Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Managers 5
Financial Information:
Portfolio of Investments 10
Notes to Portfolio of Investments 22
Statement of Assets and Liabilities 23
Statement of Operations 24
Statements of Changes in Net Assets 25
Notes to Financial Statements 26
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA Cornerstone
Strategy Fund, managed by USAA Investment Management Company (IMCO). It may be
used as sales literature only when preceded or accompanied by a current
prospectus which gives further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)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 CORNERSTONE STRATEGY FUND
OBJECTIVE: Achieve a positive, inflation-adjusted rate of return and a
reasonably stable value of Fund shares, thereby preserving purchasing power of
shareholders' capital.
- --------------------------------------------------------------------------------
11/30/98 5/31/98
- --------------------------------------------------------------------------------
Net Assets $1,364.1 Million $1,500.3 Million
Net Asset Value Per Share $27.19 $29.89
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 11/30/98
- --------------------------------------------------------------------------------
5/31/98 to 11/30/98(+) 1 Year 5 Years 10 Years
-5.56% 1.65% 10.93% 10.57%
- --------------------------------------------------------------------------------
(+) Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment has
been made for taxes payable by shareholders on their reinvested income dividends
and capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return and
principal value of an investment will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
- ---------------------------------
CUMULATIVE PERFORMANCE COMPARISON
- ---------------------------------
A chart in the form of a line graph appears here, illustrating the comparison of
a $10,000 hypothetical investment in the USAA Cornerstone Strategy Fund, the S&P
500 Index, and the Lipper Global Flexible Portfolio Funds Average for the period
of 11/30/88 through 11/30/98. The data points from the graph are as follows:
USAA Cornerstone S&P 500 Lipper
Strategy Fund Index Average
------------- ------- --------
11/30/88 $10,000 $10,000 $10,000
05/31/89 10,752 11,922 10,545
11/30/89 12,039 13,079 11,250
05/31/90 11,747 13,899 11,224
11/30/90 10,820 12,625 10,501
05/31/91 12,075 15,534 11,589
11/30/91 12,141 15,187 11,625
05/31/92 13,180 17,061 12,308
11/30/92 13,383 17,988 12,609
05/31/93 15,579 19,039 13,826
11/30/93 16,262 19,800 14,378
05/31/94 16,845 19,847 14,438
11/30/94 16,427 20,007 14,141
05/31/95 17,928 23,848 15,431
11/30/95 19,211 27,396 16,471
05/31/96 21,117 30,624 17,476
11/30/96 23,058 35,024 18,632
05/31/97 24,694 39,639 19,481
11/30/97 26,876 45,007 20,604
05/31/98 28,928 51,791 21,976
11/30/98 27,319 55,667 21,568
Data from 11/30/88 through 11/30/98
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Cornerstone Strategy Fund to the S&P 500 Index and the Lipper Global
Flexible Portfolio Funds Average, an average performance level of all global
flexible portfolio funds, as reported by Lipper Analytical Services, an
independent organization that monitors the performance of mutual funds. The S&P
500 Index is an unmanaged index representing the average performance of a group
of 500 widely held, publicly traded stocks. It is not possible to invest
directly in the S&P 500 Index.
Message from the Managers
[Photograph of Portfolio Managers appears here: Standing L to R: W. Travis
Selmier, II, CFA (International Stocks), David G. Peebles, CFA (International
Stocks), Albert C. Sebastian, CFA (International Stocks), R. David Ullom, CFA
(Allocation Manager, Basic Value Stocks), and Mark W. Johnson, CFA (Gold and
Real Estate Securities); Seated: John W. Saunders, Jr., CFA (U.S. Government
Securities)]
FUND OVERVIEW
The USAA Cornerstone Strategy Fund continues to maintain a diversity of
securities for the purpose of generating positive, inflation-adjusted rates of
return. As a percentage of net assets, the Fund invests in the following
sectors: Basic Value Stocks (22-28%), International Stocks (22-28%), Real Estate
Securities (22-28%), U.S. Government Securities (22-28%), and Gold Securities
(0-10%). The asset allocation of the Fund as of November 30, 1998, is shown in
the pie chart on page 8. The return for the six months ended November 30, 1998
was -5.56% versus -1.39% for the Lipper Global Flexible Portfolio Funds Average.
(1)
(1)Refer to page 4 for the Lipper Average definition.
BASIC VALUE CATEGORY
The Basic Value sector of the Fund was one of the better performing sectors for
the first six months of the current fiscal year. Performance in this category
was helped by weighting in technology (Intel Corp and Applied Materials) and
healthcare (Pharmacia & Upjohn, American Home Products, Bristol Myers Squibb,
and Bausch & Lomb). The sectors' exposure to retailers (J.C. Penney, Sears, and
May Department Stores), capital goods (Deere, Boeing, and B.F. Goodrich) and
basic materials (Olin Corp and Monsanto) hindered performance.
Market recovery from lows reached in September appears to be the direct result
of the Federal Reserve Board's cuts in interest rates. Given these cuts, the
market seems less concerned with economic problems in certain emerging markets
(Southeast Asia, Latin America and Russia) and with any spillover effect on
corporate earnings growth for domestic companies. We do not fully agree with
this since corporate earnings growth may slow substantially in 1999.
Stocks added to the sector during the latest six months include Avery Denison,
Ralston Purina, Proctor & Gamble and Microsoft. Two stocks eliminated during the
time period were Chrysler and RJR.
INTERNATIONAL CATEGORY
European equities turned downward around mid year while Asian markets staged a
rebound on currency strength. Latin America and Canada continued to perform
poorly.
Europe - European markets performed poorly over the period primarily because of
further deterioration in the economic fundamentals of Russia and lower
forecasted economic growth. The financial sector, which had led the market in
the first half of 1998, sharply underperformed as many banks had to increase
their credit loss provisions on account of their emerging markets exposure.
Defensive stocks, such as utilities and consumer non-durables (e.g. tobacco,
food), outperformed the general indices. European markets rebounded sharply in
October and November as the U.S. and selected European central banks cut
interest rates.
Emerging Markets - The last six months have been a tale of two quarters for
emerging markets; a tumultuous summer culminating in August's massive sell-off
was followed by a strong recovery in investor sentiment. This resulted in
pushing emerging markets back up over 30% from its bottom in early September.
The change in investor sentiment has been key. Asian economies are showing signs
of bottoming; Latin markets have bounced as Brazil has begun to take the hard
medicine needed to solve its fiscal problems; and the European and Mediterranean
market participants have realized that Russia's collapse does not mean the end
of the world for these countries' economic growth.
Japan - A change in Prime Minister may hold the promise of progress on Japan's
banking crisis and economic slowdown, but we are still cautious with an
underweighted position. While concerned about the overall market, we have
continued our selective strategy of buying financially sound industrial and
financial companies. We have also added to our technology and telecommunications
holdings over the period.
Although forecasted economic growth for Europe has been revised downward,
European stocks may have the potential to offer the best earnings growth next
year. The introduction of the Euro, which is the common currency of the European
monetary union, on January 1, 1999, will further financial and economic
integration. Also we expect to see continued mergers and acquisition activity
and shareholder-oriented policies in Europe. As well as local dynamics, events
in mature markets - health of the U.S., Japanese and European countries'
economies, Japanese bank restructuring, multilateral support, and interest rate
policies of the G-7 - will prove critical for emerging markets in 1999.
U.S. GOVERNMENT CATEGORY
The bond market has been subject to high volatility because of adverse technical
factors during this six-month period ended November 30, 1998. Beginning with the
Russian government bond default in mid-August, a "flight to quality" started a
strong rally in U.S. Treasury bonds which moved their interest rates lower. This
rally accelerated when some highly leveraged hedge funds(2) collapsed. The
result was unsustainably lower interest rates on U.S. Treasury bonds while
liquidity in the rest of the bond market vanished when bond dealers refused to
bid for bonds. This lack of liquidity caused interest rates in the rest of the
bond market to move sharply higher. A rally in the Japanese yen in October then
caused several hedge funds to sell U.S. Treasury bonds, thereby reversing the
diverging trend and forcing their interest rates higher. As the dust has
settled, interest rates are lower on balance but not as low as they were in
early October.
To reduce price volatility in this turbulent period, we shifted one-third of
this portfolio category to shorter term U.S. Government Agency securities and
reduced the long-term U.S. Treasury bonds. GNMA mortgage pass-through securities
continue to be around one-half of this portfolio category.
Meanwhile, the Federal Reserve has overtly announced an "easing" in monetary
policy with its three reductions in both the Fed Funds' target rate and its own
discount window rate. Therefore, interest rates should stabilize around current
levels.
(2) A private investment pool for wealthy investors that, unlike a mutual fund,
is exempt from SEC regulation.
REAL ESTATE CATEGORY
Real estate securities performed poorly during the six months ended November 30,
1998. Shares of Real Estate Investment Trusts (REITs), as measured by the
National Association of Real Estate Investment Trusts (NAREIT) equity index,
declined 11.49% on a total return basis. This was well below the 7.50% return on
the S&P 500 Index. This was not what one might have expected given interest rate
cuts (a positive development for a capital intensive industry) and strong
(especially relative to the S&P 500), albeit decelerating, earnings growth.
However, interest rates declined only for U.S. Government obligations. This
"flight to quality" meant that the interest rate spread over treasury rates for
real estate companies widened dramatically, such that the cost of debt capital
for REITs actually rose during the half. Moreover, the market became
increasingly concerned that a recession might soon be upon us. This would
negatively impact demand for space at a time when new supply was coming on
stream. It also might bring what had been a pattern of rising operating income
at the property level to an abrupt halt. Consequently, real estate prices
declined during the last six months - a development which flowed through to real
estate securities.
Compared to the NAREIT equity index, the Fund is overweighted in office and
industrial properties and full-service hotels. It is underweighted in
apartments, retail, healthcare, and diversified REITs. A significant exposure to
special situations within the real estate industry has been built through the
purchase of stocks focusing on ski resorts, golf courses, megaplex movie
theatres, prisons, and laboratories.
GOLD CATEGORY
Gold prices rose .4% from $293.60 to $294.70 during the six months ended
November 30, 1998. The common stocks of gold mining companies declined slightly.
The Fund had no exposure to gold stocks during this period.
Past performance is no guarantee of future results and the value of your
investment may vary according to the Fund's performance.
ASSET ALLOCATION
- ----------------
A pie chart is shown here depicting the Asset Allocation as of November 30, 1998
of the USAA Cornerstone Strategy Fund to be:
International Securities - 27.4%*; Basic Value Stocks - 24.5%*; U. S. Government
Securities - 24.2%*; and Real Estate Securities - 23.0%*.
* Percentages are of the Net Assets in the Portfolio and may or may not equal
100%.
- ------------------------------------
TOP 10 INDUSTRIES
(% OF NET ASSETS)
- ------------------------------------
Real Estate Investment Trust 21.3
Telephones 4.7
Banks - Major Rigional 4.1
Healthcare - Diversified 3.4
Oil - International Integrated 2.9
Drugs 2.2
Auto Parts 2.1
Leisure Time 1.6
Machinery Diversified 1.4
Chemicals 1.4
- ------------------------------------
- ------------------------------------
TOP 3 HOLDINGS
IN EACH SECTOR
(% OF NET ASSETS)
- ------------------------------------
FOREIGN
- --------
Nokia ADR 0.7
Novartis AG 0.6
Autoliv SDR 0.6
REAL ESTATE
- ------------
Starwood Lodging 1.1
Avalonbay Communities 1.0
Post Properties 1.0
U.S. GOVERNMENT
- ----------------
GNMA @ 5.65% 7.8
GNMA @ 6.50% 4.5
U.S. Treasury Bond @ 7.88% 3.5
BASIC VALUE
- ------------
Bristol-Myers Squibb 1.8
American Home Products 1.6
Monsanto 0.9
- ---------------------------------
Foreign investing is subject to additional risks, which are discussed in the
Fund's prospectus. Since return on any investment is generally commensurate with
risk, investors should be aware of the potential volatility associated with
foreign securities.
See page 10 for a complete listing of the Portfolio of Investments.
USAA CORNERSTONE STRATEGY FUND
PORTFOLIO OF INVESTMENTS
November 30, 1998
(Unaudited)
Market
Number Value
of Shares Security (000)
- --------------------------------------------------------------------------------
INTERNATIONAL SECURITIES (27.4%)
INTERNATIONAL STOCKS (27.2%)
Argentina (0.1%)
28,000 IRSA Inversiones y Representaciones S.A. GDR $ 784
23,400 Telefonica de Argentina S.A. ADR 758
- --------------------------------------------------------------------------------
1,542
-----
Australia (0.3%)
237,750 Cable & Wireless Optus Ltd. * 445
255,000 CSL Ltd. 1,987
642,400 HIH Insurance Ltd. 484
135,000 Smith (Howard) Ltd. 872
- --------------------------------------------------------------------------------
3,788
-------
Austria (0.8%)
8,142 Bank Austria AG 421
58,400 Boehler Uddeholm AG 2,725
90,300 VA Flughafen Wien AG 4,018
37,400 VA Technologie AG 3,134
- --------------------------------------------------------------------------------
10,298
-------
Brazil (0.3%)
33,900 Companhia Brasileira de Distribuicao Grupo Pao de Acucar ADR 680
31,818,020 Companhia Energetica de Minas Gerais (Cemig) (Preferred) 806
95,900 Panamerican Beverages, Inc."A" 2,212
5,600,000 Petroleo Brasileiro S.A.(Preferred) 797
- --------------------------------------------------------------------------------
4,495
-------
Canada (1.7%)
342,300 Anderson Exploration Ltd. * 3,031
100,000 Canadian National Railway Co. 5,400
274,800 Canadian Occidental Petroleum Ltd. 3,658
294,000 National Bank of Canada 4,600
37,000 Northern Telecom Ltd. 1,727
104,000 OSF, Inc. * 767
143,300 Suncor, Inc. 4,371
- --------------------------------------------------------------------------------
23,554
-------
Chile (0.1%)
24,800 Sociedad Quimica y Minera de Chile S.A. ADR 955
- --------------------------------------------------------------------------------
China (0.1%)
837,000 New World Infrastructure Ltd.* 1,254
- --------------------------------------------------------------------------------
Denmark (1.4%)
45,100 Carli Gry International A/S 2,378
47,000 ISS International Service System A/S "B" 3,097
153,200 SAS Danmark A/S 1,853
24,400 Tele Danmark A/S "B" 2,724
58,200 Tele Danmark A/S ADR 3,227
63,300 Unidanmark A/S 5,163
- --------------------------------------------------------------------------------
18,442
-------
Egypt (0.1%)
39,300 Suez Cement Co. S.A.E. GDR 564
- --------------------------------------------------------------------------------
Finland (1.4%)
1,115,400 Merita plc "A" 6,487
91,200 Nokia Corp. ADR 8,937
141,000 Raisio Group plc 1,826
138,900 Rauma OYJ 1,952
- --------------------------------------------------------------------------------
19,202
-------
France (2.7%)
15,100 Accor S.A. 3,318
4,430 Bouygues Offshore S.A. ADR 54
54,817 CNP Assurances * 1,657
94,800 Coflexip ADR 3,460
116,700 Elf Aquitaine ADR 7,265
34,000 Eramet Group 1,076
10,300 Essilor International 4,010
22,970 ISIS S.A. 1,659
36,900 Louis Dreyfus Citrus 1,036
62,200 Renault S.A. 2,886
41,700 Rhone Poulenc S.A. 2,078
69,839 SEITA 4,051
28,000 Simco S.A. 2,480
35,000 Valeo S.A. 2,996
- --------------------------------------------------------------------------------
38,026
-------
Germany (1.7%)
133,500 Continental AG 3,274
130,000 Hoechst AG 5,579
84,400 Merck KGaA 3,433
5,364 SAP AG 2,428
4,335 SAP AG (Preferred) 2,256
110,000 Veba AG 6,095
- --------------------------------------------------------------------------------
23,065
-------
Greece (0.2%)
79,400 Hellenic Telecommunications Organization S.A. (OTE) * 1,980
21,240 National Bank of Greece S.A. GDR * 765
1,700 Panafon Hellenic Telecommunications Co. S.A. * 30
- --------------------------------------------------------------------------------
2,775
-------
Hong Kong (0.1%)
44,000 Asia Satellite Telecommunications Holdings Ltd. ADR 699
170,000 Hutchison Whampoa Ltd. 1,213
- --------------------------------------------------------------------------------
1,912
-------
Hungary (0.2%)
44,000 Magyar Tavkozlesi RT. (MATAV) ADR 1,204
75,000 Mol Magyar Olaj-Es Gazipari GDR 1,729
- --------------------------------------------------------------------------------
2,933
-------
India (0.1%)
55,300 Hindalco Industries Ltd. GDR 636
78,800 Larsen & Toubro Ltd. GDR 528
63,300 Videsh Sanchar Nigam Ltd. GDR 647
- --------------------------------------------------------------------------------
1,811
-------
Israel (0.1%)
46,800 Blue Square - Israel Ltd. ADR 570
- --------------------------------------------------------------------------------
Italy (1.5%)
61,200 ENI S.p.A. ADR 3,741
632,000 Erg S.p.A. 2,186
58,500 Gucci Group N.V. 2,636
789,000 Italgas S.p.A. 3,899
1,284,000 Telecom Italia S.p.A. 8,018
- --------------------------------------------------------------------------------
20,480
-------
Japan (2.0%)
126,000 Bridgestone Corp. 2,946
95,000 Daibiru Corp. 639
7,000 Honda Motor Co. Ltd. 251
46,000 Ito-Yokado Co. Ltd. 2,808
22,700 Justsystem Corp. * 110
115,500 Laox Co. Ltd. 750
105,000 Namco 2,045
30,000 Nomura Securities Co. Ltd. 292
1,079 NTT Data Corp. 4,712
29 NTT Mobile Communication Network, Inc. * 1,106
70,000 Sankyo Co. Ltd. 1,591
171,000 Sanwa Bank Ltd. 1,548
149,000 Sharp Corp. 1,313
32,000 Sony Corp. 2,340
16,000 Terumo Corp. 355
390,000 Toko, Inc. 1,570
685,000 Toshiba Corp. 3,836
- --------------------------------------------------------------------------------
28,212
-------
Korea (0.1%)
251,311 Samsung Heavy Industries * 1,392
117,145 Samsung Heavy Industries Rights * 178
- --------------------------------------------------------------------------------
1,570
-------
Malaysia (0.1%)
537,400 Genting Bhd (a) 796
- --------------------------------------------------------------------------------
Mexico (0.2%)
72,437 Desc, Sociedad de Fomento Industrial, S.A. de C.V. ADR 1,367
106,000 Tubos de Acero de Mexico, S.A. ADR 749
- --------------------------------------------------------------------------------
2,116
-------
Netherlands (2.7%)
157,600 Akzo Nobel N.V. 6,460
84,400 Benckiser N.V. "B" 4,987
33,000 EVC International N.V. 260
99,780 ING Group N.V. 5,713
141,000 Koninklijke KPN N.V. 6,082
126,600 Koninklijke Pakhoed N.V.(Certificates) 3,111
87,200 Oce-van der Grinten N.V. 3,064
56,700 Philips Electronics N.V. 3,590
11,650 Simac Techniek N.V. 1,492
80,500 VNU N.V. 2,765
- --------------------------------------------------------------------------------
37,524
-------
Norway (0.7%)
1,122,900 Christiania Bank og Kreditkasse 4,124
118,600 Schibsted ASA 1,362
449,300 Storebrand ASA * 3,331
297,000 Tandberg Data ASA * 912
- --------------------------------------------------------------------------------
9,729
-------
Philippines (0.1%)
7,000,000 SM Prime Holdings, Inc. 1,315
- --------------------------------------------------------------------------------
Poland (0.1%)
120,000 Elektrim S.A. 1,010
226,737 Polifarb Cieszyn-Wroclaw S.A. 299
- --------------------------------------------------------------------------------
1,309
-------
Portugal (0.8%)
139,800 Banco Pinto & Sotto Mayor S.A. 2,548
24,500 Brisa-Auto Estradas de Portugal S.A. 1,324
95,245 Cimentos de Portugal S.A. 3,012
92,100 Portugal Telecom S.A. ADR 4,058
- --------------------------------------------------------------------------------
10,942
-------
Russia (0.1%)
30,000 LUKoil ADR 615
- --------------------------------------------------------------------------------
Singapore (0.1%)
108,000 Keppel Corp. Ltd. 284
330,000 Overseas Union Bank Ltd. 1,331
- --------------------------------------------------------------------------------
1,615
-------
South Africa (0.1%)
590,000 Sanlam Ltd. * 622
29,500 South African Breweries Ltd. 499
- --------------------------------------------------------------------------------
1,121
-------
Spain (0.9%)
203,200 Argentaria, Caja Postal y Banco Hipotecario de Espana, S.A. 4,730
80,800 Corporacion Mapfre 2,239
42,600 Telefonica de Espana S.A. ADR 5,937
- --------------------------------------------------------------------------------
12,906
-------
Sweden (1.2%)
230,600 Autoliv, Inc. SDR 8,317
1,383,000 Swedish Match AB 4,673
126,000 Volvo AB 2,926
- --------------------------------------------------------------------------------
15,916
-------
Switzerland (1.3%)
4,550 Novartis AG 8,538
13,200 Selecta Group AG 3,384
4,938 Sulzer AG P.C. 2,790
9,180 Swisscom AG * 3,090
12,003 Tag Heuer International S.A. 828
108,300 Tag Heuer International S.A. ADR 758
- --------------------------------------------------------------------------------
19,388
-------
Taiwan (0.1%)
2,255,000 China Steel Corp. 1,467
- --------------------------------------------------------------------------------
Turkey (0.1%)
16,740,000 Akbank T.A.S. 342
24,111,741 Yapi Ve Kredi Bankasi A.S. 294
5,786,817 Yapi Ve Kredi Bankasi Receipts *, (a) 70
- --------------------------------------------------------------------------------
706
-------
United Kingdom (3.6%)
1,296,200 Billiton plc 2,833
132,700 British Telecommunications plc * 1,818
74,000 Cable & Wireless plc * 940
220,000 Cadbury Schweppes plc 3,302
1,845,000 Cookson Group plc 4,047
1,010,000 Corporate Services Group plc 2,449
35,500 Doncasters plc ADR * 581
255,100 EMI Group plc 1,519
328,000 Laporte plc 2,775
847,600 LucasVarity plc 2,908
1,272,000 Medeva plc 2,161
260,000 National Westminster Bank plc 4,743
282,866 Reuters Group plc 2,732
870,000 Safeway plc 4,291
1,125,500 Tomkins plc 5,217
911,197 WPP Group plc 5,020
32,925 Zeneca Group plc * 1,369
- --------------------------------------------------------------------------------
48,705
-------
Total international stocks (cost: $310,640) 371,618
-------
Principal
Amount
(000)
- ------------
INTERNATIONAL BONDS (0.2%)
Japan (0.2%)
$ 2,100 MBL International Finance (Bermuda) Trust,
Convertible Notes, 3.00%, 11/30/2002 (cost: $2,167) 2,100
--------
Total international securities (cost: $312,807) 373,718
--------
REAL ESTATE SECURITIES (23.0%)
Leisure Time (0.9%)
500,000 Vail Resorts Inc. * 12,625
- --------------------------------------------------------------------------------
Lodging/Hotel (1.0%)
900,000 Host Marriott Corp. * 13,219
- --------------------------------------------------------------------------------
Real Estate Investment Trusts (21.1%)
300,000 Alexandria Real Estate Equities, Inc. 9,262
400,000 Avalonbay Communities, Inc. 13,550
400,000 Boston Properties, Inc. 12,625
600,000 Brandywine Realty Trust 10,800
300,000 Chelsea GCA Realty, Inc. 10,144
350,000 Correctional Properties Trust 6,738
650,000 Entertainment Properties Trust 11,984
500,000 Felcor Lodging Trust, Inc. 11,906
500,000 First Industrial Realty Trust, Inc. 12,094
400,000 Gables Residential Trust 9,925
375,000 Golf Trust of America, Inc. 9,797
475,000 Highwoods Properties, Inc. 12,914
500,000 Liberty Property Trust 12,312
425,000 Mack-Cali Realty Corp. 12,617
550,000 Mills Corp. 11,791
350,000 Pan Pacific Retail Properties, Inc. 6,978
1,000,000 Patriot American Hospitality, Inc. 7,375
350,000 Philips International Realty Corp. 5,425
350,000 Post Properties, Inc. 13,387
500,000 Prentiss Properties Trust 10,875
300,000 Prime Group Realty Trust 4,500
400,000 Shurgard Storage Centers, Inc. 10,525
425,000 Simon Property Group, Inc. 12,591
500,000 Starwood Lodging Trust 15,187
300,000 Storage USA, Inc. 9,525
225,000 Sun Communities, Inc. 7,327
200,000 Tower Realty Trust, Inc. 3,763
400,000 Weeks Corp. 11,450
- --------------------------------------------------------------------------------
287,367
--------
Total real estate securities (cost: $318,117) 313,211
--------
BASIC VALUE STOCKS (24.5%)
Aerospace/Defense (0.9%)
289,660 Boeing Co. 11,767
- --------------------------------------------------------------------------------
Aluminum (0.2%)
30,000 Aluminum Co. of America 2,224
- --------------------------------------------------------------------------------
Automobiles (0.4%)
100,000 Ford Motor Co. 5,525
- --------------------------------------------------------------------------------
Auto Parts (0.2%)
176,700 Meritor Automotive, Inc. 3,125
- --------------------------------------------------------------------------------
Banks - Major Regional (1.7%)
230,000 Fleet Financial Group, Inc. 9,588
150,000 PNC Bank Corp. 7,734
150,000 SouthTrust Corp. 5,513
- --------------------------------------------------------------------------------
22,835
--------
Banks - Money Center (0.9%)
38,000 Bankers Trust Corp. 3,306
136,000 Chase Manhattan Corp. 8,627
- --------------------------------------------------------------------------------
11,933
--------
Beverages - Nonalcoholic (0.2%)
30,000 Coca-Cola Co. 2,102
- --------------------------------------------------------------------------------
Chemicals (1.0%)
50,000 Millennium Chemicals, Inc. 1,194
275,000 Monsanto Co. 12,461
- --------------------------------------------------------------------------------
13,655
--------
Chemicals - Diversified (0.8%)
300,000 B.F. Goodrich Co. 11,381
- --------------------------------------------------------------------------------
Chemicals - Specialty (0.3%)
122,600 Olin Corp. 3,747
- --------------------------------------------------------------------------------
Computer Software & Service (0.1%)
15,000 Microsoft Corp. * 1,830
- --------------------------------------------------------------------------------
Containers - Metals & Glass (0.3%)
95,000 Ball Corp. 4,061
- --------------------------------------------------------------------------------
Drugs (0.6%)
160,000 Pharmacia & Upjohn, Inc. 8,330
- --------------------------------------------------------------------------------
Electrical Equipment (0.4%)
115,000 Rockwell International Corp. 5,628
- --------------------------------------------------------------------------------
Electronics - Semiconductors (1.0%)
125,000 Intel Corp. 13,453
- --------------------------------------------------------------------------------
Equipment - Semiconductors (0.8%)
300,000 Applied Materials, Inc. * 11,625
- --------------------------------------------------------------------------------
Finance - Consumer (0.2%)
42,408 Associates First Capital Corp."A" 3,303
- --------------------------------------------------------------------------------
Finance - Diversified (0.4%)
100,000 PMI Group, Inc. 5,469
- --------------------------------------------------------------------------------
Foods (0.2%)
80,000 Ralston Purina Group 2,785
- --------------------------------------------------------------------------------
Healthcare - Diversified (3.4%)
400,000 American Home Products Corp. 21,300
200,000 Bristol-Myers Squibb Co. 24,512
- --------------------------------------------------------------------------------
45,812
--------
Household Products (0.2%)
30,000 Procter & Gamble Co. 2,629
- --------------------------------------------------------------------------------
Insurance - Property/Casualty (0.7%)
130,000 Allstate Corp. 5,298
102,000 HSB Group, Inc. 4,220
- --------------------------------------------------------------------------------
9,518
--------
Leisure Time (0.5%)
310,000 Brunswick Corp. 6,820
- --------------------------------------------------------------------------------
Machinery - Diversified (1.1%)
100,000 Caterpillar, Inc. 4,944
300,000 Deere & Co. 10,481
- --------------------------------------------------------------------------------
15,425
--------
Manufacturing - Specialized (0.2%)
71,700 Avery Dennison Corp. 3,437
- --------------------------------------------------------------------------------
Medical Products & Supplies (1.0%)
250,000 Bausch & Lomb, Inc. 13,875
- --------------------------------------------------------------------------------
Natural Gas Utilities (0.4%)
120,000 NICOR, Inc. 5,048
- --------------------------------------------------------------------------------
Oil - Domestic Integrated (0.2%)
125,000 Occidental Petroleum Corp. 2,531
- --------------------------------------------------------------------------------
Oil - International Integrated (1.8%)
70,000 Chevron Corp. 5,854
120,000 Mobil Corp. 10,343
150,000 Texaco, Inc. 8,634
- --------------------------------------------------------------------------------
24,831
--------
Oil & Gas - Drilling/Equipment (0.1%)
100,000 Helmerich & Payne, Inc. 1,725
- --------------------------------------------------------------------------------
Paper & Forest Products (0.1%)
223,800 Unisource Worldwide, Inc. 1,762
- --------------------------------------------------------------------------------
Railroads/Shipping (0.6%)
255,000 Norfolk Southern Corp. 7,746
- --------------------------------------------------------------------------------
Retail - Department Stores (0.7%)
85,000 J.C. Penney Company, Inc. 4,675
70,000 May Department Stores Co. 4,222
- --------------------------------------------------------------------------------
8,897
--------
Retail - General Merchandising (0.3%)
90,000 Sears, Roebuck & Co. 4,269
- --------------------------------------------------------------------------------
Telecommunications - Long Distance (0.7%)
120,000 Sprint Corp. 8,730
60,000 Sprint PCS * 960
- --------------------------------------------------------------------------------
9,690
--------
Telephones (1.9%)
170,000 Bell Atlantic Corp. 9,456
120,000 GTE Corp. 7,440
186,000 SBC Communications Corp. 8,917
- --------------------------------------------------------------------------------
25,813
--------
Total basic value stocks (cost: $192,823) 334,606
--------
Principal
Amount
(000)
- --------------
U.S. GOVERNMENT & AGENCY ISSUES (24.2%)
Government National Mortgage Assoc. (19.9%)
$ 105,110 5.65%, 6/12/2000 106,233
45,520 6.00%, 4/15/2028 - 9/15/2028 45,176
61,071 6.50%, 5/15/2023 - 3/15/2026 61,820
46,560 7.00%, 8/15/2023 - 5/15/2026 47,746
2,193 7.50%, 3/15/2017 2,280
1,872 8.00%, 6/15/2016 - 3/15/2017 1,973
2,660 8.50%, 9/15/2009 - 2/15/2017 2,855
189 9.00%, 6/15/2016 - 10/15/2016 203
2,718 9.50%, 6/15/2009 - 8/15/2017 2,940
480 10.00%, 11/15/2009 - 4/15/2016 529
57 11.50%, 3/15/2013 64
- --------------------------------------------------------------------------------
271,819
--------
U.S. Treasury (3.5%)
36,264 U.S. Treasury Bonds, 7.88%, 2/15/2021 48,129
- --------------------------------------------------------------------------------
Discount Note (0.8%)
10,147 Federal Home Loan Mortgage Corp., 5.10%
12/01/1998 10,147
- --------------------------------------------------------------------------------
Total U.S. Government & agency issues (cost: $311,507) 330,095
----------
Total investments (cost: $1,135,254) $1,351,630
================================================================================
- ----------------------
*Non-income producing.
PORTFOLIO SUMMARY BY INDUSTRY
-------------------------------
U.S. Government & Agency Issues 24.2%
Real Estate Investment Trusts 21.3
Telephones 4.7
Banks - Major Regional 4.1
Healthcare - Diversified 3.4
Oil - International Integrated 2.9
Drugs 2.2
Auto Parts 2.1
Leisure Time 1.6
Banks - Money Center 1.4
Chemicals 1.4
Electronics - Semiconductors 1.4
Machinery - Diversified 1.4
Medical Products & Supplies 1.3
Lodging / Hotel 1.2
Railroads / Shipping 1.2
Computer Software & Service 1.1
Chemicals - Specialty 1.0
Insurance - Multi-Line Companies 1.0
Other 20.2
------
99.1%
======
USAA CORNERSTONE STRATEGY FUND
NOTES TO PORTFOLIO OF INVESTMENTS
November 30, 1998
(Unaudited)
GENERAL NOTES
Market values of securities are determined by procedures and practices discussed
in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
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.
SPECIFIC NOTES
(a) Illiquid security valued using methods determined by the Fund's investment
manager under the general supervision of the Board of Trustees. At November 30,
1998, these securities represented .06% of the Fund's net assets.
See accompanying notes to financial statements.
USAA CORNERSTONE STRATEGY FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
November 30, 1998
(Unaudited)
ASSETS
Investments in securities, at market value(identified
cost of $1,135,254) $1,351,630
Cash 394
Cash denominated in foreign currencies (identified
cost of $1,011) 1,038
Receivables:
Capital shares sold 409
Dividends and interest 6,165
Securities sold 10,118
Unrealized appreciation on foreign currency contracts held,
at value 2
----------
Total assets 1,369,756
----------
LIABILITIES
Securities purchased 2,646
Unrealized depreciation on foreign currency
contracts held, at value 13
Capital shares redeemed 1,918
USAA Investment Management Company 836
USAA Transfer Agency Company 235
Accounts payable and accrued expenses 7
----------
Total liabilities 5,655
----------
Net assets applicable to capital shares outstanding $1,364,101
==========
REPRESENTED BY:
Paid-in capital $1,082,891
Accumulated undistributed net investment income 19,896
Accumulated net realized gain on investments 44,898
Net unrealized appreciation of investments 216,376
Net unrealized appreciation on foreign currency translations 40
----------
Net assets applicable to capital shares outstanding $1,364,101
==========
Capital shares outstanding, unlimited number of shares authorized,
no par value 50,172
==========
Net asset value, redemption price, and offering price per share $ 27.19
==========
See accompanying notes to financial statements.
USAA CORNERSTONE STRATEGY FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended November 30, 1998
(Unaudited)
Net investment income:
Income (net of foreign taxes withheld of $386):
Dividends $ 16,587
Interest 11,198
----------
Total income 27,785
----------
Expenses:
Management fees 5,208
Transfer agent's fees 1,389
Custodian's fees 301
Postage 158
Shareholder reporting fees 87
Trustees' fees 2
Registration fees 40
Professional fees 14
Other 14
----------
Total expenses 7,213
----------
Net investment income 20,572
----------
Net realized and unrealized loss on investments
and foreign currency:
Net realized gain (loss) on:
Investments 45,879
Foreign currency transactions (385)
Change in net unrealized appreciation/depreciation of:
Investments (151,150)
Foreign currency translations 422
----------
Net realized and unrealized loss (105,234)
----------
Decrease in net assets resulting from operations $ (84,662)
==========
See accompanying notes to financial statements.
USAA CORNERSTONE STRATEGY FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended November 30, 1998
and Year ended May 31, 1998
(Unaudited)
11/30/98 5/31/98
------------------------
From operations:
Net investment income $ 20,572 $ 37,298
Net realized gain on investments 45,879 89,325
Net realized loss on foreign currency transactions (385) (314)
Change in net unrealized appreciation/depreciation of:
Investments (151,150) 92,366
Foreign currency translations 422 (354)
------------------------
Increase (decrease) in net assets resulting
from operations (84,662) 218,321
------------------------
Distributions to shareholders from:
Net investment income (14,923) (34,020)
------------------------
Net realized gains (40,489) (88,733)
From capital share transactions:
Proceeds from shares sold 78,781 222,386
Shares issued for dividends reinvested 54,300 120,534
Cost of shares redeemed (129,164) (201,585)
------------------------
Increase in net assets from capital share
transactions 3,917 141,335
------------------------
Net increase (decrease) in net assets (136,157) 236,903
Net assets:
Beginning of period 1,500,258 1,263,355
------------------------
End of period $1,364,101 $1,500,258
========================
Undistributed net investment income included in
net assets:
End of period $ 19,896 $ 14,632
========================
Change in shares outstanding:
Shares sold 2,883 7,618
Shares issued for dividends reinvested 1,877 4,304
Shares redeemed (4,783) (6,906)
------------------------
Increase (decrease) in shares outstanding (23) 5,016
========================
See accompanying notes to financial statements.
USAA CORNERSTONE STRATEGY FUND
NOTES TO FINANCIAL STATEMENTS
November 30, 1998
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA INVESTMENT TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended, is a diversified, open-end management investment company
organized as a Massachusetts business trust consisting of eleven separate funds.
The information presented in this semiannual report pertains only to the USAA
Cornerstone Strategy Fund (the Fund). The Fund's investment objective is to
achieve a positive, inflation-adjusted rate of return and a reasonably stable
value of Fund shares, thereby preserving the purchasing power of shareholders'
capital.
A. Security valuation - The value of each security is determined (as of the
close of trading on the New York Stock Exchange on each business day the
Exchange is open) as set forth below:
1. Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities exchanges
are generally valued at the closing values of such securities on the exchange
where primarily traded. If no sale is reported, the average of the bid and asked
prices is generally used depending upon local custom or regulation.
2. Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices.
3. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value.
4. Other debt and government securities are valued each business day by a
pricing service (the Service) approved by the 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. As a result of certain
permanent differences between book and tax basis accounting, reclassifications
were made to the statement of assets and liabilities to decrease paid-in capital
by $8,000 and to increase accumulated net realized gain on investments by
$8,000.
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 debt securities are amortized over the life
of the respective securities. Amortization of market discounts on long-term debt
securities is recognized as interest income upon disposition of the security to
the extent there is a gain on disposition.
D. Foreign currency translations - The assets of the Fund may be invested in the
securities of foreign issuers. Since the accounting records of the Fund are
maintained in U.S. dollars, foreign currency amounts are translated into U.S.
dollars on the following basis:
1. Market value of securities, other assets, and liabilities at the mean between
the bid and asked translation rates of such currencies against U.S. dollars 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 from the difference between amounts of dividends,
interest, and foreign withholding taxes recorded on the Fund's books and the
U.S. dollar equivalent of the amounts received. Net realized foreign currency
gains/losses have been reclassified from accumulated net realized gain/loss to
accumulated undistributed net investment income on the statement of assets and
liabilities as such amounts are treated as ordinary income/loss for tax
purposes. Net unrealized foreign currency exchange gains/losses arise from
changes in the value of assets and liabilities other than investments in
securities resulting from changes in the exchange rate.
E. Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that may affect the reported amounts in the financial
statements.
F. Euro Conversion Risk - On January 1, 1999, countries participating in the
European Monetary Union will begin converting their currencies into a new
currency unit called the euro. The countries initially participating in the
conversion are Austria, Belgium, Finland, France, Germany, Ireland, Italy,
Luxembourg, Netherlands, Portugal, and Spain. Conversion to the euro may present
certain risks to investments of the Fund held in one of the currencies being
replaced. The conversion is not expected to have a material impact on the Fund's
investments.
(2) LINES OF CREDIT
The Fund participates with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million, one with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($750 million uncommitted),and one with
NationsBank of Texas, N.A. ($100 million committed). The purpose of the
agreements is to meet temporary or emergency cash needs, including redemption
requests that might otherwise require the untimely disposition of securities.
Subject to availability under its agreement with CAPCO, the Fund may borrow from
CAPCO an amount up to 5% of the Fund's total assets at CAPCO's borrowing rate
with no markup. Subject to availability under its agreement with NationsBank,
the Fund may borrow from NationsBank an amount which, when added to outstanding
borrowings under the CAPCO agreement, does not exceed 25% of the Fund's total
assets at NationsBank's borrowing rate plus a markup. The Fund had no borrowings
under either of these agreements during the six-month period ended November 30,
1998.
(3) DISTRIBUTIONS
Distributions of net investment income and realized gains from security
transactions not offset by capital losses are made in the succeeding fiscal year
or as otherwise required to avoid the payment of federal taxes.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended November 30, 1998 were
$354.5 million and $388.9 million, respectively.
Gross unrealized appreciation and depreciation of investments at November 30,
1998 was $276.6 million and $60.2 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 8,670 Greek Drachma $ 31 $ 31 $ - $ -
12/04/98 1,143 British Pound 1,886 1,893 - (7)
12/07/98 44 British Pound 72 72 - -
12/07/98 3,540 South African Rand 622 623 - (1)
- -----------------------------------------------------------------------------------------------
$2,611 $2,619 $ - $ (8)
===============================================================================================
</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 20,348 Japanese Yen $ 165 $ 165 $ - $ -
12/02/98 182 British Pound 300 302 2 -
12/02/98 9,212 Japanese Yen 75 75 - -
12/02/98 20,681 Japanese Yen 168 168 - -
12/02/98 544 Swiss Franc 390 385 - (5)
12/03/98 9,305 Japanese Yen 75 75 - -
12/07/98 87 Singapore Dollar 53 53 - -
- ----------------------------------------------------------------------------------------
$1,226 $1,223 $ 2 $ (5)
========================================================================================
</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.
D. Brokerage services - USAA Brokerage Services, a discount brokerage service of
the Manager, may execute portfolio transactions for the Fund. The amount of
brokerage commissions paid to USAA Brokerage Services during the six-month
period ended November 30, 1998 was $12,000.
(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 $ 29.89 $ 27.96 $ 25.47 $ 22.63 $ 23.24 $ 23.43
Net investment income .41 .77 .74 .73 .68 .40
Net realized and
unrealized gain (loss) (2.00) 3.78 3.37 3.18 .67 .29
Distributions from net
investment income (.30) (.72) (.78) (.74) (.58) (.59)
Distributions of realized
capital gains (.81) (1.90) (.84) (.33) (1.38) (.29)
------------------------------------------------------------------------
Net asset value at
end of period $ 27.19 $29.89 $ 27.96 $ 5.47 $ 22.63 $23.24
========================================================================
Total return (%) * (5.56) 17.15 16.94 17.79 6.43 3.00
Net assets at end
of period (000) $1,364,101 $1,500,258 $1,263,355 $1,035,844 $874,587 $814,869
Ratio of expenses to
average net assets (%) 1.04(a) 1.01 1.06 1.15 1.13 1.11(a)
Ratio of net investment
income to average
net assets (%) 2.96(a) 2.64 2.88 3.06 3.16 2.68(a)
Portfolio turnover (%) 25.74 32.73 35.14 36.15 33.17 30.87
</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.
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
