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THE TRUST
USAA LIFE INVESTMENT TRUST
9800 Fredericksburg Road
San Antonio, Texas 78288 Prospectus dated: May 1, 1996
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USAA Life Investment Trust (the "Trust") is a Delaware business trust
organized on July 20, 1994. The Trust is a diversified open-end management
investment company (commonly referred to as a "mutual fund"), which consists of
the following five separate series, each with its own investment objectives and
policies (individually, "Fund"; collectively "Funds"):
USAA LIFE VARIABLE ANNUITY MONEY MARKET FUND ("VA Money Market Fund"). The
VA Money Market Fund's investment objective is to obtain the highest level of
current income consistent with preservation of capital and maintenance of
liquidity.
USAA LIFE VARIABLE ANNUITY INCOME FUND ("VA Income Fund"). The VA Income
Fund's investment objective is maximum current income without undue risk to
principal.
USAA LIFE VARIABLE ANNUITY GROWTH AND INCOME FUND ("VA Growth and Income
Fund"). The VA Growth and Income Fund's investment objective is capital
growth and current income.
USAA LIFE VARIABLE ANNUITY WORLD GROWTH FUND ("VA World Growth Fund"). The VA
World Growth Fund's investment objective is long-term capital appreciation.
USAA LIFE VARIABLE ANNUITY DIVERSIFIED ASSETS FUND ("VA Diversified Assets
Fund"). The VA Diversified Assets Fund's investment objective is long-term
capital growth, consistent with preservation of capital and balanced by
current income.
Shares of the Trust currently are offered only to the Separate Account of
USAA Life Insurance Company (the "Separate Account") to serve as the funding
medium for certain variable annuity contracts (the "Contracts") that USAA Life
Insurance Company ("USAA Life") is offering to individual members and families
of members of the United Services Automobile Association ("USAA"), as well as to
the general public. USAA, a large diversified financial services institution, is
the parent company of the USAA Group of Companies, which includes USAA Life and
USAA Investment Management Company ("USAA IMCO"), the investment adviser
("Adviser") to the Trust. As Adviser to the Trust, USAA IMCO will use its
professional experience and expertise to assist the Funds in trying to meet
their objectives. However, there can be no assurance that these objectives will
be attained. Shares of the Trust are not deposits or other obligations of, or
guaranteed by, the USAA Federal Savings Bank, are not insured by the Federal
Deposit Insurance Corporation (FDIC) or any other government
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agency, and are subject to investment risks, including possible loss of the
principal amount invested. Because the VA World Growth Fund
invests in foreign securities, it involves a higher degree of risk and may not
be appropriate for some investors. (See "Special Risk Considerations" at
page 39B.)
This Prospectus provides prospective purchasers of the Contracts with basic
information regarding the Trust that they should know before allocating premium
payments to any Fund. Please read it carefully and retain it for future
reference. Additional information regarding the Trust is contained in a
Statement of Additional Information ("SAI") dated May 1, 1996, which has been
filed with the Securities and Exchange Commission (the "SEC") and is
incorporated in this Prospectus by reference. If you have any questions about
this Prospectus or desire a copy of the SAI at no charge, please write to the
Trust at the address shown above or call: (210) 456-9035 or toll free
1-800-531-2923.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. AN
INVESTMENT IN THE USAA LIFE VARIABLE ANNUITY MONEY MARKET FUND IS NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT
THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
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<TABLE>
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TABLE OF CONTENTS:
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<S> <C>
INTRODUCTION.................................................................32B
FINANCIAL HIGHLIGHTS.........................................................32B
THE FUNDS....................................................................32B
USAA Life Variable Annuity Money Market Fund...........................33B
USAA Life Variable Annuity Income Fund.................................33B
USAA Life Variable Annuity Growth
and Income Fund....................................................34B
USAA Life Variable Annuity World Growth Fund...........................34B
USAA Life Variable Annuity Diversified Assets Fund.....................35B
CERTAIN INVESTMENT POLICIES, TECHNIQUES
AND RESTRICTIONS.......................................................35B
Convertible Securities.................................................35B
Municipal Lease Obligations............................................36B
Mortgage-Backed and Asset-Backed Securities............................36B
Yankee and Eurodollar Obligations......................................37B
Depositary Receipts....................................................37B
Forward Currency Contracts.............................................37B
Repurchase Agreements..................................................37B
Master Demand Notes....................................................38B
Variable Rate Securities...............................................38B
Put Bonds..............................................................38B
When-Issued Securities.................................................38B
Liquidity..............................................................38B
Portfolio Turnover.....................................................39B
SPECIAL RISK CONSIDERATIONS..................................................39B
Foreign Securities.....................................................39B
Forward Currency Contracts.............................................39B
INVESTMENT RESTRICTIONS......................................................40B
MANAGEMENT...................................................................40B
Advisory Fees..........................................................40B
Expenses...............................................................41B
Portfolio Transactions.................................................41B
Portfolio Managers.....................................................41B
PURCHASE OF FUND SHARES......................................................41B
Distributor............................................................42B
REDEMPTION OF FUND SHARES....................................................42B
VALUATION OF FUND SHARES.....................................................42B
DIVIDENDS AND DISTRIBUTIONS..................................................42B
TAX MATTERS..................................................................43B
Diversification........................................................43B
PERFORMANCE INFORMATION......................................................43B
ADDITIONAL INFORMATION ABOUT THE TRUST.......................................44B
Organization and Capitalization........................................44B
Voting Privileges......................................................44B
SERVICE PROVIDERS............................................................45B
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Introduction
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The Trust is registered with the SEC as a diversified, open-end
management investment company. The Trust currently consists of five Funds,
each of which represents a separate series of shares of beneficial interest
in the Trust. The Trust serves as the funding vehicle for Contracts issued by
USAA Life through the Separate Account. The Separate Account, and not the
individual Contract Owners ("Contract Owners"), is the shareholder of the
Trust. However, certain voting instruction privileges with respect to Trust
shares are extended to Contract Owners. See "Voting Privileges," below. A
prospectus describing the Contracts accompanies this Prospectus.
Financial Highlights
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Set out below are the Financial Highlights for each Fund of the Trust
expressed in terms of one share outstanding for the period from January 5, 1995
(the Trust's date of inception) through December 31, 1995. The information
contained in the Financial Highlights has been audited by KPMG Peat Marwick,
LLP, the Trust's independent auditors whose report thereon is contained in the
Trust's Annual Report to Shareholders ("Annual Report"). The Financial
Highlights should be read in conjunction with the Trust's audited financial
statements and notes thereto which are contained in the Annual Report.
Additional information about the performance of the Trust and the Funds has been
included in the Annual Report, which may be obtained upon request, without
charge by calling 1-800-531-2923 or writing the Trust at 9800 Fredericksburg
Road, San Antonio, Texas 78288.
USAA LIFE INVESTMENT TRUST
FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding for the period from
January 5, 1995 (the Trust's date of inception) through December 31, 1995 is as
follows:
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USAA Life USAA Life USAA Life USAA Life USAA Life
VA Money VA Income VA Growth and VA World VA Diversified
Market Fund Fund Income Fund Growth Fund Assets Fund
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<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 1.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Net investment income 0.06 (a) 0.78 (a) 0.34 (a) 0.17 (a) 0.55 (a)
Net realized and unrealized gain -- 1.61 2.83 1.79 2.08
Distributions from net investment income (0.06) (0.76) (0.30) (0.16) (0.53)
Distributions of realized capital gains -- (0.31) (0.27) (0.70) (0.14)
----------- --------- ------------- ----------- --------------
Net asset value at end of period $ 1.00 $ 11.32 $ 12.60 $ 11.10 $ 11.96
=========== ========= ============= =========== ==============
Total return 5.69%(b) 23.88%(b) 31.72%(b) 19.55%(b) 26.33%(b)
Net assets at end of period (000) $ 7,802 $ 25,823 $ 28,761 $ 24,705 $ 26,311
Ratio of expenses to average net assets 0.35%(c,d) 0.35%(c,d) 0.35%(c,d) 0.65%(c,d) 0.35%(c,d)
Ratio of net investment income to average
net assets 5.55%(c,d) 7.07%(c,d) 2.82%(c,d) 1.55%(c,d) 4.93%(c,d)
Portfolio turnover -- 55.08% 17.73% 78.86% 58.87%
Average commission rate per share -- $ 0.0400 $ 0.0489 $ 0.0076 $ 0.0482
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(a) Calculated using weighted average shares.
(b) The total return of a Fund refers to the percentage change in value of a
hypothetical investment, including the deduction of a proportional share of fund
expenses, and assumes all income and capital gains distributions are reinvested.
Total returns for the period do not reflect expenses that apply at the separate
account level including risk and expense charges. These expenses would reduce
the total return for the period shown.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) The information contained in this table is based on actual expenses for the
period, after giving effect to reimbursements of expenses by USAA Life.
Absent such reimbursements, the funds' ratios would have been:
<TABLE>
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USAA Life USAA Life USAA Life USAA Life USAA Life
VA Money VA Income VA Growth and VA World VA Diversified
Market Fund Fund Income Fund Growth Fund Assets Fund
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<S> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets 2.29%(c) 0.65%(c) 0.66%(c) 0.87%(c) 0.64%(c)
Ratio of net investment income to average
net assets 3.61%(c) 6.77%(c) 2.51%(c) 1.33%(c) 4.64%(c)
</TABLE>
The Funds
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Set out below is a description of the investment objectives, investment
program, policies, and restrictions of each Fund. The investment objective of
each Fund is a fundamental policy that may not be changed without the approval
of a majority of that Fund's outstanding shares (within the meaning of the
Investment Company Act of 1940 ["1940 Act"]). The investment program, policies,
and restrictions, except as otherwise noted or as required by law, are not
fundamental, and may be changed by the Board of Trustees of the Trust ("Board
of Trustees") without shareholder approval. There are risks in the ownership of
any security, and no assurance can be given that any Fund will achieve its
investment objective.
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USAA LIFE VARIABLE ANNUITY MONEY MARKET FUND
INVESTMENT OBJECTIVE. The VA Money Market Fund's investment objective is to
obtain the highest level of current income consistent with preservation of
capital and maintenance of liquidity.
INVESTMENT PROGRAM. The Fund will pursue this objective by investing its assets
in a diversified portfolio of high quality U.S. dollar-denominated debt
instruments that present minimal credit risk with remaining maturities of 397
days or less. Consistent with regulatory requirements, the Fund will maintain an
overall dollar-weighted average portfolio maturity of no more than 90 days.
The Fund currently invests in money market instruments with relatively short
maturities. This is done primarily to facilitate the redemption of Fund shares
when Contract values are allocated from the Money Market Variable Fund Account
to other Variable Fund Accounts following the "Free Look" period described in
the accompanying Variable Annuity prospectus.
The Fund may invest in the following categories of money market
instruments: (1) obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, and repurchase agreements collateralized by such
obligations; (2) corporate debt obligations such as notes, bonds, and commercial
paper; (3) U.S. bank or foreign bank obligations including certificates of
deposit, banker's acceptances, and time deposits; (4) obligations of state and
local governments and their agencies and instrumentalities; (5) municipal lease
obligations; (6) mortgage backed securities; (7) asset-backed securities; (8)
dollar-denominated instruments issued outside the U.S. capital markets by
foreign corporations and financial institutions and by foreign branches of U.S.
corporations and financial institutions ("Eurodollar obligations"); (9) dollar-
denominated instruments issued by foreign issuers in the U.S. capital markets
("Yankee obligations"); (10) master demand notes; and (11) other short-term debt
obligations. As a matter of operating policy, the Fund will limit its
investments in any one issuer (other than the U.S. Government, its agencies or
instrumentalities) to no more than 5% of its total assets.
The Fund will purchase only high quality debt securities that qualify, at
the time of purchase, as "first-tier" securities as defined by Rule 2a-7 under
the 1940 Act. In general, a first-tier security means a security that is: (1)
issued or guaranteed by the U.S. Government or any agency or instrumentality
thereof; (2) rated in the highest category for short-term securities by at least
two nationally recognized statistical rating organizations ("NRSROs"), or by one
NRSRO if the security is rated by only one NRSRO; (3) unrated but issued by an
issuer that has other comparable short-term debt obligations so rated; or (4)
unrated but determined to be of comparable quality by the Adviser. If a security
is downgraded after purchase, the Adviser will follow written procedures adopted
by the Board of Trustees to determine whether it is in the best interest of the
Fund's shareholders for the Fund to continue to hold the security. Current
NRSROs include: Moody's Investors Service, Inc., Standard &
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Poor's Ratings Group, Fitch Investors Service, Inc., Duff & Phelps Inc.,
Thompson BankWatch, Inc., and IBCA Inc. (See Appendix A to the SAI for a further
description of debt ratings provided by these NRSROs.)
The value of the VA Money Market Fund's securities is stated at amortized
cost, which approximates market value. This involves valuing a security at its
cost and thereafter assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates. While this
method provides certainty in valuation, it may result in periods during which
the value of an instrument, as determined by amortized cost, is higher or lower
than the price the Fund would receive upon the sale of the instrument. The
market value of a money market instrument can fluctuate due to changes in short-
term interest rates or changes in the actual or perceived creditworthiness of
the issuer or guarantor.
WHO SHOULD INVEST. The VA Money Market Fund is designed for investors seeking to
benefit from money market yields consistent with safety of principal. The Fund
does not constitute a balanced investment program, but rather, is a useful
component of a long-term balanced investment program for the conservative
investor. The securities in which the VA Money Market Fund may invest may not
yield as high a level of income as securities with a lesser degree of credit
safety and liquidity or longer-term debt obligations. Accordingly, the VA Money
Market Fund is expected to provide lower levels of income and risk than the VA
Income Fund. The Fund will endeavor to maintain a constant net asset value of
$1.00 per share, although there is no assurance that it will be able to do so.
The VA Money Market Fund's shares are neither insured nor guaranteed by the U.S.
Government.
USAA LIFE VARIABLE ANNUITY INCOME FUND
INVESTMENT OBJECTIVE. The VA Income Fund's investment objective is to obtain
maximum current income without undue risk to principal.
INVESTMENT PROGRAM. The Fund will pursue this objective by investing, under
normal market conditions, primarily (i.e., not less than 65% of its total
assets) in a diversified portfolio of U.S. dollar-denominated debt and income
producing equity securities selected for their high yields relative to the
risk involved. Consistent with this policy, in periods of rising interest
rates, the Fund may invest a greater portion of its assets in securities the
value of which is believed to be less sensitive to interest rate changes.
The debt securities in which the Fund can invest include: (1) obligations
of the U.S. Government, its agencies and instrumentalities, and repurchase
agreements collateralized by such obligations; (2) mortgage-backed securities;
(3) corporate debt securities such as notes, bonds, and commercial paper; (4)
U.S. bank obligations, including certificates of deposit and banker's
acceptances; (5) obligations of state and local governments and their agencies
and instrumentalities; (6) asset-backed securities; (7) master demand notes; (8)
Eurodollar obligations; (9) Yankee obligations; and (10) other debt securities.
In addition to investments in debt securities,
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the Fund can invest in dividend paying common stocks, preferred stocks, U.S.
real estate investment trusts ("REITs"), convertible securities, and warrants.
The Fund's investment in REITs may subject the Fund to many of the same risks
associated with direct ownership of real estate. In addition, REITs are
dependent upon the capabilities of the REIT manager(s) and have limited
diversification.
As a temporary defensive measure, the Adviser may invest up to 100% of the
Fund's assets in high quality, short-term debt instruments.
The debt securities must be investment grade at the time of purchase.
Investment grade securities are those issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, those rated in the top four
categories of any one NRSRO (e.g., those rated at least Baa by Moody's Investors
Service ["Moody's"], BBB by Standard and Poor's Ratings Group ["S&P"], BBB by
Fitch Investors Service ["Fitch"], or BBB by Duff and Phelps ["D&P"]), or those
judged to be of equivalent quality by the Adviser if not rated. Securities rated
in the lowest level of investment grade have some speculative characteristics
since adverse economic conditions and changing circumstances are more likely to
have an adverse impact on such securities. If the rating of a security is
downgraded below investment grade, the Adviser will determine whether it is in
the best interest of the Fund's shareholders to continue to hold such security
in the Fund's portfolio. Unless otherwise directed by the Board of Trustees, if
downgrades result in more than 5% of the Fund's net assets being invested in
securities that are less than investment grade quality, the Fund's Manager will
take immediate action to reduce the Fund's holdings in such securities to 5% or
less of the Fund's net assets. Investment grade debt securities typically do not
generate as high a level of income as lower-rated debt securities. The Fund,
therefore, can be expected to provide a lower level of income than mutual funds
that invest in securities of lesser quality. (See Appendix A to the SAI for a
more complete description of debt ratings.)
The Fund may invest in debt securities of any maturity, which will have a
bearing on the interest rate risk that the Fund assumes. Generally, longer-term
debt securities are more sensitive to interest rate changes than are shorter-
term debt securities.
WHO SHOULD INVEST. The VA Income Fund is designed primarily for investors
seeking to benefit from a level of income higher than that available from the VA
Money Market Fund, and who are willing to accept principal fluctuation. Like the
VA Money Market Fund, the VA Income Fund should not be relied upon as a complete
investment program.
USAA LIFE VARIABLE ANNUITY GROWTH AND INCOME FUND
INVESTMENT OBJECTIVE. The VA Growth and Income Fund seeks capital growth and
current income.
INVESTMENT PROGRAM. The Fund will pursue this objective by investing, under
normal market conditions, not less than 65% of its assets in a diversified
portfolio of dividend paying common stocks, convertible securities,
nonconvertible preferred stock and nonconvertible debt securities of companies
that offer the prospect for growth of earnings. These securities may be listed
on a national securities exchange or traded in an established over-the-
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counter securities market ("OTC market"). The debt securities in which the Fund
may invest will be of the type in which the VA Income Fund may invest.
The Fund also may invest in U.S. Real Estate Investment Trusts ("REITs").
The Fund's investment in REITs may subject the Fund to many of the same risks
associated with direct ownership of real estate. In addition, REITs are
dependent upon the capabilities of the REIT manager(s) and have limited
diversification. The Fund may invest up to 30% of its total assets in American
Depositary Receipts ("ADRs") or similar forms of ownership interests in
securities of foreign issuers deposited with a depositary, and securities of
foreign issuers that are traded on U.S. securities exchanges or in U.S. OTC
markets. (See "Special Risk Considerations - Foreign Securities," below.)
As a temporary defensive measure, the Adviser may invest up to 100% of
the Fund's assets in high quality, short-term debt instruments.
WHO SHOULD INVEST. The Fund is designed for investors seeking to benefit from
long-term growth of capital and income. Because of the Fund's emphasis on
investments in common stocks, its value will fluctuate based on market
conditions. Consequently, the Fund should not be relied on for short-term
financial needs or for short-term investment in the stock market.
USAA LIFE VARIABLE ANNUITY WORLD GROWTH FUND
INVESTMENT OBJECTIVE. The VA World Growth Fund seeks long-term capital
appreciation.
INVESTMENT PROGRAM. The Fund will pursue this objective by investing, under
normal market conditions, not less than 65% of its total assets in a diversified
portfolio of common stocks or in securities convertible into common stocks or
exchangeable for common stocks of both foreign and domestic issuers representing
at least three countries, one of which may include the United States. The Fund
may purchase ADR's, Global Depositary Receipts ("GDRs") or similar forms of
ownership interest in securities of foreign issuers deposited with a depositary.
(For a discussion of the risks pertaining to investments in foreign securities,
see "Special Risk Considerations-Foreign Securities," below.) The Fund also may
invest in convertible securities and in REITs. The Fund's investment in REITs
may subject the Fund to many of the same risks associated with direct ownership
of real estate. In addition, REITs are dependent upon the capabilities of the
REIT manager(s) and have limited diversification.
The Fund may invest up to 35% of its total assets in marketable debt
securities having remaining maturities of less than one year that are issued or
guaranteed as to both principal and interest by the U.S. Government or by its
agencies or instrumentalities and in repurchase agreements collateralized by
such securities. The Fund may, on a temporary defensive basis, invest up to 100%
of its total assets in such securities.
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The Fund may hold securities denominated in foreign currencies. As a
result, the value of the securities will be affected by changes in the exchange
rate between the dollar and foreign currencies. In managing exposure to currency
risk, the Fund may enter into forward currency contracts, which involves an
agreement to purchase or sell a specified currency at a specified future date or
over a specified time period at a price set at the time of the contract. (See
"Certain Investment Policies, Techniques and Restrictions -Forward Currency
Contracts," below.)
WHO SHOULD INVEST. The VA World Growth Fund is designed for investors seeking to
diversify by investing in securities of both foreign and domestic issuers, and
who are prepared to bear the risks of such investments. (For a discussion of the
risks pertaining to investments in foreign securities, see "Special Risk
Considerations - Foreign Securities," below.) Because of its emphasis on equity
securities and securities of foreign issuers, this Fund should not be relied
upon as a complete investment program.
USAA LIFE VARIABLE ANNUITY DIVERSIFIED ASSETS FUND
INVESTMENT OBJECTIVE. The VA Diversified Assets Fund seeks long-term capital
growth, consistent with preservation of capital and balanced by current income.
INVESTMENT PROGRAM. To achieve its objective, the Fund will invest, under
normal market conditions, approximately 60% of its assets in equity
securities, selected for total return potential and approximately 40% of its
assets in debt securities of varying maturities.
The equity component of the Fund will consist primarily of "basic value
stocks," which consist of common stocks, preferred stocks, or convertible
securities of U.S. companies that the Adviser believes are undervalued in
relation to such factors as the company's assets and current or prospective
earnings. In most cases, these securities will be listed on the New York Stock
Exchange, though securities listed on other exchanges or traded in an OTC market
may be utilized. The Fund also may invest in REITs. The Fund's investments in
REITs may subject the Fund to many of the same risks associated with the direct
ownership of real estate. In addition, REITs are dependent upon the capabilities
of the REIT manager(s) and have limited diversification.
The income component of the Fund will consist primarily of debt
securities of the type in which the VA Income Fund may invest. Subject to the
policies above, the Fund may shift its emphasis between the equity and income
portions of its portfolio based on the Adviser's analysis of relevant market,
financial and economic conditions.
As a temporary defensive measure, the Adviser may invest up to 100% of
the Fund's assets in high quality, short-term debt instruments.
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WHO SHOULD INVEST. The VA Diversified Assets Fund is designed for investors
seeking the benefits of both long-term capital appreciation and current income.
This Fund is expected generally to have less exposure to equity securities than
the VA Growth and Income Fund and, unlike that Fund, will not invest in
securities of foreign issuers other than Yankee and Eurodollar obligations.
Certain Investment Policies, Techniques and Restrictions
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CONVERTIBLE SECURITIES
Each Fund, other than the VA Money Market Fund, may invest in bonds,
notes, debentures, preferred stocks and other securities that are convertible
into or carry the right to buy, common stock. Investments in convertible
securities can provide an opportunity for capital appreciation and/or income
through interest and dividend payments by virtue of their conversion or
exchange features.
Convertible debt securities and convertible preferred stocks, until
converted, have general characteristics similar to both debt and equity
securities. Convertible securities are generally subordinated to other
similar but non-convertible securities of the same issuer, although
convertible bonds, as corporate debt obligations, enjoy seniority in right of
payment to all equity securities, and convertible preferred stock is senior
to common stock, of the same issuer. However, because of the subordination
feature, convertible bonds and convertible preferred stock typically have
lower ratings than similar non-convertible securities. Convertible securities
generally offer lower yields than non-convertible securities of similar
quality because of their conversion or exchange features.
Although to a lesser extent than with debt securities generally, the
market value of convertible debt securities tends to decline as interest
rates increase and, conversely, tends to increase as interest rates decline.
In addition, because of the conversion or exchange feature, the market value
of convertible securities typically changes as the market value of the
underlying common stock changes, and, therefore, also tends to follow
movements in the general market for equity securities. A unique feature of
convertible securities is that as the market price of the underlying common
stock declines, convertible securities tend to trade increasingly on a yield
basis, and so may not experience market value declines to the same extent as
the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock, although typically
not as much as the underlying common stock. While no securities investments
are without risk, investments in convertible securities generally entail less
risk than investments in common stock of the same issuer.
The convertible debt securities in which these Funds may invest include
fixed income or zero coupon debt securities that may be converted or
exchanged at a stated or determinable exchange ratio into underlying shares
of common stock. Fixed income convertible securities pay interest with yields
generally higher than common
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stocks. Of course, like all fixed income securities, there can be no assurance
of income or principal payments because the issuers of the convertible
securities may default on their obligations.
Zero coupon notes and bonds, including Liquid Yield Option Notes ("LYONs"),
pay no interest and are sold at substantial discounts from their face value.
When held to maturity, their entire income comes from the difference between the
purchase price and their value at maturity. Zero coupon convertible securities
offer the opportunity for capital appreciation as increases (or decreases) in
market value of such securities closely follows the movements in the market
value of the underlying common stock. Zero coupon convertible securities are
generally expected to be less volatile than the underlying common stocks as they
are usually issued with short to medium length maturities (15 years or less) and
are issued with options and/or redemption features exercisable by the holder of
the obligation entitling the holder to redeem the obligation and receive a
defined cash payment.
MUNICIPAL LEASE OBLIGATIONS
The VA Money Market Fund may invest in municipal lease obligations and
certificates of participation in such obligations (collectively, "lease
obligations"). A lease obligation does not constitute a general obligation of
the municipality for which the municipality's taxing power is pledged, although
the lease obligation is ordinarily backed by the municipality's covenant to
budget for the payments due under the lease obligation.
Certain lease obligations contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease obligation payments in
future years unless money is appropriated for such purpose on a yearly basis.
Although "non-appropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult. In evaluating a potential investment in such a lease obligation, the
Adviser will consider: (1) the credit quality of the obligor, (2) whether the
underlying property is essential to a governmental function, and (3) whether the
lease obligation contains covenants prohibiting the obligor from substituting
similar property if the obligor fails to make appropriations for the lease
obligation.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
Each Fund, other than the VA World Growth Fund, may invest in
mortgage-backed and asset-backed securities. Mortgage-backed securities
include, but are not limited to, securities issued or guaranteed by the
Government National Mortgage Association ("Ginnie Mae"), the Federal National
Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac"). These securities represent ownership in a pool
of mortgage loans. They differ from conventional bonds in that principal is
paid back to the investor as payments are made on the underlying mortgages in
the pool. Accordingly, the Fund receives monthly scheduled payments of
principal and interest along with any unscheduled principal on the underlying
mortgages. Because these scheduled and unscheduled principal payments must be
reinvested at prevailing interest rates,
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mortgage-backed securities do not provide an effective means of locking in long-
term interest rates for the investor. Like other fixed income securities, when
interest rates rise, the value of a mortgage-backed security generally will
decline. However, when interest rates are declining, the value of mortgage-
backed securities with prepayment features may not increase as much as other
fixed income securities.
Mortgage-backed securities also include collateralized mortgage
obligations ("CMOs"). CMOs are obligations fully collateralized by a portfolio
of mortgages or mortgage-related securities. CMOs are divided into pieces
(tranches) with varying maturities and the cash flows from the underlying
mortgages are used to pay off each tranche separately. CMOs are designed to
provide investors with more predictable maturities than regular mortgage
securities but such maturities can be difficult to predict because of the
effect of prepayments. Failure to accurately predict prepayments can
adversely affect the Fund's return on these investments. CMOs may also be
less marketable than other securities.
Asset-backed securities represent a participation in, or are secured by
and payable from, a stream of payments generated by particular assets, such
as credit card, motor vehicle, or trade receivables. They may be pass-through
certificates, which have characteristics very similar to mortgage-backed
securities, discussed above. They may also be in the form of asset-backed
commercial paper, which is issued by a special purpose entity, organized solely
to issue the commercial paper and to purchase interests in the assets. The
credit quality of these securities depends primarily upon the quality of the
underlying assets and the level of credit support and enhancement provided.
The weighted-average life of mortgage and asset-backed securities is
likely to be substantially shorter than their stated final maturity as a
result of scheduled principal payments and unscheduled principal prepayments.
YANKEE AND EURODOLLAR OBLIGATIONS
Each Fund, other than the VA World Growth Fund, may invest in Yankee and
Eurodollar obligations. Yankee obligations include money market instruments
and bonds of foreign issuers who customarily register such securities with
the SEC and borrow U.S. dollars by issuing such securities for delivery in
the United States. Although the principal trading market for Yankee
securities is the United States, foreign buyers can and do participate in the
Yankee securities market. Interest on such Yankee bonds is customarily paid
on a semi-annual basis. The marketability of these "foreign bonds" in the
United States is in many cases better than that for foreign bonds in foreign
markets, but is, of course dependent upon the quality of the issuer.
Eurodollar obligations include money market instruments and bonds
underwritten by an international syndicate and sold "at issue" to non-U.S.
investors. Such securities are not registered with the SEC or issued
domestically and generally may only be sold to U.S. investors after the
initial offering and cooling-off periods. The market for Eurodollar
securities is dominated by foreign-based investors and the primary trading
market for these securities
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is London. While investments in Eurodollar and Yankee obligations are intended
to reduce risk by providing further diversification, such investments involve
certain political and economic risks in addition to credit and market risk.
In addition, each Fund may invest in Eurodollar and Yankee obligations of
investment-grade emerging market countries. An emerging market country can be
considered to be a country which is in the initial stages of its industrial
cycle. Investments in emerging market countries involve exposure to economic
structures that are generally less diverse and mature than in the United States,
and to political systems that may be less stable. In the past, markets of
emerging market countries have been more volatile then the markets of developed
countries. (See "Special Risk Considerations-Foreign Securities," below.)
DEPOSITARY RECEIPTS
The VA World Growth Fund and the VA Growth and Income Fund may purchase
ADRs, which are U.S. dollar-denominated certificates issued by a U.S. bank or
trust company and represent the right to receive securities of a foreign
issuer deposited in a domestic bank or foreign branch of a U.S. bank and
traded on a U.S. exchange or in an OTC market. Generally, ADRs are in
registered form. There are no fees imposed on the purchase or sale of ADRs
when purchased from the issuing bank or trust company in the initial
underwriting, although the issuing bank or trust company may impose charges
for the collection of dividends and the conversion of ADRs into the
underlying securities. Investment in ADRs has certain advantages over direct
investment in the underlying foreign securities since: (i) ADRs are U.S.
dollar-denominated investments that are registered domestically, easily
transferable and for which market quotations are readily available, and (ii)
in some cases, the issuers whose securities are represented by ADRs may be
subject to the same auditing, accounting, and financial reporting standards
as domestic issuers.
The VA World Growth Fund may invest in GDRs. GDRs are typically issued by
foreign banks or trust companies, although they also may be issued by United
States banks or trust companies, and evidence ownership of underlying securities
issued by either a foreign or a United States corporation. Generally, GDRs in
bearer form are designed for use in foreign securities markets.
FORWARD CURRENCY CONTRACTS
The VA World Growth Fund may enter into forward currency contracts under
two circumstances. First, when the Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, it may
desire to "lock in" the U.S. dollar price of the security. Second, when the
Adviser of the Fund believes that the currency of a specific country may
deteriorate relative to the U.S. dollar, it may enter into a forward contract
to sell that currency. The Fund may not enter a forward sale contract with
respect to a particular currency for an
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amount greater than the aggregate market value (determined at the time of making
the forward sale) of the securities held in its portfolio denominated or quoted
in, or bearing a substantial correlation to, such currency. The Fund is not
required to enter into such transactions and will not do so unless deemed
appropriate by the Adviser. (See "Special Risk Considerations - Forward Currency
Contracts.")
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements that are collateralized by
obligations issued or guaranteed by or backed by the full faith and credit of
the U.S. Government, its agencies and instrumentalities. A repurchase
agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell the security back to the seller (a commercial
bank or recognized securities dealer) at an agreed-upon price on an
agreed-upon date, usually not more than seven days from the date of purchase.
The resale price reflects the purchase price plus an agreed-upon market rate
of interest which is unrelated to the coupon rate or maturity of the
purchased security. A repurchase agreement involves the obligation of the
seller to pay the agreed-upon price, which obligation is in effect secured by
the value of the underlying security. In these transactions, the securities
purchased by the Fund will have a total value equal to or in excess of the
amount of the repurchase obligation and will be held by the Fund's custodian or
another third-party custodian until repurchased. If the seller defaults and the
value of the underlying security declines, the Fund may incur a loss and may
incur expenses in selling the collateral. If the seller seeks relief under the
bankruptcy laws, the disposition of the collateral may be delayed or limited.
MASTER DEMAND NOTES
Each Fund, other than the VA World Growth Fund, may invest in variable
rate master demand notes ("master demand notes"). Master demand notes are
obligations that permit the investment of fluctuating amounts by a Fund, at
varying rates of interest pursuant to direct arrangements between the Fund,
as lender, and the borrower. These notes permit daily changes in the amounts
borrowed. The Fund has the right to increase the amount under the note at any
time up to the full amount provided by the note agreement, or to decrease the
amount, and the borrower may repay up to the full amount of the note without
penalty. Frequently, such obligations are secured by letters of credit or
other credit support arrangements provided by banks. Because master demand
notes are direct lending arrangements between the lender and borrower, it is
not contemplated that such instruments generally will be traded, and there
generally is no secondary market for these notes, although they are
redeemable (and thus immediately repayable by the borrower) at face value,
plus accrued interest, at any time. Therefore, where master demand notes are
not secured by bank letters of credit or other credit support arrangements,
the Fund's right to redeem depends on the ability of the borrower to pay
principal and interest on demand. In connection with master demand note
arrangements, the Funds will continuously monitor the earning
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power, cash flow, and other liquidity ratios of the issuer, and the borrower's
ability to pay principal and interest on demand. Master demand notes, as such,
are not typically rated by credit rating agencies. The Funds will invest in
master demand notes only if the Board of Trustees or its delegate has determined
that they are of credit quality comparable to the debt securities in which the
Funds generally may invest.
VARIABLE RATE SECURITIES
Each Fund may invest in securities that bear interest at rates that are
adjusted periodically to market rates. These interest rate adjustments can
both raise and lower the income generated by such securities. These changes
will have the same effect on the income earned by a Fund, depending on the
proportion of such securities held. The market value of fixed coupon
securities fluctuates with changes in prevailing interest rates, increasing
in value when interest rates decline and decreasing in value when interest
rates rise. The value of variable rate securities, however, is less affected
by changes in prevailing interest rates because of the periodic adjustment of
their coupons to a market rate. The shorter the period between adjustments,
the smaller the impact of interest rate fluctuations on the value of these
securities. The market value of variable rate securities usually tends toward
par (100% of face value) at interest rate adjustment time.
PUT BONDS
Each Fund may invest in securities (including securities with variable
interest rates) that may be redeemed or sold back (put) to the issuer of the
security or a third party at face value prior to stated maturity. Such
securities will normally trade as if maturity is the earlier put date, even
though stated maturity is longer.
WHEN-ISSUED SECURITIES
Each Fund may invest in new issues of securities offered on a
when-issued basis; that is, delivery and payment take place after the date of
the commitment to purchase, normally within 45 days. Both price and interest
rate are fixed at the time of commitment. The market value at the time the
transaction is completed may be more or less than the fixed purchase price.
Although such commitments are made with the intention of actually acquiring
the securities, a Fund can sell a commitment before settlement date, though
as a matter of policy, the Funds will not do so. No interest accrues to the
purchaser of a when-issued security during the period prior to settlement.
Securities purchased on a when-issued basis are subject to changes in value
in the same way as securities held in a Fund's portfolio, that is, both
experience appreciation when interest rates decline and depreciation when
interest rates rise. The value of such securities will also be affected by the
public's perception of the creditworthiness of the issuer and anticipated
changes in the level of interest rates. Purchasing securities on a when-issued
basis involves a risk that the yields available in the market when the delivery
takes place may
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actually be higher than those obtained in the transaction itself. Cash or high
quality liquid debt securities equal to the amount of the when-issued
commitments are segregated at the Fund's custodian bank.
LIQUIDITY
Each Fund may invest up to 15% of its net assets (10% in the case of the
VA Money Market Fund) in illiquid securities. Commercial paper that is subject
to restrictions on transfer, securities that may be sold pursuant to Rule 144A
under the Securities Act of 1933, put bonds with restrictions on transfer,
and lease obligations will not be counted towards the limitation on illiquid
securities, provided that the Adviser determines that such securities have a
readily available trading market, in accordance with guidelines established by
the Board of Trustees.
PORTFOLIO TURNOVER
Although no Fund purchases securities with a view to rapid turnover,
there are no limitations on the length of time that securities must be held
by any Fund. A Fund's annual portfolio turnover rate may vary significantly
from year to year. The portfolio turnover rates for each Fund, other than the
VA Money Market Fund, are not expected to exceed 100%.
Special Risk Considerations
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FOREIGN SECURITIES
Investments by a Fund in foreign securities, including Eurodollar,
Yankee, and other foreign obligations, and ADRs and GDRs, may entail one or
more of the following risks:
CURRENCY RISK. The value of the Fund's foreign investments may be affected by
changes in currency exchange rates. The U.S. dollar value of a foreign
security generally decreases when the value of the U.S. dollar rises against
the foreign currency in which the security is denominated, and tends to
increase when the value of the U.S. dollar falls against such currency. In
developing markets, it may be difficult or in some cases impossible to hedge
currency risk, due to the lack of available hedging instruments and illiq-
uidity in these markets.
POLITICAL AND ECONOMIC RISK. The economies of many of the countries in which
the Fund may invest are not as developed as the U.S. economy and may be
subject to significantly different forces. Political or social instability,
expropriation or confiscatory taxation, and limitations on the removal of
funds or other assets could also adversely affect the value of the Fund's
investments. For example, the Fund may invest in Eastern Europe and former
states of the Soviet Union (also known as the Commonwealth of Independent
States or CIS). These countries were under communist systems that had
nationalized private industry. There is no guarantee that
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nationalization may not occur again in this region or others in which the Fund
invests, in which case the Fund may lose all or part of its investment in that
country's issuers.
REGULATORY RISK. Foreign companies are generally not subject to the
regulatory controls imposed on U.S. issuers and, as a consequence, there is
generally less publicly available information about foreign securities than
is available about domestic securities. Foreign companies are not subject to
uniform accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic companies. Income
from foreign securities owned by the Fund may be reduced by a withholding tax
at the source, which tax would reduce dividend income payable by the Fund.
There is generally less government regulation and supervision of foreign
stock exchanges, brokers and issuers, which may make it difficult to enforce
contractual obligations, obtain judgments or effect collections thereon.
MARKET RISK. The securities markets in many of the countries in which the
Fund invests will have substantially less trading volume than the major U.S.
markets. As a result, the securities of some foreign companies and
governments may be less liquid and may experience more price volatility than
comparable domestic securities. Increased custodian costs as well as
administrative difficulties (such as the need to use foreign custodians) may
be associated with the maintenance of assets in foreign jurisdictions. In
addition, transaction costs in foreign securities markets are likely to be
higher, since brokerage commission rates in foreign countries are likely to
be higher than in the U.S.
FORWARD CURRENCY CONTRACTS
The use of forward currency contracts to protect the value of a Fund's
assets against a decline in the value of a currency does not eliminate
fluctuations in the value of the Fund's underlying security holdings. In
addition, although the use of forward currency contracts can minimize the
risk of loss due to a decline in value of the foreign currency, the use of
such contracts will tend to limit any potential gain resulting from an
increase in the relative value of the foreign currency to the U.S. dollar.
Under certain circumstances, a Fund that has entered into forward currency
contracts to hedge its currency risks may be in a less favorable position
than a Fund that had not entered into such contracts. The projection of
short-term currency market movements is extremely difficult and successful
execution of a short-term hedging strategy is uncertain.
The use of forward contracts involves certain risks. The precise
matching of contract amounts and the value of securities involved generally
will not be possible since the future value of such securities in currencies
more than likely will change between the date the contract is entered into
and the date it matures. The projection of short-
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term currency market movements is extremely difficult and successful execution
of a short-term hedging strategy is uncertain. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the longer term investment strategies. The Adviser believes it is important,
however, to have the flexibility to enter into such contracts when it determines
it is in the best interest of the Fund to do so. It is impossible to forecast
what the market value of a portfolio security will be at the expiration of a
contract. Accordingly, it may be necessary for the Fund to purchase additional
currency (and bear the expense of such purchase) if the market value of the
security is less than the amount of currency the Fund is obligated to deliver,
and if a decision is made to sell the security and make delivery of the
currency. Conversely, it may be necessary to sell some of the foreign currency
received on the sale of the portfolio security if its market value exceeds the
amount of currency the Fund is obligated to deliver.
Investment Restrictions
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Except as otherwise indicated, the following restrictions are fundamental
and may not be changed without the approval of a majority of the outstanding
voting securities of any Fund of the Trust, which means the approval of the
lesser of: (i) the holders of 67% or more of the shares represented in a meeting
if the holders of more than 50% of the outstanding shares are present in person
or by proxy or (ii) the holders of more than 50% of the outstanding shares. (See
"Additional Information About the Trust," below.)
A FUND MAY NOT:
A. Borrow money, except that a Fund may borrow money for temporary or emergency
purposes in an amount not exceeding 33 1/3% of its total assets (including
the amount borrowed) less liabilities (other than borrowings). A Fund will
not purchase securities when its borrowings exceed 5% of its total assets.
To the extent necessary to comply with state insurance regulatory
requirements a Fund as a matter of operating policy, will limit the amount of
borrowings to 25% of its net assets.
B. With respect to 75% of its total assets, purchase the securities of any
issuer (except Government Securities, as such term is defined in the 1940
Act) if, as a result, the Fund would own more than 10% of the outstanding
voting securities of such issuer or the Fund would have more than 5% of the
value of its total assets invested in the securities of such issuer. As a
non-fundamental operating policy, the VA Money Market Fund, in accordance
with Rule 2a-7 under the Investment Company Act of 1940, as amended, will not
invest more than 5% of its total assets in the securities (other than
securities issued by the U.S. Government or any of its agencies or
instrumentalities) issued by a single issuer.
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C. Invest more than 25% of the value of its total assets (taken at current value
at the time of each investment) in securities of issuers whose principal
business activities are in the same industry. With respect to the VA Money
Market Fund, banks are not considered a single industry for purposes of this
policy. This limitation does not apply to securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities.
Management
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The Trust has a Board of Trustees which has the primary responsibility for
the overall management of the Trust and each of the Funds.
USAA IMCO serves as the Adviser to the Trust pursuant to an Investment
Advisory Agreement dated December 16, 1994 ("Advisory Agreement.") Under the
Advisory Agreement, USAA IMCO is responsible for furnishing a continuous
investment program for each Fund; selecting the investments of each Fund,
including determining what investments each Fund will purchase, hold, sell,
or exchange, and what portion, if any, of the assets of each Fund will remain
uninvested; placing all orders for the purchase and sale of investments for
each Fund with brokers and dealers selected by the Adviser; assisting the
Trust in the preparation of various regulatory reports; and providing office
space facilities and personnel in connection with the foregoing. USAA IMCO
will render such services in accordance with the investment objectives,
investment programs, policies, and restrictions of each Fund, under the
supervision of the Board of Trustees.
USAA IMCO was organized in May 1970, and is registered as an investment
adviser with the SEC. USAA IMCO is an indirect wholly-owned subsidiary of
USAA and an affiliate of USAA Life and the Trust. As of the date of this
Prospectus, the Adviser had approximately $29 billion in total assets under
management, $17 billion of which are in publicly available mutual funds. The
Adviser's mailing address is 9800 Fredericksburg Road, San Antonio, Texas 78288
which is also the Home Office of USAA, USAA Life, and other affiliates.
Officers and employees of the Trust and the Manager are permitted to engage
in personal securities transactions subject to restrictions and procedures set
forth in the Joint Code of Ethics adopted by the Trust and the Manager. Such
restrictions and procedures include substantially all of the recommendations of
the Advisory Group of the Investment Company Institute and comply with
Securities and Exchange Commission rules and regulations.
ADVISORY FEES
For its services under the Advisory Agreement for the period from January
5, 1995 (commencement of operations) through December 31, 1995, the Trust paid
the Adviser a monthly investment advisory fee for each Fund equal to an
annualized rate of 0.20% of the monthly average net assets of each Fund.
Pursuant to an Underwriting and Administrative Services Agreement, dated
December 16, 1994, by and between USAA Life,
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USAA IMCO, and the Trust ("Underwriting Agreement"), USAA Life, out of its
General Account, will reimburse USAA IMCO for the expenses that it incurs in
rendering services to the Trust under the Advisory Agreement, but only to the
extent these expenses exceed the amount of the above advisory fees.
EXPENSES
For the period January 5, 1995 (commencement of operations) through
December 31, 1995, each Fund's total expenses were limited to .35% of the
monthly average net assets of such Fund (other than the World Growth Fund, whose
expenses were limited to .65% of that Fund's monthly average net assets),
although each Fund's actual total expenses exceeded the foregoing expense
ratios. The excess was borne by USAA Life, out of its General Account. (See
notes to "Financial Highlights" for further information.)
PORTFOLIO TRANSACTIONS
The Adviser directs the placement of orders for the purchase and sale of
the Funds' portfolio securities. In doing so, the Adviser seeks the best
combination of price and execution, which involves a number of judgmental
factors. When the Adviser believes that more than one broker or dealer is
capable of providing the best combination of price and execution in a
particular portfolio transaction, normally a broker or dealer is selected
that furnishes research services. The Adviser, a registered broker-dealer,
also may act as a broker for the Trust in conformity with the securities laws
and rules thereunder.
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PORTFOLIO MANAGERS
Set out below are the names, titles, years of investment management
experience, and prior business experience (if they have been with the Adviser
for less than 5 years) of the individuals who are primarily responsible for the
day-to-day management of the Funds, in each case since the inception of the
Fund.
VA MONEY MARKET FUND. J. Eric Thorderson, Executive Director, Fixed Income
Investments at USAA IMCO, is primarily responsible for managing the Money
Market Fund and has managed the Fund since its inception. Mr. Thorderson has
nine years investment management experience and has been affiliated with USAA
IMCO for five years. Prior to joining USAA IMCO, Mr. Thorderson was an
investment analyst with Alexander Hamilton Life Insurance Company.
VA INCOME FUND. John W. Saunders, Jr., Senior Vice President of Fixed Income
Investments at USAA IMCO, is primarily responsible for managing the VA Income
Fund and has managed the Fund since its inception. Mr. Saunders has 27 years
investment management experience and has been affiliated with USAA IMCO for 26
years.
VA GROWTH AND INCOME FUND. R. David Ullom, Assistant Vice President of Equity
Investments at USAA IMCO, is primarily responsible for managing the VA Growth
and Income Fund and has managed the Fund since its inception. Mr Ullom has 21
years investment management experience and has been affiliated with USAA IMCO
for 11 years.
VA WORLD GROWTH FUND. David G. Peebles, Vice President of Equity Investments at
USAA IMCO, and R. David Ullom, Assistant Vice President of Equity Investments at
USAA IMCO, together are primarily responsible for managing the VA World Growth
Fund and have managed the Fund since its inception. Mr. Peebles also acts as
Asset Allocation Manager for the Fund. Mr. Peebles has 30 years investment
management experience and has been affiliated with USAA IMCO for 12 years. Mr.
Ullom has 21 years investment management experience and has been affiliated with
USAA IMCo for 11 years.
VA DIVERSIFIED ASSETS FUND. Harry W. Miller, Senior Vice President of Equity
Investments at USAA IMCO, and Paul H. Lundmark, Executive Director of Fixed
Income Investments, together are primarily responsible for managing the fixed
income and equity components, respectively, of the VA Diversified Assets Fund
and have managed the Fund since its inception. Mr. Miller also acts as Asset
Allocation Manager for the Fund. Mr. Miller has 39 years investment management
experience and has been affiliated with USAA IMCO for 22 years. Mr. Lundmark has
10 years investment management experience and has been associated with USAA IMCO
for 5 years. Prior to joining USAA IMCO, Mr. Lundmark was an associate at
Raymond James & Associates, Inc., a registered broker-dealer, and an investment
analyst with Home Life Insurance Company.
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Purchase of Fund Shares
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Shares of the Funds are currently sold in a continuous offering only to
the Separate Account to fund benefits under the Contracts issued by USAA
Life. The Separate Account is divided into seven Variable Fund Accounts, five
of which invest in a corresponding Fund of the Trust, as directed by the
Contract Owners. The Variable Fund Accounts that purchase Trust shares do so at
the net asset value per share ("NAV") of the corresponding Funds, without a
sales charge, next determined after the Company receives a premium payment or
request for a transfer into a Fund.
Investments in each Fund are credited to each corresponding Variable Fund
Account in the form of full and fractional shares of the designated Fund. The
Funds do not issue share certificates. Initial and subsequent premium payments
allocated to a specific Fund are subject to the limits applied by the
Contracts.
In the future, the Trust may offer its shares to other separate accounts
of USAA Life as well as unaffiliated life insurance companies to fund
benefits under variable annuity contracts and variable life insurance
policies. The Trust does not foresee any disadvantage to purchasers of
variable annuity contracts and variable life insurance policies arising out
of these arrangements. Nevertheless, the Board of Trustees intends to monitor
events in order to identify any material irreconcilable conflicts which may
possibly arise and to determine what action, if any, should be taken in
response thereto.
DISTRIBUTOR
USAA IMCO serves as the distributor of the Fund shares pursuant to the
Underwriting Agreement, and receives no separate compensation for its
services in that capacity. No commissions are paid in connection with the
sale of Fund shares to the Separate Account.
Redemption of Fund Shares
- --------------------------------------------------------------------------------
USAA Life redeems shares of the appropriate Fund to make withdrawals or
transfers under the terms of the Contracts. Redemptions are processed on each
day on which the New York Stock Exchange (the "Exchange") is open for
business. Redemptions due to Contract Owner withdrawals or transfers are
processed at the Fund's NAV next determined after USAA Life receives
instructions from the Contract Owner. Redemptions that are not based on
actions by Contract Owners will be effected at the Fund's NAV next determined
after the Fund receives the redemption request.
Payment for redeemed shares will be made promptly, but in no event later
than seven days after USAA Life receives the redemption order in proper form.
However, the Trust may suspend the right of redemption or postpone the date
of payment during any period that the Exchange is closed, or trading in the
markets the Trust normally utilizes is restricted, or during any period that
redemption is otherwise permitted to be suspended by the
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SEC. The amount received upon the redemption of the shares of the Funds
may be more or less than the amount paid for the shares, depending upon the
fluctuations in the market value of the assets owned by a particular Fund.
Valuation of Fund Shares
- --------------------------------------------------------------------------------
The price at which shares of the Funds are purchased and redeemed by the
Separate Account is equal to the NAV per share determined on the effective
date of the purchase or redemption. The NAV is calculated by adding the value
of all securities and other assets in a Fund, deducting liabilities, and
dividing that sum by the number of outstanding shares of the Fund. The NAV
per share for each Fund is calculated at the close of the regular trading
session of the Exchange, which is usually 4:00 p.m. Eastern time.
VALUATION OF SECURITIES OF THE FUNDS (OTHER THAN THE VA MONEY MARKET FUND)
Securities traded on a U.S. exchange are generally valued at the last
sales price on the exchange. If no sale is reported, the latest bid price is
generally used. Securities traded in a U.S. OTC market are generally priced
at the last sales price or, if not available, at the average of the bid and
asked prices. Debt securities purchased with maturities of 60 days or less
are carried at amortized cost, which generally approximates market value.
Other debt securities are valued each business day at their current market
value as determined by a pricing service approved by the Board of Trustees or
its delegates. Securities that cannot be valued by the methods set forth
above are valued in good faith at fair market value using methods determined
by the Adviser under the general supervision of the Board of Trustees.
Securities primarily traded on foreign securities exchanges are
generally valued at the preceding closing value of such security on the
exchange where they are primarily traded. If no sale is reported, the latest
bid price is generally used depending on local custom or regulation.
Securities traded in a foreign OTC market are valued at the last sales price,
or, if not available, at the average of the bid and asked prices. If there is
not active trading in a particular security for a given day, the latest bid
price is generally used. Because of the need to obtain prices as of the close
of trading on various exchanges throughout the world, the calculation of net
asset value does not take place contemporaneously with the determination of
the prices of the foreign portfolio securities of a particular Fund. If an
event were to occur after the value of an instrument was established, but
before the net asset value per share was determined, which was likely to
materially change the net asset value of a particular Fund, then that
instrument would be valued using fair value considerations by the Board of
Trustees or its delegate.
VALUATION OF THE VA MONEY MARKET FUND'S SECURITIES
The valuation of the VA Money Market Fund's securities is based upon
their amortized cost, which does not take into account unrealized capital
gain or loss. This involves valuing an instrument at its cost and thereafter
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assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may
result in periods during which the value of an instrument, as determined by
amortized cost, is higher or lower than the price the Fund would receive upon
the sale of the instrument. (See "Valuation of Trust Shares" in the SAI.)
Dividends and Distributions
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Each Fund, other than the VA Money Market Fund, declares and pays to
the appropriate Variable Fund Account of the Separate Account at least once
each year: (1) all net investment income, which includes dividends and
interest paid on each Fund's investments less expenses incurred in the Fund's
operations; and (2) all net realized short-term and long-term capital gains,
if any, earned during the year.
The VA Money Market Fund declares a dividend each day the Fund's NAV is
calculated, equal to all of its daily net income, payable to the
corresponding Variable Fund Account of the Separate Account as of the close
of business the preceding business day. The amount of the dividend of the VA
Money Market Fund may fluctuate from day to day and may be omitted on some
days, depending on changes in the factors that comprise the VA Money Market
Fund's net income.
All distributions, whether from net capital gains or net investment
income, will be paid in the form of additional shares of that Fund at NAV.
Because the value of each Fund's shares, other than those of the VA Money
Market Fund, is based directly on the amount of its net assets, including any
undistributed net income, any distribution of income or capital gains will
result in a decrease in the value of that Fund's shares equal to the amount
of the distribution. The price of each Fund's shares is quoted ex-dividend
on the business day following the record date.
Tax Matters
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Each Fund has elected to be treated as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986 (the "Code"), as
amended, and to take all other actions required so that no federal income tax
will be payable by the Funds. Each Fund will be treated as a separate entity
for federal income tax purposes. As a regulated investment company, each Fund
will not be subject to federal income tax provided it distributes all of its
investment company income and net capital gains for each taxable year in
accordance with the Code.
The VA World Growth Fund may make an election to pass through to USAA
Life any taxes withheld by foreign taxing jurisdictions on foreign source
income. Such an election will result in additional taxable income and income tax
to USAA Life. The amount of additional income tax, however, may be more than
offset by
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credits for the foreign taxes withheld, which are also passed through. These
credits may provide a benefit to USAA Life.
DIVERSIFICATION
Each Fund is subject to asset diversification requirements described by
the U.S. Treasury Department under Section 1.817-5 of the Treasury
Regulations. The regulations generally provide that, as of the end of each
calendar quarter or within 30 days thereafter, no more than 55% of the total
assets of a Fund may be represented by any one investment, no more than 70%
by any two investments, no more than 80% by any three investments and no more
than 90% by any four investments. For this purpose, all securities of the
same issuer are considered a single investment. Furthermore, each U.S.
Government agency or instrumentality is treated as a separate issuer. There
are also alternative diversification requirements that may be satisfied by
the Funds under the regulations.
The Funds intend to comply with the diversification requirements. If the
Funds or a Fund should fail to comply with these diversification requirements,
or fails to meet the requirements of Subchapter M of the Code, Contracts
invested in the Funds would not be treated as annuity contracts for income tax
purposes under the Code. (See "Certain Federal Income Tax Considerations" in the
Trust's SAI for further information.)
For more detailed information regarding the federal income tax treatment
of the Contracts and distributions to Contract Owners, please refer to the
accompanying Prospectus that describes the Contracts.
Performance Information
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The Funds may, from time to time, include quotations of their total return
or yield in advertisements, sales literature or reports to Contract Owners or to
prospective investors.
The total return of a Fund refers to the percentage change in value of a
hypothetical investment in the Fund, including the deduction of a proportional
share of Fund expenses, and assumes that all dividends and capital gains
distributions during the period are reinvested. Cumulative total return reflects
the total change in value of an investment in the Fund over a specified period,
including, but not limited to, periods of one, five and ten years, or the period
since the Fund's inception through a stated ending date. Average annual total
return is the constant rate of return that would produce the cumulative total
return over the specified period, if compounded annually. Average annual total
return figures are calculated according to a formula prescribed by the SEC.
The yield of a Fund refers to the income generated by an investment in
the Fund over a specific period (seven days in the case of the VA Money
Market Fund, 30 days in the case of all other Funds), excluding realized and
unrealized capital gains and losses in the Fund's investments. This income is
then "annualized" and shown as a percentage of the investments. The VA Money
Market Fund may also provide quotations of its effective yield, which is
calculated similarly but, when annualized, the income earned by an investment
in the Fund is assumed
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to be reinvested. The effective yield of the VA Money Market Fund will be
slightly higher than its yield because of the compounding effect of this assumed
reinvestment.
A Fund may also, from time to time, compare its performance in
advertisements, sales literature and reports to Contract Owners or to
prospective investors to: (1) widely recognized indices (e.g., the Standard &
Poors 500 Composite Stock Index, the Dow Jones Industrial Average, etc.); (2)
other mutual funds whose performance is reported by Lipper Analytical Services,
Inc., ("Lipper"), Variable Annuity Research & Data Service ("VARDS") and
Morningstar, Inc. ("Morningstar") or reported by other services, companies,
individuals or other industry or financial publications of general interest,
such as Forbes, Money, The Wall Street Journal, Business Week, Barron's,
Changing Times and Fortune, which rank and/or rate mutual funds by overall
performance or other criteria; and (3) the Consumer Price Index. Lipper, VARDS
and Morningstar are widely quoted independent research firms that rank mutual
funds by overall performance, investment objectives, and assets. Unmanaged
indices may assume the reinvestment of dividends but usually do not reflect any
"deduction" for the expense of operating or managing a fund.
Total return and yield quotations reflect only the performance of a
hypothetical investment in the Fund during a specified period. These
quotations are based on historical data and do not in any way indicate or
project future performance. Quotations of a Fund's total return and yield do
not reflect charges or deductions against the Variable Fund Account or
charges and deductions against the Contracts. The yield and share price of
the VA Income Fund, VA Growth and Income Fund, VA World Growth Fund and VA
Diversified Assets Fund will vary, and shares, when redeemed, may be worth
more or less than the original purchase price. The yield of the VA Money
Market Fund will also vary. See the SAI for more information about the Funds'
performance.
Additional Information About the Trust
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ORGANIZATION AND CAPITALIZATION
The Trust was organized as a Delaware business trust on July 20, 1994.
The Trust is authorized to issue an unlimited number of full and fractional
shares of beneficial interest, having no par value, in one or more series.
The Board of Trustees currently has authorized the issuance of five series of
shares representing interests in the respective Funds and may, in the future,
authorize the issuance of additional series of shares. Each share of beneficial
interest of each Fund represents an equal proportionate interest in that Fund
with each other share, and each share is entitled to such dividends and
distributions of income belonging to that Fund as may be declared by the Board
of Trustees.
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USAA Life provided the initial capitalization of each Fund and, as of
April 1, 1996, beneficially owned, either directly or through the Separate
Account, more than 25% of the shares of beneficial interest in the VA
Income Fund, VA Growth and Income Fund, VA World Growth Fund, and VA
Diversified Assets Fund. As a result of such ownership, USAA Life may be deemed
to be in control of those Funds.
VOTING PRIVILEGES
The voting privileges of Contract Owners, and limitations on those
privileges, are explained in the accompanying prospectus relating to the
Contracts. USAA Life, as the owner of the assets in the Separate Account, will
vote Fund shares that are held in the Separate Account to fund benefits under
the Contracts in accordance with the instructions of Contract Owners. This
practice is commonly referred to as "pass-through" voting. USAA Life also
will vote for or against any proposition, or will abstain from voting, any
Fund shares attributable to a Contract for which no timely voting
instructions are received, and any Fund shares held by USAA Life for its own
account, in proportion to the voting instructions that it receives with
respect to all Contracts participating in that Fund. This practice is
commonly referred to as "mirror" or "echo" voting. If USAA Life determines,
however, that it is permitted to vote any Fund shares in its own right, it
may elect to do so, subject to the then current interpretation of the 1940
Act and the rules thereunder.
Each Fund share is entitled to one vote (with proportionate voting for
fractional shares) irrespective of the relative net asset value of the Fund
shares. Accordingly, the number of votes obtained will generally vary
depending upon which Fund's shares are purchased. For example, a $100
investment in shares of the VA Money Market Fund purchased at its initial NAV
of $1 would result in 100 votes, whereas the same investment in shares of any
one of the other Funds purchased at its initial NAV of $10 would result in
only 10 votes.
On matters affecting an individual Fund differently from any other Fund,
a separate vote of the shares of that Fund is required. Shares of a Fund are
not entitled to vote on any matter not affecting that Fund. The shares of all
the Funds vote together on matters that do not affect one Fund differently
from another, such as the election of Trustees.
Under Delaware law, the Trust is not required to hold annual or special
meetings of shareholders and the Trust does not expect to hold any such
meeting unless required by the 1940 Act. Special meetings may be called for
purposes such as electing or removing Trustees, changing fundamental
policies, or approving an investment advisory contract. Also, the holders of
an aggregate of at least 10% of the outstanding shares of the Trust may
request a meeting at any time for the purpose of voting to remove one or more
of the Trustees.
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Service Providers
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DISTRIBUTOR:
USAA Investment Management Company
9800 Fredericksburg Rd.
San Antonio, Texas 78288
CUSTODIAN:
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
TRANSFER AGENT:
USAA Life Insurance Company
9800 Fredericksburg Road
San Antonio, Texas 78288
LEGAL COUNSEL:
Freedman, Levy, Kroll & Simonds
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036
INDEPENDENT AUDITORS:
KPMG Peat Marwick LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
No dealer, salesperson, or other person has been authorized to give any
information or to make any representation not contained in this Prospectus and,
if given or made, such information or representation must not be relied upon as
having been authorized. This Prospectus does not constitute an offering of any
securities other than the registered securities to which it relates or an offer
to any person in any jurisdiction where such offer would be unlawful.
USAA LIFE INVESTMENT TRUST
May 1, 1996
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