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 17
Statement of Assets and Liabilities 19
Statement of Operations 20
Statements of Changes in Net Assets 21
Notes to Financial Statements 22
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 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 GROWTH AND TAX STRATEGY FUND
OBJECTIVE: Conservative balance for the investor 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.
- --------------------------------------------------------------------------------
5/31/99 5/31/98
- --------------------------------------------------------------------------------
Net Assets $252.4 Million $229.4 Million
Net Asset Value Per Share $16.66 $16.31
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AND 30-DAY SEC YIELD* AS OF 5/31/99
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years 30-day SEC Yield
9.10% 12.76% 10.33% 2.63%
- --------------------------------------------------------------------------------
* Calculated as prescribed by the Securities and Exchange Commission.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment has
been made for taxes payable by shareholders on their reinvested income dividends
and capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return and
principal value of an investment will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
CUMULATIVE PERFORMANCE COMPARISON
---------------------------------
A chart in the form of a line graph appears here, illustrating the comparison of
a $10,000 hypothetical investment in the USAA Growth and Tax Strategy Fund to
the Lehman Brothers Municipal Bond Index for the period of 5/31/89 through
5/31/99. The data points from the graph are as follows:
USAA Growth & Tax Lehman
Strategy Fund Index
------------- -------
05/31/89 $10,000 $10,000
11/30/89 10,690 10,447
05/31/90 10,769 10,732
11/30/90 10,782 11,251
05/31/91 11,728 11,813
11/30/91 11,990 12,405
05/31/92 12,680 12,974
11/30/92 13,015 13,649
05/31/93 14,146 14,526
11/30/93 14,754 15,162
05/31/94 14,670 14,884
11/30/94 14,495 14,366
05/31/95 16,245 16,240
11/30/95 17,549 17,081
05/31/96 18,618 16,983
11/30/96 20,106 18,085
05/31/97 21,263 18,389
11/30/97 22,877 19,381
05/31/98 24,506 20,114
11/30/98 25,147 20,885
05/31/99 26,736 21,054
Data from 5/31/89 through 5/31/99
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
[PHOTOGRAPH OF THE 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
The Growth & Tax Strategy Fund was the first mutual fund to combine tax-exempt
securities with common stocks in a balanced format. The Fund was first offered
to investors on January 11, 1989, so it crossed the ten-year point during this
reporting period.
Under Internal Revenue Service rules, the Fund must have at least 50% of its
assets invested in tax-exempt securities at the end of each fiscal quarter in
order to pass through the tax-exempt income to its shareholders. Therefore, the
Fund never had the traditional 60% common stocks, 40% bonds investment mix
normally associated with a "balanced" fund. In fact, the Fund had the reverse
mix of 60% bonds, 40% common stocks until October, 1997. After that, the common
stock target has been 41-49% with the remainder in tax-exempt securities.
The Fund is intended to be a complete but conservative investment for
shareholders seeking a good level of tax-exempt income, along with exposure to
common stocks. The stocks provide capital gain potential to offset the impact of
inflation on assets and income.
The performance record for ten years under this format is now history (see
performance chart), which gives an indication of how this combination has
worked. Of course, past performance is no guarantee of future results.
The Fund's investment categories were rebalanced within their respective ranges
in May. On May 31, 1999, the end of this reporting period, portfolio mix as a
percentage of net assets was 48.6% in tax-exempt bonds, 47.7% in blue chip
stocks, and 6.1% in tax-exempt money market instruments.
TAX-EXEMPT BONDS
Interest rates on May 31, 1999, were a bit higher than a year earlier. But that
simple statement doesn't begin to describe the events of the last twelve months.
The graph below shows what happened.
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 5/31/99.
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%
12/15/98 5.03% 5.11%
12/31/98 5.10% 5.16%
01/15/99 5.02% 5.17%
01/29/99 5.09% 5.09%
02/15/99 5.43% 5.15%
02/26/99 5.58% 5.17%
03/15/99 5.52% 5.20%
03/31/99 5.63% 5.23%
04/15/99 5.53% 5.21%
04/30/99 5.66% 5.28%
05/14/99 5.92% 5.38%
05/31/99 5.83% 5.37%
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 commonly known. This is generally considered the
benchmark for long-term interest rates in the United States. 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.
In early summer of 1998, against a backdrop of economic depression in most of
Asia, Russia collapsed economically. Latin America, particularly Brazil, began
to show signs of weakness. Investors worldwide became fearful of spreading
economic collapse and purchased U.S. Treasury bonds as the ultimate in safety
and liquidity. This forced prices up and yields down. The U.S. stock market was
also affected, and on August 31, 1998, the Dow Jones Industrial Average(1) fell
more than 500 points. At the end of September, Russia defaulted on its debt,
which led to the failure of several hedge funds. These are private investment
funds that invest in exotic securities with high degrees of leverage. This led
to worries about the health of U.S. bank and brokerage houses. On October 5,
1998, the long bond reached a yield of 4.72%, a level that had not been seen in
decades.
Much of the world's economy began to stabilize in the autumn and winter of 1998.
While recovery was very hard to find, it appears that the weakest economies were
no longer in free fall. Stock markets around the world began to recover. The
worldwide panic was over.
The U.S. economy and most of Western Europe never faltered. In fact, the
continued robustness of the U.S. economy is beginning to worry many people.
There are signs of a resurgence in inflation. Will the expansion end in sudden
collapse since much of the strength is being financed by extremely high and
growing consumer debt? This caution is apparent in the course of interest rates
in the last six months. They have risen--just what would be expected given these
concerns.
Noticeable in the graph on page 6 is the relative sedateness of the BBI40.
Municipal yields usually are less volatile than those of U.S. Treasuries (which
are among the most volatile bonds in the world). This difference in volatility
was extreme in the 12 months ended May 31, 1999. For most of the period from
late September through January, the yield on the BBI40 was higher than that of
the long bond. This is unusual since the interest on most municipal bonds is
exempt from federal income taxes, and the interest on Treasury bonds is not.
Although a more normal relationship has since re-established itself, tax-exempt
municipal bonds are still attractive compared to U.S. Treasuries on an after-tax
basis. And municipal bonds did not take investors on the wild ride in price that
Treasuries did. Tax-exempt municipal bonds have once again proven their
historical attractiveness--solid after-tax returns with relatively little risk.
BLUE CHIP STOCKS
Concerns that the turmoil overseas would cause the United States to go into a
recession took a heavy toll on stocks during the summer of 1998. 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.
On September 1, 1998, a new portfolio manager for this portion of the Fund was
named. As a result of this change and completion of the transition to blue chip
growth stocks, a number of stocks were sold and replaced. We reduced the
weightings in the basic materials, energy, health care, transportation, and
communication services sectors. We increased the weightings in consumer staples,
consumer cyclicals, and technology sectors. Generally, we sold stocks with
high-dividend yields and replaced them with lower-yielding stocks that we think
have greater appreciation potential. This should lower taxable income
distributions.
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. The Fund's emphasis on these two sectors
helped its overall performance. In addition, the Fund was helped by the recent
rebound in the energy sector and other cyclical stocks. However, the Fund's
performance was hurt by its exposure to the health care sector.
(1) The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30
actively traded blue chip stocks.
ASSET ALLOCATION
----------------
A pie chart is shown here depicting the Asset Allocation as of May 31, 1999 of
the USAA Growth and Tax Strategy Fund to be:
Tax-Exempt Bonds - 48.6%*; Blue Chip Stocks - 47.7%*; and Tax-Exempt Money
Market Instruments - 6.1%*.
* 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)
- -----------------------------------------------------------------------
Illinois-Chicago Board of Education GO, Series 1999A 3.4
Massachusetts-Bay Transit Auth. RB, Series 1997C 2.8
New York-Medical Care Facilities Finance Agency RB, Series 1995A 2.7
Illinois-Health Facilities Auth. RB, Series 1996 2.3
Michigan-Strategic Fund RB, Series 1997A 2.2
- -----------------------------------------------------------------------
- -------------------------- ---------------------------------
BLUE CHIP STOCKS TOP 10 INDUSTRIES
TOP 5 HOLDINGS (% OF NET ASSETS)
(% OF NET ASSETS) ---------------------------------
- -------------------------- Nursing/CCRC 10.0
Cisco Systems 2.9 Hospital 9.4
Microsoft Corp. 2.9 Special Assessment/Tax 6.8
Bristol-Myers Squibb 2.0 Single Family Housing 6.8
Sprint Corp. 1.9 General Obligation 5.4
SBC Communications 1.8 Electric/Gas Utility 3.5
- -------------------------- Financial-Diversified 3.4
HealthCare-Diversified 3.4
Electronics-Semiconductors 3.4
Oil-International Integrated 3.3
---------------------------------
Note: Income may be subject to federal, state, or local taxes, or to the
alternative minimum tax.
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.
Tax exempt income $ .39
Ordinary income * .09
Long-term capital gains .60
------
Total $ 1.08
======
100% 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 Growth and Tax Strategy Fund, a series
of the USAA Investment Trust, as of May 31, 1999, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the years in the two-year period then ended, and financial highlights,
presented in note 8 to the financial statements, for each of the years 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 Growth and Tax 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 GROWTH AND TAX STRATEGY FUND
PORTFOLIO OF INVESTMENTS
May 31, 1999
Market
Number Value
of Shares Security (000)
- --------------------------------------------------------------------------------
BLUE CHIP STOCKS (47.7%)
Advertising/Marketing (0.5%)
19,600 Omnicom Group, Inc. $ 1,372
- --------------------------------------------------------------------------------
Aerospace/Defense (0.7%)
43,000 Boeing Co. 1,817
- --------------------------------------------------------------------------------
Automobiles (0.9%)
39,600 Ford Motor Co. 2,260
- --------------------------------------------------------------------------------
Banks - Major Regional (2.1%)
24,700 Bank One Corp. 1,397
13,800 Fleet Financial Group, Inc. 568
18,000 Mellon Bank Corp. 642
22,800 PNC Bank Corp. 1,305
19,100 State Street Corp. 1,457
- --------------------------------------------------------------------------------
5,369
- --------------------------------------------------------------------------------
Banks - Money Center (0.6%)
11,200 J. P. Morgan & Co., Inc. 1,560
- --------------------------------------------------------------------------------
Beverages - Alcoholic (0.5%)
17,400 Anheuser-Busch Companies, Inc. 1,271
- --------------------------------------------------------------------------------
Beverages - Nonalcoholic (1.0%)
28,900 Coca-Cola Co. 1,974
15,700 PepsiCo, Inc. 562
- --------------------------------------------------------------------------------
2,536
- --------------------------------------------------------------------------------
Broadcasting - Radio & TV (0.9%)
37,400 CBS Corp. 1,561
23,000 Infinity Broadcasting Corp. * 588
- --------------------------------------------------------------------------------
2,149
- --------------------------------------------------------------------------------
Chemicals (2.6%)
12,200 Dow Chemical Co. 1,482
27,600 Du Pont (E. I.) De Nemours & Co. 1,806
80,000 Monsanto Co. 3,320
- --------------------------------------------------------------------------------
6,608
- --------------------------------------------------------------------------------
Computer - Hardware (0.5%)
35,000 Dell Computer Corp. * 1,205
- --------------------------------------------------------------------------------
Computer - Networking (2.9%)
67,200 Cisco Systems, Inc. * 7,325
- --------------------------------------------------------------------------------
Computer Software & Service (2.9%)
90,400 Microsoft Corp. * 7,294
- --------------------------------------------------------------------------------
Drugs (1.1%)
42,800 Merck & Co., Inc. 2,889
- --------------------------------------------------------------------------------
Electrical Equipment (1.7%)
42,600 General Electric Co. 4,332
- --------------------------------------------------------------------------------
Electronics - Semiconductors (3.4%)
80,000 Intel Corp. 4,325
38,500 Texas Instruments, Inc. 4,211
- --------------------------------------------------------------------------------
8,536
- --------------------------------------------------------------------------------
Entertainment (0.8%)
31,000 Time Warner, Inc. 2,110
- --------------------------------------------------------------------------------
Equipment - Semiconductors (1.3%)
37,600 Applied Materials, Inc. * 2,068
25,100 Teradyne, Inc. * 1,326
- --------------------------------------------------------------------------------
3,394
- --------------------------------------------------------------------------------
Finance - Diversified (3.4%)
11,600 American Express Co. 1,406
52,750 Citigroup, Inc. 3,495
31,600 Fannie Mae 2,149
16,500 Morgan Stanley, Dean Witter, Discover & Co. 1,592
- --------------------------------------------------------------------------------
8,642
- --------------------------------------------------------------------------------
Foods (0.5%)
29,000 Nabisco Holdings Corp. 1,214
- --------------------------------------------------------------------------------
Health Care - Diversified (3.4%)
40,000 American Home Products Corp. 2,305
73,600 Bristol-Myers Squibb Co. 5,051
12,800 Johnson & Johnson, Inc. 1,185
- --------------------------------------------------------------------------------
8,541
- --------------------------------------------------------------------------------
Household Products (1.3%)
14,200 Colgate-Palmolive Co. 1,418
20,000 Procter & Gamble Co. 1,868
- --------------------------------------------------------------------------------
3,286
- --------------------------------------------------------------------------------
Insurance - Property/Casualty (1.2%)
82,000 Allstate Corp. 2,988
- --------------------------------------------------------------------------------
Investment Banks/Brokerage (0.2%)
13,650 Bear Stearns Cos., Inc. 606
- --------------------------------------------------------------------------------
Machinery - Diversified (0.5%)
21,200 Caterpillar, Inc. 1,163
- --------------------------------------------------------------------------------
Manufacturing - Diversified Industries (0.9%)
12,300 Tyco International Ltd. 1,075
20,600 United Technologies Corp. 1,278
- --------------------------------------------------------------------------------
2,353
- --------------------------------------------------------------------------------
Medical Products & Supplies (0.5%)
17,100 Medtronic, Inc. 1,214
- --------------------------------------------------------------------------------
Oil - International Integrated (2.2%)
30,000 Mobil Corp. 3,038
40,000 Texaco, Inc. 2,620
- --------------------------------------------------------------------------------
5,658
- --------------------------------------------------------------------------------
Oil & Gas - Drilling/Equipment (1.5%)
90,000 Halliburton Co. 3,724
- --------------------------------------------------------------------------------
Paper & Forest Products (0.2%)
11,800 International Paper Co. 590
- --------------------------------------------------------------------------------
Personal Care (0.4%)
18,100 Gillette Co. 923
- --------------------------------------------------------------------------------
Retail - Building Supplies (0.6%)
24,800 Home Depot, Inc. 1,411
- --------------------------------------------------------------------------------
Retail - General Merchandising (1.7%)
25,700 Dayton Hudson Corp. 1,619
61,000 Wal-Mart Stores, Inc. 2,600
- --------------------------------------------------------------------------------
4,219
- --------------------------------------------------------------------------------
Retail - Specialty Apparel (0.3%)
12,450 Gap, Inc. 779
- --------------------------------------------------------------------------------
Telecommunications - Long Distance (2.7%)
21,300 MCI Worldcom, Inc. * 1,840
43,000 Sprint Corp. 4,848
- --------------------------------------------------------------------------------
6,688
- --------------------------------------------------------------------------------
Telephones (1.8%)
86,500 SBC Communications Corp. 4,422
- --------------------------------------------------------------------------------
Total blue chip stocks (cost: $66,742) 120,448
- --------------------------------------------------------------------------------
Principal Market
Amount Coupon Value
(000) Security Rate Maturity (000)
- --------------------------------------------------------------------------------
TAX-EXEMPT SECURITIES (54.7%)
TAX-EXEMPT BONDS (48.6%)
Alabama (1.8%)
$ 4,700 Baldwin County Health Care Auth. RB,
Series 1998 5.75% 4/01/2027 $ 4,629
Arkansas (0.8%)
2,000 Little Rock Capital Improvement. RB,
Series 1998A 5.80 1/01/2023 1,996
Connecticut (1.0%)
2,500 Development Auth. First Mortgage RB,
Series 1997 5.80 4/01/2021 2,527
Illinois (5.7%)
50,000 Chicago Board of Education GO,
Series 1999A (INS)(1),(b) 5.49 12/01/2031 8,611
5,500 Health Facilities Auth. RB,
Series 1996 6.38 1/01/2015 5,880
Indiana (3.0%)
4,815 Fifth Avenue Housing Development Corp.
MFH RB, Series 1993A 7.25 7/01/2025 5,093
2,500 LaPorte County Hospital Auth. RB 6.00 3/01/2023 2,571
Louisiana (1.3%)
3,080 Public Facilities Auth. SFM RB,
Series 1997B 5.75 8/01/2031 3,178
Maine (2.1%)
5,000 Housing Auth. SFH RB,
Series 1994C-1 (d) 6.50 11/15/2011 5,305
Massachusetts (4.8%)
7,500 Bay Transit Auth. RB,
Series 1997C (c) 5.00 3/01/2024 7,132
5,000 Industrial Finance Agency RB,
Series 1997B (LOC) 5.50 5/15/2027 4,968
Michigan (3.9%)
4,000 Hospital Finance Auth. RB,
Series 1996 6.25 10/01/2027 4,170
5,460 Strategic Fund RB, Series 1997A 5.75 8/01/2019 5,640
Missouri (1.2%)
3,000 Health and Educational Facilities
Auth. RB, Series 1997 5.88 2/01/2023 3,073
Montana (1.5%)
3,600 Health Facilities Auth. RB,
Series 1996 6.38 6/01/2018 3,777
New Jersey (1.5%)
3,750 Economic Development Auth. RB,
Series 1997A 5.88 12/01/2026 3,801
New York (5.1%)
1,750 Dormitory Authority RB,
Series 1999 (INS)(3),(c) 5.13 9/01/2023 1,693
5,850 Medical Care Facilities Finance
Agency RB, Series 1995A (PRE)(d) 6.85 2/15/2017 6,721
3,500 Metropolitan Transportation Authority
RB, Series A (INS)(2),(c) 5.25 4/01/2023 3,497
1,000 Yonkers, Series 1999C (INS)(1),(c) 5.00 6/01/2019 974
Oklahoma (1.1%)
2,695 Valley View Hospital Auth. RB,
Series 1996 6.00 8/15/2014 2,787
Oregon (1.4%)
3,420 Clackamas County Hospital Facility
Auth. RB, Series 1997 6.30 11/01/2021 3,565
Pennsylvania (2.1%)
3,240 Philadelphia Gas Works RB,
14th Series 6.38 7/01/2026 3,513
1,545 Philadelphia Gas Works RB,
14th Series (PRE) 6.38 7/01/2026 1,698
Puerto Rico (1.8%)
5,000 Highway and Transportation Auth. RB,
Series 1998A 4.75 7/01/2038 4,590
Rhode Island (2.2%)
5,200 Housing and Mortgage Finance Corp.
SFH RB, Series 15-A 6.85 10/01/2024 5,556
Texas (3.9%)
3,410 Fort Worth Higher Education Finance
Corp. RB, Series 1997A 6.00 10/01/2016 3,539
2,100 North Central Health Facilities
Development Corp. RB, Series 1996 6.30 2/15/2015 2,215
30,270 Northwest Independent School District
GO, Series 1997 (NBGA)(b) 6.38 8/15/2032 4,098
Wisconsin (2.4%)
3,000 Health and Educational Facilities
Auth. RB, Series 1998 5.75 7/01/2028 2,881
2,935 Housing and Economic Development
Auth. SFH RB, Series 1992A (d) 7.10 3/01/2023 3,102
- --------------------------------------------------------------------------------
Total tax-exempt bonds (cost: $117,333) 122,780
- --------------------------------------------------------------------------------
TAX-EXEMPT MONEY MARKET INSTRUMENTS (6.1%)
Florida (1.7%)
4,400 Hillsborough County IDA RB,
Series 1992(a) 3.30 5/15/2018 4,400
Michigan (0.6%)
1,405 Jackson County Economic Development
Corp. RB, Series 1997 (LOC)(a) 3.30 6/01/2027 1,405
New York (2.1%)
5,200 Long Island Power Authority RB,
Series 5 Series (LOC)(a) 3.30 5/01/2033 5,200
Pennsylvania (0.3%)
700 Allegheny County IDA RB (LOC)(a) 3.30 7/01/2027 700
Texas (0.4%)
1,040 Port Arthur Navigation District
IDC PCRB, Series 1985 (LOC)(a) 3.35 5/01/2003 1,040
Wyoming (1.0%)
2,600 Lincoln County Pollution Control
RB (a) 3.35 8/01/2015 2,600
- --------------------------------------------------------------------------------
Total tax-exempt money market instruments (cost: $15,345) 15,345
- --------------------------------------------------------------------------------
Total tax-exempt securities (cost: $132,678) 138,125
- --------------------------------------------------------------------------------
Total investments (cost: $199,420) $258,573
================================================================================
USAA GROWTH AND TAX 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.
PORTFOLIO DESCRIPTION ABBREVIATIONS
IDA Industrial Development Authority/Agency GO General Obligation
IDC Industrial Development Corporation MFH Multi-Family Housing
PCRB Pollution Control Revenue Bond RB Revenue Bond
SFH Single-Family Housing SFM Single-Family Mortgage
CREDIT ENHANCEMENTS - add 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.
(PRE) Prerefunded to a date prior to maturity.
(LOC) Enhanced by a bank letter of credit.
(NBGA) Enhanced by a non-bank guarantee agreement.
(INS) Scheduled principal and interest payments are insured by:
(1) Financial Guaranty Insurance Co.
(2) Financial Security Assurance Holdings Ltd.
(3) Asset Guaranty Insurance Co.
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 money market funds, the
effective maturity of these instruments is deemed to be less than 397 days in
accordance with detailed regulatory requirements. In bond funds, the effective
maturity is the next put date.
(b) Zero coupon security - the rate represents the effective yield at date of
purchase. These securities represented 5.0% of the Fund's net assets.
(c) At May 31, 1999, the cost of securities purchased on a delayed delivery
basis was $13.4 million.
(d) At May 31, 1999, these securities were segregated to cover delayed delivery
purchases.
* Non-income producing security.
See accompanying notes to financial statements.
USAA GROWTH AND TAX STRATEGY FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 1999
ASSETS
Investments in securities, at market value
(identified cost of $199,420) $ 258,573
Cash 55
Receivables:
Capital shares sold 24
Dividends and interest 1,872
Securities sold 14,109
---------
Total assets 274,633
---------
LIABILITIES
Securities purchased 22,023
Capital shares redeemed 8
USAA Investment Management Company 109
USAA Transfer Agency Company 20
Accounts payable and accrued expenses 31
---------
Total liabilities 22,191
---------
Net assets applicable to capital shares outstanding $ 252,442
=========
REPRESENTED BY:
Paid-in capital $ 192,000
Accumulated undistributed net investment income 1,234
Accumulated net realized gain on investments 55
Net unrealized appreciation of investments 59,153
---------
Net assets applicable to capital shares outstanding $ 252,442
=========
Capital shares outstanding, unlimited number of shares
authorized, no par value 15,154
=========
Net asset value, redemption price, and offering price per share $ 16.66
=========
See accompanying notes to financial statements.
USAA GROWTH AND TAX STRATEGY FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 1999
Net investment income:
Income:
Dividends $ 1,579
Interest 6,888
--------
Total income 8,467
--------
Expenses:
Management fees 1,180
Transfer agent's fees 275
Custodian's fees 75
Postage 22
Shareholder reporting fees 13
Trustees' fees 4
Registration fees 30
Professional fees 31
Other 5
--------
Total expenses 1,635
--------
Net investment income 6,832
--------
Net realized and unrealized gain on investments:
Net realized gain 6,275
Change in net unrealized appreciation/depreciation 7,365
--------
Net realized and unrealized gain 13,640
--------
Increase in net assets resulting from operations $ 20,472
========
See accompanying notes to financial statements.
USAA GROWTH AND TAX STRATEGY FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
1999 1998
-------------------------
From operations:
Net investment income $ 6,832 $ 6,749
Net realized gain on investments 6,275 4,261
Change in net unrealized appreciation/depreciation
of investments 7,365 18,173
-------------------------
Increase in net assets resulting from operations 20,472 29,183
-------------------------
Distributions to shareholders from:
Net investment income (6,836) (6,690)
-------------------------
Net realized gains (8,587) (6,834)
-------------------------
From capital share transactions:
Proceeds from shares sold 31,150 37,106
Shares issued for dividends reinvested 14,143 12,448
Cost of shares redeemed (27,304) (21,313)
-------------------------
Increase in net assets from capital share
transactions 17,989 28,241
-------------------------
Net increase in net assets 23,038 43,900
Net assets:
Beginning of period 229,404 185,504
-------------------------
End of period $ 252,442 $ 229,404
=========================
Accumulated undistributed net investment income:
End of period $ 1,234 $ 1,238
=========================
Change in shares outstanding:
Shares sold 1,906 2,363
Shares issued for dividends reinvested 871 807
Shares redeemed (1,689) (1,355)
-------------------------
Increase in shares outstanding 1,088 1,815
=========================
See accompanying notes to financial statements.
USAA GROWTH AND TAX 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 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 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 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 three joint short-term revolving
loan agreements totaling $850 million, two with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($250 million committed and $500 million
uncommitted), and one with Bank of America ($100 million committed). The purpose
of the agreements is to meet temporary or emergency cash needs, including
redemption requests that might otherwise require the untimely disposition of
securities. Subject to availability under both agreements with CAPCO, the Fund
may borrow from CAPCO an amount up to 5% of the Fund's total assets at CAPCO's
borrowing rate with no markup. Subject to availability under its agreement with
Bank of America, the Fund may borrow from Bank of America, at Bank of America's
borrowing rate plus a markup, an amount which, when added to outstanding
borrowings under the CAPCO agreements, does not exceed 25% of the Fund's total
assets. The Fund had no borrowings under either of these agreements during the
year ended May 31, 1999.
(3) DISTRIBUTIONS
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are made
in the succeeding fiscal year or as otherwise required to avoid the payment of
federal taxes.
(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 $148.7 million
and $146.7 million, respectively.
Gross unrealized appreciation and depreciation of investments at May 31, 1999
was $59.4 million and $.2 million respectively.
(5) TRANSACTIONS WITH MANAGER
A. Management fees - USAA Investment Management Company carries out the Fund's
investment policies and manages the Fund's portfolio. The Fund's management fees
are computed at .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 $28.50 per shareholder account plus
out-of-pocket expenses.
C. Underwriting services - The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing best efforts basis. The
Manager receives no commissions or fees for this service.
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 $30,000.
(6) TRANSACTIONS WITH AFFILIATES
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
(7) YEAR 2000 (UNAUDITED)
Like other mutual funds, the Fund could be adversely affected if the computer
systems used by the Manager and the Fund's other service providers are not able
to perform their intended functions effectively after 1999 because of the
inability of computer software to distinguish the year 2000 from the year 1900.
The Manager is taking steps to address this potential year 2000 problem with
respect to the computer systems that they use and to obtain satisfactory
assurances that the comparable steps are being taken by the Fund's other major
service providers. At this time, however, there can be no assurance that these
steps will be sufficient to avoid any adverse impact to the Fund from this
problem.
(8) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
Year Ended May 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------
Net asset value at
beginning of period $ 16.31 $ 15.14 $ 14.11 $ 12.82 $ 12.32
Net investment income .47 .50 .52 .51 .49
Net realized and
unrealized gain .96 1.72 1.39 1.32 .76
Distributions from net
investment income (.48) (.51) (.52) (.51) (.48)
Distributions of realized
capital gains (.60) (.54) (.36) (.03) (.27)
-------------------------------------------------------
Net asset value at
end of period $ 16.66 $ 16.31 $ 15.14 $ 14.11 $ 12.82
=======================================================
Total return (%)* 9.10 15.26 14.21 14.61 10.73
Net assets at end of
period (000) $252,442 $229,404 $185,504 $160,390 $134,538
Ratio of expenses to
average net assets (%) .69 .71 .74 .82 .80
Ratio of net investment
income to average net
assets (%) 2.89 3.22 3.66 3.79 4.02
Portfolio turnover (%) 63.42 65.58(a) 194.21(a) 202.55(a) 265.52(a)
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a)At times, 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:
Year Ended May 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------
Portfolio turnover (%) N/A 31.58 52.97 61.98 131.28
Purchases and sales of
this type are as follows:
Purchases (000) $ N/A $ 68,958 $220,402 $192,239 $234,367
Sales (000) $ N/A $ 69,044 $220,683 $192,490 $234,669
TRUSTEES
Robert G. Davis, Chairman of the Board
Michael J.C. Roth, President and Vice Chairman of the Board
John W. Saunders, Jr., Vice President
Barbara B. Dreeben
Howard L. Freeman, Jr.
Robert L. Mason
Richard A. Zucker
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
KPMG LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
Telephone Assistance
Call toll free - Central Time
Monday - Friday 7:30 a.m. to 8:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
For Additional Information On Mutual Funds
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges or redemptions
1-800-531-8448, (in San Antonio) 456-7202
Recorded Mutual Fund Price Quotes
24-Hour Service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
Mutual Fund USAA TouchLine(Registered Trademark)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
