Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Manager 5
Financial Information:
Portfolio of Investments 8
Notes to Portfolio of Investments 10
Statement of Assets and Liabilities 11
Statement of Operations 12
Statements of Changes in Net Assets 13
Notes to Financial Statements 14
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA Gold Fund,
managed by USAA Investment Management Company (IMCO). It may be used as sales
literature only when preceded or accompanied by a current prospectus which gives
further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)1999, USAA. All rights reserved.
USAA Family of Funds Summary
Fund Minimum
Type/Name Volatility Investment*
--------- ---------- ----------
CAPITAL APPRECIATION
===============================================================================
Aggressive Growth Very high $3,000
Emerging Markets(1) Very high $3,000
First Start Growth Moderate to high $3,000
Gold(1) Very high $3,000
Growth Moderate to high $3,000
Growth & Income Moderate $3,000
International(1) Moderate to high $3,000
S&P 500 (Registered
Trademark) Index(2) Moderate $3,000
Science & Technology(5) Very high $3,000
World Growth(1) Moderate to high $3,000
ASSET ALLOCATION
===============================================================================
Balanced Strategy(1) Moderate $3,000
Cornerstone Strategy(1) Moderate $3,000
Growth and Tax
Strategy(3) Moderate $3,000
Growth Strategy(1) Moderate to high $3,000
Income Strategy Low to moderate $3,000
INCOME - TAXABLE
===============================================================================
GNMA Low to moderate $3,000
Income Moderate $3,000
Income Stock Moderate $3,000
Short-Term Bond Low $3,000
INCOME - TAX EXEMPT
===============================================================================
Long-Term(3) Moderate $3,000
Intermediate-Term(3) Low to moderate $3,000
Short-Term(3) Low $3,000
State Bond Income(3)** Moderate $3,000
MONEY MARKET
===============================================================================
Money Market(4) Very low $3,000
Tax Exempt
Money Market(3),(4) Very low $3,000
Treasury Money
Market Trust(4) Very low $3,000
State Money Market(3),(4)** Very low $3,000
(1) Foreign investing is subject to additional risks, which are discussed in
the funds' prospectuses.
(2) S&P 500 (Registered Trademark) is a trademark of The McGraw-Hill Companies,
Inc. and has been licensed for use. The Product is not sponsored, sold or
promoted by Standard & Poor's, and Standard & Poor's makes no
representation regarding the advisability of investing in the Product.
(3) Some income may be subject to state or local taxes or the federal
alternative minimum tax.
(4) An investment in a money market fund is not insured or guaranteed by the
FDIC or any other government agency. Although the fund seeks to preserve
the value of your investment at $1 per share, it is possible to lose
money by investing in the fund.
(5) This Fund may be more volatile than a fund that diversifies across many
industries.
* The InveStart (Registered Trademark) program is available for investors
without the $3,000 initial investment required to open an IMCO mutual fund
account. A mutual fund account can be opened with no initial investment if
you elect to have monthly automatic investments of at least $50 from a bank
account. InveStart is not available on tax-exempt funds or the S&P 500
Index Fund. The minimum initial investment for IRAs is $250, except for the
$2,000 minimum required for the S&P 500 Index Fund. IRAs are not available
for tax-exempt funds. The Growth and Tax Strategy Fund is not available as
an investment for your IRA because the majority of its income is tax
exempt.
** California, Florida, New York, Texas, and Virginia funds available to
residents only.
Non-deposit investment products are not insured by the FDIC, are not deposits or
other obligations of, or guaranteed by, USAA Federal Savings Bank, and are
subject to investment risks, and may lose value.
For more complete information about the mutual funds managed and distributed by
USAA IMCO, including charges and expenses, please call 1-800-531-8181 for a
prospectus. Read it carefully before you invest.
Message from the President
[PHOTOGRAPH OF PRESIDENT AND VICE CHAIRMAN OF THE BOARD, MICHAEL J.C. ROTH, CFA,
APPEARS HERE.]
Since my last message to Investment Trust shareholders, the stock market has
reminded us that intense emotions are part of the investment process. In August,
the unraveling of markets around the world was downright scary. Huge daily
drops, the rampage into treasury bonds while other income markets dried up, and
the antics of huge hedge funds made for confusion and fear. At such times, it
becomes very hard for people to remember the long-term plans they have made for
their portfolios.
A scant three months later, stock markets have recouped losses and bond markets
have settled down. August looks like a momentary aberration. With the retreat of
fear, we are now seeing something the financial press has tagged "Internet
stocks." These are various companies, going public for the first time, whose
business is closely tied to Internet commerce. Some have soared to prices ten
times their initial offering, even though they have little or no earnings and
traditional analysts can detect little to support such lofty prices. In the
1600s, investors got the idea that tulip bulbs, which Dutch traders brought home
on their voyages, were highly valuable and bid their prices to incredible
levels. Those prices collapsed and the word "tulip" took on a special meaning
for investment professionals. The tulip craze became a classic example of
irrational investor behavior. When I watch the Internet IPOs, I think "Tulip."
This tells me that emotions can run both ways, from panic to euphoria, and make
people forget their long-term investment plans. But, you need those plans most
of all when the emotions are rampant. Trading in calm markets prepares you to
avoid trading during raging markets.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
For more complete information about mutual funds managed and distributed by USAA
IMCO, including charges and expenses, please call for a prospectus. Read it
carefully before investing.
Although none of the investments mentioned are guaranteed or insured, government
bonds are backed by the full faith and credit of the U.S. Government. Common
stocks are considered to have the most risk, followed by corporate bonds and
government bonds. All of these vehicles are subject to tax. If held to maturity,
bonds offer a fixed rate of return and fixed principal value. Return and
principal value of an investment in stocks will fluctuate.
Past performance is no guarantee of future results.
Investment Review
USAA GOLD FUND
OBJECTIVE: Long-term capital appreciation and to protect the purchasing power of
capital from inflation. Current income is a secondary objective.
TYPES OF INVESTMENTS: At least 80% of the Fund's assets are invested in equity
securities of companies principally engaged in gold exploration, mining, or
processing. The remainder may be invested in equity securities of companies
similarly engaged in other precious metals and minerals.
- --------------------------------------------------------------------------------
11/30/98 5/31/98
- --------------------------------------------------------------------------------
Net Assets $92.9 Million $93.2 Million
Net Asset Value Per Share $5.55 $5.87
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 11/30/98
- --------------------------------------------------------------------------------
5/31/98 to 11/30/98(+) 1 Year 5 Years 10 Years
-5.45% 5.71% -8.58% -3.80%
- --------------------------------------------------------------------------------
(+) Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment has
been made for taxes payable by shareholders on their reinvested income dividends
and capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return and
principal value of an investment will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
CUMULATIVE PERFORMANCE COMPARISON
A chart in the form of a line graph appears here, illustrating the comparison of
a $10,000 hypothetical investment in the USAA Gold Fund, the S&P 500 Index, the
Philadelphia Gold & Silver Index, and the London Gold for the period of 11/30/88
through 11/30/98. The data points from the graph are as follows:
USAA Gold S&P 500 Gold
Fund Index Philadelphia Bullion
----------- ----------- ------------ -----------
11/30/88 $10,000 $10,000 $10,000 $10,000
05/31/89 9,118 11,922 9,328 8,561
11/30/89 11,571 13,079 12,880 9,658
05/31/90 9,392 13,899 11,586 8,591
11/30/90 7,732 12,625 9,198 9,107
05/31/91 7,740 15,534 8,883 8,528
11/30/91 8,172 15,187 9,078 8,668
05/31/92 7,497 17,061 8,095 7,986
11/30/92 6,960 17,988 7,102 7,908
05/31/93 11,092 19,039 11,990 8,932
11/30/93 10,629 19,800 12,810 8,777
05/31/94 10,774 19,847 12,984 9,172
11/30/94 10,030 20,007 11,082 9,065
05/31/95 10,995 23,848 12,949 9,094
11/30/95 10,678 27,396 13,069 9,177
05/31/96 13,596 30,624 16,067 9,242
11/30/96 10,968 35,024 12,970 8,786
05/31/97 9,892 39,639 11,256 8,178
11/30/97 6,419 45,007 7,642 7,023
05/31/98 7,177 51,791 8,062 6,947
11/30/98 6,786 55,667 7,657 6,997
Data from 11/30/88 through 11/30/98
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Gold Fund; the S&P 500 Index, which is an unmanaged index representing the
average performance of a group of 500 widely held, publicly traded stocks (it is
not possible to invest directly in the S&P 500 Index); the Philadelphia Gold &
Silver Index, representing nine holdings in the gold & silver sector, typically
referred to as the XAU; and London Gold, a traditional Gold Bullion index that
is readily available.
Message from the Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER APPEARS HERE: Mark W. Johnson, CFA]
THE GOLD MARKET
Gold prices during the six months ended November 30, 1998, traded in a narrow
range of $273.40 (a 19 1/2 year low) to $300.80. Prices ended the period at
$294.70 versus $293.60 on May 31, 1998 -- a change of only .37%. While gold
slumbered, the stocks of gold mining companies gyrated. Consequently, the net
asset value range for the USAA Gold Fund was $3.69 (an all time low) to $6.18.
Interestingly, the USAA Gold Fund ended the first half of the fiscal year at
$5.55 versus $5.87 on May 31, 1998, a change of only -5.45%. For all the
hyperactivity during this period, by the end of day November 30, 1998, very
little had changed on the pricing front.
Although pricing did not change much, the underlying fundamentals improved
during the latter half of this time frame. First, the U.S. dollar turned weaker
in September. This has the effect of reducing the incentive of non-U.S. gold
producers to engage in various hedging(1) strategies that have a depressing
impact on gold. Second, the economic situation in Asia seems to have stabilized
somewhat. Consequently, the wholesale dumping of gold to garner dollars that was
seen earlier in the year seems to have halted. Third, central bank selling has
been noticeably reserved. With interest rates on gold loans at historically low
levels, it is likely that central banks as a group will remain quiet. Finally,
the World Gold Council's third quarter 1998 survey of global demand indicates
that demand for gold has rebounded sharply off of the depressed levels seen in
the first quarter. Demand is being driven by jewelry and coins in developed
countries. Because fundamentals have improved over the past six months, but
prices are essentially unchanged, we are cautiously optimistic that gold prices
can move higher from here. However, we would not expect a dramatic upside
breakout as any significant move would likely be met by renewed central bank
selling. Also, with a new government in Germany, one barrier to the partial
liquidation of International Monetary Fund (IMF) gold reserves may have been
removed. Such longer-term structural problems remain intact.
(1) A strategy to offset risk.
FUND PERFORMANCE AND STRATEGY
As noted earlier, the cumulative return of the USAA Gold Fund for the six months
ended November 30, 1998, was -5.45%. For the twelve months ending November 30,
1998, the total return was 5.71%. According to Lipper Analytical Services, the
USAA Gold Fund ranked in the top 10% or 4th of 42 funds in the Gold Oriented
category for the one-year period ending November 30, 1998.(2)
The top performing stock for the six months was Stillwater Mining at 50.8%.
Stillwater, the only U.S. producer of platinum and palladium, benefited from
favorable demand and supply factors in the palladium market. The stock also was
rewarded because of significant initiatives undertaken by management to expand
production and enhance the economics of its mine. The most disappointing
investments for the last six months were in the diamond arena: Aber Resources
(-55.1%) and Dia Met Minerals (-25.6%). The companies themselves are on track,
but the diamond market is weak. This has forced the DeBeers cartel to absorb
supply leading to the usual speculation and fear that this time around the
cartel will crack. We do not, at this juncture, share that fear.
Although the Fund, as of November 30, had a significant opportunistic exposure
to diamonds and platinum group metals (15.7% versus 6.6% eighteen months ago),
the main thrust of the Fund remained in gold at over 80% of Fund net assets. Our
strategic focus also remains unchanged: low-cost producers with good production
or reserve growth potential that sell at reasonable valuations on a
risk-adjusted basis.
USAA's commitment to the USAA Gold Fund remains unwavering. In that regard, we
are pleased to announce the addition of Patrick Chidley to our staff as the
Fund's Securities Analyst. Patrick has an undergraduate degree in mining geology
from the University of London's Royal School of Mines and a Masters degree in
mineral economics from Penn State. He comes to USAA with five years of
experience including three years as a geologist in the South African mining
industry and the remainder as a mining and commodity analyst. Patrick replaces
Lindsey Falconer, whose recommendations were a significant factor behind the
Fund's solid performance versus other gold funds.
(2) Lipper Analytical Services is an independent organization that monitors the
performance of mutual funds. Fund rankings awarded by Lipper are based on total
returns. The Fund's ranking in the Gold Oriented category for the 5-, and
10-year periods ended November 30, 1998, were 9 of 26 and 15 of 22,
respectively.
Past performance is no guarantee of future results and the value of your
investment may vary according to the Fund's performance.
- -------------------------------------------
TOP 10 EQUITY HOLDINGS
(% OF NET ASSETS)
- -------------------------------------------
Stillwater Mining 8.9
Barrick Gold 7.5
Goldcorp "A" 6.0
Getchell Gold 5.3
Euro-Nevada Mining 5.0
Ashanti Goldfields GDR 4.7
Agnico-Eagle Mines 4.4
Freeport-McMoRan Copper & Gold "A" 4.4
Acacia Resources 4.4
Placer Dome 4.3
- -------------------------------------------
Foreign investing is subject to additional risks which are discussed in the
Fund's prospectus. Gold mining stocks involve additional risk because of gold's
price volatility.
See page 8 for a complete listing of the Portfolio of Investments.
USAA GOLD FUND
PORTFOLIO OF INVESTMENTS
November 30, 1998
(Unaudited)
Market
Number Value
of Shares Security (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (97.4%)
African Gold Companies (8.9%)
500,000 Ashanti Goldfields Co. Ltd. GDR $ 4,344
600,000 Gold Fields Ltd. * 3,899
-----------
8,243
-----------
Australian Gold Companies (14.2%)
2,750,000 Acacia Resources Ltd. 4,061
2,500,000 Lihir Gold Ltd. * 3,079
1,250,000 Ranger Minerals NL * 3,417
3,000,000 Resolute Ltd. 2,620
-----------
13,177
-----------
North American Gold Companies (54.5%)
900,000 Agnico-Eagle Mines Ltd. 4,106
350,000 Barrick Gold Corp. 7,000
1,000,000 Dayton Mining Corp. * 313
300,000 Euro-Nevada Mining Corp. Ltd. 4,605
200,000 Franco-Nevada Mining Corp. Ltd. 3,673
325,000 Freeport-McMoRan Copper & Gold, Inc. "A" 4,103
200,000 Geomaque Explorations Ltd. * 203
300,000 Getchell Gold Corp. * 4,912
1,000,000 Goldcorp, Inc. "A" * 5,576
600,000 Golden Knight Resources, Inc. * 197
200,000 Homestake Mining Co. 2,150
275,000 Meridian Gold, Inc. * 1,478
200,000 Newmont Mining Corp. 3,975
275,000 Placer Dome, Inc. 4,005
400,000 Randgold Resources, Ltd. GDR * 1,052
500,000 Rio Narcea Gold Mines Ltd. * 827
1,000,000 TVX Gold, Inc. * 1,875
900,000 Vengold, Inc. * 590
-----------
50,640
-----------
South American Gold Companies (4.1%)
300,000 Compania de Minas Buenaventura ADR 3,806
-----------
Precious Metals And Minerals Companies (15.7%)
350,000 Aber Resources Ltd. * 1,587
100,000 Anglo American Platinum Corp. 1,616
150,000 Dia Met Minerals Ltd. "A" * 1,820
100,000 Impala Platinum Holdings Ltd. 1,372
225,000 Stillwater Mining Co. * 8,227
-----------
14,622
-----------
Total common stocks (cost: $123,457) 90,488
-----------
Principal
Amount
(000)
- --------------
U.S. GOVERNMENT & AGENCY ISSUES (3.7%)
Discount Note
$ 3,417 Federal Home Loan Mortgage Corp., 5.10%,
12/01/1998 (cost: $3,417) 3,417
-----------
Total investments (cost: $126,874) $ 93,905
===========
- -----------------------
* Non-income producing.
USAA GOLD FUND
NOTES TO PORTFOLIO OF INVESTMENTS
November 30, 1998
(Unaudited)
GENERAL NOTES
Market values of securities are determined by procedures and practices discussed
in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
ADR - American Depositary Receipts are receipts issued by a U.S. bank evidencing
ownership of foreign shares. Dividends are paid in U.S. dollars.
GDR - Global Depositary Receipts are receipts issued by a U.S. or foreign bank
evidencing ownership of foreign shares. Dividends are paid in U.S. dollars.
See accompanying notes to financial statements.
USAA GOLD FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
November 30, 1998
(Unaudited)
ASSETS
Investments in securities, at market value
(identified cost of $126,874) $ 93,905
Cash 86
Receivables:
Capital shares sold 48
Dividends and interest 45
Securities sold 1,092
Unrealized appreciation on foreign currency contracts
held, at value 8
-----------
Total assets 95,184
-----------
LIABILITIES
Securities purchased 1,829 Unrealized depreciation on
foreign currency contracts held, at value 3
Capital shares redeemed 314
USAA Investment Management Company 60
USAA Transfer Agency Company 39
Accounts payable and accrued expenses 41
-----------
Total liabilities 2,286
-----------
Net assets applicable to capital shares outstanding $ 92,898
-----------
REPRESENTED BY:
Paid-in capital $165,790
Accumulated net investment loss (200)
Accumulated net realized loss on investments (39,723)
Net unrealized depreciation of investments (32,969)
-----------
Net assets applicable to capital shares outstanding $ 92,898
===========
Capital shares outstanding, unlimited number of shares
authorized, no par value 16,742
===========
Net asset value, redemption price, and offering price per share $ 5.55
===========
See accompanying notes to financial statements.
USAA GOLD FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended November 30, 1998
(Unaudited)
Net investment income:
Income (net of foreign taxes withheld of $21):
Dividends $ 393
Interest 84
-----------
Total income 477
-----------
Expenses:
Management fees 314
Transfer agent's fees 227
Custodian's fees 38
Postage 16
Shareholder reporting fees 10
Trustees' fees 2
Registration fees 32
Professional fees 13
Other 5
-----------
Total expenses 657
-----------
Net investment loss (180)
-----------
Net realized and unrealized loss on investments and
foreign currency:
Net realized loss on:
Investments (990)
Foreign currency transactions (16)
Change in net unrealized appreciation/depreciation of:
Investments (2,796)
Foreign currency translations 4
-----------
Net realized and unrealized loss (3,798)
-----------
Decrease in net assets resulting from operations $ (3,978)
===========
See accompanying notes to financial statements.
USAA GOLD FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended November 30, 1998
and Year ended May 31, 1998
(Unaudited)
11/30/98 5/31/98
-------------------------
From operations:
Net investment loss $ (180) $ (418)
Net realized loss on investments (990) (4,994)
Net realized loss on foreign currency
transactions (16) (3)
Change in net unrealized appreciation/
depreciation of:
Investments (2,796) (27,241)
Foreign currency translations 4 (4)
-------------------------
Decrease in net assets resulting from
operations (3,978) (32,660)
-------------------------
From capital share transactions:
Proceeds from shares sold 38,947 91,011
Cost of shares redeemed (35,297) (86,294)
-------------------------
Increase in net assets from capital share
transactions 3,650 4,717
-------------------------
Net decrease in net assets (328) (27,943)
Net assets:
Beginning of period 93,226 121,169
-------------------------
End of period $92,898 $93,226
=========================
Undistributed net investment loss included in
net assets:
End of period $ (200) $ (4)
=========================
Change in shares outstanding:
Shares sold 7,478 14,007
Shares redeemed (6,607) (13,118)
-------------------------
Increase in shares outstanding 871 889
=========================
See accompanying notes to financial statements.
USAA GOLD FUND
NOTES TO FINANCIAL STATEMENTS
November 30, 1998
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA INVESTMENT TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended, is a diversified, open-end management investment company
organized as a Massachusetts business trust consisting of eleven separate funds.
The information presented in this semiannual report pertains only to the USAA
Gold Fund (the Fund). The Fund's primary investment objective is to seek
long-term capital appreciation and to protect the purchasing power of
shareholders' capital against inflation. Current income is a secondary
objective. USAA Investment Management Company (the Manager) seeks to achieve
this objective by investing at least 80% of the Fund's assets in common stocks,
preferred stocks or securities which are convertible into or which carry the
right to buy common stocks of companies principally engaged in gold exploration,
mining, or processing. The Fund concentrates its investments in securities of
companies principally engaged in gold exploration, mining, or processing and
therefore may be exposed to more risk than portfolios with a broader industry
diversification.
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. Securities which cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value, using methods determined
by the Manager under the general supervision of the Board of Trustees.
B. Federal taxes - The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Dividend
income, less foreign taxes, if any, is recorded on the ex-dividend date. If the
ex-dividend date has passed, certain dividends from foreign securities are
recorded upon notification. Interest income is recorded on the accrual basis.
Discounts and premiums on short-term securities are amortized over the life of
the respective securities.
D. Foreign currency translations - The assets of the Fund may be invested in the
securities of foreign issuers. Since the accounting records of the Fund are
maintained in U.S. dollars, foreign currency amounts are translated into U.S.
dollars on the following basis:
1. Market value of securities, other assets, and liabilities at the mean between
the bid and asked translation rates of such currencies against U.S. dollars on a
daily basis.
2. Purchases and sales of securities, income, and expenses at the rate of
exchange obtained from an independent pricing service on the respective dates of
such transactions.
Net realized and unrealized foreign currency gains/losses occurring during the
holding period of investments are a component of realized gain/loss on
investments and unrealized appreciation/depreciation on investments,
respectively.
Net realized foreign currency gains/losses arise from sales of foreign currency,
currency gains/losses realized between the trade and settlement dates on
security transactions, and the difference between amounts of dividends,
interest, and foreign withholding taxes recorded on the Fund's books and the
U.S. dollar equivalent of the amounts received. Net realized foreign currency
gains/losses have been reclassified from accumulated net realized gain/loss to
accumulated undistributed net investment income on the statement of assets and
liabilities as such amounts are treated as ordinary income/loss for tax
purposes. Net unrealized foreign currency exchange gains/losses arise from
changes in the value of assets and liabilities other than investments in
securities resulting from changes in the exchange rate.
E. Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that may affect the reported amounts in the financial
statements.
(2) LINES OF CREDIT
The Fund participates with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million, one with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($750 million uncommitted), and one with
NationsBank of Texas, N.A. ($100 million committed). The purpose of the
agreements is to meet temporary or emergency cash needs, including redemption
requests that might otherwise require the untimely disposition of securities.
Subject to availability under its agreement with CAPCO, the Fund may borrow from
CAPCO an amount up to 5% of its total assets at CAPCO's borrowing rate with no
markup. Subject to availability under its agreement with NationsBank, the Fund
may borrow from NationsBank an amount which, when added to outstanding
borrowings under the CAPCO agreement, does not exceed 25% of its total assets at
NationsBank's borrowing rate plus a markup. During the six-month period ended
November 30, 1998, the Fund had 6 borrowings, averaging $688,000 with an average
length of 1 day, and incurred $740 in interest expense.
(3) DISTRIBUTIONS
Distributions of net investment income and realized gains from security
transactions not offset by capital losses are made in the succeeding fiscal year
or as otherwise required to avoid the payment of federal taxes. At November 30,
1998 the Fund had capital loss carryovers for federal income tax purposes of
approximately $39.7 million which will expire in 1999 - 2007. It is unlikely
that the Trust's Board of Trustees will authorize a distribution of capital
gains realized in the future until the capital loss carryovers have been
utilized or expire.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-term
securities, for the period ended November 30, 1998 were $16.8 million and $11.7
million, respectively.
Gross unrealized appreciation and depreciation of investments at November 30,
1998 was $6.8 million and $39.8 million, respectively.
(5) FOREIGN CURRENCY CONTRACTS
A forward currency contract (currency contract) is a commitment to purchase or
sell a foreign currency at a specified date, at a negotiated price. The Fund
currently enters into currency contracts only in connection with the purchase or
sale of a security denominated in a foreign currency. These contracts allow the
Fund to "lock in" the U.S. dollar price of the security. Currency contracts are
valued on a daily basis using foreign currency exchange rates obtained from an
independent pricing service. Risks of entering into currency contracts include
the potential inability of the counterparty to meet the terms of the contract
and the Fund giving up the opportunity for potential profit.
At November 30, 1998, the terms of open foreign currency contracts were as
follows (in thousands):
Foreign Currency Contracts to Buy:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
U.S. Dollar In Exchange
Exchange Value as of for U.S. Unrealized Unrealized
Date Contracts to Receive 11/30/98 Dollar Appreciation Depreciation
- ---------------------------------------------------------------------------------------------------------
<C> <C> <S> <C> <C> <C> <C>
12/01/98 811 South African Rand $ 142 $ 143 $ $ (1)
12/01/98 1,533 South African Rand 269 270 (1)
12/01/98 1,551 South African Rand 272 271 1 -
12/01/98 824 South African Rand 145 145 -
- ---------------------------------------------------------------------------------------------------------
$ 828 $ 829 $ 1 $ (2)
=========================================================================================================
</TABLE>
Foreign Currency Contracts to Sell:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
U.S. Dollar In Exchange
Exchange Value as of for U.S. Unrealized Unrealized
Date Contracts to Deliver 11/30/98 Dollar Appreciation Depreciation
- ---------------------------------------------------------------------------------------------------------
<C> <C> <S> <C> <C> <C> <C>
12/01/98 2,221 South African Rand $ 390 $ 392 $ 2 $ -
12/01/98 2,237 South African Rand 393 392 - (1)
12/02/98 491 Australian Dollar 308 313 5 -
- ---------------------------------------------------------------------------------------------------------
$1,091 $1,097 $ 7 $ (1)
=========================================================================================================
</TABLE>
(6) 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 .75% of its annual average net assets.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Fund based on an annual charge of $23.50 per shareholder account plus
out-of-pocket expenses. Effective January 1, 1999, the annual charge will be
$26.
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.
(7) TRANSACTIONS WITH AFFILIATES
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
(8) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Six-month Eight-month
Period Ended Period Ended
November 30, Year Ended May 31, May 31,
----------------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 5.87 $ 8.09 $ 11.12 $ 9.00 $ 8.83 $ 7.95
Net investment
income (loss) (.01)(b) (.03)(b) (.01)(b) (.02) .01 .01
Net realized and
unrealized gain (loss) (.31) (2.19) (3.02) 2.15 .17 .88
Distributions from net
investment income - - - (.01) (.01) (.01)
----------------------------------------------------------------------------------
Net asset value at
end of period $ 5.55 $ 5.87 $ 8.09 $ 11.12 $ 9.00 $ 8.83
==================================================================================
Total return (%) * (5.45) (27.44) (27.25) 23.66 2.05 11.19
Net assets at end of
period (000) $92,898 $93,226 $121,169 $167,067 $160,223 $176,527
Ratio of expenses to
average net assets (%) 1.47(a) 1.46 1.31 1.33 1.28 1.26(a)
Ratio of net investment
income (loss) to
average net assets (%) (.40)(a) (.42) (.11) (.14) .10 .15(a)
Portfolio turnover (%) 13.81 19.62 26.40 16.48 34.76 34.75
</TABLE>
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a)Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b)Calculated using weighted average shares.
TRUSTEES
Robert G. Davis, Chairman of the Board
Michael J.C. Roth, President and Vice Chairman of the Board
John W. Saunders, Jr., Vice President
Barbara B. Dreeben
Howard L. Freeman, Jr.
Robert L. Mason
Richard A. Zucker
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
Telephone Assistance Hours
Call toll free - Central Time
Monday - Friday 7:30 a.m. to 8:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
For Additional Information On Mutual Funds
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges or redemptions
1-800-531-8448, (in San Antonio) 456-7202
Recorded Mutual Fund Price Quotes
24-Hour Service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
Mutual Fund TouchLine(Registered Trademark)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
