N-CSR 1 ncsrbsf53103.txt BALANCED STRATEGY FUND NCSR/ANNUAL RPT 5/31/03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-4019 Exact name of registrant as specified in charter: USAA INVESTMENT TRUST Address of principal executive offices and zip code: 9800 FREDERICKSBURG ROAD SAN ANTONIO, TX 78288 Name and address of agent for service: MARK S. HOWARD USAA INVESTMENT TRUST 9800 FREDERICKSBURG ROAD SAN ANTONIO, TX 78288 Registrant's telephone number, including area code: (210) 498-0226 Date of fiscal year end: MAY 31, 2003 Date of reporting period: MAY 31, 2003 ITEM 1. REPORT TO STOCKHOLDERS. USAA BALANCED STRATEGY FUND - MAY 31, 2003 [LOGO OF USAA] USAA(R) USAA BALANCED STRATEGY Fund [GRAPHIC OF USAA BALANCED STRATEGY FUND] A n n u a l R e p o r t -------------------------------------------------------------------------------- MAY 31, 2003 Table of CONTENTS -------------------------------------------------------------------------------- MESSAGE FROM THE PRESIDENT 2 INVESTMENT OVERVIEW & MANAGERS' COMMENTARY 5 FINANCIAL INFORMATION Distributions to Shareholders 14 Independent Auditors' Report 15 Portfolio of Investments 16 Notes to Portfolio of Investments 28 Financial Statements 30 Notes to Financial Statements 33 DIRECTORS' INFORMATION 45
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)2003, USAA. All rights reserved. 2 M E S S A G E ==============------------------------------------------------------------------ from the PRESIDENT " ... ADHERE TO YOUR ASSET ALLOCATION [PHOTO OF CHRISTOPHER W. CLAUS] AND DIVERSIFICATION STRATEGY - AND WORK WITH SKILLED PROFESSIONALS WHO CAN HELP .... " -------------------------------------------------------------------------------- Lowest interest rates in decades. New tax cuts. Jobless recovery. Dow breaks 9000. Headlines such as these are designed to grab our attention. But sometimes the hype can make it easy to forget the investing lessons we've learned over the last few years. That's why it's so important to have a plan. It can keep you from making emotional decisions and help you ride out the inevitable ups and downs of the markets. An asset allocation and diversification strategy based on your goals, needs, and appetite for risk should be at the heart of your plan. After all, you don't want to take on more risk than you can tolerate. Do you want to try to get more return on your principal, or do you want to be assured of the return of your principal? It is a classic question of risk versus reward. Investors seem to be trading where there is price momentum rather than on fundamental valuations. This is a rotation of investment styles called "momentum investing" in which people put money into whatever is going up, hoping to make a profit, and then move on to the next opportunity. While stock and bond market performance improved dramatically during the spring, it is important to remember that the markets 3 . . . C O N T I N U E D ========================-------------------------------------------------------- tend to overreact in the short term, reverting to the mean over the long term. Right now, stock prices are high by historical standards. For prices to stay high, interest rates need to remain low and corporate profits must show consistent strength. In the bond market, investors have been moving from sector to sector, looking for ways to make money. Recently, they piled in, then out of, longer-term Treasuries. A more prudent approach is to adhere to your asset allocation and diversification strategy, and call on our team of skilled professionals who can help you develop and stick to your plan. At USAA, we remain committed to providing you with outstanding resources - a market-tested portfolio management team, world-class service, and pure no-load mutual funds, without excessive fees, sales loads, or contractual plans, and with competitive expense ratios. Once again, and on behalf of the entire team at USAA Investment Management Company, I would like to thank you for your business. Sincerely, /s/ Christopher W. Claus Christopher W. Claus President and Vice Chairman of the Board PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. FOR MORE COMPLETE INFORMATION ABOUT USAA MUTUAL FUNDS, INCLUDING CHARGES AND OPERATING EXPENSES, REQUEST A PROSPECTUS FROM USAA INVESTMENT MANAGEMENT COMPANY (USAA). READ IT CAREFULLY BEFORE YOU INVEST. MUTUAL FUND OPERATING EXPENSES APPLY AND CONTINUE THROUGHOUT THE LIFE OF THE FUND. 5 I N V E S T M E N T ====================------------------------------------------------------------ OVERVIEW USAA BALANCED STRATEGY FUND OBJECTIVE -------------------------------------------------------------------------------- High total return, with reduced risk over time, through an asset allocation strategy that seeks a combination of long-term growth of capital and current income. TYPES OF INVESTMENTS -------------------------------------------------------------------------------- Using preset target ranges, the Fund's strategy is to invest its assets in a combination of stocks on the one hand and bonds and money market instruments on the other. -------------------------------------------------------------------------------- 5/31/03 5/31/02 -------------------------------------------------------------------------------- Net Assets $350.8 Million $327.6 Million Net Asset Value Per Share $13.35 $14.20 -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/03 -------------------------------------------------------------------------------- 1 YEAR 5 YEARS SINCE INCEPTION ON 9/1/95 -2.71% 4.45% 8.21% TOTAL RETURN EQUALS INCOME YIELD PLUS SHARE PRICE CHANGE AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND REALIZED CAPITAL GAIN DISTRIBUTIONS. NO ADJUSTMENT HAS BEEN MADE FOR TAXES PAYABLE BY SHAREHOLDERS ON THEIR REINVESTED INCOME DIVIDENDS AND REALIZED CAPITAL GAIN DISTRIBUTIONS. THE PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE AND ARE NOT AN INDICATION OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. 6 . . . C O N T I N U E D ========================-------------------------------------------------------- OVERVIEW -------------------------------------------------------------------------------- CUMULATIVE PERFORMANCE COMPARISON -------------------------------------------------------------------------------- [CHART OF CUMULATIVE PERFORMANCE COMPARISON]
USAA BALANCED LEHMAN BROTHERS LIPPER LIPPER RUSSELL 3000 STRATEGY U.S. AGGREGATE BALANCED BALANCED S&P 500 INDEX INDEX FUND BOND INDEX FUNDS INDEX FUNDS AVERAGE ------------- ------------ ------------- --------------- ----------- ------------- 08/31/95 $10000.00 $10000.00 $10000.00 $10000.00 $10000.00 $10000.00 09/30/95 10421.78 10387.49 10040.00 10097.29 10238.83 10229.94 10/31/95 10384.54 10297.79 9870.00 10228.60 10212.88 10215.74 11/30/95 10839.89 10754.50 10060.00 10381.87 10530.28 10533.12 12/31/95 11048.70 10930.17 10324.29 10527.57 10696.02 10688.82 01/31/96 11424.31 11247.42 10334.38 10597.48 10889.09 10888.50 02/29/96 11530.59 11413.33 10304.13 10413.27 10894.34 10915.26 03/31/96 11641.60 11528.06 10515.68 10340.89 10935.43 10951.53 04/30/96 11813.08 11746.65 10586.67 10282.73 11007.82 11047.33 05/31/96 12117.22 12047.26 10637.37 10261.85 11120.63 11188.63 06/30/96 12163.41 12008.36 10648.38 10399.66 11157.30 11206.73 07/31/96 11626.33 11379.75 10300.92 10428.12 10870.17 10900.37 08/31/96 11871.94 11724.97 10546.18 10410.64 11041.82 11092.08 09/30/96 12539.53 12363.10 10975.62 10592.07 11451.38 11511.31 10/31/96 12885.24 12589.10 11233.02 10826.70 11693.67 11736.70 11/30/96 13858.35 13477.10 11734.44 11012.14 12238.63 12275.04 12/31/96 13583.83 13314.78 11713.31 10909.75 12092.06 12141.58 01/31/97 14432.02 14051.60 12004.58 10943.16 12465.99 12504.57 02/28/97 14545.33 14066.96 12077.40 10970.38 12512.26 12522.13 03/31/97 13948.79 13430.42 11868.62 10848.81 12148.59 12153.40 04/30/97 14780.78 14091.98 12120.03 11011.21 12513.80 12513.11 05/31/97 15684.44 15054.44 12685.70 11115.31 13026.25 13059.15 06/30/97 16381.71 15680.29 13031.61 11247.24 13458.04 13460.75 07/31/97 17684.86 16909.54 13705.37 11550.54 14224.61 14237.05 08/31/97 16694.86 16223.71 13417.40 11452.02 13773.71 13848.63 09/30/97 17608.66 17143.65 13854.99 11620.91 14322.73 14391.71 10/31/97 17021.24 16567.81 13575.74 11789.50 14061.93 14161.14 11/30/97 17808.54 17202.16 13822.77 11843.79 14320.23 14414.20 12/31/97 18114.16 17546.73 13944.80 11963.04 14546.47 14628.02 01/31/98 18314.32 17637.67 13922.91 12116.62 14649.84 14720.00 02/28/98 19634.46 18899.38 14481.14 12107.49 15231.47 15339.05 03/31/98 20639.11 19836.05 14919.09 12149.10 15697.21 15779.30 04/30/98 20850.45 20031.08 14985.15 12212.51 15807.16 15888.25 05/31/98 20492.56 19536.77 14820.00 12328.36 15647.34 15712.19 06/30/98 21324.34 20197.37 14828.06 12432.91 15935.89 15964.41 07/31/98 21098.98 19830.64 14304.70 12459.36 15749.20 15754.67 08/31/98 18050.67 16792.85 12902.28 12662.13 14392.39 14360.61 09/30/98 19208.01 17938.37 13113.85 12958.63 15013.59 14985.29 10/31/98 20768.00 19300.01 13836.75 12890.11 15575.27 15617.44 11/30/98 22026.19 20480.43 14548.35 12963.27 16145.37 16222.17 12/31/98 23294.62 21782.13 15156.72 13002.24 16741.02 16809.83 01/31/99 24268.35 22522.11 15701.28 13095.04 17008.72 17101.90 02/28/99 23514.23 21724.36 15349.59 12866.45 16599.88 16638.64 03/31/99 24454.76 22521.48 16052.52 12937.75 17009.63 17052.74 04/30/99 25401.75 23538.06 16291.43 12978.73 17566.78 17561.77 05/31/99 24802.58 23090.70 15950.13 12865.05 17295.91 17310.43 06/30/99 26175.30 24257.61 16725.61 12824.07 17774.11 17810.99 07/31/99 25361.55 23522.07 16417.15 12769.47 17441.69 17455.96 08/31/99 25236.00 23254.61 16382.88 12762.97 17258.68 17235.07 09/30/99 24545.03 22660.24 16120.26 12911.14 17037.56 17007.04 10/31/99 26097.59 24081.63 16854.56 12958.78 17530.87 17518.49 11/30/99 26628.07 24755.59 17221.71 12957.85 17719.50 17746.00 12/31/99 28194.22 26335.19 18021.46 12895.37 18243.80 18314.59 01/31/00 26777.84 25302.82 17549.03 12853.14 17785.48 17817.93 02/29/00 26271.48 25537.35 17514.47 13008.59 17742.64 17854.07 03/31/00 28839.93 27537.91 18493.42 13179.96 18787.31 18851.36 04/30/00 27972.57 26567.46 17961.40 13142.22 18443.01 18475.79 05/31/00 27399.13 25821.27 17649.13 13136.18 18269.48 18223.18 06/30/00 28073.92 26585.78 18042.66 13409.48 18561.08 18600.26 07/31/00 27635.40 26115.87 17826.03 13531.20 18510.50 18551.99 08/31/00 29350.99 28052.68 18523.41 13727.32 19336.74 19443.37 09/30/00 27801.85 26782.52 17900.05 13813.63 18929.79 18958.44 10/31/00 27683.73 26401.18 17715.51 13905.04 18913.05 18881.73 11/30/00 25502.93 23967.74 16891.25 14132.40 18226.52 18103.18 12/31/00 25628.04 24370.52 17211.05 14394.56 18679.53 18543.04 01/31/01 26536.75 25204.21 18484.57 14629.96 19075.97 18976.46 02/28/01 24118.64 22901.35 18051.82 14757.41 18335.50 18115.39 03/31/01 22591.57 21408.50 17755.71 14831.49 17743.38 17462.07 04/30/01 24345.77 23125.36 18502.27 14769.93 18488.02 18224.94 05/31/01 24509.10 23311.09 18950.20 14859.02 18652.69 18360.56 06/30/01 23912.79 22881.26 18777.43 14915.17 18366.88 18103.14 07/31/01 23677.30 22504.16 19040.49 15248.63 18353.59 18074.75 08/31/01 22196.55 21175.60 18652.17 15423.25 17831.27 17514.60 09/30/01 20404.27 19307.38 17464.73 15602.97 16974.37 16561.04 10/31/01 20793.58 19756.59 17817.56 15929.47 17258.46 16916.60 11/30/01 22388.19 21278.30 18876.02 15709.85 17945.58 17616.95 12/31/01 22584.43 21578.22 19097.83 15610.09 18075.00 17727.51 01/31/02 22255.03 21307.64 18925.42 15736.45 17916.47 17549.53 02/28/02 21825.74 20871.92 18567.34 15888.95 17794.73 17359.67 03/31/02 22646.69 21787.05 19098.35 15624.62 18183.81 17737.90 04/30/02 21274.28 20644.01 18791.60 15927.62 17747.44 17306.51 05/31/02 21118.10 20404.83 18938.31 16062.95 17739.16 17227.54 06/30/02 19614.38 18936.00 17872.18 16201.84 16982.39 16438.92 07/31/02 18085.80 17430.53 16999.38 16397.34 16111.99 15639.37 08/31/02 18204.20 17512.87 17173.94 16674.20 16277.29 15797.10 09/30/02 16227.74 15672.78 16406.97 16944.24 15305.47 14860.06 10/31/02 17654.48 16920.75 16947.12 16867.06 15943.47 15432.84 11/30/02 18692.59 17944.65 17689.82 16862.58 16590.27 16006.32 12/31/02 17595.00 16930.14 17167.90 17210.89 16143.07 15554.25 01/31/03 17134.96 16515.88 16852.01 17225.58 15901.25 15323.69 02/28/03 16877.48 16244.16 16783.34 17463.93 15782.00 15219.83 03/31/03 17040.89 16414.98 16755.87 17450.47 15846.41 15283.60 04/30/03 18443.90 17755.40 17566.20 17594.46 16703.95 16097.38 05/31/03 19414.73 18827.19 18424.40 17922.51 17442.75 16824.40
[END CHART] DATA SINCE INCEPTION ON 9/1/95 THROUGH 5/31/03. THE RUSSELL 3000 INDEX REPLACED THE S&P 500 INDEX AS THE FUND'S COMPARABLE BROAD-BASED SECURITIES INDEX, BECAUSE THE RUSSELL 3000 INDEX IS AN INDEX OF MULTI-CAP GROWTH AND VALUE STOCKS, AND THUS PROVIDES A MORE APPROPRIATE COMPARISON FOR THE STOCK PORTION OF THE FUND, WHICH FOCUSES ON MULTI-CAP (SMALL-, MID-, AND LARGE-CAP) GROWTH AND VALUE STOCKS, THAN THE S&P 500 INDEX, WHICH IS AN INDEX OF LARGE-CAP GROWTH AND VALUE STOCKS. NO ADJUSTMENT HAS BEEN MADE FOR TAXES PAYABLE BY SHAREHOLDERS ON THEIR REINVESTED INCOME DIVIDENDS AND REALIZED CAPITAL GAIN DISTRIBUTIONS. 7 . . . C O N T I N U E D ========================-------------------------------------------------------- The graph illustrates the comparison of a $10,000 hypothetical investment in the USAA Balanced Strategy Fund to the following benchmarks: o The S&P 500 Index, an unmanaged index representing the weighted average performance of a group of 500 widely held, publicly traded stocks. It is not possible to invest directly in the S&P 500 Index. o The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market. o The Lehman Brothers U.S. Aggregate Bond Index, covers the U.S. investment grade fixed-rate bond market, including government and credit securities, agency mortgage pass- through securities, asset-backed securities, and commercial mortgage-backed securities that have remaining maturities of more than one year. o The Lipper Balanced Funds Index, which tracks the total return performance of the 30 largest funds within the Lipper Balanced Funds category. o The Lipper Balanced Funds Average, an average of all balanced funds, reported by Lipper Inc., an independent organization that monitors the performance of mutual funds. 8 M A N A G E R S ' ==================-------------------------------------------------------------- COMMENTARY on the Fund MATTHEW E. MEGARGEL, CFA MARGARET "DIDI" WEINBLATT, Ph.D., CFA Wellington Management Company, LLP USAA Investment Management Company (Stocks) (Bonds) -------------------------------------------------------------------------------- HOW DID THE FUND PERFORM? The USAA Balanced Strategy Fund had a total return of -2.71% for the year ended May 31, 2003. This compares to a -2.28% return for the average fund in the Lipper Balanced Funds category, -8.07% for the S&P 500 Index, -7.73% for the Russell 3000 Index, and 11.58% for the Lehman Brothers U.S. Aggregate Bond Index. [LOGO OF LIPPER LEADER] [LOGO OF LIPPER LEADER] TOTAL RETURN CONSISTENT RETURN Lipper named the Fund a Lipper Leader for total return and consistent return within the Lipper Balanced Funds category for the three-year period ending May 31, 2003. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. REFER TO PAGE 7 FOR BENCHMARK DEFINITIONS. LIPPER RATINGS FOR TOTAL RETURN REFLECT FUNDS' HISTORICAL TOTAL RETURN PERFORMANCE RELATIVE TO PEERS AS OF MAY 31, 2003. LIPPER RATINGS FOR CONSISTENT RETURN REFLECT FUNDS' HISTORICAL RISK-ADJUSTED RETURNS, ADJUSTED FOR VOLATILITY, RELATIVE TO PEERS AS OF MAY 31, 2003. THE RATINGS ARE SUBJECT TO CHANGE EVERY MONTH AND ARE BASED ON AN EQUAL-WEIGHTED AVERAGE OF PERCENTILE RANKS FOR THE TOTAL RETURN AND CONSISTENT RETURN METRICS OVER THREE-, FIVE-, AND 10-YEAR PERIODS (IF APPLICABLE). THE HIGHEST 20% OF FUNDS IN EACH PEER GROUP ARE NAMED LIPPER LEADERS, THE NEXT 20% RECEIVE A SCORE OF 2, THE MIDDLE 20% ARE SCORED 3, THE NEXT 20% ARE SCORED 4, AND THE LOWEST 20% ARE SCORED 5. 9 . . . C O N T I N U E D ========================-------------------------------------------------------- * * * * THE FUND'S PERFORMANCE RECEIVED AN OVERALL MORNINGSTAR RATING(TM) OF 4 STARS IN THE MODERATE ALLOCATION FUNDS CATEGORY (598 FUNDS IN CATEGORY) FOR THE PERIOD ENDING MAY 31, 2003. HOW WERE THE FUND'S ASSETS ALLOCATED BETWEEN STOCKS AND BONDS? We began the period with roughly 55% of assets in stocks and 45% in fixed-income securities. In late September 2002, and again in early October 2002, we took steps to increase the Fund's allocation to stocks to above 60% of assets. In April 2003, we slightly reduced the stock allocation back to just above 60%. WHAT WAS THE REASONING BEHIND THESE SHIFTS? In the fall, following a 12-month period in which long-term government bonds had outperformed stocks by approximately 35%, we took a more positive view about the prospects for economic recovery, corporate profits and, therefore, stock prices. Additionally, the market gave us classic technical signals that a shift could be THE USAA BALANCED STRATEGY FUND IN LIPPER'S BALANCED FUNDS CATEGORY WAS RATED FOR 3 YEARS AMONG 412 FUNDS, FOR 5 YEARS AMONG 339 FUNDS, AND FOR 10 YEARS AMONG 98 FUNDS FOR TOTAL RETURN; FOR 3 YEARS AMONG 381 FUNDS, FOR 5 YEARS AMONG 318 FUNDS, AND FOR 10 YEARS AMONG 63 FUNDS FOR CONSISTENT RETURN. LIPPER RATINGS ARE NOT INTENDED TO PREDICT FUTURE RESULTS, AND LIPPER DOES NOT GUARANTEE THE ACCURACY OF THIS INFORMATION. MORE INFORMATION IS AVAILABLE AT WWW.LIPPERLEADERS.COM. LIPPER LEADER COPYRIGHT 2003, REUTERS, ALL RIGHTS RESERVED. 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. 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. THE USAA BALANCED STRATEGY FUND WAS RATED AGAINST THE FOLLOWING NUMBER OF MODERATE ALLOCATION FUNDS OVER THE FOLLOWING TIME PERIODS ENDING 5/31/03: 598 FUNDS IN THE LAST THREE YEARS AND 469 FUNDS IN THE LAST FIVE YEARS. WITH RESPECT TO THE MODERATE ALLOCATION FUNDS, THE USAA BALANCED STRATEGY FUND RECEIVED A MORNINGSTAR RATING OF 4 STARS FOR THE THREE- AND FIVE-YEAR PERIODS. 10 . . . C O N T I N U E D ========================-------------------------------------------------------- COMMENTARY on the Fund under way from a cyclical bear market to a cyclical bull market. By April 2003, with the economy still sluggish and the war creating uncertainty about economic prospects, we felt it was prudent to take a slightly more conservative approach until the impact of the war on the economy became clearer. We've since seen several positive developments that give us confidence in the economy. These include strong returns from stocks, a weak dollar that helps manufacturers, a narrowing of credit spreads that helps borrowers raise capital, the stimulative effect of the recent tax cuts, and post-war economic data reflecting positive economic growth. Together, these developments lead us to believe that economic growth will pick up moderately over the next couple of quarters. We also finally got the signals we had been expecting to confirm our belief in a shift to a cyclical bull market. HOW DID YOU MANAGE THE U.S. STOCK PORTION OF THE FUND? While the stock portion of the Fund at times took on a somewhat defensive posture, by the end of the reporting year we had adjusted the portfolio in anticipation of improving economic developments. Among the areas of strength during the reporting year was information technology, where we were overweight and counted Hewlett-Packard Co. and IBM Corp. among our top contributors to performance. We benefited from strong stock selection in financials, led by our holdings in Citigroup, Inc. and Legg Mason, Inc. An overweight position in energy also helped performance, spurred by strong stock selection within the sector. We were held back by stock selection in the consumer staples sector, with Kimberly-Clark Corp. and Safeway, Inc. detracting from performance, and health care, as holdings Baxter and HCA, Inc. underperformed. Additionally, our underweight position in telecommunications proved detrimental, because this group performed second best, behind technology. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON PAGES 16-27. KIMBERLY-CLARK CORP. AND BAXTER WERE SOLD OUT OF THE PORTFOLIO PRIOR TO MAY 31, 2003. 11 . . . C O N T I N U E D ========================-------------------------------------------------------- WHAT'S YOUR OUTLOOK FOR THE U.S. STOCK MARKET? The breadth of the recent gains is telling us that the worst of the three-year bear market is most likely behind us. Our biggest concerns are jobs and income. Low interest rates and tax cuts help, but people must have income in an economy where consumer spending represents 70% of activity. Our view is that unemployment and aggregate income must stabilize, and we expect to see sequential improvement in both by early next year. In this environment, we're controlling risk by avoiding companies with high debt levels and high fixed-cost structures and focusing on those that can deliver revenue growth despite slower overall economic growth. We are positive on the prospects for materials companies, believing they will benefit as the economy improves and demand for materials rises. We also have a good outlook for health care thanks to demographic trends, the use of technology, and advances in pharmaceuticals that save money by keeping people out of the hospital. We think the technology industry will continue to grow over time and be an engine for the economy. WHAT ABOUT THE BOND PORTION OF THE FUND? The bond portion of the Fund had strong performance and provided a positive return and outperformed our peer group averages. In light of the sluggish economy, interest rates continued to fall throughout the reporting year, and are now at 45-year lows. Such an environment resulted in a good year for those bonds with the highest interest-rate sensitivity (or duration) that could not be called or prepaid. Corporate bonds rallied sharply in the second half of the reporting year along with the stock market as investors took a more positive view and credit risk decreased. In this environment, the Fund benefited from our investment in corporate bonds and in Treasury inflation-protected securities (TIPS). TIPS are unique among fixed-income securities because their principal is indexed to inflation, so they protect against rising inflation while also giving us beneficial exposure to the Treasury market. In the face of deflation fears, we reduced our exposure to TIPS at the end of the reporting period to lock in profits after their strong performance run. 12 . . . C O N T I N U E D ========================-------------------------------------------------------- COMMENTARY on the Fund WHAT'S YOUR OUTLOOK FOR THE BOND MARKET? The U.S. economy has yet to show signs that a sustainable recovery is under way, so we were not surprised that the Federal Reserve Board cut interest rates again in June. Given today's historically low rates and the stimulative effect of the government's monetary and fiscal (tax) policies, it's also important to maintain protection against rising interest rates. So we're attempting to strike the right balance while using our strong credit research and analysis capabilities to select and monitor individual corporate bonds for the Fund. We will continue to work hard on your behalf, and thank you for the confidence you've placed in us. HISTORICAL YIELD CURVE* [CHART OF HISTORICAL YIELD CURVE]
5/31/02 5/30/03 CHANGE --------- --------- -------- 3 MONTHS 1.720% 1.098% -0.6226% 6 MONTHS 1.883 1.083 -0.7994 2 YEAR 3.193 1.322 -1.8711 3 YEAR 3.680 1.565 -2.1152 5 YEAR 4.353 2.289 -2.0640 10 YEAR 5.043 3.370 -1.6728 30 YEAR 5.615 4.376 -1.2384
[END CHART] * YIELD OF TREASURY BILLS, NOTES, AND BONDS. 13 P O R T F O L I O ==================-------------------------------------------------------------- HIGHLIGHTS ---------------------------------------------------------- TOP 10 EQUITY HOLDINGS (% of Net Assets) ---------------------------------------------------------- Microsoft Corp. 2.3% Pfizer, Inc. 2.1% Citigroup, Inc. 1.9% General Electric Co. 1.7% Exxon Mobil Corp. 1.6% American International Group, Inc. 1.5% AOL Time Warner, Inc. 1.2% Wyeth 1.2% Abbott Laboratories 1.1% SBC Communications, Inc. 1.1% ----------------------------------------------------------
ASSET ALLOCATION 5/31/03 [PIE CHART OF ASSET ALLOCATION] Corporate Obligations 12.9% Asset-Backed & Mortgage-Backed Securities 3.5% U.S.Government Agency Issues 4.3% U.S.Government Agency Mortgage-Backed Securities 12.9% Municipal Bond 0.3% Money Market Instruments 6.7% Stocks 60.3%
[END PIE CHART] PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT EQUAL 100%. YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON PAGES 16-27. 14 D I S T R I B U T I O N S ==========================------------------------------------------------------ to SHAREHOLDERS USAA BALANCED STRATEGY FUND The following federal tax information related to the Fund's fiscal year ended May 31, 2003, is provided for information purposes only and should not be used for reporting to federal or state revenue agencies. Federal tax information for the calendar year will be reported to you on Form 1099-DIV in January 2004. 34.13% of ordinary income distributions qualifies for the dividends-received deductions eligible to corporations. 15 I N D E P E N D E N T ======================---------------------------------------------------------- AUDITORS' Report THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA BALANCED STRATEGY FUND: We have audited the accompanying statement of assets and liabilities of USAA Balanced Strategy Fund (a portfolio of USAA Investment Trust), including the portfolio of investments, as of May 31, 2003, and the related statement of operations, statement of changes in net assets, and financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. The statement of changes in net assets for the year ended May 31, 2002, and the financial highlights for each of the periods presented through May 31, 2002, were audited by other auditors, whose report dated July 5, 2002, expressed an unqualified opinion on the statement and financial highlights. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of May 31, 2003, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2003 financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of USAA Balanced Strategy Fund at May 31, 2003, the results of its operations, changes in its net assets, and financial highlights for the year then ended in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP San Antonio, Texas July 11, 2003 16 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS USAA BALANCED STRATEGY FUND MAY 31, 2003
MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------ STOCKS (60.3%) ADVERTISING (0.6%) 23,800 Catalina Marketing Corp. * $ 443 24,100 Omnicom Group, Inc. 1,683 ------- 2,126 ------- AEROSPACE & DEFENSE (1.3%) 50,200 Boeing Co. 1,539 41,600 Lockheed Martin Corp. 1,931 13,300 United Technologies Corp. 908 ------- 4,378 ------- AIR FREIGHT & LOGISTICS (0.8%) 47,400 EGL, Inc. * 742 34,700 FedEx Corp. 2,220 ------- 2,962 ------- AIRLINES (0.1%) 7,900 JetBlue Airways Corp. * 267 ------- ALUMINUM (0.6%) 91,900 Alcoa, Inc. 2,262 ------- APPAREL, ACCESSORIES, & LUXURY GOODS (0.3%) 26,300 Liz Claiborne, Inc. 891 ------- APPAREL RETAIL (0.7%) 15,600 American Eagle Outfitters, Inc. * 265 35,600 Chico's FAS, Inc. * 762 55,900 Gap, Inc. 950 18,200 Pacific Sunwear of California, Inc. * 409 ------- 2,386 ------- APPLICATION SOFTWARE (0.8%) 36,530 Cadence Design Systems, Inc. * 508 24,100 Intuit, Inc. * 1,111 15,800 Manhattan Associates, Inc. * 424 32,400 Siebel Systems, Inc. * 304 23,400 Verity, Inc. * 487 ------- 2,834 -------
17 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003
MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------ ASSET MANAGEMENT & CUSTODY BANKS (0.6%) 34,500 Legg Mason, Inc. $ 2,229 ------- BIOTECHNOLOGY (0.9%) 63,700 Albany Molecular Research, Inc. * 864 15,100 Gilead Sciences, Inc. * 796 38,800 IDEC Pharmaceuticals Corp. * 1,481 ------- 3,141 ------- BROADCASTING & CABLE TV (1.1%) 97,400 Comcast Corp. "A" * 2,807 33,300 Univision Communications, Inc. "A" * 994 ------- 3,801 ------- BUILDING PRODUCTS (0.5%) 69,000 Masco Corp. 1,697 ------- CASINOS & GAMING (0.1%) 5,300 International Game Technology, Inc. * 467 ------- CATALOG RETAIL (0.5%) 41,500 USA Interactive, Inc. * 1,596 ------- COMMUNICATIONS EQUIPMENT (0.9%) 201,200 Cisco Systems, Inc. * 3,276 ------- COMPUTER & ELECTRONIC RETAIL (0.1%) 5,600 CDW Computer Centers, Inc. * 228 ------- COMPUTER HARDWARE (1.8%) 150,800 Hewlett-Packard Co. 2,941 39,200 IBM Corp. 3,451 ------- 6,392 ------- CONSUMER FINANCE (0.5%) 17,500 Countrywide Credit Financial Corp. 1,289 59,300 Providian Financial Corp. * 536 ------- 1,825 -------
18 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003
MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------ DATA PROCESSING & OUTSOURCED SERVICES (0.9%) 22,800 Automatic Data Processing, Inc. $ 796 17,000 CheckFree Corp. * 416 88,100 SunGard Data Systems, Inc. * 2,026 ------- 3,238 ------- DISTILLERS & VINTNERS (0.3%) 33,800 Constellation Brands, Inc. "A" * 932 ------- DIVERSIFIED BANKS (2.4%) 42,900 Bank of America Corp. 3,183 71,100 Bank One Corp. 2,656 64,500 Wachovia Corp. 2,592 ------- 8,431 ------- DIVERSIFIED CHEMICALS (0.5%) 54,700 Dow Chemical Co. 1,739 ------- DIVERSIFIED COMMERCIAL SERVICES (0.1%) 21,500 ARAMARK Corp. "B" * 451 ------- DRUG RETAIL (0.4%) 48,700 CVS Corp. 1,271 ------- ELECTRIC UTILITIES (1.2%) 19,200 CINergy Corp. 729 34,400 Exelon Corp. 1,971 20,000 FPL Group, Inc. 1,329 ------- 4,029 ------- ELECTRONIC EQUIPMENT MANUFACTURERS (0.4%) 102,300 Sanmina-SCI Corp. * 585 25,400 Waters Corp. * 721 ------- 1,306 ------- ENVIRONMENTAL SERVICES (0.6%) 82,900 Waste Management, Inc. 2,111 -------
19 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003
MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------ FOOD RETAIL (0.1%) 17,700 Safeway, Inc. * $ 333 ------- GENERAL MERCHANDISE STORES (0.2%) 16,300 Target Corp. 597 ------- HEALTH CARE DISTRIBUTORS (0.5%) 12,500 Cardinal Health, Inc. 721 10,100 Henry Schein, Inc. * 497 16,300 Laboratory Corp. of America Holdings * 524 ------- 1,742 ------- HEALTH CARE EQUIPMENT (0.4%) 4,600 Diagnostic Products Corp. 175 29,200 Guidant Corp. * 1,234 ------- 1,409 ------- HEALTH CARE FACILITIES (0.6%) 32,200 HCA, Inc. 1,063 42,400 Triad Hospitals, Inc. * 1,097 ------- 2,160 ------- HEALTH CARE SERVICES (0.3%) 17,200 Quest Diagnostics, Inc. * 1,090 ------- HEALTH CARE SUPPLIES (0.3%) 37,700 Edwards Lifesciences Corp. * 1,143 ------- HOME FURNISHINGS (0.1%) 8,100 Mohawk Industries, Inc. * 467 ------- HOME IMPROVEMENT RETAIL (0.8%) 91,300 Home Depot, Inc. 2,966 ------- HOMEBUILDING (0.3%) 35,600 D.R. Horton, Inc. 936 ------- HOUSEHOLD PRODUCTS (0.7%) 27,400 Procter & Gamble Co. 2,516 -------
20 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003
MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------ HYPER MARKETS & SUPER CENTERS (1.0%) 67,300 Wal-Mart Stores, Inc. $ 3,541 ------- INDUSTRIAL CONGLOMERATES (2.1%) 10,500 3M Co. 1,328 205,400 General Electric Co. 5,895 ------- 7,223 ------- INDUSTRIAL MACHINERY (0.5%) 28,100 ITT Industries, Inc. 1,761 ------- INSURANCE BROKERS (0.9%) 25,300 Arthur J. Gallagher & Co. 690 47,600 Marsh & McLennan Companies, Inc. 2,386 ------- 3,076 ------- INTEGRATED OIL & GAS (2.4%) 41,512 ChevronTexaco Corp. 2,945 154,100 Exxon Mobil Corp. 5,609 ------- 8,554 ------- INTEGRATED TELECOMMUNICATION SERVICES (1.1%) 151,600 SBC Communications, Inc. 3,860 ------- INVESTMENT BANKING & BROKERAGE (1.0%) 76,700 Merrill Lynch & Co., Inc. 3,321 ------- IT CONSULTING & OTHER SERVICES (0.6%) 113,800 Accenture Ltd. "A" * 1,994 ------- LEISURE PRODUCTS (0.1%) 7,100 Polaris Industries, Inc. 427 ------- MANAGED HEALTH CARE (0.4%) 4,800 Anthem, Inc. * 352 26,000 Caremark Rx, Inc. * 587 12,000 Oxford Health Plans, Inc. * 445 ------- 1,384 ------- METAL & GLASS CONTAINERS (0.3%) 57,700 Pactiv Corp. * 1,128 -------
21 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003
MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------ MOVIES & ENTERTAINMENT (1.2%) 273,900 AOL Time Warner, Inc. * $ 4,169 ------- MULTI-LINE INSURANCE (1.5%) 93,500 American International Group, Inc. 5,412 ------- OIL & GAS DRILLING (0.1%) 11,200 GlobalSantaFe Corp. 279 ------- OIL & GAS EQUIPMENT & SERVICES (0.6%) 44,600 Schlumberger Ltd. 2,168 ------- OIL & GAS EXPLORATION & PRODUCTION (0.9%) 80,100 Chesapeake Energy Corp. 818 42,900 EOG Resources, Inc. 1,849 49,300 Swift Energy Co. * 584 ------- 3,251 ------- OTHER DIVERSIFIED FINANCIAL SERVICES (2.0%) 165,539 Citigroup, Inc. 6,790 38,800 E-Trade Group, Inc. * 297 ------- 7,087 ------- PACKAGED FOODS & MEAT (0.5%) 40,900 General Mills, Inc. 1,913 ------- PAPER PACKAGING (0.2%) 55,700 Smurfit-Stone Container Corp. * 825 ------- PAPER PRODUCTS (0.5%) 44,600 International Paper Co. 1,636 ------- PERSONAL PRODUCTS (0.8%) 81,800 Gillette Co. 2,749 ------- PHARMACEUTICALS (6.3%) 89,800 Abbott Laboratories 4,001 51,500 Eli Lilly & Co. 3,078
22 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003
MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------ 53,700 King Pharmaceuticals, Inc. * $ 769 233,700 Pfizer, Inc. 7,249 128,900 Schering-Plough Corp. 2,378 18,331 Watson Pharmaceuticals, Inc. * 679 92,300 Wyeth 4,047 -------- 22,201 -------- PROPERTY & CASUALTY INSURANCE (1.2%) 13,200 Ambac Financial Group, Inc. 880 41,500 St. Paul Companies, Inc. 1,518 108,700 Travelers Property Casualty Corp. "B" 1,758 -------- 4,156 -------- PUBLISHING (0.5%) 22,800 Gannett Co., Inc. 1,801 -------- REGIONAL BANKS (0.8%) 16,400 Bank Hawaii Corp. 573 38,700 Banknorth Group, Inc. 991 32,300 UnionBanCal Corp. 1,365 -------- 2,929 -------- RESTAURANTS (1.0%) 51,200 Brinker International, Inc. * 1,783 25,800 Darden Restaurants, Inc. 511 72,200 McDonald's Corp. 1,353 -------- 3,647 -------- SEMICONDUCTOR EQUIPMENT (0.6%) 67,600 Applied Materials, Inc. * 1,052 16,100 Cabot Microelectronics Corp. * 744 9,400 Novellus Systems, Inc. * 326 -------- 2,122 -------- SEMICONDUCTORS (2.0%) 1 Agere Systems, Inc. "B" * - 23,300 Analog Devices, Inc. * 898 49,900 Fairchild Semiconductor International, Inc. "A" * 698 20,100 Integrated Circuit Systems, Inc. * 524 168,800 Intel Corp. 3,518 49,000 International Rectifier Corp. * 1,283 22,000 Lattice Semiconductor Corp. * 200 -------- 7,121 --------
23 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003
MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------ SOFT DRINKS (2.1%) 71,300 Coca-Cola Co. $ 3,249 62,800 Coca-Cola Enterprises, Inc. 1,177 64,000 PepsiCo, Inc. 2,829 --------- 7,255 --------- SPECIALTY CHEMICALS (0.0%)(h) 6,300 Cambrex Corp. 134 --------- SPECIALTY STORES (0.6%) 12,700 Linens `n Things, Inc. * 292 27,400 Michaels Stores, Inc. * 1,031 27,300 O'Reilly Automotive, Inc. * 833 --------- 2,156 --------- SYSTEMS SOFTWARE (2.4%) 322,500 Microsoft Corp. 7,937 12,800 VERITAS Software Corp. * 355 --------- 8,292 --------- TECHNOLOGY DISTRIBUTORS (0.3%) 29,300 Comverse Technology, Inc. * 446 43,200 Tekelec, Inc. * 618 --------- 1,064 --------- THRIFTS & MORTGAGE FINANCE (0.3%) 57,300 Sovereign Bancorp, Inc. 935 --------- TOBACCO (0.2%) 13,500 Altria Group, Inc. 558 --------- Total Stocks (cost: $203,960) 211,754 ---------
24 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) ---------------------------------------------------------------------------------------------------- BONDS (33.9%) CORPORATE OBLIGATIONS (12.9%) AEROSPACE & DEFENSE (0.6%) $1,000 Boeing Capital Corp. 5.40% 11/30/2009 $ 1,064 1,000 Bombardier, Inc.(a) 6.75 5/01/2012 935 ------- 1,999 ------- BROADCASTING & CABLE TV (0.6%) 1,000 Comcast Cable Communications, Inc. 6.88 6/15/2009 1,158 1,000 Cox Communications, Inc. 4.63 6/01/2013 1,002 ------- 2,160 ------- CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (0.3%) 1,000 John Deere Capital Corp. 1.59 8/20/2003 1,000 ------- CONSUMER FINANCE (1.6%) 1,000 Ford Motor Credit Co. 7.60 8/01/2005 1,062 2,000 Household Finance Corp. 6.38 10/15/2011 2,283 2,000 SLM Corp. 5.38 1/15/2013 2,193 ------- 5,538 ------- DATA PROCESSING & OUTSOURCED SERVICES (0.3%) 1,000 Fiserv, Inc.(a) 4.00 4/15/2008 1,038 ------- DIVERSIFIED METALS & MINING (0.7%) 2,000 Brascan Corp. 8.13 12/15/2008 2,394 ------- ELECTRIC UTILITIES (2.7%) 2,000 El Paso Electric Co.(b) 9.40 5/01/2011 2,331 2,000 Empire District Electric Co. 7.70 11/15/2004 2,183 1,000 Entergy Mississippi, Inc. 5.15 2/01/2013 1,049 1,000 Pepco Holdings, Inc. 4.00 5/15/2010 1,009 2,000 Pinnacle One Partners, L.P.(a) 8.83 8/15/2004 2,080 800 Teco Energy, Inc. 10.50 12/01/2007 914 ------- 9,566 ------- ENVIRONMENTAL SERVICES (0.7%) 1,000 Waste Management, Inc. 6.50 11/15/2008 1,151 1,000 Waste Management, Inc. 7.38 8/01/2010 1,200 ------- 2,351 -------
25 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) ---------------------------------------------------------------------------------------------------- GAS UTILITIES (1.2%) $1,000 Enbridge Energy Partners LP(a) 4.75% 6/01/2013 $ 1,005 1,000 Peoples Energy Corp. 6.90 1/15/2011 1,145 2,000 Texas Gas Transmission, LLC(a) 4.60 6/01/2015 2,023 -------- 4,173 -------- INDUSTRIAL CONGLOMERATES (0.3%) 1,000 Hutchison Whampoa International(a) 6.50 2/13/2013 1,071 -------- INTEGRATED OIL & GAS (0.3%) 1,000 Occidental Petroleum Corp. 5.88 1/15/2007 1,110 -------- INVESTMENT BANKING & BROKERAGE (1.7%) 2,050 First Union Corp.(b) 6.82 8/01/2026 2,612 1,000 Imperial Bancorp 8.50 4/01/2009 1,183 1,000 Nordea Bank Sweden AB(a) 5.25 11/30/2012 1,091 1,000 Union Planters Bank, N.A.(b) 6.50 3/15/2008 1,124 -------- 6,010 -------- METAL & GLASS CONTAINERS (0.3%) 1,000 Pactiv Corp. 7.20 12/15/2005 1,103 -------- OIL & GAS EXPLORATION & PRODUCTION (0.3%) 1,000 Devon Financing Corp., ULC 6.88 9/30/2011 1,187 -------- PACKAGED FOODS & MEAT (0.3%) 1,000 Tyson Foods, Inc. 8.25 10/01/2011 1,162 -------- REAL ESTATE INVESTMENT TRUSTS (1.0%) 1,000 Nationwide Health Properties, Inc. 7.60 5/10/2007 1,105 2,000 Pan Pacific Retail Properties, Inc. 7.95 4/15/2011 2,417 -------- 3,522 -------- Total corporate obligations (cost: $40,948) 45,384 --------
26 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) ---------------------------------------------------------------------------------------------------- ASSET-BACKED & MORTGAGE-BACKED SECURITIES (3.5%) $1,000 Capital One Bank(g) 4.32% 4/15/2009 $ 995 4,000 Consumers Funding, LLC 5.43 4/20/2015 4,491 1,000 Credit Suisse First Boston Mortgage Capital, LLC 7.17 1/17/2012 1,116 1,000 Detroit Edison Securitization Funding, LLC 6.42 3/01/2015 1,195 2,000 First Auto Receivables Group Trust(a) 1.32 5/15/2004 2,002 2,559 Norwest Asset Security Corp. 6.75 9/25/2028 2,573 -------- Total asset-backed & mortgage-backed securities (cost: $11,503) 12,372 -------- U.S. GOVERNMENT & AGENCY ISSUES (17.2%) GOVERNMENT NATIONAL MORTGAGE ASSOCIATION NOTES (4.1%) 4,939 I, Pool# 603868 5.50 1/15/2033 5,171 1,000 Series 1999-14 VD 6.00 3/20/2014 1,082 1,631 Series 1999-11 VC 6.50 5/20/2014 1,701 2,000 Series 2001-49 VB 7.00 11/16/2016 2,155 2,870 II, Pool# 781494 6.50 8/20/2031 2,996 1,379 I, Pool# 587184 7.00 4/15/2032 1,453 -------- 14,558 -------- FANNIE MAE NOTES (4.4%) 2,000 Subordinate Note 5.25 8/01/2012 2,205 5,000 Benchmark Note 5.38 11/15/2011 5,697 2,000 Series 1999-25 VB 6.00 4/25/2016 2,075 2,000 Series 2001-20 VB 6.00 9/25/2017 2,122 1,000 Series 2001-25 D 6.00 2/25/2014 1,059 2,000 Series 2001-29 VB 6.50 8/25/2016 2,137 -------- 15,295 -------- FREDDIE MAC NOTES (6.6%) 1,765 Series 2369 VG 6.50 11/15/2011 1,789 3,000 Pool# C79394 5.50 4/01/2033 3,111 4,000 Series 2389 VH 6.00 12/01/2031 4,195 1,831 Series 2412 VA 6.50 11/15/2012 1,875 2,748 Series 2413 VA 6.50 11/15/2012 2,843 4,000 Series 2427 VL 6.50 11/15/2017 4,232 2,779 Series 2435 VG 6.00 2/15/2013 2,976 2,000 Series 2445 VD 6.50 4/15/2018 2,115 -------- 23,136 --------
27 P O R T F O L I O ==================-------------------------------------------------------------- of INVESTMENTS (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003
PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) ---------------------------------------------------------------------------------------------------- U.S. TREASURY INFLATION-INDEXED NOTE (2.1%)(d) $ 6,349 U.S. Treasury Inflation-Indexed Note 3.50% 1/15/2011 $ 7,236 -------- Total U.S. government & agency issues (cost: $56,581) 60,225 -------- MUNICIPAL BOND (0.3%) ELECTRIC UTILITIES (0.3%) 1,000 Ohio Edison Co., Water Development Authority(b) (cost: $1,000) 2.25 6/01/2033 1,000 -------- Total bonds (cost: $110,032) 118,981 -------- NUMBER OF SHARES --------- MONEY MARKET INSTRUMENTS (6.7%) MONEY MARKET FUNDS (1.7%) 385,614 AIM Short-Term Investment Co. Liquid Assets Portfolio(f) 1.25(e) - 386 477,481 Merrill Lynch Premier Institutional Fund(f) 1.23(e) - 477 6,443 SSgA Money Market Fund 0.90(e) - 6 4,991,678 SSgA Prime Money Market Fund 1.09(e) - 4,992 -------- Total money market funds (cost: $5,861) 5,861 -------- PRINCIPAL AMOUNT (000) --------- OTHER (5.0%) $ 1,985 145 Associates Ltd. (LOC)(c) 2.32 10/01/2020 1,985 5,547 Gotham Funding Corp. CP(a) 1.37 6/02/2003 5,547 5,000 Lockhart Funding LLC CP(a) 1.32 6/02/2003 5,000 4,999 UBS Finance, Inc. CP 1.35 6/02/2003 4,999 -------- Total other (cost: $17,531) 17,531 -------- Total money market instruments (cost: $23,392) 23,392 -------- TOTAL INVESTMENTS (COST: $337,384) $354,127 ========
28 N O T E S ==========---------------------------------------------------------------------- to Portfolio of INVESTMENTS USAA BALANCED STRATEGY FUND MAY 31, 2003 GENERAL NOTES -------------------------------------------------------------------------------- Market values of securities are determined by procedures and practices discussed in Note 1 to the financial statements. The percentages shown represent the percentages of the investments to net assets and, in total, may not equal 100%. PORTFOLIO DESCRIPTION ABBREVIATIONS CP Commercial Paper CREDIT ENHANCEMENTS - add the financial strength of the provider of the enhancement to support the issuer's ability to repay the principal when due. A high-quality bank, insurance company or other corporation, or a collateral trust may provide the enhancement. (LOC) Enhanced by a bank letter of credit 29 N O T E S ==========---------------------------------------------------------------------- to Portfolio of INVESTMENTS (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003 SPECIFIC NOTES -------------------------------------------------------------------------------- (a) RESTRICTED SECURITY - not registered under the Securities Act of 1933. A resale of this security in the United States may occur in an exempt transaction to a qualified institutional buyer as defined by Rule 144A, and as such is generally deemed by USAA Investment Management Company (the Manager) to be liquid under guidelines approved by the Board of Trustees. (b) PUT BONDS - provide the right to sell the bond at face value at specific tender dates prior to final maturity. The put feature shortens the effective maturity of the security. (c) VARIABLE-RATE DEMAND NOTES (VRDNS) - provide the right, on any business day, to sell the security at face value on either that day or in seven days. The interest rate is adjusted at a stipulated daily, weekly, or monthly interval to a rate that reflects current market conditions. The effective maturity is the next put date. (d) TREASURY INFLATION-PROTECTED SECURITIES - trade at the prevailing real, or after inflation, interest rates. The principal value adjusts periodically to the rate of inflation. The U.S. Treasury guarantees repayment of these securities of at least their face value in the event of sustained deflation or a drop in prices. Inflation adjustments to the face value of these securities are included in interest income. (e) Rate represents the money market fund annualized seven-day yield at May 31, 2003. (f) Investment was purchased with the cash collateral proceeds received from securities loaned. (g) At May 31, 2003, the cost of securities purchased on a when-issued basis was $993,000. (h) Represents less than 0.1% of net assets. * Non-income-producing security for the year ended May 31, 2003. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 30 S T A T E M E N T ==================-------------------------------------------------------------- of ASSETS and LIABILITIES (in thousands) USAA BALANCED STRATEGY FUND MAY 31, 2003 ASSETS Investments in securities, at market value (including securities on loan of $842) (identified cost of $337,384) $354,127 Cash 145 Receivables: Capital shares sold 619 Dividends and interest 1,273 Securities sold 3,761 USAA Investment Management Company 500 -------- Total assets 360,425 -------- LIABILITIES Payable upon return of securities loaned 864 Securities purchased (when-issued of $993) 8,167 Capital shares redeemed 163 USAA Investment Management Company 225 USAA Transfer Agency Company 95 Accounts payable and accrued expenses 69 -------- Total liabilities 9,583 -------- Net assets applicable to capital shares outstanding $350,842 ======== NET ASSETS CONSIST OF: Paid-in capital $361,705 Accumulated undistributed net investment income 1,253 Accumulated net realized loss on investments (28,859) Net unrealized appreciation of investments 16,743 -------- Net assets applicable to capital shares outstanding $350,842 ======== Capital shares outstanding, unlimited number of shares authorized, no par value 26,288 ======== Net asset value, redemption price, and offering price per share $ 13.35 ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 31 S T A T E M E N T ==================-------------------------------------------------------------- of OPERATIONS (in thousands) USAA BALANCED STRATEGY FUND YEAR ENDED MAY 31, 2003
NET INVESTMENT INCOME Income: Dividends (net of foreign taxes withheld of $1) $ 2,655 Interest 7,109 Fees from securities loaned 9 --------- Total income 9,773 --------- Expenses: Management fees 2,389 Administrative and servicing fees 460 Transfer agent's fees 1,121 Custodian's fees 153 Postage 101 Shareholder reporting fees 164 Trustees' fees 7 Registration fees 39 Professional fees 62 Other 4 --------- Total expenses 4,500 Expenses reimbursed (1,432) Expenses paid indirectly (20) --------- Net expenses 3,048 --------- Net investment income 6,725 --------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized loss on investments (27,490) Change in net unrealized appreciation/depreciation 13,186 --------- Net realized and unrealized loss (14,304) --------- Decrease in net assets resulting from operations $ (7,579) =========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 32 S T A T E M E N T S ====================------------------------------------------------------------ of Changes in NET ASSETS (in thousands) USAA BALANCED STRATEGY FUND YEARS ENDED MAY 31,
2003 2002 ---------------------- FROM OPERATIONS Net investment income $ 6,725 $ 5,685 Net realized gain (loss) on investments (27,490) 5,191 Change in net unrealized appreciation/depreciation of investments 13,186 (10,390) ---------------------- Increase (decrease) in net assets resulting from operations (7,579) 486 ---------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income (7,028) (5,188) ---------------------- Net realized gains (3,389) (10,073) ---------------------- FROM CAPITAL SHARE TRANSACTIONS Proceeds from shares sold 96,568 175,556 Shares issued for dividends reinvested 10,283 15,089 Cost of shares redeemed (65,576) (33,284) ---------------------- Increase in net assets from capital share transactions 41,275 157,361 ---------------------- Net increase in net assets 23,279 142,586 NET ASSETS Beginning of period 327,563 184,977 ---------------------- End of period $350,842 $327,563 ====================== Accumulated undistributed net investment income: End of period $ 1,253 $ 1,399 ====================== CHANGE IN SHARES OUTSTANDING Shares sold 7,605 12,182 Shares issued for dividends reinvested 813 1,069 Shares redeemed (5,197) (2,314) ---------------------- Increase in shares outstanding 3,221 10,937 ======================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 33 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements USAA BALANCED STRATEGY FUND MAY 31, 2003 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -------------------------------------------------------------------------------- USAA INVESTMENT TRUST (the Trust), registered under the Investment Company Act of 1940, as amended, is a diversified, open-end management investment company organized as a Massachusetts business trust consisting of nine separate funds. The information presented in this annual report pertains only to the USAA Balanced Strategy Fund (the Fund). The Fund's investment objective is to seek high total return, with reduced risk over time, through an asset allocation strategy that seeks a combination of long-term growth of capital and current income. A. SECURITY VALUATION - The value of each security is determined (as of the close of trading on the New York Stock Exchange on each business day the exchange is open) as set forth below: 1. Portfolio securities, except as otherwise noted, traded primarily on a domestic securities exchange are valued at the last sales price on that exchange. Portfolio securities traded primarily on foreign securities exchanges are generally valued at the closing values of such securities on the exchange where primarily traded. If no sale is reported, the average of the bid and asked prices is generally used depending upon local custom or regulation. 2. Over-the-counter equity securities are generally priced using the Nasdaq Official Closing Price (NOCP) or, if not available, the average of the bid and asked prices. 3. Securities purchased with maturities of 60 days or less are stated at amortized cost, which approximates market value. 4. Other debt and government securities are valued each business day by a pricing service (the Service) approved by the Trust's Board of Trustees. The Service uses the mean between quoted bid and asked prices or the last sales price to price securities when, in the Service's judgment, these prices are 34 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003 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. 5. Securities that cannot be valued by the methods set forth above, and all other assets, are valued in good faith at fair value, using methods determined by the Manager, an affiliate of the Fund, and if applicable, in consultation with the Fund's investment subadviser, under valuation procedures approved by the Trust's Board of Trustees. B. FEDERAL TAXES - The Fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its income to its shareholders. Therefore, no federal income tax provision is required. C. INVESTMENTS IN SECURITIES - Security transactions are accounted for on the date the securities are purchased or sold (trade date). Gain or loss from sales of investment securities is computed on the identified cost basis. Dividend income, less foreign taxes, if any, is recorded on the ex-dividend date. If the ex-dividend date has passed, certain dividends from foreign securities are recorded upon notification. Interest income is recorded on the accrual basis. Discounts and premiums on securities 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. D. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the securities of foreign issuers. Since the Fund's accounting records are maintained in U.S. dollars, foreign currency amounts are translated into U.S. dollars on the following basis: 35 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003 1. Market value of securities, other assets, and liabilities at the mean between the bid and asked translation rates of such currencies against U.S. dollars on a daily basis. 2. Purchases and sales of securities, income, and expenses at the rate of exchange obtained from an independent pricing service on the respective dates of such transactions. Net realized and unrealized foreign currency gains/losses occurring during the holding period of investments are a component of realized gain/loss on investments and unrealized appreciation/depreciation on investments, respectively. Net realized foreign currency gains/losses arise from sales of foreign currency, currency gains/losses realized between the trade and settlement dates on security transactions, and from the difference between amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts received. Net realized foreign currency gains/losses have been reclassified from accumulated net realized gain/loss to accumulated undistributed net investment income on the statement of assets and liabilities as such amounts are treated as ordinary income/loss for tax purposes. Net unrealized foreign currency exchange gains/losses arise from changes in the value of assets and liabilities other than investments in securities resulting from changes in the exchange rate. E. EXPENSES PAID INDIRECTLY - A portion of the brokerage commissions that the Fund pays may be reimbursed and used to reduce the Fund's expenses. In addition, through other fee-offset arrangements with certain of the Fund's service providers, realized credits, if any, are used to reduce the Fund's expenses. For the year ended May 31, 2003, these fee-offset arrangements reduced the Fund's expenses by $20,000. F. SECURITIES PURCHASED ON A WHEN-ISSUED BASIS - Delivery and payment for securities that have been purchased by the Fund on 36 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003 a when-issued basis can take place a month or more after the trade date. During the period prior to settlement, these securities do not earn interest, are subject to market fluctuation, and may increase or decrease in value prior to their delivery. The Fund maintains segregated assets with a market value equal to or greater than the amount of its purchase commitments. The purchase of securities on a when-issued basis may increase the volatility of the Fund's net asset value to the extent that the Fund makes such purchases while remaining substantially fully invested. As of May 31, 2003, net outstanding when-issued commitments for the Fund were $993,000. G. USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that may affect the reported amounts in the financial statements. (2) LINES OF CREDIT -------------------------------------------------------------------------------- The Fund participates with other USAA funds in two joint, short-term, revolving, committed loan agreements totaling $500 million: $400 million with USAA Capital Corporation (CAPCO), an affiliate of the Manager, and $100 million with Bank of America. The purpose of the agreements is to meet temporary or emergency cash needs, including redemption requests that might otherwise require the untimely disposition of securities. Subject to availability under its agreement with CAPCO, the Fund may borrow from CAPCO an amount up to 5% of the Fund's total assets at CAPCO's borrowing rate with no markup. Subject to availability under its agreement with Bank of America, the Fund may borrow from Bank of America, at Bank of America's borrowing rate plus a markup, an amount which, when added to outstanding borrowings under the CAPCO agreement, does not exceed 25% of the Fund's total assets. 37 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003 The USAA funds that are party to the loan agreements are assessed facility fees in aggregate by Bank of America in an annual amount equal to 0.09% of the $100 million loan agreement, whether used or not, and 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 0.09% annually of the $400 million loan agreement). The facility fees are allocated among the funds based on their respective average net assets for the period. The Fund had no borrowings under either of these agreements during the year ended May 31, 2003. (3) DISTRIBUTIONS -------------------------------------------------------------------------------- The character of distributions made during the year from net investment income or net realized gains is determined in accordance with federal tax regulations and may differ from those determined in accordance with accounting principles generally accepted in the United States. Also, due to the timing of distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains were recorded by the Fund. During the current fiscal year, permanent differences between book and tax basis accounting resulted in reclassifications made to the statement of assets and liabilities to decrease paid-in capital by $2,000, increase accumulated undistributed net investment income by $157,000, and increase accumulated net realized loss on investments by $155,000. This reclassification has no effect on net assets. The tax character of distributions paid during the years ended May 31, 2003 and 2002, was as follows: 2003 2002 --------------------------- Ordinary income* $10,417,000 $7,124,000 Long-term realized capital gains $ - $8,137,000 * INCLUDES DISTRIBUTION OF SHORT-TERM REALIZED CAPITAL GAINS, IF ANY, WHICH ARE TAXABLE AS ORDINARY INCOME. 38 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003 For the fiscal year ended May 31, 2003, certain dividends paid by the Fund may be subject to a maximum tax rate of 15%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The Fund intends to designate the maximum amount allowable as taxed at a maximum rate of 15%. Complete information will be reported in conjunction with your 2003 Form 1099-DIV. As of May 31, 2003, the components of net assets representing distributable earnings on a tax basis were as follows: Undistributed ordinary income $ 1,253,000 Accumulated capital and other losses (28,399,000) Unrealized appreciation 16,283,000 Distributions of net investment income are made quarterly. Distributions of realized gains from security transactions not offset by capital losses are made annually in the succeeding fiscal year or as otherwise required to avoid the payment of federal taxes. At May 31, 2003, the Fund had capital loss carryovers of $28,399,000 for federal income tax purposes, which if not offset by subsequent capital gains, will expire in 2011. 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 utilized or expire. (4) INVESTMENT TRANSACTIONS -------------------------------------------------------------------------------- Cost of purchases and proceeds from sales/maturities of securities, excluding short-term securities, for the year ended May 31, 2003, were $356,993,000 and $334,691,000, respectively. The cost of securities at May 31, 2003, for federal income tax purposes, was $337,844,000. Gross unrealized appreciation and depreciation of investments as of May 31, 2003, for federal income tax purposes, were $23,263,000 39 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003 and $6,980,000, respectively, resulting in net unrealized appreciation of $16,283,000. (5) LENDING OF PORTFOLIO SECURITIES -------------------------------------------------------------------------------- The Fund may lend its securities to qualified financial institutions, such as certain broker-dealers, to earn additional income. The borrowers are required to secure their loan continuously with cash collateral in an amount at least equal, at all times, to the fair value of the securities loaned. Cash collateral is invested in high-quality short-term investments. The Fund retains a portion of income from the investment of cash received as collateral. Risks to the Fund in securities-lending transactions are that the borrower may not provide additional collateral when required or return the securities when due, and that the value of the short-term investments will be less than the amount of cash collateral required to be returned to the borrower. As of May 31, 2003, the Fund loaned securities having a fair market value of approximately $842,000 and received cash collateral of $864,000 for the loans. Of this amount, $863,000 was invested in securities, as noted in the Fund's portfolio of investments, and $1,000 remained in cash. (6) TRANSACTIONS WITH MANAGER -------------------------------------------------------------------------------- A. MANAGEMENT FEES - The Manager carries out the Fund's investment policies, directly manages a portion of the Fund's portfolio, and provides portfolio management oversight of the Fund's assets managed by a subadviser. Beginning with the month ended July 31, 2002, the investment management fee for the Fund is composed of a base fee and a performance adjustment that increases or decreases the base fee depending upon the performance of the Fund relative to the performance of the Lipper Balanced Funds Index, which tracks the total return performance of the 30 largest funds in the Lipper 40 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003 Balanced Funds category. The Fund's base fee is accrued daily and paid monthly at an annualized rate of 0.75% of the Fund's average net assets. The performance adjustment is calculated monthly by comparing the Fund's performance to that of the Lipper index over the performance period. For the month ended May 31, 2003, the performance period consisted of the previous 22-month period. A new month is added to the performance period each month thereafter until the performance period consists of the previous 36 months. Thereafter, the performance period will consist of the current month plus the previous 35 months. 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 then added to (in the case of overperformance) or subtracted from (in the case of underperformance) the base fee, as referenced in the following chart:
OVER/UNDER PERFORMANCE ANNUAL ADJUSTMENT RATE RELATIVE TO INDEX(1) AS A % OF THE FUND'S AVERAGE NET ASSETS --------------------------------------------------------------------------------- +/- 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%. For the year ended May 31, 2003, the Fund incurred total management fees, paid or payable to the Manager, of $2,389,000, which included a performance adjustment of $89,000. 41 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003 B. SUBADVISORY ARRANGEMENTS - The Manager has entered into an investment subadvisory agreement with Wellington Management Company, LLP (Wellington Management), under which Wellington Management directs the investment and reinvestment of the portion of the Fund's assets invested in equity securities (as allocated from time to time by the Manager). The Manager (not the Fund) pays Wellington Management a subadvisory fee. C. ADMINISTRATIVE AND SERVICING FEES - The Manager provides certain administrative and shareholder servicing functions for the Fund. For such services, the Manager receives a fee accrued daily and paid monthly at an annualized rate of 0.15% of the Fund's average net assets. For the year ended May 31, 2003, the Fund incurred administrative and servicing fees, paid or payable to the Manager, of $460,000. D. EXPENSE LIMITATION - The Manager has voluntarily agreed to limit the annual expenses of the Fund to 1.00% of its average annual net assets, excluding the effect of any fee-offset arrangements, and will reimburse the Fund for all expenses in excess of that amount. This agreement may be modified or terminated at any time. For the year ended May 31, 2003, the Fund incurred reimbursable expenses of $1,432,000. E. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA Shareholder Account Services, an affiliate of the Manager, provides transfer agent services to the Fund based on an annual charge of $23 per shareholder account plus out-of-pocket expenses. For the year ended May 31, 2003, the Fund incurred transfer agent's fees, paid or payable to USAA Transfer Agency Company, of $1,121,000. F. UNDERWRITING SERVICES - The Manager provides exclusive underwriting and distribution of the Fund's shares on a continuing best-efforts basis. The Manager receives no commissions or fees for this service. 42 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003 (7) TRANSACTIONS WITH AFFILIATES -------------------------------------------------------------------------------- Certain trustees and officers of the Fund are also directors, officers, and/or employees of the Manager. None of the affiliated trustees or Fund officers received any compensation from the Fund. (8) SECURITY TRANSACTIONS WITH AFFILIATED FUNDS -------------------------------------------------------------------------------- During the year ended May 31, 2003, in accordance with affiliated transaction procedures approved by the Trust's Board of Trustees, security transactions were executed between the Fund and the following affiliated USAA funds at the then current market price with no brokerage commissions incurred. In most cases, the transactions involved multiple USAA funds as purchasers or sellers.
NET REALIZED COST TO GAIN (LOSS) SELLER PURCHASER PURCHASER TO SELLER -------------------------------------------------------------------------------------------------- USAA Balanced Strategy Fund Multiple USAA funds $12,169,000 (645,000) USAA Balanced Strategy Fund USAA Life Income Fund 1,060,000 107,000 Multiple USAA funds USAA Balanced Strategy Fund 18,535,000 849,000
43 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003 (9) FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- Per share operating performance for a share outstanding throughout each period is as follows:
YEAR ENDED MAY 31, ---------------------------------------------------------------------- 2003 2002 2001 2000 1999 ---------------------------------------------------------------------- Net asset value at beginning of period $ 14.20 $ 15.25 $ 15.26 $ 14.02 $ 13.46 ---------------------------------------------------------------------- Income (loss) from investment operations: Net investment income .28 .35(a,c) .33 .27 .25 Net realized and unrealized gain (loss) (.70) (.40)(a,c) .77 1.22 .74 ---------------------------------------------------------------------- Total from investment operations (.42) (.05)(a) 1.10 1.49 .99 ---------------------------------------------------------------------- Less distributions: From net investment income (.29) (.34) (.32) (.25) (.27) From realized capital gains (.14) (.66) (.79) - (.16) ---------------------------------------------------------------------- Total distributions (.43) (1.00) (1.11) (.25) (.43) ---------------------------------------------------------------------- Net asset value at end of period $ 13.35 $ 14.20 $ 15.25 $ 15.26 $ 14.02 ====================================================================== Total return (%)* (2.71) (.06) 7.37 10.65 7.63 Net assets at end of period (000) $ 350,842 $ 327,563 $ 184,977 $ 148,153 $ 95,755 Ratio of expenses to average net assets (%)** 1.00(d) 1.02(b,d) 1.23(d) 1.25 1.25 Ratio of expenses to average net assets, excluding reimbursements (%)** 1.47(d) 1.35(d) N/A 1.26 1.31 Ratio of net investment income to average net assets (%)** 2.19 2.41 (c) 2.30 1.92 1.88 Portfolio turnover (%) 113.80 42.34 80.60 87.11 63.39 * Assumes reinvestment of all dividend income and realized capital gain distributions during the period. ** For the year ended May 31, 2003, average net assets were $306,931,000. (a) Calculated using average shares. (b) Effective August 1, 2001, the Manager voluntarily agreed to limit the Fund's expense ratio to 1.00% of the Fund's average annual net assets. Prior to this date, the voluntary expense ratio limit was 1.25% of the Fund's average annual net assets. (c) In 2001, a change in amortization method was made as required by an accounting pronouncement. This change had no effect on these amounts. (d) Reflects total expenses excluding any fee-offset arrangements, which decreased these ratios as follows: (.01%) - - N/A N/A
44 N O T E S ==========---------------------------------------------------------------------- to FINANCIAL Statements (continued) USAA BALANCED STRATEGY FUND MAY 31, 2003 (10) CHANGE OF INDEPENDENT AUDITORS (UNAUDITED) -------------------------------------------------------------------------------- On May 29, 2002, based on the recommendation of the Trust's Audit Committee, the Trust's Board of Trustees determined not to retain KPMG LLP (KPMG) as the Fund's independent auditors and voted to appoint Ernst & Young LLP for the fiscal year ended May 31, 2003. KPMG served as the Fund's independent auditors since the Fund's inception on September 1, 1995. From that date through the fiscal year ended May 31, 2002, KPMG's audit reports contained no adverse opinion or disclaimer of opinion; nor were KPMG's reports qualified or modified as to uncertainty, audit scope, or accounting principle. Further, through May 29, 2002, there were no disagreements between the Fund and KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. 45 D I R E C T O R S ' ====================------------------------------------------------------------ INFORMATION DIRECTORS* AND OFFICERS OF THE COMPANY -------------------------------------------------------------------------------- The Board of Directors of the Company consists of seven Directors. These Directors and the Company's Officers supervise the business affairs of the USAA family of funds. The Board of Directors is responsible for the general oversight of the Funds' business and for assuring that the Funds are managed in the best interests of each Fund's respective shareholders. The Board of Directors periodically reviews the Funds' investment performance as well as the quality of other services provided to the Funds and their shareholders by each of the Fund's service providers, including USAA Investment Management Company (IMCO) and its affiliates. The term of office for each Director shall be fifteen (15) years or until the Director reaches age 70. All members of the Board of Directors shall be presented to shareholders for election or reelection, as the case may be, at least once every five years. Vacancies on the Board of Directors can be filled by the action of a majority of the Directors, provided that at least two-thirds of the Directors have been elected by the shareholders. Set forth below are the Directors and Officers of the Company, their respective offices and principal occupations during the last five years, length of time served, and information relating to any other directorships held. Each serves on the Board of Directors of the USAA family of funds consisting of four registered investment companies offering 39 individual Funds as of May 31, 2003. Unless otherwise indicated, the business address of each is 9800 Fredericksburg Road, San Antonio, TX 78288. If you would like more information about the Funds' Directors, you may call 1-800-531-8181 to request a free copy of the Funds' statement of additional information (SAI). * FOR SIMPLICITY THROUGHOUT THIS SECTION, THE BOARDS OF DIRECTORS AND BOARDS OF TRUSTEES OF THE FOUR LEGAL ENTITIES THAT COMPRISE THE USAA FAMILY OF FUNDS WILL BE IDENTIFIED AS THE BOARD OF DIRECTORS, AND THE TRUST WILL BE IDENTIFIED AS THE COMPANY. 46 . . . C O N T I N U E D ========================-------------------------------------------------------- INFORMATION INTERESTED DIRECTORS(1) -------------------------------------------------------------------------------- ROBERT G. DAVIS(2) Director and Chairman of the Board of Directors Born: November 1946 Year of Election or Appointment: 1996 Chairman, Chief Executive Officer, and President of United Services Automobile Association (USAA) (10/02-present); President and Chief Executive Officer of USAA (4/00-10/02); President and Chief Operating Officer of USAA (6/99-3/00); Director of USAA (2/99-present); Deputy Chief Executive Officer for Capital Management of USAA (6/98-5/99); President, Chief Executive Officer, Director, and Chairman of the Board of Directors of USAA Capital Corporation (CAPCO) and several of its subsidiaries and affiliates (1/97-present); and President, Chief Executive Officer, Director, and Chairman of the Board of Directors of USAA Financial Planning Services (1/97-present). Mr. Davis serves as a Director/Trustee and Chairman of the Boards of Directors/Trustees of the USAA family of funds. He also serves as a Director and Chairman of the Boards of Directors of USAA Investment Management Company, USAA Life Insurance Company, USAA Federal Savings Bank, and USAA Real Estate Company (RealCo). CHRISTOPHER W. CLAUS(2) Director, President, and Vice Chairman of the Board of Directors Born: December 1960 Year of Election or Appointment: 2001 President and Chief Executive Officer, Director, and Vice Chairman of the Board of Directors, IMCO (2/01-present). Senior Vice President of Investment Sales and Service, IMCO (7/00-2/01); Vice President, Investment Sales and Service, IMCO (12/94-7/00). Mr. Claus serves as President, Director/Trustee, and Vice Chairman of the Boards of Directors/Trustees of the USAA family of funds. He also serves as President, Director, and Chairman of the Board of Directors of USAA Shareholder Account Services. He also holds the Officer position of Senior Vice President of USAA Life Investment Trust, a registered investment company offering five individual funds. 47 . . . C O N T I N U E D ========================-------------------------------------------------------- INFORMATION NON-INTERESTED DIRECTORS -------------------------------------------------------------------------------- BARBARA B. DREEBEN(3,4,5,6) Director Born: June 1945 Year of Election or Appointment: 1994 President, Postal Addvantage (7/92-present), a postal mail list management service. Mrs. Dreeben serves as Director/Trustee of the USAA family of funds. Mrs. Dreeben holds no other directorships of any publicly held corporations or other investment companies outside the USAA family of funds. ROBERT L. MASON, PH.D.(3,4,5,6) Director Born: July 1946 Year of Election or Appointment: 1997 Institute Analyst, Southwest Research Institute (3/02-present); Staff Analyst, Southwest Research Institute (9/98-3/02); Manager, Statistical Analysis Section, Southwest Research Institute (8/75-9/98), which focuses on the fields of technological research. Dr. Mason serves as a Director/Trustee of the USAA family of funds. Dr. Mason holds no other directorships of any publicly held corporations or other investment companies outside the USAA family of funds. MICHAEL F. REIMHERR(3,4,5,6) Director Born: August 1945 Year of Election or Appointment: 2000 President of Reimherr Business Consulting (5/95-present), an organization that performs business valuations of large companies to include the development of annual business plans, budgets, and internal financial reporting. Mr. Reimherr serves as a Director/Trustee of the USAA family of funds. Mr. Reimherr holds no other directorships of any publicly held corporations or other investment companies outside the USAA family of funds. 48 . . . C O N T I N U E D ========================-------------------------------------------------------- INFORMATION LAURA T. STARKS, PH.D.(3,4,5,6) Director Born: February 1950 Year of Election or Appointment: 2000 Charles E. and Sarah M. Seay Regents Chair Professor of Finance, University of Texas at Austin (9/96-present); Sarah Meadows Seay Regents Professor of Finance, University of Texas of Austin (9/94-9/96). Dr. Starks serves as a Director/Trustee of the USAA family of funds. Dr. Starks holds no other directorships of any publicly held corporations or other investment companies outside the USAA family of funds. RICHARD A. ZUCKER(2,3,4,5,6) Director Born: July 1943 Year of Election or Appointment: 1992 Vice President, Beldon Roofing and Remodeling (7/85-present). Mr. Zucker serves as a Director/Trustee of the USAA family of funds. Mr. Zucker holds no other directorships of any publicly held corporations or other investment companies outside the USAA family of funds. (1) INDICATES THOSE DIRECTORS WHO ARE EMPLOYEES OF USAA INVESTMENT MANAGEMENT COMPANY OR AFFILIATED COMPANIES AND ARE CONSIDERED "INTERESTED PERSONS" UNDER THE INVESTMENT COMPANY ACT OF 1940. (2) MEMBER OF EXECUTIVE COMMITTEE (3) MEMBER OF AUDIT COMMITTEE (4) MEMBER OF PRICING AND INVESTMENT COMMITTEE (5) MEMBER OF CORPORATE GOVERNANCE COMMITTEE (6) THE ADDRESS FOR ALL NON-INTERESTED DIRECTORS IS THAT OF THE USAA FUNDS, P.O. BOX 659430, SAN ANTONIO, TX 78265-9430. 49 . . . C O N T I N U E D ========================-------------------------------------------------------- INFORMATION INTERESTED OFFICERS(1) -------------------------------------------------------------------------------- CLIFFORD A. GLADSON Vice President Born: November 1950 Year of Appointment: 2002 Senior Vice President, Fixed Income Investments, IMCO (9/02-present); Vice President, Fixed Income Investments, IMCO (5/02-9/02); Vice President, Mutual Fund Portfolios, IMCO (12/99-5/02); Assistant Vice President, Fixed Income Investments, IMCO (11/94-12/99). Mr. Gladson also holds the Officer position of Vice President of USAA Life Investment Trust, a registered investment company offering five individual funds. STUART WESTER Vice President Born: June 1947 Year of Appointment: 2002 Vice President, Equity Investments, IMCO (1/99-present); Vice President, Investment Strategy and Analysis, CAPCO (6/96-1/99). Mr. Wester also holds the Officer position of Vice President of USAA Life Investment Trust, a registered investment company offering five individual funds. MARK S. HOWARD Secretary Born: October 1963 Year of Appointment: 2002 Senior Vice President, Securities Counsel, USAA (12/02-present); Senior Vice President, Securities Counsel & Compliance, IMCO (1/02-12/02); Vice President, Securities Counsel & Compliance, IMCO (7/00-1/02); and Assistant Vice President, Securities Counsel, USAA (2/98-7/00). Mr. Howard also holds the Officer positions of Senior Vice President, Secretary and Counsel for IMCO and USAA Shareholder Account Services; and Assistant Secretary for USAA Financial Planning Services and for USAA Life Investment Trust, a registered investment company offering five individual funds. EILEEN M. SMILEY Assistant Secretary Born: November 1959 Year of Appointment: 2003 Assistant Vice President, Securities Counsel, USAA (1/03-present); Attorney, Morrision & Foerster, LLP (1/99-1/03); Senior Counsel, 50 . . . C O N T I N U E D ========================-------------------------------------------------------- INFORMATION Division of Investment Management, U.S. Securities and Exchange Commission (2/96-12/98). Ms. Smiley also holds the Officer position of Assistant Secretary of USAA Life Investment Trust, a registered investment company offering five individual funds. DAVID M. HOLMES Treasurer Born: June 1960 Year of Appointment: 2001 Senior Vice President, Life/IMCO/Financial Planning Services Senior Financial Officer, USAA (12/02-present); Senior Vice President, Senior Financial Officer, IMCO (6/01-12/02); Vice President, Senior Financial Officer, RealCo (12/97-5/01); Assistant Vice President, Capital Markets, RealCo (1/96-12/97). Mr. Holmes is a Director of USAA Life Insurance Company and also holds the Officer positions of Treasurer of USAA Life Investment Trust, a registered investment company offering five individual funds, and Senior Vice President, Senior Financial Officer of USAA Life Insurance Company and USAA Shareholder Account Services. ROBERTO GALINDO, JR. Assistant Treasurer Born: November 1960 Year of Appointment: 2000 Assistant Vice President, Portfolio Accounting/Financial Administration, USAA (12/02-present); Assistant Vice President, Mutual Fund Analysis & Support, IMCO (10/01-12/02); Executive Director, Mutual Fund Analysis & Support, IMCO (6/00-10/01); Director, Mutual Fund Analysis, IMCO (9/99-6/00); Vice President, Portfolio Administration, Founders Asset Management LLC (7/98-8/99); Assistant Vice President, Director of Fund & Private Client Accounting, Founders Asset Management LLC (7/93-7/98). Mr. Galindo also holds the Officer position of Assistant Treasurer of USAA Life Investment Trust, a registered investment company offering five individual funds. (1) INDICATES THOSE OFFICERS WHO ARE EMPLOYEES OF USAA INVESTMENT MANAGEMENT COMPANY OR AFFILIATED COMPANIES AND ARE CONSIDERED "INTERESTED PERSONS" UNDER THE INVESTMENT COMPANY ACT OF 1940. 51 N O T E S ==========---------------------------------------------------------------------- _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ 52 N O T E S ==========---------------------------------------------------------------------- _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ TRUSTEES Robert G. Davis, CHAIRMAN OF THE BOARD Christopher W. Claus, VICE CHAIRMAN OF THE BOARD Barbara B. Dreeben Robert L. Mason, Ph.D. Michael F. Reimherr Laura T. Starks, Ph.D. Richard A. Zucker ADMINISTRATOR, USAA Investment Management Company INVESTMENT ADVISER, P.O. Box 659453 UNDERWRITER, San Antonio, Texas 78265-9825 AND DISTRIBUTOR TRANSFER AGENT USAA Shareholder Account Services 9800 Fredericksburg Road San Antonio, Texas 78288 CUSTODIAN State Street Bank and Trust Company P.O. Box 1713 Boston, Massachusetts 02105 INDEPENDENT AUDITORS Ernst & Young LLP 100 West Houston St., Suite 1900 San Antonio, Texas 78205 TELEPHONE Call toll free - Central time ASSISTANCE HOURS Monday - Friday, 7 a.m. to 10 p.m. Saturday, 8:30 a.m. to 5 p.m. Sunday, 10:30 a.m. to 7 p.m. FOR ADDITIONAL 1-800-531-8181, in San Antonio 456-7200 INFORMATION ABOUT For account servicing, exchanges, MUTUAL FUNDS or redemptions 1-800-531-8448, in San Antonio 456-7202 RECORDED MUTUAL 24-hour service (from any phone) FUND PRICE QUOTES 1-800-531-8066, in San Antonio 498-8066 MUTUAL FUND (from touch-tone phones only) USAA TOUCHLINE(R) For account balance, last transaction, fund prices, or to exchange or redeem fund shares 1-800-531-8777, in San Antonio 498-8777 INTERNET ACCESS USAA.COM THROUGH OUR ONGOING EFFORTS TO REDUCE EXPENSES, YOUR REPORT MAILINGS ARE STREAMLINED. WE DEVELOP MAILING LISTS USING CRITERIA SUCH AS ADDRESS, MEMBER NUMBER, AND SURNAME TO SEND ONE REPORT TO EACH HOUSEHOLD INSTEAD OF SENDING A REPORT TO EVERY REGISTERED OWNER. THIS PRACTICE IS DESIGNED TO REDUCE DUPLICATE COPIES AND SAVE PAPER AND POSTAGE COSTS TO THE FUND. IF YOU PREFER NOT TO PARTICIPATE IN STREAMLINING AND WOULD LIKE TO CONTINUE RECEIVING ONE REPORT PER REGISTERED ACCOUNT OWNER, PLEASE CALL US AND WE WILL BEGIN YOUR INDIVIDUAL DELIVERY WITHIN 30 DAYS OF YOUR REQUEST. [LOGO OF RECYCLED PAPER] Recycled Paper -------------------------------------------------------------------------------- [LOGO OF USAA] 9800 Fredericksburg Road ------------- USAA(R) San Antonio, Texas 78288 PRSRT STD U.S. Postage P A I D USAA ------------- Receive this document and others electronically. Sign up at USAA.COM. -------------------------------------------------------------------------------- [LOGO OF USAA] WE KNOW WHAT IT MEANS TO SERVE.(R) USAA ---------------------------------- INSURANCE o MEMBER SERVICES 26889-0703 (C)2003, USAA. All rights reserved. ITEM 2. CODE OF ETHICS. Item not required because Registrant's fiscal year ended May 31, 2003. Initial compliance with this disclosure item is required in annual reports for fiscal years ending on or after July 15, 2003 ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Item not yet required because Registrant's fiscal year ended on May 31, 2003. Initial compliance with this disclosure item is required in annual reports for fiscal years ending on or after July 15, 2003. ITEM 4-8. (RESERVED) ITEM 9. CONTROLS AND PROCEDURES The chief executive officer and chief financial officer of USAA Investment Trust (Trust) have concluded that the Trust's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Trust in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. There were no significant changes or corrective actions with regard to significant deficiencies or material weaknesses in the Trust's internal controls or in other factors that could significantly affect the Trust's internal controls subsequent to the date of their evaluation.