Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Managers 5
Financial Information:
Distributions to Shareholders 8
Independent Auditors' Report 9
Portfolio of Investments 10
Notes to Portfolio of Investments 15
Statement of Assets and Liabilities 16
Statement of Operations 17
Statements of Changes in Net Assets 18
Notes to Financial Statements 19
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA Balanced
Strategy Fund, managed by USAA Investment Management Company (IMCO). It may be
used as sales literature only when preceded or accompanied by a current
prospectus which gives further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)1999, USAA. All rights reserved.
USAA Family of Funds Summary
Fund Minimum
Type/Name Volatility Investment
--------- ---------- ----------
CAPITAL APPRECIATION
===============================================================================
Aggressive Growth Very high $3,000
Emerging Markets Very high $3,000
First Start Growth Moderate to high $3,000
Gold Very high $3,000
Growth Moderate to high $3,000
Growth & Income Moderate $3,000
International Moderate to high $3,000
S&P 500 (Registered
Trademark) Index Moderate $3,000
Science & Technology Very high $3,000
World Growth Moderate to high $3,000
ASSET ALLOCATION
===============================================================================
Balanced Strategy Moderate $3,000
Cornerstone Strategy Moderate $3,000
Growth and Tax
Strategy Moderate $3,000
Growth Strategy Moderate to high $3,000
Income Strategy Low to moderate $3,000
INCOME - TAXABLE
===============================================================================
GNMA Low to moderate $3,000
Income Moderate $3,000
Income Stock Moderate $3,000
Short-Term Bond Low $3,000
INCOME - TAX EXEMPT
===============================================================================
Long-Term Moderate $3,000
Intermediate-Term Low to moderate $3,000
Short-Term Low $3,000
State Bond Income Moderate $3,000
MONEY MARKET
===============================================================================
Money Market Very low $3,000
Tax Exempt
Money Market Very low $3,000
Treasury Money
Market Trust Very low $3,000
State Money Market Very low $3,000
Foreign investing is subject to additional risks, such as currency fluctuations,
market illiquidity, and political instability.
S&P 500 (Registered Trademark) is a trademark of The McGraw-Hill Companies, Inc.
and has been licensed for use. The Product is not sponsored, sold or promoted by
Standard & Poor's, and Standard & Poor's makes no representation regarding the
advisability of investing in the Product.
Some income may be subject to state or local taxes or the federal alternative
minimum tax.
An investment in a money market fund is not insured or guaranteed by the FDIC or
any other government agency. Although the fund seeks to preserve the value of
your investment at $1 per share, it is possible to lose money by investing in
the fund.
The Science & Technology Fund may be more volatile than a fund that diversifies
across many industries.
The InveStart (Registered Trademark) program is available for investors without
the $3,000 initial investment required to open an IMCO mutual fund account. A
mutual fund account can be opened with no initial investment if you elect to
have monthly automatic investments of at least $50 from a bank account.
InveStart is not available on tax-exempt funds or the S&P 500 Index Fund. The
minimum initial investment for IRAs is $250, except for the $2,000 minimum
required for the S&P 500 Index Fund. IRAs are not available for tax-exempt
funds. The Growth and Tax Strategy Fund is not available as an investment for
your IRA because the majority of its income is tax exempt.
California, Florida, New York, Texas, and Virginia funds available to residents
only.
Non-deposit investment products are not insured by the FDIC, are not deposits or
other obligations of, or guaranteed by, USAA Federal Savings Bank, are subject
to investment risks, and may lose value.
For more complete information about the mutual funds managed and distributed by
USAA Investment Management Company, including charges and operating expenses,
please call 1-800-531-8181 for a prospectus. Read it carefully before you
invest.
Message from the President
[PHOTOGRAPH OF PRESIDENT AND VICE CHAIRMAN OF THE BOARD, MICHAEL J.C. ROTH, CFA,
APPEARS HERE]
When I was a second lieutenant in pilot training at Williams AFB, I read the
book THIS KIND OF WAR by T. R. Fehrenbach. More than 30 years later I met Ted
Fehrenbach here in San Antonio where he resides and had a chance to tell him
that I think he is a brilliant man. I recall reading that LBJ declared THIS KIND
OF WAR required reading for people in his administration. Ted writes a regular
Sunday column for the San Antonio Express News, and he continues to delight me.
Last year he wrote a piece around Columbus Day, which included this observation:
"Spain was clearly disappointed with her admiral. While he had spent much
money charting islands with mosquitoes and a miserable climate (from the
Euro standpoint)...the Portuguese had reached the real India and returned
with fabulous profits. Of course, Columbus had opened up to Spain a vast
empire, filled with treasures of every kind, but then few investors take
the long view."
As I read this passage, I thought that Ted's understanding of markets is as
sharp as his grasp of history. At the beginning of 1999, there indeed seemed to
be few investors with the long view. There were many people declaring the
absolute superiority of the S&P 500 and growth stocks, especially tech stocks,
while proclaiming that strategies such as value investing and asset allocation
were no longer relevant.
The S&P 500 and its index funds have had a wondrous four years, but here we are
five-and-a-half months into 1999, and what a difference we're seeing: The Dow
Jones Industrial Average is up more than twice as much as the S&P 500 so far
this year.
The S&P 500 Index is heavily influenced by companies like America Online, Cisco
Systems, Intel, IBM, Lucent, MCI, and Microsoft. The Dow also includes IBM, but
its impetus is coming from companies such as J.P. Morgan, Alcoa, Caterpillar,
Disney, General Motors, and Union Carbide. The upshot of this is that you can
afford to take the long view. Value investing or asset allocation are just
different from a growth philosophy. My view, throughout the last 27 years, is
that these methods go through cycles of in-favor and out-of-favor. But they do
cycle. And just about the time you begin to read that one of them is no longer
viable, you can bet the market will change. A good discipline practiced well
will give you a very good chance of prospering in the long run.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
The S&P 500 Index is an unmanaged index representing the weighted average
performance of a group of 500 widely held, publicly traded stocks. It is not
possible to invest in the S&P 500 Index.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30
actively traded blue chip stocks.
Past performance is no guarantee of future results.
Investment Review
USAA BALANCED STRATEGY FUND
OBJECTIVE: High total return, with reduced risk over time, through an asset
allocation strategy that seeks a combination of long-term growth of capital and
current income.
- --------------------------------------------------------------------------------
5/31/99 5/31/98
- --------------------------------------------------------------------------------
Net Assets $95.8 Million $70.0 Million
Net Asset Value Per Share $14.02 $13.46
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/99
- --------------------------------------------------------------------------------
1 Year Since Inception on 9/1/95
7.63% 13.26%
- --------------------------------------------------------------------------------
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 Balanced Strategy Fund, the S&P
500 Index, the Lipper Balanced Funds Average, and the Lehman Brothers Aggregate
Bond Index for the period of 09/01/95 through 05/31/99. The data points from the
graph are as follows:
USAA Balanced S&P 500 Lipper Lehman
Strategy Fund Index Average Index
------------- ------- ------- ------
09/01/95 $10,000 $10,000 $10,000 $10,000
11/30/95 10,060 10,840 10,511 10,382
05/31/96 10,637 12,117 11,188 10,262
11/30/96 11,734 13,858 12,259 11,012
05/31/97 12,686 15,684 13,024 11,115
11/30/97 13,823 17,809 14,343 11,844
05/31/98 14,820 20,493 15,606 12,328
11/30/98 14,548 22,026 16,013 12,963
05/31/99 15,950 24,803 17,043 12,865
Data since inception on 09/01/95 through 05/31/99
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Balanced Strategy Fund to the S&P 500 Index, the Lipper Balanced Funds
Average, and the Lehman Brothers Aggregate Bond Index. 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 directly in
the S&P 500 Index. The Lipper Balanced Funds Average is the average of all
balanced funds, as reported by Lipper Analytical Services, Inc., an independent
organization that monitors the performance of mutual funds. The Lehman Brothers
Aggregate Bond Index is an unmanaged index made up of the government/corporate
index, the mortgage-backed securities index, and the asset-backed securities
index.
Message from the Managers
[PHOTOGRAPH OF PORTFOLIO MANAGERS APPEARS HERE: Pamela K. Bledsoe, CFA (Money
Market Instruments), Patrick O'Hare, (Allocation Manager, Stocks), and Paul H.
Lundmark, CFA (Bonds).]
FUND OVERVIEW
During the summer of 1998 a number of events lowered investors' confidence in
the financial markets. The Asian crisis spread to Russia causing it to default
on its debts. Seemingly overnight, investors fled to the safety of the most
liquid U.S. Treasury securities and sold stocks and all other bonds.
During this time, with the markets in turmoil, we continued to purchase bonds at
excellent values. After the market hit its lows for 1998, we began to increase
our exposure to equities. As of May 31, 1999, we had increased the equity
exposure to 67.2% compared to 60.3% at the beginning of the fiscal year. This
increased exposure to equities helped the Fund's performance when stocks
rebounded sharply during the latter part of 1998 and into 1999.
STOCKS
Concerns that the turmoil overseas would cause the United States to go into a
recession took a heavy toll on stocks during the summer of 1998. Since reaching
lows in August, stocks rebounded sharply to set new highs. Leading the recovery
were the sectors hardest hit in the sell-off--the financial and the technology
sectors.
On October 1, 1998, the portfolio manager of the equity portion of the Fund
changed. As a result, a number of stocks were sold and replaced. We reduced the
weightings in traditional value sectors such as basic materials, capital goods,
consumer cyclicals, and utilities. The weightings in faster-growing sectors,
such as consumer staples and technology, were increased. We also increased the
weighting in the financial sector as we felt that the summer sell-off in this
sector was overdone.
The Fund benefited from the increased exposure to technology and to the
financial sector but was hurt by its overweight position in the health care
sector. The yearly performance was also negatively impacted by the heavy
exposure to basic materials, capital goods, and consumer cyclicals during the
first part of the fiscal year.
BONDS
We manage the bond sector to make income the primary component of total return.
Since the beginning of the year, interest rates have risen dramatically.
Investors no longer fear a deflation scenario. Rather, the fear is now that the
continuing strong economy will eventually cause inflation to rise. The Federal
Reserve Board has now changed its bias towards increasing overnight rates.
Because of our income orientation, we have favored investments in
higher-yielding instruments, such as corporate bonds, mortgage-backed
securities, and asset-backed securities, rather than Treasury bonds. This
investment style hurt the Fund in late 1998, but has now resulted in the bond
sector outperforming Treasury bonds in 1999.
The Fund's best-performing bond holdings were the Collateral Mortgage
Obligations (CMOs). The CMOs in the Fund are defensive in nature and will
outperform most other debt securities in a rising-rate environment. The debt
securities of Real Estate Investment Trusts (REITs) also performed relatively
well. REITs have rebounded since the last quarter of 1998 as investors saw that
the negative market sentiment towards this asset class had become overdone. Our
small investment in Treasuries and Agencies did not perform well because of the
rise in interest rates. We continue to hold these securities for diversification
purposes.
MONEY MARKET INSTRUMENTS
Money market instruments are used in the Fund to provide liquidity for
withdrawals or to provide a temporary investment until stock or bond purchases
are made. U.S. government discount notes are the most common instruments used
for these purposes because of their high quality.
OUTLOOK
We believe that trying to predict future interest rates is a losing bet.
Instead, we try to find fixed income securities that represent good risk/reward
characteristics with the result of high performance throughout the long term.
However, with the Federal Reserve Board going to a tightening bias, we
anticipate that it will take back the interest rate cuts made late in 1998. With
this backdrop, we think that the Fund's corporate bonds, mortgage-backed
securities, and asset-backed securities may continue to perform well.
With the strength in the U.S. economy and overseas markets, equity investors
have rotated into cyclical stocks. While we maintain our exposure in certain
cyclical and value stocks, we are emphasizing large-capitalization names in the
technology and health care sectors, two traditional growth areas of the economy.
ASSET ALLOCATION
A pie chart is shown here depicting the Asset Allocation as of May 31, 1999 of
the USAA Balanced Strategy Fund to be:
Stocks - 67.2%*; Bonds - 30.8%*; and Money Market Instruments - 1.7%*.
* Percentages are of the Net Assets in the Portfolio and may or may not equal
100%.
- ----------------------------------------
TOP 10 EQUITY HOLDINGS
(% OF NET ASSETS)
- ----------------------------------------
Microsoft 3.3
Texas Instruments, Inc. 2.3
General Electric Co. 2.3
Cisco Systems, Inc. 2.1
Hewlett-Packard Co. 2.0
Pfizer, Inc. 1.9
American International Group, Inc. 1.9
Intel Corp. 1.9
Freddie Mac 1.8
MCI Worldcom, Inc. 1.7
- ----------------------------------------
See page 10 for a complete listing of the Portfolio of Investments.
Distributions to Shareholders
The following per share information describes the federal tax treatment of
distributions made during the fiscal year ended May 31, 1999. These figures are
provided for information purposes only and should not be used for reporting to
federal or state revenue agencies. Distributions for the calendar year will be
reported to you on Form 1099-DIV in January 2000.
Ordinary income * $ .30
Long-term capital gains .13
-------
Total $ .43
=======
40.5% of ordinary income distributions qualify for deduction by corporations.
* Includes distribution of short-term capital gains, if any, which are taxable
as ordinary income.
Independent Auditors' Report
KPMG
The Shareholders and Board of Trustees
USAA INVESTMENT TRUST:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments of the USAA Balanced Strategy Fund, a series of the
USAA Investment Trust, as of May 31, 1999, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the years in the two-year period then ended, and financial highlights,
presented in note 8 to the financial statements, for each of the years or
periods in the four-year period then ended. These financial statements and
financial highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1999, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
USAA Balanced Strategy Fund as of May 31, 1999, the results of its operations
for the year then ended, the changes in its net assets for each of the years in
the two-year period then ended, and the financial highlights for each of the
years or periods in the four-year period then ended, in conformity with
generally accepted accounting principles.
KPMG LLP
San Antonio, Texas
July 2, 1999
USAA BALANCED STRATEGY FUND
PORTFOLIO OF INVESTMENTS
May 31, 1999
Market
Number Value
of Shares Security (000)
- --------------------------------------------------------------------------------
STOCKS (67.2%)
Advertising/Marketing (0.7%)
9,400 Omnicom Group, Inc. $ 658
- --------------------------------------------------------------------------------
Aerospace/Defense (0.4%)
8,400 Boeing Co. 355
- --------------------------------------------------------------------------------
Automobiles (0.8%)
13,500 Ford Motor Co. 770
- --------------------------------------------------------------------------------
Auto Parts (0.7%)
14,600 Lear Corp.* 718
- --------------------------------------------------------------------------------
Banks - Major Regional (2.2%)
9,700 Bank One Corp. 549
11,400 Fleet Financial Group, Inc. 469
15,400 Mellon Bank Corp. 549
7,800 State Street Corp. 595
- --------------------------------------------------------------------------------
2,162
- --------------------------------------------------------------------------------
Banks - Money Center (1.5%)
11,513 Bank of America Corp. 745
5,000 J. P. Morgan & Co., Inc. 696
- --------------------------------------------------------------------------------
1,441
- --------------------------------------------------------------------------------
Beverages - Alcoholic (0.6%)
7,500 Anheuser-Busch Companies, Inc. 548
- --------------------------------------------------------------------------------
Beverages - Nonalcoholic (1.7%)
14,500 Coca-Cola Co. 990
15,000 Pepsi Bottling Group, Inc. 348
8,700 PepsiCo, Inc. 312
- --------------------------------------------------------------------------------
1,650
- --------------------------------------------------------------------------------
Broadcasting - Radio & TV (1.1%)
17,400 CBS Corp. 727
11,400 Infinity Broadcasting Corp.* 291
- --------------------------------------------------------------------------------
1,018
- --------------------------------------------------------------------------------
Chemicals (1.7%)
4,600 Dow Chemical Co. 559
16,500 Du Pont (E. I.) De Nemours & Co. 1,080
- --------------------------------------------------------------------------------
1,639
- --------------------------------------------------------------------------------
Communication Equipment (0.9%)
15,128 Lucent Technologies, Inc. 860
- --------------------------------------------------------------------------------
Computer - Hardware (3.3%)
20,200 Hewlett-Packard Co. 1,905
11,200 IBM Corp. 1,303
- --------------------------------------------------------------------------------
3,208
- --------------------------------------------------------------------------------
Computer - Networking (2.0%)
18,050 Cisco Systems, Inc. * 1,967
- --------------------------------------------------------------------------------
Computer - Peripherals (0.6%)
5,600 EMC Corp.* 558
- --------------------------------------------------------------------------------
Computer Software & Service (4.6%)
6,700 America Online, Inc.* 800
39,000 Microsoft Corp.* 3,147
16,900 Oracle Corp.* 419
- --------------------------------------------------------------------------------
4,366
- --------------------------------------------------------------------------------
Drugs (3.9%)
13,700 Merck & Co., Inc. 925
17,300 Pfizer, Inc. 1,851
21,300 Schering-Plough Corp. 960
- --------------------------------------------------------------------------------
3,736
- --------------------------------------------------------------------------------
Electrical Equipment (2.9%)
9,400 Emerson Electric Co. 600
21,300 General Electric Co. 2,166
- --------------------------------------------------------------------------------
2,766
- --------------------------------------------------------------------------------
Electronics - Semiconductors (4.2%)
33,400 Intel Corp. 1,806
19,900 Texas Instruments, Inc. 2,176
- --------------------------------------------------------------------------------
3,982
- --------------------------------------------------------------------------------
Entertainment (1.2%)
16,700 Time Warner, Inc. 1,137
- --------------------------------------------------------------------------------
Equipment - Semiconductors (0.3%)
5,900 Teradyne, Inc.* 312
- --------------------------------------------------------------------------------
Finance - Diversified (4.5%)
3,800 American Express Co. 460
16,000 Citigroup, Inc. 1,060
29,000 Freddie Mac 1,691
11,200 Morgan Stanley, Dean Witter, Discover & Co. 1,081
- --------------------------------------------------------------------------------
4,292
- --------------------------------------------------------------------------------
Foods (0.9%)
11,800 Nabisco Holdings Corp. 494
5,535 Unilever N.V. - New York Shares 362
- --------------------------------------------------------------------------------
856
- --------------------------------------------------------------------------------
Health Care - Diversified (3.6%)
24,100 American Home Products Corp. 1,389
11,600 Bristol-Myers Squibb Co. 796
13,500 Johnson & Johnson, Inc. 1,250
- --------------------------------------------------------------------------------
3,435
- --------------------------------------------------------------------------------
Household Products (1.7%)
8,700 Colgate-Palmolive Co. 869
8,500 Procter & Gamble Co. 794
- --------------------------------------------------------------------------------
1,663
- --------------------------------------------------------------------------------
Housewares (0.6%)
13,900 Newell Rubbermaid, Inc. 563
- --------------------------------------------------------------------------------
Insurance - Multi-Line Companies (1.9%)
15,900 American International Group, Inc. 1,818
- --------------------------------------------------------------------------------
Insurance - Property/Casualty (0.4%)
10,200 Allstate Corp. 372
- --------------------------------------------------------------------------------
Investment Banks/Brokerage (0.4%)
4,500 Merrill Lynch & Co., Inc. 378
- --------------------------------------------------------------------------------
Machinery - Diversified (0.3%)
5,400 Caterpillar, Inc. 296
- --------------------------------------------------------------------------------
Manufacturing - Diversified Industries (1.5%)
8,500 Tyco International Ltd. 742
11,000 United Technologies Corp. 683
- --------------------------------------------------------------------------------
1,425
- --------------------------------------------------------------------------------
Medical Products & Supplies (1.3%)
11,400 Guidant Corp. * 570
9,100 Medtronic, Inc. 646
- --------------------------------------------------------------------------------
1,216
- --------------------------------------------------------------------------------
Oil - International Integrated (3.0%)
13,500 Exxon Corp. 1,078
3,000 Mobil Corp. 304
12,500 Royal Dutch Petroleum Co. 707
12,000 Texaco, Inc. 786
- --------------------------------------------------------------------------------
2,875
- --------------------------------------------------------------------------------
Oil & Gas - Drilling/Equipment (0.7%)
12,000 Schlumberger Ltd. 722
- --------------------------------------------------------------------------------
Oil & Gas - Exploration & Production (0.4%)
8,800 Unocal Corp. 350
- --------------------------------------------------------------------------------
Paper & Forest Products (0.3%)
6,800 International Paper Co. 340
- --------------------------------------------------------------------------------
Personal Care (0.5%)
8,700 Gillette Co. 444
- --------------------------------------------------------------------------------
Retail - Building Supplies (0.6%)
10,700 Home Depot, Inc. 608
- --------------------------------------------------------------------------------
Retail - Drugs (0.7%)
13,800 CVS Corp. 635
- --------------------------------------------------------------------------------
Retail - General Merchandising (2.1%)
14,000 Dayton Hudson Corp. 882
25,800 Wal-Mart Stores, Inc. 1,100
- --------------------------------------------------------------------------------
1,982
- --------------------------------------------------------------------------------
Retail - Specialty Apparel (0.4%)
6,000 Gap, Inc. 375
- --------------------------------------------------------------------------------
Services - Data Processing (0.9%)
20,000 First Data Corp. 899
- --------------------------------------------------------------------------------
Telecommunications - Long Distance (2.9%)
19,100 MCI Worldcom, Inc.* 1,650
9,700 Sprint Corp. 1,093
- --------------------------------------------------------------------------------
2,743
- --------------------------------------------------------------------------------
Telephones (2.3%)
15,900 Bell Atlantic Corp. 870
9,000 BellSouth Corp. 425
18,300 SBC Communications Corp. 936
- --------------------------------------------------------------------------------
2,231
- --------------------------------------------------------------------------------
Total stocks (cost: $49,500) 64,369
- --------------------------------------------------------------------------------
Principal Market
Amount Coupon Value
(000) Security Rate Maturity (000)
- --------------------------------------------------------------------------------
BONDS (30.8%)
$ 1,000 AT & T Capital Corp. 6.88% 1/16/2001 $ 1,003
1,000 AT & T Corp. 6.00 3/15/2009 954
1,000 Corporacion Andina DeFomento
(Venezuela)(b) 7.38 7/21/2000 1,005
2,000 First Union Commercial Mortgage
Trust II 6.60 11/18/2029 1,981
1,000 FirstPlus Home Loan Owner Trust,
Series 1998-1, Class A-5 6.25 11/10/2016 998
1,000 Glenborough Property, L.P. 7.63 3/15/2005 894
1,000 Great Atlantic & Pacific Tea,
Inc.(b) 7.70 1/15/2004 1,005
1,000 Heller Financial, Inc. 6.00 3/19/2004 977
1,000 HRPT Properties Trust 6.70 2/23/2005 951
1,000 J. P. Morgan & Co., Inc. 5.75 2/25/2004 972
900 Kmart Corp. 7.95 2/01/2023 905
1,000 MacSaver Financial Services, Inc. 7.40 2/15/2002 835
1,000 Merita Bank Ltd. (Finland) 6.50 1/15/2006 973
1,000 Merrill Lynch & Co., Inc. 6.50 7/15/2018 925
1,000 Nationwide Health Property,
Inc.(b) 7.25 4/01/2002 988
1,000 Popular North America, Inc. 6.63 10/27/2002 991
1,000 Reckson Operating Partnership 7.75 3/15/2009 978
1,000 Union Planters Bank National Assn. 6.50 3/15/2018 952
1,000 Washington Real Estate Investment
Trust 7.25 8/13/2006 987
1,000 Waste Management, Inc.(b) 6.38 12/01/2003 988
1,000 Federal Home Loan Bank 5.43 9/24/2008 946
799 Federal Home Loan Mortgage Corp.,
Series 1998-7 H 9.00 3/18/2025 839
587 Federal National Mortgage Assn.,
Series 1997-72 CA 9.50 8/15/2003 615
534 Federal National Mortgage Assn.,
Series 1997-72 CB 9.00 9/18/2023 554
1,287 Federal National Mortgage Assn.,
Series 1997-79 U 9.00 11/18/2024 1,348
679 Federal National Mortgage Assn.,
Series 1997-89 N 9.50 12/20/2022 706
1,276 Government National Mortgage
Assn. I, Construction Loan (a) 6.63 11/15/2040 1,243
2,000 U.S. Treasury Notes 5.50 5/31/2003 1,986
1,000 U.S. Treasury Notes 5.63 5/15/2008 989
- --------------------------------------------------------------------------------
Total bonds (cost: $30,276) 29,488
- --------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (1.7%)
1,604 Federal Home Loan Mortgage Corp.,
4.72%, 6/01/1999 (cost: $1,603) 1,603
- --------------------------------------------------------------------------------
Total investments (cost: $81,379) $95,460
================================================================================
USAA BALANCED STRATEGY FUND
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 1999
GENERAL NOTES
Market values of securities are determined by procedures and practices discussed
in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
Investments in foreign securities were 3.9% of net assets at May 31, 1999.
SPECIFIC NOTES
(a) At May 31, 1999, the cost of securities purchased on a delayed delivery
basis was $0.3 million.
(b) At May 31, 1999, these securities were segregated to cover delayed delivery
purchases.
* Non-income producing security.
See accompanying notes to financial statements.
USAA BALANCED STRATEGY FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 1999
ASSETS
Investments in securities, at market value
(identified cost of $81,379) $ 95,460
Cash 99
Receivables:
Capital shares sold 29
Dividends and interest 551
----------
Total assets 96,139
----------
LIABILITIES
Securities purchased 279
Capital shares redeemed 33
USAA Investment Management Company 8
USAA Transfer Agency Company 19
Accounts payable and accrued expenses 45
----------
Total liabilities 384
----------
Net assets applicable to capital shares outstanding $ 95,755
==========
REPRESENTED BY:
Paid-in capital $ 82,894
Accumulated undistributed net investment income 280
Accumulated net realized loss on investments (1,500)
Net unrealized appreciation of investments 14,081
----------
Net assets applicable to capital shares outstanding $ 95,755
==========
Capital shares outstanding, unlimited number of shares
authorized, no par value 6,828
==========
Net asset value, redemption price, and offering price per share $ 14.02
==========
See accompanying notes to financial statements.
USAA BALANCED STRATEGY FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 1999
Net investment income:
Income:
Dividends (net of foreign taxes withheld of $5) $ 683
Interest 1,766
----------
Total income 2,449
----------
Expenses:
Management fees 588
Transfer agent's fees 247
Custodian's fees 63
Postage 34
Shareholder reporting fees 11
Trustees' fees 4
Registration fees 45
Professional fees 28
Other 8
----------
Total expenses before reimbursement 1,028
Expenses reimbursed (52)
----------
Total expenses after reimbursement 976
----------
Net investment income 1,473
----------
Net realized and unrealized gain (loss) on investments:
Net realized loss (1,495)
Change in net unrealized appreciation/depreciation 6,006
----------
Net realized and unrealized gain 4,511
----------
Increase in net assets resulting from operations $ 5,984
==========
See accompanying notes to financial statements.
USAA BALANCED STRATEGY FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
1999 1998
-------------------------
From operations:
Net investment income $ 1,473 $ 1,370
Net realized gain (loss) on investments (1,495) 1,470
Change in net unrealized appreciation/depreciation
of investments 6,006 4,029
-------------------------
Increase in net assets resulting from operations 5,984 6,869
-------------------------
Distributions to shareholders from:
Net investment income (1,530) (1,217)
-------------------------
Net realized gains (905) (949)
-------------------------
From capital share transactions:
Proceeds from shares sold 43,457 44,462
Shares issued for dividends reinvested 2,383 2,019
Cost of shares redeemed (23,680) (15,739)
-------------------------
Increase in net assets from capital
share transactions 22,160 30,742
-------------------------
Net increase in net assets 25,709 35,445
Net assets:
Beginning of period 70,046 34,601
-------------------------
End of period $95,755 $70,046
=========================
Accumulated undistributed net investment income:
End of period $ 280 $ 337
=========================
Change in shares outstanding:
Shares sold 3,261 3,408
Shares issued for dividends reinvested 182 159
Shares redeemed (1,820) (1,219)
-------------------------
Increase in shares outstanding 1,623 2,348
=========================
See accompanying notes to financial statements.
USAA BALANCED STRATEGY FUND
NOTES TO FINANCIAL STATEMENTS
May 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA INVESTMENT TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended, is a diversified, open-end management investment company
organized as a Massachusetts business trust consisting of eleven separate funds.
The information presented in this annual report pertains only to the USAA
Balanced Strategy Fund (the Fund). The Fund's investment objective is to seek a
high total return, with reduced risk over time, through an asset allocation
strategy that seeks a combination of long-term growth of capital and current
income.
A. Security valuation - The value of each security is determined (as of the
close of trading on the New York Stock Exchange on each business day the
Exchange is open) as set forth below:
1. Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities exchanges
are generally valued at the closing values of such securities on the exchange
where primarily traded. If no sale is reported, the average of the bid and asked
prices is generally used depending upon local custom or regulation.
2. Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices.
3. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value.
4. Other debt and government securities are valued each business day by a
pricing service (the Service) approved by the Trust's Board of Trustees. The
Service uses the mean between quoted bid and asked prices or the last sale price
to price securities when, in the Service's judgement, these prices are readily
available and are representative of the securities' market values. For many
securities, such prices are not readily available. The Service generally prices
these securities based on methods which include consideration of yields or
prices of securities of comparable quality, coupon, maturity and type,
indications as to values from dealers in securities, and general market
conditions.
5. Securities which cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value, using methods determined
by USAA Investment Management Company (the Manager) under the general
supervision of the Board of Trustees.
B. Federal taxes - The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Dividend
income is recorded on the ex-dividend date; interest income is recorded on the
accrual basis. Discounts and premiums on securities are amortized over the life
of the respective securities.
D. Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the financial
statements.
(2) LINES OF CREDIT
The Fund participates with other USAA funds in three joint short-term revolving
loan agreements totaling $850 million, two with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($250 million committed and $500 million
uncommitted), and one with Bank of America ($100 million committed). The purpose
of the agreements is to meet temporary or emergency cash needs, including
redemption requests that might otherwise require the untimely disposition of
securities. Subject to availability under both agreements with CAPCO, the Fund
may borrow from CAPCO an amount up to 5% of the Fund's total assets at CAPCO's
borrowing rate with no markup. Subject to availability under its agreement with
Bank of America, the Fund may borrow from Bank of America, at Bank of America's
borrowing rate plus a markup, an amount which, when added to outstanding
borrowings under the CAPCO agreements, does not exceed 25% of the Fund's total
assets. The Fund had no borrowings under either of these agreements during the
year ended May 31, 1999.
(3) DISTRIBUTIONS
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are made
in the succeeding fiscal year or as otherwise required to avoid the payment of
federal taxes.
At May 31, 1999, the Fund had capital loss carryovers for federal income tax
purposes of approximately $1.4 million which, if not offset by subsequent
capital gains, will expire in 2007. It is unlikely that the Trust's Board of
Trustees will authorize a distribution of capital gains realized in the future
until the capital loss carryovers have been utilized or expire.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the period ended May 31, 1999, were $70.9 million and
$48.9 million, respectively.
Gross unrealized appreciation and depreciation of investments at May 31, 1999,
was $15.7 million and $1.6 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 .75% of its annual average net assets.
The Manager has voluntarily agreed to limit the annual expenses of the Fund to
1.25% of its annual average net assets through October 1, 1999, and accordingly
has waived a portion of its management fees.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Fund based on an annual charge of $26 per shareholder account plus
out-of-pocket expenses.
C. Underwriting services - The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing best efforts basis. The
Manager receives no commissions or fees for this service.
D. Brokerage services - USAA Brokerage Services, a discount brokerage service
of the Manager, may execute portfolio transactions for the Fund. The amount of
brokerage commissions paid to USAA Brokerage Services during the year ended May
31, 1999, was $12,000.
(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) YEAR 2000 (UNAUDITED)
Like other mutual funds, the Fund could be adversely affected if the computer
systems used by the Manager and the Fund's other service providers are not able
to perform their intended functions effectively after 1999 because of the
inability of computer software to distinguish the year 2000 from the year 1900.
The Manager is taking steps to address this potential year 2000 problem with
respect to the computer systems that they use and to obtain satisfactory
assurances that the comparable steps are being taken by the Fund's other major
service providers. At this time, however, there can be no assurance that these
steps will be sufficient to avoid any adverse impact to the Fund from this
problem.
(8) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
Nine-month
Period Ended
Year Ended May 31, May 31,
-----------------------------------------------
1999 1998 1997 1996 *
-----------------------------------------------
Net asset value at
beginning of period $ 13.46 $ 12.11 $ 10.49 $ 10.00
Net investment income .25 .35 .33 .26(b)
Net realized and unrealized gain .74 1.64 1.65 .37
Distributions from net
investment income (.27) (.35) (.33) (.14)
Distributions of realized
capital gains (.16) (.29) (.03) -
-----------------------------------------------
Net asset value at
end of period $ 14.02 $ 13.46 $ 12.11 $ 10.49
===============================================
Total return (%) ** 7.63 16.82 19.26 6.37
Net assets at end of
period (000) $95,755 $70,046 $34,601 $19,258
Ratio of expenses to
average net assets (%) 1.25 1.25 1.25 1.25(a)
Ratio of expenses to
average net assets
excluding reimbursements (%) 1.31 1.31 1.39 2.00(a)
Ratio of net investment income
to average net assets (%) 1.88 2.85 3.16 3.31(a)
Portfolio turnover (%) 63.39 22.18 28.06 26.53
* Fund commenced operations September 1, 1995.
** Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
TRUSTEES
Robert G. Davis, Chairman of the Board
Michael J.C. Roth, President and Vice Chairman of the Board
John W. Saunders, Jr., Vice President
Barbara B. Dreeben
Howard L. Freeman, Jr.
Robert L. Mason
Richard A. Zucker
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
KPMG LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
Telephone Assistance
Call toll free - Central Time
Monday - Friday 7:30 a.m. to 8:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
For Additional Information On Mutual Funds
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges or redemptions
1-800-531-8448, (in San Antonio) 456-7202
Recorded Mutual Fund Price Quotes
24-Hour Service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
Mutual Fund USAA TouchLine(Registered Trademark)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
