Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Managers 5
Financial Information:
Distributions to Shareholders 8
Independent Auditors' Report 9
Portfolio of Investments 10
Notes to Portfolio of Investments 15
Statement of Assets and Liabilities 16
Statement of Operations 17
Statements of Changes in Net Assets 18
Notes to Financial Statements 19
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA Income
Strategy Fund, managed by USAA Investment Management Company (IMCO). It may be
used as sales literature only when preceded or accompanied by a current
prospectus which gives further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)1999, USAA. All rights reserved.
USAA Family of Funds Summary
Fund Minimum
Type/Name Volatility Investment
--------- ---------- ----------
CAPITAL APPRECIATION
===============================================================================
Aggressive Growth Very high $3,000
Emerging Markets Very high $3,000
First Start Growth Moderate to high $3,000
Gold Very high $3,000
Growth Moderate to high $3,000
Growth & Income Moderate $3,000
International Moderate to high $3,000
S&P 500 (Registered
Trademark) Index Moderate $3,000
Science & Technology Very high $3,000
World Growth Moderate to high $3,000
ASSET ALLOCATION
===============================================================================
Balanced Strategy Moderate $3,000
Cornerstone Strategy Moderate $3,000
Growth and Tax
Strategy Moderate $3,000
Growth Strategy Moderate to high $3,000
Income Strategy Low to moderate $3,000
INCOME - TAXABLE
===============================================================================
GNMA Low to moderate $3,000
Income Moderate $3,000
Income Stock Moderate $3,000
Short-Term Bond Low $3,000
INCOME - TAX EXEMPT
===============================================================================
Long-Term Moderate $3,000
Intermediate-Term Low to moderate $3,000
Short-Term Low $3,000
State Bond Income Moderate $3,000
MONEY MARKET
===============================================================================
Money Market Very low $3,000
Tax Exempt
Money Market Very low $3,000
Treasury Money
Market Trust Very low $3,000
State Money Market Very low $3,000
Foreign investing is subject to additional risks, such as currency fluctuations,
market illiquidity, and political instability.
S&P 500 (Registered Trademark) is a trademark of The McGraw-Hill Companies, Inc.
and has been licensed for use. The Product is not sponsored, sold or promoted by
Standard & Poor's, and Standard & Poor's makes no representation regarding the
advisability of investing in the Product.
Some income may be subject to state or local taxes or the federal alternative
minimum tax.
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.
The InveStart (Registered Trademark) program is available for investors without
the $3,000 initial investment required to open an IMCO mutual fund account. A
mutual fund account can be opened with no initial investment if you elect to
have monthly automatic investments of at least $50 from a bank account.
InveStart is not available on tax-exempt funds or the S&P 500 Index Fund. The
minimum initial investment for IRAs is $250, except for the $2,000 minimum
required for the S&P 500 Index Fund. IRAs are not available for tax-exempt
funds. The Growth and Tax Strategy Fund is not available as an investment for
your IRA because the majority of its income is tax exempt.
California, Florida, New York, Texas, and Virginia funds available to residents
only.
Non-deposit investment products are not insured by the FDIC, are not deposits or
other obligations of, or guaranteed by, USAA Federal Savings Bank, are subject
to investment risks, and may lose value.
For more complete information about the mutual funds managed and distributed by
USAA Investment Management Company, including charges and operating expenses,
please call 1-800-531-8181 for a prospectus. Read it carefully before you
invest.
Message from the President
[PHOTOGRAPH OF PRESIDENT AND VICE CHAIRMAN OF THE BOARD, MICHAEL J.C. ROTH, CFA,
APPEARS HERE]
When I was a second lieutenant in pilot training at Williams AFB, I read the
book THIS KIND OF WAR by T. R. Fehrenbach. More than 30 years later I met Ted
Fehrenbach here in San Antonio where he resides and had a chance to tell him
that I think he is a brilliant man. I recall reading that LBJ declared THIS KIND
OF WAR required reading for people in his administration. Ted writes a regular
Sunday column for the San Antonio Express News, and he continues to delight me.
Last year he wrote a piece around Columbus Day, which included this observation:
"Spain was clearly disappointed with her admiral. While he had spent much
money charting islands with mosquitoes and a miserable climate (from the
Euro standpoint)...the Portuguese had reached the real India and returned
with fabulous profits. Of course, Columbus had opened up to Spain a vast
empire, filled with treasures of every kind, but then few investors take
the long view."
As I read this passage, I thought that Ted's understanding of markets is as
sharp as his grasp of history. At the beginning of 1999, there indeed seemed to
be few investors with the long view. There were many people declaring the
absolute superiority of the S&P 500 and growth stocks, especially tech stocks,
while proclaiming that strategies such as value investing and asset allocation
were no longer relevant.
The S&P 500 and its index funds have had a wondrous four years, but here we are
five-and-a-half months into 1999, and what a difference we're seeing: The Dow
Jones Industrial Average is up more than twice as much as the S&P 500 so far
this year.
The S&P 500 Index is heavily influenced by companies like America Online, Cisco
Systems, Intel, IBM, Lucent, MCI, and Microsoft. The Dow also includes IBM, but
its impetus is coming from companies such as J.P. Morgan, Alcoa, Caterpillar,
Disney, General Motors, and Union Carbide. The upshot of this is that you can
afford to take the long view. Value investing or asset allocation are just
different from a growth philosophy. My view, throughout the last 27 years, is
that these methods go through cycles of in-favor and out-of-favor. But they do
cycle. And just about the time you begin to read that one of them is no longer
viable, you can bet the market will change. A good discipline practiced well
will give you a very good chance of prospering in the long run.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
The S&P 500 Index is an unmanaged index representing the weighted average
performance of a group of 500 widely held, publicly traded stocks. It is not
possible to invest in the S&P 500 Index.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30
actively traded blue chip stocks.
Past performance is no guarantee of future results.
Investment Review
USAA INCOME STRATEGY FUND
OBJECTIVE: High current return, with reduced risk over time, through an asset
allocation strategy which emphasizes income and gives secondary emphasis to
long-term growth of capital.
- --------------------------------------------------------------------------------
5/31/99 5/31/98
- --------------------------------------------------------------------------------
Net Assets $70.6 Million $39.2 Million
Net Asset Value Per Share $12.17 $12.11
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AND 30-DAY SEC YIELD* AS OF 5/31/99
- --------------------------------------------------------------------------------
1 Year Since Inception on 9/1/95 30-day SEC Yield
4.97% 10.14% 3.94%
- --------------------------------------------------------------------------------
* Calculated as prescribed by the Securities and Exchange Commission.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment has
been made for taxes payable by shareholders on their reinvested income dividends
and capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return and
principal value of an investment will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
CUMULATIVE PERFORMANCE COMPARISON
A chart in the form of a line graph appears here, illustrating the comparison of
a $10,000 hypothetical investment in the USAA Income Strategy Fund, the Lehman
Brothers Aggregate Bond Index, and the Lipper General Bond Funds Average for the
period of 09/01/95 through 05/31/99. The data points from the graph are as
follows:
USAA Income Lehman Lipper
Strategy Fund Index Average
------------- ------- -------
09/01/95 $10,000 $10,000 $10,000
11/30/95 10,711 10,382 10,398
05/31/96 10,323 10,262 10,464
11/30/96 11,546 11,012 11,304
05/31/97 11,725 11,115 11,556
11/30/97 12,851 11,844 12,233
05/31/98 13,686 12,328 12,758
11/30/98 14,253 12,963 13,087
05/31/99 14,366 12,865 13,059
Data since inception on 09/01/95 through 05/31/99
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Income Strategy Fund to the Index and the Lipper Average. The Lehman
Brothers Aggregate Bond Index is an unmanaged index made up of the
government/corporate index, the mortgage-backed securities index, and the
asset-backed securities index. The Lipper General Bond Funds Average is the
average performance level of all general bond funds, as reported by Lipper
Analytical Services, Inc., an independent organization that monitors the
performance of mutual funds.
Message from the Managers
[PHOTOGRAPH OF PORTFOLIO MANAGERS APPEARS HERE: From L to R: Pamela K. Bledsoe,
CFA (Money Market Instruments), John W. Saunders, Jr., CFA (Allocation Manager,
Bonds), and Patrick O'Hare, CFA (Stocks).]
FUND OVERVIEW
The pattern is intact. New stock market highs have continued in every
shareholder reporting period since the Fund began operations on September 1,
1995. In the second half of the Fund's fiscal year, we did not see a significant
pullback in stock prices as we did in the first half, although stocks have been
in a downtrend since mid-May.
On the bond side, following the highly volatile period from August to November
last year, the market stabilized through January 1999. However, interest rates
have since resumed an upward move, depressing bond prices again. The Income
Strategy Fund continues its good performance and is ranked No. 4 of 36 funds in
the General Bond Funds category by Lipper Analytical Services, Inc. for the
one-year period ending May 31, 1999.(1) Although past performance is no
guarantee of future results, the Fund's total return of 4.97% for the one-year
period was well above the Lipper average of 2.40% for funds in the category.
(1) Lipper Analytical Services, Inc. is an independent organization that
monitors the performance of mutual funds. Lipper rankings are based on total
returns.
BONDS
Last summer's trend to lower interest rates abruptly reversed in October and
retraced three-fourths of the downward move in five weeks as shown in the chart
on page 6 for yields on the long U.S. Treasury bond.(2) The relatively stable
period which followed to the end of January, gave way to a rising trend through
the end of the Fund's fiscal year. The yield on the long Treasury bond ended
.24% higher at 6.04% for the one-year period.
30-YEAR U.S. TREASURY BOND YIELD
A chart in the form of a line graph appears here illustrating the yield of the
30-year U.S. Treasury Bond from 5/31/98 to 5/31/99.
05/31/98 5.80%
06/15/98 5.57%
06/30/98 5.63%
07/15/98 5.71%
07/31/98 5.71%
08/14/98 5.59%
08/31/98 5.35%
09/15/98 5.35%
09/30/98 5.12%
10/15/98 5.12%
10/30/98 5.27%
11/16/98 5.42%
11/30/98 5.25%
12/15/98 5.26%
12/31/98 5.31%
01/15/99 5.33%
01/29/99 5.27%
02/15/99 5.67%
02/26/99 5.78%
03/15/99 5.73%
03/31/99 5.86%
04/15/99 5.74%
04/30/99 5.86%
05/14/99 6.10%
05/31/99 6.04%
Average maturities in the Fund's bond portfolio were shortened by reducing
long-term Treasury bonds in favor of short-term corporate bonds as last summer's
rally progressed. When interest rates turned upward, GNMA mortgage pass-through
securities were increased to maintain portfolio yields with less downside price
exposure. As of May 31, 1999, the bond portfolio mix as a percentage of net
assets was 29.4% in U.S. Treasury bonds, 39.8% in mortgage pass-through
securities, and 6.5% in corporate bonds.
Economic strength in 1999 has renewed inflation fears and the specter of higher
interest rates. This fear continues although the Federal Reserve has not acted
to raise interest rates. It has, however, indicated a bias toward doing so.
(2) The 30-year U.S. Treasury bond is generally considered the benchmark for
U.S. long-term interest rates.
STOCKS
Concerns that the turmoil overseas would cause the United States to go into a
recession took a heavy toll on stocks during the summer of 1998. After reaching
lows in August, stocks rebounded sharply to set new highs. Leading the recovery
were the sectors hardest hit in the sell-off, the financial and the technology
sectors.
On October 1, 1998, a new portfolio manager of the equity portion of the Fund
was named. Consequently, a number of stocks have been sold and replaced.
Weightings in traditional value sectors, such as basic materials, capital goods,
consumer cyclicals and utilities, were reduced. The weightings in faster-growing
sectors, such as consumer staples and technology, were increased. Also increased
was the weighting in the financial sector, because we felt that the summer
sell-off in this sector was overdone.
The Fund benefited from the increased exposure in technology and in the
financial sector. However, it was hurt by its overweight position in the health
care sector. The Fund's yearly performance was also negatively impacted by the
heavy exposure to basic materials, capital goods, and consumer cyclicals during
the first part of the fiscal year.
With the strength in the U.S. economy and overseas markets, investors have
rotated into cyclical stocks. In addition, investors have moved money out of
large capitalization names and have begun to purchase mid- and small-cap stocks.
We feel that this rotation into small- and mid-cap value names will be
short-lived. If the Federal Reserve Board decides to raise interest rates, we
believe that investors will lose their appetite for cyclical issues. While we
maintain our exposure in certain cyclical and value stocks, we are emphasizing
large-capitalization names in the technology and health care sectors, two
traditional growth areas of the economy.
MONEY MARKET INSTRUMENTS
Money market instruments are used in the Fund to provide liquidity for
withdrawals or to provide a temporary investment until stock or bond purchases
are made. U.S. government discount notes are the most common instruments used
for these purposes because of their high quality.
- ----------------------------------
TOP 5 EQUITY HOLDINGS
(% OF NET ASSETS)
- ----------------------------------
Microsoft Corp. 1.3
General Electric Co. 0.8
Texas Instruments 0.8
Cisco Systems 0.7
Pfizer, Inc. 0.7
- ----------------------------------
ASSET ALLOCATION
A pie chart is shown here depicting the Asset Allocation as of May 31, 1999 of
the USAA Income Strategy Fund to be:
Bonds - 75.7%* and Stocks - 23.7%*.
* Percentages are of the Net Assets in the Portfolio and may or may not equal
100%.
See page 10 for a complete listing of the Portfolio of Investments.
Distributions to Shareholders
The following per share information describes the federal tax treatment of
distributions made during the fiscal year ended May 31, 1999. These figures are
provided for information purposes only and should not be used for reporting to
federal or state revenue agencies. Distributions for the calendar year will be
reported to you on Form 1099-DIV in January 2000.
Ordinary income * $ .45
Long-term capital gains .09
------
Total $ .54
======
6.5% of ordinary income distributions qualify for deduction by corporations.
* Includes distribution of short-term capital gains, if any, which are taxable
as ordinary income.
Independent Auditors' Report
KPMG
The Shareholders and Board of Trustees
USAA INVESTMENT TRUST:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments of the USAA Income Strategy Fund, a series of the
USAA Investment Trust, as of May 31, 1999, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the years in the two-year period then ended, and financial highlights,
presented in note 8 to the financial statements, for each of the years or
periods in the four-year period then ended. These financial statements and
financial highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1999, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
USAA Income Strategy Fund as of May 31, 1999, the results of its operations for
the year then ended, the changes in its net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
or periods in the four-year period then ended, in conformity with generally
accepted accounting principles.
KPMG LLP
San Antonio, Texas
July 2, 1999
USAA INCOME STRATEGY FUND
PORTFOLIO OF INVESTMENTS
May 31, 1999
Market
Number Value
of Shares Security (000)
- --------------------------------------------------------------------------------
STOCKS (23.7%)
Advertising/Marketing (0.3%)
3,000 Omnicom Group, Inc. $ 210
- --------------------------------------------------------------------------------
Aerospace/Defense (0.1%)
2,000 Boeing Co. 84
- --------------------------------------------------------------------------------
Automobiles (0.3%)
3,700 Ford Motor Co. 211
- --------------------------------------------------------------------------------
Auto Parts (0.3%)
3,800 Lear Corp.* 187
- --------------------------------------------------------------------------------
Banks - Major Regional (0.8%)
2,500 Bank One Corp. 141
3,000 Fleet Financial Group, Inc. 123
4,000 Mellon Bank Corp. 143
2,200 State Street Corp. 168
- --------------------------------------------------------------------------------
575
- --------------------------------------------------------------------------------
Banks - Money Center (0.5%)
3,063 Bank of America Corp. 198
1,300 J. P. Morgan & Co., Inc. 181
- --------------------------------------------------------------------------------
379
- --------------------------------------------------------------------------------
Beverages - Alcoholic (0.2%)
2,000 Anheuser-Busch Companies, Inc. 146
- --------------------------------------------------------------------------------
Beverages - Nonalcoholic (0.6%)
3,800 Coca-Cola Co. 260
4,000 Pepsi Bottling Group, Inc. 93
2,300 PepsiCo, Inc. 82
- --------------------------------------------------------------------------------
435
- --------------------------------------------------------------------------------
Broadcasting - Radio & TV (0.4%)
4,600 CBS Corp.* 192
3,000 Infinity Broadcasting Corp.* 77
- --------------------------------------------------------------------------------
269
- --------------------------------------------------------------------------------
Chemicals (0.7%)
1,400 Dow Chemical Co. 170
4,400 Du Pont (E. I.) De Nemours & Co. 288
- --------------------------------------------------------------------------------
458
- --------------------------------------------------------------------------------
Communication Equipment (0.3%)
3,700 Lucent Technologies, Inc. 210
- --------------------------------------------------------------------------------
Computer - Hardware (1.2%)
5,300 Hewlett-Packard Co. 500
3,000 IBM Corp. 349
- --------------------------------------------------------------------------------
849
- --------------------------------------------------------------------------------
Computer - Networking (0.7%)
4,750 Cisco Systems, Inc.* 518
- --------------------------------------------------------------------------------
Computer - Peripherals (0.1%)
800 EMC Corp.* 80
- --------------------------------------------------------------------------------
Computer Software & Service (1.7%)
1,700 America Online, Inc.* 203
11,000 Microsoft Corp.* 887
4,100 Oracle Corp.* 102
- --------------------------------------------------------------------------------
1,192
- --------------------------------------------------------------------------------
Drugs (1.4%)
3,000 Merck & Co., Inc. 203
4,700 Pfizer, Inc. 503
5,600 Schering-Plough Corp. 252
- --------------------------------------------------------------------------------
958
- --------------------------------------------------------------------------------
Electrical Equipment (1.0%)
1,500 Emerson Electric Co. 96
5,700 General Electric Co. 579
- --------------------------------------------------------------------------------
675
- --------------------------------------------------------------------------------
Electronics - Semiconductors (1.5%)
9,000 Intel Corp. 486
5,200 Texas Instruments, Inc. 569
- --------------------------------------------------------------------------------
1,055
- --------------------------------------------------------------------------------
Entertainment (0.4%)
4,300 Time Warner, Inc. 293
- --------------------------------------------------------------------------------
Equipment - Semiconductors (0.1%)
1,500 Teradyne, Inc.* 79
- --------------------------------------------------------------------------------
Finance - Diversified (1.4%)
4,200 Citigroup, Inc. 278
7,600 Freddie Mac 443
2,900 Morgan Stanley, Dean Witter, Discover & Co. 280
- --------------------------------------------------------------------------------
1,001
- --------------------------------------------------------------------------------
Foods (0.3%)
3,100 Nabisco Holdings Corp. 130
1,407 Unilever N.V. - New York Shares 92
- --------------------------------------------------------------------------------
222
- --------------------------------------------------------------------------------
Health Care - Diversified (1.3%)
6,300 American Home Products Corp. 363
3,000 Bristol-Myers Squibb Co. 206
3,500 Johnson & Johnson, Inc. 324
- --------------------------------------------------------------------------------
893
- --------------------------------------------------------------------------------
Household Products (0.6%)
2,100 Colgate-Palmolive Co. 210
2,200 Procter & Gamble Co. 205
- --------------------------------------------------------------------------------
415
- --------------------------------------------------------------------------------
Housewares (0.2%)
3,700 Newell Rubbermaid, Inc. 150
- --------------------------------------------------------------------------------
Insurance - Multi-Line Companies (0.7%)
4,150 American International Group, Inc. 474
- --------------------------------------------------------------------------------
Insurance - Property/Casualty (0.1%)
2,700 Allstate Corp. 98
- --------------------------------------------------------------------------------
Investment Banks/Brokerage (0.2%)
1,200 Merrill Lynch & Co., Inc. 101
- --------------------------------------------------------------------------------
Machinery - Diversified (0.1%)
1,500 Caterpillar, Inc. 82
- --------------------------------------------------------------------------------
Manufacturing - Diversified Industries (0.6%)
2,400 Tyco International Ltd. 210
3,400 United Technologies Corp. 211
- --------------------------------------------------------------------------------
421
- --------------------------------------------------------------------------------
Medical Products & Supplies (0.5%)
3,100 Guidant Corp.* 155
2,500 Medtronic, Inc. 177
- --------------------------------------------------------------------------------
332
- --------------------------------------------------------------------------------
Oil - International Integrated (1.1%)
3,600 Exxon Corp. 287
600 Mobil Corp. 61
3,300 Royal Dutch Petroleum Co. 187
3,200 Texaco, Inc. 210
- --------------------------------------------------------------------------------
745
- --------------------------------------------------------------------------------
Oil & Gas - Drilling/Equipment (0.3%)
3,200 Schlumberger Ltd. 193
- --------------------------------------------------------------------------------
Oil & Gas - Exploration & Production (0.1%)
1,800 Unocal Corp. 71
- --------------------------------------------------------------------------------
Paper & Forest Products (0.1%)
1,800 International Paper Co. 90
- --------------------------------------------------------------------------------
Personal Care (0.1%)
1,900 Gillette Co. 97
- --------------------------------------------------------------------------------
Retail - Building Supplies (0.3%)
3,000 Home Depot, Inc. 171
- --------------------------------------------------------------------------------
Retail - Drugs (0.2%)
3,600 CVS Corp. 166
- --------------------------------------------------------------------------------
Retail - General Merchandising (0.7%)
3,600 Dayton Hudson Corp. 227
6,800 Wal-Mart Stores, Inc. 290
- --------------------------------------------------------------------------------
517
- --------------------------------------------------------------------------------
Retail - Specialty Apparel (0.1%)
1,600 Gap, Inc. 100
- --------------------------------------------------------------------------------
Services - Data Processing (0.3%)
5,200 First Data Corp. 234
- --------------------------------------------------------------------------------
Telecommunications - Long Distance (1.0%)
5,000 MCI Worldcom, Inc.* 432
2,600 Sprint Corp. 293
- --------------------------------------------------------------------------------
725
- --------------------------------------------------------------------------------
Telephones (0.8%)
4,200 Bell Atlantic Corp. 230
2,400 BellSouth Corp. 113
4,800 SBC Communications Corp. 246
- --------------------------------------------------------------------------------
589
- --------------------------------------------------------------------------------
Total stocks (cost: $12,686) 16,750
- --------------------------------------------------------------------------------
Principal Market
Amount Coupon Value
(000) Security Rate Maturity (000)
- --------------------------------------------------------------------------------
BONDS (75.7%)
$ 500 Central Power & Light Co. 6.63% 7/01/2005 $ 498
500 Citicorp 6.38 1/15/2006 489
1,000 Finova Capital Corp., MTN 6.00 1/07/2004 974
500 Ford Motor Credit Co. 6.13 1/09/2006 482
175 Household Finance Corp. 6.88 3/01/2007 175
500 Hydro-Quebec (Canada) 6.98 2/28/2005 508
500 Pacific Bell 5.88 2/15/2006 479
500 Sara Lee Corp. 6.30 11/07/2005 490
500 Waste Management, Inc. 7.00 10/15/2006 503
82 Government National Mortgage
Association 7.00 3/15/2026 82
1,308 Government National Mortgage
Association 7.00 3/15/2026 1,313
64 Government National Mortgage
Association 7.50 8/15/2026 65
863 Government National Mortgage
Association 7.50 11/15/2026 884
197 Government National Mortgage
Association 7.00 2/15/2027 197
323 Government National Mortgage
Association 7.50 5/15/2027 331
4,842 Government National Mortgage
Association 6.00 4/15/2028 4,598
981 Government National Mortgage
Association 6.00 7/15/2028 932
487 Government National Mortgage
Association 6.00 9/15/2028 463
1,030 Government National Mortgage
Association 6.00 9/15/2028 978
10,043 Government National Mortgage
Association 6.00 1/15/2029 9,532
2,274 Government National Mortgage
Association 6.00 1/15/2029 2,158
6,959 Government National Mortgage
Association 6.00 1/15/2029 6,606
22,903 U.S. Treasury Bonds 5.25 11/15/2028 20,713
- --------------------------------------------------------------------------------
Total bonds (cost: $55,840) 53,450
- --------------------------------------------------------------------------------
Total investments (cost: $68,526) $ 70,200
================================================================================
USAA INCOME STRATEGY FUND
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 1999
GENERAL NOTES
Market values of securities are determined by procedures and practices discussed
in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
Investments in foreign securities were 0.7% of net assets at May 31, 1999.
* Non-income producing security.
See accompanying notes to financial statements.
USAA INCOME STRATEGY FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 1999
ASSETS
Investments in securities, at market value
(identified cost of $68,526) $70,200
Cash 131
Receivables:
Capital shares sold 73
USAA Transfer Agency Company 4
Dividends and interest 280
---------
Total assets 70,688
---------
LIABILITIES
Capital shares redeemed 28
USAA Investment Management Company 30
USAA Transfer Agency Company 3
Accounts payable and accrued expenses 38
---------
Total liabilities 99
---------
Net assets applicable to capital shares outstanding $70,589
=========
REPRESENTED BY:
Paid-in capital $67,413
Accumulated undistributed net investment income 505
Accumulated net realized gain on investments 997
Net unrealized appreciation of investments 1,674
---------
Net assets applicable to capital shares outstanding $70,589
=========
Capital shares outstanding, unlimited number of shares authorized,
no par value 5,801
=========
Net asset value, redemption price, and offering price per share $ 12.17
=========
See accompanying notes to financial statements.
USAA INCOME STRATEGY FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 1999
Net investment income:
Income:
Dividends $ 188
Interest 2,655
---------
Total income 2,843
---------
Expenses:
Management fees 295
Transfer agent's fees 120
Custodian's fees 64
Postage 10
Shareholder reporting fees 4
Trustees' fees 4
Registration fees 43
Professional fees 31
Other 4
---------
Total expenses 575
---------
Net investment income 2,268
---------
Net realized and unrealized gain (loss) on investments:
Net realized gain 1,284
Change in net unrealized appreciation/depreciation (971)
---------
Net realized and unrealized gain 313
---------
Increase in net assets resulting from operations $ 2,581
=========
See accompanying notes to financial statements.
USAA INCOME STRATEGY FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
1999 1998
----------------------------
From operations:
Net investment income $ 2,268 $ 1,031
Net realized gain on investments 1,284 231
Change in net unrealized appreciation/
depreciation of investments (971) 2,051
----------------------------
Increase in net assets resulting
from operations 2,581 3,313
----------------------------
Distributions to shareholders from:
Net investment income (2,040) (867)
----------------------------
Net realized gains (427) (92)
----------------------------
From capital share transactions:
Proceeds from shares sold 51,130 26,233
Shares issued for dividends reinvested 2,083 663
Cost of shares redeemed (21,899) (3,967)
----------------------------
Increase in net assets from capital
share transactions 31,314 22,929
----------------------------
Net increase in net assets 31,428 25,283
Net assets:
Beginning of period 39,161 13,878
----------------------------
End of period $ 70,589 $ 39,161
============================
Accumulated undistributed net investment income:
End of period $ 505 $ 277
============================
Change in shares outstanding:
Shares sold 4,175 2,233
Shares issued for dividends reinvested 170 57
Shares redeemed (1,777) (337)
----------------------------
Increase in shares outstanding 2,568 1,953
============================
See accompanying notes to financial statements.
USAA INCOME STRATEGY FUND
NOTES TO FINANCIAL STATEMENTS
May 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA INVESTMENT TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended, is a diversified, open-end management investment company
organized as a Massachusetts business trust consisting of eleven separate funds.
The information presented in this annual report pertains only to the USAA Income
Strategy Fund (the Fund). The Fund's investment objective is to seek a high
current return, with reduced risk over time, through an asset allocation
strategy which emphasizes income and gives secondary emphasis to long-term
growth of capital.
A. Security valuation - The value of each security is determined (as of the
close of trading on the New York Stock Exchange on each business day the
Exchange is open) as set forth below:
1. Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities exchanges
are generally valued at the closing values of such securities on the exchange
where primarily traded. If no sale is reported, the average of the bid and asked
prices is generally used depending upon local custom or regulation.
2. Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices.
3. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value.
4. Other debt and government securities are valued each business day by a
pricing service (the Service) approved by the Trust's Board of Trustees. The
Service uses the mean between quoted bid and asked prices or the last sale price
to price securities when, in the Service's judgement, these prices are readily
available and are representative of the securities' market values. For many
securities, such prices are not readily available. The Service generally prices
these securities based on methods which include consideration of yields or
prices of securities of comparable quality, coupon, maturity and type,
indications as to values from dealers in securities, and general market
conditions.
5. Securities which cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value, using methods determined
by USAA Investment Management Company (the Manager) under the general
supervision of the Board of Trustees.
B. Federal taxes - The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Dividend
income is recorded on the ex-dividend date; interest income is recorded on the
accrual basis. Discounts and premiums on securities are amortized over the life
of the respective securities.
D. Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the financial
statements.
(2) LINES OF CREDIT
The Fund participates with other USAA funds in three joint short-term revolving
loan agreements totaling $850 million, two with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($250 million committed and $500 million
uncommitted), and one with Bank of America ($100 million committed). The purpose
of the agreements is to meet temporary or emergency cash needs, including
redemption requests that might otherwise require the untimely disposition of
securities. Subject to availability under both agreements with CAPCO, the Fund
may borrow from CAPCO an amount up to 5% of the Fund's total assets at CAPCO's
borrowing rate with no markup. Subject to availability under its agreement with
Bank of America, the Fund may borrow from Bank of America, at Bank of America's
borrowing rate plus a markup, an amount which, when added to outstanding
borrowings under the CAPCO agreements, does not exceed 25% of the Fund's total
assets. The Fund had no borrowings under either of these agreements during the
year ended May 31, 1999.
(3) DISTRIBUTIONS
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are made
in the succeeding fiscal year or as otherwise required to avoid the payment of
federal taxes.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the period ended May 31, 1999, were $98.4 million and
$67.1 million, respectively.
Gross unrealized appreciation and depreciation of investments at May 31, 1999,
was $4.4 million and $2.7 million, respectively.
(5) TRANSACTIONS WITH MANAGER
A. Management fees - USAA Investment Management Company carries out the Fund's
investment policies and manages the Fund's portfolio. The Fund's management fees
are computed at .50% of its annual average net assets.
The Manager has voluntarily agreed to limit the annual expenses of the Fund to
1.0% of its annual average net assets through October 1, 1999, and accordingly
has waived a portion of its management fees.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Fund based on an annual charge of $28.50 per shareholder account plus
out-of-pocket expenses.
C. Underwriting services - The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing best efforts basis. The
Manager receives no commissions or fees for this service.
D. Brokerage services - USAA Brokerage Services, a discount brokerage service
of the Manager, may execute portfolio transactions for the Fund. The amount of
brokerage commissions paid to USAA Brokerage Services during the year ended May
31, 1999, was $4,900.
(6) TRANSACTIONS WITH AFFILIATES
USAA Investment Management Company is indirectly wholly owned by United Services
Automobile Association (the Association), a large, diversified financial
services institution. At May 31, 1999, the Association and its affiliates owned
303,000 shares (5.2%) of the Fund.
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
(7) YEAR 2000 (UNAUDITED)
Like other mutual funds, the Fund could be adversely affected if the computer
systems used by the Manager and the Fund's other service providers are not able
to perform their intended functions effectively after 1999 because of the
inability of computer software to distinguish the year 2000 from the year 1900.
The Manager is taking steps to address this potential year 2000 problem with
respect to the computer systems that they use and to obtain satisfactory
assurances that the comparable steps are being taken by the Fund's other major
service providers. At this time, however, there can be no assurance that these
steps will be sufficient to avoid any adverse impact to the Fund from this
problem.
(8) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
Nine-month
Period Ended
Year Ended May 31, May 31,
--------------------------------------------
1999 1998 1997 1996*
--------------------------------------------
Net asset value at
beginning of period $ 12.11 $ 10.84 $ 10.06 $ 10.00
Net investment income .44 .46 .50 .39(b)
Net realized and
unrealized gain (loss) .16 1.31 .83 (.06)
Distributions from net
investment income (.44) (.46) (.50) (.22)
Distributions of realized
capital gains (.10) (.04) (.05) (.05)
--------------------------------------------
Net asset value at
end of period $ 12.17 $ 12.11 $ 10.84 $ 10.06
============================================
Total return (%) ** 4.97 16.72 13.59 3.23
Net assets at end of period (000) $70,589 $39,161 $13,878 $12,173
Ratio of expenses to
average net assets (%) .97 1.00 1.00 1.00(a)
Ratio of expenses to
average net assets,
excluding reimbursements (%) N/A 1.21 1.51 1.78(a)
Ratio of net investment income
to average net assets (%) 3.83 4.35 4.80 4.71(a)
Portfolio turnover (%) 117.12 7.15 64.71 78.60
* Fund commenced operations September 1, 1995.
** Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
TRUSTEES
Robert G. Davis, Chairman of the Board
Michael J.C. Roth, President and Vice Chairman of the Board
John W. Saunders, Jr., Vice President
Barbara B. Dreeben
Howard L. Freeman, Jr.
Robert L. Mason
Richard A. Zucker
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
KPMG LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
Telephone Assistance
Call toll free - Central Time
Monday - Friday 7:30 a.m. to 8:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
For Additional Information On Mutual Funds
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges or redemptions
1-800-531-8448, (in San Antonio) 456-7202
Recorded Mutual Fund Price Quotes
24-Hour Service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
Mutual Fund USAA TouchLine(Registered Trademark)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
