UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR/S
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: DECEMBER 31,
Date of reporting period: JUNE 30, 2010
ITEM 1. SEMIANNUAL REPORT TO STOCKHOLDERS.
USAA TOTAL RETURN STRATEGY FUND - SEMIANNUAL REPORT FOR PERIOD ENDED
JUNE 30, 2010
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA TOTAL RETURN STRATEGY FUND]
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SEMIANNUAL REPORT
USAA TOTAL RETURN STRATEGY FUND
JUNE 30, 2010
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FUND OBJECTIVE
SEEKS A POSITIVE RETURN EVERY CALENDAR YEAR AND OVER THE LONG TERM (FIVE YEARS
AND MORE) TO ACHIEVE RETURNS GREATER THAN THE S&P 500 INDEX WITH LESS RISK.
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TYPES OF INVESTMENTS
One portion of the Fund's assets is shifted among stocks, investment-grade
bonds, or cash equivalents, generally investing at any given time in either (1)
stocks through the use of stock-based exchange-traded funds (ETFs), (2)
investment-grade bonds through either ETFs or direct investment, or (3) cash
equivalents through direct investment in short-term, high-quality money market
instruments or money market funds. Another portion of the Fund's assets is
invested in long and short positions of common stock of large U.S. companies.
The Fund also may utilize an index option-based strategy and a global tactical
asset allocation 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
FUND RECOGNITION 8
INVESTMENT OVERVIEW 9
FINANCIAL INFORMATION
Portfolio of Investments 14
Notes to Portfolio of Investments 30
Financial Statements 32
Notes to Financial Statements 35
EXPENSE EXAMPLE 52
ADVISORY AGREEMENTS 54
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
". . . INVESTORS MAY WANT TO REVIEW THEIR
LONG-TERM INVESTMENT STRATEGY. IT'S VITAL TO
CONTINUE -- AND EVEN INCREASE -- INVESTING [PHOTO OF DANIEL S. McNAMARA]
IF YOU WANT TO LIVE THE RETIREMENT LIFESTYLE
YOU ENVISION."
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JULY 2010
At the beginning of 2010, optimism permeated the financial markets. Stocks had
just finished a strong year (the S&P 500 Index was up 26.5% in 2009). Supported
by stimulus spending by the federal government, the U.S. economy was showing
signs of improvement. The housing market was stabilizing after several years of
falling prices. At the same time, corporate earnings, driven by surprisingly
strong top-line growth, were better than expected. Unemployment remained high,
but renewed job growth was widely expected at any moment.
During the spring, however, the markets were rattled by the European debt crisis
and its potential impact on European banks. There was growing investor
uncertainty about regulatory changes pending in Washington (related to the
health care, financial, and energy industries). Sentiment was further eroded by
the still-unexplained April "flash crash" in the U.S. stock market and BP's oil
spill in the Gulf of Mexico.
As a result, the outlook for the U.S. economy grew more uncertain as 2010
progressed. The federal government is winding down its stimulus spending and
many observers have questioned whether the nation's economic recovery will be
self-sustaining. The housing market has suffered more setbacks. In May, just a
month after the federal tax subsidy ended, sales of new single-family homes
dropped 33% to the lowest seasonally adjusted rate since records began in 1963.
Meanwhile, unemployment remains stubbornly high with most of the job growth
coming from government hiring of census workers.
Bonds generally provided positive results during the six-month period, but the
performance of the stock market was disappointing (the S&P 500 Index returned
-6.7% between January 1 and June 30, 2010). Many investors continue to stay on
the sidelines, primarily in low-yielding money market funds. But while there is
reason for caution, long-term investors should also take into account the
improvement in U.S. corporate balance sheets and the favorable outlook for U.S.
corporate earnings.
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2 | USAA TOTAL RETURN STRATEGY FUND
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While I find investors' lack of engagement understandable, I grow more concerned
about it with every passing day. Americans are not saving enough for their
retirements. Two-thirds have less than $50,000 in retirement savings (excluding
the value of their home and any traditional pension).
Fortunately, many people still have time to grow their retirement nest egg.
Furthermore, a number of catch-up provisions allow those over the age of 50 to
increase their contributions to individual retirement accounts (IRAs). Under
the circumstances, investors may want to review their long-term investment
strategy. It's vital to continue -- and even increase -- investing if you want
to live the retirement lifestyle you envision. However, this is based upon what
is most suitable for your needs. For assistance, please feel free to call one of
our USAA service representatives at 1-800-531-8722. They are available to help
you free of charge.
At USAA Investment Management Company, we are proud of the investment team that
manages our family of no-load mutual funds. Seasoned professionals all, they
understand the markets and are skilled at making the tactical decisions
necessary to pursue opportunities during market declines and to help reduce
exposure when valuations are rich. This ability can be especially valuable
during periods of market turmoil. I would argue that given the economic
headwinds it may be more important than ever. Certainly, it makes sense to have
some of the industry's top investment talent managing your hard-earned money.
Rest assured that in the months ahead, we will continue working hard on your
behalf. From all of us, thank you for your continued confidence in us. We
appreciate the opportunity to help you with your investment needs.
Sincerely,
/S/ DANIEL S. MCNAMARA
Daniel S. McNamara
President
USAA Investment Management Company
INVESTING IN SECURITIES PRODUCTS INVOLVES RISK, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
As interest rates rise, bond prices fall. o Past performance is no guarantee of
future results. o Mutual fund operating expenses apply and continue throughout
the life of the fund.
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.
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.
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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.
JOHN P. TOOHEY, CFA
U.S. Stocks
WASIF A. LATIF
Exchange-Traded Funds ROBERT WANG
JAMES FRANCIS, CFA
TONY ERA
Money Market Instruments
Credit Suisse Securities (USA) LLC's
Volaris Volatility Management Group
Index Options
YIRONG LI, CFA
DEFINA MALUKI, CFA
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o HOW DID THE USAA TOTAL RETURN STRATEGY FUND (THE FUND) PERFORM?
For the six months ended June 30, 2010, the Fund had a total return of
-4.27%. This compares to returns of -6.65% for the S&P 500 Index (the
Index) and -3.81% for the Lipper Flexible Portfolio Funds Index.
o PLEASE DESCRIBE THE MARKET ENVIRONMENT DURING THE SIX-MONTH REPORTING
PERIOD.
When the period began, the worst of the financial crisis and the recession
appeared to be over. The U.S. economy was improving, supported by ongoing
monetary stimulus from the Federal Reserve Board, a strong rebound in
manufacturing, robust corporate earnings, strengthening corporate balance
sheets, and increased
Past performance is no guarantee of future results.
Refer to page 10 for benchmark definitions.
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4 | USAA TOTAL RETURN STRATEGY FUND
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consumer confidence. The equity markets continued a rally that began in
March 2009, and credit markets continued to heal as corporate bond spreads
narrowed towards pre-crisis levels.
In mid-April, however, volatility returned as the Greek debt crisis shone a
light on the massive levels of sovereign debt in a number of developed
countries. Markets began pricing in the financial system risk posed by
highly leveraged European banks. Signs of a slowdown in China's economic
growth become more apparent. In the United States, financial regulatory
legislation renewed uncertainty about the future of the financial sector.
The massive oil spill in the Gulf of Mexico also focused more attention on
the potential for increased regulation of businesses.
Because of these headwinds, risk aversion returned to the markets. Yields
fell and prices rose on U.S. Treasuries as investors flocked to what they
perceived to be the safest securities. Volatility spiked as stock markets
declined and most commodity prices fell.
o WHAT FACTORS DROVE THE FUND'S PERFORMANCE?
The Fund seeks to have a positive total return every calendar year and
attempts to outperform the Index over a full market cycle using a
multi-pronged, risk-controlled strategy that attempts to avoid big stock
market downturns and participate to a significant degree in stock market
gains.
The Fund had four major components during the six-month reporting period.
The first component involved close to 70% of the Fund's assets being
invested in the SPDR Trust Series 1 exchange-traded fund (ETF), which seeks
to closely track the Index. This component had a negative total return for
the six months.
Exchange Traded Funds (ETFs) are subject to risks similar to those of
stocks. Investment returns may fluctuate and are subject to market
volatility, so that an investor's shares, when redeemed or sold, may be
worth more or less than their original cost. o As interest rates rise,
existing bond prices fall.
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MANAGERS' COMMENTARY ON THE FUND | 5
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The second component seeks to control risk in this portion of the Fund by
using an equity hedging strategy that's managed by Credit Suisse Securities
(USA) LLC's Volaris Volatility Management Group (Volaris Group). The
strategy involves purchasing index put or corresponding ETF options or put
spread options and selling index call or corresponding ETF options against
a highly correlated stock portfolio. This carefully managed equity hedging
strategy allows us to attempt to create a collar on our stock market
exposure that effectively limits downside (and upside) potential and gives
us the flexibility to quickly change the Fund's risk profile. This equity
hedging strategy helped the Fund avoid the worst of the losses when market
volatility spiked toward the end of the period. We work closely with
Volaris Group to actively manage the equity hedging strategy based on
market conditions.
The third component comprised about 23% of the Fund's assets in a
market-neutral strategy managed by Deutsche Investment Management Americas
Inc. (DIMA). DIMA invests primarily in long and short positions of common
stock of large U.S. companies and seeks to generate positive returns that
have low correlation with the Index. The market-neutral strategy had a
positive total return for the six months.
The fourth and final component comprised roughly 6% of the Fund's assets,
which were invested in a hedge fund called Deutsche iGAP Investment Trust
"B" (iGAP). Managed by DIMA, iGAP employs a global tactical asset
allocation strategy that invests only in liquid instruments, taking long or
short positions using futures on stock, currency, commodity and bond
markets around the world. The iGAP allocation had a slightly negative
return for the six months.
Options are considered speculative investment strategies. o Index collars
are generally employed to protect unrealized profits from the portfolio
being protected, and the index option class chosen will generally have an
underlying index that most closely tracks the performance of the portfolio.
While losses may be limited so are potential gains.
You will find a complete list of securities that the Fund owns on pages
14-29.
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6 | USAA TOTAL RETURN STRATEGY FUND
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o WHAT IS YOUR OUTLOOK FOR THE ECONOMY?
The broadest measure of U.S. economic activity, real gross domestic
product, grew at a 3.7% annual rate in the first quarter and a 2.4% annual
rate in the second quarter of 2010, driven by unprecedented monetary and
fiscal stimulus. We think that the lingering effects of the financial
crisis may make this recovery muted by historical standards.
Corporations took advantage of a period of extremely cheap and easy credit
to prepare their balance sheets for an uncertain future. However, banks are
still working to heal their balance sheets, suggesting that lending may
continue to contract. We expect consumer spending to remain subdued
compared to previous recoveries as households continue rebuilding their
balance sheets. Unemployment is likely to remain high. We anticipate higher
taxes and increased business regulation.
Like investors everywhere, we are deeply concerned about the news from the
eurozone, where the sovereign debt crisis could lead to a new period of
austerity which may weigh on the global recovery. We are also concerned
about the U.S. real estate market. In addition, until consumers prove more
willing to open their wallets, corporations may not have the confidence to
hire.
We remain vigilant for any signs of inflationary pressure. Longer term, we
believe that the unprecedented government spending is likely to be
inflationary. However, there is currently little evidence of inflation. In
fact, the risk of deflation grew during the six-month period because of the
eurozone debt crisis and its potential to slow the global economic recovery.
Thank you for your investment in the Fund.
THE TOTAL RETURN STRATEGY FUND MAY CHANGE THE ALLOCATION OF ITS PORTFOLIO
HOLDINGS REGULARLY WHICH MAY RESULT IN A HIGHER PROPORTION OF CAPITAL
GAINS, HIGHER PORTFOLIO TURNOVER, AND A LOWER RETURN. THE FUND UTILIZES A
FOCUSED INVESTMENT STRATEGY WHICH MAY INCREASE THE VOLATILITY OF THE FUND'S
INVESTMENT RESULTS. THERE IS NO ASSURANCE THAT THE FUND'S OBJECTIVES WILL
BE ACHIEVED.
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MANAGERS' COMMENTARY ON THE FUND | 7
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FUND RECOGNITION
USAA TOTAL RETURN STRATEGY FUND
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OVERALL MORNINGSTAR RATING(TM)
out of 1,810 large blend funds
for the period ended June 30, 2010:
OVERALL RATING
* * * *
3-YEAR
* * * * *
out of 1,810 funds
5-YEAR
* * * *
out of 1,486 funds
The Overall Morningstar Rating for a fund is derived from a weighted average of
the performance figures associated with its three-, five-, and 10-year (if
applicable) Morningstar Rating metrics. Ratings are based on risk-adjusted
returns.
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PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. For each fund with at least
a three-year history, Morningstar calculates a Morningstar Rating(TM) based on a
Morningstar Risk-Adjusted Return measure that accounts for variation in a fund's
monthly performance (including the effects of sales charges, loads, and
redemption fees), placing more emphasis on downward variations and rewarding
consistent performance. The top 10% of the funds in each broad asset class
receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars,
the next 22.5% receive 2 stars, and the bottom 10% receive 1 star.
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8 | USAA TOTAL RETURN STRATEGY FUND
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INVESTMENT OVERVIEW
USAA TOTAL RETURN STRATEGY FUND (Ticker Symbol: USTRX)
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6/30/10 12/31/09
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Net Assets $137.3 Million $149.2 Million
Net Asset Value Per Share $7.62 $7.97
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AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/10
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12/31/09 to 6/30/10* 1 Year 5 Years Since Inception 1/24/05
-4.27% 7.13% -1.12% -1.17%
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EXPENSE RATIO**
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1.96%
* Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
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 EXPENSE RATIO REPRESENTS THE TOTAL ANNUAL OPERATING EXPENSES BEFORE
REDUCTIONS OF ANY EXPENSES PAID INDIRECTLY AND INCLUDING ANY ACQUIRED FUND FEES
AND EXPENSES AND ANY DIVIDEND ON SHORT SALES, AS REPORTED IN THE FUND'S
PROSPECTUS DATED MAY 1, 2010, AND IS CALCULATED AS A PERCENTAGE OF AVERAGE NET
ASSETS. THE EXPENSE RATIO MAY DIFFER FROM THE FUND'S ACTUAL EXPENSE RATIO FOR
THE SIX-MONTH PERIOD ENDED JUNE 30, 2010, BEFORE REIMBURSEMENT, WHICH WAS 1.56%,
AS DISCLOSED IN THE FINANCIAL HIGHLIGHTS, INCLUDING DIVIDEND EXPENSES ON SHORT
SALES AND BEFORE ANY ACQUIRED FUND FEES AND EXPENSES AND EXPENSES PAID
INDIRECTLY.
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]
LIPPER FLEXIBLE USAA TOTAL RETURN
PORTFOLIO FUNDS INDEX S&P 500 INDEX STRATEGY FUND
01/31/05 $10,000.00 $10,000.00 $10,000.00
02/28/05 10,188.52 10,210.44 10,020.00
03/31/05 10,007.72 10,029.64 9,854.00
04/30/05 9,824.85 9,839.42 9,874.07
05/31/05 10,051.58 10,152.49 9,884.10
06/30/05 10,125.36 10,166.90 9,925.25
07/31/05 10,449.34 10,545.00 10,096.37
08/31/05 10,448.92 10,448.78 9,965.51
09/30/05 10,600.57 10,533.41 9,998.75
10/31/05 10,455.83 10,357.81 10,018.93
11/30/05 10,706.71 10,749.57 10,039.11
12/31/05 10,806.95 10,753.25 10,043.95
01/31/06 11,156.20 11,038.03 10,074.42
02/28/06 11,108.49 11,067.98 10,104.89
03/31/06 11,285.24 11,205.75 10,132.31
04/30/06 11,412.27 11,356.22 10,163.01
05/31/06 11,150.67 11,029.37 10,203.95
06/30/06 11,138.94 11,044.32 10,237.82
07/31/06 11,175.97 11,112.45 10,268.81
08/31/06 11,373.16 11,376.85 10,310.14
09/30/06 11,498.50 11,670.03 10,344.23
10/31/06 11,802.06 12,050.31 10,385.98
11/30/06 12,066.02 12,279.46 10,521.68
12/31/06 12,187.09 12,451.71 10,555.63
01/31/07 12,331.83 12,640.03 10,692.86
02/28/07 12,283.67 12,392.80 10,471.19
03/31/07 12,399.00 12,531.41 10,537.71
04/30/07 12,785.79 13,086.50 10,876.27
05/31/07 13,073.50 13,543.15 11,204.26
06/30/07 13,014.20 13,318.15 11,142.87
07/31/07 12,882.48 12,905.23 11,005.04
08/31/07 12,873.74 13,098.68 11,111.06
09/30/07 13,381.17 13,588.55 11,428.12
10/31/07 13,737.37 13,804.70 11,523.97
11/30/07 13,412.18 13,227.57 11,172.50
12/31/07 13,353.40 13,135.81 11,051.97
01/31/08 12,919.38 12,347.90 10,780.68
02/29/08 12,837.69 11,946.77 10,698.12
03/31/08 12,666.94 11,895.18 10,655.48
04/30/08 13,124.02 12,474.52 11,022.50
05/31/08 13,331.89 12,636.09 11,271.13
06/30/08 12,733.00 11,570.83 10,853.18
07/31/08 12,492.21 11,473.56 10,805.73
08/31/08 12,449.51 11,639.52 10,948.07
09/30/08 11,283.16 10,602.35 10,214.35
10/31/08 9,548.04 8,821.71 8,977.69
11/30/08 9,010.17 8,188.71 8,537.72
12/31/08 9,344.88 8,275.84 8,729.62
01/31/09 8,948.31 7,578.30 8,245.31
02/28/09 8,344.66 6,771.38 7,724.68
03/31/09 8,897.56 7,364.52 8,045.34
04/30/09 9,610.14 8,069.37 8,385.12
05/31/09 10,222.11 8,520.72 8,809.83
06/30/09 10,054.33 8,537.62 8,755.23
07/31/09 10,872.60 9,183.38 9,095.24
08/31/09 11,137.50 9,514.94 9,228.81
09/30/09 11,609.76 9,870.00 9,400.03
10/31/09 11,428.59 9,686.64 9,351.45
11/30/09 11,916.10 10,267.68 9,655.07
12/31/09 12,070.54 10,466.00 9,798.67
01/31/10 11,755.01 10,089.50 9,626.55
02/28/10 11,958.61 10,402.05 9,798.67
03/31/10 12,542.39 11,029.76 10,044.54
04/30/10 12,733.39 11,203.89 10,056.85
05/31/10 12,001.09 10,309.25 9,761.43
06/30/10 11,610.53 9,769.58 9,379.83
[END CHART]
*Data from 1/31/05 to 6/30/10.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Total Return Strategy Fund to the following benchmarks:
o The unmanaged Lipper Flexible Portfolio Funds Index tracks the performance
of the 30 largest funds within the Lipper Flexible Funds category. This
category allocates its investments across various asset classes, including
domestic common stocks, bonds, and money market instruments, with a focus
on total return.
o The unmanaged S&P 500 Index represents the weighted average performance of
a group of 500 widely held, publicly traded stocks.
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.
*The performance of the Lipper Flexible Portfolio Funds Index and the S&P 500
Index is calculated from the end of the month, January 31, 2005, while the
Fund's inception date is January 24, 2005. There may be a slight variation of
the performance numbers because of this difference. It is not possible to invest
directly in an index.
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10 | USAA TOTAL RETURN STRATEGY FUND
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TOP 10 COMMON STOCK POSITIONS -- LONG
AS OF 6/30/10
(% of Net Assets)
Perrigo Co. ................................................... 0.2%
CaptialSource, Inc. ........................................... 0.2%
Dr. Pepper Snapple Group, Inc. ................................ 0.2%
AmerisourceBergen Corp. ....................................... 0.2%
Hershey Co. ................................................... 0.2%
Royonier, Inc. ................................................ 0.2%
Capital One Financial Corp. ................................... 0.2%
Citigroup, Inc. ............................................... 0.2%
Del Monte Foods Co. ........................................... 0.2%
IAC/InterActiveCorp. .......................................... 0.2%
TOP 10 COMMON STOCK POSITIONS -- SHORT
AS OF 6/30/10
(% of Net Assets)
American Tower Corp. "A" ...................................... 0.2%
SBA Communications Corp. "A" .................................. 0.2%
AFLAC, Inc. ................................................... 0.2%
Crown Castle International Corp. .............................. 0.2%
Costco Wholesale Corp. ........................................ 0.2%
Allstate Corp. ................................................ 0.2%
O'Reilly Automotive, Inc. ..................................... 0.2%
Robert Half International, Inc. ............................... 0.2%
St. Joe Co. ................................................... 0.2%
C. H. Robinson Worldwide, Inc. ................................ 0.2%
You will find a complete list of securities that the Fund owns on pages 14-29.
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INVESTMENT OVERVIEW | 11
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SECTORS -- LONG COMMON STOCK POSITIONS
AS OF 6/30/10
(% of Net Assets)
Financials .................................................... 3.5%
Information Technology ........................................ 3.3%
Consumer Discretionary ........................................ 3.1%
Industrials ................................................... 2.6%
Health Care ................................................... 2.4%
Consumer Staples .............................................. 1.8%
Materials ..................................................... 1.4%
Energy ........................................................ 1.2%
Telecommunication Services .................................... 0.7%
Utilities ..................................................... 0.3%
SECTORS -- SHORT COMMON STOCK POSITIONS
AS OF 6/30/10
(% of Net Assets)
Financials .................................................... 4.5%
Information Technology ........................................ 3.0%
Industrials ................................................... 2.7%
Consumer Discretionary ........................................ 2.4%
Health Care ................................................... 1.8%
Consumer Staples .............................................. 1.6%
Energy ........................................................ 1.5%
Materials ..................................................... 1.5%
Telecommunication Services .................................... 0.9%
Utilities ..................................................... 0.6%
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12 | USAA TOTAL RETURN STRATEGY FUND
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ASSET ALLOCATION
AS OF 6/30/10
(% of Net Assets)
Common Stocks -- Long ........................................ 20.3%
Stock-Based Exchange-Traded Funds* ........................... 69.1%
Hedge Funds .................................................. 5.9%
Money Market Instruments ..................................... 1.9%
Common Stocks -- Short ....................................... -20.5%
Purchased Options ............................................ 2.4%
Written Options .............................................. -0.9%
* Exchange-traded funds (ETFs) are baskets of securities and are traded like
individual stocks on an exchange. The Fund relies on an exemptive order that
allows investments in ETFs above the level permitted under the Investment
Company Act of 1940.
Percentages are of net assets of the Fund and may not equal 100%.
================================================================================
INVESTMENT OVERVIEW | 13
<PAGE>
================================================================================
PORTFOLIO OF INVESTMENTS
June 30, 2010 (unaudited)
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
LONG POSITIONS (97.2%)
COMMON STOCKS (20.3%)(a)
CONSUMER DISCRETIONARY (3.1%)
-----------------------------
ADVERTISING (0.1%)
9,000 Clear Channel Outdoor Holdings, Inc. "A"* $ 78
--------
APPAREL & ACCESSORIES & LUXURY GOODS (0.1%)
2,900 Coach, Inc. 106
--------
APPAREL RETAIL (0.0%)
1,500 Aeropostale, Inc.* 43
--------
AUTO PARTS & EQUIPMENT (0.2%)
2,000 Autoliv, Inc.* 96
7,200 Johnson Controls, Inc. 193
--------
289
--------
BROADCASTING (0.2%)
5,000 Liberty Media-Starz "A"* 259
--------
CATALOG RETAIL (0.2%)
24,900 Liberty Media Corp. Interactive "A"* 261
--------
CONSUMER ELECTRONICS (0.1%)
4,600 Garmin Ltd. 135
--------
EDUCATION SERVICES (0.3%)
11,400 Career Education Corp.* 262
4,300 DeVry, Inc. 226
--------
488
--------
GENERAL MERCHANDISE STORES (0.1%)
2,900 Big Lots, Inc.* 93
--------
HOMEFURNISHING RETAIL (0.1%)
8,000 Williams-Sonoma, Inc. 199
--------
HOUSEHOLD APPLIANCES (0.2%)
2,800 Whirlpool Corp. 246
--------
INTERNET RETAIL (0.6%)
2,300 Amazon.com, Inc.* 251
12,900 Expedia, Inc. 242
================================================================================
14 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
1,600 Priceline.com, Inc.* $ 283
--------
776
--------
MOVIES & ENTERTAINMENT (0.1%)
5,300 Madison Square Garden, Inc. "A"* 104
--------
PUBLISHING (0.2%)
31,400 New York Times Co. "A"* 272
--------
RESTAURANTS (0.4%)
3,000 Panera Bread Co. "A"* 226
10,900 Starbucks Corp. 265
--------
491
--------
SPECIALIZED CONSUMER SERVICES (0.0%)
2,000 Hillenbrand, Inc. 43
--------
SPECIALTY STORES (0.2%)
22,200 Office Depot, Inc.* 90
9,400 Signet Jewelers Ltd.* 258
--------
348
--------
Total Consumer Discretionary 4,231
--------
CONSUMER STAPLES (1.8%)
-----------------------
AGRICULTURAL PRODUCTS (0.2%)
8,800 Corn Products International, Inc. 267
--------
FOOD RETAIL (0.2%)
7,600 Whole Foods Market, Inc.* 274
--------
HOUSEHOLD PRODUCTS (0.2%)
3,300 Colgate-Palmolive Co. 260
--------
PACKAGED FOODS & MEAT (0.6%)
19,900 Del Monte Foods Co. 286
6,100 Hershey Co. 293
16,800 Tyson Foods, Inc. "A" 275
--------
854
--------
PERSONAL PRODUCTS (0.4%)
4,500 Estee Lauder Companies, Inc. "A" 251
6,200 Herbalife Ltd. 285
--------
536
--------
SOFT DRINKS (0.2%)
8,000 Dr. Pepper Snapple Group, Inc. 299
--------
Total Consumer Staples 2,490
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 15
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
ENERGY (1.2%)
-------------
OIL & GAS DRILLING (0.3%)
17,300 Patterson-UTI Energy, Inc. $ 223
7,400 Rowan Companies, Inc.* 162
--------
385
--------
OIL & GAS EQUIPMENT & SERVICES (0.4%)
8,000 Exterran Holdings, Inc.* 206
6,800 Oil States International, Inc.* 269
2,400 Superior Energy Services, Inc.* 45
--------
520
--------
OIL & GAS EXPLORATION & PRODUCTION (0.5%)
4,500 Chesapeake Energy Corp. 95
3,900 Cimarex Energy Co. 279
10,900 Cobalt International Energy, Inc.* 81
5,200 Newfield Exploration Co.* 254
--------
709
--------
Total Energy 1,614
--------
FINANCIALS (3.5%)
-----------------
CONSUMER FINANCE (0.7%)
14,300 AmeriCredit Corp.* 261
7,200 Capital One Financial Corp. 290
12,900 Discover Financial Services 180
25,800 SLM Corp.* 268
--------
999
--------
DIVERSIFIED BANKS (0.1%)
1,600 Comerica, Inc. 59
--------
MULTI-LINE INSURANCE (0.0%)
3,500 Genworth Financial, Inc. "A"* 46
--------
MULTI-SECTOR HOLDINGS (0.2%)
10,200 Leucadia National Corp.* 199
--------
OTHER DIVERSIFIED FINANCIAL SERVICES (0.2%)
76,700 Citigroup, Inc.* 288
--------
PROPERTY & CASUALTY INSURANCE (0.4%)
4,400 Allied World Assurance Co. Holdings Ltd. 200
3,700 CNA Financial Corp.* 95
1,100 Erie Indemnity Co. "A" 50
10,400 Old Republic International Corp. 126
7,700 Xl Capital Ltd. 123
--------
594
--------
================================================================================
16 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
REAL ESTATE SERVICES (0.1%)
1,700 Jones Lang LaSalle, Inc. $ 112
--------
REGIONAL BANKS (1.2%)
62,900 CapitalSource, Inc. 299
22,600 Fifth Third Bancorp 278
50,000 Huntington Bancshares, Inc. 277
8,700 KeyCorp 67
11,100 Marshall & Ilsley Corp. 79
102,500 Popular, Inc.* 275
6,600 SunTrust Banks, Inc. 154
10,800 Zions Bancorp 233
--------
1,662
--------
REITs - OFFICE (0.2%)
45,000 HRPT Properties Trust 279
1,700 Piedmont Office Realty Trust, "A" 32
--------
311
--------
REITs - SPECIALIZED (0.4%)
13,400 Hospitality Properties Trust 283
6,600 Rayonier, Inc. 290
--------
573
--------
Total Financials 4,843
--------
HEALTH CARE (2.4%)
------------------
BIOTECHNOLOGY (0.1%)
4,400 Talecris Biotherapeutics Holdings Corp.* 93
--------
HEALTH CARE DISTRIBUTORS (0.5%)
9,400 AmerisourceBergen Corp. 299
8,100 Cardinal Health, Inc. 272
2,800 McKesson Corp. 188
--------
759
--------
HEALTH CARE EQUIPMENT (0.4%)
8,400 Hill-Rom Holdings, Inc. 256
4,900 Hologic, Inc.* 68
900 Intuitive Surgical, Inc.* 284
--------
608
--------
HEALTH CARE FACILITIES (0.2%)
6,500 Universal Health Services, Inc. "B" 248
--------
LIFE SCIENCES TOOLS & SERVICES (0.2%)
3,600 Waters Corp.* 233
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 17
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
MANAGED HEALTH CARE (0.6%)
14,700 Coventry Health Care, Inc.* $ 260
3,300 Health Net, Inc.* 80
6,200 Humana, Inc.* 283
8,100 UnitedHealth Group, Inc. 230
--------
853
--------
PHARMACEUTICALS (0.4%)
8,200 Endo Pharmaceuticals Holdings, Inc.* 179
5,200 Perrigo Co. 307
--------
486
--------
Total Health Care 3,280
--------
INDUSTRIALS (2.6%)
------------------
AIRLINES (0.4%)
27,200 AMR Corp.* 184
3,900 Copa Holdings S.A. "A" 172
16,300 Delta Air Lines, Inc.* 192
--------
548
--------
BUILDING PRODUCTS (0.3%)
3,700 Armstrong World Industries, Inc.* 112
8,500 Owens Corning, Inc.* 254
--------
366
--------
CONSTRUCTION & ENGINEERING (0.2%)
8,200 Shaw Group, Inc.* 281
--------
CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (0.4%)
8,700 Oshkosh Corp.* 271
2,300 Toro Co. 113
14,400 Trinity Industries, Inc. 255
--------
639
--------
ELECTRICAL COMPONENTS & EQUIPMENT (0.1%)
2,200 Rockwell Automation, Inc. 108
--------
INDUSTRIAL CONGLOMERATES (0.4%)
3,400 3M Co. 269
7,500 Carlisle Companies, Inc. 271
--------
540
--------
INDUSTRIAL MACHINERY (0.1%)
5,700 Timken Co. 148
--------
MARINE PORTS & SERVICES (0.2%)
10,600 Teekay Corp. 277
--------
================================================================================
18 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
SECURITY & ALARM SERVICES (0.1%)
7,100 Corrections Corp. of America* $ 136
--------
TRUCKING (0.4%)
29,900 Hertz Global Holdings, Inc.* 283
6,000 Ryder System, Inc. 241
--------
524
--------
Total Industrials 3,567
--------
INFORMATION TECHNOLOGY (3.3%)
-----------------------------
COMMUNICATIONS EQUIPMENT (0.2%)
6,100 EchoStar Corp. "A"* 116
13,200 JDS Uniphase Corp.* 130
4,200 Tellabs, Inc. 27
--------
273
--------
COMPUTER HARDWARE (0.2%)
9,100 Teradata Corp.* 278
--------
COMPUTER STORAGE & PERIPHERALS (0.8%)
8,000 Lexmark International, Inc. "A"* 264
2,900 NetApp, Inc.* 108
6,300 SanDisk Corp.* 265
20,100 Seagate Technology* 262
8,800 Western Digital Corp.* 266
--------
1,165
--------
DATA PROCESSING & OUTSOURCED SERVICES (0.5%)
5,300 Computer Sciences Corp. 240
3,800 Hewitt Associates, Inc. "A"* 131
1,400 MasterCard, Inc. "A" 279
--------
650
--------
ELECTRONIC COMPONENTS (0.2%)
35,000 Vishay Intertechnology, Inc.* 271
--------
INTERNET SOFTWARE & SERVICES (0.6%)
6,700 Akamai Technologies, Inc.* 272
11,300 AOL, Inc.* 235
13,000 IAC/InterActiveCorp.* 285
--------
792
--------
SEMICONDUCTORS (0.4%)
34,800 Advanced Micro Devices, Inc.* 255
30,800 Micron Technology, Inc.* 261
--------
516
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 19
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
SYSTEMS SOFTWARE (0.2%)
4,300 VMware, Inc. "A"* $ 269
--------
TECHNOLOGY DISTRIBUTORS (0.2%)
7,400 Tech Data Corp.* 264
--------
Total Information Technology 4,478
--------
MATERIALS (1.4%)
----------------
DIVERSIFIED CHEMICALS (0.2%)
2,800 Ashland, Inc. 130
8,900 Cabot Corp. 215
--------
345
--------
DIVERSIFIED METALS & MINING (0.4%)
15,400 Titanium Metals Corp.* 271
4,000 Walter Industries, Inc. 243
--------
514
--------
FERTILIZERS & AGRICULTURAL CHEMICALS (0.2%)
4,500 CF Industries Holdings, Inc. 285
--------
SPECIALTY CHEMICALS (0.4%)
6,800 Cytec Industries, Inc. 272
3,100 Lubrizol Corp. 249
--------
521
--------
STEEL (0.2%)
5,300 Cliffs Natural Resources, Inc. 250
--------
Total Materials 1,915
--------
TELECOMMUNICATION SERVICES (0.7%)
---------------------------------
INTEGRATED TELECOMMUNICATION SERVICES (0.2%)
44,200 Qwest Communications International, Inc. 232
--------
WIRELESS TELECOMMUNICATION SERVICES (0.5%)
51,700 Sprint Nextel Corp.* 219
8,500 Telephone & Data Systems, Inc. 258
5,500 U.S. Cellular Corp.* 227
--------
704
--------
Total Telecommunication Services 936
--------
UTILITIES (0.3%)
----------------
ELECTRIC UTILITIES (0.1%)
2,500 Progress Energy, Inc. 98
--------
================================================================================
20 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (0.2%)
5,400 Constellation Energy Group, Inc. $ 174
10,096 NRG Energy, Inc.* 214
--------
388
--------
Total Utilities 486
--------
Total Common Stocks (cost: $27,670) 27,840
--------
EXCHANGE-TRADED FUNDS (69.1%)
919,040 SPDR Trust Series 1 (cost: $117,556) 94,863
--------
HEDGE FUNDS (5.9%)
517,063 Deutsche iGAP Investment Trust "B", acquired 8/01/2008;
cost: $10,000*(b),(c) 8,102
--------
MONEY MARKET INSTRUMENTS (1.9%)
MONEY MARKET FUNDS (1.9%)
2,664,948 State Street Institutional Liquid Reserve Fund,
0.21%(a),(d) (cost: $2,665) 2,665
--------
Total Long Positions (cost: $157,891) 133,470
--------
TOTAL INVESTMENTS (COST: $157,891) $133,470
========
SHORT POSITIONS (20.5%)
COMMON STOCKS (20.5%)
CONSUMER DISCRETIONARY (2.4%)
-----------------------------
APPAREL RETAIL (0.1%)
11,300 American Eagle Outfitters, Inc. 133
--------
AUTO PARTS & EQUIPMENT (0.2%)
7,400 BorgWarner, Inc.* 276
--------
AUTOMOBILE MANUFACTURERS (0.1%)
5,600 Thor Industries, Inc. 133
--------
AUTOMOTIVE RETAIL (0.2%)
6,100 O'Reilly Automotive, Inc.* 290
--------
CABLE & SATELLITE (0.1%)
7,200 Cablevision Systems Corp. "A" 173
--------
CASINOS & GAMING (0.7%)
16,000 International Game Technology 251
10,100 Las Vegas Sands Corp.* 224
6,700 Penn National Gaming, Inc.* 155
6,700 WMS Industries, Inc.* 263
--------
893
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 21
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
DISTRIBUTORS (0.1%)
8,100 LKQ Corp.* $ 156
--------
HOMEBUILDING (0.2%)
20,600 KB Home 227
7,500 Lennar Corp. "A" 104
--------
331
--------
HOTELS, RESORTS, & CRUISE LINES (0.0%)
1,900 Carnival Corp. 58
--------
HOUSEHOLD APPLIANCES (0.1%)
2,500 Stanley Black & Decker, Inc. 126
--------
HOUSEWARES & SPECIALTIES (0.1%)
10,200 Newell Rubbermaid, Inc. 149
--------
MOVIES & ENTERTAINMENT (0.2%)
6,200 Walt Disney Co. 195
--------
PUBLISHING (0.1%)
3,300 Meredith Corp. 103
--------
RESTAURANTS (0.2%)
13,700 Burger King Holdings, Inc. 231
--------
Total Consumer Discretionary 3,247
--------
CONSUMER STAPLES (1.6%)
-----------------------
DRUG RETAIL (0.1%)
2,200 Walgreen Co. 59
--------
FOOD DISTRIBUTORS (0.2%)
9,500 Sysco Corp. 271
--------
HOUSEHOLD PRODUCTS (0.2%)
3,900 Clorox Co. 243
--------
HYPERMARKETS & SUPER CENTERS (0.2%)
5,300 Costco Wholesale Corp. 291
--------
PACKAGED FOODS & MEAT (0.5%)
11,000 Flowers Foods, Inc. 269
9,800 Kraft Foods, Inc. "A" 274
5,300 McCormick & Co., Inc. 201
--------
744
--------
PERSONAL PRODUCTS (0.1%)
5,900 Avon Products, Inc. 156
--------
SOFT DRINKS (0.2%)
4,500 PepsiCo, Inc. 274
--------
================================================================================
22 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
TOBACCO (0.1%)
7,500 Altria Group, Inc. $ 150
--------
Total Consumer Staples 2,188
--------
ENERGY (1.5%)
-------------
COAL & CONSUMABLE FUELS (0.1%)
5,400 Alpha Natural Resources, Inc.* 183
--------
OIL & GAS EQUIPMENT & SERVICES (0.2%)
2,700 Dresser-Rand Group, Inc.* 85
9,700 Halliburton Co. 238
--------
323
--------
OIL & GAS EXPLORATION & PRODUCTION (0.9%)
7,500 Comstock Resources, Inc.* 208
17,600 Denbury Resources, Inc.* 258
2,100 EOG Resources, Inc. 207
14,400 Petrohawk Energy Corp.* 244
6,200 Range Resources Corp. 249
--------
1,166
--------
OIL & GAS REFINING & MARKETING (0.3%)
15,200 Frontier Oil Corp. 204
8,300 Holly Corp. 221
--------
425
--------
Total Energy 2,097
--------
FINANCIALS (4.5%)
-----------------
ASSET MANAGEMENT & CUSTODY BANKS (1.0%)
10,100 Eaton Vance Corp. 279
13,900 Federated Investors, Inc. "B" 288
29,200 Janus Capital Group, Inc. 259
2,500 Northern Trust Corp. 117
7,600 State Street Corp. 257
5,900 Waddell & Reed Financial, Inc. "A" 129
--------
1,329
--------
DIVERSIFIED REAL ESTATE ACTIVITIES (0.2%)
12,500 St. Joe Co.* 290
--------
INVESTMENT BANKING & BROKERAGE (0.4%)
19,900 Charles Schwab Corp. 282
15,700 TD Ameritrade Holding Corp.* 240
--------
522
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 23
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
LIFE & HEALTH INSURANCE (0.5%)
6,900 AFLAC, Inc. $ 295
4,400 Torchmark Corp. 218
6,100 Unum Group 132
--------
645
--------
PROPERTY & CASUALTY INSURANCE (0.2%)
10,100 Allstate Corp. 290
--------
REGIONAL BANKS (0.7%)
8,600 BancorpSouth, Inc. 154
3,200 Bank of Hawaii Corp. 155
20,756 First Horizon National Corp.* 237
16,500 TCF Financial Corp. 274
17,600 Wilmington Trust Corp. 195
--------
1,015
--------
REITs - INDUSTRIAL (0.2%)
24,500 ProLogis 248
--------
REITs - OFFICE (0.1%)
3,000 Boston Properties, Inc. 214
--------
REITs - RESIDENTIAL (0.3%)
13,800 Apartment Investment & Management Co. "A" 267
1,500 AvalonBay Communities, Inc. 140
--------
407
--------
REITs - RETAIL (0.4%)
7,200 Regency Centers Corp. 248
3,300 Simon Property Group, Inc. 266
--------
514
--------
REITs - SPECIALIZED (0.1%)
9,000 Host Hotels & Resorts, Inc. 121
--------
SPECIALIZED FINANCE (0.1%)
4,300 Moody's Corp. 86
--------
THRIFTS & MORTGAGE FINANCE (0.3%)
20,800 Hudson City Bancorp, Inc. 255
17,700 People's United Financial, Inc. 239
--------
494
--------
Total Financials 6,175
--------
HEALTH CARE (1.8%)
------------------
BIOTECHNOLOGY (0.1%)
4,600 Amylin Pharmaceuticals, Inc.* 87
--------
================================================================================
24 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
HEALTH CARE DISTRIBUTORS (0.1%)
6,700 Patterson Companies, Inc. $ 191
--------
HEALTH CARE EQUIPMENT (0.3%)
1,600 Baxter International, Inc. 65
4,800 Beckman Coulter, Inc. 290
3,000 St. Jude Medical, Inc.* 108
--------
463
--------
HEALTH CARE FACILITIES (0.1%)
7,800 VCA Antech, Inc.* 193
--------
HEALTH CARE SERVICES (0.2%)
5,400 Quest Diagnostics, Inc. 269
--------
HEALTH CARE SUPPLIES (0.2%)
7,700 DENTSPLY International, Inc. 230
--------
LIFE SCIENCES TOOLS & SERVICES (0.2%)
4,800 Covance, Inc.* 246
--------
MANAGED HEALTH CARE (0.1%)
5,000 CIGNA Corp. 155
--------
PHARMACEUTICALS (0.5%)
6,000 Abbott Laboratories 281
20,200 Pfizer, Inc. 288
2,500 Watson Pharmaceuticals, Inc.* 101
--------
670
--------
Total Health Care 2,504
--------
INDUSTRIALS (2.7%)
------------------
AEROSPACE & DEFENSE (0.3%)
4,400 Alliant Techsystems, Inc.* 273
1,500 Precision Castparts Corp. 154
--------
427
--------
AIR FREIGHT & LOGISTICS (0.3%)
5,200 C.H. Robinson Worldwide, Inc. 290
9,400 UTi Worldwide, Inc. 116
--------
406
--------
BUILDING PRODUCTS (0.1%)
3,000 Lennox International, Inc. 125
--------
CONSTRUCTION & ENGINEERING (0.1%)
5,000 AECOM Technology Corp.* 115
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 25
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (0.8%)
5,600 AGCO Corp.* $ 151
4,700 Caterpillar, Inc. 282
5,400 Navistar International Corp.* 266
14,000 Terex Corp.* 263
6,500 Wabtec Corp. 259
--------
1,221
--------
ELECTRICAL COMPONENTS & EQUIPMENT (0.1%)
2,000 Roper Industries, Inc. 112
--------
ENVIRONMENTAL & FACILITIES SERVICES (0.1%)
3,600 Waste Connections, Inc.* 125
--------
HUMAN RESOURCE & EMPLOYMENT SERVICES (0.2%)
12,300 Robert Half International, Inc. 290
--------
INDUSTRIAL CONGLOMERATES (0.1%)
5,400 McDermott International, Inc.* 117
--------
RAILROADS (0.3%)
5,000 CSX Corp. 248
3,900 Union Pacific Corp. 271
--------
519
--------
RESEARCH & CONSULTING SERVICES (0.1%)
2,700 FTI Consulting, Inc.* 118
--------
TRADING COMPANIES & DISTRIBUTORS (0.1%)
4,300 GATX Corp. 115
--------
TRUCKING (0.1%)
2,400 Con-Way, Inc. 72
--------
Total Industrials 3,762
--------
INFORMATION TECHNOLOGY (3.0%)
-----------------------------
APPLICATION SOFTWARE (0.5%)
9,100 Adobe Systems, Inc.* 240
3,200 ANSYS, Inc.* 130
24,000 Cadence Design Systems, Inc.* 139
16,900 Nuance Communications, Inc.* 253
--------
762
--------
COMMUNICATIONS EQUIPMENT (0.1%)
4,400 QUALCOMM, Inc. 145
--------
DATA PROCESSING & OUTSOURCED SERVICES (0.2%)
10,300 Fidelity National Information Services, Inc. 276
--------
================================================================================
26 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
HOME ENTERTAINMENT SOFTWARE (0.2%)
16,400 Electronic Arts, Inc.* $ 236
--------
INTERNET SOFTWARE & SERVICES (0.1%)
6,200 Monster Worldwide, Inc.* 72
--------
IT CONSULTING & OTHER SERVICES (0.2%)
17,100 SAIC, Inc.* 286
--------
SEMICONDUCTOR EQUIPMENT (0.8%)
22,300 Applied Materials, Inc. 268
7,300 Lam Research Corp.* 278
26,100 MEMC Electronic Materials, Inc.* 258
9,500 Novellus Systems, Inc.* 241
--------
1,045
--------
SEMICONDUCTORS (0.7%)
10,100 Linear Technology Corp. 281
8,100 Maxim Integrated Products, Inc. 136
10,400 Microchip Technology, Inc. 288
20,600 National Semiconductor Corp. 277
--------
982
--------
SYSTEMS SOFTWARE (0.2%)
8,800 McAfee, Inc.* 271
--------
Total Information Technology 4,075
--------
MATERIALS (1.5%)
----------------
CONSTRUCTION MATERIALS (0.4%)
3,300 Martin Marietta Materials, Inc. 280
6,000 Vulcan Materials Co. 263
--------
543
--------
FERTILIZERS & AGRICULTURAL CHEMICALS (0.2%)
5,100 Monsanto Co. 236
--------
FOREST PRODUCTS (0.2%)
6,300 Weyerhaeuser Co. 222
--------
PAPER PACKAGING (0.1%)
6,800 Bemis Co., Inc. 183
--------
STEEL (0.6%)
22,100 AK Steel Holding Corp. 263
2,400 Allegheny Technologies, Inc. 106
7,400 Nucor Corp. 283
5,900 United States Steel Corp. 228
--------
880
--------
Total Materials 2,064
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 27
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
TELECOMMUNICATION SERVICES (0.9%)
---------------------------------
INTEGRATED TELECOMMUNICATION SERVICES (0.2%)
27,100 Windstream Corp. $ 286
--------
WIRELESS TELECOMMUNICATION SERVICES (0.7%)
6,800 American Tower Corp. "A"* 302
7,800 Crown Castle International Corp.* 291
8,700 SBA Communications Corp. "A"* 296
--------
889
--------
Total Telecommunication Services 1,175
--------
UTILITIES (0.6%)
----------------
GAS UTILITIES (0.2%)
6,000 EQT Corp. 217
--------
MULTI-UTILITIES (0.3%)
14,200 CMS Energy Corp. 208
3,300 Sempra Energy 154
--------
362
--------
WATER UTILITIES (0.1%)
12,100 Aqua America, Inc. 214
--------
Total Utilities 793
--------
Total Common Stocks (proceeds: $30,127) 28,080
--------
TOTAL SHORT POSITIONS (PROCEEDS: $30,127) $ 28,080
========
--------------------------------------------------------------------------------
NUMBER
OF CONTRACTS
--------------------------------------------------------------------------------
PURCHASED OPTIONS (2.4%)
732 Put - S&P 500 Index expiring August 21, 2010 at 1,025
(cost: $1,832) 3,279
--------
WRITTEN OPTIONS (0.9%)
(732) Put - S&P 500 Index expiring August 21, 2010 at 920
(premiums received: $650) (1,277)
--------
================================================================================
28 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------------
($ 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
----------------------------------------------------------------------------------------------------
Long Positions:
Common Stocks $ 27,840 $- $- $ 27,840
Exchange-Traded Funds 94,863 - - 94,863
Hedge Funds - 8,102 - 8,102
Money Market Instruments 2,665 - - 2,665
Purchased Options 3,279 - - 3,279
----------------------------------------------------------------------------------------------------
Total $128,647 $8,102 $- $136,749
----------------------------------------------------------------------------------------------------
(LEVEL 1) (LEVEL 2) (LEVEL 3)
QUOTED PRICES OTHER SIGNIFICANT SIGNIFICANT
IN ACTIVE MARKETS OBSERVABLE UNOBSERVABLE
LIABILITIES FOR IDENTICAL ASSETS INPUTS INPUTS TOTAL
----------------------------------------------------------------------------------------------------
Short Positions:
Common Stocks $(28,080) $- $- $(28,080)
Written Options (1,277) - - (1,277)
----------------------------------------------------------------------------------------------------
Total $(29,357) $- $- $(29,357)
----------------------------------------------------------------------------------------------------
For the six-month period ended June 30, 2010, there were no significant
transfers of securities between levels 1, 2, or 3. Transfers into and out of the
levels are recognized based on the securities' placements as of the beginning of
the period in which the event or circumstance that caused the transfer occurred.
================================================================================
PORTFOLIO OF INVESTMENTS | 29
<PAGE>
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
June 30, 2010 (unaudited)
--------------------------------------------------------------------------------
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.
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
HEDGE FUNDS -- private investment funds open to a limited range of investors
and exempt from certain regulations. Deutsche iGAP Investment Trust, managed
by Deutsche Bank Trust Company Americas, invests primarily in a diversified
portfolio of short-term money market investments, and long and short
positions in exchange-traded equity index and government bond index futures,
currency forward contracts, and other derivative instruments. As of June 30,
2010, the Fund owns approximately 7% of the Class "B" shares of the iGAP fund
and may redeem all or part of its investment upon 10 days' prior written
notice. The Fund does not invest in the iGAP fund for the purpose of
exercising management or control.
================================================================================
30 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
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.
o SPECIFIC NOTES
(a) Securities are pledged with a broker as collateral for short positions
borrowed and segregated to cover the value of the short positions.
(b) Restricted security that is not registered under the Securities Act of
1933.
(c) Security deemed illiquid by the USAA Investment Management Company (the
Manager), under liquidity guidelines approved by the Board of Trustees.
The aggregate market value of these securities at June 30, 2010, was
$8,102,000, which represented 5.9% of the Fund's net assets.
(d) Rate represents the money market fund annualized seven-day yield at June
30, 2010.
* Non-income-producing security.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 31
<PAGE>
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
June 30, 2010 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $157,891) $133,470
Purchased options, at market value (cost of $1,832) 3,279
Cash 20
Deposits with broker for securities sold short 29,624
Receivables:
Capital shares sold 71
Dividends and interest 501
--------
Total assets 166,965
--------
LIABILITIES
Payables:
Dividends for securities sold short 43
Capital shares redeemed 102
Securities sold short, at market value (proceeds of $30,127) 28,080
Written options, at market value (premiums received of $650) 1,277
Accrued management fees 70
Accrued transfer agent's fees 6
Other accrued expenses and payables 58
--------
Total liabilities 29,636
--------
Net assets applicable to capital shares outstanding $137,329
========
NET ASSETS CONSIST OF:
Paid-in capital $191,284
Accumulated undistributed net investment loss (183)
Accumulated net realized loss on investments, securities
sold short, and options (32,218)
Net unrealized depreciation of investments,
securities sold short, and options (21,554)
--------
Net assets applicable to capital shares outstanding $137,329
========
Capital shares outstanding, unlimited number of shares
authorized, no par value 18,017
========
Net asset value, redemption price, and offering price per share $ 7.62
========
See accompanying notes to financial statements.
================================================================================
32 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended June 30, 2010 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 1,120
Interest 1
--------
Total income 1,121
--------
EXPENSES
Management fees 440
Administration and servicing fees 110
Transfer agent's fees 275
Custody and accounting fees 49
Postage 15
Shareholder reporting fees 9
Trustees' fees 5
Registration fees 13
Professional fees 35
Dividend expense on securities sold short 170
Other 23
--------
Total expenses 1,144
--------
NET INVESTMENT LOSS (23)
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
SECURITIES SOLD SHORT, AND OPTIONS
Net realized gain (loss) on:
Investments (3,226)
Securities sold short 2,836
Options 142
Change in net unrealized appreciation/depreciation of:
Investments (12,899)
Securities sold short 6,829
Options 361
--------
Net realized and unrealized loss (5,957)
--------
Decrease in net assets resulting from operations $ (5,980)
========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 33
<PAGE>
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended June 30, 2010 (unaudited), and year ended December 31,
2009
--------------------------------------------------------------------------------
6/30/2010 12/31/2009
---------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income (loss) $ (23) $ 558
Net realized loss on investments (3,226) (15,131)
Net realized gain on securities sold short 2,836 5,633
Net realized gain (loss) on options 142 (6,676)
Payment from USAA Investment Management Company - 8
Change in net unrealized appreciation/depreciation of:
Investments (12,899) 37,777
Securities sold short 6,829 (7,222)
Options 361 459
-----------------------
Increase (decrease) in net assets resulting from operations (5,980) 15,406
-----------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (185) (531)
Net realized gains - (1,664)
-----------------------
Distributions to shareholders (185) (2,195)
-----------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 18,135 28,037
Reinvested dividends 183 2,172
Cost of shares redeemed (24,030) (37,192)
-----------------------
Decrease in net assets from capital share transactions (5,712) (6,983)
-----------------------
Net increase (decrease) in net assets (11,877) 6,228
NET ASSETS
Beginning of period 149,206 142,978
-----------------------
End of period $137,329 $149,206
=======================
Accumulated undistributed net investment income (loss):
End of period $ (183) $ 25
=======================
CHANGE IN SHARES OUTSTANDING
Shares sold 2,254 3,760
Shares issued for dividends reinvested 23 281
Shares redeemed (2,990) (5,139)
-----------------------
Decrease in shares outstanding (713) (1,098)
=======================
See accompanying notes to financial statements.
================================================================================
34 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
June 30, 2010 (unaudited)
--------------------------------------------------------------------------------
(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 semiannual report pertains only to the USAA Total
Return Strategy Fund (the Fund), which is classified as nondiversified under the
1940 Act. The Fund's investment objective is to seek a positive return every
calendar year and over the long term (five years and more) to achieve returns
greater than the S&P 500 Index with less risk.
As a nondiversified fund, the Fund may invest a greater percentage of its assets
in a single issuer, such as a single stock-based or bond-based exchange-traded
fund (ETF), a single corporate bond, or a single money market instrument.
Because a relatively high percentage of the Fund's total assets may be invested
in the securities of a single issuer or a limited number of issuers, the
securities of the Fund may be more sensitive to changes in the market value of a
single issuer, a limited number of issuers, or large companies generally. Such a
focused investment strategy may increase the volatility of the Fund's investment
results because this Fund may be more susceptible to risk associated with a
single economic, political, or regulatory event than a diversified fund.
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 ETFs and equity securities sold short,
except as otherwise noted, traded primarily on a domestic
================================================================================
NOTES TO FINANCIAL STATEMENTS | 35
<PAGE>
================================================================================
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. 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 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.
================================================================================
36 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
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. Debt securities purchased with original or remaining maturities of 60
days or less may be valued at amortized cost, which approximates market
value.
5. 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.
6. Repurchase agreements are valued at cost, which approximates market
value.
7. 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 determined to most
closely reflect market value of the options at the time of computation of
the Fund's NAV.
8. 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, 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 37
<PAGE>
================================================================================
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 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. The Deutsche iGAP
Investment Trust "B" hedge fund was valued at its NAV, and is classified as
level 2 because it is a private investment fund open to a limited number of
investors and is not regularly traded.
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.
================================================================================
38 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risks associated with investing in those securities.
C. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- 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.
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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 39
<PAGE>
================================================================================
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 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.
================================================================================
40 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
FAIR VALUES OF DERIVATIVE INSTRUMENTS AS OF JUNE 30, 2010* (IN THOUSANDS)
ASSET DERIVATIVES LIABILITY DERIVATIVES
------------------------------------------------------------------------------------
STATEMENT OF STATEMENT OF
ASSETS AND ASSETS AND
DERIVATIVES NOT ACCOUNTED LIABILITIES LIABILITIES
FOR AS HEDGING INSTRUMENTS LOCATION FAIR VALUE LOCATION FAIR VALUE
------------------------------------------------------------------------------------
Equity contracts Purchased $3,279 Written $1,277
options options
------------------------------------------------------------------------------------
* For open derivative instruments as of June 30, 2010, see the portfolio of
investments, which is also indicative of activity for the six-month period
ended June 30, 2010.
THE EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF OPERATIONS FOR THE
SIX-MONTH PERIOD ENDED JUNE 30, 2010 (IN THOUSANDS)
CHANGE IN
UNREALIZED
DERIVATIVES NOT REALIZED APPRECIATION
ACCOUNTED FOR AS STATEMENT OF GAIN (LOSS) (DEPRECIATION)
HEDGING INSTRUMENTS OPERATIONS LOCATION ON DERIVATIVES ON DERIVATIVES
-----------------------------------------------------------------------------------------
Equity contracts Net realized gain (loss) on $142 $361
options/Change in net
unrealized appreciation/
depreciation of options
-----------------------------------------------------------------------------------------
D. SHORT POSITIONS -- The Fund may engage in short sales (selling securities it
does not own) as part of its normal investment activities. Short positions
are collateralized by cash proceeds from the short sales and by designated
long positions. In order to sell securities it does not own, the Fund must
borrow the securities from a broker or lending agent. If the borrowed
security pays a dividend during this time, the Fund must pay the amount of
the dividend to the broker or lending agent. This amount is shown as
"dividend expense" on the Fund's statement of operations. The Fund is subject
to risk of loss if the broker executing the short sale or the lending agent
were to fail to perform its obligation under the contractual terms.
Short sales involve the risk that the Fund will incur a loss by subsequently
buying the security at a higher price than the price at which the Fund
previously sold the security short. Short sale
================================================================================
NOTES TO FINANCIAL STATEMENTS | 41
<PAGE>
================================================================================
transactions result in off-balance-sheet risk because the ultimate obligation
may exceed the amount shown in the accompanying statement of assets and
liabilities. Because the Fund's loss on a short sale stems from increases in
the value of the security sold short, the extent of such loss, like the price
of the security sold short, is theoretically unlimited. By contrast, a Fund's
loss on a long position arises from decreases in the value of the security
held by the Fund and therefore is limited by the fact that a security's value
cannot drop below zero. A gain, limited to the price at which the Fund sold
the security short, or a loss, unlimited in size, will be recognized upon the
termination of a short sale.
The Fund may not always be able to close out a short position at a particular
time or at an acceptable price. The lender of securities sold short may
request that borrowed securities be returned to it on short notice, and the
Fund may have to buy the borrowed securities at an unfavorable price. If this
occurs at a time when other short sellers of the same security also want to
cover their positions, it is more likely that the Fund will have to cover its
short sale at an unfavorable price and potentially reduce or eliminate any
gain, or increase or cause a loss, as a result of the short sale.
E. 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.
F. 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.
================================================================================
42 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
G. 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 and expense on securities sold short, 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.
H. EXPENSES PAID INDIRECTLY -- Through arrangements with the Fund's custodian
and other 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 six-month period
ended June 30, 2010, these custodian and other bank credits reduced the
Fund's expenses by less than $500.
I. 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.
J. 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 43
<PAGE>
================================================================================
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 funding programs in total
(in no event to exceed 0.13% annually 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 six-month period ended June 30, 2010, the Fund paid CAPCO facility fees
of less than $500, which represents 0.3% of the total fees paid to CAPCO by the
USAA funds. The Fund had no borrowings under this agreement during the six-month
period ended June 30, 2010.
(3) DISTRIBUTIONS
The tax basis of distributions and accumulated undistributed net investment
income will be determined based upon the Fund's tax year-end of December 31,
2010, in accordance with applicable tax law.
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 December 31, 2009, the Fund had capital loss
carryovers of $17,718,000, for federal income tax purposes, which, if not offset
by subsequent capital gains, will expire in 2017. 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.
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
================================================================================
44 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
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 six-month period, ended June 30, 2010, the Fund did not incur any income
tax, interest, or penalties. As of June 30, 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 December 31, 2009, 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 six-month period ended June 30, 2010, were
$33,134,000 and $40,184,000, respectively.
As of June 30, 2010, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as that reported in
the financial statements.
Gross unrealized appreciation and depreciation of investments as of June 30,
2010, were $3,672,000 and $26,646,000, respectively, resulting in net unrealized
depreciation of $22,974,000.
For the six-month period ended June 30, 2010, transactions in written call and
put options* were as follows:
PREMIUMS
NUMBER OF RECEIVED
CONTRACTS (000's)
---------------------------
Outstanding at December 31, 2009 1,896 $ 1,328
Options written 6,297 10,591
Options terminated in closing
purchase transactions (4,592) (8,414)
Options expired (2,869) (2,855)
---------------------------
Outstanding at June 30, 2010 732 $ 650
===========================
*Refer to Note 1C for a discussion of derivative instruments and how they are
accounted for in the Fund's financial statements.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 45
<PAGE>
================================================================================
(5) 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 also is 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 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 is accrued daily and paid monthly at
an annualized rate of 0.65% 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 Flexible Portfolio Funds Index over the
performance period. The Lipper Flexible Portfolio Funds Index tracks the
total return performance of the 30 largest funds in the Lipper Flexible Funds
category. The performance period for the Fund consists of the current month
plus the previous 35 months.
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46 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
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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.
Under the performance fee arrangement, the Fund will pay a positive
performance fee adjustment for a performance period whenever the Fund
outperforms the Lipper Flexible Portfolio Funds Index over that period, even
if the Fund had overall negative returns during the performance period.
For the six-month period ended June 30, 2010, the Fund incurred total
management fees, paid or payable to the Manager, of $440,000, which included
a (0.05)% performance adjustment of $(38,000).
B. SUBADVISORY ARRANGEMENTS -- The Manager has entered into an investment
subadvisory agreements 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 (as allocated
from time to time by the Manager) and the Volaris Group directs the
investment and reinvestment of the portion of the Fund's assets
================================================================================
NOTES TO FINANCIAL STATEMENTS | 47
<PAGE>
================================================================================
invested in index options (as allocated from time to time by the Manager).
The Manager (not the Fund) pays DIMA a subadvisory fee in the annual amount
of 0.60% of the portion of the Fund's average daily net assets that DIMA
manages. For the six-month period ended June 30, 2010, the Manager incurred
subadvisory fees, paid or payable to DIMA, of $95,000.
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 Global
Opportunities Fund, and the USAA Total Return Strategy 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 six-month period ended June 30, 2010,
the Manager incurred subadvisory fees for the Fund, paid or payable to CSSU's
Volaris Group of $65,000.
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 six-month
period ended June 30, 2010, the Fund incurred administration and servicing
fees, paid or payable to the Manager, of $110,000.
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 six-month period
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48 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
ended June 30, 2010, the Fund reimbursed the Manager $2,000 for these
compliance and legal services. These expenses are included in the
professional fees on the Fund's statement of operations.
D. 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 six-month period ended June 30, 2010, the Fund incurred
transfer agent's fees, paid or payable to SAS, of $275,000.
E. 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.
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.
(6) 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 event will affect the Fund's future financial
statements.
Effective August 1, 2010, QS Investors, LLC will replace DIMA as one of the
subadvisers of the Fund.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 49
<PAGE>
================================================================================
(7) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER 31,
--------------------------------------------------------------------------------------
2010 2009 2008 2007 2006 2005*
--------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 7.97 $ 7.21 $ 9.37 $ 10.00 $ 9.89 $ 10.00
--------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income (loss) (.00)(a),(b) .03 .13 .13 .39 .15
Net realized and unrealized
gain (loss) (.34)(b) .85(c) (2.09) .35 .11 (.11)
--------------------------------------------------------------------------------------
Total from investment
operations (.34)(b) .88 (1.96) .48 .50 .04
--------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.01) (.03) (.13) (.13) (.39) (.15)
Realized capital gains - (.09) (.07) (.98) - -
--------------------------------------------------------------------------------------
Total distributions (.01) (.12) (.20) (1.11) (.39) (.15)
--------------------------------------------------------------------------------------
Net asset value at
end of period $ 7.62 $ 7.97 $ 7.21 $ 9.37 $ 10.00 $ 9.89
======================================================================================
Total return (%)** (4.27) 12.25(c),(e) (21.01) 4.70(d) 5.09 .44
Net assets at
end of period (000) $137,329 $149,206 $142,978 $250,714 $293,619 $205,630
Ratios to average
net assets:***
Expenses including dividend
expense on securities
Sold short (%)(f)
Including reimbursements 1.56(g) 1.56(e),(h) 1.31(h) 1.12(d),(h) 1.00(h) 1.00(g),(h)
Excluding reimbursements 1.56(g) 1.70(e) 1.60 1.31 1.20 1.21(g)
Expenses excluding dividend
expense on securities
Sold short (%)(f)
Including reimbursements 1.33(g) 1.29(e),(h) 1.00(h) 1.00(d),(h) 1.00(h) 1.00(g),(h)
Excluding reimbursements 1.33(g) 1.43(e) 1.29 1.19 1.20 1.21(g)
Net investment
income (loss) (%) (.03)(g) .41 1.00 1.22 4.09 1.88(g)
PORTFOLIO TURNOVER (%)(k) 23(i) 68(i) 384(i) 471(i) 200(j) 443(j)
* Fund commenced operations on January 24, 2005.
** 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 six-month period ended June 30, 2010, average net assets were
$148,148,000.
(a) Represents less than $0.01 per share.
(b) Calculated using average shares. For the six-month period ended June 30,
2010, average shares were 18,454,000.
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50 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
(c) For the year ended December 31, 2009, the Manager reimbursed the Fund $8,000
for a loss incurred from the sale of option contracts that were purchased in
excess of what was required to hedge the equity portion of the Fund's
portfolio. The effect of this reimbursement on the Fund's net realized loss
per share and total return was less than $0.01/0.01%.
(d) For the year ended December 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.
(e) During the year ended December 31, 2009, SAS voluntarily reimbursed the Fund
$56,000 for corrections in fees paid for the administration and servicing of
certain accounts. The effect of this reimbursement on the Fund's total
return was less than 0.01%. The reimbursement decreased the Fund's expense
ratios by 0.04%. This decrease is excluded from the expense ratios in the
Financial Highlights table.
(f) Reflects total operating expenses of the Fund before reductions of any
expenses paid indirectly. The Fund's expenses paid indirectly decreased the
expense ratios by less than 0.01%.
(g) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(h) Prior to May 1, 2009, the Manager voluntarily agreed to limit the annual
expenses of the Fund to 1.00% of the Fund's average net assets, excluding
the effect of any dividend expense for securities sold short.
(i) Calculated excluding securities sold short, covers on securities sold short,
and options transactions. The turnover rate or the portion of the Fund
invested in ETFs and bonds was calculated using average daily market value
for the years ended December 31, 2007, and 2008, and calculated using
average monthly market value for the year ended December 31, 2009.
(j) Calculated using average daily market value for the number of months during
which the Fund was invested in long-term securities (ETFs and bonds), which,
for the year ended December 31, 2006, and the period ended December 31,
2005, were two and seven, respectively.
(k) The Fund's various investment strategies may create a large volume of
purchase and sales transactions relative to the market value of portfolio
investments, which results in portfolio turnover rates exceeding 100%.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 51
<PAGE>
================================================================================
EXPENSE EXAMPLE
June 30, 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 January 1, 2010, through June
30, 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
================================================================================
52 | USAA TOTAL RETURN STRATEGY FUND
<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 JANUARY 1, 2010 -
JANUARY 1, 2010 JUNE 30, 2010 JUNE 30, 2010
-------------------------------------------------------------
Actual $1,000.00 $ 957.30 $7.57
Hypothetical
(5% return before expenses) 1,000.00 1,017.06 7.80
* Expenses are equal to the Fund's annualized expense ratio of 1.56%, which is
net of any reimbursements and expenses paid indirectly and includes dividend
expense for securities sold short, multiplied by the average account value
over the period, multiplied by 181 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 (4.27)% for the six-month period of
January 1, 2010, through June 30, 2010.
================================================================================
EXPENSE EXAMPLE | 53
<PAGE>
================================================================================
ADVISORY AGREEMENTS
June 30, 2010 (unaudited)
--------------------------------------------------------------------------------
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 the Subadvisory Agreements
and the Manager and the Subadvisers, 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 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 Agreement 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
================================================================================
54 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
the Fund's performance and related services provided by the Manager. At the
meeting at which the renewal of the Advisory Agreement 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 is an ongoing one. In this
regard, the Board's and its committees' consideration of the Advisory Agreement
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 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 allocation of the Fund's
================================================================================
ADVISORY AGREEMENTS | 55
<PAGE>
================================================================================
brokerage, including the Manager's process for monitoring "best execution," was
also 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 and its affiliates, including the Manager's oversight of
the Fund's day-to-day operations and oversight of Fund accounting. The Trustees,
guided also by information obtained from their experiences as 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 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 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 above the median of its expense group and was the median of
its expense universe. The Board
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56 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
took into account the various services provided to the Fund by the Manager and
its affiliates. The Board also took into account Management's discussion of the
Fund's expenses, including the various components contributing to the Fund's
expense ratio. The Board also noted the level and method of computing the
management fee, including the performance adjustment to such fee.
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 below the average of its performance universe and its
Lipper index for the one- and three-year periods ended December 31, 2009. The
Board also noted that the Fund's percentile performance ranking was in the
bottom 50% of its performance universe for the one- and three-year periods ended
December 31, 2009. The Board took into account management's discussion of the
Fund's performance, including actions taken to address performance, such as the
addition of another subadviser in 2009. The Board also noted the improvement in
the Fund's more recent 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. The Trustees reviewed
the profitability of the Manager's relationship with the Fund before tax
expenses. In considering the profitability data with respect to the Fund,
the Trustees noted that the Manager reimbursed the Fund for expenses.
================================================================================
ADVISORY AGREEMENTS | 57
<PAGE>
================================================================================
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 discussion
of the Fund's commentary fee structure. The Board also took into account
management's discussion of the current advisory fee structure. The Board also
noted 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 determined that the current investment management fee structure was
reasonable.
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) the performance of the Fund is being
addressed; (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 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 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,
================================================================================
58 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
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, to the extent available, 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
each Subadvisory 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 PROVIDED; INVESTMENT PERSONNEL -- The
Board considered information provided to it regarding the services provided by
each Subadviser. The Board considered each Subadviser's level of knowledge and
investment style. The Board reviewed the experience and credentials of the
investment personnel who would be responsible for managing the investment of
portfolio securities with respect to the Fund and each Subadviser's level of
staffing. The Board noted that the materials provided to it 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 Board 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 the Subadvisers would
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 reviews of each 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 each Subadviser of its relationship
with the Fund, the Board noted the undertakings of
================================================================================
ADVISORY AGREEMENTS | 59
<PAGE>
================================================================================
the Manager to maintain expense limitations for the Fund and also noted that the
fees under the Subadvisory Agreements were paid by the Manager. The Board also
relied on the ability of the Manager to negotiate the Subadvisory Agreements 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 anticipated 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, this information was less significant to the Board's
consideration of the Subadvisory Agreements than the other factors considered
for the above reasons.
SUBADVISORY FEES AND FUND PERFORMANCE -- The Board compared the subadvisory fees
for the Fund with the fees 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 the Fund's performance during
the one- and three-year periods ended December 31, 2009, as compared to the
Fund's peer group and noted that the Board reviews at its regularly scheduled
meetings information about the Fund's performance results. The Board noted the
Manager's expertise and resources in monitoring the performance, investment
style, and risk-adjusted performance of each Subadviser. 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
a portion of the Fund's assets in accordance with its investment objectives and
policies; (ii) each Subadviser maintains an appropriate compliance program;
(iii) the performance of the Fund is being addressed; 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 of the Subadvisory
Agreements with respect to the Fund would be in the best interests of the Fund
and its shareholders.
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60 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
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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
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TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
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CUSTODIAN AND State Street Bank and Trust Company
ACCOUNTING AGENT P.O. Box 1713
Boston, Massachusetts 02105
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INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1800
ACCOUNTING FIRM San Antonio, Texas 78205
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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.
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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.
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<PAGE>
USAA
9800 Fredericksburg Road --------------
San Antonio, TX 78288 PRSRT STD
U.S. Postage
PAID
USAA
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>> 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)
=============================================================================
48704-0810 (C)2010, USAA. All rights reserved.
ITEM 2. CODE OF ETHICS.
NOT APPLICABLE. This item must be disclosed only in annual reports.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
NOT APPLICABLE. This item must be disclosed only in annual reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
NOT APPLICABLE. This item must be disclosed only in annual reports.
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/S 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
considered by the Funds' Board in approving the Funds' advisory agreements.
ITEM 12. EXHIBITS.
(a)(1). NOT APPLICABLE. This item must be disclosed only in annual reports.
(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 June 30, 2010
By:* CHRISTOPHER P. LAIA
-----------------------------------------------------------
Signature and Title: Christopher P. Laia, Secretary
Date: 08/25/2010
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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:* CHRISTOPHER W. CLAUS
-----------------------------------------------------
Signature and Title: Christopher W. Claus, President
Date: 08/25/2010
------------------------------
By:* ROBERTO GALINDO, JR.
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Signature and Title: Roberto Galindo, Jr., Treasurer
Date: 08/25/2010
------------------------------
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