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 9
Independent Auditors' Report 10
Portfolio of Investments 11
Notes to Portfolio of Investments 23
Statement of Assets and Liabilities 24
Statement of Operations 25
Statements of Changes in Net Assets 26
Notes to Financial Statements 27
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA Cornerstone
Strategy Fund, managed by USAA Investment Management Company (IMCO). It may be
used as sales literature only when preceded or accompanied by a current
prospectus which gives further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)1999, USAA. All rights reserved.
USAA Family of Funds Summary
Fund Minimum
Type/Name Volatility Investment
- --------------------------------------------------------------------------------
CAPITAL APPRECIATION
- --------------------------------------------------------------------------------
Aggressive Growth Very high $3,000
Emerging Markets 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 THE 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 CORNERSTONE STRATEGY FUND
OBJECTIVE: Achieve a positive, inflation-adjusted rate of return and a
reasonably stable value of Fund shares, thereby preserving purchasing power of
shareholders' capital.
- --------------------------------------------------------------------------------
5/31/99 5/31/98
- --------------------------------------------------------------------------------
Net Assets $1,257.8 Million $1,500.3 Million
Net Asset Value Per Share $27.29 $29.89
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/99
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
-0.74% 11.25% 10.32%
- --------------------------------------------------------------------------------
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment has
been made for taxes payable by shareholders on their reinvested income dividends
and capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return and
principal value of an investment will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
CUMULATIVE PERFORMANCE COMPARISON
---------------------------------
A chart in the form of a line graph appears here, illustrating the comparison of
a $10,000 hypothetical investment in the USAA Cornerstone Strategy Fund, the S&P
500 Index, and the Lipper Global Flexible Portfolio Funds Average for the period
of 5/31/89 through 5/31/99. The data points from the graph are as follows:
USAA Cornerstone S&P 500 Lipper
Strategy Fund Index Average
------------- ------- -------
05/31/89 $10,000 $10,000 $10,000
11/30/89 11,196 10,970 10,718
05/31/90 10,925 11,658 10,863
11/30/90 10,063 10,589 10,403
05/31/91 11,230 13,029 11,688
11/30/91 11,292 12,738 11,878
05/31/92 12,257 14,310 12,741
11/30/92 12,446 15,087 13,021
05/31/93 14,489 15,969 14,421
11/30/93 15,124 16,608 15,092
05/31/94 15,667 16,647 15,307
11/30/94 15,278 16,781 14,992
05/31/95 16,673 20,003 16,310
11/30/95 17,867 22,978 17,456
05/31/96 19,639 25,686 18,749
11/30/96 21,444 29,377 20,000
05/31/97 22,966 33,248 21,010
11/30/97 24,995 37,750 22,048
05/31/98 26,904 43,440 23,513
11/30/98 25,407 46,691 22,804
05/31/99 26,703 52,576 24,312
Data from 5/31/89 through 5/31/99
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Cornerstone Strategy Fund to the S&P 500 Index and the Lipper Global
Flexible Portfolio Funds Average, an average performance level of all global
flexible portfolio funds, as reported by Lipper Analytical Services, Inc., an
independent organization that monitors the performance of mutual funds. 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.
Message from the Managers
[PHOTOGRAPH OF THE PORTFOLIO MANAGERS APPEARS HERE: W. TRAVIS SELMIER, II, CFA
(INTERNATIONAL STOCKS); DAVID G. PEEBLES, CFA (INTERNATIONAL STOCKS); ALBERT C.
SEBASTIAN, CFA (INTERNATIONAL STOCKS); R. DAVID ULLOM, CFA (ALLOCATION MANAGER,
BASIC VALUE STOCKS); MARK W. JOHNSON, CFA (GOLD AND REAL ESTATE SECURITIES); AND
JOHN W. SAUNDERS, JR., CFA (U.S. GOVERNMENT SECURITIES).]
As outlined in a recent letter, the Cornerstone Strategy Fund is currently
altering its asset allocation. The modification will be made primarily due to
the changing behavior of certain asset classes. In response to this changing
behavior, we will reduce the Fund's allocation in Real Estate Securities and
U.S. Government Securities, while increasing the allocation to U.S. Stocks.
Also, we will change the Basic Value Stocks category to U.S. Stocks to enable
the Fund to better diversify its holdings within the domestic market. These
changes should allow us to better respond to changes in the market.
BASIC VALUE CATEGORY
Over the last fiscal year, the Basic Value Stocks sector of the Cornerstone
Strategy Fund has not kept pace with the major market averages. This sector had
an above-average market weighting in such areas as capital goods
(aerospace/defense, machinery, and manufacturing) and basic materials (aluminum
and chemicals), both of which did not appreciate in line with the S&P 500. The
poor performance by these two sectors was the result of investor concerns with
the economic conditions of Southeast Asia and Brazil. Also, the sector has had a
lower-than-average market weighting in technology and consumer staples. Stocks
in these two groups generally performed well throughout the last year.
Performance in this sector has improved since April, largely as a result of
signs of improvement in the economic condition of Southeast Asia. Also, the rise
in crude oil prices in April has helped the performance of the Fund's energy
holdings.
As previously communicated, a decision was made to alter our strategy in the
Basic Value Stocks sector of the Cornerstone Strategy Fund. This change
fundamentally involves broadening the diversification of this sector to include
not only basic value stocks, but also selected growth stocks we feel can enhance
the performance of the sector.
INTERNATIONAL CATEGORY
Europe - Most European equity markets rebounded from last year's declines.
However, despite the introduction of the Euro, returns were negatively impacted
in 1999 by weak European currencies. Central banks in Europe cut interest rates
as economic growth forecasts were revised downward, primarily because of
weakness in the German and Italian economies. After last year's sell-off,
cyclical and resource stocks rebounded based on stronger global economic
forecasts and higher energy prices. In general, the larger European equity
market (for example, United Kingdom) outperformed the smaller ones (for example,
Portugal, Belgium) throughout the period.
Canada and Australia - Although we have preferred Canadian to Australian
equities, both markets have rebounded from last year's declines. Our positions
in Canada benefited from higher energy prices, a swing back to cyclical stocks,
and a stronger Canadian dollar. These same factors negatively impacted the
performance of the Fund in the second half of 1998.
Emerging Markets - Emerging markets went through a rough summer, but have since
recovered. Asian equities' strong recovery has been driven by good export
growth, signs of reflation in many economies, and capital flows into the stock
market and into acquisitions of Asian companies. Although Russia's economic and
political problems and the conflict in Kosovo will influence Central European
and many Mediterranean markets, these markets look more to the European
Community for their political and economic cues, with Greece the best performer
in the region. Israel's and South Africa's economic recovery, export strength,
and improving political prospects have validated our overweight position in
those markets. With the exception of a strong Mexican market, our lower
weighting in Latin markets over the last six months was validated by Brazil's
forced devaluation of its currency, the Real, in January.
Japan - Since the election last summer, the Japanese political situation has
solidified, more progress has been seen on Japan's banking crisis, and a raft of
corporate restructuring announcements has pushed the market up over the last
eight months. While constructive, we will need to see follow-through on the
corporate restructuring coupled with stimulatory economic policy to push the
market higher. Our technology, telecommunications, and financial holdings helped
us outperform the market throughout the period.
U.S. GOVERNMENT CATEGORY
Following the highly volatile period from August to November last year, the bond
market stabilized through January 1999. Interest rates then moved upward
depressing bond prices again.
Economic strength in the first quarter of 1999, which is the fourth year in a
row for first quarter strength, renewed inflation fears and the specter of
higher interest rates. Although the Federal Reserve has not acted to raise
interest rates, it has indicated a bias toward doing so. Yields on the 30-year
current Treasury bond have moved from 5.06% on November 30, 1998, to 5.82% on
May 31, 1999, the end of this reporting period. With yields on the long Treasury
bond now above 6%, this rise in interest rates may be near an end. We would
expect lower rates by year end.
Investments in this portfolio segment on May 31, 1999, were 10% short-term U.S.
Government Agency securities, 49% GNMA mortgage pass-through securities, and 41%
U. S. Treasury bonds.
REAL ESTATE CATEGORY
Total return for the fiscal year ended May 31, 1999, for Real Estate Investment
Trusts (REITs), as measured by the National Association of Real Estate
Investment Trusts (NAREIT) equity index, was -7.68%. This compares poorly to the
S&P 500 Index return of 19.34%. REIT prices began declining in May 1998,
initially because of recession and new construction fears and later as the
result of a capital crunch, which raised the cost of capital and reduced capital
availability. Prices bottomed out in October 1998. Except for some brief
unsustained rallies, prices remained in the doldrums through March 1999. By then
it became apparent that the conditions which had caused the original sell-off
were no longer relevant and prices for many companies had fallen below
liquidation value. After several privatization announcements and the emergence
of a few high-profile investors in the real estate market, including Warren
Buffett, REIT prices rallied and ended the fiscal year on a strong note.
Compared to the NAREIT equity index, the Fund is overweighted in office and
industrial properties and full-service hotels. It is underweighted in apartments
and retail. We have built a significant exposure to special situations within
the real estate industry through the purchase of stocks focusing on ski resorts,
golf courses, megaplex movie theaters, prisons, restaurants, and laboratories.
GOLD CATEGORY
Gold prices fell 8.5% from $293.60 to $268.60 during the fiscal year ended May
31, 1999. The common stocks of gold mining companies did even worse. The Fund
had no exposure to gold stocks during this period.
ASSET ALLOCATION
----------------
A pie chart is shown here depicting the Asset Allocation as of May 31, 1999 of
the USAA Cornerstone Strategy Fund to be:
International Securities - 26.8%*; Basic Value Stocks - 25.9%*; Real Estate
Stocks - 22.5%*; and U.S. Government Securities - 22.0%*.
* Percentages are of the Net Assets in the Portfolio and may or may not equal
100%.
---------------------------------------
TOP 10 INDUSTRIES
(% OF NET ASSETS)
---------------------------------------
Real Estate Investment Trusts 20.7
Telephones 4.6
Banks - Major Regional 4.4
Oil - International Integrated 2.7
Drugs 2.6
Health Care - Diversified 2.1
Insurance - Multi-Line Companies 1.6
Auto Parts 1.5
Machinery - Diversified 1.5
Railroads/Shipping 1.4
---------------------------------------
-------------------------------------
TOP 3 HOLDINGS IN EACH SECTOR
(% OF NET ASSETS)
-------------------------------------
International
-------------
Elf Aquitaine ADR 0.6
Nokia ADR 0.6
Novartis AG 0.5
Real Estate
-----------
Liberty Property Trust 1.0
Prentiss Properties Trust 0.9
Simon Property Group, Inc. 0.9
U.S. Government
---------------
U.S. Treasury Bond @ 7.88% 9.1
GNMA @ 6.50% 4.5
GNMA @ 6.00% 3.4
Basic Value
-----------
Bristol-Myers Squibb 1.1
Sprint Corp. 1.0
American Home Products 1.0
-------------------------------------
Foreign investing is subject to additional risks, which are discussed in the
Fund's prospectus. Since return on any investment is generally commensurate with
risk, investors should be aware of the potential volatility associated with
foreign securities.
See page 11 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 * $ .95
Long-term capital gains 1.39
------
Total $ 2.34
======
16.1% 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 Cornerstone 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 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 Cornerstone 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 in the five-year period then ended, in conformity with generally accepted
accounting principles.
KPMG LLP
San Antonio, Texas
July 2, 1999
USAA CORNERSTONE STRATEGY FUND
PORTFOLIO OF INVESTMENTS
May 31, 1999
Market
Number Value
of Shares Security (000)
- --------------------------------------------------------------------------------
INTERNATIONAL SECURITIES (26.8%)
INTERNATIONAL STOCKS (26.7%)
Argentina (0.1%)
27,698 IRSA Inversiones y Representaciones S.A. GDR $ 800
- --------------------------------------------------------------------------------
Australia (0.1%)
237,750 Cable & Wireless Optus Ltd. * 455
111,000 CSL Ltd. 927
- --------------------------------------------------------------------------------
1,382
- --------------------------------------------------------------------------------
Austria (0.7%)
15,300 Bank Austria AG 783
46,200 Boehler Uddeholm AG 2,256
68,300 VA Flughafen Wien AG 2,900
29,400 VA Technologie AG 2,467
- --------------------------------------------------------------------------------
8,406
- --------------------------------------------------------------------------------
Brazil (0.2%)
41,400 Companhia Brasileira de Distribuicao Grupo Pao
de Acucar ADR 750
63,000 Panamerican Beverages, Inc. "A" 1,461
5,600,000 Petroleo Brasileiro S.A. (Preferred) 792
- --------------------------------------------------------------------------------
3,003
- --------------------------------------------------------------------------------
Canada (2.0%)
272,300 Anderson Exploration Ltd. * 3,300
55,000 Canadian Imperial Bank of Commerce 1,344
89,500 Canadian National Railway Co. 5,728
229,800 Canadian Occidental Petroleum Ltd. 3,074
172,600 National Bank of Canada 2,572
51,000 Nortel Networks Corp. 3,825
107,900 Suncor Energy, Inc. 4,073
32,200 Toronto-Dominion Bank 1,701
- --------------------------------------------------------------------------------
25,617
- --------------------------------------------------------------------------------
Chile (0.1%)
1,434 Sociedad Quimica y Minera de Chile S.A. ADR "A" 50
24,800 Sociedad Quimica y Minera de Chile S.A. ADR "B" 865
- --------------------------------------------------------------------------------
915
- --------------------------------------------------------------------------------
China (0.2%)
1,110,000 Cosco Pacific Ltd. 655
831,000 New World Infrastructure Ltd. * 1,334
- --------------------------------------------------------------------------------
1,989
- --------------------------------------------------------------------------------
Denmark (0.9%)
30,200 ISS International Service System A/S "B" * 1,517
153,200 SAS Danmark A/S 1,752
41,000 Tele Danmark A/S "B" 4,187
62,300 Unidanmark A/S 4,370
- --------------------------------------------------------------------------------
11,826
- --------------------------------------------------------------------------------
Egypt (0.1%)
39,300 Suez Cement Co. S.A.E. GDR 584
- --------------------------------------------------------------------------------
Finland (1.4%)
913,900 Merita plc "A" 5,412
100,400 Nokia Corp. ADR 7,128
110,000 Raisio Group plc 1,203
133,900 Rauma OYJ 1,480
65,300 Sampo Insurance Co. "A" 1,974
- --------------------------------------------------------------------------------
17,197
- --------------------------------------------------------------------------------
France (2.4%)
12,600 Accor S.A. 3,089
54,817 CNP Assurances 1,377
80,800 Coflexip ADR 3,313
100,700 Elf Aquitaine ADR 7,150
34,000 Eramet Group 1,330
8,300 Essilor International 2,907
18,970 ISIS S.A. 1,256
36,900 Louis Dreyfus Citrus 769
62,200 Renault S.A. 2,415
50,000 Rhone Poulenc S.A. 2,372
55,839 SEITA 3,385
30,400 Valeo S.A. 2,481
- --------------------------------------------------------------------------------
31,844
- --------------------------------------------------------------------------------
Germany (1.1%)
86,800 Continental AG 2,009
90,000 Hoechst AG 4,006
75,400 Merck KGaA 2,590
95,000 Veba AG 5,417
- --------------------------------------------------------------------------------
14,022
- --------------------------------------------------------------------------------
Greece (0.2%)
79,400 Hellenic Telecommunications Organization S.A. (OTE) 1,719
62,655 National Bank of Greece S.A. GDR * 868
- --------------------------------------------------------------------------------
2,587
- --------------------------------------------------------------------------------
Hong Kong (0.1%)
44,000 Asia Satellite Telecommunications Holdings Ltd. ADR 907
- --------------------------------------------------------------------------------
Hungary (0.2%)
30,100 Magyar Tavkozlesi RT. (MATAV) ADR 843
72,900 Mol Magyar Olaj-Es Gazipari GDR 1,768
- --------------------------------------------------------------------------------
2,611
- --------------------------------------------------------------------------------
India (0.1%)
54,400 Hindalco Industries Ltd. GDR 775
63,300 Videsh Sanchar Nigam Ltd. GDR 720
- --------------------------------------------------------------------------------
1,495
- --------------------------------------------------------------------------------
Israel (0.1%)
260,218 Bank Hapoalim Ltd. 659
46,800 Blue Square - Israel Ltd. ADR 714
- --------------------------------------------------------------------------------
1,373
- --------------------------------------------------------------------------------
Italy (1.4%)
60,200 ENI S.p.A. ADR 3,789
227,000 Erg S.p.A. 684
43,500 Gucci Group N.V. 2,876
708,000 Italgas S.p.A. 3,034
170,000 Telecom Italia S.p.A. Ordinary 1,751
886,000 Telecom Italia S.p.A. Savings 4,812
- --------------------------------------------------------------------------------
16,946
- --------------------------------------------------------------------------------
Japan (2.4%)
70,000 Bridgestone Corp. 1,836
95,000 Daibiru Corp. 747
130,000 Fujitsu Ltd. 2,173
38,000 Ito-Yokado Co. Ltd. 2,267
270,000 Nikko Securities Co. Ltd. 1,180
1,293,000 Nippon Steel Corp. 2,717
230 Nippon Telegraph & Telephone Corp. (NTT) 2,245
18 NTT Mobile Communication Network, Inc. 984
55,000 Ono Pharmaceutical Co. Ltd. 1,979
165,000 Sankyo Co. Ltd. 3,884
399,000 Sharp Corp. 4,430
18,000 Sony Corp. 1,692
190,000 Sumitomo Electric Industries, Ltd. 2,128
340,000 Toshiba Corp. 2,101
- --------------------------------------------------------------------------------
30,363
- --------------------------------------------------------------------------------
Korea (0.2%)
20,470 Dongwon Securities Co. 443
32,661 Korea Telecom Corp. ADR * 1,039
17,000 Samsung Electronics Co. Ltd. 1,182
1,391 Samsung Electronics Co. Ltd. Rights * 15
- --------------------------------------------------------------------------------
2,679
- --------------------------------------------------------------------------------
Malaysia (0.2%)
537,400 Genting Bhd (a) 1,527
786,000 Malaysia International Shipping Corp. Bhd (a) 1,101
- --------------------------------------------------------------------------------
2,628
- --------------------------------------------------------------------------------
Mexico (0.2%)
54,437 Desc, Sociedad de Fomento Industrial, S.A. de C.V. ADR 1,218
117,400 Tubos de Acero de Mexico, S.A. ADR 1,086
- --------------------------------------------------------------------------------
2,304
- --------------------------------------------------------------------------------
Netherlands (2.7%)
135,600 Akzo Nobel N.V. 5,626
82,900 Benckiser N.V. "B" 4,477
33,000 EVC International N.V. 241
62,600 Fortis NL N.V. 2,033
96,580 ING Group N.V. 5,160
97,500 Koninklijke KPN N.V. 4,706
113,400 Koninklijke Pakhoed N.V. (Certificates) 2,612
50,400 Koninklijke Philips Electronics N.V. 4,334
85,200 Oce-van der Grinten N.V. 2,345
78,500 VNU N.V. 3,331
- --------------------------------------------------------------------------------
34,865
- --------------------------------------------------------------------------------
Norway (0.8%)
1,056,000 Christiania Bank og Kreditkasse 4,262
118,600 Schibsted ASA 1,365
439,300 Storebrand ASA * 2,946
297,000 Tandberg Data ASA * 1,503
- --------------------------------------------------------------------------------
10,076
- --------------------------------------------------------------------------------
Philippines (0.1%)
4,000,000 SM Prime Holdings, Inc. 872
- --------------------------------------------------------------------------------
Poland (0.1%)
114,200 Elektrim S.A. 1,333
- --------------------------------------------------------------------------------
Portugal (0.7%)
158,100 Banco Pinto & Sotto Mayor S.A. 3,132
43,900 Brisa-Auto Estradas de Portugal S.A. 1,986
81,600 Portugal Telecom S.A. ADR 3,692
- --------------------------------------------------------------------------------
8,810
- --------------------------------------------------------------------------------
Russia (0.1%)
10,000 LUKoil ADR 365
- --------------------------------------------------------------------------------
Singapore (0.1%)
206,000 Overseas Union Bank Ltd. 1,058
- --------------------------------------------------------------------------------
South Africa (0.2%)
888,400 Sanlam Ltd. * 855
60,876 South African Breweries plc 489
270,000 Standard Bank Investment Corp. Ltd. 830
- --------------------------------------------------------------------------------
2,174
- --------------------------------------------------------------------------------
Spain (0.7%)
163,200 Argentaria, Caja Postal y Banco Hipotecario de Espana, S.A. 3,656
39,221 Telefonica de Espana S.A. ADR * 5,658
- --------------------------------------------------------------------------------
9,314
- --------------------------------------------------------------------------------
Sweden (0.9%)
137,600 Autoliv, Inc. GDR 4,361
73,600 Skandinaviska Enskilda Banken "A" 890
1,033,000 Swedish Match AB 3,761
82,000 Volvo AB 2,079
- --------------------------------------------------------------------------------
11,091
- --------------------------------------------------------------------------------
Switzerland (1.3%)
4,090 Novartis AG 5,931
8,600 Selecta Group AG 3,404
3,538 Sulzer AG P.C. * 2,067
8,780 Swisscom AG 3,160
22,833 Tag Heuer International S.A. 2,114
- --------------------------------------------------------------------------------
16,676
- --------------------------------------------------------------------------------
Taiwan (0.2%)
2,367,750 China Steel Corp. 1,622
394,200 Compal Electronics, Inc. 1,055
- --------------------------------------------------------------------------------
2,677
- --------------------------------------------------------------------------------
Turkey (0.1%)
13,011,558 Yapi Ve Kredi Bankasi A.S. 166
19,209,246 Yapi Ve Kredi Bankasi A.S. Receipts *, (a) 245
- --------------------------------------------------------------------------------
411
- --------------------------------------------------------------------------------
United Kingdom (4.3%)
56,600 AstraZeneca Group plc 2,250
273,000 Bank of Scotland 3,793
1,111,200 Billiton plc 3,472
83,800 BOC Group plc 1,433
159,200 British Telecommunications plc 2,638
179,000 Cable & Wireless plc 2,203
400,000 Cadbury Schweppes 2,719
236,200 CGU plc 3,452
1,645,000 Cookson Group plc 4,764
910,000 Corporate Services Group plc 1,086
36,400 Glaxo Wellcome plc ADR 2,048
206,000 Laporte plc 2,426
1,032,000 Medeva plc 1,802
240,000 National Westminster Bank plc 5,445
62,300 Powergen plc 675
282,866 Reuters Group plc 3,889
636,000 Safeway plc 2,639
1,025,500 Tomkins plc 3,685
586,197 WPP Group plc 4,743
- --------------------------------------------------------------------------------
55,162
- --------------------------------------------------------------------------------
Total international stocks (cost: $266,640) 336,362
- --------------------------------------------------------------------------------
Principal
Amount
(000)
- -------------
INTERNATIONAL BOND (0.1%)
Japan
$ 600 MBL International Finance (Bermuda) Trust,
Convertible Notes, 3.00%, 11/30/2002 (cost: $600) 666
- --------------------------------------------------------------------------------
Total international securities (cost: $267,240) 337,028
- --------------------------------------------------------------------------------
Number
of Shares
- ----------
REAL ESTATE SECURITIES (22.5%)
Leisure Time (0.7%)
425,000 Vail Resorts Inc. * 8,765
- --------------------------------------------------------------------------------
Lodging/Hotel (1.1%)
425,000 Starwood Hotels & Resorts Worldwide, Inc. 13,919
- --------------------------------------------------------------------------------
Real Estate Investment Trusts (20.7%)
325,000 Alexandria Real Estate Equities, Inc. 10,278
325,000 Avalon Bay Communities, Inc. 11,497
325,000 Boston Properties, Inc. 11,680
375,000 Brandywine Realty Trust 7,289
300,000 Chelsea GCA Realty, Inc. 11,381
350,000 Correctional Properties Trust 5,031
550,000 Entertainment Properties Trust 10,347
300,000 Felcor Lodging Trust, Inc. 6,806
425,000 First Industrial Realty Trust, Inc. 11,502
400,000 Franchise Finance Corp. of America 9,850
300,000 Gables Residential Trust 7,200
375,000 Golf Trust of America, Inc. 9,141
400,000 Highwoods Properties, Inc. 10,525
875,000 Host Marriott Corp. 10,938
500,000 Liberty Property Trust 12,062
350,000 Mack California Realty Corp. 11,331
525,000 Mills Corp. 11,583
350,000 Pan Pacific Retail Properties, Inc. 6,956
350,000 Philips International Realty Corp. 5,622
275,000 Post Properties, Inc. 11,516
500,000 Prentiss Properties Trust 11,812
208,800 Prime Group Realty Trust 3,367
112,667 Reckson Associates Realty Corp. 3,112
400,000 Shurgard Storage Centers, Inc. 10,875
400,000 Simon Property Group, Inc. 11,700
225,000 Storage USA, Inc. 7,509
225,000 Sun Communities, Inc. 8,227
350,000 Weeks Corp. 10,938
- --------------------------------------------------------------------------------
260,075
- --------------------------------------------------------------------------------
Total real estate securities (cost: $263,481) 282,759
- --------------------------------------------------------------------------------
BASIC VALUE STOCKS (25.9%)
Aerospace/Defense (0.8%)
239,660 Boeing Co. 10,126
- --------------------------------------------------------------------------------
Aluminum (0.5%)
105,000 Alcoa, Inc. 5,775
- --------------------------------------------------------------------------------
Automobiles (0.5%)
100,000 Ford Motor Co. 5,706
- --------------------------------------------------------------------------------
Auto Parts (0.3%)
176,700 Meritor Automotive, Inc. 4,307
- --------------------------------------------------------------------------------
Banks - Major Regional (1.8%)
230,000 Fleet Financial Group, Inc. 9,459
125,000 PNC Bank Corp. 7,156
150,000 SouthTrust Corp. 5,841
- --------------------------------------------------------------------------------
22,456
- --------------------------------------------------------------------------------
Banks - Money Center (0.8%)
136,000 Chase Manhattan Corp. 9,860
- --------------------------------------------------------------------------------
Beverages - Nonalcoholic (0.4%)
45,000 Coca-Cola Co. 3,074
96,800 Pepsi Bottling Group, Inc. 2,245
- --------------------------------------------------------------------------------
5,319
- --------------------------------------------------------------------------------
Chemicals (0.3%)
26,100 Lyondell Petrochemical Co. 498
125,000 Millennium Chemicals, Inc. 3,117
- --------------------------------------------------------------------------------
3,615
- --------------------------------------------------------------------------------
Chemicals - Diversified (0.9%)
275,000 B.F. Goodrich Co. 11,138
20,000 Monsanto Co. 830
- --------------------------------------------------------------------------------
11,968
- --------------------------------------------------------------------------------
Chemicals - Specialty (0.1%)
36,300 Arch Chemicals, Inc. 837
72,600 Olin Corp. 962
- --------------------------------------------------------------------------------
1,799
- --------------------------------------------------------------------------------
Computer - Hardware (0.5%)
70,000 Hewlett-Packard Co. 6,602
- --------------------------------------------------------------------------------
Computer Software & Service (0.4%)
30,000 Microsoft Corp. * 2,421
100,050 Oracle Corp. * 2,482
- --------------------------------------------------------------------------------
4,903
- --------------------------------------------------------------------------------
Containers - Metals & Glass (0.4%)
95,000 Ball Corp. 4,625
- --------------------------------------------------------------------------------
Drugs (0.7%)
160,000 Pharmacia & Upjohn, Inc. 8,870
- --------------------------------------------------------------------------------
Electric Utilities (0.2%)
90,000 Reliant Energy, Inc. 2,745
- --------------------------------------------------------------------------------
Electrical Equipment (0.4%)
95,000 Rockwell International Corp. 5,243
- --------------------------------------------------------------------------------
Electronics - Semiconductors (0.8%)
190,000 Intel Corp. 10,272
- --------------------------------------------------------------------------------
Entertainment (0.3%)
115,000 Walt Disney Co. 3,349
- --------------------------------------------------------------------------------
Equipment - Semiconductors (0.4%)
90,000 Applied Materials, Inc. * 4,950
- --------------------------------------------------------------------------------
Finance - Consumer (0.3%)
84,816 Associates First Capital Corp. "A" 3,477
- --------------------------------------------------------------------------------
Finance - Diversified (0.1%)
25,000 PMI Group, Inc. 1,463
- --------------------------------------------------------------------------------
Foods (0.6%)
75,000 Nabisco Holdings Corp. 3,141
160,000 Ralston Purina Group 4,360
- --------------------------------------------------------------------------------
7,501
- --------------------------------------------------------------------------------
Health Care - Diversified (2.1%)
215,000 American Home Products Corp. 12,389
200,000 Bristol-Myers Squibb Co. 13,725
- --------------------------------------------------------------------------------
26,114
- --------------------------------------------------------------------------------
Household Products (0.4%)
30,000 Kimberly-Clark Corp. 1,761
40,000 Procter & Gamble Co. 3,735
- --------------------------------------------------------------------------------
5,496
- --------------------------------------------------------------------------------
Insurance - Life/Health (0.3%)
27,900 Aetna, Inc. 2,534
47,000 Stancorp Financial Group, Inc. * 1,172
- --------------------------------------------------------------------------------
3,706
- --------------------------------------------------------------------------------
Insurance - Multi-Line Companies (0.5%)
15,000 American International Group, Inc. 1,715
48,000 CIGNA Corp. 4,476
- --------------------------------------------------------------------------------
6,191
- --------------------------------------------------------------------------------
Insurance - Property/Casualty (0.4%)
130,000 Allstate Corp. 4,737
- --------------------------------------------------------------------------------
Leisure Time (0.5%)
260,000 Brunswick Corp. 6,240
- --------------------------------------------------------------------------------
Machinery - Diversified (1.3%)
100,000 Caterpillar, Inc. 5,487
300,000 Deere & Co. 11,419
- --------------------------------------------------------------------------------
16,906
- --------------------------------------------------------------------------------
Manufacturing - Diversified Industries (0.1%)
15,000 Eaton Corp. 1,308
- --------------------------------------------------------------------------------
Manufacturing - Specialized (0.5%)
100,000 Avery Dennison Corp. 5,988
- --------------------------------------------------------------------------------
Medical Products & Supplies (0.9%)
150,000 Bausch & Lomb, Inc. 11,456
- --------------------------------------------------------------------------------
Natural Gas Utilities (0.4%)
120,000 NICOR, Inc. 4,515
- --------------------------------------------------------------------------------
Oil - International Integrated (1.6%)
70,000 Chevron Corp. 6,488
60,000 Mobil Corp. 6,075
110,000 Texaco, Inc. 7,205
- --------------------------------------------------------------------------------
19,768
- --------------------------------------------------------------------------------
Oil & Gas - Drilling/Equipment (0.2%)
100,000 Helmerich & Payne, Inc. 2,331
- --------------------------------------------------------------------------------
Photography - Imaging (0.3%)
70,000 Xerox Corp. 3,933
- --------------------------------------------------------------------------------
Railroads/Shipping (0.7%)
255,000 Norfolk Southern Corp. 8,351
- --------------------------------------------------------------------------------
Retail - Department Stores (0.7%)
85,000 J.C. Penney Company, Inc. 4,393
105,000 May Department Stores Co. 4,548
- --------------------------------------------------------------------------------
8,941
- --------------------------------------------------------------------------------
Retail - General Merchandising (0.3%)
90,000 Sears, Roebuck & Co. 4,303
- --------------------------------------------------------------------------------
Services - Commercial & Consumer (0.1%)
70,000 Service Corp. International 1,343
- --------------------------------------------------------------------------------
Services - Data Processing (0.3%)
90,000 First Data Corp. 4,044
- --------------------------------------------------------------------------------
Telecommunications - Cellular/Wireless (0.1%)
30,000 Sprint PCS 1,350
- --------------------------------------------------------------------------------
Telecommunications - Long Distance (1.0%)
110,900 Sprint Corp. 12,504
- --------------------------------------------------------------------------------
Telephones (1.7%)
120,000 Bell Atlantic Corp. 6,570
120,000 GTE Corp. 7,567
136,000 SBC Communications Corp. 6,953
- --------------------------------------------------------------------------------
21,090
- --------------------------------------------------------------------------------
Total basic value stocks (cost: $190,071) 325,546
- --------------------------------------------------------------------------------
Principal
Amount
(000)
- ------------
U.S. GOVERNMENT & AGENCY ISSUES (22.0%)
Government National Mortgage Assoc. (11.9%)
$ 44,733 6.00%, 4/15/2028 - 9/15/2028 42,474
57,735 6.50%, 5/15/2023 - 3/15/2026 56,650
41,382 7.00%, 8/15/2023 - 5/15/2026 41,568
1,751 7.50%, 3/15/2017 1,804
1,627 8.00%, 6/15/2016 - 3/15/2017 1,712
2,152 8.50%, 9/15/2009 - 2/15/2017 2,293
162 9.00%, 6/15/2016 - 10/15/2016 175
2,186 9.50%, 6/15/2009 - 8/15/2017 2,368
440 10.00%, 11/15/2009 - 4/15/2016 483
33 11.50%, 3/15/2013 38
- --------------------------------------------------------------------------------
149,565
- --------------------------------------------------------------------------------
U.S. Treasury (10.1%)
10,943 U.S. Treasury Bonds, 7.88%, 2/15/2021 13,193
126,000 U.S. Treasury Bonds, 5.25%, 11/15/2028 113,951
- --------------------------------------------------------------------------------
127,144
- --------------------------------------------------------------------------------
Total U.S. government & agency issues (cost: $285,142) 276,709
- --------------------------------------------------------------------------------
MONEY MARKET INSTRUMENT (2.4%)
30,951 Federal Home Loan Mortgage Corp., 4.72%,
6/01/1999 (cost: $30,939) 30,939
- --------------------------------------------------------------------------------
Total investments (cost: $1,036,873) $1,252,981
================================================================================
PORTFOLIO SUMMARY BY INDUSTRY
-----------------------------
U.S. Government & Agency Issues 24.4%
Real Estate Investment Trusts 20.7
Telephones 4.6
Banks - Major Regional 4.4
Oil - International Integrated 2.7
Drugs 2.6
Health Care - Diversified 2.1
Insurance - Multi-Line Companies 1.6
Auto Parts 1.5
Machinery - Diversified 1.5
Railroads/Shipping 1.4
Lodging/Hotel 1.4
Leisure Time 1.3
Banks - Money Center 1.3
Electronics - Semiconductors 1.3
Telecommunications - Long Distance 1.2
Medical Products & Supplies 1.1
Chemicals - Diversified 1.1
Other 23.4
----
Total 99.6%
====
USAA CORNERSTONE 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.
ADR - American Depositary Receipts are receipts issued by a U.S. bank evidencing
ownership of foreign shares. Dividends are paid in U.S. dollars.
GDR - Global Depositary Receipts are receipts issued by a U.S. or foreign bank
evidencing ownership of foreign shares. Dividends are paid in U.S. dollars.
SPECIFIC NOTES
(a) Illiquid security valued using methods determined by the Fund's investment
manager under the general supervision of the Board of Trustees. At May 31, 1999,
these securities represented .23% of the Fund's net assets.
* Non-income producing security.
See accompanying notes to financial statements.
USAA CORNERSTONE STRATEGY FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 1999
ASSETS
Investments in securities, at market value
(identified cost of $1,036,873) $ 1,252,981
Cash 43
Cash denominated in foreign currencies
(identified cost of $1,134) 1,128
Receivables:
Capital shares sold 208
Dividends and interest 3,683
Securities sold 3,190
Unrealized appreciation on foreign currency contracts held,
at value 2
------------
Total assets 1,261,235
LIABILITIES
Securities purchased 1,434
Unrealized depreciation on foreign currency contracts held,
at value 4
Capital shares redeemed 954
USAA Investment Management Company 821
USAA Transfer Agency Company 157
Accounts payable and accrued expenses 48
------------
Total liabilities 3,418
------------
Net assets applicable to capital shares outstanding $ 1,257,817
============
REPRESENTED BY:
Paid-in capital $ 974,317
Accumulated undistributed net investment income 15,143
Accumulated net realized gain on investments 52,286
Net unrealized appreciation of investments 216,108
Net unrealized depreciation on foreign currency translations (37)
------------
Net assets applicable to capital shares outstanding $ 1,257,817
============
Capital shares outstanding, unlimited number of shares
authorized, no par value 46,084
============
Net asset value, redemption price, and offering price per share $ 27.29
============
See accompanying notes to financial statements.
USAA CORNERSTONE STRATEGY FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 1999
Net investment income:
Income:
Dividends (net of foreign taxes withheld of $958) $ 34,916
Interest 21,130
-----------
Total income 56,046
----------
Expenses:
Management fees 10,072
Transfer agent's fees 2,828
Custodian's fees 584
Postage 295
Shareholder reporting fees 184
Trustees' fees 4
Registration fees 81
Professional fees 31
Other 30
-----------
Total expenses 14,109
-----------
Net investment income 41,937
-----------
Net realized and unrealized gain (loss) on investments and
foreign currency:
Net realized gain (loss) on:
Investments 88,403
Foreign currency transactions (311)
Change in net unrealized appreciation/depreciation of:
Investments (151,418)
Foreign currency translations 345
-----------
Net realized and unrealized loss (62,981)
-----------
Decrease in net assets resulting from operations $ (21,044)
===========
See accompanying notes to financial statements.
USAA CORNERSTONE STRATEGY FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
1999 1998
-----------------------
From operations:
Net investment income $ 41,937 $ 37,298
Net realized gain on investments 88,403 89,325
Net realized loss on foreign currency transactions (311) (314)
Change in net unrealized appreciation/depreciation of:
Investments (151,418) 92,366
Foreign currency translations 345 (354)
-----------------------
Increase (decrease) in net assets
resulting from operations (21,044) 218,321
-----------------------
Distributions to shareholders from:
Net investment income (40,396) (34,020)
-----------------------
Net realized gains (76,343) (88,733)
-----------------------
From capital share transactions:
Proceeds from shares sold 151,031 222,386
Shares issued for dividends reinvested 114,177 120,534
Cost of shares redeemed (369,866) (201,585)
-----------------------
Increase (decrease) in net assets
from capital share transactions (104,658) 141,335
-----------------------
Net increase (decrease) in net assets (242,441) 236,903
Net assets:
Beginning of period 1,500,258 1,263,355
-----------------------
End of period $1,257,817 $1,500,258
=======================
Accumulated undistributed net investment income:
End of period $ 15,143 $ 14,632
=======================
Change in shares outstanding:
Shares sold 5,602 7,618
Shares issued for dividends reinvested 4,163 4,304
Shares redeemed (13,876) (6,906)
-----------------------
Increase (decrease) in shares outstanding (4,111) 5,016
=======================
See accompanying notes to financial statements.
USAA CORNERSTONE STRATEGY FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
1999 1998
-----------------------
From operations:
Net investment income $ 41,937 $ 37,298
Net realized gain on investments 88,403 89,325
Net realized loss on foreign currency transactions (311) (314)
Change in net unrealized appreciation/depreciation of:
Investments (151,418) 92,366
Foreign currency translations 345 (354)
-----------------------
Increase (decrease) in net assets
resulting from operations (21,044) 218,321
-----------------------
Distributions to shareholders from:
Net investment income (40,396) (34,020)
-----------------------
Net realized gains (76,343) (88,733)
-----------------------
From capital share transactions:
Proceeds from shares sold 151,031 222,386
Shares issued for dividends reinvested 114,177 120,534
Cost of shares redeemed (369,866) (201,585)
-----------------------
Increase (decrease) in net assets
from capital share transactions (104,658) 141,335
-----------------------
Net increase (decrease) in net assets (242,441) 236,903
Net assets:
Beginning of period 1,500,258 1,263,355
-----------------------
End of period $1,257,817 $1,500,258
=======================
Accumulated undistributed net investment income:
End of period $ 15,143 $ 14,632
=======================
Change in shares outstanding:
Shares sold 5,602 7,618
Shares issued for dividends reinvested 4,163 4,304
Shares redeemed (13,876) (6,906)
-----------------------
Increase (decrease) in shares outstanding (4,111) 5,016
=======================
See accompanying notes to financial statements.
USAA CORNERSTONE 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
Cornerstone Strategy Fund (the Fund). The Fund's investment objective is to
achieve a positive, inflation-adjusted rate of return and a reasonably stable
value of Fund shares, thereby preserving the purchasing power of shareholders'
capital.
A. Security valuation - The value of each security is determined (as of the
close of trading on the New York Stock Exchange on each business day the
Exchange is open) as set forth below:
1. Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities exchanges
are generally valued at the closing values of such securities on the exchange
where primarily traded. If no sale is reported, the average of the bid and asked
prices is generally used depending upon local custom or regulation.
2. Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices.
3. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value.
4. Other debt and government securities are valued each business day by a
pricing service (the Service) approved by the Trust's Board of Trustees. The
Service uses the mean between quoted bid and asked prices or the last sale price
to price securities when, in the Service's judgement, these prices are readily
available and are representative of the securities' market values. For many
securities, such prices are not readily available. The Service generally prices
these securities based on methods which include consideration of yields or
prices of securities of comparable quality, coupon, maturity and type,
indications as to values from dealers in securities, and general market
conditions.
5. Securities which cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value, using methods determined
by USAA Investment Management Company (the Manager) under the general
supervision of the Board of Trustees.
B. Federal taxes - The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required. As a result of certain
permanent differences between book and tax basis accounting, reclassifications
were made to the statement of assets and liabilities to decrease paid-in capital
by $7,000, to decrease accumulated undistributed net investment income by
$719,000, and to increase accumulated net realized gain on investments by
$726,000.
C. Investments in securities - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Dividend
income, less foreign taxes, if any, is recorded on the ex-dividend date. If the
ex-dividend date has passed, certain dividends from foreign securities are
recorded upon notification. Interest income is recorded on the accrual basis.
Discounts and premiums on short-term securities are amortized over the life of
the respective securities. Amortization of market discounts on long-term
securities is recognized as interest income upon disposition of the security to
the extent there is a gain on disposition.
D. Foreign currency translations - The assets of the Fund may be invested in
the securities of foreign issuers. Since the accounting records of the Fund are
maintained in U.S. dollars, foreign currency amounts are translated into U.S.
dollars on the following basis:
1. Market value of securities, other assets, and liabilities at the mean
between the bid and asked translation rates of such currencies against U.S.
dollars on a daily basis.
2. Purchases and sales of securities, income, and expenses at the rate of
exchange obtained from an independent pricing service on the respective dates of
such transactions.
Net realized and unrealized foreign currency gains/losses occurring during the
holding period of investments are a component of realized gain/loss on
investments and unrealized appreciation/depreciation on investments,
respectively.
Net realized foreign currency gains/losses arise from sales of foreign currency,
currency gains/losses realized between the trade and settlement dates on
security transactions, and from the difference between amounts of dividends,
interest, and foreign withholding taxes recorded on the Fund's books and the
U.S. dollar equivalent of the amounts received. Net realized foreign currency
gains/losses have been reclassified from accumulated net realized gain/loss to
accumulated undistributed net investment income on the statement of assets and
liabilities as such amounts are treated as ordinary income/loss for tax
purposes. Net unrealized foreign currency exchange gains/losses arise from
changes in the value of assets and liabilities other than investments in
securities resulting from changes in the exchange rate.
E. Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that may affect the reported amounts in the financial
statements.
(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 and realized gains from security
transactions not offset by capital losses are made in the succeeding fiscal year
or as otherwise required to avoid the payment of federal taxes.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the period ended May 31, 1999, were $613.2 million
and $809.1 million, respectively.
Gross unrealized appreciation and depreciation of investments at May 31, 1999,
was $262.1 million and $46.0 million, respectively.
(5) FOREIGN CURRENCY CONTRACTS
A forward currency contract (currency contract) is a commitment to purchase or
sell a foreign currency at a specified date, at a negotiated price. The Fund
currently enters into currency contracts only in connection with the purchase or
sale of a security denominated in a foreign currency. These contracts allow the
Fund to "lock in" the U.S. dollar price of the security. Currency contracts are
valued on a daily basis using foreign currency exchange rates obtained from an
independent pricing service. Risks of entering into currency contracts include
the potential inability of the counterparty to meet the terms of the contract
and the Fund giving up the opportunity for potential profit.
At May 31, 1999, the terms of open foreign currency contracts were as follows
(in thousands):
Foreign Currency Contracts to Buy:
- --------------------------------------------------------------------------------
U.S. Dollar
Exchange Contracts to Value as of In Exchange Unrealized Unrealized
Date Receive 5/31/99 for U.S. Dollar Appreciation Depreciation
- --------------------------------------------------------------------------------
6/01/99 90 $ 14 $ 14 $ - $ -
South African Rand
- --------------------------------------------------------------------------------
6/01/99 388 62 62 - -
South African Rand
- --------------------------------------------------------------------------------
6/02/99 175 280 280 - -
British Pound
- --------------------------------------------------------------------------------
6/02/99 186 299 299 - -
British Pound
- --------------------------------------------------------------------------------
$655 $655 $ - $ -
================================================================================
Foreign Currency Contracts to Sell:
- --------------------------------------------------------------------------------
U.S. Dollar
Exchange Contracts to Value as of In Exchange Unrealized Unrealized
Date Deliver 5/31/99 for U.S. Dollar Appreciation Depreciation
- --------------------------------------------------------------------------------
6/01/99 62,995 $521 $517 $ - $(4)
Japanese Yen
- --------------------------------------------------------------------------------
6/01/99 20 21 21 - -
Euro Currency
- --------------------------------------------------------------------------------
6/01/99 69 71 73 2 -
Euro Currency
- --------------------------------------------------------------------------------
6/02/99 52 54 54 - -
Euro Currency
- --------------------------------------------------------------------------------
$667 $665 $ 2 $(4)
================================================================================
(6) TRANSACTIONS WITH MANAGER
A. Management fees - USAA Investment Management Company carries out the Fund's
investment policies and manages the Fund's portfolio. The Fund's management fees
are computed at .75% of its annual average net assets.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Fund based on an annual charge of $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 period ended
May 31, 1999, was $28,000.
(7) TRANSACTIONS WITH AFFILIATES
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated Trustees or Fund officers
received any compensation from the Fund.
(8) 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:
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 29.89 $ 27.96 $ 25.47 $ 22.63 $ 23.24
Net investment income .88 .77 .74 .73 .68
Net realized and
unrealized
gain (loss) (1.14) 3.78 3.37 3.18 .67
Distributions from net
investment income (.81) (.72) (.78) (.74) (.58)
Distributions of realized
capital gains (1.53) (1.90) (.84) (.33) (1.38)
-----------------------------------------------------------
Net asset value at
end of period $ 27.29 $ 29.89 $ 27.96 $ 25.47 $ 22.63
===========================================================
Total return (%) * (.74) 17.15 16.94 17.79 6.43
Net assets at end of
period (000) $1,257,817 $1,500,258 $1,263,355 $1,035,844 $ 874,587
Ratio of expenses to
average
net assets (%) 1.05 1.01 1.06 1.15 1.13
Ratio of net investment
income to average
net assets (%) 3.12 2.64 2.88 3.06 3.16
Portfolio turnover (%) 46.27 32.73 35.14 36.15 33.17
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
</TABLE>
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 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 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
