Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Manager 5
Financial Information:
Independent Auditors' Report 10
Portfolio of Investments 11
Notes to Portfolio of Investments 13
Statement of Assets and Liabilities 14
Statement of Operations 15
Statements of Changes in Net Assets 16
Notes to Financial Statements 17
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 GNMA Trust,
managed by USAA Investment Management Company (IMCO). It may be used as sales
literature only when preceded or accompanied by a current prospectus which gives
further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)1999, USAA. All rights reserved.
USAA Family of Funds Summary
Fund Minimum
Type/Name Volatility Investment
--------- ---------- ----------
CAPITAL APPRECIATION
===============================================================================
Aggressive Growth Very high $3,000
Emerging Markets Very high $3,000
First Start Growth Moderate to high $3,000
Gold Very high $3,000
Growth Moderate to high $3,000
Growth & Income Moderate $3,000
International Moderate to high $3,000
S&P 500 (Registered Trademark)
Index Moderate $3,000
Science & Technology Very high $3,000
World Growth Moderate to high $3,000
ASSET ALLOCATION
===============================================================================
Balanced Strategy Moderate $3,000
Cornerstone Strategy Moderate $3,000
Growth and Tax
Strategy Moderate $3,000
Growth Strategy Moderate to high $3,000
Income Strategy Low to moderate $3,000
INCOME - TAXABLE
===============================================================================
GNMA Low to moderate $3,000
Income Moderate $3,000
Income Stock Moderate $3,000
Short-Term Bond Low $3,000
INCOME - TAX EXEMPT
===============================================================================
Long-Term Moderate $3,000
Intermediate-Term Low to moderate $3,000
Short-Term Low $3,000
State Bond Income Moderate $3,000
MONEY MARKET
===============================================================================
Money Market Very low $3,000
Tax Exempt
Money Market Very low $3,000
Treasury Money
Market Trust Very low $3,000
State Money Market Very low $3,000
Foreign investing is subject to additional risks, such as currency fluctuations,
market illiquidity, and political instability.
S&P 500 (Registered Trademark) is a trademark of The McGraw-Hill Companies, Inc.
and has been licensed for use. The Product is not sponsored, sold or promoted by
Standard & Poor's, and Standard & Poor's makes no representation regarding the
advisability of investing in the Product.
Some income may be subject to state or local taxes or the federal alternative
minimum tax.
An investment in a money market fund is not insured or guaranteed by the FDIC or
any other government agency. Although the fund seeks to preserve the value of
your investment at $1 per share, it is possible to lose money by investing in
the fund.
The Science & Technology Fund may be more volatile than a fund that diversifies
across many industries.
The InveStart (Registered Trademark) program is available for investors without
the $3,000 initial investment required to open an IMCO mutual fund account. A
mutual fund account can be opened with no initial investment if you elect to
have monthly automatic investments of at least $50 from a bank account.
InveStart is not available on tax-exempt funds or the S&P 500 Index Fund. The
minimum initial investment for IRAs is $250, except for the $2,000 minimum
required for the S&P 500 Index Fund. IRAs are not available for tax-exempt
funds. The Growth and Tax Strategy Fund is not available as an investment for
your IRA because the majority of its income is tax exempt.
California, Florida, New York, Texas, and Virginia funds available to residents
only.
Non-deposit investment products are not insured by the FDIC, are not deposits or
other obligations of, or guaranteed by, USAA Federal Savings Bank, are subject
to investment risks, and may lose value.
For more complete information about the mutual funds managed and distributed by
USAA Investment Management Company, including charges and operating expenses,
please call 1-800-531-8181 for a prospectus. Read it carefully before you
invest.
Message from the President
[PHOTOGRAPH OF PRESIDENT AND VICE CHAIRMAN OF THE BOARD, MICHAEL J.C. ROTH, CFA,
APPEARS HERE]
When I was a second lieutenant in pilot training at Williams AFB, I read the
book THIS KIND OF WAR by T. R. Fehrenbach. More than 30 years later I met Ted
Fehrenbach here in San Antonio where he resides and had a chance to tell him
that I think he is a brilliant man. I recall reading that LBJ declared THIS KIND
OF WAR required reading for people in his administration. Ted writes a regular
Sunday column for the San Antonio Express News, and he continues to delight me.
Last year he wrote a piece around Columbus Day, which included this observation:
"Spain was clearly disappointed with her admiral. While he
had spent much money charting islands with mosquitoes
and a miserable climate (from the Euro standpoint)...the
Portuguese had reached the real India and returned with
fabulous profits. Of course, Columbus had opened up to
Spain a vast empire, filled with treasures of every kind,
but then few investors take the long view."
As I read this passage, I thought that Ted's understanding of markets is as
sharp as his grasp of history. At the beginning of 1999, there indeed seemed to
be few investors with the long view. There were many people declaring the
absolute superiority of the S&P 500 and growth stocks, especially tech stocks,
while proclaiming that strategies such as value investing and asset allocation
were no longer relevant.
The S&P 500 and its index funds have had a wondrous four years, but here we are
five-and-a-half months into 1999, and what a difference we're seeing: The Dow
Jones Industrial Average is up more than twice as much as the S&P 500 so far
this year.
The S&P 500 Index is heavily influenced by companies like America Online, Cisco
Systems, Intel, IBM, Lucent, MCI, and Microsoft. The Dow also includes IBM, but
its impetus is coming from companies such as J.P. Morgan, Alcoa, Caterpillar,
Disney, General Motors, and Union Carbide. The upshot of this is that you can
afford to take the long view. Value investing or asset allocation are just
different from a growth philosophy. My view, throughout the last 27 years, is
that these methods go through cycles of in-favor and out-of-favor. But they do
cycle. And just about the time you begin to read that one of them is no longer
viable, you can bet the market will change. A good discipline practiced well
will give you a very good chance of prospering in the long run.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
The S&P 500 Index is an unmanaged index representing the weighted average
performance of a group of 500 widely held, publicly traded stocks. It is not
possible to invest in the S&P 500 Index.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30
actively traded blue chip stocks.
Past performance is no guarantee of future results.
Investment Review
USAA GNMA TRUST
OBJECTIVE: High level of current income consistent with preservation of
principal.
TYPES OF INVESTMENTS: Invests primarily in securities backed by the full faith
and credit of the U.S. government, mostly GNMA pass-through certificates, which
represent ownership in a pool of mortgage loans or a single mortgage loan.
- --------------------------------------------------------------------------------
5/31/99 5/31/98
================================================================================
Net Assets $500.5 Million $377.5 Million
Net Asset Value Per Share $10.00 $10.32
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AND 30-DAY SEC YIELD* AS OF 5/31/99
================================================================================
1 Year 5 Years Since Inception on 2/1/91 30-Day SEC Yield
3.15% 7.39% 7.38% 6.28%
- --------------------------------------------------------------------------------
* Calculated as prescribed by the Securities and Exchange Commission.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment has
been made for taxes payable by shareholders on their reinvested income dividends
and capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return and
principal value of an investment will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
CUMULATIVE PERFORMANCE COMPARISON
- ---------------------------------
A chart in the form of a line graph appears here, illustrating the comparison of
a $10,000 hypothetical investment in the USAA GNMA Trust, the Lehman Brothers
Inc. GNMA 30-Year Index, and the Lipper GNMA Funds Average for the period of
2/01/91 through 5/31/99. The data points from the graph are as follows:
USAA GNMA Lehman Lipper
Trust Index Average
------------- ------- -------
02/01/91 $10,000 $10,000 $10,000
05/31/91 10,207 10,336 10,280
11/30/91 10,932 11,178 11,018
05/31/92 11,382 11,659 11,478
11/30/92 11,838 12,139 11,912
05/31/93 12,594 12,773 12,531
11/30/93 12,731 12,974 12,766
05/31/94 12,677 12,726 12,463
11/30/94 12,778 12,758 12,425
05/31/95 14,013 14,205 13,758
11/30/95 14,818 14,917 14,423
05/31/96 14,524 14,972 14,360
11/30/96 15,575 16,040 15,328
05/31/97 15,865 16,409 15,573
11/30/97 16,759 17,328 16,438
05/31/98 17,554 17,995 17,070
11/30/98 18,296 18,622 17,620
05/31/99 18,105 18,876 17,715
Data since inception on 2/01/91 through 5/31/99
The graph illustrates how a $10,000 hypothetical investment in the USAA GNMA
Trust closely tracks the broad-based unmanaged index of the Lehman Brothers Inc.
GNMA 30-Year Index and an unmanaged index of funds similar to the Trust as
represented by the Lipper GNMA Funds Average.
Message from the Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER: KENNETH E. WILLMANN, CFA, APPEARS HERE]
INTEREST RATE MARKET
Interest rates on May 31, 1999, were a bit higher than a year earlier. But that
simple statement doesn't begin to describe the events of the last twelve months.
The graph below shows what happened.
GNMA PASS-THROUGH AND U.S. TREASURY NOTE YIELDS
- -----------------------------------------------
A graph is shown comparing the GNMA 6.5% 30-Year Pass-through Certificate to the
10-Year U.S. Treasury Note for the period 05/31/98 to 05/31/99. The vertical
axis shows the yield and the horizontal axis shows the time period. The data
points from the graph are as follows:
GNMA 6.5% 30 Year 10-Year
Pass-through Certificate U.S. Treasury Note
------------------------ ------------------
05/31/98 6.63% 5.55%
08/31/98 6.42% 4.98%
11/30/98 6.38% 4.71%
02/28/99 6.66% 5.29%
05/31/99 6.95% 5.62%
Please note that the top line is the yield of the 6.5% 30-year GNMA pass-through
certificate. The bottom line in the graph represents the yield of the 10-year
U.S. Treasury note, which is the industry standard against which most mortgage
securities are measured.
Against a backdrop of economic depression in most of Asia, Russia collapsed
economically in early summer of 1998. Latin America, particularly Brazil, began
to show signs of weakness. Investors worldwide became fearful of spreading
economic collapse and purchased U.S. Treasury bonds as the ultimate in safety
and liquidity. This forced prices up and yields down. The U.S. stock market was
also affected, and on August 31, 1998, the Dow Jones Industrial Average(1) fell
over 500 points. At the end of September, Russia defaulted on its debt, which
led to the failure of several hedge funds. These are private investment funds
that invest in exotic securities with high degrees of leverage. This led to
worries about the health of U.S. bank and brokerage houses. On October 5, 1998,
the 10-year Treasury note reached a yield of 4.16%, a level that had not been
seen in decades.
Much of the world's economy began to stabilize in the autumn and winter of 1998.
While recovery is very hard to find, it appears that the weakest economies are
no longer in free fall. Stock markets around the world began to recover. The
worldwide panic was over.
The U.S. economy and the economy of most of Western Europe never faltered. In
fact, the continued robustness of the U.S. economy is beginning to worry many
people. There are signs of a resurgence in inflation. Will the expansion end in
sudden collapse since much of the strength is being financed by extremely high
and growing consumer debt? These concerns are apparent in the course of interest
rates in the last seven months. They have risen substantially, just what would
be expected in these circumstances.
While the yield on the Treasury note was very volatile in this period, the yield
on the mortgage security was significantly less so. Remember that bond prices
move in opposite directions to yields, so prices on the two securities showed
similar relative volatility. Most mortgage securities receive principal and
interest monthly, while the Treasury securities receive interest semiannually
and principal at maturity. The smaller, more-frequent payments of mortgages
leads to lower volatility. While GNMA securities offer the same ultimate credit
quality as Treasury securities, the fact that mortgages can usually be prepaid
at any time leads to uncertainty in the timing and size of monthly cash flows.
This uncertainty is referred to as prepayment risk and leads to both higher
yields and lower volatility.
(1) The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30
actively trade blue chip stocks.
THE GNMA TRUST PORTFOLIO
The prime differentiator of mortgage securities is structure. Prepayment risk
inherent in different types of mortgages is perhaps the major structural
difference. GNMA construction loans and project loans are commercial mortgages
which typically cannot be prepaid for a period of ten years from issuance.
Fixed-rate single-family home mortgages can be prepaid at any time. This has led
me to spread prepayment risk as seen in the graph on the opposite page.
TYPES OF MORTGAGES
- ------------------
A pie chart is shown here depicting the Types of Mortgages as of May 31, 1999
of the USAA GNMA Trust to be:
Contruction Loans - 44.3%*; Fixed Rate Single Family - 41.1%*; and Project Loans
- - 14.1%*.
* Percentages are of the Net Assets in the Portfolio and may or may not equal
100%.
Another way to reduce prepayment risk is to own lower-interest-rate mortgages.
This sounds like a way to lower income, but remember that monthly principal
payments are received at face value. If you purchase a pass-through security
below face value, you realize a gain with each paydown of principal. Monthly
paydowns, and even prepayments, can actually enhance the Fund's return. Here is
the breakdown by coupon for fixed-rate home mortgage securities on May 31, 1999.
FIXED-RATE SF MORTGAGE POOL COMPOSITION BY COUPON RATE
- ------------------------------------------------------
A bar graph is shown here illustrating the Fixed-Rate SF Mortgage Pool
Composition by Coupon Rate as of 05/31/99. The vertical axis shows the coupon
rate, and the horizontal axis shows the category percentage.
The values are:
Coupon Rate 5.5 6.0 6.5 6.75 7.0 7.5 8.0 8.5 9.0
Category % 14.7 25.4 26.1 3.3 16.1 5.6 6.3 1.4 1.3
The graph also shows the average coupon rate to be 6.5%.
See page 11 for a complete listing of the Porfolio of Investments.
GNMA TRUST PERFORMANCE
While past performance is no guarantee of future results, from May 31, 1998, to
May 31, 1999, your Fund paid a dividend distribution yield(2) of 6.45% versus an
average dividend distribution yield of 5.83% for the Lipper GNMA Funds
Average.(3) During the twelve-month period, the Trust's share price fell
$.32--to $10.00. Over this period, your Fund provided a total return of 3.15%,
below the Lipper GNMA Funds Average total return of 3.62% for the same time
period.
Your Fund received an Overall Star Rating of 4 stars in the taxable bond fund
category from Morningstar Rating(TradeMark) for the period ended May 31,
1999.(4)
The strategy of investing for low prepayment risk has the side effect of
increasing the volatility of mortgage securities and funds that invest in them.
The GNMA Trust reacted as expected in the period of rising interest rates in the
second half of the fiscal year. While the income was above average, the price
decline was significant.
In the short run, bond prices can be volatile. In the long run, bonds all mature
at par. We believe a high level of income, over time, will overcome short-term
price volatility. This is the strategy we have generally followed for several
years and intend to follow in the future.
(2) 12-month dividend yield is computed by dividing income dividends paid
during the 12 months by the latest month-end net asset value adjusted for
capital gains distributions.
(3) Refer to the bottom of page 4 for the Lipper Average definition.
(4) Past performance is no guarantee of future results.
Morningstar proprietary ratings reflect historical risk-adjusted performance
as of May 31, 1999. The ratings are subject to change every month.
Morningstar ratings are calculated from the fund's 3-, 5-, and 10-year
average annual returns in excess of 90-day Treasury bill returns with
appropriate fee adjustments, and a risk factor that reflects fund
performance below 90-day T-bill returns. The Morningstar overall rating is
a weighted average of a fund's 3-, 5-, and 10-year ratings as applicable.
The USAA GNMA Fund received 4 stars for the 3- and 5-year periods,
respectively. The top 10% of the funds in a broad asset class receive 5
stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the
next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The fund
was rated among 1,536 and 1,085 funds in the taxable bond fund category
for the 3- and 5-year periods, respectively.
Distributions to Shareholders
The following per share information describes the federal tax treatment of
distributions made during the fiscal year ended May 31, 1999. These figures are
provided for information purposes only and should not be used for reporting to
federal or state revenue agencies. Distributions for the calendar year will be
reported to you on Form 1099-DIV in January 2000.
Ordinary income* $ .65
======
* Includes distribution of short-term capital gains, if any, which are taxable
as ordinary income.
Independent Auditors' Report
KPMG
The Shareholders and Board of Trustees
USAA INVESTMENT TRUST:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments of the USAA GNMA Trust, a series of the USAA
Investment Trust, as of May 31, 1999, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended, and financial highlights, presented in
note 9 to the financial statements, for each of the years in the five-year
period then ended. These financial statements and financial highlights are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1999, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
USAA GNMA Trust as of May 31, 1999, the results of its operations for the year
then ended, the changes in its net assets for each of the years in the two-year
period then ended, and the financial highlights for each of the years in the
five-year period then ended, in conformity with generally accepted accounting
principles.
KPMG LLP
San Antonio, Texas
July 2, 1999
USAA GNMA TRUST
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
May 31, 1999
Principal Market
Amount Security Value
- --------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY ISSUES (99.5%)
Government National Mortgage Assn. I, Single Family (28.3%)
$55,005 6.00%, 2/15/2029 $ 52,211
54,931 6.50%, 4/15/2029 53,658
6,834 6.75%, 5/15/2028 6,765
13,131 7.00%, 4/15/2027 (b) 13,174
10,082 8.00%, 1/15/2022 - 6/15/2023 (b) 10,506
2,683 8.50%, 6/15/2021 - 7/15/2022 2,849
2,447 9.00%, 7/15/2021 2,624
- --------------------------------------------------------------------------------
141,787
- --------------------------------------------------------------------------------
Government National Mortgage Assn. II, Single Family (12.8%)
32,825 5.50%, 12/20/2028 - 2/20/2029 30,347
19,867 7.00%, 5/20/2024 - 11/20/2025 (b) 19,865
11,247 7.50%, 10/20/2023 (b) 11,477
2,287 8.00%, 12/20/2022 2,372
- --------------------------------------------------------------------------------
64,061
- --------------------------------------------------------------------------------
Government National Mortgage Assn. I, Construction Loan (44.3%)
22,396 6.25%, 10/15/2001 (a) 21,090
5,880 6.35%, 3/15/2001 (a) 5,542
9,231 6.38%, 7/15/2001 (a) 8,719
7,598 6.40%, 6/15/2000 - 10/15/2000 (a) 7,262
30,422 6.50%, 3/15/2001 - 5/15/2001 (a) 28,932
49,300 6.63%, 4/15/2002 (a) 47,243
9,513 6.70%, 9/15/2000 (a) 9,223
8,570 6.80%, 5/15/2000 (a) 8,452
3,575 6.85%, 4/15/2000 (a) 3,526
11,838 6.88%, 7/15/2000 (a) 11,782
16,635 7.00%, 8/15/2000 (a) 16,692
15,127 7.03%, 8/15/2000 (a) 15,205
7,028 7.05%, 4/15/2000 (a) 6,889
11,499 7.10%, 10/15/2000 (a) 11,625
10,501 7.25%, 6/15/2000 (a) 10,716
8,717 7.32%, 11/15/1999 (a) 8,939
- --------------------------------------------------------------------------------
221,837
- --------------------------------------------------------------------------------
Government National Mortgage Assn. I, Project Loan (14.1%)
4,184 6.30%, 11/15/2033 4,018
11,184 6.35%, 12/15/2031 (b) 10,774
12,213 6.70%, 4/15/2039 (b) 12,081
7,182 7.00%, 2/15/2039 7,218
24,406 7.33%, 10/15/2030 (b) 25,029
10,894 7.50%, 12/15/2030 (b) 11,319
- --------------------------------------------------------------------------------
70,439
- --------------------------------------------------------------------------------
Total U.S. government & agency issues (cost: $503,077) 498,124
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (18.9%)
94,642 Bankers Trust Securities Corp., 4.78%, acquired on
05/28/99 and due 06/01/99 at $94,692 (collateralized
by a $18,307 U.S. Treasury Note, 8.875%, due 2/15/19;
market value of $24,389 and a $50,000 U.S. Treasury Note,
13.875%, due 05/15/11; market value of $72,409)
(cost: $94,642) (b) 94,642
- --------------------------------------------------------------------------------
Total investments (cost: $597,719) $592,766
================================================================================
USAA GNMA TRUST
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 1999
GENERAL NOTES
Market values of securities are determined by procedures and practices discussed
in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
SPECIFIC NOTES
(a) At May 31, 1999, the cost of securities purchased on a delayed delivery
basis was $99.6 million. These securities are GNMA construction loans which are
drawn against monthly during the construction period. Once the construction is
completed, the security converts to a project loan.
(b) At May 31, 1999, these securities were segregated to cover delayed delivery
purchases.
See accompanying notes to financial statements.
<TABLE>
USAA GNMA TRUST
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 1999
<S> <C>
ASSETS
Investments in securities, at market value (identified cost of $503,077) $498,124
Repurchase agreements 94,642
Cash 346
Receivables:
Capital shares sold 267
Interest 2,606
Securities sold 4,927
--------
Total assets 600,912
--------
LIABILITIES
Securities purchased 99,573
Capital shares redeemed 147
USAA Investment Management Company 53
USAA Transfer Agency Company 44
Accounts payable and accrued expenses 61
Dividends on capital shares 570
--------
Total liabilities 100,448
--------
Net assets applicable to capital shares outstanding $500,464
========
REPRESENTED BY:
Paid-in capital $514,694
Accumulated net realized loss on investments (9,277)
Net unrealized depreciation of investments (4,953)
--------
Net assets applicable to capital shares outstanding $500,464
========
Capital shares outstanding, unlimited number of shares authorized,
no par value 50,028
========
Net asset value, redemption price, and offering price per share $ 10.00
========
See accompanying notes to financial statements.
</TABLE>
USAA GNMA TRUST
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 1999
Net investment income:
Interest income $ 29,085
--------
Expenses:
Management fees 555
Transfer agent's fees 493
Custodian's fees 106
Postage 43
Shareholder reporting fees 7
Trustees' fees 4
Registration fees 115
Professional fees 31
Other 15
--------
Total expenses 1,369
--------
Net investment income 27,716
--------
Net realized and unrealized gain (loss) on investments:
Net realized gain 2,274
Change in net unrealized appreciation/depreciation (18,135)
--------
Net realized and unrealized loss (15,861)
--------
Increase in net assets resulting from operations $ 11,855
========
See accompanying notes to financial statements.
USAA GNMA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
1999 1998
---------------------
From operations:
Net investment income $ 27,716 $ 22,165
Net realized gain on investments 2,274 2,227
Change in net unrealized appreciation/depreciation
of investments (18,135) 9,784
--------------------
Increase in net assets resulting from operations 11,855 34,176
--------------------
Distributions to shareholders from:
Net investment income (27,716) (22,165)
--------------------
From capital share transactions:
Proceeds from shares sold 212,281 105,972
Shares issued for dividends reinvested 20,534 15,706
Cost of shares redeemed (94,018) (64,959)
--------------------
Increase in net assets from capital share
transactions 138,797 56,719
--------------------
Net increase in net assets 122,936 68,730
Net assets:
Beginning of period 377,528 308,798
--------------------
End of period $500,464 $377,528
====================
Change in shares outstanding:
Shares sold 20,571 10,386
Shares issued for dividends reinvested 1,992 1,540
Shares redeemed (9,126) (6,369)
--------------------
Increase in shares outstanding 13,437 5,557
====================
See accompanying notes to financial statements.
USAA GNMA TRUST
NOTES TO FINANCIAL STATEMENTS
May 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA INVESTMENT TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended, is a diversified, open-end management investment company
organized as a Massachusetts business trust consisting of eleven separate funds.
The information presented in this annual report pertains only to the USAA GNMA
Trust (the Fund). The Fund's investment objective is to provide a high level of
current income consistent with preservation of principal. USAA Investment
Management Company (the Manager) seeks to achieve this objective by investing
the Fund's assets in securities backed by the full faith and credit of the U.S.
Government.
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. 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.
2. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value. Repurchase agreements are valued
at cost.
3. 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. Interest
income is recorded on the accrual basis. Discounts and premiums on securities
are amortized over the life of the respective securities.
D. Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the financial
statements.
(2) LINES OF CREDIT
The Fund participates with other USAA funds in three joint short-term revolving
loan agreements totaling $850 million, two with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($250 million committed and $500 million
uncommitted), and one with Bank of America ($100 million committed). The purpose
of the agreements is to meet temporary or emergency cash needs, including
redemption requests that might otherwise require the untimely disposition of
securities. Subject to availability under both agreements with CAPCO, the Fund
may borrow from CAPCO an amount up to 5% of the Fund's total assets at CAPCO's
borrowing rate with no markup. Subject to availability under its agreement with
Bank of America, the Fund may borrow from Bank of America, at Bank of America's
borrowing rate plus a markup, an amount which, when added to outstanding
borrowings under the CAPCO agreements, does not exceed 25% of the Fund's total
assets. The Fund had no borrowings under either of these agreements during the
year ended May 31, 1999.
(3) DISTRIBUTIONS
Distributions of 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. Net investment income is accrued daily as
dividends and distributed to shareholders monthly. At May 31, 1999, the Fund had
capital loss carryovers for federal income tax purposes of approximately $9.3
million which, if not offset by subsequent capital gains, will expire between
2003 - 2008. 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/maturities of securities, excluding
short-term securities, for the period ended May 31, 1999, were $444.7 million
and $366.6 million, respectively.
Gross unrealized appreciation and depreciation of investments at May 31, 1999,
was $4.0 million and $9.0 million, respectively.
(5) TRANSACTIONS WITH MANAGER
A. Management fees - USAA Investment Management Company carries out the Fund's
investment policies and manages the Fund's portfolio. The Fund's management fees
are computed at .125% 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 $28.50 per shareholder account plus
out-of-pocket expenses.
C. Underwriting services - The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing best efforts basis. The
Manager receives no commissions or fees for this service.
(6) 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.
(7) REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with commercial banks or
recognized security dealers. These agreements are secured by obligations backed
by the full faith and credit of the U.S. Government. Obligations pledged as
collateral are required to maintain a value equal to or in excess of the resale
price of the repurchase agreement and are held by the Fund's custodian until
maturity of the repurchase agreement. The Fund's Manager monitors the
creditworthiness of sellers with which the Fund may enter into repurchase
agreements.
(8) YEAR 2000 (UNAUDITED)
Like other mutual funds, the Fund could be adversely affected if the computer
systems used by the Manager and the Fund's other service providers are not able
to perform their intended functions effectively after 1999 because of the
inability of computer software to distinguish the year 2000 from the year 1900.
The Manager is taking steps to address this potential year 2000 problem with
respect to the computer systems that they use and to obtain satisfactory
assurances that the comparable steps are being taken by the Fund's other major
service providers. At this time, however, there can be no assurance that these
steps will be sufficient to avoid any adverse impact to the Fund from this
problem.
(9) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
Year Ended May 31,
----------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------
Net asset value at
beginning of period $ 10.32 $ 9.95 $ 9.76 $ 10.09 $ 9.82
Net investment income .65 .66 .69 .70 .72
Net realized and
unrealized gain (loss) (.32) .37 .19 (.33) .27
Distributions from net
investment income (.65) (.66) (.69) (.70) (.72)
-----------------------------------------------------
Net asset value at
end of period $ 10.00 $ 10.32 $ 9.95 $ 9.76 $ 10.09
====================================================
Total return (%)* 3.15 10.65 9.23 3.65 10.54
Net assets at
end of period (000) $500,464 $377,528 $308,798 $301,589 $265,571
Ratio of expenses to
average net assets (%) .31 .30 .30 .32 .32
Ratio of net investment
income to average net
assets (%) 6.24 6.48 6.93 6.90 7.34
Portfolio turnover (%) 64.93 60.85 77.82 127.77 93.78
* Assumes reinvestment of all dividend income distributions during the period.
TRUSTEES
Robert G. Davis, Chairman of the Board
Michael J.C. Roth, President and Vice Chairman of the Board
John W. Saunders, Jr., Vice President
Barbara B. Dreeben
Howard L. Freeman, Jr.
Robert L. Mason
Richard A. Zucker
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
KPMG LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
Telephone Assistance
Call toll free - Central Time
Monday - Friday 7:30 a.m. to 8:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
For Additional Information on Mutual Funds
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges or redemptions
1-800-531-8448, (in San Antonio) 456-7202
Recorded Mutual Fund Price Quotes
24-Hour Service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
Mutual Fund USAA TouchLine(Registered Trademark)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
