Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Manager 5
Financial Information:
Portfolio of Investments 9
Notes to Portfolio of Investments 10
Statement of Assets and Liabilities 11
Statement of Operations 12
Statements of Changes in Net Assets 13
Notes to Financial Statements 14
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA 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(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 the 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 GNMA TRUST
OBJECTIVE: Provide investors with a high level of current income consistent with
preservation of principal by investing in securities backed by the full faith
and credit of the U.S. Government.
TYPES OF INVESTMENTS: At least 65% of the Fund's total assets are invested in
Government National Mortgage Association (GNMA) pass-through certificates. The
remaining assets of the Fund are invested in other obligations backed by the
full faith and credit of the U.S. Government.
- --------------------------------------------------------------------------------
11/30/98 5/31/98
- --------------------------------------------------------------------------------
Net Assets $448.0 Million $377.5 Million
Net Asset Value Per Share $10.42 $10.32
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AND 30-DAY SEC YIELD* AS OF 11/30/98
- --------------------------------------------------------------------------------
5/31/98 Since Inception 30-Day
11/30/98(+) 1 Year 5 Years on 2/1/91 SEC Yield
4.22% 9.17% 7.52% 8.02% 6.34%
- --------------------------------------------------------------------------------
* Calculated as prescribed by the Securities and Exchange Commission.
+ 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 GNMA Trust, the Lehman Brothers
Inc. GNMA 30-Year Index, and the Lipper GNMA Funds Average for the period of
2/01/91 through 11/30/98. 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 10,335 10,282
11/30/91 10,932 11,173 11,022
05/31/92 11,382 11,651 11,483
11/30/92 11,838 12,128 11,917
05/31/93 12,594 12,765 12,539
11/30/93 12,731 12,969 12,775
05/31/94 12,677 12,721 12,467
11/30/94 12,778 12,750 12,427
05/31/95 14,013 14,193 13,747
11/30/95 14,818 14,898 14,407
05/31/96 14,524 14,953 14,344
11/30/96 15,575 16,007 15,310
05/31/97 15,865 16,375 15,555
11/30/97 16,759 17,292 16,417
05/31/98 17,554 17,905 17,048
11/30/98 18,296 18,378 17,596
Data since inception on 2/01/91 through 11/30/98
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 the Portfolio Manager, Kenneth E. Willmann, CFA, appears here.]
GNMA TRUST PERFORMANCE
While past performance is no guarantee of future results, from May 31, 1998, to
November 30, 1998, your Fund paid an annualized dividend distribution yield(1)
of 6.34% versus the Lipper GNMA Funds Average(2) of 5.90% for the 51 funds in
the category. During the six-month period, the Trust's share price rose $.10 to
$10.42. Over this period, your Fund provided a total return of 4.22%, well above
the Lipper GNMA Funds Average total return of 3.24% for the same time period.
The Fund received a 5-star overall rating out of 1,496 funds in the taxable bond
fund category from Morningstar as of November 30, 1998. It also received 4 and 5
stars among 1,496 and 964 taxable bond funds for the 3- and 5-year periods,
respectively.(3)
(1) Dividend yield is computed by dividing income dividends paid during the
previous 6 months by the latest month-end net asset value adjusted for capital
gain distributions and annualizing the result.
(2) Refer to page 4 for the Lipper Average definition.
Past performance is no guarantee of future results.
(3) Morningstar proprietary ratings reflect historical risk-adjusted performance
through November 30, 1998. The ratings are subject to change monthly. The
ratings are calculated from the Fund's 3-, 5-, and 10-year average annual total
returns, as applicable, in excess of 90-day Treasury bill returns with
appropriate fee adjustments, and a risk factor that reflects fund performance
below 90-day Treasury bill returns. There is a 3-year minimum performance
requirement before a fund is rated. Overall rating is a weighted average of a
fund's 3-, 5-, and 10-year ratings, as applicable. The top ten percent of the
funds in a rating category receive five stars and the next 22.5% receive four
stars.
INTEREST RATE MARKET
Interest rates were generally lower on November 30, 1998, than they were at the
beginning of the six-month period. The absolute low points occurred in the first
week of October, with rates rising somewhat in October and November.
This pattern may be seen in the graph below.
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 5/31/98 to 11/30/98. 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 6.41% 4.98%
11/30/98 6.36% 4.71%
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.
Besides the fact that both lines show a similar pattern, the most striking thing
is how much more volatile the Treasury Note is than the mortgage securities. On
October 5, 1998, the 10-year Treasury Note yield declined to 4.16%. Yes, 4.16%
is correct! Treasury Notes hit yield levels not seen in over 30 years!
CHANGING RELATIONSHIPS
Mortgage securities followed the trend but in a more gentle manner. What causes
the relationship to change? Why does the yield of Treasury Notes drop and rise
so much more than mortgages? Let's begin by discussing what is going on with
U.S. Treasury Notes.
While the U.S. economy is currently in good shape, many of the world's economies
are not. You have probably heard of the economic collapses in Asia and Russia.
It appears that Latin America may be poised to follow. These collapses have led
to business failures, declining employment and wages, credit crunches, and
deflation of prices. In short, many of the world's economies look a lot like the
early 1930s in the U.S.
The economies of almost all countries in the world are increasingly intertwined
by technology and the expansion of world trade. Many people believe that it's
only a matter of time, and perhaps not much time, before the U.S. and Western
Europe are dragged into this scenario. The Federal Reserve Board in the U.S.,
which has been the leader in the fight against inflation for years, has recently
turned its attention to worries about recession. On September 29, 1998, it
lowered short-term interest rates .25% to 5.25%, the first change in over a
year. It lowered rates .25% again on October 15, 1998, and then repeated that
action on November 17, 1998. The lowering of interest rates is thought to
stimulate the economy. Many investors around the world, particularly those
outside of this country, view U.S. Treasury securities as a very safe
investment. Therefore, demand was very high for Treasury bonds as a haven
against future economic turmoil and deflation brought on by severe recession. As
a result, prices of these bonds soared, which in turn, caused yields to fall
very rapidly. After the initial panic buying, some semblance of stability seeped
into the market place.
While GNMA securities offer the same ultimate credit quality as Treasury
securities, the fact that mortgages can usually be prepaid any time leads to
uncertainty in the timing and size of monthly cash flows. This uncertainty is
referred to as "prepayment risk" and leads both to higher yields and lower
volatility.
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. This has led me to spread prepayment risk as seen in the graph
below.
TYPES OF MORTGAGES
- ------------------
A pie chart is shown here depicting the Types of Mortgages as of November 30,
1998 of the USAA GNMA Trust to be:
Contruction Loans - 51.0%*; Fixed Rate SF - 45.8%*; and Project Loans - 14.6%*.
* 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.
While this sounds like a way to lower income, 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. The
breakdown by coupon for fixed-rate home mortgage securities on November 30,
1998, is seen below.
FIXED-RATE SF MORTGAGE POOL COMPOSITION BY COUPON RATE
- ------------------------------------------------------
A graph is shown here illustrating the Fixed-Rate SF Mortgage Pool Composition
by Coupon Rate as of 11/30/98. 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 % 3.0 24.3 32.3 3.5 18.9 6.9 7.7 1.8 1.6
The graph also shows the average coupon rate to be 6.7%.
See page 9 for a complete listing of the Portfolio of Investments.
USAA GNMA TRUST
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
November 30, 1998
(Unaudited)
Principal Market
Amount Security Value
- --------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY ISSUES (111.4%)
Government National Mortgage Assn. I, Single Family (9.4%)
$ 6,968 6.75%, 5/15/2028 $ 7,067
15,013 7.00%, 4/15/2027 15,387
12,120 8.00%, 1/15/2022 - 6/15/2023 12,645
3,447 8.50%, 6/15/2021 - 7/15/2022 3,687
3,052 9.00%, 7/15/2021 3,274
- --------------------------------------------------------------------------------
42,060
- --------------------------------------------------------------------------------
Government National Mortgage Assn. II, Single Family (36.4%)
6,400 5.50%, 12/20/2028 (a) 6,170
50,593 6.00%, 9/20/2028 (b) 49,958
65,789 6.50%, 8/20/2025 - 10/20/2028 (b) 66,215
23,018 7.00%, 5/20/2024 - 11/20/2025 (b) 23,459
13,819 7.50%, 10/20/2023 (b) 14,222
3,021 8.00%, 12/20/2022 3,139
- --------------------------------------------------------------------------------
163,163
- --------------------------------------------------------------------------------
Government National Mortgage Assn. I, Construction Loan (51.0%)
22,396 6.25%, 10/15/2001 (a) 22,200
7,598 6.40%, 6/15/2000 - 10/15/2000 (a) 7,524
21,915 6.50%, 6/15/2000 (a) 21,956
49,300 6.63%, 4/15/2002 (a) 49,847
21,784 6.70%, 2/15/2000 - 9/15/2000 (a) 22,006
8,570 6.80%, 5/15/2000 (a) 8,768
3,575 6.85%, 4/15/2000 (a) 3,670
11,838 6.88%, 7/15/2000 (a) 12,180
24,124 7.00%, 8/15/1999 - 8/15/2000 (a) 24,987
15,127 7.03%, 8/15/2000 (a) 15,720
7,028 7.05%, 4/15/2000 (a) 7,316
11,499 7.10%, 10/15/2000 (a) 12,013
10,501 7.25%, 6/15/2000 (a) 11,082
8,717 7.32%, 11/15/1999 (a) 9,229
- --------------------------------------------------------------------------------
228,498
- --------------------------------------------------------------------------------
Government National Mortgage Assn. I, Project Loan (14.6%)
4,200 6.30%, 11/15/2033 4,179
11,225 6.35%, 12/15/2031 11,077
7,847 6.63%, 10/15/2033 7,930
5,069 6.75%, 11/15/2028 5,153
24,498 7.33%, 10/15/2030 (b) 25,384
10,933 7.50%, 12/15/2030 11,472
- --------------------------------------------------------------------------------
65,195
- --------------------------------------------------------------------------------
Total U.S. government & agency issues (cost: $486,999) 498,916
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (17.1%)
76,892 First Chicago Corp., 5.20%, acquired 11/30/98 and due
12/01/98 at $76,903 (collateralized by a $50,000 U.S.
Treasury Note, 7.875%, due 11/15/04; market value of
$58,117 and a $19,415 U.S. Treasury Note, 6.375%, due
3/31/01; market value of $20,350) (cost: $76,892) 76,892
- --------------------------------------------------------------------------------
Total investments (cost: $563,891) $575,808
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
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 November 30, 1998, the cost of securities purchased on a delayed delivery
basis was $137.7 million. The majority of these 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 November 30, 1998, these securities were segregated to cover delayed
delivery purchases.
See accompanying notes to financial statements.
USAA GNMA TRUST
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
November 30, 1998
(Unaudited)
ASSETS
Investments in securities, at market value (identified
cost of $486,999) $ 498,916
Repurchase agreements 76,892
Cash 374
Receivables:
Capital shares sold 160
Interest 2,759
Securities sold 7,673
---------
Total assets 586,774
---------
LIABILITIES
Securities purchased 137,712
Capital shares redeemed 335
USAA Investment Management Company 45
USAA Transfer Agency Company 39
Accounts payable and accrued expenses 29
Dividends on capital shares 606
---------
Total liabilities 138,766
---------
Net assets applicable to capital shares outstanding $ 448,008
=========
REPRESENTED BY:
Paid-in capital $ 442,438
Accumulated net realized loss on investments (6,347)
Net unrealized appreciation of investments 11,917
---------
Net assets applicable to capital shares outstanding $ 448,008
=========
Capital shares outstanding, unlimited number of shares
authorized, no par value 42,990
=========
Net asset value, redemption price, and offering price per share $ 10.42
=========
See accompanying notes to financial statements.
USAA GNMA TRUST
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended November 30, 1998
(Unaudited)
Net investment income:
Interest income $ 13,714
---------
Expenses:
Management fees 240
Transfer agent's fees 219
Custodian's fees 47
Postage 17
Shareholder reporting fees 8
Trustees' fees 2
Registration fees 65
Professional fees 13
Other 6
---------
Total expenses 617
---------
Net investment income 13,097
---------
Net realized and unrealized gain on investments:
Net realized gain 5,204
Change in net unrealized appreciation/depreciation (1,265)
---------
Net realized and unrealized gain 3,939
---------
Increase in net assets resulting from operations $ 17,036
=========
See accompanying notes to financial statements.
USAA GNMA TRUST
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 $ 13,097 $ 22,165
Net realized gain on investments 5,204 2,227
Change in net unrealized appreciation/depreciation
of investments (1,265) 9,784
------------------------
Increase in net assets resulting from operations 17,036 34,176
------------------------
Distributions to shareholders from:
Net investment income (13,097) (22,165)
------------------------
From capital share transactions:
Proceeds from shares sold 89,670 105,972
Shares issued for dividends reinvested 9,652 15,706
Cost of shares redeemed (32,781) (64,959)
------------------------
Increase in net assets from capital share
transactions 66,541 56,719
------------------------
Net increase in net assets 70,480 68,730
Net assets:
Beginning of period 377,528 308,798
------------------------
End of period $ 448,008 $ 377,528
========================
Change in shares outstanding:
Shares sold 8,631 10,386
Shares issued for dividends reinvested 926 1,540
Shares redeemed (3,158) (6,369)
------------------------
Increase in shares outstanding 6,399 5,557
========================
See accompanying notes to financial statements.
USAA GNMA TRUST
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
GNMA Trust (the Fund). The Fund's investment objective is to provide a high
level of current income consistent with preservation of principal by investing
in securities backed by the full faith and credit of the U.S. Government. USAA
Investment Management Company (the Manager) seeks to achieve this objective by
investing at least 65% of the Fund's total assets in Government National
Mortgage Association (GNMA) pass through certificates.
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 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 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 November 30, 1998, the
Fund had capital loss carryovers for federal income tax purposes of
approximately $6.3 million which, if not offset by subsequent capital gains,
will expire between 2001 - 2005. 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 six-month period ended November 30, 1998 were
$208.5 million and $149.2 million, respectively.
Gross unrealized appreciation and depreciation of investments at November 30,
1998 was $12.4 million and $494,000, 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 $26 per shareholder account plus
out-of-pocket expenses. Effective January 1, 1999, the annual charge will be
$28.50.
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
USAA Investment Management Company is indirectly wholly owned by United Services
Automobile Association (the Association), a large, diversified financial
services institution. At November 30, 1998, the Association and its affiliates
owned 432,700 shares (1.0%) of the Fund.
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
(7) 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) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
Six-month Eight-month
Period Ended Period Ended
November 30, Year Ended May 31, May 31,
--------------------------------------------------------------
1998 1998 1997 1996 1995 1994
--------------------------------------------------------------
Net asset value
at beginning
of period $ 10.32 $ 9.95 $ 9.76 $ 10.09 $ 9.82 $ 10.37
Net investment
income .33 .66 .69 .70 .72 .49
Net realized and
unrealized
gain (loss) .10 .37 .19 (.33) .27 (.55)
Distributions from
net investment
income (.33) (.66) (.69) (.70) (.72) (.49)
--------------------------------------------------------------
Net asset value at
end of period $ 10.42 $ 10.32 $ 9.95 $ 9.76 $ 10.09 $ 9.82
==============================================================
Total return (%) * 4.22 10.65 9.23 3.65 10.54 (.66)
Net assets at end
of period (000) $448,008 $377,528 $308,798 $301,589 $265,571 $261,251
Ratio of expenses
to average
net assets (%) .30(a) .30 .30 .32 .32 .31(a)
Ratio of net
investment
income to
average net
assets (%) 6.36(a) 6.48 6.93 6.90 7.34 7.20(a)
Portfolio
turnover (%) 31.32 60.85 77.82 127.77 93.78 90.05
* Assumes reinvestment of all dividend income 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
