UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-7852
Exact name of registrant as specified in charter: USAA MUTUAL FUNDS TRUST
Address of principal executive offices and zip code: 9800 FREDERICKSBURG ROAD
SAN ANTONIO, TX 78288
Name and address of agent for service: CHRISTOPHER P. LAIA
USAA MUTUAL FUNDS TRUST
9800 FREDERICKSBURG ROAD
SAN ANTONIO, TX 78288
Registrant's telephone number, including area code: (210) 498-0226
Date of fiscal year end: MAY 31
Date of reporting period: MAY 31, 2010
ITEM 1. REPORT TO STOCKHOLDERS.
USAA MUTUAL FUNDS TRUST - ANNUAL REPORT FOR PERIOD ENDING MAY 31, 2010
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA BALANCED STRATEGY FUND]
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ANNUAL REPORT
USAA BALANCED STRATEGY FUND
MAY 31, 2010
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FUND OBJECTIVE
HIGH TOTAL RETURN, WITH REDUCED RISK OVER TIME, THROUGH AN ASSET ALLOCATION
STRATEGY THAT SEEKS A COMBINATION OF LONG-TERM GROWTH OF CAPITAL AND CURRENT
INCOME.
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TYPES OF INVESTMENTS
Using preset target ranges, the Fund's strategy is to invest its assets in a
combination of stocks on the one hand and bonds and money market instruments on
the other. The Fund also may use alternative investment strategies from time to
time, in an attempt to reduce the Fund's volatility over time, including an
equity hedging strategy.
IRA DISTRIBUTION WITHHOLDING DISCLOSURE
We generally must withhold federal income tax at a rate of 10% of the taxable
portion of your distribution and, if you live in a state that requires state
income tax withholding, at your state's set rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. If you
wish to make such an election, please call USAA Investment Management Company at
(800) 531-USAA (8722).
If you must pay estimated taxes, you may be subject to estimated tax penalties
if your estimated tax payments are not sufficient and sufficient tax is not
withheld from your distribution.
For more specific information, please consult your tax adviser.
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TABLE OF CONTENTS
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PRESIDENT'S MESSAGE 2
MANAGERS' COMMENTARY 4
INVESTMENT OVERVIEW 9
FINANCIAL INFORMATION
Distributions to Shareholders 14
Report of Independent Registered
Public Accounting Firm 15
Portfolio of Investments 16
Notes to Portfolio of Investments 40
Financial Statements 45
Notes to Financial Statements 48
EXPENSE EXAMPLE 69
ADVISORY AGREEMENTS 71
TRUSTEES' AND OFFICERS' INFORMATION 79
THIS REPORT IS FOR THE INFORMATION OF THE SHAREHOLDERS AND OTHERS WHO HAVE
RECEIVED A COPY OF THE CURRENTLY EFFECTIVE PROSPECTUS OF THE FUND, MANAGED BY
USAA INVESTMENT MANAGEMENT COMPANY. IT MAY BE USED AS SALES LITERATURE ONLY WHEN
PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS, WHICH PROVIDES FURTHER DETAILS
ABOUT THE FUND.
(C)2010, USAA. All rights reserved.
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PRESIDENT'S MESSAGE
"WHILE IT IS STILL TOO EARLY TO DECLARE THAT
A SELF-SUSTAINING RECOVERY IS UNDERWAY, [PHOTO OF DANIEL S. McNAMARA]
WE THINK MOST ECONOMIC INDICATORS ARE
POINTED IN THE RIGHT DIRECTION."
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JUNE 2010
As it turned out, the fiscal year ended May 31, 2010, was kind to patient,
long-term investors. With some zigs and zags along the way, the U.S. stock
market, as represented by the S&P 500 Index, was up nearly 21% for the period.
At the same time, high-quality bonds generated attractive returns (the U.S.
10-year Treasury returned 4.65% during the fiscal year) as investors continued
to search for income. Corporate and municipal bonds did even better.
However, investors suffered some setbacks in April and May of this year as
Greece's debt crisis unsettled the markets. As fears of contagion spread, many
of them abandoned stocks for the safety of Treasury securities and other liquid,
high-quality investments. The S&P 500 Index experienced its worst May
since 1962.
Although the European Union (EU) crafted a rescue plan for Greece, a number of
troubling problems remain. Some European countries continue to live beyond their
means, threatening the EU's sustainability. What's more, no one knows how a
default or a debt restructuring by one of these countries would affect major
European banks, which are believed to be heavily invested in the debt securities
of the weaker nations. This uncertainty caused the euro to fall during the
fiscal year to a four-year low versus the U.S. dollar. At the time of this
writing, the dollar is once again the world's undisputed reserve currency.
Commodity prices, which had been rising for most of the fiscal year, dropped in
response to the turmoil in Europe and fears about its impact on the global
economy. The one exception -- gold, widely considered a safe haven.
Meanwhile, the U.S. economy seems to be improving. While it is still too early
to declare that a self-sustaining recovery is underway, we think most economic
indicators are pointed in the right direction. Corporate earnings, fueled by
surprisingly strong top-line revenue growth, have been better than expected. At
the same time, inflation has remained benign, giving the Federal Reserve Board
(the Fed) latitude to hold short-term rates in a range between zero and 0.25%.
There is no doubt that investor confidence was badly shaken by Greece's debt
problems, and at the time of this writing, market sentiment seems driven more by
headlines than by investment fundamentals. Perhaps as a result, many
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2 | USAA BALANCED STRATEGY FUND
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people are keeping large amounts of money in low-yielding money market funds. We
see no relief from these low yields until at least the fourth quarter of 2010.
In fact, we think the debt crisis in Europe could extend the time the Fed can
maintain its "easy money" stance.
Under the circumstances, investors may want to review how much they have in
their money market accounts. Inflation may be muted but as of this writing, it
is higher than money market yields. That isn't to say that investors should take
risks with their immediate or emergency spending needs. In such cases, we
believe a money market fund, a savings account or short-term certificate of
deposit should be considered. However, if the money isn't required for two or
three years, it could be earning higher yields in short- and intermediate-term
bond funds. For longer-term, future needs such as retirement, a diversified
portfolio of stock and bond funds might be most appropriate.
If timing is a concern, we recommend making gradual changes. However, this is
based on your individual immediate needs. Our USAA service representatives would
be happy to assist. They are available -- free of charge -- to help you update
your financial plan and answer any questions you might have.
At USAA Investment Management Company, we are proud of the long-term performance
we have provided to shareholders. In the months ahead, we will continue working
hard on your behalf. From all of us here, thank you for the opportunity to help
you with your investment needs.
Sincerely,
/s/ Daniel S. McNamara
Daniel S. McNamara
President
USAA Investment Management Company
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
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 $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN
THE FUND.
INVESTMENT/INSURANCE: NOT FDIC INSURED o NOT BANK ISSUED, GUARANTEED OR
UNDERWRITTEN o MAY LOSE VALUE
INVESTMENT AND INSURANCE PRODUCTS ARE NOT DEPOSITS, NOT INSURED BY FDIC OR ANY
GOVERNMENT AGENCY, NOT GUARANTEED BY THE BANK. INVESTMENTS AND CERTAIN INSURANCE
PRODUCTS MAY LOSE VALUE.
Diversification does not guarantee a profit or prevent a loss.
Gold is a volatile asset class and is subject to additional risks, such as
currency fluctuation, market liquidity, political instability and increased
price volatility. It may be more volatile than other asset classes that
diversify across many industries and companies.
Financial advice provided by USAA Financial Planning Services Insurance Agency,
Inc. (known as USAA Financial Insurance Agency in California, License #
0E36312), and USAA Financial Advisors, Inc., a registered broker dealer.
As interest rates rise, bond prices fall.
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PRESIDENT'S MESSAGE | 3
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MANAGERS' COMMENTARY ON THE FUND
USAA Investment Management Company Deutsche Investment Management
Americas Inc.
ARNOLD J. ESPE, CFA
Bonds and Money Market Instruments JAMES B. FRANCIS, CFA
Stocks
JOHN P. TOOHEY, CFA
WASIF A. LATIF Credit Suisse Securities (USA) LLC
Stocks Volaris Volatility Management Group
Deutsche Investment Management YIRONG LI, CFA
Americas Inc. DEFINA MALUKI, CFA
Index Options
ROBERT WANG
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o HOW DID THE USAA BALANCED STRATEGY FUND (THE FUND) PERFORM DURING THE
REPORTING PERIOD?
For the one-year period ended May 31, 2010, the Fund had a total return of
26.76%. This compares to a return of 16.40% for the Lipper Balanced Funds
Index, 23.20% for the Russell 3000 Index, and 8.42% for the Barclays Capital
U.S. Aggregate Bond Index.
USAA Investment Management Company (IMCO) serves as the Fund's overall
adviser and manages certain portions of the Fund, including the US bond
portion. Deutsche Investment Management Americas (DIMA) manages the U.S.
stock portion of the Fund, using a quantitative approach to active stock
selection. Credit Suisse Securities (USA) LLC's Volaris Volatility
Management Group (Volaris Group) is responsible for managing a strategy that
involves purchasing index put options or corresponding exchange-traded fund
(ETF) options or put spread options and selling index call or corresponding
ETF options against a
Refer to page 11 for benchmark definitions.
Past performance is no guarantee of future results.
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4 | USAA BALANCED STRATEGY FUND
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highly-correlated stock portfolio in an attempt to reduce the Fund's
volatility. This strategy is also referred to as an "equity hedging
strategy."
o WHAT LED TO THE FUND'S STRONG PERFORMANCE DURING THE REPORTING YEAR?
Most instrumental in the strong performance was the outstanding absolute and
relative returns of the U.S. bond portion of the Fund, which is managed by
IMCO. DIMA implemented our U.S. stock market allocation using a diversified,
quantitative approach to individual stock selection. DIMA's stock selection
had a mildly negative impact on performance.
The equity hedging strategy moderately detracted from performance for the
full reporting year as global equity markets generally rallied sharply, but
proved its worth by helping offset the volatility late in the reporting
year. Given the high degree of uncertainty that has existed in global
financial markets for several years, and is expected to persist, the equity
hedging strategy remains an essential element of the Fund's ability to
achieve its objectives.
The Fund had roughly 10% of assets in non-U.S. developed markets within the
Morgan Stanley Capital International-Europe, Australasia and Far East Index
(the MSCI-EAFE Index) through an exchange-traded fund for diversification
purposes. This exposure had a negative impact on performance as the
MSCI-EAFE lagged the U.S. stock market, especially late in the reporting
year in response to the eurozone debt crisis.
o WHAT LED TO THE STRONG PERFORMANCE BY THE FUND'S U.S. BOND PORTION?
For the reporting year, the bond portion had a total return of 48.15%,
compared to 12.59% for the Lipper Intermediate Investment Grade
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MANAGERS' COMMENTARY ON THE FUND | 5
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Debt Funds Average. This performance reflected a continuation of the trends
that started to take hold in March 2009, when bonds with any credit risk at
all were trading at what we believed were extremely oversold levels. We
maintained and added to our positions back then when there was virtually no
confidence in the credit markets, and subsequently have benefited as the
markets normalized and many investors re-embraced risk assets.
While our best absolute and relative performance came in the first half of
the reporting year, it's important to note that we continued to outperform
our peers in the second half, with a total return of 12.31% for the six
months ended May 31, 2010.
o ISN'T THERE SUBSTANTIALLY MORE RISK IN THE BOND MARKET TODAY?
Compared to a year ago, yes. We're in a low absolute-yield environment and
there is a significant risk of inflation longer term. That's why we
continually adjust the portfolio to reflect both the opportunities and the
risks. As the reporting year progressed, we gradually reduced our exposure
to riskier assets while still maintaining a significant yield advantage over
the peer group.
Specifically, we reduced exposure to asset-backed securities when they
achieved full value, but are maintaining substantial holdings of commercial
mortgage-backed securities as well as subordinated financial debt, both of
which have played a large role in our strong performance.
Investing based on inflation fears is not a straightforward proposition.
Longer term, we believe that the unprecedented government spending will very
likely result in significant inflation. However, there is little
Past performance is no guarantee of future results. o High double digit
returns are attributable, in part, to unusually favorable market conditions
and may not be repeated or consistently. o Mortgage-backed securities have
prepayment, credit, interest rate, and extension risks. Generally, when
interest rates decline, prepayments accelerate beyond the initial pricing
assumptions and may cause the average life of the securities to shorten.
Also the market value may decline when interest rates rise because
prepayments decrease beyond the initial pricing assumptions and may cause
the average life of the securities to extend.
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6 | USAA BALANCED STRATEGY FUND
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evidence of inflation today, and so far in 2010 the risk of deflation has
grown with the eurozone debt crisis and its potential to slow the global
economic recovery. We have been adding recently Treasury Inflation-Protected
Securities (TIPS), which tend to perform adequately in both deflationary and
inflationary periods. We remain vigilant for any signs of inflationary
pressure.
o WHAT'S USAA'S OUTLOOK?
Well before U.S. economic growth (as measured by gross domestic product)
turned positive, we took the view that the lingering effects of the
financial crisis would make this recovery muted by historical standards,
with trend economic growth more volatile and lower than we've enjoyed in
recent decades. Unprecedented monetary and fiscal stimulus has been the
primary driver of the economic recovery, while very strong corporate profit
growth from the depressed levels of the Great Recession drove stock prices
much higher off the market low of March 9, 2009.
Some of our macroeconomic themes, however, have remained remarkably stable
over the past year. Bank lending continues to contract as banks work to heal
their balance sheets and some borrowers remain hesitant to incur additional
debt. Households are also slowly rebuilding their balance sheets, choosing
saving over borrowing and spending. Unemployment remains structurally
higher. The process of higher taxes and re-regulation is moving ahead. The
good news is at the corporate level, where corporate treasurers took
advantage of a period of extremely cheap credit to prepare their balance
sheets for an uncertain future.
The question now is whether the economy can move from a now waning
stimulus-driven recovery to one that depends on consumer and corporate
spending. Both corporations and consumers appear hesitant to embrace the
recovery, and headwinds are increasing. The most recent news comes from the
eurozone, where the sovereign
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MANAGERS' COMMENTARY ON THE FUND | 7
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debt crisis is most likely to lead to a new period of austerity that will
further weigh on the global recovery.
We have adjusted the strategic allocations in your Fund, putting more
emphasis on U.S. large-cap stocks and reducing our base allocation to U.S.
small-cap stocks. On a tactical level, we have further increased exposure to
U.S. large-cap stocks given their stronger balance sheets.
As the managers of your assets, we continue to focus on risk management and
tactical asset allocation in these volatile markets. We are pleased that
our efforts provided outstanding returns during the reporting year, and we
are committed to redoubling our efforts given the uncertainty ahead.
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8 | USAA BALANCED STRATEGY FUND
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INVESTMENT OVERVIEW
USAA BALANCED STRATEGY FUND (Ticker Symbol: USBSX)
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5/31/10 5/31/09
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Net Assets $592.1 Million $450.0 Million
Net Asset Value Per Share $12.26 $10.08
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AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/10
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1 YEAR 5 YEARS 10 YEARS
26.76% 1.59% 3.12%
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EXPENSE RATIO*
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Before Reimbursement 1.47% After Reimbursement 1.00%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*THE BEFORE REIMBURSEMENT EXPENSE RATIO REPRESENTS THE TOTAL ANNUAL OPERATING
EXPENSES, BEFORE REDUCTIONS OF ANY EXPENSES PAID INDIRECTLY AND INCLUDING ANY
ACQUIRED FUND FEES AND EXPENSES, AND IS CALCULATED AS A PERCENTAGE OF AVERAGE
NET ASSETS. THE AFTER REIMBURSEMENT EXPENSE RATIO REPRESENTS TOTAL ANNUAL
OPERATING EXPENSES, BEFORE REDUCTIONS OF ANY EXPENSES PAID INDIRECTLY AND
EXCLUDING ANY ACQUIRED FUND FEES AND EXPENSES, AFTER REIMBURSEMENT FROM USAA
INVESTMENT MANAGEMENT COMPANY (IMCO). BEFORE AND AFTER REIMBURSEMENT EXPENSE
RATIOS ARE REPORTED IN THE FUND'S PROSPECTUS DATED OCTOBER 1, 2009. IMCO HAS
VOLUNTARILY AGREED TO LIMIT THE FUND'S TOTAL ANNUAL OPERATING EXPENSES TO 1.00%,
BEFORE REDUCTIONS OF ANY EXPENSES PAID INDIRECTLY AND EXCLUDING ANY ACQUIRED
FUND FEES AND EXPENSES, AND TO REIMBURSE THE FUND FOR EXPENSES IN EXCESS OF THIS
AMOUNT. IMCO CAN MODIFY OR TERMINATE THIS ARRANGEMENT AT ANY TIME. THESE EXPENSE
RATIOS MAY DIFFER FROM THE EXPENSE RATIOS DISCLOSED IN THE FINANCIAL HIGHLIGHTS.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions. The total
returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
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INVESTMENT OVERVIEW | 9
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o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
BARCLAYS CAPITAL U.S. USAA BALANCED LIPPER BALANCED RUSSELL 3000
AGGREGATE BOND INDEX STRATEGY FUND FUNDS INDEX INDEX
05/31/00 $10,000.00 $10,000.00 $10,000.00 $10,000.00
06/30/00 10,208.05 10,222.97 10,159.61 10,296.08
07/31/00 10,300.71 10,100.23 10,131.92 10,114.09
08/31/00 10,450.01 10,495.37 10,584.17 10,864.17
09/30/00 10,515.71 10,142.17 10,361.43 10,372.27
10/31/00 10,585.29 10,037.61 10,352.26 10,224.59
11/30/00 10,758.37 9,570.58 9,976.48 9,282.17
12/31/00 10,957.94 9,751.78 10,224.44 9,438.16
01/31/01 11,137.14 10,473.36 10,441.44 9,761.02
02/28/01 11,234.16 10,228.16 10,036.13 8,869.18
03/31/01 11,290.56 10,060.39 9,712.03 8,291.04
04/30/01 11,243.70 10,483.39 10,119.62 8,955.94
05/31/01 11,311.52 10,737.19 10,209.75 9,027.87
06/30/01 11,354.26 10,639.30 10,053.31 8,861.40
07/31/01 11,608.11 10,788.35 10,046.04 8,715.36
08/31/01 11,741.04 10,568.32 9,760.14 8,200.84
09/30/01 11,877.86 9,895.52 9,291.11 7,477.32
10/31/01 12,126.41 10,095.43 9,446.61 7,651.28
11/30/01 11,959.21 10,695.16 9,822.71 8,240.61
12/31/01 11,883.27 10,820.83 9,893.55 8,356.76
01/31/02 11,979.47 10,723.14 9,806.77 8,251.97
02/28/02 12,095.56 10,520.25 9,740.14 8,083.22
03/31/02 11,894.34 10,821.13 9,953.10 8,437.64
04/30/02 12,124.99 10,647.33 9,714.25 7,994.96
05/31/02 12,228.02 10,730.45 9,709.72 7,902.33
06/30/02 12,333.75 10,126.38 9,295.49 7,333.49
07/31/02 12,482.57 9,631.85 8,819.07 6,750.45
08/31/02 12,693.33 9,730.76 8,909.55 6,782.34
09/30/02 12,898.91 9,296.19 8,377.61 6,069.72
10/31/02 12,840.15 9,602.24 8,726.83 6,553.03
11/30/02 12,836.74 10,023.05 9,080.86 6,949.56
12/31/02 13,101.89 9,727.34 8,836.08 6,556.67
01/31/03 13,113.08 9,548.35 8,703.72 6,396.23
02/28/03 13,294.52 9,509.44 8,638.45 6,291.00
03/31/03 13,284.28 9,540.00 8,673.70 6,357.15
04/30/03 13,393.89 10,001.36 9,143.08 6,876.27
05/31/03 13,643.62 10,439.27 9,547.47 7,291.35
06/30/03 13,616.54 10,559.36 9,619.87 7,389.74
07/31/03 13,158.76 10,614.35 9,642.16 7,559.26
08/31/03 13,246.13 10,763.63 9,804.94 7,726.78
09/30/03 13,596.76 10,758.22 9,817.38 7,642.89
10/31/03 13,469.95 11,176.25 10,141.28 8,105.43
11/30/03 13,502.21 11,294.55 10,231.07 8,217.08
12/31/03 13,639.62 11,613.17 10,597.66 8,592.93
01/31/04 13,749.35 11,739.83 10,755.90 8,772.18
02/29/04 13,898.18 11,898.16 10,902.50 8,890.36
03/31/04 14,002.26 11,808.08 10,850.49 8,784.83
04/30/04 13,637.97 11,593.68 10,622.46 8,603.19
05/31/04 13,583.34 11,673.09 10,669.36 8,728.22
06/30/04 13,660.11 11,902.04 10,836.17 8,901.69
07/31/04 13,795.51 11,607.28 10,632.17 8,565.07
08/31/04 14,058.66 11,623.21 10,696.85 8,600.35
09/30/04 14,096.81 11,760.38 10,855.76 8,732.55
10/31/04 14,215.02 11,864.31 10,973.15 8,875.98
11/30/04 14,101.64 12,208.09 11,268.73 9,288.59
12/31/04 14,231.39 12,548.76 11,550.03 9,619.55
01/31/05 14,320.75 12,378.19 11,401.24 9,363.34
02/28/05 14,236.21 12,508.15 11,562.54 9,569.46
03/31/05 14,163.10 12,355.99 11,403.34 9,407.60
04/30/05 14,354.78 12,233.65 11,266.32 9,203.21
05/31/05 14,510.08 12,568.04 11,524.66 9,551.93
06/30/05 14,589.20 12,630.59 11,607.48 9,618.65
07/31/05 14,456.39 12,925.47 11,865.41 10,013.26
08/31/05 14,641.71 12,974.62 11,899.74 9,917.80
09/30/05 14,490.89 12,982.35 11,946.91 10,004.57
10/31/05 14,376.21 12,719.08 11,759.33 9,817.20
11/30/05 14,439.79 13,023.48 12,044.82 10,199.09
12/31/05 14,577.08 13,095.10 12,150.32 10,208.24
01/31/06 14,577.90 13,320.43 12,440.36 10,549.31
02/28/06 14,626.29 13,285.77 12,424.79 10,568.07
03/31/06 14,482.76 13,329.76 12,545.78 10,750.74
04/30/06 14,456.51 13,408.22 12,682.57 10,867.38
05/31/06 14,441.09 13,050.78 12,431.11 10,519.44
06/30/06 14,471.70 13,074.22 12,423.67 10,538.06
07/31/06 14,667.38 13,039.12 12,481.66 10,528.19
08/31/06 14,891.92 13,214.62 12,721.71 10,785.74
09/30/06 15,022.73 13,489.22 12,905.10 11,027.18
10/31/06 15,122.10 13,753.88 13,205.75 11,424.13
11/30/06 15,297.53 13,965.62 13,460.13 11,672.70
12/31/06 15,208.76 14,060.10 13,559.67 11,812.49
01/31/07 15,202.52 14,277.43 13,705.91 12,037.33
02/28/07 15,436.94 14,211.28 13,653.60 11,839.87
03/31/07 15,437.41 14,297.47 13,770.75 11,963.10
04/30/07 15,520.65 14,658.47 14,166.81 12,440.99
05/31/07 15,403.03 14,914.97 14,471.21 12,894.37
06/30/07 15,357.46 14,766.77 14,336.00 12,652.88
07/31/07 15,485.57 14,432.47 14,091.62 12,221.38
08/31/07 15,675.37 14,566.19 14,205.53 12,396.81
09/30/07 15,794.29 14,915.03 14,606.86 12,848.76
10/31/07 15,936.16 15,174.34 14,863.72 13,084.46
11/30/07 16,222.75 14,703.74 14,515.26 12,495.41
12/31/07 16,268.31 14,580.97 14,444.75 12,419.80
01/31/08 16,541.59 14,133.26 13,967.22 11,667.02
02/29/08 16,564.55 13,868.71 13,785.50 11,304.64
03/31/08 16,621.06 13,699.74 13,680.15 11,237.67
04/30/08 16,586.33 14,068.34 14,133.68 11,799.65
05/31/08 16,464.70 14,344.79 14,289.81 12,041.38
06/30/08 16,451.40 13,539.85 13,534.33 11,047.72
07/31/08 16,437.97 13,302.49 13,362.93 10,959.61
08/31/08 16,593.98 13,343.77 13,413.74 11,129.82
09/30/08 16,371.10 12,198.48 12,400.32 10,083.35
10/31/08 15,984.67 10,357.79 10,811.04 8,294.97
11/30/08 16,504.97 9,671.43 10,318.54 7,640.17
12/31/08 17,120.76 9,848.08 10,663.81 7,786.33
01/31/09 16,969.70 9,279.92 10,170.18 7,132.90
02/28/09 16,905.64 8,511.86 9,512.34 6,385.69
03/31/09 17,140.66 8,949.79 10,041.41 6,945.04
04/30/09 17,222.60 9,727.57 10,733.07 7,675.89
05/31/09 17,347.53 10,729.09 11,271.54 8,085.45
06/30/09 17,446.20 11,001.98 11,298.46 8,113.00
07/31/09 17,727.60 11,616.80 11,977.31 8,744.48
08/31/09 17,911.16 12,059.04 12,297.84 9,056.94
09/30/09 18,099.31 12,706.10 12,691.06 9,436.39
10/31/09 18,188.67 12,738.79 12,542.68 9,193.69
11/30/09 18,424.15 13,120.19 13,009.60 9,716.11
12/31/09 18,136.16 13,396.53 13,154.07 9,992.99
01/31/10 18,413.20 13,319.48 12,929.11 9,632.76
02/28/10 18,481.96 13,561.65 13,159.08 9,959.33
03/31/10 18,459.24 14,076.81 13,659.54 10,587.04
04/30/10 18,651.39 14,320.86 13,827.19 10,815.51
05/31/10 18,808.34 13,599.83 13,120.17 9,961.12
[END CHART]
Data from 5/31/00 to 5/31/10.
See next page for benchmark definitions.
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on fund distributions or the redemption of fund shares.
================================================================================
10 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
The graph on page 10 illustrates the comparison of a $10,000 hypothetical
investment in the USAA Balanced Strategy Fund to the following benchmarks:
o The unmanaged Barclays Capital U.S. Aggregate Bond Index covers the U.S.
investment-grade fixed-rate bond market, including government and credit
securities, agency mortgage pass-through securities, asset-backed
securities, and commercial mortgage-backed securities that have remaining
maturities of more than one year.
o The unmanaged Lipper Balanced Funds Index tracks the total return
performance of the 30 largest funds within the Lipper Balanced Funds
category.
o The unmanaged Russell 3000 Index measures the performance of the 3,000
largest U.S. companies based on total market capitalization, which
represents approximately 98% of the investable U.S. equity market.
================================================================================
INVESTMENT OVERVIEW | 11
<PAGE>
================================================================================
TOP 5 STOCK HOLDINGS
AS OF 5/31/10
(% of Net Assets)
iShares MSCI EAFE Index ETF* ..................................... 10.2%
SPDR Trust Series 1 ETF* ......................................... 5.0%
Microsoft Corp. .................................................. 1.0%
International Business Machines Corp. ............................ 1.0%
Bank of America Corp. ............................................ 0.9%
TOP 5 BOND HOLDINGS
AS OF 5/31/10
(% of Net Assets)
U.S. Treasury Inflation-Indexed Notes
2.13%, 2/15/2040 ............................................... 3.5%
U.S. Treasury Inflation-Indexed Notes
2.50%, 1/15/2029 ............................................... 1.0%
Nationwide Mutual Insurance Co. .................................. 0.6%
TransCanada Pipelines Ltd. ....................................... 0.6%
Credit Suisse Commercial Mortgage Trust .......................... 0.5%
* Pursuant to a Securities and Exchange Commission (SEC) exemptive order, the
Fund may invest in an amount that exceeds the Fund's limitations as set forth
in the Investment Company Act of 1940 that would otherwise be applicable.
You will find a complete list of securities that the Fund owns on pages 16-39.
================================================================================
12 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
o ASSET ALLOCATION -- 5/31/2010* o
[PIE CHART OF ASSET ALLOCATION]
STOCKS 56.8%
BONDS 42.1%
MONEY MARKET INSTRUMENTS 0.6%
[END CHART]
* Excludes futures, options, and short-term investments purchased with cash
collateral from securities loaned.
Percentages are of the net assets of the Fund and may not equal 100%.
================================================================================
INVESTMENT OVERVIEW | 13
<PAGE>
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
May 31, 2010, is provided for information purposes only and should not be used
for reporting to federal or state revenue agencies. Federal tax information for
the calendar year will be reported to you on Form 1099-DIV in January 2011.
27.79% of ordinary income distributions qualify for the dividends-received
deductions eligible to corporations.
For the fiscal year ended May 31, 2010, the Fund hereby designates 100%, or the
maximum amount allowable, of its net taxable income as qualified dividends taxed
at individual net capital gain rates.
For the fiscal year ended May 31, 2010, certain dividends paid by the Fund
qualify as interest-related dividends. The Fund designates $14,942,000 as
qualifying interest income.
================================================================================
14 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA BALANCED STRATEGY FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the USAA Balanced Strategy Fund (one of the
portfolios constituting USAA Mutual Funds Trust) (the "Fund") as of May 31,
2010, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund'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 the standards of the Public Company
Accounting Oversight Board (United States). 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. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of May 31, 2010, by correspondence with the custodian and
brokers or by other appropriate auditing procedures where replies from brokers
were not received. 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 Balanced Strategy Fund at May 31, 2010, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended, in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young LLP
San Antonio, Texas
July 23, 2010
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 15
<PAGE>
================================================================================
PORTFOLIO OF INVESTMENTS
May 31, 2010
-------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------
EQUITY SECURITIES (56.8%)
COMMON STOCKS (39.9%)
CONSUMER DISCRETIONARY (4.8%)
-----------------------------
APPAREL & ACCESSORIES & LUXURY GOODS (0.1%)
8,700 Coach, Inc. $ 358
15,600 Jones Apparel Group, Inc.(m) 306
1,800 Perry Ellis International, Inc.* 43
--------
707
--------
APPAREL RETAIL (0.4%)
5,300 Finish Line, Inc. "A" 88
57,300 Gap, Inc. 1,249
15,800 Ross Stores, Inc. 828
3,100 Stage Stores, Inc. 44
--------
2,209
--------
AUTO PARTS & EQUIPMENT (0.2%)
51,100 Johnson Controls, Inc. 1,458
--------
CABLE & SATELLITE (0.4%)
116,300 Comcast Corp. "A" 2,104
--------
CATALOG RETAIL (0.1%)
24,000 Liberty Media Corp. Interactive "A"* 311
--------
COMPUTER & ELECTRONICS RETAIL (0.0%)
8,600 Rent-A-Center, Inc.* 208
--------
DEPARTMENT STORES (0.5%)
22,400 Dillard's, Inc. "A" 643
51,300 J.C. Penney Co., Inc. 1,410
1,500 Kohl's Corp.* 76
9,300 Sears Holdings Corp.*(a) 819
--------
2,948
--------
DISTRIBUTORS (0.0%)
1,500 Core-Mark Holding Co., Inc.* 41
--------
================================================================================
16 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
-------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------
EDUCATION SERVICES (0.3%)
23,600 Career Education Corp.* $ 661
70,500 Corinthian Colleges, Inc.*(a) 944
--------
1,605
--------
GENERAL MERCHANDISE STORES (0.3%)
5,300 Fred's, Inc. "A" 73
33,400 Target Corp. 1,821
23,700 Tuesday Morning Corp.* 134
--------
2,028
--------
HOME IMPROVEMENT RETAIL (0.7%)
5,400 Home Depot, Inc. 183
126,200 Lowe's Companies, Inc. 3,123
11,300 Sherwin-Williams Co. 866
--------
4,172
--------
HOUSEWARES & SPECIALTIES (0.0%)
3,700 American Greetings Corp. "A" 87
700 Blyth, Inc. 35
--------
122
--------
INTERNET RETAIL (0.4%)
18,200 Amazon.com, Inc.* 2,283
--------
LEISURE PRODUCTS (0.2%)
4,300 JAKKS Pacific, Inc.* 64
51,000 Mattel, Inc. 1,104
--------
1,168
--------
MOVIES & ENTERTAINMENT (0.0%)
6,800 Cinemark Holdings, Inc. 109
--------
PUBLISHING (0.1%)
11,300 Scholastic Corp. 296
--------
RESTAURANTS (0.9%)
12,400 Dominos Pizza, Inc.* 161
50,300 McDonald's Corp. 3,364
8,100 Ruth's Hospitality Group, Inc.* 39
76,300 Starbucks Corp. 1,976
--------
5,540
--------
SPECIALTY STORES (0.2%)
33,400 Barnes & Noble, Inc.(a) 676
7,200 Signet Jewelers Ltd.* 223
--------
899
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 17
<PAGE>
================================================================================
-------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------
TIRES & RUBBER (0.0%)
4,300 Cooper Tire & Rubber Co. $ 81
--------
Total Consumer Discretionary 28,289
--------
CONSUMER STAPLES (3.0%)
-----------------------
AGRICULTURAL PRODUCTS (0.2%)
41,500 Archer-Daniels-Midland Co. 1,049
7,700 Fresh Del Monte Produce, Inc.* 154
--------
1,203
--------
DRUG RETAIL (0.1%)
21,100 CVS Caremark Corp. 731
--------
FOOD DISTRIBUTORS (0.0%)
4,700 Andersons, Inc. 154
--------
FOOD RETAIL (0.3%)
45,400 Whole Foods Market, Inc.* 1,836
6,800 Winn Dixie Stores, Inc.* 76
--------
1,912
--------
HOUSEHOLD PRODUCTS (0.7%)
3,700 Central Garden & Pet Co. "A"* 35
33,800 Colgate-Palmolive Co. 2,639
19,800 Procter & Gamble Co. 1,210
--------
3,884
--------
HYPERMARKETS & SUPER CENTERS (0.1%)
9,000 Wal-Mart Stores, Inc. 455
--------
PACKAGED FOODS & MEAT (1.0%)
2,200 American Italian Pasta Co.* 86
8,300 Campbell Soup Co. 297
28,200 Del Monte Foods Co. 411
33,700 Hershey Co. 1,577
1,400 J.M. Smucker Co. 77
500 Lancaster Colony Corp. 27
16,900 Sanderson Farms, Inc. 927
6,600 Sara Lee Corp. 94
9,300 Smart Balance, Inc.* 56
141,200 Tyson Foods, Inc. "A" 2,482
--------
6,034
--------
PERSONAL PRODUCTS (0.0%)
3,800 China Biotics, Inc.* 54
2,000 China Sky One Medical, Inc.* 25
2,100 Elizabeth Arden, Inc.* 36
--------
115
--------
================================================================================
18 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
-------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------
SOFT DRINKS (0.3%)
1,000 Coca-Cola Co. $ 51
44,300 Dr. Pepper Snapple Group, Inc. 1,677
--------
1,728
--------
TOBACCO (0.3%)
19,100 Lorillard, Inc. 1,365
2,100 Reynolds American, Inc. 110
--------
1,475
--------
Total Consumer Staples 17,691
--------
ENERGY (4.3%)
-------------
INTEGRATED OIL & GAS (2.5%)
68,400 Chevron Corp. 5,052
73,600 ConocoPhillips 3,817
58,300 Exxon Mobil Corp. 3,525
88,000 Marathon Oil Corp. 2,736
--------
15,130
--------
OIL & GAS DRILLING (0.5%)
114,000 Patterson-UTI Energy, Inc. 1,600
47,300 Rowan Companies, Inc.* 1,171
--------
2,771
--------
OIL & GAS EQUIPMENT & SERVICES (0.9%)
6,700 Complete Production Services, Inc.* 87
64,800 National-Oilwell Varco, Inc. 2,471
53,600 Oil States International, Inc.* 2,092
7,900 Schlumberger Ltd. 444
1,700 Seacor Holdings, Inc.* 124
--------
5,218
--------
OIL & GAS EXPLORATION & PRODUCTION (0.4%)
15,700 Cimarex Energy Co. 1,154
20,300 Newfield Exploration Co.* 1,057
--------
2,211
--------
OIL & GAS REFINING & MARKETING (0.0%)
33,300 Western Refining, Inc.* 175
--------
Total Energy 25,505
--------
FINANCIALS (6.2%)
-----------------
CONSUMER FINANCE (0.8%)
36,900 American Express Co. 1,471
4,800 AmeriCredit Corp.* 104
65,700 Capital One Financial Corp. 2,713
================================================================================
PORTFOLIO OF INVESTMENTS | 19
<PAGE>
================================================================================
-------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------
2,800 Cash America International, Inc. $ 104
30,800 Discover Financial Services 414
4,600 Nelnet, Inc. "A" 91
1,100 Student Loan Corp. 32
--------
4,929
--------
DIVERSIFIED BANKS (0.6%)
48,800 Comerica, Inc. 1,859
59,500 Wells Fargo & Co. 1,707
--------
3,566
--------
INVESTMENT BANKING & BROKERAGE (1.0%)
18,200 Goldman Sachs Group, Inc. 2,625
116,000 Morgan Stanley 3,145
--------
5,770
--------
LIFE & HEALTH INSURANCE (0.0%)
5,500 American Equity Investment Life Insurance Co. 52
1,800 Prudential Financial, Inc. 104
--------
156
--------
MULTI-LINE INSURANCE (0.2%)
26,400 Assurant, Inc. 916
--------
OTHER DIVERSIFIED FINANCIAL SERVICES (1.7%)
343,300 Bank of America Corp. 5,404
997,200 Citigroup, Inc.* 3,949
23,300 JPMorgan Chase & Co. 922
--------
10,275
--------
PROPERTY & CASUALTY INSURANCE (0.6%)
25,500 Allied World Assurance Co. Holdings Ltd. 1,145
35,600 Chubb Corp. 1,788
700 Infinity Property & Casualty Corp. 33
3,400 Meadowbrook Insurance Group, Inc. 30
9,000 Old Republic International Corp. 125
4,300 Progressive Corp. 84
4,400 Stewart Information Services Corp. 47
1,400 United Fire & Casualty Co. 30
--------
3,282
--------
REGIONAL BANKS (0.9%)
87,500 CapitalSource, Inc. 397
3,025 Commerce Bancshares, Inc. 112
1,500 Community Bank System, Inc. 34
194,700 Fifth Third Bancorp 2,529
23,900 PNC Financial Services Group, Inc. 1,500
================================================================================
20 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
-------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------
16,200 SunTrust Banks, Inc. $ 437
20,500 Zions Bancorp 491
--------
5,500
--------
REINSURANCE (0.0%)
3,100 PartnerRe Ltd. 226
--------
REITs - DIVERSIFIED (0.0%)
14,300 Cousins Properties, Inc. 110
1,700 PS Business Parks, Inc. 92
2,100 Winthrop Realty Trust, Inc. 27
--------
229
--------
REITs - MORTGAGE (0.1%)
11,900 American Capital Agency Corp. 312
15,800 Resource Capital Corp. 89
--------
401
--------
REITs - OFFICE (0.0%)
2,300 Parkway Properties, Inc. 39
--------
REITs - RETAIL (0.0%)
1,300 Agree Realty Corp. 31
1,800 Urstadt Biddle Properties, Inc. "A" 30
--------
61
--------
REITs - SPECIALIZED (0.2%)
20,000 Ashford Hospitality Trust, Inc.* 159
4,000 LaSalle Hotel Properties 90
6,600 Public Storage 612
11,900 Strategic Hotel Capital, Inc.* 58
--------
919
--------
SPECIALIZED FINANCE (0.1%)
31,000 PHH Corp.* 684
--------
THRIFTS & MORTGAGE FINANCE (0.0%)
11,300 NewAlliance Bancshares, Inc. 133
--------
Total Financials 37,086
--------
HEALTH CARE (4.9%)
------------------
BIOTECHNOLOGY (0.3%)
27,400 Cephalon, Inc.* 1,613
2,700 Emergent BioSolutions, Inc.* 42
13,800 Incyte Corp.* 178
3,200 Martek Biosciences Corp.* 59
4,700 Nabi Biopharmaceuticals* 26
--------
1,918
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 21
<PAGE>
================================================================================
-------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------
HEALTH CARE DISTRIBUTORS (1.0%)
82,200 AmerisourceBergen Corp. $ 2,571
77,600 Cardinal Health, Inc. 2,677
11,700 McKesson Corp. 819
--------
6,067
--------
HEALTH CARE EQUIPMENT (0.1%)
4,600 American Medical Systems Holdings, Inc.* 104
2,200 Hospira, Inc.* 114
13,900 Sirona Dental Systems, Inc.* 492
--------
710
--------
HEALTH CARE FACILITIES (0.1%)
10,500 LifePoint Hospitals, Inc.* 373
4,400 Sun Healthcare Group, Inc.* 40
--------
413
--------
HEALTH CARE SERVICES (0.2%)
25,400 Amedisys, Inc.*(a) 1,263
7,600 CardioNet, Inc.* 59
3,200 Gentiva Health Services, Inc.* 88
--------
1,410
--------
LIFE SCIENCES TOOLS & SERVICES (0.4%)
32,200 Life Technologies Corp.* 1,612
6,400 Waters Corp.* 438
--------
2,050
--------
MANAGED HEALTH CARE (1.7%)
29,500 Aetna, Inc. 860
115,600 Coventry Health Care, Inc.* 2,393
18,200 Health Net, Inc.* 449
16,100 HealthSpring, Inc.* 280
33,500 Humana, Inc.* 1,543
5,400 Molina Healthcare, Inc.* 148
103,800 UnitedHealth Group, Inc. 3,017
3,000 Universal American Financial Corp.* 44
22,700 WellPoint, Inc.* 1,164
--------
9,898
--------
PHARMACEUTICALS (1.1%)
11,800 Allergan, Inc. 710
30,200 Endo Pharmaceuticals Holdings, Inc.* 632
2,800 Hi-Tech Pharmacal Co., Inc.* 64
9,400 Impax Laboratories, Inc.* 198
================================================================================
22 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
-------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------
16,000 Johnson & Johnson $ 933
13,300 Medicis Pharmaceutical Corp. "A" 309
31,000 Par Pharmaceutical Companies, Inc.* 861
21,600 Perrigo Co. 1,283
7,900 Pfizer, Inc. 120
18,100 Questcor Pharmaceuticals, Inc.* 172
13,500 Santarus, Inc.* 39
10,900 ViroPharma, Inc.* 133
21,200 Watson Pharmaceuticals, Inc.* 936
--------
6,390
--------
Total Health Care 28,856
--------
INDUSTRIALS (4.1%)
------------------
AEROSPACE & DEFENSE (0.7%)
4,200 Ceradyne, Inc.* 91
44,600 Northrop Grumman Corp. 2,698
28,800 Raytheon Co. 1,509
--------
4,298
--------
AIR FREIGHT & LOGISTICS (0.5%)
45,500 United Parcel Service, Inc. "B" 2,855
--------
AIRLINES (0.1%)
9,000 Alaska Air Group, Inc.* 420
12,800 Hawaiian Holdings, Inc.* 91
6,000 SkyWest, Inc. 88
--------
599
--------
COMMERCIAL PRINTING (0.2%)
1,000 Consolidated Graphics, Inc.* 46
52,800 R.R. Donnelley & Sons Co. 1,011
--------
1,057
--------
CONSTRUCTION & ENGINEERING (0.6%)
71,600 EMCOR Group, Inc.* 1,788
19,400 Jacobs Engineering Group, Inc.* 810
1,300 Northwest Pipe Co.* 26
25,000 Shaw Group, Inc.* 853
--------
3,477
--------
CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (0.2%)
2,800 Astec Industries, Inc.* 84
28,500 Oshkosh Corp.* 1,013
10,500 Trinity Industries, Inc. 229
--------
1,326
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 23
<PAGE>
================================================================================
-------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------
ELECTRICAL COMPONENTS & EQUIPMENT (0.0%)
4,500 Fushi Copperweld, Inc.* $ 45
--------
INDUSTRIAL CONGLOMERATES (1.0%)
42,100 3M Co. 3,339
29,500 Carlisle Companies, Inc. 1,147
85,800 General Electric Co. 1,403
18 Seaboard Corp. 26
--------
5,915
--------
INDUSTRIAL MACHINERY (0.5%)
13,100 Eaton Corp. 916
17,000 Parker-Hannifin Corp. 1,045
32,400 Timken Co. 933
7,400 Watts Water Technologies, Inc. "A" 240
--------
3,134
--------
MARINE (0.1%)
29,900 Genco Shipping & Trading Ltd.* 569
--------
TRADING COMPANIES & DISTRIBUTORS (0.1%)
27,900 Aircastle Ltd. 275
--------
TRUCKING (0.1%)
60,000 Hertz Global Holdings, Inc.* 682
--------
Total Industrials 24,232
--------
INFORMATION TECHNOLOGY (8.5%)
-----------------------------
APPLICATION SOFTWARE (0.0%)
2,100 Kenexa Corp.* 30
5,300 Smith Micro Software, Inc.* 52
--------
82
--------
COMMUNICATIONS EQUIPMENT (0.7%)
15,300 Cisco Systems, Inc.* 354
1,600 EchoStar Corp. "A"* 34
10,600 Harris Corp. 497
398,800 Motorola, Inc.* 2,732
1,800 Sycamore Networks, Inc. 32
19,500 Tellabs, Inc. 175
--------
3,824
--------
COMPUTER HARDWARE (1.8%)
8,000 Apple, Inc.* 2,058
63,900 Hewlett-Packard Co. 2,940
44,900 International Business Machines Corp. 5,624
--------
10,622
--------
================================================================================
24 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
-------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------
COMPUTER STORAGE & PERIPHERALS (0.9%)
12,300 SanDisk Corp.* $ 574
134,900 Seagate Technology* 2,072
12,200 Synaptics, Inc.*(a) 365
71,100 Western Digital Corp.* 2,475
--------
5,486
--------
DATA PROCESSING & OUTSOURCED SERVICES (0.6%)
27,400 Computer Sciences Corp.* 1,369
7,200 MasterCard, Inc. "A" 1,453
31,500 Total System Services, Inc. 460
--------
3,282
--------
ELECTRONIC COMPONENTS (0.5%)
140,400 Corning, Inc. 2,447
41,400 Vishay Intertechnology, Inc.* 375
--------
2,822
--------
ELECTRONIC MANUFACTURING SERVICES (0.1%)
3,900 Benchmark Electronics, Inc.* 72
50,100 Jabil Circuit, Inc. 686
1,400 Multi-Fineline Electronix, Inc.* 37
--------
795
--------
HOME ENTERTAINMENT SOFTWARE (0.4%)
240,000 Activision Blizzard, Inc. 2,580
--------
INTERNET SOFTWARE & SERVICES (0.9%)
7,100 AOL, Inc.* 146
9,600 Google, Inc. "A"* 4,658
24,300 IAC/InterActiveCorp.* 570
--------
5,374
--------
IT CONSULTING & OTHER SERVICES (0.1%)
5,200 Cognizant Technology Solutions Corp. "A"* 260
11,500 Unisys Corp.* 267
--------
527
--------
SEMICONDUCTORS (0.1%)
8,700 Intel Corp. 186
9,100 Micron Technology, Inc.* 83
--------
269
--------
SYSTEMS SOFTWARE (1.0%)
238,200 Microsoft Corp. 6,146
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 25
<PAGE>
================================================================================
-------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------
TECHNOLOGY DISTRIBUTORS (1.4%)
4,300 Anixter International, Inc.* $ 204
85,100 Arrow Electronics, Inc.* 2,321
82,200 Avnet, Inc.* 2,361
80,700 Ingram Micro, Inc. "A"* 1,369
53,900 Tech Data Corp.* 2,191
--------
8,446
--------
Total Information Technology 50,255
--------
MATERIALS (1.6%)
----------------
DIVERSIFIED CHEMICALS (0.1%)
2,500 Ashland, Inc. 134
6,900 Cabot Corp. 193
16,500 Huntsman Corp. 165
--------
492
--------
DIVERSIFIED METALS & MINING (0.2%)
16,600 Freeport-McMoRan Copper & Gold, Inc. 1,163
--------
FERTILIZERS & AGRICULTURAL CHEMICALS (0.3%)
31,700 CF Industries Holdings, Inc. 2,174
--------
PAPER PACKAGING (0.1%)
63,600 Boise, Inc.* 391
--------
PAPER PRODUCTS (0.3%)
55,700 International Paper Co. 1,294
14,200 MeadWestvaco Corp. 339
--------
1,633
--------
SPECIALTY CHEMICALS (0.6%)
28,300 Cytec Industries, Inc. 1,209
14,200 Lubrizol Corp. 1,258
1,800 Stepan Co. 130
36,000 W.R. Grace & Co.* 922
--------
3,519
--------
Total Materials 9,372
--------
TELECOMMUNICATION SERVICES (1.2%)
---------------------------------
ALTERNATIVE CARRIERS (0.0%)
5,100 Cogent Communications Group, Inc.* 46
--------
INTEGRATED TELECOMMUNICATION SERVICES (0.9%)
211,200 AT&T, Inc. 5,132
5,600 Cbeyond, Inc.* 88
--------
5,220
--------
================================================================================
26 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
-------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES (0.3%)
119,800 MetroPCS Communications, Inc.* $ 1,077
13,900 Telephone & Data Systems, Inc. 457
4,900 U.S. Cellular Corp.* 203
--------
1,737
--------
Total Telecommunication Services 7,003
--------
UTILITIES (1.3%)
----------------
ELECTRIC UTILITIES (0.8%)
51,700 Exelon Corp. 1,996
86,000 Southern Co. 2,812
--------
4,808
--------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (0.4%)
17,400 Constellation Energy Group, Inc. 615
79,300 NRG Energy, Inc.* 1,852
--------
2,467
--------
MULTI-UTILITIES (0.1%)
1,600 DTE Energy Co. 73
8,400 Integrys Energy Group, Inc. 380
--------
453
--------
Total Utilities 7,728
--------
Total Common Stocks (cost: $223,404) 236,017
--------
-------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
$(000)/
SHARES
-------------------------------------------------------------------------------------
PREFERRED SECURITIES (1.7%)
CONSUMER STAPLES (0.4%)
-----------------------
AGRICULTURAL PRODUCTS (0.4%)
30,000 Dairy Farmers of America, Inc., 7.88%,
cumulative redeemable, perpetual(b) 2,460
--------
FINANCIALS (1.3%)
-----------------
LIFE & HEALTH INSURANCE (0.5%)
65,000 Delphi Financial Group, Inc., 7.38%, perpetual 1,305
60,000 Delphi Financial Group, Inc., 8.00% 1,476
--------
2,781
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 27
<PAGE>
================================================================================
-------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT MARKET
$(000)/ VALUE
SHARES SECURITY (000)
-------------------------------------------------------------------------------------
OTHER DIVERSIFIED FINANCIAL SERVICES (0.4%)
30 International Lease Finance Corp., 0.97%, perpetual(c) $ 2,400
--------
PROPERTY & CASUALTY INSURANCE (0.0%)
$1,000 Security Capital Assurance Ltd., 6.88%, perpetual*(c) -
--------
REINSURANCE (0.4%)
1,500 Ram Holdings Ltd., 7.50%, non-cumulative, perpetual,
acquired 1/23/2007 - 3/09/2007; cost $1,533*(d) 375
$2,500 Swiss Re Capital I LP, 6.85%, perpetual(b) 2,028
--------
2,403
--------
Total Financials 7,584
--------
-------------------------------------------------------------------------------------
NUMBER
OF SHARES
-------------------------------------------------------------------------------------
GOVERNMENT (0.0%)
-----------------
U.S. GOVERNMENT (0.0%)
40,000 Fannie Mae, 8.25%, perpetual* 42
40,000 Freddie Mac, 8.38%, perpetual* 42
--------
Total Government 84
--------
Total Preferred Securities (cost: $14,103) 10,128
--------
EXCHANGE-TRADED FUNDS (15.2%)
1,256,543 iShares MSCI EAFE Index Fund 60,716
268,322 SPDR Trust Series 1(a) 29,365
--------
Total Exchange-Traded Funds (cost: $112,524) 90,081
--------
WARRANTS (0.0%)
CONSUMER DISCRETIONARY (0.0%)
-----------------------------
RESTAURANTS (0.0%)
1,356 Krispy Kreme Doughnuts, Inc.* (cost: $0) -
--------
Total Equity Securities (cost: $350,031) 336,226
--------
================================================================================
28 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------
BONDS (42.1%)
CORPORATE OBLIGATIONS (20.7%)
CONSUMER DISCRETIONARY (0.2%)
-----------------------------
APPAREL & ACCESSORIES & LUXURY GOODS (0.2%)
$ 1,024 Kellwood Co.(f) 12.88% 7/15/2011 $ 860
1,000 Kellwood Co. 7.63 10/15/2017 505
--------
Total Consumer Discretionary 1,365
--------
CONSUMER STAPLES (0.5%)
-----------------------
DRUG RETAIL (0.5%)
3,000 CVS Caremark Corp. 6.30 6/01/2037 2,716
--------
ENERGY (0.8%)
-------------
OIL & GAS STORAGE & TRANSPORTATION (0.8%)
3,059 Enbridge Energy Partners, LP 8.05 10/01/2037 3,025
1,000 Enterprise Products Operating, LP 7.00 6/01/2067 878
1,000 Southern Union Co. 7.20 11/01/2066 905
--------
Total Energy 4,808
--------
FINANCIALS (16.2%)
------------------
CONSUMER FINANCE (0.7%)
2,500 American Express Co. 6.80 9/01/2066 2,381
2,000 Capital One Financial Corp. 7.69 8/15/2036 1,850
--------
4,231
--------
DIVERSIFIED BANKS (1.7%)
1,800 Comerica Capital Trust II 6.58 2/20/2037 1,512
1,000 Emigrant Bancorp, Inc.(b) 6.25 6/15/2014 753
2,500 First Tennessee Bank, N.A. 5.65 4/01/2016 2,409
1,000 USB Capital IX 6.19 -(g) 790
2,000 USB Realty Corp.(b) 6.09 -(g) 1,470
2,500 Wachovia Capital Trust III 5.80(h) -(g) 2,000
1,000 Wells Fargo Capital XIII 7.70 -(g) 990
--------
9,924
--------
INVESTMENT BANKING & BROKERAGE (0.4%)
3,000 Goldman Sachs Capital II 5.79 -(g) 2,310
--------
LIFE & HEALTH INSURANCE (2.4%)
1,000 Great-West Life & Annuity Insurance Co.(b) 7.15 5/16/2046 900
3,500 Lincoln National Corp. 7.00 5/17/2066 2,905
1,000 MetLife Capital Trust X(b) 9.25 4/08/2038 1,095
1,000 MetLife, Inc. 10.75 8/01/2069 1,198
4,000 Nationwide Mutual Insurance Co.(b) 5.81 12/15/2024 3,482
================================================================================
PORTFOLIO OF INVESTMENTS | 29
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------
$ 2,000 Prudential Financial, Inc. 8.88% 6/15/2038 $ 2,140
3,000 StanCorp Financial Group, Inc. 6.90 6/01/2067 2,473
--------
14,193
--------
MULTI-LINE INSURANCE (1.1%)
3,500 Genworth Financial, Inc. 6.15 11/15/2066 2,459
4,000 Glen Meadow(b) 6.51 2/12/2067 2,990
1,000 Oil Insurance Ltd.(b) 7.56 -(g) 874
--------
6,323
--------
OTHER DIVERSIFIED FINANCIAL SERVICES (1.3%)
2,000 BankAmerica Capital III 0.87(h) 1/15/2027 1,356
1,500 BankBoston Capital Trust IV 0.85(h) 6/08/2028 1,007
1,000 First Republic Bank Corp. 7.75 9/15/2012 1,087
2,000 General Electric Capital Corp. 6.38(h) 11/15/2067 1,862
2,000 ILFC E-Capital Trust II(b) 6.25 12/21/2065 1,230
2,000 JPMorgan Chase & Co. Capital XXI 1.29(h) 2/02/2037 1,403
--------
7,945
--------
PROPERTY & CASUALTY INSURANCE (2.5%)
3,000 Allstate Corp. 6.13 5/15/2037 2,640
3,000 Chubb Corp. 6.38 3/29/2067 2,880
1,500 Fund American Companies, Inc. 5.88 5/15/2013 1,551
1,500 Ironshore Holdings US, Inc.(b) 8.50 5/15/2020 1,495
3,000 Progressive Corp. 6.70 6/15/2037 2,741
1,000 RLI Corp. 5.95 1/15/2014 1,030
2,500 Travelers Companies, Inc. 6.25 3/15/2037 2,334
--------
14,671
--------
REGIONAL BANKS (3.5%)
1,000 City National Capital Trust I 9.63 2/01/2040 1,021
1,000 Cullen/Frost Bankers, Inc. 5.75 2/15/2017 951
3,500 Fifth Third Capital Trust IV 6.50 4/15/2037 2,826
500 First Empire Capital Trust I 8.23 2/01/2027 481
2,000 Fulton Capital Trust I 6.29 2/01/2036 1,282
4,000 Huntington Capital III 6.65 5/15/2037 2,793
2,000 Manufacturers & Traders Trust Co. 5.63 12/01/2021 1,857
1,000 National City Preferred Capital Trust I 12.00 -(g) 1,073
2,000 PNC Preferred Funding Trust(b) 6.52 -(g) 1,523
2,000 Regions Financing Trust II 6.63 5/15/2047 1,454
1,000 Susquehanna Bancshares, Inc. 2.16(h) 5/01/2014 764
1,000 Susquehanna Capital II 11.00 3/23/2040 1,053
1,000 TCF National Bank 5.50 2/01/2016 954
3,500 Webster Capital Trust IV 7.65 6/15/2037 2,450
--------
20,482
--------
================================================================================
30 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------
REINSURANCE (0.5%)
$ 1,500 Max USA Holdings Ltd.(b) 7.20% 4/14/2017 $ 1,569
1,500 Platinum Underwriters Finance, Inc. 7.50 6/01/2017 1,644
--------
3,213
--------
REITs - INDUSTRIAL (0.4%)
1,000 ProLogis 6.88 3/15/2020 957
1,500 ProLogis 2.25 4/01/2037 1,416
--------
2,373
--------
REITs - OFFICE (0.2%)
1,000 Brandywine Operating Partnership, LP 5.70 5/01/2017 988
--------
REITs - RETAIL (1.1%)
2,000 Developers Diversified Realty Corp. 5.38 10/15/2012 1,984
2,000 New Plan Excel Realty Trust, Inc. 5.13 9/15/2012 1,800
1,000 New Plan Excel Realty Trust, Inc.,
acquired 2/20/2009; cost $340(d) 7.68 11/02/2026 789
2,000 Pan Pacific Retail Properties, Inc. 7.95 4/15/2011 2,048
--------
6,621
--------
REITs - SPECIALIZED (0.4%)
1,000 Hospitality Properties Trust 5.13 2/15/2015 979
1,500 Ventas Realty, LP 6.75 4/01/2017 1,506
--------
2,485
--------
Total Financials 95,759
--------
INDUSTRIALS (0.2%)
------------------
AIRLINES (0.2%)
98 Airport Airplanes 0.63(h) 3/15/2019 96
1,149 America West Airlines, Inc. Pass-Through
Trust (INS) 7.93 1/02/2019 1,138
--------
Total Industrials 1,234
--------
UTILITIES (2.8%)
----------------
ELECTRIC UTILITIES (1.5%)
923 Cedar Brakes II, LLC(b) 9.88 9/01/2013 947
1,000 FPL Group Capital, Inc. 6.35 10/01/2066 911
1,000 FPL Group Capital, Inc. 6.65 6/15/2067 916
1,000 FPL Group Capital, Inc. 7.30(h) 9/01/2067 987
617 Oglethorpe Power Corp. 6.97 6/30/2011 618
3,372 PPL Capital Funding, Inc. 6.70 3/30/2067 2,955
997 Texas Competitive Electric Holdings Co., LLC(i) 3.79 10/10/2014 771
995 Texas Competitive Electric Holdings Co., LLC(i) 3.80 10/10/2014 765
--------
8,870
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 31
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------
MULTI-UTILITIES (1.3%)
$ 2,500 Dominion Resources, Inc. 7.50% 6/30/2066 $ 2,428
3,042 Integrys Energy Group, Inc. 6.11 12/01/2066 2,741
1,325 Puget Sound Energy, Inc. 6.97 6/01/2067 1,215
1,500 Wisconsin Energy Corp. 6.25 5/15/2067 1,367
--------
7,751
--------
Total Utilities 16,621
--------
Total Corporate Obligations (cost: $109,441) 122,503
--------
EURODOLLAR AND YANKEE OBLIGATIONS (3.7%)
ENERGY (0.7%)
-------------
INTEGRATED OIL & GAS (0.0%)
133 PEMEX Finance Ltd. 8.88 11/15/2010 136
--------
OIL & GAS DRILLING (0.1%)
672 Delek & Avner-Yam Tethys Ltd.(b) 5.33 8/01/2013 684
--------
OIL & GAS STORAGE & TRANSPORTATION (0.6%)
3,500 TransCanada Pipelines Ltd. 6.35 5/15/2067 3,179
--------
Total Energy 3,999
--------
FINANCIALS (2.9%)
-----------------
DIVERSIFIED BANKS (0.7%)
2,500 Barclays Bank plc(b) 8.55 -(g) 2,375
2,000 BayernLB Capital Trust I 6.20 -(g) 925
1,000 Landsbanki Islands hf, acquired 10/12/2007;
cost $1,000(b),(d),(j) 7.43 -(g) 4
2,000 Royal Bank of Scotland Group plc 7.64 -(g) 1,140
--------
4,444
--------
DIVERSIFIED CAPITAL MARKETS (0.5%)
3,000 UBS Preferred Funding Trust I 8.62(h) -(g) 2,926
--------
DIVERSIFIED REAL ESTATE ACTIVITIES (0.3%)
1,500 Brookfield Asset Management, Inc. 7.13 6/15/2012 1,611
--------
MULTI-LINE INSURANCE (0.6%)
1,500 AXA SA 3.79(h) -(g) 1,013
2,625 ING Capital Funding Trust III 8.44 -(g) 2,336
--------
3,349
--------
OTHER DIVERSIFIED FINANCIAL SERVICES (0.2%)
1,000 ZFS Finance USA Trust II(b) 6.45 12/15/2065 920
--------
================================================================================
32 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------
PROPERTY & CASUALTY INSURANCE (0.6%)
$ 1,000 Allied World Assurance Holdings Ltd. 7.50% 8/01/2016 $ 1,089
3,000 QBE Insurance Group Ltd.(b) 5.65 7/01/2023 2,750
--------
3,839
--------
REGIONAL BANKS (0.0%)
2,000 Glitnir Banki hf, acquired 9/11/2006
and 10/18/2006; cost $2,034(b),(d),(j) 7.45 -(g) 8
--------
Total Financials 17,097
--------
MATERIALS (0.1%)
----------------
DIVERSIFIED METALS & MINING (0.1%)
1,000 Glencore Finance S.A. 8.00 -(g) 965
--------
Total Eurodollar and Yankee Obligations
(cost: $24,905) 22,061
--------
ASSET-BACKED SECURITIES (2.1%)
FINANCIALS (2.1%)
-----------------
ASSET-BACKED FINANCING (2.1%)
150 Aerco Ltd.(b) 0.86(h) 7/15/2025 141
1,500 AESOP Funding II, LLC(b) 9.31 10/20/2013 1,667
18 AmeriCredit Automobile Receivables Trust 2.03(h) 1/12/2012 18
1,000 AmeriCredit Automobile Receivables Trust 6.96 10/14/2014 1,065
1,500 Credit Acceptance Auto Loan Trust(b) 5.68 5/15/2017 1,548
1,000 GE Equipment Midticket, LLC 0.66(h) 9/15/2017 967
1,000 Hertz Vehicle Financing, LLC(b) 5.08 11/25/2011 1,010
1,000 MBNA Master Credit Card Note Trust 6.80 7/15/2014 1,067
850 Prestige Auto Receivables Trust "A"(b) 5.67 4/15/2017 850
1,500 Rental Car Finance Corp.(b) 0.48(h) 7/25/2013 1,393
908 SLM Student Loan Trust 0.87(h) 10/25/2038 791
1,500 Triad Automobile Receivables Owners Trust 5.43 7/14/2014 1,570
242 USXL Funding, LLC (INS)(b) 5.38 4/15/2014 242
--------
Total Financials 12,329
--------
Total Asset-Backed Securities (cost: $11,718) 12,329
--------
COMMERCIAL MORTGAGE SECURITIES (10.6%)
FINANCIALS (10.6%)
------------------
COMMERCIAL MORTGAGE-BACKED SECURITIES (10.6%)
268 Banc of America Commercial Mortgage, Inc. 7.20 9/15/2032 268
1,000 Banc of America Commercial Mortgage, Inc. 5.32 11/10/2042 608
1,205 Banc of America Commercial Mortgage, Inc. 4.95 7/10/2043 987
================================================================================
PORTFOLIO OF INVESTMENTS | 33
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------
$ 3,000 Banc of America Commercial Mortgage, Inc. 6.01% 7/10/2044 $ 2,569
2,000 Banc of America Commercial Mortgage, Inc. 5.96 5/10/2045 1,797
2,700 Banc of America Commercial Mortgage, Inc. 5.46 9/10/2045 2,365
2,643 Banc of America Commercial Mortgage, Inc. 5.18 10/10/2045 2,467
1,000 Banc of America Commercial Mortgage, Inc. 5.68 7/10/2046 875
2,429 Banc of America Commercial Mortgage, Inc. 5.35 9/10/2047 2,298
2,867 Banc of America Commercial Mortgage, Inc.(b) 6.14 9/10/2047 2,509
2,000 BCRR Trust(b) 5.86 7/17/2040 1,711
218 Bear Stearns Commercial
Mortgage Securities, Inc. 4.00 3/13/2040 221
1,000 Bear Stearns Commercial
Mortgage Securities, Inc. 5.69 6/11/2050 1,020
1,000 Citigroup Commercial Mortgage Trust 5.40 7/15/2044 964
2,000 Citigroup Commercial Mortgage Trust 6.30 12/10/2049 1,707
1,000 Commercial Mortgage Loan Trust 5.54 2/11/2017 811
3,000 Commercial Mortgage Loan Trust 6.22 12/10/2049 2,359
1,000 Credit Suisse Commercial Mortgage Trust 6.02 6/15/2038 1,026
3,000 Credit Suisse Commercial Mortgage Trust 6.42 2/15/2041 3,043
1,000 Credit Suisse First Boston Mortgage
Securities Corp.(b) 5.02 1/15/2037 811
1,000 Credit Suisse First Boston
Mortgage Securities Corp. 5.10 8/15/2038 886
75 Credit Suisse First Boston
Mortgage Securities Corp. 7.17 5/17/2040 76
1,598 G-Force, LLC(b) 5.16 12/25/2039 1,582
1,000 GE Capital Commercial Mortgage Corp. 6.07 6/10/2038 1,033
1,000 GE Capital Commercial Mortgage Corp. 5.51 11/10/2045 524
1,000 GE Capital Commercial Mortgage Corp. 5.61 12/10/2049 666
1,000 GMAC Commercial Mortgage Securities, Inc. 4.75 5/10/2043 950
1,000 GMAC Commercial Mortgage Securities, Inc. 4.81 5/10/2043 912
166 Government Lease Trust(b) 6.48 5/18/2011 169
1,000 GS Mortgage Securities Corp. II 4.78 7/10/2039 894
1,000 J.P. Morgan Chase Commercial Mortgage
Securities Corp. 4.82 9/12/2037 1,009
1,000 J.P. Morgan Chase Commercial Mortgage
Securities Corp. 4.99 9/12/2037 912
1,500 J.P. Morgan Chase Commercial Mortgage
Securities Corp. 5.81 6/12/2043 1,536
1,000 J.P. Morgan Chase Commercial Mortgage
Securities Corp. 5.50 12/15/2044 618
1,000 J.P. Morgan Chase Commercial Mortgage
Securities Corp. 5.50 12/15/2044 678
1,500 Merrill Lynch Mortgage Trust 5.41 11/12/2037 1,493
2,000 Merrill Lynch Mortgage Trust 5.38 8/12/2048 1,858
1,000 Merrill Lynch Mortgage Trust 6.02 6/12/2050 999
2,000 Merrill Lynch Mortgage Trust 5.69 2/12/2051 2,015
1,000 ML-CFC Commercial Mortgage Trust 5.42 8/12/2048 733
================================================================================
34 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
----------------------------------------------------------------------------------------------
$ 1,500 ML-CFC Commercial Mortgage Trust 6.15% 8/12/2049 $ 1,267
1,500 ML-CFC Commercial Mortgage Trust 5.70 9/12/2049 1,453
878 Morgan Stanley Capital I, Inc. 5.15 8/13/2042 598
723 Morgan Stanley Capital I, Inc. 5.17 8/13/2042 472
2,000 Morgan Stanley Capital I, Inc. 5.81 12/12/2049 1,988
2,000 Morgan Stanley Capital I, Inc. 4.77 7/15/2056 1,663
1,500 Mortgage Capital Funding, Inc. 7.15 6/18/2030 1,497
2,000 Prudential Mortgage Capital Funding, LLC 6.76 5/10/2034 2,056
2,000 Wachovia Bank Commercial Mortgage Trust 5.42 1/15/2045 2,016
--------
Total Financials 62,969
--------
Total Commercial Mortgage Securities
(cost: $52,468) 62,969
--------
U.S. GOVERNMENT AGENCY ISSUES (0.0%)(k)
INTEREST-ONLY COMMERCIAL MORTGAGE-BACKED SECURITIES (0.0%)
1,976 Government National Mortgage Assn. (cost: $5) 1.75 7/16/2010 24
--------
U.S. TREASURY SECURITIES (4.5%)
INFLATION-INDEXED NOTES (4.5%)
19,129 2.13%, 2/15/2040 20,499
5,574 2.50%, 1/15/2029 6,206
--------
Total Inflation-Indexed Notes 26,705
--------
Total U.S. Treasury Securities (cost: $26,407) 26,705
--------
MUNICIPAL BONDS (0.5%)
CASINOS & GAMING (0.4%)
2,000 Mashantucket (Western) Pequot Tribe,
acquired 7/29/2005; cost $2,000(b),(d),(j) 5.91 9/01/2021 1,003
1,020 Seneca Nation of Indians Capital Improvements
Auth. 6.75 12/01/2013 976
--------
1,979
--------
SPECIAL ASSESSMENT/TAX/FEE (0.1%)
855 Erie County Tobacco Asset Securitization Corp. 6.00 6/01/2028 748
--------
Total Municipal Bonds (cost: $3,847) 2,727
--------
Total Bonds (cost: $228,791) 249,318
--------
MONEY MARKET INSTRUMENTS (0.6%)
U.S. TREASURY BILLS (0.1%)
401 0.01%, 9/16/2010(m),(e) 401
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 35
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
MONEY MARKET FUNDS (0.5%)
3,050,490 State Street Institutional Liquid Reserve Fund, 0.18%(l),(m) $ 3,050
--------
Total Money Market Instruments (cost: $3,451) 3,451
--------
SHORT-TERM INVESTMENTS PURCHASED WITH
CASH COLLATERAL FROM SECURITIES LOANED (5.8%)
MONEY MARKET FUNDS (1.5%)
2,423 BlackRock Liquidity Funds TempFund Portfolio, 0.16%(l) 3
8,676,142 Fidelity Institutional Money Market Portfolio, 0.23%(l) 8,676
--------
Total Money Market Funds 8,679
--------
----------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
(000)
----------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (4.3%)
$13,000 Credit Suisse First Boston LLC, 0.20%, acquired on 5/28/2010 and due
6/01/2010 at $13,000 (collateralized by $13,265 of Freddie Mac(k),(+),
0.16%(n), due 7/06/2010; market value $13,264) 13,000
12,700 Deutsche Bank Securities, Inc., 0.20%, acquired on 5/28/2010 and due
6/01/2010 at $12,700 (collateralized by $12,775 of Federal Home
Loan Bank(k)(+), 1.75% - 1.85%, due 12/14/2012 - 4/01/2013;
market value $12,956) 12,700
--------
Total Repurchase Agreements 25,700
--------
Total Short-Term Investments Purchased With Cash
Collateral From Securities Loaned (cost: $34,379) 34,379
--------
TOTAL INVESTMENTS (COST: $616,651) $623,374
========
----------------------------------------------------------------------------------------------
NUMBER OF
CONTRACTS
----------------------------------------------------------------------------------------------
PURCHASED OPTIONS (0.1%)
147 Put - Russell 2000 Index expiring June 19, 2010 at 620 139
150 Put - Russell 2000 Index expiring June 19, 2010 at 630 174
150 Put - S&P 500 Index expiring June 19, 2010 at 1,080 376
--------
TOTAL PURCHASED OPTIONS (COST: $797) $ 689
========
================================================================================
36 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER OF VALUE
CONTRACTS SECURITY (000)
----------------------------------------------------------------------------------------------
WRITTEN OPTIONS (0.0%)
(147) Put - Russell 2000 Index expiring June 19, 2010 at 550 $ (38)
(150) Put - S&P 500 Index expiring June 19, 2010 at 970 (86)
-------
TOTAL WRITTEN OPTIONS (PREMIUMS RECEIVED: $311) $ (124)
=======
----------------------------------------------------------------------------------------------
NUMBER OF CONTRACT UNREALIZED
CONTRACTS EXPIRATION VALUE (DEPRECIATION)
LONG/(SHORT) DATE (000) (000)
----------------------------------------------------------------------------------------------
FUTURES (0.2%)
19 Russell 2000 Mini Index Futures 6/18/2010 $1,256 $ (21)
-------
TOTAL FUTURES $ (21)
=======
================================================================================
PORTFOLIO OF INVESTMENTS | 37
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
----------------------------------------------------------------------------------------------
(LEVEL 1) (LEVEL 2) (LEVEL 3)
QUOTED PRICES OTHER SIGNIFICANT SIGNIFICANT
IN ACTIVE MARKETS OBSERVABLE UNOBSERVABLE
ASSETS FOR IDENTICAL ASSETS INPUTS INPUTS TOTAL
----------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $236,017 $ - $ - $236,017
Preferred Securities 1,518 6,210 2,400 10,128
Exchange-Traded Funds 90,081 - - 90,081
Warrants - - - -
Bonds:
Corporate Obligations - 122,503 - 122,503
Eurodollar and Yankee Obligations - 22,061 - 22,061
Asset-Backed Securities - 12,329 - 12,329
Commercial Mortgage Securities - 62,969 - 62,969
U.S. Government Agency Issues - 24 - 24
U.S. Treasury Securities 26,705 - - 26,705
Municipal Bonds - 2,727 - 2,727
Money Market Instruments:
U.S. Treasury Bills - 401 - 401
Money Market Funds 3,050 - - 3,050
Short-Term Investments
Purchased With Cash
Collateral From Securities
Loaned:
Repurchase Agreements - 25,700 - 25,700
Money Market Funds 8,679 - - 8,679
Purchased Options 689 - - 689
Futures* (21) - - (21)
----------------------------------------------------------------------------------------------
Total $366,718 $254,924 $2,400 $624,042
----------------------------------------------------------------------------------------------
* Futures are valued at the unrealized appreciation/depreciation on the
investment.
================================================================================
38 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
----------------------------------------------------------------------------------------------
(LEVEL 1) (LEVEL 2) (LEVEL 3)
QUOTED PRICES OTHER SIGNIFICANT SIGNIFICANT
IN ACTIVE MARKETS OBSERVABLE UNOBSERVABLE
LIABILITIES FOR IDENTICAL LIABILITIES INPUTS INPUTS TOTAL
----------------------------------------------------------------------------------------------
Written Options $(124) $- $- $(124)
----------------------------------------------------------------------------------------------
Total $(124) $- $- $(124)
----------------------------------------------------------------------------------------------
Reconciliation of investments in which significant unobservable inputs (Level 3)
were used in determining value:
----------------------------------------------------------------------------------------------
PREFERRED
SECURITIES
----------------------------------------------------------------------------------------------
Balance as of May 31, 2009 $ -
Net realized gain (loss) -
Change in net unrealized appreciation/depreciation* (150)
Net purchases (sales) 2,550
Transfers in and/or out of Level 3 -
----------------------------------------------------------------------------------------------
Balance as of May 31, 2010 $2,400
----------------------------------------------------------------------------------------------
* Reported in the statement of operations in the change in net unrealized
appreciation/depreciation of investments.
================================================================================
PORTFOLIO OF INVESTMENTS | 39
<PAGE>
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 2010
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1 to the financial statements.
The portfolio of investments category percentages shown represent the
percentages of the investments to net assets, and, in total, may not equal
100%. A category percentage of 0.0% represents less than 0.1% of net assets.
Investments in foreign securities were 14.1% of net assets at May 31, 2010.
The Fund may rely on certain Securities and Exchange Commission (SEC)
exemptive orders or rules that permit funds meeting various conditions to
invest in an exchange-traded fund (ETF) in amounts exceeding limits set forth
in the Investment Company Act of 1940 that would otherwise be applicable.
o CATEGORIES AND DEFINITIONS
ASSET-BACKED AND COMMERCIAL MORTGAGE-BACKED SECURITIES -- Asset-backed
securities represent a participation in, or are secured by and payable from,
a stream of payments generated by particular assets. Commercial mortgage-
backed securities reflect an interest in, and are secured by, mortgage loans
on commercial real property. The weighted average life is likely to be
substantially shorter than the stated final maturity as a result of scheduled
and unscheduled principal repayments. Rates on commercial mortgage-backed
securities may change slightly over time as underlying mortgages pay down.
================================================================================
40 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
EURODOLLAR AND YANKEE OBLIGATIONS -- Eurodollar obligations are dollar-
denominated instruments that are issued outside the U.S. capital markets by
foreign corporations and financial institutions and by foreign branches of
U.S. corporations and financial institutions. Yankee obligations are dollar-
denominated instruments that are issued by foreign issuers in the U.S.
capital markets.
INTEREST-ONLY COMMERCIAL MORTGAGE-BACKED SECURITIES (CMBS IOs) -- represent
the right to receive only the interest payments on an underlying pool of
commercial mortgage loans. The purchase yield reflects an anticipated yield
based upon interest rates at the time of purchase and the estimated timing
and amount of future cash flows. Coupon rates after purchase vary from
period to period. The principal amount represents the notional amount of the
underlying pool on which current interest is calculated. CMBS IOs are backed
by loans that have various forms of prepayment protection, which include
lock-out provisions, yield maintenance provisions, and prepayment penalties.
This serves to moderate their prepayment risk. CMBS IOs are subject to
default-related prepayments that may have a negative impact on yield.
U.S. TREASURY INFLATION-INDEXED NOTES -- designed to provide a real rate of
return after being adjusted over time to reflect the impact of inflation.
Their principal value periodically adjusts to the rate of inflation. They
trade at the prevailing real, or after-inflation, interest rates. The U.S.
Treasury guarantees repayment of these securities of at least their face
value in the event of sustained deflation or a drop in prices. Inflation
adjustments to the face value of these securities are included in interest
income.
WARRANTS -- entitle the holder to buy a proportionate amount of common stock
at a specified price for a stated period.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
iShares Exchange-traded funds, managed by Black Rock, Inc., that represent
a portfolio of stocks designed to closely track a
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 41
<PAGE>
================================================================================
specific market index. iShares funds are traded on securities
exchanges.
REIT Real estate investment trust
SPDR Exchange-traded funds, managed by State Street Global Advisers,
that represent a portfolio of stocks designed to closely track a
specific market index. SPDR is an acronym for the first member of
the fund family, Standard & Poor's Depositary Receipts, which
tracks the S&P 500 Index. SPDRs are traded on securities exchanges.
CREDIT ENHANCEMENTS -- add the financial strength of the provider of the
enhancement to support the issuer's ability to repay the principal and
interest payments when due. The enhancement may be provided by a high-quality
bank, insurance company or other corporation, or a collateral trust. The
enhancements do not guarantee the market values of the securities.
(INS) Principal and interest payments are insured by one of the
following: AMBAC Assurance Corp., and Financial Guaranty Insurance
Co. Although bond insurance reduces the risk of loss due to default
by an issuer, such bonds remain subject to the risk that value may
fluctuate for other reasons, and there is no assurance that the
insurance company will meet its obligations.
o SPECIFIC NOTES
(a) The security or a portion thereof was out on loan as of May 31, 2010.
(b) Restricted security that is not registered under the Securities Act of
1933. A resale of this security in the United States may occur in an
exempt transaction to a qualified institutional buyer as defined by Rule
144A, and as such has been deemed liquid by USAA Investment Management
Company (the Manager) under liquidity guidelines approved by the Board
of Trustees, unless otherwise noted as illiquid.
================================================================================
42 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
(c) Security was fair valued at May 31, 2010, by the Manager in accordance
with valuation procedures approved by the Board of Trustees.
(d) Security deemed illiquid by the Manager, under liquidity guidelines
approved by the Board of Trustees. The aggregate market value of these
securities at May 31, 2010, was $2,179,000, which represented 0.4% of the
Fund's net assets.
(e) Security with a value of $401,000 is segregated as collateral for initial
margin requirements on open futures contracts.
(f) Pay-in-kind (PIK) -- security in which the issuer has the option to make
interest or dividend payments in cash or in additional securities. The
security issued with the interest or dividend payment option usually has
the same terms, including maturity date, as the PIK securities.
(g) Security is perpetual and has no final maturity date but may be subject
to calls at various dates in the future.
(h) Variable-rate or floating-rate security -- interest rate is adjusted
periodically. The interest rate disclosed represents the current rate at
May 31, 2010.
(i) Senior loan (loan) -- is not registered under the Securities Act of 1933.
The loan contains certain restrictions on resale and cannot be sold
publicly. The interest rate is adjusted periodically, and the rate
disclosed represents the current rate at May 31, 2010. The weighted
average life of the loan is likely to be substantially shorter than the
stated final maturity date due to mandatory or optional prepayments.
Security deemed liquid by the Manager, under liquidity guidelines
approved by the Board of Trustees, unless otherwise noted as illiquid.
(j) Currently the issuer is in default with respect to interest and/or
principal payments.
(k) U.S. government agency issues -- mortgage-backed securities issued by
Government National Mortgage Association (GNMA)
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 43
<PAGE>
================================================================================
and certain other U.S. government guaranteed securities are supported by
the full faith and credit of the U.S. government. Securities issued by
government-sponsored enterprises, indicated with "+", are supported only
by the right of the government-sponsored enterprise to borrow from the
U.S. Treasury, the discretionary authority of the U.S. government to
purchase the government-sponsored enterprises' obligations, or by the
credit of the issuing agency, instrumentality, or corporation, and are
neither issued nor guaranteed by the U.S. Treasury.
(l) Rate represents the money market fund annualized seven-day yield at May
31, 2010.
(m) Security, or a portion thereof, is segregated to cover the value of open
futures contracts at May 31, 2010.
(n) Zero-coupon security. Rate represents the effective yield at the date of
purchase.
* Non-income-producing security.
See accompanying notes to financial statements.
================================================================================
44 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 2010
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value
(including securities on loan of $33,306) (cost of $616,651) $623,374
Purchased options, at market value (cost of $797) 689
Cash 20
Receivables:
Capital shares sold 594
USAA Investment Management Company (Note 6D) 822
Dividends and interest 4,131
Other 25
--------
Total assets 629,655
--------
LIABILITIES
Payables:
Upon return of securities loaned 34,379
Securities purchased 2,163
Capital shares redeemed 348
Written options, at market value (premiums received of $311) 124
Variation margin on futures contracts 23
Accrued management fees 385
Accrued transfer agent's fees 15
Other accrued expenses and payables 130
--------
Total liabilities 37,567
--------
Net assets applicable to capital shares outstanding $592,088
========
NET ASSETS CONSIST OF:
Paid-in capital $672,987
Accumulated undistributed net investment income 3,613
Accumulated net realized loss on investments, options, and
futures transactions (91,294)
Net unrealized appreciation of investments, options, and futures contracts 6,782
--------
Net assets applicable to capital shares outstanding $592,088
========
Capital shares outstanding, unlimited number of shares
authorized, no par value 48,306
========
Net asset value, redemption price, and offering price per share $ 12.26
========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 45
<PAGE>
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 2010
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 6,414
Interest 20,640
Securities lending (net) 199
--------
Total income 27,253
--------
EXPENSES
Management fees 4,050
Administration and servicing fees 825
Transfer agent's fees 2,179
Custody and accounting fees 197
Postage 129
Shareholder reporting fees 63
Trustees' fees 10
Registration fees 45
Professional fees 88
Other 16
--------
Total expenses 7,602
Expenses reimbursed (2,101)
--------
Net expenses 5,501
--------
NET INVESTMENT INCOME 21,752
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
OPTIONS, AND FUTURES CONTRACTS
Net realized gain (loss) on:
Unaffiliated transactions 20,704
Affiliated transactions (Note 8) (168)
Options (5,406)
Futures transactions 13,310
Change in net unrealized appreciation/depreciation of:
Investments 77,878
Options (236)
Futures contracts (7,088)
--------
Net realized and unrealized gain 98,994
--------
Increase in net assets resulting from operations $120,746
========
See accompanying notes to financial statements.
================================================================================
46 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
--------------------------------------------------------------------------------
2010 2009
--------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 21,752 $ 18,908
Net realized gain (loss) on investments 20,536 (82,452)
Net realized gain (loss) on options (5,406) 1,402
Net realized gain (loss) on futures transactions 13,310 (20,082)
Change in net unrealized appreciation/depreciation of:
Investments 77,878 (77,587)
Options (236) 196
Futures contracts (7,088) 4,780
------------------------
Increase (decrease) in net assets
resulting from operations 120,746 (154,835)
------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (21,571) (17,911)
Net realized gains - (78)
------------------------
Distributions to shareholders (21,571) (17,989)
------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 120,358 89,126
Reinvested dividends 21,344 17,794
Cost of shares redeemed (98,773) (106,338)
------------------------
Increase in net assets from capital share transactions 42,929 582
------------------------
Capital contribution from USAA Transfer Agency Company - 40
------------------------
Net increase (decrease) in net assets 142,104 (172,202)
NET ASSETS
Beginning of year 449,984 622,186
------------------------
End of year $592,088 $ 449,984
========================
Accumulated undistributed net investment income:
End of year $ 3,613 $ 3,420
========================
CHANGE IN SHARES OUTSTANDING
Shares sold 10,071 8,741
Shares issued for dividends reinvested 1,845 1,730
Shares redeemed (8,264) (10,214)
------------------------
Increase in shares outstanding 3,652 257
========================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 47
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
May 31, 2010
--------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA MUTUAL FUNDS TRUST (the Trust), registered under the Investment Company Act
of 1940 (the 1940 Act), as amended, is an open-end management investment company
organized as a Delaware statutory trust consisting of 46 separate funds. The
information presented in this annual report pertains only to the USAA Balanced
Strategy Fund (the Fund), which is classified as diversified under the 1940 Act.
The Fund's investment objective is to seek high total return, with reduced risk
over time, through an asset allocation strategy that seeks a combination of
long-term growth of capital and current income.
A. SECURITY VALUATION -- The value of each security is determined (as of the
close of trading on the New York Stock Exchange (NYSE) on each business day
the NYSE is open) as set forth below:
1. Equity securities, including exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange or
the Nasdaq over-the-counter markets, are valued at the last sales price
or official closing price on the exchange or primary market on which they
trade. Equity securities traded primarily on foreign securities exchanges
or markets are valued at the last quoted sales price, or the most
recently determined official closing price calculated according to local
market convention, available at the time the Fund is valued. If no last
sale or official closing price is reported or available, the average of
the bid and asked prices is generally used.
2. Equity securities trading in various foreign markets may take place on
days when the NYSE is closed. Further, when the NYSE is open, the foreign
markets may be closed. Therefore, the calculation of
================================================================================
48 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
the Fund's net asset value (NAV) may not take place at the same time the
prices of certain foreign securities held by the Fund are determined. In
most cases, events affecting the values of foreign securities that occur
between the time of their last quoted sales or official closing prices
and the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not be reflected in the value of the Fund's foreign
securities. However, USAA Investment Management Company (the Manager), an
affiliate of the Fund, and the Fund's subadvisers, if applicable, will
monitor for events that would materially affect the value of the Fund's
foreign securities. The Fund's subadvisers have agreed to notify the
Manager of significant events they identify that would materially affect
the value of the Fund's foreign securities. If the Manager determines
that a particular event would materially affect the value of the Fund's
foreign securities, then the Manager, under valuation procedures approved
by the Trust's Board of Trustees, will consider such available
information that it deems relevant to determine a fair value for the
affected foreign securities. In addition, the Fund may use information
from an external vendor or other sources to adjust the foreign market
closing prices of foreign equity securities to reflect what the Fund
believes to be the fair value of the securities as of the close of the
NYSE. Fair valuation of affected foreign equity securities may occur
frequently based on an assessment that events that occur on a fairly
regular basis (such as U.S. market movements) are significant.
3. Investments in open-end investment companies, hedge, or other funds,
other than ETFs, are valued at their NAV at the end of each business day.
4. Futures are valued based upon the last sale price at the close of market
on the principal exchange on which they are traded.
5. Options are valued by a pricing service at the National Best Bid/Offer
(NBBO) composite price, which is derived from the best available bid and
ask prices in all participating options exchanges
================================================================================
NOTES TO FINANCIAL STATEMENTS | 49
<PAGE>
================================================================================
determined to most closely reflect market value of the options at the
time of computation of the Fund's NAV.
6. Debt securities purchased with original or remaining maturities of 60
days or less may be valued at amortized cost, which approximates market
value.
7. Debt securities with maturities greater than 60 days are valued each
business day by a pricing service (the Service) approved by the Trust's
Board of Trustees. The Service uses an evaluated mean between quoted bid
and asked prices or the last sales price to price securities when, in the
Service's judgment, 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 that 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.
8. Repurchase agreements are valued at cost, which approximates market
value.
9. Securities for which market quotations are not readily available or are
considered unreliable, or whose values have been materially affected by
events occurring after the close of their primary markets but before the
pricing of the Fund, are valued in good faith at fair value, using
methods determined by the Manager in consultation with the Fund's
subadvisers, if applicable, under valuation procedures approved by the
Trust's Board of Trustees. The effect of fair value pricing is that
securities may not be priced on the basis of quotations from the primary
market in which they are traded and the actual price realized from the
sale of a security may differ materially from the fair value price.
Valuing these securities at fair value is intended to cause the Fund's
NAV to be more reliable than it otherwise would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing
================================================================================
50 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
services, broker-dealers, or widely used quotation systems. General
factors considered in determining the fair value of securities include
fundamental analytical data, the nature and duration of any restrictions
on disposition of the securities, and an evaluation of the forces that
influenced the market in which the securities are purchased and sold.
B. FAIR VALUE MEASUREMENTS -- Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The three-
level valuation hierarchy disclosed in the portfolio of investments is based
upon the transparency of inputs to the valuation of an asset or liability as
of the measurement date. The three levels are defined as follows:
Level 1 -- inputs to the valuation methodology are quoted prices (unadjusted)
in active markets for identical securities.
Level 2 -- inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
that are observable for the securities, either directly or indirectly, and
market-corroborated inputs such as market indices.
Level 3 -- inputs to the valuation methodology are unobservable and
significant to the fair value measurement, including the Manager's own
assumptions in determining the fair value.
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risks associated with investing in those securities.
For the securities that were valued as of May 31, 2010, using significant
unobservable inputs, market quotations were not available from the pricing
services. As such, the securities were valued in good faith using methods
determined by the Manager, under valuation procedures approved by the Trust's
Board of Trustees. The Fund held a preferred security that was not priced by
any of the pricing services. The fair value methods included using inputs
such as the last available quotations from the sole market maker for the
security. Refer to the portfolio of
================================================================================
NOTES TO FINANCIAL STATEMENTS | 51
<PAGE>
================================================================================
investments for a reconciliation of investments in which significant
unobservable inputs (Level 3) were used in determining value.
C. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- On December 1, 2008, the
Fund adopted an accounting standard that requires qualitative disclosures
about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative agreements, if any.
The Fund may buy, sell, and enter into certain types of derivatives,
including, but not limited to futures contracts, options, and options on
futures contracts under circumstances in which such instruments are expected
by the portfolio manager to aid in achieving the Fund's investment objective.
The Fund also may use derivatives in circumstances where the portfolio
manager believes they offer an economical means of gaining exposure to a
particular asset class or securities market or to keep cash on hand to meet
shareholder redemptions or other needs while maintaining exposure to the
market. With exchange listed futures contracts and options, counterparty
credit risk to the Fund is limited to the exchange's clearinghouse which, as
counterparty to all exchange traded futures contracts and options, guarantees
the transactions against default from the actual counterparty to the trade.
FUTURES CONTRACTS -- The Fund is subject to equity price risk, interest rate
risk, and foreign currency exchange rate risk in the normal course of
pursuing its investment objectives. The Fund may use futures contracts to
gain exposure to, or hedge against, changes in the value of equities,
interest rates, or foreign currencies. A futures contract represents a
commitment for the future purchase or sale of an asset at a specified price
on a specified date. Upon entering into such contracts, the Fund is required
to deposit with the broker in either cash or securities an initial margin in
an amount equal to a certain percentage of the contract amount. Subsequent
payments (variation margin) are made or received by the Fund each day,
depending on the daily fluctuations in the value of the contract, and are
recorded
================================================================================
52 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
for financial statement purposes as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed. Upon entering into such contracts, the
Fund bears the risk of interest or exchange rates or securities prices moving
unexpectedly in an unfavorable direction, in which case, the Fund may not
achieve the anticipated benefits of the futures contracts.
OPTION TRANSACTIONS -- The Fund is subject to equity price risk in the normal
course of pursuing its investment objectives. The Fund may use options on
underlying instruments, namely, equity securities, ETFs, and equity indexes,
to gain exposure to, or hedge against, changes in the value of equity
securities, ETFs, or equity indexes. A call option gives the purchaser the
right to buy, and the writer the obligation to sell, the underlying
instrument at a specified price during a specified period. Conversely, a put
option gives the purchaser the right to sell, and the writer the obligation
to buy, the underlying instrument at a specified price during a specified
period. The purchaser of the option pays a premium to the writer of the
option.
Premiums paid for purchased options are included in the Fund's statement of
assets and liabilities as an investment. If a purchased option expires
unexercised, the premium paid is recognized as a realized loss. If a
purchased call option on a security is exercised, the cost of the security
acquired includes the exercise price and the premium paid. If a purchased put
option on a security is exercised, the realized gain or loss on the security
sold is determined from the exercise price, the original cost of the
security, and the premium paid. The risk associated with purchasing a call
or put option is limited to the premium paid.
Premiums received from writing options are included in the Fund's statement
of assets and liabilities as a liability. If a written option expires
unexercised, the premium received is recognized as a realized gain. If a
written call option on a security is exercised, the realized gain or loss on
the security sold is determined from the exercise price, the original cost of
the security, and the premium received. If a written
================================================================================
NOTES TO FINANCIAL STATEMENTS | 53
<PAGE>
================================================================================
put option on a security is exercised, the cost of the security acquired is
the exercise price paid less the premium received. The Fund, as a writer of
an option, bears the market risk of an unfavorable change in the price of the
security underlying the written option.
In an attempt to reduce the Fund's volatility over time, the Fund may
implement a strategy that involves writing (selling) index call or
corresponding ETF options and purchasing index put or corresponding ETF
options or index put spread options against a highly correlated stock
portfolio. The combination of the diversified stock portfolio with the index
call and put or corresponding ETF options is designed to provide the Fund
with consistent returns over a wide range of equity market environments. This
strategy may not fully protect the Fund against declines in the portfolio's
value, and the Fund could experience a loss. Options on securities indexes or
corresponding ETF options are different from options on individual securities
in that the holder of the index options contract has the right to receive an
amount of cash equal to the difference between the exercise price and the
closing price of the underlying index on exercise date. If an option on an
index is exercised, the realized gain or loss is determined from the exercise
price, the value of the underlying index, and the amount of the premium.
FAIR VALUES OF DERIVATIVE INSTRUMENTS
(IN THOUSANDS)
ASSETS 5/31/2010 5/31/2009
-------------------------------------------------------------------------------------------
STATEMENT OF STATEMENT OF
DERIVATIVES NOT ACCOUNTED ASSETS AND ASSETS AND
FOR AS HEDGING INSTRUMENTS LIABILITIES LIABILITIES
UNDER STATEMENT 133 LOCATION FAIR VALUE LOCATION FAIR VALUE
-------------------------------------------------------------------------------------------
Equity contracts Purchased options; $668* Purchased options; $8,323*
Net unrealized Net unrealized
appreciation of depreciation of
investments, investments,
options, and options, and
futures contracts futures contracts
-------------------------------------------------------------------------------------------
*Includes cumulative appreciation (depreciation) of futures contracts as
reported in the portfolio of investments. Only current day's variation
margin is reported within the statement of assets and liabilities.
================================================================================
54 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
LIABILITIES 5/31/2010 5/31/2009
-------------------------------------------------------------------------------------------
STATEMENT OF STATEMENT OF
DERIVATIVES NOT ACCOUNTED ASSETS AND ASSETS AND
FOR AS HEDGING INSTRUMENTS LIABILITIES LIABILITIES
UNDER STATEMENT 133 LOCATION FAIR VALUE LOCATION FAIR VALUE
-------------------------------------------------------------------------------------------
Equity contracts Written options $124 Written options $774
-------------------------------------------------------------------------------------------
THE EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF CHANGES IN NET
ASSETS DURING THE YEAR ENDED MAY 31, 2010, AND SIX-MONTH PERIOD ENDED MAY 31,
2009*
(IN THOUSANDS)
DERIVATIVES
NOT ACCOUNTED
FOR AS HEDGING CHANGE IN UNREALIZED
INSTRUMENTS APPRECIATION
UNDER STATEMENT OF CHANGES IN REALIZED GAIN (LOSS) (DEPRECIATION) ON
STATEMENT 133 NET ASSETS LOCATION ON DERIVATIVES DERIVATIVES
------------------------------------------------------------------------------------------
5/31/2010 5/31/2009* 5/31/2010 5/31/2009*
------------------------------------------------------------------------------------------
Interest rate Net realized gain (loss) on $ (27) $ - $ - $ -
contracts transactions from futures/
Change in unrealized
appreciation/depreciation
of futures
------------------------------------------------------------------------------------------
Equity contracts Net realized gain (loss) on 7,931 (19,041) 7,324 20,790
options and futures
transactions/Change in
net unrealized
appreciation/depreciation
of options and futures
contracts
------------------------------------------------------------------------------------------
Total $7,904 $(19,041) $7,324 $20,790
------------------------------------------------------------------------------------------
*The statement of changes reflects the year ended May 31, 2009, while the
schedule reflects the period December 1, 2008 -- May 31, 2009. This
accounting standard was effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008.
D. 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 tax provision is required.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 55
<PAGE>
================================================================================
E. INVESTMENTS IN SECURITIES -- Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gains or losses from
sales of investment securities are 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 daily
on the accrual basis. Discounts and premiums are amortized over the life of
the respective securities, using the effective yield method for long-term
securities and the straight-line method for short-term securities.
F. REPURCHASE AGREEMENTS -- The Fund may enter into repurchase agreements with
commercial banks or recognized security dealers. These agreements are
collateralized by underlying securities. The collateral obligations are
marked-to-market daily to ensure their value is equal to or in excess of the
repurchase agreement price plus accrued interest and are held by the Fund,
either through its regular custodian or through a special "tri-party"
custodian that maintains separate accounts for both the Fund and its
counterparty, until maturity of the repurchase agreement. Repurchase
agreements are subject to credit risk, and the Fund's Manager monitors the
creditworthiness of sellers with which the Fund may enter into repurchase
agreements.
G. FOREIGN CURRENCY TRANSLATIONS -- The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the exchange
rate obtained from an independent pricing service on the respective dates
of such transactions.
2. Market value of securities, other assets, and liabilities at the exchange
rate obtained from an independent pricing service on a daily basis.
================================================================================
56 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations
are included with the net realized and unrealized gain or loss from
investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and 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. At the
end of the Fund's fiscal year, these net realized foreign currency
gains/losses are 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.
H. SECURITIES PURCHASED ON A DELAYED-DELIVERY OR WHEN-ISSUED BASIS -- Delivery
and payment for securities that have been purchased by the Fund on a
delayed-delivery or when-issued basis can take place a month or more after
the trade date. During the period prior to settlement, these securities do
not earn interest, are subject to market fluctuation, and may increase or
decrease in value prior to their delivery. The Fund maintains segregated
assets with a market value equal to or greater than the amount of its
purchase commitments. The purchase of securities on a delayed-delivery or
when-issued basis may increase the volatility of the Fund's NAV to the extent
that the Fund makes such purchases while remaining substantially fully
invested.
I. EXPENSES PAID INDIRECTLY -- A portion of the brokerage commissions that the
Fund pays may be recaptured as a credit that is tracked and used by the
custodian to directly reduce expenses paid by the Fund. In addition, through
arrangements with the Fund's custodian and other
================================================================================
NOTES TO FINANCIAL STATEMENTS | 57
<PAGE>
================================================================================
banks utilized by the Fund for cash management purposes, realized credits, if
any, generated from cash balances in the Fund's bank accounts may be used to
directly reduce the Fund's expenses. For the year ended May 31, 2010, the
Fund incurred custodian and other bank credits of less than $500. For the
year ended May 31, 2010, the Fund did not incur any brokerage commission
recapture credits.
J. INDEMNIFICATIONS -- Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities arising out of the
performance of their duties to the Trust. In addition, in the normal course
of business the Trust enters into contracts that contain a variety of
representations and warranties that provide general indemnifications. The
Trust's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Trust that have not yet
occurred. However, the Trust expects the risk of loss to be remote.
K. USE OF ESTIMATES -- The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINE OF CREDIT
The Fund participates in a joint, short-term, revolving, committed loan
agreement of $750 million with USAA Capital Corporation (CAPCO), an affiliate of
the Manager. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption requests that might otherwise require the untimely
disposition of securities. Subject to availability, the Fund may borrow from
CAPCO an amount up to 5% of the Fund's total assets at a rate per annum equal to
the rate at which CAPCO obtains funding in the capital markets, with no markup.
The USAA funds that are party to the loan agreement are assessed facility fees
by CAPCO based on the funds' assessed proportionate share of CAPCO's operating
expenses related to obtaining and maintaining CAPCO's
================================================================================
58 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
funding programs in total (in no event to exceed 0.13% annually of the amount of
the committed loan agreement). Prior to September 25, 2009, the maximum annual
facility fee was 0.07% of the amount of the committed loan agreement. The
facility fees are allocated among the funds based on their respective average
net assets for the period.
For the year ended May 31, 2010, the Fund paid CAPCO facility fees of $2,000,
which represents 1.3% of the total fees paid to CAPCO by the USAA funds. The
Fund had no borrowings under this agreement during the year ended May 31, 2010.
(3) DISTRIBUTIONS
The character of any distributions made during the year from net investment
income or net realized gains is determined in accordance with federal tax
regulations and may differ from those determined in accordance with U.S.
generally accepted accounting principles. Also, due to the timing of
distributions, the fiscal year in which amounts are distributed may differ from
the year that the income or realized gains were recorded by the Fund.
During the current fiscal year, permanent differences between book-basis and
tax-basis accounting for distributions resulted in reclassifications to the
statement of assets and liabilities to increase accumulated undistributed net
investment income and increase accumulated net realized loss on investments by
$12,000. These reclassifications had no effect on net assets.
The tax character of distributions paid during the years ended May 31, 2010, and
2009, was as follows:
2010 2009
--------------------------------
Ordinary income* $21,571,000 $17,989,000
* Includes distribution of short-term realized capital gains, if any, which are
taxable as ordinary income.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 59
<PAGE>
================================================================================
As of May 31, 2010, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income $3,621,000
Accumulated capital and other losses (89,386,000)
Unrealized appreciation 4,779,000
The difference between book-basis and tax-basis unrealized appreciation of
investments is attributable to the tax deferral of losses on wash sales and the
mark-to-market of open futures contracts.
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are made
annually in the succeeding fiscal year or as otherwise required to avoid the
payment of federal taxes. At May 31, 2010, the Fund had capital loss carryovers
of $89,386,000, for federal income tax purposes, which are not offset by
subsequent capital gains, will expire between 2017 and 2018, as shown below. It
is unlikely that the Trust's Board of Trustees will authorize a distribution of
capital gains realized in the future until the capital loss carryovers have been
used or expire.
CAPITAL LOSS CARRYOVERS
---------------------------------------
EXPIRES BALANCE
--------- -----------
2017 $58,134,000
2018 31,252,000
-----------
Total $89,386,000
===========
The Fund is required to evaluate tax positions taken or expected to be taken in
the course of preparing the Fund's tax returns to determine whether the tax
positions are "more-likely-than-not" of being sustained by the applicable tax
authority. Income tax and related interest and penalties would be recognized by
the Fund as tax expense in the statement of operations if the tax positions were
deemed to not meet the more-likely-than-not threshold. For the year ended May
31, 2010, the Fund did not incur any income tax, interest, or penalties. As of
May 31, 2010, the Manager has reviewed all open tax years and concluded that
there was no impact to the Fund's net assets or results of operations. Tax year
ended
================================================================================
60 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
May 31, 2010, and each of the three preceding fiscal years, remain subject to
examination by the Internal Revenue Service and state taxing authorities. On an
ongoing basis, the Manager will monitor its tax positions to determine if
adjustments to this conclusion are necessary.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended May 31, 2010, were $646,700,000 and
$555,956,000, respectively.
As of May 31, 2010, the cost of securities, including short-term securities, for
federal income tax purposes, was $619,285,000.
Gross unrealized appreciation and depreciation of investments as of May 31,
2010, for federal income tax purposes, were $46,255,000 and $41,476,000,
respectively, resulting in net unrealized appreciation of $4,779,000.
For the year ended May 31, 2010 transactions in written call and put options*
were as follows:
PREMIUMS
NUMBER OF RECEIVED
CONTRACTS (000's)
----------------------
Outstanding at May 31, 2009 2,986 $ 1,841
Options written 18,353 25,478
Options terminated in closing purchase transactions (15,459) (23,421)
Options expired (5,583) (3,587)
----------------------
Outstanding at May 31, 2010 297 $ 311
======================
* Refer to Note 1C for a discussion of derivative instruments and how they are
accounted for in the Fund's financial statements.
(5) LENDING OF PORTFOLIO SECURITIES
The Fund, through its third-party securities-lending agent, Wachovia Global
Securities Lending (Wachovia), may lend its securities to qualified financial
institutions, such as certain broker-dealers, to earn additional income. The
borrowers are required to secure their loans continuously with cash collateral
in an amount at least equal to the fair value of the
================================================================================
NOTES TO FINANCIAL STATEMENTS | 61
<PAGE>
================================================================================
securities loaned, initially in an amount at least equal to 102% of the fair
value of domestic securities loaned and 105% of the fair value of international
securities loaned. Cash collateral is invested in high-quality short-term
investments. Cash collateral requirements are determined daily based on the
prior business day's ending value of securities loaned. Imbalances in cash
collateral may occur on days where market volatility causes security prices to
change significantly, and are adjusted the next business day. The Fund and
Wachovia retain 80% and 20%, respectively, of the income earned from the
investment of cash received as collateral, net of any expenses associated with
the lending transaction. Wachovia receives no other fees from the Fund for its
services as securities-lending agent. Risks to the Fund in securities-lending
transactions are that the borrower may not provide additional collateral when
required or return the securities when due, and that the value of the short-term
investments will be less than the amount of cash collateral required to be
returned to the borrower. Wachovia Bank, N.A., parent company of Wachovia, has
agreed to indemnify the Fund against any losses due to counterparty default in
securities-lending transactions. For the year ended May 31, 2010, the Fund
received securities-lending income of $199,000, which is net of the 20% income
retained by Wachovia. As of May 31, 2010, the Fund loaned securities having a
fair market value of approximately $33,306,000 and received cash collateral of
$34,379,000 for the loans, which was invested in short-term investments, as
noted in Fund's portfolio of investments.
(6) TRANSACTIONS WITH MANAGER
A. MANAGEMENT FEES -- The Manager provides investment management services to the
Fund pursuant to an Advisory Agreement. Under this agreement, the Manager is
responsible for managing the business and affairs of the Fund and for
directly managing the day-to-day investment of a portion of the Fund's
assets, subject to the authority of and supervision by the Trust's Board of
Trustees. The Manager is also authorized to select (with approval of the
Trust's Board of Trustees and without shareholder approval) one or more
subadvisers to manage the day-to-day investment of a portion of the Fund's
assets. The
================================================================================
62 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
Manager monitors each subadviser's performance through quantitative and
qualitative analysis, and periodically recommends to the Trust's Board of
Trustees as to whether each subadviser's agreement should be renewed,
terminated, or modified. The Manager also is responsible for allocating
assets to the subadvisers. The allocation for each subadviser can range from
0% to 100% of the Fund's assets, and the Manager can change the allocations
without shareholder approval.
The investment management fee for the Fund is composed of a base fee and a
performance adjustment. The Fund's base fee is accrued daily and paid monthly
at an annualized rate of 0.75% of the Fund's average net assets for the
fiscal year.
The performance adjustment is calculated monthly by comparing the Fund's
performance to that of the Lipper Balanced Funds Index over the performance
period. The Lipper Balanced Funds Index tracks the total return performance
of the 30 largest funds in the Lipper Balanced Funds category. The
performance period for the Fund consists of the current month plus the
previous 35 months. The following table is utilized to determine the extent
of the performance adjustment:
OVER/UNDER PERFORMANCE ANNUAL ADJUSTMENT RATE
RELATIVE TO INDEX(1) AS A % OF THE FUND'S AVERAGE NET ASSETS(1)
-----------------------------------------------------------------------------
+/- 1.00% to 4.00% +/- 0.04%
+/- 4.01% to 7.00% +/- 0.05%
+/- 7.01% and greater +/- 0.06%
(1)Based on the difference between average annual performance of the Fund and
its relevant index, rounded to the nearest 0.01%. Average net assets are
calculated over a rolling 36-month period.
The annual performance adjustment rate is multiplied by the average net
assets of the Fund over the entire performance period, which is then
multiplied by a fraction, the numerator of which is the number of days in the
month and the denominator of which is 365 (366 in leap years). The resulting
amount is the performance adjustment; a positive adjustment in the case of
overperformance, or a negative adjustment in the case of underperformance.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 63
<PAGE>
================================================================================
Under the performance fee arrangement, the Fund will pay a positive
performance fee adjustment for a performance period whenever the Fund
outperforms the Lipper Balanced Funds Index over that period, even if the
Fund had overall negative returns during the performance period.
For the year ended May 31, 2010, the Fund incurred total management fees,
paid or payable to the Manager, of $4,050,000, which included a (0.01)%
performance adjustment of $(76,000).
B. SUBADVISORY ARRANGEMENTS -- The Manager has entered into an investment
subadvisory agreement with Deutsche Investment Management Americas Inc.
(DIMA) and Credit Suisse Securities (USA) LLC (CSSU) for its Volaris
Volatility Management Group (Volaris Group), under which DIMA directs the
investment and reinvestment of a portion of the Fund's assets invested in
equity securities (as allocated from time to time by the Manager) and Volaris
Group directs the investment and reinvestment of the portion of the Fund's
assets invested in index options (as allocated from time to time by the
Manager).
The Manager (not the Fund) pays DIMA a subadvisory fee in an annual amount of
0.15% of the portion of the Fund's average net assets that DIMA manages. For
the year ended May 31, 2010, the Manager incurred subadvisory fees, paid or
payable to DIMA, of $338,000.
The Manager (not the Fund) pays CSSU's Volaris Group a subadvisory fee based
on the total notional amount of the options contracts that CSSU's Volaris
Group manages in the USAA Balanced Strategy Fund, the USAA Cornerstone
Strategy Fund, the USAA First Start Growth Fund, the USAA Total Return
Strategy Fund, and the USAA Global Opportunities Fund, in an annual amount of
0.23% on the first $50 million of the total notional amount; 0.20% on the
total notional amount over $50 million and up to $250 million; 0.12% on the
total notional amount over $250 million and up to $500 million; 0.10% on the
total notional amount over $500 million and up to $2 billion; and 0.08% on
the total notional amount over $2 billion. The notional amount is based on
the daily closing price of the index that underlies the written options
strategy for the Fund. For the year ended May 31,
================================================================================
64 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
2010, the Manager incurred subadvisory fees for the Fund, paid or payable to
CSSU's Volaris Group of $161,000.
C. ADMINISTRATION AND SERVICING FEES -- The Manager provides certain
administration and shareholder servicing functions for the Fund. For such
services, the Manager receives a fee accrued daily and paid monthly at an
annualized rate of 0.15% of the Fund's average net assets. For the year ended
May 31, 2010, the Fund incurred administration and servicing fees, paid or
payable to the Manager, of $825,000.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and
legal services for the benefit of the Fund. The Trust's Board of Trustees
has approved the reimbursement of a portion of these expenses incurred by the
Manager. For the year ended May 31, 2010, the Fund reimbursed the Manager
$23,000 for these compliance and legal services. These expenses are included
in the professional fees on the Fund's statement of operations.
D. EXPENSE LIMITATION -- The Manager has voluntarily agreed to limit the annual
expenses of the Fund to 1.00% of its average annual net assets, excluding
extraordinary expenses and before reductions of any expenses paid indirectly,
and will reimburse the Fund for all expenses in excess of that amount. The
Manager may modify or terminate this voluntary agreement at any time. For the
year ended May 31, 2010, the Fund incurred reimbursable expenses of
$2,101,000, of which $822,000 was receivable from the Manager.
E. TRANSFER AGENT'S FEES -- USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services (SAS), an affiliate of the Manager, provides transfer agent
services to the Fund based on an annual charge of $23 per shareholder account
plus out-of-pocket expenses. The Fund also pays SAS fees that are related to
the administration and servicing of accounts that are traded on an omnibus
basis. For the year ended May 31, 2010, the Fund incurred transfer agent's
fees, paid or payable to SAS, of $2,179,000.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 65
<PAGE>
================================================================================
F. 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.
(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) SECURITY TRANSACTIONS WITH AFFILIATED FUNDS
During the year ended May 31, 2010, in accordance with affiliated transaction
procedures approved by the Trust's Board of Trustees, purchases and sales of
security transactions were executed between the Fund and the following
affiliated USAA funds at the then-current market price with no brokerage
commissions incurred.
COST TO NET REALIZED
SELLER PURCHASER PURCHASER GAIN (LOSS) TO SELLER
--------------------------------------------------------------------------------
USAA Balanced USAA High-Yield
Strategy Fund Opportunities Fund $ 798,000 $(228,000)
USAA Balanced USAA Short-Term
Strategy Fund Bond Fund 1,078,000 60,000
(9) SUBSEQUENT EVENTS
Events or transactions that occur after the balance sheet date, but before the
financial statements are issued are categorized as recognized or non-recognized
for financial statement purposes. The Manager has evaluated subsequent events
through the date the financial statements were issued, and has determined there
were no events that require recognition or disclosure in the Fund's financial
statements. The following events will affect the Fund's future financial
statements.
Effective August 1, 2010, QS Investors, LLC will replace Deutsche Investment
Management Americas, Inc. as one of the subadvisers of the Fund.
================================================================================
66 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
(10) NEW ACCOUNTING PRONOUNCEMENT
FAIR VALUE MEASUREMENTS -- In January 2010, the Financial Accounting
Standards Board issued amended guidance for improving disclosures about fair
value measurements that adds new disclosure requirements about significant
transfers between Level 1, Level 2, and Level 3, and separate disclosures
about purchases, sales, issuances, and settlements in the reconciliation for
fair value measurements using significant unobservable inputs (Level 3). It
also clarifies existing disclosure requirements relating to the levels of
disaggregation for fair value measurement and inputs and valuation techniques
used to measure fair value. The amended guidance is effective for financial
statements for fiscal years and interim periods beginning after December 15,
2009, except for disclosures about purchases, sales, issuances and
settlements in the rollforward of activity in Level 3 fair value
measurements, which are effective for fiscal years beginning after December
15, 2010, and for interim periods within those fiscal years. The Manager is
in the process of evaluating the impact of this guidance on the Fund's
financial statement disclosures.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 67
<PAGE>
================================================================================
(11) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
----------------------------------------------------------------
2010 2009 2008 2007 2006
----------------------------------------------------------------
Net asset value at
beginning of period $ 10.08 $ 14.01 $ 15.70 $ 14.97 $ 15.41
-----------------------------------------------------------------
Income (loss) from investment
operations:
Net investment income .47 .43 .38 .37 .34
Net realized and unrealized
gain (loss) 2.18 (3.95) (.96) 1.68 .26
-----------------------------------------------------------------
Total from investment operations 2.65 (3.52) (.58) 2.05 .60
-----------------------------------------------------------------
Less distributions from:
Net investment income (.47) (.41) (.38) (.38) (.31)
Realized capital gains - (.00)(a) (.73) (.94) (.73)
-----------------------------------------------------------------
Total distributions (.47) (.41) (1.11) (1.32) (1.04)
-----------------------------------------------------------------
Net asset value at end of period $ 12.26 $ 10.08 $ 14.01 $ 15.70 $ 14.97
=================================================================
Total return (%)* 26.63 (25.13) (3.82) 14.28(b) 3.84
Net assets at end of period (000) $592,088 $449,984 $622,186 $661,780 $634,124
Ratios to average net assets:**
Expenses (%)(c) 1.00 1.00 1.00 1.00(b) 1.00
Expenses, excluding
reimbursements (%)(c) 1.38 1.42 1.26 1.26(b) 1.27
Net investment income (%) 3.95 4.12 2.61 2.46 2.15
Portfolio turnover (%) 110 115 185(d) 179 153
* Assumes reinvestment of all net investment income and realized capital gain distributions, if any,
during the period. Includes adjustments in accordance with U.S. generally accepted accounting
principles and could differ from the Lipper reported return.
** For the year ended May 31, 2010, average net assets were $550,354,000.
(a) Represents less than $0.01 per share.
(b) For the year ended May 31, 2007, SAS voluntarily reimbursed the Fund for a portion of the transfer
agent's fees incurred. The reimbursement had no effect on the Fund's total return or ratio of
expenses to average net assets.
(c) Reflects total operating expenses of the Fund before reductions of any expenses paid indirectly.
The Fund's expenses paid indirectly decreased the expense ratios as follows:
(.00%)(+) (.00%)(+) (.00%)(+) (.01%) (.01%)
(+) Represents less than 0.01% of average net assets.
(d) Reflects increased trading activity due to changes in subadvisers and asset allocation strategies.
================================================================================
68 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
EXPENSE EXAMPLE
May 31, 2010 (unaudited)
--------------------------------------------------------------------------------
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: direct costs, such
as wire fees, redemption fees, and low balance fees; and indirect costs,
including management fees, transfer agency fees, and other Fund operating
expenses. This example is intended to help you understand your indirect costs,
also referred to as "ongoing costs" (in dollars), of investing in the Fund and
to compare these costs with the ongoing costs of investing in other mutual
funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire six-month period of December 1, 2009, through May
31, 2010.
ACTUAL EXPENSES
The first line of the table on the next page provides information about actual
account values and actual expenses. You may use the information in this line,
together with the amount you invested at the beginning of the period, to
estimate the expenses that you paid over the period. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number in the first line under the heading
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table provides information about hypothetical account
values and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses, which is not the Fund's
actual return. The hypothetical account values and expenses may not be used to
estimate the actual ending account balance or expenses you paid for the period.
You may use this
================================================================================
EXPENSE EXAMPLE | 69
<PAGE>
================================================================================
information to compare the ongoing costs of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the second line of the table is
useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if these direct
costs were included, your costs would have been higher.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE DECEMBER 1, 2009 -
DECEMBER 1, 2009 MAY 31, 2010 MAY 31, 2010
-------------------------------------------------------
Actual $1,000.00 $1,036.60 $5.08
Hypothetical
(5% return before expenses) 1,000.00 1,019.95 5.04
* Expenses are equal to the Fund's annualized expense ratio of 1.00%, which is
net of any reimbursements and expenses paid indirectly, multiplied by the
average account value over the period, multiplied by 182 days/365 days (to
reflect the one-half-year period). The Fund's ending account value on the
first line in the table is based on its actual total return of 3.66% for the
six-month period of December 1, 2009, through May 31, 2010.
================================================================================
70 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
ADVISORY AGREEMENTS
May 31, 2010
--------------------------------------------------------------------------------
At a meeting of the Board of Trustees (the Board) held on April 9, 2010, the
Board, including the Trustees who are not "interested persons" of the Trust (the
Independent Trustees), approved the continuance of the Advisory Agreement
between the Trust and the Manager with respect to the Fund and the Subadvisory
Agreements with respect to the Fund.
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and Subadvisory Agreements and
the Manager and each Subadviser, and were given the opportunity to ask questions
and request additional information from management. The information provided to
the Board included, among other things: (i) a separate report prepared by an
independent third party, which provided a statistical analysis comparing the
Fund's investment performance, expenses, and fees to comparable investment
companies; (ii) information concerning the services rendered to the Fund, as
well as information regarding the Manager's revenues and costs of providing
services to the Fund and compensation paid to affiliates of the Manager; and
(iii) information about the Manager's and the Subadvisers' operations and
personnel. Prior to voting, the Independent Trustees reviewed the proposed
continuance of the Advisory Agreement and the Subadvisory Agreements with
management and with experienced independent counsel and received materials from
such counsel discussing the legal standards for their consideration of the
proposed continuation of the Advisory Agreement and the Subadvisory Agreements
with respect to the Fund. The Independent Trustees also reviewed the proposed
continuation of the Advisory Agreement and the Subadvisory Agreements with
respect to the Fund in private sessions with their counsel at which no
representatives of management were present.
At each regularly scheduled meeting of the Board and its committees, the Board
receives and reviews, among other things, information concerning
================================================================================
ADVISORY AGREEMENTS | 71
<PAGE>
================================================================================
the Fund's performance and related services provided by the Manager and by each
Subadviser. At the meeting at which the renewal of the Advisory Agreement and
Subadvisory Agreements is considered, particular focus is given to information
concerning Fund performance, comparability of fees and total expenses, and
profitability. However, the Board noted that the evaluation process with respect
to the Manager and the Subadvisers is an ongoing one. In this regard, the
Board's and its committees' consideration of the Advisory Agreement and
Subadvisory Agreements included certain information previously received at such
meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving the
Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by independent counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES -- In considering the nature, extent,
and quality of the services provided by the Manager under the Advisory
Agreement, the Board reviewed information provided by the Manager relating to
its operations and personnel. The Board also took into account its familiarity
with the Manager's management through Board meetings, discussions, and reports
during the preceding year. The Board considered the fees paid to the Manager and
the services provided to the Fund by the Manager under the Advisory Agreement,
as well as other services provided by the Manager and its affiliates under other
agreements, and the personnel who provide these services. In addition to the
investment advisory services provided to the Fund, the Manager and its
affiliates provide administrative services, stockholder services, oversight of
Fund accounting, marketing services, assistance in meeting legal and regulatory
requirements, and other services necessary for the operation of the Fund and the
Trust.
The Board considered the Manager's management style and the performance of its
duties under the Advisory Agreement. The Board
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72 | USAA BALANCED STRATEGY FUND
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considered the level and depth of knowledge of the Manager, including the
professional experience and qualifications of its senior and investment
personnel, as well as current staffing levels. The Board discussed the Manager's
effectiveness in monitoring the performance of the Subadvisers and its
timeliness in responding to performance issues. The allocation of the Fund's
brokerage, including the Manager's process for monitoring "best execution" and
the utilization of "soft dollars," also were considered. The Manager's role in
coordinating the activities of the Fund's other service providers also was
considered. The Board considered the Manager's financial condition and that it
had the financial wherewithal to continue to provide the same scope and high
quality of services under the Advisory Agreement. In reviewing the Advisory
Agreement, the Board focused on the experience, resources, and strengths of the
Manager and its affiliates in managing investment companies, including the Fund.
The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager, including oversight of the Fund's day-to-day operations
and oversight of Fund accounting. The Manager and its affiliates provide
compliance and administrative services to the Fund. The Trustees, guided also by
information obtained from their experiences as directors/trustees of the Fund
and other investment companies managed by the Manager, also focused on the
quality of the Manager's compliance and administrative staff.
EXPENSES AND PERFORMANCE -- In connection with its consideration of the Advisory
Agreement, the Board evaluated the Fund's advisory fees and total expense ratio
as compared to other open-end investment companies deemed to be comparable to
the Fund as determined by the independent third party in its report. The Fund's
expenses were compared to (i) a group of investment companies chosen by the
independent third party to be comparable to the Fund based upon certain factors,
including fund type, comparability of investment objective and classification,
sales load type (in this case, investment companies with no sales loads and
front-end loads), asset size, and expense components (the "expense group") and
(ii) a larger group of investment companies that includes all no-load and
front-end load retail open-end investment companies in the
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ADVISORY AGREEMENTS | 73
<PAGE>
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same investment classification/objective as the Fund regardless of asset size,
excluding outliers (the "expense universe"). Among other data, the Board noted
that the Fund's management fee rate -- which includes advisory and
administrative services and the effects of any performance fee adjustment as
well as any fee waivers or reimbursements -- was below the median of its expense
group and its expense universe. The data indicated that the Fund's total
expenses, after reimbursements, were below the median of its expense group and
its expense universe. The Board took into account the various services provided
to the Fund by the Manager and its affiliates. The Board also noted the level
and method of computing the management fee, including any performance adjustment
to such fee. The Board also took into account the Manager's current voluntary
undertakings to maintain expense limitations for the Fund and that the
subadvisory fees under the Subadvisory Agreements are paid by the Manager.
In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total return with its Lipper index and with that of other mutual funds deemed to
be in its peer group by the independent third party in its report (the
"performance universe"). The Fund's performance universe consisted of the Fund
and all retail and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or primary channel
of distribution. This comparison indicated that, among other data, the Fund's
performance was above the average of its performance universe and its Lipper
index for the one-year period ended December 31, 2009, was lower than the
average of its performance universe and its Lipper index for the three- and
five-year periods ended December 31, 2009. The Board also noted that the Fund's
percentile performance ranking was in the top 5% of its performance universe for
the one-year period ended December 31, 2009, was in the bottom 50% of its
performance universe for the three- and five-year periods ended December 31,
2009. The Board took into account management's
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74 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
discussion of the Fund's performance, as well as the various steps management
has taken to address the Fund's performance. The Board also noticed the Fund's
more recent improved performance.
COMPENSATION AND PROFITABILITY -- The Board took into consideration the level
and method of computing the management fee. The information considered by the
Board included operating profit margin information for the Manager's business as
a whole. The Board also received and considered profitability information
related to the management revenues from the Fund. This consideration included a
broad review of the methodology used in the allocation of certain costs to the
Fund. In considering the profitability data with respect to the Fund, the
Trustees noted that the Manager has reimbursed a portion of its management fees
to the Fund and also pays the subadvisory fees. The Trustees reviewed the
profitability of the Manager's relationship with the Fund before tax expenses.
In reviewing the overall profitability of the management fee to the Manager, the
Board also considered the fact that affiliates provide shareholder servicing and
administrative services to the Fund for which they receive compensation. The
Board also considered the possible direct and indirect benefits to the Manager
from its relationship with the Trust, including that the Manager may derive
reputational and other benefits from its association with the Fund. The Trustees
recognized that the Manager should be entitled to earn a reasonable level of
profits in exchange for the level of services it provides to the Fund and the
entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE -- The Board considered whether there should be changes in
the management fee rate or structure in order to enable the Fund to participate
in any economies of scale. The Board took into account management's discussions
of the current advisory fee structure. The Board also considered the effect of
the Fund's growth and size on its performance and fees, noting that if the
Fund's assets increase over time, the Fund may realize other economies of scale
if assets increase proportionally more than some expenses. The Board also
considered the fee waivers and expense reimbursement arrangements by the Manager
and the fact that the Manager pays the subadvisory fees. The Board determined
that the current investment management fee structure was reasonable.
================================================================================
ADVISORY AGREEMENTS | 75
<PAGE>
================================================================================
CONCLUSIONS -- The Board reached the following conclusions regarding the Fund's
Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) appropriate action has been taken to
address the Fund's performance; (iv) the Fund's advisory expenses are reasonable
in relation to those of similar funds and to the services to be provided by the
Manager; and (v) the Manager and its affiliates' level of profitability, if any,
from their relationship with the Fund is reasonable. Based on its conclusions,
the Board determined that continuation of the Advisory Agreement would be in the
best interests of the Fund and its shareholders.
SUBADVISORY AGREEMENTS
In approving each Subadvisory Agreement with respect to the Fund, the Board
considered various factors, among them: (i) the nature, extent, and quality of
services provided to the Fund by the respective Subadviser, including the
personnel providing services; (ii) each Subadviser's compensation and any other
benefits derived from the subadvisory relationship; (iii) comparisons of
subadvisory fees and performance to comparable investment companies; and (iv)
the terms of each Subadvisory Agreement. The Board's analysis of these factors
is set forth below. After full consideration of a variety of factors, the Board,
including the Independent Trustees, voted to approve each Subadvisory Agreement.
In approving the Subadvisory Agreements, the Trustees did not identify any
single factor as controlling, and each Trustee may have attributed different
weights to various factors. Throughout their deliberations, the Independent
Trustees were represented and assisted by independent counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES PROVIDED; INVESTMENT PERSONNEL -- The
Trustees considered information provided to them regarding the services provided
by each Subadviser, including information presented periodically throughout the
previous year. The Board considered each Subadviser's level of knowledge and
investment style. The Board reviewed the experience and credentials of the
investment personnel who
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76 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
are responsible for managing the investment of portfolio securities with respect
to the Fund and each Subadviser's level of staffing. The Trustees noted that the
materials provided to them by each Subadviser indicated that the method of
compensating portfolio managers is reasonable and includes appropriate
mechanisms to prevent a manager with underperformance from taking undue risks.
The Trustees also noted each Subadviser's brokerage practices. The Board also
considered each Subadviser's regulatory and compliance history. The Board noted
that the Manager's monitoring processes of each Subadviser include: (i) regular
telephonic meetings to discuss, among other matters, investment strategies and
to review portfolio performance; (ii) monthly portfolio compliance checklists
and quarterly compliance certifications to the Board; and (iii) due diligence
visits to the Subadviser.
SUBADVISER COMPENSATION -- The Board also took into consideration the financial
condition of each Subadviser. In considering the cost of services to be provided
by each Subadviser and the profitability to that Subadviser of its relationship
with the Fund, the Trustees noted the undertakings of the Manager to maintain
expense limitations for the Fund and also noted that the fees under each
Subadvisory Agreement were paid by the Manager. The Trustees also relied on the
ability of the Manager to negotiate each Subadvisory Agreement and the fees
thereunder at arm's length. The Board also considered information relating to
the cost of services to be provided by each Subadviser, each Subadviser's
profitability with respect to the Fund, and the potential economies of scale in
each Subadviser's management of the Fund, to the extent available. However, for
the reasons noted above, this information was less significant to the Board's
consideration of the Subadvisory Agreements than the other factors considered.
SUBADVISORY FEES AND FUND PERFORMANCE -- The Board compared the subadvisory fees
for the Fund with the fees that each Subadviser charges to comparable clients,
as applicable. The Board considered that the Fund pays a management fee to the
Manager and that, in turn, the Manager pays a subadvisory fee to each
Subadviser. As noted above, the Board considered, among other data, the Fund's
performance during the one-, three-, and
================================================================================
ADVISORY AGREEMENTS | 77
<PAGE>
================================================================================
five-year periods ended December 31, 2009, as compared to the Fund's respective
peer group and noted that the Board reviews at its regularly scheduled meetings
information about the Fund's performance results. The Board also considered the
performance of each Subadviser. The Board noted the Manager's expertise and
resources in monitoring the performance, investment style, and risk-adjusted
performance of each Subadviser. The Board was mindful of the Manager's focus on
each Subadviser's performance. The Board also noted each Subadviser's long-term
performance record for similar accounts, as applicable.
CONCLUSIONS -- The Board reached the following conclusions regarding each
Subadvisory Agreement, among others: (i) each Subadviser is qualified to manage
the Fund's assets in accordance with its investment objectives and policies;
(ii) each Subadviser maintains an appropriate compliance program; (iii)
appropriate action has been taken to address the Fund's performance; and (iv)
the Fund's advisory expenses are reasonable in relation to those of similar
funds and to the services to be provided by the Manager and each Subadviser.
Based on its conclusions, the Board determined that approval of each Subadvisory
Agreement with respect to the Fund would be in the best interests of the Fund
and its shareholders.
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78 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION
TRUSTEES AND OFFICERS OF THE TRUST
--------------------------------------------------------------------------------
The Board of Trustees of the Trust consists of six Trustees. These Trustees and
the Trust's Officers supervise the business affairs of the USAA family of funds.
The Board of Trustees is responsible for the general oversight of the funds'
business and for assuring that the funds are managed in the best interests of
each fund's respective shareholders. The Board of Trustees periodically reviews
the funds' investment performance as well as the quality of other services
provided to the funds and their shareholders by each of the fund's service
providers, including USAA Investment Management Company (IMCO) and its
affiliates. The term of office for each Trustee shall be 20 years or until the
Trustee reaches age 70. All members of the Board of Trustees shall be presented
to shareholders for election or re-election, as the case may be, at least once
every five years. Vacancies on the Board of Trustees can be filled by the action
of a majority of the Trustees, provided that at least two-thirds of the Trustees
have been elected by the shareholders.
Set forth below are the Trustees and Officers of the Trust, their respective
offices and principal occupations during the last five years, length of time
served, and information relating to any other directorships held. Each serves on
the Board of Trustees of the USAA family of funds consisting of one registered
investment company offering 46 individual funds as of May 31, 2010. Unless
otherwise indicated, the business address of each is 9800 Fredericksburg Road,
San Antonio, TX 78288.
If you would like more information about the funds' Trustees, you may call (800)
531-USAA (8722) to request a free copy of the funds' statement of additional
information (SAI).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 79
<PAGE>
================================================================================
INTERESTED TRUSTEE(1)
--------------------------------------------------------------------------------
CHRISTOPHER W. CLAUS(2, 4)
Trustee, President, and Vice Chair of the Board of Trustees
Born: December 1960
Year of Election or Appointment: 2001
Chair of the Board of Directors, IMCO (11/04-present); President, IMCO
(2/08-10/09); Chief Investment Officer, IMCO (2/07-2/08); President and Chief
Executive Officer, IMCO (2/01-2/07); Chair of the Board of Directors, USAA
Financial Advisors, Inc. (FAI) (1/07-present); President, FAI (12/07-10/09);
President, Financial Advice and Solutions Group (FASG) USAA (9/09-present);
President, Financial Services Group, USAA (1/07-9/09). Mr. Claus serves as Chair
of the Board of Directors of USAA Shareholder Account Services (SAS), USAA
Financial Planning Services Insurance Agency, Inc. (FPS), and FAI. He also
serves as Vice Chair for USAA Life Insurance Company (USAA Life).
NON-INTERESTED (INDEPENDENT) TRUSTEES
--------------------------------------------------------------------------------
BARBARA B. DREEBEN(3, 4, 5, 6)
Trustee
Born: June 1945
Year of Election or Appointment: 1994
President, Postal Addvantage (7/92-present), a postal mail list management
service. Mrs. Dreeben holds no other directorships of any publicly held
corporations or other investment companies outside the USAA family of funds.
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80 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
ROBERT L. MASON, Ph.D.(3, 4, 5, 6)
Trustee
Born: June 1946
Year of Election or Appointment: 1997
Institute Analyst, Southwest Research Institute (3/02-present), which focuses in
the fields of technological research. Dr. Mason holds no other directorships of
any publicly held corporations or other investment companies outside the USAA
family of funds.
BARBARA B. OSTDIEK, Ph.D.(3, 4, 5, 6, 7)
Trustee
Born: March 1964
Year of Election or Appointment: 2007
Academic Director of the El Paso Corporation Finance Center at Jesse H. Jones
Graduate School of Business at Rice University (7/02-present); Associate
Professor of Finance at Jesse H. Jones Graduate School of Management at Rice
University (7/01-present). Dr. Ostdiek holds no other directorships of any
publicly held corporations or other investment companies outside the USAA family
of funds.
MICHAEL F. REIMHERR(3, 4, 5, 6)
Trustee
Born: August 1945
Year of Election or Appointment: 2000
President of Reimherr Business Consulting (5/95-present), an organization that
performs business valuations of large companies to include the development of
annual business plans, budgets, and internal financial reporting. Mr. Reimherr
holds no other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 81
<PAGE>
================================================================================
RICHARD A. ZUCKER(2, 3, 4, 5, 6)
Trustee and Chair of the Board of Trustees
Born: July 1943
Year of Election or Appointment: 1992(+)
Vice President, Beldon Roofing Company (7/85-present). Mr. Zucker holds no other
directorships of any publicly held corporations or other investment companies
outside the USAA family of funds.
(1) Indicates the Trustee is an employee of IMCO or affiliated companies and
is considered an "interested person" under the Investment Company Act of
1940.
(2) Member of Executive Committee
(3) Member of Audit Committee
(4) Member of Pricing and Investment Committee
(5) Member of Corporate Governance Committee
(6) The address for all non-interested trustees is that of the USAA Funds,
P.O. Box 659430, San Antonio, TX 78265-9430.
(7) Dr. Ostdiek was appointed the Audit Committee Financial Expert for the
Funds' Board in November 2008.
(+) Mr. Zucker was elected as Chair of the Board in 2005.
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82 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
INTERESTED OFFICERS(1)
--------------------------------------------------------------------------------
DANIEL S. McNAMARA
Vice President
Born: June 1966
Year of Appointment: 2009
President and Director, IMCO, FAI, FPS, and SAS (10/09-present); President, Banc
of America Investment Advisors (9/07-9/09); Managing Director, Planning and
Financial Products Group, Bank of America (9/01-9/09).
R. MATTHEW FREUND
Vice President
Born: July 1963
Year of Appointment: 2010
Senior Vice President, Investment Portfolio Management, IMCO (3/10-present);
Vice President, Fixed Income Investments, IMCO (2/04-3/10). Mr. Freund also
serves as a Director for SAS.
JOHN P. TOOHEY
Vice President
Born: March 1968
Year of Appointment: 2009
Vice President, Equity Investments, IMCO (2/09-present); Managing Director, AIG
Investments (12/00-1/09).
CHRISTOPHER P. LAIA
Secretary
Born: January 1960
Year of Appointment: 2010
Vice President, Financial Advice & Solutions Group General Counsel, USAA
(10/08-present); Vice President, Securities Counsel, USAA (6/07-10/08);
Assistant Secretary, USAA family of funds (11/08-4/10); General Counsel,
Secretary, and Partner, Brown Advisory (6/02-6/07). Mr. Laia also holds the
Officer positions of Vice President and Secretary of IMCO and SAS and Vice
President and Assistant Secretary of FAI and FPS.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 83
<PAGE>
================================================================================
JAMES G. WHETZEL
Assistant Secretary
Born: February 1978
Year of Appointment: 2010
Executive Attorney, Financial Advice & Solutions Group General Counsel, USAA
(11/08-present); Reed Smith, LLP, Associate (08/05-11/08).
ROBERTO GALINDO, Jr.
Treasurer
Born: November 1960
Year of Appointment: 2008
Assistant Vice President, Portfolio Accounting/Financial Administration, USAA
(12/02-present); Assistant Treasurer, USAA family of funds (7/00-2/08).
WILLIAM A. SMITH
Assistant Treasurer
Born: June 1948
Year of Appointment: 2009
Vice President, Senior Financial Officer, and Treasurer, IMCO, FAI, FPS, SAS and
USAA Life (2/09-present); Vice President, Senior Financial Officer, USAA
(2/07-present); consultant, Robert Half/Accounttemps (8/06-1/07); Chief
Financial Officer, California State Automobile Association (8/04-12/05).
JEFFREY D. HILL
Chief Compliance Officer
Born: December 1967
Year of Appointment: 2004
Assistant Vice President, Mutual Funds Compliance, USAA (9/04-present).
(1) Indicates those Officers who are employees of IMCO or affiliated companies
and are considered "interested persons" under the Investment Company
Act of 1940.
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84 | USAA BALANCED STRATEGY FUND
<PAGE>
================================================================================
TRUSTEES Christopher W. Claus
Barbara B. Dreeben
Robert L. Mason, Ph.D.
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
Richard A. Zucker
--------------------------------------------------------------------------------
ADMINISTRATOR, USAA Investment Management Company
INVESTMENT ADVISER, P.O. Box 659453
UNDERWRITER, AND San Antonio, Texas 78265-9825
DISTRIBUTOR
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN AND State Street Bank and Trust Company
ACCOUNTING AGENT P.O. Box 1713
Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1800
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
MUTUAL FUND Under "Products & Services"
SELF-SERVICE 24/7 click "Investments," then
AT USAA.COM "Mutual Funds"
OR CALL Under "My Accounts" go to
(800) 531-USAA "Investments." View account balances,
(8722) or click "I want to...," and select
the desired action.
--------------------------------------------------------------------------------
Copies of the Manager's proxy voting policies and procedures, approved by the
Trust's Board of Trustees for use in voting proxies on behalf of the Fund, are
available without charge (i) by calling (800) 531-USAA (8722); (ii) at USAA.COM;
and (iii) on the SEC's Web site at HTTP://WWW.SEC.GOV. Information regarding
how the Fund voted proxies relating to portfolio securities during the most
recent 12-month period ended June 30 is available (i) at USAA.COM; and (ii) on
the SEC's Web site at HTTP://WWW.SEC.GOV.
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. These Forms N-Q are
available at no charge (i) by calling (800) 531-USAA (8722); (ii) at usaa.com;
and (iii) on the SEC's Web site at http://www.sec.gov. These Forms N-Q also may
be reviewed and copied at the SEC's Public Reference Room in Washington, D.C.
Information on the operation of the Public Reference Room may be obtained by
calling (800) 732-0330.
================================================================================
<PAGE>
USAA
9800 Fredericksburg Road --------------
San Antonio, TX 78288 PRSRT STD
U.S. Postage
PAID
USAA
--------------
>> SAVE PAPER AND FUND COSTS
At usaa.com click: MY DOCUMENTS
Set preferences to USAA DOCUMENTS ONLINE.
[LOGO OF USAA]
USAA WE KNOW WHAT IT MEANS TO SERVE.(R)
=============================================================================
26889-0710 (C)2010, USAA. All rights reserved.
ITEM 2. CODE OF ETHICS.
On September 24, 2009, the Board of Trustees of USAA Mutual Funds Trust approved
a Code of Ethics (Sarbanes Code) applicable solely to its senior financial
officers, including its principal executive officer (President), as defined
under the Sarbanes-Oxley Act of 2002 and implementing regulations of the
Securities and Exchange Commission. A copy of the Sarbanes Code is attached as
an Exhibit to this Form N-CSR.
No waivers (explicit or implicit) have been granted from a provision of the
Sarbanes Code.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
On November 18, 2008, the Board of Trustees of USAA Mutual Funds Trust
designated Dr. Barbara B. Ostdiek, Ph.D. as the Board's audit committee
financial expert. Dr. Ostdiek has served as an Associate Professor of Management
at Rice University since 2001. Dr. Ostdiek also has served as an Academic
Director at El Paso Corporation Finance Center since 2002. Dr. Ostdiek is an
independent trustee who serves as a member of the Audit Committee, Pricing and
Investment Committee and the Corporate Governance Committee of the Board of
Trustees of USAA Mutual Funds Trust.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES. The Registrant, USAA Mutual Funds Trust, consists of 46 funds in
all. Only 10 funds of the Registrant have a fiscal year-end of May 31 and are
included within this report (the Funds). The aggregate fees accrued or billed
by the Registrant's independent auditor, Ernst & Young LLP, for
professional services rendered for the audit of the Registrant's annual
financial statements and services provided in connection with statutory and
regulatory filings by the Registrant for the Funds for fiscal years ended
May 31, 2010 and 2009 were $280,916 and $288,764, respectively.
(b) AUDIT RELATED FEE. The aggregate fees accrued or paid to Ernst & Young, LLP
by USAA Shareholder Account Services (SAS) for professional services rendered
for audit related services related to the annual study of internal controls of
the transfer agent for fiscal years ended May 31, 2010 and 2009 were $61,513 and
$63,500, respectively. All services were preapproved by the Audit Committee.
(c) TAX FEES. No such fees were billed by Ernst & Young LLP for the review of
federal, state and city income and tax returns and excise tax calculations for
fiscal years ended May 31, 2010 and 2009.
(d) ALL OTHER FEES. No such fees were billed by Ernst & Young LLP for fiscal
years ended May 31, 2010 and 2009.
(e)(1) AUDIT COMMITTEE PRE-APPROVAL POLICY. All audit and non-audit services to
be performed for the Registrant by Ernst & Young LLP must be pre-approved by the
Audit Committee. The Audit Committee Charter also permits the Chair of the Audit
Committee to pre-approve any permissible non-audit service that must be
commenced prior to a scheduled meeting of the Audit Committee. All non-audit
services were pre-approved by the Audit Committee or its Chair, consistent with
the Audit Committee's preapproval procedures.
(2) Not applicable.
(f) Not applicable.
(g) The aggregate non-audit fees billed by Ernst & Young LLP for services
rendered to the Registrant and the Registrant's investment adviser, IMCO, and
the Funds' transfer agent, SAS, for May 31, 2010 and 2009 were $104,896 and
$108,000, respectively.
(h) Ernst & Young LLP provided non-audit services to IMCO in 2010 and 2009 that
were not required to be pre-approved by the Registrant's Audit Committee because
the services were not directly related to the operations of the Registrant's
Funds. The Board of Trustees will consider Ernst & Young LLP's independence and
will consider whether the provision of these non-audit services to IMCO is
compatible with maintaining Ernst & Young LLP's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not Applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Filed as part of the report to shareholders.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not Applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not Applicable.
Item 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not Applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Corporate Governance Committee selects and nominates candidates for
membership on the Board as independent directors. Currently, there is no
procedure for shareholders to recommend candidates to serve on the Board.
ITEM 11. CONTROLS AND PROCEDURES
The principal executive officer and principal financial officer of USAA Mutual
Funds Trust (Trust) have concluded that the Trust's disclosure controls and
procedures are sufficient to ensure that information required to be disclosed by
the Trust in this Form N-CSR was recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms, based upon such officers' evaluation of these controls and
procedures as of a date within 90 days of the filing date of the report.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Trust's internal controls
or in other factors that could significantly affect the Trust's internal
controls subsequent to the date of their evaluation. The only change to the
procedures was to document the annual disclosure controls and procedures
established for the new section of the shareholder reports detailing the factors
considering by the Trust's Board in approving the Trust's advisory agreements.
ITEM 12. EXHIBITS.
(a)(1). Code of Ethics pursuant to Item 2 of Form N-CSR is filed hereto exactly
as set forth below:
CODE OF ETHICS
FOR PRINCIPAL EXECUTIVE OFFICER
AND SENIOR FINANCIAL OFFICERS
USAA MUTUAL FUNDS TRUST
I. PURPOSE OF THE CODE OF ETHICS
USAA Mutual Funds Trust (the Trust or the Funds) has adopted this code
of ethics (the Code) to comply with Section 406 of the Sarbanes-Oxley Act of
2002 (the Act) and implementing regulations of the Securities and Exchange
Commission (SEC). The Code applies to the Trust's Principal Executive Officer,
Principal Financial Officer and Principal Accounting Officer (each a Covered
Officer), as detailed in Appendix A.
The purpose of the Code is to promote:
- honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between the Covered
Officers' personal and professional relationships;
- full, fair, accurate, timely and understandable disclosure in
reports and documents that the Trust files with, or submits
to, the SEC and in other public communications made by the
Trust;
- compliance with applicable laws and governmental rules and
regulations;
- prompt internal reporting of violations of the Code to the
Chief Legal Officer of the Trust, the President of the Trust
(if the violation concerns the Treasurer), the CEO of USAA,
and if deemed material to the Funds' financial condition or
reputation, the Chair of the Trust's Board of Trustees; and
- accountability for adherence to the Code.
Each Covered Officer should adhere to a high standard of business
ethics and should be sensitive to actual and apparent conflicts of interest.
II. CONFLICTS OF INTEREST
A. DEFINITION OF A CONFLICT OF INTEREST.
A conflict of interest exists when a Covered Officer's private interest
influences, or reasonably appears to influence, the Covered Officer's judgment
or ability to act in the best interests of the Funds and their shareholders. For
example, a conflict of interest could arise if a Covered Officer, or an
immediate family member, receives personal benefits as a result of his or her
position with the Funds.
Certain conflicts of interest arise out of relationships between
Covered Officers and the Funds and are already subject to conflict of interest
provisions in the Investment Company Act of 1940 (the 1940 Act) and the
Investment Advisers Act of 1940 (the Advisers Act). For example, Covered
Officers may not individually engage in certain transactions with the Funds
because of their status as "affiliated persons" of the Funds. The USAA Funds'
and USAA Investment Management Company's (IMCO) compliance programs and
procedures are designed to prevent, or identify and correct, violations of these
provisions. This Code does not, and is not intended to, repeat or replace these
programs and procedures, and such conflicts fall outside of the parameters of
this Code.
Although typically not presenting an opportunity for improper personal
benefit, conflicts could arise from, or as a result of, the contractual
relationships between the Funds and IMCO of which the Covered Officers are also
officers or employees. As a result, this Code recognizes that the Covered
Officers will, in the normal course of their duties (whether formally for the
Funds or for IMCO, or for both), be involved in establishing policies and
implementing decisions that will have different effects on IMCO and the Funds.
The participation of Covered Officers in such activities is inherent in the
contractual relationship between the Funds and IMCO and is consistent with the
performance by the Covered Officers of their duties as officers of the Funds.
Thus, if performed in compliance with the provisions of the 1940 Act and the
Advisers Act, such activities will be deemed to have been handled ethically.
B. GENERAL RULE. Covered Officers Should Avoid Actual and Apparent
Conflicts of Interest.
Conflicts of interest, other than the conflicts described in the two
preceding paragraphs, are covered by the Code. The following list provides
examples of conflicts of interest under the Code, but Covered Officers should
keep in mind that these examples are not exhaustive. The overarching principle
is that the personal interest of a Covered Officer should not be placed
improperly before the interest of the Funds and their shareholders.
Each Covered Officer must not engage in conduct that constitutes an
actual conflict of interest between the Covered Officer's personal interest and
the interests of the Funds and their shareholders. Examples of actual conflicts
of interest are listed below but are not exclusive. Each Covered Officer must
not:
- use his personal influence or personal relationships improperly to
influence investment decisions or financial reporting by the Funds
whereby the Covered Officer would benefit personally to the
detriment of the Funds and their shareholders;
- cause the Funds to take action, or fail to take action, for the
individual personal benefit of the Covered Officer rather than the
benefit of the Funds and their shareholders.
- accept gifts, gratuities, entertainment or any other benefit from
any person or entity that does business or is seeking to do
business with the Funds DURING CONTRACT NEGOTIATIONS.
- accept gifts, gratuities, entertainment or any other benefit with
a market value over $100 per person, per year, from or on behalf
of any person or entity that does, or seeks to do, business with
or on behalf of the Funds.
- EXCEPTION. Business-related entertainment such as meals,
and tickets to sporting or theatrical events, which are
infrequent and not lavish are excepted from this
prohibition. Such entertainment must be appropriate as to
time and place, reasonable and customary in nature, modest
in cost and value, incidental to the business, and not so
frequent as to raise any question of impropriety
(Customary Business Entertainment).
Certain situations that could present the appearance of a conflict of
interest should be discussed with, and approved by, or reported to, an
appropriate person. Examples of these include:
- service as a director on the board or an officer of any public or
private company, other than a USAA company or the Trust, must be
approved by the USAA Funds' and Investment Code of Ethics
Committee and reported to the Trust.
- the receipt of any non-nominal (I.E., valued over $25) gifts from
any person or entity with which a Trust has current or prospective
business dealings must be reported to the Chief Legal Officer. For
purposes of this Code, the individual holding the title of
Secretary of the Trust shall be considered the Chief Legal Officer
of the Trust.
- the receipt of any business-related entertainment from any person
or entity with which the Funds have current or prospective
business dealings must be approved in advance by the Chief Legal
Officer unless such entertainment qualifies as Customary Business
Entertainment.
- any ownership interest in, or any consulting or employment
relationship with, any of the Trust's service providers, other
than IMCO or any other USAA company, must be approved by the CEO
of USAA and reported to the Trust's Board.
- any material direct or indirect financial interest in commissions,
transaction charges or spreads paid by the Funds for effecting
portfolio transactions or for selling or redeeming shares other
than an interest arising from the Covered Officer's employment,
such as compensation or equity ownership should be approved by the
CEO of USAA and reported to the Trust's Board.
III. DISCLOSURE AND COMPLIANCE REQUIREMENTS
- Each Covered Officer should familiarize himself with the
disclosure requirements applicable to the Funds, and the
procedures and policies implemented to promote full, fair,
accurate, timely and understandable disclosure by the Trust.
- Each Covered Officer should not knowingly misrepresent, or
cause others to misrepresent, facts about the Funds to others,
whether within or outside the Funds, including to the Funds'
Trustees and auditors, and to government regulators and
self-regulatory organizations.
- Each Covered Officer should, to the extent appropriate within
his area of responsibility, consult with other officers and
employees of the Funds and IMCO with the goal of promoting
full, fair, accurate, timely and understandable disclosure in
the reports and documents filed by the Trust with, or
submitted to, the SEC, and in other public communications made
by the Funds.
- Each Covered Officer is responsible for promoting compliance
with the standards and restrictions imposed by applicable
laws, rules and regulations, and promoting compliance with the
USAA Funds' and IMCO's operating policies and procedures.
- A Covered Officer should not retaliate against any person
who reports a potential violation of this Code in good faith.
- A Covered Officer should notify the Chief Legal Officer
promptly if he knows of any violation of the Code. Failure
to do so itself is a violation of this Code.
IV. REPORTING AND ACCOUNTABILITY
A. INTERPRETATION OF THE CODE. The Chief Legal Officer of the Trust
is responsible for applying this Code to specific situations in
which questions are presented under it and has the authority to
interpret the Code in any particular situation. The Chief Legal
Officer should consult, if appropriate, the USAA Funds' outside
counsel or counsel for the Independent Trustees. However, any
approvals or waivers sought by a Covered Officer will be
reported initially to the CEO of USAA and will be considered by
the Trust's Board of Trustees.
B. REQUIRED REPORTS
- EACH COVERED OFFICER MUST:
- Upon adoption of the Code, affirm in writing to the
Board that he has received, read and understands the
Code.
- Annually thereafter affirm to the Chief Legal Officer
that he has complied with the requirements of the Code.
- THE CHIEF LEGAL OFFICER MUST:
- report to the Board about any matter or situation
submitted by a Covered Officer for interpretation under
the Code, and the advice given by the Chief Legal
Officer;
- report annually to the Board and the Corporate
Governance Committee describing any issues that arose
under the Code, or informing the Board and Corporate
Governance Committee that no reportable issues occurred
during the year.
C. INVESTIGATION PROCEDURES
The Funds will follow these procedures in investigating and enforcing
this Code:
- INITIAL COMPLAINT. All complaints or other inquiries
concerning potential violations of the Code must be reported
to the Chief Legal Officer. The Chief Legal Officer shall be
responsible for documenting any complaint. The Chief Legal
Officer also will report immediately to the President of the
Trust (if the complaint involves the Treasurer), the CEO of
USAA and the Chair of the Trust's Audit Committee (if the
complaint involves the President) any material potential
violations that could have a material effect on the Funds'
financial condition or reputation. For all other complaints,
the Chief Legal Officer will report quarterly to the Board.
- INVESTIGATIONS. The Chief Legal Officer will take all
appropriate action to investigate any potential violation
unless the CEO of USAA directs another person to undertake
such investigation. The Chief Legal Officer may utilize USAA's
Office of Ethics to do a unified investigation under this Code
and USAA's Code of Conduct. The Chief Legal Officer may direct
the Trust's outside counsel or the counsel to the Independent
Trustees (if any) to participate in any investigation under
this Code.
- STATUS REPORTS. The Chief Legal Officer will provide monthly
status reports to the Board about any alleged violation of the
Code that could have a material effect on the Funds' financial
condition or reputation, and quarterly updates regarding all
other alleged violations of the Code.
- VIOLATIONS OF THE CODE. If after investigation, the Chief
Legal Officer, or other investigating person, believes that a
violation of the Code has occurred, he will report immediately
to the CEO of USAA the nature of the violation, and his
recommendation regarding the materiality of the violation. If,
in the opinion of the investigating person, the violation
could materially affect the Funds' financial condition or
reputation, the Chief Legal Officer also will notify the Chair
of the Trust's Audit Committee. The Chief Legal Officer will
inform, and make a recommendation to, the Board, which will
consider what further action is appropriate. Appropriate
action could include: (1) review of, and modifications to, the
Code or other applicable policies or procedures;
(2) notifications to appropriate personnel of IMCO or USAA;
(3) dismissal of the Covered Officer; and/or (4) other
disciplinary actions including reprimands or fines.
- The Board of Trustees understands that Covered
Officers also are subject to USAA's Code of Business
Conduct. If a violation of this Code also violates
USAA's Code of Business Conduct, these procedures do
not limit or restrict USAA's ability to discipline
such Covered Officer under USAA's Code of Business
Conduct. In that event, the Chairman of the Board of
Trustees will report to the Board the action taken by
USAA with respect to a Covered Officer.
V. OTHER POLICIES AND PROCEDURES
This Code shall be the sole code of ethics adopted by the Funds for
purposes of Section 406 of the Act and the implementing regulations adopted by
the SEC applicable to registered investment companies. If other policies and
procedures of the Trust, IMCO, or other service providers govern or purport to
govern the behavior or activities of Covered Officers, they are superseded by
this Code to the extent that they overlap, conflict with, or are more lenient
than the provisions of this Code. The Investment Code of Ethics (designated to
address 1940 Act and Advisers Act requirements) and IMCO's more detailed
compliance policies and procedures (including its Insider Trading Policy) are
separate requirements applying to Covered Officers and other IMCO employees, and
are not part of this Code. Also, USAA's Code of Conduct imposes separate
requirements on Covered Officers and all employees of USAA, and also is not part
of this Code.
VI. AMENDMENTS
Any amendment to this Code, other than amendments to Appendix A, must
be approved or ratified by majority vote of the Board of Trustees.
VII. CONFIDENTIALITY AND DOCUMENT RETENTION
The Chief Legal Officer shall retain material investigation documents
and reports required to be prepared under the Code for six years from the date
of the resolution of any such complaint. All reports and records prepared or
maintained pursuant to this Code will be considered confidential and shall be
maintained and protected accordingly. Except as otherwise required by law or
this Code, such matters shall not be disclosed to anyone other than the Trust's
Board of Trustees and counsel for the Independent Trustees (if any), the Trust
and its counsel, IMCO, and other personnel of USAA as determined by the Trust's
Chief Legal Officer or the Chair of the Trust's Board of Trustees.
Approved and adopted by IMCO's Code of Ethics Committee: June 12, 2003.
Approved and adopted by the Boards of Directors/Trustees of USAA Mutual Fund,
Inc., USAA Tax-Exempt Fund, Inc., USAA Investment Trust & USAA State Tax-Free
Trust: June 25, 2003.
Approved and adopted by the Board of Trustees of USAA Life Investment Trust:
August 20, 2003.
Approved and adopted as amended by IMCO's Code of Ethics Committee: August 15,
2005.
Approved and adopted as amended by the Boards of Directors/Trustees of USAA
Mutual Fund, Inc., USAA Tax-Exempt Fund, Inc., USAA Investment Trust & USAA
State Tax-Free Trust: September 14, 2005.
Approved and adopted as amended by the Board of Trustees of USAA Life Investment
Trust: December 8, 2005.
Approved and adopted as amended by IMCO's Code of Ethics Committee: August 16,
2006.
Approved and adopted by the Board of Trustees of USAA Mutual Funds Trust:
September 13, 2006.
Approved and adopted by IMCO's Code of Ethics Committee: August 28, 2007.
Approved and adopted by the Investment Code of Ethics Committee: August 29,
2008.
Approved and adopted as amended by the Board of Trustees of USAA Mutual Funds
Trust: September 19, 2008.
Approved and adopted by the Investment Code of Ethics Committee: August 17,
2009.
Approved and adopted by the Board of Trustees of USAA Mutual Funds Trust:
September 24, 2009.
<PAGE>
APPENDIX A
COVERED OFFICERS
PRESIDENT
TREASURER
<PAGE>
(a)(2). Certification pursuant to Rule 30a-2(a) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit
99.CERT.
(a)(3). Not Applicable.
(b). Certification pursuant to Rule 30a-2(b) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(b))is filed and attached hereto as Exhibit
99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Registrant: USAA MUTUAL FUNDS TRUST, Period Ended May 31, 2010
By:* /s/ CHRISTOPHER P. LAIA
--------------------------------------------------------------
Signature and Title: Christopher P. Laia, Secretary
Date: August 6, 2010
------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:* /s/ CHRISTOPHER W. CLAUS
-----------------------------------------------------
Signature and Title: Christopher W. Claus, President
Date: August 6, 2010
------------------------------
By:* /s/ ROBERTO GALINDO, JR.
-----------------------------------------------------
Signature and Title: Roberto Galindo, Jr., Treasurer
Date: August 6, 2010
------------------------------
*Print the name and title of each signing officer under his or her signature.
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