 14.70 $ 14.30 $ 13.10 $ 12.74
=====================================================
Total return (%)** 8.46 12.12 7.73 27.76
Net assets at end of
period (000) $ 258,753 $249,412 $ 193,921 $ 87,188
Ratio of expenses to
average net assets (%) 1.28 1.25 1.31 1.66a
Ratio of net investment
income to average net
assets (%) .84 .97 1.46 1.34a
Portfolio turnover (%) 41.65 69.42 62.50 40.21
- ------------------
* Fund commenced operations September 1, 1995.
** Assumes reinvestment of all dividend income and capital gain distributions
during the period.
a Annualized. The ratio is not necessarily indicative of 12 months of
operations.
b Calculated using weighted average shares.
27
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES IN WHICH WE MAY
INVEST THE FUND'S ASSETS:
REPURCHASE AGREEMENTS
We may invest the Fund's assets in repurchase agreements that are
collateralized by obligations issued or guaranteed as to both principal and
interest by the U.S. government, its agencies and instrumentalities. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell it back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on an agreed upon date.
This date is usually not more than seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest, which is unrelated to the coupon rate or maturity of the purchased
security.
WHEN-ISSUED SECURITIES
We may invest the Fund's assets in new issues of debt securities offered on a
when-issued basis.
* Delivery and payment take place after the date of the commitment to purchase,
normally within 45 days. Both price and interest rate are fixed at the time
of commitment.
* The Fund does not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
* Such securities can be sold before settlement date.
VARIABLE RATE SECURITIES
We may invest the Fund's assets in securities that bear interest at rates which
are adjusted periodically to market rates.
* These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on
the income earned by the Fund depending on the proportion of such
securities held.
* Because the interest rates of variable rate securities are periodically
adjusted to reflect current market rates, their market value is less
affected by changes in prevailing interest rates than the market value of
securities with fixed interest rates.
* The market value of a variable rate security usually tends toward par (100%
of face value) at interest rate adjustment time.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
We may invest the Fund's assets in mortgage-backed and asset-backed securities.
Mortgage-backed securities include, but are not limited to, securities issued
by the Government National Mortgage Association (Ginnie Mae), the Federal
National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage
Corporation (Freddie Mac). These securities represent ownership in a pool of
mortgage loans. They differ from conventional bonds in that principal is paid
back to the investor as payments are made on the underlying mortgages in the
pool. Accordingly, the Fund receives monthly scheduled
28
<PAGE>
payments of principal and interest along with any unscheduled principal
prepayments on the underlying mortgages. Because these scheduled and
unscheduled principal payments must be reinvested at prevailing interest rates,
mortgage-backed securities do not provide an effective means of locking in
long-term interest rates for the investor. Like other fixed income securities,
when interest rates rise, the value of a mortgage-backed security generally
will decline; however, when interest rates are declining, the value of
mortgage-backed securities with prepayment features may not increase as much as
other fixed income securities.
Mortgage-backed securities also include collateralized mortgage obligations
(CMOs). CMOs are obligations fully collateralized by a portfolio of mortgages
or mortgage-related securities. CMOs are divided into pieces (tranches) with
varying maturities. The cash flow from the underlying mortgages is used to pay
off each tranche separately. CMOs are designed to provide investors with more
predictable maturities than regular mortgage securities but such maturities can
be difficult to predict because of the effect of prepayments. Failure to
accurately predict prepayments can adversely affect the Fund's return on these
investments. CMOs may also be less marketable than other securities.
Asset-backed securities represent a participation in, or are secured by and
payable from, a stream of payments generated by particular assets, such as
credit card, motor vehicle, or trade receivables. They may be pass-through
certificates, which have characteristics very similar to mortgage-backed
securities, discussed above. They may also be in the form of asset-backed
commercial paper, which is issued by a special purpose entity, organized solely
to issue the commercial paper and to purchase interests in the assets. The
credit quality of these securities depends primarily upon the quality of the
underlying assets and the level of credit support and enhancement provided.
The weighted average life of such securities is likely to be substantially
shorter than their stated final maturity as a result of scheduled principal
payments and unscheduled principal prepayments.
MUNICIPAL LEASE OBLIGATIONS
We may invest the Fund's assets in a variety of instruments commonly referred
to as municipal lease obligations, including:
* Leases,
* Installment purchase contracts, and
* Certificates of participation in such leases and contracts.
MASTER DEMAND NOTES
We may invest the Fund's assets in master demand notes, which are obligations
that permit the investment of fluctuating amounts by the Fund, at varying rates
of interest using direct arrangements between the Fund, as lender, and the
borrower. These notes permit daily changes in the amounts borrowed. The Fund
has the right to increase the amount under the note at any time up to the full
amount provided by the note agreement, or to decrease the amount, and the
borrower may repay up to the full amount of the note without penalty.
Frequently, such obligations are secured by letters of credit or other credit
support
29
<PAGE>
arrangements provided by banks. Because master demand notes are direct lending
arrangements between the lender and borrower, these instruments generally will
not be traded, and there generally is no secondary market for these notes,
although they are redeemable (and immediately repayable by the borrower) at
face value, plus accrued interest, at any time. We will invest the Fund's
assets in master demand notes only if the Fund's Board of Trustees or its
delegate has determined that they are of credit quality comparable to the debt
securities in which the Fund generally may invest.
EURODOLLAR AND YANKEE OBLIGATIONS
We may invest a portion of the Fund's assets in dollar-denominated instruments
that have been issued outside the U.S. capital markets by foreign corporations
and financial institutions and by foreign branches of U.S. corporations and
financial institutions (Eurodollar obligations) as well as dollar-denominated
instruments that have been issued by foreign issuers in the U.S. capital
markets (Yankee obligations).
PUT BONDS
We may invest the Fund's assets in securities (including securities with
variable interest rates) that may be redeemed or sold back (put) to the issuer
of the security or a third party prior to stated maturity (put bonds). Such
securities will normally trade as if maturity is the earlier put date, even
though stated maturity is longer.
FORWARD CURRENCY CONTRACTS
The Fund may hold securities denominated in foreign currencies. As a result,
the value of the securities will be affected by changes in the exchange rate
between the dollar and foreign currencies. In managing currency exposure, the
Fund may enter into forward currency contracts. A forward currency contract
involves an agreement to purchase or sell a specified currency at a specified
future date or over a specified time period at a price set at the time of the
contract. We only enter into forward currency contracts when the Fund enters
into a contract for the purchase or sale of a security denominated in a foreign
currency and desires to "lock in" the U.S. dollar price of the security until
settlement.
ILLIQUID SECURITIES
We may invest up to 15% of the Fund's net assets in securities that are
illiquid. Illiquid securities are those securities which cannot be disposed of
in the ordinary course of business, seven days or less, at approximately the
same value at which the Fund has valued the securities.
AMERICAN DEPOSITARY RECEIPTS (ADRS)
We may invest the Fund's assets in ADRs, which are foreign shares held by a
U.S. bank that issues a receipt evidencing ownership. Dividends are paid in
U.S. dollars.
GLOBAL DEPOSITARY RECEIPTS (GDRS)
We may invest the Fund's assets in GDRs, which are foreign shares held by a
U.S. or foreign bank that issues a receipt evidencing ownership. Dividends are
paid in U.S. dollars.
30
<PAGE>
APPENDIX B
USAA Family of No-Load Mutual Funds
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide you with the opportunity to formulate your own investment program. You
may exchange any shares you hold in any one USAA Fund for shares in any other
USAA Fund. For more complete information about the mutual funds managed and
distributed by USAA Investment Management Company, including charges and
operating expenses, call us for a Prospectus. Read it carefully before you
invest. Mutual fund operating expenses apply and continue throughout the life
of the Fund.
FUND TYPE/NAME VOLATILITY
===============================================
CAPITAL APPRECIATION
-----------------------------------------------
Aggressive Growth Very high
Emerging Markets Very high
First Start Growth Moderate to high
Gold Very high
Growth Moderate to high
Growth & Income Moderate
International Moderate to high
S&P 500 Index Moderate
Science & Technology Very high
Small Cap Stock Very high
World Growth Moderate to high
-----------------------------------------------
ASSET ALLOCATION
-----------------------------------------------
Balanced Strategy Moderate
Cornerstone Strategy Moderate
Growth and Tax Strategy Moderate
Growth Strategy Moderate to high
Income Strategy Low to moderate
-----------------------------------------------
INCOME - TAXABLE
-----------------------------------------------
GNMA Low to moderate
High-Yield Opportunities High
Income Moderate
Income Stock Moderate
Intermediate-Term Bond Low to moderate
Short-Term Bond Low
-----------------------------------------------
INCOME - TAX EXEMPT
-----------------------------------------------
Long-Term Moderate
Intermediate-Term Low to moderate
Short-Term Low
State Bond/Income Moderate
-----------------------------------------------
MONEY MARKET
-----------------------------------------------
Money Market Very low
Tax Exempt Money Market Very low
Treasury Money Market Trust Very low
State Money Market Very low
===============================================
FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
S&P(R) IS A TRADEMARK OF THE MCGRAW-HILL COMPANIES, INC., AND HAS BEEN
LICENSED FOR USE. THE PRODUCT IS NOT SPONSORED, SOLD OR PROMOTED BY
STANDARD & POOR'S, AND STANDARD & POOR'S MAKES NO REPRESENTATION REGARDING
THE ADVISABILITY OF INVESTING IN THE PRODUCT.
SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY
TO RESIDENTS OF THOSE STATES.
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.
THE SCIENCE & TECHNOLOGY FUND MAY BE MORE VOLATILE THAN A FUND THAT
DIVERSIFIES ACROSS MANY INDUSTRIES.
31
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's Statement of Additional Information (SAI),
Annual or Semiannual Report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of the Prospectus. In the Fund's Annual Report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally, copies
of this information can be obtained, for a duplicating fee, by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-6009.
================================================================================
Investment Adviser, Underwriter and Distributor
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
---------------------------------------------------------
Transfer Agent Custodian
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
---------------------------------------------------------
Telephone Assistance Hours
Call toll free - Central Time
Monday - Friday 7:00 a.m. to 9:00 p.m.
Saturday 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 USAA TouchLine(R)
(from touch-tone phones only)
For account balance, last transaction, fund prices,
or to exchange or redeem fund shares
1-800-531-8777, (in San Antonio) 498-8777
---------------------------------------------------------
Internet Access
www.usaa.com
================================================================================
Investment Company Act File No. 811-4019
<PAGE>
USAA USAA STATEMENT OF
EAGLE INVESTMENT ADDITIONAL INFORMATION
LOGO TRUST October 1, 1999
- --------------------------------------------------------------------------------
USAA INVESTMENT TRUST
USAA INVESTMENT TRUST (the Trust) is a registered investment company offering
shares of eleven no-load mutual funds which are described in this Statement of
Additional Information (SAI): the Income Strategy Fund, Growth and Tax Strategy
Fund, Balanced Strategy Fund, Cornerstone Strategy Fund, Growth Strategy Fund,
Emerging Markets Fund, Gold Fund, International Fund, World Growth Fund, GNMA
Trust, and Treasury Money Market Trust (collectively, the Funds). Each Fund is
classified as diversified.
You may obtain a free copy of a Prospectus dated October 1, 1999, for each Fund
by writing to USAA Investment Trust, 9800 Fredericksburg Road, San Antonio, TX
78288, or by calling toll free 1-800-531-8181. The Prospectus provides the basic
information you should know before investing in the Funds. This SAI is not a
Prospectus and contains information in addition to and more detailed than that
set forth in each Fund's Prospectus. It is intended to provide you with
additional information regarding the activities and operations of the Trust and
the Funds, and should be read in conjunction with each Fund's Prospectus.
The financial statements of the Funds and the Independent Auditors' Report
thereon for the fiscal year ended May 31, 1999, are included in the accompanying
Annual Report to Shareholders of that date and are incorporated herein by
reference.
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TABLE OF CONTENTS
PAGE
2 Valuation of Securities
3 Conditions of Purchase and Redemption
3 Additional Information Regarding Redemption of Shares
4 Investment Plans
5 Investment Policies
9 Special Risk Considerations
10 Investment Restrictions
12 Portfolio Transactions
15 Description of Shares
16 Tax Considerations
17 Trustees and Officers of the Trust
20 The Trust's Manager
22 General Information
22 Calculation of Performance Data
24 Appendix A - Long-Term and Short-Term Debt Ratings
26 Appendix B - Comparison of Portfolio Performance
29 Appendix C - Dollar-Cost Averaging
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VALUATION OF SECURITIES
Shares of each Fund are offered on a continuing, best-efforts basis through USAA
Investment Management Company (IMCO or the Manager). The offering price for
shares of each Fund is equal to the current net asset value (NAV) per share. The
NAV per share of each Fund is calculated by adding the value of all its
portfolio securities and other assets, deducting its liabilities, and dividing
by the number of shares outstanding.
A Fund's NAV per share is calculated each day, Monday through Friday,
except days on which the New York Stock Exchange (NYSE) is closed. The NYSE is
currently scheduled to be closed on New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas, and on the preceding Friday or subsequent Monday
when one of these holidays falls on a Saturday or Sunday, respectively.
The value of securities of each Fund (except Treasury Money Market Trust)
is determined by one or more of the following methods:
(1) Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities
exchanges are valued at the last quoted sales price, or the most recently
determined closing price calculated according to local market convention,
available at the time a Fund is valued. If no sale is reported, the
average of the bid and asked prices is generally used depending upon local
custom or regulation.
(2) Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices at the time trading
closes on the NYSE.
(3) Debt securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value. Repurchase agreements are
valued at cost.
(4) Other debt and government securities are valued each business day by a
pricing service (the Service) approved by the Board of Trustees. The
Service uses the mean between quoted bid and asked prices or the last
sales price to price securities when, in the Service's judgment, these
prices are readily available and are representative of the securities'
market values. For many securities, such prices are not readily available.
The Service generally prices those securities based on methods which
include consideration of yields or prices of securities of comparable
quality, coupon, maturity and type, indications as to values from dealers
in securities, and general market conditions.
(5) Securities that cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value using methods
determined by the Manager under the general supervision of the Board of
Trustees.
The value of the Treasury Money Market Trust's securities is stated at
amortized cost which approximates market value. This involves valuing a security
at its cost and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates.
While this method provides certainty in valuation, it may result in periods
during which the value of an instrument, as determined by amortized cost, is
higher or lower than the price the Trust would receive upon the sale of the
instrument.
The valuation of the Treasury Money Market Trust's portfolio instruments
based upon their amortized cost is subject to the Fund's adherence to certain
procedures and conditions. Consistent with regulatory requirements, the Manager
will only purchase securities with remaining maturities of 397 days or less and
will maintain a dollar-weighted average portfolio maturity of no more than 90
days. The Manager will invest only in securities that have been determined to
present minimal credit risk and that satisfy the quality and diversification
requirements of applicable rules and regulations of the Securities and Exchange
Commission (SEC).
The Board of Trustees has established procedures designed to stabilize the
Treasury Money Market Trust's price per share, as computed for the purpose of
sales and redemptions, at $1. There can be no assurance, however, that the Fund
will at all times be able to maintain a constant $1 NAV per share. Such
procedures include review of the Fund's holdings at such intervals as is deemed
appropriate to determine whether the Fund's NAV calculated by using available
market quotations deviates from $1 per share and, if so, whether such deviation
may result in material dilution or is otherwise unfair to existing shareholders.
In the event that it is determined that such a deviation exists, the Board of
Trustees will take such corrective action as it regards as necessary and
appropriate. Such action may include, among other options, selling portfolio
instruments prior to maturity to the Manager or another party, withholding
dividends, or establishing a NAV per share by using available market quotations.
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CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is canceled due to nonpayment or if the Trust
does not receive good funds either by check or electronic funds transfer, USAA
Shareholder Account Services (Transfer Agent) will treat the cancellation as a
redemption of shares purchased, and you will be responsible for any resulting
loss incurred by the Fund or the Manager. If you are a shareholder, the Transfer
Agent can redeem shares from any of your accounts as reimbursement for all
losses. In addition, you may be prohibited or restricted from making future
purchases in any of the USAA Family of Funds. A $15 fee is charged for all
returned items, including checks and electronic funds transfers.
TRANSFER OF SHARES
You may transfer Fund shares to another person by sending written instructions
to the Transfer Agent. The account must be clearly identified, and you must
include the number of shares to be transferred, the signatures of all registered
owners, and all stock certificates, if any, which are the subject of transfer.
You also need to send written instructions signed by all registered owners and
supporting documents to change an account registration due to events such as
divorce, marriage, or death. If a new account needs to be established, you must
complete and return an application to the Transfer Agent.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
The value of your investment at the time of redemption may be more or less than
the cost at purchase, depending on the value of the securities held in each
Fund's portfolio. Requests for redemption that are subject to any special
conditions or which specify an effective date other than as provided herein
cannot be accepted. A gain or loss for tax purposes may be realized on the sale
of shares, depending upon the price when redeemed.
The Board of Trustees may cause the redemption of an account with a balance
of less than $900, provided that (1) the value of such account has been reduced
below the minimum initial investment required in such Fund at the time of the
establishment of the account to less than $900 entirely for reasons other than
market action, (2) the account has remained below the minimum initial investment
for six months, and (3) 60 days' prior written notice of the proposed redemption
has been sent to you. Shares will be redeemed at the NAV on the date fixed for
redemption by the Board of Trustees. Prompt payment will be made by mail to your
last known address.
The Trust reserves the right to suspend the right of redemption or postpone
the date of payment (1) for any periods during which the NYSE is closed, (2)
when trading in the markets the Trust normally utilizes is restricted, or an
emergency exists as determined by the SEC so that disposal of the Trust's
investments or determination of its NAV is not reasonably practicable, or (3)
for such other periods as the SEC by order may permit for protection of the
Trust's shareholders.
For the mutual protection of the investor and the Funds, the Trust may
require a signature guarantee. If required, EACH signature on the account
registration must be guaranteed. Signature guarantees are acceptable from FDIC
member banks, brokers, dealers, municipal securities dealers, municipal
securities brokers, government securities dealers, government securities
brokers, credit unions, national securities exchanges, registered securities
associations, clearing agencies, and savings associations. A signature guarantee
for active duty military personnel stationed abroad may be provided by an
officer of the United States Embassy or Consulate, a staff officer of the Judge
Advocate General, or an individual's commanding officer.
REDEMPTION BY CHECK
Shareholders in the Treasury Money Market Trust may request that checks be
issued for their accounts. Checks must be written in amounts of at least $250.
Checks issued to shareholders of the Treasury Money Market Trust will be
sent only to the person in whose name the account is registered and only to the
address of record. The checks must be manually signed by the registered owner(s)
exactly as the account is registered. For joint accounts the signature of either
or both joint owners will be required on the check, according to the election
made on the signature card. You will continue to earn dividends until the shares
are redeemed by the presentation of a check.
When a check is presented to the Transfer Agent for payment, a sufficient
number of full and fractional shares from your account will be redeemed to cover
the amount of a check. If the account balance is not
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adequate to cover the amount of a check, the check will be returned unpaid.
Because the value of the account changes as dividends are accrued on a daily
basis, checks may not be used to close an account.
The checkwriting privilege is subject to the customary rules and
regulations of State Street Bank and Trust Company (State Street Bank or the
Custodian) governing checking accounts. There is no charge to you for the use of
the checks or for subsequent reorders of checks.
The Trust reserves the right to assess a processing fee against your
account for any redemption check not honored by a clearing or paying agent.
Currently, this fee is $15 and is subject to change at any time. Some examples
of such dishonor are improper endorsement, checks written for an amount less
than the minimum check amount, and insufficient or uncollectible funds.
The Trust, the Transfer Agent, and State Street Bank each reserve the right
to change or suspend the checkwriting privilege upon 30 days' written notice to
participating shareholders.
You may request that the Transfer Agent stop payment on a check. The
Transfer Agent will use its best efforts to execute stop payment instructions,
but does not guarantee that such efforts will be effective. The Transfer Agent
will charge you $10 for each stop payment you request.
INVESTMENT PLANS
The Trust makes available the following investment plans to shareholders of all
the Funds. At the time you sign up for any of the following investment plans
that utilize the electronic funds transfer service, you will choose the day of
the month (the effective date) on which you would like to regularly purchase
shares. When this day falls on a weekend or holiday, the electronic transfer
will take place on the last business day before the effective date. You may
terminate your participation in a plan at any time. Please call the Manager for
details and necessary forms or applications.
AUTOMATIC PURCHASE OF SHARES
INVESTART(R) - A no initial investment plan. With this plan the regular minimum
initial investment amount is waived if you make monthly additions of at least
$50 through electronic funds transfer from a checking or savings account.
INVESTRONIC(R) - The regular purchase of additional shares through electronic
funds transfer from a checking or savings account. You may invest as little as
$50 per month.
DIRECT PURCHASE SERVICE - The periodic purchase of shares through electronic
funds transfer from a non-governmental employer, an income-producing investment,
or an account with a participating financial institution.
DIRECT DEPOSIT PROGRAM - The monthly transfer of certain federal benefits to
directly purchase shares of a USAA mutual fund. Eligible federal benefits
include: Social Security, Supplemental Security Income, Veterans Compensation
and Pension, Civil Service Retirement Annuity, and Civil Service Survivor
Annuity.
GOVERNMENT ALLOTMENT - The transfer of military pay by the U.S. Government
Finance Center for the purchase of USAA mutual fund shares.
AUTOMATIC PURCHASE PLAN - The periodic transfer of funds from a USAA money
market fund to purchase shares in another non-money market USAA mutual fund.
There is a minimum investment required for this program of $5,000 in the money
market fund, with a monthly transaction minimum of $50.
BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account. You may
initiate a "buy" or "sell" whenever you choose.
DIRECTED DIVIDENDS - If you own shares in more than one of the Funds in the USAA
Family of Funds, you may direct that dividends and/or capital gain distributions
earned in one fund be used to purchase shares automatically in another fund.
Participation in these systematic purchase plans allows you to engage in
dollar-cost averaging. For additional information concerning the benefits of
dollar-cost averaging, see APPENDIX C.
SYSTEMATIC WITHDRAWAL PLAN
If you own shares having a NAV of $5,000 or more in a single investment account
(accounts in different Funds cannot be aggregated for this purpose) you may
request that enough shares to produce a fixed amount of money be liquidated from
the account monthly or quarterly. The amount of each withdrawal must be at least
$50. Using the electronic funds transfer service, you may choose to have
withdrawals electronically deposited at your bank or other financial
institution. You may also elect to have checks mailed to a designated address.
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This plan may be initiated by depositing shares worth at least $5,000 with
the Transfer Agent and by completing a Systematic Withdrawal Plan application,
which may be requested from the Manager. You may terminate participation in the
plan at any time. You are not charged for withdrawals under the Systematic
Withdrawal Plan. The Trust will not bear any expenses in administering the plan
beyond the regular transfer agent and custodian costs of issuing and redeeming
shares. The Manager will bear any additional expenses of administering the plan.
Withdrawals will be made by redeeming full and fractional shares on the
date you select at the time the plan is established. Withdrawal payments made
under this plan may exceed dividends and distributions and, to this extent, will
involve the use of principal and could reduce the dollar value of your
investment and eventually exhaust the account. Reinvesting dividends and
distributions helps replenish the account. Because share values and net
investment income can fluctuate, you should not expect withdrawals to be offset
by rising income or share value gains.
Each redemption of shares may result in a gain or loss, which must be
reported on your income tax return. Therefore, you should keep an accurate
record of any gain or loss on each withdrawal.
TAX-DEFERRED RETIREMENT PLANS (NOT available in the Growth and Tax Strategy
Fund)
Federal taxes on current income may be deferred if you qualify for certain types
of retirement programs. For your convenience, the Manager offers 403(b)(7)
accounts and various forms of IRAs. You may make investments in one or any
combination of the portfolios described in the Prospectus of each Fund of USAA
Investment Trust and USAA Mutual Fund, Inc.
Retirement plan applications for the IRA and 403(b)(7) programs should be
sent directly to USAA Shareholder Account Services, 9800 Fredericksburg Road,
San Antonio, TX 78288. USAA Federal Savings Bank serves as Custodian of these
tax-deferred retirement plans under the programs made available by the Manager.
Applications for these retirement plans received by the Manager will be
forwarded to the Custodian for acceptance.
An administrative fee of $20 is deducted from the money sent to you after
closing an account. Exceptions to the fee are: partial distributions, total
transfer within USAA, and distributions due to disability or death. This charge
is subject to change as provided in the various agreements. There may be
additional charges, as mutually agreed upon between you and the Custodian, for
further services requested of the Custodian.
Each employer or individual establishing a tax-deferred retirement plan is
advised to consult with a tax adviser before establishing the plan. You may
obtain detailed information about the plans from the Manager.
INVESTMENT POLICIES
The sections captioned WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN
STRATEGY? and FUND INVESTMENTS in each Fund's Prospectus describe the
fundamental investment objective(s) and the investment policies applicable to
each Fund. Each Fund's objective(s) cannot be changed without shareholder
approval. The following is provided as additional information.
SECTION 4(2) COMMERCIAL PAPER AND RULE 144A SECURITIES
The Income Strategy, Balanced Strategy, and Growth Strategy Funds may invest in
commercial paper issued in reliance on the "private placement" exemption from
registration afforded by Section 4(2) of the Securities Act of 1933 (Section
4(2) Commercial Paper). Section 4(2) Commercial Paper is restricted as to
disposition under the federal securities laws; therefore, any resale of Section
4(2) Commercial Paper must be effected in a transaction exempt from registration
under the Securities Act of 1933. Section 4(2) Commercial Paper is normally
resold to other investors through or with the assistance of the issuer or
investment dealers who make a market in Section 4(2) Commercial Paper, thus
providing liquidity.
Each Fund, except the GNMA Trust and the Treasury Money Market Trust, may
also purchase restricted securities eligible for resale to "qualified
institutional buyers" pursuant to Rule 144A under the Securities Act of 1933
(Rule 144A Securities). Rule 144A provides a non-exclusive safe harbor from the
registration requirements of the Securities Act of 1933 for resales of certain
securities to institutional investors.
MUNICIPAL LEASE OBLIGATIONS
The Income Strategy, Balanced Strategy, Growth Strategy, and Growth and Tax
Strategy Funds may invest in municipal lease obligations, installment purchase
contract obligations, and certificates of participation in such obligations
(collectively, lease obligations). A lease obligation does not constitute a
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general obligation of the municipality for which the municipality's taxing power
is pledged, although the lease obligation is ordinarily backed by the
municipality's covenant to budget for the payments due under the lease
obligation.
Certain lease obligations contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease obligation payments in
future years unless money is appropriated for such purpose on a yearly basis.
Although "non-appropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult. In evaluating a potential investment in such a lease obligation, the
Manager will consider: (1) the credit quality of the obligor; (2) whether the
underlying property is essential to a governmental function; and (3) whether the
lease obligation contains covenants prohibiting the obligor from substituting
similar property if the obligor fails to make appropriations for the lease
obligation.
LIQUIDITY DETERMINATIONS
The Board of Trustees has established guidelines pursuant to which Municipal
Lease Obligations, Section 4(2) Commercial Paper and Rule 144A Securities, and
certain restricted debt securities that are subject to unconditional put or
demand features exercisable within seven days (Restricted Put Bonds) may be
determined to be liquid for purposes of complying with SEC limitations
applicable to each Fund's investments in illiquid securities. In determining the
liquidity of Municipal Lease Obligations, Section 4(2) Commercial Paper and Rule
144A Securities, the Manager will consider the following factors, among others,
established by the Board of Trustees: (1) the frequency of trades and quotes for
the security, (2) the number of dealers willing to purchase or sell the security
and the number of other potential purchasers, (3) dealer undertakings to make a
market in the security, and (4) the nature of the security and the nature of the
marketplace trades, including the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer. Additional factors
considered by the Manager in determining the liquidity of a municipal lease
obligation are: (1) whether the lease obligation is of a size that will be
attractive to institutional investors, (2) whether the lease obligation contains
a non-appropriation clause and the likelihood that the obligor will fail to make
an appropriation therefor, and (3) such other factors as the Manager may
determine to be relevant to such determination. In determining the liquidity of
Restricted Put Bonds, the Manager will evaluate the credit quality of the party
(the Put Provider) issuing (or unconditionally guaranteeing performance on) the
unconditional put or demand feature of the Restricted Put Bond. In evaluating
the credit quality of the Put Provider, the Manager will consider all factors
that it deems indicative of the capacity of the Put Provider to meet its
obligations under the Restricted Put Bond based upon a review of the Put
Provider's outstanding debt and financial statements and general economic
conditions.
Certain foreign securities (including Eurodollar obligations) may be
eligible for resale pursuant to Rule 144A in the United States and may also
trade without restriction in one or more foreign markets. Such securities may be
determined to be liquid based upon these foreign markets without regard to their
eligibility for resale pursuant to Rule 144A. In such cases, these securities
will not be treated as Rule 144A securities for purposes of the liquidity
guidelines established by the Board of Trustees.
CALCULATION OF MATURITY FOR FIXED INCOME SECURITIES
A fixed income security's maturity is typically determined on a stated final
maturity basis, although there are some exceptions to the rule.
If the issuer of the security has committed to take advantage of a maturity
shortening device, such as a call, refunding, or redemption provision, the date
on which the instrument will be called, refunded, or redeemed will be considered
to be its maturity date. Also, the maturities of mortgage-backed securities,
some asset-backed securities, and securities subject to sinking fund
arrangements are determined on a weighted average life basis, which is the
average time for principal to be repaid. For mortgage-backed and some
asset-backed securities, this average time is calculated by assuming a constant
prepayment rate (CPR) for the life of the mortgages or assets backing the
security. The CPR for a security can vary depending upon the level and
volatility of interest rates. This, in turn, can affect the weighted average
life of the security. The weighted average lives of these securities will be
shorter than their stated final maturities. A security will be treated as having
a maturity earlier than its stated maturity date if the security has technical
features, such as a put or demand feature which, in the judgment of the Manager,
will result in the security being valued in the market as though it has the
earlier maturity.
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LENDING OF SECURITIES
Each Fund may lend its securities. A lending policy may be authorized by the
Trust's Board of Trustees and implemented by the Manager, but securities may be
loaned only to qualified broker-dealers or institutional investors that agree to
maintain cash collateral with the Trust equal at all times to at least 100% of
the value of the loaned securities. The Trustees will establish procedures and
monitor the creditworthiness of any institution or broker-dealer during such
times as any loan is outstanding. The Trust will continue to receive interest on
the loaned securities and will invest the cash collateral in short-term
obligations of the U.S. Government or of its agencies or instrumentalities or in
repurchase agreements, thereby earning additional interest.
No loan of securities will be made if, as a result, the aggregate of such
loans would exceed 33 1/3% of the value of a Fund's total assets. The Trust may
terminate such loans at any time.
FOREIGN SECURITIES
Each Fund, except the Growth and Tax Strategy Fund, GNMA, and Treasury Money
Market Trusts, may invest their assets in foreign securities purchased in either
foreign or U.S. markets, including American Depositary Receipts (ADRs) and
Global Depositary Receipts (GDRs). These foreign holdings may include securities
issued in emerging markets as well as securities issued in established markets.
Investing in foreign securities poses unique risks: currency exchange rate
fluctuations; foreign market illiquidity; increased price volatility; exchange
control regulations; foreign ownership limits; different accounting, reporting,
and disclosure requirements; political instability; and difficulties in
obtaining legal judgments. In the past, equity and debt instruments of foreign
markets have been more volatile than equity and debt instruments of U.S.
securities markets.
FORWARD CURRENCY CONTRACTS
Each Fund, except the Growth and Tax Strategy Fund, GNMA, and Treasury Money
Market Trusts, may enter into forward currency contracts in order to protect
against uncertainty in the level of future foreign exchange rates. A forward
contract involves an agreement to purchase or sell a specific currency at a
specified future date or over a specified time period at a price set at the time
of the contract. These contracts are usually traded directly between currency
traders (usually large commercial banks) and their customers. A forward contract
generally has no deposit requirements, and no commissions are charged.
The Funds may enter into forward currency contracts under two
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security until settlement. By entering into such a
contract, a Fund will be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar and
the foreign currency from the date the security is purchased or sold to the date
on which payment is made or received. Second, when management of a Fund believes
that the currency of a specific country may deteriorate relative to the U.S.
dollar, it may enter into a forward contract to sell that currency. A Fund may
not hedge with respect to a particular currency for an amount greater than the
aggregate market value (determined at the time of making any sale of forward
currency) of the securities held in its portfolio denominated or quoted in, or
bearing a substantial correlation to, such currency.
The use of forward contracts involves certain risks. The precise matching
of contract amounts and the value of securities involved generally will not be
possible since the future value of such securities in currencies more than
likely will change between the date the contract is entered into and the date it
matures. The projection of short-term currency market movements is extremely
difficult and successful execution of a short-term hedging strategy is
uncertain. Under normal circumstances, consideration of the prospect for
currency parities will be incorporated into the longer term investment
strategies. The Manager believes it is important, however, to have the
flexibility to enter into such contracts when it determines it is in the best
interest of the Funds to do so. It is impossible to forecast what the market
value of portfolio securities will be at the expiration of a contract.
Accordingly, it may be necessary for the Funds to purchase additional currency
(and bear the expense of such purchase) if the market value of the security is
less than the amount of currency the Funds are obligated to deliver, and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell some of the foreign currency received on
the sale of the portfolio security if its market value exceeds the amount of
currency the Funds are obligated to deliver. The Funds are not required to enter
into such transactions and will not do so unless deemed appropriate by the
Manager.
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Although the Funds value their assets each business day in terms of U.S.
dollars, they do not intend to convert their foreign currencies into U.S.
dollars on a daily basis. They will do so from time to time, and shareholders
should be aware of currency conversion costs. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (spread) between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
WHEN-ISSUED SECURITIES
Each Fund may invest in new issues of debt securities offered on a when-issued
basis; that is, delivery of and payment for the securities take place after the
date of the commitment to purchase, normally within 45 days. The payment
obligation and the interest rate that will be received on the securities are
each fixed at the time the buyer enters into the commitment. A Fund may sell
these securities before the settlement date if it is deemed advisable.
Debt securities purchased on a when-issued basis are subject to changes in
value in the same way that other debt securities held in the Funds' portfolios
are; that is, both generally experience appreciation when interest rates decline
and depreciation when interest rates rise. The value of such securities will
also be affected by the public's perception of the creditworthiness of the
issuer and anticipated changes in the level of interest rates. Purchasing
securities on a when-issued basis involves a risk that the yields available in
the market when the delivery takes place may actually be higher than those
obtained in the transaction itself. Cash or high-quality, liquid-debt securities
equal to the amount of the when-issued commitments are segregated at the Fund's
custodian bank. The segregated securities are valued at market, and daily
adjustments are made to keep the value of the cash and segregated securities at
least equal to the amount of such commitments by the Fund.
On the settlement date of the when-issued securities, the Fund will meet
its obligations from then available cash, sale of segregated securities, sale of
other securities, or from sale of the when-issued securities themselves (which
may have a value greater or less than the Trust's payment obligations). Sale of
securities to meet such obligations carries with it a greater potential for the
realization of capital gains.
INVESTMENTS IN REAL ESTATE INVESTMENT TRUSTS (REITs)
Because the Income Strategy, Balanced Strategy, Cornerstone Strategy, Growth
Strategy, and World Growth Funds may invest a portion of their assets in equity
securities of REITs, the Funds may also be subject to certain risks associated
with direct investments in REITs. In addition, the Income Strategy, Balanced
Strategy, and Growth Strategy Funds may invest a portion of their assets in the
debt securities of REITs and, therefore, may be subject to certain other risks,
such as credit risk, associated with investment in the debt securities of REITs.
REITs may be affected by changes in the value of their underlying properties and
by defaults by borrowers or tenants. Furthermore, REITs are dependent upon
specialized management skills of their managers and may have limited geographic
diversification, thereby, subjecting them to risks inherent in financing a
limited number of projects. REITs depend generally on their ability to generate
cash flow to make distributions to shareholders, and certain REITs have
self-liquidation provisions by which mortgages held may be paid in full and
distributions of capital returns may be made at any time.
PUT AND CALL OPTIONS, FINANCIAL FUTURES CONTRACTS, OPTIONS ON FINANCIAL FUTURES
CONTRACTS
Although the GNMA Trust, Income Strategy, Balanced Strategy, Growth Strategy,
and Emerging Markets Funds are permitted to purchase and sell these contracts or
options, the Funds have no current intention of doing so in the coming year and
will not engage in such transactions without first notifying shareholders and
supplying further information in each Fund's Prospectus.
TAX-EXEMPT SECURITIES
Tax-exempt securities generally include debt obligations issued by states and
their political subdivisions, and duly constituted authorities and corporations,
to obtain funds to construct, repair, or improve various public facilities such
as airports, bridges, highways, hospitals, housing, schools, streets, and water
and sewer works. Tax-exempt securities may also be issued to refinance
outstanding obligations as well as to obtain funds for general operating
expenses and for loans to other public institutions and facilities.
The two principal classifications of tax-exempt securities are "general
obligations" and "revenue" or "special tax" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a
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special excise or other tax, but not from general tax revenues. The Funds may
also invest in tax-exempt private activity bonds, which in most cases are
revenue bonds and generally do not have the pledge of the credit of the issuer.
The payment of the principal and interest on such industrial revenue bonds is
dependent solely on the ability of the user of the facilities financed by the
bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment. There are, of
course, many variations in the terms of, and the security underlying tax-exempt
securities. Short-term obligations issued by states, cities, municipalities or
municipal agencies, include Tax Anticipation Notes, Revenue Anticipation Notes,
Bond Anticipation Notes, Construction Loan Notes, and Short-Term Notes.
The yields of tax-exempt securities depend on, among other things, general
money market conditions, conditions of the tax-exempt bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's Investors Service, Inc. (Moody's), Standard &
Poor's Ratings Group (S&P), Fitch IBCA, Inc. (Fitch), and Duff & Phelps LLC
represent their opinions of the quality of the securities rated by them, see
APPENDIX A. It should be emphasized that such ratings are general and are not
absolute standards of quality. Consequently, securities with the same maturity,
coupon, and rating may have different yields, while securities of the same
maturity and coupon but with different ratings may have the same yield. It will
be the responsibility of the Manager to appraise independently the fundamental
quality of the tax-exempt securities included in a Fund's portfolio.
REPURCHASE AGREEMENTS
Each Fund, except the Growth and Tax Strategy Fund, may invest in repurchase
agreements which are collateralized by obligations issued or guaranteed as to
both principal and interest by the U.S. Government, its agencies, or
instrumentalities. A repurchase agreement is a transaction in which a security
is purchased with a simultaneous commitment to sell it back to the seller (a
commercial bank or recognized securities dealer) at an agreed upon price on an
agreed upon date. This date is usually not more than seven days from the date of
purchase. The resale price reflects the purchase price plus an agreed upon
market rate of interest, which is unrelated to the coupon rate or maturity of
the purchased security. The obligation of the seller to pay the agreed upon
price is in effect secured by the value of the underlying security. In these
transactions, the securities purchased by a Fund will have a total value equal
to or in excess of the amount of the repurchase obligation and will be held by
the Fund's custodian until repurchased. If the seller defaults and the value of
the underlying security declines, the Fund may incur a loss and may incur
expenses in selling the collateral. If the seller seeks relief under the
bankruptcy laws, the disposition of the collateral may be delayed or limited.
TEMPORARY DEFENSIVE POLICY
Each Fund, except the Treasury Money Market Trust, may on a temporary basis
because of market, economic, political, or other conditions, invest up to 100%
of its assets in investment-grade, short-term debt instruments. Such securities
may consist of obligations of the U.S. Government, its agencies or
instrumentalities, and repurchase agreements secured by such instruments;
certificates of deposit of domestic banks having capital, surplus, and undivided
profits in excess of $100 million; banker's acceptances of similar banks;
commercial paper and other corporate debt obligations.
SPECIAL RISK CONSIDERATIONS
CURRENCY EXCHANGE RATE FLUCTUATIONS
The Income Strategy, Balanced Strategy, Cornerstone Strategy, Growth Strategy,
Emerging Markets, Gold, International, and World Growth Funds' assets may be
invested in securities of foreign issuers. Any such investments will be made in
compliance with U.S. and foreign currency restrictions, tax laws, and laws
limiting the amount and types of foreign investments. Pursuit of the Funds'
investment objectives will involve currencies of the United States and of
foreign countries. Consequently, changes in exchange rates, currency
convertibility, and repatriation requirements may favorably or adversely affect
the Funds.
UNPREDICTABLE POLITICAL, ECONOMIC AND SOCIAL CONDITIONS
For the Income Strategy, Balanced Strategy, Cornerstone Strategy, Growth
Strategy, Emerging Markets, Gold, International, and World Growth Funds,
investing in securities of foreign issuers presents certain other risks not
present in domestic investments, including different accounting, reporting, and
disclosure requirements for foreign issuers, possible political or social
instability, including policies of foreign governments which may affect their
respective equity markets, and foreign taxation requirements including
withholding taxes.
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INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Trust for each
Fund. These restrictions may not be changed for any given Fund without approval
by the lesser of (1) 67% or more of the voting securities present at a meeting
of the Fund if more than 50% of the outstanding voting securities of the Fund
are present or represented by proxy or (2) more than 50% of that Fund's
outstanding voting securities. The investment restrictions of one Fund may thus
be changed without affecting those of any other Fund.
Under the restrictions, each of the Growth and Tax Strategy, Cornerstone
Strategy, Gold, International, and World Growth Funds may not:
(1) With respect to 75% of its total assets, purchase the securities of any
issuer (except U.S. Government Securities, as such term is defined in the
Investment Company Act of 1940, as amended (1940 Act)) if, as a result,
the Fund would own more than 10% of the outstanding voting securities of
such issuer or the Fund would have more than 5% of the value of its total
assets invested in the securities of such issuer.
(2) Borrow money, except for temporary or emergency purposes in an amount not
exceeding 33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings).
(3) Lend any securities or make any loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties, except that this
limitation does not apply to purchases of debt securities or to repurchase
agreements.
(4) Underwrite securities of other issuers, except to the extent that it may
be deemed to act as a statutory underwriter in the distribution of any
restricted securities or not readily marketable securities.
(5) Purchase securities on margin or sell securities short, except that it may
obtain such short-term credits as are necessary for the clearance of
securities transactions.
(6) Invest in put, call, straddle, or spread options or interests in oil, gas
or other mineral exploration or development programs, except that it may
purchase securities of issuers whose principal business activities fall
within such areas in accordance with its investment objectives and
policies.
(7) Invest more than 2% of the market value of its total assets in marketable
warrants to purchase common stock. Warrants initially attached to
securities and acquired by a Fund upon original issuance thereof shall be
deemed to be without value.
(8) Purchase or sell real estate or partnership interests therein, except that
the Cornerstone Strategy Fund may purchase securities secured by real
estate interests or interests therein, or issued by companies or
investment trusts which invest in real estate or interests therein.
(9) Purchase or sell commodities or commodity contracts.
(10) Purchase securities of other open-end investment companies, except a Fund
may invest up to 10% of the market value of its total assets in such
securities through purchases in the open market involving only customary
broker's commissions or in connection with a merger, consolidation,
reorganization, or acquisition of assets approved by the shareholders.
(11) Invest more than 5% of the market value of its total assets in any
closed-end investment company and will not hold more than 3% of the
outstanding voting stock of any closed-end investment company.
(12) Change the nature of its business so as to cease to be an investment
company.
(13) Issue senior securities as defined in the 1940 Act, except as permitted by
Section 18(f)(2) and rules thereunder.
(14) Invest more than 25% of its total assets in one industry.
For purposes of restriction 8 above, interests in publicly traded Real
Estate Investment Trusts (REITs) are not deemed to be real estate or partnership
interests therein.
Each of the GNMA and Treasury Money Market Trusts may not:
(1) With respect to 75% of its total assets, purchase the securities of any
issuer (except U.S. Government Securities, as such term is defined in the
1940 Act) if, as a result, the Fund would own more than 10% of the
outstanding voting securities of such issuer or the Fund would have more
than 5% of the value of its total assets invested in the securities of
such issuer.
(2) Borrow money, except for temporary or emergency purposes in an amount not
exceeding 33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings).
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(3) Lend any securities or make any loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties, except that this
limitation does not apply to purchases of debt securities or to repurchase
agreements.
(4) Underwrite securities of other issuers, except to the extent that it may
be deemed to act as a statutory underwriter in the distribution of any
restricted securities or not readily marketable securities.
(5) Change the nature of its business so as to cease to be an investment
company.
(6) Issue senior securities as defined in the 1940 Act, except as permitted by
Section 18(f)(2) and rules thereunder.
(7) Purchase or sell real estate, commodities or commodity contracts, except
that the GNMA Trust may invest in financial futures contracts and options
thereon.
(8) Purchase any security if immediately after the purchase 25% or more of the
value of its total assets will be invested in securities of issuers
principally engaged in a particular industry (except that such limitation
does not apply to obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities).
The Emerging Markets Fund may not:
(1) With respect to 75% of its total assets, purchase the securities of any
issuer (except U.S. Government Securities, as such term is defined in the
1940 Act) if, as a result, it would own more than 10% of the outstanding
voting securities of such issuer or it would have more than 5% of the
value of its total assets invested in the securities of such issuer.
(2) Borrow money, except that it may borrow money for temporary or emergency
purposes in an amount not exceeding 33 1/3% of its total assets (including
the amount borrowed) less liabilities (other than borrowings), nor will it
purchase securities when its borrowings exceed 5% of its total assets.
(3) Concentrate its investments in any one industry although it may invest up
to 25% of the value of its total assets in any one industry; provided,
this limitation does not apply to securities issued or guaranteed by the
U.S. Government or its corporate instrumentalities.
(4) Issue senior securities, except as permitted under the 1940 Act.
(5) Underwrite securities of other issuers, except to the extent that it may
be deemed to act as a statutory underwriter in the distribution of any
restricted securities or not readily marketable securities.
(6) Lend any securities or make any loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties, except that this
limitation does not apply to purchases of debt securities or to repurchase
agreements.
(7) Purchase or sell commodities, except that the Fund may invest in financial
futures contracts, options thereon, and similar instruments.
(8) Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments, except that the Fund may invest in
securities or other instruments backed by real estate or securities of
companies that deal in real estate or are engaged in the real estate
business.
Each of the Income Strategy, Balanced Strategy, and Growth Strategy Funds may
not:
(1) With respect to 75% of its total assets, purchase the securities of any
issuer (except U.S. Government Securities, as such term is defined in the
1940 Act) if, as a result, it would own more than 10% of the outstanding
voting securities of such issuer or it would have more than 5% of the
value of its total assets invested in the securities of such issuer.
(2) Borrow money, except for temporary or emergency purposes in an amount not
exceeding 33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings).
(3) Concentrate its investments in any one industry although it may invest up
to 25% of the value of its total assets in any one industry; provided,
this limitation does not apply to securities issued or guaranteed by the
U.S. Government and its agencies or instrumentalities.
(4) Issue senior securities, except as permitted under the 1940 Act.
(5) Underwrite securities of other issuers, except to the extent that it may
be deemed to act as a statutory underwriter in the distribution of any
restricted securities or not readily marketable securities.
(6) Lend any securities or make any loan if, as a result, more than 331/3% of
its total assets would be lent to other parties, except that this
limitation does not apply to purchases of debt securities or to repurchase
agreements.
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(7) Purchase or sell commodities, except that each Fund may invest in
financial futures contracts, options thereon, and similar instruments.
(8) Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments, except that each Fund may invest in
securities or other instruments backed by real estate or securities of
companies that deal in real estate or are engaged in the real estate
business.
With respect to each Fund's concentration policies as described above, the
Manager uses industry classifications for industries based on categories
established by Standard & Poor's Corporation (S&P) for the Standard & Poor's 500
Composite Index, with certain modifications. Because the Manager has determined
that certain categories within, or in addition to, those set forth by S&P have
unique investment characteristics, additional industries are included as
industry classifications. The Manager classifies municipal obligations by
projects with similar characteristics, such as toll road revenue bonds, housing
revenue bonds or higher education revenue bonds. In addition, the Cornerstone
Strategy Fund may not concentrate investments in any one industry, although it
may invest up to 25% of the value of its total assets in one industry; the Basic
Value Stocks, Foreign Stocks, and U.S. Government Securities investment
categories are not considered industries for this purpose.
ADDITIONAL RESTRICTION
The following restriction is not considered to be a fundamental policy of the
Funds. The Board of Trustees may change this additional restriction without
notice to or approval by the shareholders.
Each Fund may not purchase any security while borrowings representing more
than 5% of the Fund's total assets are outstanding.
PORTFOLIO TRANSACTIONS
The Manager, pursuant to the Advisory Agreement dated September 21, 1990, and
subject to the general control of the Trust's Board of Trustees, places all
orders for the purchase and sale of Fund securities. In executing portfolio
transactions and selecting brokers and dealers, it is the Trust's policy to seek
the best overall terms available. The Manager shall consider such factors as it
deems relevant, including the breadth of the market in the security, the
financial condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any, for the specific transaction or on a
continuing basis. Securities purchased or sold in the over-the-counter market
will be executed through principal market makers, except when, in the opinion of
the Manager, better prices and execution are available elsewhere.
The Funds will have no obligation to deal with any particular broker or
group of brokers in the execution of portfolio transactions. The Funds
contemplate that, consistent with obtaining the best overall terms available,
brokerage transactions may be effected through USAA Brokerage Services, a
discount brokerage service of the Manager. The Trust's Board of Trustees has
adopted procedures in conformity with Rule 17e-1 under the 1940 Act designed to
ensure that all brokerage commissions paid to USAA Brokerage Services are
reasonable and fair. The Trust's Board of Trustees has authorized the Manager,
as a member of the Chicago Stock Exchange, to effect portfolio transactions for
the Funds on such exchange and to retain compensation in connection with such
transactions. Any such transactions will be effected and related compensation
paid only in accordance with applicable SEC regulations.
In the allocation of brokerage business used to purchase securities for the
Income Strategy, Growth and Tax Strategy, Balanced Strategy, Cornerstone
Strategy, Growth Strategy, Emerging Markets, Gold, International, and World
Growth Funds, preference may be given to those broker-dealers who provide
statistical research or other services to the Manager as long as there is no
sacrifice in obtaining the best overall terms available. Such research and other
services may include, for example: advice concerning the value of securities,
the advisability of investing in, purchasing, or selling securities, and the
availability of securities or the purchasers or sellers of securities; analyses
and reports concerning issuers, industries, securities, economic factors and
trends, portfolio strategy, and performance of accounts; and various functions
incidental to effecting securities transactions, such as clearance and
settlement. These research services may also include access to research on third
party data bases, such as historical data on companies, financial statements,
earnings history and estimates, and corporate releases; real-time quotes and
financial news; research on specific fixed income securities; research on
international market news and securities; and rating services on companies and
industries. In return for such services, a Fund may pay to a broker a higher
commission than may be charged by other brokers, provided that the Manager
determines in good faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such broker, viewed in
terms of either that particular transaction or of the overall responsibility of
the Manager to the Funds and its other clients. The Manager continuously reviews
the performance of
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<PAGE>
the broker-dealers with whom it places orders for transactions. The receipt of
research from broker-dealers that execute transactions on behalf of the Trust
may be useful to the Manager in rendering investment management services to
other clients (including affiliates of the Manager), and conversely, such
research provided by broker-dealers who have executed transaction orders on
behalf of other clients may be useful to the Manager in carrying out its
obligations to the Trust. While such research is available to and may be used by
the Manager in providing investment advice to all its clients (including
affiliates of the Manager), not all of such research may be used by the Manager
for the benefit of the Trust. Such research and services will be in addition to
and not in lieu of research and services provided by the Manager, and the
expenses of the Manager will not necessarily be reduced by the receipt of such
supplemental research. See THE TRUST'S MANAGER.
Securities of the same issuer may be purchased, held, or sold at the same
time by the Trust for any or all of its Funds, or other accounts or companies
for which the Manager acts as the investment adviser (including affiliates of
the Manager). On occasions when the Manager deems the purchase or sale of a
security to be in the best interest of the Trust, as well as the Manager's other
clients, the Manager, to the extent permitted by applicable laws and
regulations, may aggregate such securities to be sold or purchased for the Trust
with those to be sold or purchased for other customers in order to obtain best
execution and lower brokerage commissions, if any. In such event, allocation of
the securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Manager in the manner it considers to be most
equitable and consistent with its fiduciary obligations to all such customers,
including the Trust. In some instances, this procedure may impact the price and
size of the position obtainable for the Trust.
The Trust pays no brokerage commissions as such for debt securities. The
market for such securities is typically a "dealer" market in which investment
dealers buy and sell the securities for their own accounts, rather than for
customers, and the price may reflect a dealer's mark-up or mark-down. In
addition, some securities may be purchased directly from issuers.
During the fiscal year ended May 31, 1999, the Funds purchased securities
of the following regular broker-dealers (the ten largest broker-dealers through
whom the Fund purchased securities) or the parents of regular broker-dealers.
Regular Broker-Dealer Value Of Securities
--------------------- As of May 31,1999
-------------------
Morgan Stanley Dean Witter & Company
Growth and Tax Strategy $ 1,560,000
World Growth $ 3,078,000
Income Strategy $ 271,000
Balanced Strategy $ 1,081,000
Growth Strategy $ 618,000
Citigroup
Growth and Tax Strategy $ 3,495,000
Income Strategy $ 272,000
Balanced Strategy $ 1,060,000
Merrill Lynch
Income Strategy $ 94,000
Balanced Strategy $ 1,302,000
Growth Strategy $ 1,177,000
BROKERAGE COMMISSION
During the last three fiscal years, the Funds paid the following brokerage fees:
Fund 1997 1998 1999
---- ---- ---- ----
Income Strategy $ 2,820 $ 7,690 $ 21,501
Growth and Tax Strategy $ 81,456 $ 50,508 $ 97,792
Balanced Strategy $ 13,006 $ 29,977 $ 75,407
Cornerstone Strategy $ 1,428,772 $ 1,466,734 $ 1,233,228
Growth Strategy $ 230,440 $ 247,249 $ 160,115
Emerging Markets $ 484,792 $ 1,578,101 $ 1,309,471
Gold $ 225,284 $ 165,197 $ 262,813
International $ 1,362,389 $ 1,317,048 $ 970,956
World Growth $ 558,990 $ 586,870 $ 502,635
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During the last three fiscal years, the Funds paid the following brokerage fees
to USAA Brokerage Services, a discount brokerage service of the Manager:
Fund 1997 1998 1999*
---- ---- ---- -----
Income Strategy $ 454 $ 802 $ 4,816
Growth and Tax Strategy $ 15,356 $ 3,976 $ 29,728
Balanced Strategy $ 1,132 $ 2,168 $ 12,104
Cornerstone Strategy $ 11,878 $ 6,200 $ 27,720
Growth Strategy $ 10,580 $ 8,951 $ 11,419
Emerging Markets $ 240 - -
World Growth $ 2,380 $ 2,800 $ 18,428
- ---------------------
* These amounts are 22.4%, 30.4%, 16.1%, 2.2%, 7.1%, -%, and 3.7%,
respectively, of brokerage fees paid by each Fund.
For the year ended May 31, 1999, 25.9%, 26.3%, 19.4%, 4.9%, 11.7%, and 7.6%, of
the aggregate dollar amounts of transactions involving the payment of
commissions by the Income Strategy, Growth and Tax Strategy, Balanced Strategy,
Cornerstone Strategy, Growth Strategy, and World Growth Funds, respectively,
were effected through USAA Brokerage Services.
The Manager directed a portion of the Funds' brokerage transactions to
certain broker-dealers that provided the Manager with research, statistical and
other information. Such transactions amounted to $6,208,774, $58,950,062,
$22,575,215, $101,176,414, $20,736,073, and $39,783,928, and the related
brokerage commissions or underwriting commissions were $5,507, $63,060, $20,025,
$107,285, $23,362, and $45,127, for the Income Strategy, Growth and Tax
Strategy, Balanced Strategy, Cornerstone Strategy, Growth Strategy, and World
Growth Funds, respectively, for the year ended May 31, 1999.
PORTFOLIO TURNOVER RATES
The rate of portfolio turnover in any of the Funds (other than the Treasury
Money Market Trust) will not be a limiting factor when the Manager deems changes
in a Fund's portfolio appropriate in view of its investment objective. Although
no Fund will purchase or sell securities solely to achieve short-term trading
profits, a Fund may sell portfolio securities without regard to the length of
time held if consistent with the Fund's investment objective. A higher degree of
equity portfolio activity will increase brokerage costs to a Fund. It is not
anticipated that the portfolio turnover rates of the Income Strategy, Growth and
Tax Strategy, Balanced Strategy, Cornerstone Strategy, Growth Strategy, Emerging
Markets, Gold, International, and World Growth Funds or the GNMA Trust will
exceed 100%.
The portfolio turnover rate is computed by dividing the dollar amount of
securities purchased or sold (whichever is smaller) by the average value of
securities owned during the year. Short-term investments such as commercial
paper and short-term U.S. Government securities are not considered when
computing the turnover rate.
For the last two fiscal years, the Funds' portfolio turnover rates were as
follows:
Fund 1998 1999
---- ---- ----
Income Strategy 7.15% 117.12%*
Growth and Tax Strategy (1) 65.58% 63.42%
Balanced Strategy 22.18% 63.39%
Cornerstone Strategy 32.73% 46.27%
Growth Strategy 69.42% 41.65%
Emerging Markets 41.23% 83.84%
Gold 19.62% 33.48%
International 42.97% 37.69%
World Growth 45.04% 51.19%
GNMA Trust 60.85% 64.93%
- ------------------
* The turnover rate was significantly higher due to the restructuring of the
portfolio to make the Fund more tax efficient.
1 The Fund has simultaneously purchased and sold the same securities. These
transactions have at times been high in volume and dissimilar to other
trade activity within the Fund. If these transactions were excluded from
the calculation, the portfolio turnover rate would have been as follows:
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Year Ended May 31,
1998 1999
---- ----
Portfolio turnover 31.58% -
Purchases and sales of
this type are as follows:
Purchases (000) $68,958 -
Sales (000) $69,044 -
DESCRIPTION OF SHARES
The Funds are series of the Trust and are diversified. The Trust is an open-end
management investment company established under the laws of the Commonwealth of
Massachusetts pursuant to the First Amended and Restated Master Trust Agreement
(Master Trust Agreement), dated June 2, 1995, as amended. The Trust is
authorized to issue shares of beneficial interest in separate portfolios. Eleven
such portfolios have been established which are described in this SAI. Under the
Master Trust Agreement, the Board of Trustees is authorized to create new
portfolios in addition to those already existing without the approval of the
shareholders of the Trust. The Cornerstone Strategy and Gold Funds were
established May 9, 1984, by the Board of Trustees and commenced public offering
of their shares on August 15, 1984. The International Fund, established on
November 4, 1987, commenced public offering of its shares on July 11, 1988. The
Growth and Tax Strategy Fund was established on November 3, 1988, and commenced
public offering of its shares on January 11, 1989. On November 7, 1990, the
Board of Trustees established the GNMA Trust and Treasury Money Market Trust and
commenced public offering of their shares on February 1, 1991. The World Growth
Fund was established on July 21, 1992, and commenced public offering of its
shares on October 1, 1992. The Emerging Markets Fund was established on
September 7, 1994, and commenced public offering of its shares on November 7,
1994. The Income Strategy, Balanced Strategy, and Growth Strategy Funds were
established on June 2, 1995, and commenced public offering of their shares on
September 1, 1995.
Each Fund's assets, and all income, earnings, profits and proceeds thereof,
subject only to the rights of creditors, are specifically allocated to each
Fund. They constitute the underlying assets of each Fund, are required to be
segregated on the books of account, and are to be charged with the expenses of
such Fund. Any general expenses of the Trust not readily identifiable as
belonging to a particular Fund are allocated on the basis of the Funds' relative
net assets during the fiscal year or in such other manner as the Trustees
determine to be fair and equitable. Each share of each Fund represents an equal
proportionate interest in that Fund with every other share and is entitled to
such dividends and distributions out of the net income and capital gains
belonging to that Fund when declared by the Trustees. Upon liquidation of that
Fund, shareholders are entitled to share pro rata in the net assets belonging to
such Fund available for distribution.
Under the Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there will ordinarily be no shareholder meeting
unless otherwise required by the 1940 Act. Under certain circumstances, however,
shareholders may apply to the Trustees for shareholder information in order to
obtain signatures to request a shareholder meeting. The Trust may fill vacancies
on the Board or appoint new Trustees if the result is that at least two-thirds
of the Trustees have still been elected by shareholders. Moreover, pursuant to
the Master Trust Agreement, any Trustee may be removed by the vote of two-thirds
of the outstanding Trust shares and holders of 10% or more of the outstanding
shares of the Trust can require Trustees to call a meeting of shareholders for
the purpose of voting on the removal of one or more Trustees. The Trust will
assist in communicating to other shareholders about the meeting. On any matter
submitted to the shareholders, the holder of any share is entitled to one vote
per share (with proportionate voting for fractional shares) regardless of the
relative net asset values of the Funds' shares. However, on matters affecting an
individual Fund, a separate vote of the shareholders of that Fund is required.
For example, the Advisory Agreement must be approved separately by each Fund and
only becomes effective with respect to a Fund when a majority of the outstanding
voting securities of that Fund approves it. Shareholders of a Fund are not
entitled to vote on any matter which does not affect that Fund but which
requires a separate vote of another Fund. For example, a proposed change in the
investment objectives of a particular Fund would require the affirmative vote of
a majority of the outstanding voting securities of only that Fund.
Shares do not have cumulative voting rights, which means that in situations
in which shareholders elect Trustees, holders of more than 50% of the shares
voting for the election of Trustees can elect 100% of
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the Board of Trustees, and the holders of less than 50% of the shares voting for
the election of Trustees will not be able to elect any person as a Trustee.
When issued, each Fund's shares are fully paid and nonassessable by the
Trust, have no preemptive or subscription rights, and are fully transferable.
There are no conversion rights.
TAX CONSIDERATIONS
TAXATION OF THE FUNDS
Each Fund intends to qualify as a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended (the Code). Accordingly, each
Fund will not be liable for federal income taxes on its taxable net investment
income and net capital gains (capital gains in excess of capital losses) that
are distributed to shareholders, provided that each Fund distributes at least
90% of its net investment income and net short-term capital gain for the taxable
year.
To qualify as a regulated investment company, a Fund must, among other
things, (1) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies (the 90% test) and (2) satisfy certain diversification
requirements, at the close of each quarter of the Fund's taxable year. In the
case of the Growth and Tax Strategy Fund, in order to be entitled to pay
exempt-interest dividends to shareholders, at the close of each quarter of its
taxable year, at least 50% of the value of the Fund's total assets must consist
of obligations the interest of which is exempt from federal income tax. The
Growth and Tax Strategy Fund intends to satisfy this requirement.
The Code imposes a nondeductible 4% excise tax on a regulated investment
company that fails to distribute during each calendar year an amount at least
equal to the sum of (1) 98% of its taxable net investment income for the
calendar year, (2) 98% of its capital gain net income for the twelve-month
period ending on October 31, and (3) any prior amounts not distributed. Each
Fund intends to make such distributions as are necessary to avoid imposition of
excise tax.
The Income Strategy, Balanced Strategy, Cornerstone Strategy, Growth
Strategy, Emerging Markets, Gold, International, and World Growth Funds' ability
to make certain investments may be limited by provisions of the Code that
require inclusion of certain unrealized gains or losses in the Fund's income for
purposes of the 90% test, and the distribution requirements of the Code, and by
provisions of the Code that characterize certain income or loss as ordinary
income or loss rather than capital gain or loss. Such recognition,
characterization and timing rules generally apply to investments in certain
forward currency contracts, foreign currencies and debt securities denominated
in foreign currencies, as well as certain other investments.
If the Income Strategy, Balanced Strategy, Cornerstone Strategy, Growth
Strategy, Emerging Markets, Gold, International, or World Growth Funds invest in
an entity that is classified as a "passive foreign investment company" (PFIC)
for federal income tax purposes, the application of certain provisions of the
Code applying to PFICs could result in the imposition of certain federal income
taxes on the Fund. It is anticipated that any taxes on a Fund with respect to
investments in PFICs would be insignificant.
TAXATION OF THE SHAREHOLDERS
Taxable distributions are generally included in a shareholder's gross income for
the taxable year in which they are received. Dividends declared in October,
November, or December and made payable to shareholders of record in such a month
will be deemed to have been received on December 31, if a Fund pays the dividend
during the following January. If a shareholder of a Fund receives a distribution
taxable as long-term capital gain with respect to shares of a Fund and redeems
or exchanges the shares before he or she has held them for more than six months,
any loss on the redemption or exchange that is less than or equal to the amount
of the distribution will be treated as long-term capital loss, except as noted
below.
In the case of the Growth and Tax Strategy Fund, if a shareholder receives
an exempt-interest dividend with respect to any share and such share has been
held for six months or less, any loss on the sale or exchange of such share will
be disallowed to the extent of such exempt-interest dividend. Shareholders who
are recipients of Social Security benefits should be aware that exempt-interest
dividends received from the Growth and Tax Strategy Fund are includible in their
"modified adjusted gross income" for purposes of determining the amount of such
Social Security benefits, if any, that are required to be included in their
gross income.
16
<PAGE>
The Growth and Tax Strategy Fund may invest in private activity bonds.
Interest on certain private activity bonds issued after August 7, 1986, is an
item of tax preference for purposes of the Federal Alternative Minimum Tax
(AMT), although the interest continues to be excludable from gross income for
other purposes. AMT is a supplemental tax designed to ensure that taxpayers pay
at least a minimum amount of tax on their income, even if they make substantial
use of certain tax deductions and exclusions (referred to as tax preference
items). Interest from private activity bonds is one of the tax preference items
that is added to income from other sources for the purposes of determining
whether a taxpayer is subject to AMT and the amount of any tax to be paid.
Opinions relating to the validity of the tax-exempt securities purchased
for the Growth and Tax Strategy Fund and the exemption of interest thereon from
federal income tax are rendered by recognized bond counsel to the issuers.
Neither the Manager's nor the Fund's counsel makes any review of the basis of
such opinions.
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of any state
or local taxing authority. Shareholders of a Fund may be exempt from state and
local taxes on distributions of tax-exempt interest income derived from
obligations of the state and/or municipalities of the state in which they are a
resident, but generally are subject to tax on income derived from obligations of
other jurisdictions. Shareholders should consult their tax advisers about the
status of distributions from a Fund in their own states and localities.
TRUSTEES AND OFFICERS OF THE TRUST
The Board of Trustees of the Trust consists of seven Trustees who supervise the
business affairs of the Trust. Set forth below are the Trustees and officers of
the Trust, and their respective offices and principal occupations during the
last five years. Unless otherwise indicated, the business address of each is
9800 Fredericksburg Road, San Antonio, TX 78288.
Robert G. Davis 1, 2
Trustee and Chairman of the Board of Trustees
Age: 52
President and Chief Operating Officer of United Services Automobile Association
(USAA) (6/99-present); Deputy Chief Executive Officer for Capital Management of
USAA (6/98-5/99); President, Chief Executive Officer, Director, and Vice
Chairman of the Board of Directors of USAA Capital Corporation and several of
its subsidiaries and affiliates (1/97-present); President, Chief Executive
Officer, Director, and Chairman of the Board of Directors of USAA Financial
Planning Network, Inc. (1/97-present); Executive Vice President, Chief Operating
Officer, Director, and Vice Chairman of the Board of Directors of USAA Financial
Planning Network, Inc. (6/96-12/96); Special Assistant to Chairman, USAA
(6/96-12/96); President and Chief Executive Officer, Banc One Credit Corporation
(12/95-6/96); and President and Chief Executive Officer, Banc One Columbus,
(8/91-12/95). Mr. Davis serves as a Trustee/Director and Chairman of the Boards
of Trustees/Directors of each of the remaining funds within the USAA Family of
Funds; Director and Chairman of the Boards of Directors of USAA Investment
Management Company (IMCO), USAA Shareholder Account Services, USAA Federal
Savings Bank, and USAA Real Estate Company.
Michael J.C. Roth 1, 2
Trustee, President, and Vice Chairman of the Board of Trustees
Age: 58
Chief Executive Officer, IMCO (10/93-present); President, Director, and Vice
Chairman of the Board of Directors, IMCO (1/90-present). Mr. Roth serves as
President, Trustee/Director, and Vice Chairman of the Boards of
Trustees/Directors of each of the remaining funds within the USAA Family of
Funds and USAA Shareholder Account Services; Director of USAA Life Insurance
Company; and Trustee and Vice Chairman of USAA Life Investment Trust.
John W. Saunders, Jr. 1, 2, 4
Trustee and Vice President
Age: 64
Senior Vice President, Fixed Income Investments, IMCO (10/85-present). Mr.
Saunders serves as a Trustee/Director of each of the remaining funds within the
USAA Family of Funds; Director of IMCO; Senior Vice President of USAA
Shareholder Account Services; and Vice President of USAA Life Investment Trust.
17
<PAGE>
Barbara B. Dreeben 3, 4, 5
200 Patterson #1008
San Antonio, TX 78209
Trustee
Age: 54
President, Postal Addvantage (7/92-present); Consultant, Nancy Harkins Stationer
(8/91-12/95). Mrs. Dreeben serves as a Trustee/Director of each of the remaining
funds within the USAA Family of Funds.
Howard L. Freeman, Jr. 2, 3, 4, 5
2710 Hopeton
San Antonio, TX 78230
Trustee
Age: 64
Retired. Assistant General Manager for Finance, San Antonio City Public Service
Board (1976-1996). Mr. Freeman serves as a Trustee/Director of each of the
remaining funds within the USAA Family of Funds.
Robert L. Mason, Ph.D. 3, 4, 5
12823 Queens Forest
San Antonio, TX 78230
Trustee
Age: 53
Staff Analyst, Southwest Research Institute (9/98-present); Manager, Statistical
Analysis Section, Southwest Research Institute (2/79-9/98). Dr. Mason serves as
a Trustee/Director of each of the remaining funds within the USAA Family of
Funds.
Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Trustee
Age: 56
Vice President, Beldon Roofing and Remodeling (1985-present). Mr. Zucker serves
as a Trustee/Director of each of the remaining funds within the USAA Family of
Funds.
Michael D. Wagner 1
Secretary
Age: 51
Senior Vice President, CAPCO General Counsel (01/99-present); Vice President,
Corporate Counsel, USAA (1982-01/99). Mr. Wagner has held various positions in
the legal department of USAA since 1970 and serves as Vice President, Secretary,
and Counsel, IMCO and USAA Shareholder Account Services; Secretary of each of
the remaining funds within the USAA Family of Funds; and Vice President,
Corporate Counsel, for various other USAA subsidiaries and affiliates.
Alex M. Ciccone 1
Assistant Secretary
Age: 49
Vice President, Compliance, IMCO (12/94-present); Vice President and Chief
Operating Officer, Commonwealth Shareholder Services (6/94-11/94). Mr. Ciccone
serves as Assistant Secretary of each of the remaining funds within the USAA
Family of Funds.
Mark S. Howard 1
Assistant Secretary
Age: 35
Assistant Vice President, Securities Counsel, USAA (2/98-present); Executive
Director, Securities Counsel, USAA (9/96-2/98); Senior Associate Counsel,
Securities Counsel, USAA (5/95-8/96); Attorney, Kirkpatrick & Lockhart LLP
(9/90-4/95). Mr. Howard serves as Assistant Vice President and Assistant
Secretary, IMCO and USAA Shareholder Account Services; Assistant Secretary of
each of the remaining funds within the USAA Family of Funds and for USAA Life
Investment Trust; and Assistant Vice President, Securities Counsel for various
other USAA subsidiaries and affiliates.
18
<PAGE>
Sherron A. Kirk 1
Treasurer
Age: 54
Vice President, Senior Financial Officer, IMCO (8/98-present); Vice President,
Controller, IMCO (10/92-8/98). Mrs. Kirk serves as Treasurer of each of the
remaining funds within the USAA Family of Funds; and Vice President, Senior
Financial Officer of USAA Shareholder Account Services.
Caryl Swann 1
Assistant Treasurer
Age: 51
Executive Director, Mutual Fund Analysis & Support, IMCO (10/98-present);
Director, Mutual Fund Portfolio Analysis & Support, IMCO (2/98-10/98); Manager,
Mutual Fund Accounting, IMCO (7/92-2/98). Ms. Swann serves as Assistant
Treasurer for each of the remaining funds within the USAA Family of Funds and
for USAA Life Investment Trust.
- -------------------
1 Indicates those Trustees and officers who are employees of the Manager or
affiliated companies and are considered "interested persons" under the 1940
Act.
2 Member of Executive Committee
3 Member of Audit Committee
4 Member of Pricing and Investment Committee
5 Member of Corporate Governance Committee
Between the meetings of the Board of Trustees and while the Board is not in
session, the Executive Committee of the Board of Trustees has all the powers and
may exercise all the duties of the Board of Trustees in the management of the
business of the Trust which may be delegated to it by the Board. The Pricing and
Investment Committee of the Board of Trustees acts upon various
investment-related issues and other matters which have been delegated to it by
the Board. The Audit Committee of the Board of Trustees reviews the financial
statements and the auditor's reports and undertakes certain studies and analyses
as directed by the Board. The Corporate Governance Committee of the Board of
Trustees maintains oversight of the organization, performance, and effectiveness
of the Board and independent Trustees.
In addition to the previously listed Trustees and/or officers of the Trust who
also serve as Directors and/or officers of the Manager, the following
individuals are Directors and/or executive officers of the Manager: Carl W.
Shirley, Senior Vice President, Insurance Company Portfolios; John J. Dallahan,
Senior Vice President, Investment Services; and David G. Peebles, Senior Vice
President, Equity Investments. There are no family relationships among the
Trustees, officers and managerial level employees of the Trust, or its Manager.
The following table sets forth information describing the compensation of the
current Trustees of the Trust for their services as Trustees for the fiscal year
ended May 31, 1999.
Name Aggregate Total Compensation
of Compensation from the USAA
Trustee From the Trust Family of Funds (b)
------- -------------- -------------------
Robert G. Davis None (a) None (a)
Barbara B. Dreeben $8,461 $30,500
Howard L. Freeman, Jr. $8,461 $30,500
Robert L. Mason $8,461 $30,500
Michael J.C. Roth None (a) None (a)
John W. Saunders, Jr. None (a) None (a)
Richard A. Zucker $8,461 $30,500
----------
(a) Robert G. Davis, Michael J.C. Roth, and John W. Saunders, Jr. are
affiliated with the Trust's investment adviser, IMCO, and, accordingly,
receive no remuneration from the Trust or any other Fund of the USAA
Family of Funds.
(b) At May 31, 1999, the USAA Family of Funds consisted of four registered
investment companies offering 35 individual funds. Each Trustee presently
serves as a Trustee or Director of each investment company in the USAA
Family of Funds. In addition, Michael J.C. Roth presently serves as a
Trustee
19
<PAGE>
of USAA Life Investment Trust, a registered investment company advised by
IMCO, consisting of seven funds available to the public only through the
purchase of certain variable annuity contracts and variable life insurance
policies offered by USAA Life Insurance Company. Mr. Roth receives no
compensation as Trustee of USAA Life Investment Trust.
All of the above Trustees are also Trustees/Directors of the other funds
within the USAA Family of Funds. No compensation is paid by any fund to any
Trustee/Director who is a director, officer, or employee of IMCO or its
affiliates. No pension or retirement benefits are accrued as part of fund
expenses. The Trust reimburses certain expenses of the Trustees who are not
affiliated with the investment adviser. As of August 31, 1999, the officers and
Trustees of the Trust and their families as a group owned beneficially or of
record less than 1% of the outstanding shares of the Trust.
As of August 31, 1999, USAA and its affiliates owned 303,025 shares (5.1%)
of the Income Strategy Fund, 24,008,365 shares (78.1%) of the Emerging Markets
Fund, 2,446,188 shares (9.7%) of the International Fund, and no shares of the
Growth and Tax Strategy Fund, Balanced Strategy Fund, Cornerstone Strategy Fund,
Growth Strategy Fund, Gold Fund, World Growth Fund, GNMA Trust and Treasury
Money Market Trust.
The Trust knows of no other persons who, as of August 31, 1999, held of
record or owned beneficially 5% or more of the voting stock of any Fund's
shares.
THE TRUST'S MANAGER
As described in each Fund's Prospectus, USAA Investment Management Company is
the Manager and investment adviser, providing the services under the Advisory
Agreement. The Manager, a wholly owned indirect subsidiary of United Services
Automobile Association (USAA), a large, diversified financial services
institution, was organized in May 1970, has served as investment adviser and
underwriter for USAA Investment Trust from its inception.
In addition to managing the Trust's assets, the Manager advises and manages
the investments for USAA and its affiliated companies as well as those of USAA
Mutual Fund, Inc., USAA Tax Exempt Fund, Inc., USAA State Tax-Free Trust, and
USAA Life Investment Trust. As of the date of this SAI, total assets under
management by the Manager were approximately $40 billion, of which approximately
$27 billion were in mutual fund portfolios.
While the officers and employees of the Manager, as well as those of the
Funds, may engage in personal securities transactions, they are restricted by
the procedures in a Joint Code of Ethics adopted by the Manager and the Funds.
The Joint Code of Ethics was designed to ensure that the shareholders' interests
come before the individuals who manage their Funds. It also prohibits the
portfolio managers and other investment personnel from buying securities in an
initial public offering or from profiting from the purchase or sale of the same
security within 60 calendar days. Additionally, the Joint Code of Ethics
requires the portfolio manager and other employees with access information about
the purchase or sale of securities by the Funds to obtain approval before
executing permitted personal trades. A copy of the Joint Code of Ethics has been
filed with the Securities and Exchange Commission and is available for public
view.
ADVISORY AGREEMENT
Under the Advisory Agreement, the Manager provides an investment program,
carries out the investment policy and manages the portfolio assets for each
Fund. The Manager is authorized, subject to the control of the Board of Trustees
of the Trust, to determine the selection, amount, and time to buy or sell
securities for each Fund. In addition to providing investment services, the
Manager pays for office space, facilities, business equipment, and accounting
services (in addition to those provided by the Custodian) for the Trust. The
Manager compensates all personnel, officers, and Trustees of the Trust if such
persons are also employees of the Manager or its affiliates. For these services
under the Advisory Agreement, each Fund has agreed to pay the Manager a fee
computed as described under FUND MANAGEMENT in its Prospectus. Management fees
are computed and accrued daily and are payable monthly.
Except for the services and facilities provided by the Manager, the Funds
pay all other expenses incurred in their operations. Expenses for which the
Funds are responsible include taxes (if any); brokerage commissions on portfolio
transactions (if any); expenses of issuance and redemption of shares; charges of
transfer agents, custodians, and dividend disbursing agents; costs of preparing
and distributing proxy material; costs of printing and engraving stock
certificates; auditing and legal expenses; certain expenses of registering and
qualifying shares for sale; fees of Trustees who are not interested (not
affiliated) persons of
20
<PAGE>
the Manager; costs of printing and mailing the Prospectus, SAI, and periodic
reports to existing shareholders; and any other charges or fees not specifically
enumerated. The Manager pays the cost of printing and mailing copies of the
Prospectus, the SAI, and reports to prospective shareholders.
The Advisory Agreement will remain in effect until June 30, 2000, for each
Fund and will continue in effect from year to year thereafter for each Fund as
long as it is approved at least annually by a vote of the outstanding voting
securities of such Fund (as defined by the 1940 Act) or by the Board of Trustees
(on behalf of such Fund) including a majority of the Trustees who are not
interested persons of the Manager or (otherwise than as Trustees) of the Trust,
at a meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated at any time by either the Trust or the Manager on 60
days' written notice. It will automatically terminate in the event of its
assignment (as defined by the 1940 Act).
From time to time the Manager may, without prior notice to shareholders,
waive all or any portion of fees or agree to reimburse expenses incurred by a
Fund. The Manager has voluntarily agreed to continue to limit the annual
expenses of the Balanced Strategy Fund to 1.25% of the Fund's ANA, until October
1, 2000, and will reimburse the Fund for all expenses in excess of such
limitation. After October 1, 2000, any such waiver or reimbursement may be
terminated by the Manager at any time without prior notice to the shareholders.
For the last three fiscal years, management fees were as follows:
Fund 1997 1998 1999
---- ---- ---- ----
Income Strategy $ 65,023 $ 118,050 $ 295,068
Growth and Tax Strategy $ 852,055 $ 1,048,344 $ 1,179,802
Balanced Strategy $ 190,093 $ 360,127 $ 588,256
Cornerstone Strategy $ 8,496,435 $ 10,594,219 $ 10,071,779
Growth Strategy $ 990,525 $ 1,754,693 $ 1,844,418
Emerging Markets $ 600,181 $ 2,598,294 $ 2,408,986
Gold $ 996,721 $ 744,517 $ 672,400
International $ 3,805,999 $ 4,650,798 $ 3,990,284
World Growth $ 1,994,809 $ 2,524,040 $ 2,421,173
GNMA Trust $ 381,390 $ 427,196 $ 554,601
Treasury Money Market Trust $ 105,420 $ 118,804 $ 160,368
As a result of the Funds' actual expenses exceeding an expense limitation, the
Manager did not receive fees to which it would have been entitled as follows:
Fund 1997 1998 1999
---- ---- ---- ----
Income Strategy $ 66,382 $ 51,777 -
Balanced Strategy $ 37,577 $ 34,811 $ 52,511
Treasury Money Market Trust $ 15,808 $ 17,721 -
UNDERWRITER
The Trust has an agreement with the Manager for exclusive underwriting and
distribution of the Funds' shares on a continuing best efforts basis. This
agreement provides that the Manager will receive no fee or other compensation
for such distribution services.
TRANSFER AGENT
The Transfer Agent performs transfer agent services for the Trust under a
Transfer Agency Agreement. Services include maintenance of shareholder account
records, handling of communications with shareholders, distribution of Fund
dividends, and production of reports with respect to account activity for
shareholders and the Trust. For its services under the Transfer Agency
Agreement, each Fund pays the Transfer Agent an annual fixed fee of $26 to
$28.50 per account. The fee is subject to change at any time.
The fee to the Transfer Agent includes processing of all transactions and
correspondence. Fees are billed on a monthly basis at the rate of one-twelfth of
the annual fee. In addition, each Fund pays all out-of-pocket expenses of the
Transfer Agent and other expenses which are incurred at the specific direction
of the Trust.
21
<PAGE>
GENERAL INFORMATION
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 1713, Boston, MA 02105, is the
Trust's Custodian. The Custodian is responsible for, among other things,
safeguarding and controlling the Trust's cash and securities, handling the
receipt and delivery of securities, and collecting interest on the Trust's
investments. In addition, assets of the Income Strategy, Balanced Strategy,
Cornerstone Strategy, Growth Strategy, Emerging Markets, Gold, International,
and World Growth Funds may be held by certain foreign banks and foreign
securities depositories as agents of the Custodian in accordance with the rules
and regulations established by the SEC.
COUNSEL
Goodwin, Procter & Hoar LLP, Exchange Place, Boston, MA 02109, will review
certain legal matters for the Trust in connection with the shares offered by the
Prospectus.
INDEPENDENT AUDITORS
KPMG LLP, 112 East Pecan, Suite 2400, San Antonio, TX 78205, is the Trust's
independent auditor. In this capacity, the firm is responsible for auditing the
annual financial statements of the Funds and reporting thereon.
CALCULATION OF PERFORMANCE DATA
Information regarding the total return and yield of each Fund is provided under
COULD THE VALUE OF YOUR INVESTMENT IN THE FUND FLUCTUATE? in its Prospectus. See
VALUATION OF SECURITIES herein for a discussion of the manner in which each
Fund's price per share is calculated.
YIELD - TREASURY MONEY MARKET TRUST
When the Treasury Money Market Trust quotes a current annualized yield, it is
based on a specified recent seven-calendar-day period. It is computed by (1)
determining the net change, exclusive of capital changes and income other than
investment income, in the value of a hypothetical preexisting account having a
balance of one share at the beginning of the period, (2) dividing the net change
in account value by the value of the account at the beginning of the base period
to obtain the base return, then (3) multiplying the base period return by 52.14
(365/7). The resulting yield figure is carried to the nearest hundredth of one
percent.
The calculation includes (1) the value of additional shares purchased with
dividends on the original share, and dividends declared on both the original
share and any such additional shares, and (2) any fees charged to all
shareholder accounts, in proportion to the length of the base period and the
Trust's average account size.
The capital changes excluded from the calculation are realized capital
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The Trust's effective (compounded) yield will be computed by
dividing the seven-day annualized yield as defined above by 365, adding 1 to the
quotient, raising the sum to the 365th power, and subtracting 1 from the result.
Current and effective yields fluctuate daily and will vary with factors
such as interest rates and the quality, length of maturities, and type of
investments in the portfolio.
Yield For 7-day Period ended May 31, 1999, was 4.42%.
Effective Yield For 7-day Period ended May 31, 1999, was 4.52%.
YIELD - INCOME STRATEGY FUND, GROWTH AND TAX STRATEGY FUND, AND GNMA TRUST
These Funds may advertise performance in terms of 30-day yield quotation. The
30-day yield quotation is computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
YIELD = 2[(a-b/cd + 1)^6-1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
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<PAGE>
The 30-day yields for the period ended May 31, 1999, for the Income Strategy
Fund, Growth and Tax Strategy Fund, and GNMA Trust were 3.94%, 2.63% and 6.28%,
respectively.
TAX-EQUIVALENT YIELD
A tax-exempt mutual fund may provide more "take-home" income than a fully
taxable mutual fund after paying taxes. Calculating a "tax-equivalent yield"
means converting a tax-exempt yield to a pretax equivalent so that a meaningful
comparison can be made between a tax-exempt municipal fund and a fully taxable
fund. Because the Growth and Tax Strategy Fund invests a significant percentage
of its assets in tax-exempt securities, it may advertise performance in terms of
a 30-day tax-equivalent yield.
To calculate a tax-equivalent yield, an investor must know his federal
marginal income tax rate. The tax-equivalent yield for the Growth and Tax
Strategy Fund is then computed by dividing that portion of the yield which is
tax exempt by the complement of the federal marginal tax rate and adding the
product to that portion of the yield which is taxable. The complement, for
example, of a federal marginal tax rate of 36.0% is 64.0%, that is
(1.00-0.36=0.64).
Tax-Equivalent Yield = (% Tax-Exempt Income x 30-day Yield/
(1-Federal Marginal Tax Rate))
+ (% Taxable Income x 30-day Yield)
Based on a federal marginal tax rate of 36.0%, the tax-equivalent yield for
the Growth and Tax Strategy Fund for the period ended May 31, 1999, was 3.87%.
TOTAL RETURN
The Funds may advertise performance in terms of average annual total return for
1-, 5-, and 10-year periods, or for such lesser periods as any of such Funds
have been in existence. Average annual total return is computed by finding the
average annual compounded rates of return over the periods that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the 1-, 5-, or 10-year periods at the end of
the year or period
The calculation assumes any charges are deducted from the initial $1,000
payment and assumes all dividends and distributions by such Fund are reinvested
at the price stated in the Prospectus on the reinvestment dates during the
period and includes all recurring fees that are charged to all shareholder
accounts.
Average Annual Total Returns
For Periods Ended May 31, 1999
1 5 10 From
Fund Year Years Years Inception*
---- ---- ----- ----- ----------
Income Strategy 4.97% - - 10.14%
Growth and Tax Strategy 9.10% 12.76% 10.33% 10.66%
Balanced Strategy 7.63% - - 13.26%
Cornerstone Strategy (0.74%) 11.25% 10.32% 12.09%
Growth Strategy 8.46% - - 14.72%
Emerging Markets (4.63%) - - (1.43%)
Gold (9.20%) (9.57%) (3.30%) (3.14%)
International (6.63%) 8.66% 10.05% 9.67%
World Growth 2.06% 12.04% - 12.97%
GNMA Trust 3.15% 7.39% - 7.38%
- -------------
* Data from inception is shown for Funds that are less than ten years old.
Income Strategy, Balanced Strategy, and Growth Strategy Funds commenced
operations on September 1, 1995. Growth and Tax Strategy Fund commenced
operations on January 11, 1989. Emerging Markets Fund commenced operations on
November 7, 1994. International Fund commenced operations on July 11, 1988.
World Growth Fund commenced operations on October 1, 1992. GNMA Trust
commenced operations on February 1, 1991.
23
<PAGE>
APPENDIX A - LONG-TERM AND SHORT-TERM DEBT RATINGS
1. LONG-TERM DEBT RATINGS:
MOODY'S INVESTOR SERVICES, INC.
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
NOTE: MOODY'S APPLIES NUMERICAL MODIFIERS 1, 2, AND 3 IN EACH GENERIC RATING
CLASSIFICATION. THE MODIFIER 1 INDICATES THAT THE OBLIGATION RANKS IN THE HIGHER
END OF ITS GENERIC RATING CATEGORY, THE MODIFIER 2 INDICATES A MID-RANGE
RANKING, AND THE MODIFIER 3 INDICATES A RANKING IN THE LOWER END OF THAT GENERIC
RATING CATEGORY.
A description of ratings Ba and below assigned to debt obligations by Moody's is
included in Appendix A of the Emerging Markets Fund Prospectus.
STANDARD & POOR'S RATINGS GROUP
AAA An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated AA differs from the highest rated issues only in
small degree. The obligor's capacity to meet its financial commitment
on the obligation is VERY STRONG.
A An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still STRONG.
BBB An obligation rated BBB exhibits adequate capacity to pay interest and
repay principal. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
PLUS (+) OR MINUS (-): THE RATINGS FROM AA TO BBB MAY BE MODIFIED BY THE
ADDITION OF A PLUS OR MINUS SIGN TO SHOW RELATIVE STANDING WITHIN THE MAJOR
RATING CATEGORIES.
FITCH IBCA, INC.
AAA Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. "A" ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
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BBB Good credit quality. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
PLUS AND MINUS SIGNS ARE USED WITH A RATING SYMBOL TO INDICATE THE RELATIVE
POSITION OF A CREDIT WITHIN THE RATING CATEGORY. PLUS AND MINUS SIGNS, HOWEVER,
ARE NOT USED IN THE AAA CATEGORY.
DUFF & PHELPS LLC
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic
cycles.
2. SHORT-TERM DEBT RATINGS:
MOODY'S MUNICIPAL
MIG-1/VMIG1 This designation denotes best quality. There is present
strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to
the market for refinancing.
MIG-2/VMIG2 This designation denotes high quality. Margins of
protection are ample although not so large as in the
preceding group.
MOODY'S CORPORATE AND GOVERNMENT
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the
following characteristics:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
o Broad margins in earning coverage of fixed financial charges and
high internal cash generation.
o Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
S&P MUNICIPAL
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.
S&P CORPORATE AND GOVERNMENT
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated A-1.
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FITCH
F1 Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit features.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in
the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
DUFF & PHELPS
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are
minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very
small.
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk
factors are small.
D-3 Satisfactory liquidity and other protection factors quality issues as
to investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
APPENDIX B - COMPARISON OF PORTFOLIO PERFORMANCE
Occasionally, we may make comparisons in advertising and sales literature
between the Funds contained in this SAI and other Funds in the USAA Family of
Funds. These comparisons may include such topics as risk and reward, investment
objectives, investment strategies, and performance.
Fund performance also may be compared to the performance of broad groups of
mutual funds with similar investment goals or unmanaged indexes of comparable
securities. Evaluations of Fund performance made by independent sources may also
be used in advertisements concerning the Fund, including reprints of, or
selections from, editorials or articles about the Fund. The Fund or its
performance may also be compared to products and services not constituting
securities subject to registration under the Securities Act of 1933 such as, but
not limited to, certificates of deposit and money market accounts. Sources for
performance information and articles about the Fund may include but are not
restricted to the following:
AAII JOURNAL, a monthly association magazine for members of the American
Association of Individual Investors.
ARIZONA REPUBLIC, a newspaper that may cover financial and investment news.
AUSTIN AMERICAN-STATESMAN, a newspaper that may cover financial news.
BARRON'S, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
BUSINESS WEEK, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds.
CHICAGO TRIBUNE, a newspaper that may cover financial news.
CONSUMER REPORTS, a monthly magazine that from time to time reports on companies
in the mutual fund industry.
DALLAS MORNING NEWS, a newspaper that may cover financial news.
DENVER POST, a newspaper that may quote financial news.
FINANCIAL PLANNING, a monthly magazine that periodically features companies in
the mutual fund industry.
FINANCIAL SERVICES WEEK, a weekly newspaper that covers financial news.
FINANCIAL WORLD, a monthly magazine that periodically features companies in the
mutual fund industry.
FORBES, a national business publication that periodically reports the
performance of companies in the mutual fund industry.
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FORTUNE, a national business publication that periodically rates the performance
of a variety of mutual funds.
FUND ACTION, a mutual fund news report.
HOUSTON CHRONICLE, a newspaper that may cover financial news.
HOUSTON POST, a newspaper that may cover financial news.
IBC'S MONEYLETTER, a biweekly newsletter that covers financial news and from
time to time rates specific mutual funds.
INCOME AND SAFETY, a monthly newsletter that rates mutual funds.
INVESTECH, a bimonthly investment newsletter.
INVESTMENT ADVISOR, a monthly publication directed primarily to the advisor
community; includes ranking of mutual funds using a proprietary methodology.
INVESTMENT COMPANY INSTITUTE, the national association of the American
Investment Company industry.
INVESTOR'S BUSINESS DAILY, a newspaper that covers financial news.
KIPLINGER'S PERSONAL FINANCE MAGAZINE, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
LIPPER ANALYTICAL SERVICES, INC.'S EQUITY FUND PERFORMANCE ANALYSIS, a weekly
and monthly publication of industry-wide mutual fund performance averages by
type of fund.
LIPPER ANALYTICAL SERVICES, INC.'S FIXED INCOME FUND PERFORMANCE ANALYSIS, a
monthly publication of industry-wide mutual fund performance averages by type of
fund.
LOS ANGELES TIMES, a newspaper that may cover financial news.
LOUIS RUKEYSER'S WALL STREET, a publication for investors.
MEDICAL ECONOMICS, a monthly magazine providing information to the medical
profession.
MONEY, a monthly magazine that features the performance of both specific funds
and the mutual fund industry as a whole.
MORNINGSTAR 5 STAR INVESTOR, a monthly newsletter that covers financial news and
rates mutual funds produced by Morningstar, Inc. (a data service which tracks
open-end mutual funds).
MUTUAL FUND FORECASTER, a monthly newsletter that ranks mutual funds.
MUTUAL FUND INVESTING, a newsletter covering mutual funds.
MUTUAL FUND PERFORMANCE REPORT, a monthly publication of industry-wide mutual
fund averages produced by Morningstar, Inc.
MUTUAL FUNDS MAGAZINE, a monthly publication reporting on mutual fund investing.
MUTUAL FUND SOURCE BOOK, an annual publication produced by Morningstar, Inc.
that describes and rates mutual funds.
MUTUAL FUND VALUES, a biweekly guidebook to mutual funds produced by
Morningstar, Inc.
NEWSWEEK, a national business weekly.
NEW YORK TIMES, a newspaper that may cover financial news.
NO LOAD FUND INVESTOR, a newsletter covering companies in the mutual fund
industry.
ORLANDO SENTINEL, a newspaper that may cover financial news.
PERSONAL INVESTOR, a monthly magazine that from time to time features mutual
fund companies and the mutual fund industry.
SAN ANTONIO BUSINESS JOURNAL, a weekly newspaper that periodically covers mutual
fund companies as well as financial news.
SAN ANTONIO EXPRESS-NEWS, a newspaper that may cover financial news.
SAN FRANCISCO CHRONICLE, a newspaper that may cover financial news.
SMART MONEY, a monthly magazine featuring news and articles on investing and
mutual funds.
USA TODAY, a newspaper that may cover financial news.
U.S. NEWS AND WORLD REPORT, a national business weekly that periodically reports
mutual fund performance data.
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WALL STREET JOURNAL, a Dow Jones and Company, Inc. newspaper that covers
financial news.
WASHINGTON POST, a newspaper that may cover financial news.
WEISENBERGER MUTUAL FUNDS INVESTMENT REPORT, a monthly newsletter that reports
on both specific mutual fund companies and the mutual fund industry as a whole.
WORLD MONITOR, The Christian Science Monitor Monthly.
WORTH, a magazine that covers financial and investment subjects including mutual
funds.
YOUR MONEY, a monthly magazine directed towards the novice investor.
In addition, the Cornerstone Strategy, Growth Strategy, Emerging Markets,
Gold, International, and World Growth Funds may be cited for performance
information and articles in INTERNATIONAL REPORTS, a publication providing
insights on world financial markets and economics.
The GNMA and Treasury Money Market Trusts may be cited in:
THE BOND BUYER, a daily newspaper that covers bond market news.
IBC'S MONEY FUND REPORT, a weekly publication of the IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity, and including certain averages as performance
benchmarks, specifically Taxable Money Fund Averages: "100% U.S. Treasury" and
"U.S. Treasury & Repo."
IBC'S MONEY MARKET INSIGHT, a monthly money market industry analysis prepared by
IBC USA, Inc.
In addition to the sources above, performance of our Funds may also be
tracked by Lipper Analytical Services, Inc. and Morningstar, Inc. A Fund will be
compared to Lipper's or Morningstar's appropriate fund category according to its
objective and portfolio holdings. Footnotes in advertisements and other sales
literature will include the time period applicable for any rankings used.
For comparative purposes, unmanaged indexes of comparable securities or
economic data may be cited. Examples include the following:
- - Bond Buyer Indices, indices of debt of varying maturities including revenue
bonds, general obligation bonds, and U.S. Treasury bonds which can be found in
THE BOND BUYER.
- - Consumer Price Index, a measure of U.S. inflation in prices on consumer goods.
- - Financial Times Gold Mines Index, an index that includes gold mining companies
if they: a) have sustainable, attributable gold production of at least 300,000
ounces a year; b) draw at least 75% of revenue from mined gold sales; and c)
have at least 10% of their capital available to the investing public.
- - Ibbotson Associates, Inc., Stocks, Bonds, Bills, and Inflation Yearbook.
- - IFC Investable Index (IFCI) and IFC Global Index (IFCG), premier benchmarks
for international investors. Both index series cover 25 discrete markets,
regional indexes, and a composite index, providing the most accurate
representation of the emerging markets universe available.
- - Lehman Brothers Inc. GNMA 30 Year Index is an unmanaged index of pass-through
securities with an original maturity of 30 years.
- - Lehman Brothers Municipal Bond Index, a total return performance benchmark for
the long-term investment grade tax-exempt bond market.
- - London Gold, a traditional index that prices London gold.
- - London Gold PM Fix Price, the evening gold prices as set by London dealers.
- - Morgan Stanley Capital Index (MSCI) - EAFE, an unmanaged index which reflects
the movements of stock markets in Europe, Australia, and the Far East by
representing a broad selection of domestically listed companies within each
market.
- - Morgan Stanley Capital Index (MSCI) - World, an unmanaged index which reflects
the movements of world stock markets by representing a broad selection of
domestically listed companies within each market.
- - NAREIT Equity Index (National Association of Real Estate Investment Trusts,
Inc.) a broad-based listing of all tax-qualified REITs (only common shares
issued by the REIT) listed on the NYSE, American Stock Exchange, and NASDAQ.
- - Philadelphia Gold/Silver Index (XAU), an index representing nine holdings in
the gold and silver sector.
- - S&P 500 Index, a broad-based composite unmanaged index that represents the
weighted average performance of a group of 500 widely held, publicly traded
stocks.
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- - Shearson Lehman Hutton Bond Indices - indices of fixed-rate debt issues rated
investment grade or higher which can be found in the BOND MARKET REPORT.
Other sources for total return and other performance data which may be used
by a Fund or by those publications listed previously are Schabaker Investment
Management and Investment Company Data, Inc. These are services that collect and
compile data on mutual fund companies.
APPENDIX C - DOLLAR-COST AVERAGING
Dollar-cost averaging is a systematic investing method, which can be used by
investors as a disciplined technique for investing. A fixed amount of money is
invested in a security (such as a stock or mutual fund) on a regular basis over
a period of time, regardless of whether securities markets are moving up or
down.
This practice reduces average share costs to the investor who acquires more
shares in periods of lower securities prices and fewer shares in periods of
higher prices.
While dollar-cost averaging does not assure a profit or protect against
loss in declining markets, this investment strategy is an effective way to help
calm the effect of fluctuations in the financial markets. Systematic investing
involves continuous investment in securities regardless of fluctuating price
levels of such securities. Investors should consider their financial ability to
continue purchases through periods of low and high price levels.
As the following chart illustrates, dollar-cost averaging tends to keep the
overall cost of shares lower. This example is for illustration only, and
different trends would result in different average costs.
HOW DOLLAR-COST AVERAGING WORKS
$100 Invested Regularly for 5 Periods
Market Trend
--------------------------------------------------------------------
Down Up Mixed
------------------- --------------------- -----------------------
Share Shares Share Shares Share Shares
Investment Price Purchased Price Purchased Price Purchased
------------------- --------------------- -----------------------
$100 10 10 6 16.67 10 10
100 9 11.1 7 14.29 9 11.1
100 8 12.5 7 14.29 8 12.5
100 8 12.5 9 11.1 9 11.1
100 6 16.67 10 10 10 10
- ---- -- ----- -- ----- -- -----
$500 ***41 62.77 ***39 66.35 ***46 54.7
*Avg. Cost: $ 7.97 *Avg. Cost: $ 7.54 *Avg. Cost: $ 9.14
----- ----- -----
**Avg. Price: $ 8.20 **Avg. Price: $ 7.80 **Avg. Price: $ 9.20
----- ----- -----
* Average Cost is the total amount invested divided by number of
shares purchased.
** Average Price is the sum of the prices paid divided by number
of purchases.
*** Cumulative total of share prices used to compute average prices.
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06088-1099
