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 10
Independent Auditors' Report 11
Portfolio of Investments 12
Notes to Portfolio of Investments 25
Statement of Assets and Liabilities 26
Statement of Operations 27
Statements of Changes in Net Assets 28
Notes to Financial Statements 29
IMPORTANT INFORMATION
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are streamlined. One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a mutual fund representative at 1-800-531-8448 during business hours.
THIS REPORT IS FOR THE INFORMATION OF THE SHAREHOLDERS AND OTHERS WHO HAVE
RECEIVED A COPY OF THE CURRENTLY EFFECTIVE PROSPECTUS OF THE USAA CORNERSTONE
STRATEGY FUND, MANAGED BY USAA INVESTMENT MANAGEMENT COMPANY (IMCO). IT MAY BE
USED AS SALES LITERATURE ONLY WHEN PRECEDED OR ACCOMPANIED BY A CURRENT
PROSPECTUS WHICH GIVES FURTHER DETAILS ABOUT THE FUND.
USAA WITH THE EAGLE IS REGISTERED IN THE U.S. PATENT & TRADEMARK
OFFICE. (COPYRIGHT)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 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 CORNERSTONE STRATEGY FUND
OBJECTIVE: Achieve a positive, inflation-adjusted rate of return and a
reasonably stable value of Fund shares, thereby preserving purchasing power of
shareholders' capital.
TYPES OF INVESTMENTS: Invests principally in U.S. stocks, international stocks,
U.S. government securities, real estate securities, and gold securities.
--------------------------------------------------------------------------------
5/31/00 5/31/99
--------------------------------------------------------------------------------
Net Assets $1,097.2 Million $1,257.8 Million
Net Asset Value Per Share $26.27 $27.29
--------------------------------------------------------------------------------
Average Annual Total Returns as of 5/31/00
--------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
5.49% 11.06% 9.93%
--------------------------------------------------------------------------------
TOTAL RETURN EQUALS INCOME YIELD PLUS SHARE PRICE CHANGE AND ASSUMES
REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. NO ADJUSTMENT HAS
BEEN MADE FOR TAXES PAYABLE BY SHAREHOLDERS ON THEIR REINVESTED INCOME DIVIDENDS
AND CAPITAL GAIN DISTRIBUTIONS. THE PERFORMANCE DATA QUOTED REPRESENT PAST
PERFORMANCE AND ARE NOT AN INDICATION OF FUTURE RESULTS. INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, AND AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
CUMULATIVE PERFORMANCE COMPARISON
A chart in the form of a line graph appears here, illustrating the comparison of
a $10,000 hypothetical investment in the USAA Cornerstone Strategy Fund, the S&P
500 Index, and the Lipper Global Flexible Portfolio Funds Average for the period
of 5/31/90 through 5/31/00. The data points from the graph are as follows:
USAA Cornerstone S&P 500 Lipper
Strategy Fund Index Average
------------- ------- -------
05/31/90 $10,000 $10,000 $10,000
11/30/90 9,210 9,084 9,588
05/31/91 10,279 11,176 10,794
11/30/91 10,335 10,927 10,978
05/31/92 11,219 12,275 11,830
11/30/92 11,392 12,942 12,067
05/31/93 13,262 13,698 13,529
11/30/93 13,843 14,246 14,300
05/31/94 14,340 14,280 14,610
11/30/94 13,984 14,395 14,374
05/31/95 15,261 17,159 15,626
11/30/95 16,354 19,711 16,686
05/31/96 17,976 22,034 18,069
11/30/96 19,628 25,200 19,223
05/31/97 21,020 28,520 20,283
11/30/97 22,878 32,383 21,176
05/31/98 24,625 37,263 22,666
11/30/98 23,255 40,052 21,881
05/31/99 23,134 44,468 22,530
11/30/99 24,517 48,420 24,781
05/31/00 25,784 48,822 25,812
DATA FROM 5/31/90 THROUGH 5/31/00.
THE GRAPH ILLUSTRATES THE COMPARISON OF A $10,000 HYPOTHETICAL INVESTMENT IN THE
USAA CORNERSTONE STRATEGY FUND TO THE S&P 500 INDEX AND THE LIPPER GLOBAL
FLEXIBLE PORTFOLIO FUNDS AVERAGE, AN AVERAGE PERFORMANCE LEVEL OF ALL GLOBAL
FLEXIBLE PORTFOLIO FUNDS, AS REPORTED BY LIPPER ANALYTICAL SERVICES, INC., AN
INDEPENDENT ORGANIZATION THAT MONITORS THE PERFORMANCE OF MUTUAL FUNDS. THE S&P
500 INDEX IS AN UNMANAGED INDEX REPRESENTING THE WEIGHTED AVERAGE PERFORMANCE OF
A GROUP OF 500 WIDELY HELD, PUBLICLY TRADED STOCKS. IT IS NOT POSSIBLE TO INVEST
DIRECTLY IN THE S&P 500 INDEX.
MESSAGE FROM THE MANAGERS
[PHOTOGRAPHS OF PORTFOLIO MANAGERS: FROM LEFT TO RIGHT: MARK W. JOHNSON, CFA
(GOLD AND REAL ESTATE SECURITIES); KEVIN P. MOORE (INTERNATIONAL STOCKS); DONNA
BAGGERLY, CFA (U.S. GOVERNMENT SECURITIES); ALBERT C. SEBASTIAN, CFA
(INTERNATIONAL STOCKS); AND R. DAVID ULLOM, CFA (ALLOCATION MANAGER AND U.S.
STOCKS) APPEARS HERE.]
Over the course of the last 12 months, we have made significant changes to the
USAA Cornerstone Strategy Fund. As explained in our semiannual report, our goal
is to improve performance while adhering to the basic objectives and strategy of
the Fund. The net result is that the Fund's weighting in U.S. stocks was raised
from 26% to 39%, while the weighting in real estate securities as a percentage
of fund net assets was lowered from 23% to 13%. The weighting in U.S. government
securities was cut from 22% to 19%. These changes resulted in the Fund
generating a total return of 5.49% over the latest fiscal year. This result
compares to the total return of 13.33% for the Lipper Global Flexible category.
UNITED STATES
In many ways, performance of the Fund's U.S. stock sector ending May 31, 2000,
is similar to the performance of the prior year ending May 31, 1999. During both
periods, the Fund's U.S. stock sector underperformed the S&P 500 Index from June
through December 1999, while it outperformed the index from January through May
of 2000. Over the entire fiscal year, however, the U.S. stock sector did not
keep up with the other major indexes.
The primary reason for the relatively poor performance of the U.S. stock sector
is its underweighting in technology stocks. Although these same technology
stocks did not do well this year, their strong performance from June through
December of 1999 was enough to give them a positive performance overall.
The performance of most of the other components of this sector hindered the
overall performance of the U.S. sector. It was most impacted by the poor
performance of basic materials (Alcoa, Weyerhaeuser, and Lyondell Chemicals),
consumer cyclicals (Ford, Lear, Brunswick, and Meritor), financials (PNC Bank,
SouthTrust, Bank of America, Citigroup, Associates First Capital, Morgan Stanley
Dean Witter, and Allstate), and health care (Pharmacia, American Home Products,
Bristol-Myers, CIGNA, and Bausch & Lomb). The sector was largely helped by
investments in technology (Hewlett Packard, Cisco, Oracle, Intel, Applied
Materials, and First Data) and consumer staples (Walt Disney and
Kimberly-Clark).
The poor performance of most cyclical and financial companies was the result of
the Federal Reserve Board's (the Fed) action to raise interest rates beginning
in June of 1999. The strong performance of most technology companies results
from the belief that these companies can continue to grow revenue and earnings,
even in light of higher interest rates.
INTERNATIONAL
EUROPE - In 2000, the Fund has benefited from its overweighted position in
European equities. This is in spite of a weaker euro compared to the U.S.
dollar. Within Europe, the Fund has benefited from good stock selection and an
overweighted position in energy and heath care. Consumer staples and financials
have also performed well, while metal and mining stocks have performed poorly.
CANADA - The Canadian equity market has rebounded strongly this year, and the
Fund has consequently benefited from its overweighted position. Energy stocks
have been particularly strong due to higher oil and natural gas prices.
Technology and financial stocks have also positively contributed to performance.
JAPAN - Our overweighted position in technology worked well in 1999. Despite the
recent turmoil in technology stocks, they were the primary reason for our
outperformance over the last 12 months. Our underweighted position in bank
stocks and other OLD ECONOMY stocks has turned out to be positive. We believe
that corporate restructuring is intact and earnings outlook continues to be
favorable. However, we are still skeptical about the Japanese government's
commitment to a tighter fiscal policy and deregulation. We will remain
underweighted in Japan until we see more progress.
EMERGING MARKETS - Most emerging markets started 2000 on a strong upswing only
to be subsequently caught in the negative sentiment that gripped equity markets
beginning in March. Economic growth in most Asian emerging markets continues to
rebound from the lows of the regional crisis. Latin American markets have also
rebounded on the back of strong exports as well as improving domestic economies.
The South African economy, while suffering from currency and interest rate
pressure, continues to grow, while economic performance in East European and
Middle Eastern countries is mixed. We believe that improving domestic demand,
coupled with the potential for falling interest rates, provides a favorable
backdrop for emerging markets over the next 12 months.
U.S. GOVERNMENT
BOND MARKET OVERVIEW - The economy entered its 10th year of economic expansion,
which increased fears of inflation. In order to slow the economy, the Fed raised
interest rates six times since June 1999. It is expected that the Fed will
continue to raise interest rates until there are signs of an economic slowdown.
As of May 31, 2000, it appears that there are finally some early economic signs
of a slowing economy, which 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.
During the fiscal year, the Treasury yield curve moved from an upward sloping
curve -- where interest rates on the short end of the curve are lower than
interest rates on the long end of the curve -- to an inverted curve, where
short-term interest rates are higher than long-term interest rates. Interest
rates on the shorter end of the curve (less than five years) rose approximately
1% to 1.25%, whereas interest rates on the longer end of the curve (longer than
five years) rose approximately 0.20% to 0.65%. The short end of the curve rose
because of the six Fed interest rate increases. The long end of the curve fell
because the U.S. Treasury began buying long-term Treasury bonds with the funds
from its budget surplus. Given the laws of supply and demand, a smaller supply
of long-term Treasury bonds caused the price of these bonds to go up and,
therefore, the yield of these bonds to fall. In general, when interest rates
rise, bond prices fall, and when interest rates fall, bond prices rise. The
curve is expected to stay inverted until the economy greatly slows.
PERFORMANCE
The U.S. government sector of the Fund slightly underperformed the Lipper
General U.S. Government Funds Average for the fiscal year ending May 31, 2000.
Because of the portfolio's long duration, it performs well in a falling interest
rate environment, but not in a rising interest rate environment. (Duration
measures the price sensitivity of a portfolio to changes in interest rates.) In
February, still with no sign of an economic slowdown occurring, the portfolio's
duration was shortened by selling long U.S. Treasury bonds and reinvesting the
proceeds in shorter mortgage pass-through securities.
On May 31, 2000, investments in this portfolio segment were 10% short-term U.S.
government agency securities and/or repurchase agreements collateralized by
securities of the U.S. government, 75% GNMA mortgage pass-through securities,
10% FNMA pass-through securities, 2% FNMA notes, and 3% U.S. Treasury bonds.
REAL ESTATE
Total return for the fiscal year ended May 31, 2000, for real estate investment
trusts (REITs) was -1.17%, as measured by the National Association of Real
Estate Investment Trusts (NAREIT) equity index. This compares poorly to the S&P
500 Index's total return of 10.47% for the same period. However, more recently,
REITs have been performing better in the context of a weaker overall stock
market. This reflects the defensive nature of REITs, the low correlation of
REITs to the overall market, the endorsement of the sector by a number of
influential investors and strategists, and the realization by investors that
REITs had been oversold during the 1999 great rush to technology stocks. The
recent behavior of real estate stocks underscores the important role they play
in your Fund. First, because real estate securities are so poorly correlated to
other securities, they significantly enhance diversification and, in the
process, greatly reduce the risk level of the Fund. Second, because the
fundamentals are solid with new construction generally under control and with
most expiring leases below market rates, real estate companies are growing their
earnings and dividends. Consequently, REIT investors could realize solid rates
of return at the same time they lower their risk level.
GOLD
Gold prices rose 1.4% from $268.60 per ounce to $272.25 per ounce during the
fiscal year ended May 31, 2000. The common stocks of gold mining companies
declined somewhat. The Fund had no exposure to gold stocks during this period.
NEW PORTFOLIO MANAGER
On February 1, 2000, Donna Baggerly assumed management responsibilities for the
U.S. government securities sector of the USAA Cornerstone Strategy Fund. Donna's
predecessor, John W. Saunders Jr., retired from USAA Investment Management
Company on January 31, 1999, after 29 years of service. Donna was a senior
analyst at USAA Investment Management Company for four years and has a total of
12 years of investment management experience.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
REFER TO THE BOTTOM OF PAGE 4 FOR THE LIPPER AVERAGE AND S&P 500 INDEX
DEFINITIONS.
----------------------------------------
Top 10 Industries
(% of Net Assets)
----------------------------------------
Real Estate Investment Trusts 11.8
Telephones 4.7
Drugs 3.7
Banks - Money Center 3.2
Banks - Major Regional 2.8
Communications Equipment 2.8
Oil - International Integrated 2.8
Insurance - Multiline Companies 2.7
Electronics - Semiconductors 2.5
Computers - Software & Service 2.4
----------------------------------------
-----------------------------------------------
Top 3 Holdings
in Each Sector
(% of Net Assets)
-----------------------------------------------
INTERNATIONAL
-------------
Nokia Corp. ADR 1.1
Kloninklijke Philips Elec. N.V. ADR 0.7
Total Fina S.A. 0.7
REAL ESTATE
-----------
Starwood Hotels & Resorts 1.0
Equity Office Properties Trust 0.9
Simon Property Group, Inc. 0.9
U.S. GOVERNMENT
---------------
GNMA @ 6.50% 4.3
GNMA @ 6.00% 3.5
GNMA @ 7.00% 3.2
U.S.
----
Intel Corp. 1.7
Oracle Corp. 1.1
Bausch & Lomb, Inc. 1.0
----------------------------------------------
ASSET ALLOCATION
A pie chart is shown here depicting the Asset Allocation as of May 31, 2000 of
the USAA Cornerstone Strategy Fund to be:
U.S. Securities - 38.6%; International Securities - 28.1%; U.S. Government &
Agency Issues - 18.7%; Real Estate Securities - 13.2%; and Money Market
Instrument 2.0%.
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY OR MAY NOT EQUAL 100%.
SEE PAGE 12 FOR A COMPLETE LISTING OF THE PORTFOLIO OF INVESTMENTS.
FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY FLUCTUATIONS,
MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
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 * $ .79
Long-term capital gains 1.66
------
Total $ 2.45
======
20.9% 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 CORNERSTONE STRATEGY FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the USAA Cornerstone Strategy Fund, a series of
the USAA Investment Trust, as of May 31, 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 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 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 Cornerstone 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 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 CORNERSTONE STRATEGY FUND
PORTFOLIO OF INVESTMENTS
MAY 31, 2000
Market
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
INTERNATIONAL SECURITIES (28.1%)
FOREIGN COMMON STOCKS (28.0%)
ARGENTINA (0.0%)(a)
312,000 PC Holdings S.A. $ 493
--------------------------------------------------------------------------------
AUSTRALIA (0.0%)(a)
776,000 Pasminco Ltd. * 403
--------------------------------------------------------------------------------
AUSTRIA (0.5%)
35,300 Bank Austria AG 1,676
39,200 Boehler Uddeholm AG 1,532
12,900 VA Technologie AG 709
33,300 Vienna Airport (Flughafen Wien) 1,117
--------------------------------------------------------------------------------
5,034
--------------------------------------------------------------------------------
BRAZIL (0.1%)
25,200 Companhia Brasileira de Distribuicao Grupo Pao de
Acucar ADR 756
33,800 Embratel Participacoes S.A. ADR 708
--------------------------------------------------------------------------------
1,464
--------------------------------------------------------------------------------
CANADA (2.3%)
136,800 Anderson Exploration Ltd. * 2,525
52,400 C-MAC Industries, Inc. * 2,001
47,900 Canadian Imperial Bank of Commerce 1,290
129,100 Canadian National Railway Co. 3,462
108,500 Canadian Occidental Petroleum Ltd. 2,692
98,600 Manulife Financial Corp. 1,738
121,200 Nortel Networks Corp. 6,583
147,800 Suncor Energy, Inc. 3,390
71,900 Toronto-Dominion Bank 1,800
--------------------------------------------------------------------------------
25,481
--------------------------------------------------------------------------------
CHINA (0.1%)
1,050,000 Cosco Pacific Ltd. 781
500,000 Legend Holding 507
--------------------------------------------------------------------------------
1,288
--------------------------------------------------------------------------------
DENMARK (0.7%)
425,584 Nordic Baltic Holding * 2,739
101,200 SAS Danmark A/S 911
60,000 Tele Danmark A/S "B" 4,236
--------------------------------------------------------------------------------
7,886
--------------------------------------------------------------------------------
EGYPT (0.0%)(a)
15,360 Suez Cement Co. S.A.E. GDR 170
--------------------------------------------------------------------------------
FINLAND (1.7%)
124,502 Metso OYJ 1,626
240,200 Nokia Corp. ADR 12,490
50,600 Perlos Corp. 1,818
62,800 Sampo Insurance Co. "A" 2,637
--------------------------------------------------------------------------------
18,571
--------------------------------------------------------------------------------
FRANCE (2.2%)
38,000 Accor S.A. 1,539
55,889 Aventis S.A. 3,634
57,217 CNP Assurances 1,859
65,400 Coflexip ADR 3,810
23,000 Eramet Group 1,084
16,970 ISIS S.A. 1,073
36,200 Renault S.A. 1,705
50,000 Rhodia S.A. 830
94,174 Total Fina S.A. 7,434
23,400 Valeo S.A. 1,185
--------------------------------------------------------------------------------
24,153
--------------------------------------------------------------------------------
GERMANY (0.8%)
66,800 Continental AG 1,234
68,400 Merck KGaA 2,122
3,600 SAP AG 1,494
81,000 Veba AG 4,096
--------------------------------------------------------------------------------
8,946
--------------------------------------------------------------------------------
GREECE (0.2%)
35,800 Hellenic Telecommunications Orgn. S.A. (OTE) 884
87,717 National Bank of Greece S.A. GDR * 800
--------------------------------------------------------------------------------
1,684
--------------------------------------------------------------------------------
HONG KONG (0.1%)
66,000 Hutchison Whampoa Ltd. 760
--------------------------------------------------------------------------------
HUNGARY (0.0%)(a)
15,400 Magyar Tavkozlesi RT. (MATAV) ADR 526
--------------------------------------------------------------------------------
INDIA (0.1%)
36,300 Videsh Sanchar Nigam Ltd. GDR 566
--------------------------------------------------------------------------------
ISRAEL (0.2%)
116,718 Bank Hapoalim Ltd. 336
46,800 Blue Square Ltd. ADR 462
5,400 Check Point Software Technologies Ltd. * 1,015
800 Teva Pharmaceutical Industries Ltd. ADR 43
--------------------------------------------------------------------------------
1,856
--------------------------------------------------------------------------------
ITALY (1.2%)
57,700 ENI S.p.A. ADR 3,134
30,500 Gucci Group N.V. 2,611
630,000 Italgas S.p.A. 2,580
132,100 Telecom Italia S.p.A. 1,824
556,700 Telecom Italia S.p.A. Savings 3,454
--------------------------------------------------------------------------------
13,603
--------------------------------------------------------------------------------
JAPAN (4.6%)
31,000 Asatsu DK 1,010
95,000 Daibiru Corp. 790
300 DDI Corp. 3,064
82,000 Fujitsu Ltd. 2,322
45,000 Honda Motor Co. Ltd. 1,483
6,500 Internet Initiative, Inc. ADR * 401
29,000 Ito-Yokado Co. Ltd. 1,721
210,000 Kikkoman Corp. 1,472
50,000 Kirin Brewery Co. Ltd. 604
18,000 Murata Manufacturing Co. Ltd. 3,109
260,000 Nikko Securities Co. Ltd. 2,409
891,000 Nippon Steel Corp. 1,952
235 Nippon Telegraph & Telephone Corp. (NTT) 2,793
52 NTT Mobile Communication Network, Inc. 1,342
62,400 Paris Miki, Inc. 4,137
27,000 Pasona Softbank, Inc. 647
13,800 Ryohin Keikaku Co. 2,010
76,000 Sailor Pen Co. Ltd. 1,332
45,300 Sanix, Inc. * 2,528
47,600 Sony Corp. * 4,309
209,000 Sumitomo Corp. 1,940
51,000 Sumitomo Electric Industries, Ltd. 743
43,000 Takeda Chemical Industries 2,934
340,000 Toshiba Corp. 3,283
2,500 Toys R Us * 402
261 West Japan Railway 1,103
21,200 Zenrin Co. 646
--------------------------------------------------------------------------------
50,486
--------------------------------------------------------------------------------
KOREA (0.2%)
5,000 Korea Electric Power Corp. ADS 78
32,661 Korea Telecom Corp. ADR 1,208
39,800 Samsung Corp. 319
2,691 Samsung Electronics Co. Ltd. 734
--------------------------------------------------------------------------------
2,339
--------------------------------------------------------------------------------
MALAYSIA (0.1%)
142,300 Malayan Bank Berhad 607
17,300 Malaysian Pacific 195
262,000 Technology Resources Industries Bhd 314
--------------------------------------------------------------------------------
1,116
--------------------------------------------------------------------------------
MEXICO (0.2%)
3,400 Coca Cola Femsa S.A. ADR 52
17,400 Telefonos de Mexico, S.A. de C.V. ADR 847
63,000 Tubos de Acero de Mexico, S.A. ADR 850
--------------------------------------------------------------------------------
1,749
--------------------------------------------------------------------------------
NETHERLANDS (3.0%)
110,600 Akzo Nobel N.V. 4,221
33,000 EVC International N.V. * 323
72,700 Fortis NL N.V. 1,913
25,500 Getronics N.V. 427
79,580 ING Group N.V. 4,760
51,500 Koninklijke KPN N.V. 4,651
173,272 Koninklijke Philips Electronics N.V. ADR 7,657
88,700 Oce-van der Grinten N.V. 1,258
66,200 Versatel Telecom * 2,390
53,700 VNU N.V. 2,740
92,200 Vopak Kon 2,107
--------------------------------------------------------------------------------
32,447
--------------------------------------------------------------------------------
NORWAY (0.8%)
1,056,000 Christiania Bank og Kreditkasse 5,441
48,600 Schibsted ASA 947
291,500 Storebrand ASA 1,878
--------------------------------------------------------------------------------
8,266
--------------------------------------------------------------------------------
PORTUGAL (0.7%)
132,100 Banco Pinto & Sotto Mayor S.A. * 2,983
187,000 Brisa-Auto Estrada de Portugal S.A. 1,371
313,000 Portugal Telecom S.A. ADR 3,404
--------------------------------------------------------------------------------
7,758
--------------------------------------------------------------------------------
RUSSIA (0.1%)
10,000 LUKoil ADR 552
--------------------------------------------------------------------------------
SINGAPORE (0.0%)(a)
99,800 Natsteel Electronics 294
--------------------------------------------------------------------------------
SOUTH AFRICA (0.1%)
518,300 Firstrand Ltd. 544
60,876 South African Breweries plc 371
--------------------------------------------------------------------------------
915
--------------------------------------------------------------------------------
SPAIN (1.2%)
140,987 Altadis S.A. 2,068
249,333 Banco Bilbao Vizcaya Argentaria 3,489
109,750 Repsol S.A. 2,342
85,716 Telefonica de Espana S.A. ADR * 5,218
--------------------------------------------------------------------------------
13,117
--------------------------------------------------------------------------------
SWEDEN (1.4%)
113,100 Autoliv, Inc. GDR 3,116
199,200 Ericsson L M Tel Co. ADR 4,084
881,178 Nordic Baltic Holding * 5,755
88,320 Skandinaviska Enskilda Banken "A" 963
543,000 Swedish Match AB 1,686
543,000 Swedish Match Redemption Rights 28
--------------------------------------------------------------------------------
15,632
--------------------------------------------------------------------------------
SWITZERLAND (0.8%)
2,380 Novartis AG 3,511
5,500 Selecta Group AG 1,579
2,738 Sulzer AG P.C. * 1,844
5,280 Swisscom AG 1,855
--------------------------------------------------------------------------------
8,789
--------------------------------------------------------------------------------
TAIWAN (0.1%)
342,672 Compal Electronics, Inc. 818
184,000 Winbond Electronic * 555
--------------------------------------------------------------------------------
1,373
--------------------------------------------------------------------------------
TURKEY (0.1%)
15,300,000 Eregli Demir Ve Celik Fabrikalari T.A.S. * 708
52,711,480 Yapi Ve Kredi Bankasi A.S. 651
--------------------------------------------------------------------------------
1,359
--------------------------------------------------------------------------------
UNITED KINGDOM (4.4%)
79,300 AstraZeneca Group plc 3,345
240,000 Bank of Scotland 2,263
720,200 Billiton plc 2,447
73,800 BOC Group plc 1,039
1,600 Bookham Technology * 79
191,000 Cable & Wireless plc 3,188
400,000 Cadbury Schweppes 2,664
220,100 Celltech Group 3,202
213,200 CGU plc 3,242
1,278,000 Cookson Group plc 4,132
900,000 Corporate Services Group plc * 1,206
32,400 Glaxo Wellcome plc ADR 1,825
2,656,000 Laporte * 30
166,000 Laporte plc * 1,329
550,000 Old Mutual plc 1,157
132,300 Powergen plc 871
326,000 Reckitt & Colman 3,577
227,866 Reuters Group plc 3,397
196,880 Royal Bank Scot Group 3,242
775,100 Tomkins plc 2,222
306,197 WPP Group plc 3,726
--------------------------------------------------------------------------------
48,183
--------------------------------------------------------------------------------
Total Foreign Common Stocks (cost: $219,344) 307,259
--------------------------------------------------------------------------------
FOREIGN PREFERRED STOCK (0.1%)
BRAZIL (0.1%)
3,700,000 Petroleo Brasileiro S.A. (cost: $407) 850
--------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
---------------------------------------------------------------------
FOREIGN BOND (0.0%)(a)
JAPAN (0.0%)(a)
$ 600 MBL International Finance (Bermuda)
Trust, Convertible Notes (cost: $600) 3.00% 11/30/2002 630
--------------------------------------------------------------------------------
Total International Securities (cost: $220,351) 308,739
--------------------------------------------------------------------------------
Market
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
REAL ESTATE SECURITIES (13.2%)
LEISURE TIME (0.4%)
250,000 Vail Resorts, Inc. * $ 4,000
--------------------------------------------------------------------------------
LODGING/HOTEL (1.0%)
370,000 Starwood Hotels & Resorts Worldwide, Inc. 10,938
--------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (11.8%)
150,000 Alexandria Real Estate Equities, Inc. 5,072
230,000 AvalonBay Communities, Inc. 9,142
220,000 Boston Properties, Inc. 7,686
69,400 Brandywine Realty Trust 1,228
180,000 Chelsea GCA Realty, Inc. 6,086
320,000 Correctional Properties Trust 3,200
390,000 Duke-Weeks Realty Corp. 8,409
260,000 Entertainment Properties Trust 3,543
390,000 Equity Office Properties Trust 10,359
270,000 Franchise Finance Corp. of America 6,092
230,000 Golf Trust of America, Inc. 3,752
280,000 Highwoods Properties, Inc. 6,738
270,000 Liberty Property Trust 6,750
300,000 Meristar Hospitality Corp. 5,700
60,000 Mills Corp. 1,061
240,000 Pan Pacific Retail Properties, Inc. 4,800
300,000 Philips International Realty Corp. 5,100
190,000 Post Properties, Inc. 8,336
230,000 Prentiss Properties Trust 5,520
250,000 Reckson Associates Realty Corp. "B" 5,703
400,000 Simon Property Group, Inc. 9,800
180,000 Sun Communities, Inc. 5,828
--------------------------------------------------------------------------------
129,905
--------------------------------------------------------------------------------
Total Real Estate Securities (cost: $133,724) 144,843
--------------------------------------------------------------------------------
U.S. STOCKS (38.6%)
AEROSPACE/DEFENSE (1.3%)
235,000 B.F. Goodrich Co. 8,343
146,060 Boeing Co. 5,705
--------------------------------------------------------------------------------
14,048
--------------------------------------------------------------------------------
ALUMINUM (0.8%)
145,000 Alcoa, Inc. 8,473
--------------------------------------------------------------------------------
AUTOMOBILES (0.5%)
115,000 Ford Motor Co. 5,585
--------------------------------------------------------------------------------
AUTO PARTS (0.5%)
155,000 Lear Corp. * 3,633
176,700 Meritor Automotive, Inc. 2,198
--------------------------------------------------------------------------------
5,831
--------------------------------------------------------------------------------
BANKS - MAJOR REGIONAL (1.7%)
230,000 Fleet Boston Financial Corp. 8,697
125,000 PNC Bank Corp. 6,297
150,000 SouthTrust Corp. 4,059
--------------------------------------------------------------------------------
19,053
--------------------------------------------------------------------------------
BANKS - MONEY CENTER (1.3%)
109,000 Bank of America Corp. 6,056
106,000 Chase Manhattan Corp. 7,917
--------------------------------------------------------------------------------
13,973
--------------------------------------------------------------------------------
BEVERAGES - ALCOHOLIC (0.2%)
25,000 Anheuser-Busch Companies, Inc. 1,938
--------------------------------------------------------------------------------
BEVERAGES - NONALCOHOLIC (0.5%)
205,000 Pepsi Bottling Group, Inc. 5,356
--------------------------------------------------------------------------------
CHEMICALS (0.3%)
210,000 Lyondell Petrochemical Co. 3,504
--------------------------------------------------------------------------------
COMMUNICATION EQUIPMENT (0.7%)
130,000 Lucent Technologies, Inc. 7,459
--------------------------------------------------------------------------------
COMPUTER - HARDWARE (1.5%)
62,000 Hewlett-Packard Co. 7,448
88,000 IBM Corp. 9,443
--------------------------------------------------------------------------------
16,891
--------------------------------------------------------------------------------
COMPUTER - NETWORKING (0.6%)
120,000 Cisco Systems, Inc. * 6,832
--------------------------------------------------------------------------------
COMPUTER SOFTWARE & SERVICE (2.1%)
40,000 Computer Associates International, Inc. 2,060
105,000 Microsoft Corp. * 6,569
160,100 Oracle Corp. * 11,507
122,000 Unisys Corp. * 3,309
--------------------------------------------------------------------------------
23,445
--------------------------------------------------------------------------------
CONSUMER JEWELRY AND NOVELTIES - MISCELLANEOUS (0.2%)
110,000 American Greetings Corp. "A" 2,049
--------------------------------------------------------------------------------
CONTAINERS - METALS & GLASS (0.2%)
53,000 Ball Corp. 1,573
--------------------------------------------------------------------------------
DRUGS (1.8%)
120,000 Merck & Co., Inc. 8,955
158,500 Pharmacia Corp. 8,232
65,000 Watson Pharmaceuticals, Inc. * 2,868
--------------------------------------------------------------------------------
20,055
--------------------------------------------------------------------------------
ELECTRIC UTILITIES (0.1%)
45,000 Reliant Energy, Inc. 1,283
--------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT (0.9%)
195,000 General Electric Co. 10,262
--------------------------------------------------------------------------------
ELECTRONICS - SEMICONDUCTORS (1.7%)
150,000 Intel Corp. 18,703
--------------------------------------------------------------------------------
ENTERTAINMENT (0.6%)
160,000 Walt Disney Co. 6,750
--------------------------------------------------------------------------------
EQUIPMENT - SEMICONDUCTORS (0.6%)
80,000 Applied Materials, Inc. * 6,680
--------------------------------------------------------------------------------
FINANCE - CONSUMER (0.3%)
70,000 PMI Group, Inc. 3,553
--------------------------------------------------------------------------------
FINANCE - DIVERSIFIED (1.1%)
169,816 Associates First Capital Corp. "A" 4,659
94,000 Morgan Stanley Dean Witter & Co. 6,762
--------------------------------------------------------------------------------
11,421
--------------------------------------------------------------------------------
FOODS (0.9%)
133,700 Nabisco Holdings Corp. "A" 6,175
220,000 Ralston Purina Group 4,084
--------------------------------------------------------------------------------
10,259
--------------------------------------------------------------------------------
HEALTH CARE - DIVERSIFIED (1.4%)
155,000 American Home Products Corp. 8,351
130,000 Bristol-Myers Squibb Co. 7,158
--------------------------------------------------------------------------------
15,509
--------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS (1.0%)
120,000 Kimberly-Clark Corp. 7,260
60,000 Procter & Gamble Co. 3,990
--------------------------------------------------------------------------------
11,250
--------------------------------------------------------------------------------
INSURANCE - LIFE/HEALTH (0.3%)
69,900 Metlife, Inc. * 1,433
47,000 Stancorp Financial Group, Inc. 1,498
--------------------------------------------------------------------------------
2,931
--------------------------------------------------------------------------------
INSURANCE - MULTILINE COMPANIES (1.4%)
79,000 American International Group, Inc. 8,892
70,000 CIGNA Corp. 6,217
--------------------------------------------------------------------------------
15,109
--------------------------------------------------------------------------------
INSURANCE - PROPERTY/CASUALTY (0.3%)
130,000 Allstate Corp. 3,445
--------------------------------------------------------------------------------
LEISURE TIME (0.4%)
195,000 Brunswick Corp. 3,754
--------------------------------------------------------------------------------
MACHINERY - DIVERSIFIED (0.7%)
100,000 Caterpillar, Inc. 3,825
100,000 Deere & Co. 4,156
--------------------------------------------------------------------------------
7,981
--------------------------------------------------------------------------------
MANUFACTURING - DIVERSIFIED INDUSTRIES (0.5%)
80,500 Eaton Corp. 5,841
--------------------------------------------------------------------------------
MANUFACTURING - SPECIALIZED (0.9%)
135,000 Avery Dennison Corp. 8,269
73,333 Energizer Holdings, Inc. * 1,246
--------------------------------------------------------------------------------
9,515
--------------------------------------------------------------------------------
MEDICAL PRODUCTS & SUPPLIES (1.0%)
150,000 Bausch & Lomb, Inc. 10,425
--------------------------------------------------------------------------------
NATURAL GAS UTILITIES (0.8%)
90,000 Coastal Corp. 5,524
90,000 NICOR, Inc. 3,302
--------------------------------------------------------------------------------
8,826
--------------------------------------------------------------------------------
OIL - DOMESTIC INTEGRATED (0.9%)
155,000 Conoco, Inc. "A" * 4,146
260,000 Occidental Petroleum Corp. * 6,159
--------------------------------------------------------------------------------
10,305
--------------------------------------------------------------------------------
OIL - INTERNATIONAL INTEGRATED (1.5%)
70,000 Chevron Corp. 6,471
39,604 Exxon Mobil Corp. 3,299
110,000 Texaco, Inc. 6,318
--------------------------------------------------------------------------------
16,088
--------------------------------------------------------------------------------
OIL & GAS - DRILLING/EQUIPMENT (0.5%)
157,800 Helmerich & Payne, Inc. 5,878
--------------------------------------------------------------------------------
OIL & GAS - EXPLORATION & PRODUCTION (0.6%)
270,000 Union Pacific Resources, Inc. 6,396
--------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS (0.3%)
250,000 Smurfit-Stone Container Corp. * 3,547
--------------------------------------------------------------------------------
PHOTOGRAPHY - IMAGING (0.5%)
190,000 Xerox Corp. 5,154
--------------------------------------------------------------------------------
RAILROADS/SHIPPING (0.3%)
200,000 Norfolk Southern Corp. 3,563
--------------------------------------------------------------------------------
RETAIL - GENERAL MERCHANDISING (1.0%)
120,000 Sears, Roebuck & Co. 4,432
120,000 Wal-Mart Stores, Inc. 6,915
--------------------------------------------------------------------------------
11,347
--------------------------------------------------------------------------------
RETAIL - SPECIALTY (0.1%)
188,100 Office Depot, Inc. * 1,328
--------------------------------------------------------------------------------
SAVINGS & LOAN HOLDING CO. (0.4%)
135,000 Washington Mutual, Inc. 3,881
--------------------------------------------------------------------------------
SERVICES - COMMERCIAL & CONSUMER (0.4%)
120,000 Hertz Corp. "A" 3,758
--------------------------------------------------------------------------------
SERVICES - DATA PROCESSING (0.3%)
60,000 First Data Corp. 3,364
--------------------------------------------------------------------------------
TELECOMMUNICATIONS - LONG DISTANCE (1.2%)
65,000 AT&T Corp. 2,255
121,800 Sprint Corp. 7,369
94,500 Worldcom, Inc. * 3,555
--------------------------------------------------------------------------------
13,179
--------------------------------------------------------------------------------
TELEPHONES (1.5%)
120,000 Bell Atlantic Corp. 6,345
120,000 GTE Corp. 7,590
46,000 SBC Communications, Inc. 2,010
--------------------------------------------------------------------------------
15,945
--------------------------------------------------------------------------------
Total U.S. Stocks (cost: $319,481) 423,295
--------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
(000)
------------
U.S. GOVERNMENT & AGENCY ISSUES (18.7%)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION PASS-THROUGH
SECURITIES (15.5%)
$42,333 6.00%, 4/15/2028 - 9/15/2028 38,584
50,565 6.50%, 5/15/2023 - 3/15/2026(c) 47,559
36,658 7.00%, 8/15/2023 - 5/15/2026(c) 35,287
11,398 7.50%, 3/15/2017 - 10/15/2029 11,213
33,402 8.00%, 6/15/2016 - 2/15/2030 33,502
1,612 8.50%, 9/15/2009 - 2/15/2017 1,652
143 9.00%, 6/15/2016 - 10/15/2016 148
1,651 9.50%, 6/15/2009 - 8/15/2017 1,724
312 10.00%, 11/15/2009 - 4/15/2016 329
26 11.50%, 3/15/2013 29
--------------------------------------------------------------------------------
170,027
--------------------------------------------------------------------------------
COUPON
RATE MATURITY
-------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
PASS-THROUGH SECURITIES (2.1%)
4,910 Federal National Mortgage Association 7.50% 9/01/2029 4,774
10,000 Federal National Mortgage Association 7.50 5/01/2030 9,716
8,400 Federal National Mortgage Association(b) 8.50 12/01/2099 8,492
--------------------------------------------------------------------------------
22,982
--------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION NOTE (0.5%)
5,000 Federal National Mortgage Association 7.25 1/15/2010 4,924
--------------------------------------------------------------------------------
U.S. TREASURY (0.6%)
8,000 U.S. Treasury Bonds 5.25 11/15/2028 6,962
--------------------------------------------------------------------------------
Total U.S. Government & Agency Issues (cost: $211,059) 204,895
--------------------------------------------------------------------------------
MONEY MARKET INSTRUMENT (2.0%)
22,088 Federal Home Loan Bank,
Discount Notes (cost: $22,088) 6.30 6/01/2000 22,088
--------------------------------------------------------------------------------
Total Investments (cost: $906,703) $1,103,860
================================================================================
PORTFOLIO SUMMARY BY CONCENTRATION
----------------------------------
Government National Mortgage Association 15.5%
Real Estate Investment Trusts 11.8
Telephones 4.7
Drugs 3.7
Banks - Money Center 3.2
Banks - Major Regional 2.8
Communication Equipment 2.8
Oil - International Integrated 2.8
Insurance - Multiline Companies 2.7
Electronics - Semiconductors 2.5
Computer Software & Service 2.4
Federal National Mortgage Association 2.1
Electrical Equipment 1.7
Computer - Hardware 1.7
Health Care - Diversified 1.4
Telecommunications - Long Distance 1.4
Household Products 1.4
Aerospace/Defense 1.3
Manufacturing - Diversified Industries 1.3
Oil - Domestic Integrated 1.2
Finance - Diversified 1.2
Manufacturing - Specialized 1.2
Lodging/Hotel 1.1
Oil & Gas - Exploration & Production 1.1
Leisure Time 1.1
Foods 1.1
Natural Gas Utilities 1.0
Auto Parts 1.0
Retail - General Merchandising 1.0
Retail - Specialty 1.0
Oil & Gas - Drilling/Equipment 1.0
Medical Products & Supplies 1.0
Other 19.4
-----
Total 100.6%
=====
USAA CORNERSTONE 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.
ADR - American Depositary Receipts are receipts issued by a U.S. bank evidencing
ownership of foreign shares. Dividends are paid in U.S. dollars.
GDR - Global Depositary Receipts are receipts issued by a U.S. or foreign bank
evidencing ownership of foreign shares. Dividends are paid in U.S. dollars.
SPECIFIC NOTES
(a) Represents less than 0.1% of net assets.
(b) At May 31, 2000, the cost of securities purchased on a delayed-delivery
basis was $8,459,000.
(c) At May 31, 2000, portions of these securities were segregated to cover
delayed-delivery purchases.
* Non-income producing.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<TABLE>
USAA CORNERSTONE STRATEGY FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
MAY 31, 2000
<S> <C>
ASSETS
Investments in securities, at market value (identified cost of $906,703) $1,103,860
Cash 133
Cash denominated in foreign currencies (identified cost of $2,962) 3,092
Receivables:
Capital shares sold 124
Dividends and interest 3,101
Securities sold 487
Unrealized appreciation on foreign currency contracts held, at value 7
----------
Total assets 1,110,804
----------
LIABILITIES
Securities purchased 11,666
Capital shares redeemed 880
USAA Investment Management Company 695
USAA Transfer Agency Company 192
Accounts payable and accrued expenses 201
----------
Total liabilities 13,634
----------
Net assets applicable to capital shares outstanding $1,097,170
==========
REPRESENTED BY:
Paid-in capital $ 863,197
Accumulated undistributed net investment income 8,189
Accumulated net realized gain on investments 28,553
Net unrealized appreciation of investments 197,157
Net unrealized depreciation on foreign currency translations 74
----------
Net assets applicable to capital shares outstanding $1,097,170
==========
Capital shares outstanding, unlimited number of shares authorized,
no par value 41,765
==========
Net asset value, redemption price, and offering price per share $ 26.27
==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
USAA CORNERSTONE STRATEGY FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED MAY 31, 2000
Net investment income:
Income:
Dividends (net of foreign taxes withheld of $919) $ 24,374
Interest 16,839
--------
Total income 41,213
--------
Expenses:
Management fees 8,779
Transfer agent's fees 2,661
Custodian's fees 515
Postage 630
Shareholder reporting fees 118
Trustees' fees 3
Registration fees 35
Professional fees 60
Other 12
--------
Total expenses 12,813
--------
Net investment income 28,400
--------
Net realized and unrealized gain (loss) on investments and
foreign currency:
Net realized gain (loss) on:
Investments 51,745
Foreign currency transactions (186)
Change in net unrealized appreciation/depreciation of:
Investments (18,951)
Foreign currency translations 111
--------
Net realized and unrealized gain 32,719
--------
Increase in net assets resulting from operations $ 61,119
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA CORNERSTONE STRATEGY FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
YEARS ENDED MAY 31,
2000 1999
-----------------------
From operations:
Net investment income $ 28,400 $ 41,937
Net realized gain on investments 51,745 88,403
Net realized loss on foreign currency transactions (186) (311)
Change in net unrealized appreciation/depreciation of:
Investments (18,951) (151,418)
Foreign currency translations 111 345
----------------------
Increase (decrease) in net assets
resulting from operations 61,119 (21,044)
----------------------
Distributions to shareholders from:
Net investment income (35,168) (40,396)
----------------------
Net realized gains (75,478) (76,343)
----------------------
From capital share transactions:
Proceeds from shares sold 82,776 151,031
Reinvested dividends 107,815 114,177
Cost of shares redeemed (301,711) (369,866)
----------------------
Decrease in net assets from
capital share transactions (111,120) (104,658)
----------------------
Decrease in net assets (160,647) (242,441)
Net assets:
Beginning of period 1,257,817 1,500,258
----------------------
End of period $1,097,170 $1,257,817
======================
Accumulated undistributed net investment income:
End of period $ 8,189 $ 15,143
======================
Change in shares outstanding:
Shares sold 3,177 5,602
Shares issued for dividends reinvested 4,115 4,163
Shares redeemed (11,611) (13,876)
----------------------
Decrease in shares outstanding (4,319) (4,111)
======================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA CORNERSTONE 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
Cornerstone Strategy Fund (the Fund). The Fund's investment objective is to
achieve a positive, inflation-adjusted rate of return and a reasonably stable
value of Fund shares, thereby preserving the purchasing power of shareholders'
capital. Using preset target ranges, USAA Investment Management Company (the
Manager) will invest the Fund's assets mostly in stocks (divided into the
categories of U.S., international, real estate, and gold) and to a much lesser
extent in U.S. government securities.
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, less foreign taxes, if any, is recorded on the ex-dividend date. If the
ex-dividend date has passed, certain dividends from foreign securities are
recorded upon notification. Interest income is recorded on the accrual basis.
Discounts and premiums on short-term securities are amortized over the life of
the respective securities. Amortization of market discounts on long-term
securities is recognized as interest income upon disposition of the security to
the extent there is a gain on disposition.
D. FOREIGN CURRENCY TRANSLATIONS - The assets of the Fund may be invested in
the securities of foreign issuers. Since the accounting records of the Fund are
maintained in U.S. dollars, foreign currency amounts are translated into U.S.
dollars on the following basis:
1. Market value of securities, other assets, and liabilities at the mean
between the bid and asked translation rates of such currencies against U.S.
dollars on a daily basis.
2. Purchases and sales of securities, income, and expenses at the rate of
exchange obtained from an independent pricing service on the respective dates of
such transactions.
Net realized and unrealized foreign currency gains (losses) occurring during the
holding period of investments are a component of realized gain (loss) on
investments and unrealized appreciation/depreciation on investments,
respectively.
Net realized foreign currency gains (losses) arise from sales of foreign
currency, currency gains (losses) realized between the trade and settlement
dates on security transactions, from the difference between amounts of
dividends, interest, and foreign withholding taxes recorded on the Fund's books,
and the U.S. dollar equivalent of the amounts received. Net realized foreign
currency gains (losses) have been reclassified from accumulated net realized
gain (loss) to accumulated undistributed net investment income on the statement
of assets and liabilities as such amounts are treated as ordinary income (loss)
for tax purposes. Net unrealized foreign currency exchange gains (losses) arise
from changes in the value of assets and liabilities other than investments in
securities resulting from changes in the exchange rate.
E. USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the financial
statements.
(2) LINES OF CREDIT
The Fund participates with other USAA funds in three joint short-term revolving
loan agreements totaling $850 million, two with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($250 million committed and $500 million
uncommitted), and one with Bank of America ($100 million committed). The purpose
of the agreements is to meet temporary or emergency cash needs, including
redemption requests that might otherwise require the untimely disposition of
securities. Subject to availability under both agreements with CAPCO, the Fund
may borrow from CAPCO an amount up to 5% of the Fund's total assets at CAPCO's
borrowing rate with no markup. Subject to availability under its agreement with
Bank of America, the Fund may borrow from Bank of America, at Bank of America's
borrowing rate plus a markup, an amount which, when added to outstanding
borrowings under the CAPCO agreements, does not exceed 25% of the Fund's total
assets. The Fund had no borrowings under either of these agreements during the
year ended May 31, 2000.
(3) DISTRIBUTIONS
Distributions of net investment income and 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 $429,588,000 and
$601,563,000, respectively.
Gross unrealized appreciation and depreciation of investments at May 31, 2000,
was $257,361,000 and $60,204,000, respectively.
(5) FOREIGN CURRENCY CONTRACTS
A forward currency contract (currency contract) is a commitment to purchase or
sell a foreign currency at a specified date, at a negotiated price. The Fund
currently enters into currency contracts only in connection with the purchase or
sale of a security denominated in a foreign currency. These contracts allow the
Fund to "lock in" the U.S. dollar price of the security. Currency contracts are
valued on a daily basis using foreign currency exchange rates obtained from an
independent pricing service. Risks of entering into currency contracts include
the potential inability of the counterparty to meet the terms of the contract
and the Fund giving up the opportunity for potential profit.
At May 31, 2000, the terms of open foreign currency contracts were as follows
(in thousands):
<TABLE>
Foreign Currency Contracts to Buy:
<CAPTION>
-----------------------------------------------------------------------------------
U.S. Dollar
Exchange Contracts to Value as of In Exchange Unrealized Unrealized
Date Receive 5/31/00 for U.S. Dollar Appreciation Depreciation
-----------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
6/02/00 30 Argentine Peso $ 30 $ 30 $ - $ -
-----------------------------------------------------------------------------------
6/02/00 138 British Pound 207 203 4 -
-----------------------------------------------------------------------------------
6/02/00 120 British Pound 179 178 1 -
-----------------------------------------------------------------------------------
6/05/00 122 Argentine Peso 122 122 - -
-----------------------------------------------------------------------------------
6/30/00 95 Euro Currency 89 87 2 -
-----------------------------------------------------------------------------------
$627 $620 $ 7 $ -
===================================================================================
</TABLE>
(6) TRANSACTIONS WITH MANAGER
A. MANAGEMENT FEES - USAA Investment Management Company carries out the Fund's
investment policies and manages the Fund's portfolio. The Fund's management fees
are computed at .75% of its annual average net assets.
B. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Fund based on an annual charge of $26 per shareholder account plus
out-of-pocket expenses.
C. UNDERWRITING SERVICES - The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing, best-efforts basis. The
Manager receives no commissions or fees for this service.
D. BROKERAGE SERVICES - USAA Brokerage Services, a discount brokerage service
of the Manager, may execute portfolio transactions for the Fund. The amount of
brokerage commissions paid to USAA Brokerage Services during the year ended May
31, 2000, was $13,000.
(7) TRANSACTIONS WITH AFFILIATES
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated Trustees or Fund officers
received any compensation from the Fund.
(8) FINANCIAL HIGHLIGHTS
<TABLE>
Per share operating performance for a share outstanding throughout each period
is as follows:
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 27.29 $ 29.89 $ 27.96 $ 25.47 $ 22.63
Net investment income .63 .88 .77 .74 .73
Net realized and
unrealized gain (loss) .80 (1.14) 3.78 3.37 3.18
Distributions from net
investment income (.78) (.81) (.72) (.78) (.74)
Distributions of realized
capital gains (1.67) (1.53) (1.90) (.84) (.33)
--------------------------------------------------------------
Net asset value at
end of period $ 26.27 $ 27.29 $ 29.89 $ 27.96 $ 25.47
==============================================================
Total return (%) * 5.49 (.74) 17.15 16.94 17.79
Net assets at end of
period (000) $1,097,170 $1,257,817 $1,500,258 $1,263,355 $1,035,844
Ratio of expenses to
average net assets (%) 1.09 1.05 1.01 1.06 1.15
Ratio of net investment
income to average net
assets (%) 2.43 3.12 2.64 2.88 3.06
Portfolio turnover (%) 37.46 46.27 32.73 35.14 36.15
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
</TABLE>
TRUSTEES
Robert G. Davis, CHAIRMAN OF THE BOARD
Michael J.C. Roth, 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
