TABLE OF CONTENTS
USAA FAMILY OF FUNDS 1
MESSAGE FROM THE PRESIDENT 2
INVESTMENT REVIEW 4
MESSAGE FROM THE MANAGERS 5
FINANCIAL INFORMATION
Distributions to Shareholders 8
Independent Auditors' Report 9
Portfolio of Investments 10
Notes to Portfolio of Investments 17
Statement of Assets and Liabilities 18
Statement of Operations 19
Statements of Changes in Net Assets 20
Notes to Financial Statements 21
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 INCOME
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)2000, 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(Registered
Trademark) 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
Small Cap Stock 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(Registered Trademark) Low to moderate $3,000
High-Yield Opportunities High 3,000
Income Moderate 3,000
Income Stock Moderate 3,000
Intermediate-Term Bond Low to 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(Registered
Trademark) Very low 3,000
State Money Market Very low 3,000
-------------------------------------------------------------------------------
FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, WHICH ARE DISCUSSED IN THE
FUNDS' PROSPECTUSES.
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.
NONDEPOSIT 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]
--------------------------------------------------------------------------------
THE FIRST FIVE MONTHS OF 2000 WERE AS FASCINATING AND CHALLENGING A PERIOD AS
INVESTORS HAVE SEEN IN A LONG TIME. IT WAS FRAMED BY TWO EVENTS THAT WERE
STUNNINGLY OPPOSITE TO ONE ANOTHER.
--------------------------------------------------------------------------------
The more notable of the two was the precipitous drop of the NASDAQ Index. This
market gauge is dominated by the tech stocks which created the stupendous
returns of 1999. Many mutual funds could boast triple-digit returns for 12-month
periods, and the valuation of tech stocks in general reached undreamt-of levels.
More traditional investors struggled with the triple-digit price/earnings ratios
of the techs, and the retort was that this was the new economy. Then, about
three months into 2000, the trend cracked. The NASDAQ began falling, and it fell
hard. There were numerous drops of 5% or more in a day, very severe for an
entire index.
The second event was at the opposite end of the investment spectrum. Most people
were highly aware that the Federal Reserve (the Fed) was getting serious about
inflation and was raising interest rates. Therefore, bonds were a bad
investment? Wrong!
The Fed indeed raised short-term rates more than once. But something else was
happening. The federal government continued to run a budget surplus, and that
surplus has begun to be applied to the national debt. The Treasury began to
retire its 30-year bond. The effect was that by early June the six-month
Treasury bill yielded over 6.30%, but the 30-year bond, which had long been the
benchmark for the entire bond market, had a yield of 5.91%. Not only could you
get a higher rate of interest investing for 180 days instead of 30 years, but if
you happened to already own the 30-year bond, you received the benefit of a
run-up in its price.
In May THE WALL STREET JOURNAL reported that one of the world's foremost hedge
funds had suspected that tech stocks would drop, but missed the opportunity to
get out ahead of the event.
And there was no forewarning of what happened in the bond market. Once again, at
a pair of major market turns most investors were surprised. And that is why we
continue to believe that a well-allocated portfolio, set up before the fact, is
an excellent way to approach investing.
Sincerely,
Michael J.C. Roth, CFA
PRESIDENT AND
VICE CHAIRMAN OF THE BOARD
FOR MORE COMPLETE INFORMATION ABOUT THE MUTUAL FUNDS MANAGED AND DISTRIBUTED BY
USAA INVESTMENT MANAGEMENT COMPANY, INCLUDING CHARGES AND OPERATING EXPENSES,
PLEASE CALL FOR A PROSPECTUS. READ IT CAREFULLY BEFORE INVESTING.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
INVESTMENT REVIEW
USAA INCOME STRATEGY FUND
OBJECTIVE: High current return, with reduced risk over time, through an asset
allocation strategy that emphasizes income and gives secondary emphasis to
long-term growth of capital.
TYPES OF INVESTMENTS: Invests principally in bonds, and to a lesser extent,
stocks and money market instruments.
--------------------------------------------------------------------------
5/31/00 5/31/99
--------------------------------------------------------------------------
Net Assets $62.1 Million $70.6 Million
Net Asset Value Per Share $11.93 $12.17
--------------------------------------------------------------------------
Average Annual Total Returns and 30-Day SEC Yield* as of 5/31/00
--------------------------------------------------------------------------
1 YEAR SINCE INCEPTION ON 9/1/95 30-DAY SEC YIELD
3.96% 8.81% 4.48%
--------------------------------------------------------------------------
* 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 Income Strategy Fund, the Lehman
Brothers Aggregate Bond Index, and the Lipper General Bond Funds Average for the
period of 9/01/95 through 5/31/00. The data points from the graph are as
follows:
USAA Income Lehman Lipper
Strategy Fund Index Average
------------- ------- --------
09/01/95 $10,000 $10,000 $10,000
11/30/95 10,711 10,382 10,390
05/31/96 10,323 10,262 10,471
11/30/96 11,546 11,012 11,283
05/31/97 11,725 11,115 11,508
11/30/97 12,851 11,844 12,200
05/31/98 13,686 12,328 12,710
11/30/98 14,253 12,963 13,072
05/31/99 14,366 12,865 13,078
11/30/99 14,668 12,958 13,192
05/31/00 14,936 13,136 13,271
DATA SINCE INCEPTION ON 9/1/95 THROUGH 5/31/00.
THE GRAPH ILLUSTRATES THE COMPARISON OF A $10,000 HYPOTHETICAL INVESTMENT IN THE
USAA INCOME STRATEGY FUND TO THE LEHMAN INDEX AND THE LIPPER AVERAGE. THE LEHMAN
BROTHERS AGGREGATE BOND INDEX IS AN UNMANAGED INDEX MADE UP OF THE
GOVERNMENT/CORPORATE INDEX, THE MORTGAGE-BACKED SECURITIES INDEX, AND THE
ASSET-BACKED SECURITIES INDEX. THE LIPPER GENERAL BOND FUNDS AVERAGE IS THE
AVERAGE PERFORMANCE LEVEL OF ALL GENERAL BOND FUNDS, AS REPORTED BY LIPPER
ANALYTICAL SERVICES, INC., AN INDEPENDENT ORGANIZATION THAT MONITORS THE
PERFORMANCE OF MUTUAL FUNDS.
MESSAGE FROM THE MANAGERS
[PHOTOGRAPH OF PORTFOLIO MANAGERS FROM LEFT TO RIGHT: DAVID PARSONS, CFA
(STOCKS); DIDI WEINBLATT, CFA (ALLOCATION MANAGER AND BONDS); AND PAMELA BLEDSOE
NOBLE, CFA (MONEY MARKET INSTRUMENTS) APPEARS HERE.]
FUND OVERVIEW
For the 12-month period ending May 31, 2000, the USAA Income Strategy Fund had a
total return of 3.96%, well above the 1.72% average return for the General Bond
Funds category of Lipper Analytical Services and above the 2.11% return for the
Lehman Brothers Aggregate Bond Index. Your Fund ranked 10 out of 49 funds in its
Lipper category for this time period. Lipper rankings are based on total
returns.
The USAA Income Strategy Fund's performance shows the benefits of diversifying a
portfolio among different asset classes. Its assets were invested primarily in
bonds, but also -- to a lesser extent -- in stocks and money market instruments
within a preset target range. During the first part of the fiscal year, interest
rates were rising, and bond prices were on a downward trend. But during that
period, rising stock prices offset these falling bond prices. This trend
reversed in the last few months with rising bond prices offsetting falling stock
prices. In addition, bonds provide the potential for a high current return,
while stocks provide the potential for long-term capital growth.
BONDS
The Federal Reserve Board (the Fed) is now almost a year into the tightening
cycle that began in June 1999. The Fed has now increased the federal funds rate
-- the target interest rate on overnight loans between banks -- six times for a
total of 1.75%. Interest rates on Treasury bonds started the fiscal year below
6% and rose steadily through mid-January to 6.75%. By mid-January, faced with a
large budget surplus, the U.S. government announced a buyback of Treasury bonds.
This created strong demand for long-term Treasury bonds, short-term bonds to
rise. The result was an INVERTED Treasury yield curve -- a condition where
long-term interest rates are lower than those of short-term bonds.
The bonds in the Fund were positioned to take advantage of the rally in
longer-term Treasury bonds. Over the last four months, the Fund's long-term
Treasuries outperformed most other types of bonds. The Fund's Government
National Mortgage Association (GNMA) securities (48% of your Fund) also
performed well, benefiting from their being backed by the full faith and credit
of the U.S. government.
Since the beginning of the year, yields on corporate bonds have increased
relative to those on Treasury bonds. This created a buying opportunity that we
used to increase your Fund's corporate bond allocation to 22%.
OUTLOOK FOR BONDS
Our outlook for the bond market continues to depend on Fed policy. After a year
of Fed tightening, the economy is beginning to show signs of slowing. Slowing of
the current strong economic growth would be good news for the bond market,
because it would signal that the tightening cycle might be near its end. This
gives us reason to be cautiously optimistic about the course of interest rates.
STOCKS
The equity portion of the Fund had a good fiscal year. The main driver of this
performance was technology. Our holdings in Nortel, Dell, Hewlett-Packard,
Cisco, Texas Instruments, Intel, Oracle, and Applied Materials far outperformed
the market. Our weak performers in the group were Lucent, Microsoft, and America
Online. Overall, health care was also a positive contributor to the Fund's
performance. Pfizer, Pharmacia, Amgen, Medtronic, and Merck each had a strong
year, while Bristol-Myers, Guidant, and American Home were weak. A further area
of strength was the financial sector. Bank of New York, Northern Trust, State
Street, Wells & Fargo, American Express, Morgan Stanley Dean Witter, Lehman,
AIG, and Marsh & McLennan performed well. In contrast, our weak stocks in this
sector were Bank One, First Union, National City, J.P. Morgan, Freddie Mac,
Schwab, E-Trade, and Franklin Resources.
The two sectors that did not do well were basic materials and telephones. Dow,
DuPont, International Paper, AT&T, SBC Communications, and WorldCom were all
down for the year.
OUTLOOK FOR STOCKS
As usual, the two main factors driving the stock market up and down are the
direction of interest rates and the strength of the economy. The intention of
the Fed, at present, is to raise interest rates to that point which slows the
economy to a sustainable, noninflationary rate of growth. The danger is that the
Fed will raise interest rates so high that the economy is not only slowed but
put into reverse. So far, the present chairman of the Fed has proven himself to
be a nimble manager of inflation and the economy. We believe he will probably
pull off a soft landing again. If so, the stock market may continue to perform
well.
MONEY MARKET INSTRUMENTS
Money market instruments are used to provide liquidity for withdrawals or to
provide a temporary investment until stock or bond purchases are made.
Commercial paper or U.S. government agency discount notes are the most common
investments used for these purposes.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
REFER TO THE BOTTOM OF PAGE 4 FOR THE LIPPER AVERAGE AND LEHMAN BROTHERS
AGGREGATE BOND INDEX DEFINITIONS.
THE 30-YEAR U.S. TREASURY BOND IS GENERALLY CONSIDERED THE BENCHMARK FOR U.S.
LONG-TERM INTEREST RATES.
-------------------------------------
Top 5 Equity Holdings
(% of Net Assets)
-------------------------------------
General Electric Co. 1.2
Intel Corp. 0.7
Lucent Technologies, Inc. 0.7
Microsoft Corp. 0.7
Pfizer, Inc. 0.7
-------------------------------------
ASSET ALLOCATION
A pie chart is shown here depicting the Asset Allocation as of May 31, 2000 of
the USAA Income Strategy Fund to be:
U.S. Government & Agency Issues 53.5%; Corporate Bonds 21.7%; and Stocks -
24.0%.
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY OR MAY NOT EQUAL 100%.
SEE PAGE 10 FOR A COMPLETE LISTING OF THE PORTFOLIO OF INVESTMENTS
DISTRIBUTIONS TO SHAREHOLDERS
The following per share information describes the federal tax treatment of
distributions made during the fiscal year ended May 31, 2000. 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 2001.
Ordinary income * $ .64
Long-term capital gains .07
-----
Total $ .71
=====
5.4% 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 INCOME STRATEGY FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the USAA Income Strategy Fund, a series of the
USAA Investment Trust, as of May 31, 2000, 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 the financial
highlights, presented in note 7 to the financial statements, for each of the
years or periods in the five-year period then ended. These financial statements
and financial highlights are the responsibility of the Trust'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 auditing standards generally accepted
in the United States of America. 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, 2000, 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 Income Strategy Fund as of May 31, 2000, the results of its operations for
the year then ended, the changes in its net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
or periods in the five-year period then ended, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
San Antonio, Texas
July 7, 2000
USAA INCOME STRATEGY FUND
PORTFOLIO OF INVESTMENTS
MAY 31, 2000
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------
STOCKS (24.0%)
ADVERTISING/MARKETING (0.1%)
500 Omnicom Group, Inc. $ 42
------------------------------------------------------------------------
AEROSPACE/DEFENSE (0.1%)
1,900 Boeing Co. 74
------------------------------------------------------------------------
AIR FREIGHT (0.2%)
1,800 United Parcel Service "B" 108
------------------------------------------------------------------------
AIRLINES (0.1%)
2,500 Southwest Airlines Co. 48
------------------------------------------------------------------------
ALUMINUM (0.1%)
1,400 Alcoa, Inc. 82
------------------------------------------------------------------------
AUTOMOBILES (0.2%)
900 DaimlerChrysler AG 48
1,500 Ford Motor Co. 73
376 General Motors Corp. 27
------------------------------------------------------------------------
148
------------------------------------------------------------------------
BANKS - MAJOR REGIONAL (0.9%)
1,500 Bank Of New York Co., Inc. 70
2,200 Bank One Corp. 73
600 Fifth Third Bancorp 41
1,100 Fleet Boston Financial Corp. 42
1,100 Mellon Financial Corp. 42
900 Northern Trust Corp. 59
400 State Street Corp. 45
3,600 Wells & Fargo Co. 163
------------------------------------------------------------------------
535
------------------------------------------------------------------------
BANKS - MONEY CENTER (0.6%)
2,700 Bank of America Corp. 150
1,200 Chase Manhattan Corp. 89
1,000 J. P. Morgan & Co., Inc. 129
------------------------------------------------------------------------
368
------------------------------------------------------------------------
BEVERAGES - ALCOHOLIC (0.2%)
1,700 Anheuser-Busch Companies, Inc. 132
------------------------------------------------------------------------
BEVERAGES - NONALCOHOLIC (0.6%)
5,600 Coca-Cola Co. 299
2,300 PepsiCo, Inc. 94
------------------------------------------------------------------------
393
------------------------------------------------------------------------
BIOTECHNOLOGY (0.1%)
1,500 Amgen, Inc.* 95
------------------------------------------------------------------------
BROADCASTING - RADIO & TV (0.0%)(b)
132 General Motors Corp. "H" 13
------------------------------------------------------------------------
CHEMICALS (0.4%)
500 Dow Chemical Co. 53
3,300 Du Pont (E. I.) De Nemours & Co. 162
1,000 Rohm & Haas Co. 34
------------------------------------------------------------------------
249
------------------------------------------------------------------------
COMMUNICATION EQUIPMENT (1.2%)
7,200 Lucent Technologies, Inc. 413
1,100 Motorola, Inc. 103
2,800 Nortel Networks Corp. 152
1,400 Tellabs, Inc.* 91
------------------------------------------------------------------------
759
------------------------------------------------------------------------
COMPUTER - HARDWARE (1.3%)
2,500 Compaq Computer Corp. 66
2,700 Dell Computer Corp.* 116
900 Gateway 2000, Inc.* 44
1,000 Hewlett-Packard Co. 120
2,700 IBM Corp. 290
2,200 Sun Microsystems, Inc.* 169
------------------------------------------------------------------------
805
------------------------------------------------------------------------
COMPUTER - NETWORKING (0.5%)
5,500 Cisco Systems, Inc.* 313
------------------------------------------------------------------------
COMPUTER - PERIPHERALS (0.2%)
1,300 EMC Corp.* 151
------------------------------------------------------------------------
COMPUTER SOFTWARE & SERVICE (1.6%)
3,000 America Online, Inc.* 159
600 BMC Software, Inc.* 26
2,100 Computer Associates International, Inc. 108
6,800 Microsoft Corp.* 426
3,600 Oracle Corp.* 259
------------------------------------------------------------------------
978
------------------------------------------------------------------------
DISTRIBUTIONS - FOOD/HEALTH (0.1%)
900 Sysco Corp. 38
------------------------------------------------------------------------
DRUGS (2.0%)
1,800 Eli Lilly & Co. 137
4,200 Merck & Co., Inc. 313
9,100 Pfizer, Inc. 405
3,151 Pharmacia Corp. 164
4,600 Schering-Plough Corp. 223
------------------------------------------------------------------------
1,242
------------------------------------------------------------------------
ELECTRICAL EQUIPMENT (1.3%)
14,100 General Electric Co. 742
1,800 Honeywell International, Inc. 98
------------------------------------------------------------------------
840
------------------------------------------------------------------------
ELECTRONICS - SEMICONDUCTORS (1.1%)
3,700 Intel Corp. 461
400 Micron Technology, Inc.* 28
2,600 Texas Instruments, Inc. 188
------------------------------------------------------------------------
677
------------------------------------------------------------------------
ENTERTAINMENT (0.7%)
1,400 Time Warner, Inc. 111
2,004 Viacom, Inc.* 124
4,300 Walt Disney Co. 181
------------------------------------------------------------------------
416
------------------------------------------------------------------------
EQUIPMENT - SEMICONDUCTORS (0.1%)
1,000 Applied Materials, Inc.* 84
------------------------------------------------------------------------
FINANCE - CONSUMER (0.0%)(b)
700 Household International, Inc. 33
------------------------------------------------------------------------
FINANCE - DIVERSIFIED (1.3%)
2,400 American Express Co. 129
500 American General Corp. 32
1,300 Associates First Capital Corp. "A" 36
5,300 Citigroup, Inc. 329
3,600 Freddie Mac 160
1,900 Morgan Stanley Dean Witter & Co. 137
------------------------------------------------------------------------
823
------------------------------------------------------------------------
FOODS (0.5%)
800 Bestfoods 52
2,200 ConAgra, Inc. 51
1,000 H.J. Heinz Co. 39
500 Hershey Foods Corp. 26
400 Quaker Oats Co. 29
2,500 Unilever N.V. - New York Shares 127
------------------------------------------------------------------------
324
------------------------------------------------------------------------
HEALTH CARE - DIVERSIFIED (1.2%)
3,400 American Home Products Corp. 183
4,600 Bristol-Myers Squibb Co. 253
3,400 Johnson & Johnson, Inc. 305
------------------------------------------------------------------------
741
------------------------------------------------------------------------
HOUSEHOLD PRODUCTS (0.8%)
2,600 Colgate-Palmolive Co. 137
1,300 Kimberly-Clark Corp. 79
3,900 Procter & Gamble Co. 259
------------------------------------------------------------------------
475
------------------------------------------------------------------------
INSURANCE BROKERS (0.1%)
500 Marsh & McLennan Cos., Inc. 55
------------------------------------------------------------------------
INSURANCE - MULTILINE COMPANIES (0.4%)
2,512 American International Group, Inc. 283
------------------------------------------------------------------------
INVESTMENT BANKS/BROKERAGE (0.3%)
1,650 Charles Schwab Corp. 47
1,100 E-Trade Group, Inc.* 17
300 Lehman Brothers Holdings, Inc. 23
900 Merrill Lynch & Co., Inc. 89
------------------------------------------------------------------------
176
------------------------------------------------------------------------
INVESTMENT MANAGEMENT (0.1%)
800 Franklin Resources, Inc. 24
600 T. Rowe Price Associates, Inc. 23
------------------------------------------------------------------------
47
------------------------------------------------------------------------
MACHINERY - DIVERSIFIED (0.1%)
1,100 Caterpillar, Inc. 42
------------------------------------------------------------------------
MANUFACTURING - DIVERSIFIED INDUSTRIES (0.6%)
600 Illinois Tool Works, Inc. 35
800 Minnesota Mining & Manufacturing Co. 69
4,000 Tyco International Ltd. 188
1,200 United Technologies Corp. 72
------------------------------------------------------------------------
364
------------------------------------------------------------------------
MEDICAL PRODUCTS & SUPPLIES (0.3%)
1,000 Guidant Corp.* 50
2,300 Medtronic, Inc. 119
------------------------------------------------------------------------
169
------------------------------------------------------------------------
OIL - INTERNATIONAL INTEGRATED (0.9%)
3,948 Exxon Mobil Corp. 329
3,800 Texaco, Inc. 218
------------------------------------------------------------------------
547
------------------------------------------------------------------------
OIL & GAS - DRILLING/EQUIPMENT (0.2%)
1,700 Schlumberger Ltd. 125
------------------------------------------------------------------------
OIL & GAS - EXPLORATION & PRODUCTION (0.1%)
1,800 Unocal Corp. 69
------------------------------------------------------------------------
PAPER & FOREST PRODUCTS (0.1%)
1,200 International Paper Co. 42
600 Weyerhaeuser Co. 30
------------------------------------------------------------------------
72
------------------------------------------------------------------------
PERSONAL CARE (0.1%)
2,500 Gillette Co. 83
------------------------------------------------------------------------
PHOTOGRAPHY - IMAGING (0.2%)
3,900 Xerox Corp. 106
------------------------------------------------------------------------
PUBLISHING/NEWSPAPERS (0.1%)
400 Gannett, Inc. 26
700 Tribune Co. 27
------------------------------------------------------------------------
53
------------------------------------------------------------------------
RETAIL - BUILDING SUPPLIES (0.2%)
3,050 Home Depot, Inc. 149
------------------------------------------------------------------------
RETAIL - COMPUTERS & ELECTRONICS (0.1%)
700 Best Buy Co., Inc.* 45
------------------------------------------------------------------------
RETAIL - DEPARTMENT STORES (0.1%)
1,000 Kohls Corp.* 52
------------------------------------------------------------------------
RETAIL - FOOD (0.1%)
1,000 Safeway, Inc.* 46
------------------------------------------------------------------------
RETAIL - GENERAL MERCHANDISING (0.6%)
1,000 Target Corp. 63
5,800 Wal-Mart Stores, Inc. 334
------------------------------------------------------------------------
397
------------------------------------------------------------------------
RETAIL - SPECIALTY APPAREL (0.1%)
1,200 Gap, Inc. 42
------------------------------------------------------------------------
TELECOMMUNICATIONS - CELLULAR/WIRELESS (0.1%)
1,400 AT&T Wireless Group* 40
400 NEXTEL Communications, Inc.* 37
------------------------------------------------------------------------
77
------------------------------------------------------------------------
TELECOMMUNICATIONS - LONG DISTANCE (0.7%)
4,000 AT&T Corp. 139
2,200 Qwest Communications International, Inc.* 93
5,100 Worldcom, Inc.* 192
------------------------------------------------------------------------
424
------------------------------------------------------------------------
TELEPHONES (0.9%)
2,200 Bell Atlantic Corp. 116
2,500 BellSouth Corp. 117
2,000 GTE Corp. 126
4,042 SBC Communications, Inc. 177
------------------------------------------------------------------------
536
------------------------------------------------------------------------
Total Stocks (cost: $11,846) 14,945
------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------
DEBT INSTRUMENTS (75.2%)
U.S. GOVERNMENT & AGENCY ISSUES (53.5%)
$ 57 Government National Mortgage Assn. 7.00% 3/15/2026 $ 54
1,144 Government National Mortgage Assn. 7.00 3/15/2026 1,100
56 Government National Mortgage Assn. 7.50 8/15/2026 55
733 Government National Mortgage Assn. 7.50 11/15/2026 722
175 Government National Mortgage Assn. 7.00 2/15/2027 169
297 Government National Mortgage Assn. 7.50 5/15/2027 292
1,754 Government National Mortgage Assn. 7.50 6/15/2027 1,725
464 Government National Mortgage Assn. 6.00 9/15/2028 422
9,292 Government National Mortgage Assn. 6.00 1/15/2029 8,439
2,137 Government National Mortgage Assn. 6.00 1/15/2029 1,941
6,825 Government National Mortgage Assn. 6.00 1/15/2029 6,199
3,785 Government National Mortgage Assn. 7.00 6/15/2029 3,634
4,903 Government National Mortgage Assn. 8.00 2/15/2030 4,916
4,090 U.S. Treasury Bonds 5.25 1/15/2028 3,560
------------------------------------------------------------------------
Total U.S. Government and Agency Issues (cost: $35,037) 33,228
------------------------------------------------------------------------
CORPORATE BONDS(21.7%)
500 Central Power & Light Co. 6.63 7/01/2005 470
500 Citicorp 6.38 1/15/2006 465
1,400 Exxon Mobil Corp. 6.15 7/02/2008 1,342
1,000 Finova Capital Corp., MTN 6.00 1/07/2004 822
500 Ford Motor Credit Co. 6.13 1/09/2006 456
175 Household Finance Corp. 6.88 3/01/2007 162
500 Hydro-Quebec (Canada) 6.98 2/28/2005 486
3,000 Osprey Trust, Osprey I, Inc.,
Senior Notes(a) 8.31 1/15/2003 2,985
500 Pacific Bell 5.88 2/15/2006 464
1,000 Phillips Petroleum Co. 8.75 5/25/2010 1,024
500 Sara Lee Corp. 6.30 11/07/2005 469
2,000 Service Master Co. 8.45 4/15/2005 1,965
2,000 Washington Mutual, Inc. 8.25 4/01/2010 1,936
500 Waste Management, Inc. 7.00 10/15/2006 432
------------------------------------------------------------------------
Total Corporate Bonds (cost: $13,915) 13,478
------------------------------------------------------------------------
Total Investments (cost: $60,798) $61,651
========================================================================
USAA INCOME STRATEGY FUND
NOTES TO PORTFOLIO OF INVESTMENTS
MAY 31, 2000
GENERAL NOTES
Market values of securities are determined by procedures and practices discussed
in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
Investments in foreign securities were 1.5% of net assets at May 31, 2000.
SPECIFIC NOTES
(a) Security is exempt from registration under the Securities Act of 1933 and
has been determined to be liquid by the Fund's investment manager. Any resale of
this security in the United States may occur in an exempt transaction to a
qualified institutional buyer as defined by the Rule 144A.
(b) Represents less than 0.1% of net assets.
* Non-income producing security.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA INCOME STRATEGY FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
MAY 31, 2000
ASSETS
Investments in securities, at market value
(identified cost of $60,798) $61,651
Cash 78
Receivables:
Capital shares sold 4
Dividends and interest 463
-------
Total assets 62,196
-------
LIABILITIES
Capital shares redeemed 10
USAA Investment Management Company 26
USAA Transfer Agency Company 9
Accounts payable and accrued expenses 28
-------
Total liabilities 73
-------
Net assets applicable to capital shares outstanding $62,123
=======
REPRESENTED BY:
Paid-in capital $60,420
Accumulated undistributed net investment income 527
Accumulated net realized gain on investments 323
Net unrealized appreciation of investments 853
-------
Net assets applicable to capital shares outstanding $62,123
=======
Capital shares outstanding, unlimited number of shares authorized,
no par value 5,209
=======
Net asset value, redemption price, and offering price per share $ 11.93
=======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA INCOME STRATEGY FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED MAY 31, 2000
Net investment income:
Income:
Dividends $ 167
Interest 3,451
------
Total income 3,618
------
Expenses:
Management fees 339
Transfer agent's fees 169
Custodian's fees 63
Postage 34
Shareholder reporting fees 13
Trustees' fees 3
Registration fees 38
Professional fees 24
Other 2
------
Total expenses 685
------
Net investment income 2,933
------
Net realized and unrealized gain (loss) on investments:
Net realized gain on investments 491
Change in net unrealized appreciation/depreciation of
investments (821)
------
Net realized and unrealized loss (330)
------
Increase in net assets resulting from operations $2,603
======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA INCOME STRATEGY FUND
STATEMENTS OF CHANGES IN NET ASSETS (IN THOUSANDS)
YEARS ENDED MAY 31,
2000 1999
---------------------
From operations:
Net investment income $ 2,933 $ 2,268
Net realized gain on investments 491 1,284
Change in net unrealized appreciation/depreciation
of investments (821) (971)
---------------------
Increase in net assets resulting from operations 2,603 2,581
---------------------
Distributions to shareholders from:
Net investment income (2,911) (2,040)
---------------------
Net realized gains (1,165) (427)
---------------------
From capital share transactions:
Proceeds from shares sold 19,311 51,130
Reinvested dividends 3,621 2,083
Cost of shares redeemed (29,925) (21,899)
---------------------
(Decrease) increase in net assets
from capital share transactions (6,993) 31,314
---------------------
Net (decrease) increase in net assets (8,466) 31,428
Net assets:
Beginning of period 70,589 39,161
---------------------
End of period $62,123 $70,589
=====================
Accumulated undistributed net investment income:
End of period $ 527 $ 505
=====================
Change in shares outstanding:
Shares sold 1,615 4,175
Shares issued for dividends reinvested 303 170
Shares redeemed (2,510) (1,777)
---------------------
(Decrease) increase in shares outstanding (592) 2,568
=====================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA INCOME STRATEGY FUND
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000
(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 11 separate funds. The
information presented in this annual report pertains only to the USAA Income
Strategy Fund (the Fund). The Fund's investment objective is to seek a high
current return, with reduced risk over time, through an asset allocation
strategy which emphasizes income and gives secondary emphasis to long-term
growth of capital. USAA Investment Management Company (the Manager) seeks to
achieve this objective by investing the Fund's assets mostly in bonds, and to a
lesser extent, stocks and money market instruments.
A. SECURITY VALUATION - The value of each security is determined (as of the
close of trading on the New York Stock Exchange on each business day the
Exchange is open) as set forth below:
1. Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities exchanges
are generally valued at the closing values of such securities on the exchange
where primarily traded. If no sale is reported, the average of the bid and asked
prices is generally used depending upon local custom or regulation.
2. Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices.
3. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value.
4. Other debt and government securities are valued each business day by a
pricing service (the Service) approved by the Trust's Board of Trustees. The
Service uses the mean between quoted bid and asked prices or the last sale price
to price securities when, in the Service's judgement, these prices are readily
available and are representative of the securities' market values. For many
securities, such prices are not readily available. The Service generally prices
these securities based on methods which include consideration of yields or
prices of securities of comparable quality, coupon, maturity, and type;
indications as to values from dealers in securities; and general market
conditions.
5. Securities which cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value, using methods determined
by the Manager under the general supervision of the Board of Trustees.
B. FEDERAL TAXES - The Fund's policy is to comply with the requirements of the
Internal Revenue code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. INVESTMENTS IN SECURITIES - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Dividend
income is recorded on the ex-dividend date; interest income is recorded on the
accrual basis. Discounts and premiums on securities are amortized over the life
of the respective securities.
D. USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the financial
statements.
(2) LINES OF CREDIT
The Fund participates with other USAA funds in three joint short-term revolving
loan agreements totaling $850 million, two with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($250 million committed and $500 million
uncommitted), and one with Bank of America ($100 million committed). The purpose
of the agreements is to meet temporary or emergency cash needs, including
redemption requests that might otherwise require the untimely disposition of
securities. Subject to availability under both agreements with CAPCO, the Fund
may borrow from CAPCO an amount up to 5% of the Fund's total assets at CAPCO's
borrowing rate with no markup. Subject to availability under its agreement with
Bank of America, the Fund may borrow from Bank of America, at Bank of America's
borrowing rate plus a markup, an amount which, when added to outstanding
borrowings under the CAPCO agreements, does not exceed 25% of the Fund's total
assets. The Fund had no borrowings under either of these agreements during the
year ended May 31, 2000.
(3) DISTRIBUTIONS
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are made
annually 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 year ended May 31, 2000, were $40,998,000 and
$49,273,000, respectively.
Gross unrealized appreciation and depreciation of investments at May 31, 2000,
was $3,669,000 and $2,816,000, 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 $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-effort basis. The
Manager receives no commissions or fees for this service.
D. BROKERAGE SERVICES - USAA Brokerage Services, a discount brokerage service
of the Manager, may execute portfolio transactions for the Fund. The amount of
brokerage commissions paid to USAA Brokerage Services during the year ended May
31, 2000, was $2,000.
(6) TRANSACTIONS WITH AFFILIATES
USAA Investment Management Company is indirectly wholly owned by United Services
Automobile Association (the Association), a large, diversified financial
services institution. At May 31, 2000, the Association and its affiliates owned
303,000 shares (5.8%) of the Fund.
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
<TABLE>
(7) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
<CAPTION>
NINE-MONTH
PERIOD ENDED
YEAR ENDED MAY 31, MAY 31,
----------------------------------------------------
2000 1999 1998 1997 1996*
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 12.17 $ 12.11 $ 10.84 $ 10.06 $ 10.00
Net investment income .53 .44 .46 .50 .39(b)
Net realized and
unrealized gain (loss) (.06) .16 1.31 .83 (.06)
Distributions from net
investment income (.51) (.44) (.46) (.50) (.22)
Distributions of realized
capital gains (.20) (.10) (.04) (.05) (.05)
----------------------------------------------------
Net asset value at
end of period $ 11.93 $ 12.17 $ 12.11 $ 10.84 $ 10.06
====================================================
Total return (%) ** 3.96 4.97 16.72 13.59 3.23
Net assets at
end of period (000) $62,123 $70,589 $39,161 $13,878 $12,173
Ratio of expenses to
average net assets (%) 1.01 .97 1.00 1.00 1.00(a)
Ratio of expenses to average
net assets, excluding
reimbursements (%) N/A N/A 1.21 1.51 1.78(a)
Ratio of net investment
income to average
net assets (%) 4.32 3.83 4.35 4.80 4.71(a)
Portfolio turnover (%) 61.08 117.12 7.15 64.71 78.60
</TABLE>
* Fund commenced operations September 1, 1995.
** Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
TRUSTEES
Robert G. Davis, CHAIRMAN OF THE BOARD
Michael J.C. Roth, VICE CHAIRMAN OF THE BOARD
Barbara B. Dreeben
Robert L. Mason
David G. Peebles
Michael F. Reimherr
Richard A. Zucker
INVESTMENT ADVISER, UNDERWRITER, AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
KPMG LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
TELEPHONE ASSISTANCE HOURS
Call toll free - Central Time
Monday - Friday 7:00 a.m. to 9:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
Sundays 11:30 a.m. to 8:00 p.m.
INTERNET ACCESS
USAA.COM(Service Mark)
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 touch-tone phones only)
For account balance, last transaction, fund prices,
or to exchange or redeem fund shares
1-800-531-8777, (in San Antonio) 498-8777
