Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Managers 5
Financial Information:
Portfolio of Investments 9
Notes to Portfolio of Investments 16
Statement of Assets and Liabilities 17
Statement of Operations 18
Statements of Changes in Net Assets 19
Notes to Financial Statements 20
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 Growth and Tax
Strategy Fund, managed by USAA Investment Management Company (IMCO). It may be
used as sales literature only when preceded or accompanied by a current
prospectus which gives further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)1999, USAA. All rights reserved.
USAA Family of Funds Summary
Fund Minimum
Type/Name Volatility Investment*
--------- ---------- ----------
CAPITAL APPRECIATION
===============================================================================
Aggressive Growth Very high $3,000
Emerging Markets(1) Very high $3,000
First Start Growth Moderate to high $3,000
Gold(1) Very high $3,000
Growth Moderate to high $3,000
Growth & Income Moderate $3,000
International(1) Moderate to high $3,000
S&P 500 (Registered Trademark)
Index(2) Moderate $3,000
Science & Technology(5) Very high $3,000
World Growth(1) Moderate to high $3,000
ASSET ALLOCATION
===============================================================================
Balanced Strategy(1) Moderate $3,000
Cornerstone Strategy(1) Moderate $3,000
Growth and Tax
Strategy(3) Moderate $3,000
Growth Strategy(1) Moderate to high $3,000
Income Strategy Low to moderate $3,000
INCOME - TAXABLE
===============================================================================
GNMA Low to moderate $3,000
Income Moderate $3,000
Income Stock Moderate $3,000
Short-Term Bond Low $3,000
INCOME - TAX EXEMPT
===============================================================================
Long-Term(3) Moderate $3,000
Intermediate-Term(3) Low to moderate $3,000
Short-Term(3) Low $3,000
State Bond Income(3)** Moderate $3,000
MONEY MARKET
===============================================================================
Money Market(4) Very low $3,000
Tax Exempt
Money Market(3),(4) Very low $3,000
Treasury Money
Market Trust(4) Very low $3,000
State Money Market(3),(4)** Very low $3,000
(1) Foreign investing is subject to additional risks, which are discussed in
the funds' prospectuses.
(2) S&P 500 (Registered Trademark) is a trademark of The McGraw-Hill Companies,
Inc. and has been licensed for use. The Product is not sponsored, sold or
promoted by Standard & Poor's, and Standard & Poor's makes no
representation regarding the advisability of investing in the Product.
(3) Some income may be subject to state or local taxes or the federal
alternative minimum tax.
(4) An investment in a money market fund is not insured or guaranteed by the
FDIC or any other government agency. Although the fund seeks to preserve
the value of your investment at $1 per share, it is possible to lose money
by investing in the fund.
(5) This Fund may be more volatile than a fund that diversifies across many
industries.
* The InveStart (Registered Trademark) program is available for investors
without the $3,000 initial investment required to open an IMCO mutual fund
account. A mutual fund account can be opened with no initial investment if
you elect to have monthly automatic investments of at least $50 from a bank
account. InveStart is not available on tax-exempt funds or the S&P 500
Index Fund. The minimum initial investment for IRAs is $250, except for the
$2,000 minimum required for the S&P 500 Index Fund. IRAs are not available
for tax-exempt funds. The Growth and Tax Strategy Fund is not available as
an investment for your IRA because the majority of its income is tax
exempt.
** California, Florida, New York, Texas, and Virginia funds available to
residents only.
Non-deposit investment products are not insured by the FDIC, are not deposits or
other obligations of, or guaranteed by, USAA Federal Savings Bank, and are
subject to investment risks, and may lose value.
For more complete information about the mutual funds managed and distributed by
USAA IMCO, including charges and expenses, please call 1-800-531-8181 for a
prospectus. Read it carefully before you invest.
Message from the President
[Photograph of the President and Vice Chairman of the Board, Michael J. C. Roth,
CFA, appears here.]
Since my last message to Investment Trust shareholders, the stock market has
reminded us that intense emotions are part of the investment process. In August,
the unraveling of markets around the world was downright scary. Huge daily
drops, the rampage into treasury bonds while other income markets dried up, and
the antics of huge hedge funds made for confusion and fear. At such times, it
becomes very hard for people to remember the long-term plans they have made for
their portfolios.
A scant three months later, stock markets have recouped losses and bond markets
have settled down. August looks like a momentary aberration. With the retreat of
fear, we are now seeing something the financial press has tagged "Internet
stocks." These are various companies, going public for the first time, whose
business is closely tied to Internet commerce. Some have soared to prices ten
times their initial offering, even though they have little or no earnings and
traditional analysts can detect little to support such lofty prices. In the
1600s, investors got the idea that tulip bulbs, which Dutch traders brought home
on their voyages, were highly valuable and bid their prices to incredible
levels. Those prices collapsed and the word "tulip" took on a special meaning
for investment professionals. The tulip craze became a classic example of
irrational investor behavior. When I watch the Internet IPOs, I think "Tulip."
This tells me that emotions can run both ways, from panic to euphoria, and make
people forget their long-term investment plans. But, you need those plans most
of all when the emotions are rampant. Trading in calm markets prepares you to
avoid trading during raging markets.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
For more complete information about mutual funds managed and distributed by USAA
IMCO, including charges and expenses, please call for a prospectus. Read it
carefully before investing.
Although none of the investments mentioned are guaranteed or insured, government
bonds are backed by the full faith and credit of the U.S. Government. Common
stocks are considered to have the most risk, followed by corporate bonds and
government bonds. All of these vehicles are subject to tax. If held to maturity,
bonds offer a fixed rate of return and fixed principal value. Return and
principal value of an investment in stocks will fluctuate.
Past performance is no guarantee of future results.
Investment Review
USAA GROWTH AND TAX STRATEGY FUND
OBJECTIVE: A conservative balance between income, the majority of which is
exempt from federal income tax, and the potential for long-term growth of
capital to preserve purchasing power.
- --------------------------------------------------------------------------------
11/30/98 5/31/98
- --------------------------------------------------------------------------------
Net Assets $232.4 Million $229.4 Million
Net Asset Value Per Share $16.31 $16.31
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AND 30-DAY SEC YIELD* AS OF 11/30/98
- --------------------------------------------------------------------------------
5/31/98 Since Inception 30-Day
to 11/30/98(+) 1 Year 5 Years on 1/11/89 SEC Yield
2.61% 9.92% 11.25% 10.54% 2.61%
- --------------------------------------------------------------------------------
* Calculated as prescribed by the Securities and Exchange Commission.
(+) Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment has
been made for taxes payable by shareholders on their reinvested income dividends
and capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return and
principal value of an investment will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
- ---------------------------------
CUMULATIVE PERFORMANCE COMPARISON
- ---------------------------------
A chart in the form of a line graph appears here, illustrating the comparison of
a $10,000 hypothetical investment in the USAA Growth and Tax Strategy Fund to
the Lehman Brothers Municipal Bond Index for the period of 1/11/89 through
11/30/98. The data points from the graph are as follows:
USAA Growth & Tax Lehman
Strategy Fund Index
------------- -------
01/11/89 $10,000 $10,000
05/31/89 10,742 10,444
11/30/89 11,484 10,911
05/31/90 11,568 11,209
11/30/90 11,582 11,751
05/31/91 12,599 12,338
11/30/91 12,880 12,957
05/31/92 13,622 13,551
11/30/92 13,981 14,258
05/31/93 15,196 15,173
11/30/93 15,850 15,838
05/31/94 15,759 15,548
11/30/94 15,571 15,005
05/31/95 17,451 16,964
11/30/95 18,852 17,842
05/31/96 20,000 17,739
11/30/96 21,599 18,891
05/31/97 22,841 19,211
11/30/97 24,576 20,249
05/31/98 26,326 21,014
11/30/98 27,014 21,821
Data since inception on 1/11/89 through 11/30/98
The graph illustrates how a $10,000 hypothetical investment in the USAA Growth
and Tax Strategy Fund outperforms its benchmark, the Lehman Brothers Municipal
Bond Index, an unmanaged benchmark of total return performance for the long-term
investment grade tax-exempt bond market.
Message from the Managers
[A photograph of portfolio managers appears here: Kenneth E. Willmann, CFA
(Tax-Exempt Bonds and Tax-Exempt Money Market Instruments), John W. Saunders,
Jr., CFA (Allocation Manager) and Patrick O'Hare, CFA (Blue Chip Stocks).]
FUND OVERVIEW
We have completed a full year under our revised asset allocation strategy to
improve tax efficiency of the USAA Growth and Tax Strategy Fund. The shift to
longer maturity tax-exempt bonds has provided higher tax-exempt income. The
transition to lower dividend, higher appreciation potential Blue Chip stocks is
now complete, and we believe benefits from this change will begin to show in the
future. Profitable stock sales required in this transition resulted in some
long-term capital gains. Accordingly, a mandatory capital gains distribution,
significantly higher than would normally be expected in this Fund, had to be
made.
The Fund's investment categories were rebalanced within their respective ranges
in November. On November 30, 1998, the end of this reporting period, portfolio
mix as a percentage of net assets was 51.1% in tax-exempt bonds, 46.5% in Blue
Chip stocks, and 4.6% in tax-exempt money market instruments.
TAX-EXEMPT BONDS
Interest Rates - Interest rates generally declined in the six months ended
November 30, 1998. The graph below illustrates this well.
MUNICIPAL AND U.S. TREASURY BOND YIELDS
- ---------------------------------------
A chart in the form of a line graph appears here illustrating the yields of the
the 30-year U.S. Treasury Bond and the Bond Buyer 40-Bond Index (BBI40) from
5/31/98 to 11/30/98.
30-year Bond Buyer
U.S. 40-Bond
Treasury Index (BBI40)
-------- -------------
05/31/98 5.80% 5.22%
06/15/98 5.57% 5.16%
06/30/98 5.63% 5.22%
07/15/98 5.71% 5.25%
07/31/98 5.71% 5.26%
08/14/98 5.54% 5.20%
08/31/98 5.27% 5.11%
09/15/98 5.26% 5.14%
09/30/98 4.98% 5.04%
10/15/98 4.97% 5.09%
10/30/98 5.16% 5.13%
11/16/98 5.29% 5.15%
11/30/98 5.06% 5.10%
Please note that the top line is the yield of the active 30-year U.S. Treasury
Bond, or the "Long Bond" as it is known. This is generally considered the
benchmark for long-term interest rates in the U.S. The bottom line in the graph
represents the yield of the Bond Buyer 40-Bond Index (BBI40), which is the
industry standard for the yield of long-term, investment-grade municipal bonds.
Besides the fact that both lines in the graph trend downward, the most striking
observation is how different those trends are. In fact, for much of the month of
October the yield in the BBI40 was actually higher than that on the "Long Bond."
This is a very rare occurrence! Remember, the interest on most municipal bonds
is free from federal income tax while interest from government and corporate
bonds is taxable. The yield on taxable bonds is usually higher than that on
tax-free bonds to compensate the investor for the taxes which will be owed.
CHANGING RELATIONSHIPS
Why do municipal bonds yield more than Treasury bonds? Let's begin by discussing
what is going on with Treasury bonds.
While the U.S. economy is currently in good shape, many of the world's economies
are not. You have probably heard of the economic collapses in Asia and Russia.
It appears that Latin America may be poised to follow. These collapses have led
to business failures, declining employment and wages, credit crunches, and
deflation of prices. In short, many of the world's economies look a lot like the
early 1930s in the U.S.
The economies of almost all countries in the world are increasingly intertwined
by technology and the expansion of world trade. Many people believe that it's
only a matter of time, and perhaps not much time, before the U.S. and Western
Europe are dragged into this scenario. The Federal Reserve Board in the U.S.,
which has been the leader in the fight against inflation for years, has recently
turned its attention to worries about recession. On September 29, 1998, it
lowered short-term interest rates .25% to 5.25%, the first change in over a
year. It lowered rates .25% again on October 15, 1998, and then repeated that
action on November 17, 1998. The lowering of interest rates is thought to
stimulate the economy. Many investors around the world, particularly those
outside of this country, view U.S. Treasury securities as a very safe
investment. Therefore, demand is very high for Treasury bonds as a haven against
future economic turmoil and deflation brought on by severe recession. As a
result, prices of these bonds soared, which in turn, caused yields to fall very
rapidly.
Municipal bonds do not offer this "ultimate safety." They entail some default
risk, though careful selection can reduce that risk. Municipal bonds are
suffering from a high level of issuance of new bonds, as well. The lower level
of interest rates is leading to much borrowing both to refinance older
outstanding bonds and to finance new projects. Demand for new bonds has not kept
pace with this large supply, causing the more restrained decline in yields on
the BBI40.
In summary, the continued decline in inflation is lowering interest rates, while
economic fear is driving people toward buying U.S. Treasury securities.
Municipal bonds have also been affected by an oversupply of new issues.
All of the foregoing combine to make tax-free municipal bonds attractive
investments, especially relative to other bonds. If the U.S. economy slows and
inflation continues to fall, yields will continue to fall, and prices on
existing bonds will rise.
BLUE CHIP STOCKS
Concerns that the turmoil overseas would cause the U.S. to go into a recession
took a heavy toll on stocks during the summer. We took advantage of the downturn
in the stock market to complete the transition to blue chip stocks. Selling near
the market lows allowed us to minimize the realized capital gains.
Simultaneously, we were purchasing blue chip stocks that we felt had better
growth prospects in the coming years.
Since reaching lows on August 31, 1998, 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 September 1, 1998, the portfolio manager of the equity portion of the Fund
changed. As a result of this change and completing the transition to blue chip
growth stocks, a number of stocks were sold and replaced. We reduced the
weightings in the basic materials, energy, healthcare, transportation, and
communication services sectors. We increased the weightings in consumer staples,
consumer cyclicals, and technology sectors. Stocks with high-dividend yields
were generally replaced with lower-yielding stocks with greater appreciation
potential. This may have a positive effect on the overall tax efficiency of the
Fund by lowering taxable income distributions.
ASSET ALLOCATION
- ----------------
A pie chart is shown here depicting the Asset Allocation as of November 30, 1998
of the USAA Growth and Tax Strategy Fund to be:
Tax-Exempt Bonds - 51.1%*; Blue Chip Stocks - 46.5%*; and Tax-Exempt Money
Market Instruments - 4.6%*.
* Percentages are of the Net Assets in the Portfolio and may or may not equal
100%.
- --------------------------------------------------------------------------------
TAX-EXEMPT SECURITIES
TOP 5 HOLDINGS
(% OF NET ASSETS)
- --------------------------------------------------------------------------------
Michigan - Detroit City School District, Series B 3.0
New York - Medical Care Facilities Finance Agency RB, Series 1995A 2.9
Pennsylvania - Pittsburgh Water and Sewer Auth. RB, Series 1998B 2.9
Illinois - Health Facilities Auth. RB, Series 1996 2.6
Michigan - Hospital Finance Auth. RB, Series 1996 2.5
- --------------------------------------------------------------------------------
- ---------------------------------
BLUE CHIP STOCKS
TOP 5 HOLDINGS
(% OF NET ASSETS)
- ---------------------------------
Microsoft 2.4
Cisco Systems 2.2
Bristol-Myers Squibb 1.9
Intel 1.9
SBC Communications 1.8
- ---------------------------------
- -------------------------------------
TOP 10 INDUSTRIES
(% OF NET ASSETS)
- -------------------------------------
Hospital 11.1
Nursing / CCRC 11.0
Single Family Housing 7.9
General Obligation Bonds 4.7
Healthcare - Diversified 3.3
Electronics - Semiconductors 3.1
Escrowed Bonds 3.0
Chemicals 2.9
Special Assessment / Tax 2.9
Water / Sewer Utility 2.9
- -------------------------------------
Note: Income may be subject to federal, state or local taxes, or to the
alternative minimum tax.
See page 9 for a complete listing of the Portfolio of Investments.
USAA GROWTH AND TAX STRATEGY FUND
PORTFOLIO OF INVESTMENTS
November 30, 1998
(Unaudited)
Market
Number Value
of Shares Security (000)
- --------------------------------------------------------------------------------
BLUE CHIP STOCKS (46.5%)
Advertising/Marketing (0.4%)
19,600 Omnicom Group, Inc. $ 1,047
- --------------------------------------------------------------------------------
Aerospace/Defense (0.8%)
43,000 Boeing Co. 1,747
- --------------------------------------------------------------------------------
Automobiles (0.9%)
39,600 Ford Motor Co. 2,188
- --------------------------------------------------------------------------------
Auto Parts (0.4%)
24,700 Lear Corp. * 954
- --------------------------------------------------------------------------------
Banks - Major Regional (2.1%)
24,700 Bank One Corp. 1,267
13,800 Fleet Financial Group, Inc. 575
9,000 Mellon Bank Corp. 567
22,800 PNC Bank Corp. 1,176
19,100 State Street Corp. 1,311
- --------------------------------------------------------------------------------
4,896
- --------------------------------------------------------------------------------
Banks - Money Center (0.5%)
11,200 J. P. Morgan & Co., Inc. 1,197
- --------------------------------------------------------------------------------
Beverages - Alcoholic (0.5%)
17,400 Anheuser-Busch Companies, Inc. 1,055
- --------------------------------------------------------------------------------
Beverages - Nonalcoholic (1.7%)
39,200 Coca-Cola Co. 2,746
16,700 Coca-Cola Enterprises, Inc. 632
15,700 PepsiCo, Inc. 607
- --------------------------------------------------------------------------------
3,985
- --------------------------------------------------------------------------------
Broadcasting - Radio & TV (0.5%)
37,400 CBS Corp. * 1,115
- --------------------------------------------------------------------------------
Chemicals (2.9%)
12,200 Dow Chemical Co. 1,188
34,600 Du Pont (E. I.) De Nemours & Co. 2,033
80,000 Monsanto Co. 3,625
- --------------------------------------------------------------------------------
6,846
- --------------------------------------------------------------------------------
Computer - Hardware (0.5%)
17,500 Dell Computer Corp. * 1,064
- --------------------------------------------------------------------------------
Computer - Networking (2.2%)
67,200 Cisco Systems, Inc. * 5,065
- --------------------------------------------------------------------------------
Computer Software & Service (2.4%)
45,200 Microsoft Corp. * 5,514
- --------------------------------------------------------------------------------
Drugs (1.4%)
21,400 Merck & Co., Inc. 3,314
- --------------------------------------------------------------------------------
Electrical Equipment (1.7%)
8,200 Emerson Electric Co. 533
38,200 General Electric Co. 3,457
- --------------------------------------------------------------------------------
3,990
- --------------------------------------------------------------------------------
Electronics - Semiconductors (3.1%)
40,000 Intel Corp. 4,305
38,500 Texas Instruments, Inc. 2,940
- --------------------------------------------------------------------------------
7,245
- --------------------------------------------------------------------------------
Entertainment (0.4%)
9,100 Time Warner, Inc. 962
- --------------------------------------------------------------------------------
Equipment - Semiconductors (1.0%)
37,600 Applied Materials, Inc. * 1,457
25,100 Teradyne, Inc. * 805
- --------------------------------------------------------------------------------
2,262
- --------------------------------------------------------------------------------
Finance - Diversified (3.1%)
11,600 American Express Co. 1,161
52,750 Citigroup, Inc. 2,647
31,600 Fannie Mae 2,299
16,500 Morgan Stanley, Dean Witter, Discover & Co. 1,151
- --------------------------------------------------------------------------------
7,258
- --------------------------------------------------------------------------------
Foods (1.3%)
29,000 Nabisco Holdings Corp. 1,156
35,700 Ralston Purina Group 1,243
7,100 Unilever N.V. - New York Shares 549
- --------------------------------------------------------------------------------
2,948
- --------------------------------------------------------------------------------
Healthcare - Diversified (3.3%)
40,000 American Home Products Corp. 2,130
36,800 Bristol-Myers Squibb Co. 4,510
12,800 Johnson & Johnson, Inc. 1,040
- --------------------------------------------------------------------------------
7,680
- --------------------------------------------------------------------------------
Household Products (1.3%)
14,200 Colgate-Palmolive Co. 1,216
20,000 Procter & Gamble Co. 1,752
- --------------------------------------------------------------------------------
2,968
- --------------------------------------------------------------------------------
Housewares (0.4%)
21,400 Newell Co. 947
- --------------------------------------------------------------------------------
Insurance - Property/Casualty (1.4%)
82,000 Allstate Corp. 3,342
- --------------------------------------------------------------------------------
Investment Banks / Brokerage (0.2%)
13,000 Bear Stearns Cos., Inc. 546
- --------------------------------------------------------------------------------
Machinery - Diversified (0.5%)
21,200 Caterpillar, Inc. 1,048
- --------------------------------------------------------------------------------
Manufacturing - Diversified Industries (0.9%)
12,400 Minnesota Mining & Manufacturing Co. 996
10,300 United Technologies Corp. 1,104
- --------------------------------------------------------------------------------
2,100
- --------------------------------------------------------------------------------
Medical Products & Supplies (0.5%)
17,100 Medtronic, Inc. 1,157
- --------------------------------------------------------------------------------
Oil - International Integrated (2.1%)
30,000 Mobil Corp. 2,586
40,000 Texaco, Inc. 2,302
- --------------------------------------------------------------------------------
4,888
- --------------------------------------------------------------------------------
Oil & Gas - Drilling/Equipment (1.1%)
90,000 Halliburton Co. 2,644
- --------------------------------------------------------------------------------
Paper & Forest Products (0.2%)
11,800 International Paper Co. 513
- --------------------------------------------------------------------------------
Retail - Building Supplies (0.4%)
20,000 Home Depot, Inc. 995
- --------------------------------------------------------------------------------
Retail - General Merchandising (1.3%)
25,700 Dayton Hudson Corp. 1,157
24,300 Wal-Mart Stores, Inc. 1,830
- --------------------------------------------------------------------------------
2,987
- --------------------------------------------------------------------------------
Retail - Specialty Apparel (0.3%)
8,300 Gap, Inc. 611
- --------------------------------------------------------------------------------
Services - Commercial & Consumer (0.5%)
28,200 Service Corp. International 1,054
- --------------------------------------------------------------------------------
Telecommunications - Long Distance (1.9%)
21,300 MCI Worldcom, Inc. * 1,257
43,000 Sprint Corp. 3,128
- --------------------------------------------------------------------------------
4,385
- --------------------------------------------------------------------------------
Telephones (1.8%)
86,500 SBC Communications Corp. 4,147
- --------------------------------------------------------------------------------
Tobacco (0.6%)
23,200 Philip Morris Cos., Inc. 1,298
- --------------------------------------------------------------------------------
Total blue chip stocks (cost: $70,775) 107,962
- --------------------------------------------------------------------------------
Principal
Amount Coupon
(000) Rate Maturity
- --------------------------------------------------------------------------------
TAX-EXEMPT SECURITIES (55.7%)
TAX-EXEMPT BONDS (51.1%)
Alabama (2.1%)
$ 4,700 Baldwin County Health Care Auth. RB,
Series 1998 5.75% 4/01/2027 4,774
Arkansas (0.9%)
2,000 Little Rock Capital Improvement. RB,
Series 1998A 5.80 1/01/2023 2,027
Connecticut (1.1%)
2,500 Development Auth. First Mortgage RB,
Series 1997 5.80 4/01/2021 2,589
Hawaii (0.6%)
1,500 Department of Budget & Finance RB,
Series 1988 5.50 7/01/2028 1,511
Illinois (2.6%)
5,500 Health Facilities Auth. RB, 6.38 1/01/2015 5,994
Series 1996
Indiana (3.3%)
4,845 Fifth Avenue Housing Development Corp.
MFH RB, Series 1993A 7.25 7/01/2025 5,144
2,500 LaPorte County Hospital Auth. RB 6.00 3/01/2023 2,609
Louisiana (1.4%)
3,080 Public Facilities Auth. SFM RB,
Series 1997B 5.75 8/01/2031 3,217
Maine (2.3%)
5,000 Housing Auth. SFH RB, Series 1994C-1 6.50 11/15/2011 5,364
Massachusetts (2.2%)
5,000 Industrial Finance Agency RB,
Series 1997B (CRE) 5.50 5/15/2027 5,122
Michigan (7.3%)
7,250 Detroit City School District,
Series B (CRE) (1) 4.75 5/01/2028 6,913
4,000 Hospital Finance Auth. RB, Series 1996 6.25 10/01/2027 4,255
5,460 Strategic Fund RB, Series 1997A 5.75 8/01/2019 5,763
Missouri (1.3%)
3,000 Health and Educational Facilities
Auth. RB, Series 1997 5.88 2/01/2023 3,135
Montana (1.7%)
3,600 Health Facilities Auth. RB,
Series 1996 6.38 6/01/2018 3,853
New Jersey (1.7%)
3,750 Economic Development Auth. RB,
Series 1997A 5.88 12/01/2026 3,896
New York (2.9%)
5,850 Medical Care Facilities Finance Agency
RB, Series 1995A (c) 6.85 2/15/2017 6,853
Oklahoma (1.2%)
2,695 Valley View Hospital Auth. RB, Series 6.00 8/15/2014 2,843
1996
Oregon (1.6%)
3,420 Clackamas County Hospital Facility
Auth. RB, Series 1997 6.30 11/01/2021 3,632
Pennsylvania (5.1%)
4,785 Philadelphia Gas Works RB, 14th Series 6.38 7/01/2026 5,255
31,755 Pittsburgh Water and Sewer Auth. RB,
Series 1998B (CRE) (1), (b) 5.30 9/01/2029 6,668
Puerto Rico (2.1%)
5,000 Highway and Transportation Auth. RB,
Series 1998A 4.75 7/01/2038 4,814
Rhode Island (2.4%)
5,200 Housing and Mortgage Finance Corp.
SFH RB, Series 15-A 6.85 10/01/2024 5,616
Texas (4.3%)
3,410 Fort Worth Higher Education Finance
Corp. RB, Series 1997A 6.00 10/01/2016 3,631
2,100 North Central Health Facilities
Development Corp. RB, Series 1996 6.30 2/15/2015 2,259
30,270 Northwest Independent School District
GO, Series 1997 (CRE) (2), (b) 6.38 8/15/2032 4,101
Wisconsin (3.0%)
3,000 Health and Educational Facilities Auth.
RB, Series 1998 5.75 7/01/2028 2,958
3,845 Housing and Economic Development Auth.
SFH RB, Series 1992A 7.10 3/01/2023 4,104
- --------------------------------------------------------------------------------
Total tax-exempt bonds (cost: $111,003) 118,900
--------
TAX EXEMPT MONEY MARKET INSTRUMENTS (4.6%)
California (0.3%)
800 Statewide Communities Development
Auth. COP, Series 1996 (CRE) (a) 3.20 6/01/2026 800
Florida (0.3%)
590 Manatee County PCRB, Series 1994 (a) 3.35 9/01/2024 590
Georgia (1.3%)
2,900 Burke County Development Auth. PCRB,
Series 1997 (a) 3.25 9/01/2026 2,900
Michigan (0.1%)
100 Jackson County Economic Development
Corp. RB, Series 1997 (CRE) (a) 3.25 6/01/2027 100
Mississippi (0.4%)
1,000 Jackson County Port Facility RB,
Series 1993 (a) 3.30 6/01/2023 1,000
New York (1.2%)
2,725 St. Lawrence County IDA PCRB,
Series 1985 (CRE) (a) 3.30 12/01/2007 2,725
Texas (0.7%)
1,570 Port Arthur Navigation District IDC
PCRB, Series 1985 (CRE) (a) 3.30 5/01/2003 1,570
Virginia (0.4%)
990 Alexandria Redevelopment and Housing
Auth., Series 1996B (CRE) (a) 3.35 10/01/2006 990
- --------------------------------------------------------------------------------
Total tax-exempt money market instruments (cost: $10,675) 10,675
- --------------------------------------------------------------------------------
Total tax-exempt securities (cost: $121,678) 129,575
- --------------------------------------------------------------------------------
Total investments (cost: $192,453) $ 237,537
================================================================================
USAA GROWTH AND STRATEGY FUND
NOTES TO PORTFOLIO OF INVESTMENTS
November 30, 1998
(Unaudited)
GENERAL NOTES
Market values of securities are determined by procedures and practices discussed
in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
PORTFOLIO DESCRIPTION ABBREVIATIONS
COP Certificate of Participation SFM Single-Family Mortgage
GO General Obligation MFH Multi-Family Housing
IDA Industrial Development PCRB Pollution Control Revenue Bond
Authority/Agency RB Revenue Bond
IDC Industrial Development SFH Single-Family Housing
Corporation
CRE - Credit Enhancement - adds the financial strength of the provider of the
enhancement to support the issuer's ability to repay the principal when due. The
enhancement may be provided by either a high quality bank, insurance company, or
other corporation, or a collateral trust. Typically, the rating agencies
evaluate the security based upon the credit standing of the provider of the
credit enhancement, rather than the credit standing of the issuer. If the
securities are enhanced by a bond insurer, scheduled principal and interest
payments are insured by one of the following:
(1) Financial Guaranty Insurance Co.
(2) Texas Permanent School Fund
SPECIFIC NOTES
(a) Variable rate demand notes (VRDN) - provide the right, on any business day,
to sell the security at face value on either that day or in seven days. The
interest rate is adjusted at a stipulated daily, weekly, or monthly interval to
a rate that reflects current market conditions. In bond funds, the effective
maturity is the next date the holder may sell the security back to the issuer.
Most VRDNs possess a credit enhancement.
(b) Zero coupon security - the rate represents the effective yield at date of
purchase. These securities represented 4.5% of the Fund's net assets.
(c) Prerefunded to various dates prior to maturity at the call price.
See accompanying notes to financial statements.
USAA GROWTH AND TAX STRATEGY FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
November 30, 1998
(Unaudited)
ASSETS
Investments in securities, at market value (identified
cost of $192,453) $237,537
Cash 55
Receivables:
Capital shares sold 39
Dividends and interest 1,896
----------
Total assets 239,527
----------
LIABILITIES
Securities purchased 6,915
Capital shares redeemed 54
USAA Investment Management Company 94
USAA Transfer Agency Company 23
Accounts payable and accrued expenses 24
---------
Total liabilities 7,110
---------
Net assets applicable to capital shares outstanding $232,417
=========
REPRESENTED BY:
Paid-in capital $177,108
Accumulated undistributed net investment income 1,194
Accumulated net realized gain on investments 9,031
Net unrealized appreciation of investments 45,084
---------
Net assets applicable to capital shares outstanding $232,417
=========
Capital shares outstanding, unlimited number of shares authorized,
no par value 14,251
=========
Net asset value, redemption price, and offering price per share $ 16.31
=========
See accompanying notes to financial statements.
USAA GROWTH AND TAX STRATEGY FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended November 30, 1998
(Unaudited)
Net investment income:
Income:
Dividends $ 909
Interest 3,371
-------
Total income 4,280
-------
Expenses:
Management fees 566
Transfer agent's fees 134
Custodian's fees 36
Postage 6
Shareholder reporting fees 6
Trustees' fees 2
Registration fees 23
Professional fees 13
Other 3
-------
Total expenses 789
-------
Net investment income 3,491
-------
Net realized and unrealized gain on investments:
Net realized gain on investments 9,031
Change in net unrealized appreciation/depreciation of investments (6,704)
-------
Net realized and unrealized gain 2,327
-------
Increase in net assets resulting from operations $5,818
=======
See accompanying notes to financial statements.
USAA GROWTH AND TAX STRATEGY FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended November 30, 1998
and Year ended May 31, 1998
(Unaudited)
11/30/98 5/31/98
-------------------------
From operations:
Net investment income $ 3,491 $ 6,749
Net realized gain on investments 9,031 4,261
Change in net unrealized appreciation/depreciation
of investments (6,704) 18,173
-------------------------
Increase in net assets resulting from operations 5,818 29,183
-------------------------
Distributions to shareholders from:
Net investment income (3,535) (6,690)
-------------------------
Net realized gains (2,367) (6,834)
-------------------------
From capital share transactions:
Proceeds from shares sold 12,735 37,106
Shares issued for dividends reinvested 5,405 12,448
Cost of shares redeemed (15,043) (21,313)
-------------------------
Increase in net assets from capital share
transactions 3,097 28,241
-------------------------
Net increase in net assets 3,013 43,900
Net assets:
Beginning of period 229,404 185,504
-------------------------
End of period $232,417 $229,404
=========================
Undistributed net investment income included in
net assets:
End of period $ 1,194 $ 1,238
=========================
Change in shares outstanding:
Shares sold 801 2,363
Shares issued for dividends reinvested 336 807
Shares redeemed (952) (1,355)
-------------------------
Increase in shares outstanding 185 1,815
=========================
See accompanying notes to financial statements.
USAA GROWTH AND TAX STRATEGY FUND
NOTES TO FINANCIAL STATEMENTS
November 30, 1998
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA INVESTMENT TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended, is a diversified, open-end management investment company
organized as a Massachusetts business trust consisting of eleven separate funds.
The information presented in this semiannual report pertains only to the USAA
Growth and Tax Strategy Fund (the Fund). The Fund's investment objective is to
seek a conservative balance between income, the majority of which is exempt from
federal income tax, and the potential for long-term growth of capital to
preserve purchasing power.
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.
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 short-term taxable debt securities,
original issue discounts on all securities, and premiums on long-term tax exempt
securities are amortized over the life of the respective securities.
Amortization of market discounts on long-term debt securities is recognized as
interest income upon disposition of the security to the extent there is a gain
on disposition.
D. Use of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINES OF CREDIT
The Fund participates with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million, one with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($750 million uncommitted), and one with
NationsBank of Texas, N.A. ($100 million committed). The purpose of the
agreements is to meet temporary or emergency cash needs, including redemption
requests that might otherwise require the untimely disposition of securities.
Subject to availability under its agreement with CAPCO, the Fund may borrow from
CAPCO an amount up to 5% of the Fund's total assets at CAPCO's borrowing rate
with no markup. Subject to availability under its agreement with NationsBank,
the Fund may borrow from NationsBank an amount which, when added to outstanding
borrowings under the CAPCO agreement, does not exceed 25% of the Fund's total
assets at NationsBank's borrowing rate plus a markup. The Fund had no borrowings
under either of these agreements during the six-month period ended November 30,
1998.
(3) DISTRIBUTIONS
Distributions of 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.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended November 30, 1998 were
$80.9 million and $83.7 million, respectively.
Gross unrealized appreciation and depreciation of investments at November 30,
1998 was $45.1 million and $29,000 respectively.
(5) TRANSACTIONS WITH MANAGER
A. Management fees - USAA Investment Management Company carries out the Fund's
investment policies and manages the Fund's portfolio. The Fund's management fees
are computed at .50% of its annual average net assets.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Fund based on an annual charge of $26 per shareholder account plus
out-of-pocket expenses. Effective January 1, 1999, the annual charge will be
$28.50.
C. Underwriting services - The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing best efforts basis. The
Manager receives no commissions or fees for this service.
D. Brokerage services - USAA Brokerage Services, a discount brokerage service of
the Manager, may execute portfolio transactions for the Fund. The amount of
brokerage commissions paid to USAA Brokerage Services during the six-month
period ended November 30, 1998 was $21,000.
(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) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Six-month Eight-month
Period Ended Period Ended
November 30, Year Ended May 31, May 31,
---------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value
at beginning
of period $ 16.31 $ 5.14 $ 14.11 $ 12.82 $ 12.32 $ 13.00
Net investment
income .25 .50 .52 .51 .49 .29
Net realized and
unrealized
gain (loss) .17 1.72 1.39 1.32 .76 (.27)
Distributions from net
investment income (.25) (.51) (.52) (.51) (.48) (.33)
Distributions of realized
capital gains (.17) (.54) (.36) (.03) (.27) (.37)
---------------------------------------------------------------------------
Net asset value at
end of period $ 16.31 $ 16.31 $ 15.14 $ 14.11 $ 12.82 $ 12.32
===========================================================================
Total return (%) * 2.61 15.26 14.21 14.61 10.73 .13
Net assets at end
of period (000) $232,417 $229,404 $185,504 $160,390 $134,538 $128,077
Ratio of expenses
to average
net assets (%) .70(a) .71 .74 .82 .80 .84(a)
Ratio of net investment
income to average
net assets (%) 3.09(a) 3.22 3.66 3.79 4.02 3.56(a)
Portfolio turnover(%) 36.56 65.58(b) 194.21(b) 202.55(b) 265.52(b) 171.35(b)
</TABLE>
* Assumes reinvestment of all dividend income distributions during the period.
(a)Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b)At times, before the current period, the Fund has simultaneously purchased
and sold the same securities. These transactions sometimes were high in
volume and were dissimilar to other trade activity within the Fund. If these
transactions were excluded from the calculation, the portfolio turnover rate
would have been:
Six-month Eight-month
Period Ended Period Ended
November 30, Year Ended May 31, May 31,
-------------------------------------------------------------
1998 1998 1997 1996 1995 1994
-------------------------------------------------------------
Portfolio turnover (%) N/A 31.58 52.97 61.98 131.28 93.56
Purchases and sales
of this type are
as follows:
Purchases (000) N/A $68,958 $220,402 $192,239 $234,367 $98,639
Sales (000) N/A $69,044 $220,683 $192,490 $234,669 $98,761
TRUSTEES
Robert G. Davis, Chairman of the Board
Michael J.C. Roth, President and Vice Chairman of the Board
John W. Saunders, Jr., Vice President
Barbara B. Dreeben
Howard L. Freeman, Jr.
Robert L. Mason
Richard A. Zucker
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
Telephone Assistance Hours
Call toll free - Central Time
Monday - Friday 7:30 a.m. to 8:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
For Additional Information On Mutual Funds
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges or redemptions
1-800-531-8448, (in San Antonio) 456-7202
Recorded Mutual Fund Price Quotes
24-Hour Service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
Mutual Fund TouchLine(Registered Trademark)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
